<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1999
REGISTRATION NO. 333-72687
REGISTRATION NO. 333-36209
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CLAIMSNET.COM INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7374 75-2649230
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
</TABLE>
------------------------
CLAIMSNET.COM INC.
12801 North Central Expressway
Dallas, Texas 75243
(Address of principal place of business)
BO W. LYCKE
President and Chairman of the Board of Directors
Claimsnet.com inc.
12801 North Central Expressway
Dallas, Texas 75243
(972) 458-1701
(Name, address, and telephone number of principal executive offices and agent
for service)
COPIES TO:
ROBERT STEVEN BROWN, ESQ. SPENCER G. 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)(6)
</TABLE>
(1) Estimated solely for purposes of calculation of the registration fee in
accordance with Rule 457 under the Securities Act of 1933, 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 333-72687). The filing of this
Registration Statement constitutes Post-Effective Amendment No. 2 of the
Registration Statement on Form S-1 (333-36209) and Pre-Effective Amendment
No. 1 of the Registration Statement on Form S-1 (333-72687). 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.
(6) Filing fee previously paid.
<PAGE>
Pursuant to Rule 424(b)(4)
Registration No. 333-36209
SUBJECT TO COMPLETION, DATED MARCH 3, 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.
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 45 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.
------------------------
[CRUTTENDEN ROTH INCORPORATED LOGO]
[LOGO]
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
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 (which are described
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 incorporated under the laws of the State of Delaware in September
1997 under the name Claimsnet.com inc. as a wholly-owned subsidiary of American
Net Claims. American Net Claims was incorporated under the laws of the State of
Texas in April 1996. In December 1998, American Net Claims merged into
Claimsnet.com. Our principal office is located at 12801 North Central
Expressway, Suite 1515, Dallas, Texas 75243, and our telephone number is (972)
458-1701.
In July 1996, we acquired all of the Internet software, licenses,
intellectual property rights, and technology developed by an affiliated company,
American Medical Finance. See "Use of Proceeds" and "Related Party
Transactions." In June 1997, we acquired 100% of the capital stock of Medica
Systems, Inc., a software development firm from which we had licensed a portion
of our healthcare transaction processing software. We operated in the
development stage through March 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 80,000 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 this 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
representing solely indebtedness
incurred by American Medical Finance 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
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 8, 1996
(INCEPTION) YEAR ENDED DECEMBER 31,
THROUGH ----------------------------------
STATEMENT OF OPERATIONS DATA: 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)
----------------- ------------------- -------------
----------------- ------------------- -------------
Loss per weighted average common share outstanding (basic
and diluted)............................................ $ (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, 1997 DECEMBER 31, 1998
------------------------ ------------------------
PRO FORMA, ACTUAL PRO FORMA,
AS --------- AS
BALANCE SHEET DATA: 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 June 2, 1997, its date of
acquisition.
(2) Adjusted to reflect the receipt of the estimated net proceeds of
approximately $17,000,000 from the sale of our common stock 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 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 1996 (inception)
through December 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 in April 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, pay us $.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.
8
<PAGE>
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 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 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 FINANCE
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 and to
repay advances accrued under our line of credit with American Medical Finance.
As a result, American Medical Finance will directly benefit from the sale of the
shares. American Medical Finance 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
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- 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.
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 NEED 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."
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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 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 DEPEND 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 American Medical Finance. 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 POSES RISKS TO OUR ENTIRE BUSINESS
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
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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."
WE MAY NOT BE ABLE TO PROCESS A SUBSTANTIAL INCREASE IN THE NUMBER OF CLAIMS WE
RECEIVE THROUGH OUR WEBSITE
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 further upgrade 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.
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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."
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
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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.
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
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- 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 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
Our core technologies were initially developed by American Medical Finance.
Since inception, we have had transactions with American Medical Finance, our
affiliate, including the acquisition of all of the Internet software, licenses,
intellectual property rights, and technology developed by American Medical
Finance and an agreement (the "Services Agreement") in which American Medical
Finance 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 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, and 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, 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."
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION WITH RESPECT TO THE INTERNET
We are not currently subject to direct regulation by any government agency
other than laws or regulations applicable to electronic commerce, but we process
information which, by law, must remain confidential. The U.S. Healthcare
Financing Administration has defined security requirements for
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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, 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 our common stock, and an active
trading market may not develop or be sustained. Unless and until a public market
develops, purchasers of our common stock may have difficulty selling their
shares of common stock.
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 our 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' common stock 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, our
common stock could be subject to delisting from the Nasdaq SmallCap-Registered
Trademark- Market. Trading, if any, in our 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, our shares.
THE MARKET FOR THE COMMON STOCK MAY SUFFER IN THE EVENT OF DELISTING FROM THE
NASDAQ SMALLCAP MARKET AND IF OUR COMMON STOCK IS "PENNY STOCK"
If our 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 were available, our
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common stock would be subject to the penny stock rules that impose additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
defined as investors with net worth in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 together with a spouse). For transactions covered
by these rules, the broker-dealer must make a special suitability determination
for the purchase, and must have received the purchaser's written consent to the
transaction prior to sale. As a result, delisting, if it were to occur, could
materially adversely affect the ability of broker-dealers to sell our 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 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 or ISG Solid Capital Markets 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.
WE HAVE NOT, AND DO NOT INTEND, TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE
We have not paid any cash dividends on our 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 OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share exceeds the net tangible book
value per share. Accordingly, investors 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
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months from the date of this prospectus. Some 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 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, subject to the lock-up agreements, is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- ---------------------------------------------------------------------------
<S> <C>
3,111,458 On the date of this prospectus
239,343 Within six months of the date of this prospectus
399,199 Between six and twelve months from the date of this prospectus
</TABLE>
As of the date of this prospectus, 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 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 these 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.
Some of our 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."
SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER OUR
ACQUISITION
Some of the 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 SOLID CAPITAL MARKETS HAS A LIMITED UNDERWRITING HISTORY
ISG Solid Capital Markets was first registered a broker-dealer in 1997 and
has completed three public offerings in which it was a co-managing underwriter.
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 Solid Capital Markets 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 us from the sale of the shares offered in
this offering are estimated to be approximately $17,000,000. We presently intend
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 relating to the acquisition
by Claimsnet.com of its Internet software, intellectual property rights,
internet technology, and technology rights from American Medical Finance,
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 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 our 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) We anticipate utilizing these proceeds to fund the capital requirements
associated with our growth, including, without limitation, the retention and
training of additional personnel. In the ordinary course of our business, we
from time to time evaluate technologies for acquisition or license that, if
acquired, could be used in the development of product or software
candidates. We currently have no agreements, plans, or arrangements with
respect to any such acquisition or investment. Our management and in
particular our Board of Directors and authorized officers will have broad
discretion as to the application of these 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, 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 those investors determine to exercise such rescission
rights, we would be required to refund the entirety of the gross proceeds of
such private
20
<PAGE>
offerings to those investors. Those 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 our best estimate of the allocation of the net
proceeds of the sale of the shares offered in this offering based upon our
contemplated operations, our business plan, and current economic and industry
conditions and is subject to reapportionment of proceeds among the categories
listed above or to new categories in response to, among other things, changes in
our 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 our contemplated operations or business
plan and changes in economic and industry conditions.
Based on our operating plan, we believe that the net proceeds of this
offering, together with anticipated revenues from continuing operations, will be
sufficient to satisfy our capital requirements and finance our plans for
expansion for at least the next 18 months. We base such belief upon certain
assumptions, which may prove to be incorrect. Accordingly, there can be no
assurance that such resources will satisfy our capital requirements for said
period. We may require additional financing in order to expand our 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 we will be able to obtain needed additional capital on a
timely basis, on favorable terms, or at all.
Pending their use, we 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, giving 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.
23
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data is 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) YEAR ENDED DECEMBER 31,
THROUGH ----------------------------
DECEMBER 31, 1996 1997(1) 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)
----------------- ------------- -------------
----------------- ------------- -------------
Loss per weighted average common share outstanding
(basic and diluted)................................... $ (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' deficit................................................ (3,430,041) (1,676,850) (3,864,317)
</TABLE>
- ------------------------
(1) Includes the results of operations of Medica from June 2, 1997, its date of
acquisition.
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, 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.
In July 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, in exchange for $3,740,000, payable through the
issuance of a promissory note to American Medical Finance. On September 23,
1997, American Medical Finance 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 was engaged in the financing and processing
of medical accounts receivable and had made preliminary development efforts to
expand
25
<PAGE>
into the business of Claimsnet.com, including the proprietary claims processing
software. American Medical Finance 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. See "Related Party Transactions."
In June 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 operations 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:
- 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 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
26
<PAGE>
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 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, 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 in
connection with the financing of the development of Claimsnet.com's proprietary
software. On September 23, 1997, American Medical Finance 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 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 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 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 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 described above. Accrued interest at
December 31, 1998, under the 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.
27
<PAGE>
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.
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 March 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
28
<PAGE>
- 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. 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 1998, 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:
- industry standard website management software,
- state-of-the-art commercial security and encryption software licensed by
Claimsnet.com from third parties, including Citrix, and
- 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
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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 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 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 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
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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.
CUSTOMERS
Claimsnet.com views its customers as both the healthcare providers
submitting claims and the payors accepting claims.
Claimsnet.com is currently 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 be 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.
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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.
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.
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 Inc., 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.
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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 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 March 1999, 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 services agreement with American Medical Finance. 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. 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, DIRECTOR-NOMINEE, AND EXECUTIVE OFFICERS
The directors, director-nominee 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................................. 42 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
Westcott W. Price, III............................ 59 Class II Director-Nominee
</TABLE>
The following is certain summary information with respect to the executive
officers, director-nominee, 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 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
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Chief Financial Officer and Vice President of Quality Management Services for
Sweetwater Health Enterprises, Inc., a NCQA accredited credentials verification
organization and commercial software firm serving the managed healthcare
industry. From April 1991 to May 1995, Mr. Miller served as Chief Financial
Officer and Secretary of Quantra Corporation (formerly, Melson Technologies), an
information systems company serving the 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 American
Medical Finance 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 in
operations and management positions for high volume and technical customer
support operations. 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 American Medical Finance. Since June 1994, he served as Senior
Vice President of American Medical Finance 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 & Gamble.
ROBERT H. BROWN, JR. has served as a director of Claimsnet.com since April
1996 and had been a director of American Medical Finance 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 Ortivus AB, 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 Ortivus AB.
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.
DIRECTOR-NOMINEE
The following individual is a nominee to the Company's Board of Directors
and will be appointed as a Class II director at the close of this offering.
WESTCOTT W. PRICE, III is the former President, Chief Executive Officer and
Vice Chairman of the Board of Directors of FHP International Corporation
("FHP"), a publicly-held managed health care company. During his fifteen-year
tenure at FHP, FHP's annual revenues grew from under $50 million
40
<PAGE>
to over $4 billion. In February 1997, FHP was acquired for $2.1 billion. Before
joining FHP in 1981, Mr. Price served as President and Chief Executive Officer
of Wm. Flaggs, Inc., a restaurant chain. From 1970 to 1973, Mr. Price was the
Chief Operating Officer of California Medical Centers, a publicly-held long-term
care and retail pharmacy-operating company in Los Angeles. Mr. Price has in the
past served on various boards, including Health Maintenance Life Insurance
Company and Talbert Medical Management Company, a physician practice management
company with revenues of $460 million. He currently serves as a director of
Scripps Health, a non-profit hospital operating company, and of StorComm, Inc.,
as well as other private companies. Mr. Price is a member of the Advisory Board
for the School of Medicine at the University of California-Irvine.
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. Upon the close of this offering, Mr. Price will be appointed as
a Class II director. After the initial term, each class is elected for a term of
two years. At each annual meeting of stockholders, directors are elected to
succeed those in the Class the term of which expires at that annual meeting,
such newly elected directors to hold office until the second succeeding annual
meeting and the election and qualification of their respective successors.
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
In April 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.
In April 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.
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<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- ---------------------------------------------------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
Bo W. Lycke....................................................................... 1998 $ 108,333 $ --
Chairman of the Board of Directors, President, and Chief Executive Officer 1997 50,415 --
1996 17,500 --
Terry A. Lee(1)................................................................... 1998 125,000 --
Executive Vice President of Marketing and Technology 1997 122,806 153,500
1996 28,365 --
Randall S. Lindner................................................................ 1998 100,000 --
Vice President of Technology 1997 74,498 --
Paul W. Miller.................................................................... 1998 100,000 20,000
Vice President and Chief Financial Officer 1997 11,538 --
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, 1998, 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, 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
80,000 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. With the exception of those options to be issued to Mr. Price, the
terms of which are described below, fifty percent of the options granted under
the Directors' Plan become "vested" in the option holder on the first
anniversary of the date of grant with the remainder vesting on the second
anniversary of the date of grant. During the period an option is exercisable,
the option holder may pay the purchase price for the share subject to the option
in cash, except 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.
42
<PAGE>
Mr. Price will be granted 30,000 options upon the closing of this offering
with an excercise price equal to the initial public offering price per share.
The options will expire ten years from the date of grant. Mr. Price's options
will "vest" every 90 days, commencing 90 days after the close of this offering
in 7,500 share increments. During the period an option is excercisable, Mr.
Price may pay the purchase price for the shares subject to the option in cash,
except he may, under certain circumstances, make payments by surrendering shares
of common stock (at their then fair market value on the date of excercise), or
by 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 of 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 this prospectus
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 (a) upon his death, (b) by Claimsnet.com
due to disability, (c) by Claimsnet.com without cause, or (d) by Mr. Lycke
voluntarily upon Claimsnet.com's
43
<PAGE>
default or unremedied Adverse Change in Duties (as defined in the agreement),
then Claimsnet.com is required to pay Mr. Lycke a lump sum severance payment
equal to his then current annual salary. Mr. Lycke may terminate his employment
at any time upon at least 30 days written notice to 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
In April 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
44
<PAGE>
(determined as of the date the option is granted) of common stock for which any
person may be granted incentive stock options which first become exercisable in
any calendar year may not exceed $100,000.
No 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 NUMBER OF PERCENT PRIOR PERCENT AFTER
OF BENEFICIAL OWNER SHARES TO 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 .......................... 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.
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<PAGE>
(3) Includes 381,603 shares of common stock owned of record by American Medical
Finance, 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. Messrs. Lycke, Bensen, and Brown are stockholders
of American Medical Finance owning 70.1%, 11.2%, and 17.7% of the
outstanding capital stock of American Medical Finance, respectively.
Therefore, Messrs. Lycke, Bensen, and Brown may be deemed to beneficially
own the shares of common stock owned by American Medical Finance.
(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.
See footnote (3), above. Excludes options granted under the Directors' Plan
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. 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 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. 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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<PAGE>
RELATED PARTY TRANSACTIONS
American Medical Finance 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, 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, a Director and Senior Vice President, and a Director,
respectively, of American Medical Finance. Messrs. Lycke, Bensen, and Brown are
all stockholders of American Medical Finance, owning 70.1%, 11.2%, and 17.7% of
the outstanding capital stock of American Medical Finance, respectively. See
"Principal Stockholders." Such individuals will devote minimal time to winding
up the business and affairs of American Medical Finance 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 in exchange for a promissory note in the amount of $3,740,000.
On September 19, 1997, American Medical Finance 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 and
Claimsnet.com entered into the Service Agreement in which American Medical
Finance 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 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, 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, American Medical Finance 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 purchased
nine units of Claimsnet.com's 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 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 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.
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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:
- 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,
- the name and address, as they appear on Claimsnet.com's books, of the
stockholder proposing such business,
50
<PAGE>
- the class and number of shares of Claimsnet.com which are beneficially
owned by the stockholder, and
- any material interest of the stockholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no business shall
be conducted at the stockholder meeting, except in accordance with the
procedures set forth in the By-laws. The chairman of the meeting, as determined
in accordance with the By-Laws, shall, if the facts warrant, determine and
declare 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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<PAGE>
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 Solid
Capital Markets 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 this
Registration Statement. The Underwriting Agreement provides that the obligation
of the underwriters to purchase the shares is subject to some 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 some 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 some 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 some 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 related matters.
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.
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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 Cruttenden Roth for a period of at
least 12 months after 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. 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 discount, 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 some 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, 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 after 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 some 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 underlying
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 issued on their exercise, to make all necessary filings
to permit a public offering of the Representatives' Warrants and underlying
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 the underlying
shares of common stock of its intention to file a registration statement, and in
such case, holders of the Representatives' Warrants and the underlying shares
shall have the right to require Claimsnet.com to include such shares of common
stock in such registration statement at Claimsnet.com's expense (subject to some
limitations).
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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 prevail in the open
market. Neither Claimsnet.com nor the underwriters make 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 Solid Capital Markets, 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 underwriter. Prospective purchasers of
the shares offered hereby should consider this limited experience in evaluating
this offering. There can be no assurance that the lack of experience of ISG
Solid Capital Markets 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.
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<PAGE>
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 Cruttenden Roth and ISG Solid Capital
Markets, LLC 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 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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CLAIMSNET.COM INC.
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-20
Financial Statements
Balance Sheets as of December 31, 1996 and 1995................................................... F-21
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-22
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-23
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-24
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-25
Unaudited Balance Sheet as of March 31, 1997...................................................... F-28
Unaudited Statement of Operations for the three months ended March 31, 1997....................... F-29
Unaudited Statement of Cash Flows for the three months ended March 31, 1997....................... F-30
Notes to Unaudited Financial Statements as of March 31, 1997...................................... F-31
</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)
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)
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>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Claimsnet.com inc.
(formerly American NET Claims)
We have audited the accompanying consolidated balance sheets of
Claimsnet.com inc. (formerly American NET Claims) 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 February 28, 1999.
F-5
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS)
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)
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 -- --
American Medical Finance 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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
NOTE A--ORGANIZATION AND BACKGROUND
Claimsnet.com inc. (formerly American Net Claims) ("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 ("American Medical Finance"). American Medical Finance
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 American Medical Finance. (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 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.
F-11
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
SOFTWARE
Financial Accounting Standard No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," provides for the
capitalization of certain costs related to development of computer software
products. Software development costs through December 31, 1998 include
internally developed costs totaling $395,322, software purchased from American
Medical Finance 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
F-12
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
future based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share", in 1997, which
requires the disclosure of basic and diluted net income (loss) per share. Basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of 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.
F-13
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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)
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 American Medical Finance 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 American Medical Finance below.
The Company has a note payable to American Medical Finance (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 American Medical
Finance 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)
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 American Medical Finance. 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
American Medical Finance. Accordingly, the asset was recorded at $615,000 with a
corresponding note payable to American Medical Finance $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
F-16
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
(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.
On September 23, 1997, American Medical Finance 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 American Medical Finance 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 American
Medical Finance (see Note D).
Certain of the Company's expenses were paid by American Medical Finance 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
American Medical Finance 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.
F-17
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
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 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
F-18
<PAGE>
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
NOTE L--YEAR 2000 (CONTINUED)
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.
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)
On February 28, 1999 the Company completed the sale of the 1999 Private
Placement for which the Company will issue 125,000 shares of common stock, and
enter into note agreements in the amount of $1,000,000. Net proceeds from the
transaction will be $900,000. The notes and all accrued interest will be due
upon the earlier of the first day subsequent to the closing of the Company's
initial public offering or one year from the closing of the private placement.
The notes will bear 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
("American Medical Finance"), accounted for 22% of the revenues for 1996. The
remaining three customers accounted for 39%, 22% and 13%, respectively. American
Medical Finance 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, American Medical Finance, 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 ("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 ("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 LOGO]
[LOGO]
, 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 in February
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. On February 28, 1999, Claimsnet.com completed the
sale of the 1999 Private Placement for which Claimsnet.com issued 125,000 shares
of common stock, and entered into note agreements in the principal amount of
$1,000,000. Net proceeds from the transaction were $900,000. The notes and all
accrued interest will be due upon the earlier of the first day subsequent to the
closing of Claimsnet.com's initial public offering or one year from the closing
of the private placement. The notes will bear interest at the rate of 12% per
annum. 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), 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 to American Medical Finance, in the
principal amount of $3,740,000
10.6* Security Agreement, dated July 31, 1996, between Claimsnet.com inc. and American Medical Finance.
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 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 American Medical Finance 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 page attached hereto).
99 Consent of Westcott W. Price, III
</TABLE>
- ------------------------
* Incorporated by reference to the corresponding exhibit filed by the
Registrant with the Registration Statement on Form S-1 (Registration No.
333-36209).
+ 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 Amendment to
the Registration Statements to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Dallas, Texas on March 2, 1999.
Claimsnet.com inc.
By: /s/ BO W. LYCKE
------------------------------------------
Bo W. Lycke
Chairman of the Board of Directors,
President, and Chief Executive Officer
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 March 2, 1999
Bo W. Lycke (Principal Executive
Officer)
Vice President and Chief
* Financial Officer
- ------------------------------ (Principal Financial and March 2, 1999
Paul W. Miller Accounting Officer)
* Executive Vice President of
- ------------------------------ Marketing and Technology March 2, 1999
Terry A. Lee and Director
*
- ------------------------------ Director March 2, 1999
Ward L. Bensen
*
- ------------------------------ Director March 2, 1999
Robert H. Brown, Jr.
*
- ------------------------------ Director March 2, 1999
Sture Hedlund
*
- ------------------------------ Director March 2, 1999
John C. Willems, III
<TABLE>
<S> <C> <C> <C>
*By: /s/ BO W. LYCKE
-------------------------
Bo W. Lycke
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
2,500,000 Shares
CLAIMSNET.COM INC.
Common Stock
FORM OF
UNDERWRITING AGREEMENT
New York, New York
_____________, 1999
Cruttenden Roth Incorporated
24 Corporate Plaza
Newport Beach, CA 92660
ISG Solid Capital Markets, LLC
592 Fifth Avenue, 5th Floor
New York, New York 10036
Claimsnet.com inc., a Delaware corporation (the "Company"), hereby confirms
its agreement with you. The Company proposes to issue and sell to you (referred
to together as the "Underwriter") pursuant to this Underwriting Agreement (the
"Agreement") an aggregate of 2,500,000 shares (the "Firm Shares") of the
Company's common stock, par value $.001 per share (the "Common Stock"). The
Company has also agreed to grant you an option to purchase up to an additional
375,000 shares of Common Stock (the "Option Shares"). The Firm Shares and the
Option Shares are referred to together as the "Shares."
You have advised the Company that you desire to purchase the Shares. The
Company confirms the agreement made by it with respect to the purchase of the
Shares by the Underwriter, as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, the Underwriter that:
(a) A registration statement on Form S-1 (File No. 333-______) with
respect to the Shares, including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and in
conformity with the requirements of the Act and the rules and regulations of the
Commission thereunder (the "Rules and Regulations"), and one or more amendments
to such registration statement may have been so filed and such registration
statement has been delivered to you. After the execution of this Agreement, the
Company will file with the Commission either (i) if such registration statement,
as it may have been amended, has been declared by the Commission to be effective
under the Act, either (A) if the Company relies on Rule 434 under the Act, a
Term Sheet (as hereinafter defined) relating to
<PAGE>
the Shares, that shall identify the Preliminary Prospectus (as hereinafter
defined) that it supplements containing such information as is required or
permitted by Rules 434, 430A and 424(b) under the Act or (B) if the Company does
not rely on Rule 434 under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of
this sentence as have been provided to and approved by you prior to the
execution of this Agreement, or (ii) if such registration statement, as it may
have been amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by you
prior to the execution of this Agreement. The Company may also file a related
registration statement with the Commission pursuant to Rule 462(b) under the Act
for the purpose of registering certain additional Shares, which registration
shall be effective upon filing with the Commission. As used in this Agreement,
the term "Registration Statement" means the registration statement initially
filed relating to the Shares, as amended at the time when it was or is declared
effective under the Act, including all financial schedules and exhibits thereto
and including any information omitted therefrom pursuant to Rule 430A under the
Act and included in the Prospectus (as hereinafter defined), and including any
registration statement filed with the Commission pursuant to Rule 462(b); the
term "Preliminary Prospectus" means each prospectus subject to completion filed
with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration Statement
or any amendment thereto at the time it was or is declared effective under the
Act); the term "Prospectus" means:
(i) If the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Shares that is first filed pursuant to Rule 424(b)(7) under
the Act, together with the Preliminary Prospectus identified therein that
such Term Sheet supplements;
(ii) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b) under
the Act; or
(iii) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act,
the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending
use of the Registration Statement or any Preliminary Prospectus. When any
Preliminary Prospectus was filed with the Commission it (i) contained all
statements required to
2
<PAGE>
be stated therein in accordance with, and complied in all material respects with
the requirements of, the Act and the Rules and Regulations and (ii) did not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective under the Act, it (i) contained or will contain all
statements required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements or, the Act and the
Rules and Regulations and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. When the
Prospectus or any Term Sheet that is a part thereof or any amendment or
supplement to the Prospectus is filed with the Commission pursuant to Rule
424(b) (or, if the Prospectus or part thereof or such amendment or supplement is
not required to be so filed, when the Registration Statement or the amendment
thereto Containing such amendment or supplement to the Prospectus was or is
declared effective under the Act) and on the Closing Date, the Prospectus, as
amended or supplemented at any such time, (i) contained or will contain all
statements required to be stated therein in accordance with, and complied or
will comply in all material respects with the requirements of, the Act and the
Rules and Regulations and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (b) do not apply to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or any amendment thereto
or the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by you specifically
for use therein. It is understood that the statements set forth in the
Prospectus on the cover page with respect to fees and discounts, paragraph one
(1) and three (3) under the heading "Underwriting" and the identity of counsel
to the Underwriter under the heading "Legal Matters" constitute the only
information furnished in writing by or on behalf of the Underwriter for
inclusion in the Registration Statement, the Preliminary Prospectus and
Prospectus, as the case may be.
(c) If the Company has elected to rely on Rule 462(b) and the
Registration Statement has not been declared effective under the Act (i) the
Company has filed a Registration Statement in compliance with, and that is
effective upon filing pursuant, to Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(d) Each of the Company and its subsidiary has been duly organized and
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate and
other) to own its properties and conduct its baseness as described in the
Registration Statement and Prospectus and is duly qualified or licensed to do
business as a foreign corporation and is in good standing in each other
jurisdiction in which the nature of its business or the character or location of
its properties requires such qualification, except where the failure to so
qualify will not materially affect the
3
<PAGE>
condition (financial or otherwise), business, properties, prospects, net worth
or results of operations of the Company and its subsidiary, taken as a whole.
The Company owns all of the outstanding shares of capital stock of its
subsidiary, ANC Holdings, Inc., and the Company has, no other subsidiaries.
Except for the stock of its subsidiary, the Company does not control, directly
or indirectly, any corporation, partnership, joint venture, association or other
business organization.
(e) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under "Capitalization;" the shares of
issued and outstanding capital stock of the Company set forth thereunder have
been duly authorized, validly issued, fully paid and nonassessable; except as
set forth in the Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any shares of capital stock of the Company or the
subsidiary have been granted or entered into by the Company; and the Common
Stock conforms in all material respects to all statements relating thereto
contained in the Registration Statement and Prospectus.
(f) The Shares and the shares of Common Stock to be issued upon
exercise of the Underwriter's Warrants (as hereinafter defined) when issued and
delivered pursuant to this Agreement (and the Underwriter's Warrants with
respect to the shares of Common Stock to be issued upon the exercise thereof),
will be duly authorized, validly issued, fully paid and nonassessable and free
of preemptive rights of any security holder of the Company. The Underwriter's
Warrants when issued, paid for and delivered in accordance with the terms of the
Warrant Agreement (as hereinafter defined), will be duly authorized, validly
issued, fully paid and nonassessable and free of preemptive rights of any
security holder of the Company. Neither the filing of the Registration Statement
nor the offering or sale of the Shares as contemplated in this Agreement gives
rise to any rights, other than those which have been waived or satisfied the
existence of which have been disclosed to the Underwriters, for or relating to
the registration of any shares of Common Stock, except as described in the
Registration Statement.
(g) Each of this Agreement and the Warrant Agreement have been duly
and validly authorized. This Agreement has been, and on the Closing Date the
Warrant will be, executed and delivered by the Company and, assuming due
execution by the other party hereto and thereto, each constitutes the valid and
binding obligation of the Company enforceable against the Company in accordance
with their terms, except as enforceability may be limited by applicable
bankruptcy, insolvency or other laws affecting the rights of creditors generally
and the discretion of the courts in granting equitable remedies. The Company has
full power and lawful authority to authorize, issue and sell the Shares to be
sold by it hereunder on the terms and conditions set forth herein. No consent,
approval, authorization or order of, or any filing or declaration with, any
governmental authority is required for the consummation of the transactions
contemplated by this Agreement or in connection with the issuance and sale of
the Shares or the Underwriter's Warrants by the Company, except such as have
been obtained under the Act or the Rules and Regulations and such as may be
required under state securities or Blue Sky laws or the bylaws and rules of the
National Association of Securities Dealers, Inc. (the
4
<PAGE>
"NASD") in connection with the purchase and distribution by the Underwriter of
the Shares and the Underwriter's Warrants to be sold by the Company.
(h) Except as described in the Prospectus, neither the Company
nor its subsidiary is in violation, breach or default (which includes any event
that has occurred which, with notice or lapse of time or both, would constitute
a default) of or under, and consummation of the transactions herein contemplated
and the fulfillment of the terms of this Agreement or the terms of any agreement
contemplated hereby will not conflict with, or result in a breach of, any of the
terms or provisions of, or constitute a default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any of the property or
assets of the Company or its subsidiary pursuant to the terms of any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or the subsidiary is a party or by which the Company or the
subsidiary may be bound or to which any of the property or assets of the Company
or the subsidiary is subject, nor will such action result in any violation of
the provisions of the articles of incorporation or any order, rule or regulation
applicable to the Company or the subsidiary of any court or any regulatory
authority or other governmental body having jurisdiction over the Company or the
subsidiary.
(i) Subject to the qualifications stated in the Prospectus, each of
the Company and the subsidiary has good and marketable title to all properties
and assets described in the Prospectus as owned by them, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the material leases
and subleases under which the Company or the subsidiary is the lessor or
sublessor of properties or assets or under which the Company or the subsidiary
holds properties or assets as lessee or sublessee as described in the Prospectus
are in full force and effect, and, except as described in the Prospectus,
neither the Company nor the subsidiary is in default in any material respect
with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or the subsidiary as lessor, sublessor, lessee or sublessee under any of
the leases or subleases mentioned above, or affecting or questioning the right
of the Company or the subsidiary to continued possession of the leased or
subleased premises or assets under any such lease or sublease, except as
described or referred to in the Prospectus; and each of the Company and the
subsidiary owns or leases all such properties described in the Prospectus as are
necessary to its operations as now conducted and, except as otherwise stated in
the Prospectus, as proposed to be conducted as set forth in the Prospectus.
(j) King Griffin & Adamson P.C. who has given its report on certain
financial statements filed and to be filed with the Commission as a part of the
Registration Statement, which are incorporated in the Prospectus, are, with
respect to the Company, independent public accountants as required by the Act
and the Rules and Regulations.
(k) The consolidated financial statements and the related notes of the
Company, any supplementary financial information, any related schedules and the
pro forma financial statements of the Company set forth in the Registration
Statement and the Prospectus present fairly the consolidated financial position
and results of operations and changes in
5
<PAGE>
stockholder's equity and cash flows of the Company on the basis stated in the
Registration Statement, at the respective dates and for the respective periods
to which they apply. The consolidated financial statements and the related notes
of Medica Systems, Inc., any supplementary financial information and any related
schedules set forth in the Registration Statement and the Prospectus, present
fairly the consolidated financial position and results of operations and changes
in stockholders' equity and cashflows of Medica Systems, Inc. on the basis
stated in the Registration Statement, at the respective dates and for the
respective periods to which they apply. Said financial statements and notes,
supplementary financial information, related schedules and pro forma financial
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a basis which is consistent during the periods
involved. The financial data with respect to the Company set forth in the
Prospectus under the captions "Summary of Consolidated Financial Information,"
"Capitalization," "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" fairly present, on
the basis stated in the Prospectus, the information set forth therein and have
been compiled on a basis consistent with that of the audited financial
statements included in the Prospectus. No other financial statements are
required by Form S-1 or otherwise to be included in the Registration Statement
or the Prospectus. The pro forma financial information included in the
Registration Statement has been prepared in accordance with the applicable
requirements of Regulation S-X and the assumptions used in the preparation of
such pro forma information are, in the opinion of the Company, reasonable. There
has been no material adverse change in the condition (financial or otherwise),
business, properties, prospects, net worth or results of operations of the
Company and its subsidiary, taken as a whole, from the latest information set
forth in the Registration Statement or the Prospectus, except as properly
described in the Prospectus; and there is no fact known to the Company or its
subsidiary which could reasonably be expected to have a material and adverse
effect on the future prospects of the Company and its subsidiary (other than
political or economic matter of general applicability or as properly described
in the Prospectus).
(l) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and except as described in
the Registration Statement, the Company has not paid or declared any dividends
or other distributions of any kind on any class of its capital stock nor has it
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which is material to the business of the Company, and there
has not been any change in the capital stock of, or any material incurrence of
long-term debt by the Company or its subsidiary or any material issuance of
options, warrants or other rights to purchase the capital stock of the Company
or its subsidiary or any material adverse change or any material development
involving, so far as the Company or its subsidiary can now reasonably foresee, a
prospective adverse change in the condition (financial or otherwise), net worth,
results of operations, business, key personnel or properties of the Company or
its subsidiary which would be material to the business or condition (financial
or otherwise) of the Company and its subsidiary, taken as a whole, and neither
the Company nor its subsidiary has become a party to, and neither the business
nor the property of the Company or its subsidiary has become the subject of, any
material litigation whether or not in the ordinary course of business.
6
<PAGE>
(m) Except as set forth in the Prospectus, there is not now pending or
threatened, any action, suit or proceeding to which the Company or its
subsidiary is a party before or by any court or governmental agency or body,
which might result in any material adverse change in the condition (financial or
otherwise), business, properties, prospects, net worth, or results of operations
of the Company and its subsidiary, taken as a whole, nor are there any actions,
suits or proceedings related to environmental matters or related to
discrimination on the basis of age, sex, religion or race; and no labor disputes
involving the employees of the Company or its subsidiary exist or are threatened
which might be expected to materially adversely affect the condition (financial
or otherwise), business, properties, prospects, net worth or results of
operations of the Company and its subsidiary, taken as a whole.
(n) Except as disclosed in the Prospectus, each of the Company and its
subsidiary has sufficient licenses, permits, certificates and other governmental
authorizations as are required for the conduct of its business or the ownership
of its property as described in the Prospectus and are in all material respects
complying therewith. Neither the Company nor its subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit nor, to the knowledge of the Company or its
subsidiary, do any of the activities or business of the Company or its
subsidiary cause the Company or its subsidiary to be in violation of, or cause
the Company or its subsidiary to violate, any law, rule, regulation or order of
the United States, any state, county or locality, or of any agency or body of
the United States or of any state, county or locality, the violation of which
would have a material adverse impact upon the condition (financial or
otherwise), business, properties, prospects, net worth or results of operations
of the Company and its subsidiary, taken as a whole.
(o) Neither the Company nor its subsidiary has directly or indirectly,
at any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(p) On the Closing Date (as hereinafter defined) all transfer or other
taxes (including franchise, capital stock or other tax, other than income taxes,
imposed by any jurisdiction), if any, which are required to be paid in
connection with the sale and transfer of the Shares to the Underwriter hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been fully complied with in all material respects.
(q) There is no document or contract of a character required to be
described in the Registration Statement or Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required.
7
<PAGE>
(r) The Company has not taken nor will take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute the stabilization or manipulation of
the price of the Shares. The Company has not distributed and will not distribute
any offering material in connection with the offering and sale of the Shares
other than the Preliminary Prospectus and the Registration Statement, the
Prospectus or other materials permitted or required by the Act.
(s) The Company has not entered into any agreement pursuant to which
any person is entitled, either directly or indirectly, to compensation from the
Company for services as a finder in connection with the public offering referred
to herein.
(t) There are no holders of shares of Common Stock or other securities
of the Company having rights to register such Common Stock or other securities
by means of the Registration Statement.
(u) The Company has entered into employment contracts with its
principal executive officers, including Bo W. Lycke, Terry A. Lee and Randall S.
Linder, and the description of such employment agreements in the Prospectus is
true, correct and complete in all material respects.
(v) No labor dispute with the employees of the Company exists or is
threatened or imminent that could result in a material adverse change in the
condition (financial or otherwise), business, properties, prospects, net worth
or results of operations of the Company, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(w) The Company owns or possesses, or can acquire on reasonable terms,
all material patents, patent applications, trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential information
currently employed by them in connection with their respective businesses, and
the Company has not received any notice of infringement of or conflict with
asserted rights of any third party with respect to any of the foregoing, which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
funding, would result in a material adverse change in the condition (financial
or otherwise), business, properties, prospects, net worth or results of
operations of the Company and its subsidiary, taken as a whole, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(x) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amount as the Company
believes are prudent and customary in the businesses in which it is engaged; the
Company has not been refused any insurance coverage sought or applied for; and
the Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business, properties, prospects, net worth or results
of operations of the Company and
8
<PAGE>
its subsidiary, taken as a whole, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(y) The Company will conduct its operations in a manner that will not
subject it to registration as an investment company under the Investment Company
Act of 1940, as amended, and this transaction will not cause the Company to
become an investment company subject to registration under such Act.
(z) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company and its subsidiary, taken as a whole) and has paid
all taxes required to be paid and any other assessment, fine or penalty levied,
to the extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith or
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(aa) Any certificate signed by any officer of the Company and
delivered to the Underwriter or to counsel for the Underwriter shall be deemed a
representation and warranty made by the Company to the Underwriter as to the
matters covered thereby and shall be deemed incorporated herein in its entirety
and shall be effective as if such representation and warranty were made herein.
(bb) The Company owns no shares of stock or any other equity
securities of any corporation or has any equity interest in any firm,
partnership, association or other entity, except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(cc) The books, records and accounts and systems of internal
accounting controls of the Company currently comply in all material respects
with the requirements of Section 13(b)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(dd) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Underwriter is or will be, when made,
inaccurate, untrue or incorrect in any material respect, unless such statement,
representation, warranty or covenant is qualified as to materiality, in which
case it is not or will not be, when made, inaccurate, untrue or incorrect.
9
<PAGE>
(ee) The Shares have been approved for listing on the Nasdaq SmallCap
Market under the symbol "CLAI," and the Boston Stock Exchange under the symbol
"CLA" subject only to notice of issuance.
(ff) The business, operations and facilities of each of the Company
and its subsidiary have been and are being conducted in compliance in all
material respects with all applicable laws, ordinances, rules, regulations,
licenses, permits, approvals, plans, authorizations or requirements relating to
occupational safety and health, or pollution, or protection of health or the
environment (including, without limitation, those relating to emissions,
discharges, releases or threatened releases of pollutants, contaminants or
hazardous or toxic substances, materials or wastes into ambient air, surface
water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
chemical substances, pollutants, contaminants or hazardous or toxic substances,
materials or wastes, whether solid, gaseous or liquid in nature) of any
governmental department, commission, board, bureau, agency or instrumentality of
the United States or any state or political subdivision thereof, and all
applicable judicial or administrative agency or regulatory decrees, awards,
judgments and orders relating thereto; and neither the Company nor its
subsidiary has received any notice from any governmental instrumentality or any
third party alleging any violation thereof or liability thereunder (including,
without limitation, liability for costs of investigating or remediating sites
containing hazardous substances and/or damages to natural resources), which
violation would have, or could reasonably be expected to have, a material
adverse effect on the condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company and its subsidiary,
taken as a whole. The intended use and occupancy of each of the facilities owned
or operated by the Company or its subsidiary complies in all material respects
with all applicable codes and zoning laws and regulations and there is no
pending or, to the knowledge of the Company or its subsidiary, threatened
condemnation, zoning change, environmental or other proceeding or action that
will in any material respect adversely affect the size of, use of, improvements
on, construction on, or access to such facilities.
(gg) Each executive officer, director and certain stockholders of the
Company, as listed on SCHEDULE A attached hereto, has delivered to the
Underwriter an agreement (the "Lock-up Agreement"), in substantially the form of
ANNEX A, to the effect that he, she or it will not, for a period of two years
after the date hereof, without the prior written consent of the Underwriter,
offer to sell, sell, contract to sell, grant any option to purchase or otherwise
dispose (or announce any offer, sale, grant of any option to purchase or other
disposition) of any shares of Common Stock or securities convertible into, or
exchangeable or exercisable for, shares of Common Stock, except for bona fide
private sales or transfers of Common Stock to purchasers or transferees provided
that such person agrees in writing to be bound by the terms of the Lock-up
Agreement.
(hh) No transaction has occurred between or among the Company or any
of its affiliates, officers or directors or any affiliate or affiliates of any
such officer or director that is required to be described in and is not
described in the registration Statement and the Prospectus.
10
<PAGE>
(ii) The merger of American Net Claims, Inc. with and into the Company
(the "Merger") was duly authorized under all applicable laws by each of the
parties thereto; the merger agreement was duly authorized, executed and
delivered by all corporate action of the Company and American Net Claims, Inc.
and such agreement constitutes the legal, valid and binding obligation of each
of the parties thereto. No registration or filing with, or approval, consent or
action by, any governmental authority is required, other than those which have
heretofore been made or obtained in connection with the Merger. As a result of
the consummation of the Merger, the Company is, by operation of law and without
further action, the legal successor to American Net Claims, Inc.
(jj) Neither the Company nor any of its affiliates nor any person
acting on the Company's behalf has, directly or indirectly, at any time within
the past six (6) months made, nor will any such party make within six (6) months
of the Closing Date, any offer or sale of any security or solicitation of any
offer to buy any security under circumstances that would eliminate the
availability of the exemption from registration under Regulation D under the Act
in connection with the 1998 Private Placements nor which would violate the Act.
2. Purchase, Delivery and Sale of the Shares.
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties and agreements herein contained,
the Company agrees to issue and sell to the Underwriter, and the Underwriter
agrees to buy from the Company, at $_____ per share, at the place and time
hereinafter specified, 2,500,000 shares of Common Stock (the "Firm Shares").
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option (the "Option") to the
Underwriter to purchase up to an additional 375,000 shares of Common Stock (the
"Option Shares"), at $_____ per share, at the place and time hereinafter
specified. The Option hereby granted will expire 45 days after the date of the
Prospectus, and may be exercised in whole or in part only for the purpose of
covering over-allotments which may be made in connection with the offerings and
distribution of the Firm Shares upon written notice from the Underwriter to the
Company setting forth the amount of Option Shares as to which the Underwriter is
exercising the Option and the time and date of payment for such Option Shares.
Such time and date of delivery for the Option Shares (the "Option Closing Date")
shall be determined by the Underwriter, but shall not be, unless otherwise
agreed upon by the Underwriter and the Company, later than seven full business
days after the exercise of the Option, and in no event prior to the Closing Date
(as hereinafter defined). If the Option is exercised as to all or any portion of
the Option Shares, the Company shall sell all or such portion of the Option
Shares to the Underwriter and the Underwriter shall purchase all or such portion
of the Option Shares from the Company.
(c) Delivery of the Firm Shares against payment therefor shall take
place at the offices of Greenberg Traurig, MetLife Building, 200 Park Avenue,
15th Floor, New York, New York 10166 (or at such other place as may be
designated by agreement between you
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and the Company) at 10:00 a.m., New York time, on _______________, 1999, or at
such later time and date as you may designate but not later than ten (10) days
from the effective date of the Registration Statement under the Act (the
"Effective Date"), such time and date of payment and delivery for the Firm
Shares being herein called the "Closing Date." In addition, in the event that
any or all of the Option Shares are purchased by the Underwriter, delivery of
the Option Shares against payment therefor shall take place at the
above-mentioned offices of Greenberg Traurig (or at such other place as may be
designated by agreement between you and the Company), at 10:00 a.m., New York
time, on the Option Closing Date as specified in the notice from the Underwriter
to the Company.
(d) The Company will make the certificates for the Firm Shares or the
Option Shares, as the case may be, to be purchased by the Underwriter hereunder
available to you for inspection at least one (1) full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
shall be in such names and denominations as you may request at least two (2)
full business days prior to the Closing Date or the Option Closing Date, as the
case may be. Time shall be of the essence, and delivery of the certificates
representing the Firm Shares or the Option Shares, as the case may be, at the
time and place specified in this Agreement is a further condition to the
obligations of the Underwriter.
If so requested by you, definitive certificates in negotiable
form for the Firm Shares or the Option Shares, as the case may be, to be
purchased by the Underwriter hereunder will be delivered by the Company to you
on the Closing Date or the Option Closing Date, as the case may be, against
payment of the purchase price therefor, by certified or bank cashier's checks in
New York Clearing House funds, payable to the order of the Company or by wire
transfer. However, if eligible, the Shares may be delivered in book entry form
using the Full FAST facilities of The Depository Trust Company.
It is understood that the Underwriter proposes to offer the
Shares to be purchased hereunder to the public, upon the terms and conditions
set forth in the Registration Statement, after the Registration Statement
becomes effective under the Act.
(e) On the Closing Date, the Company will further issue and sell to
you or, at your direction, to your respective bona fide officers, for a total
purchase price of $25.00, warrants entitling the holders thereof to purchase an
aggregate of 250,000 shares of Common Stock, at an initial exercise price of
$______ per share (the "Underwriter's Warrants") for a period of four (4) years,
such period to commence twelve (12) months after the Effective Date. Such
Underwriter's Warrants shall contain such other terms and provisions as may be
set forth in an agreement with respect thereto (the "Warrant Agreement")
executed and delivered by the Company and you simultaneously with the execution
and delivery of this Agreement. As provided in the Warrant Agreement, you may
designate that the Underwriter's Warrants be issued in varying amounts directly
to your respective bona fide officers and not to you. Such designation will be
made by you only if you determine that such issuances would not violate the
Rules of Conduct of the National Association of Securities Dealers, Inc.
relating to the review of corporate financing arrangements. The holders of the
Underwriter's Warrants will be entitled to the registration rights set forth in
Section 10 of the Warrant Agreement.
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3. Covenants of the Company. The Company covenants and agrees with the
Underwriter as to the matters set forth in subparagraphs (a) through (r) below:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective under the Act at the time of execution of this
Agreement, and any amendments thereto to become effective under the Act as
promptly as possible. If required, the Company will file the Prospectus or any
Term Sheet that constitutes a part thereof and any amendment or supplement
thereto with the Commission in the manner and within the time period required by
Rules 434 and 424(b) under the Act. During any time when a prospectus relating
to the Shares is required to be delivered under the Act, the Company (i) will
comply in all material respects with all requirements imposed upon it by the Act
and the Rules and Regulations to the extent necessary to permit the continuance
of sales of or dealings in the Shares in accordance with the provisions hereof
and of the Prospectus, as then amended or supplemented, and (ii) except as
required by law, will not file with the Commission the Prospectus, Term Sheet or
the amendment referred to in the second sentence of Section 1(a) hereof, any
amendment or supplement to such Prospectus, Term Sheet or any amendment to the
Registration Statement of which the Underwriter previously have been advised and
furnished with a copy for a reasonable period of time prior to the proposed
filing and as to which filing the Underwriter shall not have given their
consent. The Company will prepare and file with the Commission, in accordance
with the Rules and Regulations, promptly upon request by the Underwriter or
counsel for the Underwriter, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be necessary or advisable
in connection with the distribution of the Shares by the Underwriter, and will
use its best efforts to cause any such amendment to the Registration Statement
to be declared effective under the Act by the Commission as promptly as
possible. The Company will advise the Underwriter, promptly after receiving
notice thereof, of the time when the Registration Statement or any amendment
thereto has been filed or declared effective under the Act or the Prospectus or
any amendment or supplement thereto has been filed and will furnish the
Underwriter with copies of such documents and provide evidence satisfactory to
the Underwriter of each such filing or effectiveness.
The Company will advise the Underwriter, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or any
amendment thereto or any stop order or any order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, (ii) the suspension of the qualification of any
jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use its reasonable
best efforts to prevent the issuance of any such stop order and, if any such
order or stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company authorizes
the Underwriter and dealers to use the Prospectus in connection with the sale of
the Shares for such period as, in the
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opinion of counsel to the Underwriter, the use thereof is required to comply
with the applicable provisions of the Act and the Rules and Regulations. In case
of the happening, at any time within such period as a Prospectus is required
under the Act to be delivered in connection with sales by an underwriter, of any
event of which the Company has knowledge and which materially affects the
Company or the securities of the Company or which, in the opinion of counsel for
the Company or counsel for the Underwriter, should be set forth in an amendment
of the Registration Statement or a supplement to the Prospectus in order to make
the statements therein not then misleading, in light of the circumstances
existing at the time the Prospectus is required to be delivered to a purchaser
of the Shares, or in case it shall be necessary to amend or supplement the
Prospectus to comply with law or with the Rules and Regulations, the Company
will notify you promptly and forthwith prepare and furnish to you copies of such
amended Prospectus or of such supplement to be attached to the Prospectus, in
such quantities as you may reasonably request, in order that the Prospectus, as
so amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements in the Prospectus, in light of the circumstances under which they
were made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriter,
except that in case the Underwriter is required, in connection with the sale of
the stock, to deliver a Prospectus ninety (90) days or more after the effective
date of the Registration Statement, the Company will upon request of and at the
expense of the Underwriter, amend or supplement the Registration Statement and
Prospectus and furnish the Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply in all material respects with the Act, the
Rules and Regulations and the Exchange Act and the rules and regulations
thereunder in connection with the offering and issuance of the Shares.
(b) The Company will use its reasonable best efforts to qualify to
register the Shares for sale under the securities or "blue sky" laws of such
jurisdictions as the Underwriter may reasonably designate and will make such
application and furnish such information as may be required for that purpose and
to comply with such laws, provided the Company shall not be required to qualify
as a foreign corporation or a dealer in securities or to execute a general
consent to service of process in any jurisdiction in any action other than one
arising out of the offering or sale of the Shares. The Company will, from time
to time, prepare and file such statements and reports as are or may be required
to continue such qualification in effect for so long a period as the Underwriter
may reasonably request.
(c) If the sale of the Shares provided for herein is not consummated
for any reason caused by the Company, the Company shall pay all costs and
expenses incident to the performance of the Company's obligations hereunder
including, but not limited to, all of the expenses itemized in Section 8,
including the accountable expenses of the Underwriter, including legal fees.
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(d) For so long as the Company is a reporting company under either
Section 12(b) or (g) or 15(d) of the Exchange Act, the Company, at its expense,
will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants) in reasonable detail and,
at its own expense, will furnish such report to you during the period ending
five (5) years from the date hereof; (i) as soon as practicable after the end of
each fiscal year, a balance sheet of the Company as at the end of such fiscal
year, together with statements of income, changes in stockholder's equity and
cash flows of the Company for such fiscal year, all in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as they are available, a copy of all reports
(financial or other) mailed to security holders; (iii) as soon as they are
available, a copy of all nonconfidential reports and financial statements
furnished to or filed with the Commission; and (iv) such other information as
you may from time to time reasonably request.
(e) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (d) above will be furnished
on a consolidated basis to the extent the accounts of the Company and its
subsidiary or subsidiaries are consolidated in reports finished to its
stockholders generally.
(f) The Company will deliver to you at or before the Closing Date two
(2) signed copies of the Registration Statement, including all financial
statements and exhibits filed therewith, and of all amendments thereto, and will
deliver to the Underwriter such number of copies of the Registration Statement,
including financial statements but without exhibits, as the Underwriter may
reasonably request. The Company will deliver to or upon the order of the
Underwriter, from time to time until the effective date of the Registration
Statement, as many copies of any Preliminary Prospectus as the Underwriter may
reasonably request. The Company will deliver to the Underwriter on the effective
date of the Registration Statement and thereafter for so long as a Prospectus is
required to be delivered under the Act, from time to time, as many copies of the
Prospectus, in final form, or as thereafter amended or supplemented, as the
Underwriter may from time to time reasonably request.
(g) The Company will make generally available to its security holders
and deliver to you as soon as it is practicable to do so, but in no event later
than ninety (90) days after the and of twelve (12) months after its current
fiscal quarter, an earnings statement (which need not be audited) covering a
period of at least twelve (12) consecutive months beginning after the effective
date of the Registration Statement, which shall satisfy the requirements of
Section 11(a) of the Act.
(h) The Company will apply the net proceeds from the sale of the
Shares for the purposes set forth under "Use of Proceeds" in the Prospectus, and
will file such reports with the Commission with respect to the sale of the
Shares and the application of the proceeds therefrom as may be required pursuant
to Rule 463 under the Act.
(i) The Company will promptly, upon your written request, prepare and
file with the Commission any amendments or supplements to the Registration
Statement, Preliminary Prospectus or Prospectus and take any other action which,
in the reasonable opinion
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of Greenberg Traurig, counsel to the Underwriter, may be reasonably necessary or
advisable in connection with the distribution of the Shares, and will use its
best efforts to cause the same to become effective as promptly as possible.
(j) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Underwriter's Warrants outstanding from time to time.
(k) Upon completion of this offering, the Company will make all
filings required, including registration under the Exchange Act, to obtain the
listing of its Common Stock on the Nasdaq SmallCap Market and the Boston Stock
Exchange, and will effect and will use its best efforts to maintain such
listings for at least five (5) years from the date of this Agreement.
(l) The Company represents that it has not taken and agrees that it
will not take, directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in the stabilization or manipulation
of the price of the Shares or to facilitate the sale or resale of the Shares.
The Company has not distributed and will not distribute any offering material in
connection with the offering and sale of the Shares other than the Preliminary
Prospectus and the Registration Statement, the Prospectus or other materially
permitted or required by the Act.
(m) On the Closing Date and simultaneously with the delivery of the
Firm Shares, the Company shall execute and deliver to Cruttenden Roth
Incorporated and its designees the Underwriter's Warrants for an initial
exercise price of $______ per share. The Underwriter's Warrants will be
substantially in the form as filed as an exhibit to the Registration Statement.
(n) During the one hundred eighty (180) day period commencing on the
Closing Date, the Company will not, without the prior written consent of the
Underwriter, grant options to purchase shares of Common Stock at a price less
than the initial public offering price except as may be provided by the
Company's currently existing stock option plan as described in the Prospectus.
To the extent that such stock option plan allows, the Company may issue shares
upon exercise of the options.
(o) For a period of two (2) years from the Effective Date, when deemed
necessary by the Chief Financial Officer of the Company, the Company, at its
expense, shall cause its regularly engaged independent certified public
accountants to review (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's quarterly report on
Form 10-Q and the mailing of quarterly financial information to stockholders.
(p) Pending completion of the offering and for a period of ninety (90)
days thereafter, the Company will not issue press releases or engage in other
publicity without the Underwriters prior consent.
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(q) For a period of two years from the Closing Date, the Company will
not, nor will it allow, without the prior written consent of the Underwriter,
the executive officers, directors or certain holders of any class of equity
securities of the Company to, sell, grant any option or warrant for the sale, or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
other equity securities of the Company (including any shares obtained through
the exercise of options granted under the Company's Stock Option Plan (as such
term is defined in the Prospectus) or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock or other equity
securities of the Company, provided, however, that with respect to any issuances
of securities by the Company such consent may not be unreasonably withheld, and
the Company may issue options for up to 500,000 shares of Common Stock under its
Stock Option Plan and 100,000 under its Non-Employee Director's Plan without
such consent.
(r) On the Closing Date, the Company will furnish you with a Lock-up
Agreement, substantially in the form of Annex A hereto, from each of the
executive officers, directors and certain holders of any class of equity
securities of the Company, as listed on Schedule A attached hereto, not to sell
any shares of Common Stock or other equity securities of the Company, held by
each prior to the Effective Date or obtained through exercise of options granted
under the Stock Option Plan, for a period of twenty-four (24) months from the
Closing Date, without your prior written consent, which consent may not be
unreasonably withheld; provided, however, the aforementioned restrictions do not
apply to private sales or transfers of Common Stock to purchasers or transferees
who agree in writing to be bound by the terms of such Lock-up Agreement.
4. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Firm Shares, and the Option Shares if
the Option is exercised, which it has agreed to purchase hereunder, are subject
to the accuracy (as of the date hereof and as of the Closing Date, or with
respect to the Option Shares, the Option Closing Date) of and compliance with
the representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective, and you
shall have received notice thereof not later than 10:00 a.m., New York time, on
the day following the date of this Agreement, or at such later time or on such
later date as to which you may agree; on or prior to the Closing Date, and on
the Option Closing Date if the Option is exercised, no stop order suspending the
effectiveness of the Registration Statement shall have been issued, and no
proceedings for that or any similar purpose shall have been instituted or shall
be pending or, to your knowledge or to the knowledge of the Company, shall be
contemplated by the Commission; any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Greenberg Traurig, counsel to the Underwriter; and no stop order
shall be in effect denying or suspending the effectiveness of such
qualification, nor shall any stop order proceedings with respect thereto be
instituted or pending or threatened under such law.
(b) On the Closing Date, and again on the Option Closing Date if the
Option is exercised, you shall have received the opinion, dated as of the
Closing Date, of Brock
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Silverstein McAuliffe LLC, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriter, to the effect that:
(i) The Company owns all of the outstanding capital stock of ANC
Holdings, Inc. (the "Subsidiary") and has no other subsidiaries. Each of
the Company and the Subsidiary has been duly organized and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate
and other) to own its properties and conduct its business as described in
the Registration Statement and Prospectus, and is duly qualified or
licensed to do business as a foreign corporation and is in good standing in
each other jurisdiction in which the nature of its business or the
character or location of its properties requires such qualification, except
where the failure to so qualify would not have a material adverse effect on
the condition (financial or otherwise), business, properties, prospects,
net worth or results of operations of the Company and its subsidiary, taken
as a whole.
(ii) To our knowledge, each of the Company and the Subsidiary has not
been required to obtain any authorization, approval, order, license or
permit of or from any governmental or regulatory official or body
(collectively "Permits") to own or lease its material properties and
conduct the material aspects of its business within the United States as
described in the Prospectus. To our knowledge, neither the Company nor the
Subsidiary has received any notice of a proceeding relating to the
revocation or modification of any Permit which singly or in aggregate, if
the subject of an unfavorable decision, ruling or finding would materially
and adversely affect the condition, financial or otherwise, of the Company
and the Subsidiary or their operations taken as a whole.
(iii) The authorized equity capitalization of the Company is as set
forth under "Capitalization" in the Prospectus; all shares of the Company's
outstanding Common Stock requiring authorization for issuance by the
Company's Board of Directors have been duly authorized, validly issued, are
fully paid and nonassessable and conform to the description thereof
contained in the Prospectus; to our knowledge, the outstanding shares of
Common Stock of the Company have not been issued in violation of the
preemptive rights of any stockholder, and the stockholders of the Company
do not have any preemptive rights or other rights to subscribe for or to
purchase, nor are there any restrictions upon the voting or transfer of any
of the Shares; the Shares conform to the description thereof contained in
the Prospectus; the Shares have been duly authorized and, when issued and
delivered pursuant to this Agreement, will be duly and validly issued,
fully paid, nonassessable, free of preemptive rights and no personal
liability will attach to the ownership thereof; and to our knowledge,
neither the filing of the Registration Statement nor the offering or sale
of the Shares as contemplated by the Agreement gives rise to any
registration rights or other rights, other than those
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which have been waived or satisfied, relating to the registration of any
shares of Common Stock.
(iv) The Agreement and the Warrant Agreement have been duly and
validly authorized, executed and delivered by the Company and, assuming due
execution and delivery of the Agreement and the Warrant Agreement by the
other parties thereto, payment by the Underwriter for the Shares offered
pursuant to the Agreement and payment by the Underwriter for the
Underwriter's Warrants, are the valid and legally binding obligations of
the Company, except as enforceability may be limited by bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
in general and subject, as to enforceability to general principles of
equity (regardless of whether enforcement is sought in a proceeding, in
equity or law); and except that no opinion is expressed as to the
enforceability of the indemnity provisions contained in Section 6 or the
contribution provisions contained in Section 7 of the Agreement.
(v) The certificates evidencing the Shares are in due and proper form;
the additional shares issuable upon exercise of the over-allotment option
and the shares of Common Stock of the Company issuable upon exercise of the
Underwriter's Warrants in accordance with the terms of, respectively, the
Agreement and the Warrant Agreement and at the prices therein provided for,
have been duly authorized and reserved for issuance upon such exercise, and
such shares, when issued upon exercise in accordance with the terms of the
Agreement and such warrants and at the price provided for, will be duly and
validly issued, fully paid and nonassessable.
(vi) We do not know of any pending or threatened legal or governmental
proceedings to which the Company or a subsidiary is a party which, if an
unfavorable decision were rendered, could materially adversely affect the
condition (financial or otherwise), business, properties, net worth or
results of operations of the Company and the Subsidiary, taken as a whole,
or which question the validity of the Common Stock of the Company, the
Shares, the Agreement, the Warrant Agreement, the Underwriter's Warrants or
of any action taken or to be taken by the Company pursuant to the
Agreement, the Warrant Agreement, or the Underwriter's Warrants; and to our
knowledge there are no governmental proceedings or regulations required to
be described or referred to in the Registration Statement which are not so
described or referred to.
(vii) Neither the Company nor the Subsidiary is in violation of or
default under, nor will the execution, delivery or performance by the
Company of its obligations under the Agreement, the Warrant Agreement or
the Underwriter's Warrants, result in a violation of, or constitute a
default under articles or certificate of incorporation or by-laws of the
Company's or of the Subsidiary.
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(viii) The Registration Statement has become effective under the Act,
and no stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for that purpose have been
instituted or are pending before, or to our knowledge threatened by, the
Commission; the Registration Statement and the Prospectus (except for the
financial statements and other financial data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements of the Act
and the Rules and Regulations.
(ix) The descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and other
documents are accurate in all material respects and fairly present the
information required to be shown; and we do not know of any contract or
document to be summarized or described therein or to be filed as exhibits
thereto which are not so summarized, described or filed.
(x) No authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in connection
with the authorization, issuance, transfer, sale or delivery of the Shares
by the Company, in connection with the execution, delivery and performance
of this Agreement or the Warrant Agreement by the Company, or the issuance
of the Underwriter's Warrants or the Common Stock underlying the
Underwriter's Warrants, other than registrations or qualifications of such
stock under applicable state or foreign securities or "Blue Sky" laws and
registration under the Act.
(xi) We have reviewed the statements in the Registration Statement
under the captions "Business," "Management," "Principal Stockholders,"
"Certain Transactions," "Description of Securities" and "Shares Eligible
for Future Sale" and, insofar as they refer to descriptions of agreements,
statements of law, descriptions of statutes, licenses, rules or regulations
or legal conclusions, such statements are correct in all material respects.
(xii) The merger prior to the sale of the Shares between the Company
and its American Net Claims, Inc. ("ANC"), its former parent, in which the
Company was the surviving corporation and succeeds to the rights,
limitations, obligation and liabilities of ANC (the "Merger") was duly
authorized by each of the parties thereto; the merger agreement was duly
executed and delivered by the parties thereto and is the legal, valid and
binding obligation of each of the parties thereto. Except as enforceability
may be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights in general and subject as to
enforceability to general principles of equity (regardless of whether
enforcement is sought in a proceeding, in equity or law). No registration
or filing with, or approval, consent or action by, any Governmental
authority is required, other than those which have heretofore been made or
obtained in connection with the Merger.
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Such counsel shall also state that such counsel has participated
in the preparation of the Registration Statement and the Prospectus, and nothing
has come to the attention of such counsel to cause such Counsel to have reason
to believe that the Registration Statement or any amendment thereto at the time
it became effective under the Act contained any untrue statement of a material
fact required to be stated therein or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any supplement thereto contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading (except, in the case of both the Registration
Statement and any amendment thereto and the Prospectus and any supplement
thereto, for the financial statements, notes thereto and other financial
information and statistical data contained therein, as to which such counsel
need express no opinion).
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Underwriter or counsel for the
Underwriter shall reasonably request. In rendering such opinion, such counsel
may rely upon certificates of any officer of the Company or public officials as
to matters of fact; and may rely as to all matters of law other than the law of
the United States or of the State of Delaware upon opinions of counsel
satisfactory to you (e.g., local counsel shall provide a satisfactory opinion
for matters of Texas law), in which case the opinion shall state that they have
no reason to believe that you and they are not entitled to so rely.
(c) On the Closing Date, and again on the Option Closing Date if the
Option is exercised, you shall have received the opinion, dated as of the
Closing Date, of __________________, special intellectual property counsel for
the Company, in form and substance satisfactory to counsel for the Underwriter
and in substantially the form of Schedule B attached hereto.
(d) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus and other related matters
shall be satisfactory to or approved by Greenberg Traurig, counsel to the
Underwriter, and you shall have received from such counsel a signed opinion,
dated as of the Closing Date (or in the event of the Option Closing, the Option
Closing Date), with respect to the validity of the issuance of the Firm Shares
(or in the event of the Option Closing, the Option Shares), the form of the
Registration Statement and Prospectus (other than the financial statements,
notes thereto and other financial data contained therein), the execution of this
Agreement and other related matters as you may reasonably require. The Company
shall have furnished to counsel for the Underwriter such documents as they may
reasonably request for the purpose of enabling them to render such opinion.
(e) You shall have received a letter on and as of the Effective Date
of the Registration Statement and again on and as of the Closing Date (and again
on and as of the Option Closing Date, if the Option is exercised) from King
Griffin & Adamson P.C., independent public accountants for the Company,
substantially in the form approved by you.
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<PAGE>
(f) At the Closing Date or, in the event the Option is exercised, at
the Option Closing Date, (i) the representations and warranties of the Company
contained in this Agreement shall be true and correct with the same effect as if
made on and as of the Closing Date or the Option Closing Date, as the case may
be, and the Company shall have performed all of its obligations hereunder and
satisfied all the conditions on its part to be satisfied at or prior to such
Closing Date or such Option Closing Date, as the case may be; (ii) the
Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations and in all material
respects conform to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; (iii) there shall have been, since the respective dates as of
which information is given, no material adverse change in the condition
(financial or otherwise), business, properties, prospects, net worth, results of
operations, capital stock, long-term or short-term debt or general affairs of
the Company and its subsidiary, taken as a whole, from that set forth in the
Registration Statement and the Prospectus, except changes which the Registration
Statement and Prospectus indicate might occur after the effective date of the
Registration Statement, and neither the Company nor its subsidiary shall have
incurred any material liabilities or agreement not in the ordinary course of
business other than as referred to in the Registration Statement and Prospectus;
(iv) except as set forth in the Prospectus, no action, suit or proceeding at law
or in equity shall be pending or threatened against the Company or its
subsidiary which would be required to be set forth in the Registration
Statement, and no proceedings shall be pending or threatened against the Company
or its subsidiary before or by any commission, board or administrative agency in
the United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially adversely affect the condition (financial or
otherwise), business, properties, prospects, net worth or results of operations
of the Company and its subsidiary, taken as a whole; and (v) you shall receive
at the Closing Date or the Option Closing Date, as the case may be, a
certificate signed by each of the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated as of the
Closing Date or the Option Closing Date, as the case may be, evidencing
compliance with the provisions of this subsection (e).
(g) If any of the conditions herein provided for in this Section shall
not have been fulfilled as of the date indicated, this Agreement and all
obligations of the Underwriter under this Agreement may be canceled at, or at
any time prior to, the Closing Date by the Underwriter by notifying the Company
of such cancellation in writing or by telegram at or prior to the Closing Date.
Any such cancellation shall be without liability of the Underwriter to the
Company.
(h) In the event the Option is exercised, if any of the conditions
herein provided for in this Section, with respect to the Option Closing, shall
not have been fulfilled as of the date indicated, all obligations of the
Underwriter under this Agreement with respect to such Option Closing may be
canceled at, or at any time prior to, the Option Closing Date by the Underwriter
by notifying the Company of such cancellation in writing or by telegram at or
prior
22
<PAGE>
to the Option Closing Date. Any such cancellation shall be without liability of
the Underwriter to the Company.
5. Conditions of the Company's Obligations. The obligation of the Company
to sell and deliver the Firm Shares, and the Option Shares if the Option is
exercised, is subject to the following conditions:
(a) The Registration Statement shall have become effective under the
Act not later than 10:00 a.m., New York time, on the day following the date of
this Agreement, or on such later date as the Company and the Underwriter may
agree to in writing.
(b) At the Closing Date, and on the Option Closing Date if the Option
is exercised, no stop orders suspending the effectiveness under the Act of the
Registration Statement shall have been issued under the Act or any proceedings
therefor initiated or threatened by the Commission.
(c) The Company shall have received payment for the Shares from the
Underwriter.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Underwriter
and each person, if any, who controls the Underwriter within the meaning of the
Act, the Underwriter's counsel and the Company's counsel against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all reasonable costs of
defense and investigation and all attorneys' fees), to which the Underwriter,
any controlling person, the Underwriter's counsel or the Company's counsel may
become subject, under the Act or otherwise, insofar, as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in (i) the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto; (ii) any "Blue Sky"
application or other document executed by the Company specifically for the
purpose or based upon written information furnished by the Company filed in any
state or other jurisdiction in order to qualify any or all of the Shares, under
the securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent, but only to the
extent, that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written or oral
information furnished to the Company by or on behalf of the Underwriter or oral
misrepresentations or omissions in connection therewith specifically for use in
the preparation of the Registration Statement or any such amendment or
supplement thereof or any such Blue Sky Application or any such Preliminary
Prospectus or the Prospectus of any such amendment or supplement thereto. The
23
<PAGE>
Company shall not be obligated to indemnify the Underwriter for a violation of
state securities or "Blue Sky" laws for liability occasioned by reason of such
Underwriter's (or its agent's) failure to have been registered as a
broker-dealer (or agent) or the failure of the securities to have been
registered or qualified in a jurisdiction where such Underwriter (or its agent)
is determined to have sold such security. This indemnity will be in addition to
any liability which the Company may otherwise have.
(b) The Underwriter will indemnify and hold hardness the Company, each
of the Company's directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement,
each person, if any, who controls the Company within the meaning of the Act, the
Underwriter's counsel and the Company's counsel against any losses, claims,
damages or liabilities (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company, any such director, nominee, officer or
controlling person, the Underwriter's counsel or the Company's counsel may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by you specifically for use in the preparation thereof.
The Underwriter shall indemnify the Company for any violation of state
securities or "Blue Sky" laws for liability occasioned by reason of such
Underwriter's (or its agent's) failure to have been registered as a
broker-dealer (or agent) or the failure of the securities to have been
registered or qualified in a jurisdiction which such Underwriter (or agent) is
determined to have sold such security. This indemnity will be in addition to any
liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof,
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than the reasonable costs of investigation. The
24
<PAGE>
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that if the indemnified party is
the Underwriter or a person who controls the Underwriter within the meaning of
the Act, the fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party or (ii) the named parties to any
such action (including any impleaded parties) include both the Underwriter or
such controlling person and the indemnifying party and, the Underwriter
reasonably determines that it is advisable for the Underwriter or controlling
persons to be represented by separate counsel (in which case the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the Underwriter or such controlling person, it being understood, however, that
the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
Underwriter and controlling persons, which firm shall be designated in writing
by you). No settlement of any action against an indemnified party shall be made
without the consent of the indemnifying party, which shall not be unreasonably
withheld in light of all factors of importance to such indemnified party.
(d) If the Closing occurs, the Company will not have liability to the
Underwriter (for indemnification or otherwise) with respect to any
representation or warranty unless on or before the third anniversary of the date
hereof the Underwriter notifies the Company of a claim of breach of a
representation or warranty.
7. Contribution. In order to provide for just and equitable contribution
under the Act in any case in which (i) the Underwriter makes claim for
indemnification pursuant to Section 6 hereof but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case, notwithstanding the fact
that the express provisions of Section 6 provide for indemnification in such
case or (ii) contribution under the Act may be required on the part of the
Underwriter or the Company in circumstances for which indemnification is
provided for pursuant to Section 6, then the Company, in the aggregate, and the
Underwriter shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (which shall for all purposes of this
Agreement include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
contribution from others) in such proportions that the Underwriter is
responsible in the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting discount per
share appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon, and the Company shall be responsible for the remaining
portion; provided, however, that, if such allocation is not permitted by
applicable law, then the relative fault of the Company and the Underwriter, in
the aggregate, in connection with the statements or omissions which resulted in
such damages and other relevant equitable considerations shall also be
considered.
25
<PAGE>
The relative fault shall be determined by reference to, among other things,
whether in the case of an untrue statement or a material fact or the omission to
state a material fact, such statement or omission relates to information
supplied by the Company or the Underwriter, and the parties' relevant intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriter agree that it
would not be just and equitable if the respective obligations of the Company and
the Underwriter to contribute pursuant to this Section 7 were to be determined
by pro rata or per capital allocation of the aggregate damages (even if the
Underwriter and its controlling persons in the aggregate were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in the first sentence of
this Section 7. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. For the purposes
of this paragraph, each officer, director, or other person who controls the
Underwriter within the meaning of Section 15 of the Act shall have the same
rights to contribution as such Underwriter, and each officer, director, or other
person. If the full amount of the contribution specified in this paragraph is
not permitted by law, then the Underwriter and each person who controls the
Underwriter shall be entitled to contribution from the Company to the full
extent permitted by law. The foregoing contribution agreement shall in no way
affect the contribution liabilities of any persons having liability under
Section 11 of the Act other than the Company and the Underwriter. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement; provided, however, that such
consent shall not be unreasonably withheld in light of all factors of importance
to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the sale of the
Shares to the Underwriter is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement including, but not
limited to, the fees and expenses of counsel to the Company and of the Company's
accountants; the costs and expenses incident to the preparation, printing,
filing and distribution under the Act of the Registration Statement (including
the financial statements therein and all amendments and exhibits thereto),
Preliminary Prospectus and Prospectus, as amended or supplemented; all expenses,
including fees, disbursements and other charges of counsel to the Underwriter,
in connection with any filing required by the NASD relating to the offering of
the Shares contemplated hereby; all expenses, including fees, disbursements and
other charges of counsel to the Underwriter, in connection with the
qualification of the Shares under the state securities or blue sky laws which
the Underwriter shall designate; the cost of printing and furnishing to the
Underwriter copies of the Registration Statement, each Preliminary Prospectus
and the Prospectus and the cost of printing the certificates representing the
Shares. The Company shall pay any and all taxes (including any transfer,
franchise, capital stock or other tax imposed by any jurisdiction) on sales by
the Company to the Underwriter hereunder. The Company will also pay all costs
and expenses incident to the furnishing of any amended Prospectus or of any
supplement to be attached to the Prospectus as called for in Section 3(a) of
this Agreement except as otherwise set forth in said Section.
26
<PAGE>
(b) In addition to the foregoing expenses the Company shall at the
Closing Date pay to Cruttenden Roth Incorporated a non-accountable expense
allowance equal to 2.5% of the gross proceeds of the sale of the Shares. In the
event the transactions contemplated hereby are not consummated by reason of any
action by the Underwriter (except if such prevention is based upon a breach by
the Company of any covenant, representation or warranty contained herein or
because any other condition to the Underwriter's obligations hereunder required
to be fulfilled by the Company is not fulfilled), the Company shall not be
liable to the Underwriter for any out-of-pocket accountable expenses except that
the Underwriter may retain all monies paid to it prior to the termination of the
underwriting, but only to the extent of out-of-pocket accountable expenses
incurred by the Underwriter, and the Underwriter shall return to the Company all
monies received in excess of its out-of-pocket accountable expenses. In the
event the transactions contemplated hereby are not consummated by reason of any
action of the Company or because of a breach by the Company of any covenant,
representation or warranty contained herein, the Company shall be liable for the
out-of-pocket accountable expenses incurred by the Underwriter, including
attorneys' fees, less a credit of any amounts previously paid by the Company to
the Underwriter, and the Underwriter shall return to the Company all monies
received in excess of its out-of-pocket accountable expenses.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless the Underwriter against any losses,
claims, damages or liabilities, joint or several, which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees, to which the Company, the Underwriter or
person may become subject insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon the claim of any
person (other than an employee of the party claiming indemnity) or entity that
he or it is entitled to a finder's fee in connection with the proposed offering
by reason of such person's or entity's influence or prior contact with the
indemnifying party.
9. Effective Date. This Agreement shall become effective upon its
execution, except that you may, at your option, delay its effectiveness until
11:00 a.m., New York time, on the first full business day following the
Effective Date of the Registration Statement, or at such earlier time after the
Effective Date of the Registration Statement as you in your discretion shall
first commence the initial public offering by the Underwriter of any of the
Shares. The time of the initial public offering shall mean the time of release
by you of the first newspaper advertisement with respect to the Shares, or the
time when the Shares are first generally offered by you to dealers by letter or
telegram, whichever shall first occur. This Agreement may be terminated by you
at any time before it becomes effective as provided above, except that Sections
3(c), 6, 7, 8, 12, 13, 14 and 15 hereof shall remain in effect notwithstanding
such termination.
27
<PAGE>
10. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13, 14 and
15 hereof, may be terminated by you at any time prior to the Closing Date if in
your judgment it is impracticable to offer for sale or to enforce contracts made
by the Underwriter for the resale of the Shares agreed to be purchased hereunder
by reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree; (ii)
trading in securities on the New York Stock Exchange, the American Stock
Exchange, and/or the Nasdaq Small Cap Market having been generally suspended or
limited; (iii) material governmental restrictions having been imposed on trading
in securities generally (not in force and effect on the date hereof); (iv) a
banking moratorium having been declared by federal or New York State
authorities; (v) an outbreak of major international hostilities or other
national or international calamity having occurred; (vi) the passage by the
Congress of the United States, or by any state legislative body of similar
impact, of any act or measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
the Underwriter to have a material impact on the condition (financial or
otherwise), business, properties, prospects or financial statements of the
Company or on the market for the securities offered hereby; (vii) any material
adverse change in the financial or securities markets in the United States,
particularly in the over-the-counter market, having occurred since the date of
this Agreement, or (viii) any material adverse change having occurred, since the
respective dates of which information is given in the Registration Statement and
Prospectus, in the condition (financial or otherwise), business, properties,
prospects, net worth or results of operations of the Company, not arising in the
ordinary course of business.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 10 or in Section 9, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
11. Warrants. At or before the Closing Date, the Company will sell to
Cruttenden Roth Incorporated the Underwriters' Warrants to purchase an aggregate
of 250,000 shares of the Common Stock of the Company for a consideration of
$25.00 upon the terms and conditions set forth in the Warrant Agreement. In the
event of conflict in the terms of this Agreement and the Underwriter's Warrants,
the language of the Underwriter's Warrants shall control.
12. Representations, Warranties and Agreements to Survive Delivery. Except
as may be limited by Section 6(d), the respective indemnities, agreements,
representations, warranties and other statements of the Company and the
Underwriter set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of the
Underwriter, the Company or any of its officers or directors or any controlling
person and will survive delivery of and payment for the Shares and the
termination of this Agreement.
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<PAGE>
13. Notices. Any communications specifically required hereunder to be in
writing, if sent to the Underwriter, will be mailed, delivered or telegraphed
and confirmed to them at Cruttenden Roth Incorporated, 24 Corporate Plaza,
Newport Beach, California 92660, Attention: Mr. Shelly Singhal, with a copy sent
to Greenberg Traurig, MetLife Building, 200 Park Avenue, 15th Floor, New York,
New York 10166, Attention: Spencer G. Feldman, Esq., or if sent to the Company,
will be mailed, delivered or telegraphed and confirmed to it at Claimsnet.com
inc., 12801 North Central Expressway, Dallas, Texas 75243, Attention: Mr. Bo W.
Lycke, President, with a copy to Brock Silverstein McAuliffe LLC, One Citicorp
Center, 153 East 53rd Street, New York, New York 10022-4611, Attention: Robert
S. Brown, Esq.
14. Parties in Interest. The Agreement herein set forth is made solely for
the benefit of the Underwriter, the Company and any person controlling the
Company or the Underwriter, and the directors of the Company, nominees for
directors (if any) named in the Prospectus, its officers who have signed the
Registration Statement, and their respective executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" shall
not include any purchaser, as such purchaser, from the Underwriter of the
Shares.
15. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMIENTS
MADE AND TO BE ENTIRELY PERFORMED WITHIN NEW YORK.
29
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement among the Company and the Underwriter in accordance with its
terms.
Very truly yours,
CLAIMSNET.COM INC.
By:
----------------------------------------
Bo W. Lycke
President
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
CRUTTENDEN ROTH INCORPORATED
By:
-----------------------------------------
Name:
Title:
ISG SOLID CAPITAL MARKETS, LLC
By:
-----------------------------------------
Name:
Title:
<PAGE>
ANNEX A
FORM OF LOCK-UP
Cruttenden Roth Incorporated
24 Corporate Plaza
Newport Beach, CA 92660
ISG Solid Capital Markets, LLC
592 Fifth Avenue, 5th Floor
New York, New York 10036
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated ____________,
1999 (the "Underwriting Agreement"), between Claimsnet.com inc., a Delaware
corporation (the "Company"), and Cruttenden Roth Incorporated and ISG Solid
Capital Markets, LLC (together, the "Underwriter"). Capitalized terms used
herein and not defined herein shall have the same meanings ascribed to them in
the Underwriting Agreement.
1. In consideration of the Underwriting Agreement, the undersigned
hereby agrees not to, without the prior written consent of the Underwriter and
except as set forth in Section 2, offer, sell or otherwise dispose of any shares
of the Company's common stock, par value $.001 per share (the "Common Stock"),
or any securities convertible into or exercisable or exchangeable for, or any
rights to purchase or acquires Common Stock owned by the Undersigned for a
period of twenty-four (24) months after the date of the Underwriting Agreement.
2. The restrictions set forth in Section 1 shall not apply to private
sales or transfers of Common Stock to purchasers or transferees who agree in
writing to be bound by the terms set forth herein.
3. The undersigned hereby waives all registration rights to which the
undersigned may be entitled prior to the expiration of such twenty-four (24)
month period.
Dated: ___________, 1999
Very truly yours,
--------------------------------
Name:
<PAGE>
SCHEDULE A
Bo W. Lycke
Scott Spurlock
Terry Lee
Randall Lindner
Michelle Lindner
Ward Benson
John C. Willems, III
Sture Hedlund
Brock Silverstein McAuliffe LLC
American Medical Finance, Inc.
<PAGE>
- --------------------------------------------------------------------------------
FORM OF
WARRANT AGREEMENT
By and Between
CLAIMSNET.COM, INC.
and
CRUTTENDEN ROTH INCORPORATED
ISG SOLID CAPITAL MARKETS, LLC
Dated as of ______________, 1999
- --------------------------------------------------------------------------------
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of ______________, 1999, by and between
CLAIMSNET.COM, INC., a Delaware corporation (the "Company"), and CRUTTENDEN ROTH
INCORPORATED and ISG SOLID CAPITAL MARKETS, LLC (together, the "Underwriter").
The Company proposes to issue to the Underwriter warrants as hereinafter
described (the "Underwriter Warrants") to purchase up to an aggregate of 250,000
shares, subject to adjustment as provided in Section 8 hereof (such shares, as
adjusted, being hereinafter referred to as the "Shares") of the Company's common
stock, par value $.001 per share (the "Common Shares"), each Underwriter Warrant
entitling the holder thereof to purchase one Common Share. All capitalized terms
used herein and not otherwise defined herein shall have the same meanings as in
that certain underwriting agreement, of even date herewith, by and between the
Company and the Underwriter (the "Underwriting Agreement"). In this Agreement,
the singular includes the plural and the plural includes the singular.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth and for other good and valuable consideration, the parties
hereto agree as follows:
1. ISSUANCE OF WARRANTS; FORM OF WARRANT. The Company will issue, sell and
deliver the Underwriter Warrants to the Underwriter or its bona fide officers
for an aggregate price of $25.00. The form of the Underwriter Warrants and the
form of election to purchase Shares to be attached thereto shall be
substantially as set forth on EXHIBIT A attached hereto. The Underwriter
Warrants shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future Chief Executive Officer, President or any
Vice President of the Company, under its corporate seal, affixed or in
facsimile, and attested by the manual or facsimile signature of the present or
any future Secretary or Assistant Secretary of the Company.
2. REGISTRATION. The Underwriter Warrants shall be numbered and shall be
registered in an Underwriter Warrant register (the "Underwriter Warrant
Register"). The Company shall be entitled to treat the registered holder of any
Underwriter Warrant on the Underwriter Warrant Register (the "Holder") as the
owner in fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Underwriter Warrant on the part
of any other person, and shall not be liable for any registration of transfer of
Underwriter Warrants which are registered or are to be registered in the name of
a fiduciary or the nominee of a fiduciary unless made with the actual knowledge
that a fiduciary or nominee is committing a breach of trust in requesting such
registration of transfer, or with such knowledge of such facts that its
participation therein amounts to bad faith. The Underwriter Warrants shall be
registered initially in the name of "Cruttenden Roth Incorporated" and "ISG
Solid Capital Markets, LLC" in such denominations as the Underwriter may request
in writing to the Company; PROVIDED, HOWEVER, that the Underwriter may designate
that all or a portion of the Underwriter Warrants be issued in varying amounts
directly to its bona fide officers, and not to the Underwriter. Such designation
will only be made by the Underwriter if it determines that such issuances would
not
2
<PAGE>
violate the interpretation of the Board of Governors of the National Association
of Securities Dealers, Inc. (the "NASD") relating to the review of corporate
financing arrangements.
3. TRANSFER OF WARRANTS. The Underwriter Warrants will not be sold,
transferred, assigned or hypothecated, in part or in whole the (other than by
will or pursuant to the laws of descent and distribution), except to officers of
the Underwriter and thereafter only upon delivery thereof duly endorsed by the
Holder or by his duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer. In all cases
of transfer by an attorney, the original power of attorney, duly approved, or an
official copy thereof, duly certified, shall be deposited with the Company. In
case of transfer by executors, administrators, guardians or other legal
representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited with the Company in its
discretion. Upon any registration of transfer, the Company shall deliver a new
Underwriter Warrant or Underwriter Warrants to the persons entitled thereto. The
Underwriter Warrants may be exchanged at the option of the Holder thereof for
another Underwriter Warrant, or other Underwriter Warrants, of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Common Shares upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Underwriter Warrants to be transferred on its books to any
person if such transfer would violate the Securities Act of 1933, as amended
(the "Act").
4. TERM OF WARRANTS, EXERCISE OF WARRANTS. Each Underwriter Warrant
entitles the registered owner thereof to purchase one Share at a purchase price
of $_____ per Share (the "Exercise Price") at any time from the first
anniversary of the effective date of the Registration Statement until 5:00 p.m.,
New York City time, on ________, 2004) (the "Warrant Expiration Date"). Prior to
the Warrant Expiration Date, the Company will not take any action which would
terminate the Underwriter Warrants. The Exercise Price and the Shares issuable
upon exercise of the Underwriter Warrants are subject to adjustment upon the
occurrence of certain events pursuant to the provisions of Section 8 of this
Agreement. Subject to the provisions of this Agreement, each Holder shall have
the right, which may be exercised as set forth in such Underwriter Warrants, to
purchase from the Company (and the Company shall issue and sell to such Holder)
the number of fully paid and nonassessable Common Shares specified in such
Underwriter Warrants, upon surrender to the Company, or its duly authorized
agent, of such Underwriter Warrants with the form of election to purchase
attached thereto duly completed and signed, with signatures guaranteed by a
member firm of a national securities exchange, a commercial bank or trust
company located in the United States or a member of the NASD and upon payment to
the Company of the Exercise Price, as adjusted in accordance with the provisions
of Section 8 of this Agreement, for the number of Shares in respect of which
such Underwriter Warrants are then exercised.
Payment of such Exercise Price may be made at the Holder's election (i) by
certified or official bank check, (ii) in the event that the Holder holds Common
Shares of the Company and such Common Shares are listed on a domestic stock
exchange or quoted in the domestic over-the-counter market, by transferring to
the Company an amount of such Common Shares which, when multiplied by, the
current market price of the Common Shares at the time of
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exercise of such Underwriter Warrant, equals the aggregate amount of the
consideration payable upon such exercise, (iii) by surrendering to the Company
the right to receive a portion of the number of Shares with respect to which
such Underwriter Warrant is then being exercised equal to the product obtained
by multiplying such number of Shares by a fraction, the numerator of which is
the Exercise Price in effect on the date of such exercise and the denominator of
which is the current market price of the Common Shares in effect on such date,
or (iv) by a combination of the foregoing methods of payment selected by the
Holder. For purposes of this paragraph, the current market price of the Common
Shares shall be calculated either (a) on the date which the form of election to
purchase attached hereto is deemed to have been sent to the Company pursuant to
Section 12 hereof ("Notice Date") or (b) as the average of the last reported
sale price for each of the five trading days preceding the Notice Date,
whichever of (a) or (b) is greater. In any case where the consideration payable
upon such exercise is being paid in whole or in part pursuant to the provisions
of clause (ii) or clause (iii) of the preceding sentence, such exercise shall be
accompanied by written notice from the Holder specifying the manner of payment
thereof, and in the case of clause (ii), stating the amount of Common Shares of
the Company to be applied to such payment, and in the case of clause (iii),
containing a calculation showing the number of Shares with respect to which
rights are being surrendered thereunder and the net number of Shares to be
issued after giving effect to such surrender. No adjustment shall be made for
any dividends on any Shares issuable upon exercise of an Underwriter Warrant.
Upon each surrender of Underwriter Warrants and payment of the Exercise Price as
aforesaid, the Company shall issue and cause to be delivered with all reasonable
dispatch to or upon the written order of the Holder of such Underwriter Warrants
and in such name or names as such Holder may designate. a certificate or
certificates for the number of full Shares so purchased upon the exercise of
such Underwriter Warrants, together with cash, as provided in Section 9 of this
Agreement, in respect of any fractional Shares otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such Shares as of the date of the surrender of Underwriter
Warrants and payment of the Exercise Price as aforesaid; provided, however, that
if, at the date of surrender of such Underwriter Warrants and payment of such
Exercise Price, the transfer books for the Common Shares or other class of
securities issuable upon the exercise of such Underwriter Warrants shall be
closed, the certificates for the Shares shall be issuable as of the date on
which such books shall next be opened (whether before, on or after the Warrant
Expiration Date) and until such date the Company shall be under no duty to
deliver any certificate for such Shares; provided, further, however, that the
transfer books of record, unless otherwise required by law, shall not be closed
at any one time for a period longer than twenty (20) days. The rights of
purchase represented by the Underwriter Warrants shall be exercisable, at the
election of the Holders thereof, either in full or from time to time in part
and, in the event that any Underwriter Warrant is exercised in respect of less
than all of the Shares issuable upon such exercise at any time prior to the
Warrant Expiration Date, a new Underwriter Warrant or Underwriter Warrants will
be issued for the remaining number of Shares specified in the Underwriter
Warrant so surrendered.
5. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
any, attributable to the issuance of Shares upon the exercise of Underwriter
Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay any
tax or taxes which may be payable in
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respect of any transfer involved in the issue or delivery of any certificates
for Shares in a name other than that of the Holder of Underwriter Warrants in
respect of which such Shares are issued.
6. MUTILATED OR MISSING WARRANTS. In case any of the Underwriter Warrants
shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and deliver in exchange and substitution for and upon
cancellation of the mutilated Underwriter Warrant, or in lieu of and
substitution for the Underwriter Warrant lost, stolen or destroyed, a new
Underwriter Warrant of like tenor and representing an equivalent right or
interest, but only upon receipt of evidence reasonably satisfactory to the
Company of such mutilation, loss, theft or destruction of such Underwriter
Warrant and indemnity, unless mutilated, also reasonably satisfactory to the
Company. An applicant for such substitute Underwriter Warrants shall also comply
with such other reasonable regulations and pay such other reasonable charges as
the Company may prescribe.
7. RESERVATION OF SHARES, ETC. There have been reserved and the Company
shall at all times keep reserved, out of the authorized and unissued Common
Shares, a number of Common Shares sufficient to provide for the exercise of the
rights of purchase represented by the outstanding Underwriter Warrants.
Continental Stock Transfer & Trust Company, transfer agent for the Common Shares
(the "Transfer Agent"), and every subsequent transfer agent, if any, for the
Company's securities issuable upon the exercise of the Underwriter Warrants will
be irrevocably authorized and directed at all times until the Warrant Expiration
Date to reserve such number of authorized and unissued Common Shares as shall be
required for such purpose. The Company will keep a copy of this Agreement on
file with the Transfer Agent and with every subsequent transfer agent of the
Company's securities issuable upon the exercise of the Underwriter Warrants. The
Company will supply the Transfer Agent or any subsequent transfer agent with
duly executed certificates for such purpose and will itself provide or otherwise
make available any cash which may be distributable as provided in Section 9 of
this Agreement. All Underwriter Warrants surrendered in the exercise of the
rights thereby evidenced shall be canceled, and such canceled Underwriter
Warrants shall constitute sufficient evidence of the number of Shares that have
been issued upon the exercise of such Underwriter Warrants. No Common Shares
shall be subject to reservation in respect of unexercised Underwriter Warrants
subsequent to the Warrant Expiration Date.
8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES. The Exercise Price
and the number and kind of securities issuable upon exercise of each Underwriter
Warrant shall be subject to adjustment from time to time upon the happening of
certain events, as follows:
(a) In case the Company shall (i) declare a dividend on its Common
Shares in Common Shares or make a distribution of Common Shares, (ii)
subdivide its outstanding Common Shares, (iii) combine its outstanding
Common Shares into a smaller number of Common Shares or (iv) issue by
reclassification of the Common Shares other securities of the Company
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation), the number of
Shares purchasable upon exercise of each Underwriter Warrant immediately
prior thereto shall be adjusted so that the Holder of each Underwriter
Warrant shall be entitled to receive the
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kind and number of Shares or other securities of the Company which he would
have owned or have been entitled to receive after the happening of any of
the events described above, had such Underwriter Warrant been exercised
immediately prior to the happening of such event or any record date with
respect thereto. An adjustment made pursuant to this paragraph (a) shall
become effective immediately after the effective date of such event
retroactive to immediately after the record date, if any, for such event.
(b) In case the Company shall issue rights, options or warrants to all
holders of its Common Shares, without any charge to such holders, entitling
them (for a period expiring within 45 days after the record date mentioned
below in this paragraph (b)) to subscribe for or to purchase Common Shares
at a price per share that is lower at the record date mentioned below than
the then current market price per Common Share (as defined in paragraph (d)
below), the number of Shares thereafter purchasable upon exercise of each
Underwriter Warrant shall be determined by multiplying the number of Shares
theretofore purchasable upon exercise of each Underwriter Warrant by a
fraction, of which the numerator shall be the number of Common Shares
outstanding on such record date plus the number of additional Common Shares
offered for subscription or purchase, and of which the denominator shall be
the number of Common Shares outstanding on such record date plus the number
of shares which the aggregate offering price of the total number of Common
Shares so offered would purchase at the then current market price per
Common Share. Such adjustment shall be made whenever such rights, options
or warrants are issued, and shall become effective retroactively to
immediately after the record date for the determination of shareholders
entitled to receive such rights, options or warrants.
(c) In case the Company shall distribute to all holders of its Common
Shares stock other than Common Shares or evidences of its indebtedness or
assets (excluding cash dividends payable out of consolidated earnings or
retained earnings and dividends or distributions referred to in paragraph
(a) above) or rights, options or warrants or convertible or exchangeable
securities containing the right to subscribe for or purchase Common Shares
(excluding those referred to in paragraph (b) above), then in each case the
number of Shares thereafter issuable upon the exercise of each Underwriter
Warrant shall be determined by multiplying the number of Shares theretofore
issuable upon the exercise of each Underwriter Warrant, by a fraction, of
which the numerator shall be the current market price per Common Share (as
defined in paragraph (d) below) on the record date mentioned below in this
paragraph (c), and of which the denominator shall be the current market
price per Common Share on such record date, less the then fair value (as
determined by the Board of Directors of the Company, whose determination
shall be conclusive) of the portion of the shares of capital stock other
than Common Shares or assets or evidences of indebtedness so distributed or
of such subscription rights, options or warrants, or of such convertible or
exchangeable securities applicable to one Common Share. Such adjustment
shall be made whenever any such distribution is made, and shall become
effective on the date of distribution retroactive to immediately after the
record date for the determination of shareholders entitled to receive such
distribution.
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(d) For the purpose of any computation under paragraphs (b) and (c) of
this Section 8, the current market price per Common Share at any date shall
be the average of the daily closing prices for fifteen (15) consecutive
trading days commencing twenty (20) trading days before the date of such
computation. The closing price for each day shall be the last reported sale
price regular way or, in case no such reported sale takes place on such
day, the average of the closing bid and asked prices regular way for such
day, in either case on the principal national securities exchange on which
the shares are listed or admitted to trading, or if they are not listed or
admitted to trading on any national securities exchange, but are traded in
the over-the-counter market, the closing sale price of the Common Shares
or, in case no sale is publicly reported, the average of the representative
closing bid and asked quotations for the Common Shares on the Nasdaq
SmallCap Market or any comparable system, or if the Common Shares are not
listed on the Nasdaq SmallCap Market or a comparable system, the closing
sale price of the Common Shares or, in case no sale is publicly reported,
the average of the closing bid and asked prices as furnished by two members
of the NASD selected from time to time by the Company for that purpose.
(e) No adjustment in the number of Shares purchasable hereunder shall
be required unless such adjustment would require an increase or decrease of
at least one percent (1%) in the number of Shares purchasable upon the
exercise of each Underwriter Warrant; provided, however, that any
adjustments which by reason of this paragraph (e) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment, but not later than three years after the happening of the
specified event or events. All calculations shall be made to the nearest
one thousandth of a share. Anything in this Section 8 to the contrary
notwithstanding, the Company shall be entitled, but shall not be required,
to make such changes in the number of Shares purchasable upon the exercise
of each Underwriter Warrant, in addition to those required by this Section
8, as it in its discretion shall determine to be advisable in order that
any dividend or distribution in shares of Common Shares, subdivision,
reclassification or combination of Common Shares, issuance of rights,
warrants or options to purchase Common Shares, or distribution of shares of
capital stock other than Common Shares, evidences of indebtedness or assets
(other than distributions of cash out of consolidated earnings or retained
earnings) or convertible or exchangeable securities hereafter made by the
Company to the holders of its Common Shares, shall not result in any tax to
the holders of its Common Shares or securities convertible into Common
Shares.
(f) Whenever the number of Shares purchasable upon the exercise of
each Underwriter Warrant is adjusted, as herein provided, the Exercise
Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of Shares purchasable upon the exercise of each
Underwriter Warrant immediately prior to such adjustment, and of which the
denominator shall be the number of Shares so purchasable immediately
thereafter.
(g) For the purpose of this Section 8, the term "Common Shares" shall
mean (i) the class of stock designated as the Common Shares of the Company
at the date of this
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Agreement or (ii) any other class of stock resulting from successive
changes or reclassifications of such shares consisting solely of changes in
par value, or from no par value to par value, or from par value to no par
value. In the event that at any time, as a result of an adjustment made
pursuant to paragraph (a) above, the Holders shall become entitled to
purchase any shares of capital stock of the Company other than Common
Shares, thereafter the number of such other shares so purchasable upon
exercise of each Underwriter Warrant and the Exercise Price of such shares
shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Shares contained in paragraphs (a) through (f), inclusive, and paragraphs
(h) through (m), inclusive, of this Section 8, and the provisions of
Sections 4, 5, 7 and 10, with respect to the Shares, shall apply on like
terms to any such other shares.
(h) Upon the expiration of any rights, options, warrants or conversion
rights or exchange privileges, if any thereof shall not have been
exercised, the Exercise Price and the number of Common Shares purchasable
upon the exercise of each Underwriter War-rant shall, upon such expiration,
be readjusted and shall thereafter be such as it would have been had it
originally been adjusted (or had the original adjustment not been required,
as the case may be) as if (i) the only Common Shares so issued were the
Common Shares, if any, actually issued or sold upon the exercise of such
rights, options, warrants or conversion rights or exchange privileges and
(ii) such Common Shares, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the aggregate
consideration, if any, actually received by the Company for the issuance,
sale or grant of all of such rights, options, warrants or conversion rights
or exchange privileges whether or not exercised; provided, however, that no
such readjustment shall have the effect of increasing the Exercise Price by
an amount in excess of the amount of the adjustment initially made in
respect to the issuance, sale or grant of such rights, options, warrants or
conversion rights or exchange privileges.
(i) The Company may, at its option, at any time during the term of the
Underwriter Warrants, reduce the then current Exercise Price to any amount
deemed appropriate by the Board of Directors of the Company.
(j) Whenever the number of Shares issuable upon the exercise of each
Underwriter Warrant or the Exercise Price of such Shares is adjusted, as
herein provided, the Company shall promptly mail by first class mail
postage prepaid to each Holder notice of such adjustment or adjustments.
The Company shall retain a firm of independent public accountants (who may
be the regular accountants employed by the Company) to make any computation
required by this Section 8 and shall cause such accountants to prepare a
certificate setting forth the number of Shares issuable upon the exercise
of each Underwriter Warrant and the Exercise Price of such Shares after
such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment
was made. Such certificate shall be conclusive on the correctness of such
adjustment and each Holder shall have the right to inspect such certificate
during reasonable business hours.
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(k) Except as provided in this Section 8, no adjustment in respect of
any dividends shall be made during the term of the Underwriter Warrants or
upon the exercise of the Underwriter Warrants.
(l) In case of any consolidation of the Company with or merger of, the
Company with or into another corporation or in case of any sale or
conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation (or an affiliate of such successor or purchasing
corporation), as the case may be, agrees that each Holder shall have the
right thereafter upon payment of the Exercise Price in effect immediately
prior to such action to purchase upon exercise of each Underwriter Warrant
the kind and amount of shares and other securities and property (including
cash) which he would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale or conveyance had such
Underwriter Warrant been exercised immediately prior to such action. The
provisions of this paragraph (1) shall similarly apply to successive
consolidations, mergers, sales or conveyances.
(m) Notwithstanding any adjustment in the Exercise Price or the number
or kind of shares purchasable upon the exercise of the Underwriter Warrants
pursuant to this Agreement, certificates for Underwriter Warrants issued
prior or subsequent to such adjustment may continue to express the same
price and number and kind of Shares as are initially issuable pursuant to
this Agreement.
9. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractions of Shares on the exercise of Underwriter Warrants. If more than one
Underwriter Warrant shall be presented for exercise in full at the same time by
the same Holder, the number of Shares which shall be issuable upon the exercise
thereof shall be computed on the basis of the number of Shares issuable on
exercise of the Underwriter Warrants so presented. If any fraction of a Share
would, except for the provisions of this Section 9, be issuable on the exercise
of any Underwriter Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
current market price per Common Share (determined as provided in the second
sentence of Section 8(d) of this Agreement) on the date of exercise.
10. REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS. The Company covenants and agrees with
the Underwriter and any other or subsequent Holders of the Registrable
Securities (as defined in paragraph (e) of this Section 10) that, upon written
request of the then Holder(s) of at least a majority of the aggregate of the
Registrable Securities which were originally issued on the date hereof to the
Underwriter or its designees, made at any time within the period commencing one
year and ending five years after the Effective Date, the Company will file as
promptly as practicable and, in any event, within 45 days after receipt of such
written request, at its sole expense, no more than once, a post-effective
amendment (the "Amendment") to the Registration Statement, or a new Registration
Statement or a Regulation A Offering Statement (an "Offering Statement") under
the Act, registering or qualifying the Registrable Securities for sale. Within
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fifteen (15) days after receiving any such notice, the Company shall give notice
to the other Holders of the Registrable Securities advising that the Company is
proceeding with such Amendment, Registration Statement or Offering Statement and
offering to include therein the Registrable Securities of such Holders. The
Company shall not be obligated to any such other Holder unless such other Holder
shall accept such offer by notice in writing to the Company within ten (10) days
thereafter. No other securities of the Company shall be entitled to be included
in such Amendment, Registration Statement or Offering Statement. The Company
will use its best efforts, through its officers, directors, auditors and counsel
in all matters necessary or advisable, to file and cause to become effective
such Amendment, Registration Statement or Offering Statement as promptly as
practicable and for a period of two years thereafter to reflect in the
Amendment, Registration Statement or Offering Statement financial statements
which are prepared in accordance with Section 10(a)(3) of the Act and any facts
or events arising that, individually, or in the aggregate, represent a
fundamental and/or material change in the Amendment, Registration Statement or
Offering Statement to enable information set forth in Amendment, Registration
Statement or Offering Statement to enable any Holders of the Underwriter
Warrants to either sell such Underwriter Warrants or to exercise such
Underwriter Warrants and sell Shares, or to enable any holders of Shares to sell
such Shares, during said two-year period. The Holders may sell the Registrable
Securities pursuant to the Amendment, Registration Statement or the Offering
Statement without exercising the Underwriter Warrants. If any registration
pursuant to this paragraph (a) is an underwritten offering, the Holders of a
majority of the Registrable Securities to be included in such registration shall
be entitled to select the underwriter or managing underwriter (in the case of a
syndicated offering) of such offering.
(b) PIGGYBACK REGISTRATION RIGHTS. The Company covenants and agrees
with the Underwriter and any other Holders or subsequent Holders of the
Registrable Securities that if, at any time within the period commencing one
year and ending five years after the Effective Date, it proposes to file a
Registration Statement or Offering Statement with respect to any class of
security (other than in connection with an offering to the Company's employees)
under the Act in a primary registration on behalf of the Company and/or in a
secondary registration on behalf of holders of such securities and the
registration form or Offering Statement to be used may be used for registration
of the Registrable Securities, the Company will give prompt written notice
(which. in the case of a Registration Statement or notification pursuant to the
exercise of demand registration rights other than those provided in Section
10(a) of this Agreement, shall be within ten (10) business days after the
Company's receipt of notice of such exercise, in any event, shall be at least 45
days prior to such filing) to, the Holders of Registrable Securities (regardless
of whether some of the Holders shall have theretofore availed themselves of the
right provided in Section 10(a) of this Agreement) at the addresses appearing on
the records of the Company of its intention to file a Registration Statement or
Offering Statement and will offer to include in such registration statement or
Offering Statement to the maximum extent possible, and limited, in the case of a
Regulation A offering, to the amount of the available exemption, subject to
sub-paragraphs (i) and (ii) of this paragraph (b), such number of Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within ten (10) days after the giving of notice by the
Company. All registrations requested pursuant to this Section 10(b) are referred
to herein as "Piggyback Registrations," All Piggyback Registrations pursuant to
this Section 10(b) will be made solely at the Company's expense. This paragraph
is not applicable to
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a Registration Statement filed by the Company with the Commission on Forms S-4
or S-8 or any successor forms.
(i) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration
includes an underwritten primary registration on behalf of the Company and
the underwriter(s) for the offering being registered by the Company shall
determine in good faith and advise the Company in writing that in its/their
opinion the number of Registrable Securities requested to be included in
such registration exceeds the number that can be sold in such offering
without materially adversely affecting the distribution of such securities
by the Company, the Company will include in such registration (A) first,
the securities that the Company proposes to sell and (B) second, the
Registrable Securities requested to be included in such registration,
apportioned pro rata among the Holders of Registrable Securities and (C)
third, securities of the holders of other securities requesting
registration.
(ii) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration
consists only of an underwritten secondary registration on behalf of
holders of securities of the Company (other than pursuant to Section
10(a)), and the underwriter(s) for the offering being registered by the
Company advise the Company in writing that in its/their opinion the number
of Registrable Securities requested to be included in such registration
exceeds the number which can be sold in such offering without materially
adversely affecting the distribution of such securities by the Company, the
Company will include in such registration (A) first, the securities
requested to be included therein by the holders requesting such
registration and the Registrable Securities requested to be included in
such registration above, pro rata, among all such holders on the basis of
the number of shares requested to be included by each such holder and (B)
second, other securities requested to be included in such registration.
Notwithstanding the foregoing if any such underwriter shall determine in
good faith and advise the Company in writing that the distribution of the of the
Registrable Securities requested to be included in the registration concurrently
with the securities being registered by the Company would materially adversely
affect the distribution of such securities by the Company, then the Holders of
such Registrable Securities shall delay their offering and We for such period
ending on the earliest of (1) 90 days following the effective date of the
Company's registration statement, (2) the day upon which the underwriting
syndicate, if any, for such offering shall have been disbanded or, (3) such date
as the Company, managing underwriter and Holders of Registrable Securities shall
otherwise agree. In the event of such delay, the Company shall file such
supplements, post-effective amendments and take any such other steps as may be
necessary to permit such Holders to Take their proposed offering and sale for a
period of 120 days immediately following the end of such period of delay. If any
party disapproves of the terms of any, such underwriting, it may elect to
withdraw therefrom by written notice to the Company, the underwriter, and
Underwriter. Notwithstanding the foregoing, the Company shall not be required to
file a registration statement to include Shares pursuant to this Section 10(b)
if an opinion of independent counsel, reasonably satisfactory to counsel for the
Company and counsel
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<PAGE>
for Underwriter, that the Shares proposed to be disposed of may be transferred
pursuant to the provisions of Rule 144 under the Act, shall have been delivered
to counsel for the Company.
(c) OTHER REGISTRATION RIGHTS. In addition to the rights above
provided, the Company will cooperate with the then Holders of the
Registrable Securities in preparing and signing any Registration Statement
or Offering Statement, in addition to the Registration Statements and
Offering Statements discussed above, required in order to sell or transfer
the Registrable Securities and will supply all information required
therefor, but such additional Registration Statement or Offering Statement
shall be at the then Holders' cost, and expense; provided, however, that if
the Company elects to register or qualify additional Common Shares, the
cost and expense of such Registration Statement or Offering Statement will
be pro rated between the Company and the Holders of the Registrable
Securities according to the aggregate sales price of the securities being
issued, Notwithstanding the foregoing, the Company will not be required to
file a Registration Statement or Offering, Statement at a time when the
audited financial statements required to be included therein are not
available, which time shall be limited to the period commencing 45 days
after the end of a fiscal year and ending 90 days after the end of such
fiscal year.
(d) ACTION TO BE TAKEN BY THE COMPANY. In connection with the
registration of Registrable Securities in accordance with paragraphs (a),
(b) or (c) of this Section 10, the Company agrees to:
(i) Bear the expenses of any registration or qualification under
paragraphs (a) or (b) of this Section 10, including, but not limited
to, legal accounting, and printing fees; provided, however, that in no
event shall the Company be obligated to pay (A) any fees and
disbursements of special counsel for Holders of Registrable
Securities, or (B) any underwriters' discount or commission in respect
of such Registrable Securities, or (C) upon the exercise of and demand
registration right provided for in paragraph (a) of this Section 10,
the cost of and liability or similar insurance required by an
underwriter, to the extent that such costs are attributable solely to
the offering of such Registrable Securities, payment of which shall,
in each case, be the sole responsibility of the Holders of the
Registrable Securities;
(ii) Use its best efforts to register or qualify the Registrable
Securities for offer or sale under state securities or Blue Sky laws
of such jurisdictions as Underwriter shall reasonably request arid to
do any and all other acts and things which may be necessary or
advisable to enable the holders to consummate the proposed sale,
transfer or other disposition of such securities in any jurisdiction;
and
(iii) Enter into a cross-indemnity agreement, in customary form,
with each underwriter, if any, and each holder of securities included
in such Amendment, Registration Statement or Offering Statement,
12
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(e) For purposes of this Section 10, (i) the term "Holder" shall
include holders of Shares, and (ii) the term "Registrable Securities" shall mean
the Underwriter Warrants and the Shares, issued upon exercise of the Underwriter
Warrants.
11. NOTICES TO HOLDERS.
(a) Nothing contained in this Agreement or in any of the Underwriter
Warrants shall be construed as conferring upon the Holders thereof the right to
vote or to receive dividends or to consent or to receive notice as shareholders
in respect of the meetings of shareholders or the election of directors of the
Company or any other matter, or any rights whatsoever as shareholders of the
Company; provided, however, that in the event that a meeting of shareholders
shall be called to consider and take act ion on a proposal for the voluntary
dissolution of the Company, other than in connection with a consolidation,
mercer or sale of all, or substantially all, or its property, assets, business
and good will as an entirety. then and in that event the Company shall cause a
notice thereof to be sent by first-class mail, postage prepaid, at least twenty
(20) days prior to the date filed as a record date or the date of closing, the
transfer books in relation to such meeting, to each registered Holder of
Underwriter Warrants at such Holder's address appearing in the Underwriter
Warrant Register; but failure to mail or to receive such notice or any defect
therein or in the mailing thereof shall not affect the validity of any action
taken in connection with such voluntary dissolution. If such notice shall have
been so given and if such a voluntary dissolution shall be authorized at such
meeting or any adjournment thereof, then from and after the date on which such
voluntary dissolution shall have been duly authorized by the shareholders, the
purchase rights represented by the Underwriter Warrants and all other rights
with respect thereto shall cease and terminate.
(b) In the event the Company intends to make any distribution on its
Common Shares (or other securities which may be issuable in lieu thereof upon
the exercise of Underwriter Warrants), including, without limitation, any such
distribution to be made in connection with a consolidation or merger in which
the Company is the continuing corporation, or to issue subscription rights or
warrants to holders of its Common Shares, the Company shall cause a notice of
its intention to make such distribution to be sent by first-class mail, postage
prepaid, at least twenty (20) days prior to the date fixed as a record date or
the date of closing the transfer books in relation to such distribution, to each
registered Holder of Underwriter Warrants at such Holder's address appearing, on
the Underwriter Warrant Register, but failure to mail or to receive such notice
or any defect therein or in the mailing thereof shall not affect the validity of
any action taken in correction with such distribution.
12. NOTICES. Any notice pursuant to this Agreement to be given or made by
the Holder of any Underwriter Warrant and/or the holder of any Share to or on
the Company shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed as follows or to such other address as the Company
may designate by notice given in accordance with this Section 12, to the Holders
of Underwriter Warrants and/or the holders of Shares:
13
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Claimsnet.com, inc.
12801 North Central Expressway
Dallas, Texas 75243
Attn: Mr. Bo W. Lycke, President
with a copy to: Brock Silverstein McAuliffe LLC
One Citicorp Center
56th Floor
New York, New York 10022-4611
Attn: Robert Brown, Esq.
Notices or demands authorized by this Agreement to be given or made by the
Company to or on the Holder of any Underwriter Warrant and/or the holder of any
Share shall be sufficiently given or made (except as otherwise provided in this
Agreement) if sent by first-class mail, postage prepaid, addressed to such
Holder or such holder of Shares at the address of such Holder or such holder of
Shares as shown on the Underwriter Warrant Register or the books of the Company,
as the case may be.
13. GOVERNING LAW. THIS AGREEMENT AND EACH UNDERWRITER WARRANT ISSUED
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL
LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS. The Company hereby agrees to accept service of process by notice given to
it pursuant to the provisions of Section 12.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same agreement.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
(Corporate Seal)
Attest: CLAIMSNET.COM, INC.
By:
- ---------------------------------- ------------------------------------
Secretary Bo W. Lycke
President
Attest: CRUTTENDEN ROTH INCORPORATED
By:
- ---------------------------------- ------------------------------------
Name:
Title:
Attest: ISG SOLID CAPITAL MARKETS, LLC
By:
- ---------------------------------- ------------------------------------
Name:
Title:
15
<PAGE>
EXHIBIT A
No.___________ __________ Warrants
VOID AFTER 5:00 P.M. NEW YORK CITY TIME
ON ________________, 2004
CLAIMSNET.COM, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received __________________ or registered
assigns, is the owner of the number of warrants set forth above, each of which
entities the owner thereof to purchase at any time from ____________, 2000,
until 5:00 p.m., New York City time on _____________, 2004 (the "Warrant
Expiration Date"), one fully paid and nonassessable Common Share, without par
value (the "Common Shares"), of Claimsnet.com, inc., a Delaware corporation (the
"Company"), at the purchase price of $_____ per share (the "Exercise Price")
upon presentation and surrender of this Warrant Certificate with the Form of
Election to Purchase duly executed, The number of Warrants evidenced by this
Warrant Certificate (and the number of shares which may be purchased upon
exercise thereto set forth above, and the Exercise Price per share set forth
above, are the number and Exercise Price as of the date of original issuance of
the Warrants, based on the Common Shares of the Company as constituted at such
date. As provided in the Warrant Agreement referred to below, the Exercise Price
and the number or kind of shares which may be purchased upon the exercise of the
Warrants evidenced by this Warrant Certificate are, upon the happening of
certain events, subject to modification and adjustment.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement, dated as of
_____________, 1999 (the "Warrant Agreement"), between the Company and
Cruttenden Roth Incorporated and ISG Solid Capital Markets, LLC, which Warrant
Agreement is hereby incorporated herein by reference and made a part hereof and
to which Warrant Agreement reference is hereby made for a full description of
the rights, limitations of rights, duties and immunities hereunder of the
Company and the holders of the Warrant Certificates. Copies of the Warrant
Agreement are on file at the principal office of the Company.
This Warrant Certificate, with or without other Warrant Certificates, upon
surrender at the principal office of the Company, may be exchanged for another
Warrant Certificate or Warrant Certificates of like tenor and date evidencing
Warrants entitling the holder to purchase a like aggregate number of Common
Shares as the Warrants evidenced by the Warrant Certificate or Warrant
Certificates surrendered entitled such holder to purchase. If this Warrant
Certificate shall be exercised in part, the holder hereof shall be entitled to
receive upon surrender hereof
16
<PAGE>
another Warrant Certificate or Warrant Certificates for the number of whole
Warrants not exercised.
No fractional Common Shares will be issued upon the exercise of any Warrant
or Warrants evidenced hereby, but in lieu thereof a cash payment will be made,
as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Shares, any other securities of the
Company which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or,
except as provided in the Warrant Agreement, to receive notice of meetings, or
to receive dividends or subscription rights or otherwise, until the Warrant or
Warrants evidenced by this Warrant Certificate shall have been exercised and the
shares shall have become deliverable as provided in the Warrant Agreement.
If this Warrant shall be surrendered for exercise within any period during
which the transfer books for the Company's Common Shares or other class of stock
purchasable upon the exercise of this Warrant are closed for any purpose, the
Company shall not be required to make delivery of certificates for shares
purchasable upon such exercise until the date of the reopening of said transfer
books.
IN WITNESS WHEREOF, Claimsnet.com, inc. has caused the signature (or
facsimile signature) of its President and its Secretary to be printed hereon and
its corporate seal (or facsimile) to be printed hereon.
Dated: _________________, 1999
CLAIMSNET.COM, INC.
By:
------------------------------------
Bo W. Lycke
President
(Corporate Seal)
Attest:
- ----------------------------------
Secretary
17
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrant Certificate.)
TO:
-------------------------------
The undersigned hereby irrevocably elects to exercise Warrants represented
by this Warrant Certificate to purchase the Common Shares issuable upon the
exercise of such Warrants and requests that certificates for such shares be
issued in the name of: (Please insert social security or other identifying
number)
---------------------------------------
---------------------------------------
---------------------------------------
(Please print name and address)
If such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security number or other identifying number
---------------------------------------
---------------------------------------
---------------------------------------
(Please print name and address)
Dated:
----------------------------
-------------------------------------
Signature
(signature must conform in all
respects to name of holder as
specified on the face of this Warrant
Certificate)
Signature Guaranteed:
- ----------------------------------
18
<PAGE>
FORM OF
ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificates.)
FOR VALUE RECEIVED, _____________________ hereby sells, assigns and
transfers unto ______________________________________ this Warrant Certificate,
together with all right, title and interest herein, and does hereby irrevocably
constitute and appoint ________________, to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
Dated:
-----------------------
Signature:
-----------------------------
Signature Guaranteed:
- -----------------------------
NOTICE
The signature of the foregoing Assignment must correspond to the name as
written upon the face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated January 22, 1999 except for Note M for which the date is
February 28, 1999 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
March 2, 1999
<PAGE>
EXHIBIT 99
CONSENT OF WESTCOTT W. PRICE, III
I, Westcott W. Price, III, consent to the inclusion in the registration
statements on Form S-1 (Registration Nos. 333-36209 and 333-72687) under the
Securities Act of 1933, as amended, of my name and biography under the caption
"Management" as a Class II director-nominee of the Board of Directors of the
Company.
<TABLE>
<S> <C>
/s/ WESTCOTT W. PRICE, III
------------------------------------------
Westcott W. Price, III
Date: March 1, 1999
</TABLE>
