Back to GetFilings.com
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, 2002
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 executive offices) (Zip Code)
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 the OTC
Bulletin Board stock market on March 20, 2003 was $2,000,897.
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, 15,391,514 shares outstanding as of March 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
THIS REPORT CONTAINS FORWARD-LOOKING INFORMATION THAT INVOLVES RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
BY THE FORWARD-LOOKING INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED ELSEWHERE IN THIS REPORT
INCLUDING OUR ABILITY TO SECURE ADDITIONAL FUNDING, SUCCESSFULLY IMPLEMENT OUR
REVISED BUSINESS STRATEGY, DEVELOP AND MAINTAIN STRATEGIC PARTNERSHIPS OR
ALLIANCES, INCREASE OUR CUSTOMER BASE, FURTHER DEVELOP OUR TECHNOLOGY AND
TRANSACTION PROCESSING SYSTEM, RESPOND TO COMPETITIVE DEVELOPMENTS, OR COMPLY
WITH GOVERNMENT REGULATIONS. ANY FORWARD-LOOKING STATEMENT THAT WE MAKE IS
INTENDED TO SPEAK ONLY AS OF THE DATE ON WHICH WE MADE THE STATEMENT. WE WILL
NOT UPDATE ANY FORWARD-LOOKING STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES THAT
OCCUR AFTER THE DATE ON WHICH THE STATEMENT IS MADE. THESE RISKS AND
UNCERTAINTIES, AMONG OTHERS, MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE DESCRIBED IN FORWARD-LOOKING STATEMENTS MADE IN THIS REPORT OR
PRESENTED ELSEWHERE BY MANAGEMENT FROM TIME TO TIME.
ITEM 1. BUSINESS
We are an electronic commerce company engaged in healthcare transaction
processing for the medical and dental industries by means of the Internet. Our
proprietary software, which was developed over the last eight years, enables the
efficient communication of data between healthcare payers and their provider
networks and trading partners (claim clearinghouses, third party administrators,
preferred provider organizations, health maintenance organizations, claim
re-pricing organizations, independent physician associations, and managed
service organizations), for the purpose of conducting administrative
transactions required to effect financial reimbursement for healthcare services.
Our system improves both the ease of data exchange as well as the quality of the
data being exchanged, allowing the users to realize an increase in electronic
transaction and cost improvements from better data. We accomplish this by
allowing healthcare providers, EDI vendors, and trading partners to download
healthcare claims interactively on the Internet and electronically transmit the
claims to us for pre-processing. Our software provides real-time editing of the
claims data for compliance with the format and content requirements of payers
and converts the claims to satisfy payers' specific processing requirements. We
then electronically transmit pre-processed claims directly or indirectly to
medical and dental payers. In addition, our software provides for secure
encryption of all claims data transmitted in compliance with the regulations of
the United States Centers for Medicare and Medicaid Services (formerly HCFA).
We formerly focused our business primarily toward healthcare providers, both
from a marketing perspective and from a system functionality perspective. During
2002, we shifted our business strategy to focus on the payer market and their
trading partners. We effected this transition by selling our provider-focused
client base to a clearinghouse partner and we simultaneously entered into an
agreement to provide the acquirer with a limited license to our proprietary
software. The license allows the providers to continue to use our proprietary
system and also provides a recurring revenue stream to us. Our role changed from
being a full-service clearinghouse for each of the providers to one of a
technology and support services supplier to the acquirer.
We believe that the following are significant advantages of our electronic
transaction pre-processing services:
o the ability to easily configure the system to meet the specific needs of
our clients, both in the format and content of data being exchanged;
o the ability to accept input from a variety of sources (direct output from a
provider's practice management system, EDI files from clearinghouses and
trading partners, and data conversion from scanned paper forms),
pre-process the data, improve the data or reject the transaction according
to client-specific business rules, and deliver the data in a consistent and
client-defined format;
o the ability to create multiple custom Web site formats to be promoted by
partners and sponsors without modification of the server-based processing
systems;
o the ability of healthcare providers utilizing their Web sites to
interactively process claims on the Internet and receive real time edits
prior to claim submission; and
o the minimal software and processing power required for providers to utilize
our proprietary software.
We believe that the services offered by our competitors are generally based on
legacy mainframe technology, proprietary networks, and proprietary file formats,
which limit the ability of those competitors to offer interactive Internet-based
processing services on an economical basis.
2
We generate non-recurring revenue from initial setup fees and from project-based
fees and we generate recurring revenue primarily from support fees and
transaction-based fees. We use the services of certain partners and vendors to
assist with the conversion of scanned paper forms, the printing of paper forms
from electronic data, and the delivery of certain electronic transactions.
ELECTRONIC CLAIMS PROCESSING MARKET
The healthcare electronic claims processing market, including dental claims, has
been estimated by Faulkner & Gray's Health Data Directory, an industry
publication, to include over 4.7 billion healthcare claim and HMO encounter form
or claim submissions in 1999 (the most recent data available), of which,
approximately 1.7 billion claims were submitted on paper forms. Health Data
Management estimates that electronic claims processing was used to process
approximately 43% of all medical outpatient claims and 17% of all dental claims.
The number of non-electronic paper transactions in the HMO market is increasing
rapidly and we believe that HMO encounters are another underserved segment of
the outpatient claims processing market. Currently there is no formal
transmission document standard. However, a national standard electronic format
is being mandated to facilitate the processing of encounter forms. Accordingly,
we believe that the opportunity exists for us to utilize our claims processing
system for the HMO market.
Healthcare claims are traditionally 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 payers, either electronically or
on paper. Many of 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 payer requirements. In contrast, our healthcare transaction processing
software system on the Internet is designed to operate in a real-time, open
client-server configuration. This operating alternative offers the provider and
payer a method of communicating directly in a rapid, accurate, and
cost-effective manner.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
includes a section on administrative simplification requiring improved
efficiency in health care delivery by standardizing electronic data interchange,
and protection of confidentiality and security of health data through setting
and enforcing standards. More specifically, HIPAA calls for (a) standardization
of electronic patient health, administrative and financial data, (b) unique
health identifiers for individuals, employers, health plans and health care
providers, and (c) security standards protecting the confidentiality and
integrity of "individually identifiable health information". All healthcare
organizations are effected, including health care providers, health plans,
employers, public health authorities, life insurers, clearinghouses, billing
agencies, information systems vendors, service organizations, and universities.
HIPAA calls for severe civil and criminal penalties for noncompliance. The
provisions relating to standards for electronic transactions, including health
claims and equivalent managed care encounter information, must be implemented by
October 2003 for clearinghouse and large payer organizations. The provisions
must be implemented by all entities no later than October 2004. The provisions
relating to standards for privacy must be implemented by April 2003 for large
organizations and April 2004 for small organizations. The provisions relating to
security must be implemented by April 2005 for large organizations and April
2006 for small organizations. The deadlines for standards related to unique
identifiers have not yet been established.
We believe that the convergence of HIPAA mandates and the proliferation of
internet technology will cause sweeping changes in the health care industry. At
a minimum, it will cause all payers to implement secure electronic transaction
processing capabilities for a full menu of administrative transactions. The
universal availability of data exchange between healthcare organizations is
expected to generate growth in the healthcare EDI industry. If the industry
evolves toward direct payer submission of claims or real-time adjudication of
claims, we believe our software will be able to offer efficient access to payers
and healthcare providers in a HIPAA-compliant format.
BUSINESS STRATEGY
Our recently modified business strategy is as follows:
o to utilize our state of the art technology to help large healthcare
organizations achieve more efficient and less costly administrative
operations;
o to market our services directly to the payer community and its trading
partners;
3
o to aggressively pursue and support strategic relationships with companies
that will in turn aggressively market our services to large volume
healthcare organizations, including insurers, HMO's, third party
administrators, provider networks, re-pricing organizations, clinics,
hospitals, laboratories, physicians and dentists;
o to provide total claim management services to payer organizations,
including internet claim submission, paper claim conversion to electronic
transactions, and receipt of EDI transmissions;
o to continue to expand our product offerings to include additional
transaction processing solutions, such as HMO encounter forms, eligibility
and referral verifications, claim status inquiries, electronic remittance
advices, claim attachments, and other healthcare administrative services,
in order to diversify sources of revenue; and
o to license our technology for other applications, including stand-alone
purposes, Internet systems and private label use, and for original
equipment manufacturers.
There can be no assurance that any of our business strategies will succeed or
that any of our business objectives will be met with any success.
On April 18, 2000, we, through our wholly-owned subsidiary, HealthExchange.com,
Inc., a Delaware corporation ("HECOM"), acquired from VHx Company, a Nevada
corporation ("VHx"), selected properties and assets, including it's
HealthExchange.com name and trademark, and in-process research and development
(together, "HealthExchange"). Several factors have caused us to discontinue
development of the HealthExchange(TM) products, including lack of existing
customer commitment to continued product development, lack of market acceptance,
future cash requirements to continue product development, and the cost of sales
and marketing efforts to create a market niche.
On September 11, 2002, we sold for net proceeds of $640,000 certain assets
consisting primarily of customer contracts (the "Assigned Contracts") and
related revenue streams thereunder to ProxyMed, Inc. At the same time, we also
entered into an Affiliate and Partner Services and License Agreement pursuant to
which (i) we and ProxyMed have agreed to provide certain administrative and
support services for each other in connection with each other's customers,
including without limitation the customers under the Assigned Contracts, (ii) we
agreed to assist ProxyMed in establishing a "hot-site" which will permit our
software application to run on ProxyMed's hardware platform to service
ProxyMed's customers, and (iii) we granted ProxyMed a limited, non-exclusive,
5-year license to use our software application at its "hot-site". We are
entitled to receive fees for our services and the use of our software
applications until the occurrence of certain bankruptcy and liquidation events
with respect to us as set forth in such agreement.
MARKETING EFFORTS
We began in October 2002 to build a direct sales organization and launched a
marketing campaign to communicate our service capabilities and value proposition
to our target market, primarily small and mid-sized payers. The direct sales
organization currently consists of three representatives, only one of which has
been employed by us for more than two weeks.
Additionally, we have entered into several relationships with strategic partners
for the marketing of our services and use of our proprietary technology,
including:
o arrangements entered into in 2000 and 2001 with business-to-business
healthcare transaction service providers and application service providers
such as Synertech Systems, Inc. and Quality Care Solutions, Inc. to operate
or provide each a co-branded or private-labeled version of our claims
processing application to be marketed by the other party either directly
throughout the United States or, as part of its own internet-based service;
and
o an agreement entered into in September 2002 with a major healthcare
clearinghouse to operate a private-labeled version of our claims processing
application for use by certain of their clients, including those clients
acquired from us.
RECENT DEVELOPMENTS
In January, February and March 2003, we completed the private placement of
950,000 shares of common stock to accredited investors at $0.20 per share for
net proceeds of $189,000. In connection with the private placement, we also
issued warrants to purchase an aggregate of 950,000 shares of common stock. The
warrants contain an exercise price of $0.20 per share and expire December 31,
2007.
HEALTHCARE TRANSACTION PROCESSING SOFTWARE AND SECURITY
Our healthcare transaction processing software is designed for processing
in-patient and outpatient healthcare claims. The software is modular, providing
valuable flexibility, and generally consists of the following components:
4
o core processing software developed by us which provides claims review,
claims editing, and a "table-based" software coding of claims variables at
a payer-specific level;
o data mapping software that allows us to accept a wide variety of data input
formats;
o data format generating software developed by us that allows us to easily
create a wide variety of data output formats;
o an integrated web-based user interface that can be easily configured to
support co-branded and private-labeled deployment;
o industry standard website management software; and
o state-of-the-art commercial security and encryption software.
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 payer-specific edits to meet the requirements of payers and avoids
expensive onsite software changes. Our personnel input new edits. Once
healthcare providers or trading partners connect to our secure website, our
software edits claims on-line automatically, using a database containing more
than 22,000 edit variables. In the event that a particular payer cannot accept
submission of claims electronically, we either print and mail hard copies of the
claims to these payers and charge the provider for this additional service or
allow the provider to print and mail the claims.
Our healthcare transaction processing software is a Web-based system, 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 submitting system to our Internet claims
processing server, where editing and formatting occurs in a secure environment.
Our system then delivers the claims to the payer gateway. The different software
applications have been purchased, licensed, or developed by us.
Our website user interface 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 Centers for
Medicare and Medicaid Services (formerly HCFA) has defined security requirements
for Internet communications including healthcare data. We operate in compliance
with these requirements. The PRIVATE INTRANET site is designed for internal
communications, website operating reports, customer support, and reporting.
Our personnel access IBM, or the client's hosted environment, remotely via a
secure Virtual Private Network (VPN) for technical operations support. Examples
of the type of support provided include migrating Web site changes to
production, database administration, and Claims Processing Engine monitoring and
management.
With the exception of the commercial software, such as that provided by
Microsoft, we have either identified back-up sources for all the software used
or, in the event of a business failure by the licensing vendor, we own the
source code.
TRAINING AND HARDWARE REQUIREMENTS
The training for the various products and services offered by us is included in
the initial setup fee. User manuals and reference information is available
online through our client extranet to the provider, seven days a week, 24 hours
a day. The tutorial and other training documents are always available at our Web
home page, the location of which is http://www.claimsnet.com.
No significant hardware investment by the customer is required in order to take
advantage of our services. The system requires the provider to use a 28,800 bps
or better asynchronous modem and a PC with Windows 3.11 or higher operating
system installed. An Internet Service Provider, such as AT&T Worldnet, America
Online or Earthlink, offers local telecommunication to the Internet. Our
customers are responsible for obtaining and maintaining the Internet Service
Provider connection.
INTERNET/INTRANET
The processing configuration used by us requires no electronic claims processing
software to reside at the level of the healthcare provider. All editing and
formatting takes place at our Internet application server site. All software
updates and all format changes are available instantly to all customers. Our
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.
5
Our 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 our servers and a user takes place in a highly controlled,
secure, and encrypted environment.
The dual encryption utilized by us 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
We view our customers as (1) the payers accepting claims, (2) the strategic
partners and affiliates with which we jointly operate, and (3) the healthcare
providers submitting claims. Revenues received from three customers represented
a significant portion of our total revenues during the last three years.
Revenues received from one customer and clearinghouse partner who acquired
certain of our business assets in September 2002 represented 23% and 9% of our
revenues for 2002 and 2001, respectively, and revenues received from another
customer represented 9% of our 2002 revenues. Revenues received from McKesson
represented 27% and 47% of 2001 and 2000 revenues, respectively.
We enter into agreements with our clients. Generally, such agreements protect
our intellectual property rights and define the financial terms of our
relationship. We require each healthcare provider using our services to enter
into a standard license agreement via our website. We also enter into agreements
with the commercial medical and dental payers or clearinghouses to which we
submit processed claims. Generally, such agreements provide for transaction fees
to be received by us for certain payers and transaction fees to be paid by us
for other payers.
In a Development and Services Agreement with McKesson, originally entered into
in October 1999 and amended and replaced by a new agreement on April 12, 2001,
we granted McKesson a multi-year, non-exclusive, private label license for
certain of our proprietary technology and agreed to manage McKesson's operation
of the system on a fully outsourced basis in the way we determine to be the most
efficient.
Under the April 2001 agreement, McKesson acquired 1,514,285 shares of common
stock at a cost of $2,650,000 and paid us $200,000; and a three year warrant to
purchase 819,184 shares of our common stock at $7.00 per share, granted under
the October 1999 agreement, was cancelled. The April 2001 agreement granted
McKesson additional license rights for co-branding the services to third parties
and for an expanded set of transactions. McKesson will continue to pay
transaction fees for all transactions processed under the license, but will not
pay additional license fees and subscription fees that were included in the
October 1999 agreement. McKesson has not been using the license since May 2002.
In September 2000 we entered into an agreement with Synertech Systems, Inc., a
premier application service provider and administrative outsourcer for the
healthcare industry, to provide Synertech and its customers, primarily payer
organizations, with co-branded versions of our claims processing application.
Under an arrangement entered into in September 2000 with ProxyMed, a leading
provider of business-to-business healthcare transaction services, we operated a
co-branded version of our claims processing application for ProxyMed. This
arrangement also provides for us to use ProxyMed's extensive direct payer
connections to submit certain claims to selected payers.
On September 11, 2002, we sold certain assets consisting primarily of customer
contracts (the "Assigned Contracts") and related revenue streams thereunder to
ProxyMed, Inc. At the same time, we also entered into an Affiliate and Partner
Services and License Agreement pursuant to which (i) we and ProxyMed have agreed
to provide certain administrative and support services for each other in
connection with each other's customers, including without limitation the
customers under the Assigned Contracts, (ii) we agreed to assist ProxyMed in
establishing a "hot-site" which will permit our software application to run on
ProxyMed's hardware platform to service ProxyMed's customers, and (iii) we
granted ProxyMed a limited, non-exclusive, 5-year license to use our software
application at its "hot-site". We are entitled to receive fees for our
liquidation events set forth in such agreement in respect of us.
In February 2001 we agreed with Quality Care Solutions, Inc. (QCSI), a leading
provider of enterprise-wide solutions for healthcare payer organizations, to
provide a co-branded version of our claims processing application to QCSI and be
able to submit claims directly to the QCSI system.
MARKETING
We are pursuing a two fold marketing and sales strategy.
6
1. Creating strategic partnerships with organizations that:
o are engaged in electronic claims processing and expect to benefit by using
our advanced technology; and
o serve or are engaged in direct sales and marketing to the healthcare market
and desire to expand the products and services they offer to their clients
without incurring substantial costs by using our advanced technology in a
co-branded or private-label arrangement.
We have established several valuable strategic relationships and are actively
seeking additional partners for alliances and joint ventures, including managed
care companies, Internet service and information providers, traditional
healthcare information systems providers, clearinghouses, payer organizations,
and consulting firms, each seeking solutions to the costly handling of
healthcare claims and other administrative transactions.
We also believe that there are opportunities for joint marketing with banks,
insurance companies, laboratories, and pharmaceutical companies that desire
online interfacing with healthcare providers.
We believe that our strategic alliance marketing strategy will allow us to
capture a share of the claims processing market without a costly direct sales
and marketing effort as the healthcare industry adopts new technology, either
because of greater efficiencies or due to required compliance with HIPAA
mandates and other regulatory initiatives. If such a transition takes place
gradually, we expect to benefit by conserving expenses, or if it escalates
dramatically due to HIPAA compliance deadlines or for other reasons, we expect
to benefit by having a broad distribution network.
There can be no assurance that we will secure any additional alliances or joint
venture relations, or if we do, that such alliances or joint venture
relationships will be profitable.
2. We also maintain a direct sales force, currently three persons, and have
launched an aggressive, yet cost-effective direct sales campaign to the PPO,
HMO, TPA and Medical Insurance carrier marketplace. We continue to review and
assess sales and marketing policies to enable us to accelerate revenue growth.
However, there can be no assurance that such efforts will be successful.
COMPETITION
Several large companies such as WebMD, McKesson, National Data Corporation,
PerSe Technologies, and ProxyMed dominate the claims processing industry in
which we operate. 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. We estimate,
based on information from various trade journals, that in addition to these
large competitors, there are approximately 300 or more small independent
electronic claims processing companies and clearinghouses which operate as local
sub-clearinghouses for the processing of medical and dental claims.
A number of additional companies, several of which have greater financial
resources and marketing capabilities than us, have announced that they intend to
enter the claims processing industry. Some of these companies have indicated a
desire to primarily serve the payer community and some are primarily focused on
the provider community.
All of these companies are considered competitors, however, several of these
companies are already our strategic partners for co-branded or private label
solutions using our technology.
We believe that the flexibility, configurability, and operational efficiency of
our claims processing system will allow us to compete effectively in the payer
market and to partner with clearinghouses and other vendors in the provider
market. We anticipate that competition will increase in the processing of claims
on the Internet. No assurance can be given that we will successfully compete in
any market in which we conduct or may conduct operations.
EMPLOYEES
As of December 31, 2002, we had a total of 11 full-time employees, of whom two
were executive officers, six were technical and service personnel, two were
sales and marketing personnel, and one was administrative personnel. None of our
employees is represented by a labor organization. Most of our employees have
been granted incentive stock options and we believe that our relations with our
employees are satisfactory.
7
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING FACTORS
SHOULD BE CONSIDERED CAREFULLY IN EVALUATING OUR BUSINESS AND PROSPECTS.
CONDITIONS EXIST WHICH CAUSE SUBSTANTIAL DOUBT ABOUT OR ABILITY TO CONTINUE AS A
GOING CONCERN.
The Report of our independent auditors with respect to our financial state as of
December 31, 2002 and the year then ended has been qualified with respect to our
ability to continue as a going concern.
Management believes that available cash resources, together with anticipated
revenues from operations and the proceeds of recently completed financing
activities and funding commitments will not be sufficient to satisfy our capital
requirements through April 30, 2003. Necessary additional capital may not be
available on a timely basis or on acceptable terms, if at all. In any of these
events, we may be unable to implement current plans for expansion or to repay
debt obligations as they become due. If sufficient capital cannot be obtained,
we may be forced to significantly reduce operating expenses to a point which
would be detrimental to business operations, curtail research and development
activities, sell certain business assets or discontinue some or all of our
business operations, take other actions which could be detrimental to business
prospects and result in charges which could be material to our operations and
financial position, or cease operations altogether. In the event that any future
financing is effected, to the extent it includes equity securities, the holders
of the common stock and preferred stock may experience additional dilution. In
the event of a cessation of operations, there may not be sufficient assets to
fully satisfy all creditors, in which case the holders of equity securities may
be unable to recoup any of their investment.
WE HAVE A HISTORY OF NET LOSSES, LIMITED REVENUES, ANTICIPATE FURTHER LOSSES AND
HAVE A WORKING CAPITAL DEFICIT
We have incurred net losses since inception and expect to continue to operate at
a loss for the foreseeable future. For the years ended December 31, 1998, 1999,
2000, 2001 and 2002, we incurred net losses of $(4,663,000), $(8,858,000),
$(17,695,000), $(5,194,000) and $(2,927,000) respectively. As of December 31,
1998, 1999, 2000, 2001 and 2002, we had working capital (deficits) of
$(1,089,000), $6,113,000, $(1,348,000), $(535,000) and $(1,238,000)
respectively. We generated revenues of $155,000, $414,000, $1,602,000,
$1,336,000 and $1,104,000 for the years ended December 31, 1998, 1999, 2000,
2001 and 2002, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--In General."
THREE CUSTOMERS GENERATED A SIGNIFICANT SHARE OF OUR REVENUES AND WE ENTERED
INTO AGREEMENTS IN 2001 AND 2002 WHICH WILL HAVE A NEGATIVE IMPACT ON OUR NEAR
TERM REVENUES
Revenues received from three customers represented a significant portion of our
total revenues during the last three years. Revenues received from one customer
and clearinghouse partner who acquired certain of our business assets in
September 2002 represented 23% and 9% of our revenues for 2002 and 2001,
respectively, and revenues from another customer represented 9% of our 2002
revenues. Revenues received from McKesson represented 27% and 47% of 2001 and
2000 revenues, respectively.
In April 2001, we entered into a new agreement with McKesson that supersedes an
agreement under which the majority of the revenues from the customer was earned.
The new agreement eliminates further payments for software development, software
license, and dedicated support services, which accounted for nearly all of the
revenues from this customer recognized during 2000 and 2001. The new agreement
has had a material effect in 2002 and will have a material effect on our near
term financial results. The nature of all future cash payments to be received
pursuant to the new agreement are dependent on the volume of services provided.
In September 2002, we sold certain assets consisting primarily of customer
contracts (the "Assigned Contracts") and the related revenue streams thereunder
, which generated 76%, 71% and 57% of our total revenues for 2002, 2001 and
2000, respectively, to a customer and clearinghouse partner. At the same time,
we also entered into an agreement with the acquirer granting it a limited,
non-exclusive license to use our software to service certain of their customers,
including the Assigned Contracts. We are entitled to receive fees under the
agreement; however, it is unlikely that the fees will generate revenues
equivalent to the Assigned Contracts in the near term. The transaction will,
therefore, have a material effect on our near term financial results.
8
WE CANNOT PREDICT OUR FUTURE CAPITAL NEEDS AND WE MAY NOT BE ABLE TO SECURE
ADDITIONAL FINANCING
We believe that our available cash resources, together with anticipated revenues
from operations and the proceeds of recently completed financing activities and
funding commitments will not be sufficient to satisfy our capital requirements
through April 30, 2003. Necessary additional capital may not be available on a
timely basis or on acceptable terms, if at all. In any of these events, we may
be unable to implement current plans for expansion or to repay debt obligations
as they become due. If sufficient capital cannot be obtained, we may be forced
to:
o significantly reduce operating expenses to a point which would be detrimental
to business operations,
o curtail research and development activities and marketing efforts,
o sell certain business assets or discontinue some or all of our business
operations,
o take other actions which could be detrimental to business prospects and
result in charges which could be material to our operations and financial
position, or
o cease operations altogether.
In the event that any future financing should take the form of equity
securities, the holders of the common stock and preferred stock may experience
additional dilution. In the event of a cessation of operations, there may not be
sufficient assets to fully satisfy all creditors, in which case the holders of
equity securities may be unable to recoup any of their investment.
BECAUSE WE HAVE BEEN IN BUSINESS FOR A LIMITED PERIOD OF TIME, THERE IS LIMITED
INFORMATION UPON WHICH YOU CAN EVALUATE OUR BUSINESS
We have a limited operating history upon which you may base an evaluation of us
and determine our prospects for achieving our intended business objectives. We
are prone to all of the risks inherent to the establishment of any new business
venture. Organized in April 1996, we were a development stage company through
March 31, 1997. From March 1997 until September 2002, we operated as a full
service clearinghouse serving primarily healthcare providers. In September 2002,
we sold our healthcare provider clearinghouse service contracts to a strategic
partner to generate cash, simplify our operations, and focus our attention on
the payer market. We endeavored to diversify our business during the year ended
December 31, 2000, through an asset acquisition, which due to delay in market
readiness resulted in a large non-recurring loss. We have recently changed our
sales and marketing strategy. Consequently, you should consider the likelihood
of our future success to be highly speculative in light of our limited operating
history, our limited resources and problems, expenses, risks, and complications
frequently encountered by similarly situated companies in the early stages of
development, particularly companies in new and rapidly evolving markets, such as
electronic commerce. To address these risks, we must, among other things:
o maintain and increase our strategic partnerships,
o maintain and increase our customer base,
o implement and successfully execute our business and marketing strategy,
o continue to develop and upgrade our technology and transaction-processing
systems,
o continually update and improve our Web site,
o provide superior customer service,
o respond to competitive developments,
o appropriately evaluate merger and acquisition opportunities, and
o attract, retain, and motivate qualified personnel.
9
We may not be successful in addressing all or some of these risks, and our
failure to do so could have a material adverse effect on our business,
prospects, financial condition, and results of operations.
WE EXPECT TO EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR FUTURE OPERATING RESULTS
DUE TO A VARIETY OF FACTORS, MANY OF WHICH ARE OUTSIDE OUR CONTROL
We are a relatively young company in the rapidly evolving and highly competitive
internet-based medical claims processing industry. Our ability to achieve
operating results in this industry will depend on several factors, including:
o our ability to satisfy capital requirements in an investment climate that
has been more reluctant generally to invest in "Internet" companies,
o our ability to retain existing customers, attract new customers at a steady
rate, and maintain customer satisfaction in an industry in which there is
as of yet no uniformly accepted standard or methodology for claims
processing,
o our ability to introduce new sites, service and products,
o our ability to effectively develop and implement plans to potentially
reposition our products, services and marketing efforts,
o the effect of announcements or introductions of new sites, services, and
products by our competitors in a rapidly evolving industry,
o price competition or price increases in our industry,
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
health claims processing services,
o our ability to upgrade and develop our systems and infrastructure in a
timely and effective manner,
o the amount of traffic on our Web site,
o the incurrence of technical difficulties, system downtime, or Internet
brownouts to which we are acutely sensitive insofar as our medical claims
processing service is Internet-based,
o the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations, and infrastructure which cannot
be predicted with any large degree of accuracy in light of the rapidly
evolving nature of the medical claims processing industry,
o our ability to comply with existing and added government regulation such as
HIPAA or privacy regulations relating to the Internet or patient
information, and
o general economic conditions and economic conditions specific to the
Internet, electronic commerce, and the medical claims processing industry.
If we are unable to handle or satisfactorily respond to these factors, our
operating results may fall below the expectations of securities analysts and
investors. In this event, the market price of our common stock would likely be
materially adversely affected.
OUR MARKETING STRATEGY HAS NOT BEEN SUFFICIENTLY TESTED AND MAY NOT RESULT IN
SUCCESS
We have recently modified our marketing strategy from heavy reliance on the
development and maintenance of strategic relationships with companies that will
aggressively market electronic claims processing and our other services to
payers and healthcare providers to a two-fold approach that also includes a
direct sales and marketing campaign to the PPO, HMO, TDA and Medical Insurance
Carrier marketplace. To penetrate our market we will have to exert significant
efforts and devote material resources to create awareness of and demand for our
products and services. No assurance can be given that our strategic partners
will devote significant efforts and resources to, and be successful in, these
marketing services or that they will result in material sales of our products
and services. No representation can be made that our strategy will prove
successful or that we will have adequate resources to support direct marketing
of our products and services. Our failure to develop our marketing capabilities,
successfully market our products or services, or recover the cost of our
services will have a material adverse effect on our business, prospects,
financial condition, and results of operations.
10
IF WE ARE UNABLE TO UPGRADE OUR SYSTEMS, WE MAY BE UNABLE TO PROCESS AN
INCREASED VOLUME OF CLAIMS OR MAINTAIN COMPLIANCE WITH REGULATORY REQUIREMENTS
A key element of our strategy is to generate a high volume of traffic on, and
use of, our Web site. We are currently processing less than 10 million medical
claims per year in an industry that processes approximately 4.7 billion claims
annually. If the volume of traffic on our Web site or the number of claims
submitted by customers substantially increases, we will have to expand and
further upgrade our technology, claims processing systems, and network
infrastructure to accommodate these increases or our 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. We operate in an industry that is
undergoing change due to increasing regulatory requirements, some of which
require us to upgrade our systems. We may be unable to effectively upgrade and
expand our claims processing system or to integrate smoothly any newly developed
or purchased modules with our existing systems, which could have a material
adverse effect on our business, prospects, financial condition, and results of
operations.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
contains provisions which require us to modify our software application to be in
compliance. The required modifications may prove to be very costly and disrupt
our ability to allocate resources to other business activities. If we are unable
to complete the required modifications prior to compliance deadlines, our
ability to operate in the healthcare industry would be severely restricted.
BECAUSE WE DEPEND UPON ONLY TWO SITES FOR OUR COMPUTER SYSTEMS WE ARE VULNERABLE
TO THE EFFECTS OF NATURAL DISASTERS, COMPUTER VIRUSES, AND SIMILAR DISRUPTIONS
Our ability to successfully receive and process claims and provide high-quality
customer service largely depends on the efficient and uninterrupted operation of
our computer and communications hardware systems. Our proprietary software
serving the majority of our customers currently resides solely on our servers,
most of which are currently located in a monitored server facility in Dallas,
TX. Our systems and operations are in a secured facility with hospital-grade
electrical power, redundant telecommunications connections to the Internet
backbone, uninterruptible power supplies, and generator back-up power
facilities. Further, we maintain redundant systems at a separate facility for
backup and disaster recovery. Despite such safeguards, we remain vulnerable to
damage or interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake, terrorist attacks, and similar events. Our proprietary
software serving our largest customer currently resides solely on the customer's
servers, in which case we are reliant on the customer to ensure a secure,
efficient and uninterrupted operation of computer and communication systems. In
addition, we do not, and may not in the future, carry sufficient business
interruption insurance to compensate us for losses that may occur. Despite our
implementation of network security measures, our servers are vulnerable to
computer viruses, physical or electronic break-ins, and similar disruptions,
which could lead to interruptions, delays, loss of data, or the inability to
accept and process customer claims. The occurrence of any of these events could
have a material adverse effect on our business, prospects, financial condition,
and results of operations.
WE RELY ON INTERNALLY DEVELOPED ADMINISTRATIVE SYSTEMS THAT ARE INEFFICIENT,
WHICH MAY PUT US AT A COMPETITIVE DISADVANTAGE
Some of the systems and processes used by our business office to prepare
information for financial, accounting, billing, and reporting, are inefficient,
inadequate, and require a significant amount of manual effort. For example, our
systems require cumbersome data manipulation using spreadsheets in order to
prepare information for both billing and client reporting purposes. The manual
effort is both costly and negatively affects the timeliness of these processes.
These inefficiencies may place us at a competitive disadvantage when compared to
competitors with more efficient systems. We intend to continue to upgrade and
expand our administrative systems and to integrate newly-developed and purchased
modules with our existing systems in order to improve the efficiency of our
reporting methods, although we are unable to predict whether these upgrades will
improve our competitive position.
WE HAVE LIMITED SENIOR MANAGEMENT RESOURCES, AND WE NEED TO ATTRACT AND RETAIN
HIGHLY SKILLED PERSONNEL; WE MAY BE UNABLE TO EFFECTIVELY MANAGE GROWTH WITH OUR
LIMITED RESOURCES
Our senior management currently consists of Don Crosbie, our President and Chief
Executive Officer, and Paul Miller, our Chief Financial Officer. We have
undergone a number of staffing reductions since June 2000, requiring remaining
employees to handle an increasingly large and more diverse amount of
responsibility. Any expansion of our business would place a significant
additional strain on our limited managerial, operational, and financial
resources. We will be required to expand our operational and financial systems
significantly and to expand, train, and manage our work force in order to manage
the expansion of our operations. Our failure to fully integrate our new
employees into our operations could have a material adverse effect on our
business, prospects, financial condition, and results of operations. Our ability
to attract and retain highly skilled personnel is critical to our operations and
expansion. We face competition for these types of personnel from other
technology companies and more established organizations, many of which have
significantly larger operations and greater financial, marketing, human, and
other resources than we have. We may not be successful in attracting and
retaining qualified personnel on a timely basis, on competitive terms, or at
all. If we are not successful in attracting and retaining these personnel, our
business, prospects, financial condition, and results of operations will be
materially adversely affected.
11
BECAUSE OF THEIR SPECIALIZED KNOWLEDGE OF OUR PROPRIETARY TECHNOLOGY AND THE
MEDICAL CLAIMS PROCESSING INDUSTRY, WE DEPEND UPON OUR SENIOR MANAGEMENT AND
CERTAIN KEY PERSONNEL; THE LOSS OR UNAVAILABILITY OF ANY OF THEM COULD PUT US AT
A COMPETITIVE DISADVANTAGE; OUR LIMITED RESOURCES WILL ADVERSELY AFFECT OUR
ABILITY TO HIRE ADDITIONAL MANAGEMENT PERSONNEL
We currently depend upon the efforts and abilities of our senior executives
currently comprising of Don Crosbie, our President and Chief Executive Officer,
Paul Miller, our Chief Financial Officer and two other key personnel, each of
whom has a distinctive body of knowledge regarding electronic claims submissions
and related technologies, the medical claims processing industry and our
services. We may be unable to retain and motivate remaining personnel for an
extended period of time in this environment. The additional loss or
unavailability of the services of any senior management or such key personnel
for any significant period of time could have a material adverse effect on our
business, prospects, financial condition, and results of operations. We have not
obtained key-person life insurance on any of our senior executives. In addition,
we do not have employment agreements with any of our senior executives or key
personnel.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
The Company's business is based in large part upon the proprietary nature of its
services and technologies. Accordingly, our ability to compete effectively will
depend on our ability to maintain the proprietary nature of these services and
technologies, including our proprietary software and the proprietary software of
others with which we have entered into software licensing agreements. We hold no
patents and rely on a combination of trade secrets and copyright laws,
nondisclosure, and other contractual agreements and technical measures to
protect our rights in our technological know-how and proprietary services. In
addition, we have been advised that trademark and service mark protection of our
corporate name is not available. We depend upon confidentiality agreements with
our officers, directors, employees, consultants, and subcontractors to maintain
the proprietary nature of our technology. These measures may not afford us
sufficient or complete protection, and others may independently develop know-how
and services similar to ours, otherwise avoid our confidentiality agreements, or
produce patents and copyrights that would materially and adversely affect our
business, prospects, financial condition, and results of operations. We believe
that our services are not subject to any infringement actions based upon the
patents or copyrights of any third parties; however, our know-how and technology
may in the future be found to infringe upon the rights of others. Others may
assert infringement claims against us, and if we should be found to infringe
upon their patents or copyrights, or otherwise impermissibly utilize their
intellectual property, our ability to continue to use our technology could be
materially restricted or prohibited. If this event occurs, we may be required to
obtain licenses from the holders of their intellectual property, enter into
royalty agreements, or redesign our products so as not to utilize their
intellectual property, each of which may prove to be uneconomical or otherwise
impossible. Licenses or royalty agreements required in order for us to use this
technology may not be available on terms acceptable to us, or at all. These
claims could result in litigation, which could materially adversely affect our
business, prospects, financial condition, and results of operations.
BECAUSE WE ARE NOT CURRENTLY PAYING CASH DIVIDENDS, INVESTORS MAY HAVE TO SELL
CLAIMSNET.COM SHARES IN ORDER TO REALIZE THEIR INVESTMENT
Whether we pay cash dividends in the future will be at the discretion of our
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, and any other factors that the board of
directors decides is relevant. In view of our losses and substantial financial
requirements, we will not be in a position to pay cash dividends at any time in
the reasonable future. Holders of our common stock may have to sell all or a
part of their shares in order to realize their investment.
12
SOME PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAY DETER OUR
ACQUISITION
A number of provisions of our amended certificate of incorporation and Delaware
law may be deemed to have an anti-takeover effect. Our certificate of
incorporation and by-laws provide that our board of directors is divided into
two classes serving staggered two-year terms, resulting in approximately
one-half of the directors being elected each year and contain other provisions
relating to voting and the removal of the officers and directors. Further, our
by-laws contain provisions which regulate the introduction of business at annual
meetings of our stockholders by other than the board of directors. In addition,
we are subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner.
In addition, our certificate of incorporation, as amended, authorizes our board
of directors to issue up to 4,000,000 shares of preferred stock, which may be
issued in one or more series, the terms of which may be determined at the time
of issuance by the board of directors, without further action by stockholders,
and may include voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and liquidation, conversion,
and redemption rights, and sinking fund provisions.
ISSUANCE OF NEW SERIES OF PREFERRED STOCK COULD MATERIALLY ADVERSELY AFFECT
HOLDERS OF COMMON STOCK AND ANY EXPANSION OR SALES OPPORTUNITIES
We may be required to issue a new series of preferred stock for continued
funding of operations. The issuance of any new series of preferred stock could
materially adversely affect the rights of holders of shares of our common stock
and, therefore, could reduce the value of the common stock. In addition,
specific rights granted to holders of preferred stock could be used to restrict
our ability to merge with, or sell our assets to, a third party. The ability of
the board of directors to issue preferred stock could have the effect of
rendering more difficult, delaying, discouraging, preventing, or rendering more
costly an acquisition of us or a change in control of us, thereby preserving our
control by the current stockholders.
INTERNET SECURITY POSES RISKS TO OUR ENTIRE BUSINESS
The electronic submission of healthcare claims and other electronic healthcare
transaction processing services by means of our proprietary software involves
the transmission and analysis of confidential and proprietary information of the
patient, the healthcare provider, or both, as well as our own confidential and
proprietary information. The compromise of our security or misappropriation of
proprietary information could have a material adverse effect on our business,
prospects, financial condition, and results of operations. We rely on encryption
and authentication technology licensed from other companies to provide the
security and authentication necessary to effect secure Internet transmission of
confidential information, such as medical information. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the technology used by us
to protect customer transaction data. Anyone who is able to circumvent our
security measures could misappropriate proprietary information or cause
interruptions in our operations. We may be required to expend significant
capital and other resources to protect against security breaches or to minimize
problems caused by security breaches. Concerns over the security of the Internet
and other online transactions and the privacy of users may also inhibit the
growth of the Internet and other online services generally, and the Web site in
particular, especially as a means of conducting commercial transactions. To the
extent that our activities or the activities of others involve the storage and
transmission of proprietary information, such as diagnostic and treatment data,
security breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches. Our failure to prevent these security breaches may have a
material adverse effect on our business, prospects, financial condition, and
results of operations.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF ELECTRONIC COMMERCE
CONTINUES TO GROW GENERALLY AND SPECIFICALLY IN THE HEALTH CARE INDUSTRY
Our future revenues and any future profits are substantially dependent upon the
widespread acceptance and use of the Internet and other online services as an
effective medium of commerce by submitters of medical claims. Rapid growth in
the use of, and interest in, the Internet, the Web, and online services is a
recent phenomenon, and may not continue on a lasting basis. In addition,
customers may not adopt, and continue to use, the Internet and other online
services as a medium of commerce. Demand and market acceptance for recently
introduced services and products over the Internet are subject to a high level
of uncertainty, and few services and products have generated profits. For us to
be successful, the healthcare community must accept and use novel and cost
efficient ways of conducting business and exchanging information.
13
In addition, the public in general, and the healthcare industry in particular,
may not accept the Internet and other online services as a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet and other online "business to business" services continue to experience
significant growth in the number of users, their frequency of use, or in their
bandwidth requirements, the infrastructure for the Internet and online services
may be unable to support the demands placed upon them. In addition, the Internet
or other online services could lose their viability due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased governmental
regulation. Changes in, or insufficient availability of, telecommunications
services to support the Internet or other online services also could result in
slower response times and adversely affect usage of the Internet and other
online services generally and our product and services in particular. If use of
the Internet and other online services does not continue to grow or grows more
slowly than we expect, if the infrastructure for the Internet and other online
services does not effectively support the growth that may occur, or if the
Internet and other online services do not become a viable commercial
marketplace, our business, prospects, financial condition, and results of
operations could be materially adversely affected.
WE MAY NOT BE ABLE TO ADAPT AS THE INTERNET, ELECTRONIC COMMERCE, AND CUSTOMER
DEMANDS CONTINUE TO EVOLVE
The Internet and the medical claims processing industry are characterized by:
o rapid technological change,
o changes in user and customer requirements and preferences,
o changes in federal legislation and regulation,
o frequent new product and service introductions embodying new technologies,
and
o the emergence of new industry standards and practices that could render our
existing Web site and proprietary technology and systems obsolete.
Our success will depend, in part, on our ability to:
o enhance and improve the responsiveness and functionality of our online
claims processing services,
o license leading technologies useful in our business and to enhance our
existing services,
o comply with all applicable regulations regarding our industry and the
Internet,
o develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective or current customers, and
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of our Web site and other proprietary technology will involve
significant technical and business risks and require material financial
commitment. We may not be able to adapt successfully to such demands. Our
failure to respond in a timely manner to changing market conditions or customer
requirements could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
WE HAVE NOT COMPETED AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN OUR INDUSTRY
Based on total assets and annual revenues for the fiscal year ended in 2002, we
are significantly smaller than the majority of our national competitors. We have
not successfully competed and may not in the future successfully compete in any
market in which we co nduct or may conduct operations.
14
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
We are not currently subject to direct regulation by any government agency other
than laws or regulations applicable to electronic commerce, but we process
information which, by law, must remain confidential. The U.S. Centers for
Medicare and Medicaid Services (formerly HCFA) has defined security requirements
for Internet communications including healthcare data. We must operate in
compliance in all material respects with these requirements. Due to the
increasing popularity and use of the Internet and other online services,
federal, state, and local governments may adopt laws and regulations, or amend
existing laws and regulations, with respect to the Internet or other online
services covering issues such as user privacy, pricing, content, copyrights,
distribution, and characteristics and quality of products and services.
Furthermore, the growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws to impose
additional burdens on companies conducting business online. The adoption of any
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for our services and
increase our cost of doing business, or otherwise have a material adverse effect
on our business, prospects, financial condition, and results of operations.
Moreover, the relevant governmental authorities have not resolved the
applicability to the Internet and other online services of existing laws in
various jurisdictions governing issues such as property ownership and personal
privacy, and it may take time to resolve these issues definitively. Any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could have a material adverse effect on our business, prospects,
financial condition, and results of operations.
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE HIGHLY VOLATILE
The market price of our common stock has experienced, and may continue to
experience, significant volatility. Our operating results, announcements by us
or our competitors regarding acquisitions or dispositions, new procedures or
technology, changes in general conditions in the economy, and general market
conditions have caused and could in the future cause the market price of our
common stock to fluctuate substantially. The equity markets have, on occasion,
experienced significant price and volume fluctuations that have affected the
market prices for many companies' common stock and have often been unrelated to
the operating performance of these companies.
OUR COMMON STOCK TRADES ON THE OTC BULLETIN BOARD; OUR COMMON STOCK IS SUBJECT
TO "PENNY STOCK" RULES
Since the opening of trading on March 6, 2002, our common stock has been trading
in the over-the-counter market on the OTC Bulletin Board ("OTCBB") established
for securities that do not meet the Nasdaq SmallCap Market listing requirements
or in what are commonly referred to as the "pink sheets." As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, our shares.
As a result and the fact that our common stock trades below $5.00 per share, our
common stock is subject to the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell these securities to persons
other than established customers as defined under applicable rules and
institutional accredited investors. For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase,
and must have received the purchaser's written consent to the transaction prior
to sale. As a result, delisting could materially adversely affect the ability of
broker-dealers to sell our common stock and the ability of purchasers of our
stock to sell their shares in the secondary market.
FUTURE SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD ADVERSELY AFFECT
OUR STOCK PRICE
The market price of our common stock could decline as a result of sales of a
large number of shares of our common stock in the market, or the perception that
these sales could occur. These sales also might make it more difficult for us to
sell equity securities in the future at a time and at a price that we deem
appropriate.
CAUTIONARY NOTES REGARDING THE FORWARD-LOOKING STATEMENTS
This report contains, and incorporates by reference, forward-looking statements
regarding our plans and objectives for the future. These forward-looking
statements are based on current expectations that involve numerous risks and
uncertainties. Our plans and objectives are based on a successful execution of
our expansion strategy and are based upon a number of assumptions, including
assumptions relating to the growth in the use of the Internet and that there
will be no unanticipated material adverse change in our operations or business.
These assumptions involve judgments with respect to, among other things, future
economic, political, competitive, and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of the assumptions
could prove inaccurate. The forward-looking statements included, or incorporated
by reference, in this report may prove to be inaccurate. In light of the
significant uncertainties inherent in these forward-looking statements, you
should not regard these statements as representations by us or any other person
that we will achieve our objectives and plans.
15
ITEM 2. PROPERTIES
We currently lease 6,061 square feet of office space at a rent of approximately
$9,400 per month, at 12801 North Central Expressway, Suite 1515, Dallas, Texas
75243. The lease expires June 30, 2003. We believe that, in the event
alternative or larger offices are required, such space is available at
competitive rates. For our servers, we currently utilize IBM 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 approximately $22,200 per month pursuant to an agreement
expiring on July 31, 2005. Both our office lease and managed hosting agreement
are under review for potential cost reduction.
ITEM 3. LEGAL PROCEEDINGS
We are not currently party to any litigation proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
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 traded on the Nasdaq SmallCap Market under the
symbol "CLAI" and on the Boston Stock Exchange under the trading symbol "CLA"
for the period from April 6, 1999 to March 5, 2002. The Common Stock of
Claimsnet.com has traded on the OTC Bulletin Board under the symbol "CLAI.OB"
and on the Boston Stock Exchange under the trading symbol "CLAI" since March 6,
2002. The following table sets forth, for the fiscal periods indicated, the
quarterly high and low per share sales prices, as reported by Nasdaq through
March 5, 2002 and the high and low bid prices as reported by the National
Association of Securities Dealer, Inc. Electronic Bulletin Board for the period
from March 6, 2002 through December 31, 2002:
HIGH LOW
------ ------
2001
Three months ended March 31, 2001 $2.313 $1.063
Three months ended June 30, 2001 2.820 1.313
Three months ended September 30, 2001 3.290 1.250
Three months ended December 31, 2001 1.750 0.350
2002
January 1, 2002 to March 5, 2002 $0.980 $0.290
March 6, 2002 to March 31, 2002 0.420 0.200
Three months ended June 30, 2002 0.410 0.150
Three months ended September 30, 2002 0.300 0.050
Three months ended December 31, 2002 0.250 0.050
The high bid for the Common Stock on the OTCBB on March 20, 2003 was $0.13 per
share. As of December 31, 2002, there were 83 holders of record of the Common
Stock.
DIVIDEND POLICY
We have not paid any cash dividends on our Common Stock and, in view of net
losses and our operating requirements, do not intend to pay cash dividends in
the foreseeable future. If we achieve profitability, we intend to retain future
earnings, if any, for reinvestment in the development and expansion of our
business. Any credit agreements, which we may enter into with institutional
lenders, may restrict our ability to pay dividends. Any preferred stock
shareholders may receive preferential rights in the distribution of dividends,
if any. Whether we pay cash dividends in the future will be at the discretion of
our Board of Directors and will be dependent upon our financial condition,
results of operations, capital requirements, and any other factors that the
Board of Directors determines to be relevant.
RECENT SALES OF UNREGISTERED SECURITIES
In January, February and March 2003, we completed the private placement of
950,000 shares of common stock to accredited investors at $0.20 per share for
net proceeds of $189,000. In connection with the private placement, we also
issued warrants to purchase an aggregate of 950,000 shares of common stock. The
warrants contain an exercise price of $0.20 per share and expire December 31,
2007. The private placement included 100,000 shares of common stock plus
warrants to acquire an additional 100,000 shares of common stock purchased by
National Financial Corporation and 500,000 shares of common stock plus warrants
to acquire an additional 500,000 shares of common stock purchased by Elmira
United, a 5% shareholder.
From June through December 2002, we completed the private placement of 3,675,000
shares of common stock to accredited investors at $0.20 per share for net
proceeds of $735,000. In connection with the private placement, we also issued
warrants to purchase an aggregate of 3,675,000 shares of common stock. The
warrants contain an exercise price of $0.20 per share and expire between June
and December 2007. The private placement included 1,750,000 shares of common
stock plus warrants to acquire an additional 1,750,000 shares of common stock
purchased by Elmira United.
17
In June 2002, we accepted non-revocable equity investments in the aggregate
amount of $50,000 from four members of the Board of Directors on terms to be set
by a committee of disinterested directors, such terms to be no more favorable to
the Directors than those which would have been negotiated at arms length with
unaffiliated third parties. Funds received were recorded as a current liability
until the equity investment terms were finalized. In October 2002, based upon
the determination of the committee of disinterested directors, we completed the
private placement by issuing to the four Directors at a rate of $300 per share
an aggregate of 167 shares of Series E Preferred Stock, convertible into 166,667
shares of common stock.
In May 2002, we completed the sale of 3,304 shares of Series D Preferred Stock,
convertible into 3,304,000 shares of common stock, to accredited investors at
$250 per share for net proceeds of $826,000. The private placement included 100
shares of Series D Preferred Stock purchased by Mr. Michel, 565 shares of Series
D Preferred Stock purchased by Mr. Dubach, 1,600 shares of Series D Preferred
Stock purchased by Elmira United, a 5% stockholder, and 620 shares of Series D
Preferred Stock purchased by New York Venture Corp., an entity for which Jeffrey
Black, a Director of the Company, was the corporate secretary. Messrs. Michel
and Black were elected Directors of the Company in February 2002.
In December 2001, we issued to accredited investors for a net consideration of
$462,000, at the rate of $0.70 per common share, 660,000 shares of common stock,
including 440,000 shares resulting from the conversion of 440 shares of Series C
Preferred Stock with an aggregate stated value of $308,000 at the rate of $0.70
of stated value of Series C Preferred Stock for each share of common stock.
In June 2001, we issued 16,000 shares of common stock with a fair market value
of $41,600 to New York Capital AG in connection with an agreement for
professional services to be rendered in 2001.
In April 2001, McKesson acquired 1,514,285 shares of common stock at $1.75 per
share for net proceeds of $2,650,000 and the cancellation of the stock purchase
warrant originally issued to McKesson in 1999 to purchase 819,184 shares of
common stock. No registration rights were granted to McKesson for the shares
acquired.
In March 2001, we sold 400,000 shares of common stock to an accredited investor
for $1.75 per share for net proceeds of $596,000, and in connection therewith,
in April 2001, we issued immediately exercisable two year warrants at a price of
$1.75 per share to purchase 40,000 shares of common stock to financial advisors
who assisted us in the negotiation and structuring of the sale.
Except as otherwise indicated, in each of the security issuances referenced
above, we provided certain rights to register resale of the shares at our
expense under the Securities Act of 1933 (the "Act"); none of the sales of
securities involved the use of an underwriter or the payment of any commissions,
and the proceeds were used for general corporate purposes. The certificates
evidencing the common stock issued in each of the transactions referenced above
were appropriately legended.
The offer and sale of the securities in each of the foregoing transactions were
exempt from registration under the Act by virtue of Section 4(2) thereof and the
rules promulgated thereunder. Each of the offerees and investors in such private
placements provided representations to us that the investor is an "accredited
investors," as defined in Rule 501 under the Act (some were existing
stockholders at the time of such transaction). Each investor was afforded the
right to conduct a complete due diligence review of us and the opportunity to
ask questions of, and receive answers from, our management.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from our consolidated
financial statements. The financial statements as of, and for the years ended
December 31, 1998 and 2002 have been audited by KBA Group LLP (formerly King
Griffin & Adamson P.C), independent auditors. The financial statements as of,
and for the years ended December 31, 2001, 2000 and 1999 have been audited by
Ernst & Young LLP, independent auditors.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
appearing elsewhere in this form 10-K.
Year Ended December 31,
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 1,104,000 $ 1,336,000 $ 1,602,000 $ 414,000 $ 155,000
------------ ------------ ------------ ------------ ------------
Total operating expenses 4,651,000 6,573,000 19,432,000 8,485,000 4,510,000
------------ ------------ ------------ ------------ ------------
Interest (expense) - affiliate (13,000) (6,000) (6,000) (142,000) (314,000)
Interest (expense) - bridge debt -- -- -- (967,000) --
Interest (expense) - other (7,000) (6,000) -- -- --
Interest income -- 55,000 141,000 322,000 6,000
Gain on sale of business assets 640,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss $ (2,927,000) $ (5,194,000) $(17,695,000) $ (8,858,000) $ (4,663,000)
============ ============ ============ ============ ============
Loss per weighted average common
share outstanding (basic and diluted) $ (.24) $ (.52) $ (2.16) $ (1.52) $ (1.41)
============ ============ ============ ============ ============
Weighted average common shares
outstanding (basic and diluted) 12,241,000 9,999,000 8,174,000 5,811,000 3,309,000
============ ============ ============ ============ ============
December 31,
----------------------------------------------------------------------------
BALANCE SHEET DATA: 2002 2001 2000 1999 1998
------------------- ------------- ------------- ------------- ------------- ------------
Current assets $ 382,000 $ 837,000 $ 1,562,000 $ 7,124,000 $ 105,000
Total assets 521,000 1,457,000 3,076,000 9,034,000 1,653,000
Working capital (deficit) (1,238,000) (535,000) (1,348,000) 6,113,000 (1,089,000)
Long-term debt 35,000 - - - 4,323,000
Accumulated deficit (42,424,000) (39,497,000) (34,303,000) (16,608,000) (7,750,000)
Stockholders' equity (deficit) (1,134,000) 85,000 166,000 7,971,000 (3,864,000)
19
QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------
Quarters
---------------------------------------------------------------------------
First Second Third Fourth Total
----------- ----------- ----------- ----------- -----------
FISCAL 2002
Revenues $ 315,000 $ 338,000 $ 285,000 $ 166,000 $ 1,104,000
Gross loss (245,000) (125,000) (161,000) (98,000) (629,000)
Net loss (1,102,000) (740,000) (22,000) (1,063,000) (2,927,000)
Basic loss per common share (0.10) (0.07) (0.00) (0.08) (0.24)
FISCAL 2001
Revenues $ 532,000 $ 263,000 $ 242,000 $ 299,000 $ 1,336,000
Gross loss (378,000) (302,000) (382,000) (207,000) (1,269,000)
Net loss (1,316,000) (1,406,000) (1,345,000) (1,127,000) (5,194,000)
Basic loss per common share (0.15) (0.14) (0.13) (0.10) (0.52)
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED BY THE 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, 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 OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES
INCLUDED ELSEWHERE IN THIS REPORT.
IN GENERAL
As of December 31, 2002, we had a working capital deficit of $(1,238,000) and
stockholders' deficit of $(1,134,000). We generated revenues of $1,104,000 for
the year ended December 31, 2002, $1,336,000 for the year ended December 31,
2001,and $1,602,000 for the year ended December 31, 2000. We have incurred net
losses since inception and had an accumulated deficit of $(42,424,000) at
December 31, 2002. We expect to continue to operate at a loss for the
foreseeable future. There can be no assurance that we will ever achieve
profitability. In addition, during the year ended December 31, 2002, net cash
used in operating activities was $2,422,000.
We have only been in operation since 1996, and have operated under several
different business strategies. As a result, the relationships between revenue
and cost of revenue, and operating expenses reflected in the financial
information included in this report may not represent future expected financial
relationships. Much of the cost of revenue and operating expenses reflected in
our consolidated financial statements are associated with people costs, and not
directly related to transaction volumes. Our expenses decreased for the year
ended December 31, 2002 due to staffing and other cost reductions. Further
expense reductions were effected at the beginning of 2003. In 2002 we recognized
a significant gain on sale of certain business assets. Our operating expenses
for the year ended December 31, 2001 included a significant one-time,
non-recurring expense due to write off of unamortized development costs and
warrants, net of revenues from amendment of the Development and Services
Agreement with McKesson. Our operating expenses for the year ended December 31,
2000 included significant costs associated with the asset acquisition of HECOM.
Accordingly, we believe that, at our current stage of operations, period to
period comparisons of results of operations are not meaningful.
PRIVATE PLACEMENTS, OPTIONS AND WARRANTS
During 2002, we completed the private placement of 3,675,000 shares of common
stock to accredited investors at $0.20 per share for net proceeds of $735,000.
In connection with the private placement, we also issued warrants to purchase an
aggregate of 3,675,000 shares of common stock. The warrants contain an exercise
price of $0.20 per share and expire between June and December 2007.
In October 2002, we hired a new president and chief executive officer and issued
him warrants to acquire an aggregate of 200,000 shares of common stock. The
warrants contain an exercise price of $0.20 per share, expire in October 2007,
and vest 50% in October 2003 and fully in October 2004.
In October 2002, we issued warrants to acquire an aggregate of 500,000 shares of
common stock to a non-employee in connection with an agreement for professional
services to be rendered. The warrants contain an exercise price of $0.20 per
share, were fully vested on the date of grant, expire in September 2007, and
become exercisable 50% in September 2003 and fully in September 2004. The
warrants were valued at $0.08 per share based on the Black-Scholes valuation
method (using the following assumptions: life of five years, risk free rate of
2.68%, no dividends during the term, and a volatility of .752). The expense is
being recognized ratably over the term of the service agreement, October 1, 2002
through December 31, 2004.
In June 2002, we accepted non-revocable equity investments in the aggregate
amount of $50,000 from four members of the Board of Directors on terms to be set
by a committee of disinterested directors, such terms to be no more favorable
than those which would have been negotiated at arms length with unaffiliated
third parties. Funds received were recorded as a current liability until the
equity investment terms were finalized. In October 2002, based upon the
determination of the committee of disinterested directors, we completed the
private placement by the issuance to the four Directors of an aggregate of 167
shares of Series E Preferred Stock at the rate of $300 per share convertible
into an aggregate of 166,667 shares of common stock.
21
In June 2002, we issued warrants to acquire an aggregate of 50,000 shares of
common stock to a non-employee in connection with an agreement for professional
services to be rendered. The warrants contain an exercise price of $0.30 per
share and, as originally issued, were scheduled to expire in June 2003. The
warrants were valued at $0.07 per share based on the Black-Scholes valuation
method (using the following assumptions: life of one year, risk free rate of
2.12%, no dividends during the term, and a volatility of .566). The expense was
recognized ratably over the service agreement, June 1, 2002 through August 31,
2002. In October 2002, we entered into a new professional service agreement for
the period October 1, 2002 through December 31, 2002 and agreed to cancel the
original warrant and issue a replacement warrant under similar terms, except
that the expiration date of the warrants was extended to June 2007. The new
warrants were valued at $0.07 per share based on the Black-Scholes valuation
method (using the following assumptions: life of five years, risk free rate of
2.68%, no dividends during the term, and a volatility of .752). The expense was
recognized ratably over the service agreement, October 1, 2002 through December
31, 2002.
In May 2002, we completed the sale of 3,304 shares of Series D Preferred Stock,
convertible into 3,304,000 shares of common stock, to accredited investors at
$250 per share for net proceeds of $826,000.
In May 2002, upon election of a new non-employee director to the board, we
granted ten year options exercisable for 5,000 shares of common stock under the
Non-Employee Directors Plan. The option exercise price of $.30 was the fair
market value of a share of the outstanding common stock on the date the options
were granted. The options vest to the extent of 50% one year from the date of
grant and will vest fully on the second anniversary of the date of grant.
In February 2002, upon election of two new non-employee directors to the board,
we granted ten year options exercisable for 10,000 shares of common stock under
the Non-Employee Directors Plan. The option exercise price of $.35 was the fair
market value of a share of the outstanding common stock on the date the options
were granted. The options vest to the extent of 50% one year from the date of
grant and will vest fully on the second anniversary of the date of grant.
In February 2002, we granted employees the remaining options to purchase 328,842
shares of common stock under our 1997 Stock Option Plan and warrants to purchase
an additional 253,203 shares of common stock in exchange for voluntary salary
reductions. The options and warrants contained an exercise of $0.35 per share,
the market price on the date of grant, expire on the tenth anniversary of the
grant, and vest 25 % immediately on the date of grant and an additional 25% on
each third month anniversary of the date of grant.
In January 2002, we granted employees options under our 1997 Stock Option Plan
to purchase an aggregate of 456,000 shares of common stock. The options contain
an exercise of $0.60 per share, the market price on the date of grant, expire on
the tenth anniversary of the grant, and vest 100 % one year from the date of
grant.
See Item 5, Recent Sale of Unregistered Securities, for information as to the
sale in 2001 for aggregate net proceeds and services of $3,749,600 of an
aggregate of 2,150,285 shares of common stock and 440 shares of Series C
Preferred Stock which subsequently converted into 440,000 additional shares of
common stock.
In December 2001, upon completion of our annual meeting, ten year options
exercisable for an aggregate of 25,000 shares of common stock were granted under
the Directors' Plan. The option exercise price of $0.50 was the fair market
value of a share of the outstanding common stock on the date the options were
granted. The options become vested to the extent of 50% one year from the date
of grant and fully on the second anniversary of the date of grant.
In April 2001, ten year options exercisable for an aggregate of 25,000 shares of
common stock were granted to employees under the 1997 Stock Option Plan. The
option exercise price of $1.75 was the fair market value of a share of the
outstanding common stock on the date the options were granted. The options
become vested to the extent of 50% one year from the date of grant and fully on
the second anniversary of the date of grant.
In January 2001, ten year options exercisable for an aggregate of 385,500 shares
of common stock were granted to employees under the 1997 Stock Option Plan. The
option exercise price of $1.25 was the fair market value of a share of the
outstanding common stock on the date the options were granted. The options
become fully vested on the first anniversary of the date of grant.
In October 2000, upon completion of our annual meeting, ten year options
exercisable for an aggregate of 25,000 shares of common stock were granted under
the Directors' Plan. The option exercise price of $2.375 was the fair market
value of a share of the outstanding common stock on the date the options were
granted. The options become vested to the extent of 50% one year from the date
of grant and fully on the second anniversary of the date of grant.
22
In August 2000, we completed a private placement of 270,000 shares of common
stock at $3.50 per share for net proceeds of $927,000 to various accredited
investors. In connection with the financing, we also issued one year warrants to
purchase 270,000 shares of common stock at a price of $4.60 per share and two
year warrants to purchase 270,000 shares of common stock at a price of $5.60 per
share.
In June 2000, we sold 1,000,000 shares of common stock to an accredited investor
at $3.00 per share yielding net proceeds of $2,982,000.
In June 2000, we granted certain employees ten year warrants to purchase 178,250
shares of common stock at a price of $3.00 per share, the market price on the
date of grant. The warrants became fully exercisable in June 2001.
In May 2000, we sold at a price of $3.00 per share, 100,000 shares of common
stock to American Medical Finance, Inc., the owner of record of 381,603 shares
of common stock prior to the transaction. Bo W. Lycke, former Chairman of the
Board, President and Chief Executive Officer of the Company, Robert H. Brown,
Jr., a former Director of the Company, and Ward L. Bensen, a former Director of
the Company, control 71.1%, 17.7%, and 11.2%, respectively, of the outstanding
common stock of American Medical Finance, Inc. They held the foregoing positions
with the Company at the time of the transaction.
In April 2000, we issued 1,200,000 shares of common stock (placed in escrow)
valued at $6,376,000 to acquire certain assets from VHx Company. In December
2000, pursuant to provisions of the asset purchase agreement, we released
312,000 shares to VHx and withdrew from the escrow and returned to our treasury
888,000 shares at a value of $1,415,000, and we issued an additional 244,000
shares valued at $389,000 from treasury stock to JDH, a major creditor, in
satisfaction of debt owed by VHx Company. In December 2001 we cancelled the
shares held in treasury.
None of the above sales of securities involved the use of an underwriter and
except as indicated no commissions were paid in connection with the sale of any
securities. Except for the issuance of options under the referred to option
plan, the certificates evidencing the common stock issued in each of the
transactions referenced above were appropriately legended.
The offer and sale of the securities in each of the transactions referenced
above was exempt from registration under the Securities Act of 1933 by virtue of
Section 4(2) thereof and the rules promulgated thereunder. Each of the offerees
and investors in such private placements provided representations to us that the
offeree or investor is an "accredited investor," as defined in Rule 501 under
the Act, as well as highly sophisticated (some of whom were existing
stockholders of us at the time of such transaction.) The shares subject to the
options have been registered under the Act.
PLAN OF OPERATIONS
Our recently modified business strategy is as follows:
o to utilize our state of the art technology to help large healthcare
organizations achieve more efficient and less costly administrative
operations;
o to market our services directly to the payer community and its trading
partners;
o to aggressively pursue and support strategic relationships with companies
that will in turn aggressively market our services to large volume
healthcare organizations, including insurers, HMO's, third party
administrators, provider networks, re-pricing organizations, clinics,
hospitals, laboratories, physicians and dentists;
o to provide total claim management services to payer organizations,
including internet claim submission, paper claim conversion to electronic
transactions, and receipt of EDI transmissions;
o to continue to expand our product offerings to include additional
transaction processing solutions, such as HMO encounter forms, eligibility
and referral verifications, claim status inquiries, electronic remittance
advices, claim attachments, and other healthcare administrative services,
in order to diversify sources of revenue; and
o to license our technology for other applications, including stand-alone
purposes, Internet systems and private label use, and for original
equipment manufacturers.
We anticipate that our primary source of revenues will be revenue paid by payers
and vendors for private-label or co-branded licenses and services. Historically,
our primary source of revenues was fees paid by users for insurance claims and
patient statement services, and fees from medical and dental payers for
processing claims electronically. We expect most of our revenues to be recurring
in nature.
23
Our principal costs to operate are anticipated to be technical and customer
support, sales and marketing, research and development, acquisition of capital
equipment, and general and administrative expenses. We intend to continue to
develop and upgrade our technology and transaction-processing systems and
continually update and improve our website to incorporate new technologies,
protocols, and industry standards. Selling, general and administrative expenses
include all corporate and administrative functions that serve to support our
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, professional fees, network administration, business insurance,
and rent.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
We enter into services agreements with our customers to provide access to our
hosted software platform for processing of customer transactions, including base
level support. The customers are not entitled to ownership of our software at
any time during or at the end of the agreements. The end users of our software
application access our hosted software platform or privately hosted versions of
our software application via the internet with no additional software required
to be located on the customer's systems. Customers pay transaction fees and pay
time and materials charges for support above the base level and one customer
paid monthly hosting fees for dedicated servers and databases until March 31,
2001. Customer agreements also may (i) provide for development fees related to
private labeling of our software platform (i.e. access to our servers through a
web site which is in the name of and/or has the look and feel of the customer's
other web sites) and some customization of the offering and business rules, and
(ii) have periodic license fees. We account for our service agreements by
combining the contractual revenues from development, license and support fees
and recognizing the revenue ratably over the estimated period covered by the
development and license. We do not segment these services and use the
contractual allocation to recognize revenue because we do not have objective and
reliable evidence of fair value to allocate the arrangement consideration to the
deliverables in the arrangement. We recognize service fees for transactions,
above base support and monthly hosting as the services are performed.
SOFTWARE FOR SALE OR LICENSE
We begin capitalizing costs incurred in developing a software product once
technological feasibility of the product has been determined. Capitalized
computer software costs include direct labor, labor-related costs and interest.
The software is amortized over its expected useful life of 3 years or the
contract term, as appropriate.
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, capitalized
software costs will be written down to fair value.
24
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002 AND 2001
REVENUES
Revenues decreased 17% to $1,104,000 in 2002 from $1,336,000 in 2001. Revenues
of $0 and $288,000, respectively, during 2002 and 2001 were related to software
license and support revenue under the McKesson Development and Services
Agreement. Revenues of $270,000 and $105,000, respectively, during 2002 and
2001, were generated by our significant payer and vendor clients. Revenues of
$834,000 and $943,000, respectively during 2002 and 2001, were generated by our
Internet-based healthcare provider clients, the majority of which revenue was
sold in September 2002. Certain of our revenues are generated by our
internet-based healthcare provider clients but received from our clearinghouse
partners. Revenues received from one customer and clearinghouse partner who
acquired certain of our business assets in September 2002 represented 23% and 9%
of our revenues for 2002 and 2001, respectively, and revenues received from
another customer represented 9% and 1% of our 2002 and 2001 revenues,
respectively. Revenues received from McKesson represented 6% and 27% of our
revenues for 2002 and 2001, respectively.
COST OF REVENUES
Cost of revenues were $1,733,000 in 2002 compared to $2,605,000 for the prior
year. The four recurring components of cost of revenues are data center
expenses, third party transaction processing expenses, customer support
operation expenses and amortization of software. Data center expenses were
$340,000 for the year ended December 31, 2002 compared with $336,000 for 2001,
an increase of 1%. Third party transaction processing expenses were $355,000 in
2002 compared to $540,000 in 2001, representing a 34% decrease. Customer support
operations expense decreased by 38% to $786,000 in 2002 from $1,130,000 in 2001.
The decreases in third party transaction processing expenses and customer
support operations expense were primarily attributable to the assignment of
contracts with a majority of our healthcare provider clients in September 2002.
Amortization of software and development project amortization was $250,000 in
2002 compared to $283,000 in 2001, representing a 12% decrease. This decrease
reflects completion of software development amortization in 2002. Additionally,
software development costs of $316,000 associated with the 1999 McKesson
Development and Services agreement required a one-time write off to cost of
revenues upon renegotiation of the contract during 2001.
RESEARCH AND DEVELOPMENT
Research and development expenses were $252,000 in 2002, compared with $772,000
in 2001, representing a decrease of 67%. Research and development expenses are
comprised of personnel costs and related expenses. Development efforts during
2002 were concentrated on enhancements to assure compliance with HIPPA
requirements. Development efforts in 2002 of $344,000 were capitalized. In
December 2002, we terminated the ongoing HIPAA remediation in-process
development project in order to pursue a more cost-effective development
alternative in light of our change in business strategy. Therefore, we
recognized a charge for in-process development impairment expense of $344,000.
No costs were capitalized for development efforts during 2001.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $2,322,000 in 2002, compared
with $3,196,000 in 2001, a decrease of 27%. The $874,000 decrease is primarily
related to reduction in personnel expenses.
INTEREST (INCOME) EXPENSE
Interest expense was $20,000 for 2002 compared with $12,000 for 2001. Included
in the 2002 expense was $13,000 related to interest on short-term notes payable
to related parties. Included in the 2001 expense was $6,000 related to interest
on short-term notes payable related parties. Interest expense of $4,000 in 2002
related to other notes payable. Interest of $3,000 and $6,000 respectively was
paid to vendors in 2002 and 2001 for financing fees. Interest income of $55,000
was provided in 2001 from investment of cash and equivalents.
GAIN ON SALE OF BUSINESS ASSETS
In 2002 we sold certain business assets consisting primarily of customer
contracts and the related revenue streams thereunder and recognized a gain of
$640,000 on the sale.
25
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES
Revenues decreased 17% to $1,336,000 in 2001 from $1,602,000 in 2000. Revenues
of $288,000 and $681,000, respectively, during 2001 and 2000 were related to
software license and support revenue under the McKesson Development and Services
Agreement. Revenues of $105,000 and $0, respectively, during 2001 and 2000 were
generated by our significant payer and vendor clients. Revenues of $943,000 and
$921,000, respectively during 2001 and 2000, were generated by our
Internet-based healthcare provider clients. Increased revenues from
internet-based clients are attributable to volume and pricing improvements.
Revenues from then-recurring revenue sources for 2001, which represented 64% of
total revenues, were comprised of $704,000 from transaction-based fees and
$149,000 from subscription fees. Revenues from non-recurring sources, other than
revenue related to the McKesson Development and Services Agreement, totaled
$195,000 and were related to setup, support, and other fees. Revenues under the
McKesson Development and Services Agreement accounted for approximately 22% of
2001 revenues versus 43% of 2000 revenues.
Transactions processed by us increased 19% to 6,303,000 in 2001 from 5,283,000
in 2000. All of the increase was attributable to internal growth in the number
of accounts and healthcare providers subscribing to our services. Additionally,
92% of all transactions were for physician and dental claim submission services
and 8% were from patient statement processing. We had 503 accounts processing
transactions for 4,393 providers at December 31, 2001 compared with 399 accounts
and 3,696 providers at December 31, 2000, representing increases of 26% and 19%,
respectively.
Transaction-based revenue averaged $.11 per transaction and $.12 per transaction
for the years ended December 31, 2001 and 2000, respectively, representing a
decrease of 8%, primarily due to fluctuations in the mix of transactions
processed. Average revenue per claim transaction remained constant at $.09 for
5,789,000 and 4,656,000 claims processed in 2001 and 2000, respectively. Patient
statement volumes decreased to 503,000 in 2001 from 626,000 in 2000 while the
average revenue per statement transaction increased to $.39 in 2001 compared to
$.34 in 2000. Eligibility transactions increased to 11,000 in 2001 with average
revenue of $.47 per transaction from 1,000 in 2000 when revenues were not
generally recognized on a transaction basis.
COST OF REVENUES
Cost of revenues were $2,605,000 in 2001 compared to $3,274,000 for the prior
year. The four recurring components of cost of revenues are data center
expenses, third party transaction processing expenses, customer support
operation expenses and amortization of software. Data center expenses were
$336,000 for the year ended December 31, 2001 compared with $394,000 for 2000, a
decrease of 15%. Renegotiation of the McKesson contract eliminated contractual
requirements for segregated data center services. Third party transaction
processing expenses were $540,000 in 2001 compared to $498,000 in 2000,
representing an 8% increase compared to the 19% increase in total transactions
processed. Customer support operations expense decreased by 38% to $1,130,000 in
2001 from $1,832,000 in 2000, while the number of accounts and providers served
at the end of each year increased by 26% and 19%, respectively. The decreases in
customer support operations expense were primarily attributable to decreased
staffing. Amortization of software and development project amortization was
$283,000 in 2001 compared to $550,000 in 2000, representing a 49% decrease. This
decrease reflects completion of software development amortization in 2001.
Additionally, software development costs of $316,000 associated with the 1999
McKesson Development and Services agreement required a one-time write off to
cost of revenues upon renegotiation of the contract during 2001.
RESEARCH AND DEVELOPMENT
Research and development expenses were $772,000 in 2001, compared with
$2,019,000 in 2000, representing a decrease of 62%. Research and development
expenses are comprised of personnel costs and related expenses. Development
efforts during 2001 were concentrated on web site improvements and continuous
incremental enhancements to assure compliance with HIPPA requirements.
Development efforts in 2000 were concentrated on development of the McKesson
project started during 1999 and additional development of HealthExchange(TM)
products which were postponed for release before reaching marketability. No
costs were capitalized for development efforts during either 2001 or 2000.
PURCHASED RESEARCH AND DEVELOPMENT AND WRITE-OFF OF PURCHASED INTANGIBLES AND
OTHER ASSETS
On April 18, 2000, the Company executed an asset purchase agreement (the "Asset
Purchase Agreement") with VHx Company ("VHx") to acquire selected properties and
assets of VHx, including the HealthExchange.com name and HealthExchange.com
trademarks, related to all efforts of VHx to develop products and services
designed to use Internet technology to facilitate and improve interaction
between physicians, health plans, employers and their members.
26
The Company allocated the purchase price to the various assets acquired using
standard valuation methodologies, projecting cash flows over the estimated
useful lives of the assets, net of additional investment needs, and considering
the stage of completion of software development projects. The initial results
valued the intangible assets at $3,700,000 after charges to in-process
technology of $6,154,000, recorded in the quarter ended June 30, 2000.
One of the significant assets acquired, an agreement with John Deere Health
("JDH") for development of an Enterprise Care Management System, required the
parties to negotiate mutually agreeable business terms for delivery of the
system after acceptance of beta testing. The Company and JDH were unable to
reach such an agreement.
In November and December 2000, as a result of the inability to negotiate
mutually agreeable business terms with JDH, an industry consolidation of system
vendors, sluggish sales in the payer market, and dramatic changes in the
financial markets, the Company substantially lowered its estimates of future
revenues less costs of completing the product. The Company reevaluated the
HealthExchange asset purchase using the same valuation methodologies and
determined that there had been a total impairment of the assets acquired. The
Company ceased further development of the HealthExchange(TM) products and all
marketing efforts. As a result of the revised valuation, the Company recognized
charges of $2,276,000 for the write-off of the unamortized balance of purchased
intangibles and other assets.
AMORTIZATION OF INTANGIBLES
Amortization of intangible assets of $412,000 was recorded in 2000 on trademarks
and non-compete agreements acquired in the April 18, 2000 purchase of
HealthExchange assets. There was no such expense recognized in 2001.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $3,196,000 in 2001, compared
with $5,297,000 in 2000, a decrease of 40%. The $2,101,000 decrease includes a
$773,000 decrease for general and administrative expenses, primarily related to
reduction in the work force and discontinuation of HealthExchange operations.
Additionally, decreases in work force created reductions of $1,093,000 in sales
and marketing expenses and $275,000 in technology infrastructure and support
expenses. Offsetting the expense decreases was a one-time charge of $40,000 for
write off of warrants, net of development revenues, associated with the McKesson
contract renegotiation.
INTEREST (INCOME) EXPENSE
Interest expense was $12,000 for 2001 compared with $6,000 for 2000. Included in
the 2001 expense was $6,000 related to interest on short-term notes payable to
American Medical Finance, a related party. Interest of $6,000 was paid to
vendors for financing fees. Interest income of $55,000 and $141,000 was provided
in 2001 and 2000, respectively, from investment of cash and equivalents.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2002 net cash used in operating activities of
$2,422,000 was primarily attributable to an operating loss of $2,888,000,
adjusted for a gain on sale of business assets of $640,000 and warrants issued
for services of $36,000, offset in part by depreciation of $474,000, a charge
for in-process development impairment expense of $344,000 and a change in
working capital of $252,000.
For the year ended December 31, 2001 net cash used in operating activities of
$4,243,000 was primarily attributable to an operating loss of $5,194,000 and
change in working capital of $217,000, offset in part by depreciation of
$599,000, non-cash amortizations and write offs of $470,000, and common stock
issued for services of $99,000.
Net cash provided by investing activities was $281,000 in 2002, attributable to
proceeds of $643,000 from the sale of assets, offset by $3,000 for the purchase
of property and equipment and $344,000 for capitalized software development
costs.
Net cash used by investing activities was $38,000 in 2001 compared to net cash
provided by investing activities in 2000 of $380,000 and net cash used in
investing activities in 1999 of $5,493,000. For 2001, cash was provided
represented the proceeds of $11,000 from the sale of equipment and fixtures and
cash used was due to the purchase of $49,000 of equipment and furniture.
Net cash provided by financing activities in 2002 was $1,763,000 as a result of
the private placement of common and preferred stocks for net proceeds of
$1,610,000 and proceeds of $610,000 from debt financing, offset by $457,000 used
to repay debt.
Net cash used by investing activities was $38,000 in 2001, attributable to
$49,000 for the purchase of property and equipment, offset by proceeds of
$11,000 from the sale of property and equipment.
27
Net cash provided by financing activities in 2001 was $3,680,000 as a result of
private placements of shares of common stock. A one-year loan in March 2001 from
American Medical Finance, Inc., affiliated with certain officers and directors
of the Company, in the amount of $400,000 bearing interest at 9.5% per annum was
repaid in May 2001.
Management believes that available cash resources, together with anticipated
revenues from operations and the proceeds of recently completed financing
activities and funding commitments will not be sufficient to satisfy our capital
requirements through April 30, 2003. Necessary additional capital may not be
available on a timely basis or on acceptable terms, if at all. In any of these
events, we may be unable to implement current plans for expansion or to repay
debt obligations as they become due. If sufficient capital cannot be obtained,
we may be forced to significantly reduce operating expenses to a point which
would be detrimental to business operations, curtail research and development
activities, sell certain business assets or discontinue some or all of our
business operations, take other actions which could be detrimental to business
prospects and result in charges which could be material to our operations and
financial position, or cease operations altogether. In the event that any future
financing is effected, to the extent it includes equity securities, the holders
of the common stock and preferred stock may experience additional dilution. In
the event of a cessation of operations, there may not be sufficient assets to
fully satisfy all creditors, in which case the holders of equity securities may
be unable to recoup any of their investment.
In January, February and March 2003, we completed the private placement of
950,000 shares of common stock to accredited investors at $0.20 per share for
net proceeds of $189,000. In connection with the private placement, we also
issued warrants to purchase an aggregate of 950,000 shares of common stock. The
warrants contain an exercise price of $0.20 per share and expire December 31,
2007.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Below is an index of financial statements. The financial statements required by
this item begin at page F-1 hereof.
Page
----
Independent Auditors' Report of KBA Group LLP F-1
Independent Auditors' Report of Ernst & Young, LLP F-2
Consolidated Balance Sheets - December 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-8
29
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 subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' deficit 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 subsidiaries at December 31, 2002, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has generated losses since inception, incurred
negative cash flows from operations, and has a negative capital position at
December 31,2002. Additionally, management does not believe that available cash
resources, anticipated revenues from operations or proceeds from financing
activities and funding commitments will be sufficient to satisfy the Company's
near term capital requirements. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. These financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
KBA Group LLP
Dallas, Texas
March 17, 2003
F-1
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 subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the two years in the period ended December 31, 2001. Our audit
also included the financial statement schedule listed at 15(b). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits 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 audits provide 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 subsidiaries at December 31, 2001, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note A, the
Company has generated losses since inception and incurred negative cash flows
from operations, and management does not believe that available cash resources,
anticipated revenues from operations or proceeds from financing activities and
funding commitments will be sufficient to satisfy the Company's capital
requirements through December 31, 2002. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. These financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Ernst & Young LLP
Dallas, Texas
February 15, 2002,
except for Note A as to which the date is
March 29, 2002
F-2
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
December 31,
---------------------
2002 2001
-------- --------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 153 $ 531
Accounts receivable, net of allowance for doubtful accounts
of $33 and $35 in 2002 and 2001, respectively 150 198
Prepaid expenses and other current assets 79 108
-------- --------
Total current assets 382 837
EQUIPMENT, FIXTURES AND SOFTWARE
Computer hardware and software 1,685 1,822
Software development costs 1,922 1,922
Furniture and fixtures 108 150
Office equipment 25 25
-------- --------
3,740 3,919
Accumulated depreciation and amortization (3,601) (3,299)
-------- --------
Total equipment, fixtures and software 139 620
-------- --------
TOTAL ASSETS $ 521 $ 1,457
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable to related parties - short term 118 --
Accounts payable 486 298
Accrued severance 241 90
Accrued acquisition costs 500 500
Accrued payroll and other current liabilities 228 467
Deferred revenues 47 17
-------- --------
Total current liabilities 1,620 1,372
LONG TERM LIABILITIES
Notes payable to related parties - long term 10 --
Notes payable - long term 25 --
-------- --------
Total long term liabilities 35 --
-------- --------
Total liabilities 1,655 1,372
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value; 4,000,000 shares
authorized, 3,471 and no shares issued and
outstanding at December 31, 2002 and 2001,
respectively (liquidation preference of $876) -- --
Common stock, $.001 par value; 40,000,000 shares
authorized; 14,816,000 shares and 11,141,000 shares
issued and outstanding as of December 31, 2002 and
2001, respectively 15 11
Additional capital 41,275 39,571
Accumulated deficit (42,424) (39,497)
-------- --------
Total stockholders' equity (deficit) (1,134) 85
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 521 $ 1,457
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Year Ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
REVENUES $ 1,104 $ 1,336 $ 1,602
Cost of revenues 1,733 2,605 3,274
-------- -------- --------
Gross loss (629) (1,269) (1,672)
-------- -------- --------
OPERATING EXPENSES:
Research and development 252 772 2,019
Purchased research and development, write-off
of purchased intangibles and other assets and
impairment of in-process software development 344 -- 8,430
Amortization of intangibles -- -- 412
Selling, general and administrative 2,322 3,196 5,297
-------- -------- --------
LOSS FROM OPERATIONS (3,547) (5,237) (17,830)
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense-related parties (13) (6) (6)
Interest expense-other (7) (6) --
Interest income -- 55 141
Gain on sale of business assets 640 -- --
-------- -------- --------
Total other income (expense) 620 43 135
-------- -------- --------
NET LOSS $ (2,927) $ (5,194) $(17,695)
======== ======== ========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.24) $ (0.52) $ (2.16)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (Basic and diluted) 12,241 9,999 8,174
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)
(In Thousands)
Number of Number of Total
Preferred Common Deferred Stockholders'
Shares Preferred Shares Common Additional Sales Accumulated Treasury Equity
Outstanding Stock Outstanding Stock Capital Discount Deficit Stock (Deficit)
----------- --------- ----------- ------ ---------- -------- ----------- -------- ------------
Balances at January
1, 2000 -- -- 6,625 $ 7 $ 26,220 $(1,648) $ (16,608) -- $ 7,971
Sale of common stock -- -- 1,370 1 4,226 -- -- -- 4,227
Issuance of common
stock for asset purchase -- -- 1,200 1 6,374 -- -- -- 6,375
Return to treasury of
stock issued for asset
purchase -- -- (888) -- -- -- -- (1,415) (1,415)
Issuance from treasury
of common stock for
settlement of acquired
obligation -- -- 244 -- -- -- -- 389 389
Amortization of
deferred sales
discount -- -- -- -- -- 314 -- -- 314
Net loss -- -- -- -- -- -- (17,695) -- (17,695)
----------- --------- ----------- ------ ---------- -------- ----------- -------- ------------
Balances at December
31, 2000 -- -- 8,551 9 36,820 (1,334) (34,303) (1,026) 166
----------- --------- ----------- ------ ---------- -------- ----------- -------- ------------
Sale of preferred
stock converted into
common stock -- -- 660 1 462 -- -- -- 463
Sale of common stock -- -- 1,914 1 3,216 -- -- -- 3,217
Issuance of common
stock for services -- -- 16 -- 42 -- -- -- 42
Issuance of warrants
for services -- -- -- -- 57 -- -- -- 57
Cancellation of
treasury stock -- -- -- -- (1,026) -- -- 1,026 --
Write off unamortized
portion of deferred
sales discount -- -- -- -- -- 1,334 -- -- 1,334
Net loss -- -- -- -- -- -- (5,194) -- (5,194)
----------- --------- ----------- ------ ---------- -------- ----------- -------- ------------
Balances at December
31, 2001 -- -- 11,141 11 39,571 -- (39,497) -- 85
----------- --------- ----------- ------ ---------- -------- ----------- -------- ------------
Sale of preferred
stock 3 -- -- -- 875 -- -- -- 875
Sale of common stock -- -- 3,675 4 731 -- -- -- 735
Issuance of warrants
and options for
services -- -- -- -- 98 -- -- -- 98
Net loss -- -- -- -- -- -- (2,927) -- (2,927)
----------- --------- ----------- ------ ---------- -------- ----------- -------- ------------
Balances at December
31, 2002 3 $ -- 14,816 $ 15 $ 41,275 $ -- $ (42,424) $ -- $ (1,134)
=========== ========= =========== ====== ========== ======== =========== ======== ============
The accompanying notes are an integral part of
these consolidated financial statements
F-5
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
Year Ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,927) $ (5,194) $(17,695)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 474 599 855
Common stock and warrants issued for services 98 99 --
Provision for doubtful accounts 9 19 27
Amortization of intangibles -- -- 412
Purchased research and development and write off of
purchased intangibles -- -- 8,415
Write off deferred development costs and warrants,
net of project revenue 344 356 --
Gain on sale of business assets (640) -- --
Loss on sale and write-off of property and equipment 22 16 15
Amortization of deferred sales discount -- 79 313
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable 39 90 (236)
Prepaid expenses and other current assets 29 15 51
Accounts payable and accrued expenses (51) (57) (130)
Accrued severance 151 (273) 363
Deferred revenues 30 8 1,114
-------- -------- --------
Net cash used in operating activities (2,422) (4,243) (6,496)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities -- -- 3,832
Purchase of intangible assets and research and development -- -- (2,978)
Employee loan -- -- 25
Purchase of property and equipment (18) (49) (499)
Proceeds from sale of business assets 640 -- --
Proceeds from sale of property and equipment 3 11 --
Capitalized cost of internal software development (344) -- --
-------- -------- --------
Net cash (used in) provided by investing activities 281 (38) 380
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes 25 -- --
Increase in notes - related parties 585 400 --
Payments of notes - related parties (457) (400) --
Proceeds from issuance of common and preferred stock 1,610 3,680 4,227
-------- -------- --------
Net cash provided by financing activities 1,763 3,680 4,227
-------- -------- --------
NET DECREASE IN CASH AND EQUIVALENTS (378) (601) (1,889)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 531 1,132 3,021
-------- -------- --------
CASH AND EQUIVALENTS, END OF YEAR $ 153 $ 531 $ 1,132
======== ======== ========
F-6
CLAIMSNET.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In Thousands)
Year Ended December 31,
-------------------------------
2002 2001 2000
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NON CASH TRANSACTIONS:
Issuance of common stock for intangible assets
and research and development $ -- $ -- $ 6,375
======= ======= =======
Return to treasury of stock issued for asset
purchase $ -- $ -- $(1,415)
======= ======= =======
Issuance of common stock for settlement of
acquired obligation $ -- $ -- $ 389
======= ======= =======
Cash paid for interest $ 9 $ 12 $ 6
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE A--ORGANIZATION, BACKGROUND AND LIQUIDITY
Claimsnet.com inc. ("Claimsnet.com" or the "Company") is a Delaware corporation
originally formed in April 1996. The Company owns, operates and licenses
software used for processing medical insurance claims on the internet.
The Company completed an initial public offering in April 1999, for 2,875,000
shares of common stock at $8.00 per share including the underwriter's
overallotment of 375,000 shares.
During 2000, the Company made private placements of 1,370,000 shares of common
stock at prices between $3.00 and $3.50 per share. In April 2000, the Company
formed a wholly owned subsidiary, HealthExchange.com (HECOM), to purchase
certain research and development and other assets from VHx Company. (See Note
D).
During 2001, the Company sold 1,514,000 shares of common stock to McKesson
Corporation ("McKesson") at $1.75 per share, sold 620,000 shares of common stock
to other investors at prices between $0.70 and $1.75, sold 440 shares of Series
C Preferred Stock to accredited investors at $700 per share which subsequently
converted into 440,000 shares of common stock, and issued 16,000 shares of
common stock in exchange for professional services rendered. In March 2001, the
Company entered into a twelve-month loan agreement with American Medical
Finance, Inc., a related party, in the amount of $400,000 bearing interest at
9.5% per annum which was repaid in April 2001.
During 2002, the Company sold 3,304 shares of Series D Preferred Stock,
convertible into 3,304,000 shares of common stock, to accredited investors at
$250 per share, sold 167 shares of Series E Preferred Stock, convertible into
166,667 shares of common stock, to directors of the Company at $300 per share,
and sold 3,675,000 shares of common stock to accredited investors at $.20 per
share. During 2002, the Company borrowed an aggregate of $475,000 pursuant to
six separate unsecured short-term loan agreements with National Financial Corp.,
a related party, and repaid an aggregate of $457,000 plus accrued interest at
9.5% thereon. The Company also borrowed $50,000 from an accredited investor and
$50,000 from a director of the Company pursuant to unsecured short-term notes
bearing interest at 9.5% and $35,000 from two accredited investors pursuant to
unsecured long-term notes bearing interest at 8.0%. In September 2002, the
Company sold certain assets that generated the majority of its then-recurring
revenues. (See Note C).
The Company has generated losses since inception and has had negative cash flow
from operations. Through 2002, the Company generated minimal revenues and relied
on an initial public offering, private equity placements, unsecured debt, the
sale of certain assets, and funding from a related party to fund its operations
and development activities. In January, February and March 2003, the Company
sold 950,000 shares of common stock for net proceeds of $189,000. The Company's
business strategy and organization has been modified on several occasions to
improve near-term financial performance.
Management believes that available cash resources, together with anticipated
revenues from operations and the proceeds of recently completed financing
activities and funding commitments will not be sufficient to satisfy the
Company's capital requirements through April 30, 2003. Necessary additional
capital may not be available on a timely basis or on acceptable terms, if at
all. In any of these events, the Company may be unable to implement current
plans for expansion or to repay debt obligations as they become due. If
sufficient capital cannot be obtained, the Company may be forced to
significantly reduce operating expenses to a point which would be detrimental to
business operations, curtail research and development activities, sell business
assets or discontinue some or all of its business operations, take other actions
which could be detrimental to business prospects and result in charges which
could be material to the Company's operations and financial position, or cease
operations altogether. In the event that any future financing is effected, to
the extent it includes equity securities, the holders of the common stock and
preferred stock may experience additional dilution. In the event of a cessation
of operations, there may not be sufficient assets to fully satisfy all
creditors, in which case the holders of equity securities may be unable to
recoup any of their investment.
F-8
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Claimsnet.com and its subsidiaries. All material intercompany accounts and
transactions 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 three months or less when
purchased.
REVENUE RECOGNITION
The Company enters into services agreements with its customers to provide access
to its software application for processing of customer transactions, including
base level support. The Company operates the software application for all
customers and the customers are not entitled to delivery of the
Company's software at any time during or at the end of the agreements. The
customers either host the application on their own servers or access the
Company's hosted software platform via the internet. Customers pay transaction
fees and pay time and materials charges for support above the base level.
Customer agreements also may (i) provide for development fees related to private
labeling of the Company's software platform (i.e. access to the Company's
servers through a web site which is in the name of and/or has the look and feel
of the customer's other web sites) and some customization of the offering and
business rules, and (ii) have periodic license fees. The Company accounts for
its service agreements by combining the contractual revenues from development,
license and support fees and recognizing the revenue ratably over the estimated
period covered by the development and license. The Company does not segment
these services and use the contractual allocation to recognize revenue because
it does not have objective and reliable evidence of fair value to allocate the
arrangement consideration to the deliverables in the arrangement. The Company
recognizes service fees for transactions, above base support and monthly hosting
as the services are performed.
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 at December 31, 2002 and 2001 were $1,922,000.
Capitalized computer software costs include direct labor, labor-related costs
and interest. The software is amortized over its expected useful life of 3 years
or the contractual term, as appropriate. Amortization was completed in year 2001
for all capitalized software development. Amortization expense related to
internally developed software totaled $20,000 and $292,000 for 2001 and 2000,
respectively.
In December 2002, the Company terminated the ongoing HIPAA remediation
in-process development project in order to pursue a more cost-effective
development alternative in light of our change in business strategy. Therefore,
in December 2002, the Company recognized a charge for in-process development
impairment expense of $344,000.
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, capitalized
software costs will be written down to fair value.
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 $224,000, $297,000 and
$304,000 in 2002, 2001 and 2000, respectively.
F-9
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company applies Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." No internal
development costs were capitalized in 2002, 2001 or 2000. 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
$250,000, $282,000 and $258,000 in 2002, 2001 and 2000.
INTANGIBLE ASSETS
The purchase price of HECOM assets acquired from VHx Company in April 2000 (see
Note D) was allocated to intangible assets and research and development based
upon projected cash flows over the estimated useful lives of the assets, net of
additional investment needs, and considering the stage of completion of software
development projects. Intangible assets included trademarks and non-compete
agreements. Initial results of the valuation valued intangibles at $3,700,000
and amortization commenced using straight-line method of depreciation, with a
four year expected life. Amortization of $412,000 was recorded in 2000 prior to
total impairment. Subsequent re-valuations, due to contractual and strategic
revisions resulted in a charge for the full impairment of intangibles in 2000.
INCOME TAXES
Deferred income taxes are provided for the tax effects of differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Valuation reserves are provided
for the deferred tax assets when, based on available evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
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 convertible Preferred Stock, options and
warrants totaling approximately 9,537,000 shares at December 31, 2002 are not
included in the diluted loss per share as they would be antidilutive. As such,
diluted and basic loss per share are the same.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("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 net loss is equal to its net loss for all periods presented.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees". Under APB 25, the Company recognizes no compensation expense related
to employee stock options when options are granted with exercise prices at the
estimated fair value of the stock on the date of grant, as determined by the
Board of Directors. The Company provides the supplemental disclosures required
by Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," which assumes the recognition of compensation
expense based on the fair value of options on the grant date. The Company
follows the provisions of SFAS 123 and Emerging Issues Task Force No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Connection with Selling Goods or Services," for equity
instruments granted to non-employees.
F-10
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS 123, "Accounting
for Stock-Based Compensation." SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. SFAS 148 is effective for fiscal years ending after December 15,
2002. The adoption of SFAS 148 did not impact the Company's financial position
or operations.
SFAS 123 requires the disclosure of pro forma net loss and net loss per share as
if the Company applied the fair value method. The Company's calculations for
employee grants were made using a Black-Scholes model using the following
assumptions: expected life, five to ten years; risk free rate of 2.5%; no
dividends during the expected term; and a volatility of 2.8 for 2002, expected
life, four years; risk free rate of 3.51% to 7.0%; no dividends during the
expected term; and a volatility of 0.8 to 1.4 for 2001, and expected life, four
years; risk free rate of 5.65% to 7.0%; no dividends during the expected term;
and a volatility of 0.8 to 1.355 for 2000.
If the computed values of all the Company's stock based awards were amortized to
expense over the vesting period of the awards as specified under SFAS 123, net
loss would have been:
Years Ended December 31,
2002 2001 2000
------- ------- -------
Net Loss (thousands)
As reported $ 2,927 $ 5,194 $17,695
Add: Stock-based compensation expense
determined under the fair value based method 368 91 469
Pro forma 3,295 5,285 18,164
Loss per share
As reported $ 0.24 $ 0.52 $ 2.16
Pro forma $ 0.25 $ 0.53 $ 2.22
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
Revenues from three customers represented a significant portion of the Company's
total revenues during the last three years. Revenues received from one customer
and clearinghouse partner who acquired certain of the Company's business assets
in September 2002 represented 23% and 9% of our revenues for 2002 and 2001,
respectively, and revenues received from another customer represented 9% and 1%,
respectively, of our 2002 and 2001 revenues. Revenues received from McKesson
represented 27% and 47% of 2001 and 2000 revenues, respectively. 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. On an ongoing basis, management evaluates its estimates,
including those related to customer programs and incentives, bad debts,
investments, intangible assets, financing operations, and contingencies and
litigation. Estimates are based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results could vary from the estimates that were used.
F-11
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs of $20,000,
$44,000 and $230,000 were incurred for the years ended December 31, 2002, 2001
and 2000, respectively.
RECLASSIFICATION
Certain 2000 amounts have been reclassified to conform with the 2002 and 2001
presentation.
NOTE C--SALE OF ASSETS
On September 11, 2002 the Company sold certain assets consisting primarily of
customer contracts (the "Assigned Contracts") and related revenue streams
thereunder to ProxyMed, Inc. ("Purchaser") in a negotiated arms-length
transaction for a purchase price consideration of $700,000. The Company received
cash consideration of $690,000, net of contractual expenses, recognized a gain
of $640,000 on the sale, and recorded $50,000 as deferred revenue.
The Company and Purchaser also entered into an Affiliate and Partner Services
and License Agreement dated September 11, 2002, pursuant to which (i) the
Company and Purchaser have agreed to provide certain administrative and support
services for each other in connection with each other's customers, including
without limitation the customers under the Assigned Contracts, in each case
pursuant to an agreed upon fee schedule, (ii) the Company has agreed to assist
Purchaser in establishing a "hot-site" which will permit Purchaser to run from
its own hardware platform, the Company's software application to service
Purchaser's customers, and (iii) the Company granted Purchaser a limited,
non-exclusive, 5-year license to use the Company's software application at its
"hot-site". The Company is entitled to receive fees for its services and use of
the Company's software application unless and until the occurrence of certain
bankruptcy and liquidation events set forth in such agreement in respect of the
Company. In addition to the transaction fees, the Company will also recognize
the $50,000 of deferred revenue ratably over the term of the agreement.
The Company and Purchaser also entered into a Preferred Escrow Agreement with
DSI Technology Escrow Services, Inc., pursuant to which the Company has
deposited into escrow its proprietary claims processing software and related
materials for potential release to Purchaser for use pursuant to a limited,
non-exclusive license upon the occurrence of certain bankruptcy and liquidation
events.
NOTE D--HEALTHEXCHANGE ASSET ACQUISITION
On April 18, 2000, Claimsnet.com, through its newly formed, wholly-owned
subsidiary, HealthExchange.com, Inc., a Delaware corporation ("HECOM"), executed
an asset purchase agreement (the "Asset Purchase Agreement") with VHx Company, a
Nevada corporation ("VHx"), whereby HECOM acquired selected properties and
assets of VHx, including the HealthExchange.com name and HealthExchange.com
trademarks, related to all efforts of VHx to develop products and services
designed to use Internet technology to facilitate and improve interaction
between physicians, health plans, employers and their members in exchange for
(i) 1,200,000 shares of common stock, par value $.001 per share, which were held
in escrow, (ii) the assumption of certain liabilities, and (iii) the
cancellation of a $2 million advance owed by VHx to the Company. In addition,
the Company issued additional consideration comprised of 13,767 shares of Series
A 8% Convertible Redeemable Preferred Stock, stated value of $725.60 per share,
and 13,767 shares of Series B 8% Convertible Redeemable Preferred Stock, stated
value of $725.60 per share (the Preferred Stock).
The Preferred Stock was contingent upon the completion of specified milestones,
described below, by March 31, 2001. The Preferred Stock was cancelled since the
milestones were not satisfied.
One of the significant assets acquired, an agreement with John Deere Health
("JDH") for development of an Enterprise Care Management System, required the
parties to negotiate mutually agreeable business terms for delivery of the
system after acceptance of beta testing. The Company and JDH were unable to
reach such an agreement. Additionally, the asset purchase agreement contained
provisions related to the satisfaction of pre-existing financial obligations due
to JDH by VHx within 180 days of the acquisition and also contained certain
provisions in the event that such obligations were not satisfied by VHx. VHx was
unable to satisfy the JDH obligations within the 180 days. As a result, the
Company
F-12
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE D--HEALTHEXCHANGE ASSET ACQUISITION (CONTINUED)
exercised its rights pursuant to the asset purchase agreement and reclaimed
888,000 of the 1,200,000 million shares of common stock into treasury stock. The
fair market value of the common shares returned to the Company was $1,415,000 as
of the date of the agreement. Contemporaneously, the Company, HECOM, and JDH
reached an agreement in December 2000 by which the parties agreed to cancel all
pre-existing agreements and JDH agreed to forgive all unpaid obligations in
exchange for 244,000 shares of Claimsnet.com common stock which was valued at
$389,000 at the date of the agreement. The remaining treasury stock was
cancelled in 2001.
The Company allocated the purchase price to the various assets acquired using
standard valuation methodologies, projecting cash flows over the estimated
useful lives of the assets, net of additional investment needs, and considering
the stage of completion of software development projects. A blended state and
federal effective tax rate of 40% was applied to the cash flows. These cash
flows were discounted to their present value using discount rates between 60 and
70 percent, reflective of development products at similar risk. The initial
results valued the intangible assets at $3,700,000 after charges to in-process
technology of $6,154,000, which was recorded in the quarter ended June 30, 2000.
In November 2000, as a result of revised expectations due to the inability to
negotiate mutually agreeable business terms with JDH, the Company reevaluated
the HealthExchange asset purchase using the same valuation methodologies and
determined that there had been an impairment of the assets acquired. The revised
valuation valued the intangible assets acquired at $400,000.
In December 2000, in recognition of the sluggish growth in potential customers,
and future cash requirements to continue product development, the Company
decided to postpone further development of the HealthExchange(TM) products and
terminate the Atlanta facility. The residual value of intangible assets was
written off.
As a result of the revised valuation of intangible assets acquired and the
revised agreement and return of escrowed shares described above, the Company
recognized charges of $3,288,000 for impairment of assets, $15,000 for write off
of fixed assets and a reduction to purchased research and development expense of
$1,026,000 in 2000. Amortization of $412,000 related to the acquisition has been
recognized during the twelve months ended December 31, 2000.
The Company and JDH also entered into a separate business agreement whereby the
Company continued to provide limited services to JDH and its clients at fair
market value through the third quarter of 2001.
The following table reflects the impact of HECOM upon the Company's year 2000
operations:
Revenue $ 58,000
-----------
Cost of sales 21,000
Research and development 944,000
Purchased research and development and write-off
of intangible assets 8,430,000
Amortization of intangibles 412,000
Selling, general and administrative 900,000
-----------
Total operating expenses 10,707,000
-----------
NET LOSS $10,649,000
===========
NOTE E--INCOME TAXES
There was no provision or benefit for federal or state income taxes for the
three years ended December 31, 2002.
The differences between the actual income tax benefit and the amount computed by
applying the statutory federal tax rate to the loss before incomes taxes are as
follows:
F-13
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE E--INCOME TAXES (CONTINUED)
December 31,
2002 2001 2000
------------ ------------ ------------
Benefit computed at federal statutory rate $ (995,180) $ (1,765,851) $ (6,016,300)
Permanent differences 93,775 69,123 60,591
State income tax benefit, net of federal
tax effect at state statutory rate (83,419) (148,214) (520,249)
Increase in valuation reserve 946,016 1,844,942 6,475,958
Other 38,808 -- --
------------ ------------ ------------
$ -- $ -- $ --
============ ============ ============
The components of the deferred tax assets and liabilities are as follows:
December 31,
2002 2001
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 15,335,262 $ 14,038,041
Fixed assets -- 156,052
Allowance for doubtful accounts 12,898 12,940
Deferred revenue 17,504 --
Other 2,211 --
------------ ------------
Total deferred tax assets 15,367,875 14,207,033
Valuation allowance for deferred tax assets (15,153,049) (14,207,033)
------------ ------------
214,826 --
Deferred tax liabilities:
Fixed assets (214,826) --
Deferred income tax assets, net of -- --
deferred tax liabilities $ -- $ --
============ ============
At December 31, 2002, the Company has approximately $42,000,000 of federal net
operating loss carryforwards, which begin to expire in 2012.
As a result of stock issued during 2000, 2001 and 2002, the Company may have
experienced an ownership change as defined in Internal Revenue Code section 382.
As a result, the Company's ability to use net operating loss carryforwards and
certain other deductions to offset future taxable income may be limited. The
annual limit is an amount equal to the value of the Company at the date of an
ownership change multiplied by approximately 5%. In addition, as the ability to
generate future taxable income is highly uncertain, the Company has recorded
valuation allowance against all of its deferred tax assets.
NOTE F--RELATED PARTY TRANSACTIONS
In August 2002, the Company entered into an unsecured loan agreement in the
amount of $50,000 with a director of the Company. Principal and interest, at
9.5% per annum on the unpaid principal, was due on September 30, 2002. The note
holder agreed to forego repayment at September 30, 2002 and to amend the terms
of the note to be due on demand. The Company has not repaid the principal amount
of the note or the accrued interest thereon.
In August 2002, the Company entered into an unsecured loan agreement in the
amount of $50,000 with a 5% shareholder of the Company. Principal and interest,
at 9.5% per annum on the unpaid principal, was due on September 30, 2002. The
F-14
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE F--RELATED PARTY TRANSACTIONS (CONTINUED)
note holder agreed to forego repayment at September 30, 2002 and to amend the
terms of the note to be due on demand. The Company has not repaid the principal
amount of the note or the accrued interest thereon.
In June 2002 the Company accepted non-revocable equity investments in the
aggregate amount of $50,000 from four members of the Board of Directors on terms
to be set by a committee of disinterested directors, such terms to be no more
favorable than those which would have been negotiated at arms length with
unaffiliated third parties. Funds received were recorded as a current liability
until the equity investment terms were finalized. In October 2002, based upon
the determination of the committee of disinterested directors, the Company
completed the private placement by issuing to the four directors an aggregate of
167 shares of Series E Preferred Stock at the rate of $300 per share for net
proceeds of $50,000.
In February, March, April and June 2002, the Company borrowed an aggregate of
$475,000 pursuant to six separate unsecured short-term loan agreements with
National Financial Corp., a related entity. In February, May, August and
September 2002, the Company fully repaid principal pursuant to four notes and
partially repaid principal on one note in the aggregate amount of $412,000 plus
accrued interest thereon. An unpaid principal amount of $63,000 plus interest
was due on September 30, 2002. National Financial Corp. agreed to forego
repayment at September 30, 2002 and to amend the terms of the notes to be due on
demand. In October and December 2002, upon the demand of National Financial
Corp., the Company repaid the remaining principal on one note and partially
repaid the remaining note in the aggregate amount of $45,000 plus accrued
interest thereon. The outstanding $18,000 principal of the remaining note plus
interest, at 9.5% per annum on the unpaid principal, is due on demand.
In March 2001, the Company entered into a loan agreement in the amount of
$400,000 with American Medical Finance, Inc., a related party. Principal and
interest, at 9.5% per annum on the unpaid principal, was due in March 2002. In
April 2001, the Company repaid the full amount of the note along with accrued
interest thereon.
In 2000, American Medical Finance acquired 100,000 shares of common stock at
$3.00 per share. In 2002, American Medical Finance transferred ownership of
these and all previously acquired shares of the Company's common stock to
National Financial Corporation. As a result, National Financial Corporation owns
a total 482,000 shares of the Company's common stock or 4.3% of the outstanding
shares at December 31, 2002.
NOTE G--STOCKHOLDERS' EQUITY
During 2002, the Company completed the private placement of 3,675,000 shares of
common stock to accredited investors at $0.20 per share for net proceeds of
$735,000. In connection with the private placement, the Company also issued
warrants to purchase an aggregate of 3,675,000 shares of common stock. The
warrants contain an exercise price of $0.20 per share and expire between June
and December 2007.
In October 2002, the Company hired a new president and chief executive officer
and issued him warrants to acquire an aggregate of 200,000 shares of common
stock. The warrants contain an exercise price of $0.20 per share, expire in
October 2007, and vest 50% in October 2003 and fully in October 2004.
In October 2002, the Company issued warrants to acquire an aggregate of 500,000
shares of common stock to a non-employee in connection with an agreement for
professional services to be rendered. The warrants contain an exercise price of
$0.20 per share, were fully vested on the date of grant, expire in September
2007, and become exercisable 50% in September 2003 and fully in September 2004.
The warrants were valued at $0.08 per share based on the Black-Scholes valuation
method (using the following assumptions: life of five years, risk free rate of
2.68%, no dividends during the term, and a volatility of .752). The expense was
recognized on the date of the grant.
In June 2002, the Company accepted non-revocable equity investments in the
aggregate amount of $50,000 from four members of the Board of Directors on terms
to be set by a committee of disinterested directors, such terms to be no more
favorable than those which would have been negotiated at arms length with
unaffiliated third parties. Funds received were recorded as a current liability
until the equity investment terms were finalized. In October 2002, based upon
the determination of the committee of disinterested directors, the Company
completed the private placement by issuing to the four Directors an aggregate of
167 shares of Series E Convertible Redeemable Preferred Stock (the "Series E
Preferred
F-15
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
Stock") at the rate of $300 per share. The Series E Preferred Stock was issued
at a stated value of $300 per share. Each share of Series E Preferred Stock may
be converted into 1,000 shares of common stock at the election of the holder.
The Company has the right, but not the obligation, to redeem all or any portion
of the Series E Preferred Stock in the event that the closing sale price of the
Company's common stock exceeds $.60 for twenty of any thirty consecutive trading
days. The Series E Preferred Stock does not accrue dividends but is entitled to
a preference over the common stock on liquidation of the Company. Holders of the
Series E Preferred Stock have the right to vote together with the holders of
common stock on an as converted basis.
In June 2002, the Company issued warrants to acquire an aggregate of 50,000
shares of common stock to a non-employee in connection with an agreement for
professional services to be rendered. The warrants contain an exercise price of
$0.30 per share and, as originally issued, were scheduled to expire in June
2003. The warrants were valued at $0.07 per share based on the Black-Scholes
valuation method (using the following assumptions: life of one year, risk free
rate of 2.12%, no dividends during the term, and a volatility of .566). The
expense was recognized on the date of the grant. In October 2002, the Company
entered into a new professional service agreement for the period October 1, 2002
through December 31, 2002 and agreed to cancel the original warrant and issue a
replacement warrant under similar terms, except that the expiration date of the
warrants was extended to June 2007. The new warrants were valued at $0.07 per
share based on the Black-Scholes valuation method (using the following
assumptions: life of five years, risk free rate of 2.68%, no dividends during
the term, and a volatility of .752). The expense was recognized on the date of
the grant.
In May 2002, the Company completed the private placement of 3,304 shares of
Series D Convertible Redeemable Preferred Stock (the "Series D Preferred Stock")
to accredited investors at $250 per share for net proceeds of $826,000. The
Series D Preferred Stock was issued at a stated value of $250 per share. Each
share of Series D Preferred Stock may be converted into 1,000 shares of common
stock at the election of the holder. The Company has the right, but not the
obligation, to redeem all or any portion of the Series D Preferred Stock in the
event that the closing sale price of the Company's common stock exceeds $.50 for
twenty of any thirty consecutive trading days. The Series D Preferred Stock does
not accrue dividends but is entitled to a preference over the common stock on
liquidation of the Company. Holders of the Series D Preferred Stock have the
right to vote together with the holders of common stock on an as converted
basis. A portion of the proceeds of the sale was used to repay $305,000 of
short-term loans incurred in February and March 2002.
In May 2002, upon election of a new non-employee director to the board, the
Company granted ten year options exercisable for 5,000 shares of common stock
under the Non-Employee Directors Plan. The option exercise price of $.30 was the
fair market value of a share of the outstanding common stock on the date the
options were granted. The options vest to the extent of 50% one year from the
date of grant and will vest fully on the second anniversary of the date of
grant.
In April 2002 the Company negotiated a severance agreement with Bo W. Lycke, our
former chief executive officer, pursuant to which the Company extended the
exercise period for 250,000 stock options and warrants issued to Mr. Lycke in
February 2002. The Company recorded a $51,000 expense related to the
modification of exercise terms.
In February 2002, upon election of a new non-employee director to the board, the
Company granted ten year options exercisable for 10,000 shares of common stock
under the Non-Employee Directors Plan. The option exercise price of $.35 was the
fair market value of a share of the outstanding common stock on the date the
options were granted. The options vest to the extent of 50% one year from the
date of grant and will vest fully on the second anniversary of the date of
grant.
In February 2002, the Company granted employees the then remaining options to
purchase 328,842 shares of common stock under its 1997 Stock Option Plan and
warrants to purchase an additional 253,203 shares of common stock in exchange
for voluntary salary reductions. The options and warrants contained an exercise
price of $0.35 per share, the market price on the date of grant, expire on the
tenth anniversary of the grant, and vested 25% immediately on the date of grant
and an additional 25% on each third month anniversary of the date of grant.
In January 2002, the Company granted employees options under its 1997 Stock
Option Plan to purchase an aggregate of 456,000 shares of common stock. The
options contain an exercise price of $0.60 per share, the market price on the
date of grant, expire on the tenth anniversary of the grant, and vested 100% one
year from the date of grant.
In December 2001, upon completion of our annual meeting, the Company granted ten
year options exercisable for an aggregate of 25,000 shares of common stock under
the Non-Employee Directors' Plan. The option exercise price of $0.50 was the
fair market value of a share of the outstanding common stock on the date the
options were granted. The options vested to the extent of 50% one year from the
date of grant and will vest fully on the second anniversary of the date of
grant.
F-16
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
In December 2001, the Company issued in a private placement to accredited
investors 660,000 shares of common stock, including 440,000 shares resulting
from the conversion of 440 shares of Series C 8% Convertible Redeemable
Preferred Stock ("Series C Preferred Stock") at $0.70 per common share, for net
proceeds of $462,000. The Series C Preferred Stock was issued at the stated
value of $700 per share. No dividends accrued prior to March 31, 2002. Each
share of Series C Preferred Stock was automatically convertible into 1,000
shares of common stock upon approval of the shareholders, which was received at
the annual shareholders" meeting held on December 26, 2001. Holders of the
Series C Preferred Stock have the right to vote together with the holders of
common stock on an as converted basis.
In June 2001, the Company issued 16,000 shares of common stock valued at $42,000
to New York Capital AG in connection with an agreement for professional services
to be rendered in 2001. The Company recognized expense of $42,000 for services
rendered.
In April 2001, the Company entered into an agreement with McKesson that
superseded its October 1999 agreement. Under the new agreement, McKesson
acquired 1,514,285 shares of common stock at $1.75 per share, for net proceeds
of $2,650,000, and paid a one-time fee of $200,000. The stock purchase warrant
originally issued to McKesson in October 1999 was cancelled in April 2001.
Additionally, the new agreement eliminated certain Claimsnet operating
requirements to provide dedicated system hosting, operations, and support
services, and eliminated future McKesson license and subscription fees. The new
agreement retains provisions for the payment of transaction fees by McKesson and
expands the scope of transactions that may be processed under the license and
the scope of other business opportunities which the Company and McKesson may
jointly pursue. No registration rights were granted to McKesson for the shares
acquired. The Company received 27% or $366,000 of its 2001 revenues from
McKesson, $288,000 of which was related to software license and support revenues
under the McKesson Development and Services Agreement, and incurred $352,000 of
expense for services provided by McKesson.
Pursuant to the October 1999 agreement, through March 31, 2001 the Company (a)
received payments in the aggregate amount of $2,202,000 (of which approximately
$1,200,000 was received in December 2000) related to development and license fee
provisions, which were recorded as deferred revenue and were being accounted for
by amortizing the total amount, received and to be received, of approximately
$4,500,000 ratably over the expected contract life of 65 months, (b) expended
$428,000 related to development and implementation costs, which was recorded as
software development costs on the balance sheet, and was being amortized ratably
over the expected contract period of 65 months, and (c)recorded in equity a
capital contribution and an offsetting deferred sales discount in the amount of
$1,700,000 for the imputed value of the warrant, which was being amortized
ratably over the expected contract period of 65 months. As of March 31, 2001,
the Company had amortized $1,187,000 of the deferred revenue into revenue,
$112,000 of the deferred development costs into cost of revenues, and $445,000
of the deferred sales discount as a reduction of revenues, leaving balances of
$1,015,000, $316,000 and $1,255,000, respectively. As of March 31, 2001, the
Company accrued the $200,000 payment, received in April 2001 in connection with
the contract modification, as additional deferred revenue. As a result of the
April 2001 modification of the October 1999 agreement with McKesson, as of March
31, 2001 the Company offset the remaining deferred sales discounts against the
remaining deferred revenue. Although the new agreement with McKesson permits it
to continue to use the software, which the Company had developed specifically to
process its transactions, there was no requirement for McKesson to use the
system and no ability to project future transaction revenues.
In March 2001, the Company completed the private placement of 400,000 shares of
common stock to an accredited investor at $1.75 per share for net proceeds of
$596,000. In April 2001, the Company issued warrants to purchase 40,000 shares
of common stock to financial advisors that assisted the Company with the
negotiation and structuring of such investment. The warrants are immediately
exercisable at a price of $1.75 per share and expire on the second anniversary
of the date of grant. The stock price on the date of grant was $1.74 per share.
The warrants are fully vested and issued for services rendered in the current
period. The Company recognized a charge to earnings of $57,000, which was equal
to the imputed value of the warrants, estimated at $1.41 per share using the
Black-Scholes valuation method (using the following assumptions: life of two
years, risk free rate of 5.10 percent, no dividends during the term, and a
volatility of 1.5).
F-17
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
In January 2001, the Company granted employees options to purchase an aggregate
of 385,500 shares of common stock under the 1997 Stock Option Plan. The options
were issued at a price of $1.25 per share, the market price on the date of
grant, expire on the tenth anniversary of the grant, and vest on the first
anniversary of the grant.
In 2000, the Company sold 1,370,000 shares of common stock in private placement
to various accredited investors at prices between $3.00 and $3.50 per share for
proceeds of $4,227,000. In connection with the financing, the Company issued
warrants to purchase 270,000 shares of common stock at a price of $4.60 for a
period of one year and warrants to purchase 270,000 shares of common stock at a
price of $5.60 for a period of two years.
The Company also issued 1,200,000 shares valued at $6,376,000 for the purchase
of assets from VHx Company. Subsequent adjustments pursuant to provisions of the
asset purchase agreement resulted in the return of 888,000 shares to treasury
stock at a value of $1,415,000 and the issuance from treasury stock of 244,000
shares at a value of $389,000 to JDH in forgiveness of all the unpaid
obligations of VHx Company to JDH under a development agreement.
In October 2000, upon completion of the Company's annual meeting and pursuant to
the terms of the Directors' Plan, options exercisable for an aggregate of 25,000
shares of common stock were granted under the Directors' Plan. The option
exercise price of $2.375 was the fair market value of the common stock on the
date the options were granted.
In June 2000, the Company granted certain employees warrants to purchase 178,250
shares of common stock at $3.00 per share, the market price on the date of
grant. The warrants expire on the 10th anniversary of the grant, and become
exercisable one year from the grant date.
STOCK BASED COMPENSATION ARRANGEMENTS
The Company's 1997 Plan provides for the issuance to employees, officers,
directors, and consultants of incentive and/or non-qualified options to acquire
1,307,692 shares of common stock. The options are to be issued at fair market
value, as defined, and generally vest 25% each year from the date of the option
grant. Options generally expire 10 years from the date of grant and
automatically expire on termination of employment.
The Company's Directors' Plan provides for the issuance to non-employee
directors of options to acquire 361,538 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 under the two Plans
related to the Company:
PER SHARE EXERCISE WEIGHTED AVERAGE
NUMBER OF SHARES PRICE EXERCISE PRICE
---------------- ------------------ ----------------
Outstanding options-December 31, 1999 519,750 7.00-8.80 7.70
Granted 220,000 2.38-8.00 7.36
Expired (221,837) 7.00-8.00 7.46
---------------- ------------------ ----------------
Outstanding options-December 31, 2000 517,913 2.38-8.80 7.66
Granted 435,500 0.50-1.75 1.21
Expired (273,813) 1.25-8.00 6.20
---------------- ------------------ ----------------
Outstanding options-December 31, 2001 679,600 $0.50-8.80 $ 4.11
Granted 799,842 0.30-0.60 0.49
Expired (418,875) 0.50-8.80 1.96
---------------- ------------------ ----------------
Outstanding options-December 31, 2002 1,060,567 $0.30-8.00 $ 2.23
================ ================== ================
Options exercisable-December 31, 2002 728,886 $0.35-8.00 $ 2.60
================ ================== ================
F-18
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE G--STOCKHOLDERS' EQUITY (CONTINUED)
Outstanding options as of December 31, 2002, had a weighted average remaining
contractual life of approximately 8.3 years and a weighted average fair value at
issuance of $0.36 based on the Black-Scholes value method. No compensation
expense has been recognized for options granted to employees in 2002. At
December 31, 2002, options available for grant under the Company's 1997 Plan at
December 31, 2002, were 369,625, and under the Company's Directors' Plan were
239,038.
The following table summarizes the warrant activity related to employee grants:
WEIGHTED
NUMBER OF PER SHARE AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
-------------- -------------- --------------
Outstanding warrants-January 1, 2000 - $ - $ -
Granted 178,250 3.00 3.00
Expired (33,800) 3.00 3.00
-------------- -------------- --------------
Outstanding warrants-December 31, 2000 144,450 3.00 3.00
Granted - - -
Expired (51,200) 3.00 3.00
-------------- -------------- --------------
Outstanding warrants-December 31, 2001 93,250 $3.00 $ 3.00
Granted 453,203 0.20-0.35 0.28
Expired (87,226) 0.35-3.00 1.85
-------------- -------------- --------------
Outstanding warrants-December 31, 2002 459,227 $0.20-0.35 $ 0.54
============== ============== ==============
Warrants exercisable-December 31, 2002 259,227 $0.35-3.00 $ 0.80
============== ============== ==============
Outstanding employee warrants as of December 31, 2002, had a weighted average
contractual life of approximately 6.6 years and a weighted average fair value at
issuance of $0.23 based on the Black-Scholes value method.
Approximately $98,000 of expense has been recognized in 2002 for options and
warrants issued as consideration for services provided by non-employees.
NOTE H--NOTES PAYABLE TO RELATED PARTIES AND OTHER NOTE PAYABLE
The following is a summary of notes payable at December 31, 2002:
Note payable to a Director. Principal due
on demand; unsecured. Interest payable at 9.5%. $ 50,000
Note payable to a 5% shareholder; unsecured. Principal due
on demand; unsecured. Interest payable at 9.5%. 50,000
Note payable to NFC, a related party. Principal due
on demand; unsecured. Interest payable at 9.5%. 18,066
Note payable to a 5% shareholder. Principal due August 31,
2005; unsecured. Interest payable at 8%. 10,000
Note payable. Principal due August 31,
2005; unsecured. Interest payable at 8% 25,000
---------
Total $ 153,066
=========
All unpaid interest has been accrued.
F-19
CLAIMSNET.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001, AND 2000
NOTE H--NOTES PAYABLE TO RELATED PARTIES AND OTHER NOTE (CONTINUED)
The following are the maturities of notes payable for years ended December 31:
2003 $ 118,066
2004 -
2005 35,000
---------
Total $ 153,066
=========
NOTE I--COMMITMENTS AND CONTINGENCIES
The Company leases office space under a lease agreement that expires on June 30,
2003. Rent expense totaled $147,000, $184,000 and $492,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. The Company also leases servers
and Web server management facilities under an agreement that expires in 2005.
The Company's aggregate lease commitments are shown below.
2003 $ 303,704
2004 $ 247,704
2005 $ 185,778
From time to time in the normal course of business, the Company is a party to
various matters involving claims or possible litigation. One such dispute
relates to a $500,000 amount associated with the acquisition of HECOM assets in
April 2000, which is accrued in current liabilities as of December 31, 2002.
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 J--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, 2002.
NOTE K--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. Cash,
accounts receivable, accounts payable, notes payable and other liabilities are
carried at amounts that reasonably approximate their fair values.
NOTE L--SUBSEQUENT EVENTS
In January, February and March 2003, the Company completed the private placement
of 950,000 shares of common stock to accredited investors at $0.20 per share for
net proceeds of $189,000. In connection with the private placement, the Company
also issued warrants to purchase an aggregate of 950,000 shares of common stock.
The warrants contain an exercise price of $0.20 per share and expire December
31, 2007. The private placement included 100,000 shares of common stock plus
warrants to acquire an additional 100,000 shares of common stock purchased by
National Financial Corporation and 500,000 shares of common stock plus warrants
to acquire an additional 500,000 shares of common stock purchased by Elmira
United.
F-20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 20, 2003 we discontinued the engagement of Ernst & Young LLP, which
served as our independent auditors since 1999. The report issued by Ernst &
Young LLP on the financial statements for the year ended December 31, 2001 did
not contain an adverse opinion nor a disclaimer of opinion, and was not
qualified or modified as to audit scope or accounting principles. The report
issued by Ernst & Young LLP on our financial statements for the year ended
December 31, 2001 was modified to include an explanatory paragraph describing
conditions that raised substantial doubt about our ability to continue as a
going concern. Based on the recommendation of our Audit Committee of the Board
of Directors, the Board approved the decision to change independent auditors. In
connection with its audits for the years ended December 31, 2000 and 2001and
through February 20, 2003, there were no disagreements with Ernst & Young LLP 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 Ernst & Young LLP, would have caused Ernst & Young LLP to
make reference thereto in their report on the financial statements for such
years or such interim periods. Ernst & Young LLP furnished us with a letter
addressed to the Commission stating that it agrees with the above statements. A
copy of such letter, dated February 26, 2003, is filed as Exhibit 1 to the Form
8-K, dated February 26, 2003.
We engaged King Griffin & Adamson P.C. as our new independent auditors as of
February 20, 2003. Our Audit Committee approved the engagement. During the two
most recent fiscal years and through February 20, 2003, we have not consulted
with King Griffin & Adamson P.C. with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(1)(v) and (ii) of Regulation S-K. We allowed King Griffin & Adamson P.C.
to review the aforementioned Form 8-K before it was filed with the Commission.
King Griffin & Adamson, P.C. has not furnished us with a letter containing any
new information, clarification, or disagreement with the information set forth
herein.
On March 14, 2003, King Griffin & Adamson P.C. resigned to allow its successor
entity, KBA Group LLP, to be engaged as our independent public accountants. King
Griffin & Adamson P.C. had not issued reports on our financial statements for
any prior fiscal periods nor has King Griffin & Adamson P.C. completed any
reviews of our interim financial statements since being engaged on February 20,
2003. From February 20, 2003, through March 14, 2003 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
for such interim periods. King Griffin & Adamson P.C. furnished us with a letter
addressed to the Commission stating whether or not it agrees with the above
statements. A copy of such letter, dated March 14, 2003, is filed as Exhibit
16.1 to the Form 8-K, dated March 17, 2003.
Our Audit Committee approved the engagement of KBA Group LLP and we engaged KBA
Group LLP as our new independent public accountants as of March 14, 2003. We
allowed KBA Group LLP to review the aforementioned Form 8-K before it was filed
with the Commission. King Griffin & Adamson P.C. has not furnished us with a
clarification or disagreement with the information set forth herein.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Our directors and executive officers, their ages, and their positions held with
us are as follows:
NAME AGE POSITION
---- --- --------
Don Crosbie 59 President, Chief Executive Officer,
Chairman of the Board of Directors and
Class I Director
Paul W. Miller 46 Chief Operating Officer, Chief Financial
Officer and Class II Director
Alfred Dubach 55 Vice Chairman of the Board of Directors
and Class I Director
John C. Willems, III 47 Class II Director
Jeffry M. Black 46 Class I Director
Thomas Michel 51 Class II Director
The following is certain summary information with respect to our executive
officers and directors.
DON CROSBIE joined us in October 2002 from Xactimed where he was President and
CEO. Xactimed is a claims processing and clearinghouse company serving the
hospital market. In the year he was at Xactimed the company experienced a
dramatic turnaround, with revenue growing 150% over the prior year and an
operating profit was achieved as compared to significant operating losses for
the prior year. From September 2000 to July 2001, Mr. Crosbie served as CFO and
President of North American Operations of Blue Wave Systems, a high density DSP
board supplier to the telecom infrastructure market, including media gateways
and 2 1/2 and 3 G wireless. He joined Blue Wave with a corporate strategic
direction to identify and complete a sale of the company. This was accomplished
in July 2001 with the sale of the company to Motorola for $125 million. From
September 1999 to June 2000, Mr. Crosbie served as President, COO and CFO of
Ypay.com, an internet start up company in the free ISP/media rich advertising
space. From June 1997 to December 1998, Mr. Crosbie served as CEO of
Rheumatology Research International, a Site Management Organization performing
clinical trials for pharmaceutical and biotech companies in pre FDA approval
trials for new arthritis drugs. Prior to Rheumatology Research International,
Mr. Crosbie served as Founder, Chairman and CEO of ComVest Partners Inc., an
institutional research boutique with an emphasis on networking, wireless, voice
and remote access; and Executive Vice President and Chief Financial Officer of
InterVoice Inc, a high technology provider of customized voice response systems.
PAUL W. MILLER, a Certified Public Accountant, has served as our Chief Financial
Officer since November 1997, and our Chief Operating Officer since October 2000.
From March 2002 to October 2002, Mr. Miller also served as our Chief Executive
Officer. 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.
ALFRED DUBACH has served as the Vice Chairman of our board of directors since
January 2002. He has been an independent business consultant and financial
advisor in Zurich, Switzerland for more than 10 years. Since January 2002, Mr.
Dubach has been an independent business consultant working with non-food
consumer goods, luxury goods, cosmetics, retail and wholesale, banking,
e-banking, e-commerce, and pharmaceuticals. From March 2001 to February 2002,
Mr. Dubach served as the Chief Investment Officer for Swissquote Bank and a
member of the Executive Management Team that developed the first pure Internet
Bank in Switzerland. CASH magazine voted Swissquote Bank the best Swiss online
broker in Autumn 2001 and the bank reached a market share of twenty percent by
the end of 2001. From June 1994 to February 2001, Mr. Dubach was a Director of
Credit Suisse, where he served as a member of the project team for the legal
integration of Volksbank and Credit Suisse as well as the restructuring of the
Credit Suisse Group. Prior to that, Mr. Dubach served in several capacities
within management and executive management in the pharmaceutical industry and
other leading Swiss banks (Louis Widmer Intl, Union Bank of Switzerland, Swiss
Volksbank).
51
JOHN C. WILLEMS, III has served as a director of our Company since 1998 and has
been our legal counsel 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.
JEFFREY M. BLACK was elected a director of our Company in February 2002. He has
been engaged for over 20 years in advising and developing publicly traded
companies in strategic planning and procedures for many aspects concerning the
business of operating in a public arena. For the past six years, Mr. Black has
served as President of Investors Communications Group, Inc. (ICG) a public
relations firm. ICG focuses on helping companies develop and implement public
relation programs for the investment /broker community, consulting on financing
for new capital infusion and planning/implementing acquisition strategies.
THOMAS MICHEL was elected as a director of our Company in February 2002. Since
1996, Mr. Michel has been a Principal of Switzerland based CIMA Consulting, AG,
of which he was a founder, and which provides financial and fund raising
services in the form of venture capital, private equity, and bridge loan
facilities. From 1980 to 1996, he served in various capacities at Swiss Bank
Corporation in Zurich, Switzerland. Mr. Michel currently serves on the Board of
Directors for Best 243 AG, IQUBE AG and Spirit of Covey AG, a manufacturer of
natural skincare products.
In March 2002, Mr. Bo W. Lycke resigned as President and Chief Executive Officer
and in October 2002 he resigned as Chairman of the Board of Directors and as a
Director of our Company. In October 2002, Mr. Steve Hedlund resigned as a
director of our Company. In January 2003, Ms. Patricia Davis, who had been our
Senior Vice President of Sales, Marketing and Business Development, and Mr.
Jeffrey P. Baird, who had been our Senior Vice President of Technology, left us
as part of downsizing and reorganization. Messrs. Crosbie and Miller are our
executive officers.
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 Class I directors currently are
Messrs. Crosbie, Dubach and Black, whose terms expire at the next annual meeting
of stockholders, which is to be held in 2003. The Class II directors currently
are Messrs. Miller, Willems, and Michel, whose terms expire at the following
annual meeting of stockholders. Each director is elected for a term of two
years, except when the election is by the Board to fill a vacancy, in which
case, the director's term expires at the next annual meeting of stockholders.
There are no family relationships among our directors and executive officers.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by us for
services rendered in all capacities during the years ended December 31, 2002,
2001, and 2000 by the chief executive officer and each of the other most highly
compensated executive officers of our Company who received compensation of at
least $100,000 during the year ended December 31, 2002.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
SECURITIES
UNDERLYING
OPTIONS/ OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS WARRANTS COMPENSATION
- --------------------------------------------- ---- -------- ------- ---------- ------------
Don Crosbie(1). 2002 $ 21,538 - 200,000 -
President and Chief Executive Officer
Paul W. Miller 2002 124,231 - 189,285 -
Chief Operating Officer and Chief 2001 153,173 35,742 50,000 -
Financial Officer 2000 130,192 7,723 12,000 -
Bo W. Lycke(2) 2002 56,827 - 324,000 111,343
Formerly Chairman of the Board of Directors, 2001 267,500 - 75,000 -
President and Chief Executive Officer 2000 263,173 11,891 22,500 -
Patricia Davis(3) 2002 127,861 - 107,143 -
Formerly Senior Vice President of Sales, 2001 143,173 11,029 50,000 -
Marketing and Business Development 2000 109,680 3,482 12,000 -
Jeffrey P. Baird(4) 2002 131,923 - 107,143 -
Formerly Senior Vice President of 2001 67,308 16,381 - -
Technology
52
(1) Mr. Crosbie joined us in October 2002.
(2) Mr. Lycke resigned from his position as President and Chief Executive
Officer in March 2002. Other compensation is comprised of cash payments
due pursuant to a severance agreement entered into with Mr. Lycke, of
which payments aggregating $38,891 have been paid to Mr. Lycke and
payments aggregating $72,451 are delinquent.
(3) Mrs. Davis ceased being employed by us in January 2003.
(4) Mr. Baird joined us in June 2001 and ceased being employed by us in
January 2003.
The following table provides information on the value of each of the named
executive officers' options at December 31, 2002:
FISCAL YEAR AND FISCAL YEAR-END OPTION/WARRANT VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY OPTIONS/
OPTIONS/WARRANTS AT WARRANTS AT
SHARES DECEMBER 31, 2002 (#) DECEMBER 31, 2002 ($)
ACQUIRED VALUE ----------------------
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
------------------- ----------- -------- ---------------------- ---------------------
Don Crosbie -- -- -- / 200,000 -- / 8,000
Bo W. Lycke -- -- 250,000 / -- -- / --
Paul W. Miller -- -- 213,785 / 87,500 -- / --
Patricia Davis -- -- 125,143 / 52,000 -- / --
Jeffrey P. Baird -- -- 57,143 / 50,000 -- / --
All options were granted at an exercise price not less than the fair value of
the common stock on the date of the grant.
The value of unexercised in the money warrants for Mr. Crosbie was calculated
based on the closing price of our common stock on December 31, 2002, $.24. All
other stock options and warrants for the named executive officers contain
exercise prices greater than $.24.
DIRECTOR COMPENSATION
During the year ended December 31, 2002, 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, we adopted the Directors' Plan to tie the compensation of outside
(non-employee) directors to future potential growth in our earnings, and
encourage them to remain on our board of directors, to provide them with an
increased incentive to make significant and extraordinary contributions to our
long-term performance and growth, and to align their interests through the
opportunity for increased stock ownership, with the interests of our
stockholders. Only outside directors are eligible to receive options under the
Directors' Plan.
An aggregate of 361,538 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.
53
The period for exercising an option ends ten years from the date the option is
granted. With the exception of those options to purchase 80,000 shares of common
stock issued in April 1999, which were fully exercisable in May 1999, fifty
percent of the options granted become exercisable on the first anniversary of
the date of grant with the remainder becoming exercisable on the second
anniversary of the date of grant. During the period an option is exercisable,
the option holder may pay the purchase price in cash or, under some
circumstances, 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 has not been exercised 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.
As of December 31, 2002 there were outstanding options to purchase an aggregate
of 122,500 shares at exercise prices ranging from $.30 to $8.00 per share.
Unless earlier terminated, the Directors' Plan will terminate on December 31,
2007.
1997 STOCK OPTION PLAN
In April 1997, our board of directors and stockholders adopted the 1997 Plan.
The 1997 Plan provides for the grant of options to purchase up to 1,307,692
shares of common stock to our employees, officers, directors, and consultants.
Options may be either "incentive stock options" or non-qualified options under
the Federal tax laws. Incentive stock options may be granted only to our
employees, while non-qualified options may be issued to non-employee directors,
consultants, and others, as well as to our employees.
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 of an optionee by reason of death or permanent and
total disability, the optionee's incentive stock options remain exercisable for
one year to the extent the options were exercisable on the date of such
termination. Options may not be granted under the 1997 Plan beyond a date 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 us 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 us become available again for issuance under the 1997 Plan.
The following table summarizes the stock option activity under the 1997 Plan and
the Directors' Plan through December 31, 2002 (none of the options granted have
been exercised):
54
PER SHARE EXERCISE WEIGHTED AVERAGE
NUMBER OF SHARES PRICE EXERCISE PRICE
---------------- ------------------ ----------------
Outstanding options-January 1, 1999 - $ - $ -
Granted 562,500 7.00-8.80 7.73
Expired (42,750) 8.00 8.00
---------------- ------------------ ----------------
Outstanding options-December 31, 1999 519,750 7.00-8.80 7.70
Granted 220,000 2.38-8.00 7.36
Expired (221,837) 7.00-8.00 7.46
---------------- ------------------ ----------------
Outstanding options-December 31, 2000 517,913 2.38-8.80 7.66
Granted 435,500 0.50-1.75 1.21
Expired (273,813) 1.25-8.00 6.20
---------------- ------------------ ----------------
Outstanding options-December 31, 2001 679,600 $0.50-8.80 $ 4.11
Granted 799,842 0.30-0.60 0.49
Expired (418,875) 0.50-8.80 1.96
---------------- ------------------ ----------------
Outstanding options-December 31, 2002 1,060,567 $0.30-8.00 $ 2.23
================ ================== ================
Options exercisable-December 31, 2002 728,886 $0.35-8.00 $ 2.60
================ ================== ================
Outstanding options as of December 31, 2002, had a weighted average remaining
contractual life of approximately 8.3 years and a weighted average fair value at
issuance of $0.36 based on the Black-Scholes value method.
WARRANTS
The Company has from time to time, issued warrants to its employees and
directors.
The following table summarizes the warrant activity related to employee grants:
PER SHARE EXERCISE WEIGHTED AVERAGE
NUMBER OF SHARES PRICE EXERCISE PRICE
---------------- ------------------ ----------------
Outstanding warrants-January 1, 2000 - $ - $ -
Granted 178,250 3.00 3.00
Expired (33,800) 3.00 3.00
---------------- ------------------ ----------------
Outstanding warrants-December 31, 2000 144,450 3.00 3.00
Granted - - -
Expired (51,200) 3.00 3.00
---------------- ------------------ ----------------
Outstanding warrants-December 31, 2001 93,250 $3.00 $ 3.00
Granted 453,203 0.20-0.35 0.28
Expired (87,226) 0.35-3.00 1.85
---------------- ------------------ ----------------
Outstanding warrants-December 31, 2002 459,227 $0.20-0.35 $ 0.54
================ ================== ================
Warrants exercisable-December 31, 2002 259,227 $0.35-3.00 $ 0.80
================ ================== ================
Outstanding employee warrants as of December 31, 2002, had a weighted average
contractual life of approximately 6.6 years and a weighted average fair value at
issuance of $0.23 based on the Black-Scholes value method.
55
No options or warrants were exercised during 2002. The following table sets
forth information with respect to options and warrants granted during 2002 to
the individuals set forth in the Summary Compensation Table above:
INDIVIDUAL GRANTS
Number of % of Total Potential Realizable
Securities Options and Value at Assumed Annual
Underlying Warrants Rates of Stock Price
Options and Granted to Exercise Appreciation for Option Alternative
Warrants Employees in Price Expiration or Warrant Term (1) Grant Date
Name Granted Fiscal Year ($/Share) Date 5% 10% Value (2)
------------------ ----------- ------------ --------- ----------------- -------- -------- -----------
Don Crosbie 200,000 21.2% $0.20 October 20, 2007 $ 25,156 $ 63,750 $ -
Paul W. Miller 189,288 20.0 0.35-0.60 January 2, 2012- 53,456 135,468 -
February 21, 2012
Bo W. Lycke 325,000 34.4 0.35-0.60 January 2, 2012 83,329 211,171 -
February 21, 2012
Patricia Davis 107,143 11.3 0.35-0.60 January 2, 2012 31,445 79,687 -
February 21, 2012
Jeffrey P. Baird 107,143 11.3 0.35-0.60 January 2, 2012 31,445 79,687 -
February 21, 2012
(1) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the gains or "option or warrant spreads"
that would exist for the options or warrants granted, based on the
assumed rates of annually compounded stock price appreciation of 5% and
10%, respectively, from the date the option or warrant was granted over
the full option or warrant term, without adjustment for the present
valuation of such potential future option or warrant 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 using the following average assumption: expected life, four
years; risk free rate of 3.51 to 7%; no dividends during the expected
term; and a volatility of 0.8 to 1.4.
We account for our 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.
DIRECTORS' LIMITATION OF LIABILITY
Our 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. We believe that these provisions are necessary to
attract and retain qualified persons as directors and officers.
We provide directors and officers liability insurance coverage of $5,000,000.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to our directors, officers, and controlling persons as
stated in the foregoing provisions or otherwise, we have been advised that, in
the opinion of the Commission, this indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 28, 2003,
o each person who is known by us to be the beneficial owner of more than 5%
of the outstanding common stock,
o each director and each of our executive officers, named in the compensation
table under Item 11,
o all our directors and executive officers 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 March
28, 2003.
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.
SHARES BENEFICIALLY OWNED
----------------------------------------
Number of
Shares Percent of
Name and Address of Beneficially Percent of Voting
Beneficial Owner Class of Security Owned Class Power
------------------------ ------------------------ ------------ ---------- ----------
Don Crosbie Common Stock - - % - %
Paul W. Miller (1) Common Stock 302,885 2.0 1.6
Bo W. Lycke (2) (3) Common Stock 2,111,326 13.7 11.2
4730 Melissa Ln. Series E Preferred Stock 33.333 20.0 *
Dallas, Texas 75229
Patricia Davis (4) Common Stock 177,243 1.2 *
1600 Thorntree Dr.
Desoto, Texas 75115
Jeffrey P. Baird (5) Common Stock 107,143 * *
1414 Kaitlyn Ln.
Keller, Texas 76248
John C. Willems, III (6) Common Stock 21,777 * *
Thomas Michel (7) Common Stock 162,500 1.1 *
Series D Preferred Stock 100 3.0 *
Series E Preferred Stock 50 30.0 *
Jeffrey M. Black (8) Common Stock 2,500 * *
Alfred Dubach (9) Common Stock 617,500 4.0 3.3
Series D Preferred Stock 565 17.1 3.0
Series E Preferred Stock 50 30.0 *
Robert H. Brown, Jr. (2) (10) Common Stock 892,354 5.8 4.7
2727 N. Harwood, #1000
Dallas, Texas 75201
57
SHARES BENEFICIALLY OWNED
----------------------------------------
Number of
Shares Percent of
Name and Address of Beneficially Percent of Voting
Beneficial Owner Class of Security Owned Class Power
------------------------ ------------------------ ------------ ---------- ----------
Sture Hedlund (11) Common Stock 33,333 * *
Norrmalmstorg 14 Series E Preferred Stock 33.333 20.0 *
S-11184 Stockholm
Sweden
McKesson Corporation Common Stock 1,514,285 9.8 8.0
One Post Street
San Francisco, CA 94104
J. R. Schellenberg (2) (12) Common Stock 1,043,603 6.8 5.5
Kohlrainstrasse 1 Series D Preferred Stock 120 3.6 *
Kusnacht
Switzerland CH-8700
Elmira United (13) Common Stock 6,100,000 39.6 32.3
Swiss Tower - 16th Floor Series D Preferred Stock 1,600 48.4 8.5
Panama
Republic of Panama
New York Ventures (14) Common Stock 620,000 4.0 3.3
c/o BDO Visura Series D Preferred Stock 620 18.8 3.3
Entfelderstrasse 1
CH-5001 Aarau
All our directors and Common Stock 1,107,162 7.2 5.9
executive officers as a Series D Preferred Stock 665 20.1 3.5
group (6 persons) (15) Series E Preferred Stock 100 60.0 *
* Less than one percent.
(1) Consists of 1,600 shares of common stock owned of record by Mr. Miller and
301,285 shares which Mr. Miller has the right to acquire upon exercise of
options or warrants.
(2) Includes 581,603 shares of common stock owned of record by National
Financial Corporation. Messrs. Lycke, Bensen and Brown own 71.1%, 11.2% and
17.7%, respectively, of the outstanding capital stock of National Financial
Corporation. MNS Enterprises, Inc. manages all activities of National
Financial Corporation pursuant to a Management Agreement. Mr. Schellenberg
is the President and a Director of MNS Enterprises, Inc. Therefore, Messrs.
Lycke, Bensen, Brown and Schellenberg may be deemed to beneficially own the
shares of common stock owned by National Financial Corporation.
(3) Common Stock consists of 1,246,390 shares of common stock owned of record
by Mr. Lycke, 33,333 shares which may be issued to Mr. Lycke upon
conversion of preferred stock, 250,000 shares which Mr. Lycke has the right
to acquire upon exercise of options or warrants, and 581,603 shares of
Common Stock owned of record by National Financial Corporation.
(4) Consists of 100 shares of common stock owned of record by Ms. Davis and
177,243 shares which Ms. Davis has the right to acquire upon exercise of
options or warrants.
(5) Consists of 107,143 shares which Mr. Baird has the right to acquire upon
exercise of options or warrants.
(6) Consists of 9,277 shares of common stock owned of record by Mr. Willems and
12,500 shares which Mr. Willems has the right to acquire upon exercise of
options or warrants.
(7) Common Stock consists of 110,000 shares of common stock owned of record by
Mr. Michel, 50,000 shares which may be issued to Mr. Michel upon conversion
of preferred stock, and 2,500 shares which Mr. Michel has the right to
acquire upon exercise of options or warrants.
(8) Consists of 2,500 shares which Mr. Black has the right to acquire upon
exercise of options or warrants.
(9) Common Stock consists of 615,000 shares which may be issued to Mr. Dubach
upon conversion of preferred stock, and 2,500 shares which Mr. Dubach has
the right to acquire upon exercise of options or warrants.
(10) Consists of 310,751 shares of common stock owned of record by Mr. Brown and
581,603 shares of Common Stock owned of record by National Financial
Corporation.
(11) Common Stock consists of 33,333 shares which may be issued to Hedlund upon
conversion of preferred stock.
(12) Common Stock consists of 342,000 shares of common stock owned of record by
Mr. Schellenberg, 120,000 shares which may be issued to Mr. Schellenberg
upon conversion of preferred stock, and 581,603 shares of Common Stock
owned of record by National Financial Corporation.
58
(13) Common Stock consists of 2,250,000 shares of common stock owned of record
by Elmira United, 1,600,000 shares which may be issued to Elmira United
upon conversion of preferred stock, and 2,250,000 shares which Elmira
United has the right to acquire upon exercise of options or warrants.
(14) Common Stock consists of 620,000 shares which may be issued to New York
Ventures upon conversion of preferred stock.
(15) Includes an aggregate of 321,285 shares which they have a right to acquire
upon exercise of options or warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bo W. Lycke, formerly our Chairman of the Board, President and Chief Executive
Officer, Ward L. Bensen, a former Director, and Robert H. Brown, Jr., a former
Director, are, respectively, the Chairman of the Board, a Director and Senior
Vice President and a Director, and owners, respectively, of 71.1%, 11.2%, and
17.7% of the outstanding capital stock of American Medical Finance.
Messrs. Lycke, Bensen and Brown are owners, respectively, of 71.1%, 11.1, and
17.8 of the outstanding capital stock of National Financial Corporation.
In February, March, April and June 2002, we borrowed an aggregate of $475,000
pursuant to six separate unsecured short-term loan agreements with National
Financial Corp. In February, May, August and September 2002, we fully repaid
principal pursuant to four notes and partially repaid principal on one note in
the aggregate amount of $412,000 plus accrued interest thereon. The unpaid
principal amount of $63,000 plus interest was due on September 30, 2002.
National Financial Corp. agreed to forego repayment at September 30, 2002 and to
amend the terms of the notes to be due on demand. In October and December 2002,
upon the demand of National Financial Corp., we repaid the remaining principal
on one note and partially repaid the remaining note in the aggregate amount of
$45,000 plus accrued interest thereon. The $18,000 principal balance of the
remaining note plus interest, at 9.5% per annum on the unpaid principal, is due
on demand.
In May 2002, we completed the private placement of 3,304 shares of Series D
Preferred Stock to accredited investors at $250 per share for net proceeds of
$826,000. Each share of Series D Preferred Stock has a stated value of $250 per
share, a liquidation preference over holders of common stock, does not accrue
dividends but is entitled to a preference over the common stock on liquidation
of the Company, and is convertible into 1,000 shares of common stock at a stated
value of $0.25 per share at the election of the holder. We have the right to
initiate redemption of the Series D Preferred Stock at the stated value in the
event that the average high and low bid price of our common stock exceeds $.50
for 20 of any 30 consecutive trading days. If we initiate redemption
proceedings, the holders may elect to convert to common shares prior to the
redemption date. Holders of the Series D Preferred Stock have the right to vote
together with the holders of common stock on an as converted basis. The private
placement included 100 shares of Series D Preferred Stock purchased by Mr.
Michel, 565 shares of Series D Preferred Stock purchased by Mr. Dubach, 1,600
shares of Series D Preferred Stock purchased by Elmira United, a 5% stockholder,
and 620 shares of Series D Preferred Stock purchased by New York Venture Corp.,
an entity for which Jeffrey Black, a Director of the Company, was the corporate
secretary. Messrs. Michel and Black were elected Directors of the Company in
February 2002.
In June 2002, we accepted non-revocable equity investments in the aggregate
amount of $50,000 from Messrs. Michel, Dubach, Lycke and Hedlund, four of our
Directors, on terms to be set by a committee of disinterested directors, such
terms to be no more favorable than those which would have been negotiated at
arms length with unaffiliated third parties. Funds received were recorded as a
current liability until the equity investment terms were finalized. In October
2002, based upon the determination of the committee of disinterested directors,
we completed the private placement by issuing to the four Directors an aggregate
of 167 shares of Series E Preferred Stock at the rate of $300 per share. The
Series E Preferred Stock was issued at a stated value of $300 per share. Each
share of Series E Preferred Stock may be converted into 1,000 shares of common
stock at the election of the holder. We have has the right, but not the
obligation, to redeem all or any portion of the Series E Preferred Stock in the
event that the closing sale price of our common stock exceeds $.60 for twenty of
any thirty consecutive trading days. The Series E Preferred Stock does not
accrue dividends but is entitled to a preference over the common stock on
liquidation of the Company. Holders of the Series E Preferred Stock have the
right to vote together with the holders of common stock on an as converted
basis.
In August 2002, we borrowed $50,000 from Mr. Michel. Principal and interest, at
9.5% per annum on the unpaid principal, was due on September 30, 2002. Mr.
Michel agreed to forego repayment at September 30, 2002 and to amend the terms
of the note to be due on demand. We have not repaid the principal amount of the
note or the accrued interest thereon.
59
In August 2002, we borrowed $50,000 from Mr. Schellenberg. Principal and
interest, at 9.5% per annum on the unpaid principal, was due on September 30,
2002. Mr. Schellenberg agreed to forego repayment at September 30, 2002 and to
amend the terms of the note to be due on demand. We have not repaid the
principal amount of the note or the accrued interest thereon.
During 2002, we completed the private placement of 3,675,000 shares of common
stock to accredited investors at $0.20 per share for net proceeds of $735,000.
In connection with the private placement, we also issued warrants to purchase an
aggregate of 3,675,000 shares of common stock. The warrants contain an exercise
price of $0.20 per share and expire between June and December 2007. The private
placement included 1,750,000 shares of common stock plus warrants to acquire an
additional 1,750,000 shares of common stock purchased by Elmira United, a 5%
stockholder.
In January, February and March 2003, we completed the private placement of
950,000 shares of common stock to accredited investors at $0.20 per share for
net proceeds of $190,000 ($189,000 net). In connection with the private
placement, we also issued warrants to purchase an aggregate of 950,000 shares of
common stock. The warrants contain an exercise price of $0.20 per share and
expire December 31, 2007. The private placement included 100,000 shares of
common stock plus warrants to acquire an additional 100,000 shares of common
stock purchased by National Financial Corporation and 500,000 shares of common
stock plus warrants to acquire an additional 500,000 shares of common stock
purchased by Elmira United.
The foregoing transactions and all future transactions between us and our
officers, directors, and 5% stockholders were and will be on terms at least as
favorable to us than as obtainable from unaffiliated third parties and have been
and will be approved by a majority of our independent and disinterested
directors.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90 days prior to this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company that is required to be included in
our periodic SEC filings. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of our evaluation.
60
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed as part of this report:
a) Consolidated Financial Statements: See Index to Consolidated Financial
Statements included herein in Part II, Item 8 of this report.
b) Financial Statement Schedule: See page 45 of this report for Schedule II -
Valuation and Qualifying Accounts. All other schedules for which provision
is made in the applicable accounting regulation of the Securities an
Exchange Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
The following exhibits are filed herewith or are incorporated herein by
reference:
2.1(1) Asset purchase agreement, dated as of March 23, 2000, related to the
acquisition of VHX.
3.1(2) Certificate of Incorporation
3.1(a)(2) Form of Certificate of Amendment to Certificate of Incorporation
3.1(b)(6) Certificate of Designation of Series A Preferred Stock
3.1(c)(6) Certificate of Designation of Series B Preferred Stock
3.1(d)(6) Certificate of Designation of Series C Preferred Stock
3.1(e)(6) Certificate of Designation of Series D Preferred Stock
3.1(f) Certificate of Designation of Series E Preferred Stock
3.2(2) Bylaws, as amended
4.1(2) Form of warrant issued to Cruttenden Roth Inc.
4.2(2) Form of Common Stock Certificate
4.3(a)(6) Forms of Warrant issued to Jeff Baird
4.3(b)(6) Forms of Warrant issued to Patricia Davis
4.3(c)(6) Forms of Warrant issued to Bo W. Lycke
4.3(d)(6) Forms of Warrant issued to Paul W. Miller
4.3(e) Forms of Warrant issued to Don Crosbie
10.1(2) Employment Agreement, dated as of April 8, 1997 between
Claimsnet.com inc. and Bo W. Lycke
10.1(a)(6) Severance Agreement dated April 8, 2002 between Claimsnet.com and Bo
W. Lycke
10.2(2) 1997 Stock Option Plan, as amended through October 19, 2000
10.2(a)(3) Amendment dated October 20, 2000 to 1997 Stock Option Plan
10.3(2) Form of Indemnification Agreement
10.4(2) 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(4) Employment Agreement, dated as of September 17, 1996, between
Claimsnet.com inc. and Terry A. Lee, as amended as of March 26,
1997, April 6, 1998 and June 7, 1999.
10.5(a)(5) Severance Agreement with Mr. Lee
61
10.6(2) Service Agreement, dated August 5, 1997, between American Medical
Finance and Claimsnet.com Inc.
10.7(2) Form of Agreement, dated September 14, 1998, between Claimsnet.com
and BlueCross BlueShield of Louisiana
10.8(2) Form of Non-Employee Director's Plan
10.9(2) Service Agreement, dated November 1998, between Claimsnet.com and
Southern Medical Association.
10.10(4) Development and Services Agreement, dated October 27, 1999, between
Claimsnet.com and McKesson HBOC, Inc.
10.10(a)(3) Agreement, dated April 12, 2001, between Claimsnet.com and McKesson
HBOC, Inc. superseding October 1999 Agreement.
10.11(3) Note dated March 9, 2001 between Claimsnet.com and American Medical
Finance related to $400,000 loan.
10.12 Note dated February 1, 2002 between Claimsnet.com and National
Financial Corporation related to $105,000 loan.
10.13 Note dated February 27, 2002 between Claimsnet.com and National
Financial Corporation related to $100,000 loan.
10.14 Note dated March 12, 2002 between Claimsnet.com and National
Financial Corporation related to $100,000 loan.
10.15 Note dated March 20, 2002 between Claimsnet.com and National
Financial Corporation related to $85,000 loan.
10.16 Note dated April 8, 2002 between Claimsnet.com and National
Financial Corporation related to $25,000 loan.
10.17 Note dated June 6, 2002 between Claimsnet.com and J. R. Schellenberg
related to $50,000 loan.
10.18 Note dated June 6, 2002 between Claimsnet.com and National Financial
Corporation related to $60,000 loan.
10.19 Note dated August 1, 2002 between Claimsnet.com and J. R.
Schellenberg related to $10,000 loan.
10.20 Note dated August 1, 2002 between Claimsnet.com and Thomas Michel
related to $50,000 loan.
10.21(7) Note dated August 20, 2002 between Claimsnet.com and J. D. Stauffer
related to $25,000 loan.
10.22(8) Asset Purchase Agreement dated September 11, 2002 by and between
Claimsnet.com, Inc. and ProxyMed, Inc.
10.23(8) Affiliate and Partner Services and License Agreement dated September
11, 2002, by and between Claimsnet.com, Inc. and ProxyMed, Inc.
10.24(8) Form of Preferred Escrow Agreement by and among Claimsnet.com, Inc.,
ProxyMed, Inc. and DSI Technology Escrow Services, Inc.
16.1(2) Letter from King Griffin & Adamson P.C. as to change in certifying
accountant to Ernst & Young LLP, dated August 16, 1999 and filed on
Form 8K.
16.2(9) Letter from Ernst & Young LLP as to change in certifying accountant
to King Griffin & Adamson P.C., dated February 26, 2003 and filed on
Form 8K.
16.3(10) Letter from King Griffin & Adamson P.C. as to change in certifying
accountant to KBA Group LLP, dated March 14, 2003 and filed on Form
8K.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
62
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-------------------------------------------------------------------------------
(1) Incorporated by reference to the corresponding exhibit filed by the
Registrant with its Current Report on Form 8-K, dated March 23,
2000.
(2) Incorporated by reference to the corresponding exhibit filed by the
Registrant with the registration statement on Form S-1 (Registration
No. 333-36209).
(3) Incorporated by reference to the corresponding exhibit filed by the
Registrant with its Annual Report on Form 10-K for the year ended
December 31, 2000 filed on April 16, 2001 and amended on October 3,
2001.
(4) Incorporated by reference to the corresponding exhibit filed by the
Registrant with its Annual Report on Form 10-K for the year ended
December 31, 1999.
(5) Incorporated by reference to the corresponding exhibit filed by the
Registrant with its Current Report on Form 8-K dated June 28, 2000.
(6) Incorporated by reference to the corresponding exhibit filed by the
Registrant with its Annual Report on Form 10-K for the year ended
December 31, 2001 filed on April 15, 2002.
(7) Incorporated by reference to the corresponding exhibit filed by the
Registrant with its Current Report on Form 8-K dated September 4,
2002.
(8) Incorporated by reference to the corresponding exhibit filed by the
Registrant its Current Report on Form 8-K dated September 17, 2002.
(9) Incorporated by reference to the corresponding exhibit filed by the
Registrant with its Current Report on Form 8-K dated February 26,
2003.
(10) Incorporated by reference to the corresponding exhibit filed by the
Registrant its Current Report on Form 8-K dated March 17, 2002.
63
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2002, 2001, and 2000
(In Thousands)
Charge to Other
Beginning of Charge to Accounts/ End of
Period Operations Adjustments Deductions Period
------------ ---------- --------------- ---------- ---------
Allowance for doubtful accounts
2002 $ 35 $ 9 $ -- $ (11) $ 33
2001 29 19 -- (13) 35
2000 26 27 -- (24) 29
Valuation allowance for deferred
tax assets (1)
2002 $ 14,207 $ 946 $ -- $ -- $ 15,153
2001 12,362 1,845 -- -- 14,207
2000 5,886 6,476 -- -- 12,362
(1) Offset to deferred tax benefit created primarily by net losses.
64
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/ Don Crosbie
-----------------------------
Don Crosbie
President,
Chief Executive Officer,
Class I Director and
Chairman of the Board on
behalf of the Registrant
By: /s/ Paul W. Miller
----------------------------
Paul W. Miller
Chief Operating Officer,
Chief Financial Officer and
Class II Director
By: /s/ Alfred Dubach
-----------------------------
Alfred Dubach
Class I Director and
Vice Chairman of the Board
By: /s/ John C. Willems, III
-----------------------------
John C. Willems, III
Class II Director
By: /s/ Thomas Michel
-----------------------------
Thomas Michel
Class II Director
By: /s/ Jeffrey M. Black
-----------------------------
Jeffrey M. Black
Class I Director
March 31, 2003
65
CERTIFICATION
I, Don Crosbie, certify that:
I have reviewed this annual report on Form 10-K of CLAIMSNET.COM INC.;
(1) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(2) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
(3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by other within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(4) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(5) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Don Crosbie
-----------------------
Don Crosbie
President and Chief Executive Officer
March 31, 2003
66
CERTIFICATION
I, Paul W. Miller, certify that:
I have reviewed this annual report on Form 10-K of CLAIMSNET.COM INC.;
(1) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
(2) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
(3) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by other within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(4) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(5) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Paul W. Miller
------------------------
Paul W. Miller
Chief Operating Officer and Chief Financial Officer
March 31, 2003
67