AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1998
REGISTRATION NO. 333-36209
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CLAIMSNET.COM INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 7374 75-2649230
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
------------------------
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.
STEPHEN H. GRAY, ESQ.
Brock Silverstein
McAuliffe LLC
One Citicorp Center
153 East 53rd Street
New York, New York 10022
(212) 371-2000 / (212) 371-5500 (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. / /
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 COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Front Cover
[Provides a brief overview of the Claimsnet.com process and contains three
examples of processing screens. The text and graphics emphasize the three
primary benefits of the Claimsnet.com service.]
Back Cover
[Contains an image of the Claimsnet.com internet home page imposed over a
background of a starry sky. The home page shows the Claimsnet.com logo and name,
along with the messages, "Healthcare Transaction Processing" and "Reducing
Healthcare Provider Costs with Internet Technology."]
SUBJECT TO COMPLETION, DATED JUNE 3, 1998
PROSPECTUS
2,500,000 SHARES
[LOGO]
COMMON STOCK
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Claimsnet.com inc., a Delaware corporation (the "Company"), hereby offers
2,500,000 shares (the "Shares") of Common Stock, par value $.001 per share (the
"Common Stock"). It is currently contemplated that the initial public offering
price of the Common Stock will be $6.00 per Share. See "Underwriting" for the
factors to be considered in the determination of the initial public offering
price of the Shares.
Prior to this offering, there has been no public market for the Shares, and
there can be no assurance that an active market will develop therefor upon
completion of this offering. Application has been made for the quotation of the
Common Stock on the Nasdaq SmallCap-Registered Trademark- Market under the
symbol "CLAI," and application for the listing of the Common Stock has been made
to the Boston Stock Exchange under the symbol "CLA."
SEE "RISK FACTORS" LOCATED ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)
Per Share.............................. $ $ $
Total(3)............................... $ $ $
(1) Does not include additional consideration to be received by First Asset
Management, Inc., the representative (the "Representative") of the several
underwriters (the "Underwriters"), in the form of (a) a 3% non-accountable
expense allowance and (b) warrants to purchase up to an aggregate of 250,000
shares of Common Stock (the "Representative's Warrants"). The Company has
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting estimated expenses of the offering payable by the Company
of $ , including the Representative's non-accountable expense
allowance, assuming no exercise of the Underwriters' over-allotment option.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
an additional 375,000 shares of Common Stock, on the same conditions as set
forth herein, solely to cover over-allotments, if any. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ , and $ , respectively. See "Underwriting."
------------------------------
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as, and if delivered to, and accepted by them, and subject to their
right to reject orders in whole or in part and to certain other conditions. It
is expected that delivery of certificates will be made against payment therefor
at the offices of First Asset Management, Inc. on or about , 1998.
------------------------
FIRST ASSET MANAGEMENT, INC.
[LOGO]
THE DATE OF THIS PROSPECTUS IS , 1998
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION THEREIN MAINTAINED
BY THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
The Company intends to furnish to its stockholders annual reports, which
will include financial statements audited by independent accountants, and such
other periodic reports as it may determine to furnish or as may be required by
law, including Sections 13(a) and 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED HEREIN, THE INFORMATION IN THIS PROSPECTUS DOES NOT GIVE
EFFECT TO (I) THE REPRESENTATIVE'S WARRANTS OR THE EXERCISE THEREOF; (II) THE
UNDERWRITERS' OVER-ALLOTMENT OPTION OR THE EXERCISE THEREOF; (III) UP TO 500,000
SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE EXERCISE OF OPTIONS WHICH
MAY BE GRANTED PURSUANT TO THE COMPANY'S 1997 STOCK OPTION PLAN (THE "1997
PLAN"), 150,000 OF WHICH HAVE BEEN GRANTED TO DATE; AND (IV) UP TO 100,000
SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE EXERCISE OF OPTIONS WHICH
MAY BE GRANTED PURSUANT TO THE COMPANY'S NON-EMPLOYEE AND DIRECTOR'S PLAN (THE
"DIRECTOR'S PLAN"), NONE OF WHICH HAVE BEEN GRANTED TO DATE. EXCEPT AS OTHERWISE
INDICATED, THE INFORMATION HEREIN REFLECTS (I) A 2.325578-FOR-ONE STOCK SPLIT OF
THE OUTSTANDING SHARES OF COMMON STOCK EFFECTED ON MAY 15, 1997, AND A
2.88-FOR-ONE REVERSE STOCK SPLIT OF THE OUTSTANDING SHARES OF COMMON STOCK TO BE
EFFECTED PRIOR TO THE DATE OF THIS PROSPECTUS, (II) AN INCREASE OF THE
AUTHORIZED SHARES OF COMMON STOCK TO 40,000,000 SHARES AND THE AUTHORIZED SHARES
OF PREFERRED STOCK TO 5,000,000 SHARES TO BE EFFECTED PRIOR TO THE DATE OF THIS
PROSPECTUS, AND (III) THE REINCORPORATION OF THE COMPANY UNDER THE LAWS OF THE
STATE OF DELAWARE PRIOR TO THE DATE OF THIS PROSPECTUS. AS USED HEREIN, THE TERM
"YEAR" OR "FISCAL YEAR" REFERS TO THE COMPANY'S FISCAL YEAR ENDING DECEMBER 31.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE CERTAIN
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH IN "RISK FACTORS."
THE COMPANY
Claimsnet.com inc. (the "Company") is an electronic commerce company engaged
in healthcare transaction processing for the medical and dental industries by
means of the Internet. The Company's proprietary software, which was developed
over the last six years and resides entirely on the Company's servers, allows
healthcare providers to prepare and enter healthcare claims interactively on the
Internet and electronically transmits the claims to the Company for processing.
It also allows the Company to download claims from the healthcare providers'
computers directly to the Company's servers. The software provides real-time
editing of the claims data for compliance with payor format and converts the
claims to satisfy specific payor processing requirements. The Company then
electronically transmits processed claims on behalf of such healthcare
providers, directly or indirectly, to medical and dental payors that accept
claims processing transmissions electronically. In addition, the Company's
software provides for secure encryption of all claims data transmitted. The
payors to which claims processed by the Company have been submitted, primarily
through clearinghouses, include plans and affiliates of Aetna Life & Casualty
Company, Inc., MetLife Healthcare/Metropolitan Healthcare Corporation, Cigna
Healthcare, Inc., The Prudential Insurance Company of America, and United
Healthcare Corporation.
The Company believes that (i) the ability of healthcare providers utilizing
the Company's Web site to interactively prepare claims on the Internet and
receive real time edits prior to claim submission, (ii) the ease and
availability of Company-provided training over the Internet, (iii) the minimal
software and processing power required for providers to utilize the Company's
proprietary software, and (iv) the ability to add incremental services, such as
patient statements, collection letters, and data modeling, through the same
browser interface and Web site as the Company's claims processing services are
significant advantages of the Company's electronic claims transmission services
over other currently available services. The Company believes that the improved
claims processing procedure will result in a sharply reduced average number of
outstanding accounts receivable days, thereby improving the provider's working
capital. The Company believes that the services offered by its competitors are
generally based on legacy mainframe technology, proprietary networks, and
proprietary file formats, which limit the ability of those competitors to offer
interactive Internet-based processing services on an economical basis. In
addition, competitors' services generally require extensive formal training, the
installation of substantial software on each healthcare provider's computer, and
significant processing power.
3
The healthcare claims processing market, including dental claims, was
estimated by Health Data Management ("HDM"), an industry publication, to be over
4.0 billion healthcare claim and HMO encounter form (the HMO equivalent of a
claim) submissions in 1997. HDM has estimated that electronically submitted
claims volume increased by 13% in 1997 over 1996 levels, that physicians
submitted approximately 38% of their claims electronically in 1997, as compared
to 35% in 1996, and that the rate of growth in dental electronic claim
submissions increased from 10% in 1996 to 13% in 1997.
The Company seeks to generate revenue by charging commercial payors, or
clearinghouses acting for commercial payors, a transaction fee for claims
submitted electronically and by charging healthcare providers a subscription fee
for the use of the Company's services. Generally, the Company collects a monthly
subscription fee of $19.95 from those which have subscribed to the Company's
services on or after January 1, 1998. The Company has, however, determined to
waive all provider subscription fees through at least June 30, 1998 for those
which subscribed to the Company's services prior to January 1, 1998 as part of
its marketing strategy to attract healthcare providers to use its services.
There can be no assurance that the Company will be able to collect subscription
fees from such healthcare providers after June 30, 1998 or, if collected, the
amount of such fees.
In February 1998, the Company entered into development and marketing
agreement with Millbrook Corporation ("Millbrook"), a Microsoft solution
provider, to be the default claims processing, statement, and remittance advice
vendor for all healthcare provider customers of Millbrook. The processing
solution offered by the Company pursuant to such agreement is tightly integrated
through distinctive software controls allowing automatic updates within each
provider's practice management system.
The Company's business strategy is: (i) to aggressively market electronic
claims processing services to outpatient healthcare providers, including
clinics, hospitals, physicians, HMOs, third party administrators, dentists, and
other outpatient service providers; (ii) to expand the services offered by the
Company to include additional transaction processing functions, such as
eligibility for benefit coverage, HMO encounter forms, and practice management
functions (e.g. CPT code analysis, fee schedule analysis, etc.) in order to
diversify sources of revenue; (iii) to acquire and integrate electronic claims
processing companies that enable the Company to accelerate its entry into the
inpatient hospital claims market; (iv) to offer new customers initial and
ongoing American Airlines-Registered Trademark- AAdvantage-Registered Trademark-
mileage rewards relative to the commerical insurance claims submitted; and (v)
to license its claims processing technology for other applications, including
stand-alone purposes, Internet systems, private label use, and original
equipment manufacturers ("OEMs").
The Company was incorporated under the laws of the State of Texas on April
8, 1996 under the name American Net Claims, Inc. The Company was reincorporated
under the laws of the State of Delaware on , 1998 under the name
Claimsnet.com inc. The Company's principal office is located at 12801 North
Central Expressway, Suite 1515, Dallas, Texas 75243, and its telephone number is
(972) 458-1701. On July 31, 1996, the Company acquired all of the Internet
software, licenses, intellectual property rights, and technology developed by an
affiliated company, American Medical Finance, Inc. ("AMF"). See "Use of
Proceeds" and "Certain Transactions." On June 2, 1997, the Company acquired (the
"Medica Acquisition") 100% of the capital stock of Medica Systems, Inc.
("Medica"), a software development firm from which the Company had licensed a
portion of the Company's healthcare transaction processing software. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company operated in the development stage through March 31,
1997 and thereafter commenced processing claims for healthcare providers. The
Company maintains its Web page at http://claimsnet.com and has registered the
Internet domain of Claimsnet.com.
4
THE OFFERING
Shares of Common Stock Offered by the
Company.................................... 2,500,000 shares
Shares of Common Stock Outstanding
Immediately Prior to this Offering......... 2,916,667 shares
Shares of Common Stock Outstanding
Immediately Following Offering............. 5,416,667 shares
Use of Proceeds.............................. To repay indebtedness; to increase marketing
and research and development; to acquire
businesses or products that compliment the
Company's operations; to acquire additional
capital equipment; and for general corporate
and working capital purposes. See "Use of
Proceeds."
Risk Factors................................. An investment in the securities offered
hereby involves a high degree of risk and
immediate and substantial dilution and should
not be made by investors who cannot afford
the loss of their entire investment. See
"Risk Factors" and "Dilution."
Proposed Nasdaq Small
Cap-Registered Trademark- Market Trading
Symbol..................................... "CLAI"
Proposed Boston Stock Exchange Trading
Symbol..................................... "CLA"
5
SUMMARY FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA:
PERIOD FROM
APRIL 8, 1996 THREE MONTHS ENDED MARCH 31,
(INCEPTION) YEAR ENDED
THROUGH DECEMBER 31, ----------------------------
DECEMBER 31, 1996 1997(1) 1997 1998
----------------- ------------------- ------------- -------------
Revenues................................... $ -- $ 81,712 $ -- $ 42,978
----------------- ------------------- ------------- -------------
Total operating expenses................... 147,918 2,514,290 188,897 749,132
----------------- ------------------- ------------- -------------
Interest expense--affiliate................ 158,123 389,548 118,985 70,623
Interest income............................ -- (40,817) -- (1,820)
----------------- ------------------- ------------- -------------
Net loss................................... (306,041) (2,781,309) (307,882) (774,597)
----------------- ------------------- ------------- -------------
----------------- ------------------- ------------- -------------
Basic and diluted loss per weighted average
common share outstanding................. $ (0.15) $ (1.12) $ (0.15) $ (0.29)
----------------- ------------------- ------------- -------------
----------------- ------------------- ------------- -------------
Weighted average common shares outstanding
(basic and diluted)...................... 2,047,234 2,481,047 2,061,798 2,708,333
----------------- ------------------- ------------- -------------
----------------- ------------------- ------------- -------------
BALANCE SHEET DATA:
DECEMBER 31, 1997 MARCH 31, 1998
------------------------ ------------------------
PRO FORMA PRO FORMA
AS AS
ACTUAL ADJUSTED(2)(3) ACTUAL ADJUSTED(2)(3)
--------- ------------- --------- -------------
Current assets......................... $ 419,329 $10,687,712 $ 112,472 $10,044,720
Total assets........................... 2,174,597 12,406,277 1,755,788 11,599,083
Working capital........................ 36,202 10,204,585 (238,058) 9,594,190
Long-term debt......................... 3,468,320 -- 3,856,705 --
Stockholders' equity (deficit)......... (1,676,850) 11,923,150 (2,451,447) 11,148,523
- ------------------------
(1) Includes the results of operations of Medica Systems, Inc. from the date of
acquisition, June 2, 1997.
(2) Adjusted to reflect the estimated net proceeds of approximately $12,650,000
from the sale of the Shares at an assumed initial public offering price of
$6.00 per Share and the initial application of such net proceeds as
described under "Use of Proceeds".
(3) Adjusted to reflect the net proceeds of approximately $950,000 from the sale
of Common Stock in April and May 1998 as described under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
6
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK, AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE
OTHER MATTERS REFERRED TO HEREIN, INCLUDING THE FINANCIAL STATEMENTS AND NOTES
THERETO, THE FOLLOWING RISK FACTORS. PROSPECTIVE INVESTORS SHOULD BE IN A
POSITION TO RISK THE LOSS OF THEIR ENTIRE INVESTMENT. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING INFORMATION WHICH INVOLVES RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH
FORWARD-LOOKING INFORMATION AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS.
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES
The Company, organized on April 8, 1996, was a development stage company
through March 31, 1997, is currently processing claims for more than 300
providers, and has entered into agreements with clearinghouses providing access
to more than 150 payors which, on average, provide for a payment to the Company
of $.10 per claim. Consequently, the Company has a very limited operating
history upon which prospective investors may base an evaluation of the Company
and determine its prospects for achieving its intended business objectives. The
Company is subject to all of the risks inherent to the establishment of any new
business venture. The likelihood of the future success of the Company is highly
speculative and must be considered in light of its limited operating history, as
well as the limited resources, problems, expenses, risks, and complications
frequently encountered by similarly situated companies in the early stages of
development, particularly companies in new and rapidly evolving markets, such as
electronic commerce. To address these risks, the Company must, among other
things, maintain and increase its customer base, implement and successfully
execute its business and marketing strategy, continue to develop and upgrade its
technology and transaction-processing systems, continually update and improve
its Web site, provide superior customer service, respond to competitive
developments, and attract, retain, and motivate qualified personnel. There can
be no assurance that the Company will be successful in addressing such risks,
and the failure to do so could have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations.
As of December 31, 1996 and 1997, and March 31, 1998, the Company had
working capital of $15,659, $36,202, and $(238,058) respectively, and
stockholders' deficit of $(3,430,041), $(1,676,850), and $(2,451,447),
respectively. See "Business" and the Financial Statements and the Notes thereto.
The Company generated revenues of $81,712 through December 31, 1997, and $42,978
for the three months ended March 31, 1998, and has incurred net losses since
inception and expects to continue to operate at a loss for the foreseeable
future. For the period from April 8, 1996 (inception) through December 31, 1996,
the year ended December 31, 1997, and the three months ended March 31, 1998, the
Company incurred net losses of $(306,041), $(2,781,309), and $(774,597)
respectively. There can be no assurance that the Company will ever achieve
profitability.
A significant portion of the Company's revenues for the year ended December
31, 1997 were from software licensing fees to a former customer of Medica. The
customer was a home-based claims processing business opportunity vendor. License
revenues to the customer, totalling $51,011 are included in the Company's
revenues for the year ended December 31, 1997. The Company has since cancelled
the contract.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include: (i) the Company's ability to retain
existing
7
customers, attract new customers at a steady rate, and maintain customer
satisfaction; (ii) the announcement or introduction of new sites, services, and
products by the Company and its competitors; (iii) price competition or higher
prices in the industry; (iv) the level of use of the Internet and online
services and the rate of market acceptance of the Internet and other online
services for the purchase of "business to business" services, such as those
offered by the Company; (v) the Company's ability to upgrade and develop its
systems and infrastructure in a timely and effective manner; (vi) the level of
traffic on the Company's Web site; (vii) technical difficulties, system
downtime, or Internet brownouts; (viii) the amount and timing of operating costs
and capital expenditures relating to expansion of the Company's business,
operations, and infrastructure; (ix) government regulation; and (x) general
economic conditions and economic conditions specific to the Internet, electronic
commerce, and the medical claims processing industry.
Due to the foregoing factors, in one or more future quarters, the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Common Stock would likely be
materially adversely affected.
UNTESTED MARKETING STRATEGY
To date, the Company has engaged in limited marketing efforts. Achieving
market penetration will require significant efforts by the Company to create
awareness of, and demand for, the Company's products and services. The Company
intends to upgrade its marketing efforts to include advertising on the Internet,
direct mail, e-mail, and an expanded sales staff. The Company seeks to generate
revenue by charging commercial payors, or clearinghouses acting on behalf of
commercial payors, a transaction fee for each claim submitted and healthcare
providers a monthly subscription fee for the use of the Company's services. The
Company has, however, determined to waive all provider subscription fees through
at least June 30, 1998 for those which subscribed to the Company's services
prior to January 1, 1998. All of these marketing efforts have been largely
untested in the marketplace and there can be no assurance that such efforts will
result in sales of the Company's products and services. Further, there can be no
assurance that the Company will be able to build a provider customer base or be
able to collect subscription fees from such healthcare providers after June 30,
1998 or, if collected, the amount of such fees. The failure of the Company to
develop its marketing capabilities, succesfully market its products or services,
or recover the cost of its services would have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
The waiver of such subscriber fees through at least June 30, 1998 and a
potential determination by the Company to waive subscriber fees after such date
could have a material adverse effect on the business, prospects, financial
condition, and results of operations of the Company. See "Use of Proceeds,"
"Business--Business Strategy," and "Business--Customers."
ADDITIONAL FINANCING REQUIREMENTS
Based on the Company's operating plan, the Company believes that the net
proceeds of this offering, together with anticipated revenues from operations,
will be sufficient to satisfy its capital requirements for at least the next 18
months. This belief is based on certain assumptions, which may prove to be
incorrect. Accordingly, there can be no assurance that the Company's financial
resources will be sufficient to satisfy the Company's capital requirements for
such period. If the Company's financial resources are insufficient and, in any
case, after such 18-month period, the Company will require additional financing
in order to meet its plans for expansion. Additional financing may take the form
of the issuance of common or preferred equity securities or debt securities, or
may involve bank financings. There can be no assurance that the Company will be
able to obtain the necessary additional capital on a timely basis or on
acceptable terms, if at all. In any of such events, the Company may be unable to
implement its current plans for expansion or to repay its debt obligations as
they become due. In the event that any such financing should take the form of
equity securities, the holders of the Common Stock may experience additional
dilution. See "Use of Proceeds," "Dilution," and "Business--Business Strategy."
8
RISK ASSOCIATED WITH GROWTH; NEW MANAGEMENT TEAM AND LIMITED SENIOR MANAGEMENT
RESOURCES; DEPENDENCE UPON KEY PERSONNEL
From April 8, 1996 (inception) to December 31, 1996, during the year ended
December 31, 1997, and during the three month period ended March 31, 1998, the
Company expanded from one to 11 employees and from 11 to 23 employees, and
decreased from 23 to 22 employees, respectively. The majority of the Company's
senior management joined the Company after January 1, 1997, and some officers
have no prior senior management experience at public companies. The Company's
new employees include a number of key managerial, technical, financial,
marketing, and operations personnel who have not yet been fully integrated into
the Company, and the Company expects to add additional key personnel in the near
future. Expansion of the Company's business is expected to place a significant
strain on its limited managerial, operational, and financial resources. The
Company will be required to expand its operational and financial systems
significantly and to expand, train, and manage its work force in order to manage
the expansion of its operations. Failure to fully integrate such new employees
into the Company's operations could have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Employees."
The Company is currently dependent upon the efforts and abilities of its
senior executives. The loss or unavailability of the services of any such
individuals for any significant period of time could have a material adverse
effect on the Company's business, prospects, financial condition, and results of
operations. The Company has obtained, owns, and is the sole beneficiary of,
key-person life insurance in the amount of $2,000,000 on the life of Bo W.
Lycke, the Chairman of the Board of Directors, President, and Chief Executive
Officer of the Company. There can be no assurance that such insurance, if
needed, will continue to be available on reasonable terms, or at all, to the
Company. Mr. Lycke and Messrs. Ward L. Bensen and Robert H. Brown Jr., Directors
of the Company, serve as the Chairman of the Board of Directors, a Director and
Senior Vice President, and a Director, respectively, of AMF. See "Certain
Transactions." In addition, while Mr. Lycke has entered into an employment
agreement with the Company, such agreement is terminable by Mr. Lycke on 30 days
notice. See "Management--Employment Agreements."
The ability of the Company to attract and retain highly skilled personnel is
critical to the operations and expansion of the Company. The Company faces
competition for such personnel from other technology companies and more
established organizations, many of which have significantly larger operations
and greater financial, marketing, human, and other resources than the Company.
There can be no assurance that the Company will be successful in attracting and
retaining qualified personnel on a timely basis, on competitive terms, or at
all. In the event that the Company is not successful in attracting and retaining
such personnel, the Company's business, prospects, financial condition, and
results of operations will be materially adversely affected. See
"Business--Business Strategy."
INTERNET SECURITY RISKS
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
Internet transmission of confidential information, such as medical information.
There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the algorithms used by the Company to
protect customer transaction data. A party who is able to circumvent the
Company's security measures could misappropriate proprietary information or
cause interruptions in the Company's operations. If any such compromise of the
Company's security or misappropriation of proprietary information were to occur,
it could have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations. The Company may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by security breaches. Concerns over the
9
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 Web in particular, especially as a means of conducting commercial
transactions. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
such as diagnostic and treatment data, security breaches could damage the
Company's reputation and expose the Company to a risk of loss or litigation and
possible liability. There can be no assurance that the Company's security
measures will prevent security breaches or that failure to prevent such security
breaches will not have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations. See
"Business--Healthcare Transaction Processing Software and Security."
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of
traffic on, and use of, its Web site. The Company's revenues depend on the
number of clients who submit claims on its Web site and the volume of claims
they process. Accordingly, the satisfactory performance, reliability, and
availability of the Company's Web site, claims processing systems, and network
infrastructure are critical to the Company's reputation and its ability to
attract and retain customers and maintain adequate customer service levels. Any
system interruptions that result in the unavailability of the Company's Web site
or reduced claims processing performance would reduce the volume of claims
processed and the attractiveness of the Company's service offerings. While the
Company has not experienced any system interruptions, it believes that such
interruptions may occur from time to time. Any substantial increase in the
volume of traffic on the Company's Web site or the number of claims submitted by
customers will require the Company to expand and upgrade further its technology,
claims processing systems, and network infrastructure. There can be no assurance
that the Company will be able to accurately project the rate or timing of
increases, if any, in the use of its Web site or timely expand and upgrade its
systems and infrastructure to accommodate such increases. The Company's
inability to add additional software and hardware or to develop and upgrade its
existing technology, claims-processing systems, or network infrastructure to
accommodate increased traffic on its Web site or increased claims submission
volume through its claims processing systems may cause unanticipated system
disruptions, slower response times, degradation in levels of customer service,
impaired quality, and speed of claims processing, and delays in reporting
accurate financial information. In addition, although the Company takes
safeguards, including data encryption and firewalls, to prevent unauthorized
access to Company data, it is impossible to completely eliminate this risk.
There can be no assurance that the Company will be able in a timely manner to
effectively upgrade and expand its claims processing system or to integrate
smoothly any newly developed or purchased modules with its existing systems. Any
inability to do so could have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations. See
"Business--Business Strategy."
RELIANCE ON INTERNALLY DEVELOPED SYSTEMS
The Company uses an internally developed system for its Web site and for a
portion of its claims processing software. The Web site was developed using
industry standard tools and stores information in databases that will be
integrated with the remainder of the Company's accounting and financial systems.
To date, development efforts for the Company's claims-processing system have
focused primarily on support for rapid growth of claim submission volume and
customer service, and less on traditional accounting, control, and reporting
aspects of system development. As a result, the Company's current management
information system, which produces frequent operational reports, is inefficient
with respect to traditional accounting-oriented reporting and requires a
significant amount of manual effort to prepare information for financial and
accounting reporting. The Company intends to upgrade and expand its
claims-processing systems and to integrate newly developed and/or purchased
modules with its existing systems in order to improve the efficiency of its
reporting methods and support increased transaction volume.
10
RISK OF SYSTEM FAILURE; DEPENDENCE UPON SINGLE SITE
The Company's ability to successfully receive and process claims and provide
high-quality customer service, largely depends on the efficient and
uninterrupted operation of its computer and communications hardware systems. The
Company's proprietary software resides solely on its servers, all of which, as
well as all of its communications hardware, are located in a monitored
co-location server facility in Washington, DC. The Company's systems and
operations are in a secured facility utilizing hospital-grade electrical power,
redundant telecommunications connections to the Internet backbone,
uninterruptible power supplies, and generator back-up power facilities. Further,
the Company maintains redundant systems at a separate facility for backup and
disaster recovery. Notwithstanding the foregoing, the Company remains vulnerable
to damage or interruption from fire, flood, power loss, telecommunications
failure, break-ins, earthquake, and similar events. In addition, the Company
does not, and may not in the future, carry sufficient business interruption
insurance to compensate it for losses that may occur. Despite the implementation
of network security measures by the Company, its servers are vulnerable to
computer viruses, physical or electronic break-ins, and similar disruptions,
which could lead to interruptions, delays, loss of data, or the inability to
accept and process customer claims. The occurrence of any of the foregoing risks
could have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations. See "Business--Healthcare
Transaction Processing Software and Security," and "Business--Facilities."
DEPENDENCE ON CONTINUED GROWTH OF ELECTRONIC COMMERCE
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of commerce by submitters of medical
claims. Rapid growth in the use of, and interest in, the Internet, the Web, and
online services is a recent phenomenon, and there can be no assurance that
acceptance will be achieved on a lasting basis and use will continue to develop
or that a sufficiently broad base of customers will adopt, and continue to use,
the Internet and other online services as a medium of commerce. Demand and
market acceptance for recently introduced services and products over the
Internet are subject to a high level of uncertainty, and there exist few
services and products which have generated profits. For the Company to be
successful, the healthcare community must accept and utilize novel and cost
efficient ways of conducting business and exchanging information.
In addition, the Internet and other online services may not be accepted as a
viable commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. To the extent
that the Internet and other online "business to business" services continue to
experience significant growth in the number of users, their frequency of use, or
an increase in their bandwidth requirements, there can be no assurance that the
infrastructure for the Internet and online services will be able to support the
demands placed upon them. In addition, the Internet or other online services
could lose their viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in, or
insufficient availability of, telecommunications services to support the
Internet or other online services also could result in slower response times and
adversely affect usage of the Internet and other online services generally and
the Company in particular. If use of the Internet and other online services does
not continue to grow or grows more slowly than expected, if the infrastructure
for the Internet and other online services does not effectively support growth
that may occur, or if the Internet and other online services do not become a
viable commercial marketplace, the Company's business, prospects, financial
condition, and results of operations would be materially adversely affected.
11
PROPRIETARY RIGHTS; ABSENCE OF PATENT PROTECTION
The Company's ability to compete effectively will depend on its ability to
maintain the proprietary nature of its services and technologies, including its
proprietary software and the proprietary software of third parties with which
the Company has entered into software licensing agreements. The Company holds no
patents and relies on a combination of trade secrets and copyright laws,
nondisclosure, and other contractual agreements and technical measures to
protect its rights in its technological know-how and proprietary services. The
Company depends upon confidentiality agreements executed by officers, directors,
employees, consultants, and subcontractors of the Company to maintain the
proprietary nature of the Company's technology. These measures may not afford
the Company sufficient or complete protection, and there can be no assurance
that others will not independently develop know-how and services similar to
those of the Company, otherwise avoid the confidentiality agreements of the
Company, or produce patents and copyrights that would materially and adversely
affect the Company's business, prospects, financial condition, and results of
operations. The Company believes that its services do not infringe upon the
patents or copyrights of any third parties; however, there can be no assurance
that the Company's know-how and technology will not be found to infringe upon
the rights of third parties. Others may assert infringement claims against the
Company, and if the Company should be found to infringe upon the patents or
copyrights, or otherwise impermissibly utilize the intellectual property, of
others, the Company's ability to utilize the technology referred to herein could
be materially restricted or prohibited. If such an event occurs, the Company may
be required to obtain licenses from such third parties, enter into royalty
agreements, or redesign its products so as not to utilize such intellectual
property, each of which may prove to be uneconomical or otherwise impossible.
There can be no assurance that any licenses or royalty agreements required under
any such proprietary rights could be obtained on terms acceptable to the Company
or the third party, or at all. Such claims could result in litigation, which
could materially adversely affect the Company's business, prospects, financial
condition, and results of operations. See "Business--Intellectual Property."
RAPID TECHNOLOGICAL CHANGE
The Internet and the electronic commerce industry are characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies, and
the emergence of new industry standards and practices that could render the
Company's existing Web site and proprietary technology and systems obsolete. The
Company's success will depend, in part, on its ability to enhance and improve
the responsiveness and functionality of its online claims processing services,
to license leading technologies useful in its business, enhance its existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of its prospective or current customers, and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis. The development of Web site and other
proprietary technology entails significant technical and business risks. There
can be no assurance that the Company will successfully adapt to such demands.
The failure of the Company to respond in a timely manner in response to changing
market conditions or customer requirements would have a material adverse effect
on the Company's business, prospects, financial condition, and results of
operations. See "Business--Business Strategy."
AFFILIATED TRANSACTIONS; BENEFITS TO AFFILIATES
The Company's core technologies were initially developed by AMF. Since
inception, the Company has engaged in transactions with AMF, an affiliate of the
Company, including the acquisition of all of the Internet software, licenses,
intellectual property rights, and technology developed by AMF and an agreement
(the "Service Agreement") in which AMF provided staff and office support
services to the Company and for which the Company was billed monthly. The
Services Agreement was terminated by the Company, effective April 1, 1997. While
the Company believes that such transactions were on terms no less
12
favorable to the Company than could be obtained from unaffiliated third parties,
there can be no assurance thereof.
On April , 1998, the Company entered into a loan agreement with Sterling
Bank in connection with which the Company entered into a promissory note in the
amount of approximately $3,600,000 (the "Sterling Note"). Such note is
guaranteed by AMF. As security for such guarantee, AMF has hypothecated to
Sterling Bank a certificate of deposit equal in amount to the principal amount
outstanding under the Sterling Note together with an additional certificate of
deposit in the amount of $40,000. The Company intends to utilize a portion of
the net proceeds of this offering to repay the Sterling Note in full, at which
time such guarantee and hypothecation will terminate. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions."
COMPETITION
The medical claims processing industry is highly competitive. The Company
competes with, and expects to continue to compete with, numerous national,
regional, and local companies, many of which have significantly larger
operations, greater financial, marketing, human, and other resources than the
Company. Major companies in the healthcare claims processing industry include:
Envoy/NEIC, Inc., HBO & Company; National Data Corporation; and QuadraMed
Corporation. The Company estimates, based on information from various trade
journals, that there are approximately 300 or more small independent electronic
claims processing companies and clearinghouses in addition to the aforementioned
large competitors, which operate as local sub-clearinghouses for the processing
of medical and dental claims. While the Company competes with all other
providers of electronic claims processing services, it is not aware of any other
companies that provide healthcare electronic claims processing services in the
same manner as those provided by the Company and thus represent a direct
competitor. Notwithstanding the foregoing, Company anticipates that competition
will arise in the processing of claims on the Internet. There can be no
assurance that the Company will successfully compete in any market in which it
conducts or may conduct operations. Certain segments of the medical and dental
claims processing industry are not currently suited to the use of inpatient
electronic claims processing. Among such segments are psychiatry and surgery,
each of which requires substantial documentation in addition to the claim to be
submitted. In these market segments, the Company believes that it is not
currently able to compete with existing potential competitors and, accordingly,
the Company has designed its business plan to address other market segments. See
"Business--Electronic Claims Processing Market" and "Business--Competition."
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency other than laws or regulations applicable to electronic commerce, but the
Company processes information which, by law, must remain confidential. Due to
the increasing popularity and use of the Internet and other online services, it
is possible that laws and regulations may be adopted with respect to the
Internet or other online services covering issues such as user privacy, pricing,
content, copyrights, distribution, and characteristics and quality of products
and services. Furthermore, the growth and development of the market for
electronic commerce may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies conducting business
online. The adoption of any additional laws or regulations may decrease the
growth of the Internet or other online services, which could, in turn, decrease
the demand for the Company's services and increase the Company's cost of doing
business, or otherwise have an adverse effect on the Company's business,
prospects, financial condition, and results of operations. Moreover, the
applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership and personal
privacy is uncertain and may take time to resolve. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and
13
regulations to the Internet and other online services could have a material
adverse effect on the Company's business, prospects, financial condition, and
results of operations.
ABSENCE OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; VOLATILITY; NASDAQ
MAINTENANCE REQUIREMENTS
Prior to this offering, there has been no public market for the Shares, and
there can be no assurance that any active trading market therefor will develop
or, if any such market develops, that it will be sustained. Accordingly, unless
and until a public market develops, purchasers of the Shares may experience
difficulty selling or otherwise disposing of such securities.
The initial public offering price of the Shares was arbitrarily determined
by negotiations between the Company and the Representative, and does not
necessarily bear any relationship to the Company's assets, book value, results
of operations, or any other generally accepted indicia of value. See
"Underwriting." From time to time after this offering, there may be significant
volatility in the market price of the Common Stock. Quarterly operating results
of the Company or other developments affecting the Company, such as
announcements by the Company or its competitors regarding acquisitions or
dispositions, new procedures or technology, changes in general conditions in the
economy, and general market conditions could cause the market price of the
Common Stock to fluctuate substantially. The equity markets have, on occasion,
experienced significant price and volume fluctuations that have affected the
market prices for many companies' securities and have often been unrelated to
the operating performance of these companies.
Under the currently effective criteria for listing of securities on the
Nasdaq SmallCap-Registered Trademark- Market, for initial listing, a company
must have at least US$4,000,000 in net tangible assets, a minimum bid price of
US$4.00 per share, and a public float of at least US$5,000,000. For continued
listing, a company must maintain US$2,000,000 in net tangible assets, a minimum
bid price of US$1.00, and a public float of at least US$1,000,000.
In the event that the Company should be unable to maintain the standards for
continued listing, the Common Stock could be subject to delisting from the
Nasdaq SmallCap-Registered Trademark- Market. Trading, if any, in the Common
Stock would thereafter be conducted in the over-the-counter market on the OTC
Bulletin Board established for securities that do not meet the Nasdaq
SmallCap-Registered Trademark- Market listing requirements or in what are
commonly referred to as the "pink sheets." As a result, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Shares.
RISK OF LOW-PRICED STOCKS
If the Common Stock were delisted from the Nasdaq SmallCap-Registered
Trademark- Market, and no other exclusion from the definition of a "penny stock"
under the Exchange Act were available, such securities would be subject to the
penny stock rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as investors with net
worth in excess of US$1,000,000 or annual income exceeding US$200,000 or
US$300,000 together with a spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase,
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, such delisting, if it were to occur, could materially
adversely affect the ability of broker-dealers to sell the Common Stock and the
ability of purchasers in this offering to sell their Shares in the secondary
market.
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET
A significant number of the Shares offered hereby may be sold to customers
of the Representative. Such customers may engage in transactions for the sale or
purchase of the Shares through or with the Representative. Although it has no
obligation to do so, the Representative intends to make a market in the Shares
and may otherwise effect transactions therein. If it participates in such
market, the Representative
14
may influence the market, if one develops, for the Shares. Such market-making
activity may be discontinued at any time. Moreover, if the Representative sells
the shares of Common Stock issuable upon exercise of the Representative's
Warrants, it may be required under the Exchange Act to temporarily suspend its
market-making activities. The price and liquidity of the Shares may be
significantly affected by the degree, if any, of the Representative's
participation in such market. See "Underwriting."
NO DIVIDENDS
The Company has not paid any cash dividends on the Common Stock and does not
intend to do so in the foreseeable future, but rather intends to retain future
earnings, if any, for reinvestment in the development and expansion of its
business. In addition, any credit agreements which the Company may enter into
with institutional lenders may contain restrictions on the payment of dividends
by the Company. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors deems relevant. See "Dividend Policy" and
"Description of Securities--Common Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution of $4.09 per share, assuming an initial public offering
price of $6.00 per Share, or approximately 68.2%, in the net tangible book value
of the shares of Common Stock purchased thereby. Additional dilution to future
net tangible book value per share may occur upon exercise of outstanding stock
options and warrants (including the Representative's Warrants) and may occur, in
addition, if the Company issues additional equity securities in the future. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The sale, or availability for sale, of a substantial number of shares of
Common Stock in the public market subsequent to this offering, pursuant to Rule
144 under the Securities Act ("Rule 144") or otherwise, could materially
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise additional capital through the sale of its equity
securities or debt financing. The availability of Rule 144 to the holders of
restricted securities of the Company would be conditioned on, among other
factors, the availability of certain public information concerning the Company.
All of the 2,916,667 shares of Common Stock currently outstanding are
"restricted securities" as that term is defined in Rule 144 and may, under
certain circumstances, be sold without registration under the Securities Act. In
addition, any shares issuable upon exercise of options granted under the Plan
could be sold publicly commencing 90 days after the Company becomes a reporting
company under the Exchange Act, pursuant to Rule 701 under the Securities Act.
However, officers, directors, and stockholders of the Company and option holders
under the 1997 plan will execute agreements ("Lock-Up Agreements") pursuant to
which they have agreed not to, directly or indirectly, issue, offer, agree to
sell, sell, grant an option for the purchase or sale of, transfer, pledge,
assign, hypothecate, distribute, or otherwise dispose of, or encumber any shares
of Common Stock or options, rights, warrants, or other securities convertible
into, or exercisable or exchangeable for, or evidencing any right to purchase or
subscribe for, shares of Common Stock, whether or not beneficially owned by such
person, or any beneficial interest therein, for a period of 18 months from the
date of this Prospectus. See "Underwriting."
For a period of 18 months from the date of this Prospectus, the Company has
agreed that it will not sell or otherwise dispose of any securities of the
Company without the prior written consent of the Representative, which consent
shall not be unreasonably withheld. Notwithstanding the foregoing, during such
period, the Company shall be entitled to issue (i) shares of Common Stock in
connection with mergers and acquisitions, (ii) up to 500,000 shares of Common
Stock issuable upon exercise of options which may be granted under the 1997
Plan, (iii) up to 100,000 shares of Common Stock issuable upon
15
exercise of options which may be granted under the Director's Plan, and (iv)
shares of Common Stock issuable upon the exercise of the Representative's
Warrants (the "Warrant Shares").
The holders of the Representative's Warrants will have certain demand
registration rights with respect to such Warrants and the Warrant Shares
commencing one year after the date hereof. If the Representative should exercise
its registration rights to effect a distribution of the Representative's
Warrants or the Warrant Shares, the Representative, prior to and during such
distribution, may be unable to make a market in the Company's securities. If the
Representative ceases making a market in the Common Stock, the market and market
prices of the Common Stock may be materially adversely affected, and holders
thereof may be unable to sell or otherwise dispose thereof. See "Underwriting."
The Company has agreed to register the 713,021 shares of Common Stock issued
in the Bridge Financings (as hereinafter defined) for resale commencing 18
months from the date of this Prospectus. In addition, pursuant to the terms of
the Medica Acquisition, the Company granted "piggy-back" registration rights
with respect to the 104,167 shares of Common Stock issued in connection
therewith. See "Shares Eligible for Future Sale."
SUBSTANTIAL INFLUENCE OF EXISTING MANAGEMENT
Upon the completion of this offering, the current directors and executive
officers of the Company will, in the aggregate, beneficially own approximately
1,654,689, or 30.5%, of the outstanding shares of Common Stock, or approximately
28.6% of such outstanding shares of Common Stock if the Underwriters'
over-allotment option is exercised in full. As a result, the current officers
and directors of the Company will have the ability to substantially influence
the outcome of all matters on which stockholders are entitled to vote, including
the elections of the Company's directors and the approval of significant
corporate transactions.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK
Certain provisions of the Company's Amended Certificate of Incorporation and
Delaware Law may be deemed to have an anti-takeover effect. The Company's
Certificate of Incorporation and By-laws provide that its Board of Directors is
divided into two classes serving staggered two year terms, resulting in
approximately one-half of the directors being elected each year and certain
other provisions relating to voting and the removal of the officers and
directors. Further, the By-laws of the Company contain provisions which regulate
the introduction of business at annual meetings of stockholders of the Company
by other than the Board of Directors. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law.
In general, such statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Each of the foregoing provisions may have the effect of
rendering more difficult, delaying, discouraging, preventing or rendering more
costly an acquisition of the Company or a change in control of the Company. See
"Description of Securities--Anti-Takeover Provisions" and "Description of
Securities--Regulation of the Introduction of Business at Annual Meetings of
Stockholders."
In addition, the Company's Certificate of Incorporation, as amended,
authorizes the Board of Directors to issue up to 5,000,000 shares of preferred
stock, which may be issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors, without further
action by stockholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion and redemption rights, and sinking fund provisions. No
shares of preferred stock are currently outstanding, and the Company has no
present plans for the issuance of any preferred stock. However, the issuance of
any such preferred stock could materially adversely affect the rights of holders
of shares of Common Stock and, therefore, could reduce the value of
16
the Common Stock. In addition, specific rights granted to future holders of
preferred stock could be used to restrict the Company's ability to merge with,
or sell its assets to, a third party. The ability of the Board of Directors to
issue preferred stock could discourage, delay, or prevent a takeover of the
Company, thereby preserving control of the Company by the current stockholders.
See "Description of Securities--Preferred Stock."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; BENEFITS TO INSIDERS
Approximately $8,925,000, or 70.6%, of the estimated net proceeds of this
offering has been allocated for general corporate and working capital purposes.
Accordingly, the Company's management will have broad discretion as to the
application thereof, and investors will not know in advance how such net
proceeds will be utilized by the Company. See "Use of Proceeds."
Approximately $3,725,000, or 29.4%, of the estimated net proceeds of this
offering has been allocated to the payment of (i) a promissory note in the
amount of approximately $3,600,000 payable to Sterling Bank (the "Sterling
Note") and (ii) promissory notes in the aggregate amount of $125,000 related to
the Medica Acquisition.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This Prospectus contains certain forward-looking statements regarding the
plans and objectives of management for future operations. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties. The Company's plans and objectives are based
on a successful execution of the Company's expansion strategy and are based upon
a number of assumptions, including assumptions relating to the growth in the use
of the Internet and that there will be no unanticipated material adverse change
in the Company's operations or business. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
political, competitive, and market conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that its
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
17
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Shares
offered hereby are estimated to be approximately $12,650,000, assuming an
initial public offering price of $6.00 per Share.
The principal purposes of this offering are to repay indebtedness to obtain
additional capital to be utilized by the Company to increase its level of
operations through increased marketing, including offering new customers initial
and ongoing grants of American Airlines-Registered Trademark-
AAdvantage-Registered Trademark- Miles relative to the commercial claims
submitted, research, and development relating to, among other things, the
Company's proprietary claims processing software, and the acquisition of
additional capital equipment, including computers, servers, communication
hardware and software, and networking equipment, to create a public market for
the Common Stock, to facilitate future access by the Company to public equity
markets, and to provide increased visibility and credibility in a marketplace
where many of the Company's current and potential competitors are or will be
publicly held companies.
The indebtedness to be repaid in full from the estimated net proceeds of
this offering is anticipated to be in the amount of approximately $3,725,000,
consisting of (i) the repayment of the Sterling Note which accrues interest at
the rate of 1% per annum above the prime rate and is due on the earlier of the
date of the closing of this offering and six months from the date of such note
and (ii) approximately $125,000 related to the Medica Acquisition. The initial
payment to the former holders of Medica, representing $125,000 of principal
amount, matures 60 days following the closing of this offering.
Proceeds of this offering may also be used, if the Company so elects, to
acquire companies or products that compliment its business or operations. In the
ordinary course of its business, the Company from time to time evaluates
technologies for acquisition or license that, if acquired, could be used in the
development of product and software candidates. The Company has no agreement or
arrangement with respect to any such acquisition or license.
The net proceeds, if any, from the exercise of the Underwriters'
over-allotment option will be utilized for general corporate and working capital
purposes.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the sale of the Shares based upon the Company's contemplated
operations, the Company's business plan, and current economic and industry
conditions and is subject to reapportionment of proceeds among the categories
listed above or to new categories in response to, among other things, changes in
the Company's plans, regulations, industry conditions, and future revenues and
expenditures. The amount and timing of expenditures will vary depending on a
number of factors, including changes in the Company's contemplated operations or
business plan and changes in economic and industry conditions.
Based on its operating plan, the Company believes that the net proceeds of
this offering, together with revenues from continuing operations, will be
sufficient to satisfy its capital requirements and finance its plans for
expansion for at least the next 18 months. Such belief is based upon certain
assumptions, which may prove to be incorrect. Accordingly, there can be no
assurance that such resources will satisfy the Company's capital requirements
for said period. The Company may require additional financing in order to expand
its operations. Such financing may take the form of the issuance of common or
preferred stock or debt securities, and/or may involve bank or other lender
financing. There can be no assurance that the Company will be able to obtain
needed additional capital on a timely basis, on favorable terms, or at all.
Pending their use, the net proceeds of this offering will be invested in
short-term, interest bearing, investment grade securities.
18
DILUTION
As of March 31, 1998, the net tangible book value of the Company, was
$(3,907,616), or approximately $(1.44) per share of Common Stock based on
2,708,333 shares of Common Stock outstanding. The net tangible book value per
share represents the amount of the Company's total assets less the amount of its
intangible assets and its liabilities, divided by the number of shares of Common
Stock outstanding at such date. After giving effect to the net proceeds of
approximately $950,000 from the sale of shares of Common Stock in April and May
1998 and to the estimated net proceeds from the sale by the Company of 2,500,000
shares of Common Stock offered hereby at the assumed initial public offering
price of $6.00 and the initial application thereof, the as adjusted net tangible
book value of the Company at March 31, 1998 would have been $9,692,384, or
approximately $1.79 per share of Common Stock. This would result in dilution to
the public investors (i.e., the difference between the assumed public offering
price per share of Common Stock and the as adjusted net tangible book value
thereof after giving effect to this offering) of approximately $4.21 per share.
The following table illustrates the per share dilution:
PER SHARE OF
COMMON
STOCK
-------------
Assumed public offering price......................................................... $ 6.00
Net tangible book value at March 31, 1998........................................... $ (1.44)
Increase in net tangible book value................................................. 3.23
------------
As adjusted net tangible book value after this offering (1)........................... 1.79
-----
Dilution of net tangible book value to new investors (1).............................. $ 4.21
-----
-----
- ------------------------
(1) If the Underwriters' over-allotment option is exercised in full, the
adjusted net tangible book value per share after this offering would be
$2.01 and dilution per share to new investors in this offering would be
$3.99.
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased, the percentage of total shares of
Common Stock purchased, the total consideration paid, the percentage of total
consideration paid, and the average price per share of Common Stock paid by the
investors in this offering and the current stockholders of the Company.
SHARES OF COMMON
STOCK PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ----------- ------------- ----------- -----------
Current Stockholders.............................. 2,916,667 53.8% $ 5,535,500 27.0% $ 1.90
New Investors(1).................................. 2,500,000 46.2% 15,000,000 73.0% $ 6.00
---------- ----- ------------- -----
Total............................................. 5,416,667 100.0% $ 20,535,500 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
- ------------------------
(1) Assuming an initial public offering price of $6.00 per Share.
19
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the actual
capitalization of the Company and (ii) the as adjusted capitalization of the
Company adjusted to give effect to the receipt by the Company of net proceeds of
approximately $950,000 from the sale of shares of Common Stock in April and May
1998 and to the estimated net proceeds of approximately $12,650,000 from the
sale of the Shares at the assumed initial public offering price of $6.00 per
Share and the initial application of the net proceeds therefrom as set forth
under the heading "Use of Proceeds." The selected financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements of
the Company and Notes thereto and other financial information included elsewhere
in this Prospectus.
MARCH 31, 1998
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
Short-term debt:............................................... $ 125,000 $ --
------------- -------------
------------- -------------
Long-term debt:................................................ 3,856,705 225,000
------------- -------------
Stockholders' equity
Preferred Stock--$0.001 par value, Authorized-- 5,000,000
shares; issued and outstanding--0 shares................... -- --
Common Stock--$0.001 par value, Authorized-- 40,000,000
shares; issued and outstanding 2,708,333 shares--actual;
5,416,667 shares, as adjusted.............................. 2,708 5,417
Additional paid-in capital..................................... 1,407,792 15,005,083
Accumulated deficit............................................ (3,861,947) (3,861,947)
------------- -------------
Total stockholders' equity..................................... 2,451,447 11,148,553
------------- -------------
Total capitalization........................................... $ 1,405,258 $ 11,373,553
------------- -------------
------------- -------------
20
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock and does not
intend to do so in the foreseeable future, but intends to retain future
earnings, if any, for reinvestment in the development and expansion of its
business. The payment of future cash dividends, if any, by the Company will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, future earnings, operations, capital requirements and
surplus, the general financial condition of the Company, restrictive covenants
in loan or other agreements to which the Company may become subject, and such
other factors as the Board of Directors of the Company may deem relevant. See
"Description of Securities."
21
SELECTED FINANCIAL DATA
The following selected statement of operations data for the period from
April 8, 1996 (inception) through December 31, 1996 and the year ended December
31, 1997 and the selected balance sheet data as of December 31, 1996 and 1997
are derived from the Financial Statements of the Company and Notes thereto
included elsewhere herein audited by King Griffin & Adamson P.C., independent
certified public accountants for the Company. The unaudited statement of
operations data presented for the three month periods ended March 31, 1997 and
1998, and the unaudited balance sheet data at March 31, 1998, are derived from
the unaudited Financial Statements of the Company, which have been prepared on a
basis consistent with the audited Financial Statements of the Company, and in
the opinion of management, include all adjustments consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
condition and results of operations of the Company as of the dates and for the
periods presented. The results of operations of any interim period are not
necessarily indicative of results expected for the entire year. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements of
the Company and Notes thereto included elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
PERIOD FROM
APRIL 8, 1996 THREE MONTHS
(INCEPTION) ENDED MARCH 31,
THROUGH YEAR ENDED ------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997(1) 1997 1998
----------------- -------------------- ----------- -----------
Revenues...................................... $ -- $ 81,712 $ -- $ 42,978
----------------- ----------- ----------- -----------
Total operating expense....................... 147,918 2,514,290 188,897 749,132
----------------- ----------- ----------- -----------
Interest expense--affiliate................... 158,123 389,548 118,985 70,623
Interest income............................... -- (40,817) -- (1,820)
----------------- ----------- ----------- -----------
Net loss...................................... $ (306,041) $ (2,781,309) $ (307,882) $ (774,597)
----------------- ----------- ----------- -----------
----------------- ----------- ----------- -----------
Basic and diluted loss per weighted average
common share outstanding.................... $ (0.15) $ (1.12) $ (0.15) $ (0.29)
----------------- ----------- ----------- -----------
----------------- ----------- ----------- -----------
Weighted average common shares outstanding
(basic and diluted)......................... 2,047,234 2,481,047 2,061,798 2,708,333
----------------- ----------- ----------- -----------
----------------- ----------- ----------- -----------
BALANCE SHEET DATA:
DECEMBER 31,
------------------------------------ MARCH 31,
1996 1997 1998
----------------- ----------------- -------------
Current assets.............................................. $ 15,659 $ 419,329 $ 112,472
Total assets................................................ 978,332 2,174,597 1,755,788
Working capital............................................. 15,659 36,202 (238,058)
Long-term debt.............................................. 4,408,373 3,468,320 3,856,705
Stockholders' equity (deficit).............................. (3,430,041) (1,676,850) (2,451,447)
- ------------------------
(1) Includes the results of operations of Medica Systems Inc. from the date of
acquisition, June 2, 1997.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PORTIONS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED UNDER THE HEADING "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND RESULTS THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
GENERAL
The Company is an electronic commerce company engaged in healthcare
transaction processing for the medical and dental industries by means of the
Internet. The Company's proprietary software, which was developed over the last
six years and resides entirely on the Company's servers, allows healthcare
providers to prepare and enter healthcare claims interactively on the Internet
and electronically transmits the claims to the Company for processing. It also
allows the Company to download claims from the healthcare providers' computers
directly to the Company's servers. The software provides real-time editing of
the claims data for compliance with payor format and converts the claims to
satisfy specific payor processing requirements. The Company then electronically
transmits processed claims on behalf of healthcare providers, directly or
indirectly, to medical and dental payors that accept claims processing
transmissions electronically. In addition, the Company's software provides for
secure encryption of all claims data transmitted. The payors to which claims
processed by the Company have been submitted, primarily through clearinghouses,
include plans and affiliates of Aetna Life & Casualty Company, Inc., MetLife
Healthcare/Metropolitan Healthcare Corporation, Cigna Healthcare, Inc., The
Prudential Insurance Company of America, and United Healthcare Corporation.
As of December 31, 1996 and December 31, 1997 and March 31, 1998, the
Company had working capital of $15,659, $36,202, and $(238,058), respectively,
and stockholders' equity (deficit) of $(3,430,041), $(1,676,850), and
$(2,451,447), respectively. The Company generated revenues of $81,712 through
December 31, 1997, and $42,978 for the three month period ended March 31, 1998,
and has incurred net losses since inception and expects to continue to operate
at a loss for the foreseeable future. For the period from April 8, 1996
(inception) through December 31, 1996, the year ended December 31, 1997, and the
three month period ended March 31, 1998, the Company incurred net losses of
$(306,041), $(2,781,309), and $(774,597), respectively. There can be no
assurance that the Company will ever achieve profitability.
PLAN OF OPERATIONS
The Company's business strategy is: (i) to aggressively market electronic
claims processing services to outpatient healthcare providers, including
clinics, hospitals, physicians, HMOs, third party administrators, dentists, and
other outpatient service providers; (ii) to expand the services offered by the
Company to include additional transaction processing functions, such as
eligibility for benefit coverage, HMO encounter forms, and practice management
functions in order to diversify sources of revenue; (iii) to acquire and
integrate electronic claims processing companies that enable the Company to
accelerate its entry into the inpatient hospital claims market; (iv) to offer
new customers initial and ongoing American Airlines-Registered Trademark-
AAdvantage-Registered Trademark- mileage rewards relative to the commercial
insurance claims submitted; and (v) to license its claims processing technology
for stand-alone purposes, Internet systems, private label use, and OEMs.
Through June 30, 1998, the Company anticipates that its primary source of
revenues will be fees paid by commercial medical and dental payors and other
payors for delivering claims electronically. Thereafter, the Company intends to
provide advertising capabilities to its Web site for third parties, thereby
providing a potential additional source of revenues for the Company. In
addition, after an initial free period of
23
unlimited technical support, the Company intends to charge users a fee for
technical support comparable to those charged by other healthcare software
vendors.
The Company's principal operating costs are anticipated to be marketing,
research and development, acquisition of capital equipment, and general and
administrative expenses. The Company intends to continue to develop and upgrade
its technology and transaction-processing systems and continually update and
improve its Web site to incorporate new technologies, protocols, and industry
standards. The Company intends to engage in a dedicated marketing and sales
plan, including advertising at relevant sites on the Internet and in trade
publications, conducting direct mail programs targeting healthcare providers and
payors, including commercial medical and dental payors, hiring additional sales
and marketing personnel, preparing brochures and other promotional materials,
and engaging in a public relations campaign designed to expose the Company and
its services to healthcare providers and payors which otherwise would not be
exposed thereto. In connection with the expansion of the Company's business, the
Company intends to acquire additional computers and networking equipment in
order to permit an increased volume of claims to be processed by the Company.
General and administrative expenses include all corporate and administrative
functions that serve to support the Company's current and future operations and
provide an infrastructure to support future growth; management and staff
salaries and benefits, travel, network administration and data processing,
training, and rent are major items in this category.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that may adversely affect the Company's
quarterly operating results include: (i) the Company's ability to retain
existing customers, attract new customers at a steady rate, and maintain
customer satisfaction; (ii) the announcement or introduction of new sites,
services, and products by the Company and its competitors; (iii) price
competition or higher prices in the industry; (iv) the level of use of the
Internet and online services and the rate of market acceptance of the Internet
and other online services for the purchase of "business to business" services,
such as those offered by the Company; (v) the Company's ability to upgrade and
develop its systems and infrastructure in a timely and effective manner; (vi)
the level of traffic on the Company's Web site; (vii) technical difficulties,
system downtime, or Internet brownouts; (viii) the amount and timing of
operating costs and capital expenditures relating to expansion of the Company's
business, operations, and infrastructure; (ix) government regulation; and (x)
general economic conditions and economic conditions specific to the Internet,
electronic commerce, and the medical claims processing industry.
Due to the foregoing factors, in one or more future quarters, the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Common Stock would likely be
materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
On July 31, 1996, the Company acquired all of the Internet software,
licenses, intellectual property rights, and technology developed by an
affiliated company, AMF, in exchange for $3,740,000, payable through the
issuance of the AMF Note. On September 23, 1997, AMF reduced the principal
amount of the AMF Note to $2,000,000 and contributed the remaining $1,740,000 in
principal amount of the AMF Note to the capital of the Company. On May , 1998,
the Company used a portion of the net proceeds of the Sterling Note to repay the
AMF Note in full. AMF is affiliated to the Company through common stockholders,
including Mr. Lycke, the Chairman of the Board of Directors, President, and
Chief Executive Officer of the Company, and Messrs. Bensen and Brown, Directors
of the Company, and as a stockholder of the Company. The AMF Note accrued
interest at the rate of 9.50% per annum and was collateralized by all of the
Internet software, intellectual property rights, internet technology and
technology rights of the Company, including software development costs. The
acquisition of the Internet software, licenses,
24
intellectual property rights, and technology was recorded at the book value of
the assets purchased. See the Financial Statements and Notes thereto.
Upon the consummation of the acquisition of the Internet software, licenses,
intellectual property rights, and technology developed by AMF, AMF agreed to
provide the Company with a credit line of up to $950,000 to facilitate
additional development of the Company's services and technology. At March 31,
1998, advances under such line of credit were approximately $1,014,000. On May
, 1998, the Company used a portion of the net proceeds of the Sterling Note to
repay such credit line in full. The line of credit accrued interest at the rate
of 9.50% per annum and was secured by all of the assets of the Company, other
than the collateral securing the AMF Note.
In May 1997, the Company consummated the private offering of 45 units, each
unit consisting of 11,215 shares of Common Stock, for aggregate gross proceeds
of $2,250,000 (the "1997 Bridge Financing"). The Company has used, and intends
to use, the net proceeds of the 1997 Bridge Financing for ongoing working
capital requirements.
On June 2, 1997, the Company acquired Medica. In accordance with the terms
of the acquisition agreement, the purchase price for all of the outstanding
capital stock of Medica was (i) 104,167 shares of Common Stock, (ii) $100,000 in
cash, paid upon the consummation of the acquisition, (iii) $125,000 in cash
payable within 60 days following the date of this offering and $225,000 on the
one-year anniversary of such date, and (iv) $57,797 representing 50% of amounts
collected on outstanding accounts receivable of Medica that existed on the
closing date. The software technology of Medica is the primary value of the
acquisition. The Company intends to utilize a portion of the net proceeds of
this offering to satisfy the $125,000 obligation.
In April and May 1998, the Company consummated a private offering of 20
units, each unit consisting of 10,417 shares of Common Stock, for aggregate
gross proceeds of $1,000,000 (the "1998 Bridge Financing," and together with the
1997 Bridge Financing, the "Bridge Financings"). The Company has used, and
intends to use, the net proceeds of 1998 Bridge Financing for ongoing working
cpaital purposes.
On May , 1998, the Company entered into a $3,600,000 loan agreement with
Sterling Bank in connection with which the Company entered into the Sterling
Note. Such loan accrues interest at the rate of 1% per annum above the bank's
base loan rate. As security for such guarantee, AMF has hypothecated to Sterling
Bank a certificate of deposit equal in amount to the principal amount
outstanding under such loan, together with a certificate of deposit in the
amount of $40,000. The Company intends to utilize a portion of the net proceeds
of this offering to repay such obligation in full.
25
BUSINESS
GENERAL
The Company is an electronic commerce company engaged in healthcare
transaction processing for the medical and dental industries by means of the
Internet. The Company's proprietary software, which was developed over the last
six years and resides entirely on the Company's servers, allows healthcare
providers to prepare and enter healthcare claims interactively on the Internet
and electronically transmits the claims to the Company for processing. It also
allows the Company to download claims from the healthcare providers' computers
directly to the Company's servers. The software provides real-time editing of
the claims data for compliance with payor format and converts the claims to
satisfy specific payor processing requirements. The Company then electronically
transmits processed claims on behalf of healthcare providers, directly or
indirectly, to medical and dental payors that accept claims processing
transmissions electronically. In addition, the Company's software provides for
secure encryption of all claims data transmitted. The payors to which claims
processed by the Company have been submitted, primarily through clearinghouses,
include plans and affiliates of Aetna Life & Casualty Company, Inc., MetLife
Healthcare/Metropolitan Healthcare Corporation, Cigna Healthcare, Inc., The
Prudential Insurance Company of America, and United Healthcare Corporation.
The Company believes that (i) the ability of healthcare providers utilizing
the Company's Web site to interactively prepare claims on the Internet and
receive real time edits prior to claim submission, (ii) the ease and
availability of Company-provided training over the Internet, (iii) the minimal
software and processing power required for providers to utilize the Company's
proprietary software, and (iv) the ability to add incremental services, such as
patient statements, collection letters, and data modeling, through the same
browser interface and Web site as the Company's claims processing services are
significant advantages of the Company's electronic claims transmission services
over other currently available services. The Company believes that the improved
claims processing procedure will result in a sharply reduced average number of
outstanding accounts receivable days, thereby improving the provider's working
capital. The Company believes that the services offered by its competitors are
generally based on legacy mainframe technology, proprietary networks, and
proprietary file formats, which limit the ability of those competitors to offer
interactive Internet-based processing services on an economical basis. In
addition, competitors' services generally require extensive formal training, the
installation of substantial software on each healthcare provider's computer, and
significant processing power.
On July 31, 1996, the Company acquired all of its core technology and
proprietary software, consisting of the Internet software, licenses,
intellectual property rights, and technology developed by an affiliated company,
AMF, in exchange for $3,740,000, payable through the issuance of the AMF Note.
On September 23, 1997, AMF reduced the principal amount of the AMF Note to
$2,000,000 and contributed the remaining $1,740,000 in principal amount of the
AMF Note to the capital of the Company. On April , 1998, the Company used a
portion of the net proceeds of the Sterling Note to repay the AMF Note in full.
The AMF Note accrued interest at a rate of 9.50% per annum and was
collateralized by all of the Internet software and technology of the Company,
including software development costs. AMF was engaged in the financing and
processing of medical accounts receivable and had made preliminary development
efforts to expand into the business of the Company, including the proprietary
claims processing software. AMF is currently in the process of dissolving and
liquidating. Mr. Lycke, the Chairman of the Board of Directors, President and
Chief Executive Officer of the Company, and Messrs. Bensen and Brown, Directors
of the Company, serve as the Chairman of the Board of Directors, a Director and
Senior Vice President, and a Director, respectively, of AMF. See "Certain
Transactions."
On June 2, 1997, the Company acquired 100% of the capital stock of Medica, a
software development firm from which the Company had licensed a portion of the
Company's healthcare transaction processing software. The purchase price for all
of the outstanding capital stock of Medica was (i) 104,167 shares of Common
Stock, (ii) $100,000 in cash upon the consummation of such acquisition, (iii)
$125,000 in cash
26
payable within 60 days following the date of this offering and $225,000 on the
anniversary of such date, and (iv) $57,797 representing 50% of amounts collected
on outstanding accounts receivable of Medica that existed on the closing date.
The software technology of Medica is the primary value of the acquisition. The
Company intends to utilize a portion of the net proceeds of this offering to
satisfy the $125,000 obligation.
ELECTRONIC CLAIMS PROCESSING MARKET
The healthcare electronic claims processing market, including dental claims,
is estimated by HDM, an industry publication, to include over 4.0 billion
healthcare claim and HMO encounter forms (the HMO equivalent of a claim)
submissions in 1997. HDM has forecasted such market to grow at the rate of
approximately 7% per annum through the year 2000 and has determined that, of the
current total claim volume, approximately 1.6 billion claims or more are
submitted on paper forms. Currently, electronic claims processing is used to
process approximately 38% of all medical outpatient claims and 13% of all dental
claims. The Company believes that, as a result of the low penetration of
electronic claims processing among healthcare providers and dentists, such
market presents an attractive opportunity for the Company to offer a low-cost
effective service. The Company intends to focus its marketing efforts on
outpatient claims, including claims of clinics, hospitals, physicians, dentists,
and other outpatient service providers, as the Company believes they are the
underserved segments of the market.
The Company believes that the least developed market segment for electronic
claims processing is the dental community. Due to the lower average number of
claims submitted by dental practitioners compared to medical providers, current
claims processing systems used in the dental market result in a high cost per
claim for dentists. Initially, the Company intends to devote substantial efforts
to enroll dentists and install the Company's healthcare transaction processing
software. An estimated 30,000 dental practices have computer resources for
Internet access.
The number of non-electronic paper claims transactions in the HMO market is
increasing rapidly and the Company believes that another underserved segment of
the outpatient claims processing market is HMO claims. Currently there is no
formal transmission document standard. Therefore, the Company believes that the
opportunity exists for the Company to utilize its claims processing
configuration to make available a document scanning service using hypertext
markup language ("HTML"). This will enable the Company to convert an encounter
form into a document that appears identical to the printed version, yet is
designed to reconfigure the data entered and presents it in a format that
conforms to a payor's specific requirements.
Healthcare claims are generally processed by clearinghouses using a similar
operating structure to that which exists in the credit card industry. A merchant
that accepts a credit card for payment does not send payment requests directly
to the bank that issued the card, but sends the payment request to a
clearinghouse. The payment request is processed and transmitted to the
appropriate bank. Healthcare claim clearinghouses accept, sort, process, edit,
and then forward the claims to the appropriate payors, either electronically or
on paper. The major healthcare clearinghouses operate in a mainframe computer
environment. This operating configuration is both expensive and time consuming
due to the source code changes required to continuously process claims correctly
to meet payor requirements. In contrast, the Company's healthcare transaction
processing software system on the Internet is designed to operate in an open
client-server configuration. This operating alternative can offer the provider a
method of bypassing the clearinghouse and communicating directly with the payor
in a rapid, accurate, and cost-effective manner. The Company believes that if
the industry evolves toward direct payor submission of claims, the Company's
software will be able to offer efficient access to payors to its healthcare
provider customers.
BUSINESS STRATEGY
The Company's business strategy is: (i) to aggressively market electronic
claims processing services to outpatient healthcare providers, including
clinics, hospitals, physicians, HMOs, third party administrators,
27
dentists, and other outpatient service providers; (ii) to expand the services
offered by the Company to include additional transaction processing functions,
such as eligibility, HMO encounter forms, and practice management functions in
order to diversify sources of revenue; (iii) to acquire and integrate electronic
claims processing companies that enable the Company to accelerate its entry into
the inpatient hospital claims market; (iv) to offer new customers initial and
ongoing American Airlines-Registered Trademark- AAdvantage-Registered Trademark-
mileage awards relative to the commercial insurance claims submitted; and (v) to
license its claims processing technology for other applications, including
stand-alone purposes, Internet systems, private label use, and OEMs. There can
be no assurance that any of the Company's business strategies will succeed or
that any of its business objectives will be met with any success. See
"Business--Marketing" and "Business--Healthcare Transaction Processing Software
and Security."
EXPANDED MARKETING EFFORTS
To date, the Company has engaged in limited marketing efforts. Achieving
market penetration will require significant efforts by the Company to create
awareness of, and demand for, the Company's products and services. The Company
intends to utilize a portion of the proceeds from this offering to upgrade its
marketing services to include advertising on the Internet and an expanded sales
staff, targeted e-mail and mail campaigns, and participation in major trade
shows.
The Company is also actively seeking partners for alliances and joint
ventures, including managed care companies, Internet service and information
providers, traditional healthcare information systems providers, and major
payors, seeking solutions to the costly handling of paper claims. In February
1998, the Company entered into a development and marketing agreement with
Millbrook a Microsoft Solution Provider, to be the default claims processing,
statement, and remittance advice vendor for all healthcare provider customers of
Millbook. The processing solution offered by the Company pursuant to such
agreement is tightly integrated through distinctive software controls allowing
automatic updates within each provider's practice management system.
The Company believes that there are opportunities for joint marketing with
banks, insurance companies, and pharmaceutical companies that desire online
interfacing with healthcare providers. There can be no assurance that the
Company will secure any alliances or joint venture relations, or if it does,
that such alliances or joint ventures relationships will be profitable.
On each of the Company's Internet and Extranet Web pages, there is space
reserved for advertisers. The Company intends to sell the space to quality
advertisers desiring to target healthcare providers.
EXPANSION OF ONLINE SERVICES
Following this offering, the Company intends to develop and offer other
service offerings to increase its revenue per client. The targeted services will
include eligibility for benefit coverage, HMO encounter forms, practice
management functions (e.g. CPT code analysis, fee schedule analysis, etc.),
batched claims delivery, and statistical data processing as it relates to claim
payments from insurance companies.
IDENTIFICATION OF POTENTIAL STRATEGIC ACQUISITIONS
The Company is seeking opportunities to capitalize on the fragmented nature
of the healthcare electronic claims processing market through the acquisition of
regional "wholesale" claims processing companies or software companies
complementing the Company's current services. Acquisitions would be targeted
which allow the Company to enter the hospital inpatient healthcare claims
processing marketplace rapidly and would permit the Company to implement its
Internet based healthcare transaction processing software solution in such
marketplace. The Company currently is not in discussions with any person or
entity regarding an acquisition, and there can be no assurance that the
Company's management will be able identify and affiliate with suitable
acquisition candidates, and if such candidates are located, that the Company
will be able to consummate any such transaction.
28
Notwithstanding the foregoing, investors should be aware that the Company's
future plans are subject to a number of variables outside its control, such as
the availability of suitable acquisition candidates, the availability of
sufficient management resources, the continued growth of Internet commerce, and
the continued acceptance of the Internet as a suitable medium of transmission
for healthcare claims, and there can be no assurance that the Company will be
able to implement any or all of such plans, or that such plans, when and if
implemented, will be successful.
AIRLINE MILEAGE REWARD PROGRAM
The Company has entered into an agreement with AMR Corporation to offer new
healthcare provider customers initial and ongoing American Airline-Registered
Trademark- AAdvantage-Registered Trademark- mileage rewards relative to the
commercial insurance claims submitted for the year ending December 31, 1998.
CONTINUING AND ENTERING LICENSING AGREEMENTS
The Company acquired Medica in June 1997 and expects to continue to realize
licensing revenues from existing license agreements entered into by Medica. The
Company may also seek to offer a complete private label solution on the Internet
to clearinghouses or payors seeking an internet solution to claims processing.
HEALTHCARE TRANSACTION PROCESSING SOFTWARE AND SECURITY
The Company's healthcare transaction processing software is designed for
in-patient, out-patient, and dental claims. The software is modular, providing
valuable flexibility, and generally consists of the following components: (i)
industry standard Web site management software; (ii) state-of-the-art commercial
security and encryption software licensed by the Company from third parties,
including Citrix; and (iii) core processing software developed by Medica which
provides claims review, claims processing, hard-coding of claims, and a
"table-based" software coding of claims variables. The expensive and time-
consuming hard-coding routines required by traditional systems have been
replaced by a user friendly system that is table-based. This permits
payor-specific edits to meet the requirements of payors and avoids expensive
onsite software changes. New edits can be input by Company personnel. Once
healthcare providers connect to the Company's secure Web site, claims are edited
on-line automatically, using a database containing more than 22,000 edit
variables. The direct provider-payor connections offered by the Company's system
are designed to allow for immediate billing data and information exchange when
it becomes available from the payors. In the event that a particular payor
cannot accept submission of claims electronically, the Company prints and mails
hard copies of such claims to such payors and charges the provider therefor.
During the initial application process, a new customer interacts with the
Company's proprietary "Print Wizard," that downloads claim files from the
provider's practice management system. When connecting to the Internet, the
provider's browser encryption is automatically enabled at the client extranet
site. The user must "log-in" through a secure firewall to reach the Company's
healthcare transaction processing system. At this point, an additional level of
encryption may be enabled automatically at the option of the healthcare
provider, claims are extracted from the provider's PC, and editing begins. Only
claims containing errors are identified for editing. Once claims are edited,
they are queued with accurate claims for transmission to payors. Should a claim
not be acceptable electronically by a payor, the claim is automatically printed
and mailed by the payor gateways. Such mailing service is optional to the
providers. To assure proper network operation and allow other revenue producing
services, such as custom reports, eligibility inquiries, and decision support
tools, all traffic is monitored through the Company's private application server
and firewall.
The Company's healthcare transaction processing software system is based
upon a client-server computing model and includes a variety of different
software applications. Individual applications work
29
together to provide the extraction and encryption of claims from a provider's
practice management system to the Company's Internet claims processing server,
where editing and formatting occurs in a secure environment. The claims are then
delivered to the payor gateway. The different software applications have either
been purchased, licensed, or developed by the Company. In June 1997, the Company
consummated the Medica Acquisition; Medica had licensed the core editing
software to the Company.
The Company's web site, claimsnet.com is structured into three sections:
"PUBLIC INTERNET," "CLIENT EXTRANET," and "PRIVATE INTRANET." The PUBLIC
INTERNET site provides company background, product demonstrations, and customer
enrollment forms. The CLIENT EXTRANET provides a secure individual customer area
for private customer communication and encrypted claims transmission.
Traditional claims clearinghouses that use regular phone and private data
networks cannot provide this level of data security. The PRIVATE INTRANET site
is designed for internal communications, web site operating reports, customer
support, and reporting.
With the exception of the commercial software, such as that provided by
Citrix and Microsoft, the Company has either identified back-up sources for all
the software used or, in the event of a business failure by the licensing
vendor, the Company owns the source code.
TRAINING AND HARDWARE REQUIREMENTS
The training for the various products and services offered by the Company is
free and delivered online through the Client Extranet to the provider, seven
days a week, 24 hours a day. The tutorial and other training documents are
always available at the Company's Web home page (http://claimsnet.com). After an
initial free period of unlimited service, the Company will charge users a fee
for technical support comparable to those charged by other healthcare software
vendors.
No significant hardware investment by the customer is required in order to
take advantage of the Company's services. The system requires the provider to
use a 28,800 bps asynchronous modem and a PC with Windows 3.11 or Windows 95
operating system installed. An Internet Service Provider ("ISP"), such as AT&T
Worldnet, MCI and Physicians' Online, offers local telecommunication to the
Internet. The Company's customers are responsible for the ISP connection.
INTERNET/INTRANET
The processing configuration used by the Company requires limited electronic
claims processing software to reside at the level of the healthcare provider.
All editing and formatting takes place at the Company's Internet application
server site. This application was initially developed internally by AMF and
acquired by the Company. From the standpoint of the user, the net effect is to
have "the latest" software version and all format changes available instantly.
The Company's healthcare transaction processing software has the effect of
turning a provider's "old" or "outdated" hardware into a terminal capable of
operating in a 32-bit Windows environment.
The Company's processing does not take place on the Internet, but rather in
an extranet configuration. The main advantage of this approach is to assure that
the communication between the Company and a provider takes place in a
highly-controlled, secure, and (because of the remote LAN software) encrypted
environment. The dual encryption utilized by the Company occurs at the browser
software and application server level. All processing and data storage occurs
behind a firewall, providing secure and controlled access to all data.
Small volume providers/users are able to input their claims directly on-line
(avoiding the need to have a practice management software system installed), and
thereby interact with the Company's high-capacity servers and their on-line edit
capability.
30
CUSTOMERS
The Company views its customers as both the healthcare providers submitting
claims and the payors accepting claims.
At the date hereof, the Company is processing claims for more than 300
providers. The providers are geographically dispersed and represent a mix of
physician specialties and dentists. Approximately 90 additional providers are in
a "testing mode." This requires verification of each provider's claims format
with proper payors. There are over 500 providers in various stages of submitting
test claims through the Company's electronic claims processing system.
The Company requires each healthcare provider using the Company's services
to enter into a standard subscription agreement available on the home page of
the Company's web site. This system allows the healthcare provider to access,
complete, and return the subscription agreement on the Internet, thereby
enabling the provider to immediately access the Company's services. Each
subscription agreement provides (i) that the healthcare provider shall pay to
the Company monthly a subscription fee (which fee the Company has determined to
waive through at least June 30, 1998 for those which subscribed to the Company's
services prior to January 1, 1998), and (ii) the nature of the services to be
rendered by the Company and the terms and conditions under which the Company
will render such services. Such contracts are terminable by the healthcare
provider upon 30 days prior written notice. There can be no assurance that the
Company will be able to charge and collect subscription fees after June 30, 1998
from those not currently paying such fees, or if charged, what the level of fees
(individually or in the aggregate) will be.
The Company also enters into agreements with the commercial medical and
dental payors or regional clearinghouses to which the Company submits processed
claims. Generally, such agreements provide for the payment of a fee per claim
averaging approximately $.10 to paid to the Company once certain minimum volume
requirements have been met. As a result of the varying submission requirements
of many insurance and other plans within any payor, the Company treats each plan
as a separate payor with its own particular requirements.
In February 1998, the Company entered into development and marketing
agreement with Millbrook, a Microsoft solution provider, to be the default
claims processing, statement, and remittance advice vendor for all healthcare
provider customers of Millbrook. The processing solution offered by the Company
pursuant to such agreement is tightly integrated through distinctive software
controls allowing automatic updates within each provider's practice management
system.
INTELLECTUAL PROPERTY
The Company regards its copyrights and similar intellectual property as
critical to its success, and relies on trademark and copyright law, trade secret
protection, and confidentiality and/or license agreements with its employees,
customers, partners and others to protect its proprietary rights. The Company
intends to pursue the registration of its trademarks and service marks in the
U.S. The Company has licensed in the past, and expects that it may license in
the future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand name is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the Company's proprietary rights or reputation,
which could have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations. There can be no assurance that
the steps taken by the Company to protect its proprietary rights will be
adequate or that third parties will not infringe or misappropriate the Company's
copyrights, trademarks, trade dress, and similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against the Company. The Company has been subject to claims
and expects to be subject to legal proceedings and claims from time to time in
the ordinary course of its business, including claims of alleged infringement of
the trademarks and other intellectual property rights of third parties by the
Company and its licensees. Such claims, even if not
31
meritorious, could result in the expenditure of significant financial and
managerial resources. The Company is not currently aware of any legal
proceedings pending against it.
COMPETITION
The segment of the industry in which the Company operates is dominated by
several large companies such as Envoy/NEIC, Inc., HBO & Company, National Data
Corporation, and QuadraMed Corporation, each of which operates a regional or
national clearinghouse of medical and dental claims. In most cases, these
companies have large existing capital and software investments and focus on
large healthcare providers, such as hospitals and large clinics, or act as
wholesale clearinghouses for smaller electronic claims processing companies. The
Company estimates, based on information from various trade journals, that there
are approximately 300 or more small independent electronic claims processing
companies and clearing houses in addition to the aforementioned large
competitors, which operate as local sub-clearinghouses for the processing of
medical and dental claims.
While the Company competes with all other providers of electronic claims
processing services, it is not aware of any other companies that provide
healthcare electronic claims processing services in the same manner as those
provided by the Company and thus represent a direct competitor. The Company
believes that its pricing structure and total cost is very competitive with
other providers of electronic claims processing services. The Company further
believes that existing competitors are constrained not only by capital
investments and existing hardware/software configurations, but by existing
customer agreements. Notwithstanding the foregoing, the Company anticipates that
competition will arise in the processing of claims on the Internet. No assurance
can be given that the Company will successfully compete in any market in which
it conducts or may conduct operations.
Certain segments of the medical and dental claims processing industry are
not currently suited to the use of inpatient electronic claims processing. Among
such segments are psychiatry and surgery, each of which requires substantial
documentation in addition to the claim to be submitted. In these market
segments, the Company believes that it is not currently able to compete with
existing potential competitors and, accordingly, the Company has designed its
business plan to address other market segments.
EMPLOYEES
As of December 31, 1997, the total number of full-time employees of the
Company was 23 persons, four of whom were executive officers, 17 of whom were
technical personnel, and two of whom were administrative personnel. Thirteen of
such employees were individuals whose services were theretofore obtained under
the service agreement with AMF. Three of the remaining employees were obtained
as a result of the Medica acquisition. None of the Company's employees are
represented by a labor organization. The Company believes that its relations
with its employees are satisfactory.
Mr. Lycke, the Chairman of the Board of Directors, President, and Chief
Executive Officer of the Company, and Messrs. Bensen and Brown, Directors of the
Company, also serve as Chairman of the Board of Directors, a Director and Senior
Vice President, and a Director, respectively, of AMF. See "Certain
Transactions."
The ability of the Company to attract and retain highly skilled personnel is
critical to the operations and expansion of the Company. To date, the Company
has been able to attract and retain the personnel necessary for its limited
operations. However, there can be no assurance that the Company will be able to
do so in the future, particularly in light of the Company's expansion plans. If
the Company is unable to attract and retain personnel with necessary skills when
needed, its business and expansion plans could be materially adversely affected.
32
FACILITIES
The Company currently leases 6,061 square feet of office space at the rate
of $8,586.42 per month. Such offices are located at Suite 1515, 12801 North
Central Expressway, Dallas, Texas 75243. The lease expires on September 30,
1998. The Company believes that, in the event alternative or larger offices are
required, such space is available at competitive rates. See "Certain
Transactions." For the Company's servers, the Company utilizes DIGEX Business
Internet Solutions, including a nationwide DS-3 backbone, a substantial
dedicated Web servers management facility, and a 24 hour per day, 7 day per week
Network Operations Center at a cost of $6,100 per month.
LEGAL MATTERS
The Company is not currently party to any litigation.
33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company, their ages, and their
positions held with the Company are as follows:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Bo W. Lycke.......................................... 52 Chairman of the Board of Directors, President, Chief
Executive Officer, and Class I Director
Terry A. Lee......................................... 43 Executive Vice President of Marketing and Technology
and Class II Director
Paul W. Miller....................................... 41 Vice President and Chief Financial Officer
Randall S. Lindner................................... 38 Vice President of Technology
Samuel A. Carrel..................................... 45 Vice President of Sales and Marketing
Ward L. Bensen....................................... 55 Class I Director
Robert H. Brown, Jr.................................. 45 Class I Director
Sture Hedlund........................................ 59 Class II Director
John C. Willems, III................................. 43 Class II Director
Set forth below is certain information with respect to the executive
officers and directors of the Company.
BO W. LYCKE has served as the Chairman of the Board of Directors, President,
and Chief Executive Officer of the Company since its inception. In 1990, Mr.
Lycke founded AMF for the purpose of financing and processing medical accounts
receivable and, since such time, has served as the Chairman of the Board of
Directors thereof. During the period from 1983 to 1990, Mr. Lycke was involved
in a variety of entrepreneurial undertakings in the fields of satellite antenna
manufacturing, precious metal scrap recovery, and independent radio programming
production. He also has extensive experience as a director of several private
companies and is currently on the board of Diagnostic Health Services, Inc., a
public corporation. In 1972, Mr. Lycke founded, and from 1973 to 1983, was
president and director, of Scanoil, Inc., a company engaged in domestic and
international oil futures trading, as well as chartering and operating
ocean-going oil tankers. From 1971 to 1983 Mr. Lycke also served as a President
and director of various domestic operating subsidiaries of the Volvo
Automotive/Beijer Group, the indirect owner of Scanoil, Inc.
TERRY A. LEE has served as Executive Vice President of Marketing and
Technology of the Company since September 1996 and has served as director of the
Company since 1998. From October 1995 until September 1996, Mr. Lee served as a
director of North American Sales and Marketing, Internetworking Product Group of
Compaq Computer Corporation ("Compaq"). From January 1995 through December 1995,
Mr. Lee served as Vice President of Sales of Networth, a network hardware
manufacturer acquired by Compaq. From October 1988 to January 1995, Mr. Lee
served as Director of Major Accounts, with Lotus Development Corporation, a
software developer and marketer. From November 1983 to October 1988, Mr. Lee
served as a district manager with CompuServe, Inc., an online service provider.
PAUL W. MILLER is a Certified Public Accountant and served as Chief
Financial Officer of the Company since November 1997. From September 1995 to
October 1997, Mr. Miller served as Chief Financial Officer and Vice President of
Quality Management Services for Sweetwater Health Enterprises, Inc., a NCQA
accredited credentials verification organization and commercial software firm
serving the managed health care 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
34
Beecham Clinical Laboratories, Inc. and Nichols Institute Laboratories North
Texas, Ltd. Mr. Miller began his career in 1978 in the audit division of Arthur
Andersen & Company.
RANDALL S. LINDNER serves as Vice President of Technology of the Company,
coming to the Company as the former President of Medica, in connection with the
Company's acquisition of Medica. Mr. Lindner has over nineteen years of software
development and management experience, eight of which were dedicated to
healthcare and electronic claims processing. Mr. Lindner founded Medica in May
1994, and under Mr. Lindner's presidency, Medica developed a fourth generation
electronic claims processing and editing software, CyberClaim for Windows. From
1990 to April 1994, Mr. Lindner served as Director of Development after
developing a MS-DOS claims processing and tracking system for Vision Software,
Inc. From 1987 to 1990, Mr. Lindner served as Systems Director of Neilson Media
Research, a division of Dunn & Bradstreet, and assumed responsibility for
management and development of products for the over 300 clients using over 35
different operating systems. From 1986 to 1987, Mr. Lindner was a member of CIS,
Inc., a company that developed one of the first electronic claims processing
systems for the hospital market and healthcare industry.
SAMUEL A. CARREL has served as Vice President of Sales and Marketing of the
Company since January, 1998. Mr. Carrel has over 15 years of experience in the
healthcare industry. From June 1996 to December 1997, Mr. Carrel served as Vice
President of Corporate Accounts at Henry Schein Inc. From April 1989 to April
1996 he held a variety of corporate and account sales management positions with
McKesson General Medical Corp., formerly General Medical Corporation ("General
Medical"). While at General Medical, Mr. Carrel served as National Sales
Manager/Acute Care Specialty Sales before accepting the position of Director of
Integrated Healthcare Systems. Prior experience includes positions with Boston
Scientific and McGraw Laboratories.
WARD L. BENSEN has been a director of the Company since April 1996. Since
1990, he has served as a director of AMF. Since June 1994, he served as Senior
Vice President of AMF where he is primarily responsible for its marketing
efforts in the western United States and receivables acquisitions nationwide.
From March 1993 until September 1993, Mr. Bensen was Vice President of
Investment, and marketed investment programs for both Prudential Securities and
Shearson Lehman Brothers, and, from 1991 to 1993, provided specialized
investment banking services as a partner of John Casey and Associates, a
contract wholesale securities marketing firm. From 1984 to 1991, he served as
Division Vice President for Jones International Securities and prior thereto,
held various positions with Shearson American Express, The Safeco Insurance Co.
and Procter and Gamble.
ROBERT H. BROWN, JR. has served as a director of the Company since April
1996 and had been a director of AMF since 1990. Since 1990, Mr. Brown has been
employed by Dain Rauscher, Inc., a Dallas-based full service regional investment
banking and brokerage firm which is a New York Stock Exchange member, where he
is currently Executive Vice President and a member of the Executive Committee.
Mr. Brown was Senior Vice President of TM Capital Corporation during 1989. From
1985 to 1989, Mr. Brown was a Vice President of Thompson McKinnon Securities,
where he was responsible for all corporate finance activities in the
southwestern United States.
STURE HEDLUND has served as a director of the Company since 1998. Since
January 1987, Mr. Hedlund has also served as Chairman of the Board of Directors
of Scandinavian Merchant Group AB, a Swedish corporation engaged in venture
capital investing. Since 1993, Mr. Hedlund has been a director of Medical Invest
Svenska AB ("Medical Invest"), a public company engaged in the business of
medical technology, and has been a director of Ortivus Medical AB, a company
engaged in the manufacture of heart monitoring devices and a subsidiary of
Medical Invest.
JOHN C. WILLEMS, III has served as a director of the Company since 1998 and
has been legal counsel to the Company since April 1996. Since September 1993,
Mr. Willems has been an attorney with the law firm of McKinley, Ringer & Zeiger,
PC, in Dallas, Texas, practicing in the area of Business law. From
35
January 1992 to August 1993, Mr. Willems was an attorney in the law firm of
Settle & Pou, PC, also located in Dallas, Texas.
The Board of Directors is divided into two classes with each class
consisting of, as nearly as possible, one-half of the total number of directors
constituting the entire Board of Directors. The Board of Directors currently
consists of three members in Class I and three members in Class II. Class I
currently consists of Messrs. Lycke, Bensen, and Brown, the terms of which
expire at the 2000 meeting of stockholders. Class II currently consists of
Messrs. Lee, Hedlund, and Willems, the terms of which expire at the 1999 meeting
of stockholders. After the initial term, each Class is elected for a term of two
years. At each annual meeting of stockholders, directors are elected to succeed
those in the Class the term of which expires at that annual meeting, such newly
elected directors to hold office until the second succeeding annual meeting and
the election and qualification of their respective successors.
Officers are elected annually by the Board of Directors and hold office at
the discretion of the Board of Directors. There are no family relationships
among the Company's directors and executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
On April 5, 1997, the Board of Directors created a Compensation Committee,
which is comprised of Messrs. Lycke, Bensen, and Brown. The Compensation
Committee has (i) full power and authority to interpret the provisions of, and
supervise the administration of, the 1997 Plan and (ii) the authority to review
all compensation matters relating to the Company.
On April 5, 1997, the Board also created an Audit Committee, which is
comprised of Messrs. Lycke, Bensen, and Brown. The Audit Committee is
responsible for reviewing the plans and results of the audit engagement with the
independent auditors; reviewing the adequacy, scope, and results of the internal
accounting controls and procedures; reviewing the degree of independence of the
auditors; reviewing the auditors' fees; and recommending the engagement of
auditors to the full Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid to, or accrued by the Company for, Bo W. Lycke, the Chairman
of the Board of Directors, President, and Chief Executive Officer of the
Company, for the period from April 8, 1996 (inception) through December 31,
1997.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER ANNUAL COMPENSATION
- ----------------------------------------------------- --------- ------------------------- -------------------------------
Bo W. Lycke.......................................... $ 67,915 -- --
Chairman of the Board of Directors, President, and
Chief Executive Officer
DIRECTOR COMPENSATION
During the year ended December 31, 1997, directors received no compensation
for their services other than reimbursement of expenses relating to attending
meetings of the Board of Directors.
DIRECTOR'S STOCK OPTION PLAN
In April 1998, the Company adopted the Director's Plan to tie the
compensation of outside directors to future potential growth in the Company's
earnings, if any, and to provide such directors and encourage them to remain on
the Board of Directors of the Company, to provide outside directors with an
increased
36
incentive to make significant and extraordinary contributions to the long-term
performance and growth of the Company, and to join the interests of the outside
directors through the opportunity for increased stock ownership, with the
interests of the Company's stockholders. Any member of the Company's Board of
Directors who is not an officer or employee of the Company, any subsidiary of
the Company, or any stockholder of the Company that owns one percent or more of
the capital stock of the Company (an "outside director") is eligible to receive
options under the Director's Plan.
To date, no options have been granted under the Director's Plan. All options
that are granted will be non-statutory stock options for purposes of tax
treatment under the Internal Revenue Code 1986, as amended (the "Code"). Stock
Options granted under the Director's Plan will give the option holder the right
to purchase Common Stock at a price (the "Option Exercise Price") fixed in the
stock option agreement executed by the option holder and the Company at the time
of grant. The Option Exercise Price will not be less than the fair market value
of a share of the authorized and issued Common Stock on the date the option is
granted.
The period for exercising an option will begin on the first anniversary of
the date of grant and generally will end ten years from the date the option is
granted. Fifty percent of any options granted under the Plan become "vested" in
the option holder on the first anniversary of the date of grant with the
remainder vesting on the second anniversary of the date of grant. During the
period an option is exercisable, the option holder may pay the purchase price
for the share subject to the option in cash, except the stockholder may, under
certain circumstances, permit such payment to be by surrender of shares of
Common Stock (at their then fair market value on the date of exercise), or by a
combination of cash and shares.
An aggregate of 100,000 shares of Common Stock are reserved for issuance to
participants under the Director's Plan. In the event of any changes in the
Common Stock by reason of stock dividends, split-ups, recapitalization, mergers,
consolidations, combinations, or other exchanges or shares and the like,
appropriate adjustments will be made by the Board of Directors to the number of
shares of Common Stock available for issuance under the Director's Plan, the
number of shares subject to outstanding options, and/ or the exercise price per
share of outstanding options, as necessary substantially to preserve option
holders' economics interests in their options.
No shares will be issued under the Director's Plan until full payment
therefor has been made to the Company. A holder of an option will have none of
the rights of a stockholder (e.g., voting, dividend, and other ownership rights)
until the shares are issued to him or her.
Shares subject to an option which remain unpurchased at the expiration,
termination, or cancellation of an option will again be available for use under
the Director's Plan, but shares surrendered as payment for an option, as
described above will not again be available for use under the Director's Plan.
Options awarded under the Director's Plan are not transferable or
assignable, except by will or by the laws of descent and distribution. During an
option holder's lifetime, options may be exercised only by the option holder and
may not be transferred or assigned or encumbered by a lien or other security
interest. The Director's Plan is administered by an administrator who is the
Secretary of the Corporation or such other person designated by the Board of
Directors of the Corporation.
The Board of Directors has the right at any time and from time to time to
amend, modify, or discontinue the Director's Plan. However, no such amendment,
modification, or discontinuance will revoke or alter the terms of any valid
option previously granted in accordance with the Director's Plan without the
consent of the holder of the option unless necessary to bring the option into
compliance with applicable law. Also, no action of the Board of Directors may,
without approval by the affirmative vote of a majority of the votes of
stockholders cast at a meeting at which a quorum is present, (i) increase the
maximum number of shares of Common Stock subject to the Director's Plan, (ii)
materially increases the benefits accruing to participants under the Director's
Plan, (iii) materially modify the requirements for eligibility
37
under the Director's Plan. Unless earlier terminated, the Director's Plan will
terminate on December 31, 2007.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during the period from
April 8, 1996 (inception) through December 31, 1996. Messrs. Lycke and Bensen,
officers of the Company during such period, participated in deliberations of the
Company's Board of Directors concerning executive officer compensation. There
were no interlocking relationships between the Company and other entities that
might affect the determination of the compensation of the directors and
executive officers of the Company.
EMPLOYMENT AGREEMENTS
In April, 1997, the Company entered into an employment agreement with Mr.
Lycke providing that, commencing on the effective date of the Registration
Statement relating to this offering, 1998 and expiring on December 31, 2002, Mr.
Lycke will serve as Chairman of the Board of Directors, President, and Chief
Executive Officer of the Company at a base salary equal to $250,000, increasing
by 5% per annum (subject to increase by the Board of Directors), and such
bonuses as may be determined by the Board of Directors. In addition, Mr. Lycke
will receive use of a company-owned automobile or an automobile allowance. In
the event of a Change in Control of the Company (as defined in such agreement),
all options previously granted to Mr. Lycke which remain unvested will
automatically vest immediately. Upon a termination of Mr. Lycke's employment
following a Change in Control, unless Mr. Lycke voluntarily terminates his
employment for other than certain listed reasons, the Company is required to pay
Mr. Lycke a lump sum severance payment equal to one-half his then current annual
salary. In addition, if Mr. Lycke's employment is terminated (i) upon his death,
(ii) by the Company due to disability, (iii) by the Company without cause, or
(iv) by Mr. Lycke voluntarily upon the Company's default or unremedied Adverse
Change in Duties (as defined in such agreement), then the Company is required to
pay Mr. Lycke a lump sum severance payment equal to his then current annual
salary. Mr. Lycke may terminate his employment at any time upon at least 30 days
written notice to the Company. Upon the termination of such agreement, Mr. Lycke
is subject to certain non-compete, non-disturbance, and non-interference
provisions for a period of one year.
In September, 1996, the Company entered into an employment agreement, as
amended as of March 26, 1997 and March , 1998, with Mr. Lee, Executive Vice
President of Marketing and Technology of the Company, providing that, commencing
on such date and terminating on the second anniversary thereof, Mr. Lee will
devote his full business time and efforts to the Company for a base salary per
annum of $125,000 plus bonus for achieving certain designated milestones. In
addition and pursuant to such agreement, Mr. Lee was issued 40,375 shares of
Common Stock on March 26, 1997. Mr. Lee is also entitled to participate in
insurance and other benefit plans established by the Company for the employees
thereof. Generally, upon the termination of Mr. Lee's employment for cause, Mr.
Lee shall be restricted from competing with the Company for a period of six
months thereafter. In the event Mr. Lee is terminated without cause or for
certain other reasons at the discretion of the Company, Mr. Lee shall be
entitled to receive $40,000 in consideration of the termination of his
employment and shall be restricted from competing with the Company for a period
of six months thereafter. In January 1998, Mr. Lee was granted an option to
purchase 95,042 previously issued shares of Common Stock at a price of $4.46 per
share from three shareholders of the Company. See "Principal Stockholders."
In connection with the Medica acquisition, the Company entered into an
employment agreement with Mr. Randall S. Lindner, the Vice President of
Technology of the Company, providing that, commencing on June 2, 1997 and
terminating on the third anniversary thereof, Mr. Lindner will devote his full
business time and efforts to the Company for a base salary per annum of $100,000
plus bonus for achieving certain designated milestones. In addition, pursuant to
the Medica acquisition, Mr. Lindner was issued 72,771 shares of Common Stock on
June 2, 1997. Mr. Lindner is also entitled to participate in insurance and other
38
benefit plans established by the Company for the employees thereof. Generally,
upon the termination of Mr. Lindner's employment for cause, he shall be
restricted from competing with the Company for a period of one year thereafter.
In the event Mr. Lindner is terminated without cause or for certain other
reasons at the discretion of the Company, Mr. Lindner shall be entitled to
receive between $20,000 and $30,000 in consideration of the termination of his
employment. Mr Lindner has been granted an option under the 1997 Plan to
purchase 108,900 shares of Common Stock at an exercise price per share equal to
the initial public offering price per Share in this offering.
1997 STOCK OPTION PLAN
On April 5, 1997, the Board of Directors of the Company and stockholders of
the Company authorized adoption of the 1997 Plan. The 1997 Plan provides for the
grant of options to purchase up to 500,000 shares of Common Stock to employees,
officers, directors, and consultants of the Company. Options may be either
"incentive stock options" within the meaning of Section 422 of the United States
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified
options. Incentive stock options may be granted only to employees of the
Company, while non-qualified options may be issued to non-employee directors,
consultants, and others, as well as to employees of the Company.
The 1997 Plan will be administered by "disinterested members" of the Board
of Directors or the Compensation Committee, who determine, among other things,
the individuals who shall receive options, the time period during which the
options may be partially or fully exercised, the number of shares of Common
Stock issuable upon the exercise of each option, and the option exercise price.
The exercise price per share of Common Stock subject to an incentive option
may not be less than the fair market value per share of Common Stock on the date
the option is granted. The per share exercise price of the Common Stock subject
to a non-qualified option may be established by the Board of Directors. The
aggregate fair market value (determined as of the date the option is granted) of
Common Stock for which any person may be granted incentive stock options which
first become exercisable in any calendar year may not exceed $100,000. No person
who owns, directly or indirectly, at the time of the granting of an incentive
stock option to such person, 10% or more of the total combined voting power of
all classes of stock of the Company (a "10% Stockholder") shall be eligible to
receive any incentive stock options under the 1997 Plan unless the exercise
price is at least 110% of the fair market value of the shares of Common Stock
subject to the option, determined on the date of grant. Non-qualified options
are not subject to such limitation.
No stock option may be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only by the optionee. In the event of termination of
employment or engagement other than by death or disability, the optionee will
have no more than three months after such termination during which the optionee
shall be entitled to exercise the option, unless otherwise determined by the
Board of Directors. Upon termination of employment or engagement of an optionee
by reason of death or permanent and total disability, such optionee's options
remain exercisable for one year thereafter to the extent such options were
exercisable on the date of such termination. No similar limitation applies to
non-qualified options.
Options under the 1997 Plan must be issued within ten years from the
effective date of the 1997 Plan. The effective date of the 1997 Plan is April 5,
1997. Incentive stock options granted under the 1997 Plan cannot be exercised
more than ten years from the date of grant. Incentive stock options issued to a
10% Stockholder are limited to five year terms. Options granted under the 1997
Plan generally provide for the payment of the exercise price in cash and may
provide for the payment of the exercise price by delivery to the Company of
shares of Common Stock already owned by the optionee having a fair market value
equal to the exercise price of the options being exercised, or by a combination
of such methods. Therefore, if so provided in an optionee's options, such
optionee may be able to tender shares of Common Stock to
39
purchase additional shares of Common Stock and may theoretically exercise all of
his stock options with no additional investment other than the purchase of his
original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the 1997 Plan.
To date, options to purchase an aggregate of 150,000 shares of Common Stock
have been granted under the 1997 Plan.
DIRECTORS' LIMITATION OF LIABILITY
The Company's Certificate of Incorporation and By-Laws include provisions to
(a) indemnify the directors and officers to the fullest extent permitted by the
Delaware General Corporation Law, including circumstances under which
indemnification is otherwise discretionary and (b) eliminate the personal
liability of directors and officers for monetary damages resulting from breaches
of their fiduciary duty (except for liability for breaches of the duty of
loyalty, acts, or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware General Corporation Law, or for any transaction from which the director
derived an improper personal benefit). The Company believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers.
The Company has applied for directors and officers liability insurance in an
amount of not less than $2 million, provided, however, that, pursuant to the
Underwriting Agreement between the Company and the Underwriters (the
"Underwriting Agreement"), the Company shall not be required to pay more than
$50,000 per year in order to maintain such insurance and if such insurance is
not available at such cost, the Company shall purchase that amount of insurance
which is available at a cost of $50,000 per year.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
40
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date hereof, (i) each person who
is known by the Company to be the owner of record or beneficial owner of more
than 5% of the outstanding Common Stock, (ii) each director and each executive
officer of the Company, (iii) all directors and executive officers of the
Company as a group, and (iv) the number of shares of Common Stock beneficially
owned by each such person and such group and the percentage of the outstanding
shares owned by each such person and such group. Except as otherwise indicated,
the stockholders listed in the table have sole voting and investment powers with
respect to the shares indicated.
SHARES BENEFICIALLY OWNED(1)
---------------------------------------------
NAME AND ADDRESS NUMBER OF PERCENT PRIOR PERCENT AFTER
OF BENEFICIAL OWNER SHARES TO OFFERING OFFERING
- --------------------------------------------------- ------------- --------------- -------------
Bo W. Lycke (2) (3) (7) (8)........................ 1,323,318 45.4% 24.4%
Terry A. Lee (2) (7)............................... 135,417 4.6 2.5
Paul W. Miller (2)................................. 0 0 0
Randall S. Lindner (2)(6).......................... 72,771 2.5 1.3
Samuel A. Carrel(2)................................ 0 0 0
Ward L. Bensen (2) (3) (4)......................... 408,409 14.0 7.5
Robert H. Brown, Jr. (2) (3) (5)................... 508,901 17.4 9.4
Sture Hedlund (2).................................. 8,075 * *
John C. Willems, III (2)........................... 8,075 * *
American Medical Finance, Inc. .................... 238,411 8.2 4.4
12801 N. Central Expressway
Suite 1515
Dallas, Texas 75243
Healthcare Reform Investment Trust Plc. ........... 157,014 5.4 2.9
c/o Miss D.A. Kingston
Lloyds Bank Securities Services
51-53 New London Road
Essex CM2 OSY, England
All directors and executive officers of the Company
as a group (9 persons) (2) (3) (4) (5)........... 1,893,104 64.9% 34.9%
- ------------------------------
* Less than one percent.
(1) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Exchange Act, as consisting of sole or
shared voting power (including the power to vote or direct the vote) and/or
sole or shared investment power (including the power to dispose or direct
the disposition) with respect to the security through any contract,
arrangement, understanding, relationship, or otherwise, including a right to
acquire such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting, and investment
power with respect to all Ordinary Shares shown as beneficially owned by
them.
(2) The address of the referenced individual is c/o Claimsnet.com inc., 12801 N.
Central Expressway, Suite 1515, Dallas, Texas 75243.
(3) Includes 238,411 shares of Common Stock owned of record by AMF, 14,217
shares of which are subject to an option agreement with Terry A. Lee, as
described in footnote (7). Mr. Lycke serves as the Chairman of the Board of
Directors of AMF. Messrs. Lycke, Bensen, and Brown are stockholders of AMF
owning 70.1%, 11.2%, and 17.7% of the outstanding capital stock of AMF,
respectively. Therefore, Messrs. Lycke, Bensen, and Brown may be deemed to
beneficially own the shares of Common Stock owned by AMF.
(4) Consists of 169,998 shares of Common Stock owned of record by Mr. Bensen and
238,411 shares of Common Stock owned of record by AMF. See footnote (3),
above.
(5) Consists of 270,490 shares of Common Stock owned of record by Mr. Brown,
16,130 shares of which are subject to an option agreement with Terry A. Lee,
as described in footnote (7), and 238,411 shares of Common Stock owned of
record by AMF. See footnote (3), above.
(6) Does not include 2,854 shares of Common Stock owned of record by Mr.
Lindner's wife, as to which shares Mr. Lindner disclaims beneficial
ownership. Does not include 108,900 options granted to Mr. Lindner pursuant
to the 1997 Plan.
(7) Includes an option, granted by Bo Lycke, Robert H. Brown, Jr. and American
Medical Finance, Inc. to Terry Lee to purchase 95,042 shares of Common Stock
at an exercise price of $4.46 per share.
(8) Consists of 1,084,907 shares of Common Stock owned of record by Mr. Lycke,
64,695 shares of which are subject to an option agreement with Terry A. Lee,
as described in footnote (7), and 238,411 shares of Common Stock owned of
record by AMF. See footnote (3) above.
41
CERTAIN TRANSACTIONS
AMF is the record owner of 238,411 shares of Common Stock, representing 8.2%
of the outstanding Common Stock prior to this offering and 4.4% of the
outstanding Common Stock following this offering. Bo W. Lycke, the Chairman of
the Board of Directors, President, and Chief Executive Officer of the Company,
is the Chairman of the Board of Directors of AMF. Mr. Lycke, Ward L. Bensen and
Robert H. Brown, Jr., directors of the Company, are all stockholders of AMF,
owning 70.1%, 11.2%, and 17.7% of the outstanding capital stock of AMF,
respectively. See "Principal Stockholders." Such individuals will devote minimal
time to winding up the business and affairs of AMF for approximately three
months following this offering.
On July 31, 1996, the Company acquired all of the Internet software,
licenses, intellectual property rights, and technology developed by an
affiliated company, AMF, in exchange for a promissory note in the amount of
$3,740,000. On September 19, 1997, AMF reduced the principal amount of the AMF
Note to $2,000,000 and contributed the remaining $1,740,000 in principal amount
of the AMF Note to the capital of the Company. On May , 1998, the Company used
a portion of the net proceeds of the Sterling Note to repay the AMF Note in
full. The AMF Note accrued interest at the rate of 9.50% per annum and was
collateralized by all of the Internet software, intellectual property rights,
internet technology and technology rights of the Company, including software
development costs.
In connection with such acquisition, AMF and the Company entered into a
Service Agreement (the "Service Agreement"), in which AMF provides staff and
office support services to the Company and for which the Company was billed
monthly. Such agreement was canceled by the Company effective April 1, 1997. The
Company believes that the cost of the services provided by AMF was comparable
to, or lower than, available alternatives. Commencing April 1, 1997, the Company
established its own payroll and personnel/management structure and assumed
direct responsibility for all of its support services. No material effect on the
relationship with employees is expected.
From April 1996 until August 1997, the Company subleased 4,000 square feet
of office space from AMF, on a month-to-month basis, at the rate of $4,000 per
month.
Upon the consummation of the acquisition transaction with AMF, AMF agreed to
provide the Company with a credit line of up to $1,500,000 to facilitate
additional development of the Company's services and technology. At March 31,
1998, advances under such line of credit were approximately $1,014,000. On April
, 1998, the Company used a portion of the net proceeds of the Sterling Note to
repay such line of credit in full. Such line of credit accrued interest at the
rate of 9.50% per annum and was secured by all of the assets of the Company.
On May , 1998, the Company entered into a line of credit with Sterling
Bank in connection with which the Company entered into a promissory note in the
amount of approximately $3,600,000 (the "Sterling Note"). Such note is
guaranteed by AMF. As security for such guarantee, AMF has hypothecated to
Sterling Bank a certificate of deposit equal in amount to the principal amount
outstanding under the Sterling Note together with an additional certificate of
deposit in the amount of $40,000. The Company intends to utilize a portion of
the net proceeds of this offering to repay the Sterling Note in full, at which
time such guarantee and hypothecation will terminate. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
All future transactions between the Company and its officers, directors, and
5% stockholders will be on terms no less favorable to the Company than can be
obtained from unaffiliated third parties and will be approved by a majority of
the independent and disinterested directors of the Company.
For a description of employment agreements between the Company and the
executive officers thereof, see "Management--Employment Agreements."
42
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 40,000,000 shares of Common Stock, par value $.001 per share, and
5,000,000 shares of preferred stock, par value $.001 per share. As of December
31, 1997, 2,708,333 shares of Common Stock were outstanding and held of record
by 26 stockholders.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for the election of directors. Subject to the prior rights of
any class or series of preferred stock which may from time to time be
outstanding, if any, holders of Common Stock are entitled to receive ratably,
dividends when, as, and if declared by the Board of Directors out of funds
legally available therefor and, upon the liquidation, dissolution, or winding up
of the Company, are entitled to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. Holders of Common Stock have no
preemptive rights and have no rights to convert their Common Stock into any
other securities. The outstanding Common Stock is validly authorized and issued,
fully-paid, and nonassessable. In the event the Company were to elect to sell
additional shares of Common Stock following this Offering, investors in this
Offering would have no prior right to purchase such additional shares. As a
result, their percentage equity interest in the Company would be diluted. The
shares of Common Stock offered hereby will be, when issued and paid for, fully
paid and not liable for further call or assessment. Holders of the Common Stock
do not have cumulative voting rights, which means that the holders of more than
one half of the outstanding shares of Common Stock (subject to the rights of the
holders of the preferred stock) can elect all of the Company's directors, if
they choose to do so. In such event, the holders of the remaining shares of
Common Stock would not be able to elect any directors. The Board is empowered to
fill any vacancies on the Board, except vacancies caused by an increase in the
number of directors, which are filled by the stockholders. Except as otherwise
required by Delaware law, and subject to the rights of the holders of preferred
stock, all stockholder action is taken by the vote of a majority of the
outstanding shares of Common Stock voting as a single class present at a meeting
of stockholders at which a quorum (consisting of a majority of the outstanding
shares of Common Stock) is present in person or proxy.
PREFERRED STOCK
Preferred stock may be issued in one or more series and having such rights,
privileges, and limitations, including voting rights, conversion privileges,
and/or redemption rights, as may, from time to time, be determined by the Board
of Directors of the Company. Preferred stock may be issued in the future in
connection with acquisitions, financings, or such other matters as the Board of
Directors deems appropriate. In the event that any such shares of preferred
stock are to be issued, a Certificate of Designation, setting forth the series
of such preferred stock and the rights, privileges, and limitations with respect
thereto, shall be filed with the Secretary of State of the State of Delaware.
The effect of such preferred stock is that the Company's Board of Directors
alone, and subject to, federal securities laws and Delaware law, may be able to
authorize the issuance of preferred stock which could have the effect of
delaying, deferring, or preventing a change in control of the Company without
further action by the stockholders, and may adversely affect the voting and
other rights of the holders of the Common Stock. The issuance of preferred stock
with voting and conversion rights may also adversely affect the voting power of
the holders of Common Stock, including the loss of voting control to others.
43
ANTI-TAKEOVER PROVISIONS
Upon consummation of this Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or an associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an interested stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and the shares held by
certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66-2/3%
of the corporations outstanding voting stock at an annual or special meeting,
excluding the shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is: (i) the owner of 15%
or more of the outstanding voting stock of the corporation or (ii) an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from coverage of Section
203 by amending its certificate of incorporation or bylaws, by action of its
stockholders, to exempt itself from coverage, provided that such certificate of
incorporation amendment or bylaw shall not become effective until 12 months
after the date it is adopted. The Company has not adopted such an amendment to
its certificate of incorporation or bylaws.
REGULATION OF THE INTRODUCTION OF BUSINESS AT ANNUAL MEETINGS OF STOCKHOLDERS
The Company's By-laws include provisions which regulate the submission by
persons other than the Board of Directors of matters to a vote of stockholders.
Generally, at an annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the annual meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice for
such meeting, who shall be entitled to vote at such annual meeting and who
complies with the notice procedures set forth in the By-laws. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to, and
received at, the principal executive offices of the Corporation not less than 60
days nor more than 90 days prior to the annual meeting, regardless of any
postponement, deferrals, or adjournments of that meeting to a later date;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the annual meeting is given or made to
stockholders, notice by the stockholder to be timely must be received no later
than the close of business on the 10th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
was made. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting the
following: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business; (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder; and (iv) any
material interest of the stockholder in such business. Notwithstanding anything
in the By-Laws to the contrary, no business shall be conducted at the
stockholder meeting, except in accordance with the procedures set forth in the
By-laws. The chairman of the meeting, as determined in accordance with the
By-Laws, shall, if the facts warrant, determine and declare
44
to the meeting that business was not properly brought before the meeting and, in
accordance with the provisions of these By-Laws, and if he should so determine,
he shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the foregoing.
QUOTATION ON NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
The Company has applied to include the Common Stock for quotation on the
Nasdaq SmallCap Market under the symbol "CLAI" and has applied for listing of
the Common Stock on the Boston Stock Exchange under the symbol "CLA." No
assurance can be given that an active trading market for the Common Stock will
develop or be sustained or at what price the Common Stock will trade.
TRANSFER AGENT; WARRANT AGENT
The Company's Transfer Agent and Registrar for the Common Stock is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York
10004.
45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 5,416,667 shares of
Common Stock outstanding (5,791,667 shares of Common Stock outstanding if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
2,500,000 Shares offered hereby (2,875,000 shares if the Representative's
over-allotment option is exercised in full) will be freely tradeable without
further registration under the Securities Act. All officers and directors of the
Company, current stockholders, and option holders under the 1997 Plan have
agreed not to sell, or otherwise dispose of any securities of the Company for a
period of 18 months from the date of this offering without the Representative's
prior written consent.
All of the presently outstanding 2,916,667 shares of Common Stock are
"restricted securities" within the meaning of Rule 144 of the Securities Act
and, if held for at least one year, would be eligible for sale in the public
market in reliance upon, and in accordance with, the provisions of Rule 144
following the expiration of such one-year period. In general, under Rule 144 as
currently in effect, a person or persons whose shares are aggregated, including
a person who may be deemed to be an "affiliate" of the Company as that term is
defined under the Securities Act, would be entitled to sell within any three
month period a number of shares beneficially owned for at least one year that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock, or (ii) the average weekly trading volume in the Common Stock during the
four calendar weeks preceding such sale. Sales under Rule 144 are also subject
to certain requirements as to the manner of sale, notice, and the availability
of current public information about the Company. However, a person who is not
deemed to have been an affiliate of the Company during the 90 days preceding a
sale by such person and who has beneficially owned such shares of Common Stock
for at least two years may sell such shares without regard to the volume, manner
of sale, or notice requirements of Rule 144.
Prior to this offering, there has been no public market for the Company's
securities. Following this offering, the Company cannot predict the effect, if
any, that sales of shares of Common Stock pursuant to Rule 144 or otherwise, or
the availability of such shares for sale, will have on the market price
prevailing from time to time. Nevertheless, sales by the current stockholders of
a substantial number of shares of Common Stock in the public market could
materially adversely affect prevailing market prices for the Common Stock. In
addition, the availability for sale of a substantial number of shares of Common
Stock acquired through the exercise of the Representative's Warrants or the
outstanding options under the 1997 Plan or the Director's Plan could materially
adversely affect prevailing market prices for the Common Stock. See "Risk
Factors--Shares Eligible for Future Sale."
The Company has agreed to register the 713,021 shares of Common Stock issued
in the Bridge Financings for resale commencing 18 months from the date of this
Prospectus.
In addition, pursuant to the terms of the Medica Acquisition, the Company
granted "piggy-back" registration rights with respect to the 104,167 shares of
Common Stock issued in connection therewith. Such shares of Common Stock shall
be included in any registration of Common Stock which occurs after this
offering, subject to certain restrictions.
Up to 250,000 additional shares of Common Stock may be purchased by the
Representative during the period commencing on the first anniversary of the date
of this Prospectus and terminating on the fifth anniversary of the date of this
Prospectus through the exercise of the Representative's Warrants. Any and all
securities purchased upon the exercise of the Representative's Warrants may be
freely tradeable, provided that the Company satisfies certain securities
registration and qualification requirements in accordance with the terms of the
Representative's Warrants. See "Underwriting."
46
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of the Underwriters, for which First Asset
Management, Inc. is acting as Representative, has severally, and not jointly,
agreed, to purchase the number of Shares offered hereby set forth opposite their
respective names below.
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------------------------------------------- ----------
First Asset Management, Inc..........................................................................
Total............................................................................................ 2,500,000
A copy of the Underwriting Agreement has been filed as an exhibit to the
Registration Statement, to which reference is hereby made. The Underwriting
Agreement provides that the obligations of the Underwriters to purchase the
Shares is subject to certain conditions. The Underwriters shall be obligated to
purchase all of the Shares (other than those covered by the Underwriters'
over-allotment option described below), if any are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the Shares to the public at the initial public offering price set forth on
the cover page of this Prospectus and that they may allow to certain dealers who
are members of the National Association of Securities Dealers, Inc. (the
"NASD"), and to certain foreign dealers, concessions not in excess of $
per Share, of which amount a sum not in excess of $ per Share may in
turn be reallowed by such dealers to other dealers who are members of the NASD
and to certain foreign dealers. After the commencement of this offering, the
offering price, the concession to selected dealers, and the reallowance to other
dealers may be changed by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or will
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company has agreed to pay to the Representative an expense allowance, on
a non-accountable basis, equal to 3% of the gross proceeds derived from the sale
of 2,500,000 Shares offered hereby (or 2,875,000 Shares if the Underwriters'
over-allotment option is exercised in full). The Company paid an advance on such
allowances in the amount of $25,000. The Company has also agreed to pay certain
of the Representative's expenses in connection with this offering, including
expenses in connection with qualifying the Shares offered hereby for sale under
the laws of such states as the Representative may designate and the placement of
tombstone advertisements.
In connection with this offering, the Company has granted the Representative
the right, for the three-year period commencing on the closing date of this
offering, to appoint an observer to attend all meetings of the Company's Board
of Directors. This designee has the right to notice of all meetings of the Board
of Directors and to receive reimbursement for all out-of-pocket expenses
incurred in attending such meetings. In addition, such designee will be entitled
to indemnification to the same extent as the Company's directors.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales of the Shares offered hereby to any account over which
they exercise discretionary authority.
The Company, its officers, directors, and stockholders, as well as the
holders of options under the Plan, have agreed not to offer, assign, issue,
sell, hypothecate, or otherwise dispose of any shares of Common Stock,
securities of the Company convertible into, or exercisable or exchangeable for,
shares of Common Stock, or shares of Common Stock received upon conversion,
exercise, or exchange of such
47
securities, to the public without the prior written consent of the
Representative for a period of 18 months from the date of this Prospectus.
Prior to this offering, there has been no public trading market for the
Common Stock. The initial public offering price for the Shares will be
determined by arms-length negotiations between the Company and the
Representative and does not necessarily bear any relationship to the Company's
book value, assets, past operating results, financial condition, or other
established criteria of value. Among the factors to be considered in such
negotiations will be prevailing market conditions, the history and prospects for
the Company and the industry in which the Company competes, an assessment of the
Company's management, its capital structure, and such other factors deemed
relevant.
The Company has also granted to the Underwriters an option, exercisable
during the 45-day period commencing on the date of this Prospectus, to purchase
at the public offering price per share, less the underwriting discounts and
commissions, up to an aggregate of 375,000 shares of Common Stock. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase additional shares of Common Stock proportionate
to such Underwriter's initial commitment as indicated in the preceding table.
The Underwriters may exercise such right of purchase only for the purpose of
covering over-allotments, if any, made in connection with the sale of Shares.
Purchases of shares of Common Stock upon exercise of the over-allotment option
will result in the realization of additional compensation by the Underwriters.
In connection with this offering, the Company has agreed to sell to the
Representative, individually and not as Representative of the several
Underwriters, at the price of $.001 per warrant, the Representative's Warrants
to purchase 250,000 shares of Common Stock. The Representative's Warrants are
exercisable for a period of four years commencing one year from the date of this
Prospectus at an exercise price per share (the "Exercise Price") equal to 110%
of the public offering price per share. The Representative's Warrants may not be
sold, transferred, assigned, pledged, or hypothecated for a period of 12 months
from the date of the Prospectus, except to members of the selling group and to
officers and partners of the Representative and members of the selling group.
The Representative's Warrants contain anti-dilution provisions providing for
adjustments of the Exercise Price and number of shares issuable on exercise of
the Representative's Warrants, upon the occurrence of certain events, including
stock dividends, stock splits, and recapitalizations. The holders of the
Representative's Warrants have no voting, dividend, or other rights as
stockholders of the Company with respect to shares of Common Stock underlying
the Representative's Warrants, unless the Representative's Warrants shall have
been exercised.
A new registration statement or post-effective amendment to the Registration
Statement will be required to be filed and declared effective before
distribution to the public of the Representative's Warrants and the Warrant
Shares. The Company has agreed, on one occasion during the period beginning one
year after the date of this Prospectus and ending four years thereafter, if
requested by the holders of a majority of the Representative's Warrants or
Warrant Shares, to make all necessary filings to permit a public offering of the
Representative's Warrants and Warrant Shares and to use its best efforts to
cause such filing to become effective under the Securities Act and to remain
effective for at least 12 months, at the Company's sole expense. Notwithstanding
the foregoing, the Company shall have no obligation to prepare and file such new
registration statement or post-effective amendment to the Registration Statement
if, within 20 days after it receives the request therefor, the Company or
insiders who own individually in excess of 2% of the Common Stock agree to
purchase the Representative's Warrants and/or the underlying securities from
such requesting holders at a price, in the case of the Representative's
Warrants, equal to the difference between the exercise price of the
Representative's Warrants and the current market price (as defined) of the
underlying securities. In addition, the Company has agreed to give advance
notice to holders of the Representative's Warrants and Warrant Shares of its
intention to file a registration statement, and in such case, holders of the
Representative's Warrants and the Warrant Shares shall have the right to require
the Company to include the Warrant Shares in such registration statement at the
Company's expense (subject to certain limitations).
48
During and after this offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in this offering for their
account may be reclaimed by the syndicate if such shares are repurchased by the
syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock
which may be higher than the price that might otherwise affect the market price
of the Common Stock, which may be higher than the price that might otherwise
prevail in the open market. Neither the Company nor any of the Underwriters
makes any representation or prediction as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions of that
such transactions, once commenced, will not be discontinued at any time.
The Company has granted the Representative, individually and not as the
Representative of the several Underwriters, a right of first refusal to act as
the Company's investment banker with respect to future financings or any merger,
acquisition, or disposition of assets of the Company for a period of two years
from the date of this Prospectus.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
49
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Brock
Silverstein McAuliffe LLC, New York, New York. Brock Silverstein McAuliffe LLC
renders legal services to the Representative in connection with matters other
than this offering and owns beneficially and of record an aggregate of 20,187
shares of Common Stock.
EXPERTS
The financial statements of the Company as of December 31, 1996 and for the
period from April 8, 1996 (inception) to December 31, 1996 and as of December
31, 1997 and for the year then ended, and the financial statements of Medica
Systems, Inc. as of December 31, 1996 and 1995 and for the years then ended, and
the period from May 1, 1994 to December 31, 1994 included in this Prospectus and
the Registration Statement have been audited by King Griffin & Adamson P.C.,
Dallas, Texas, independent certified public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon such
reports given upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington D.C. 20549, a registration statement on Form S-1 (the "Registration
Statement"), including amendments thereto, under the Exchange Act with respect
to the securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith, as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
Offering, reference is hereby made to the Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or other document which has been filed as an
exhibit to the Registration Statement are qualified in their entirety by
reference to such exhibits for a complete statement of their terms and
conditions. The Registration Statement and the exhibits and schedules thereto
may be inspected without charge at the offices of the Commission and copies of
all or any part thereof may be obtained from the Commission's principal office
at 450 Fifth Street, N.W., Washington D.C. 20549 or at certain of the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, upon payment of the fees prescribed by the Commission. Electronic
registration statements filed through the Electronic Data Gathering, Analysis,
and Retrieval system are publicly available through the Commission's Web site
(http://www.sec.gov). Following approval of the Common Stock for quotation on
the Nasdaq SmallCap-Registered Trademark- Market, reports and other information
concerning the Company may be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. Following approval of the Common Stock for listing on the Boston Stock
Exchange, reports and other information concerning the Company may be inspected
at the offices of such exchange located at One Boston Place, Boston,
Massachusetts 02108.
50
INDEX TO FINANCIAL STATEMENTS
PAGE
-----------
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Statement of Operations for the year ended December 31, 1997.................................... F-3
Unaudited Statement of Operations for the three month period ended March 31, 1998......................... F-4
CLAIMSNET.COM INC.
Report of Independent Certified Public Accountants.................................................... F-5
Financial Statements
Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (Unaudited).................... F-6
Statements of Operations for the period from April 8, 1996 (inception) to December 31, 1996, the
year ended December 31, 1997, and the three month periods ended March 31, 1997 and 1998
(Unaudited)........................................................................................ F-7
Statements of Changes in Stockholders' Deficit for the period from April 8, 1996 (inception) to
December 31, 1996, the year ended December 31, 1997, and the three month period ended March 31,
1998 (Unaudited)................................................................................... F-8
Statements of Cash Flows for the period from April 8, 1996 (inception) to December 31, 1996, the
year ended December 31, 1997, and the three month periods ended March 31, 1997 and 1998
(Unaudited)........................................................................................ F-9
Notes to Financial Statements for the period from April 8, 1996 (inception) to December 31, 1996,
the year ended December 31, 1997, and the three month periods ended March 31, 1997 and 1998
(Unaudited)........................................................................................ F-11
MEDICA SYSTEMS, INC.
Report of Independent Certified Public Accountants.................................................... F-19
Financial Statements
Balance Sheets as of December 31, 1996 and 1995................................................... F-20
Statements of Operations for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-21
Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1996 and
1995 and the period from May 1, 1994 (inception) to December 31, 1994.............................. F-22
Statements of Cash Flows for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-23
Notes to Financial Statements for the years ended December 31, 1996 and 1995
and the period from May 1, 1994 (inception) to December 31, 1994.................................. F-24
Unaudited Balance Sheet as of March 31, 1997...................................................... F-27
Unaudited Statement of Operations for the three months ended March 31, 1997....................... F-28
Unaudited Statement of Cash Flows for the three months ended March 31, 1997....................... F-29
Notes to Unaudited Financial Statements as of March 31, 1997...................................... F-30
F-1
CLAIMSNET.COM INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Effective June 2, 1997, Claimsnet.com inc. ("Claimsnet" or "Company")
completed an acquisition of Medica Systems, Inc. ("Medica"). The historical
financial statements prior to the acquisition transaction are those of
Claimsnet.
For accounting purposes, the acquisition of Medica is accounted for using
the purchase method of accounting. See Note C to the consolidated financial
statements for a more complete discussion.
The unaudited pro forma statements of operations for the year ended December
31, 1997 and the three months ended March 31, 1998 reflect the acquisition as if
the transaction were consummated on January 1, 1997, and the intended use of
proceeds from the proposed initial public offering.
The unaudited pro forma statements are not necessarily indicative of the
results that would have been reported had such events actually occurred on the
dates specified, nor is it necessarily indicative of the future results of the
combined entities. The unaudited pro forma statements of operations should be
read in conjunction with the separate historical financial statements of the
Company and Medica and related notes appearing elsewhere in this registration
statement.
F-2
CLAIMSNET.COM INC.
(FORMERLY AMERICAN NET CLAIMS, INC.)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(A)
MEDICA
HISTORICAL SYSTEMS, PRO FORMA PRO FORMA
1997 INC. ADJUSTMENTS 1997
------------- ------------ ----------- -------------
REVENUES $ 81,712 $ 325,944 $ -- $ 407,656
------------- ------------ ----------- -------------
OPERATING EXPENSES
Depreciation and amortization.................... 402,835 1,594 123,425(C) 527,854
Other............................................ 2,111,455 275,318 221,501(B) 2,608,274
------------- ------------ ----------- -------------
Total operating expenses....................... 2,514,290 276,912 344,926 3,136,128
INTEREST EXPENSE--affiliate........................ (389,548) -- 389,548(D) --
INTEREST INCOME.................................... 40,817 -- -- 40,817
------------- ------------ ----------- -------------
NET INCOME (LOSS) BEFORE TAXES..................... (2,781,309) 49,032 44,622 (2,687,655)
INCOME TAXES....................................... -- -- -- --
------------- ------------ ----------- -------------
NET LOSS........................................... $ (2,781,309) $ 49,032 $ 44,622 $ (2,687,655)
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
LOSS PER WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(basic and diluted).............................. $ (1.12) $ (0.54)
------------- -------------
------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (basic
and diluted)..................................... 2,481,047 4,981,047
------------- -------------
------------- -------------
- ------------------------
(A) To reflect the operations of Medica Systems, Inc. prior to its acquisition
on June 2, 1997.
(B) To reflect contractual salary increases, assuming the offering had been
completed on January 1, 1997.
(C) To reflect the amortization of software costs, assuming the Company had
acquired Medica Systems, Inc. on January 1, 1997.
(D) To reflect the reduction in interest expense resulting from the debt
reduction in accordance with the use of proceeds from the offering.
F-3
CLAIMSNET.COM INC.
(FORMERLY AMERICAN NET CLAIMS, INC.)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ------------
REVENUES................................................................. $ 42,978 $ -- $ 42,978
----------- ----------- ------------
OPERATING EXPENSES
Depreciation and amortization.......................................... 167,802 -- 167,802
Other.................................................................. 581,330 35,500(B) 616,830
----------- ----------- ------------
Total operating expenses............................................. 749,132 35,500 784,632
INTEREST EXPENSE--affiliate.............................................. (70,263) 70,263(A) --
INTEREST INCOME.......................................................... 1,820 -- 1,820
----------- ----------- ------------
NET INCOME (LOSS) BEFORE TAXES........................................... (774,597) 34,763 (739,834)
INCOME TAXES............................................................. -- -- --
----------- ----------- ------------
NET LOSS................................................................. $ (774,597) $ 34,763 $ (739,834)
----------- ----------- ------------
----------- ----------- ------------
LOSS PER WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING (basic and diluted).......................... $ (0.29) $ (0.14)
----------- ------------
----------- ------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (basic and diluted)................................. 2,708,333 5,416,667
- ------------------------
(A) To reflect the reduction in interest expense resulting from the debt
reduction in accordance with the use of proceeds from the offering.
(B) To reflect contractual salary increases, assuming the offering had been
completed on January 1, 1998.
F-4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
After the change in common stock from no par value to a par value of $0.001
per share concurrently with the reincorporation of the Company in the State of
Delaware, the 1 for 2.88 reverse stock split of the common stock, and completion
of the private placement, as discussed in Note L to the Claimsnet.com inc.
consolidated financial statements are effected, we expect to be in a position to
render the following audit report.
KING GRIFFIN & ADAMSON P.C.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Claimsnet.com inc.
(formerly American NET Claims, Inc.)
We have audited the accompanying consolidated balance sheets of
Claimsnet.com inc. (formerly American NET Claims, Inc.) and subsidiary as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' deficit, and cash flows for the year ended December 31, 1997 and
the period from April 8, 1996 (inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in that balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Claimsnet.com inc. and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for the year ended December 31, 1997 and the period from
April 8, 1996 (inception) to December 31, 1996, in conformity with generally
accepted accounting principles.
KING GRIFFIN & ADAMSON P.C.
Dallas, Texas
February 21, 1998, except for Note L for which the date is .
F-5
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash...................................................................... $ 15,659 $ 394,913 $ 67,723
Accounts receivable net of allowance for doubtful accounts of $10,000..... -- 13,240 43,749
Employee receivable....................................................... -- 3,000 1,000
Prepaid assets............................................................ -- 8,176 --
----------- ----------- -----------
Total current assets.................................................... 15,659 419,329 112,472
----------- ----------- -----------
FIXED ASSETS
Computer hardware and software............................................ 29,135 184,971 188,571
Furniture and fixtures.................................................... -- 3,519 3,519
Office equipment.......................................................... -- 24,694 24,694
----------- ----------- -----------
29,135 213,184 216,784
Accumulated depreciation and amortization................................. -- (18,620) (29,637)
----------- ----------- -----------
Total fixed assets...................................................... 29,135 194,564 187,147
----------- ----------- -----------
OTHER ASSETS
Software development costs net of accumulated amortization of $398,535 and
$555,320 at December 31, 1997 and March 31, 1998, respectively.......... 831,869 1,524,001 1,367,216
Deferred offering costs................................................... 101,669 36,703 88,953
----------- ----------- -----------
Total other assets...................................................... 933,538 1,560,704 1,456,169
----------- ----------- -----------
TOTAL ASSETS................................................................ $ 978,332 $ 2,174,597 $ 1,755,788
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable.......................................................... $ -- $ 98,278 $ 52,636
Accrued expenses.......................................................... -- 159,849 172,894
Contingent payable........................................................ -- 125,000 125,000
----------- ----------- -----------
Total current liabilities............................................... -- 383,127 350,530
----------- ----------- -----------
LONG-TERM LIABILITIES
Line of credit--affiliate................................................. 510,250 695,650 1,013,773
Note payable--affiliate................................................... 3,740,000 2,000,000 2,000,000
Notes payable............................................................. -- 225,000 225,000
Accrued interest--affiliate............................................... 158,123 547,670 617,932
----------- ----------- -----------
Total long-term liabilities............................................. 4,408,373 3,468,320 3,856,705
----------- ----------- -----------
TOTAL LIABILITIES........................................................... 4,408,373 3,851,447 4,207,235
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes A, C, D, H, I, J and L)
STOCKHOLDERS' DEFICIT
Preferred stock--$.001 par value; 5,000,000 shares authorized; no shares
issued or outstanding...................................................
Common stock--$.001 par value; 40,000,000 shares authorized; 2,708,333 and
2,059,106 shares issued and outstanding, respectively................... 2,059 2,708 2,708
Additional paid-in capital................................................ (3,125,059) 1,407,792 1,407,792
Accumulated deficit....................................................... (306,041) (3,087,350) (3,861,947)
----------- ----------- -----------
(3,429,041) (1,676,850) (2,451,447)
Less note receivable for shares........................................... (1,000) -- --
----------- ----------- -----------
TOTAL STOCKHOLDERS' DEFICIT................................................. (3,430,041) (1,676,850) (2,451,447)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT................................. $ 978,332 $ 2,174,597 $ 1,755,788
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM APRIL 8, 1996 (INCEPTION) TO DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1997, AND THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
THREE MONTHS ENDED MARCH
PERIOD ENDED YEAR ENDED 31,
DECEMBER 31, DECEMBER 31, --------------------------
1996 1997 1997 1998
------------- ------------- ------------ ------------
REVENUES................................................ $ -- $ 81,712 $ -- $ 42,978
COST OF REVENUES........................................ -- 250,889 -- 138,318
------------- ------------- ------------ ------------
GROSS LOSS.............................................. -- (169,177) -- (95,340)
------------- ------------- ------------ ------------
OPERATING EXPENSES
Research and development.............................. -- 461,245 4,260 142,188
Software amortization................................. -- 402,835 7,198 161,788
Selling, general and administrative................... 147,918 1,399,321 177,439 306,838
------------- ------------- ------------ ------------
LOSS FROM OPERATIONS.................................... (147,918) (2,432,578) (188,897) (706,154)
------------- ------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense--affiliate........................... (158,123) (389,548) (118,985) (70,263)
Interest income....................................... -- 40,817 -- 1,820
------------- ------------- ------------ ------------
Total Other Income (Expense)........................ (158,123) (348,731) (118,985) (68,443)
------------- ------------- ------------ ------------
NET LOSS................................................ $ (306,041) $ (2,781,309) $ (307,882) $ (774,597)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
BASIC LOSS PER SHARE.................................... $ (0.15) $ (1.12) $ (0.15) $ (0.29)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
DILUTED LOSS PER SHARE.................................. $ (0.15) $ (1.12) $ (0.15) $ (0.29)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Basic and
diluted).............................................. 2,047,234 2,481,047 2,061,798 2,708,333
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
PERIOD FROM APRIL 8, 1996 (INCEPTION) TO DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1997, AND THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
ADDITIONAL
NUMBER OF COMMON PAID-IN NOTE ACCUMULATED
SHARES STOCK CAPITAL RECEIVABLE DEFICIT
---------- ----------- ------------- ----------- -------------
April 8,1996--Issuance of common stock at
inception..................................... 2,038,919 $ 2,039 $ (1,039) $ -- $ --
Issuance of common stock for note............... 20,187 20 980 (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................... 2,059,106 2,059 (3,125,059) (1,000) (306,041)
---------- ----------- ------------- ----------- -------------
Issuance of stock for compensation.............. 40,375 40 78,460 -- --
Net loss for the three months ended March 31,
1997.......................................... -- -- -- -- (307,882)
---------- ----------- ------------- ----------- -------------
Balances at March 31, 1997...................... 2,099,481 2,099 (3,046,599) (1,000) (613,923)
---------- ----------- ------------- ----------- -------------
Issuance of stock for cash pursuant to PPM...... 504,685 505 2,249,495 -- --
Issuance of stock related to the purchase of
Medica........................................ 104,167 104 464,896 -- --
AMF capital contribution........................ -- -- 1,740,000 1,000 --
Net loss for the nine month period from April 1,
1997 through December 31, 1997................ -- -- -- -- (2,473,427)
---------- ----------- ------------- ----------- -------------
Balances at December 31, 1997................... 2,708,333 2,708 1,407,792 -- (3,087,350)
---------- ----------- ------------- ----------- -------------
Net loss for the three months ended March 31,
1998.......................................... -- -- -- -- (774,597)
---------- ----------- ------------- ----------- -------------
Balances at March 31, 1998...................... 2,708,333 $ 2,708 $ 1,407,792 $ -- $ (3,861,947)
---------- ----------- ------------- ----------- -------------
---------- ----------- ------------- ----------- -------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM APRIL 8, 1996 (INCEPTION) TO DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1997, AND THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
THREE MONTHS
PERIOD ENDED YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------------
1996 1997 1997 1998
------------ ------------- ----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss.................................................. $ (306,041) $ (2,781,309) $ (307,882) $ (774,597)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization......................... -- 417,155 8,957 167,802
Common stock issued for compensation.................. -- 78,500 78,500 --
Allowance for doubtful accounts....................... -- 10,000 -- --
Offering costs written off............................ -- 101,669 -- --
Changes in assets and liabilities net of effects of
acquisition:
(Increase) decrease in accounts receivable and
employee receivable............................... -- 93,069 -- (28,509)
(Increase) decrease in prepaid expenses............. -- (10,988) -- 8,176
Increase (decrease) in accounts payable and other
current liabilities............................... -- 118,776 18,748 (32,598)
Increase in accrued interest........................ 158,123 389,549 118,985 70,263
------------ ------------- ----------- -----------
Net cash used by operating activities................. (147,918) (1,583,579) (82,692) (589,463)
------------ ------------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Cash in acquired subsidiary............................... -- 15,664 -- --
Cash paid to acquire subsidiary........................... -- (100,000) -- --
Purchases of property and equipment....................... (29,135) (159,355) (6,379) (3,600)
Software development costs................................ (216,869) (193,173) (177,184) --
------------ ------------- ----------- -----------
Net cash used in investing activities................. (246,004) (436,864) (183,563) (3,600)
------------ ------------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Increase in line of credit--affiliate..................... 510,250 185,400 266,820 318,123
Payments for deferred offering costs...................... (101,669) (36,703) -- (52,250)
Proceeds from common stock issuances...................... 1,000 2,251,000 -- --
------------ ------------- ----------- -----------
Net cash provided by financing activities............. 409,581 2,399,697 266,820 265,873
------------ ------------- ----------- -----------
NET INCREASE IN CASH...................................... 15,659 379,254 565 (327,190)
Cash--beginning balance................................... -- 15,659 15,659 394,913
------------ ------------- ----------- -----------
Cash--ending balance...................................... $ 15,659 $ 394,913 $ 16,224 $ 67,723
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
F-9
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PERIOD FROM APRIL 8, 1996 (INCEPTION) TO DECEMBER 31, 1996,
THE YEAR ENDED DECEMBER 31, 1997, AND THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
THREE MONTHS
PERIOD ENDED YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ------------------------
1996 1997 1997 1998
------------ ------------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Purchase of asset from affiliate--net..................... $ 615,000 $ -- $ -- $ --
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
Common stock issued for compensation...................... $ -- $ 78,500 $ 78,500 $ --
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
Common stock issued for acquisition of subsidiary......... $ -- $ 465,000 $ -- $ --
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
Other liabilities incurred for acquisition of
subsidiary.............................................. $ -- $ 57,798 $ -- $ --
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
Conversion of portion of note payable--affiliate to
equity.................................................. $ -- $ 1,740,000 $ -- $ --
------------ ------------- ----------- -----------
------------ ------------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1998
AND FOR EACH THREE MONTH PERIOD THEN ENDED)
NOTE A--ORGANIZATION AND BACKGROUND
Claimsnet.com inc. ("Claimsnet.com" or the "Company") was incorporated in
the state of Texas on April 8, 1996 as American Net Claims, Inc. Effective
February 3, 1997, the Company assumed the name Claimsnet.com in the state of
Texas. The Company was formed for the purpose of completing the development of
and marketing software used for processing medical insurance claims on the
Internet.
On July 31, 1996, the Company acquired all the Internet software, licenses,
intellectual property rights and technology developed by an affiliated company,
American Medical Finance, Inc. ("AMF"). AMF is affiliated through common
stockholders, and as a stockholder of the Company. On June 2, 1997, the Company
acquired Medica Systems, Inc., which owned the CyberClaim software source code
previously licensed to the Company for use in conjunction with the software
purchased from AMF. (See Note C) The acquisition was completed through a merger
with a newly created, wholly-owned subsidiary, ANC Holdings, Inc. which is the
surviving corporation in the merger.
The Company has generated losses of $2,781,309, $306,041 and $774,597 during
the year ended December 31, 1997, the period from its inception (April 8, 1996)
to December 31, 1996, and the three months ended March 31, 1998, respectively.
During these same periods, the Company used cash in its operations of
$1,583,579, $147,918 and $589,463, respectively. Through the date of this
report, the Company has generated minimal revenues and has relied on private
equity placement proceeds and financing from an affiliate to fund its operations
and development activities. At December 31, 1997 and March 31, 1998 liabilities
significantly exceed assets.
On , 1998, the Company completed a private equity placement for
which the Company received net proceeds of approximately $950,000. 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 $12,650,000 (excluding underwriters overallotment
options), although no assurance can be given that such offering will be
successful. In addition, as discussed in Note C, the contingent payable of
$125,000 and notes payable of $225,000 due to the prior shareholders of Medica
are due only after the successful completion of an initial public offering.
Based on the above and managements belief that additional equity and debt
financing can be raised, management believes that the Company has the ability to
continue its business through December 31, 1998.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of 3 months or less when purchased.
SOFTWARE
Financial Accounting Standard No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," provides for the
capitalization of certain costs related to development of
F-11
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1998
AND FOR EACH THREE MONTH PERIOD THEN ENDED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
computer software products. Gross internally developed capitalized software
costs at December 31, 1997 and March 31, 1998 totaled $395,322. Capitalized
computer software costs include direct labor, labor-related overhead costs and
interest. The software will be amortized over its expected useful life of 3
years after it is placed in service. Amortization expense related to developed
software since the product was introduced in 1997 totaled $398,535 and $161,788
at December 31, 1997 and March 31, 1998 respectively. Management periodically
evaluates the recoverability, valuation, and amortization of capitalized
software cost. As part of this review, management considers the undiscounted
projected future net earnings. If the undiscounted future net earnings is less
than the stated value, software costs will be written down to fair value.
REVENUE
Revenue is recognized at the point at which the processing of an insurance
claim is completed.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is provided using the straight
line method over the estimated useful lives of the depreciable assets which
range from the three to seven years. Maintenance and repairs are expensed as
incurred. Replacements and betterments are capitalized. Depreciation and
amortization related to fixed assets totaled $18,620 and $11,017 for the year
ended December 31, 1997 and the three months ended March 31, 1998, respectively.
DEFERRED OFFERING COSTS
Deferred offering costs are capitalized and will be recorded as a reduction
to stockholders' equity upon completion of the Company's Offering or expensed if
the Offering is unsuccessful.
CONSOLIDATION
The accompanying financial statements include the amounts of Claimsnet.com
inc. and its subsidiary from the date of acquisition. All material intercompany
accounts and transactions from that date have been eliminated in consolidation.
INCOME TAXES
The Company accounts for income taxes in accordance with the asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
F-12
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1998
AND FOR EACH THREE MONTH PERIOD THEN ENDED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share", in 1997, which
requires the disclosure of basic and diluted net income (loss) per share. Basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares and common stock equivalents
outstanding for the period. The Company has no common stock equivalents or
dilutive securities outstanding. As such, diluted and primary loss per share is
identical. Net loss per share has been stated for all periods presented in
accordance with SFAS No. 128.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
RECENT ACCOUNTING PROCUMENTS
In June 1997, the Financial Accounting Standards Board issued two new
statements: SFAS No. 130, "Reporting Comprehensive Income," which requires
enterprises to report, by major component and in total, all changes in equity
from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes annual and interim
reporting standards for a public company's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the Company's fiscal year ended December 31,
1998, with earlier application permitted. The effect of adoption of these
statements, if any, will be limited to the form and content of the Company's
disclosures and will not impact the Company's results of operations or financial
position.
RECLASSIFICATION
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
NOTE C--MEDICA SYSTEMS, INC. ACQUISITION
On June 2, 1997, the Company completed the acquisition of Medica Systems,
Inc. ("Medica"), giving the Company ownership of the underlying source code of a
software program which processes medical insurance claims. The software was
previously licensed from Medica under a software licensing agreement. The
transaction was accounted for as a purchase. The Company received all of the
outstanding stock of Medica in exchange for a purchase price of $972,798 which
consisted of $100,000 cash at closing, 104,167 shares of the Company's common
stock, a contingent cash payment of $125,000 due within 60 days of closing an
initial public offering, a note for $225,000 due one year from the closing of an
initial public offering, and 50% of the amounts collected relating to the
accounts receivable of Medica existing on the
F-13
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1998
AND FOR EACH THREE MONTH PERIOD THEN ENDED)
NOTE C--MEDICA SYSTEMS, INC. ACQUISITION (CONTINUED)
closing date. The fair value of the common stock given as consideration in the
transaction totaled $465,000 or $4.46 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.
NOTE D--LINE OF CREDIT AND NOTES PAYABLE
The Company has a line of credit facility with AMF of up to $950,000. At
December 31, 1997 and 1996, and March 31, 1998, advances under the line of
credit were $695,650, $510,250 and $1,013,773, respectively. The line of credit
bears interest at 9.50%, is due on October 1, 1999, and is collaterized by all
of the assets of the Company, other than that collateral specified by note
payable to AMF below.
The Company has a note payable to AMF of $2,000,000 at December 31, 1997 and
March 31, 1998 and $3,740,000 at December 31, 1996 (see Note H). The note bears
interest at 9.5%, is due on May 1, 1998, and is collaterized by all Internet
software and technology of the Company including software development costs.
Accrued interest at December 31, 1997 and 1996 and March 31, 1998, under the
note and line of credit with AMF totaled $547,670, $158,123 and $617,932,
respectively, and is due on October 1, 1999.
Notes payable at December 31, 1997 and March 31, 1998 relate to debt
incurred in conjunction with the purchase of Medica (see Note C). The notes are
unsecured, due one year from the completion of an initial public offering, and
bear interest at 8% which will begin to accrue once the Offering is completed.
NOTE E--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate.
The note payable and the line of credit (both amounts are fixed rate debt)
have a carrying amount of $2,695,650 and $3,013,773 at December 31, 1997 and
March 31, 1998, respectively, and a fair value of approximately the same amount.
The fair value of the Company's fixed rate debt has been estimated based upon
relative changes in the Company's variable borrowing rates since origination of
the fixed rate debt.
NOTE F--CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments subject to credit risk consist primarily of cash
deposits which are at risk to the extent that they exceed Federal Deposit
Insurance Corporation insured amounts. At December 31, 1997, such uninsured
amounts totaled approximately $343,000 which are at risk in the event that the
financial institutions are unable to continue business. To minimize this risk,
the Company places its cash and cash equivalents with high credit quality
financial institutions.
F-14
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1998
AND FOR EACH THREE MONTH PERIOD THEN ENDED)
NOTE F--CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS (CONTINUED)
For the year ended December 31, 1997, one customer acquired as part of the
Medica Acquisition guaranteed revenue of $51,011, representing 62% of the
Company's total revenue for the year. The Company has subsequently cancelled its
contract with this customer.
NOTE G--INCOME TAXES
Deferred tax assets and liabilities at December 31, 1996 and 1997 are as
follows:
1996 1997
---------- -------------
Current deferred tax asset............................................................. -- $ 3,697
Non-current deferred tax asset......................................................... 150,730 1,289,723
Non-current deferred tax liability..................................................... (37,587) (136,490)
Valuation allowance.................................................................... (113,143) (1,156,930)
---------- -------------
Net non-current deferred taxes......................................................... $ -- $ --
---------- -------------
---------- -------------
The non-current deferred tax liability results from deferred offering costs
deducted for income tax purposes and deferred for financial reporting purposes.
The non-current deferred tax asset results from the net operating loss generated
by the Company. The net deferred tax asset has a 100% valuation allowance
recorded against it due to the uncertainty of generating future taxable income.
The Company's effective income tax rate differed from the Federal statutory
rate of 34% as follows:
1996 1997
----------- -------------
Statutory rate of 34% applied to net loss............................................. $ 104,054 $ 945,645
Permanent difference.................................................................. -- 14,289
State income taxes, net of federal tax effect......................................... -- 83,853
Change in valuation allowance......................................................... (104,054) (1,043,787)
----------- -------------
$ -- $ --
----------- -------------
----------- -------------
At December 31, 1997, the Company has a net operating loss carryforward of
approximately $3,490,000 which begins to expire in 2011.
NOTE H--RELATED PARTY TRANSACTIONS
On July 31, 1996, the Company purchased software, licenses, intellectual
property rights and technology from AMF. As the software was purchased from a
related entity, the asset was recorded by the Company at the basis (in
accordance with Generally Accepted Accounting Principles) of AMF. Accordingly,
the asset was recorded at $615,000 with a corresponding note payable to AMF of
$3,740,000. The difference between the recorded cost of the asset and the note
payable of $3,125,000 is reflected as a contra to additional paid-in capital (a
deemed distribution). The asset was recorded at the net book value per the
affiliates records.
F-15
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1998
AND FOR EACH THREE MONTH PERIOD THEN ENDED)
NOTE H--RELATED PARTY TRANSACTIONS (CONTINUED)
On September 23, 1997, AMF agreed to reduce its note receivable from the
Company by $1,740,000. The reduction in the note was recorded as a capital
contribution by AMF and effectively reduces the $3,125,000 contra to paid-in
capital described above.
The Company has a note payable and a line of credit facility with AMF (see
Note D).
The Company entered into an agreement with AMF, dated which allows
for extending the due date on all amounts due to AMF to , should the
Company be unable to repay amounts due to AMF in accordance with the current
terms.
Certain of the Company's expenses were paid by AMF and represent costs such
as rent, printing and office supplies. All such expenses were accounted for as
increases in the line of credit and comprise a significant portion of the
increase in 1997 and 1996.
The relationship with AMF could result in operating results or financial
position significantly different from that which would have been obtained if the
entities were autonomous.
NOTE I--STOCKHOLDERS' DEFICIT
During 1997, the Company raised $2,250,000 in gross proceeds under a private
placement memorandum which closed on May 7, 1997. The Company sold 45 units,
each unit consisting of 11,215 shares of common stock at $50,000 per unit, which
totaled 504,685 shares.
On May 15, 1997, the Board of Directors authorized a 2.325577789 for 1 split
in common shares and an increase in authorized common shares to 40,000,000. In
addition, as discussed in Note J, on the Board authorized a 1 for 2.88
reverse split in common shares and the change in common stock from no par value
to a par value of $0.001 per share concurrent with the reincorporation of the
Company in the state of Delaware. The financial statements, including all
references to the number of shares of common stock and all per share
information, have been adjusted on a retroactive basis to reflect these equity
transactions.
NOTE J--COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with several key
employees. The agreements generally provide for an annual base salary, incentive
compensation and termination provisions. Certain of the provisions are
contingent upon the completion of an initial public offering. The agreements are
for
F-16
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1998
AND FOR EACH THREE MONTH PERIOD THEN ENDED)
NOTE J--COMMITMENTS AND CONTINGENCIES (CONTINUED)
terms ranging from two to five years. The minimum commitments under the
agreements are set forth in the following table.
CONTINGENT
COMMITMENTS COMMITMENTS
------------- -------------
1998............................................................ 268,750 156,250
1999............................................................ 175,000 250,000
2000............................................................ 72,917 250,000
2001............................................................ -- 250,000
2002............................................................ -- 250,000
Compensation expense of $78,500 related to common stock issued under these
agreements is included in the statement of operations for the year ended
December 31, 1997.
In December 1997, the Company entered into an agreement with American
Airlines, Inc. (AA) to allow the Company to purchase miles in the AAdvantage
Incentive Miles (AAIM) program for the purpose of rewarding new customers of the
Company. In January 1998 the Company extended an offer to new providers who
enroll with the Company before June 30, 1998 and who submit 1,000 commercial
insurance claims by December 31, 1998 with a one-time reward of 10,000 AAIM
miles. A similar reward of 10,000 AAIM miles may also be rewarded to the
provider's designated billing administrator, with certain limitations. Further,
the Company will reward the provider with one additional AAIM mile for each
commercial claim in excess of 1,000 submitted by December 31, 1998. At December
31, 1997 there was no material financial commitment to AA. The Company will
accrue the estimated cost of the reward program as eligible claims are submitted
by participants.
NOTE K--STOCK OPTION PLAN
In April, 1997, the Board of Directors adopted the 1997 Stock Option Plan
(the "1997 Plan"). The Plan authorizes the grant of options to employees,
officers, directors, and consultants to purchase up to 750,000 shares of common
stock. At December 31, 1997 and March 31, 1998 no options had been granted under
the Plan.
NOTE L--SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company signed a letter of intent with
an underwriter for the completion of an initial public offering (IPO). In
conjunction with the IPO, on , the Company reincorporated under the laws
of the state of Delaware under the name Claimsnet.com inc., changing the par
value of the Company's common stock to $0.001. In addition, effective ,
the Board of Directors approved a 1 for 2.88 reverse split of the Company's
common stock.
In January 1998, the Company increased its credit line with AMF to
$1,500,000. At March 31,1998, advances under such line of credit were
approximately $1,014,000.
F-17
CLAIMSNET.COM INC. AND SUBSIDIARY
(FORMERLY AMERICAN NET CLAIMS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
(UNAUDITED WITH RESPECT TO MARCH 31, 1997 AND 1998
AND FOR EACH THREE MONTH PERIOD THEN ENDED)
NOTE L--SUBSEQUENT EVENTS (CONTINUED)
On , the Company issued a private placement memorandum to sell 20
units, each unit consisting of 10,417 shares of the Company's common stock at
$50,000 per unit. As of April , 1998, the Company has sold all 20 units
totaling $1,000,000 in gross proceeds. The private placement units were
purchased by institutional investment trusts that also participated in
the Company's 1997 private placement (See Note I). The proceeds, net of offering
costs, if any, will be recorded as common stock and additional paid-in capital.
During March 1998, the Company agreed to loan $25,000 to a key employee at
6% interest. The principal and interest is due at the earlier of five years from
the date the loan is made, or upon the sale of any shares of the Company's
common stock by the employee, or twelve months from the date upon which
employment ceases.
In April, 1998, the Board of Directors amended the 1997 Stock Option Plan
(the "1997 Plan") to authorize the grant of options to purchase up to 500,000
shares of common stock.
In April, 1998, the Board of Directors adopted the Non-Employees and
Directors Plan (the "Directors Plan"). The Directors Plan authorized the grant
of options to outside directors to purchase up to 100,000 shares of common
stock.
During April 1998, the Company granted two employees options to purchase an
aggregate of 150,000 shares of common stock at a price equal to the IPO price,
pursuant to the 1997 Stock Option Plan, as amended.
On May , 1998, the Company entered into a demand note agreement with
Sterling National Bank in the amount of $3,620,000. The note bears interest at
1% above the bank's base loan rate. The proceeds of the note were used to
purchase a certificate of deposit in the amount of $3,620,000 in the name of AMF
to repay the note payable, line of credit and accrued interest due to AMF (See
Note D). AMF has pledged the certificate of deposit as security for the demand
note. In addition, the Company has purchased and pledged a certificate of
deposit in the amount of $40,000 to secure the note.
F-18
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
MEDICA SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
--------- ---------
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
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements.
F-20
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
1996 1995 1994
---------- ---------- ---------
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
---------- ---------- ---------
---------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
F-21
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
RETAINED
EARNINGS
NUMBER OF COMMON (ACCUMULATED
SHARES STOCK DEFICIT)
------------- --------- -------------
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)
--- --------- -------------
--- --------- -------------
The accompanying notes are an integral part of these financial statements.
F-22
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
1996 1995 1994
--------- ---------- ---------
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
--------- ---------- ---------
--------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
F-23
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 provided using the straight line
method over the estimated useful lives of the software of five years.
INCOME TAXES
The Company accounts for income taxes in accordance with the asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
REVENUE RECOGNITION
Revenue relating to services is recognized upon completion of services,
which are usually completed within one fiscal year. Payments for services
received in advance are deferred and recognized when services have been
rendered.
USE OF ESTIMATES AND ASSUMPTIONS
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could vary from the estimates that were
used.
F-24
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
NOTE C--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments", requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate. All
financial assets and liabilities are current and have carrying amounts and fair
values of approximately the same amount.
NOTE D--INCOME TAXES
Deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows:
1996 1995
--------- ---------
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)
--------- ---------
--------- ---------
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:
1996 1995 1994
--------- ---------- ---------
Federal:
Current...................................................... $ 1,011 $ 129 $ --
Deferred..................................................... 6,904 (10,908) 1,975
--------- ---------- ---------
$ 7,915 $ (10,779) $ 1,975
--------- ---------- ---------
--------- ---------- ---------
The Company's effective income tax rate differed from the Federal statutory
rate of 15% as follows:
1996 1995 1994
--------- ---------- ---------
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
--------- ---------- ---------
--------- ---------- ---------
F-25
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
MAY 1, 1994 (INCEPTION) TO DECEMBER 31, 1994
NOTE E--CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company's business activities are primarily with customers located
within the state of Texas. During 1996, four customers accounted for
approximately 96% of revenues. One of the customers, American Medical Finance,
Inc. ("AMF"), accounted for 22% of the revenues for 1996. The remaining three
customers accounted for 39%, 22% and 13%, respectively. AMF is an affiliate of
ANC (See Note G). At December 31, 1996, one customer comprised approximately 43%
of trade accounts receivable. The Company has recorded an allowance of $24,000
related to this receivable. A second customer, AMF, comprised approximately 29%
of trade accounts receivable. Management evaluates accounts receivable balances
on an on-going basis and provides allowances as necessary for amounts estimated
to eventually become uncollectible. In the event of complete non- performance of
accounts receivable, the maximum exposure to the Company is the recorded amount
shown on the balance sheet.
NOTE F--COMMITMENT
The Company entered into a lease for office space in November, 1996 which
expires in April, 1997. Minimum lease payments under this lease for 1997 total
$3,500.
NOTE G--SUBSEQUENT EVENTS
The Company was involved in litigation which was settled subsequent to
December 31, 1996. In terms of the settlement, the Company is obligated to pay
$50,000. This amount was accrued and has been reflected as legal settlement
expense for the year ended December 31, 1996.
On May 30, 1997, the Company was acquired by American Net Claims, Inc.
("ANC") in exchange for cash, notes and common stock of ANC.
F-26
MEDICA SYSTEMS, INC.
BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
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
---------
---------
The accompanying notes are an integral part of these financial statements.
F-27
MEDICA SYSTEMS, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
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
---------
---------
The accompanying notes are an integral part of these financial statements.
F-28
MEDICA SYSTEMS, INC.
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
CASH FLOWS PROVIDED BY IN OPERATING ACTIVITIES
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
---------
The accompanying notes are an integral part of these financial statements.
F-29
MEDICA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997 (UNAUDITED)
NOTE A--INTERIM INFORMATION
Interim information is unaudited; however, in the opinion of the Company's
management, all adjustments necessary for a fair statement of interim results
have been included in accordance with Generally Accepted Accounting Principles.
All adjustments are of a normal recurring nature. The results for interim
periods are not necessarily indicative of results to be expected for the entire
year. These financial statements and notes should be read in conjunction with
the Company's annual financial statements and the notes thereto for the fiscal
year ended December 31, 1996.
NOTE B--SUBSEQUENT EVENT
On June 2, 1997, the Company was acquired by American Net Claims, Inc.
("ANC") in exchange for cash, notes and common stock of ANC.
F-30
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
PAGE
---------
PROSPECTUS SUMMARY.............................. 3
RISK FACTORS.................................... 7
USE OF PROCEEDS................................. 18
DILUTION........................................ 19
CAPITALIZATION.................................. 20
DIVIDEND POLICY................................. 21
SELECTED FINANCIAL DATA......................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 23
BUSINESS........................................ 26
MANAGEMENT...................................... 34
PRINCIPAL STOCKHOLDERS.......................... 41
CERTAIN TRANSACTIONS............................ 42
DESCRIPTION OF SECURITIES....................... 43
SHARES ELIGIBLE FOR FUTURE SALE................. 46
UNDERWRITING.................................... 47
LEGAL MATTERS................................... 50
EXPERTS......................................... 50
ADDITIONAL INFORMATION.......................... 50
FINANCIAL STATEMENTS............................ F-1
------------------------
UNTIL , 1998 (25 DAYS AFTER THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FIRST ASSET
MANAGEMENT, INC.
[LOGO]
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby,
excluding the underwriters' discounts and commissions (items marked with an
asterisk (*) represent estimated expenses):
SEC Registration Fee........................................... $ 5,727.00
Legal Fees and Expenses........................................ 200,000.00*
Blue Sky Fees (including counsel fees)......................... 35,000.00*
NASD Filing Fees............................................... 4,272.00
Listing Fees................................................... 20,000.00*
Accounting Fees and Expenses................................... 35,000.00*
Transfer Agent and Registrar Fees.............................. 5,000.00*
Printing and Engraving Expenses................................ 60,000.00
Miscellaneous.................................................. 35,001.00
----------
Total...................................................... $400,000.00*
----------
----------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware General Corporation Law, Section 102(b)(7), enables a corporation
in its original certificate of incorporation, or an amendment thereto validly
approved by stockholders, to eliminate or limit personal liability of members of
its Board of Directors for violations of a director's fiduciary duty of care.
However, the elimination or limitation shall not apply where there has been a
breach of the duty of loyalty, failure to act in good faith, intentional
misconduct or a knowing violation of a law, the payment of a dividend or
approval of a stock repurchase which is deemed illegal or an improper personal
benefit is obtained. The Company's Certificate of Incorporation includes the
following language:
"The personal liability of the Directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of Subsection (b) of
Section 102 of the General Corporation Law of the State of Delaware as the same
may be amended and supplemented."
Delaware General Corporation Law, Section 145, permits a corporation
organized under Delaware law to indemnify directors and officers with respect to
any matter in which the director or officer acted in good faith and in a manner
he reasonably believed to be not opposed to the best interests of the Company,
and, with respect to any criminal action, had reasonable cause to believe his
conduct was lawful. Article VII, Section 7 of the By-laws of the Company
provides as follows:
"The corporation shall indemnify its officers, directors, employees, and
agents to the extent permitted by the General Corporation Law of Delaware."
Article 11 of the Certificate of Incorporation of the Company, as amended,
permits indemnification of, and advancement of expenses to, among others,
officers and directors of the Corporation. Such Article provides as follows:
"(a) Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director, officer, employee, or
agent of the Corporation or any of its direct or indirect subsidiaries or is or
was serving at the request of the 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
II-1
an "indemnitee"), whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee, or agent or in any other
capacity while serving as a director, officer, employee, or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability, and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith, and such indemnification shall continue as
to an indemnitee who has ceased to be a director, officer, employee, or agent
and shall inure to the benefit of the indemnitee's heirs, executors, and
administrators; provided, however, that, except as provided in paragraph (c) of
this Article 11 with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
"(b) The right to indemnification conferred in paragraph (a) of this Article
11 shall include the right to be paid by the Corporation the expenses incurred
in defending any proceeding for which such right to indemnification is
applicable in advance of its final disposition (hereinafter an "advancement of
expenses"); provided, however, that, if the Delaware General Corporation Law
requires, an advancement of expenses incurred by an indemnitee in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not entitled
to be indemnified for such expenses under this Article 11 or otherwise.
"(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article 11 shall be contract rights.
If a claim under paragraph (a) or (b) of this Article 11 is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by an indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article 11 or otherwise, shall be on the Corporation.
II-2
"(d) The rights to indemnification and to the advancement of expenses
conferred in this Article 11 shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, this certificate of
incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
"(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, or agent of the Corporation or
another corporation, partnership, joint venture, trust, or other enterprise
against any expense, liability, or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability, or loss
under the Delaware General Corporation Law.
"(f) The Corporation's obligation, if any, to indemnify any person who was
or is serving as a director, officer, employee, or agent of any direct or
indirect subsidiary of the Corporation or, at the request of the Corporation, of
any other corporation or of a partnership, joint venture, trust, or other
enterprise shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
or other enterprise.
"(g) Any repeal or modification of the foregoing provisions of this Article
11 shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification."
Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1
to the Registration Statement for certain provisions regarding indemnification
of the Company, its officers and directors, and any controlling persons by the
Underwriters against certain liabilities for information furnished by the
Underwriters.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is information regarding the numbers
of shares of Common Stock sold by the Company, the number of options issued by
the Company, and the principal amount of debt instruments issued by the Company
since April 8, 1996 (inception), the consideration received by the Company for
such shares, options and debt instruments and information relating to the
section of the Securities Act or rule of the Securities and Exchange Commission
under which exemption from registration was claimed. None of these securities
was registered under the Securities Act. Except as otherwise indicated, no sales
of securities involved the use of an underwriter and no commissions were paid in
connection with the sale of any securities.
Each of such transactions was exempt from registration under the Securities
Act by virtue of the provisions of Section 4(2) and/or Section 3(b) of the
Securities Act. Each purchaser of the securities described below has represented
that he/she/it understands that the securities acquired may not be sold or
otherwise transferred absent registration under the Securities Act or the
availability of an exemption from the registration requirements of the
Securities Act, and each certificate evidencing the securities owned by each
purchaser bears or will bear upon issuance a legend to that effect.
All share numbers set forth below give effect to a 2.325578-for-one stock
split effected on May 15, 1997 and a 2.88-for-one-reverse stock split effected
on , 1998.
From the Company's inception through December 31, 1996, the Company issued
to certain stockholders, including the founders of the Company, certain other
directors and officers of the Company, a total of 2,059,105 shares of Common
Stock at a price of $.001 per share.
II-3
On March 26, 1997, the Company issued to Terry A. Lee 40,375 shares of
Common Stock at a price of approximately $.001 per share.
On May 21, 1997, the Company completed a private placement, for $2,250,000,
of 45 Units, each Unit consisting of 11,215 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. In April 1998, the Company completed a private placement of 20
Units, each Unit consisting of 10,417 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.
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
EXHIBIT NO.
- -----------
1.1+ Form of Underwriting Agreement
3.1+ Articles of Incorporation
3.2* Bylaws
4.1+ Form of Representative's Warrant
4.2* Form of Common Stock Certificate
5.1* Opinion of Brock Silverstein McAuliffe LLC
10.1* Employment Agreement, dated as of April 1, 1996 between Claimsnet.com inc. and Bo W. Lycke
10.2+ 1997 Stock Option Plan
10.3* Form of Indemnification Agreement
10.4+ Agreement and Plan of Merger, dated June 2, 1997, among Claimsnet.com inc. (formerly, American NET
Claims Inc.), ANC Holdings, Inc., Medica Systems, Inc., and the stockholders of Medica Systems Inc.
10.5+ Promissory Note, dated July 31, 1996, from American NET Claims Inc. to American Medical Finance, Inc.,
in the principal amount of $3,740,000
10.6+ Security Agreement, dated July 31, 1996, between Claimsnet.com inc. and American Medical Finance, Inc.
10.7+ Employment Agreement, dated as of September 17, 1996, between Claimsnet.com inc. and Terry A. Lee, as
amended as of March 26, 1997.
10.8+ Service Agreement, dated August 5, 1997, between American Medical Finance, Inc. and Claimsnet.com inc.
10.9+ Employment Agreement, dated June 2, 1997, between Claimsnet.com inc. and Randall S. Lindner
10.10* Form of Registration Rights Agreement, between the Company and the Investors in the Company's May 1997
Private Placement.
10.11* Employment Agreement dated as of , 1998, between Claimsnet.com inc. and Bo W. Lycke
10.12 Line of Credit with AMF in amount of $1,500,000.
23.1 Consent of King Griffin & Adamson P.C.
23.2* Consent of Brock Silverstein McAuliffe LLC (contained in the Opinion filed as Exhibit 5.1).
24.1 Power of Attorney (set forth on the signature page hereof)
- ------------------------
+ Previously filed.
* To be filed by amendment.
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ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or together, represent
a fundamental change in the information in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be treated as a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
(b) 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.
(c) 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.
(d) The Registrant hereby undertakes that it will provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this
Pre-Effective Amendment No. 3 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Dallas,
Texas on June 3, 1998.
Claimsnet.com inc.
By: /s/ BO W. LYCKE
------------------------------------------
Bo W. Lycke
Chairman of the Board of Directors,
President, and Chief Executive Officer
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board of
/s/ BO W. LYCKE Directors, President, and
- ------------------------------ Chief Executive Officer June 3, 1998
Bo W. Lycke (Principal Executive
Officer)
Vice President and Chief
* Financial Officer
- ------------------------------ (Principal Financial and June 3, 1998
Paul W. Miller Accounting Officer)
* Executive Vice President of
- ------------------------------ Marketing and Technology June 3, 1998
Terry A. Lee and Director
*
- ------------------------------ Director June 3, 1998
Ward L. Bensen
*
- ------------------------------ Director June 3, 1998
Robert H. Brown, Jr.
*
- ------------------------------ Director June 3, 1998
Sture Hedlund
*
- ------------------------------ Director June 3, 1998
John C. Willems, III
*By: /s/ BO W. LYCKE
------------------------------------------
Bo W. Lycke
ATTORNEY-IN-FACT
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