<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1999
REGISTRATION NO. 333-72687
REGISTRATION NO. 333-36209
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
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, 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. 3 of the
registration statement on Form S-1 (333-36209) and Pre-Effective Amendment
No. 2 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 25, 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."
WE EXPECT THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $7.00 AND
$9.00 PER SHARE.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF 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 some 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.
[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 their ability 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
3
<PAGE>
marketing strategy to attract healthcare providers to use our services. We may
be unable to collect subscription fees from these healthcare providers after
January 31, 1999.
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 using 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 our
verification services.
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. The processing solution we offer Millbrook 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 physician billing services to over 2,500 Island
customers. 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 this 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 this agreement, we
will provide claim processing, patient statements, eligibility verification, and
other services to participating members of Premier.
In October 1998, as part of our private placements of our securities
consummated in 1998, DVI Business Credit Corporation made a strategic investment
of $500,000 in us by purchasing shares of our common stock at $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 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 or claim form 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 OR THE EXERCISE OF THESE WARRANTS,
(2) THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR ITS EXERCISE, (3) UP TO AN
AGGREGATE OF 669,230 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF
OPTIONS WHICH MAY BE GRANTED PURSUANT TO OUR EXISTING STOCK OPTION PLANS, AND
(4) UP TO 31,154 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF
OUTSTANDING WARRANTS. EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS REFLECTS (1) ALL STOCK SPLITS AND REVERSE STOCK SPLITS PRIOR TO THE
DATE OF THIS PROSPECTUS AND (2) OUR 1999 PRIVATE PLACEMENT OF SECURITIES. PLEASE
SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
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
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>
6
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The following selected statement of operations data is for the period from
our inception on April 8, 1996 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 selected
statement of operations data for the year ended December 31, 1997 includes the
results of operations of Medica from June 2, 1997, its date of acquisition. The
pro forma, as adjusted balance sheet data as of December 31, 1997 and 1998 is
adjusted to reflect the following:
- the net proceeds of $900,000 from our 1999 private placement as described
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," and
- the receipt of 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 these proceeds as described under
"Use of Procceds."
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 the related notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 8, 1996
(INCEPTION) YEAR ENDED DECEMBER 31,
THROUGH ----------------------------
STATEMENT OF OPERATIONS DATA: DECEMBER 31, 1996 1997 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>
<S> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C> <C>
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------- ---------------------
<CAPTION>
PRO FORMA, ACTUAL PRO FORMA,
AS --------- AS
BALANCE SHEET DATA: ACTUAL ADJUSTED ADJUSTED
--------- ---------- (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>
7
<PAGE>
This prospectus contains 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
risks, uncertainties, and assumptions. Our actual future results may differ
significantly from the results discussed in the forward-looking statements in
this prospectus. Some, but not all, of the factors that may cause this kind of
difference include those which we discuss in the Risk Factors section beginning
on page 9 of this prospectus.
8
<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.
RISKS SPECIFIC TO CLAIMSNET.COM
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 our inception in April 1996
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.
BECAUSE WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME, THERE IS
LIMITED INFORMATION UPON WHICH YOU CAN EVALUATE OUR BUSINESS
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 prone 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 to do so
could have a material adverse effect on our business, prospects, financial
condition, and results of operations.
9
<PAGE>
FLUCTUATIONS IN OUR OPERATING RESULTS MAY AFFECT OUR STOCK PRICE
We expect to experience significant fluctuations in our future quarterly
operating results due to a variety of factors, many of which are outside our
control. Factors that may adversely affect our quarterly operating results
include:
- our ability to retain existing customers, attract new customers at a
steady rate, and maintain customer satisfaction,
- the announcement or introduction of new sites, services, and products by
us and our competitors,
- price competition or higher prices in the industry,
- the level of use of the Internet and online services and the rate of
market acceptance of the Internet and other online services for the
purchase of "business to business" services, such as those which we offer,
- our ability to upgrade and develop our systems and infrastructure in a
timely and effective manner,
- the amount of traffic on our website,
- technical difficulties, system downtime, or Internet brownouts,
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations, and infrastructure,
- government regulation, and
- general economic conditions and economic conditions specific to the
Internet, electronic commerce, and the medical claims processing industry.
As a result of these factors, in one or more future quarters, our operating
results may fall below the expectations of securities analysts and investors. In
this event, the market price of the common stock would likely be materially
adversely affected.
OUR MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT IN SUCCESS
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, as part of our marketing plan, 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."
10
<PAGE>
OUR PERFORMANCE IS CRITICAL TO OUR REPUTATION AND BUSINESS
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 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 RELY ON INTERNALLY DEVELOPED SYSTEMS WHICH ARE INEFFICIENT, WHICH MAY PUT
US AT A COMPETITIVE DISADVANTAGE
We use an internally developed system for our website and for a portion of
our claims processing software. As we developed these systems primarily to
support the rapid growth of claim submission volume and customer service and
less on traditional accounts, control, and reporting, these systems are
inefficient and require a significant amount of manual effort to prepare
information for financial and
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accounting reporting. Such manual effort is time-consuming and costly and may
place us at a competitive disadvantage when compared to competitors with more
efficient systems. 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, although we are unable to predict whether these
upgrades will improve our competitive position when compared to our competitors.
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.
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."
OUR MANAGEMENT TEAM IS RELATIVELY NEW, WE HAVE LIMITED SENIOR MANAGEMENT
RESOURCES, AND WE NEED TO ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL; WE
MAY BE UNABLE TO EFFECTIVELY MANAGE GROWTH WITH OUR LIMITED RESOURCES
From our inception on April 8, 1996 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 AND THEIR LOSS OR UNAVAILABILITY COULD
PUT US AT A COMPETITIVE DISADVANTAGE
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
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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."
WE MAY BE REQUIRED TO USE FUNDS WHICH WE WOULD OTHERWISE USE FOR GROWTH TO
RESCIND OUR 1998 PRIVATE PLACEMENTS AND OUR 1999 PRIVATE PLACEMENT
During 1998 and 1999 we completed our 1998 private placements and our 1999
private placement for aggregate gross proceeds of approximately $3,475,000.
Pursuant to the Securities Act the rules and regulations under the Securities
Act, and the interpretations of the Commission, we may be required to offer the
investors in our 1998 private placements and our 1999 private placement the
opportunity to require us to repurchase the securities which they purchased in
these private placements for a price equal to the amount they paid for these
securities when they were purchased from us. If we are so required to offer the
investors this opportunity to rescind these investments and all of the investors
in our 1998 private placements and our 1999 private placement determine to
exercise these 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 MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
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
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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."
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 a services agreement in which American Medical Finance provided
staff and office support services to us and for which we were billed monthly. We
terminated this 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."
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, or 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."
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
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 assumptions, which may prove to be incorrect. See "Risk
Factors--We may be required to rescind our 1998 private placements and our 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."
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR
MATERIAL THIRD PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT
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 third party vendors,
licensors of hardware, and software, and services, and customers regarding their
Year 2000 readiness. Following our assessment and after contacting these third
parties, we will be able to make an evaluation of our state of readiness, our
risks and costs, and determine whether a contingency plan is necessary. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
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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."
SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER
OUR ACQUISITION
Some of the provisions of our certificate of incorporation, our by-laws, 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."
RISKS SPECIFIC TO OUR INDUSTRY
INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS
The electronic submission of healthcare claims and other electronic
healthcare transaction processing services by means of our proprietary software
involves the transmission and analysis of confidential and proprietary
information of the patient, the healthcare provider, or both, as well as our own
confidential and proprietary information. 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
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. We may be required to expend significant
capital and other resources to protect against security breaches or to minimize
problems caused by security breaches. Concerns over the security of the Internet
and other online transactions and the privacy of users may also inhibit the
growth of the Internet and other online services generally, and the website in
particular, especially as a means of conducting commercial transactions. To the
extent that our activities or the activities of others involve the storage and
transmission of proprietary information, such as diagnostic and treatment data,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches. Our failure to prevent these security breaches may have a
material adverse effect on our business, prospects, financial condition, and
results of operations. See "Business--Healthcare Transaction Processing Software
and Security."
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ELECTRONIC COMMERCE
CONTINUES TO GROW
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
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be successful, the healthcare community must accept and use novel and cost
efficient ways of conducting business and exchanging information.
In addition, the public in general, and the healthcare industry in
particular, may not accept the Internet and other online services as a viable
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet and other online "business to business" services continue to experience
significant growth in the number of users, their frequency of use, or in their
bandwidth requirements, the infrastructure for the Internet and online services
may be unable to support the demands placed upon them. In addition, the Internet
or other online services could lose their viability due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in, or insufficient availability of, telecommunications
services to support the Internet or other online services also could result in
slower response times and adversely affect usage of the Internet and other
online services generally and our product and services in particular. If use of
the Internet and other online services does not continue to grow or grows more
slowly than we expect, if the infrastructure for the Internet and other online
services does not effectively support the 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 could be materially adversely affected.
WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ELECTRONIC COMMERCE, AND
CUSTOMER DEMANDS CONTINUE TO EVOLVE
The Internet and the electronic commerce industry are characterized by:
- rapid technological change,
- changes in user and customer requirements and preferences,
- frequent new product and service introductions embodying new technologies,
and
- the emergence of new industry standards and practices that could render
our existing website and proprietary technology and systems obsolete.
Our success will depend, in part, on our ability to:
- enhance and improve the responsiveness and functionality of our online
claims processing services,
- license leading technologies useful in our business, enhance our existing
services, develop new services and technology that address the
increasingly sophisticated and varied needs of our prospective or current
customers, and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of website and other proprietary technology will involve
significant technical and business risks. We may not be able to successfully
adapt to such demands. Our failure to respond in a 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."
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY
The medical claims processing industry is highly competitive and is
dominated by a number of significantly larger companies with greater resources
than we have. We may not successfully compete in
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any market in which we conduct or may conduct operations. In addition, in
certain market segments, including psychiatry and surgery, 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."
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
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 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.
RISKS SPECIFIC TO THIS OFFERING
THERE IS NOT CURRENTLY A PUBLIC MARKET FOR OUR COMMON STOCK, THE OFFERING
PRICE OF OUR COMMON STOCK IS ARBITRARY, AND WE MUST SATISFY THE APPLICABLE
REQUIREMENTS FOR OUR 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 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
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$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 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 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 Market, and no
other exclusion from the definition of a "penny stock" under the Exchange Act
were available, our common stock would be subject to the penny stock rules that
impose additional sales practice requirements on broker-dealers who sell these
securities to persons other than established customers and accredited investors.
Accredited investors are generally those 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 sells the shares of common stock issuable upon exercise
of the representatives' warrants, they 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 the market.
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
(1) pay a price per share which substantially exceeds the value of our assets
after subtracting our intangible assets and liabilities and (2) contribute 73.8%
of the total amount invested to date to fund us, but will only own 40% of the
shares of common stock outstanding. See "Dilution."
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY
AFFECT OUR STOCK PRICE
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 a number
of our stockholders who hold 2,341,847 shares in the aggregate have entered into
lock-up agreements by which they have agreed that they will not sell, directly
or indirectly, any shares of common stock without the prior written consent of
the underwriters for a period of 24 months from
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the date of this prospectus. Some of our stockholders who hold 1,408,153 shares
in the aggregate have entered into lock-up agreements by 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 669,230 shares of common stock reserved for issuance under our
existing stock option plans described in "Management-- Director Compensation"
and "Management--1997 Stock Option Plan." We expect that 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 some
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 a number of conditions and limitations, to
include their shares in 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,"
and "Underwriting."
ISG HAS A LIMITED UNDERWRITING HISTORY
ISG was first registered a broker-dealer in 1997 and has completed three
firm commitment 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 will not adversely affect this offering or the
subsequent development of a trading market for the shares. See "Underwriting."
THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS PRESENT RISKS AND
UNCERTAINTIES
This prospectus contains 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
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<PAGE>
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.
THE TERMINATION OF OUR PRIOR PUBLIC OFFERING MAY AFFECT THIS OFFERING AND
THE DEVELOPMENT OF A TRADING MARKET FOR OUR COMMON STOCK
Our initial registration statement was declared effective on December 10,
1998 and on this date the shares of common stock subject to that registration
statement commenced trading. For reasons unknown to us, our then-underwriter,
Strasbourger Pearson Tulcin Wolff Incorporated, a registered broker-dealer,
unilaterally terminated its obligations under the underwriting agreement. As a
result, the NASD cancelled all trades effected on December 10, 1998. The events
described in this paragraph may adversely affect this offering or the subsequent
development of a trading market for the shares.
20
<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............................................................. $ 5,373,000 31.6%
Marketing............................................................................. 3,500,000 20.6
Research and development.............................................................. 2,000,000 11.8
Acquisition of capital equipment...................................................... 450,000 2.6
General corporate and working capital purposes, including possible acquisitions of,
and investments in, competing or complementary businesses and technologies........... 5,677,000 33.4
</TABLE>
The following is a description of each of the items in the table above.
REPAYMENT OF INDEBTEDNESS. Claimsnet.com will use the estimated net
proceeds of this offering allocated to the repayment of indebtedness as follows:
- to repay $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,
- to repay approximately $1,462,000 pursuant to the American Medical Finance
credit line,
- to repay approximately $911,000 of accrued interest pursuant to this note
and line of credit, and
- to repay $1,000,000 pursuant to the Series A 12% Subordinated Notes issued
by Claimsnet.com in its 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."
MARKETING. Claimsnet.com will use the estimated net proceeds of this
offering allocated to marketing for advertising on the Internet, trade
publications, direct mail programs, vendor exhibits, salaries for personnel,
brochures, and public relations.
RESEARCH AND DEVELOPMENT. Claimsnet.com will use the estimated net proceeds
of this offering allocated to research and development for the continued
enhancement of its Internet-based healthcare transaction processing system.
ACQUISITION OF CAPITAL EQUIPMENT. Claimsnet.com will use the estimated net
proceeds of this offering allocated to the acquisition of capital equipment to
purchase or otherwise acquire computers, servers, communication hardware and
software, and networking equipment.
GENERAL CORPORATE AND WORKING CAPITAL PURPOSES. Claimsnet.com will use the
estimated net proceeds of this offering allocated to general corporate and
working capital purposes to fund the capital requirements associated with its
growth, including, without limitation, the retention and training of additional
personnel. In the ordinary course of its business, Claimsnet.com from time to
time evaluates technologies for acquisition or license that, if acquired, could
be used in the development of product or
21
<PAGE>
software candidates. Claimsnet.com currently has no agreements, plans, or
arrangements with respect to any 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. In addition, the net
proceeds, if any, from the exercise of the underwriters' over-allotment option
will be used for general corporate and working capital purposes.
The net proceeds, if any, from the exercise of the underwriters'
over-allotment option will be utilized for general corporate and working capital
purposes.
Under the Securities Act, the rules and regulations under the Securities
Act, and the interpretations of the Commission, we may be required to offer
rescission to investors in our 1998 private placements and our 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 these private 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 our 1998 private placements and our 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 this belief upon a number of
assumptions, which may prove to be incorrect. Accordingly, there can be no
assurance that these resources will satisfy our capital requirements for said
period. We may require additional financing in order to expand our operations.
Additional financing may take the form of the issuance of common or preferred
stock or debt securities, and 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.
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<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 December 31, 1998.
After giving effect to the net proceeds of approximately $900,000 from our
1999 private placement and to the estimated net proceeds from the sale by
Claimsnet.com of 2,500,000 shares of common stock offered in this offering at
the initial public offering price per share of $8.00 and the initial application
of those proceeds as described in "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 represents
an immediate increase in the adjusted net tangable book value of $3.37 per share
to existing stockholders and an immediate dilution in as adjusted net tangable
book value of $6.05 per share, or 75.6%, to investors in this offering. 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>
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, and
- 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>
23
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998:
- the actual capitalization of Claimsnet.com,
- the as adjusted capitalization of Claimsnet.com, adjusted to give effect
to its receipt of proceeds of approximately $1,000,000 from our 1999
private placement, and
- the as adjusted capitalization of Claimsnet.com, adjusted to give effect
to its receipt of proceeds of approximately $1,000,000 from our 1999
private placement and 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 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
AFTER 1999
PRIVATE
AS ADJUSTED PLACEMENT AND
AFTER 1999 PRIVATE INITIAL 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>
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected statement of operations data is for the period from
our inception on April 8, 1996 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 selected statement of
operations data for the year ended December 31, 1997 includes the results of
operations of Medica from June 2, 1997, its date of acquisition. 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 the related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 8, 1996
(INCEPTION) YEAR ENDED DECEMBER 31,
THROUGH ----------------------------
DECEMBER 31, 1996 1997 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>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. CLAIMSNET.COM'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THESE 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
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 our inception
on April 8, 1996 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.
Claimsnet.com is in the early stage of operations and, as a result, the
relationships between revenue, cost of revenue, and operating expenses reflected
in the financial information included in this prospectus 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 these 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, such as
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.
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. Afterwards, Claimsnet.com expects to
26
<PAGE>
receive fees from commercial medical and dental payors and other payors for
delivering claims electronically. In addition, after an initial free period of
unlimited technical support, Claimsnet.com intends to charge users a fee for
technical support comparable to those charged by other healthcare software
vendors.
Claimsnet.com's principal operating costs are anticipated to be marketing,
research and development, acquisition of capital equipment, and general and
administrative expenses. Claimsnet.com intends to continue to develop and
upgrade its technology and transaction-processing systems and continually update
and improve its website to incorporate new technologies, protocols, and industry
standards. Claimsnet.com intends to engage in a dedicated marketing and sales
plan, including advertising at relevant sites on the Internet and in trade
publications, conducting direct mail programs targeting healthcare providers and
payors, such as 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 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 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.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
REVENUES. Revenues increased from $81,712 in 1997 to $154,653 in 1998. The
increase is due to an increase in the number of customers subscribing to and
using Claimsnet.com's service to file insurance claims.
COST OF REVENUES. Cost of revenues increased from $250,889 in 1997 to
$648,748 in 1998. The increase results primarily from an increase in the number
of employees involved in setting up customers as sales and marketing efforts
expanded and supporting customers as the customer base increased. The increase
in cost of revenues is disproportionately larger than the increase in revenues
because much of the cost is attributable to the initial setup of clients that
will produce recurring revenues over future periods.
RESEARCH AND DEVELOPMENT.
Research and development expense increased from $461,245 in 1997 to $530,502
in 1998. The increase is attributed to an increase in the number of employees
involved in software development and testing activities related to improvements
in the claims processing system and the introduction of complementary products
such as patient statement processing services and eligibility verification of
patient coverage.
SOFTWARE AMORTIZATION. Software amortization expense increased from
$402,835 in 1997 to $672,328 in 1998. The increase is due to the capitalization
of $911,741 of software development costs associated with the acquisition of
Medica in June 1997 and the related full-year amortization charge in 1998 versus
the partial-year charge in 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased from $1,399,321 in 1997 to $2,657,975 in 1998. The increase is
the result of an increase of approximately
27
<PAGE>
$500,000 in sales and marketing expenses, an increase of approximately $350,000
in information systems expenses, and the write-off of $411,641 of deferred
financing costs incurred in conjunction with an initial public offering that was
not completed.
INTEREST EXPENSE- AFFILIATE. Interest expense -- affiliate decreased from
$389,548 in 1997 to $313,680 in 1998. The decrease is due to the completion of a
series of private equity placements in 1997 and 1998, from which the proceeds
were used to reduce the line of credit due to affiliate until such time as the
funds were needed for operating activities.
INTEREST INCOME. Interest income decreased from $40,817 in 1997 to $6,113
in 1998. The decrease is due to a reduction in the average balance of short term
investments. During late 1997, the proceeds from private equity placements were
sufficient to fully repay the line of credit due to affiliate and the excess
funds were invested in short term securities. During early 1998 all remaining
short term investments were liquidated to provide working capital and the
proceeds from the subsequent private equity placements did not exceed the
balance of the line of credit due to affiliate.
Net cash used by operating activities increased from $1,583,579 in 1997 to
$2,681,172 in 1998. The increase is generally attributable to the increase in
operating expenses, offset by an increase in non-cash amortization expense and
an increase in accrued liabilities, primarily related to deferred offering
costs. Net cash used in investing activities decreased from $436,864 in 1997 to
$120,159 in 1998. During 1997, cash used in investing activities included
non-recurring uses of $84,336 related to the Medica acquisition and $193,173
related to capitalized software development costs. Net cash provided by
financing activities increased slightly from $2,399,697 in 1997 to $2,450,179 in
1998. Proceeds from common stock issuances related to private equity placements
decreased by $226,000 and net borrowings under the line of credit due to
affiliate increased by $1,031,288 while payments for deferred offering costs
increased by $754,806.
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, 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 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
28
<PAGE>
December 31, 1998, advances under this 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 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. Claimsnet.com has used, and intends to use, the net
proceeds of the 1997 private placement 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:
- 119,671 shares of common stock,
- $100,000 in cash, paid upon the consummation of the acquisition,
- $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
- $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. Claimsnet.com has used, and intends to use, the
net proceeds of its 1998 private placements and its 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 its 1998 private placements
and its 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 these "Year 2000"
29
<PAGE>
requirements. Claimsnet.com's business is dependent on the operation of numerous
systems that could potentially be impacted by Year 2000 related problems. Those
systems include, among others:
- hardware and software systems used by Claimsnet.com to deliver services to
its customers, including Claimsnet.com's proprietary software systems as
well as hardware and software supplied by third parties,
- communications networks, such as the Internet and private intranets, which
Claimsnet.com depends on to provide electronic transactions to its
customers,
- the internal systems of Claimsnet.com's customers and suppliers,
- the hardware and software systems used internally by Claimsnet.com in the
management of its business, and
- non-information technology systems and services used by Claimsnet.com in
its business, such as telephone systems and building systems.
Claimsnet.com has internally reviewed the proprietary software systems it
uses to deliver services to its customers. Although Claimsnet.com believes that
its internally developed applications and systems are designed to be Year 2000
compliant, Claimsnet.com utilizes third-party equipment and software that may
not be Year 2000 compliant. Failure of third-party or currently owned equipment
or software to operate properly with regard to the Year 2000 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 its services. Claimsnet.com may
be unable to collect subscription fees from these healthcare providers after
January 31, 1999.
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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 verification purposes.
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 or 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 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
original equipment manufacturers.
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 contracts that Claimsnet.com has
entered.
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 services to increase
its revenue per client. The targeted services will include HMO encounter forms,
practice management functions, such as CPT code analysis and fee schedule
analysis, 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 companies or software
companies complementing its current services. Acquisitions would be targeted
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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 acquisition, and there can be no assurance that Claimsnet.com's
management will be able identify suitable acquisition candidates, and if
candidates are located, that Claimsnet.com will be able to consummate any such
transaction.
Nevertheless, 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. There can be no assurance that Claimsnet.com will be able to
implement any of these plans, or that these 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 the claims
to these 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. This mailing service is optional to
the providers. To assure proper network operation and allow other revenue
producing services, such as custom reports, eligibility inquiries, and decision
support tools, Claimsnet.com monitors all traffic through its private
application server and firewall.
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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 its 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 the location of which on the
Web is 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, 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 Internet Service Provider 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 Claimsnet.com and a provider takes place in a
highly-controlled, secure, and encrypted environment. The dual encryption
utilized by Claimsnet.com occurs at the browser software and application server
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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 fees 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 its services. These 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 will be, either individually or in the aggregate.
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 to Millbrook 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 this agreement, Claimsnet.com and Blue Cross/Blue
Shield of Louisiana will jointly promote Claimsnet.com's services to the 9,600
network providers of Blue Cross/Blue Shield of Louisiana through website links,
Blue Cross/Blue Shield of Louisiana network communication resources, educational
seminars, telemarketing, and direct mail campaigns.
In September 1998, Claimsnet.com entered into a group purchasing agreement
with Provider Select, Inc., an affiliate of Premier, Inc., the nation's largest
alliance of hospitals and health care
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organizations. Under this 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 agreement, Claimsnet.com will
provide claim processing, patient statements, eligibility verification, and
other services to participating members of Southern Medical Association.
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 these
large competitors, which operate as local sub-clearinghouses for the processing
of medical and dental claims.
While Claimsnet.com competes with all other providers of electronic claims
processing services, it is not aware of any other companies that provide
healthcare electronic claims processing services in the same manner as those
provided by Claimsnet.com and thus represent a direct competitor.
Claimsnet.com believes that its pricing structure and total cost is very
competitive with other providers of electronic claims processing services.
Claimsnet.com further believes that existing competitors are constrained not
only by capital investments and existing hardware/software configurations, but
by existing customer agreements. Despite these facts, Claimsnet.com anticipates
that competition will arise 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.
Some segments of the medical and dental claims processing industry are not
currently suited to the use of inpatient electronic claims processing. Some of
these 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."
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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 Claimsnet'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 (1) full power and authority to interpret the provisions of, and
supervise the administration of, the 1997 Plan and (2) the authority to review
all compensation matters relating to Claimsnet.com.
In April 1997, the board of directors also created an audit committee, which
is comprised of Messrs. Lycke, Bensen, and Brown. The audit committee is
responsible for reviewing the plans and results of the audit engagement with the
independent auditors; reviewing the adequacy, scope, and results of the internal
accounting controls and procedures; reviewing the degree of independence of the
auditors; reviewing the auditors' fees; and recommending the engagement of
auditors to the full board of directors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by
Claimsnet.com for services rendered in all capacities during the years ended
December 31, 1998, 1997 and 1996 by the chief executive officer and each of the
four other most highly compensated executive officers of Claimsnet.com.
41
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
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...................................................................... 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>
A portion of the annual bonus to Terry A. Lee consisted 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 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 some circumstances, permit this
payment to be by surrender of shares of common stock, valued 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 some circumstances, make payments by surrendering shares of
common stock, valued 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 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, including 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 Claimsnet.com's corporate Secretary or any 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
our inception on April 8, 1996 through April 4, 1997. During this period,
Messrs. Lycke and Bensen, officers of Claimsnet.com, 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 any 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 the employment 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 listed reasons described in the employment agreement, 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
(1) upon his death, (2) by Claimsnet.com due to disability, (3) by Claimsnet.com
without cause, or
43
<PAGE>
(4) by Mr. Lycke voluntarily upon Claimsnet.com's default or an 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 a non-compete, non-disturbance, and non-interference
provisions for one year.
In September 1996, Claimsnet.com entered into an employment agreement, which
was amended on March 26, 1997 and March 1998, with Mr. Lee, Executive Vice
President of Marketing and Technology of Claimsnet.com, providing that, 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 designated milestones. In addition and
according to this 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. 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. In the event Mr. Lee is
terminated without cause or other reasons at the discretion of Claimsnet.com,
Mr. Lee will be entitled to receive $40,000 in consideration of his termination
and will be restricted from competing with Claimsnet.com for a period of six
months. 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 three
years later, 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
designated milestones. In addition, as part of 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. 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. In the event Mr. Lindner is terminated without cause
or for 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 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 some 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 of
44
<PAGE>
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 on the
date of grant.
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, the optionee's options
remain exercisable for one year to the extent the 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 some 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 these methods.
Therefore, if that is provided in an optionee's options, the 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, some 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 (1) 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 (2) 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 as stated in the foregoing provisions or otherwise, Claimsnet.com
has been advised that, in the opinion of the Commission, this 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,
- 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,
- each director and each executive officer of Claimsnet.com,
- all directors and executive officers of Claimsnet.com as a group, and
- 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.
As used in the table below and elsewhere 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 following the date of this prospectus. Except
as otherwise indicated, the stockholders listed in the table have sole voting
and investment powers with respect to the shares indicated. Because the table
below provides information with respect to securities of Claimsnet.com
beneficially owned by the persons indicated, we have segregated from this
information the information relating to securities of Claimsnet.com owned, but
not beneficially owned, by the persons indicated according to this definition.
At the date of this prospectus, these securities consist of shares of common
stock issuable upon the exercise of options granted under our stock option plans
described in "Management--Director Compensation" and "Management--1997 Stock
Option Plan." None of these stock options is exercisable within 60 days
following the date of this prospectus.
Except as otherwise noted below, the address of each of the persons in the
table is c/o Claimsnet.com inc., 12801 N. Central Expressway, Suite 1515,
Dallas, Texas 75243.
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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------------------------
OPTIONS
GRANTED
UNDER OUR
STOCK
NAME AND ADDRESS NUMBER OF PERCENT PRIOR PERCENT AFTER OPTION
OF BENEFICIAL OWNER SHARES TO OFFERING OFFERING PLANS
- --------------------------------------- ------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
Bo W. Lycke (1) (5) (6)................ 1,627,993 43.4% 26.0% 20,000
Terry A. Lee (5)....................... 155,573 4.1 2.5 20,000
Paul W. Miller......................... -- -- -- 50,000
Randall S. Lindner (4)................. 83,606 2.2 1.3 118,900
William C. Guynup...................... -- -- -- 10,000
C. Kelly Campbell...................... -- -- -- 10,000
Abbas R. Kafi.......................... -- -- -- 12,000
Cheryl L. Corless...................... -- -- -- 10,000
Ward L. Bensen (1) (2)................. 576,904 15.4 9.2 25,000
Robert H. Brown, Jr. (1) (3)........... 692,354 18.5 11.1 10,000
Sture Hedlund.......................... 9,277 * * 10,000
John C. Willems, III................... 9,277 * * 5,000
American Medical Finance .............. 381,603 10.2 6.1 --
12801 N. Central Expressway
Suite 1515
Dallas, Texas 75243
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------------------------
OPTIONS
GRANTED
UNDER OUR
STOCK
NAME AND ADDRESS NUMBER OF PERCENT PRIOR PERCENT AFTER OPTION
OF BENEFICIAL OWNER SHARES TO OFFERING OFFERING PLANS
- --------------------------------------- ------------- --------------- ------------- -----------
<S> <C> <C> <C> <C>
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 (12 persons)
(3) (4) (5)............................ 2,282,589 60.2 36.5 300,900
</TABLE>
- ------------------------
* Less than one percent.
(1) 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. 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.
(2) 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.
(3) 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
and 381,603 shares of common stock owned of record by American Medical
Finance.
(4) Excludes 3,279 shares of common stock owned of record by Mr. Lindner's wife,
as to which shares Mr. Lindner disclaims beneficial ownership.
(5) 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.
(6) 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
and 381,603 shares of Common Stock owned of record by American Medical
Finance.
47
<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." These 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
this obligation.
In connection with this acquisition, American Medical Finance and
Claimsnet.com entered into a service agreement in which American Medical Finance
provides staff and office support services to Claimsnet.com and for which
Claimsnet.com was billed monthly. This 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 in Claimsnet.com's then pending 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 cancelled $450,000
of the principal balance then outstanding under the credit line. At December 31,
1998, advances under this line of credit were approximately $1,462,000. This
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 this 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.
48
<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 for that purpose 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 additional shares. As a
result, their percentage equity interest in Claimsnet.com would be diluted.
The shares of common stock offered in this offering 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 this 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 the 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 other matters as the board of directors deems
appropriate. In the event that any 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.
49
<PAGE>
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
of the Delaware Law provides, subject to a number of 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 an affiliate, who is an "interested
stockholder" for a period of three years from the date that person became an
interested stockholder unless:
- 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,
- the interested stockholder acquired 85% or more of the outstanding voting
stock of the corporation in the same transaction that makes this 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
- 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 of the Delaware Law, an
"interested stockholder" is defined as any person who is either the owner
of 15% or more of the outstanding voting stock of the corporation or 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 of the Delaware Law by amending its certificate of incorporation or by-laws,
by action of its stockholders, to exempt itself from coverage, provided that the
amendment to the certificate of incorporation or by-laws does not become
effective until 12 months after the date it is adopted. Claimsnet.com has not
adopted this 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, the only business conducted
must be brought before the annual meeting either by or at the direction of the
board of directors or 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 be 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 notice of the date of the annual meeting was
mailed or 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:
50
<PAGE>
- a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting this business at the annual
meeting,
- the name and address, as they appear on Claimsnet.com's books, of the
stockholder proposing this business,
- the class and number of shares of Claimsnet.com which are beneficially
owned by the stockholder, and
- any material interest of the stockholder in the business he wishes to
bring before the annual meeting.
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 business not properly
brought before the meeting shall not be transacted. Notwithstanding the
foregoing, a stockholder shall also comply with all applicable requirements of
the Exchange Act with respect to the above.
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."
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.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Claimsnet.com will have 6,250,000 shares
of common stock outstanding. Of these shares, the 2,500,000 shares offered in
this offering 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 under 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 a 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 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 these 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 its 1997 private placement and its 1998 private placements for resale
commencing 18 months from the date of this prospectus. Claimsnet.com has agreed
that, under some limited circumstances, it will register the 125,000 shares of
common stock issued in its 1999 private placement for resale commencing not
earlier than 12 months from the date of this prospectus.
In addition, according 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. These shares of common
stock shall be included in any registration of common stock which occurs after
this offering, subject to some 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 the securities
registration and qualification requirements in accordance with the terms of the
representatives' warrants. See "Underwriting."
52
<PAGE>
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 and ISG are acting as
representatives, has severally, and not jointly, agreed to purchase the number
of shares offered in this offering 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 on the
cover page of this prospectus and that they may allow some dealers who are
members of 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 some
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the underwriters may be required to make in this respect.
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 this allowance 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 in
this offering 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 to attend these meetings. In addition, the
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. According to the underwriting 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 in this offering to any account
over which they exercise discretionary authority.
53
<PAGE>
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 these 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 these
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 this option is
exercised, the underwriters will become obligated, subject to some conditions,
to purchase additional shares of common stock. The underwriters may exercise
this right of purchase only for the purpose of covering over-allotments, if any,
made in connection with the sale of shares. Purchases of shares of common stock
upon exercise of the over-allotment option will result in the realization of
additional compensation by the underwriters.
In connection with this offering, Claimsnet.com has agreed to sell to the
representatives, individually and not as representatives of the several
underwriters, at the price of $.001 per warrant, the 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 this 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 after the date
of this prospectus, 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 this 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 a number of limitations.
During and after this offering, the underwriters may purchase and sell
common stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to
54
<PAGE>
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 these
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, one of the representatives of the underwriters, was first registered a
broker-dealer in 1997 and has completed three firm commitment 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 will not
adversely affect this offering or the subsequent development of a trading market
for the shares.
Claimsnet.com's initial registration statement was declared effective on
December 10, 1998 and on that date the shares of common stock subject to that
registration statement 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, the NASD terminated
all trades effected on December 10, 1998. The events described in this paragraph
may adversely affect this offering or the subsequent development of a trading
market for our common stock.
55
<PAGE>
LEGAL MATTERS
Legal matters will be passed upon for Claimsnet.com by Brock Silverstein
LLC, New York, New York. 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 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 our inception April 8, 1996 to December 31, 1996
and as of December 31, 1997 and 1998 and for the years then ended, and the
financial statements of Medica 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 in this prospectus in reliance upon
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 two
registration statements on Form S-1, including the exhibits, schedules and
amendments to these registration statements, 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
statements. For further information with respect to Claimsnet.com and the shares
of common stock to be sold in this offering, we make reference to the
registration statements. Although this prospectus contains all material
information regarding Claimsnet.com, 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 we make reference to the copy of such
contract, agreement or other document filed as an exhibit to the registration
statements, each such statement being qualified in all respects by such
reference.
You may read and copy all or any portion of the registration statements 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 Exchange Act and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. 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. Such reports, proxy and
information statements may also be inspected at the offices of the Boston Stock
Exchange, One Boston Place, Boston, Massachusetts 02108.
56
<PAGE>
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, 1998.................................... F-3
CLAIMSNET.COM INC.
Report of Independent Certified Public Accountants.................................................... F-4
Financial Statements
Balance Sheets as of December 31, 1996, 1997, and 1998............................................ F-5
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-6
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-7
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-8
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-10
MEDICA SYSTEMS, INC.
Report of Independent Certified Public Accountants.................................................... F-19
Financial Statements
Balance Sheets as of December 31, 1996 and 1995................................................... F-20
Statements of Operations for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-21
Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1996 and
1995 and the period from May 1, 1994 (inception) to December 31, 1994.............................. F-22
Statements of Cash Flows for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-23
Notes to Financial Statements for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-24
Unaudited Balance Sheet as of March 31, 1997...................................................... F-27
Unaudited Statement of Operations for the three months ended March 31, 1997....................... F-28
Unaudited Statement of Cash Flows for the three months ended March 31, 1997....................... F-29
Notes to Unaudited Financial Statements as of March 31, 1997...................................... F-30
</TABLE>
F-1
<PAGE>
CLAIMSNET.COM INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma statement of operations for the year ended December
31, 1998 reflects the intended use of proceeds from the proposed initial public
offering as if it had been completed on January 1, 1998.
The unaudited pro forma statement is 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
entity. The unaudited pro forma statement of operations should be read in
conjunction with the separate historical financial statements of the Company 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, 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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-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)
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-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)
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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Medica Systems, Inc.
We have audited the accompanying balance sheets of Medica Systems, Inc. as
of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended and the
period from May 1, 1994 (inception) to December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medica Systems, Inc. as of
December 31, 1996 and 1995 and the results of its operations and cash flows for
the years then ended and for the period from May 1, 1994 (inception) to December
31, 1994 in conformity with generally accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
June 2, 1997
F-19
<PAGE>
MEDICA SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................................................... $ 23,046 $ 21,271
Accounts receivable, net of allowance of $24,000 and $-0-................................. 32,216 6,991
Prepaid expenses.......................................................................... 4,388 --
Deferred income taxes..................................................................... 3,316 10,465
--------- ---------
Total current assets.................................................................... 62,966 38,727
--------- ---------
FIXED ASSETS
Office equipment.......................................................................... 33,217 21,626
Software.................................................................................. 10,329 6,332
Accumulated depreciation and amortization................................................. (12,640) (4,893)
--------- ---------
30,906 23,065
--------- ---------
OTHER ASSETS................................................................................ 560 770
--------- ---------
TOTAL ASSETS................................................................................ $ 94,432 $ 62,562
--------- ---------
--------- ---------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable........................................................ $ 8,683 $ 3,469
Accrued liabilities, including $1,300 due to stockholder................ 51,978 1,300
Deferred revenue........................................................ -- 75,000
Federal income taxes payable............................................ 1,011 129
--------- ---------
Total current liabilities............................................. 61,672 79,898
--------- ---------
DEFERRED INCOME TAXES, NON-CURRENT........................................ 1,287 1,532
TOTAL LIABILITIES......................................................... 62,959 81,430
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes E, F and G)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock--no par value; 1,000 shares
authorized; 730 shares issued and outstanding......................... 33,595 33,595
Accumulated deficit..................................................... (2,122) (52,463)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)...................................... 31,473 (18,868)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)...................... $ 94,432 $ 62,562
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
CONSULTING INCOME.............................................................. $ 395,396 $ 120,902 $ 79,952
---------- ---------- ---------
OPERATING EXPENSES
Bad debt provision........................................................... 24,000 -- --
Claims processing............................................................ 7,536 -- --
Depreciation and amortization................................................ 7,957 4,103 1,070
Legal settlement............................................................. 50,000 -- --
Professional fees............................................................ 46,788 17,522 1,825
Rents........................................................................ 2,625 -- --
Salaries and payroll taxes................................................... 161,253 150,086 62,767
Telephone.................................................................... 12,977 6,556 2,449
Travel....................................................................... 8,352 8,779 1,000
Other........................................................................ 15,652 7,790 (1,826)
---------- ---------- ---------
Total operating expense.................................................... 337,140 194,836 67,285
---------- ---------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES.......................................... 58,256 (73,934) 12,667
INCOME TAX BENEFIT (EXPENSE)................................................... (7,915) 10,779 (1,975)
---------- ---------- ---------
NET INCOME (LOSS).............................................................. $ 50,341 $ (63,155) $ 10,692
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
RETAINED
EARNINGS
NUMBER OF COMMON (ACCUMULATED
SHARES STOCK DEFICIT)
------------- --------- -------------
<S> <C> <C> <C>
Capital contribution at inception........................................ 730 $ 33,595 $ --
Net income............................................................... -- -- 10,692
--- --------- -------------
Balances at December 31, 1994............................................ 730 33,595 10,692
Net loss................................................................. -- -- (63,155)
--- --------- -------------
Balances at December 31, 1995............................................ 730 33,595 (52,463)
Net income............................................................... -- -- 50,341
--- --------- -------------
Balances at December 31, 1996............................................ 730 $ 33,595 $ (2,122)
--- --------- -------------
--- --------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................................ $ 50,341 $ (63,155) $ 10,692
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities...............................
Depreciation and amortization.............................................. 7,957 4,103 1,070
Provision for bad debts.................................................... 24,000 -- --
Changes in assets and liabilities:
Accounts receivable.................................................... (49,225) 23,460 (30,451)
Prepaid expenses....................................................... (4,388) -- --
Organization costs..................................................... -- -- (1,050)
Accounts payable....................................................... 5,214 2,504 965
Accrued liabilities.................................................... 50,677 (1,850) 3,150
Deferred revenue....................................................... (75,000) 75,000 --
Federal income taxes payable........................................... 882 129 --
Deferred income taxes.................................................. 6,904 (10,908) 1,975
--------- ---------- ---------
Net cash provided (used) by operating activities......................... 17,362 29,283 (13,649)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.......................................... (15,587) (13,979) (11,164)
--------- ---------- ---------
Net cash used in investing activities.................................... (15,587) (13,979) (11,164)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock................................................... -- -- 30,780
--------- ---------- ---------
Net cash provided by financing activities................................ -- -- 30,780
NET INCREASE IN CASH........................................................... 1,775 15,304 5,967
Cash--beginning balance...................................................... 21,271 5,967 --
--------- ---------- ---------
Cash--ending balance......................................................... $ 23,046 $ 21,271 $ 5,967
--------- ---------- ---------
--------- ---------- ---------
Supplemental disclosure of income taxes paid................................... $ 129 $ -- $ --
--------- ---------- ---------
--------- ---------- ---------
Supplemental schedule of non-cash investing and financing activities
Equipment contributed by shareholder......................................... $ -- $ -- $ 2,815
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
NOTE A--BACKGROUND AND ORGANIZATION
Medica Systems, Inc. ("Medica" or the "Company") was incorporated in the
state of Texas on May 1, 1994. Medica was formed for the purpose of developing
software in the healthcare industry. The Company provides consulting services
for medical billing processing.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
OFFICE EQUIPMENT
Office equipment is stated at cost. Depreciation is provided using the
straight line method over the estimated useful lives of the assets of five to
seven years. Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized.
SOFTWARE
Software is stated at cost. Amortization is calculated using the straight
line method over the estimated useful lives of the software of five years.
INCOME TAXES
The Company accounts for income taxes in accordance with the asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
REVENUE RECOGNITION
Revenue relating to services is recognized upon completion of services,
which are usually completed within one fiscal year. Payments for services
received in advance are deferred and recognized when services have been
rendered.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts
F-24
<PAGE>
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
NOTE 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-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 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-26
<PAGE>
MEDICA SYSTEMS, INC.
BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................ $ 36,113
Accounts receivable, net of allowance of $30,000................................ 37,226
Deferred income taxes........................................................... 4,063
---------
Total current assets.......................................................... 77,402
---------
FIXED ASSETS
Office equipment................................................................ 35,322
Software........................................................................ 10,329
Accumulated depreciation and amortization....................................... (14,715)
---------
30,936
---------
OTHER ASSETS...................................................................... 507
---------
TOTAL ASSETS...................................................................... $ 108,845
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................................ $ 12,018
Accrued liabilities, including $1,300 due to stockholder........................ 57,010
Federal income taxes payable.................................................... 1,208
---------
Total current liabilities..................................................... 70,236
---------
DEFERRED INCOME TAXES, NON-CURRENT................................................ 1,487
TOTAL LIABILITIES................................................................. 71,723
---------
STOCKHOLDERS' EQUITY
Common stock--no par value; 1,000 shares authorized; 730 shares issued and
outstanding................................................................... 33,595
Retained earnings............................................................... 3,527
---------
TOTAL STOCKHOLDERS' EQUITY........................................................ 37,122
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $ 108,845
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<S> <C>
CONSULTING INCOME................................................................. $ 106,507
---------
OPERATING EXPENSES
Bad debt provision.............................................................. 6,000
Claims processing............................................................... 5,775
Depreciation and amortization................................................... 2,128
Professional fees............................................................... 11,530
Rents........................................................................... 2,625
Salaries and payroll taxes...................................................... 62,206
Telephone....................................................................... 4,345
Travel.......................................................................... 1,771
Other........................................................................... 3,817
---------
Total operating expense....................................................... 100,197
---------
NET INCOME BEFORE INCOME TAXES.................................................... 6,310
INCOME TAX EXPENSE................................................................ (661)
---------
NET INCOME........................................................................ $ 5,649
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
MEDICA SYSTEMS, INC.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CASH FLOWS PROVIDED BY IN OPERATING ACTIVITIES
<S> <C>
Net income...................................................................... $ 5,649
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................................. 2,128
Provision for bad debts....................................................... 6,000
Changes in assets and liabilities:
Accounts receivable....................................................... (11,010)
Prepaid expenses.......................................................... 4,388
Accounts payable.......................................................... 3,335
Accrued liabilities....................................................... 5,032
Federal income taxes payable.............................................. 197
Deferred income taxes..................................................... (547)
---------
Net cash provided by operating activities................................... 15,172
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of property and equipment............................................. (2,105)
---------
Net cash used in investing activities......................................... (2,105)
NET INCREASE IN CASH.............................................................. 13,067
Cash--beginning balance......................................................... 23,046
---------
Cash--ending balance............................................................ $ 36,113
---------
---------
Supplemental disclosure of income taxes paid...................................... $ 1,011
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
NOTE A--INTERIM INFORMATION
Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments necessary for a fair statement of interim results
have been included in accordance with generally accepted accounting principles.
All adjustments are of a normal recurring nature. The results for interim
periods are not necessarily indicative of results to be expected for the entire
year. These financial statements and notes should be read in conjunction with
the Company's annual financial statements and the notes thereto for the fiscal
year ended December 31, 1996.
NOTE B--SUBSEQUENT EVENT
On June 2, 1997, the Company was acquired by American Net Claims ("ANC") in
exchange for cash, notes and common stock of ANC.
F-30
<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..................................... 9
Use of Proceeds.................................. 21
Dilution......................................... 23
Capitalization................................... 24
Selected Financial Data.......................... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 26
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* Certificate 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.
10.14 Service Agreement, dated November 1998, between Claimsnet.com and Southern Medical Association.
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 22, 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 22, 1999
Bo W. Lycke (Principal Executive
Officer)
Vice President and Chief
* Financial Officer
- ------------------------------ (Principal Financial and March 22, 1999
Paul W. Miller Accounting Officer)
* Executive Vice President of
- ------------------------------ Marketing and Technology March 22, 1999
Terry A. Lee and Director
*
- ------------------------------ Director March 22, 1999
Ward L. Bensen
*
- ------------------------------ Director March 22, 1999
Robert H. Brown, Jr.
*
- ------------------------------ Director March 22, 1999
Sture Hedlund
*
- ------------------------------ Director March 22, 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>
Exhibit 10.14
MARKETING AGREEMENT BETWEEN
AMERICAN NET CLAIMS D/B/A CLAIMSNET.COM AND SOUTHERN MEDICAL
ASSOCIATION LOCATED IN BIRMINGHAM, AL
This MARKETING AGREEMENT (this "Agreement"), dated November 4, 1998,
made and entered into by and between AMERICAN NET CLAIMS D/B/A CLAIMSNET.COM,
a Texas corporation ("Claimsnet"), and Southern Medical Association ("SMA"),
located in Birmingham, AL.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, SMA is a Physician Association providing services to medical
providers.
WHEREAS, Claimsnet provides medical claims submission and related services
(the "Claimsnet Services") over the Internet;
WHEREAS, SMA and Claimsnet have agreed to market Claimsnet Services, such
that Customers of SMA (the "Customers") will have access to the Claimsnet
Services on the Internet, and SMA will not distribute, license or directly
sell any Software Product from Claimsnet.
WHEREAS, Claimsnet has agreed to provide training and support to SMA, and SMA
Customers on the use of the Claimsnet Services.
NOW THEREFORE, the parties hereby agree as follows:
1. MARKETING
SMA and Claimsnet agree to facilitate the marketing of Claimsnet Services to
SMA existing and new Customers. Claimsnet shall:
a) Provide HCFA 1500 and ADA 1990 claim processing for SMA Customers
at Claimsnet published rate for unlimited claim processing for
commercial, Medicare, Medicaid and Blue Cross/Blue Shield payers.
The monthly subscription fee will be $19.95/month.
b) The Initial Set-up Fee will be reduced for SMA End Users to $99.95.
c) Additional Services will be provided at Claimsnet published rates;
1. PAPER CLAIMS. A fee of Forty-Nine Cents ($0.49) per claim and
Twenty Cents ($.20) for each additional page for claims of a
type that may not be submitted electronically. This fee
includes all paper, printing and postage costs.
2. STATEMENTS. A fee of Forty-Nine Cents ($0.49) per single page
statement with an additional fee of Twenty Cents ($.20) for
each page thereafter. This fee includes all related costs,
including printing of statements, return envelopes and
postage, not including return postage.
3. UB92 CLAIMS. A fee of Forty-Nine Cents ($0.49) for single
page UB92 Claim and an additional fee of Twenty Cents ($.20)
for every page thereafter of a type that may or may not be
submitted electronically. This fee includes all paper,
printing and postage costs.
4. ADDITIONAL SUBSCRIPTION SERVICES. Claimsnet may provide
additional subscription services, such as data modeling and
claim information reporting. The SMA End User may subscribe to
such services as offered and at published Claimsnet rates.
d) Claimsnet will bill the End Users directly for the services provided.
e) All pricing and terms for service to SMA customers will be
standard published terms for Claimsnet.
<PAGE>
SMA shall:
f) Recommend Claimsnet as the exclusive provider for the Claimsnet
services described in Section 1.a. and 1.b., to all new and
existing customers with the intent for Claimsnet to be the default
processing solution for SMA customers.
g) Include Claimsnet in marketing materials and presentations as the
exclusive claims processing and electronic statement solution for
SMA customers.
2. TRAINING AND SUPPORT
a) Claimsnet will provide all customer support for Customers for
Claimsnet services in accordance to Claimsnet published support
policies.
b) Claimsnet will provide, and allow SMA to reasonably use available
printed training and support materials.
3. ROYALTY PAYMENTS.
a) Claimsnet agrees to pay set-up and subscription fee royalties to
SMA for all customers utilizing Claimsnet services under the
SMA/Claimsnet agreement. These are customers who have informed
Claimsnet at the time of enrollment or after that they wish to
participate in the SMA/Claimsnet agreement. Claimsnet will only
pay royalty fees to one organization.
b) Upon enrollment and a customer reaching production status,
Claimsnet will pay SMA $50 of the set-up fee collected for each
customer reaching production status.
c) SMA will receive a royalty from subscription services revenue for,
and paid by, SMA Customers. Subscription includes the monthly
claims processing subscription and any additional subscription
services such as data modeling. Royalties will not be paid on
transaction services under this Agreement.
d) Claimsnet agreed to pay set-up and subscription fee royalties to
SMA for all customers utilizing Claimsnet services under the
SMA/Claimsnet agreement.
e) Revenue sharing will be as follows:
------------------------ ------------------------
Total Number % Subscription
Active End Users Revenue Royalty
------------------------ ------------------------
------------------------ ------------------------
1-200 10%
------------------------ ------------------------
201-500 15%
------------------------ ------------------------
501+ 20%
------------------------ ------------------------
------------------------ ------------------------
4. TITLE. The parties agree that, as between SMA and Claimsnet, Claimsnet
shall have sole and exclusive ownership of, and all right, title, and
interest in and to, Claimsnet Services and CyberClaim, including
documentation, all copies of all or portions of CyberClaim and Claimsnet
services or its documentation, and all modifications and enhancements to
Claimsnet services and CyberClaim or its documentation (including ownership
of all copyrights and other intellectual property rights).
5. INTELLECTUAL PROPERTY. Solely for purposes of Section 1 of this
Agreement, each party grants the other party a non-exclusive license to use
certain logos, including possibly trademarks, tradenames or other
intellectual property (the "Logos"), as agreed in advance by the parties.
Neither party shall use the Logos in a way, or otherwise make any
representation, whether oral or written, which might confuse, mislead or
deceive the public, which might be detrimental to the Logos, good name or
slogans of the other party, or otherwise which might imply or suggest a
relationship other than which is set forth in this Agreement. Each party
agrees that it will in no way modify, alter or conceal, remove or make any
other modification to
<PAGE>
any Logos of the other party. Each party acknowledges and agrees that it has
no right, title, or interest in any Logos of the other party. Each party's
limited right to use the other party's Logos shall cease upon termination of
this Agreement or otherwise upon notice as provided in this Agreement by the
other party.
6. TERM AND TERMINATION. This agreement goes into full effect beginning
November 4, 1998. This Agreement shall remain in effect until the first
anniversary of the date from the effective date of this agreement, however,
this Agreement shall renew automatically for additional one (1) year terms
unless either party shall notify the other party of its intentions not to
renew this Agreement no more than ninety (90), and not fewer than sixty (60),
days prior to the date this Agreement would otherwise terminate.
7. ENROLLMENT. Claimsnet shall provide to all SMA Customers the ability to
enroll for Claimsnet services using an on-line enrollment process. Claimsnet
shall be solely responsible for support related to such enrollment process.
8. MISCELLANEOUS. The relationship of the parties under this Agreement shall
be non-exclusive, such that both SMA and Claimsnet may associate, by contract
or otherwise, with third parties who may perform the same or similar services
as those to be provided by any party under this Agreement (subject) to the
limitations set forth in Section I). This Agreement shall be binding on each
of the parties, and their respective successors and assigns; provided,
however, that this Agreement may not be assigned without the prior written
consent of the other party. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and there are no other
oral or written understandings or agreements between the parties hereto
relating to the subject matter hereof. No amendment or other modifications of
this Agreement shall be valid or binding on either party hereto, unless
reduced to writing and executed by the parties hereto. ANY JUDICIAL
PROCEEDING BROUGHT BY OR AGAINST ANY OF THE PARTIES TO THIS AGREEMENT ON ANY
DISPUTE ARISING OUT OF THIS AGREEMENT OR ANY MATTER RELATED HERETO SHALL BE
RESOLVED BY A RULING OF THE AMERICAN ARBITRATION ASSOCIATION IN DALLAS, TEXAS.
THIS AGREEMENT HAS BEEN ACCEPTED BY SOUTHERN MEDICAL ASSOCIATION, IN
BIRMINGHAM, ALABAMA, AND SHALL BE GOVERNED AND CONSTRUED UNDER AND IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ITS
CONFLICT OF LAW PRINCIPLES. It is understood and agreed by the parties to
this Agreement that it is their intention that if a court of competent
jurisdiction shall determine that any of the terms of this Agreement are
invalid or otherwise unenforceable, that such court shall substitute terms
therefor which such court determines are enforceable, so as to result in the
enforcement of the original terms to the maximum extent permitted by law.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as
of the date first written above.
SMA:
SOUTHERN MEDICAL ASSOCIATION
By: /s/ Rudy Sturm
--------------------------------------
Rudy Sturm
CLAIMSNET:
CLAIMSNET.COM
By: /s/ Terry A. Lee
--------------------------------------
Terry A. Lee, Executive Vice President
<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 24, 1999
