-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RVMIZkWpvtuGhE4mOipuF4vBsCbwsQMqu8pAj6vHaEVbLnaz4Yyoo7RQEn3R1aS9 D6WNK4CLbb8h2bT7VKFvkQ== 0001019687-00-000325.txt : 20000331 0001019687-00-000325.hdr.sgml : 20000331 ACCESSION NUMBER: 0001019687-00-000325 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLAIMSNET COM INC CENTRAL INDEX KEY: 0001046057 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 792649230 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14665 FILM NUMBER: 586610 BUSINESS ADDRESS: STREET 1: 12801 N CENTRAL EXPRESSWAY STREET 2: SUITE 1515 CITY: DALLAS STATE: TX ZIP: 75243 BUSINESS PHONE: 9724581701 10-K 1 CLAIMSNET.COM, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____________ to ______________ 001-14665 COMMISSION FILE NUMBER CLAIMSNET.COM INC. ------------------ (Exact name of registrant as specified in its charter) Delaware 75-2649230 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12801 N. Central Expressway, Suite 1515 Dallas, Texas 75243 --------------------------------------- ---------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: 972-458-1701 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] The aggregate market value of the Common Stock of the registrants held by non-affiliates of the registrant, based on the closing sales price on Nasdaq SmallCap stock market on March 27, 2000 was $40,607,916. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.001 par value, 6,625,000 shares outstanding as of March 30, 2000. DOCUMENTS INCORPORATED BY REFERENCE None. PART I THIS REPORT CONTAINS FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. CLAIMSNET.COM'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THESE FORWARD-LOOKING INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED ELSEWHERE IN THIS REPORT. ITEM 1. BUSINESS IN GENERAL Claimsnet.com is an electronic commerce company engaged in healthcare transaction processing for the medical and dental industries by means of the Internet. Claimsnet.com's proprietary software, which was developed over the last seven years and resides entirely on its servers, allows healthcare providers to prepare healthcare claims interactively on the Internet and electronically transmits the claims to Claimsnet.com for processing. It also allows Claimsnet.com to download claims from the healthcare providers' computers directly to its servers. The software provides real-time editing of the claims data for compliance with the format and content requirements of payors and converts the claims to satisfy payor's specific processing requirements. Claimsnet.com then electronically transmits processed claims on behalf of healthcare providers directly or indirectly, to medical and dental payors that accept claims processing transmissions electronically. In addition, Claimsnet.com's software provides for secure encryption of all claims data transmitted in compliance with the regulations of the United States Health Care Financing Administration. The payors to which claims processed by Claimsnet.com have been submitted, primarily through clearinghouses, such as HBO & Company and Envoy Corporation with which it has agreements, include plans and affiliates of Aetna Life & Casualty Company, Inc., MetLife Healthcare/Metropolitan Healthcare Corporation, Cigna Healthcare, Inc., The Prudential Insurance Company of America, Blue Shield/Blue Cross of Louisiana, and United Healthcare Corporation. Claimsnet.com believes that the following are significant advantages of its electronic claims transmission services over other currently available services: o the ability of healthcare providers utilizing their websites to interactively prepare claims on the Internet and receive real time edits prior to claim submission, o the ease and availability of Claimsnet.com-provided training over the Internet, o the minimal software and processing power required for providers to utilize the Claimsnet.com proprietary software, o the scalability of the Company's software allows it the ability to add incremental services, such as patient statements, eligibility verification, electronic remittance advices and data modeling, through the same browser interface and website as the Claimsnet.com claims processing services, and o the ability to create multiple custom website formats to be promoted by partners and sponsors without modification of the server-based processing systems. Claimsnet.com believes that the improved claims processing procedure will result in a sharply reduced average number of outstanding days revenue in accounts receivable, which should improve a provider's working capital. Claimsnet.com believes that the services offered by its competitors are generally based on legacy mainframe technology, proprietary networks, and proprietary file formats, which limit the ability of those competitors to offer interactive Internet-based processing services on an economical basis. In addition, competitors' services generally require extensive formal training, the installation of substantial software on each healthcare provider's computer, and significant processing power. 2 Claimsnet.com generates revenue from claim processing services by charging commercial payors, or clearinghouses acting for commercial payors, a transaction fee for claims submitted electronically and by charging healthcare providers a subscription fee and certain transaction fees for use of its services. Claimsnet.com also offers patient statement processing services and real time eligibility verification of patient benefit coverage for healthcare providers. Claimsnet.com generates revenue by charging a transaction fee for each statement processed. It uses a subcontractor to print and mail the bar-coded and customized statements along with a return envelope. ELECTRONIC CLAIMS PROCESSING MARKET The healthcare electronic claims processing market, including dental claims, is estimated by Health Data Management, an industry publication, to include over 4.7 billion healthcare claim and HMO encounter form or claim submissions in 1999, of which, approximately 1.7 billion claims are submitted on paper forms. It is estimated by Health Data Management that electronic claims processing is currently used to process approximately 43% of all medical outpatient claims and 17% of all dental claims. Claimsnet.com believes that, as a result of the low penetration of electronic claims processing among healthcare providers and dentists, this market presents an attractive opportunity for it to offer a low-cost effective service. Claimsnet.com intends to focus its marketing efforts on outpatient claims, including claims of clinics, hospitals, physicians, dentists, and other outpatient service providers, as it believes they are the underserved segments of the market. The number of non-electronic paper claims transactions in the HMO market is increasing rapidly and Claimsnet.com believes that HMO claims is another underserved segment of the outpatient claims processing market. Currently there is no formal transmission document standard. Accordingly, Claimsnet.com believes that the opportunity exists for it to utilize its claims processing configuration to make available a document scanning service using hypertext markup language (HTML). This will enable Claimsnet.com to convert an encounter form into a document that appears identical to the printed version, yet is designed to reconfigure the data entered and present 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. Furthermore, traditional clearinghouses process claims in off-line batches and return edit results to the submitters in a subsequent batch transmission. This operating configuration is both expensive and time consuming due to the source code changes required to continuously process claims correctly to meet payor requirements. In contrast, Claimsnet.com's healthcare transaction processing software system on the Internet is designed to operate in a real-time, open client-server configuration. This operating alternative can offer the provider a method of bypassing the clearinghouse and communicating directly with the payor in a rapid, accurate, and cost-effective manner. Claimsnet.com believes that if the industry evolves toward direct payor submission of claims or real-time adjudication of claims, its software will be able to offer efficient access to payors and their healthcare provider customers in a Health Information Portability and Accountability Act (HIPAA)-compliant format. 3 BUSINESS STRATEGY Claimsnet.com's business strategy is as follows: o 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, o to expand the services offered by Claimsnet.com to include additional transaction processing functions, such as eligibility for benefit coverage, HMO encounter forms, and practice management functions in order to diversify sources of revenue, and o to license its claims processing technology for other applications, including stand-alone purposes, Internet systems, private label use, and original equipment manufacturers, to aggressively market HIPAA-compliant claim processing solutions to commercial, governmental, and managed care payors. There can be no assurance that any of Claimsnet.com's business strategies will succeed or that any of its business objectives will be met with any success. EXPANDED MARKETING EFFORTS The Company has entered into a Development and Services Agreement (the "Agreement") with McKesson HBOC, Inc. (McKesson), whereby the Company has granted McKesson a multi-year, non-exclusive, private label license for certain of the Company's proprietary technology and has agreed to manage McKesson's operation of the system on a fully outsourced basis. The Company will receive development fees, license fees, subscription fees, and transaction fees pursuant to the agreement. Claimsnet.com has entered into joint marketing agreements with a variety of partners, including Physicians' Online (recently acquired by Mediconsult, Inc.), Blue Cross/Blue Shield of Louisiana, Southern Medical Association, and Premier, Inc. RECENT DEVELOPMENTS On March 20, 2000, Claimsnet.com Inc., a Delaware corporation (the "Company"), through its wholly-owned subsidiary, HealthExchange.com, Inc., a Delaware corporation ("HEX"), entered into an asset purchase agreement (the "Asset Purchase Agreement") with VHX Company, a Nevada corporation ("VHX"), whereby HEX will acquire substantially all of the properties and assets, the business and goodwill of VHX, including the HealthExchange.com name and HealthExchange.com trademarks, and assume certain liabilities in exchange for (i) 1,200,000 shares of common stock, par value $.001 per share, (ii) shares of Series A 8% Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") and shares of Series B 8% Convertible Redeemable Preferred Stock (the "Series B Preferred Stock," and, together with the Series A Preferred Stock, the "Preferred Stock"), and (iii) the cancellation of certain indebtedness owed by VHX to the Company. The Company estimates that total purchase price to be approximately $32 million. Pursuant to the Asset Purchase Agreement, the stated value of the shares of each series of Preferred Stock to be issued shall be determined immediately prior to closing in accordance with the following formula: $15.35 million less (1) the product of 600,000 and the average of the closing sale prices of the Common Stock as quoted on the Nasdaq SmallCap Market on each trading day during the ten-day period terminating on the date immediately prior to March 20, 2000 (the "Trailing Average Closing Price"), and (2) the product of (a) the principal amount of, and accrued and unpaid interest on, the debt obligations owed by VHX to the Company and (b) 0.5. 4 The Preferred Stock is convertible into shares of Common Stock at a conversion price based upon the market value of the Common Stock at a specified time provided that the conversion price cannot be less than $14.00 or greater than $15.00, and provided further that (i) the convertibility of the Preferred Stock has been approved by the stockholders of the Company by March 31, 2001 and (ii) the performance milestone for the relevant series of Preferred Stock has been satisfied by March 31, 2001. The performance milestone for the Series A Preferred Stock is the existence of 1,000,000 lives covered by the business operation attributable to assets acquired. The performance milestone for the Series B Preferred Stock is the recognition of revenue from 6,000,000 member-months attributable to assets acquired. In the event that the performance milestone of any series of Preferred Stock is not satisfied that series of Preferred Stock will be cancelled. In the event that the performance milestone for any series of Preferred Stock is satisfied by such date, but the required approval by the stockholders of the Company is not obtained by such date, the relevant series of preferred stock will begin on April 1, 2001 to accrue cumulative dividends at the rate of 8% per annum and will be redeemed in equal quarterly installments thereafter for three years out of capital legally available therefor. VHX was formed for the purpose of creating and marketing the first integrated Internet solution for employers, health plans and consumers (employees/members). The management of VHX had experience in transaction processing, health behavior modeling, clinical information systems, disease state management and knowledge engineering, all of which met HIPAA (Health Insurance Portability and Accountability Act) compliance guidelines. The target solution, which is in operation today, was designed to respond to three key dynamics: the rising cost of healthcare, the increasing complexity of managing the health benefit, and the escalating demand for more choice and control by health care consumers. VHX's product suite consists of front-office web products for managing relationships with employers, members, providers and vendors, and back-office products for completing administrative functions. It has three core products through which the objectives are met: HealthExchange(TM) - a consumer/member web site enabling administrative self-service, health management, and money saving commerce opportunities; BenefitsExchange(TM) - an employer/health plan web site for managing billings, administering plans, identifying, responding to and reporting on health and disease management trends; and CareExchange(TM) - a physician web site that processes claims and eligibility requests, enables collaboration with patients, plans and employers while integrating with existing practice management and electronic medical records systems. All of these solutions are designed to conform with the electronic transactions guidelines currently outlined by the HIPAA regulations. In connection with the Asset Purchase Agreement, HEX will at closing enter into employment agreements with each of Eric Hillerbrand, Jeff Muscarella and Nan P. Smith, the Executive Vice President - Chief Knowledge Officer, Executive Vice President - Business Development, and President, respectively, of VHX, each of whom will serve in various managerial capacities with the Company. HEALTHCARE TRANSACTION PROCESSING SOFTWARE AND SECURITY Claimsnet.com's healthcare transaction processing software is designed for in-patient, out-patient, and dental claims. The software is modular, providing valuable flexibility, and generally consists of the following components: o industry standard website management software, o state-of-the-art commercial security and encryption software, and o core processing software developed by Claimsnet.com which provides claims review, claims processing, hard-coding of claims, and a "table-based" software coding of claims variables. The expensive and time-consuming hard-coding routines required by traditional systems have been replaced by a user friendly system that is table-based. This permits payor-specific edits to meet the requirements of payors and avoids expensive onsite software changes. Claimsnet.com personnel inputs new edits. Once healthcare providers connect to Claimsnet.com's secure website, Claimsnet.com's software edits claims on-line automatically, using a database containing more than 22,000 edit variables. The direct provider-payor connections offered by Claimsnet.com's system are designed to allow for immediate billing data and information exchange when it becomes available from the payors. In the event that a particular payor cannot accept submission of claims electronically, Claimsnet.com prints and mails hard copies of the claims to these payors and charges the provider for this additional service. 5 During the initial application process, a new customer interacts with Claimsnet.com's proprietary "Print Wizard," that downloads claim files from the provider's practice management system. When connecting to the Internet, the provider's browser encryption is automatically enabled at the client extranet site. The user must "log-in" through a secure firewall to reach Claimsnet.com's healthcare transaction processing system. At this point, the healthcare provider, at his option, may automatically enable an additional level of encryption, claims are extracted from the provider's PC, and editing begins. Only claims containing errors are identified for editing. Once claims are edited, they are queued with accurate claims for transmission to payors. Should a claim not be acceptable electronically by a payor, the claim is automatically printed and mailed by the payor gateways. This mailing service is optional to the providers. To assure proper network operation and allow other revenue producing services, such as custom reports, eligibility inquiries, and decision support tools, Claimsnet.com monitors all traffic through its private application server and firewall. Claimsnet.com's healthcare transaction processing software system is based upon a client-server computing model and includes a variety of different software applications. Individual applications work together to provide the extraction and encryption of claims from a provider's practice management system to Claimsnet.com's Internet claims processing server, where editing and formatting occurs in a secure environment. Claimsnet.com's system then delivers the claims to the payor gateway. The different software applications have either been purchased, licensed, or developed by Claimsnet.com. Claimsnet.com's website is structured into three sections: "PUBLIC INTERNET," "CLIENT EXTRANET," and "PRIVATE INTRANET." The PUBLIC INTERNET site provides company background, product demonstrations, and customer enrollment forms. The CLIENT EXTRANET provides a secure individual customer area for private customer communication and encrypted claims transmission. The United States Health Care Financing Administration has defined security requirements for Internet communications including healthcare data. Claimsnet.com operates in compliance with these requirements. Traditional claims clearinghouses that use regular phone and private data networks cannot provide this level of data security. The PRIVATE INTRANET site is designed for internal communications, website operating reports, customer support, and reporting. With the exception of the commercial software, such as that provided by Microsoft, Claimsnet.com has either identified back-up sources for all the software used or, in the event of a business failure by the licensing vendor, Claimsnet.com owns the source code. TRAINING AND HARDWARE REQUIREMENTS The training for the various products and services offered by Claimsnet.com is free and delivered online through its client extranet to the provider, seven days a week, 24 hours a day. The tutorial and other training documents are always available at Claimsnet.com's Web home page the location of which on the Web is http://www.claimsnet.com. After an initial free period of unlimited service, Claimsnet.com will charge users a fee for technical support comparable to those charged by other healthcare software vendors. No significant hardware investment by the customer is required in order to take advantage of Claimsnet.com's services. The system requires the provider to use a 28,800 bps asynchronous modem and a PC with Windows 3.11 or higher operating system installed. An Internet Service Provider, such as AT&T Worldnet, MCI, and Physicians' Online, offers local telecommunication to the Internet. Claimsnet.com's customers are responsible for obtaining and maintaining the Internet Service Provider connection. INTERNET/INTRANET The processing configuration used by Claimsnet.com requires limited electronic claims processing software to reside at the level of the healthcare provider. All editing and formatting takes place at Claimsnet.com's Internet application server site. From the standpoint of the user, Claimsnet.com believes its system has the latest software version and all format changes available instantly. Claimsnet.com's healthcare transaction processing software has the effect of turning a provider's old or outdated hardware into a terminal capable of operating in a 32-bit Windows environment. 6 Claimsnet.com's processing does not take place on the Internet, but rather in an extranet configuration. The main advantage of this approach is to assure that the communication between Claimsnet.com and a provider takes place in a highly-controlled, secure, and encrypted environment. The dual encryption utilized by Claimsnet.com occurs at the browser software and application server level. All processing and data storage occurs behind a firewall, providing secure and controlled access to all data. CUSTOMERS Claimsnet.com views its customers as both the healthcare providers submitting claims and the payors accepting claims. Claimsnet.com is currently processing claims for approximately 3,000 providers and payors. The providers are geographically dispersed and represent a mix of physician specialties and dentists. One customer project represented 21% of the Company's total revenue for 1999. Claimsnet.com requires each healthcare provider using Claimsnet.com's services to enter into a standard subscription agreement available on the home page of Claimsnet.com's website. This system allows the healthcare provider to access, complete, and return the subscription agreement on the Internet, and enables the provider to immediately access Claimsnet.com's services. Each subscription agreement provides (1) that the healthcare provider shall pay to Claimsnet.com monthly a subscription fee and (2) the nature of the services to be rendered by Claimsnet.com and the terms and conditions under which, Claimsnet.com will render its services. These contracts are terminable by the healthcare provider upon 30 days prior written notice. Claimsnet.com also enters into agreements with the commercial medical and dental payors or regional clearinghouses to which Claimsnet.com submits processed claims. Generally, such agreements provide for the payment of a fee per claim to be paid to Claimsnet.com once certain minimum volume requirements have been met. As a result of the varying submission requirements of many insurance and other plans within any payor, Claimsnet.com treats each plan as a separate payor with its own particular requirements. In September 1998, Claimsnet.com entered into an agreement with Electronic Data Interchange Services, a department of Blue Cross/Blue Shield of Louisiana, to provide claim processing services to Blue Cross/Blue Shield of Louisiana network providers. Under this agreement, Claimsnet.com and Blue Cross/Blue Shield of Louisiana are to jointly promote Claimsnet.com's services to the 9,600 network providers of Blue Cross/Blue Shield of Louisiana through website links, Blue Cross/Blue Shield of Louisiana network communication resources, educational seminars, telemarketing, and direct mail campaigns. In September 1998, Claimsnet.com entered into a group purchasing agreement with Provider Select, Inc., an affiliate of Premier, Inc., the nation's largest alliance of hospitals and health care organizations. Under this agreement, Claimsnet.com is to provide claim processing, patient statements, eligibility verification, and other services to participating members of Premier. In November 1998, Claimsnet.com signed an agreement with Southern Medical Association, a physician association which provides services to over 35,000 physicians in seventeen Southern states. Under the agreement, Claimsnet.com provides claim processing, patient statements, eligibility verification, and other services to participating members of Southern Medical Association. In September 1999, Claimsnet.com entered into a joint marketing agreement with Physicians Online (POL), the leading medical information and communication network for physicians. POL has rapidly gained the membership of one-fourth of the physicians in the United States. Claimsnet.com offers POL members access to secure, easy-to-use and cost-effective transaction processing through a link at the Officestaff.com Website for Physicians' Online. Subsequently, POL was acquired by Mediconsult Inc., a leading provider of Internet services to patient groups. 7 In October 1999, Claimsnet.com entered into a Development and Services Agreement (the "Agreement") with McKesson HBOC, Inc. (McKesson), whereby the Company has granted McKesson a multi-year, non-exclusive, private label license for certain of the Company's proprietary technology and has agreed to manage McKesson's operation of the system on a fully outsourced basis. McKesson is the leading provider of information technology services in the worldwide healthcare market. Under the terms of the agreement, Claimsnet.com will be integrating its proprietary Internet-based claims processing technology into selected McKesson's electronic commerce solutions, for the purposes of better serving the claims processing needs of the independent physician practice market. The agreement provides for the Company to receive development fees, license fees, subscription fees, and transaction fees. In conjunction with this agreement, Claimsnet.com granted McKesson an immediately exercisable, three year warrant to purchase 819,184 shares of common stock at a price of $7.00 per share. MARKETING Claimsnet.com intends to engage in a dedicated marketing and sales plan, including advertising at relevant sites on the Internet and in trade publications, conducting direct mail programs targeting healthcare providers and payors, such as commercial medical and dental payors, hiring additional sales and marketing personnel, preparing brochures and other promotional materials, and engaging in a public relations campaign designed to expose Claimsnet.com and its services to healthcare providers and payors which otherwise would not be exposed to Claimsnet.com and its products and services. Claimsnet.com is actively seeking additional 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. Claimsnet.com believes that there are opportunities for joint marketing with banks, insurance companies, and pharmaceutical companies that desire online interfacing with healthcare providers. There can be no assurance that Claimsnet.com will secure any additional alliances or joint venture relations, or if it does, that such alliances or joint venture relationships will be profitable. COMPETITION Several large companies such as Healtheon, McKesson, National Data Corporation, QuadraMed Corporation, and ProxyMed Inc. dominate the segment of the industry in which Claimsnet.com operates. Each of these companies operates a regional or national clearinghouse of medical and dental claims. In most cases, these companies have large existing capital and software investments and focus on large healthcare providers, such as hospitals and large clinics, or act as wholesale clearinghouses for smaller electronic claims processing companies. Claimsnet.com estimates, based on information from various trade journals, that there are approximately 300 or more small independent electronic claims processing companies and clearinghouses in addition to these large competitors, which operate as local sub-clearinghouses for the processing of medical and dental claims. While Claimsnet.com competes with all other providers of electronic claims processing services, it is not aware of any other companies that provide healthcare electronic claims processing services in the same manner as those provided by Claimsnet.com and thus represent a direct competitor. Claimsnet.com believes that its pricing structure and total cost is very competitive with other providers of electronic claims processing services. Claimsnet.com further believes that existing competitors are constrained not only by capital investments and existing hardware/software configurations, but also by existing customer agreements. Despite these limitations, Claimsnet.com anticipates that competition will arise in the processing of claims on the Internet. No assurance can be given that Claimsnet.com will successfully compete in any market in which it conducts or may conduct operations. 8 Some segments of the medical and dental claims processing industry are not currently suited to the use of inpatient electronic claims processing. Some of these segments are psychiatry and surgery, each of which requires substantial documentation in addition to the claim to be submitted. In these market segments, Claimsnet.com believes that it is not currently able to compete with existing and potential competitors and, accordingly, it has not designed its business plan to address this market segment. EMPLOYEES As of December 1999, Claimsnet.com had a total of 73 full-time employees, four of whom were executive officers, 49 of whom were technical personnel, twelve of whom were sales and marketing personnel, and eight of whom were administrative personnel. None of Claimsnet.com's employees are represented by a labor organization. Claimsnet.com believes that its relations with its employees are satisfactory. RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING CLAIMSNET.COM'S BUSINESS AND PROSPECTS. CONTINUATION OF LOSSES The Company has incurred net losses since inception and expects to continue to operate at a loss for the foreseeable future. As of December 31, 1999, Claimsnet.com had an accumulated deficit of ($16,608,000). LIMITED OPERATING HISTORY Organized in April 1996 and a development stage company through March 31, 1997. Claimsnet.com has a very limited operating history. Claimsnet.com is prone to all of the risks inherent to the establishment of any new business venture including 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, Claimsnet.com must, among other things: o maintain and increase its customer base, o implement and successfully execute its business and marketing strategy, o continue to develop and upgrade its technology and transaction-processing systems, o continually update and improve its website, o provide superior customer service, o respond to competitive developments, and o attract, retain, and motivate qualified personnel. The failure to adequately address these risks could have a material adverse effect on Claimsnet.com's business, prospects, financial condition, and results of operations. FLUCTUATIONS IN OPERATING RESULTS MAY AFFECT THE MARKET PRICE OF COMMON STOCK Significant fluctuations in its future quarterly operating results may occur due to a variety of factors, many of which are outside the Company's control. Factors that may adversely affect quarterly operating results include: o Claimsnet.com's ability to retain existing customers, attract new customers at a steady rate, and maintain customer satisfaction, o the announcement or introduction of new sites, services, and products by us and its competitors, o price competition or higher prices in the industry, 9 o the level of use of the Internet and online services and the rate of market acceptance of the Internet and other online services for the purchase of "business to business" services, such as those which Claimsnet.com offer, o Claimsnet.com's ability to upgrade and develop its systems and infrastructure in a timely and effective manner, o the amount of traffic on its website, o technical difficulties, system downtime, or Internet brownouts, o the amount and timing of operating costs and capital expenditures relating to expansion of its business, operations, and infrastructure, o government regulation, and o general economic conditions and economic conditions specific to the Internet, electronic commerce, and the healthcare transaction processing industry. As a result of these factors, operating results of Claimsnet.com in one or more future quarters, may fall below the expectations of securities analysts and investors. In this event, the market price of the Common Stock would likely be materially adversely affected. UNTESTED MARKETING STRATEGY To date, Claimsnet.com has conducted limited marketing efforts. To penetrate its market Claimsnet.com will have to exert significant efforts to create awareness of, or demand for, its products and services. Claimsnet.com intends to upgrade its marketing efforts to include advertising via traditional and Internet methods, expanded sales staff, increased strategic business development activities, and broader product and service offerings. All of the marketing efforts of Claimsnet.com have been largely untested in the marketplace, and may not result in material sales. Claimsnet.com's failure to develop its marketing capabilities, successfully market its products or services, or recover the cost of its services would have a material adverse effect on the business, prospects, financial condition, and results of operations of Claimsnet.com. NEED TO UPGRADE ITS SYSTEMS AND PROCESS AN INCREASED VOLUME OF CLAIMS A key element of the strategy of Claimsnet.com is to generate a high volume of traffic on, and use of, its website. If the volume of traffic on the website or the number of claims submitted by customers substantially increases, Claimsnet.com will have to expand and further upgrade its technology, claims processing systems, and network infrastructure to accommodate these increases or its systems may suffer from 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. Claimsnet.com may be unable to effectively upgrade and expand its claims processing system or to integrate smoothly any newly developed or purchased modules with its existing systems, which could have a material adverse effect on its business, prospects, financial condition, and results of operations. 10 NEED TO ATTRACT, INTEGRATE AND RETAIN HIGHLY SKILLED PERSONNEL, AND TO EFFECTIVELY MANAGE GROWTH Claimsnet.com expects the expansion of its business to place a significant strain on its limited managerial, operational, and financial resources. Claimsnet.com will be required to expand its operational and financial systems significantly and to expand, train, and manage its work force in order to manage a material expansion of its operations. A failure to attract, retain and integrate highly skilled personnel could have a material adverse effect on the business, financial condition and results of operations of Claimsnet.com. NEED TO PROTECT INTELLECTUAL PROPERTY RIGHTS The ability of Claimsnet.com to compete effectively depends on its ability to maintain the proprietary nature of its services and technologies, including its proprietary software and the proprietary software of others with which it has entered into software licensing agreements. Claimsnet.com holds no patents and relies on a combination of trade secrets and copyright laws, nondisclosure, and other contractual agreements and technical measures to protect its rights in its technological know-how and proprietary services. In addition, it has been advised that trademark and service mark protection of its corporate name is not available. Claimsnet.com depends upon confidentiality agreements with its officers, directors, employees, consultants, and subcontractors to maintain the proprietary nature of its technology. These measures may not afford sufficient or complete protection, and others may independently develop know-how and services similar to the Company, otherwise avoid its confidentiality agreements, or produce patents and copyrights that would materially and adversely affect the business, prospects, financial condition, and results of operations of Claimsnet.com. While Claimsnet.com believes that its services are not subject to any infringement actions based upon the patents or copyrights of any third parties, its know-how and technology may in the future be found to infringe upon the rights of others. In such event Claimsnet.com may be required to obtain licenses from the other holders of their intellectual property, enter into royalty agreements, or redesign its products so as not to utilize the other's intellectual property, each of which may prove to be uneconomical or otherwise impossible. Licenses or royalty agreements required in order for Claimsnet.com to use this technology may not be available on acceptable terms or at all. These claims could result in litigation, which could materially adversely affect its business, prospects, financial condition, and results of operations. INTERNET SECURITY POSES RISKS The electronic submission of healthcare claims and other electronic healthcare transaction processing services by means of its proprietary software of Claimsnet.com involves the transmission and analysis of confidential and proprietary information of the patient, the healthcare provider, or both, as well as its own confidential and proprietary information. The compromise of the Company's security or misappropriation of proprietary information could have a material adverse effect on its business, prospects, financial condition, and results of operations. Claimsnet.com relies on encryption and authentication technology licensed from other companies to provide the security and authentication necessary to effect secure Internet transmission of confidential information, such as medical information. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the technology used by Claimsnet.com to protect customer transaction data. Anyone who is able to circumvent its security measures could misappropriate proprietary information or cause interruptions in its operations. Claimsnet.com may be required to expend significant capital and other resources to protect against security breaches or to minimize problems caused by security breaches. To the extent that its activities or the activities of others involve the storage and transmission of proprietary information, such as diagnostic and treatment data, security breaches could damage its reputation and expose it to a risk of loss or litigation and possible liability. The failure of Claimsnet.com to prevent these security breaches may have a material adverse effect on its business, prospects, financial condition, and results of operations. 11 REGULATORY AND LEGAL UNCERTAINTIES Claimsnet.com is not currently subject to direct regulation by any government agency other than laws or regulations applicable to electronic commerce, but it processes information which, by law, must remain confidential. The U.S. Healthcare Financing Administration has defined security requirements for Internet communications including healthcare data. The Company operates in compliance with these requirements. Due to the increasing popularity and use of the Internet and other online services, federal, state, and local governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet or other online services covering issues such as user privacy, pricing, content, copyrights, distribution, and characteristics and quality of products and services. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws to impose additional burdens on companies conducting business online. The adoption of any additional laws or regulations may decrease the growth of the Internet or other online services, which could, in turn, decrease the demand for the services of Claimsnet.com, increase its cost of doing business, or otherwise have a material adverse effect on its business, prospects, financial condition, and results of operations. Moreover, the relevant governmental authorities have not resolved the applicability to the Internet and other online services of existing laws in various jurisdictions governing issues such as property ownership and personal privacy and it may take time to resolve these issues definitively. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to the business of Claimsnet.com, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on its business, prospects, financial condition, and results of operations. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT PRESENT RISKS AND UNCERTAINTIES This Report contains forward-looking statements regarding plans and objectives of Claimsnet.com for the future. These forward-looking statements are based on current expectations that involve numerous risks and uncertainties. Its plans and objectives are based on a successful execution of its 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 its operations or business. These assumptions involve judgments with respect to, among other things, future economic, political, competitive, and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond its control. Although Claimsnet.com believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove inaccurate. In light of the significant uncertainties inherent in these forward-looking statements, the reader should not regard these statements as representations by Claimsnet.com or any other person that Claimsnet.com will achieve its objectives and plans. 12 ITEM 2. PROPERTIES Claimsnet.com currently leases 20,000 square feet of office space at the rate of $34,000 per month. Their offices are located at Suite 1515, 12801 North Central Expressway, Dallas, Texas 75243. The lease expires December 31, 2000. Claimsnet.com believes that, in the event alternative or larger offices are required, such space is available at competitive rates. For Claimsnet.com's servers, Claimsnet.com utilizes DIGEX Business Internet Solutions, including a nationwide DS-3 backbone, a substantial dedicated Web server management facility, and a 24 hour per day, 7 day per week Network Operations Center at a cost of $35,000 per month. ITEM 3. LEGAL PROCEDINGS On December 17, 1999, Millbrook Corporation (Millbrook) filed a complaint, in the 134th District Court, in connection with a Claims Submission Support and Marketing Agreement entered into in 1998. The complaint alleges breach of contract and violation of the Texas Deceptive Trade Practices-Consumer Protection Act and asserts that Claimsnet.com has failed to perform its obligations under the agreement. Although the complaint seeks substantial monetary awards, the Company believes that it has meritorious defenses to Millbrook's claims and intends to contest the case vigorously while continually evaluating and maintaining its out-of-court settlement options. The Company does not believe that the outcome of this litigation will have a material adverse effect on the financial position or operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 21, 1999, the annual meeting of stockholders was held in Dallas, Texas. The stockholders elected by a vote of 5,271,088 for and 4,480 withheld, Wescott W. Price, III, Terry A. Lee, Sture Hedlund and John C. Willems, III to serve as Class II Directors for a two year period and until their successors are elected and qualified. The stockholders also ratified by a vote of 5,272,088 for, 1,000 against and 2,530 abstaining, the selection of Ernst & Young, LLP as independent auditors for the fiscal year ending December 31, 1999. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Common Stock of Claimsnet.com has been traded on the Nasdaq SmallCap market under the symbol "CLAI" and on the Boston Stock Exchange under the trading symbol "CLA" since April 6, 1999. The following table sets forth, for the fiscal periods indicated, the quarterly high and low per share sales prices, as reported by Nasdaq: HIGH LOW ---- --- 1999 From April 6, 1999 through June 30,1999 $19.125 $7.563 Three months ended September 30, 1999 8.500 4.000 Three months ended December 31, 1999 12.625 4.000 The last reported sale price of the Common Stock on the Nasdaq SmallCap Market on March 27, 2000 was $9.44 per share. As of November 11, 1999 there were 3,107 holders of record of the Common Stock. DIVIDEND POLICY Claimsnet.com has not paid any cash dividends on its Common Stock and does not intend to pay cash dividends in the foreseeable future. Claimsnet.com intends to retain future earnings, if any, for reinvestment in the development and expansion of its business. Any credit agreements, which we may enter into with institutional lenders, may restrict its ability to pay dividends. Whether Claimsnet.com pays cash dividends in the future will be at the discretion of its Board of Directors and will be dependent upon its financial condition, results of operations, capital requirements, and any other factors that the Board of Directors determines to be relevant. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are derived from the consolidated financial statements of Claimsnet.com. The financial statements as of December 31, 1999 have been audited by Ernst & Young LLP, independent auditors. The financial statements as of December 31, 1998 and for the two years in the period then ended, have been audited by King Griffin & Adamson, P.C., independent auditors. The selected statement of operations data for the year ended December 31, 1997 includes the results of operations of Medica from June 2, 1997, its date of acquisition. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Claimsnet.com's consolidated financial statements and the related notes appearing elsewhere in this 10K. 14 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
Year Ended December 31, ----------------------------------------- 1999 1998 1997 ---- ---- ---- STATEMENT OF OPERATIONS DATA: - ----------------------------- Revenues . . . . . . . . . . . . . . . . . . . . .$ 414,000 $ 155,000 $ 82,000 ------------ ------------ ------------ Total operating expenses . . . . . . . . . . . . . 8,485,000 4,510,000 2,514,000 ------------ ------------ ------------ Interest expense - affiliate . . . . . . . . . . . 142,000 314,000 390,000 Interest expense - bridge debt . . . . . . . . . . 967,000 - - Interest income . . . . . . . . . . . . . . . . . (322,000) (6,000) (41,000) ------------ ------------ ------------ Net Loss . . . . . . . . . . . . . . . . . . . . .$(8,858,000) $(4,663,000) $(2,781,000) ============ ============ ============ Loss per weighted average common share outstanding (basic and diluted) . . . . . . . . . . . . . .$ (1.52) $ (1.41) $ (0.98) ============ ============ ============ Weighted average common shares outstanding (basic and diluted) . . . . . . . . . . . . . . . . . . 5,811,000 3,309,000 2,851,000 ============ ============ ============
December 31, ------------------------------------------ 1999 1998 1997 ---- ---- ---- BALANCE SHEET DATA: - ------------------- Current assets . . . . . . . . . . . . . . . . . $ 7,176,000 $ 105,000 $ 419,000 Total assets . . . . . . . . . . . . . . . . . . . 8,923,000 1,653,000 2,175,000 Working capital (deficit). . . . . . . . . . . . . 6,224,000 (1,089,000) 36,000 Long-term debt . . . . . . . . . . . . . . . . . . - 4,323,000 3,468,000 Stockholders' equity (deficit) . . . . . . . . . . 7,971,000 (3,864,000) (1,677,000)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CLAIMSNET.COM, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS REPORT CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. CLAIMSNET.COM'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THESE FORWARD-LOOKING INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, AVAILABILITY OF FINANCIAL RESOURCES FOR LONG TERM NEEDS, PRODUCT DEMAND AND MARKET ACCEPTANCE AND OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH CLAIMSNET.COM'S CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. IN GENERAL As of December 31, 1999, Claimsnet.com had working capital of $6,224,000 and stockholders' equity of $7,971,000. Claimsnet.com generated revenues of $414,000 for the year ended December 31, 1999, $155,000 for the year ended December 31, 1998 and $82,000 through December 31, 1997. Claimsnet.com has incurred net losses since inception and had an accumulated deficit of $16,608,000 at December 31, 1999. The Company expects to continue to operate at a loss for the foreseeable future. There can be no assurance that Claimsnet.com will ever achieve profitability. In addition, during the year ended December 31, 1999, Claimsnet.com used $6.5 million in operating activities. 15 Claimsnet.com is in the early stage of operations and, as a result, the relationships between revenue, cost of revenue, and operating expenses reflected in the financial information included in this report do not represent future expected financial relationships. Much of the cost of revenue and operating expenses reflected in Claimsnet.com's consolidated financial statements are relatively fixed costs. Claimsnet.com's expenses increased with the escalation of sales and marketing activities and transaction volumes, but at a much slower rate of growth than the corresponding revenue increase. Accordingly, Claimsnet.com believes that, at its current stage of operations period to period comparisons of results of operations are not meaningful. BRIDGE FINANCING In February, 1999 the Company issued $1,000,000 of Series A 12% Subordinated Notes along with 125,000 shares of common stock for net proceeds of $892,000 (net of closing fees and cash financing expenses). The notes and all accrued interest were due upon the earlier of the first day subsequent to the close of the Company's initial public offering or one year from the date of issuance. The 125,000 shares of common stock issued with the Notes were valued at $850,000 ($6.80 per share) and were recorded at that amount with a corresponding charge to debt discount. The Notes were repaid from the proceeds of the initial public offering which occurred on April 6, 1999 (see note 4 to the consolidated financial statements) and the debt discount was amortized over the period from issuance to repayment, resulting in an $850,000 charge to interest expense during the twelve months ended December 31, 1999. Debt issuance costs of $108,000 were also capitalized and amortized over the period the Notes were outstanding, resulting in $108,000 charged to interest expense. Cash interest expense of $9,000 was also recorded for the two month period the notes were outstanding. INITIAL PUBLIC OFFERING On April 6, 1999, the Company consummated an initial public offering ("IPO") of 2,500,000 shares of common stock at a price of $8.00 per share. The underwriters exercised, in full, the right to sell an additional 375,000 shares under the underwriters' overallotment option on May 21, 1999. The aggregate net proceeds to the Company (after deducting the underwriting discount and offering expenses payable by the Company) were approximately $19.5 million. The net proceeds were used to (i) repay approximately $5.1 million of outstanding principal and accrued interest on its 9.5% note payable and line of credit facility with American Medical Finance, Inc., a related party, and (ii) repay approximately $1.0 million of outstanding principal and accrued interest under its Series A 12% Subordinated Notes. In connection with the IPO, the Company granted certain employees and non-employees options to purchase 420,000 shares of common stock under the 1997 Stock Option Plan, 27,000 of which were granted to non-employees. The options were issued at a price of $8.00 or $8.80 per share and expire on the tenth anniversary of the grant. The employee options vest ratably over the first four anniversaries of the grant. The non-employee options were issued for past services, are fully vested, and become exercisable ratably over the first four anniversaries of the grant. The options granted to non-employees require a charge to earnings equal to the imputed value of the options, which is estimated at $5.73 per option using the Black-Scholes valuation method. Therefore, the Company accrued and recognized a one-time expense of $155,000 related to the past services. The Company also granted non-employee directors options to purchase 80,000 shares of common stock under the Non-Employee Director's Plan. The non-employee director options were issued at a price of $8.00 per share. Under the terms as originally issued, options for 50,000 shares of common stock were to vest ratably over the first two anniversaries of the grant, and options for 30,000 shares of common stock were to vest ratably on each three-month anniversary of the grant. On May 21, 1999 the Board of Directors, at the recommendation of the compensation committee, voted to modify the vesting period for all outstanding non-employee director options such that the options became fully vested on May 21, 1999. All options expire on the tenth anniversary of the grant. The modification did not result in a charge to earnings as it resulted in a de minimus change in the fair value of the options. 16 Also in connection with the initial public offering, the Company issued warrants to purchase an aggregate of 20,000 shares of common stock at a price of $8.80 per share, exercisable between the first and fifth anniversaries of the date of grant. The warrants are fully vested and issued for past services and, therefore, require a charge to earnings equal to the imputed value of the warrants, which is estimated at $6.07 per share using the Black-Scholes valuation method. Therefore, the Company accrued and recognized a one-time expense of $121,400 related to the issuance of warrants. In November 1999, the Company granted certain employees and non-employees options to purchase 62,500 shares of common stock under the 1997 Stock Option Plan, 5,000 of which were granted to a non-employee. The options were issued at an exercise price of $8.00 per share, the market price on the date of grant, expire on the tenth anniversary of the grant, and vest ratably over the first four anniversaries of the grant. PLAN OF OPERATIONS Claimsnet.com's business strategy is: o 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, o to expand the services offered by Claimsnet.com to include additional transaction processing functions, such as eligibility for benefit coverage, HMO encounter forms, and practice management functions in order to diversify sources of revenue; o to license its claims processing technology for stand-alone purposes, Internet systems, private label use, and original equipment manufacturers and o to aggressively market HIPAA-compliant claim processing solutions to commercial, governmental, and managed care payors. Claimsnet.com anticipates that its primary source of near-term revenues will be fees paid by alliances for private label use and fees paid by users for insurance claim and patient statement services. In the future, Claimsnet.com expects a significant portion of its revenues to be derived from fees from commercial medical and dental payors and other payors for delivering claims electronically. Claimsnet.com's principal operating costs are anticipated to be marketing, research and development, acquisition of capital equipment, and general and administrative expenses. Claimsnet.com intends to continue to develop and upgrade its technology and transaction-processing systems and continually update and improve its website to incorporate new technologies, protocols, and industry standards. Claimsnet.com intends to engage in a dedicated marketing and sales plan, including advertising at relevant sites on the Internet and in trade publications, conducting direct mail programs targeting healthcare providers and payors, such as commercial medical and dental payors, hiring additional sales and marketing personnel, preparing brochures and other promotional materials, and engaging in a public relations campaign designed to expose Claimsnet.com and its services to healthcare providers and payors which otherwise would not be exposed to Claimsnet.com and its products and services. In connection with the expansion of its business, Claimsnet.com intends to acquire additional computers and networking equipment to permit an increased volume of claims to be processed by it. General and administrative expenses include all corporate and administrative functions that serve to support Claimsnet.com's current and future operations and provide an infrastructure to support future growth. Major items in this category include management and staff salaries and benefits, travel, network administration and data processing, training, and rent. 17 RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUES Revenues increased 167% to $414,000 in 1999 from $155,000 in 1998. Revenues of $87,000 during 1999 are related to percentage completion recognition of the McKesson/HBOC Development and Services Agreement and revenues of $327,000 are related to the Company's Internet-based clients. Although the Company provided Internet-based services during the year-earlier period, there were no related revenues recognized because the Company waived fees as an introductory promotional offer for its initial clients. Revenues for the 1998 periods were exclusively derived from the remaining business of Medica Systems, Inc. (Medica), which was acquired by the Company in June 1997. The acquisition was made primarily for the value of Medica's claims processing software technology. A majority of Medica's revenues related to business that was not transferable to the Company's Internet-based system. Nearly all of the Medica business was phased out during 1998. Revenues from recurring revenue sources for the year ended December 31, 1999 represented 61% of total revenues. Recurring revenues were comprised of $199,000 from transaction-based fees and $53,000 from subscription fees. Revenues from non-recurring sources totaled $75,000 and were related to setup, support, and other fees. Revenues under the McKesson Development and Services Agreement accounted for approximately 21% of 1999 revenues. Transactions processed by the Company increased 302% to 2,809,000 in 1999 from 699,000 in 1998. All of the increase was attributable to internal growth in the number of accounts and healthcare providers subscribing to the Company's services. Additionally, 99.1% of all transactions were for physician and dental claim submission services. The Company intends to process additional transaction types in the future, including patient statements, eligibility and referral verifications, managed care encounter reports, and hospital claims. The Company had 365 accounts processing transactions for 3,001 providers at December 31, 1999 compared with 175 accounts and 1,364 providers at December 31, 1998, representing increases of 109% and 120%, respectively. Transaction-based revenue averaged $.07 per transaction for the year ended December 31, 1999. The Company expects the average revenue per transaction to increase in future periods for several reasons. Revenue per transaction for the 1,649,000 commercial electronic claims averaged $.02 during 1999 and will increase due to payer rebate contracts with volume-based pricing structures. Revenue per transaction for the 842,000 Medicare and Medicaid claims averaged $.01 during 1999 and will increase with the implementation of a new pricing structure to charge a per transaction fee. Additionally, the Company's agreement with McKesson HBOC, Inc. includes a per transaction processing fee which is greater than the average revenue per transaction recognized for the year ended December 31, 1999. Average revenue per transaction for the 287,000 paper claims was $.47 during the year. The company processed approximately 31,000 patient statements during the year ended December 31, 1999, representing one percent of total transactions during the period. The Company expects the number of accounts using patient statement processing to increase and, therefore, patient statement transactions should represent a larger percentage of total transactions in the future. COST OF REVENUES Cost of revenues were $1,665,000 in 1999 compared to $649,000 for the prior year. The three components of cost of revenues are data center expenses, transaction processing expenses, and customer support operation expenses. Data center expenses were $324,000 for the year ended December 31, 1999 compared with $114,000 for 1998, an increase of 184%. Transaction processing expenses were $208,000 in 1999 compared to $110,000 in 1998, representing a 89% increase. Customer support operations expense increased by 167% to $1,133,000 in 1999 from $425,000 in 1998, while the number of accounts and providers served at the end of each year increased by 109% and 120%, respectively. The increases in Customer support operations expense were primarily attributable to increased staffing. 18 RESEARCH AND DEVELOPMENT Research and development expenses were $1,005,000 in 1999, compared with $531,000 in 1998, representing an increase of 89%. Research and development expenses are comprised of personnel costs and related expenses. Internal use software costs of $161,000 were capitalized during 1999 while no costs were capitalized during the year-earlier period. Development efforts during both periods relating to the Company's proprietary software system represented continuous incremental enhancements, which are individually and simultaneously implemented for all clients on the Company's centralized operating system. No costs were capitalized for these development efforts. Development costs capitalized during the year were related to several internal infrastructure system projects. SOFTWARE AMORTIZATION Software amortization expenses increased 8% to $729,000 in 1999 from $672,000 in 1998. These increases reflect additional amortization for internal use software costs capitalized in the period ended December 31, 1999. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $5,086,000 in the year ended December 31, 1999, compared with $2,658,000 in 1998, an increase of 91%. The $2,428,000 increase includes a $1,413,000 increase in sales and marketing expenses and a $192,000 increase in technology infrastructure and support expenses, both of which are primarily related to personnel costs and related expenses. The sales and marketing increase also reflects marketing efforts during 1999. A one-time charge of $276,000 for the cost of past services related to the grant of stock options and warrants to non-employees is also included in the general and administrative increase. The increase for other general administrative expenses was $547,000, primarily due to increases in office rent, telephone expenses, employee recruiting expenses, employment agreement contractual increases, and outside professional fees. INTEREST EXPENSE Interest expense was $1,109,000 for 1999 compared with $314,000 in 1998. Included in the 1999 expense was $850,000 related to amortization of debt discount related to bridge financing, $108,000 related to amortization of deferred financing costs and $9,000 of cash interest at 12%. Interest of $142,000 was paid to affiliates in 1999 and $314,000 in 1998. Interest income of $322,000 was provided in 1999 from investment of the net proceeds from the April 6, 1999 Initial Public Offering. Interest income of $6,000 was earned in 1998. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 REVENUES. Revenues increased to $155,000 in 1998 from $82,000 in 1997. The increase is due to an increase in the number of customers subscribing to and using Claimsnet.com's service to file insurance claims. One customer represented 62% of the Company's total revenues in 1997, and the Company subsequently cancelled its contract with this customer. COST OF REVENUES. Cost of revenues increased to $649,000 in 1998 from $251,000 in 1997. The increase results primarily from an increase in the number of employees involved in setting up customers as sales and marketing efforts expanded and supporting customers as the customer base increased. The increase in cost of revenues is disproportionately larger than the increase in revenues because much of the cost is attributable to the initial setup of clients that will produce recurring revenues over future periods. RESEARCH AND DEVELOPMENT. Research and development expense increased to $531,000 in 1998 from $461,000 in 1997. The increase is attributed to an increase in the number of employees involved in software development and testing activities related to improvements in the claims processing system and the introduction of complementary products such as patient statement processing services and eligibility verification of patient coverage. 19 SOFTWARE AMORTIZATION. Software amortization expense increased to $672,000 in 1998 from $403,000 in 1997. The increase is due to the capitalization of $912,000 of software development costs associated with the acquisition of Medica in June 1997 and the related full-year amortization charge in 1998 versus the partial-year charge in 1997. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense increased to $2,658,000 in 1998 from $1,399,000 in 1997. The increase is the result of an increase of approximately $500,000 in sales and marketing expenses, an increase of approximately $350,000 in information systems expenses, and the write-off of $412,000 of deferred financing costs incurred in conjunction with an initial public offering that was not completed. INTEREST EXPENSE - AFFILIATE. Interest expense -- affiliate decreased to $314,000 in 1998 from $390,000 in 1997. The decrease is due to the completion of a series of private equity placements in 1998 and 1997, from which the proceeds were used to reduce the line of credit due to the affiliate until such time as the funds were needed for operating activities. INTEREST INCOME Interest income decreased to $6,000 in 1998 from $41,000 in 1997. The decrease is due to a reduction in the average balance of short term investments. During late 1997, the proceeds from private equity placements were sufficient to fully repay the line of credit due to affiliate and the excess funds were invested in short term securities. During early 1998 all remaining short term investments were liquidated to provide working capital and the proceeds from the subsequent private equity placements did not exceed the balance of the line of credit due to affiliate. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $6,451,000 in 1999, compared with $2,994,000 for the year-earlier period, primarily due to increased selling, general and administrative expenses, as discussed above. Net cash used in investing activities was $5,306,000 in 1999 and $120,000 in 1998. Primary uses consisted of the purchase of $3,832,000 marketable securities and the purchase of $1,313,000 in property and equipment. In addition, the Company purchased operating licenses and began implementation for several internal support systems during the 1999 period. In connection with the implementation of such systems, the Company capitalized $161,000 of internal development costs during the period. In February, 1999 the Company issued $1,000,000 of Series A 12% Subordinated Notes along with 125,000 shares of common stock for net proceeds of $892,000 (net of closing fees and cash financing expenses). The notes and all accrued interest were due upon the earlier of the first day subsequent to the close of the Company's initial public offering or one year from the date of issuance. Total new borrowings from an affiliate were $911,000 in 1999. Payments of notes payable were $6,584,000 in 1999 as the Company retired all notes with the proceeds of its IPO. In April of 1999, the Company completed its IPO, issuing 2,875,000 shares for net proceeds of $19,515,000. In October of 1999, the Company entered into a Development and Services Agreement (the "Agreement") with McKesson HBOC, Inc. (McKesson), whereby the Company has granted McKesson a multi-year, non-exclusive, private label license for certain of the Company's proprietary technology and has agreed to manage McKesson's operation of the system on a fully outsourced basis. The Company will receive development fees, license fees, subscription fees, and transaction fees pursuant to the agreement. In connection with the Agreement, the Company issued McKesson a warrant for the purchase of 819,184 shares of common stock at an exercise price of $7.00 per share. The warrant is immediately exercisable and can be exercised at any time through October 27, 2002. The value of the warrant, which is estimated at approximately $1.7 million using the Black-Scholes valuation method, will be amortized ratably over the life of the agreement as a sales discount. 20 Net cash used by operating activities increased to $2,994,000 in 1998 from $1,973,000 in 1997. The increase is generally attributable to the increase in operating expenses, offset by an increase in non-cash amortization expense and an increase in accrued liabilities, primarily related to deferred offering costs. Net cash used in investing activities decreased to $120,000 in 1998 from $437,000 in 1997. During 1997, cash used in investing activities included non-recurring uses of $84,000 related to the Medica acquisition and $193,000 related to capitalized software development costs. Net cash provided by financing activities decreased slightly to $2,763,000 in 1998 from $2,789,000 in 1997. Proceeds from common stock issuances related to private equity placements decreased by $226,000 and net borrowings under the line of credit due to affiliate increased by $955,000 while payments for deferred offering costs increased by $755,000. The Company believes that its current cash reserves and contractual cash inflows are sufficient to fund operations, capital improvements and the Company's obligations resulting from the VHX transaction for a period of at least twelve months. YEAR 2000 COMPLIANCE In late 1999, the Company completed its remediation and testing of its information systems to become year 2000 ready. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $10,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the Year 2000 to insure that any latent Year 2000 matters that may arise are addressed promptly. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK THE FOLLOWING DISCUSSION AND ANALYSIS ABOUT MARKET RISK DISCLOSURES MAY CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. The Company elected to minimize risk during 1999 by investing excess cash in money market instruments and domestic bonds. Claimsnet.com operates in the United States and is not subject to foreign currency fluctuations and run away inflation. Remaining proceeds from the April 6, 1999 Initial Public Offering (IPO), together with anticipated revenues from operations, are expected to be sufficient to satisfy capital requirements for at least the next 12 months. If financial resources are insufficient, additional financing may be required to implement plans for expansion. The Company can not predict whether this additional financing will be in the form of equity or debt, or be in another form. In the event that any future financing should take the form of equity securities, the holders of the common stock may experience additional dilution. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Claimsnet.com, Inc.: We have audited the accompanying consolidated balance sheet of Claimsnet.com, Inc. and subsidiary as of December 31, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Claimsnet.com, Inc. and subsidiary at December 31, 1999, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. /S/ Ernst & Young LLP Dallas, Texas February 8, 2000, except for Note L as to which the date is March 20, 2000 22 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Claimsnet.com Inc. We have audited the accompanying consolidated balance sheet of Claimsnet.com inc, and subsidiary as of December 31, 1998 and the related statements of operations, stockholders' deficit, and cash flows for the years ended December 31, 1998 and 1997. 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 have 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 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 Claimsnet.com, Inc. and subsidiary as of December 31, 1998 and the results of their operations and their cash flows for the years ended December 31, 1998 and 1997 in conformity with generally accepted accounting principles. /S/ KING GRIFFIN & ADAMSON, P.C. Dallas, Texas January 22, 1999 23 CLAIMSNET.COM INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, ----------------------------- 1999 1998 ------------- ------------- ASSETS CURRENT ASSETS Cash and equivalents $ 3,021,000 $ 44,000 Marketable securities 3,832,000 - Accounts receivable, net of allowance for doubtful accounts of $26,000 and $43,000 in 1999 and 1998, respectively 98,000 42,000 Interest receivable 100,000 - Prepaid expenses and other current assets 125,000 19,000 ------------- ------------- Total current assets 7,176,000 105,000 EQUIPMENT, FIXTURES AND SOFTWARE Computer hardware and software 1,617,000 273,000 Software development costs 1,923,000 1,923,000 Furniture and fixtures 109,000 10,000 Office equipment 25,000 25,000 Leasehold improvements 31,000 - ------------- ------------- 3,705,000 2,231,000 Accumulated depreciation and amortization (1,983,000) (1,125,000) ------------- ------------- Total equipment, fixtures and software 1,722,000 1,106,000 OTHER ASSETS Deferred offering costs - 417,000 Other 25,000 25,000 ------------- ------------- Total other assets 25,000 442,000 ------------- ------------- TOTAL ASSETS $ 8,923,000 $ 1,653,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 489,000 $ 173,000 Accrued expenses 463,000 671,000 Contingent payable - 125,000 Notes payable - 225,000 ------------- ------------- Total current liabilities 952,000 1,194,000 ------------- ------------- LONG-TERM DEBT Line of credit-affiliate - 1,462,000 Note payable-affiliate - 2,000,000 Accrued interest-affiliate - 861,000 ------------- ------------- Total long-term liabilities - 4,323,000 ------------- ------------- TOTAL LIABILITIES 952,000 5,517,000 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock, $.001 par value; 4,000,000 shares authorized, no shares issued or outstanding Common stock, $.001 par value; 40,000,000 shares authorized; 6,625,000 shares and 3,625,000 shares outstanding as of December 31, 1999 and 1998, respectively 7,000 4,000 Additional capital 24,572,000 3,882,000 Accumulated deficit (16,608,000) (7,750,000) ------------- ------------- Total stockholders' equity (deficit) 7,971,000 (3,864,000) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,923,000 $ 1,653,000 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 24 CLAIMSNET.COM INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ---------------------------------------- 1999 1998 1997 ---- ---- ---- REVENUES $ 414,000 $ 155,000 $ 82,000 Cost of Revenues 1,665,000 649,000 251,000 ------------ ------------ ------------ Gross Loss (1,251,000) (494,000) (169,000) ------------ ------------ ------------ OPERATING EXPENSES: Research and Development 1,005,000 531,000 461,000 Software Amortization 729,000 672,000 403,000 Selling, General & Administrative 5,086,000 2,658,000 1,399,000 ------------ ------------ ------------ LOSS FROM OPERATIONS (8,071,000) (4,355,000) (2,432,000) ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest expense-affiliate (142,000) (314,000) (390,000) Interest expense-bridge debt (967,000) - - Interest income 322,000 6,000 41,000 ------------ ------------ ------------ Total Other Income (Expense) (787,000) (308,000) (349,000) ------------ ------------ ------------ NET LOSS $(8,858,000) $(4,663,000) $(2,781,000) ============ ============ ============ NET LOSS PER SHARE - BASIC AND DILUTED $ (1.52) $ (1.41) $ (0.98) ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Basic and diluted) 5,811,000 3,309,000 2,851,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 25 CLAIMSNET.COM INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Total Number of Common Additional Note Accumulated Shareholders' Shares Stock Capital Receivable Deficit Equity --------- ------- ------------ ---------- ------------- ------------- Balances at January 1, 1997 2,365,000 $ 2,000 $(3,125,000) $ (1,000) $ (306,000) $ (3,430,000) Issuance of stock for compensation 46,000 - 78,000 - - 78,000 Sale of stock for cash 580,000 1,000 2,249,000 - - 2,250,000 Issuance of stock related to the purchase of Medica 120,000 - 465,000 - - 465,000 American Medical Finance capital Contribution - - 1,740,000 1,000 - 1,741,000 Net loss - - - - (2,781,000) (2,781,000) --------- ------- ------------ ---------- ------------- ------------- Balances at December 31, 1997 3,111,000 3,000 1,407,000 - (3,087,000) (1,677,000) --------- ------- ------------ ---------- ------------- ------------- Sale of stock for cash 514,000 1,000 2,475,000 - - 2,476,000 Net loss - - - - (4,663,000) (4,663,000) --------- ------- ------------ ---------- ------------- ------------- Balances at December 31, 1998 3,625,000 4,000 3,882,000 - (7,750,000) (3,864,000) --------- ------- ------------ ---------- ------------- ------------- Issuance of common stock with Series A 12% Subordinated Notes 125,000 - 850,000 - - 850,000 Non-employee stock option grants - - 155,000 - - 155,000 Issuance of common stock warrants - - 121,000 - - 121,000 Sale of common stock in initial public Offering 2,875,000 3,000 19,512,000 - - 19,515,000 Amortization of common stock warrants issued in connection with development agreement - - 52,000 - - 52,000 Net loss - - - - (8,858,000) (8,858,000) --------- ------- ------------ ---------- ------------- ------------- Balances at December 31, 1999 6,625,000 $ 7,000 $24,572,000 $ - $(16,608,000) $ 7,971,000 ========== ======= ============ ========== ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 26 CLAIMSNET.COM INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, --------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (8,858,000) $ (4,663,000) $ (2,781,000) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 858,000 707,000 417,000 Common stock issued for services 276,000 - 78,000 Provision for doubtful accounts 65,000 34,000 10,000 Amortization of debt discount and deferred financing costs 958,000 - - Offering costs written off - 412,000 102,000 Amortization of prepaid sales discount 52,000 - - Changes in operating assets and liabilities net of acquisitions: (Increase) decrease in accounts receivable (121,000) (62,000) 93,000 Increase in prepaid expenses and other current assets (206,000) (9,000) (11,000) Increase in accounts payable, accrued expenses and other current liabilities 525,000 587,000 119,000 ------------- ------------- ------------- Net cash used in operating activities (6,451,000) (2,994,000) (1,973,000) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (5,757,000) - - Proceeds from sale of marketable securities 1,925,000 - - Purchase of business, net of cash acquired - - (84,000) Employee loan - (25,000) - Purchase of property and equipment (1,313,000) (95,000) (160,000) Capitalized cost of internal software development (161,000) - (193,000) ------------- ------------- ------------- Net cash used in investing activities (5,306,000) (120,000) (437,000) ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in line of credit - affiliate 911,000 1,530,000 575,000 Payments of notes and line of credit - affiliate (5,234,000) - - Issuance of Series A 12% Subordinated Notes 892,000 - - Payment of Series A 12% Subordinated Notes (1,000,000) - - Payment of contingent notes (350,000) - - Proceeds from issuance of common stock 19,515,000 2,025,000 2,251,000 Payments of deferred offering costs - (792,000) (37,000) ------------- ------------- ------------- Net cash provided by financing activities 14,734,000 2,763,000 2,789,000 ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,977,000 (351,000) 379,000 CASH AND EQUIVALENTS, BEGINNING OF YEAR 44,000 395,000 16,000 ------------- ------------- ------------- CASH AND EQUIVALENTS, END OF YEAR $ 3,021,000 $ 44,000 $ 395,000 ============= ============= =============
27 CLAIMSNET.COM INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended December 31, 1999 1998 1997 ------------ ------------ ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION NON CASH TRANSACTIONS: Common stock issued for acquisition of a business $ - $ - $ 465,000 ============ ============ =========== Common stock issued in connection with Series A 12% Subordinated Notes $ 850,000 $ - $ - ============ ============ =========== Other liabilities incurred for acquisition of subsidiary $ - $ - $ 58,000 ============ ============ =========== Conversion of note payable - affiliate to equity $ - $ - $1,740,000 ============ ============ =========== Conversion of portion of line of credit - affiliate to equity $ - $ 450,000 $ - ============ ============ =========== Common stock warrants issued in connection with development and services agreement $ 1,700,000 $ - $ - ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 28 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE A--ORGANIZATION AND BACKGROUND Claimsnet.com inc. ("Claimsnet.com" or the "Company") is a Delaware corporation originally formed in April 1996. The Company owns and licenses software used for processing medical insurance claims on the internet. In 1996, the Company acquired all the internet software, licenses, intellectual property rights and technology developed by an affiliated company, American Medical Finance ("American Medical Finance"). American Medical Finance is affiliated through common stockholders, and as a stockholder of the Company. On June 2, 1997, the Company acquired Medica Systems, Inc., which owned the CyberClaim software source code previously licensed to the Company for use in conjunction with the software purchased from American Medical Finance. (See Note C). The Company completed an initial public offering in April 1999 for 2,875,000 shares at $8.00 per share including the underwriter's overallotment of 375,000 shares. The Company has generated losses since inception and has had negative cash flow from operations. Through 1999, the Company has generated minimal revenues and has relied on an initial public offering and funding from an affiliate to fund its operations and development activities. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying financial statements include the accounts of Claimsnet.com Inc. and its subsidiary from the date of acquisition. All material intercompany accounts and transactions from that date have been eliminated in consolidation. CASH EQUIVALENTS Cash equivalents include time deposits, certificates of deposits and all highly liquid debt instruments with original maturities of 3 months or less when purchased. MARKETABLE SECURITIES Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designations as of each balance sheet date. The Company has classified all investments in debt securities as held-to-maturity because the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Interest on securities classified as held-to-maturity is included in investment income. 29 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SOFTWARE FOR SALE OR LICENSE The Company begins capitalizing costs incurred in developing a software product once technological feasibility of the product has been determined. Software development costs capitalized through December 31, 1999, include internal software development costs totaling $396,000, software purchased from American Medical Finance totaling $615,000 (See Note H), and software purchased through the acquisition of Medica totaling $912,000 (See Note C). Capitalized computer software costs include direct labor, labor-related overhead costs and interest. The software is amortized over its expected useful life of 3 years. Amortization expense related to internally developed software costs totaled $649,000, $629,000 and $394,000 for 1999, 1998 and 1997, respectively. Management periodically evaluates the recoverability, valuation, and amortization of capitalized software costs to be sold, leased, or otherwise marketed. As part of this review, management considers the expected undiscounted future net cash flows. If they are less than the stated value, software costs will be written down to fair value. REVENUE Monthly subscription fee revenue is recognized ratably over the applicable subscription period. Claim processing revenues are recognized when the claims are processed. Enrollment fee revenue is recognized upon enrollment of customers. Customer support fees are recognized when support services are rendered. Project development revenues are recognized on a percentage of completion basis. Software license revenues are recognized in accordance with the American Institute of Certified Public Accountants' Statement of Position (SOP) 97-2, "Software Revenue Recognition". Under SOP 97-2, software license revenues are recognized upon execution of a contract and delivery of software, provided that the license fee is fixed and determinable; no significant production, modification, or customization of the software is required; and collection is considered probable by management. EQUIPMENT, FIXTURES AND INTERNAL USE SOFTWARE Equipment and fixtures are stated at cost. Depreciation is provided using the straight line method over the estimated useful lives of the depreciable assets which range from three to seven years. Maintenance and repairs are expensed as incurred. Significant replacements and betterments are capitalized. Depreciation expense related to equipment and fixtures totaled $141,000, $57,000 and $19,000 and in 1999, 1998 and 1997, respectively. Effective January 1, 1999 the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Internal development costs of $161,000 and software purchased of $559,000 related to software utilized in several of the Company's internal support systems, were capitalized in 1999 in compliance with this Statement. The software is amortized over its expected useful life of three years. Amortization expense related to costs of software developed or obtained for internal use totaled $68,000, $21,000, and $4,000 in 1999, 1998, and 1997. Leasehold improvement costs are capitalized and amortized over the remaining lease term. Costs incurred in 1999 were $42,000 and amortization totaled $11,000. 30 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED OFFERING COSTS Offering costs are capitalized and recorded as a reduction to stockholders' equity upon completion of a successful offering or expensed if the offering is unsuccessful. INCOME TAXES Deferred income tax assets and liabilities are recorded for differences between the financial statement and tax bases of assets and liabilities. Valuation allowances are provided for deferred tax assets when realization is not reasonably assured. LOSS PER SHARE Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period. Common stock equivalents, representing options and warrants totaling approximately 1,371,000 shares at December 31,1999 are not included in the diluted loss per share as they are antidilutive. As such, diluted and basic loss per share are the same. COMPREHENSIVE INCOME In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that total comprehensive income (loss) be disclosed with equal prominence as net income (loss). The Company's comprehensive loss is equal to its net losses for all periods presented. SEGMENT REPORTING The Company operated during all periods in a single segment when applying the management approach defined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS One customer project represented 21% of the Company's total revenue for 1999. The Company does not generally require collateral. Management provides an allowance for doubtful accounts which reflects its estimate of uncollectible receivables. 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. 31 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities." The Standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The new Standard is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Claimsnet does not expect the adoption of the new Standard to have a material impact on its financial position or results of operations. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense totaled $579,000, $99,000 and $46,000 for the years ended December 31, 1999, 1998 and 1997, respectively. RECLASSIFICATION Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 presentation. NOTE C--MEDICA SYSTEMS, INC. ACQUISITION On June 2, 1997, the Company completed the acquisition of Medica Systems, Inc. ("Medica "), giving it 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 $973,000 which consisted of $100,000 cash at closing, 119,671 shares of the Company's common stock, a contingent cash payment of $125,000 due within 60 days of the effective date of a registration statement (February 9, 1999), notes for $225,000 due one year from the effective date of a registration statement (December 11, 2000), and 50% of the amounts collected relating to the accounts receivable of Medica existing on the closing date. The fair value of the common stock given as consideration in the transaction totaled $465,000 or $3.89 per share. The Company collected $116,000 of Medica's outstanding receivables at the closing date and has included $58,000 (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. The fair value of assets acquired and liabilities assumed consisted of: Software ................................................... $ 912,000 Accounts receivable, net ................................... 116,000 Fixed assets ............................................... 25,000 Other current assets ....................................... 2,000 Current liabilities ........................................ (82,000) ---------- $ 973,000 ========== 32 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE C--MEDICA SYSTEMS, INC. ACQUISITION (CONTINUED) Unaudited pro forma financial information for the year ended December 31, 1997 as though the acquisition had occurred on January 1, 1997 is as follows: Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 408,000 =========== Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,856,000 =========== Net loss per common share (basic and diluted) . . . . . . . . $ (0.99) =========== Weighted average common shares outstanding (basic and diluted) 2,900,632 =========== NOTE D-MARKETABLE SECURITIES The following is a summary of held-to-maturity debt securities at December 31, 1999: ESTIMATED FACE VALUE FAIR VALUE ---------- ---------- Due in one year or less $3,483,000 $3,484,000 Due after one year through two years 350,000 348,000 ---------- ---------- $3,833,000 $3,832,000 Held-to-maturity debt securities at December 31, 1999 are summarized based on contractual maturity, however, expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Amortized cost of securities sold in 1999 upon maturity was $1,925,000. NOTE E--LINE OF CREDIT AND NOTES PAYABLE The Company had a line of credit facility with American Medical Finance, an affiliate, of up to $2,000,000, carrying an interest rate of 9.5%. The Company also had a note payable-affiliate to American Medical Finance (see Note H) for $2,000,000 plus interest at 9.5%. The balances due on the line of credit and the note, and the related interest, were paid in 1999 with proceeds from the initial public offering. Notes payable at December 31, 1998 related to debt incurred in conjunction with the purchase of Medica (see Note C). The notes were retired in 1999 with proceeds from the initial public offering. NOTE F--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 with fixed rate debt) had a carrying amount of $3,462,338 and a fair value of approximately the same amount at December 31, 1998. The fair value of the Company's fixed rate debt has been estimated based upon relative changes in the Company's variable borrowing rates since origination of the fixed rate debt. 33 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE G--INCOME TAXES Deferred tax assets and liabilities at December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Current deferred tax assets. . . . . . . $ 10,000 $ 16,000 $ 4,000 Non-current deferred tax assets. . . . . 6,088,000 2,953,000 1,289,000 Non-current deferred tax liabilities . . (212,000) (191,000) (417,000) Valuation allowance . . . . . . . . . . (5,886,000) (2,778,000) (876,000) ------------ ------------ ------------ Net non-current deferred taxes . . . . . $ -- $ -- $ -- ============ ============ ============
The deferred tax assets result from the provision for doubtful accounts which is not currently deductible for income tax purposes and from the net operating loss generated by the Company. The non-current deferred tax liability results from depreciation and amortization deducted for income tax purposes in excess of that expensed for financial reporting purposes and the remaining deferred tax liability acquired in the Medica acquisition. The net deferred tax asset is fully reserved through a valuation allowance recorded against it due to the uncertainty of the Company generating future taxable income. The Company's effective income tax rate differed from the Federal statutory rate of 34% as follows:
1999 1998 1997 ---- ---- ---- Statutory rate of 34% applied to net loss . .$ 3,012,000 $ 1,585,000 $ 946,000 Permanent differences . . . . . . . . . . . . (167,000) 62,000 14,000 State income taxes, net of federal tax effect 263,000 143,000 84,000 Change in valuation allowance . . . . . . . . (3,108,000) (1,790,000) (1,044,000) ------------ ------------ ------------ $ -- $ -- $ -- ============ ============ ============
At December 31, 1999, the Company has net operating loss carryforwards of approximately $10.3 million which begin to expire in 2011. NOTE H--RELATED PARTY TRANSACTIONS In 1996, the Company purchased software, licenses, intellectual property rights and technology from American Medical Finance. As the software was purchased from a related entity, the asset was recorded by the Company at the basis (in accordance with generally accepted accounting principles) of American Medical Finance. Accordingly, the asset was recorded at $615,000 with a corresponding note payable to American Medical Finance $3,740,000. The difference between the recorded cost of the asset and the note payable ($3,125,000) was reflected as a contra to paid-in capital (a deemed distribution). The asset was recorded at the net book value per the affiliate's records, which was less than the estimated fair market value. 34 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE H--RELATED PARTY TRANSACTIONS (CONTINUED) In 1997, American Medical Finance agreed to reduce its note receivable from the Company by $1,740,000. The reduction in the note was recorded as a capital contribution by American Medical Finance and effectively reduced the $3,125,000 contra to additional capital described above. The Company had a note payable and a line of credit facility with American Medical Finance (see Note E). In 1998 and 1997, certain of the Company's expenses totaling $317,000 and $185,000, respectively, were paid by American Medical Finance and represent costs such as rent, printing and office supplies. All such expenses were accounted for as increases in the line of credit. The relationship with American Medical Finance could result in operating results or financial position significantly different from that which would have been obtained if the entities were autonomous. NOTE I--STOCKHOLDERS' EQUITY In 1999 the Company issued $1,000,000 of Series A 12% Subordinated Notes along with 125,000 shares of common stock for net proceeds of approximately $892,000 (net of closing fees and cash financing expenses). The notes and all accrued interest were due upon the earlier of the first day subsequent to the close of the Company's initial public offering or one year from the date of issuance. The 125,000 shares of common stock issued with the Notes were valued at $850,000 ($6.80 per share) and were recorded at that amount with a corresponding charge to debt discount. The Notes were repaid in April 1999 from the proceeds of the initial public offering which occurred on April 6, 1999 (see note 4) and the debt discount was amortized over the period from issuance to repayment, resulting in an $850,000 charge to interest expense. Debt issuance costs of $108,000 were also capitalized as deferred financing costs and amortized to interest expense over the period the Notes were outstanding. In connection with the Companys initial public offering ("IPO"), 2,875,000 shares of common stock were sold in April and May 1999 at a price of $8.00 per share. The net proceeds to the Company (after deducting the underwriting discount and offering expenses payable by the Company) were approximately $19.5 million. In connection with the initial public offering, the Company granted employees and non-employees options to purchase 420,000 shares of common stock under the 1997 Stock Option Plan, 27,000 of which were granted to non-employees. Total shares authorized for grant under the 1997 Plan are 557,692. The options were granted at a price of $8.00 or $8.80 per share, expire on the tenth anniversary of the grant, and the employee options vest ratably over the first four anniversaries of the grant. The non-employee options were granted for past services, are fully vested, and become exercisable ratably over the first four anniversaries of the grant. The options granted to non-employees require a charge to earnings equal to the imputed value of the options, which is estimated at $5.73 per option using the Black-Scholes valuation method. Therefore, the Company recognized a one-time expense of $155,000 related to the past services as of March 31, 1999. The Company also granted non-employee directors options to purchase 80,000 shares of common stock under the Non-Employees and Director's Plan. The non-employee director options were issued at a price of $8.00 per share. In May of 1999, the board of directors voted to accelerate the vesting of the directors' option shares from one year to immediate vesting. The Company did not record a charge for the acceleration as it determined the modification resulted in a de minimus change in fair value. All options expire on the tenth anniversary of the date of the grant. Total shares authorized for grant under this Plan are 111,538. 35 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE I--STOCKHOLDERS' EQUITY (CONTINUED) Also in connection with the initial public offering, the Company issued warrants to purchase an aggregate of 20,000 shares of common stock at a price of $8.80 per share, exercisable between the first and fifth anniversaries of the date of grant. The warrants are fully vested and issued for past services and, therefore, required a charge to earnings equal to the imputed value of the warrants, which was estimated at $6.07 per share using the Black-Scholes valuation method. Therefore, the Company recognized a one-time expense of $121,400 related to the issuance of warrants as of March 31, 1999. In November 1999, the Company granted certain employees and non-employees options to purchase 62,500 shares of common stock under the 1997 Stock Option Plan, 5,000 of which were granted to a non-employee. The options were issued at a price of $8.00 per share, the market price on the date of grant, expire on the tenth anniversary of the grant, and vest ratably over the first four anniversaries of the grant. In October 1999 Claimsnet.com entered into a Development and Services Agreement (the "Agreement") with McKesson HBOC, Inc. (McKesson), whereby the Company has granted McKesson a multi-year, non-exclusive, private label license for certain of the Company's proprietary technology and has agreed to manage McKesson's operation of the system on a fully outsourced basis. In connection with the Agreement, the Company issued McKesson a warrant for the purchase of 819,184 shares of common stock at an exercise price of $7.00 per share. The fair market value of the Company's Common Stock on the date the warrant was granted was $4.25 a share. The warrant is immediately exercisable and can be exercised at any time through October 27, 2002. The imputed value of the warrant, which was estimated at approximately $1.7 million using the Black-Scholes valuation method, is being amortized ratably over the life of the agreement as a direct reduction of revenues generated by The Agreement. During 1998, the Company consummated a private offering of 20 units, each unit consisting of 11,967 shares of common stock, for aggregate gross proceeds of $1,000,000 in the form of $550,000 cash and $450,000 debt cancellation related to a portion of the line of credit-affiliate. Also, during the period from July to October 1998, the Company consummated an additional private offering of 29.5 units, each unit consisting of 9,295 shares of the Company's common stock for aggregate gross proceeds of $1,475,000. In July 1998, the Company issued warrants to acquire an aggregate of 11,154 shares of common stock to a non-employee. Such warrants are exercisable for a period of four years commencing one year following the IPO at a price per share equal to 110% of the IPO price. During 1997, the Company raised $2,250,000 in gross proceeds, in a private placement, through the sale of 579,806 shares of common stock. STOCK BASED COMPENSATION ARRANGEMENTS The Company's 1997 stock option plan provides for the issuance to employees, officers, directors, and consultants of incentive and/or non-qualified options to acquire 557,692 shares of common stock. The options are to be issued at fair market value, as defined, and vest 25% each year from the date of the option grant. Options generally expire 10 years from the date of grant and automatically expire at termination of employment. 36 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE I--STOCKHOLDERS' EQUITY (CONTINUED) The Company's Directors' Plan provides for the issuance to non-employee directors of options to acquire 111,538 shares of common stock. The options are to be issued at fair market value, as defined, and vest on the first anniversary from the date of the option grant. Options generally expire 10 years from the date of grant and automatically expire one year from the date upon which the participant ceases to be a Director. The following table summarizes the stock option activity related to the Company:
NUMBER OF PER SHARE WEIGHTED AVERAGE SHARES EXERCISE EXERCISE PRICE ---------- ---------- ---------------- Outstanding options-January 1, 1999 - $ - $ - Granted 562,500 8.00-8.80 8.03 Cancelled (41,500) 8.00 8.00 ---------- ---------- --------- Outstanding options-December 31, 1999 521,000 8.00-8.80 8.03 ========== ========== ========= Options exercisable-December 31, 1999 - - - ========== ========== =========
Outstanding options as of December 31, 1999, had a weighted average remaining contractual life of approximately 9 years and a weighted average fair value at issuance of $4.83 based on the Black-Scholes value method. The Company accounts for its stock based awards to employees using the intrinsic value method in accordance with APB 25, "Accounting for Stock Issued to Employees," and its related interpretations. SFAS No. 123 requires the disclosure of pro forma net loss and net loss per share as if the Company had adopted the fair value method since inception. The Company's calculations for employee grants were made using a Black-Scholes model using the following assumptions: expected life, four years; risk free rate of 7 percent; no dividends during the expected term; and a volatility of 0.8. If the computed values of the Company's stock based awards were amortized to expense over the vesting period of the awards as specified under SFAS No. 123, net loss would have been $9,252,643 ($1.59 per basic and diluted share) for the year ended December 31, 1999. NOTE J--COMMITMENTS AND CONTINGENCIES The Company leases office space under a lease agreement that expires on December 31, 2000. Rent expense totaled $248,000, $116,000 and $56,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Rent expense for the year ended December 31, 2000 is expected to be $409,000. 37 CLAIMSNET.COM INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE J--COMMITMENTS AND CONTINGENCIES (CONTINUED) >From time to time in the normal course of business, the Company is a party to various matters involving claims or possible litigation. Management believes the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. NOTE K--RETIREMENT PLAN The Company utilizes a third party for the processing and administration of its payroll and benefits. Under the agreement, the third party is legally a co-employer of all of the Company's employees, which are covered by the third party's 401(k) retirement plan. Under the plan, employer contributions are discretionary. The Company has made no contributions to the plan through December 31, 1999. NOTE L--SUBSEQUENT EVENTS On March 20, 2000, Claimsnet.com Inc., a Delaware corporation (the "Company"), through its wholly-owned subsidiary, HealthExchange.com, Inc., a Delaware corporation ("HEX"), entered into an asset purchase agreement (the "Asset Purchase Agreement") with VHX Company, a Nevada corporation ("VHX"), whereby HEX will acquire substantially all of the properties and assets, the business and goodwill of VHX, including the HealthExchange.com name and HealthExchange.com trademarks, and assume certain liabilities in exchange for (i) 1,200,000 shares of common stock, par value $.001 per share, (ii) shares of Series A 8% Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") and shares of Series B 8% Convertible Redeemable Preferred Stock (the "Series B Preferred Stock," and, together with the Series A Preferred Stock, the "Preferred Stock"), and (iii) the cancellation of certain indebtedness owed by VHX to the Company. The Company estimates that total purchase price to be approximately $32 million. Pursuant to the Asset Purchase Agreement, the stated value of the shares of each series of Preferred Stock to be issued shall be determined immediately prior to closing in accordance with the following formula: $15.35 million less (1) the product of 600,000 and the average of the closing sale prices of the Common Stock as quoted on the Nasdaq SmallCap Market on each trading day during the ten-day period terminating on the date immediately prior to March 20, 2000 (the "Trailing Average Closing Price"), and (2) the product of (a) the principal amount of, and accrued and unpaid interest on, the debt obligations owed by VHX to the Company and (b) 0.5. The Preferred Stock is convertible into shares of Common Stock at a conversion price based upon the market value of the Common Stock at a specified time provided that the conversion price cannot be less than $14.00 or greater than $15.00, and provided further that (i) the convertibility of the Preferred Stock has been approved by the stockholders of the Company by March 31, 2001 and (ii) the performance milestone for the relevant series of Preferred Stock has been satisfied by March 31, 2001. The performance milestone for the Series A Preferred Stock is the existence of 1,000,000 lives covered by the business operation attributable to assets acquired. The performance milestone for the Series B Preferred Stock is the recognition of revenue from 6,000,000 member-months attributable to assets acquired. In the event that the performance milestone of any series of Preferred Stock is not satisfied that series of Preferred Stock will be cancelled. In the event that the performance milestone for any series of Preferred Stock is satisfied by such date, but the required approval by the stockholders of the Company is not obtained by such date, the relevant series of preferred stock will begin on April 1, 2001 to accrue cumulative dividends at the rate of 8% per annum and will be redeemed in equal quarterly installments thereafter for three years out of capital legally available therefor. 38 In connection with the Asset Purchase Agreement, HEX will at closing enter into employment agreements with each of Eric Hillerbrand, Jeff Muscarella and Nan P. Smith, the Executive Vice President - Chief Knowledge Officer, Executive Vice President - Business Development, and President, respectively, of VHX, each of whom will serve in various managerial capacities with the Company. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On August 10, 1999 the Company dismissed King Griffin & Adamson P.C., which served as the Company's independent auditors since 1996. The reports issued by King Griffin & Adamson P.C. on the financial statements for the years ended December 31, 1998 and 1997 of the Company did not contain an adverse opinion nor a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. Based on the recommendation of the Audit Committee of the Board of Directors of the Company, the Company's Board of Directors approved the decision to change independent auditors. In connection with its audits for the years ended December 31, 1998 and 1997 and through August 10, 1999, there were no disagreements with King Griffin & Adamson P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of King Griffin & Adamson P.C., would have caused King Griffin & Adamson P.C. to make reference thereto in their Report on the financial statements for such years or such interim periods. King Griffin & Adamson P.C. furnished the Company with a letter addressed to the Commission stating whether or not it agrees with the above statements. A copy of such letter, dated August 16, 1999, is filed as Exhibit 16.1 to the Form 8-K of the Company, dated August 10, 1999. The Company engaged Ernst & Young LLP as its new independent auditors as of August 10, 1999. The Company's Board of Directors approved the engagement on May 21, 1999. Through August 10, 1999, the Company has verbally consulted with Ernst & Young LLP only regarding issues related to 1999 matters and, specifically, to matters related to a bridge financing transaction, matters related to the issuance of stock options and stock warrants to non-employees, and general matters related to the presentation of interim financial results. The recommendations of Ernst & Young LLP were adopted by the Company and disclosed in the Form 10-Q filings dated May 17, 1999 and August 16,1999. The previous independent auditors were verbally consulted on the matter related to a bridge financing transaction and were not in disagreement with the views of management and Ernst & Young LLP. The Company had allowed Ernst & Young LLP to review the aforementioned Form 8-K before it was filed with the Commission. Ernst & Young LLP has not furnished the Company with a letter containing any new information, clarification, or disagreement with the information set forth herein. 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT The directors and executive officers of Claimsnet.com, their ages, and their positions held with Claimsnet.com are as follows:
NAME AGE POSITION - ---- --- -------- Bo W. Lycke ........................ 53 Chairman of the Board of Directors, President, Chief Executive Officer, and Class I Director Terry A. Lee ........................45 Executive Vice President, Chief Operating Officer and Class II Director Paul W. Miller ......................43 Vice President and Chief Financial Officer Patricia Davis ......................44 Vice President of Business Development Ellen Opperthauser...................36 Vice President of Marketing C. Kelly Campbell ...................41 Vice President of Finance and Secretary Sharon G. Larkin ...................47 Vice President, Corporate Controller Abbas R. Kafi .......................45 Vice President of Information Systems Cheryl L. Corless ...................43 Vice President of Customer Operations Ward L. Bensen ..................... 57 Class I Director, Treasurer Robert H. Brown, Jr. ................46 Class I Director Sture Hedlund ...................... 61 Class II Director John C. Willems, III ................44 Class II Director Westcott W. Price, III ..............60 Class II Director
The following is certain summary information with respect to the executive officers and directors of Claimsnet.com. BO W. LYCKE has served as the Chairman of the Board of Directors, President, and Chief Executive Officer of Claimsnet.com since its inception. In 1990, Mr. Lycke founded American Medical Finance 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. 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 and Chief Operating Officer of Claimsnet.com since September 1996 and has served as director of Claimsnet.com since 1998. From October 1995 until September 1996, Mr. Lee served as a director of North American Sales and Marketing, Internetworking Product Group of Compaq Computer Corporation. From January 1995 through December 1995, Mr. Lee served as Vice President of Sales of Networth, a network hardware manufacturer acquired by Compaq. From October 1988 to January 1995, Mr. Lee served as Director of Major Accounts, with Lotus Development Corporation, a software developer and marketer. From November 1983 to October 1988, Mr. Lee served as a district manager with CompuServe, Inc., an online service provider. 40 PAUL W. MILLER is a Certified Public Accountant and served as Chief Financial Officer of Claimsnet.com since November 1997. From September 1995 to October 1997, Mr. Miller served as Chief Financial Officer and Vice President of Quality Management Services for Sweetwater Health Enterprises, Inc., a NCQA accredited credentials verification organization and commercial software firm serving the managed healthcare industry. From April 1991 to May 1995, Mr. Miller served as Chief Financial Officer and Secretary of Quantra Corporation, formerly, Melson Technologies, an information systems company serving the commercial real estate industry. From January 1984 to February 1991, Mr. Miller held a variety of financial and operations management positions in the independent clinical laboratory industry with SmithKline Beecham Clinical Laboratories, Inc. and Nichols Institute Laboratories North Texas, Ltd. Mr. Miller began his career in 1978 in the audit division of Arthur Andersen & Company. PATRICIA DAVIS joined the Company and was named the Company's first Vice President of Business Development in October 1999. She comes to Claimsnet.com with over 15 years of health industry management experience. From December 1996 to September 1999 Ms. Davis was the director of quality management services for Caredata.com, a leading healthcare intelligence provider and Internet content destination. From November 1993 to November 1996, Ms. Davis was the region sales/service manager for Quest Diagnostics, one of the leading clinical and research development laboratories. Prior to Quest Diagnostics, Ms. Davis held positions managing operations, client services, sales and multi-site information systems for several of the largest companies in the $35 billion clinical laboratory industry, including Nichols Institute and SmithKline Beecham Clinical Laboratories. Ms. Davis began her career in 1980 at International Clinical Laboratories. ELLEN OPPERTHAUSER has served as Vice President of Marketing since August 1999. Ms. Opperthauser came to Claimsnet.com with nine years of high-technology marketing and business development experience. From May 1997 to March 1999, Ms. Opperthauser was Global Director of Marketing, Public Relations, Tradeshows & Events for Philips Consumer Communications (PCC). In that capacity, Ms. Opperthauser was responsible for developing and executing marketing strategies to support PCC's strategic alliances and new product launches including the primary responsibility for marketing partnerships with Disney's Touchstone Pictures and the National Association of Stock Car Automobile Racing (NASCAR). >From December 1996 to April 1997, Ms. Opperthauser was employed by Advanced Telemarketing Corporation as Director of Marketing Communications where she was responsible for development and execution of the company's strategic marketing plan. Previously (January 1995- July 1996) she was Director, Public Relations/Account Executive for G. Williams & Associates, an advertising agency. Ms. Opperthauser began her career with Challenger Electrical Equipment Corporation, a wholly owned subsidiary of Westinghouse (1988 - 1995) where her marketing communications background was complemented by a foundation in the operations of customer service, distribution and production scheduling. C. KELLY CAMPBELL has served as Vice President, as well as Secretary, of Claimsnet.com and in other positions with Claimsnet.com since April 1996. Mr. Campbell served as the Chief Financial Officer of American Medical Finance from September 1994 until May 1998. From September 1988 to September 1994, Mr. Campbell was President of Campbell Rojas & Associates, Inc., which provided consulting services for the Resolution Trust Corporation, the Federal Deposit Insurance Corporation, banks, and other companies. From July 1984 to September 1988, he served as Vice President and Controller for Turtle Creek National Bank in Dallas, Texas. Mr. Campbell began his career in 1980 in the audit division of KPMG Peat Marwick. SHARON G. LARKIN has served as Vice President, Corporate Controller of Claimsnet.com since June 1999. Ms. Larkin has over 20 years of financial management experience in both domestic and international markets. From January 1996 to April 1999, Ms. Larkin served as Corporate Controller for Global Compression Services Inc., a wholly-owned subsidiary of GE Capital Co., where she had financial and administrative management, international accounting and audit coordination responsibilities. From 1991 to 1995 Ms Larkin served as Corporate Controller for Production Operators, Inc., a publicly traded oil field service company specializing in contract gas compression services, pipeline management and oil and gas production in the United States and South America. She began her career at Production Operators in August 1976 and progressed through various levels of financial management in a significant growth environment. 41 ABBAS R. KAFI has served as the Vice President of Information Systems of Claimsnet.com since July 1998. Mr. Kafi has over 17 years of software development and information systems management experience. From August 1996 to July 1998 Mr. Kafi served as Senior Director, Business Systems Development and Operations for Citizens Communications, Inc. in Dallas, Texas, where he was responsible for supporting 1.2 million customers nationwide. From September 1995 to August 1996, Mr. Kafi served as Executive Director of Information Technology for PrimeCo Personal Communications, L.P., Dallas, Texas, during its start up period. At PrimeCo, Mr. Kafi was responsible for designing, developing, and implementing a state of the art client/server environment capable of supporting 4.0 million subscribers nationwide. Mr. Kafi's prior experience includes software development and management positions with Value-Added Communication, USDATA Corporation, Harris Corporation, and American Micro Products. CHERYL L. CORLESS joined Claimsnet.com in February 1999 as the Vice President of Customer Operations. Ms. Corless has over 12 years of experience in operations and management positions for high volume and technical customer support operations. From June 1998 to February 1999 Ms. Corless served as Senior Manager of Greyhound Lines, Inc. where she managed call center operations handling 10 million calls annually. From March 1987 to February 1998 Ms. Corless held various positions with National TechTeam, Inc., most recently as Call Center and Remote Site Director. At TechTeam, Ms. Corless established and managed technical call centers employing 500 support technicians and successfully implemented and achieved ISO 9001 quality certification. TechTeam provided outsourcing services to Hewlett-Packard, AST, 3COM, WordPerfect, Novell, General Electric, Micrografx, Chrysler, Ford and General Motors. WARD L. BENSEN has been a director of Claimsnet.com since April 1996 and has served as Treasurer of Claimsnet.com since inception. Since 1990, he has served as a director of American Medical Finance. Since June 1994, he served as Senior Vice President of American Medical Finance where he is primarily responsible for its marketing efforts in the western United States and receivables acquisitions nationwide. From March 1993 until September 1993, Mr. Bensen was Vice President of Investment, and marketed investment programs for both Prudential Securities and Shearson Lehman Brothers, and, from 1991 to 1993, provided specialized investment banking services as a partner of John Casey and Associates, a contract wholesale securities marketing firm. From 1984 to 1991, he served as Division Vice President for Jones International Securities and prior thereto, held various positions with Shearson American Express, The Safeco Insurance Co. and Procter & Gamble. ROBERT H. BROWN, JR. has served as a director of Claimsnet.com since April 1996 and had been a director of American Medical Finance since 1990. Since January 1999, Mr. Brown has served as President and Chief Executive Officer of Frost Securities, Inc. From July 1998 to January 1999, Mr. Brown served as President and Chief Executive Officer of RHB Capital, LLC, a Dallas-based private investment firm. From 1990 to 1998, Mr. Brown was employed by Dain Rauscher, Inc., a regional investment banking and brokerage firm, as an Executive Vice President. Mr. Brown was Senior Vice President of TM Capital Corporation during 1989. From 1985 to 1989, Mr. Brown was a Vice President of Thompson McKinnon Securities, where he was responsible for all corporate finance activities in the southwestern United States. Mr. Brown also serves as a director of Emerson Radio Inc. STURE HEDLUND has served as a director of Claimsnet.com since 1998. Since January 1987, Mr. Hedlund has also served as Chairman of the board of directors of Scandinavian Merchant Group AB, a Swedish corporation engaged in venture capital investing. Since 1993, Mr. Hedlund has been a director of Ortivus AB, a public company engaged in the business of medical technology, and has been a director of Ortivus Medical AB, a company engaged in the manufacture of heart monitoring devices and a subsidiary of Ortivus AB. JOHN C. WILLEMS, III has served as a director of Claimsnet.com since 1998 and has been legal counsel to Claimsnet.com since April 1996. Since September 1993, Mr. Willems has been an attorney with the law firm of McKinley, Ringer & Zeiger, PC, in Dallas, Texas, practicing in the area of business law. From January 1992 to August 1993, Mr. Willems was an attorney in the law firm of Settle & Pou, PC, also located in Dallas, Texas. 42 WESTCOTT W. PRICE, III has served as a director of Claimsnet.com since April 1999. Mr. Price is the former President, Chief Executive Officer and Vice Chairman of the board of directors of FHP International Corporation ("FHP"), a publicly-held managed health care company. During his fifteen-year tenure at FHP, FHP's annual revenues grew from under $50 million to over $4 billion. In February 1997, FHP was acquired for $2.1 billion. Before joining FHP in 1981, Mr. Price served as President and Chief Executive Officer of Wm. Flaggs, Inc., a restaurant chain. From 1970 to 1973, Mr. Price was the Chief Operating Officer of California Medical Centers, a publicly-held long-term care and retail pharmacy-operating company in Los Angeles. Mr. Price has in the past served on various boards, including Health Maintenance Life Insurance Company and Talbert Medical Management Company, a physician practice management company with revenues of $460 million. He currently serves as a director of Scripps Health, a non-profit hospital operating company, and of StorComm, Inc., as well as other private companies. Mr. Price is a member of the Advisory Board for the School of Medicine at the University of California-Irvine. STRUCTURE OF THE BOARD OF DIRECTORS The board of directors is divided into two classes with each class consisting of, as nearly as possible, one-half of the total number of directors constituting the entire board of directors. The board of directors currently consists of three members in class I and three members in class II. Class I currently consists of Messrs. Lycke, Bensen, and Brown, the terms of which expire at the 2000 annual meeting of stockholders. Class II currently consists of Messrs. Lee, Hedlund, Price, and Willems, the terms of which expire at the 2001 annual meeting of stockholders. Each class is elected for a term of two years. There are no family relationships among Claimsnet.com's directors and executive officers. COMMITTEES OF THE BOARD OF DIRECTORS In April 1997, the board of directors created a compensation committee, which is currently comprised of Messrs. Brown, and Hedlund. The Compensation Committee has (1) full power and authority to interpret the provisions of, and supervise the administration of, the 1997 Plan and (2) the authority to review all compensation matters relating to Claimsnet.com. In April 1997, the board of directors also created an audit committee, which is currently comprised of Messrs. Brown, and Hedlund. 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. 43 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by Claimsnet.com for services rendered in all capacities during the years ended December 31, 1999, 1998 and 1997 by the chief executive officer and each of the other most highly compensated executive officers of Claimsnet.com. who received compensation of at least $100,000 during the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY BONUS - --------------------------- ---- ------ ----- Bo W. Lycke ........................................................ 1999 $258,390 $ - Chairman of the Board of Directors, President, and Chief 1998 108,333 -- Executive Officer 1997 50,415 -- Terry A. Lee(1)..................................................... 1999 140,865 15,000 Executive Vice President and Chief Operating Officer 1998 125,000 -- 1997 122,806 153,500 Randall S. Lindner(2)............................................... 1999 97,308 5,451 Former Vice President of Technology 1998 100,000 -- 1997 74,498 -- Paul W. Miller ..................................................... 1999 106,345 31,487 Vice President and Chief Financial Officer 1998 100,000 20,000 1997 11,538 -- Abbas R. Kafi....................................................... 1999 125,000 15,512 Vice President of Information Systems 1998 55,288 -
(1) A portion of the 1997 annual bonus to Terry A. Lee consisted of common stock valued at $78,500. (2) Mr. Lindner served as Vice President of Technology from the purchase of Medica to January 2000. DIRECTOR COMPENSATION During the year ended December 31, 1999, directors received no compensation for their services other than reimbursement of expenses relating to attending meetings of the board of directors. DIRECTORS' STOCK OPTION PLAN (THE "DIRECTORS' PLAN") In April 1998, Claimsnet.com adopted the Directors' Plan to tie the compensation of outside non-employee directors to future potential growth in Claimsnet.com's earnings, and encourage them to remain on its board of directors, to provide outside directors with an increased incentive to make significant and extraordinary contributions to the long-term performance and growth of Claimsnet.com, and to join the interests of the outside directors through the opportunity for increased stock ownership, with the interests of Claimsnet.com's stockholders. Only outside directors are eligible to receive options under the Directors' Plan. An aggregate of 111,538 shares of common stock are reserved for issuance to participants under the Directors' Plan. In the event of any changes in the common stock by reason of stock dividends, split-ups, recapitalization, mergers, consolidations, combinations, or other exchanges of shares and the like, appropriate adjustments will be made by the board of directors to the number of shares of common stock available for issuance under the Directors' Plan, the number of shares subject to outstanding options, and the exercise price per share of outstanding options, as necessary substantially to preserve option holders' economics interests in their options. In April 1999, upon the closing of the initial public offering, options exercisable for an aggregate of 80,000 shares of common stock were granted under the Directors' Plan. The option exercise price of $8.00 was not less than the fair market value of a share of the authorized and issued common stock on the date the option is granted. 44 Mr. Price was granted 30,000 options on April 6, 1999 with an excercise price equal to the initial public offering price per share of $8.00. The options will expire ten years from the date of grant. Mr. Price's options will "vest" every 90 days, commencing 90 days after the close of the April 6, 1999 offering in 7,500 share increments. The period for exercising an option begins on the first anniversary of the date of grant and ends ten years from the date the option is granted. With the exception of those options to be issued to Mr. Price, the terms of which are described above, fifty percent of the options granted vest 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 option holder may, under some circumstances, make this payment by surrender of shares of common stock, valued at their then fair market value on the date of exercise, or by a combination of cash and shares. Shares subject to an option which remain unpurchased at the expiration, termination, or cancellation of an option will be available for future grants under the Directors' Plan, but shares surrendered as payment for an option, as described above will not again be available for use under the Directors' Plan. Unless earlier terminated, the Directors' Plan will terminate on December 31, 2007. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Claimsnet.com did not have a compensation committee during the period from inception on April 8, 1996 through April 4, 1997. During this period, Messrs. Lycke and Bensen, officers of Claimsnet.com, participated in deliberations of Claimsnet.com's board of directors concerning executive officer compensation. There were no interlocking relationships between Claimsnet.com and other entities that might affect the determination of the compensation of the directors and executive officers of Claimsnet.com. EMPLOYMENT AGREEMENTS In April 1997, Claimsnet.com entered into an employment agreement with Mr. Lycke providing that, commencing with the public offering on April 6, 1999 and expiring on December 31, 2002, Mr. Lycke will serve as Chairman of the board of directors, President, and Chief Executive Officer of Claimsnet.com at a base salary equal to $250,000, increasing by 5% per annum subject to increase by the board of directors, and any bonuses as may be determined by the board of are directors. In the event of a change in control of Claimsnet.com, as defined in the employment agreement, all options previously granted to Mr. Lycke which are unvested automatically vest immediately. Upon a termination of Mr. Lycke's employment following a change in control, unless Mr. Lycke voluntarily terminates his employment for other than listed reasons described in the employment agreement, Claimsnet.com is required to pay Mr. Lycke a lump sum severance payment equal to one-half his then current annual salary. In addition, if Mr. Lycke's employment is terminated (1) upon his death, (2) by Claimsnet.com due to disability, (3) by Claimsnet.com without cause, or (4) by Mr. Lycke voluntarily upon Claimsnet.com's default or an unremedied adverse change in duties, as defined in the agreement, then Claimsnet.com is required to pay Mr. Lycke a lump sum severance payment equal to the balance of his salary computed at the then current annual rate. Mr. Lycke may terminate his employment at any time upon at least 30 days written notice to Claimsnet.com. Upon the termination of such agreement, Mr. Lycke is subject to a non-compete, non-disturbance, and non-interference provisions for one year. 45 In September 1996, Claimsnet.com entered into an employment agreement, which was amended on March 1997, March 1998 and June 1999, with Mr. Lee, Executive Vice President and Chief Operating Officer of Claimsnet.com, providing that, for an initial term of two years subject to annual extension, Mr. Lee will devote his full business time and efforts to Claimsnet.com for a base salary per annum of $150,000 plus bonus for achieving designated milestones. In addition and according to this agreement, Mr. Lee was issued 46,385 shares of common stock on March 26, 1997. Mr. Lee is entitled to participate in insurance and other benefit plans established by Claimsnet.com for its employees. Upon the termination of Mr. Lee's employment, Mr. Lee shall be restricted from competing with Claimsnet.com for a period of six months. In the event Mr. Lee is terminated without cause or other reasons at the discretion of Claimsnet.com, Mr. Lee will be entitled to receive $40,000 in consideration of his termination. In January 1998, Mr. Lee was granted an option to purchase 109,189 previously issued shares of common stock at a price of $3.89 per share from three stockholders of Claimsnet.com. 1997 STOCK OPTION PLAN In April 1997, the board of directors and stockholders of Claimsnet.com adopted the 1997 Plan. The 1997 Plan provides for the grant of options to purchase up to 557,692 shares of common stock to employees, officers, directors, and consultants of Claimsnet.com. Options may be either "incentive stock options" or non-qualified options under the Federal tax laws. Incentive stock options may be granted only to employees of Claimsnet.com, while non-qualified options may be issued to non-employee directors, consultants, and others, as well as to employees of Claimsnet.com. The 1997 Plan is 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 period during which the options may be exercised, the number of shares of common stock issuable upon the exercise of each option, and the option exercise price. Subject to some exceptions, the exercise price per share of common stock subject to an incentive option may not be less than the fair market value per share of common stock on the date the option is granted. The per share exercise price of the common stock subject to a non-qualified option may be established by the board of directors, but shall not, however, be less than 85% of the fair market value per share of common stock on the date the option is granted. The aggregate fair market value of common stock for which any person may be granted incentive stock options which first become exercisable in any calendar year may not exceed $100,000 on the date of grant. No stock option may be transferred by an optionee other than by will or the laws of descent and distribution, and, during the lifetime of an optionee, the option will be exercisable only by the optionee. In the event of termination of employment or engagement other than by death or disability, the optionee will have no more than three months after such termination during which the optionee shall be entitled to exercise the option to the extent exercisable at the time of termination, unless otherwise determined by the board of directors. Upon termination of employment or engagement of an optionee by reason of death or permanent and total disability, the optionee's options remain exercisable for 46 one year to the extent the options were exercisable on the date of such termination. No similar limitation applies to non-qualified options. Claimsnet.com must grant options under the 1997 Plan within ten years from the effective date of the 1997 Plan. Subject to some exceptions, holders of incentive stock options granted under the 1997 Plan cannot exercise these options more than ten years from the date of grant. Options granted under the 1997 Plan generally provide for the payment of the exercise price in cash and may provide for the payment of the exercise price by delivery to Claimsnet.com of shares of common stock already owned by the optionee having a fair market value equal to the exercise price of the options being exercised, or by a combination of these methods. Any unexercised options that expire or that terminate upon an employee's ceasing to be employed by Claimsnet.com become available again for issuance under the 1997 Plan. The following table summarizes the stock option activity related to the Company:
NUMBER OF PER SHARE WEIGHTED AVERAGE SHARES EXERCISE EXERCISE PRICE --------- ---------- ---------------- Outstanding options-January 1, 1999 - $ - $ - Granted 562,500 7.00-8.80 7.73 Expired (41,500) 7.00-8.80 8.00 ---------- ---------- --------- Outstanding options-December 31, 1999 521,000 7.00-8.80 7.70 ========== ========== ========= Options exercisable-December 31, 1999 - - - ========== ========== =========
Outstanding options as of December 31, 1999, had a weighted average remaining contractual life of approximately 9 years and a weighted average fair value at issuance of $4.83 based on the Black-Scholes value method. No options were exercised during 1999. The following table sets forth information with respect to options granted during 1999 to the individuals set forth in the Summary Compensation Table above:
INDIVIDUAL GRANTS Potential Relaizable Number of % of Total Value at Assumed Annual Sucurities Options Rates of Stock Price Underlying Granted to Exercise Appreciation for Option Alternative Options Employees in Price Term (1) Grant Date Name Granted Fiscal Year ($/Share) Expiration Date 5% 10% Value (2) - ------------------------------------------------------------------------------------------------------------------------------ Bo W. Lycke 20,000 4.4% $ 8.80 April 6, 2009 $ 84,623 $ 238,999 $ 80,600 Terry A. Lee 20,000 4.4% $ 8.00 April 6, 2009 100,623 254,999 96,600 Randall S. Lindner 118,900 26.4% $ 8.00 January 7, 2000 (3) (3) 574,287 Paul W. Miller 50,000 11.1% $ 8.00 April 6, 2009 251,588 637,497 241,500 Abbas R. Kafi 12,000 2.7% $ 8.00 April 6, 2009 60,374 152,999 57,960
(1) In accordance with the rules of the Securities and Exchange Commission (the "Commission"), shown are the gains or "option spreads" that would exist for the options granted, based on the assumed rates of annually compounded stock price appreciation of 5% and 10% from the date the option was granted over the full option term, without adjustment for the present valuation of such potential future option spread. (2) The alternative grant date value is based upon the actuarial value of the options at the date of grant as estimated using the Black-Sholes method. (3) Mr. Lindner's options expired upon the cessation of his employment on January 7, 2000. The Company's calculations for employee grants were made using a Black Scholes valuation model using the following average assumption: expected life, four years; risk free rate of 7 percent; no dividends during the expected term; and a volatility of 0.8. If the computed values of the Company's stock based awards were amortized to expense over the vesting period of the awards as specified under SFAS No. 123, net loss would have been $9,050,693 ($1.56 per basic and diluted share) for the one year period ending December 31, 1999. The Company accounts for its stock based awards to employees using the intrinsic value method in accordance with APB 25, "Accounting for Stock Issued to Employees," and its related interpretations. SFAS No. 123 requires the disclosure of pro forma net income (loss) and net income (loss) per share as if the Company had adopted the fair value method since inception. Under SFAS No. 123, the fair value of stock based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future price volatility and expected time to exercises, which greatly affect the calculated values. 47 DIRECTORS' LIMITATION OF LIABILITY Claimsnet.com's certificate of incorporation and by-laws include provisions to (1) indemnify the directors and officers to the fullest extent permitted by the Delaware General Corporation Law, including circumstances under which indemnification is otherwise discretionary and (2) eliminate the personal liability of directors and officers for monetary damages resulting from breaches of their fiduciary duty, except for liability for breaches of the duty of loyalty, acts, or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, violations under Section 174 of the Delaware General Corporation Law, or for any transaction from which the director derived an improper personal benefit. Claimsnet.com believes that these provisions are necessary to attract and retain qualified persons as directors and officers. Claimsnet.com provides directors and officers liability insurance coverage of $5,000,000. Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers, and controlling persons of Claimsnet.com as stated in the foregoing provisions or otherwise, Claimsnet.com has been advised that, in the opinion of the Commission, this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 31, 1999, o each person who is known by Claimsnet.com to be the owner of record or beneficial owner of more than 5% of the outstanding common stock, o each director and each of the executive officers of Claimsnet.com, named in the compensation table under Item 11, o all directors and executive officers of Claimsnet.com as a group, and o the number of shares of common stock beneficially owned by each such person and such group and the percentage of the outstanding shares owned by each such person and such group. As used in the table below and elsewhere in this report, the term BENEFICIAL OWNERSHIP with respect to a security consists of sole or shared voting power, including the power to vote or direct the vote, and/or sole or shared investment power, including the power to dispose or direct the disposition, with respect to the security through any contract, arrangement, understanding, relationship, or otherwise, including a right to acquire such power(s). Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated. Beneficial ownership includes shares issuable upon exercise of options exercisable within sixty days of December 31, 1999. Except as otherwise noted below, the address of each of the persons in the table is c/o Claimsnet.com inc., 12801 N. Central Expressway, Suite 1515, Dallas, Texas 75243. Unless otherwise noted, beneficial ownership consists of sole ownership, voting, and investment power with respect to all common stock shown as beneficially owned by them. 48 SHARES BENEFICIALLY OWNED ------------------------- NAME AND ADDRESS NUMBER OF PERCENT OF BENEFICIAL OWNER SHARES OWNED - ------------------- ---------- ------- Bo W. Lycke (1) (5) (6) ............................ 1,627,993 26.0% Terry A. Lee (5) ................................... 155,573 2.5 Paul W. Miller ..................................... 1,600 * Abbas R. Kafi ...................................... -- -- Ward L. Bensen (1) (2) ............................. 576,904 9.2 Robert H. Brown, Jr. (1) (3) ....................... 692,354 11.1 Sture Hedlund (7)................................... 107,008 1.7 John C. Willems, III ............................... 9,277 * Westcott W. Price III .............................. 25,000 * American Medical Finance ........................... 381,603 6.1 12801 N. Central Expressway Suite 1515, Dallas, Texas 75243 All directors and executive officers of Claimsnet.com as a group (9 persons) (3) (4) (5) ............................................ 2,323,314 37.2 * Less than one percent. (1) Includes 381,603 shares of common stock owned of record by American Medical Finance, 16,333 shares of which are subject to an option agreement with Terry A. Lee. Mr. Lycke serves as the Chairman of the Board of Directors of American Medical Finance. Messrs. Lycke, Bensen, and Brown are stockholders of American Medical Finance owning 70.1%, 11.2%, and 17.7% of the outstanding capital stock of American Medical Finance, respectively. Therefore, Messrs. Lycke, Bensen, and Brown may be deemed to beneficially own the shares of common stock owned by American Medical Finance. (2) Consists of 195,301 shares of common stock owned of record by Mr. Bensen and 381,603 shares of common stock owned of record by American Medical Finance. (3) Consists of 310,751 shares of common stock owned of record by Mr. Brown, 18,531 shares of which are subject to an option agreement with Terry A. Lee and 381,603 shares of common stock owned of record by American Medical Finance. (4) Excludes 3,279 shares of common stock owned of record by Mr. Lindner's wife, as to which shares Mr. Lindner disclaims beneficial ownership. (5) Includes an option, granted by Bo Lycke, Robert H. Brown, Jr. and American Medical Finance to Terry A. Lee to purchase 109,189 shares of common stock at an exercise price of $3.88 per share. (6) Consists of 1,246,390 shares of common stock owned of record by Mr. Lycke, 74,325 shares of which are subject to an option agreement with Terry A. Lee and 381,603 shares of Common Stock owned of record by American Medical Finance. (7) Consists of 82,157 shares of common stock owned of record by Mr. Hedlund, 12,884 shares of common stock owned by Scandinavian Export Services, AB and 11,967 shares of common stock owned by Scandinavian Merchant Group, AB. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Bo W. Lycke, the Chairman of the Board, President, and Chief Executive Officer, Ward L. Bensen, a Director, and Robert H. Brown, Jr., a Director of Claimsnet.com are, respectively, the Chairman of the Board, a Director and Senior Vice President, and a Director, and owners, respectively, of 70.1%, 11.2%, and 17.7% of the outstanding capital stock of American Medical Finance. They devoted minimal time to winding up the business and affairs of American Medical Finance for approximately three months following the IPO. 49 On July 31, 1996, Claimsnet.com acquired all of the Internet software, licenses, intellectual property rights, and technology developed by American Medical Finance in exchange for a promissory note in the amount of $3,740,000. On September 19, 1997, American Medical Finance reduced the principal amount of this note to $2,000,000 and contributed the remaining $1,740,000 in principal amount of this note to the capital of Claimsnet.com. This note 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 Claimsnet.com, including software development costs. Claimsnet.com utilized a portion of the net proceeds of the April 6, 1999 initial public offering to satisfy this obligation. Upon the consummation of the acquisition transaction with American Medical Finance, American Medical Finance agreed to provide Claimsnet.com with a credit line of up to $2,000,000 to facilitate additional development of Claimsnet.com's services and technology. During June 1998, American Medical Finance purchased nine units in Claimsnet.com's then pending private placement each unit consisting of 11,967 shares of common stock, for an aggregate of 107,704 shares. As consideration for the purchase, American Medical Finance cancelled $450,000 of the principal balance then outstanding under the credit line. Part of the proceeds of the IPO was used to repay the outstanding principal of $2,254,000 of the line of credit and $273,000 of accrued interest. All future transactions between Claimsnet.com and its officers, directors, and 5% stockholders will be on terms no less favorable to Claimsnet.com than can be obtained from unaffiliated third parties and will be approved by a majority of the independent and disinterested directors of Claimsnet.com. 50 PART IV ITEM 14. EXHIBITS The following exhibits are filed herewith: 2.1* Asset purchase agreement, dated as of March 23, 2000, related to the acquisition of VHX. 3.1 Certificate of Incorporation 3.1(a) Form of Certificate of Amendment to Certificate of Incorporation 3.2 Bylaws, as amended 4.1** Form of warrant issued to Cruttenden Roth Inc. 4.2** Form of Common Stock Certificate 10.1** Employment Agreement, dated as of April 8, 1997 between Claimsnet.com inc. and Bo W. Lycke 10.2** 1997 Stock Option Plan, as amended 10.3** Form of Indemnification Agreement 10.4** Agreement and Plan of Merger, dated June 2, 1997, among Claimsnet.com inc. (formerly, American NET Claims), ANC Holdings, Inc., Medica Systems, Inc., and the stockholders of Medica Systems Inc. 10.5 Employment Agreement, dated as of September 17, 1996, between Claimsnet.com inc. and Terry A. Lee, as amended as of March 26, 1997 and April 6, 1998 and June 7, 1999. 10.6** Service Agreement, dated August 5, 1997, between American Medical Finance and Claimsnet.com inc. 10.7** Form of Agreement, dated September 14, 1998, between Claimsnet.com and BlueCross BlueShield of Louisiana 10.8** Form of Non-Employee Director's Plan 10.9** Service Agreement, dated November 1998, between Claimsnet.com and Southern Medical Association. 10.10*** Development and Services Agreement, dated October 27, 1999, between Claimsnet.com and McKesson/HBOC. 16.1** Change in certifying accountant from King Griffin & Adamson P.C. to Ernst & Young LLC, dated August 16, 1999 and filed on Form 8K. - ----------------- * Incorporated by reference to the corresponding exhibit filed by the Registrant with its current report on form 8-K, dated March 23, 2000. ** Incorporated by reference to the corresponding exhibit filed by the Registrant with the registration statement on Form S-1 (Registration No. 333-36209). *** To be filed by amendment. 51 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CLAIMSNET.COM INC. (Registrant) By: /s/ Bo W. Lycke ----------------------------- Bo W. Lycke President and Chief Executive Officer, on behalf of the Registrant By: /s/ Paul W. Miller ----------------------------- Paul W. Miller Chief Financial Officer By: /S/ Terry A. Lee ----------------------------- Terry A. Lee Executive Vice President, Chief Operating Officer and Class II Director By: /S/ Ward L. Bensen ----------------------------- Ward L. Bensen Class I Director, Treasurer By: /S/ Robert H. Brown, Jr. ----------------------------- Robert H. Brown, Jr. Class I Director By: /S/ Sture Hedlund ----------------------------- Sture Hedlund Class II Director By: /S/ John C. Willems, III ----------------------------- John C. Willems, III Class II Director By: /S/ Westcott W. Price, III ----------------------------- Westcott W. Price, III Class II Director March 30, 2000 52 EX-3.1 2 CERTIFICATE OF INCORPORATION EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF CLAIMSNET.COM INC. FIRST. The name of the corporation is CLAIMSNET.COM INC. (the "Corporation"). SECOND. The address, including street, number, city, and county of the Corporation's registered office in the State of Delaware is 15 East North Street, in the City of Dover, County of Kent. The name of its registered agent at such address is United Corporate Services, Inc. THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH. A. The aggregate number of shares which the Corporation shall have authority to issue is 44,000,000, par value $.001 per share, of which 40,000,000 shares shall be designated Common Shares and 4,000,000 shares shall be designated Preferred Shares.' B. Authority is hereby expressly granted to the Board of Directors of the Corporation (or a Committee thereof designated by the Board of Directors pursuant to the by-laws of the Corporation, as from time to time amended (the "By-Laws")) to issue the Preferred Shares from time to time as Preferred Shares of any series and to declare and pay dividends thereon in accordance with the terms thereof and, in connection with the creation of each such series, to fix by the resolution or resolutions providing for the issue of shares thereof, the number of such shares, the designations, powers, preferences, and rights (including voting rights), and the qualifications, limitations, and restrictions, of such series, to the full extent now or hereafter permitted by the laws of the State of Delaware. FIFTH. The name and mailing address of the incorporator is Stephen H. Gray, c/o Brock Fensterstock Silverstein McAuliffe & Wade LLC, One Citicorp Center, 153 East 53rd Street, 56th Floor, New York, New York 10022. SIXTH. Election of directors need not be by written ballot. SEVENTH. The Board of Directors is authorized to adopt, amend, or repeal By-Laws of the Corporation. EIGHTH. 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 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, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended, and amounts paid in settlement) reasonably -2- 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 EIGHTH 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 EIGHTH 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 EIGHTH or otherwise. -3- C. The rights to indemnification and to the advancement of expenses conferred in Paragraphs A and B of this Article EIGHTH shall be contract rights. If a claim under Paragraph A or B of this Article EIGHTH 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 -4- 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 EIGHTH or otherwise, shall be on the Corporation. D. The rights to indemnification and to the advancement of expenses conferred in this Article EIGHTH 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 the Corporation's 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 EIGHTH shall -5- 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. NINTH. No director of the Corporation shall be liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision does not eliminate the liability of the director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware Code, or (iv) for any transaction from which the director derived an improper personal benefit. For purposes of the prior sentence, the term "damages" shall, to the extent permitted by law, include without limitation, any judgment, fine, amount paid in settlement, penalty, punitive damages, excise or other tax assessed with respect to an employee benefit plan, or expense of any nature (including, without limitation, counsel fees and disbursements). Each person who serves as a director of the Corporation while this Article NINTH is in effect shall be deemed to be doing so in reliance on the provisions of this Article NINTH, and neither the amendment or repeal of this Article NINTH, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article NINTH, shall apply to or have any effect on the liability or alleged liability of any director or the Corporation for, arising out of, based upon, or in connection with any acts or omissions of such director occurring prior to such amendment, repeal, or adoption of an inconsistent provision. The provisions of this Article NINTH are cumulative and shall be in addition to and independent of any and all other limitations on or eliminations of the liabilities of directors of the Corporation, as such, whether such limitations or eliminations arise -6- under or are created by any law, rule, regulation, by-law, agreement, vote of shareholders or disinterested directors, or otherwise. TENTH. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. -7- IN WITNESS WHEREOF, I have made, signed, and sealed this Certificate of Incorporation this 11th day of September, 1997. /S/ STEPHEN H. GRAY (L.S.) --------------------------------------- STEPHEN H. GRAY INCORPORATOR -8- EX-3.1(A) 3 CERTIFICATE OF INCORPORATION AMENDMENT EXHIBIT 3.1(a) CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF CLAIMSNET.COM INC. (Original Certificate of Incorporation filed September 11, 1997) CLAIMSNET.COM INC., a Delaware corporation (the "Corporation"), does hereby certify as follows: FIRST: That the Board of Directors of the Corporation, by unanimous written consent without a meeting pursuant to Section 141(f) of the General Corporation Law of the State of Delaware (the "DGCL"), adopted resolutions setting forth the amendments to the Certificate of Incorporation of the Corporation set forth below, declaring said amendments to be advisable and submitting them to the stockholders of the Corporation entitled to vote thereon for consideration thereof. SECOND: That, by written consent executed in accordance with Section 228 of the DGCL, the holders of a majority of the outstanding stock of the Corporation entitled to vote thereon, and a majority of the outstanding stock of each class entitled to vote thereon as a class, voted in favor of the adoption of the amendments to the Certificate of Incorporation of the Corporation set forth below. THIRD: That the amendments to the Certificate of Incorporation of the Corporation set forth below were duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. RESOLVED, that the Certificate of Incorporation of the Corporation be amended by adding thereto an Article thereof numbered "ELEVENTH" to be and read in its entirety as follows: "ELEVENTH. The Corporation hereby elects not to be governed by Section 203 of the General Corporation Law of the State of Delaware in accordance with paragraph (b)(3) of such Section 203." IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed on its behalf this 1st day of April, 1999. CLAIMSNET.COM INC. BY: /S/ Bo W. Lycke --------------------------------------------- NAME: BO W. LYCKE TITLE: CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT, AND CHIEF EXECUTIVE OFFICER ATTEST: /S/ C. Kelly Campbell - ------------------------ NAME: C. KELLY CAMPBELL TITLE: SECRETARY EX-3.2 4 BY-LAWS Exhibit 3.2 BY-LAWS OF CLAIMSNET.COM INC. CLAIMSNET.COM INC. A DELAWARE CORPORATION BY-LAWS _____________________________________ ARTICLE I STOCKHOLDERS SECTION 1.1 ANNUAL MEETING. An annual meeting of stockholders for the purpose of electing directors and of transacting such other business as may come before it in accordance with Section 1.8 of these By-Laws shall be held each year at such date, time, and place, either within or without the State of Delaware, as may be specified by the Board of Directors. SECTION 1.2 SPECIAL MEETINGS. A special meeting of stockholders for any purpose other than the election of directors may be called at any time upon call of the Chairman of the Board of Directors, if any, the President, any Vice President, or a majority of the Board of Directors, or by the holders of record of at least ten percent of the outstanding voting securities of the Corporation at such time and place, either within or without the State of Delaware, as may be stated in the notice. At any special meeting of stockholders, no business transacted and no corporate action shall be taken other than as stated in the notice of the meeting. SECTION 1.3 NOTICE OF MEETINGS. Written notice of stockholders meetings, stating the place, date, and hour thereof, and the purpose or purposes for which the meeting is called shall be given by the Chairman of the Board of Directors, if any, the President, any Vice President, the Secretary, or any Assistant Secretary to each stockholder entitled to vote thereat at least ten days, but not more than sixty days, before the date of the meeting, unless a different period is prescribed by law. - 2 - SECTION 1.4 QUORUM. Except as otherwise provided by law or in the Certificate of Incorporation or these By-Laws, at any meeting of stockholders, the holders of a majority of the outstanding shares of each class of stock entitled to vote at the meeting shall be present or represented by proxy in order to constitute a quorum for the transaction of any business. In the absence of a quorum, a majority in interest of the stockholders present or the chairman of the meeting, as determined in accordance with Section 1.6 of these By-Laws, may adjourn the meeting from time to time in the manner provided in Section 1.5 of these By-Laws until a quorum shall attend. SECTION 1.5 ADJOURNMENT. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 1.6 ORGANIZATION. (a) The Chairman of the Board of Directors, or in his or her absence the President, or in their absence any Vice President, shall call to order meetings of stockholders and shall act as chairman of such meetings. The Board of Directors or, if the Board of Directors fails to act, the stockholders, may appoint any stockholder, director, or officer of the Corporation to act as chairman of any meeting in the absence of the Chairman of the Board, the President, and all Vice Presidents. (b) The Secretary of the Corporation shall act as secretary of all meetings of stockholders, but, in the absence of the Secretary, the chairman of the meeting may appoint any other person to act as secretary of the meeting. SECTION 1.7 VOTING. Except as otherwise provided by law or in the Certificate of Incorporation or these By-Laws and except for the election of directors, at any meeting duly called and held at which a quorum is present, a majority of the votes cast at such meeting upon a given question by the holders of outstanding shares of stock of all classes of stock of the Corporation entitled to vote thereon who are present in person or by proxy shall decide such question. At any meeting duly called and held for the election of directors at which a quorum is present, directors shall be elected by a plurality of the votes cast by the holders (acting as such) of shares of stock of the Corporation entitled to elect such directors. - 3 - SECTION 1.8 INTRODUCTION OF BUSINESS AT MEETINGS OF STOCKHOLDERS. 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 provided for in this Section 1.8, who shall be entitled to vote at such annual meeting and who complies with the notice procedures set forth in this Section 1.8. 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 these By-Laws to the contrary, no business shall be conducted at the stockholder meeting, except in accordance with the procedures set forth in this Section 1.8. The chairman of the meeting, as determined in accordance with Section 1.6 of the By-Laws, shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and, in accordance with the provisions of these By-Laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 1.8, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder with respect to the matters set forth in this Section 1.8. ARTICLE II BOARD OF DIRECTORS SECTION 2.1 NUMBER AND TERM OF OFFICE. The business, property, and affairs of the Corporation shall be managed by or under the direction of a Board of not less than one, nor more than nine, directors. The Board shall be divided into two classes, which are hereby designated Class I and Class II. The term of office of the initial Class II directors shall expire at the next annual meeting of stockholders; and that of the initial Class I directors at the second, succeeding annual meeting of stockholders. At each annual meeting - 4 - after the initial classification of directors, directors to replace those whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting. Each director shall be elected by the holders of shares entitled to vote thereon at the annual meeting of stockholders, to serve (subject to the provisions of Article IV) until his respective successor is elected and qualified. SECTION 2.2 CHAIRMAN OF THE BOARD OF DIRECTORS. The directors may elect one of their members to be Chairman of the Board of Directors. The Chairman shall be subject to the control of, and may be removed by, the Board of Directors. He or she shall perform such duties as may from time to time be assigned to him or her by the Board of Directors. SECTION 2.3 MEETINGS. (a) Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. (b) Special meetings of the Board of Directors shall be held at such time and place as shall be designated in the notice of the meeting whenever called by the Chairman of the Board of Directors, if any, the President, or a majority of the directors then in office. SECTION 2.4 NOTICE OF SPECIAL MEETINGS. The Secretary, or, in his or her absence, any other officer of the Corporation, shall give each director notice of the time and place of holding of special meetings of the Board of Directors by mail at least ten days before the meeting, or by telecopy, telegram, cable, radiogram, or personal service at least one day before the meeting. Unless otherwise stated in the notice thereof, any and all business may be transacted at any meeting without specification of such business in the notice. SECTION 2.5 QUORUM AND ORGANIZATION OF MEETINGS. A majority of the total number of members of the Board of Directors as constituted from time to time shall constitute a quorum for the transaction of business, but, if at any meeting of the Board of Directors (whether or not adjourned from a previous meeting) there shall be less than a quorum present, a majority of those present may adjourn the meeting to another time and place, and the meeting may be held as adjourned without further notice or waiver. Except as otherwise provided by law or in the Certificate of Incorporation or these By-Laws, a majority of the directors present at any meeting at which a quorum is present may decide any question brought before such meeting. Meetings shall be presided over by the Chairman of the Board of Directors, if any, or, in his or her absence, by the President, or, in the absence of both the Chairman of the Board of Directors and the President, by such other person or as the directors may select. The Secretary of the Corporation shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. - 5 - SECTION 2.6 COMMITTEES. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the event of the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he, she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have, and may exercise, all the powers and authority of the Board of Directors in the management of the business, property, and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have power or authority in reference to amending the Certificate of Incorporation of the Corporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors pursuant to authority expressly granted to the Board of Directors by the Corporation's Certificate of Incorporation, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation, or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), adopting an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of the State of Delaware, recommending to the stockholders the sale, lease, or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, or amending these By-Laws; and, unless the resolution expressly so provided, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of the State of Delaware. Each committee which may be established by the Board of Directors pursuant to these By-Laws may fix its own rules and procedures. Notice of meetings of committees, other than of regular meetings provided for by the rules of such committee, shall be given to all committee members. All action taken by committees shall be recorded in minutes of the meetings. SECTION 2.7 ACTION WITHOUT MEETING. Nothing contained in these By-Laws shall be deemed to restrict the power of members of the Board of Directors or any committee designated by the Board of Directors to take any action required or permitted to be taken by them without a meeting. SECTION 2.8 TELEPHONE MEETINGS. Nothing contained in these By-Laws shall be deemed to restrict the power of members of the Board of Directors or any committee designated by the Board of Directors, to participate in a meeting of the Board of Directors, or any committee thereof, by means of conference telephone or - 6 - similar communications equipment by means of which all persons participating in the meeting can hear each other. SECTION 2.9 NOMINATION OF DIRECTORS. Only persons who are nominated in accordance with the procedure set forth in these By-Laws shall be eligible to service as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (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 provided for in this Section 2.9, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice provision of this Section 2.9. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall 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 meeting, regardless of postponements, deferrals, or adjournments of that meeting to a later date; provided, however, that in the event that less than 70 days' notice or public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting or such public disclosure was made. Such stockholder's notice shall contain the written consent of each proposed nominee to serve as a director if so elected and shall set forth the following: (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director and as to each person, acting alone or in conjunction with one or more other persons as a partnership, limited partnership, syndicate or other group, who participates or is expected to participate in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee (A) the name, age, residence address, and business address of each proposed nominee and of each such person; (B) the principal occupation or employment, and the name, type of business, and address of the corporation or other organization in which such employment is carried on, of each proposed nominee and of each such person; (C) the amount of stock of the Corporation owned beneficially, either directly or indirectly, by each proposed nominee and each such person; and (D) a description of any arrangement or understanding of each proposed nominee and of each such person with each other or any other person regarding future employment or any future transaction to which the Corporation will or may be a party; and (ii) as to the stockholder giving the notice (A) the name and address, as they appear on the Corporation's books, of such stockholder; and (B) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice or nomination which pertains to the nominee. Subject to the rights of holders of preferred stock, if any, no person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in these By-Laws. The chairman of the meeting, determined in accordance with Section 1.6 of these By-Laws, shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these By-Laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this - 7 - Section 2.9, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. ARTICLE III OFFICERS SECTION 3.1 EXECUTIVE OFFICERS. The executive officers of the Corporation shall be a President, one or more Vice Presidents, a Treasurer, and a Secretary, each of whom shall be elected by the Board of Directors. The Board of Directors may elect or appoint such other officers (including a Controller and one or more Assistant Treasurers and Assistant Secretaries) as it may deem necessary or desirable. Each officer shall hold office for such term as may be prescribed by the Board of Directors from time to time. Any person may hold at one time two or more offices. SECTION 3.2 POWERS AND DUTIES. The Chairman of the Board, if any, or, in his or her absence, the President, shall preside at all meetings of the stockholders and of the Board of Directors. Either the President or the Chairman of the Board of Directors, as determined by the Board of Directors, shall be the chief executive officer of the Corporation. In the absence of the President, a Vice President appointed by the President or, if the President fails to make such appointment, by the Board of Directors, shall perform all the duties of the President. The officers and agents of the Corporation shall each have such powers and authority and shall perform such duties in the management of the business, property, and affairs of the Corporation as generally pertain to their respective offices, as well as such powers and authorities and such duties as from time to time may be prescribed by the Board of Directors. ARTICLE IV RESIGNATIONS, REMOVALS, AND VACANCIES SECTION 4.1 RESIGNATIONS. Any director or officer of the Corporation, or any member of any committee, may resign at any time by giving written notice to the Board of Directors, the President, or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if the time be not specified therein, then upon receipt thereof. The acceptance of such resignation shall not be necessary to make it effective. SECTION 4.2 REMOVALS. - 8 - The Board of Directors, by a vote of not less than a majority of the entire Board, at any meeting thereof, or by written consent, at any time, may, to the extent permitted by law, remove with cause from office or terminate the employment of any officer or member of any committee and may, with or without cause, disband any committee. [CHECK] Any director or the entire Board of Directors may be removed, with cause, by the holders of a majority of the shares entitled at the time to vote at an election of directors. [CHECK] SECTION 4.3 VACANCIES. Any vacancy in the office of any director or officer through death, resignation, removal, disqualification, or other cause, and any additional directorship resulting from increase in the number of directors, may be filled at any time by a majority of the directors then in office (even though less than a quorum remains), and, subject to the provisions of this Article IV, the person so chosen shall hold office until his or her successor shall have been elected and qualified; or, if the person so chosen is a director elected to fill a vacancy, he shall (subject to the provisions of this Article IV) hold office for the unexpired term of his or her predecessor. ARTICLE V CAPITAL STOCK SECTION 5.1 STOCK CERTIFICATES. The certificates representing shares of the capital stock of the Corporation shall be in such form as shall be prescribed by law and approved, from time to time, by the Board of Directors. SECTION 5.2 TRANSFER OF SHARES. Shares of the capital stock of the Corporation may be transferred on the books of the Corporation only by the holder of such shares or by his or her duly authorized attorney, upon the surrender to the Corporation or its transfer agent of the certificate representing such stock properly endorsed. SECTION 5.3 FIXING RECORD DATE. (a) In order that the Corporation may determine the stockholders entitled to notice of, or to vote at, any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action other than stockholder action by written consent, the Board of Directors may fix a record date which shall not precede the date such record date is fixed and shall not be more than 60 days, nor less than 10 days, prior to the date of such meeting. If no record date is fixed, the record date for determining stockholders entitled to notice of, or to vote at, a meeting of - 9 - stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. [The record date for any other purpose other than stockholder action by written consent shall be at the close of business on the day next preceding the day on which the meeting is held. [The record date for any other purpose other than stockholder action by written consent shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.]] A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjourned meeting. [CHECK] (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received and no prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, the principal place of business, or an officer of agent of the Corporation having custody of the book in which proceedings of stockholders meetings are recorded, to the attention of the Secretary of the Corporation. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the closed of business on the date on which the Board of Directors adopts the resolution taking such prior action. (c) The fact and date of the execution by any stockholder of record of the Corporation of any written consent shall be provided by the certificate under the official seal of a notary public or of any other officer who, by the laws of public or of any other officer who, by the laws of the jurisdiction in which such written consent is executed, has power to take acknowledgments or proofs of deeds to be recorded within such jurisdiction, that the person who signed such written consent did acknowledge before such notary public or other officer the execution thereof and, in the event a record date has theretofore been established to determine the stockholders entitled to give such consents, the fact that he was on the record date the record holder of the applicable shares. No such written consent shall be valid without being so proved. (d) In the event of the delivery to the Corporation of a written consent or consents purporting to authorize or take corporate action and/or related revocations (each such written consent and any revocation thereof is referred to in this Section 5.3(d) as a "Consent"), the Secretary of the Corporation shall provide for the safekeeping of such Consents and shall, as soon - 10 - as practicable thereafter, conduct such reasonable investigation as he deems necessary or appropriate for the purpose ascertaining the validity of such Consents and all matters incident thereto, including, without limitation, whether the holders of shares having the requisite voting power to authorize or take the action specified in the Consents have given consent; provided, however, that if the removal or election of one or more members of the Board of Directors, the Secretary of the Corporation shall designate an independent, qualified inspector with respect to such Consents and such inspector shall discharge the functions of the Secretary of the Corporation under this Section 5.3(d). If, after such investigation, the Secretary or the inspector, as the case may be, shall determine that any action purportedly taken by such Consents has been validly taken, that fact shall be certified on the records of the Corporation kept for the purpose of recording the proceedings of meetings of the stockholders, and the Consents shall be filed with such records. In conducting the investigation required by this Section 5.3(d) , the Secretary or the inspector may, at the expense of the Corporation, retain to assist them special legal counsel and any other necessary or appropriate professional advisers, and such other personnel as they may deem necessary or appropriate. SECTION 5.4 LOST CERTIFICATES. The Board of Directors or any transfer agent of the Corporation may direct a new certificate or certificates representing stock of the Corporation to be issued in place of any certificate or certificates theretofore issued by the Corporation, alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors (or any transfer agent of the Corporation authorized to do so by a resolution of the Board of Directors) may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his or her legal representative, to give the Corporation a bond in such sum as the Board of Directors (or any transfer agent so authorized) shall direct to indemnify the Corporation against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed or the issuance of such new certificates, and such requirement may be general or confined to specific instances. SECTION 5.5 REGULATIONS. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, registration, cancellation, and replacement of certificates representing stock of the Corporation. ARTICLE VI MISCELLANEOUS SECTION 6.1 CORPORATE SEAL. - 11 - The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization, and the words "Corporate Seal" and "Delaware." SECTION 6.2 FISCAL YEAR. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. SECTION 6.3 NOTICES AND WAIVERS THEREOF. (a) Whenever any notice whatever is required by law, the Certificate of Incorporation, or these By-Laws to be given to any stockholder, director, or officer, such notice, except as otherwise provided by law, may be given personally, or by mail, or, in the case of directors or officers, by telecopy, telegram, cable, or radiogram, addressed to such address as appears on the books of the Corporation. Any notice given by telecopy, telegram, cable, or radiogram shall be deemed to have been given when it shall have been delivered for transmission and any notice given by mail shall be deemed to have been given when it shall have been deposited in the United States mail with postage thereon prepaid. (b) Whenever any notice is required to be given by law, the Certificate of Incorporation, or these By-Laws, a written waiver thereof, signed by the person entitled to such notice, whether before or after the meeting or the time stated therein, shall be deemed equivalent in all respects to such notice to the full extent permitted by law. SECTION 6.4 STOCK OF OTHER CORPORATIONS OR OTHER INTERESTS. Unless otherwise ordered by the Board of Directors, the Chairman of the Board of Directors, the President, the Secretary, and such attorneys or agents of the Corporation as may be, from time to time, authorized by the Board of Directors, the Chairman of the Board of Directors, or the President, shall have full power and authority on behalf of this Corporation to attend and to act and vote in person or by proxy at any meeting of the holders of securities of any corporation or other entity in which this Corporation may own or hold shares or other securities, and at such meetings shall possess and may exercise all the rights and powers incident to the ownership of such shares or other securities which this Corporation, as the owner or holder thereof, might have possessed and exercised if present. The Chairman of the Board, the President, the Secretary, or such attorneys or agents, may also execute and deliver on behalf of this Corporation powers of attorney, proxies, consents, waivers, and other instruments relating to the shares or securities owned or held by this Corporation. ARTICLE VII AMENDMENTS - 12 - The holders of shares entitled at the time to vote for the election of directors shall have the power to adopt, amend, or repeal the By-Laws of the Corporation by vote of not less than a majority of such shares, and, except as otherwise provided by law, the Board of Directors shall have power equal in all respects to that of the stockholders to adopt, amend, or repeal the By-Laws by vote of not less than a majority of the entire Board. However, any By-Law adopted by the Board of Directors may be amended or repealed by vote of the holders of a majority of the shares entitled at the time to vote for the election of directors. - 13 - EX-10.5 5 EMPLOYMENT AGREEMENT - TERRY A. LEE EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into as of June 7, 1999 between CLAIMSNET.COM INC., a Delaware corporation with a principal place of business at 12801 North Central Expressway, Suite 1515, Dallas, Texas 75243, and Terry A. Lee ("Employee"). In consideration for the mutual covenants and conditions set forth herein, the parties hereby agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee in the capacity of Executive Vice President. Employee accepts such employment and agrees to perform such services as are customary to such office and shall from time to time be assigned to him by the Chief Executive Officer. 2. TERM. Subject to earlier termination as provided in Section 5, the employment hereunder shall be for a period of two years, commencing on May 1, 1999 (the "Commencement Date") and ending on April 30, 2001. Employee's employment will be on a full-time basis requiring the devotion of such amount of his productive time as is necessary for the efficient operation of the business of the Company. 3. COMPENSATION AND BENEFITS. 3.1 SALARY. For the performance of Employee's duties hereunder, the Company shall pay Employee an annual salary of $150,000 (less required withholdings), payable no less frequently than twice monthly. 3.2 BONUS. Employee will be eligible to earn a cash performance bonus in the amount of $15,000 (less required withholdings) per quarter for Company achievement equal to 100% of the Company's quarterly goals/objectives/benchmarks, payable within 15 days subsequent to release of the Company's quarterly operating results. Employee will not earn a cash performance bonus for Company achievement equal to or less than 90% of the Company's quarterly goals/objectives/benchmarks. Employee will be eligible to earn a pro-rated cash performance bonus for Company achievement between 90% and 100% of the Company's quarterly goals/objectives/benchmarks. The bonus will be pro-rated 10% for every 1% achievement over 90% against the board approved business plan, up to a 100% attainment level, as shown in the example below. - ------------------ ----------------------------------------------------- ATTAINMENT QUARTERLY BONUS PAYMENT BASED ON $15,000 TARGET - ------------------ ----------------------------------------------------- <= 90% No Payment - ------------------ ----------------------------------------------------- 91% $1,500 or 10% - ------------------ ----------------------------------------------------- 95% $7,500 or 50% - ------------------ ----------------------------------------------------- 100% $15,000 or 100% - ------------------ ----------------------------------------------------- 105% $15,000 or 100% - ------------------ ----------------------------------------------------- 3.3 DISCRETIONARY BONUS. At the discretion of the Board, cash and/or equity bonus may be paid to Employee for performance deemed to merit recognition for significant contribution to the Company business plan including large contracts, alliances, strategic acquisitions and unforeseen positive developments. 3.4 EQUITY COMPENSATION. The Employee has been previously granted various stock and stock options which shall remain in full force and effect, which are specifically listed as follows, giving effect to all stock splits as of the date hereof. 3.4.1 STOCK GRANT. The Employee was previously granted 46,384 shares of common stock. In connection therewith, On or about April 14, 1998, the Employee was loaned the amount of $25,000 by the Company relating to the tax effect of 46,384 shares of common capital stock previously granted to the Employee. The loan is evidenced by a promissory note in such amount and will be secured by the common capital stock granted. 3.4.2 PRIVATE OPTIONS. The Employee was previously granted private options to purchase 109,189 shares of common stock pursuant to the following provisions. a. The Company agrees to cause its shareholders, Bo W. Lycke, Robert H. Brown and American Medical Finance, Inc. to grant to the Employee stock options for 109,189 shares of common capital stock of the Company (the "Private Option") (in addition to 46,384 shares currently owned by the Employee), with the understanding that securities counsel for the Company shall prepare a definitive Stock Option Agreement with such terms and conditions as they deem appropriate, but specifically to include the following terms and conditions: i. The "Private Option Price" shall be $3.88 per share; ii. The Stock Option Agreement shall be structured so that Bo W. Lycke, Robert H. Brown and American Medical Finance, Inc. will grant the Private Option to the Employee to buy the shares of common capital stock for the Private Option Price and, if necessary, that the Company join in such Stock Option Agreement; iii. The Private Option shall be deemed 100% vested upon execution of the Stock Option Agreement; iv. The Private Option shall expire the earlier of 10 years from date of the Stock Option Agreement or 12 months from termination of employment by, or the Employee from, the Company; and v. The common capital stock subject to the Private Option shall also be subject to normal restrictions as securities counsel to the Company shall dictate (which may necessitate a nominal initial consideration for grant of the options) 3.4.3 IPO OPTIONS. In connection with the Company's initial public offering on April 6, 1999, the Employee was granted the option to purchase 20,000 shares of common stock under the 1997 Stock Option Plan at the price of $8.00 per share. 3.5 BENEFITS. Employee shall be entitled to such medical, disability, and life insurance coverage and such vacation, sick leave, and holiday benefits, if any, as are made available to the Company's top executive personnel, all in accordance with the Company's benefits program in effect from time to time. 3.6 REIMBURSEMENT OF EXPENSES. Employee shall be entitled to reimbursement for all reasonable expenses for travel, meals, and entertainment, incurred by Employee in connection with and reasonably related to the furtherance of the Company's business. 3.7 ANNUAL REVIEW. On each anniversary of the Commencement Date, the Chief Executive Officer will review Employee's performance and compensation hereunder (including salary, bonus, and stock options and/or other equity incentives) and will approve an increase in such compensation of not less than 5% annually, but will not have authority, as the result of such review, to decrease any portion of such compensation without the written consent of Employee. 4. CHANGE OF CONTROL. In the event of a Change in Control of the Company (as defined below), all options then granted to Employee which are unvested at the date of the Change in Control will be immediately vested. In addition, in the event of a termination of Employee's employment for any reason (other than as set forth in Section 5.1(f)) following a Change of Control, the Company will promptly pay Employee, in addition to the amounts required under Section 5.2(a), a lump-sum severance amount payable immediately upon such termination of employment, equal to one-half of his then current annual salary. This payout shall be in lieu of any amount which may otherwise be due under Section 5.2(b). As used herein, a "Change of Control" of the Company shall be deemed to have occurred: (a) Upon the consummation, in one transaction or a series of related transactions, of the sale or other transfer of voting power (including voting power exercisable on a contingent or deferred basis as immediately exercisable voting power) representing effective control of the Company to a person or group of related persons who, on the date of this Agreement, is not affiliated (within the meaning of the Securities Act of 1933) with the Company, whether such sale or transfer results from a tender offer or otherwise; or (b) Upon the consummation of a merger or consolidation in which the Company is a constituent corporation and in which the Company's stockholders immediately prior thereto will beneficially own, immediately thereafter, securities of the Company or any surviving or new corporation resulting therefrom having less than a majority of the voting power of the Company or any such surviving or new corporation; or (c) Upon the consummation of a sale, lease, exchange, or other transfer or disposition by the Company of all or substantially all its assets to any person or group of related persons. 5. TERMINATION. 5.1 TERMINATION EVENTS. The employment hereunder will terminate upon the occurrence of any of the following events: (a) Employee dies; (b) The Company, by written notice to Employee or his personal representative, discharges Employee due to the inability to perform the duties assigned to him hereunder for a continuous period exceeding 90 days by reason of injury, physical or mental illness, or other disability, which condition has been certified by a physician; provided, however, that prior to discharging Employee due to such disability, the Company shall give a written statement of findings to Employee or his personal representative setting forth specifically the nature of the disability and the resulting performance failures, and Employee shall have a period of ten (10) days thereafter to respond in writing to the Company's findings; (c) Employee is discharged by the Company for cause. As used in this Agreement, the term "cause" shall mean: (i) Employee's conviction of (or pleading guilty or NO LO CONTENDERE to) a felony or misdemeanor involving dishonesty or moral turpitude; or (ii) (a) the willful and continued failure of Employee to substantially perform his duties with the Company (other than any such failure resulting from illness or disability) after a demand for substantial performance is requested by the Company's Chief Executive Officer, which specifically identifies the manner in which it is claimed Employee has not substantially performed his duties, or (b) Employee is willingly engaged in misconduct which has a direct and material adverse monetary effect on the Company. For purposes of this subpart (ii) no act or failure to act on Employee's part shall be considered "willful" unless done, or omitted to be done, by Employee not in good faith and without reasonable belief that Employee's actions were in the best interest of the Company. No termination shall be effected for cause pursuant to this subpart (ii) unless Employee has been provided with specific information as to the acts or omissions which form the basis of the allegation of cause, and Employee has had an opportunity to be heard, with counsel if he so desires, before the Board of Directors and such Board determines in good faith that Employee was guilty of conduct constituting "cause" as herein defined, specifying the particulars thereof in detail; (d) Employee is discharged by the Chief Executive Officer of the Company without cause, which the Company may do at any time upon notice to Employee; (e) Employee voluntarily terminates his employment due to either (i) a default by the Company in the performance of any of its obligations hereunder, or (ii) an Adverse Change in Duties (as defined below), which default or Adverse Change in Duties remains unremedied by the Company for a period of ten (10) days following its receipt of written notice thereof from Employee; or (f) Employee voluntarily terminates his employment for any reason other than the Company's default or an Adverse Change in Duties, which Employee may do at any time with at least 30 days advance written notice. As used herein, "Adverse Change in Duties" means an action or series of actions taken by the Company, without Employee's prior written consent, which results in: (1) A change in Employee's reporting responsibilities, titles, job responsibilities, or offices, which, in Employee's reasonable judgment, results in a diminution of his status, control, or authority; (2) The assignment to Employee of any positions, duties, or responsibilities which, in Employee's reasonable judgment, are inconsistent with Employee's positions, duties, and responsibilities or status with the Company; (3) A requirement by the Company that Employee be based or perform his duties anywhere other than (i) at the Company's corporate office location on the date of this Agreement, or (ii) if the Company's corporate office location is moved after the date of this Agreement, at a new location that is no more than 60 miles from such prior location; or (4) A failure by the Company (i) to continue in effect any material benefit, whether or not qualified, or other compensation, bonus, or incentive plan in effect on the date of this Agreement or subsequently adopted, (ii) to continue Employee's participation in such benefits or plans at the same level or to the same extent as on the Commencement Date or, with respect to subsequently adopted benefits or plans, on the date of the initial implementation thereof, or (iii) to provide for Employee's participation in any newly adopted benefits or plans at a level commensurate, in Employee's reasonable judgment, with that of other top executives of the Company. 5.2 EFFECTS OF TERMINATION. (a) Upon termination of Employee's employment hereunder for any reason, the Company will promptly pay Employee all compensation owed to Employee and unpaid through the date of termination (including, without limitation, salary and employee expense reimbursements). (b) In addition (except in a situation where severance is due pursuant to Section 4), if Employee's employment is terminated under Sections 5.1(a), (b), (d), or (e), the Company shall also pay Employee, immediately upon such termination of employment, a lump-sum severance amount equal to his then current annual salary. (c) Upon termination of Employee's employment hereunder for any reason, Employee agrees that for the one year period following the Termination Event: (i) Employee will not directly or indirectly, whether for his own account or as an individual, employee, director, consultant, or advisor, or in any other capacity whatsoever, provide services to any other person, firm, corporation, or other business enterprise which is involved in claims processing or other healthcare related matters unless he obtains the prior written consent of the Chief Executive Officer. (ii) Employee will not directly or indirectly encourage or solicit, or attempt to encourage or solicit, any individual to leave the Company's employ for any reason or interfere in any other manner with the employment relationships at the time existing between the Company and its current or prospective employees. (iii) Employee will not induce or attempt to induce any customer, supplier, distributor, licensee, or any other business relation of the Company to cease doing business with the Company or in any way interfere with the existing business relationship between any such customer, supplier, distributor, licensee, or any other business relation and the Company. Employee acknowledges that monetary damages may not be sufficient to compensate the Company for any economic loss which may be incurred by reason of breach of the foregoing restrictive covenants. Accordingly, in the event of any such breach, the Company shall, in addition to any remedies available to the Company at law, be entitled to obtain equitable relief in the form of an injunction precluding Employee from continuing to engage in such breach. If any restriction set forth in this paragraph is held to be unreasonable, then Employee and the Company agree, and hereby submit, to the reduction and limitation of such prohibition to such area or period as shall be deemed reasonable. 6. GENERAL PROVISIONS. 6.1 ASSIGNMENT. Neither party may assign or delegate any of its rights or obligations under this Agreement without the prior written consent of the other party, except that the Company may assign its rights and obligations hereunder to a successor by merger or an assignee of all or substantially all of the Company's assets. 6.2 TAXES. The Employee shall be fully responsible for all personal tax liabilities related to all compensation components of this Agreement, with the exception being the normal employer matching contributions for Medicaid/Medicare and Social Security on the base salary of Employee. 6.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior agreements between the parties relating to such subject matter. 6.4 MODIFICATIONS. This Agreement may be changed or modified only by an agreement in writing signed by both parties hereto. 6.5 SUCCESSOR AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and Employee and Employee's legal representatives, heirs, legatees, distributees, assigns, and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join and be bound by the terms and conditions hereof. 6.6 GOVERNING LAW. This Agreement shall be governed by, and be construed in accordance with, the laws of Delaware. 6.7 SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force and effect. 6.8 FURTHER ASSURANCES; COMMITTEES OF BOARD. The parties will execute such further instruments and take such further actions as may be reasonably necessary to carry out the intent of this Agreement. The term "Board of Directors" shall include any committee of the Board. 6.9 NOTICES. Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed received by the recipient when delivered personally or, if mailed, five (5) days after the date of deposit in the United States mail, certified or registered, postage prepaid and addressed, in the case of the Company, to 12801 North Central Expressway, Suite 1515, Dallas, Texas 75243, and in the case of Employee, to 4417 Wordsworth Drive, Plano, Texas 75093, or to such other address as either party may later specify by at least ten (10) days advance written notice delivered to the other party in accordance herewith. 6.10 NO WAIVER. The failure of either party to enforce any provision of this Agreement shall not be construed as a waiver of that provision, nor prevent that party from thereafter enforcing that provision or any other provision of this Agreement. 6.11 LEGAL FEES AND EXPENSES. In the event of any disputes under this Agreement, each party shall be responsible for their own legal fees and expenses which it may incur in resolving such dispute. 6.12 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company and Employee have executed this Agreement effective as of the date first above written. CLAIMSNET.COM INC. BY: /S/ Bo W. Lycke ----------------------- BO W. LYCKE CHIEF EXECUTIVE OFFICER EMPLOYEE /S/ Terry A. Lee ------------------------- TERRY A. LEE EXECUTIVE VICE PRESIDENT EX-27 6 FINANCIAL DATA SCHEDULE
5 1000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,021 3,832 224 (26) 0 7,176 3,705 1,983 8,923 952 0 0 0 7 7,964 8,923 414 414 0 1,665 6,755 65 787 (8,858) 0 (8,858) 0 0 0 (8,858) (1.52) (1.52)
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