SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended. . . . . . . . . . . . . . .September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from. . . . . . . . . . . to. . . . . . . . .
Commission file number. . . . . . . . . . . . . . . . . . . . 0-13591
HealthAxis Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, East Norriton, Pennsylvania 19401
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (610) 279-2500
Provident American Corporation
2500 DeKalb Pike, Norristown, Pennsylvania 19401
Former name, former address and former fiscal year, if
changed since last report:
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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 12,944,393 shares of common
stock, par value $.10, outstanding as of November 3, 1999.
Page 1 of 36 Pages
HEALTHAXIS INC.
The Company is amending its Form 10-Q filed on November 15, 1999 to adopt
discontinued operations presentation for the Company's Insurance Operations sold
on November 30, 1999 and other subsequent events as described in Notes K and R
to the financial statements herein.
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4-5
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Cash Flows 7-8
Notes to Condensed Consolidated Financial Statements 9-25
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 26-33
Recent Sales of Unregistered Securities 33-34
Part II. OTHER INFORMATION
Items 1- 5 35
Reports on Form 8-K 35
SIGNATURES 36
Exhibit 11
Exhibit 27
Page 2 of 36 Pages
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except share and per share data)
3 Months Ended September 30, 9 Months Ended September 30,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
Revenue:
Interactive commission and fee revenue $ 84 $ - $ 125 $ -
Interest and other revenue 136 22 240 66
---------- ---------- ---------- ----------
Total revenue 220 22 365 66
Expenses:
Operating and development 2,550 201 4,580 273
Sales and marketing 5,665 814 12,100 1,425
General and administrative 1,637 1,907 3,762 2,402
Amortization of Goodwill 108 - 108 -
Interest expense 304 198 565 470
---------- ---------- ---------- ----------
Total expenses 10,264 3,120 21,115 4,570
---------- ---------- ---------- ----------
Net loss before taxes and minority interest (10,044) (3,098) (20,750) (4,504)
Provision (benefit) for income taxes: - - - -
---------- ---------- ---------- ----------
Net loss before minority interest (10,044) (3,098) (20,750) (4,504)
---------- ---------- ---------- ----------
Minority interest in net loss of subsidiary (463) - (2,188) -
---------- ---------- ---------- ----------
Net loss in continuing operations (9,581) (3,098) (18,562) (4,504)
---------- ---------- ---------- ----------
Net gain (loss) in discontinued operations (13,515) (231) (17,904) 1,503
---------- ---------- ---------- ----------
Net loss (23,096) (3,329) (36,466) (3,001)
---------- ---------- ---------- ----------
Dividends on preferred stock - 37 70 111
---------- ---------- ---------- ----------
Net loss per share of common stock (23,096) (3,366) (36,536) (3,112)
========== ========== ========== ==========
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.77) $ (0.31) $ (1.55) $ (0.46)
Discontinued operations $ (1.08) $ (0.02) $ (1.49) $ 0.15
----------- ----------- ---------- ----------
Continuing and discontinued operations $ (1.85) $ (0.33) $ (3.04) $ (0.31)
=========== =========== ========== ==========
Weighted average common shares and equivalents used in computing loss
per share
Basic 12,462,000 10,169,000 12,021,000 10,131,000
Diluted 12,462,000 10,169,000 12,021,000 10,131,000
See notes to consolidated financial statements.
Page 3 of 36 Pages
HealthAxis Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except preferred and common stock data)
UNAUDITED
September 30, 1999 December 31, 1998
------------------ -----------------
Assets
- ------
Investments:
Securities available for sale $ - $ 31,880
Policy loans - 560
Other invested assets - 529
--------- ---------
Total Investments - 32,969
Cash and cash equivalents 25,924 26,185
Amounts due from third party administrator - 6,849
Premiums due and uncollected - 1,167
Amounts due from reinsurers - 22,222
Loans receivable from officer, director and stockholder - 1,328
Accrued investment income - 420
Prepaid interactive marketing expense 5,658 11,655
Property and equipment, less accumulated depreciation of $3,764 and $3,099 7,720 7,950
Unamortized deferred policy acquisition costs - 2,106
Goodwill, less accumulated amortization of $108 7,673 -
Other assets 1,303 3,838
Subsidiary assets available for sale 76,970 -
--------- ---------
Total Assets $ 125,248 $ 116,689
========= =========
Continued on next page.
See notes to consolidated financial statements.
Page 4 of 36 Pages
HealthAxis Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(Dollars in thousands, except preferred and common stock data)
UNAUDITED
September 30, 1999 December 31, 1998
------------------ -----------------
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Future policy benefits:
Life $ - $ 42,546
Annuity and other - 4,871
Policy claims - 42,481
Premiums received in advance and unearned - 335
Amounts due to reinsurers - 501
Accounts payable 1,171 2,107
Amounts due to PILIC upon sale 7,425
Accrued commissions and expenses 2,393 2,384
Loans payable - 3,865
Convertible Debenture 24,528 -
Federal income taxes 585 1,222
Ceding commission liability 5,450 5,000
Deferred Loss on the sale of PILIC 8,400 -
Other liabilities 1,406 1,945
Subsidiary liabilities available for sale 76,970 -
--------- ---------
Total Liabilities 128,328 107,257
Commitments and Contingencies:
Minority Interest in HealthAxis.com, Inc.:
Minority interest in HealthAxis.com, Inc. common stock - 1,132
HealthAxis.com, Inc. preferred stock - Cumulative preferred stock, par value $1:
authorized 5,000,000 shares:
Series B, issued 625,529 2,805 2,805
Series C, issued 1,526,412 and 0 7,845 -
Series D, issued 333,334 and 0 3,960 -
Stockholders' Equity:
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A Cumulative convertible, issued 0 and 556,600 - 557
Series B Cumulative convertible, none issued - -
Common stock, par value $.10: authorized 50,000,000, issued 12,944,393 and
11,488,911 1,294 1,149
Common stock, Class A, par value $.10: authorized 20,000,000, none issued - -
Additional paid-in capital 41,392 27,002
Accumulated other comprehensive income 39 666
Retained deficit (60,415) (23,879)
--------- ---------
Total Stockholders' Equity (17,690) 5,495
--------- ---------
Total Liabilities and Stockholders' Equity $ 125,248 $ 116,689
========= =========
See notes to condensed financial statements.
Page 5 of 36 Pages
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands)
Additional
Preferred Stock Common Stock Paid-In Retained
Shares Amount Shares Amount Capital (Deficit)
------ ------ ------ ------ ---------- ---------
BALANCE, DECEMBER 31, 1998 557 $ 557 11,489 $ 1,149 $ 27,002 $ (23,879)
Comprehensive income:
Net income (loss) (36,466)
Other comprehensive income (loss)
Comprehensive income
Issuance of common stock 25 2 267
Stock options and warrants exercised 873 87 5,589
Increase in net assets in HealthAxis.com, Inc. 5,669
Warrants issued 2,364
Conversion of Preferred Stock (557) (557) 557 56 501
Cash dividends declared on preferred stock (70)
----- ----- ------ ------- -------- ---------
BALANCE, SEPTEMBER 30, 1999 0 $ 0 12,944 $ 1,294 $ 41,392 $ (60,415)
===== ===== ====== ======= ======== ==========
[RESTUB]
Accumulated
Other
Comprehensive
Income (Loss) Total
------------- -------
BALANCE, DECEMBER 31, 1998 $ 666 $ 5,495
Comprehensive income:
Net income (loss) (36,466)
Other comprehensive income (loss) (627) (627)
--------
Comprehensive income (37,093)
--------
Issuance of common stock 269
Stock options and warrants exercised 5,676
Increase in net assets in HealthAxis.com, Inc. 5,669
Warrants issued 2,364
Conversion of Preferred Stock 0
Cash dividends declared on preferred stock (70)
----- --------
BALANCE, SEPTEMBER 30, 1999 $ 39 $(17,690)
===== ========
See notes to consolidated financial statements.
Page 6 of 36 Pages
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
9 Months Ended September 30,
1999 1998
-------------- -------------
Cash flows from operating activities
Net loss $ (36,466) $ (3,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred loss on the sale of PILIC 8,400 -
Depreciation and amortization 10,305 693
Net realized (gain) on sale of subsidiary (1,500) (264)
Minority interest in net loss (2,188) (4,000)
Shares issued for services 269 -
Deferred income taxes (35) -
Write off of deferred policy acquisition costs 2,106 -
Write off of property and equipment 1,159 -
Decrease (increase) in:
Premium due and uncollected, unearned
Premium and premium received in advance (67) (1,030)
Prepaid interactive marketing expense (3,239) -
Due to/from reinsurers (12,727) 437
Due from third party administrator 6,849 (7,220)
Deferred policy acquisition costs, net - (3,144)
Accrued investment income 191 116
Other assets, current and deferred income
Taxes and other liabilities 978 (2,933)
Accrued interest income and expense 450 (1,018)
Future policy benefits and claims (13,126) 2,091
--------- --------
Net cash used in operating activities (38,641) (19,272)
--------- --------
Cash flows from investing activities
Purchases of bonds - (2,674)
Purchases of equity securities - (85)
Sale of bonds 6,542 5,943
Sale of subsidiary - 4,000
Sale of investment in real estate - 1,154
Maturity of investments and loans 43 27
Loans to officer, director and shareholder 1,328 (63)
Purchases of property and equipment (1,826) (1,747)
--------- --------
Net cash provided by investing activities 6,087 6,555
--------- --------
Continued on next page.
See notes to consolidated financial statements.
Page 7 of 36 Pages
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
9 Months Ended September 30,
1999 1998
-------------- -------------
Cash flows from financing activities
Withdrawals from contractholder deposit funds (400) (589)
Repayments of loans payable (1,465) (1,447)
Purchase of HealthAxis stock (8,203) -
Issuance of convertible debenture 27,500 -
Costs related to issuance of convertible debenture (655) -
Issuance of common stock - 92
Issuance of convertible note - 5,000
Issuance of HealthAxis common stock 6,191 -
Issuance of HealthAxis preferred stock 12,083 -
Exercise of stock options 5,550 -
Dividends paid on preferred and common stock (70) (111)
-------- --------
Net cash from financing activities 40,531 2,945
-------- --------
Increase (decrease) in cash and cash equivalents 7,977 (9,772)
Cash and cash equivalents, beginning of period 26,185 16,767
-------- --------
Cash and cash equivalents, end of period $ 34,162 $ 6,995
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 455 $ 127
Non-cash investing activities
Sale of subsidiaries $ (9,476) -
Capital lease obligations $ 154 -
Income taxes (refunded), net $ (5,218)
Non-cash financing activities:
Issuance of warrants $ 3,230 $ 1,135
Exercise of options and warrants $ 900 -
Repayment of loans payable $ (2,400) -
Conversion of Preferred Stock to Common Stock $ 557 -
Issuance of HealthAxis.com, Inc. common stock - $ 5,107
See notes to consolidated financial statements.
Page 8 of 36 Pages
HealthAxis Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands)
Note A - General
The condensed consolidated financial statements have been prepared by
HealthAxis Inc. (formerly Provident American Corporation) and subsidiaries (the
"Company" or "HAI") without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments which, in the
opinion of the Company, are necessary to present fairly results for the interim
periods. Certain financial information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the accompanying disclosures are
adequate to make the information presented not misleading. Results of operations
for the nine-month period ended September 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K/A for the year ended December 31, 1998.
HealthAxis Inc. ("HAI") is a Pennsylvania corporation organized in 1982
and regulated as an insurance holding company by the states in which its wholly
owned insurance company, Provident Indemnity Life Insurance Company ("PILIC"),
is licensed. The operations of the Company are principally those of its
majority-owned subsidiary HealthAxis.com, Inc. ("HealthAxis") and its Insurance
Operations as defined herein.
HealthAxis was formed on March 26, 1998 to sell insurance products on
the Internet. HealthAxis is a subsidiary of HAI, which as of September 30, 1999
owned 79.8% of HealthAxis' capital stock. HAI and HealthAxis were in the process
of negotiating the terms of a merger whereby HealthAxis would be merged with and
into HealthAxis Acquisition Corp., a wholly-owned subsidiary of Provident, and
HAI would be the surviving publicly-traded company, with HealthAxis being a
wholly owned subsidiary. On October 28, 1999 HealthAxis announced that
discussions relating to the upstream merger with its parent have been put on
hold pending the outcome of discussions with an undisclosed third party
regarding a potential business combination. On December 7, 1999 HealthAxis
announced that HealthAxis and Insurdata Incorporated, a subsidiary of UICI
("UICI") (NYSE: UCI) had signed a definitive agreement to merge the two
companies and in a separate announcement HAI announced plans to move forward
with its original plan to merge with HealthAxis. On January 26, 2000, HAI and
HealthAxis entered into an Agreement and Plan of Reorganization and Agreement
and Plan of Merger pursuant to which the Company will acquire all of the
outstanding shares of HealthAxis it does not currently own through the merger of
HealthAxis with a wholly-owned subsidiary of the Company. Upon consummation of
the reorganization transactions, HealthAxis shareholders will receive 1.127
shares of the Company's common stock for each share of HealthAxis common stock
outstanding. See Note R.
Page 9 of 36 Pages
The Company's Insurance Operations were conducted through its wholly
owned life insurance subsidiary PILIC and PILIC's subsidiaries which during 1996
through 1998 were Provident American Life and Health Insurance Company
("PALHIC"), Montgomery Management Corporation ("MMC") and NIA Corporation
("NIA"). Hereinafter PILIC and all of its subsidiaries are referred to as the
Company's Insurance Operations. During 1998, the Company sold 80% of MMC's
outstanding common stock and on December 31, 1998 sold 100% of the outstanding
common stock of PALHIC and NIA. During the first quarter of 1999 the Company
sold the remaining 20% of MMC's common stock. As described in Note K, the
Company entered into a definitive agreement to sell PILIC which was sold on
November 30, 1999.
Certain prior year amounts have been reclassified to conform with the
current presentation. The results of operations of PILIC and the Insurance
Operations are reported as discontinued operations.
Note B - Losses and Uncertainties
The Company has incurred costs to develop and enhance its technology,
to create and introduce its website and to establish marketing, insurance
carrier and claims administration relationships. As a result, the Company has
incurred significant losses and expects to continue to incur losses on a
quarterly and annual basis at least through the next 18 months. The Company
currently intends to substantially increase its operating expenses as a result
of its strategic alliances, to fund increased interactive sales and marketing,
to enhance its existing web site and to fund increased salaries and other costs.
Consequently, the Company expects negative cash flow from operations to continue
for the foreseeable future as it continues to develop and market its
Internet-based health and life insurance business.
During 1999, HealthAxis completed a private offering of approximately
$8,800 of HealthAxis Series C Preferred Stock on March 30, 1999 (described in
Note H), approximately $6,200 of HealthAxis Common Stock (described in Note F)
on May 11, 1999, and approximately $4,000 of HealthAxis Series D Preferred Stock
(described in Note I) on July 12, 1999. On December 7, 1999 HealthAxis completed
a private placement which provided approximately $55 million of cash as
described in Note R. The net proceeds have been used to and are anticipated to
be used to fund amounts due under HealthAxis' distribution agreements with
America Online, Inc. ("AOL"), Lycos, Inc. ("Lycos"), CNet, Inc. ("CNet") and
Snap! LLC ("Snap") and an Advertising Agreement with Yahoo! through the end of
fiscal 1999 with the balance intended to be used by HealthAxis for its working
capital and other general purposes. See Note D - Prepaid Interactive Marketing
Expense. The Company believes that the above net proceeds together with its
current cash and cash equivalents will be sufficient to fund HealthAxis' current
operations through first quarter of 2001. However, subsequent equity or debt
financings will be necessary to enable the Company to fund amounts due to AOL in
the event that HealthAxis elects to exercise its option to renew its agreement
with AOL, payments to Lycos, CNet and Snap, future operations and continue to
implement its current business strategies.
Page 10 of 36 Pages
On September 15, 1999 the Company issued 2% Convertible Debentures
("Debentures") in the amount of $27,500 as described in Note J. The net proceeds
have been used and are anticipated to be used for working capital and other
general corporate purposes, including approximately $8,203 to purchase
HealthAxis Common Stock as described in Note F, $14,700 to sell the Insurance
Operations and retain the Company's home office and 445,916 shares of HealthAxis
Series A Preferred Stock as described in Note K, thereby completing the
Company's transition from insurance underwriter to an internet insurance agency,
and $2,000 to purchase 133,333 shares of HealthAxis common stock as described in
Note R.
Note C - Changes in Web Alliances
On April 14, 1999, the Company and CNet amended the Promotion Agreement
dated June 14, 1998, as amended on November 13, 1998 (the "Amended Agreement")
to, among other things, revise the current payment schedule, to remove Snap as a
party to the agreement and enter into a separate agreement with Snap, as CNet
and Snap are now separate entities. The Amended Agreement and the Snap Agreement
extends the termination date of the initial term of the agreement to August 31,
2000; allocates the total number of monthly impressions between Snap and CNet;
provides CNet and Snap with the ability to immediately terminate the Amended
Agreement and Snap Agreement for nonpayment of fees due or to charge interest on
all unpaid amounts at a rate of 1-1/2% per month; revises the exclusivity
provisions of the Snap Agreement; and revises the payment schedule applicable to
the optional term.
Note D - Prepaid Interactive Marketing Expense
During 1999, HealthAxis made payments aggregating $3,620 to AOL, Lycos,
CNet, Snap and Yahoo!, $3,370 of which have been charged, to prepaid interactive
marketing expense and $250 of which reduced accrued expenses. Included in Sales
and marketing expense is amortization of prepaid interactive marketing expense
of $9,367 consisting of exclusivity expense and impression advertising of $2,390
and $6,977, respectively for 1999.
Note E - HealthAxis Warrants Issued and Commitments in Connection with Alliance
Agreements
During 1999, in connection with its amended Carrier Partner agreement
with UICI, HealthAxis agreed to issue UICI a warrant to purchase 150,000 shares
of HealthAxis Common Stock at an exercise price of $4.40 per share with a
five-year term. This warrant has been valued at $505, recorded as prepaid
alliance agreement expense included in other assets and will be expensed over
the life of the agreement beginning July 1, 1999. In the event AOL exercises its
redemption rights set forth in the Certificate of Designation related to the
Series B Preferred Stock, UICI shall receive a warrant to purchase an additional
200,000 shares of HealthAxis' Common Stock at an exercise price of $3.00 per
share.
In May 1999, HealthAxis entered into a Strategic Alliance Agreement
with First Health Group Corp. ("First Health"). In conjunction with this
agreement, HealthAxis issued a warrant to First Health for 50,000 shares of
HealthAxis Common Stock at $20.00 per share with a three-year term. Of that
amount, warrants to purchase 10,000 shares are immediately exercisable, have
been valued at $84 and recorded as prepaid alliance agreement expense included
in other assets. The remaining warrants become exercisable at the rate of 10,000
warrants upon the signing of each sub-client agreement with each carrier, until
the fourth carrier is signed. In addition, if the average daily closing price of
HealthAxis' Common Stock is $50.00 per share for a period of 60 consecutive
calendar days and if no sub-client agreement has been executed, 10,000 shares
subject to this warrant which are not exercisable shall become exercisable in
full.
Page 11 of 36 Pages
In July 1999, HealthAxis issued a warrant for 75,000 shares of
HealthAxis Series D Preferred Stock at $14.50 per share with a five-year term.
Half of these warrants become exercisable in January 2000, with the remaining
warrants becoming exercisable in July 2000.
HealthAxis has entered into an Interactive Marketing Agreement with AOL
and promotional agreements with CNet, Snap and Lycos. In connection with these
agreements HealthAxis has paid $15.5 million in cash and warrants as of
September 30, 1999 and is required to pay additional amounts as described in
Notes D, E, F and O to the Company's Consolidated Financial Statements for the
period ended December 31, 1998.
In August 1999, HealthAxis entered into an Advertising Agreement with
Yahoo! for a campaign which began in September 1999 and ends on January 31st
2000. In connection with this agreement, the Company has paid, and recorded as
prepaid marketing expense, $150 as of September 30, 1999 and is required to pay
an additional $575 at a rate of $125 a month, with $75 due in January 2000.
Note F - Goodwill and Minority Interest in HealthAxis.com, Inc.
The Company has accounted for the portion of HealthAxis owned by
outside parties as Minority Interest in HealthAxis. The chart below identifies
the equity ownership of HealthAxis Common Stock and quantifies the Company's
majority interest and the minority interest in HealthAxis Common Stock.
September 30, 1999 December 31, 1998
------------------ -----------------
Shares Percentage Shares Percentage
------ ---------- ------ ----------
HAI 15,222,395 90.9% 13,807,395 85.4%
Minority Interest 1,516,416 9.1% 2,365,365 14.6%
---------- ------ ---------- ------
Total 16,738,811 100.0% 16,172,760 100.0%
========== ====== ========== ======
The aforementioned outstanding shares of HealthAxis Common Stock
exclude options and warrants to purchase HealthAxis Common Stock and HealthAxis
convertible preferred stock convertible into HealthAxis Common Stock. The
aforementioned also excludes the transactions described in Note R - Subsequent
Events.
On May 11, 1999, HealthAxis completed a private placement of 516,051
shares of HealthAxis Common Stock to a group of accredited investors at $12 per
share for an aggregate purchase price of $6,193, less issuance costs of $2. The
net proceeds of $6,191, have been used by HealthAxis for working capital and
other general corporate purposes, including marketing expenses, web site
enhancements, salary expenses and advertising and promotional expenses.
Investors purchasing HealthAxis Common Stock were provided with registration
rights described in the Company's Form 8-K filed on May 14, 1999.
Page 12 of 36 Pages
On May 13, 1999, HAI entered into a Stock Purchase Agreement for the
purchase of 1,415,000 shares of HealthAxis Common Stock from HealthPlan Services
Inc. ("HPS") for $7,040 to close on or before June 30, 1999. HAI did not close
on or before June 30, 1999 and paid HPS a late fee of $100 to extend closing
until July 30, 1999. If the closing did not occur by July 30, 1999, the Stock
Purchase Agreement provided that the purchase price per share would increase by
8-1/2% per-month until closing, which closing was required to occur on or before
November 1, 1999. HAI completed the purchase of these shares in November 1999
and will pay an aggregate of $8,203 for such shares (including late fees). The
Company has accounted for the purchase of the minority interest in accordance
with Accounting Principles Board Opinion 16 ("APB"), "Business Combinations". As
a result, $7,781 has been recorded as goodwill to be amortized over 3 years.
The Company has accounted for the 545,916 shares of HealthAxis
cumulative preferred stock, par value $1 Series A ("Series A Preferred Stock")
purchased by PILIC in 1998 for an aggregate consideration of $2,400, or $4.40
per share, as an investment in HealthAxis. The Series A Preferred Stock is
convertible into HealthAxis Common Stock on a one for one basis, subject to
adjustment. Each share of Series A Preferred Stock has the same voting rights as
a share of HealthAxis Common Stock into which it is convertible and has certain
preferences with respect to the payment of dividends and upon liquidation over
HealthAxis Common Stock. As described in Note K, 100,000 shares of HealthAxis
Series A Preferred Stock were transferred to AHC on November 30, 1999 in
connection with the sale of PILIC and will be accounted for as minority interest
subsequent to the transfer.
The Company has also accounted for the net proceeds of HealthAxis
cumulative preferred stock, par value $1 Series B ("HealthAxis Series B
Preferred Stock") as described in Note G, Series C ("HealthAxis Series C
Preferred Stock") as described in Note H and Series D ("HealthAxis Series D
Preferred Stock") as described in Note I as minority interest.
Note G - HealthAxis.com, Inc. Series B Cumulative Convertible Preferred Stock
During 1998, HealthAxis issued 625,529 shares of HealthAxis Series B
Preferred Stock to AOL at $4.40 per share for an aggregate purchase price of
$2,750, less issuance costs amounting to $51, of which a portion of such net
proceeds was used to pay amounts due to AOL under the Interactive Marketing
Agreement. The terms of the HealthAxis Series B Preferred Stock are described in
the Company's Form 8-K filed on December 23, 1998.
Dividends. As of September 30, 1999, HealthAxis accrued $105 of unpaid
dividends on Series B Preferred Stock. Prior to March 30, 1999, holders of the
Series B Preferred Stock were entitled to cumulative dividends accruing from the
date of issuance, as and if declared by the HealthAxis board of directors out of
funds legally available therefor, at the annual rate of $.13 per share (subject
to equitable adjustment to reflect stock splits, stock dividends, stock
combinations, recapitalizations and similar occurrences).
Page 13 of 36 Pages
Optional Redemption. Holders of the HealthAxis Series B Preferred Stock
have the option, exercisable upon request of the holders of 51% of the
outstanding shares of HealthAxis Series B Preferred Stock within six months
after the later of the occurrence of a Trigger Event (as defined below) or
notice of a Trigger Event, to cause HealthAxis to redeem any or all of the
shares of HealthAxis Series B Preferred Stock requested to be redeemed, at a
redemption price per share equal to the original issuance price (subject to
adjustment to reflect stock splits, stock dividends, stock contributions,
recapitalizations and similar occurrences) plus an amount that would yield a
total annualized return of 10% calculated daily and compounded annually from the
later of either the original issuance date or the date on which the holder
acquired the shares of HealthAxis Series B Preferred Stock through the date of
redemption. Notice of the exercise of the optional redemption rights with
respect to the HealthAxis Series B Preferred Stock must be given to HealthAxis
pursuant to the notice of optional redemption provision contained in the
Certificate of Designation related to the HealthAxis Series B Preferred Stock.
A "Trigger Event" means: (i) January 31, 2002, if by that date,
HealthAxis has not consummated an underwritten public offering of newly issued
HealthAxis Common Stock pursuant to a registration statement filed under the
Securities Act, at a net offering price per share of HealthAxis Common Stock
that represents a pre-offering market capitalization of not less than $150,000
and with aggregate proceeds of not less than $25,000, (ii) failure to renew by
HealthAxis or a material breach by any party other than AOL or termination of
the IM Agreement with AOL, (iii)the date of the occurrence of a liquidation of
HealthAxis, (iv) March 31, 1999, if by that date, HealthAxis has not consummated
an equity financing yielding aggregate gross proceeds to HealthAxis of not less
than $7,000 at a price per share of at least $3.74 (a "Qualified Financing"), or
(v) May 31, 1999, if by that date, HealthAxis has not consummated an equity
financing yielding aggregate gross proceeds to HealthAxis of not less than
$3,500 at a price per share of at least $3.74 (a "Second Qualified Financing").
As described in Note H, HealthAxis completed an equity financing in the amount
of $8,807 as of March 30, 1999 and as described in Note F HealthAxis completed
an equity financing in the amount of $6,193 on May 11, 1999.
Note H - HealthAxis.com, Inc. Series C Cumulative Convertible Preferred Stock
On March 30, 1999, HealthAxis issued 1,526,412 shares of HealthAxis
Series C Preferred Stock to a group of accredited investors at $5.77 per share
for an aggregate purchase price of $8,807, less issuance costs of $684 and the
value of warrants to purchase HealthAxis common stock issued in connection with
the issuance of HealthAxis Series C Preferred Stock to certain professional
service firms valued at $278. The net proceeds of $8,123 were used for working
capital and other general corporate purposes, including marketing expenses, web
site enhancements, salary expenses and advertising and promotional expenses of
HealthAxis.
The terms of the HealthAxis Series C Preferred Stock are described in
the Company's Form 8-K filed on April 30, 1999.
Page 14 of 36 Pages
Note I - HealthAxis.com, Inc. Series D Cumulative Convertible Preferred Stock
On July 12, 1999, HealthAxis issued 333,334 shares of HealthAxis Series
D Preferred Stock to Intel Corp at $12 per share for an aggregate purchase price
of $4,000, less issuance costs of $40. The net proceeds of approximately $3,960
were used for working capital and other general corporate purposes, including
marketing expenses, web site enhancements, salary expenses and advertising and
promotional expenses of HealthAxis.
In connection with the HealthAxis Series D Offering, HealthAxis'
Amended and Restated Articles of Incorporation were amended to authorize an
additional 500,000 shares of HealthAxis Preferred Stock.
The terms of the HealthAxis Series D Preferred Stock are described in
the Company's Form 8-K filed July 26, 1999.
Note J - Convertible Debentures
On September 15, 1999 the Company issued 2% Convertible Debentures
("Debentures") in the amount of $27,500 due September 14, 2002. The Debentures
bear interest at the rate of 2% per annum, payable in cash or equivalent value
of the Company's Common Stock, semi annually on January 1 and July 1 (the
"Interest Payment Date") of each year, beginning on January 1, 2000. Accrued,
unpaid and past due amounts bear interest at the rate of 15% per annum (the
"Default Rate"). Except with respect to overdue interest it is assumed that the
Company will make all payments of interest in Common Stock, unless the Company
notifies the holder in writing otherwise. The Debentures are convertible into
the Company's Common Stock at a conversion price of $20.34 per share (the
"Conversion Price"), which represented a 15% premium over the average of the
closing price of $18.00 per share on September 13, 1999 and $17.375 per share on
September 14, 1999. As part of the Transaction, the Company issued to the
Purchasers warrants to purchase 202,802 shares of its Common Stock at an
exercise price equal to the Conversion Price ($20.34 per share) (the
"Warrants"). The Warrants have a term of five years, were valued at $2,317 and
have been accounted for as a cost of issuing the Debentures. The cost of issuing
the Debentures of $3,052 consisted of the value of the Warrants and other costs,
which will be amortized over the anticipated life of the Debentures as interest
expense.
In a separate but related transaction Alvin H. Clemens, Chairman of the
Company, among other things, has assigned to the Company options to purchase
202,802 shares of Common Stock. The net result of this assignment is that the
number of Warrants issued to the purchasers of the Debentures is equal to the
number of options retired by Mr. Clemens. Reference is made to Note N herein.
Page 15 of 36 Pages
The securities issued pursuant to this transaction are exempt from the
registration requirements of the Securities Exchange Act of 1933 (the
"Securities Act"), as provided under Rule 506 and under Section 4(2) of the
Securities Act. As part of the transaction the Company executed a Registration
Rights Agreement. The Company is required to file a Form S-3 Registration
Statement to cover all Registrable Securities as defined in the registration
rights agreement to be made on a continuous basis pursuant to a "Shelf"
registration statement under Rule 415 of the Securities Act. Subject to certain
limitations the registration statement is to remain effective until four years
from the date the registration statement is declared effective by the Securities
and Exchange Commission. There is also a one time Underwritten Registration
obligation. If at any time the Registrable Securities are not covered by an
effective registration statement, and the Company files a registration statement
relating to an offering of its equity securities, the Company is required to
notify the holders of Registrable Securities of the filing and will use
reasonable efforts to effect piggy-back registration of the Registrable
Securities requested to be registered by the holder, subject to certain existing
piggy-back rights. In the event the Company does not fulfill obligations under
this agreement, it is subject to certain financial penalties.
The terms of the transaction are described in the Company's Form 8-K
filed on September 22, 1999.
Note K - Sale of PILIC to AHC Acquisition Corporation
On August 16, 1999 the Company entered into a definitive agreement (the
"Stock Purchase Agreement") to sell its insurance subsidiary, PILIC, to
Provident's Chairman, Alvin H. Clemens. Under the terms of the Stock Purchase
Agreement, the Company sold all of the issued and outstanding shares of the
common stock of PILIC to AHC Acquisition, Inc. ("AHC"), a newly formed
Pennsylvania business corporation, all of the stock of which is owned by Mr.
Clemens. The First Amendment to Stock Purchase Agreement, executed on October
27, 1999, removed the requirement for the Company's shareholders to approve the
transaction. The sale of PILIC was completed on November 30, 1999 in accordance
with the terms of the Stock Purchase Agreement and the First Amendment to the
Stock Purchase Agreement.
The Board of Directors of the Company received a fairness opinion of
Advest, Inc., a subsidiary of The Advest Group, Inc., dated October 20, 1999
(the "Fairness Opinion"). The Fairness Opinion cites the financial terms of the
transaction, and notes that the PILIC shares to be purchased by AHC will
continue to be subject to the Stock Pledge Agreement dated December 29, 1998 by
the Company in favor of Reassurance Company of Hannover. The Fairness Opinion
further discusses the information which was reviewed in arriving at the Fairness
Opinion, which includes a number of agreements between the Company and other
persons, and various reports made by the Company on Forms 10-K and 10-Q for the
calendar years 1997, 1998 and for the period ending June 30, 1999, together with
statutory financial statements and related footnotes of PILIC for the years
ended December 31, 1996, 1997, 1998, and the quarterly statement as of June 30,
1999. The Fairness Opinion concludes that the financial terms of the transaction
are fair, from a financial point of view, to the Company and its shareholders.
Page 16 of 36 Pages
On November 30, 1999 in accordance with the terms of the Stock Purchase
Agreement the Company purchased PILIC's home office building for $4.7 million
and the Company purchased 545,916 shares of HealthAxis Stock at a purchase price
equal to $4.71 per share plus interest at the rate of 8% per annum thereon from
the date of acquisition of such shares by PILIC through November 30, 1999
together with a capital contribution from the Company to PILIC. Also in
accordance with the terms of the Stock Purchase Agreement the Company
transferred on November 30, 1999 100,000 shares of the HealthAxis Stock to AHC
together with registration rights previously granted to PILIC. Further in
accordance with the terms of the Stock Purchase Agreement the Company assumed
all of PILIC's employees and related employee obligations. The Stock Purchase
Agreement provides that any cost associated with the termination of certain
executives along with certain taxes incurred by PILIC prior to the effective
date in connection with any of the transactions contemplated in the Stock
Purchase Agreement shall be borne by the Company.
In accordance with the terms of the Stock Purchase Agreement the
Company entered into an employee and facility leasing arrangement with PILIC
whereby PILIC will reimburse the Company for the Company's out of pocket
employee costs related to services provided on PILIC's behalf. The employee and
facility leasing arrangement further requires the Company to lease to PILIC
office space, furniture and equipment for a period of up to one year at no cost.
The employee and facility leasing arrangement was executed on November 30, 1999.
The Stock Purchase Agreement includes various warranties,
representations, covenants and conditions, including but not limited to certain
non-compete and non-solicitation agreements with AHC regarding the future sale
of health insurance products for a three-year period commencing on December 31,
1998 by licensed insurance agents of PILIC. Notwithstanding the foregoing,
HealthAxis, and its affiliates (as defined therein) may freely solicit the sale
of and distribute health and all other types of insurance products on behalf of
any person or entity through Internet websites, or other means of electronic
commerce, including but not limited to, sales of such products on behalf of
PILIC or AHC pursuant to the Individual Medical Products Carrier Partner
Agreement among PALHIC, and HealthAxis dated December 29, 1998 and the Carrier
Partner Agreement among PALHIC and HealthAxis dated December 14, 1998.
On November 15, 1999 the Commonwealth of Pennsylvania's Department of
Insurance (`the Department") approved HAI's sale of PILIC to AHC. The
Department's approval was contingent upon the following conditions: (1) AHC
shall provide copies of the closing documents within five business days of the
closing, (2) AHC or PILIC shall provide an accounting for reinsurance relative
to the preneed, final expense and other life insurance business of PILIC within
five days after the consummation of agreements for the reinsurance, and (3)
PILIC shall settle all inter-company receivable and payable balances with the
Company within thirty days from closing. On November 19, 1999 the Pennsylvania
Department of Insurance approved HAI's capital contribution to PILIC as required
under the Stock Purchase Agreement.
Page 17 of 36 Pages
With the completion of the closing, the Company has no liability with
respect to PILIC's ongoing insurance business, capital and surplus, and business
operations, except for the liability of the Company and its successors under the
Company Guaranty Agreement with the Reassurance Company of Hannover ("RCH"), the
Stock Pledge Agreement with RCH, the Provident American Life and Health
Insurance Company ("PALHIC") Purchase Agreement together with the ceding
commission liability recorded on the Company's books in connection with
agreements with RCH and the Company's obligation to lease to PILIC office space,
furniture and equipment.
The results of operations of the Insurance Operations are reported as
discontinued operations. The Company has recorded a loss on the sale of
subsidiary of $7,343 in connection with the sale of PILIC which includes a
write-off of unamortized deferred policy acquisition costs, property and
equipment, net of accumulated depreciation and certain other assets in the
amount of $1,128 together with a deferred loss on the sale of PILIC liability
from the sale of PILIC representing HAI's November 30, 1999 capital contribution
to PILIC and the value of the Series A Preferred Stock transferred to AHC.
Page 18 of 36 Pages
Anticipated losses resulting from PILIC's Insurance Operations for the
period October 1, 1999 through November 30, 1999 have been accrued. The
Company's realized loss on the sale of PILIC will be adjusted to compensate for
any difference in PILIC's actual operating results for the period October 1,
1999 through November 30, 1999.
The results of discontinued operations follows:
3 Months Ended September 30, 9 Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
Premium, net of reinsurance $ 1,958 $ 17,310 $ 6,012 $ 52,870
Net investment income 527 925 2,036 2,787
Realized gains (losses) on investments - 251 (65) 264
Gain on the sale of subsidiary - - 1,500 4,000
Other revenue 92 3 568 24
------- --------- --------- ---------
Total revenue 2,577 18,489 10,051 59,945
------- --------- --------- --------
Benefits and expenses:
Death and other policy benefits:
Life 1,181 948 3,911 3,433
Accident and health, net of reinsurance 1,365 9,640 3,937 31,517
Annuity contracts and other considerations 225 188 323 359
Increase (decrease) in liability for future policy benefits (40) 714 259 190
Commissions, net of ceding allowance and deferred acquisition costs 560 1,821 1,264 7,145
Other operating expenses, net of ceding allowance
And deferred acquisition costs 3,278 5,730 8,280 15,520
Accrued loss from discontinued operations for the period
October 1, 1999 through November 30, 1999 2,185 - 2,185 -
Amortization of deferred policy acquisition costs - 608 252 1,148
Interest Expense (8) 23 180 79
------- --------- --------- ---------
Total benefits and expenses 8,746 19,672 20,591 59,391
------- --------- --------- ---------
Income (loss) before taxes and minority interest (6,169) (1,183) (10,054) (554)
Provision (benefit) for income taxes:
Current 3 (952) 21 (949)
Deferred - - - -
------- --------- --------- ---------
Total income taxes 3 (952) 21 (949)
------- --------- --------- ---------
Net gain (loss) in discontinued operations (6,172) (231) (10,033) (1,503)
Page 19 of 36 Pages
The following table list assets and liabilities available for sale:
UNAUDITED
Assets Sept. 30, 1999
- ------ --------------
Investments:
Securities available for sale $ 24,136
Policy loans 558
Other invested assets 488
--------
Total Investments 25,182
Cash and cash equivalents 8,238
Accounts receivable from parent 7,425
Premiums due and uncollected 899
Amounts due from reinsurers 34,448
Accrued investment income 229
Other assets 549
--------
Total Assets $ 76,970
========
UNAUDITED
Sept. 30, 1999
--------------
Liabilities:
Future policy benefits:
Life $ 43,165
Annuity and other 4,273
Policy claims 28,934
Other liabilities 598
--------
Total Liabilities $ 76,970
========
Also see Note R.
Note L - Ceding Commission Liability
Effective December 31, 1998, the Company and PILIC signed an agreement
to reinsure 100% of its group medical and group life inforce business and sell
the Company's group medical marketing, sales distribution rights and all of the
outstanding capital stock of PALHIC to Central Reserve Life Insurance Company
("CRLC") (the "CRLC Agreement").
Under the CRLC Agreement, PALHIC reinsured 100% of its business to
PILIC, which in turn reinsured through a 100% coinsurance agreement, all of the
Company's group medical and group life business to RCH. In addition, PILIC sold
all of the outstanding shares of PALHIC and NIA to CRLC for an amount equal to
PALHIC's capital and surplus. The Company transferred all rights and control
regarding the Company's licensed insurance agents and entered into a non-compete
and non-solicitation agreements with CRLC regarding the Company's licensed
insurance agents with respect to the future sale of health insurance products
for a three year period.
Page 20 of 36 Pages
Effective December 31, 1998, PILIC entered into a coinsurance agreement
with RCH whereby PILIC received a $10,000 ceding commission which consisted of a
$5,000 non-refundable payment and a $5,000 payment contingent upon RCH's earning
at least $10,000 in future profits from the ceded inforce business, plus 12%
interest (the "guaranteed amount"). PILIC recognized the $10,000 as ceding
commission revenue net of transaction costs of $417 and HAI recognized a $5,000
ceding commission liability because of the negative financial history of the
business. As a result of the transaction, PILIC wrote-off unamortized deferred
acquisition costs and restructuring costs aggregating $4,200.
If RCH fails to earn the guaranteed amount within five years of the
date of the closing of the CRLC transaction, HAI must repay RCH the lesser of
the guaranteed amount less RCH's actual profits on the inforce business, or
$5,000, plus 12% interest. In the unlikely event that future profits exceed the
guaranteed amount, then PILIC is entitled to receive an additional payment from
RCH equal to two-thirds of the policy fees collected during 1999 and one-third
of the policy fees collected during 2000.
As security for HAI's guarantee, HAI executed a security agreement in
favor of RCH secured by the stock of PILIC. This agreement provides that RCH
will take ownership of PILIC if the Company defaults on its guarantee to RCH.
HAI provided various affirmative covenants regarding corporate existence;
compliance with laws; furnishing various notices to RCH; inspection and audit
rights and insurance coverage. Additionally, HAI provided certain negative
covenants with regard to selling, assigning, leasing or otherwise disposing of
HAI or PILIC assets; entering into agreements materially and adversely effecting
HAI's or PILIC's ability to carry on business; entering into an agreement
materially and adversely effecting HAI or PILIC ability to perform obligations
under the Guaranty, the reinsurance agreement with RCH, the Stock Purchase
Agreement and other related agreements. There also exist various provisions
regarding HAI or PILIC incurring or creating indebtedness or declaring
dividends. As described in Note K, HAI's obligation to RCH remains after PILIC's
sale.
Note M - Settlement Agreement with HPS
Sale of Montgomery Management: Effective March 31, 1999 the Company
sold its remaining 20% of MMC common stock to HPS for a purchase price of
$1,500, payment of which was made by a set off of a like amount against future
service fees, accounted for a loan payable, owed by the Company to HPS. The
Company recognized a $1,500 pre-tax gain on the sale.
The realized gains related to MMC are included in discontinued
operations.
Page 21 of 36 Pages
Commitment to pay outstanding HPS service fees to HPS: In conjunction
with the sale of MMC described above, HAI entered into a settlement agreement to
resolve a number of disputes that had arisen between the Company and HPS
relative to HPS' performance of administrative services under the HPS
Outsourcing Agreement of the now ceded block of Provident health business. The
companies agreed to settle all differences and claims related to the HPS
Outsourcing Agreement and certain actions taken by HealthAxis regarding
HealthAxis' obligations under certain agreements between the parties. Also in
accordance with the terms of the settlement agreement, HPS exercised a warrant
granted in 1998 in connection with the HPS E-commerce Agreement, and purchased
100,000 shares of the common stock of HAI for a purchase price of $900. The
purchase price was paid by a set off of a like amount against the service fees
owed by the Company to HPS. The Company paid the remaining balance of the
services fees owed to HPS in the amount of $1,267 to HPS on June 30, 1999,
whereupon the Company's obligation to pay service fees was terminated.
Note N -Letter Agreement between the Company and Alvin H. Clemens
On September 9, 1999, the Company and Mr. Clemens, the Company's
Chairman, entered into an agreement whereby Mr. Clemens agreed to convert his
Series A Preferred Stock into Common Stock of the Company, amend his agreement
to purchase 550,000 shares of the Company's Series A Preferred Stock in exchange
for an option to purchase the Company's Common Stock, released all right, title
and interest to options to purchase 202,802 shares of the Company's Common Stock
and a 1997 agreement to grant options to Mr. Clemens to purchase shares of the
Company's Series A Preferred Stock successively upon each exercise by Mr.
Clemens of his existing option and each subsequently granted option to purchase
shares of Series A Preferred Stock from time-to-time. The exercise prices of the
options to purchase Common Stock range from $3.64 to $8.75 per share and have a
weighted average price per share of $4.56. In consideration of the
aforementioned the Company paid Mr. Clemens $650 which was accounted for as
compensation expense.
Note O - Segment Information
The Company's operating segments are HealthAxis and HAI. HAI includes
investment income, interest expense and general expenses relating to corporate
operations not allocated to the other segments and amortization of goodwill.
Allocations of investment income, interest expense and certain general expenses
are based on a number of assumptions and estimates, and the business segments
reported operating results would change if different methods were applied.
Certain assets are not individually identifiable by segment and, accordingly,
have been allocated by formulas. Segment revenues include premiums and other
policy charges and considerations, net investment income, commissions and other
income. Transactions between reportable operating segments are accounted for
under respective agreements, which are generally at cost. Financial information
by operating segment for revenues, income before federal income taxes and
minority interests, and identifiable assets is summarized as follows:
Page 22 of 36 Pages
3 Months Ended Sept. 30, 9 Months Ended Sept. 30,
1999 1998 1999 1998
--------- --------- --------- --------
Revenues
- --------
HealthAxis $ 84 $ - $ 125 $ -
HAI 136 22 240 66
--------- --------- --------- --------
Total $ (220) $ 22 $ 365 $ 66
========= ========= ========= ========
Pre-tax income
- --------------
HealthAxis $ (8,990) $ (2,207) $ (18,847) $ (3,175)
HAI (1,054) (891) (1,903) (1,329)
--------- --------- --------- --------
Total $ (10,044) $ (3,098) $ (20,750) $ (4,504)
========= ========= ========= ========
September 30,1999 December 31, 1998
----------------- -----------------
Assets
- ------
HealthAxis $ 15,947 $ 14,876
Insurance Operations 76,970 96,935
HAI 32,331 4,878
--------- ---------
Total $ 125,248 $ 116,689
========= =========
Note P - Investment Considerations
In analyzing whether to make, or continue, an investment in the
Company, investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1998, a copy of which can be
obtained from the Company.
Note Q - Forward-looking Statements
The information contained in the Quarterly Report on form 10-Q for the
quarter ended September 30, 1999 contains forward-looking statements (as such
term is defined under Section 21E of the Securities Exchange Act of 1934 and the
regulations thereunder), including without limitation, statements as to trends,
management's beliefs, expectations or opinions, which are based upon a number of
assumptions concerning future conditions that ultimately may prove to be
inaccurate.
Such forward-looking statements are subject to risks and uncertainties
and may be affected by various factors, which may cause actual results to differ
materially from those in the forward-looking statements. Certain of these risks,
uncertainties and other factors are discussed in the Company's Annual Report on
Form on 10-K/A for the year ended December 31, 1998.
Page 23 of 36 Pages
Note R - Subsequent Events
Sale of PILIC: On November 30, 1999 HAI completed the sale of PILIC in
accordance with the terms of the Stock Purchase Agreement and the First
Amendment to the Stock Purchase Agreement as described in Note K. The results of
PILIC's Insurance Operations for the period October 1, 1999 through November 30,
1999 will be included in the Company's 1999 year end statement of operations as
discontinued operations. On November 30, 1999 HAI used $14,700 of the net
proceeds from the issuance of convertible debentures described in Note J to fund
its obligations to PILIC and AHC as described in Note K. All assets and
liabilities available for sale were sold on November 30, 1999.
HealthAxis issuance of Common Stock: On December 7, 1999, HealthAxis
completed a private placement of 3,846,003 shares of HealthAxis Common Stock to
a group of accredited investors and HAI at $15 per share for an aggregate
purchase price of approximately $57,690 less issuance costs estimated to
approximate $2,843. HAI purchased 133,333 shares in the transaction. The net
proceeds will be used for HealthAxis' working capital and other general
corporate purposes, including marketing.
The terms of the HealthAxis common stock issued are described in the
Company's Form 8-K filed December 8, 1999.
Merger of Insurdata into HealthAxis.com: On December 7, 1999,
HealthAxis and Insurdata Incorporated, a subsidiary of UICI (NYSE: UCI)
announced the signing of a definitive agreement to merge the two companies. The
combined entity will retain the HealthAxis.com name. Under the terms of the
transaction, Insurdata's shareholders will receive approximately 50 percent of
the newly combined company, on a pre-funding basis. The transaction was
consummated on January 7, 2000.
Michael Ashker, chief executive officer of HealthAxis will remain CEO
of the combined entity. Dennis Maloney, chief executive officer of Insurdata,
will become chief operating officer of the new HealthAxis.com. The Board of
Directors will consist of seven members, three from UICI and four from HAI. The
new company's headquarters will remain in the Philadelphia area with significant
operations in Dallas as well as eight other locations throughout the United
States and abroad. The combined company will employ over 350 IT professionals
with substantial health plan sales and administration experience. Although the
consumer and business-to-business services will be marketed separately, all
other corporate functions will be consolidated, including technology,
finance/accounting, human resources, legal, and sales.
HealthAxis will continue to market its online insurance retail
marketplace to individuals and small businesses through www.healthaxis.com.
Insurdata's proprietary solutions group, to be renamed HealthAxis Application
Solutions Group will provide proprietary Web-enabled enrollment, administration
and claims processing applications to healthcare payers, including insurance
companies, third-party administrators and large self-funded groups. These
solutions enable clients to both reduce plan administration costs and improve
service to plan members. All of Insurdata's workflow and business software
applications are built around an Application Service Provider (ASP) model.
The combined company will serve both consumers and payers with an
integrated Web-based platform. HealthAxis will offer carriers a comprehensive
suite of Web-enabled software solutions for marketing, sales, and plan
administration. For consumers and small businesses, HealthAxis will offer an
enhanced set of products and services based on its ability to seamlessly connect
carriers and purchasers through its proprietary Web platform.
Page 24 of 36 Pages
The terms of the Merger of Insurdata into HealthAxis are described in
the Company's Form 8-K filed December 8, 1999.
HAI Merger with HealthAxis: On December 7, 1999, HAI announced plans to
move forward with its original plan to merge with its subsidiary, HealthAxis. On
January 26, 2000, HAI and HealthAxis entered into an Agreement and Plan of
Reorganization and Agreement and Plan of Merger pursuant to which the Company
will acquire all of the outstanding shares of HealthAxis it does not currently
own through the merger of HealthAxis with a wholly-owned subsidiary of the
Company. Upon consummation of the reorganization transactions, HealthAxis
shareholders will receive 1.127 shares of the Company's common stock for each
share of HealthAxis common stock outstanding.
The terms of the HAI Merger with HealthAxis are contained in the
Agreement and Plan of Reorganization and Agreement and Plan of Merger described
in the Company's Form 8-K filed February 2, 2000.
Name and Trading Symbol Change: On January 27, 2000, the Company filed
an amendment to its Amended and Restated Articles of Incorporation changing its
name from Provident American Corporation to HealthAxis Inc. The Company also
announced that effective February 1, 2000, its common stock will trade on the
NASDAQ National Market under the symbol "HAXS".
Page 25 of 36 Pages
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
During 1998 the Company revised its strategy to focus predominately on
HealthAxis, the Company's e-commerce insurance marketing subsidiary. In early
1998 the Company determined that the Internet provided the opportunity to sell
health and life insurance directly to consumers thereby reaching individuals at
a cost potentially lower than traditional agency marketing channels. In light of
the losses experienced in the Company's small group and managed care products
and the need to focus on HealthAxis and deploy capital to it, the Company
entered into various agreements to sell PILIC's subsidiaries (MMC, PALHIC and
NIA) and cede 100% of the group medical and group life business during 1998.
On December 31, 1998, the Company executed a series of transactions
whereby PALHIC reinsured 100% of its business to PILIC, which in turn reinsured
via a 100% co-insurance reinsurance agreement all of the Company's group medical
and group life business to the RCH. In addition, PILIC sold PALHIC and NIA to
CRLC, transferred all rights and control regarding the Company's agents and
entered into non-compete and non-solicitation agreements regarding the Company's
agents with respect to the future sale of health insurance products by agents
for a 3-year period.
On August 16, 1999 the Company entered into an agreement to sell PILIC
which was completed on November 30, 1999. The Company's Insurance Operations are
reported as discontinued operations as described in Note K of the Notes to
Financial Statements. Accordingly the Company's revenue and expense as presented
in the Company's statement of operations includes HAI and predominantly
HealthAxis and excludes the Insurance Operations. All revenue and expense
related to the Insurance Operations are combined into the net gain (loss) in
discontinued operations line in the statement of operations and is described in
further detail in Note K of the Notes to Financial Statements. PILIC's net gain
or loss from its operations for that period will not affect the Company's net
gain or loss but will be offset by adjustments to the realized loss on the sale
of PILIC as recorded at September 30, 1999 in accordance with the terms of the
Stock Purchase Agreement. On November 30, 1999 HAI used $14,700 of the net
proceeds from the issuance of convertible debentures described in Note J to
Financial Statements to fund its obligations to PILIC and AHC as described in
Note K to Financial Statements. All assets and liabilities available for sale
were sold on November 30, 1999.
HealthAxis is an Internet-based distributor of health insurance
products. The Company believes it is the first fully transaction-enabled direct
distributor of individual and small group health insurance products. Currently
HealthAxis markets individual coverage in 22 states and short term and student
medical insurance in 43 states, with nationwide coverage planned. HealthAxis
anticipates offering a full range of health and life insurance products for
individuals and small groups, including policies for prescription drugs, vision
care, dental coverage, critical care, long-term care, long term disability and
life insurance. HealthAxis is building a nationwide product portfolio through
sourcing relationships with leading insurance companies ("Carrier Partners"),
including the following: Aetna, Aegon, WellPoint Health Networks, Fortis, UICI
and Security Life, among others. The Company anticipates that HealthAxis will
enter into additional agreements with other insurance companies. HealthAxis
markets to consumers through its website (www.healthaxis.com), strategically
selected Internet properties, Yahoo! and Snap and through the following with
which HealthAxis possesses exclusive marketing rights: AOL, Lycos and CNet.
Page 26 of 36 Pages
On December 3, 1998, HealthAxis commenced a launch of its operational
web site with distribution principally via the AOL relationship. The Company
expanded its online reach with the commencement of additional distribution on
Lycos in May 1999 and CNet and Snap in June 1999.
HealthAxis has experienced an increase in revenues during 1999 due to
increased traffic, additional products and website enhancements. In August 1999,
HealthAxis launched its second Carrier Partner, Fortis, adding two additional
products to the website. The Company anticipates launching two additional
Carrier Partners' products on its website during the fourth quarter of 1999.
Additional Carrier Partners and the Company's initial offering of small group
products are anticipated to be added during the first half of 2000. The Company
expects to expand its Carrier Partner relationships to be able to offer a choice
of carriers in each market. As additional Carrier Partners and products become
available on the site, the Company anticipates revenues to increase.
The Company had previously disclosed that it intended to engage in a
business combination involving HealthAxis by the end of fiscal 1999. HAI and
HealthAxis were in the process of negotiating the terms of a merger whereby
HealthAxis would be merged with and into HealthAxis Acquisition Corp., a
wholly-owned subsidiary of Provident, and HAI would be the surviving
publicly-traded company, with HealthAxis being a wholly owned subsidiary. On
October 28, 1999 HealthAxis announced that discussions relating to the upstream
merger with its parent have been put on hold pending the outcome of discussions
with an undisclosed third party regarding a potential business combination. On
December 7, 1999 HealthAxis announced that HealthAxis and Insurdata
Incorporated, a subsidiary of UICI had signed a definitive agreement to merge
the two companies and HAI announced plans to move forward with its original plan
to merge with HealthAxis. On December 7, 1999, HAI announced plans to move
forward with its original plan to merge with its subsidiary, HealthAxis. On
January 26, 2000, HAI and HealthAxis entered into an Agreement and Plan of
Reorganization and Agreement and Plan of Merger pursuant to which the Company
will acquire all of the outstanding shares of HealthAxis it does not currently
own through the merger of HealthAxis with a wholly-owned subsidiary of the
Company. Upon consummation of the reorganization transactions, HealthAxis
shareholders will receive 1.127 shares of the Company's common stock for each
share of HealthAxis common stock outstanding. Also see Note R of the Notes to
Financial Statements.
On January 27, 2000, the Company filed an amendment to its Amended and
Restated Articles of Incorporation changing its name from Provident American
Corporation to HealthAxis Inc. The Company also announced that effective
February 1, 2000, its common stock will trade on the NASDAQ National Market
under the symbol "HAXS".
Results of Operations
For the three months ended September 30, 1999 ("the current quarter")
the net (loss) applicable to Common Stock was ($23.1 million) or ($1.85) per
diluted share compared to a net (loss) of ($3.4 million) or ($0.33) per diluted
share for three months ended September 30, 1998 ("the same period last year").
The Company's net loss was the result of a realized loss on the sale of PILIC of
$7.3 million as described in Note K of the Notes to Financial Statements and
increased expenses in both HealthAxis and the discontinued Insurance Operations.
Page 27 of 36 Pages
Interactive commission and fee revenue of $0.1 million for the current
quarter is primarily attributable to commissions and administrative fees earned
on individual health insurance policies sold on HealthAxis' website.
Operating and development expenses of $2.6 million for the current
quarter increased from $0.2 million in the same period last year primarily due
to higher expense associated with HealthAxis due primarily to employee and
recruiting expenses related to software engineering, carrier integration,
website enhancements, and general operations. To support the HealthAxis business
strategy, operating and development expenses will increase as more carriers and
products are integrated and website enhancements are made.
Interactive sales and marketing expense of $5.7 million for the current
quarter increased from $0.8 million in the same period last year due primarily
to the amortization of HealthAxis' interactive marketing agreements based on the
number of impressions received by the website. Interactive marketing
amortization was $4.4 million for the current quarter. During the third quarter,
HealthAxis purchased impressions for $0.3 million from strategically selected
Internet properties. In addition, HealthAxis employee and recruiting expense
increased. The Company expects the impression amortization to increase as
additional carriers and products are introduced to the website. The number of
personnel and the amount spent on advertising through on-line and traditional
advertising will also increase in order to promote the HealthAxis' Internet
products.
For the nine months ended September 30, 1999 ("1999") the net (loss)
applicable to common stock was ($36.5) million or ($3.04) per diluted share
compared to net (loss) of ($3.1) million or ($0.31) per diluted share for nine
months ended September 30, 1998 ("1998"). The Company's net loss was the result
of a realized loss on the sale of PILIC as described in Note K of the Notes to
Financial Statements and increased expenses in both HealthAxis and the
discontinued Insurance Operations.
Interactive commission and fee revenue of $0.1 million for 1999 is
primarily attributable to commissions and administrative fees earned on
individual health insurance policies sold on HealthAxis' website.
Operating and development expenses of $4.6 million for 1999 increased
from $0.3 million in 1998 primarily due to higher expense associated with
HealthAxis due primarily to employee and recruiting expenses related to software
engineering, carrier integration, website enhancements, and general operations.
Interactive sales and marketing expense of $12.1 million for 1999
increased from $1.4 million in 1998 due primarily to the amortization of
HealthAxis' interactive marketing agreements based on the number of impressions
received by the website. Interactive marketing amortization was $9.4 million for
1999 and $0.8 million in 1998. In addition, HealthAxis employee and recruiting
expense increased.
Page 28 of 36 Pages
General and Administrative Expenses of $3.9 million for 1999 increased
from $2.4 million in 1998 due primarily to employee and recruiting expenses
relating to the increase in personnel as HealthAxis increased its administrative
and executive staffs. The increase was also due to professional fees and
overhead expenses. General and administrative expenses include executive
management, accounting, legal, and human resource personnel and expenditures for
applicable overhead costs.
Liquidity and Capital Resources
A major objective of the Company is to maintain sufficient liquidity to
fund growth, fulfill statutory requirements and meet all cash requirements with
cash and short term equivalents plus funds generated from operating cash flow.
During 1998, the Company's liquidity requirements were primarily
created and met by PILIC and PALHIC, along with the sale proceeds of MMC,
PALHIC, and NIA. During 1998 the primary sources of cash for the Insurance
Operations were premiums, investment income and investment sales and maturities.
During 1998 the primary uses of cash for the Insurance Operations were benefit
payments to insureds, operating costs including policy acquisition costs and
investment purchases. The primary sources of cash for HealthAxis were funds from
the issuance of debt and equity securities to outside parties and to PILIC. The
primary uses of cash for HealthAxis were operating costs and payments to AOL,
Lycos, Snap and CNet.
During 1999, the Company's liquidity requirements will be primarily
created and met by HealthAxis and HAI through the private placement of debt and
equity securities. The primary uses of cash for HealthAxis are operating costs
and payments to AOL, Lycos, Snap and CNet.
Cash and cash equivalents amounted to $25.9 million of which $14.7
million was paid to PILIC on November 30, 1999 at the closing of the sale of
PILIC as described in Note K of the Notes to Financial Statements. Included in
subsidiary assets available for sale are the cash and investments of PILIC sold
on November 30, 1999.
Net cash used in operating activities of $39.5 million in 1999 was
primarily the result of claim payments to policyholders, in particular health
claim payments related to the 1998 claim run-off of group medical business,
interactive sales and marketing expenses related to HealthAxis and other
operating expenses. The Company does not anticipate that future cash used or
provided from operations will include amounts related to the Company's Insurance
Operations sold effective November 30, 1999 as described in Notes K and R to the
Financial Statements.
During 1999 HealthAxis made the final payment of $1.5 million to AOL
under the initial term of Second Amendment to the Amended and Restated
Interactive Marketing Agreement with AOL. Additionally, HealthAxis paid $2.1
million to other Internet partners. Payments to Internet partners are included
in prepaid interactive marketing expense.
Amounts due from reinsurers increased primarily due to delays in the
collection of amounts due under PILIC's 1998 Quota Share arrangements.
Page 29 of 36 Pages
In connection with the Company's outsourcing with HPS, the Company
received premiums, net of commissions, HPS fees and certain out of pocket
expenses monthly on or before the 15th of the following month. The $6.8 million
change in amounts due from a third party administrator represented December
1998's net cash settlement collected from HPS in January 1999.
Future policy benefits and claims of $13.1 million related primarily to
the payment of claims incurred prior to 1999 for the Company's group medical and
group life business.
Non-cash repayment of notes payable represented $1.5 million of
consideration for the Company's sale of MMC Common Stock and for HPS' exercise
of its warrant obtained in 1998 in connection with the HPS E-Commerce Agreement
to purchase 100,000 shares of HAI Common Stock for $900 as described in Note M
of the Notes to Financial Statements. Non cash issuance of warrants relates to
HealthAxis as described in Notes E, H and J of the Notes to Financial
Statements.
The statutory capital and surplus of PILIC was $3.5 million at
September 30, 1999, which is $3.5 million below Company Action Level Risk Based
Capital ("RBC") but above Authorized Control Level RBC as calculated at December
31, 1998. The statutory capital and surplus of PILIC, was $4.8 million at
December 31, 1998. At December 31, 1998, PILIC calculated its RBC utilizing a
formula required by the National Association of Insurance Commissioners. The
results of this computation indicate that PILIC's adjusted capital of $5.3
million exceeded Regulatory Action Level but was below Company Action Level as
of December 31, 1998. This formula is a primary measurement as to the adequacy
of total capital and surplus of life insurance companies. Since PILIC failed to
meet its RBC requirement as of December 31, 1998 it is subject to regulatory
action. Several Departments of Insurance have requested that PILIC submit a Risk
Based Capital Plan ("RBC Plan") because PILIC's adjusted capital of $5.3 million
was below Company Action Level as of December 31, 1998. Effective with HAI's
sale of PILIC to AHC the Company no longer has any interest or liability with
respect to the ongoing insurance, capital and surplus, and business operations
of PILIC.
Payment of dividends paid by HealthAxis to HAI is subject to
restrictions set for in the Certificate of Designation related to HealthAxis
Series A, B, C and D Convertible Preferred Stock. HAI is also restricted from
paying dividends as described in Note L of the Notes to Financial Statements.
HAI and HealthAxis do not anticipate paying cash dividends on Common Stock or on
any class of HealthAxis preferred stock in the foreseeable future.
Impact of Inflation
Higher interest rates, which have traditionally accompanied inflation,
affect the Company's short-term investment revenue.
Inflation has significantly increased the cost of health care. The
adequacy of premium rates in relation to the level of health claims is
constantly monitored and, where appropriate, premium rates on such policies,
when appropriate, are increased as policy benefits increase. Failure to make
such increases commensurate with health care cost increases may result in a loss
to HealthAxis' insurance carriers. Implementation by HealthAxis' insurance
carriers of changes in premium rates may affect HealthAxis commission revenue
and may increase HealthAxis operating and development expense.
Page 30 of 36 Pages
Expenditures and Commitments
During September 1999 HAI paid HPS $7,638 to purchase 1,415,000 shares
of HealthAxis common stock as described in Note F. HAI has agreed to pay HPS an
additional $375 to complete the transaction. In consideration for PILIC's
release of claims against HPS in the amount of $190 owed from HPS to PILIC, HAI
agreed to pay PILIC $190. HAI anticipates both payments will occur in 1999.
As described in Note K of the Notes to Financial Statements, HAI
entered into a definitive agreement to sell all of the outstanding shares of the
common stock of PILIC to AHC Acquisition, Inc. ("AHC"), a newly formed
Pennsylvania business corporation, which is owned by Alvin H. Clemens, the
Company's Chairman of the Board of Directors. On November 30, 1999 HAI used
$14.7 million of the net proceeds from the issuance of convertible debentures
described in Note J of the Notes to Financial Statements to fund its obligations
to PILIC and AHC as described in Note K of the Notes to Financial Statements and
on December 7, 1999 purchased 133,333 shares of HealthAxis Common Stock as
described in Note R of the Notes to Financial Statements.
During the nine months ended September 30, 1999, HealthAxis completed
three private placement offerings, which provided approximately $18.4 million of
cash as described in Notes F, H and I of the Notes to Financial Statements. On
December 7, 1999 HealthAxis completed a private placement which provided
approximately $55 million of cash as described in Note R of the Footnotes to
Financial Statements. The net proceeds have been and are anticipated to be used
to fund amounts due under the Company's distribution agreements with AOL, Lycos,
Cnet, Snap and Yahoo! through the end of fiscal 1999, and the balance is
intended to be used by HealthAxis for its working capital and other general
purposes. The Company believes that the above net proceeds together with its
current cash and cash equivalents will be sufficient to fund HealthAxis' current
operations through the first quarter of 2001. However, subsequent equity or debt
financings will be necessary to enable the Company to fund amounts due to AOL in
the event that HealthAxis elects to exercise its option to renew its agreement
with AOL, payments to Lycos, CNet and Snap, future operations and continue to
implement its current business strategies.
The Company has no material commitments for capital expenditures at
September 30, 1999 but expects such expenditures to total approximately $2.2
million in 1999. Such expenditures will primarily be for equipment, software,
furniture and building improvements. The Company purchased $1.6 million of
property and equipment during the nine months ended September 30, 1999.
HealthAxis has entered into an Interactive Marketing Agreement with AOL
and promotional agreements with CNet, Snap and Lycos. In connection with these
agreements, the Company has paid $15.5 million in cash and warrants as of
September 30, 1999 and is required to pay additional amounts as described in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1998 in
Notes F, G, H and AA to the Company's Consolidated Financial Statements for the
year ended December 31, 1998.
Page 31 of 36 Pages
In August 1999, HealthAxis entered into an Advertising Agreement with
Yahoo!. In connection with this agreement, the Company has paid $150 as of
September 30, 1999 and is required to pay an additional $575 as described in
Note E to the Company's Consolidated Financial Statements for the period ending
September 30, 1999.
The Company does not anticipate paying cash dividends on Common Stock
or on any series or class of HealthAxis stock in the foreseeable future.
Year 2000 compliance
Year 2000 issues are the result of computer programs being written
using two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in system failures or miscalculations
causing disruptions in operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company utilizes various computer software programs, operating
systems and vendors whose software programs and communication links ("Computer
Systems") are used in the Company's Insurance Operations and HealthAxis. For the
Company's Insurance Operations these Computer Systems include health insurance
administration provided by HPS, life insurance administration, health claims
discount repricing provided by First Health Group along with financial
accounting and actuarial systems. For HealthAxis, these Computer Systems include
the www.healthaxis.com web site, links to AOL along with the AOL online network,
links to Lycos, CNet, Snap, Yahoo!, Carrier Partners, HPS, First Health Group,
along with HealthAxis' data warehouse. To the extent that the Company's Computer
Systems contain source codes that are unable to appropriately interpret the Year
2000 then some level of modification, or even replacement of such applications
may be necessary. The result of these Year 2000 issues may, if not corrected,
have a significant negative impact on the Company's business.
HealthAxis has established a task force to assess its systems to
determine whether they correctly define the Year 2000 and to determine the
extent to which the systems of its suppliers, Internet partners, Carrier
Partners and other business partners (insofar as they are material to
HealthAxis' business) are subject to the Year 2000 issue. Although HealthAxis
completed this assessment in November 1999 and has performed remedial
procedures, the Company is currently unable to predict the extent to which the
Year 2000 issue will affect its operations or the extent to which it would be
vulnerable to Year 2000 issues affecting its business partners failure to
remediate any Year 2000 issues on a timely basis. The failure of a business
partner to convert systems on a timely basis, in a manner that is compatible
with HealthAxis' systems, could have a material adverse effect on the Company.
HealthAxis does not have a contingency plan in place in the event that it or any
third party in which it engages in business is not Year 2000 compliant. In
addition, policy purchases are made with credit cards, and HealthAxis'
operations may be materially adversely affected to the extent its customers are
unable to use credit cards due to the Year 2000 issues that are not rectified by
the credit card issuers
To date, the Company has experienced very few Year 2000 problems with
those problems centering on life administration processing. The cost of
programming changes as of September 30, 1999 was less than $132. As described in
Note K of the Notes to Financial Statements, the Company sold PILIC on November
30, 1999.
Page 32 of 36 Pages
In the event that the Computer Systems of the Company or any of the
Company's business partners fail or exhibit significant problems as a result of
Year 2000 processing the Company's service to its customers could be disrupted
for a significant amount of time and result in significant lost income to the
Company.
There are risks associated with the Company's Year 2000 exposure
relating to some external vendors with whom the Company depends on material
sales and service processing. Because the Company does not control these vendors
or their resources, the Company can provide no assurance that such vendors will
complete their respective Year 2000 solutions in time for the Company to fully
test system interfaces with them. Although the Company is coordinating its
efforts with vendors to minimize this impact of Year 2000 issues, the Company is
currently unable to predict the extent to which Year 2000 issues will affect its
operations, or the extent to which it would be vulnerable to the failure of its
business partners or other, to remediate any Year 2000 issues on a timely basis.
The Company has begun the process of developing a contingency plan to
address possible Year 2000 risks to its Computer Systems. There can be no
assurance that the Company will successfully implement its contingency plan or
make all of its systems Year 2000 compliant. The Company does not have a
contingency plan in place in the event any third party in which it engages in
business is not Year 2000 compliant.
Recent Sales of Unregistered Securities
The issuance of securities described below were made pursuant to
exemptions from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended, in reliance upon the fact that such sales did not involve a
public offering. As a result, such securities are subject to restrictions on
transfer. During the nine months ended September 30, 1999, the Company entered
into the following sales of unregistered securities of which all dollar amounts
are in whole dollars:
In March 1999 HealthAxis entered into an Amended and Restated Carrier
Partner Agreement with UICI, pursuant to which HealthAxis issued a warrant to
UICI to purchase 150,000 shares of HealthAxis common stock at $4.40 per share,
with a five-year term. See in Note E to the Consolidated Financial Statements
included herein for a further explanation.
In March 1999 HealthAxis completed a private placement of 1,526,412
shares of HealthAxis Series C Cumulative Convertible Preferred Stock to a group
of accredited investors at $5.77 per share for an aggregate purchase price of
$8,807,397, less issuance cost of $683,501. See Note H to the Consolidated
Financial Statements included herein for a further explanation.
In May 1999 HealthAxis entered into a Strategic Alliance Agreement with
First Health Group Corp. ("First Health"), pursuant to which HealthAxis issued a
warrant to First Health for 50,000 shares of HealthAxis common stock at $20.00
per share, with a three-year term. See in Note E to the Consolidated Financial
Statements included herein for a further explanation.
Page 33 of 36 Pages
In May 1999 HealthAxis completed a private placement of 516,051 shares
of HealthAxis common stock to a group of accredited investors at $12.00 per
share for an aggregate purchase price of $6,193,000, less issuance cost of
$2,000. See in Note F to the Consolidated Financial Statements included herein
for a further explanation.
In June 1999 HealthAxis issued a warrant to ING Barring, Inc. ("ING
Barring") for 63,000 shares of HealthAxis common stock at $5.77 per share, with
a five-year term commencing on March 30, 1999. This warrant was issued in
settlement of its obligations pursuant to the engagement letter dated December
22, 1998 between ING Barring and HealthAxis and in connection with the
settlement agreement and mutual release dated June 16, 1999.
No commissions have been paid in connection with the above sales,
except with regard to the HealthAxis Series C Preferred Stock. In connection
therewith a placement fee of $300,000 was paid and warrants as described in the
previous paragraph were issued.
In July 1999 HealthAxis completed a private placement of 333,334 shares
of HealthAxis Series D Preferred Stock issued to Intel Corp at $12 per share for
an aggregate purchase price of $4,000. See in Note I to the Consolidated
Financial Statements included herein for a further explanation.
In September 1999 HAI completed a private placement of Convertible
Debentures in the amount of $27,500,000 due September 14, 2002. See in Note J to
the Consolidated Financial Statements included herein for a further explanation.
In December 1999 HealthAxis completed a private placement of 3,846,003
shares of HealthAxis common stock to a group of accredited investors and HAI at
$15.00 per share for an aggregate purchase price of $57,690,045, less issuance
cost of $2,843. See in Note R to the Consolidated Financial Statements included
herein for a further explanation.
Page 34 of 36 Pages
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- ------ -----------------
Not applicable.
Item 2. Change in Securities.
- ------ --------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- ------ -------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Not applicable.
Item 5. Other Information.
- ------ -----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
(1) First Amendment To Stock Purchase Agreement between the
Company and ACH Acquisition, Inc. dated October 27, 1999
(b) Reports on Form 8-K:
(1) Item 5 regarding a Stock Purchase Agreement to sell
Provident Indemnity Life Insurance Company by the Company
to AHC Acquisition, Inc., filed August 27, 1999.
(2) Item 5 regarding the $27.5 million private placement
completed by the Company, filed September 22, 1999.
(3) Item 5 regarding the $57.6 million private placement
completed by HealthAxis, HealthAxis.com merger with
Insurdata Incorporated and HealthAxis Inc. merger plans
with HealthAxis filed December 8, 1999.
Page 35 of 36 Pages
Signature
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.
HealthAxis Inc.
By: /s/ Michael Ashker
---------------------------------------------------------
Michael Ashker, President and Chief Executive Officer
By: /s/ Anthony R. Verdi
---------------------------------------------------------
Anthony R. Verdi, Chief Operating Officer
By: /s/ Francis L. Gillan III
---------------------------------------------------------
Francis L. Gillan III, Chief Financial Officer, Principal
Accounting Officer and Treasurer
Date: February 8, 2000
Page 36 of 36 Pages