SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13591
HEALTHAXIS INC.
(Exact name of Registrant as specified in its charter)
2500 DeKalb Pike
Pennsylvania East Norriton, Pennsylvania 19401 23-2214195
- -------------------------------- ------------------------------------ ----------------------
(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
(610) 279-2500
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- --------------------------------------------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
Title of Class
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 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 is not contained herein, and will not be 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. [X]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
20, 2000 as reported on the NASDAQ National Market System, was approximately
$144,535,904. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 20, 2000, the Registrant had 13,087,618 shares of Common
Stock outstanding.
The Exhibit Index is located on Page 81
HealthAxis Inc.
Table of Contents
Page
----
PART I....................................................................................
Item 1. Business...................................................................1-47
Item 2. Properties...................................................................48
Item 3. Legal Proceedings............................................................48
Item 4. Submission of Matters to a Vote of Security Holders..........................48
PART II...................................................................................
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....49-52
Item 6. Selected Financial Data...................................................53-54
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................55-60
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...................60
Item 8. Financial Statements and Supplementary Data..................................61
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................62
Part III.............................................................................
Item 10. Directors and Executive Officers of the Registrant........................63-65
Item 11. Executive Compensation....................................................66-73
Item 12. Security Ownership of Certain Beneficial Owners and Management............74-76
Item 13. Certain Relationships and Related Transactions............................76-78
Part IV.................................................................................
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............79
EXHIBIT INDEX...........................................................................81
i
PART I
Item 1. Description of Business
THE COMPANY
General
HealthAxis Inc. ("HAI"), formerly Provident American Corporation, is a
Pennsylvania corporation organized in 1982. Until November 30, 1999, HAI was
regulated as an insurance holding company by the states in which its formerly
wholly owned insurance subsidiary, Provident Indemnity Life Insurance Company
("PILIC"), was licensed. Currently, the operations of HAI and its subsidiaries
(the "Company") are principally those of its subsidiary, HealthAxis.com, Inc.
("HealthAxis").
HealthAxis was formed on March 26, 1998 to sell insurance products on
the Internet. As of December 31, 1999 and March 14, 2000, HAI owned 66.9% and
34.8%, respectively of HealthAxis' common and preferred stock. During 1999,
HealthAxis expanded from 15 to 105 employees, entered into carrier partner
agreements with nationally recognized insurance companies to sell their products
on its website, commenced interactive marketing of its website through
agreements with Internet portals, expanded and enhanced its website and raised
capital through several private placements of its securities.
Sale of PILIC
In light of the need to devote capital and focus to HealthAxis and the
continued losses experienced in the Company's group medical products, the
Company entered into various agreements to sell PILIC's subsidiaries, together
with its group medical and life insurance business, during 1998 and to sell
PILIC itself during 1999 (the "Discontinued Insurance Operations").
On August 16, 1999, HAI entered into a stock purchase agreement with
AHC Acquisition, Inc., a company owned by Alvin H. Clemens, the Chairman of
HealthAxis and HAI, which provided for the sale of PILIC to AHC Acquisition,
Inc. for an aggregate payment of $14.7 million. This transaction was completed
on November 30, 1999. In accordance with the terms of the stock purchase
agreement, HAI:
o purchased the Company's headquarters located at 2500 DeKalb Pike from PILIC
for $4.7 million;
o agreed to exercise its option to purchase 545,916 shares of HealthAxis Series
A preferred stock from PILIC for $2.8 million; and
o made a $7.2 million capital contribution from HAI to PILIC in order to
elminiate a statutory deficiency.
HAI made the $2.8 million payment for the shares of HealthAxis Series A
preferred stock pursuant to the option agreement between HAI and PILIC. The
payment equates to a $4.71 price per share plus interest at the rate of 8% per
annum thereon from the date of acquisition of these shares by PILIC through
November 30, 1999, the date of exercise. The $4.71 price represented the price
per share originally paid by PILIC for these shares. HAI agreed to make a $7.2
million capital contribution to PILIC to comply with insurance regulations that
required PILIC to maintain adequate capital to meet its liabilities, including
pay-out obligations under existing insurance policies. Also, in accordance with
the terms of the stock purchase agreement, and in order to compensate AHC
Acquisition, Inc. for assuming PILIC's liabilities, HAI transferred 100,000
shares of the HealthAxis Series A preferred stock, and the associated
1
registration rights previously granted to PILIC, to AHC Acquisition, Inc. HAI
recognized a $10.3 million loss on the sale of PILIC which included a write-off
of assets relating to the amount of $2.7 million together with HAI's November
30, 1999 capital contribution to PILIC in the amount of $7.2 million and the
value of the HealthAxis Series A preferred stock transferred to AHC Acquisition,
Inc. in the amount of $0.4 million. The terms of the sale of PILIC to AHC
Acquisition, Inc. were approved by the Insurance Department of the Commonwealth
of Pennsylvania, the regulatory agency that oversees insurance company
operations in Pennsylvania. The sale of PILIC was also approved by the
disinterested members of the board of directors of HAI with Mr. Clemens
abstaining from voting on this matter.
Financial Highlights
The following are the financial highlights for the Company.
Years ended December 31,
----------------------------------------------------
1999 1998 1997
---------- ------------ ----------
(Dollars in thousands)
Total revenue................................. $ 291 $ - $ -
Net loss in continuing operations............. $ (28,216) $ (5,408) $ (1,731)
Net loss in discontinued operations........... $ (18,315) $ (6,748) $ (16,694)
Net loss applicable to common stock........... $ (46,601) $ (12,410) $ (18,573)
Total assets.................................. $ 79,602 $ 24,568 $ 12,333
The Company's Insurance Operations are presented as discontinued
operations. The Company's revenues and net loss in continuing operations are
primarily that of HAI and HealthAxis. The Company's financial results prior to
January 7, 2000 exclude Insurdata Incorporated ("Insurdata") which merged with
HealthAxis on January 6, 2000.
Recent Developments
HAI changed its name from Provident American Corporation to HealthAxis
Inc. and its symbol on the NASDAQ National Market from "PAMC" to "HAXS"
effective February 1, 2000.
On December 7, 1999 HealthAxis and Insurdata, a provider of Internet
based software applications and services for insurance payers which include
insurance companies and other entities responsible for the processing and
payment of insurance claims, signed a definitive agreement to merge the two
companies. Insurdata was a subsidiary of UICI. As a result of this merger,
Insurdata became HealthAxis' application solutions group. The companies
completed the merger on January 6, 2000. See "Description of the Business of
HealthAxis - Historical Development and Insurdata Merger."
On January 26, 2000, HAI and HealthAxis entered into an Agreement and
Plan of Reorganization and Agreement and Plan of Merger pursuant to which HAI
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 HAI. This
transaction is referred to as the reorganization. In connection with this
reorganization, on February 11, 2000, HAI filed a Registration Statement on Form
S-4 with the Securities and Exchange Commission to seek shareholder approval of
the reorganization and register the HAI common stock to be issued to the
HealthAxis shareholders.
2
FORWARD LOOKING STATEMENTS
All statements and information herein, other than statements of
historical fact, are forward looking statements that are based upon a number of
assumptions concerning future conditions that may ultimately prove to be
inaccurate. Many phases of the Company's operations are subject to influences
outside its control. Any one, or any combination of factors described under
"Risk Factors" or in other sections of this document could have a material
adverse effect on the Company's results of operations.
RISK FACTORS
Shareholders should consider carefully the risks associated with the
ownership of HAI's common stock. These risks are described in detail below.
Shareholders should consider carefully these risk factors, together with all
other information in this Annual Report on Form 10-K.
Business Related Risks
HealthAxis' consumer services group has not had any profits in the past and may
not be profitable in the future.
Since its inception, HealthAxis' consumer services group has incurred
significant losses and expects to continue to incur losses on a quarterly and
annual basis for the foreseeable future. As of December 31, 1999, the consumer
services group had an accumulated deficit of approximately $35.3 million. The
consumer services group currently intends:
o to increase substantially its operating expenses to enhance its
website and technology;
o to fund increased sales efforts and marketing;
o to establish additional insurance carrier relationships; and
o to fund increased salaries and other operating costs.
To the extent that these expenses precede or are not subsequently
followed by increased revenues, HealthAxis may be unable to achieve or maintain
profitability on a quarterly or annual basis in the future. HealthAxis expects
negative cash flow from operations to continue for the foreseeable future. See
Note 3 to the Notes to the Consolidated Financial Statements included herein.
HealthAxis' consumer services group has a limited operating history so it is
difficult to predict its future performance.
HealthAxis was incorporated in March 1998 and began selling a limited
line of health insurance products over the Internet in December 1998. The
limited operating history of the HealthAxis consumer services group makes it
difficult to evaluate HealthAxis' future prospects. Furthermore, HealthAxis'
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in new, unproven and rapidly evolving
markets. HealthAxis may be unsuccessful in addressing these risks. If HealthAxis
is not successful in developing the consumer services group and expanding the
application solutions group, HealthAxis may never attain profitable operations.
3
If the healthcare industry does not accept HealthAxis' new information
technology, or acceptance occurs at a slower pace than anticipated by
HealthAxis, HealthAxis' profits may be negatively impacted.
HealthAxis believes that the claims and administration segment of the
healthcare industry has historically under invested in information technology
and existing technological platforms have failed to address the unique needs of
the healthcare industry. If the conversion from traditional paper methods to
electronic information exchange does not continue to occur or this conversion
occurs at levels below those currently anticipated by HealthAxis, HealthAxis
would be unable to sell a sufficient amount of its products and services to
increase revenues and generate net income. In fact, electronic information
exchange and transaction processing by the industry is still developing. In
addition, even if industry participants convert to electronic information
exchange, they may not elect to use HealthAxis' applications and services.
Competition from entities with longer operating histories and greater financial
resources than HealthAxis may have a material adverse effect on its business.
Although HealthAxis believes it is the first direct distributor of
health insurance, which permits customers to purchase and administer insurance
policies over the Internet, other competitors have established similar websites.
HealthAxis' principal online competitors are Intuit's InsureMarket
(www.insuremarket.com), Quotesmith (www.quotesmith.com), Insweb (www.insweb.com)
and ehealthinsurance.com (www.ehealthinsurance.com). In addition, in the area of
health insurance sales, HealthAxis will compete with large insurance and
financial service companies with established insurance agent networks as well as
with independent insurance agents and brokers. Substantially all of HealthAxis'
potential competitors have longer operating histories, significantly greater
financial, marketing and other resources, greater name recognition and
significantly larger existing customer bases than HealthAxis. These competitors
may be able to respond more quickly to changes in consumer preferences and to
devote greater resources to the development, promotion and sale of their
products or to claims processing services than HealthAxis. In addition, UICI
significantly increased its ownership interest in HealthAxis as a result of the
Insurdata merger. Although the existence of UICI as a major shareholder may
deter other insurance companies from offering their products over the HealthAxis
website in the future, HealthAxis believes UICI's share ownership has not been
an impediment to entering into agreements with new insurance companies to date.
The application solutions group's potential competitors in the
healthcare technology area include specialty healthcare information technology
companies, software vendors and large data processing and information companies.
HealthAxis believes that application solutions group's major competitors include
Healtheon/WebMD, RIMS, Erisco, El Dorado, TXEN, a division of Nichols Research
Corp., and Amisys Managed Care Systems, Inc., a division of HBOC. The
application solutions group also competes with the internal information
resources and systems of certain of its prospective and existing clients. These
competitors could develop or offer superior functionality with respect to
specific or overall applications. Potential and current clients may prefer other
features of competitive products or pricing could erode as competition becomes
more intense. Some of the application solutions group's current and potential
competitors are larger, better capitalized and have greater financial and
operating resources than HealthAxis. In addition, current and potential
competitors, including providers of information technology to other segments of
the healthcare industry, may establish joint marketing arrangements or other
relationships with new competitors that emerge. See "Description of the Business
of HealthAxis -- Competition."
4
If HealthAxis is unable to continue to secure the additional financing necessary
to sustain and expand its business, its business will not succeed.
HealthAxis expects that it will be required to raise additional funds
over the long-term to sustain and expand its sales, marketing and development
activities. HealthAxis will have to do this in light of the emergence of several
well-financed competitors and the ongoing technological enhancements which are
necessary in order for HealthAxis to remain competitive.
HealthAxis' current funding commitments for its Internet marketing
agreements will be approximately $5.0 million in 2000. Although HealthAxis
believes that the funds previously raised during fiscal 1999 will be sufficient
to fund HealthAxis' operations through fiscal 2000, unforeseen events may render
these funds insufficient. As a result, HealthAxis may need to seek external debt
and/or equity financing. Adequate funds on terms acceptable to HealthAxis,
whether through additional equity financing, debt financing or other sources,
may not be available when needed or may result in significant dilution to
existing shareholders. The inability to obtain sufficient funds from operations
or external sources would jeopardize future operations.
Errors in the applications solutions could detract from the reliability and
quality of the application solutions group's information systems, which in turn,
would have an adverse effect on HealthAxis' business.
The claims and administration segment of the healthcare industry
demands a high level of reliability and quality from its information systems.
Although the application solutions group devotes substantial resources to
meeting these demands, its application solutions may, from time to time, contain
undetected errors. These errors may result in loss of data, a reduction in the
ability to process transactions, or loss of, or delay in, market acceptance of
its application solutions. Many of the application solutions group's service
agreements contain performance standards, and the application solutions group's
inability to meet these standards could result in the early termination of these
agreements as well as financial penalties. Because of the importance of the
application solutions group's application solutions, errors or delays would have
a negative impact on HealthAxis' business.
HealthAxis has attempted to limit contractually and through insurance
coverage its damages arising from negligent acts, errors, mistakes or omissions
in rendering its services; however, these contractual protections could be
unenforceable or insufficient to protect HealthAxis from liability for damages
in connection with the successful assertion of one or more large lawsuits.
HealthAxis may be unable to protect its proprietary technology.
HealthAxis' success depends to a significant extent on its ability to
protect the proprietary and confidential aspects of its software applications
and the tradenames associated with them. HealthAxis relies upon a combination of
trade secret, copyright and trademark laws, license agreements, nondisclosure
and other contractual provisions and various security measures to protect these
proprietary rights. HealthAxis' software applications are not patented and
existing copyright laws offer only limited practical protection. These legal
protections afforded to HealthAxis or precautions taken by HealthAxis may be
inadequate to prevent misappropriation of its technology or the tradenames
associated with them. Any infringement or misappropriation of HealthAxis'
proprietary software applications or the related tradenames could have the
effect of allowing competitors to use its proprietary information to compete
against HealthAxis. In addition, these limited protections do not prevent
independent third-party development of functionally equivalent or superior
technologies, products or services.
5
HealthAxis may be subject to trademark and service mark infringement claims.
As competing healthcare information systems increase in complexity and
overall capabilities and the functionality of these systems further overlap,
HealthAxis could be subject to claims that its technology infringes on the
proprietary rights of third parties. These claims, even if without merit, could
subject HealthAxis to costly litigation and could direct the time and attention
of its technical and management teams. Further, if a court determined that
HealthAxis infringed on the intellectual property rights of a third party,
HealthAxis could be required to:
o develop non-infringing technology or tradenames,
o obtain a license to the intellectual property,
o stop selling the applications or using names that contain the
infringing intellectual property, or
o pay substantial damages awards.
HealthAxis may be unable to develop non-infringing technology or tradenames or
to obtain a license on commercially reasonable terms. Any of the above listed
potential court-ordered requirements would adversely impact HealthAxis' profits.
In December 1998, a third party notified Insurdata that it believed
Insurdata had infringed upon a common law trademark held by such party through
its use of the name "Insur-Web" because a similar name is currently being
utilized by the third party. In addition, HealthAxis was notified by the U. S.
Patent and Trademark Office that it had preliminarily denied registration of the
service marks "HealthAxis" and "HealthAxis.com" on the basis of potential
confusion with an allegedly similar registered service mark. HealthAxis is
attempting to overcome the U.S. Patent and Trademark Office's preliminary denial
by negotiating a consent with the party holding the similar mark. This party has
verbally agreed to HealthAxis' registration of these marks. Until HealthAxis
reaches a final agreement with this party and the U.S. Patent and Trademark
Office approves this agreement, HealthAxis can not provide any assurance as to
whether it will be successful in overcoming the U.S. Patent and Trademark
Office's denial. See "Description of the Business of HealthAxis -- Intellectual
Property and Technology."
A catastrophic loss at HealthAxis' data center or a data center of HealthAxis'
key business partners could cause significant interruptions and loss of
revenues.
The application solutions group's principal computer equipment and
application systems are maintained in North Richland Hills, Texas. Although
HealthAxis' application solutions group maintains back-up systems in order to
continue operations, interruption or loss of HealthAxis' transaction processing
capabilities even for a period of time could result in a reduction in revenues.
The consumer services group and certain key business partners maintain critical
computer operations at a single facility. In the event of a catastrophic loss at
this facility, resulting in destruction of HealthAxis' computer operations,
HealthAxis would experience a significant interruption of its business until an
alternative site is established. Further, contractual limitations relating to
those losses or available insurance may be insufficient to compensate HealthAxis
for losses due to HealthAxis' inability to provide services to its clients. See
"Description of the Business of HealthAxis -- Intellectual Property and
Technology."
HealthAxis' failure to meet certain performance standards described in its
service agreements could have a negative effect on its business.
Many of HealthAxis' service agreements contain performance standards
and the failure by HealthAxis to meet these standards could result in the
termination of these agreements as well as financial penalties, which could have
6
a negative effect on HealthAxis' revenues. If HealthAxis' network infrastructure
is unable to support the variety and number of transactions and users
anticipated, or if HealthAxis is unable to maintain performance standards,
HealthAxis' business would be negatively effected.
The loss of one or more of the application solutions group's large clients would
have a detrimental effect on HealthAxis' financial condition.
HealthAxis expects that a small number of clients, including UICI and
its subsidiaries, will continue to account for a substantial portion of the
application solutions group's total revenues for the foreseeable future. The
loss of one or more of these significant clients, or the failure of the
application solutions group to generate anticipated revenue from these clients,
would have a detrimental effect on HealthAxis' financial condition. See
"Description of the Business of HealthAxis -- Application Solutions Group's
Clients" and "Description of the Business of HealthAxis -- Relationship with
UICI."
UICI, a major shareholder of HealthAxis, and its subsidiaries
constitute, in the aggregate, the application solutions group's largest client.
UICI and its subsidiaries accounted for approximately 60% of the Insurdata's
revenues in 1999. A portion of the revenue from UICI in the past was for year
2000 services which were completed during 1999. However, UICI and its
subsidiaries are expected to remain HealthAxis' largest client for the
foreseeable future. To the extent UICI or its subsidiaries experience financial
difficulties, the financial performance of HealthAxis may be negatively
impacted. In addition, if UICI sells additional shares of its HAI stock
following completion of the merger, the value of the HAI stock could be reduced.
See "--Description of the Business of HealthAxis - Application Solutions Group's
Clients" and "Description of the Business of HealthAxis - Relationship with
UICI."
HealthAxis' operations outside of the United States may subject it to additional
risks.
HealthAxis conducts operations related to the conversion of insurance
claims information to electronic form in Jamaica through Satellite Image Systems
(Jamaica) Limited, a Jamaican subsidiary of HealthAxis Imaging Services, LLC,
which is a wholly owned subsidiary of HealthAxis. Foreign operations generally
involve greater risks than do operations based solely in the United States.
Foreign economies differ favorably or unfavorably from the United States'
economy in such respects as the level of inflation and debt, which may result in
fluctuations in the value of the country's currency and real property. In
addition, there may be less government regulation in various countries, and
difficulty in enforcing legal rights outside the United States. Additionally, in
some foreign countries, there is the possibility of expropriation or
confiscatory taxation, limitations on the removal of property or other assets,
political or social instability or diplomatic developments which could affect
the operations and assets of U.S. companies doing business in that country. Many
of these risks are more pronounced for activities in developing countries, such
as Jamaica. HealthAxis' management has limited experience in the area of foreign
operations.
Internet Related Risks
HealthAxis' future revenues depend upon whether consumers will accept the
Internet as a medium for health insurance sales.
HealthAxis has limited experience in the online insurance sales
business. Online purchases of health insurance policies is a relatively new
development, and it is unclear whether the market will accept the Internet as a
medium for insurance sales.
7
HealthAxis' future success will depend in part on its ability to
significantly increase revenues, which will require the development and
widespread acceptance of the Internet as a medium for insurance sales. Consumers
who are willing to purchase relatively simple, low cost and low risk items such
as compact discs, flowers, books and groceries over the Internet may not be
willing to purchase complicated and higher cost items such as health and related
insurance policies in the same manner. Further, consumers who buy other items on
the Internet may prefer to discuss insurance decisions with an insurance agent
in person instead of buying insurance through the Internet. Finally, consumers
may be unwilling to divulge highly personal medical information through the
Internet. See "Description of the Business of HealthAxis -- Privacy Policy."
HealthAxis' products may not be attractive to enough customers to generate
significant revenues.
HealthAxis' products, application process, pricing and Internet based
claims processing may not be attractive to a sufficient number of users to
generate significant revenues to sustain profitable operations. In addition,
HealthAxis may be unable to anticipate, monitor and successfully respond to
rapidly changing technology and consumer preferences so as to continually
attract and retain a sufficient number of customers. HealthAxis may also be
unable to develop and implement competitively priced products that allow it to
attract, retain and expand its customer base. See "Description of the Business
of HealthAxis -- The Health Insurance Industry."
HealthAxis depends upon technology licensed from third parties for the success
of its operations.
HealthAxis relies upon a variety of technology that it licenses from
third parties, including its database and Internet server software, which is
used in HealthAxis' website to perform key functions, and the application
solutions group's mainframe servers. These third-party technology licenses may
not continue to be available to HealthAxis on commercially reasonable terms. The
loss of or inability of HealthAxis to maintain or obtain upgrades to any of
these technology licenses could result in delays in completing its proprietary
software enhancements and new development until equivalent technology could be
identified, licensed or developed, and integrated. See "Description of the
Business of HealthAxis -- Intellectual Property and Technology."
Insurance Industry Related Risks
HealthAxis' success depends in part on its ability to develop new products which
respond to changes in the insurance industry.
HealthAxis' success will depend in part upon its ability to develop and
provide new products that meet consumers' changing health insurance needs and
changes in government requirements. During recent years, the health insurance
industry has experienced substantial changes, primarily caused by healthcare
legislation, originally at the state level, and more recently at the federal
level. The introduction of managed care organizations has also affected the
health insurance industry. Additionally, over the past several years the rapid
growth of health maintenance organizations and preferred provider organizations
and the organization of healthcare providers in new ways such as physician
hospital organizations, has dramatically changed health insurance sales.
HealthAxis' future success will depend, in part, on its ability to effectively
enhance its current products and claims processing capabilities and to develop
new products in the changing healthcare environment on a timely and
cost-effective basis.
8
Insurance regulations may increase HealthAxis' costs to maintain compliance.
The insurance industry is one of the most highly regulated fields. As a
result, HealthAxis is subject, both directly and indirectly, to various laws and
governmental regulations relating to its business. State laws also regulate
product marketing and advertising on the Internet. Compliance with future rules
and regulations could increase HealthAxis' operating costs. The insurance
products offered by HealthAxis must be approved by HealthAxis' carrier partners
in the various states in which those products are offered. The carrier partners
are also subject to extensive supervision and regulation at the state level.
HealthAxis could be adversely affected if its carrier partners are unable to
obtain approval for the products which HealthAxis plans to offer on its website
or are otherwise adversely affected by actions taken by state regulatory
authorities against any carrier partner.
Under the Health Insurance Portability and Accountability Act of 1996,
the Secretary of Health and Human Services is required to adopt national
standards for health information transactions and the data elements used in
those transactions. In addition, the Secretary is required to adopt safeguards
to ensure the integrity and confidentiality of health information. Violation of
the standards is punishable by fines and, in the case of wrongful disclosure of
individually identifiable health information, imprisonment. HealthAxis'
proprietary applications are designed to enable compliance with current
insurance regulations; however, these regulations could change or new
regulations could be adopted, which could require HealthAxis to expend
additional financial and managerial resources in order to comply with any
revised or new regulations. The adoption of new standards could negatively
affect the means by which HealthAxis processes transactions or the availability
to and use of claims data by HealthAxis in providing its services. See
"Description of the Business of HealthAxis -- Regulation."
HealthAxis also faces regulatory risk because most of the laws and
regulations governing insurance agents contemplate or assume paper-based
transactions and do not currently address the delivery of required disclosures
or other documents through electronic communications. Additionally, many states
have not yet enacted laws or regulation which specifically allow for electronic
signatures instead of traditional signatures. Until these laws and regulations
are revised to clarify their applicability to electronic commerce, offering of
insurance products and services through the Internet or other means of
electronic commerce will be subject to uncertainty as to compliance with these
laws and regulations. HealthAxis' policies and procedures may not be deemed
acceptable by any regulatory body examining its activities in light of these
potentially different laws and regulations.
Investment Related Risks
UICI may make decisions which some shareholders do not consider to be in their
best interest.
Upon completion of the reorganization with HAI, UICI will own 43.2% of
HAI's outstanding common stock and will have the ability to vote 21.1% of HAI's
outstanding common stock. As a result, UICI may have sufficient voting power to
influence the outcome of all corporate matters submitted to the vote of
shareholders, including:
o the election of directors;
o changes in the size and composition of the Board of Directors;
o mergers;
o tender offers; and
o open-market purchase programs.
9
The open-market purchase programs could give shareholders of HealthAxis the
opportunity to realize a premium over the then-prevailing market price for their
shares. In addition, the concentration of ownership in UICI could have the
effect of delaying or preventing a change in control of HAI and may affect the
market price of the common stock. See "Description of the Business of HealthAxis
- -- Relationship with HAI and UICI."
In connection with the reorganization with HAI, it is intended that
UICI, HealthAxis, HealthAxis Acquisition Corp, HAI and Messrs. Ashker and
Clemens will enter into a shareholders' agreement which will provide that HAI
and UICI will each select three nominees for election as directors and will
mutually select three additional nominees. All parties to the agreement will
agree to vote all HAI shares owned by them in favor of these nominees.
Two of HAI's officers and directors are also large shareholders and may
influence the outcome of matters requiring shareholder approval.
Alvin H. Clemens, the Chairman of HAI and HealthAxis is also HAI's
largest shareholder. As of December 31, 1999, Mr. Clemens owned, either directly
or indirectly, 2,499,500 shares (including options) or 18.2% of HAI common
stock. These share ownership numbers exclude shares for which Mr. Clemens
disclaims beneficial ownership and includes 683,534 shares that Mr. Clemens has
the right to acquire pursuant to exercisable options. In addition, in connection
with the sale of a HAI subsidiary, HAI transferred 100,000 shares of Series A
preferred stock of HealthAxis acquired from a HAI subsidiary to AHC Acquisition,
Inc., a company owned by Mr. Clemens. Accordingly, Mr. Clemens through his
ownership interest in HAI and in AHC Acquisition, Inc. could influence the
outcome of any matter requiring shareholder approval of HealthAxis, if these
matters were deemed by the shareholders of HAI to be in their best interests.
See "Item 13 -- Certain Relationships with Related Transactions."
In addition, Michael Ashker, a director and the President and Chief
Executive Officer of HealthAxis and HAI, beneficially owns 718,076 shares of
HAI's common stock, including options. In an amended Schedule 13D, dated
November 15, 1999, filed by Mr. Ashker, Lynx Capital Group, LLC, Van Kasper &
Company, Lynx Tech Fund, L.P., Lynx Healthtech Fund, LLC, Kenneth Brown, Deidre
Holt and Edward W. LeBaron, Jr., Mr. Ashker reported sole voting and dispositive
power with respect to 394,776 shares of HAI common stock and shared voting and
dispositive power with respect to 323,300 shares. Mr. Ashker was the sole
manager of Lynx Capital Group, LLC, which acts as an investment advisor to and
general partner of Lynx Tech Fund, L.P., which is an investment limited
partnership. Mr. LeBaron is currently serving on the Board of Directors of HAI
and HealthAxis. Mr. LeBaron reported sole voting and dispositive power with
respect to 38,571 shares of HAI common stock. Pursuant to a consulting agreement
between HAI and Lynx Capital Group, LLC, Lynx Capital Group, LLC was granted
currently exercisable warrants to purchase 400,000 shares of HAI's common stock.
Of this amount, Lynx Capital Group, LLC transferred warrants to purchase 300,000
shares of HAI common stock to Mr. Ashker. Mr. Ashker has also been granted
options to purchase 991,000 shares of HealthAxis common stock, at an exercise
price of $1.77, all of which are currently exercisable. Mr. Ashker was also
awarded options to purchase 145,000 shares of HealthAxis common stock at an
exercise price of $5.77 which are exercisable over a two year period commencing
in April, 1999, options to purchase 55,000 shares of HealthAxis common stock at
an exercise price of $12.00 which are exercisable over a two year period
commencing in November, 1999 and options to purchase 100,000 shares of
HealthAxis common stock at an exercise price of $15.00 which are exercisable
over a two year period commencing in February, 2000. See "Item 13 - Certain
Relationships and Related Transactions."
In addition, Messrs. Ashker and Clemens, by virtue of their positions
as trustees of certain voting trusts, have shared voting power with the other
trustees over 25.4% of HealthAxis' outstanding capital stock. Accordingly,
through their share ownership and positions on the board of directors of HAI,
10
Messrs. Ashker and Clemens could influence the outcome of matters requiring
HealthAxis or HAI shareholder approval.
Potential conflicts of interest could arise because some people serve as
directors, officers or employees of either HAI or UICI and HealthAxis.
Various conflicts of interest between HealthAxis and HAI could arise
because persons serving as directors, officers and employees of both HealthAxis
and HAI may have conflicting duties to each. Alvin H. Clemens, the Chairman of
HealthAxis, also serves as HAI's Chairman. Michael Ashker, the President, Chief
Executive Officer and director of HealthAxis, is President and Chief Executive
Officer and a director of HAI. An affiliate of Mr. Ashker is serving on HAI's
board of directors and on HealthAxis' board. Ownership interests of HealthAxis'
directors and officers in HAI common stock could also create, or appear to
create, potential conflicts of interest when these directors and officers are
faced with decisions that could have different implications for HealthAxis and
for HAI. This is also true with respect to Gregory T. Mutz, Chief Executive
Officer of UICI, and Patrick J. McLaughlin, who are directors of HealthAxis and
its largest shareholder, UICI. These individuals will become directors of HAI in
connection with the merger. Mr. Mutz is also the Chief Executive Officer of
UICI. See "Description of the Business of HealthAxis -- Relationship with HAI
and UICI."
Potential conflicts of interest may arise between HealthAxis and UICI regarding
the products and services provided by HealthAxis.
Conflicts of interest may arise between HealthAxis and UICI in a number
of areas relating to their past and ongoing relationships, including the nature,
quality and pricing of services rendered by HealthAxis to UICI and its
subsidiaries or by UICI and its subsidiaries to HealthAxis, sales or
distributions by UICI of all or any portion of its ownership interest in
HealthAxis, or UICI's ability to effect the management and affairs of
HealthAxis. UICI and HealthAxis may be able to resolve any potential conflict,
however, if resolved, HealthAxis may not receive a more favorable resolution
than if it were dealing with an unaffiliated party. See "Description of the
Business of HealthAxis -- Relationship with HAI and UICI."
None of the HealthAxis intercompany agreements are subject to arm's-length
negotiations.
Because HealthAxis was a majority-owned subsidiary of HAI, none of the
intercompany agreements, including the registration rights agreement transferred
to AHC Acquisition Corp., resulted from arm's-length negotiations. These
agreements may include terms and conditions that may be more or less favorable
to HealthAxis than terms contained in similar agreements negotiated with third
parties. See "Description of the Business of HealthAxis -- Relationship with HAI
and UICI."
As a result of UICI's control of Insurdata prior to the merger of
Insurdata and HealthAxis, none of the terms of Insurdata's contracts with UICI
and its subsidiaries, including the outsourcing agreement entered into between
Insurdata and UICI, were subject to arm's-length negotiations between the
parties. As a result, these agreements include terms and conditions that may be
less favorable to HealthAxis than terms contained in agreements negotiated with
third parties. See "Description of the Business of HealthAxis -- Relationship
with HAI and UICI."
HAI does not pay cash dividends and does not intend to pay cash dividends in the
future.
HAI has not paid a cash dividend on its common stock since its
inception in 1982 and is restricted from declaring and paying dividends by the
provisions of a guarantee agreement entered into in connection with a
reinsurance agreement between Reassurance Company of Hanover and HAI's former
11
wholly-owned subsidiary, Provident Indemnity Life Insurance Company. HAI
currently intends to retain all earnings to finance the expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future. In the future, HAI's ability to pay dividends will be dependent upon the
ability of its subsidiary, HealthAxis, to pay dividends to HAI. HealthAxis
currently intends to retain future earnings, if any, to fund the development and
growth of its business. Any future determination to pay cash dividends on its
common stock or preferred stock will be at the discretion of the board of
directors and will be dependent upon HealthAxis' financial condition, operating
results, capital requirements and other such factors as the board of directors
deems relevant. In the past, HAI paid cash dividends on its Series A preferred
stock at the rate of $0.0636363 per share, per quarter from 1993 to June 30,
1999.
Certain provisions of Pennsylvania law and provisions of HAI's amended and
restated articles of incorporation could have an anti-takeover effect and limit
the possibility of HAI shareholders disposing of their shares at a premium
price.
Certain provisions of Pennsylvania law and HAI's proposed amended and
restated articles of incorporation could make it more difficult for a third
party to acquire, or could discourage a third party from attempting to acquire
control of the Company. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of HAI common stock.
HAI's board of directors is not aware of any attempts to take control of HAI and
has not proposed amended and restated articles of incorporation with the intent
that the increase in authorized shares be used as an anti-takeover device.
However, the increase in the authorized capital stock of HAI may prevent or
discourage a third party from acquiring control of HAI. These take-over attempts
or merger proposals often include an offer to acquire shares of the target
company at a higher price than generally available. HAI's board of directors may
issue these additional shares of common stock or preferred stock without any
additional shareholder approval. If the increase in the authorized shares or the
issuance of the authorized shares discourages take-over attempts, shareholders
may not have the opportunity to take advantage of these premium prices.
DESCRIPTION OF THE BUSINESS OF HEALTHAXIS
General
HealthAxis is a leading online insurance provider of fully integrated,
end-to-end solutions for health insurance distribution and administration which
utilize the Internet. HealthAxis serves both consumers and insurance companies
that underwrite policies, independent entities that administer claims processing
and payment, Blue Cross/Blue Shield plans, and self-insured employers. These
entities which are responsible for the processing and payment of insurance
claims are referred to as payers in the insurance industry and in this document.
HealthAxis' consumer services group is an online retailer of health insurance
products and related consumer services. HealthAxis' application solutions group
offers a platform of Internet based software applications and services to payers
designed to enhance the efficiency and effectiveness of the claims
administration, benefits enrollment, benefits maintenance and conversion of
insurance claims information to electronic form involved in the administration
of health insurance. The application solutions group also provides the
administrative backbone for the consumer services group thereby creating a full
service, Internet based insurance agency.
Through its consumer-oriented website, www.healthaxis.com, HealthAxis
offers consumers access to educational materials, personal profiling tools,
instant quotes, and the ability to purchase health insurance entirely within the
online environment. The HealthAxis website guides a consumer through every step
in the health insurance purchase process, from education and price quotation
through enrollment and post sale service. HealthAxis believes that no other
insurance website currently matches HealthAxis' ability to cover all pre- and
post-sale activities completely online. HealthAxis believes that its
12
consumer-focused online distribution service enhances both the decision-making
and purchasing experience, by giving prospective customers relevant,
personalized and real-time information along with the convenience of shopping
online 24 hours a day, seven days a week. HealthAxis believes its website
provides a superior decision-making and purchasing experience to those currently
available through either the traditional distribution system or online
competitors.
HealthAxis does not underwrite insurance, but functions strictly as an
online insurance agency. By selling directly to consumers via the Internet,
HealthAxis can significantly reduce the cost of product distribution as compared
to the traditional agent-based distribution system. HealthAxis targets the
individual and small group health insurance markets through its website,
www.healthaxis.com. (References in this document to consumers or customers refer
to individuals as well as small groups served by the website.) HealthAxis'
website is accessible directly, or through one of the Internet portals with
which HealthAxis entered into an agreement. HealthAxis will target the large
group market with ancillary insurance products by cross-selling into the
application solutions group's client base of large group employers.
HealthAxis' consumer services group has entered into carrier partner
agreements with 12 insurance companies, including Aetna US HealthCare, Aegon,
UICI, US Life, WellPoint Health Network Inc. and Fortis Health. HealthAxis has
also entered into a national marketing alliance with the National Blue Cross and
Blue Shield Association. The insurance companies which have entered into
agreements with HealthAxis are referred to as carrier partners. These carrier
partners have agreed to distribute health insurance products online through the
HealthAxis website. HealthAxis' network of carrier partners provides products in
all 50 states and the District of Columbia, including medical, individual
medical, small group medical, dental, vision, life, prescription drug and
disability insurance. Individual medical from WellPoint, major medical from
Celtic and Ceres Group, small group medical from Aetna, dental/vision from
Security Life, short term medical and student medical plans from Fortis, and a
prescription drug benefit card plan offered by Aegon are currently available for
purchase on the HealthAxis website. HealthAxis intends to regularly add new
plans and new carriers to its website. HealthAxis' objective is to offer its
customers a choice of carriers in each market.
HealthAxis' application solutions group provides integrated proprietary
software applications that address the workflow and processing inefficiencies
embedded in the healthcare insurance industry. The software enables carriers,
independent entities that administer claims processing and payment and large
group employers to reduce costs and improve customer service through the use of
online benefits enrollment and administration services. These software
applications increase the efficiency of a client's operations by eliminating
paper-based processes and improving the client's ability to capture, process and
share data with plan members and other industry participants within the
healthcare system. These products, in conjunction with the HealthAxis' online
distribution capabilities, create an Internet based insurance agency which
provides all the services of a traditional insurance agency without assuming any
underwriting risk.
The application solutions group offers the suite of proprietary
integrated workflow and business software applications described below. The
application solutions group suite of software applications includes Insur-Web,
Insur-Image, Insur-Voice, Insur-Enroll, Insur-Admin and Insur-Claim.
In addition, the application solutions group offers the following
products and services:
Systems Integration and Technology Management Services which provide
clients with cost-effective design, development and implementation of technical
solutions for healthcare organizations and consist of four primary offerings:
information technology planning, multi-vendor system integration, application
software maintenance and workflow automation.
13
Imaging and Electronic Data Capture Services which provide outsourcing
services to efficiently convert paper healthcare claims into electronic
transactions. Additionally, HealthAxis provides mailroom services to sort
incoming healthcare claim forms prior to imaging.
Web Based Image Storage and Retrieval which provides claims image
retrieval services via the Internet from a standard desktop personal computer
using a web browser.
The application solutions group's clients include large insurance
carriers, Blue Cross and Blue Shield organizations, independent entities that
administer claims processing and payment, self-funded employers, and other
industry participants. The application solutions group also offers systems
integration, technology management and data capture services to these same
customer client groups.
The application solutions group has over 20 years of experience
building software applications and developing systems for the healthcare payer
industry. The application solutions group's current client base represents
approximately 800,000 insured lives (excluding covered dependents) enrolled
under the proprietary software applications and approximately 2,000,000 claims
per month through the data capture services. Prior to its merger into
HealthAxis, Insurdata (now HealthAxis' application solutions group) generated
approximately $38.2 million in revenues for the year ended December 31, 1998 and
approximately $42.9 million in revenues for the year ended December 31, 1999.
Historical Development and Insurdata Merger
HAI incorporated HealthAxis in March 1998 for the purpose of selling
insurance products on the Internet. The health insurance expertise supplied by
HAI based upon its 100 years of experience as an underwriter of individual
health insurance policies was critical in the initial stages of HealthAxis'
development as an online insurance agency. HAI also provided capital resources
as well as the initial products sold on the HealthAxis website. During 1998 and
1999, HealthAxis entered into marketing agreements with several Internet portals
in order to build HealthAxis brand awareness. During 1999, HealthAxis expanded
from 15 to 105 employees, entered into carrier partner agreements with
nationally recognized insurance companies to sell products on its website,
commenced interactive marketing of its website through agreements with Internet
portals, expanded and enhanced its website and raised capital through several
private placements of its securities.
In December 1998, HealthAxis initiated online insurance distribution
through America Online and the World Wide Web though the "soft launch" of one of
HAI's products in 18 states. The objective of the soft launch was to provide a
controlled environment through which HealthAxis could minimize service problems
in the delivery of insurance products.
During 1998, the board of directors of HAI made a strategic decision to
sell its insurance underwriting business and focus its capital and managerial
resources on e-commerce sales of insurance through HealthAxis. In pursuit of
this goal, between December 1998 and November 1999, HAI sold its traditional
insurance businesses in a series of unrelated transactions, including the sale
of PILIC to AHC Acquisition, Inc. As a result of these sales, at the end of
1999, HealthAxis was HAI's only operating subsidiary. During 1999, HealthAxis
continued to focus on expanding the geographic scope and diversity of the
products offered on its website through its carrier partner agreements with
nationally recognized insurance companies. Throughout 1999, HealthAxis continued
to integrate new carrier partner products on its website and make additional
technological enhancements to its website.
14
HealthAxis determined that, despite its efforts to hire information
technology employees, it needed to outsource certain aspects of the carrier
integration process to Insurdata Incorporated, a subsidiary of UICI, in order to
rapidly integrate carrier partners on its website. HealthAxis' relationship with
Insurdata highlighted HealthAxis' need to upgrade its technical capabilities in
order to capitalize on the competitive advantage created by rapidly integrating
new carrier partners on its website. In August of 1999, HealthAxis began
negotiations with Insurdata to merge Insurdata into HealthAxis. HealthAxis'
reasons for pursuing the merger with Insurdata included the following:
o Acquire technical expertise. Insurdata had over 300 software
engineers with substantial experience in the workflows applicable
to the health insurance industry's business processes. HealthAxis'
management believed its technological leadership in the healthcare
payor segment of the insurance industry would be invaluable to
HealthAxis' growth.
o Accelerate carrier partner integration process. Management
believed Insurdata's technological expertise and staff of
information technology professionals were critical to the
acceleration of the carrier partner integration process.
o Increased Revenues. Insurdata's revenues were $42.9 million in
1999.
o Enhance attraction of products and services to insurance payers.
Management believed that the addition of the ability to offer an
end-to-end Internet based set of services to insurance payers was
more attractive to insurance industry participants than solely
distribution services.
o Improve ability to raise capital. Management believed that an
established revenue base, seasoned management and significantly
greater technological resources would improve HealthAxis' ability
to raise capital.
On December 6, 1999, HealthAxis, Insurdata, HAI and UICI entered into
an agreement and plan of merger which set forth the terms and conditions under
which Insurdata was merged with and into HealthAxis. As part of this merger,
Insurdata became HealthAxis' applications solutions group. The companies
completed the merger on January 7, 2000. As a condition to the merger, UICI
required HealthAxis to raise at least $55 million in additional capital in order
for HealthAxis to implement its business plan.
Since its inception, HealthAxis has funded its operations through
capital contributions from HAI and the sale of its common and preferred stock or
debt convertible into common stock in a series of private placements. On
December 7, 1999, HealthAxis completed a $57.7 million private placement of
3,846,003 shares of its common stock at $15.00 per share to accredited
investors, including the purchase of 133,333 shares of HealthAxis common stock
by HAI. This $57.7 million private placement was a condition to the completion
of the Insurdata merger.
15
The table below identifies the equity ownership of HealthAxis common
and preferred stock before and after the merger of Insurdata. The table excludes
options and warrants to purchase HealthAxis stock.
March 14, 2000 December 31, 1999
-------------- -----------------
Shares Percentage Shares Percentage
------ ---------- ------ ----------
HAI 15,801,644 34.8% 15,801,644 66.9%
UICI 17,810,229 39.2% 866,551 3.7%
AHC Acquisition (1) 100,000 0.2% 100,000 0.4%
Michael Ashker - - - -
Minority Interest 11,714,199 25.8% 6,850,310 29.0%
---------- ------ ---------- ------
Total 45,426,072 100.0% 23,618,505 100.0%
========== ====== ========== ======
(1) AHC Acquisition Inc. is owned by Alvin, H. Clemens who is the Chairman of
HAI and HealthAxis.
As a result of the merger with Insurdata and the December 7, 1999
private placement effected as a condition to the merger, UICI became the largest
shareholder of HealthAxis holding 43.6% of HealthAxis' capital stock and HAI's
ownership of HealthAxis was reduced to 34.8%. In March 2000, HealthAxis
announced that UICI privately placed 2 million shares of its HealthAxis common
stock with a single institutional investor. UICI executed the sale to raise cash
due to its previously announced unanticipated losses in its unrelated credit
card operation. HealthAxis understands that UICI will seek alternatives, other
than the sale of additional shares of its HealthAxis stock, to meet future cash
needs. However, UICI may be required to sell additional HealthAxis shares in the
future. Any sale of a significant amount of HealthAxis shares by UICI could have
negative impact on the market price of HAI shares. UICI currently owns 39.1% of
HealthAxis.
Additionally, in connection with the Insurdata merger, UICI entered
into two voting trust agreements. These agreements grant voting power over a
portion of the HealthAxis common stock held by UICI to the trustees who are also
directors of HAI and HealthAxis. Pursuant to the terms of certain voting trust
agreements, UICI only has voting control over 19.1% of HealthAxis' outstanding
equity securities. In connection with the Insurdata merger HAI, UICI, HealthAxis
and Michael Ashker, President and Chief Executive of HealthAxis entered into a
shareholders' agreement. Under the terms of the shareholders' agreement, the
board of directors of HAI will consist of up to nine members. UICI and HAI may
each independently nominate three nominees to the board, and, the remaining
three directors will be nominated by mutual agreement of HAI (acting by the vote
of a majority of the members of the board who were not nominated by or agreed to
by UICI) and UICI. This provision of the shareholders' agreement will terminate
with respect to UICI when UICI owns less than 20% of the HAI common stock on a
fully diluted basis. In connection with the reorganization, this agreement will
be terminated and the parties to this agreement as well as Alvin Clemens and
HealthAxis Acquisition, Inc. will enter into a similar agreement.
Health Insurance Industry
The health insurance industry represents one of the largest segments of
the U.S. economy. In 1995, the last year for which industry figures are
available, the Health Insurance Association of America reported that total
premium revenues for commercial insurers, Blue Cross and Blue Shield plans,
self-insured plans and HMOs equaled approximately $321 billion. The Health
Insurance Association of America projected a growth rate of 5% to 7% for 1996
and 1997. These insurance payers collectively provided health insurance coverage
to over 185 million Americans in 1995. The remainder of the population was
either uninsured (roughly 44 million persons) or covered by a government program
such as Medicare or Medicaid.
16
The method of distributing health insurance varies by market segment.
HealthAxis plans to employ a captive sales force to market its products to large
and mid-sized employer groups by targeting the company human resource
departments of these entities. The human resources staff is then responsible for
enrolling the group members in the appropriate plans. Small group (generally 100
lives and fewer) and individual plans are sold primarily through independent
agents directly to the consumer/small group decision maker. The traditional
system serving individuals and small groups consists of a hierarchy of master
general agents, general agents and agents, each of whom creates incremental cost
as product flows downstream from the underwriter to the consumer. Agents
represent the principal point of interaction with the consumer and are
responsible for closing sales. Agents solicit prospects at the local level and
help consumers select a policy. This highly labor-intensive system of
distribution has existed since the emergence of insurance as a mass market
product. HealthAxis believes that the expenses associated with this distribution
system represents approximately 20% of the total cost of an individual health
insurance product, creating a disintermediation opportunity.
HealthAxis believes that agents, in addition to generating significant
selling costs for insurers, often create a shopping experience that is less than
ideal for the buyer. Based upon its research, HealthAxis believes prospective
consumers view meetings with agents as inconvenient and dislike sales pressure
that is perceived to accompany these meetings. Agents represent the "sellers"
(i.e. insurance carriers) and not the "purchaser" of the insurance product.
HealthAxis' goal is to position itself as the customer's "trusted advisor."
HealthAxis believes the Internet can be a significant force in
transforming the distribution and marketing of health insurance in the small
group and individual retail markets by reducing distribution costs and improving
the shopping experience. The type of labor intensive, high-cost distribution
system that is currently utilized in the health insurance industry is highly
vulnerable to the disintermediation of agents from the sales process. HealthAxis
also believes that insurance, as an information-based product, is better suited
to Internet distribution than physical products such as books and furniture,
items for which the "packing and shipping" components can entirely offset the
efficiency of online sales. The Internet offers consumers the ability to "shop"
for insurance in an environment that offers 24 hours a day/seven days a week
availability, information access, and the ability to control the pace of the
buying process, without agent pressure.
HealthAxis believes that the rapid growth of the Internet has helped to
accelerate the development of the market opportunity in Internet insurance
distribution. Rapid increases in the number of websites, number of web users,
access to the web, and dollar amounts of transactions conducted via the web
illustrate the significance of the web as both a center of commerce as well as a
mass medium. According to the Emarketer, an Internet market research firm, the
number of U.S. online users was approximately 58 million in 1999 and is
estimated to increase to approximately 88 million in 2002. The increase in web
users is attributable to a number of factors, including the decreasing cost and
wider availability of both personal computers and online access as well as an
increase in the types of goods, services and content available through the
Internet. Emarketer estimates the total value of goods and services purchased
over the Internet will grow from $38.9 billion in 1998 to $654.4 billion in
2003.
Plan Administration. Healthcare plan administration involves providers,
payers, managed care organizations, reinsurance carriers, preferred provider
organizations, medical and dental claim review staffs, employers and employees.
Unlike other insurance types, healthcare insurance administration results in
extensive interaction between the consumer and the insurance carrier due to the
high number of claims submitted. Each of these participants must be able to
share, process and access data in order to perform their respective roles in the
healthcare system. However, the fragmentation within the healthcare industry
complicates this task.
17
It is estimated that over $250 billion each year is wasted through
redundant procedures and excessive administrative costs. As the overall
healthcare industry has increased in size and complexity, the burden of
gathering, processing and managing the approximately 4.6 billion claims
generated each year has led to significant administrative bureaucracies,
inefficiencies and, consequently, increasing costs. This burden, coupled with
the fact that the industry has historically under-invested in information
technology, has placed increasing strains on the profitability of the overall
industry as pricing pressures and other competitive factors have compressed
margins. Recent industry reports conclude that the health insurance industry is
10 to 15 years behind other transaction intensive industries, such as the
airline and banking industries, in its use of information technology. This
failure to effectively utilize currently available technology is reflected in
the higher transaction processing costs incurred within the health insurance
industry. HealthAxis believes that the estimated cost to process a healthcare
claim can range from $8.00 to $18.50, versus less than $1.00 for a banking
transaction.
HealthAxis believes that the healthcare industry has historically
under-invested in information technology due to the limited suitability of
existing technological platforms in addressing the needs of the industry. The
high degree of interaction and the large volume of transactions among healthcare
providers, insurers and managed care companies, independent entities that
administer claims processing and payment, employers and employees does not lend
itself to the traditional client-server or mainframe environments. These
systems, which are designed to operate with dedicated networks, are generally
not suited for interfacing among a number of unrelated, external users on a cost
effective basis. HealthAxis believes the Internet, which facilitates the rapid
deployment of information and provides for cost-effective access to an unlimited
number of users, represents the next phase in the evolution of healthcare
information technology. Due to the transaction-intense nature of healthcare
insurance, HealthAxis believes the online consumer will demand Internet access
to healthcare eligibility information, claims status and provider information.
The HealthAxis Solution
HealthAxis provides a comprehensive set of technology-based solutions
for the health insurance industry. The HealthAxis solution addresses both the
consumer's needs for a more cost-efficient and information-rich purchase
experience and the payer community's need to achieve cost efficiencies in their
operations. HealthAxis provides fully integrated insurance distribution and
administration solutions which utilize the Internet, serving both consumers and
insurance payers. HealthAxis is composed of the consumer services group and the
application solutions group.
18
[GRAPHIC OMITTED]
The consumer services group is an online retailer of health insurance
products and related consumer services. The consumer services group targets both
the individual and small group insurance markets through its website,
www.healthaxis.com. The HealthAxis website provides a fully integrated
transaction platform for the sale of health insurance over the Internet.
HealthAxis believes its website provides a superior decision-making and
purchasing experience to those currently available through either the
traditional agent-based distribution system or online competitors. The
HealthAxis website guides a consumer through every step in the health insurance
purchase process from education and price quotation through enrollment and post
sale service. HealthAxis believes that no other insurance website currently
matches HealthAxis' ability to cover all pre-and post-sale activities.
HealthAxis' application solutions group provides integrated proprietary
software applications that utilize the Internet to address the workflow and
processing inefficiencies embedded in the healthcare insurance industry. The
software enables carriers, independent entities that administer claims
processing and payment and large group employers to reduce costs and improve
customer service through the use of online benefits enrollment and
administration services. These software applications increase the efficiency of
a client's operations by eliminating paper-based processes and improving the
client's ability to capture, process and share data with plan members and other
industry participants within the healthcare system, including providers, payers,
managed care organizations, agents, reinsurance carriers, employees and
employers. In addition, the application solutions group offers these customers
related systems integration, technology management and data capture services to
these same customer groups.
The HealthAxis Strategy
HealthAxis' strategy consists of six principal components:
o Build HealthAxis Brand Awareness.
o Expand Sales Force to Capitalize on Leading Technology.
o Provide High Levels of Value and Service to Consumers.
19
o Accelerate Carrier Partner Integration by Utilizing Technical
Expertise of the Application Solutions Group's Staff.
o Cross-Sell Payor Services to Carrier Partners and Consumer Services
to Existing Application Solutions Group Client Base.
o Develop Multiple Distribution Channels.
Build HealthAxis Brand Awareness. HealthAxis intends to expend
resources to build a recognizable, national brand. During 1998 and 1999,
HealthAxis established portal relationships with America Online Inc. ("AOL"),
Lycos, Inc. ("Lycos"), Snap! LLC ("Snap!"), CNet Inc. ("CNet") and Yahoo! Inc.
("Yahoo"). HealthAxis intends to continue to build awareness of its brand
through online marketing by renewing existing agreements, renegotiating
agreements with existing portal partners or creating new portal relationships.
HealthAxis intends to diversify its marketing approach to include TV, radio,
print, direct mail, and the use of public relations to develop brand awareness.
Expand Sales Force to Capitalize on Leading Technology. The application
solutions group has established product leadership through its software
applications: Insur-Web, Insur-Enroll and Insur-Image. HealthAxis is committed
to capitalizing on its product strength by expanding its sales force in order to
increase the market share of these products.
Provide High Levels of Value and Service to Consumers. A key element of
HealthAxis' strategy is to offer a customer-focused environment on its website
that provides the consumer with access to relevant, timely product information
and an array of interactive profiling tools to provide a customized,
user-friendly purchasing experience.
Accelerate Carrier Partner Integration by Utilizing Technical Expertise
of the Application Solutions Group's Staff. A key synergy between the consumer
services group and the application solutions group is the applicability of the
application solutions group's technical expertise to the carrier partner
integration process. The application solutions group's technical staff, with
over 300 professionals and over 20 years of experience working with health
insurance payers, is expected to support and expedite the carrier partner
integration process.
Cross-Sell Payer Services to Carrier Partners and Consumer Services to
Existing Application Solutions Group Client Base. HealthAxis intends to
cross-sell its distribution services to the application solutions group's
existing client base of large employer groups to provide these clients'
employees with access to ancillary health insurance products not offered by the
employer including vision care, disability coverage and long term care insurance
with integrated, web-enabled product distribution. Concurrently, the application
solutions group intends to cross-sell its proprietary software services to the
consumer services group's existing carrier partners. Certain of the carrier
partners are among the largest payers in the United States and represent a
potential source of revenues for the application solutions group's
administration services.
Develop Multiple Distribution Channels. HealthAxis will have the
ability to sell to a variety of health insurance consumers, including
individuals, small groups, and large groups. Individual and small groups
comprise the principal target market of the consumer services group's website.
The consumer services group can utilize the application solutions group's client
relationships to sell ancillary insurance products, including disability plans,
life insurance, critical care coverage and vision care to large group employers.
20
Revenue Model
HealthAxis derives a variety of recurring revenue streams from its
various business activities. Both the consumer services group and application
solutions group feature a transaction-driven revenue model.
Consumer Services Group Revenues. The consumer services group generates
revenues from both commissions from the sale of insurance policies and
volume-based marketing assessments. HealthAxis charges its carrier partners a
commission, which is levied as a percentage of the dollar amount of premiums
sold through HealthAxis for each carrier partner's products. Due to the
efficiency of the online channel, HealthAxis believes it can charge a commission
that is lower than that assessed by traditional agents, resulting in cost
savings to both the insurer and the consumer. The commission fee is the
principal source of revenue for the consumer services group. In addition,
carrier partners are charged a carrier marketing assessment fee based upon
actual premium revenue of the particular product line. The concept behind the
carrier marketing assessment fee is to charge the carrier partner an amount
similar to what it would allocate to advertising/marketing the same product
through traditional agent distribution channels. Carrier marketing assessment
revenues vary among the portfolio of carrier partners based upon a variety of
factors. While this amount varies by carrier, HealthAxis believes that the
industry average is between 2-4% of premiums.
HealthAxis executes the complete sale of insurance policies rather than
generating referrals or leads to insurance agents. Instead of collecting a
one-time referral fee, the consumer services group earns monthly revenues for
the duration of each policy that is sold through HealthAxis. Further, by
remaining the main point of contact for the consumers, HealthAxis will benefit
as policies are renewed.
Application Solutions Group Revenues. The application solutions group
generates transaction-based revenues through multi-year or annually renewable
contracts with its clients for its proprietary applications. These contracts
generally include an up-front payment intended to recoup certain start-up costs
incurred by the application solutions group in serving new clients. Typically,
these costs are associated with converting the client's existing system,
training and other costs incurred to tailor a specific solution for a client.
The principal revenue obtained from these contracts is a per-transaction fee,
the unit of measure which varies based upon the particular application solution.
Some applications are priced on a per-employee per-month or on a per-member
(including dependents) per-month basis while others are on a per-image and
per-transaction basis. The application solutions group charges its clients for
its systems integration and technology services on a time and materials basis.
The application solutions group charges its clients for its data capture
services, where it converts the client's data from a paper based format to an
electronic format, on a per-claim basis.
Products
HealthAxis provides a comprehensive product set with solutions for both
consumers and payers. HealthAxis is capable of providing software services
across both the administration and distribution segments of the health insurance
market. The following describes the products offered by both HealthAxis'
consumer services group and application solutions group.
21
Consumer Services Group
HealthAxis' website is located at www.healthaxis.com. HealthAxis
believes its website provides a superior retail experience when compared to
those currently available either through the traditional distribution system or
online competitors. The website can be accessed directly or through one of
HealthAxis' portal marketing partners.
www.healthaxis.com presents a consumer with the following:
o Access to insurance information and personal profiling tools;
o Opportunity to buy online from among a choice of products from
leading health insurance providers;
o Affordable products priced to reflect the efficiencies of Internet
based distribution;
o Informed assistance from licensed professionals through chat, phone
or e-mail; and
o Ongoing customer service through plan and policy information
maintained in the customer's personal space.
HealthAxis launched its service in December 1998 through America Online
Inc. This launch involved a single carrier with product distribution in 18
states. The soft launch phase was designed to aid HealthAxis in understanding
both the marketplace and the capabilities of its platform. In August 1999,
HealthAxis officially launched its website with the addition of its second
carrier partner, which expanded HealthAxis' geographic scope to include 38
states and the District of Columbia. HealthAxis offered individual major
medical, small group major medical, short-term medical, student medical, dental,
vision, and prescription plans, with at least one product available in each of
the 50 states and the District of Columbia as of March 27, 2000. Products of
additional carrier partners are anticipated to be added during 2000. HealthAxis
is licensed in 50 states and the District of Columbia either directly or through
its agency employees or wholly owned subsidiaries. See "Description of Business
of HealthAxis -- Regulation."
Product Set. HealthAxis intends to offer a full range of health and
related insurance products. HealthAxis' objective is to provide "one stop
shopping" for health insurance products. HealthAxis' goal is to offer consumers
and small businesses a choice of products from among a selection of quality
insurance providers. HealthAxis' insurance product portfolio will include the
following:
o Individual Medical o Critical Care o College Student Medical
o Small Group Medical o Long-Term Disability o Senior Medical
o Prescription o Long-Term Care o Senior Life
o Vision o Term Life o Other health related products
o Dental o Short-Term Medical
As of January 31, 2000, HealthAxis had entered into agreements with 12
carrier partners plus a national marketing agreement with the Blue Cross and
Blue Shield Association. In addition to its current carrier partner
relationships, HealthAxis continues to work towards implementing additional
relationships to enhance the depth and breadth of the product portfolio.
Relevant Information and Customized Advice. HealthAxis believes
consumer education is an important component of establishing a relationship with
the prospective customer. Consumers can use www.healthaxis.com to gather
information about insurance products, the application and underwriting process,
22
and which products are relevant to his or her needs and budget. Resources are
available both online and via the customer care center, which can be reached by
telephone, live "chat", or e-mail. HealthAxis is building an extensive
personalization capability that will enable users to self-profile their health
insurance needs. Such online profiling tools will provide an important level of
customization to the buyer's shopping experience.
Quotes. HealthAxis provides instant quotes on available plans. Plan
quotes are returned in seconds. The consumer can proceed either directly from
his or her quote to an application to purchase the desired policy or to other
areas of the website to gather more plan information.
Application Process. HealthAxis allows a customer to apply for policies
online, without traditional paper applications. For each of the products
HealthAxis sells, it creates, in conjunction with its carrier partners, an
online version of the product's application form. HealthAxis believes the online
form provides both a convenience to its consumers and a cost savings to its
carrier partners. All of HealthAxis' online applications can be saved so that
the consumer may store partially completed forms in a password-protected area
for subsequent use. HealthAxis includes in its online forms an array of
context-sensitive information to help guide the consumer through the application
process. This context-based help is complemented by the availability of licensed
insurance professionals via live "chat", e-mail, and a toll free telephone
number. Upon completion of an application form, a consumer simply clicks the
"send" button to submit the application to HealthAxis, which automatically
forwards it to the appropriate carrier partner. A consumer then receives an
instant message that confirms receipt of the application.
Customer Care Center. HealthAxis operates a customer care center in its
East Norriton headquarters in order to provide consumers a variety of customer
support options, including online "live chat" and telephone assistance. The
customer care center staff is composed predominantly of fully licensed insurance
professionals. HealthAxis believes these professionals play an important role in
ensuring both customer satisfaction and sales conversion.
As fully licensed insurance professionals, the customer care center
staff can assist applicants through the entire purchase process, including:
o evaluating the customer's insurance needs;
o evaluating insurance plans; and
o completing and submitting an application.
The customer care center staff is trained in both insurance and technology to
assist customers with product issues, processing questions and technical matters
including web browser difficulties. HealthAxis' customer service representatives
are available seven days a week.
Underwriting. HealthAxis does not engage in insurance underwriting.
HealthAxis' role is to provide an online platform that connects the applicants
and the insurance underwriters. HealthAxis believes its primary function once an
application has been submitted is to serve as the conduit for communications
between the applicant and the carrier partner. In most cases, applications
submitted by customers are electronically transmitted to the appropriate carrier
partner or to the carrier partner through its designated independent entity that
administers claims processing and payment.
Insurance products vary in the extent of review required for each
applicant. For example, products like dental insurance, vision care, and
short-term medical coverage are typically issued without underwriting.
Non-underwritten products lend themselves to rapid online fulfillment, given the
lack of review required to issue the policy. Other products, like medical
insurance, long-term care, or life insurance require underwriting. In such
instances, the underwriting process itself is substantially similar to the
23
traditional system. Carrier partner representatives receive the application
electronically from HealthAxis' web servers. Upon receipt, the underwriters
review the application and contact the applicant, if necessary, to conduct
further inquiry. Each carrier partner adheres to its own underwriting standards
with respect to the issuance and rating of policies. HealthAxis attempts to
select carrier partners for which efficient product fulfillment is a high
priority.
Policy Issuance Process. Once a policy is underwritten, the new
HealthAxis policyholder is mailed a plastic identification card with an
accompanying welcome letter. The letter directs the policyholder to his or her
HealthAxis personal space, a fully secure, online, password protected
environment, where HealthAxis has deposited an electronic copy of the policy
certificate. The carrier partner is not required to mail physical materials to
the applicant beyond any plastic identification card that may be attached to the
product. All materials formerly delivered in paper form are now delivered
electronically to the applicant through the personal space. The electronic
materials include plan information, the doctor/hospital network directory, and
other materials. HealthAxis' ability to transform the costly paper flow
historically associated with the policy issuance to an efficient electronic
document flow represents a cost savings for the carrier partner.
Post-sale Customer Care. HealthAxis provides each customer with online
access to his or her policy information, billing data, claims history and claims
status reports. These records are viewable on www.healthaxis.com via the
customer's personal space, within which a customer can not only view
information, but also maintain and update his or her personal data.
HealthAxis believes that delivering post-sale services in an online
format provides both a convenience to customers and a cost savings to insurers.
Under the traditional agent-based system, the customer would be required to call
either the agent who sold the product or the underwriter's customer service
center. In contrast, a HealthAxis customer can conveniently access his or her
plan information 24 hours a day/seven days a week without initiating a
conversation with a sales agent. Concurrently, the carrier partners benefit from
reduced customer service expenses, because policyholder records can be
automatically updated without manual intervention by the carrier partner's
staff. HealthAxis believes that its ability to deliver post-sale service to its
customers is unique within the online insurance space.
Billing Process. A consumer can select from payment methods, including
credit card or an automatic debit from a bank account. The website is fully
enabled to process both credit card and monthly bank account debit transactions.
Application Solutions Group
HealthAxis' application solutions group is a provider of proprietary
applications that address the specific workflow and processing needs of the
administration segment of the healthcare insurance industry in an efficient and
cost-effective manner. The application solutions group, through its proprietary
enrollment and plan administration applications, provides Internet enrollment
and online access to claims and eligibility data. The application solutions
group's services include proprietary workflow and Internet-enabled business
applications that enhance transaction processing and promote the flow of
information among constituent users, including providers, payers, managed care
and case management organizations, reinsurance carriers, agents, preferred
provider organizations, medical and dental claim review staffs, employers and
employees. In addition, the application solutions group offers related systems
integration, technology infrastructure management and data capture services.
24
- ------------------------------------------------------------------------------
Data Capture Services
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Workflow and Business
Administration Applications Systems Integration
Insur-Web, Insur-Image, Insur-Voice, Custom Applications
Insur-Enroll, Insur-Admin, Insur-Claims
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Technology Infrastructure Management
- ------------------------------------------------------------------------------
Proprietary Applications. The application solutions group offers the
suite of proprietary workflow and business applications described below. These
products are offered to HealthAxis' clients on a per-employee per-month basis,
where the client pays the application solutions group a monthly fee for each
enrollee it administers. HealthAxis typically enters into multi-year contracts
with clients to whom it supplies these services.
Workflow Applications
Insur-Web. Insur-Web is the application solutions group's web-enabling
technology that provides an Internet gateway to the application solutions
group's other proprietary business applications. By enabling the application
solutions group's business applications to work via the Internet, the
application solutions group allows its clients to provide direct access to
systems and data within a secure environment; thereby lowering transaction costs
and shortening cycle times for their constituent users. In addition to password
protection, Insur-Web employs firewalls, logging tools, encryption technology
and virus detection software packages that are designed to prevent unauthorized
access to the extranet. Insur-Web can serve as the gateway to the application
solutions group's proprietary applications or to the client's legacy systems.
This product was released in 1999.
Insur-Image. Insur-Image is a seamless scanning, optical character
recognition and data verification workflow system specifically engineered for
claims processing that enables payers to create a paperless environment.
HealthAxis uses Insur-Image claim forms to capture, in digital form, claims,
attachments and related correspondence. Insur-Image contains a form
identification process that automatically identifies the type of claim form and
routes it to the appropriate next step in the workflow process, thereby
eliminating the need for manual pre-sorting. The image is then processed by an
optical character recognition/intelligent character recognition engine. The
engine extracts the data from the claim image, thereby minimizing the need for
manual data entry. Insur-Image then applies a data verification technology known
as Sorted Character Image Verification, to increase data accuracy and measure
quality. Insur-Image provides long-term archival image storage. Management
believes that the speed and accuracy of its Insur-Image application gives
HealthAxis a competitive advantage in the industry. Insur-Image can be used in
conjunction with HealthAxis' Insur-Claims system, or can be integrated with an
organization's existing claims processing system. This system has been in
service for more than five years.
25
Insur-Voice. Insur-Voice is a scaleable, flexible, interactive voice
response system that provides employees, providers and employers 24-hour a day
access to information thereby improving service while reducing customer service
costs. Insur-Voice reduces administrative costs by automating the processing of
customer inquiries through the use of a menu-driven telephone interface. Using
Insur-Voice, the application solutions group's clients can provide a variety of
services including interactive enrollment, benefit modification, automated
access to provider directories, preferred provider organization pricing,
automated eligibility verification and claim status reporting. Insur-Voice can
be integrated with the application solutions group's other proprietary
application solutions or can be integrated into the client's existing system.
This product has been in operation for more than five years.
Business Administration Applications
Insur-Enroll. Insur-Enroll is an Internet and interactive voice
response enabled enrollment and eligibility function. Insur-Enroll provides
24-hour interactive enrollment, eligibility and life event management
capabilities. Insur-Enroll supports an unlimited number of benefit plans
including health, dental, life, vision and accident and disability, and medical
and dependent care flexible spending accounts. Using employee specific
demographic information, Insur-Enroll automatically computes coverage levels and
pre- and post-tax deductions. A least-cost routing feature allows Insur-Enroll
to forward customized forms and confirmation statements to employees
automatically through e-mail, fax or regular mail. HealthAxis believes that less
than 10% of plan enrollments are executed using the Internet and that this
number is expected to increase to over 60% within the next several years.
HealthAxis believes that the utilization of the Internet for enrollment services
presents a significant cost saving opportunity to insurers, benefit
administrators, independent entities that administer claims processing and
payment, consultants, self-administered groups and employers, and a significant
market opportunity for the application solutions group. The solution was
successfully deployed in 1999.
Insur-Admin. Insur-Admin is a comprehensive benefits administration
system that features enrollment, group and individual billing and premium
collection and reconciliation for independent entities that administer claims
processing and payment, insurers, self-administered groups, health plan network
managers and healthcare purchasing cooperatives. Insur-Admin accommodates both
interactive and batch enrollment into a wide spectrum of coverages. It allows
organizations to track an infinite number of divisions, subdivisions, locations,
health classifications and work groupings. Insur-Admin interfaces with a plastic
card production system thereby reducing the time required to produce
identification cards. A billing function included in Insur-Admin manages
individual and group billing and premium collection and reconciliation including
the ability to service multi-employer groups that have joined together to
negotiate insurance rates. Insur-Admin manages all aspects of Consolidated
Omnibus Budget Reconciliation Act, including calculating and collecting
Consolidated Omnibus Budget Reconciliation Act premiums, tracking qualifying
events and issuing rights and qualification letters and billing coupon books.
The system performs Health Insurance Portability and Accountability Act
compliance activities, including capturing prior coverage credit days and
issuing Health Insurance Portability and Accountability Act certificates upon
termination of coverage. Insur-Admin also manages medical and dependent care
flexible savings accounts. By integrating Insur-Admin with the application
solutions group's Insur-Web, Insur-Image and Insur-Voice applications, clients
achieve enhanced workflow efficiencies. Insur-Admin can be implemented in a
stand-alone mode, or can be integrated with the application solutions group's
claim payment systems. This system has been in service for more than five years.
Insur-Claims. Insur-Claims is a comprehensive claims processing system
for health, dental, vision, short-term disability, executive reimbursement and
medical and dependent care flexible spending accounts. A rules-based approach
allows Insur-Claims to be fully customized, which allows the system to handle
complex benefit structures and provider reimbursement arrangements. Insur-Claims
also includes auto adjudication and preferred provider organization repricing
functions, which further increases the efficiency of the system. Insur-Claims is
utilized by independent entities that administer claims processing and payment,
insurers and self-administered groups. Insur-Claims also facilitates utilization
26
management, including pre-certifications, referrals and authorizations,
re-bundling and unbundling edits, and 1099 and tax processing. Insur-Claims also
accepts electronic data interchange or "EDI" transactions. Insur-Claims can be
integrated with the application solutions group's Insur-Web and Insur-Voice
applications to provide on-demand access to benefit coverage information such as
enrollment and claim status, either through the Internet or over the telephone.
This system, combined with Insur-Voice, also enhances the ability of customer
service representatives to assist consumers by automatically routing and
displaying customer-specific data to a customer service representative upon
receipt of a phone call. This system has been in operation for more than five
years.
HealthAxis retains physical and operational control of its proprietary
applications which allows the application solutions group to cost-effectively
perform application system maintenance and upgrades as all clients utilize the
same version of each application. In addition to reducing the costs associated
with tracking and distributing application versions, the application solutions
group does not incur expenses associated with supporting multiple versions of
the same application. Management believes that this approach also reduces the
administrative burden on the client, thereby increasing overall client
satisfaction.
Systems Integration and Technology Management. Through its systems
integration and technology management services, the application solutions group
provides cost-effective design, development and implementation of technical
solutions for payers. These services can be supplied independently or as a
complete package pursuant to which the application solutions group assumes
complete responsibility for the client's information technology operation as is,
and, where appropriate, converts the client to the application solutions group's
systems. These services are provided to HealthAxis' clients on a time and
materials basis. The application solutions group's systems integration services
consist of four primary offerings:
o Information technology planning. The application solutions group's
information technology planning services match systems requirements
with the clients' long-term business needs to establish the
application, data and technology framework.
o Multi-vendor system integration. Through its multi-vendor systems
integration services, the application solutions group delivers
solutions composed of custom and packaged software, hardware and
communications technologies. This service encompasses defining user
and architecture requirements and performing systems design, vendor
management, integration testing and implementation.
o Application software maintenance. The application solutions group
offers a variety of management functions in connection with its
application software maintenance services, including the management
of the client's application software portfolio of legacy and
newly-developed systems. The application solutions group's
application management services include consulting and implementation
of application enhancements, corrective and adaptive maintenance and
application support, including training. In situations in which a
third-party application software package is a suitable alternative to
custom development, the application solutions group undertakes a
suitability analysis, evaluates and selects an application package,
performs modifications, implements the solution and trains users.
27
o Workflow automation. The application solutions group's workflow
automation services provide consulting and solution integration
focused on improving productivity by automating data capture and
shortening processing times. The application solutions group utilizes
both its proprietary workflow solutions and custom solutions within
its workflow automation services. The application solutions group
also offers systems operations for MVS mainframe processors, UNIX and
NT server environments, network management for voice, data and e-mail
systems (including on LAN environments) and comprehensive client
support through its help desk functions.
The application solutions group applies strong management practices to
the systems delivery process through its proprietary Insur-Method software
development and systems integration life cycle methodology. Insur-Method is a
standardized set of methods and techniques utilized to ensure successful
delivery of projects in a timely and cost effective manner and in accordance
with client specifications. Insur-Method encompasses all phases of project
development from planning, including business analysis and, where applicable,
business process reengineering, to development, including programming, to
implementation, including technology integration. Insur-Method also encompasses
project management through a detailed budgeting process. The application
solutions group also utilizes Insur-Method in its applications maintenance
services to manage application upgrades, track service levels and measure
programmer productivity and maintenance costs. These services are provided
exclusively to the healthcare administration industry and are generally provided
in connection with one of the proprietary applications. By focusing on
healthcare administration, HealthAxis believes it can bring greater value to
clients.
Imaging and Electronic Data Capture. The application solutions group
performs imaging or data capture outsourcing services to efficiently convert
paper transactions in the form of healthcare claims into electronic
transactions. As a complement to its imaging services, the application solutions
group also provides mailroom services pursuant to which the application
solutions group receives and sorts incoming healthcare claim forms prior to
imaging. Processing paper based claims is inherently inefficient and
time-consuming. Paper claim forms undergo several processes from the time they
are received and sorted in the payor's mailroom to the time the relevant data is
captured and entered into the payor's system. These cumbersome processes,
coupled with the high volume of claims processed by typical payers, results in a
significant and expensive administrative burden on payers.
The application solutions group utilizes a combination of advanced
technology and strong management practices in favorable labor markets in the
rural U.S. and Jamaica to efficiently capture and convert large volumes of
claims. The resulting data is downloaded to the client's internal claims
adjudication database or, for those clients utilizing the application solutions
group's claim processing solutions, to the application solutions group's data
center for adjudication and payment. HealthAxis offers these services to its
clients on a per claim or per image basis.
Web Based Image Storage and Retrieval. In tandem with claims data
capture, the application solutions group provides claims image retrieval
services via the Internet. This service features multi-level search capabilities
for locating claim images, as well as the ability to dynamically assign claims
to various work queues. All claim types are supported including dental X-rays.
Image retrieval can be done from standard desktop personal computer using a web
browser.
The application solutions group's imaging and electronic data capture
services are provided on a per image basis. The application solutions group
provides these services pursuant to multi-year or annually renewable contracts.
Claims capture is a vital component of efficient healthcare administration. This
service complements all other products and services. In addition, it provides a
good entry point with new carrier clients and provides cost efficiencies.
28
Technology Development
The application solutions group has an internal technology unit led by
the Chief Technology Officer. This unit is designed to support the application
solutions group's operating units and their clients through continuing research,
development, evaluation and implementation of new technologies. The application
solutions group uses a team approach throughout the development phase of new
products and product enhancements which involves the active participation of the
application solutions group's other business units in the early stages of
development. This early involvement is essential to the development and
successful implementation of effective technology solutions.
In addition to project specific tasks, the application solutions
group's technology unit continues to enhance the application solutions group's
proprietary applications and to develop and test new solutions, including the
testing and analysis of applications available in the market. The application
solutions group's advanced technology unit is involved in research and
development in six core technology areas: web services, workflow, transaction
processing, database services, indexing services and communication.
Carrier Partners
HealthAxis seeks to form alliances with nationally recognized insurance
carriers committed to developing the lower cost electronic channel as an
important means of distributing healthcare insurance products. Because
HealthAxis does not engage in underwriting, HealthAxis relies exclusively on its
carrier partners, the insurance providers from which HealthAxis sources its
products, in order to be able to offer products to individual and small group
consumers. All insurance plans sold on www.healthaxis.com are underwritten by
HealthAxis' carrier partners, and not by HealthAxis.
As of December 31, 1999, HealthAxis had signed agreements with 12
carrier partners. The carrier partner portfolio covers important medical
insurance categories, including individual medical, small group medical, dental,
vision, disability, term life, prescription drug, and more. HealthAxis has
signed most of its carrier partners to exclusive agreements. Under the carrier
partner agreements, HealthAxis becomes the sole online distribution intermediary
able to build electronic linkages into the carrier partner's systems. These
exclusivity provisions generally apply for one to two years from the launch of
the product(s) on the website. HealthAxis continues to market to new insurance
carriers to increase the product selection available on its website.
29
HealthAxis' current portfolio of carrier partners appears in the table
below:
HealthAxis Carrier Partners
(as of December 31, 1999)
Carrier Partner AM Best Rating(1) State Availability Products/Services
- ------------------- -------------------------- ------------------------- ------------------------------
1. Aegon NR-5(2) 49 states Discount PCS Plan *
Accidental Death &
Dismemberment
Medicare Supplemental
2. Aetna/US HealthCare A- 50 states (small group) Small Group Medical *
3 states (individual) Individual Medical
3. Ameritas A+ 49 states 10 year and 20 year Term Life
Group Dental
4. Blue Cross of A 7 states Individual Medical*
CA/WellPoint Small Group Medical
5. Celtic Life Insurance A- 35 states Major Medical *
Co.
6. Ceres Group (Provident B 24 states Major Medical *
American Life & Health Small Group Medical
Insurance Company)
7. Fortis Health A+ 44 states Short-term Medical*
Student Medical*
Long-term Care
8. HPA/Clarendon A++ 35 states Flexible Term Medical
9. Life Insurance Company A 50 states Accidental Death and
of North America (a Dismemberment
CIGNA Company) First Diagnosis Cancer
10. Security Life B+ 41 states Individual Dental/Vision *
Group Dental/Vision
Fully insured PCS
11. UICI Midwest Life A 38 states Individual Medical
12. US Life/American A+ 50 states Group Dental/Vision
General Short-term Disability
Long-term Disability
Group Term Life
- ------------------------------
(1) AM Best Company Inc. is an independent third-party that rates insurance
companies.
(2) AM Best "NR-5" rating can be assigned to a company for which AM Best
prepares standard financial reports, but are not to be formally evaluated
for the purpose of assigning rating opinions at HealthAxis' request.
* Indicates products currently available on the HealthAxis website, however,
these products may not be available in all the carrier partners' available
states.
30
As of March 27, 2000, HealthAxis offers products of the Ceres Group,
Blue Cross of CA/WellPoint, Aetna, Celtic, Security Life, Fortis Health and
Aegon through its website. The products offered include major individual medical
insurance, small group medical, short-term medical insurance, a student medical
insurance product and a prescription plan. HealthAxis has at least one product
available in each of 50 states and the District of Columbia. HealthAxis intends
to expand its products to all 50 states during the second quarter of 2000.
The two principal steps in establishing a carrier partner relationship
are carrier partner development and carrier partner integration. Carrier partner
development is the sales process involved in identifying potential carrier
partners and entering into a carrier partner agreement. Carrier partner
integration is the process by which a newly signed carrier partner links its
legacy systems to HealthAxis' web servers for the purpose of distributing
products through HealthAxis' website.
Carrier Partner Development. HealthAxis employs stringent value
criteria in selecting new Carrier Partners. HealthAxis looks for the following
characteristics:
o Do consumers need the product?
o Does the carrier partner's products fill a gap in HealthAxis' present
product portfolio, either in terms of product type or geography?
o Does the product represent a potentially significant revenue source?
o Is the product competitive in its features and price?
o Is the carrier partner committed to e-commerce?
o Is the carrier partner willing to provide product priced for the
lower cost of the Internet channel?
o Is the carrier partner capable of working with HealthAxis to create
the electronic connection between HealthAxis' servers and the carrier
partner's systems?
Carrier Partner Integration. The carrier partner integration process is
the key to building a robust product portfolio. A product cannot be sold on
HealthAxis' website until the integration team has embedded the carrier's plan
including the plan description, rating engines, provider network information and
application forms, into the website. The complexity of health insurance
underwriting workflows requires a carrier integration staff that has expertise
in both technology and insurance in order to be able to efficiently execute
their tasks. The consumer services group anticipates that it will be able to
leverage the application solutions group's workflow application experience to
expedite the carrier partner integration process.
Carrier partner integration is a multi-step process that takes two to
six months to complete. The HealthAxis integration team generates both
functional and technical specification documents. Once the requirements are
understood, the HealthAxis team begins the programming activities that will
execute the newly designed, electronic workflows. Because each carrier utilizes
different workflows and means of handling data, HealthAxis believes the
application solutions group's substantial experience in the healthcare industry
can be invaluable in resolving complex programming problems.
Application Solutions Group Clients
As of January 7, 2000, HealthAxis' application solutions group had a
total of 37 clients, which include insurance carriers, independent entities that
administer claims processing and payment, Blue Cross/Blue Shield organizations
and self-administered employers. Contracts with these payers are for a
multi-year (generally three year) term with annual renewals thereafter.
31
The application solutions group's business model of offering its
proprietary applications on a transaction basis, plus the difficulty of
migrating to a new system, makes it administratively and economically burdensome
for such clients to switch to a competitor. As a result of this model and a
generally high level of client satisfaction, HealthAxis' application solutions
group has enjoyed long-term client relationships. See "Risk Factors - Business
Related Risks - The loss of one or more of the application solutions group's
large clients would have a detrimental affect on HealthAxis' financial
condition."
As a result of the parent-subsidiary relationship between the
application solutions group (formerly, Insurdata) and UICI, the applications
solutions group has historically derived a large percentage of its revenues from
UICI and its subsidiaries. UICI and its subsidiaries accounted for approximately
60% of Insurdata's total revenues for the year ended December 31, 1999. A
portion of the application solutions group's revenue from UICI in the past was
for Year 2000 services which have been substantially completed. UICI and its
subsidiaries are currently the application solutions group's primary client for
its system integration and technology management services. HealthAxis believes
that the percentage of the application solutions group's revenues attributable
to UICI and its subsidiaries will decline as HealthAxis' marketing efforts
continue to expand HealthAxis' base of external clients. See "Risk Factors --
Business Related Risks -- The loss of one or more of the application solutions
group's large clients would have a detrimental affect on HealthAxis' financial
condition" and "Risk Factors -- Investment Related Risks -- UICI may make
decisions which some shareholders do not consider to be in their best interest."
In addition to UICI and its subsidiaries, two clients, Continental
Casualty Company and National Capital Administrative Services, have historically
accounted for a substantial portion of the application solutions group's
revenue. Continental Casualty Company accounted for approximately 8% of revenues
in 1998 and 4% of revenues in 1999. National Capital Administrative Services
accounted for 11% of the application solutions group's revenues in 1998. In
1999, the National Capital Administrative Services account was de-centralized
into multiple, separately contracted smaller entities. None of those smaller
entities generated revenues which were individually significant.
Sales and Marketing
Consumer Services Group
The primary target markets are the small group and the individual
market. Within the individual market, the targeted consumers are individuals who
are not covered by a corporate sponsored health plan. Potential individual
consumers include people who are self-employed individuals, part-time employees,
full-time independent contractors or other individuals who rely upon
self-provided health insurance coverage. Within the small group market,
HealthAxis intends to focus its marketing efforts on groups of 25 or less,
including small office and home office-based individuals. The average size of a
group sale should increase over time. The cost-savings resulting from buying
direct can be substantial when experienced by multiple employees even for very
small groups.
The consumer services group intends to utilize the application
solutions group's large employer relationships to market ancillary health
insurance products such as vision care and disability plans to members of large
groups. HealthAxis believes this type of worksite marketing program represents
an economical means of acquiring new consumers. The application solutions
group's presence in worksites gives the consumer services group a unique
marketing advantage relative to stand-alone health insurance retailers lacking
this ready access to the large group workplace.
32
HealthAxis believes its ability to create and continue to strengthen
its brand identity is critical to achieving widespread acceptance, particularly
in light of the competitive nature of HealthAxis' business. Promoting and
positioning its brand identity will depend largely on the success of HealthAxis'
marketing efforts and the ability of HealthAxis to provide high quality
insurance products and services. In order to promote its brand identity,
HealthAxis will need to increase its marketing efforts and its financial
commitment to create and maintain brand awareness and loyalty among Internet
users.
Strategic Alliances. HealthAxis' portal marketing partners were the
focus of HealthAxis' marketing efforts in 1999. HealthAxis' marketing effort in
2000 will feature a more diversified marketing approach and will include radio,
print, TV, outdoor, and direct mail. In addition, HealthAxis has initiated a
significant business development effort designed to build retailing partnerships
with a multitude of online and offline companies that share the consumer
services group's target audiences. In addition, HealthAxis has also entered into
a targeted marketing agreement with Yahoo! Inc. See " -- Marketing Agreements"
for a description of this agreement.
Life Event Marketing. HealthAxis' market research indicates that the
purchase of health insurance is generally associated with a variety of
identifiable life events. These events represent situations in which a potential
consumer may recognize a heightened need for insurance and include, among other
things, change in job, graduation from college, marriage, birth of a child,
divorce, relocation, starting a new business and discontinuing operations of an
existing business. These life events generally require the establishment of new
financial and healthcare relationships. Identifying these events and targeting
individuals experiencing such events are important elements of HealthAxis'
marketing strategy.
Direct Marketing. HealthAxis plans to use direct marketing techniques
to target new and existing customers with promotions. HealthAxis plans to e-mail
to potential customers highlighting HealthAxis products and the advantages of
Internet based insurance product purchases. The Internet allows rapid and
effective experimentation and analysis, instant user feedback and efficient
personalization of insurance products for each customer, all of which HealthAxis
seeks to incorporate in its marketing activities. Direct e-mail to HealthAxis
consumers also will be an important driver of HealthAxis' cross-selling efforts.
HealthAxis' customer relationship will allow HealthAxis to target existing
customers with offers for related, ancillary healthcare insurance products. For
example, following the customer's initial purchase of an individual health
insurance policy, HealthAxis might send that person an e-mail introducing a
long-term disability product.
Application Solutions Group
The application solutions group recently implemented a coordinated
sales and marketing effort. The goals for this sales and marketing effort are
to:
o Target potential clients for the application solutions group's
services;
o Identify opportunities to cross-sell additional services to
application solutions group's existing clients;
o Cross-sell to carrier partners the services of the application
solutions group;
o Assist clients in growing their own businesses, creating additional
revenue for the application solutions group; and
o Increase the application solutions group's visibility within the
industry.
In the past, new external clients were generally added as a result of referrals
or as a result of direct contact initiated by the client due to the application
solutions group's reputation in the industry.
33
The application solutions group's current marketing program is designed
to raise the visibility of the application solutions group and its products and
services, in order to increase sales opportunities. In the past, new external
clients were generally added as a result of references or direct contact
initiated by the client due to the application solutions group's reputation in
the industry. The application solutions group now utilizes the services of an
outside advertising firm specializing in the technology sector. The current
marketing program consists of multiple channels to reach the application
solutions group's target audience. The application solutions group's website,
currently at www.insurdata.com, allows prospective clients access to product and
service descriptions and Company news. The application solutions group issues
press releases regularly through the Internet, public wire services and selected
trade publications and pursues advertising and editorial opportunities in key
industry trade publications. Both the application solutions group and the
consumer services group also exhibit at industry trade shows and conduct direct
mail campaigns highlighting HealthAxis' products and services to targeted
audiences.
Marketing Agreements
Agreement with America Online, Inc. HealthAxis' interactive marketing
agreement with AOL provided that HealthAxis would be the exclusive third-party
direct marketer of certain types of health insurance policies and, subject to
certain restrictions, the non-exclusive third-party marketer of certain other
types of insurance policies. Under the interactive marketing agreement, AOL
advertised the products to its subscribers on AOL's online network and the
products were sold online through HealthAxis' website. On March 29, 1999,
HealthAxis and America Online, Inc. entered into the second amendment to the
interactive marketing agreement, which provided HealthAxis with access to
CompuServe and Netscape Netcenter, which HealthAxis believed would expand its
marketing scope. The second amendment also provided for a four month "wind down"
period in the event HealthAxis elected not to exercise its option to renew its
agreement with AOL for an additional term. HealthAxis has paid America Online,
Inc. a total of $10.0 million pursuant to this agreement. The initial term
expired on January 31, 2000. HealthAxis has chosen not to exercise its option to
renew its agreement with AOL HealthAxis is currently negotiating a new agreement
with AOL.
Agreement with Lycos, Inc. HealthAxis' amended agreement with Lycos,
Inc. provides that Lycos will make HealthAxis the exclusive provider of medical,
HMO, PPO, indemnity, vision, prescription, long-term care, and long-term
disability insurance, for a total of approximately $9.1 million, of which $1.7
million has been paid. The term of the agreement will extend for twenty-four
months from the launch of the co-branded version of HealthAxis' site if certain
sales goals are met. The initial term of 12 months ending April 30, 2000 has a
total cost of $2.5 million with the renewal, if certain sales goals are met, of
12 months for an approximate cost of $6.6 million. In addition, HealthAxis will
pay Lycos, certain fees based upon the success of sales from the co-branded
website.
Agreement with CNet, Inc. In June 1998, HealthAxis entered into a
promotional agreement with CNet whereby CNet would exclusively promote
HealthAxis' products on CNet's websites. This agreement was amended on April 14,
1999 to, among other things, revise the current payment schedule and remove
Snap! as a party to allow HealthAxis to enter into a separate agreement with
Snap! Under the agreement with CNet, CNet promotes HealthAxis as its exclusive
provider of certain insurance products for approximately $925,000 during the
initial term of the agreement, which extends until August 31, 2000. As of March
1, 2000, HealthAxis paid CNet approximately $650,000.
34
Agreement with Snap!, LLC. In April 1999, HealthAxis, CNet and Snap!
amended their marketing agreement to remove Snap! as a party so that HealthAxis
and Snap!, now a separate entity from CNet, could enter into a new agreement.
This agreement allows for HealthAxis to participate in Snap!'s "Insurance
Center" and provides for strategic placements across various channels. The
initial term of this agreement is through August 31, 2000, for an approximate
cost of $1.5 million. HealthAxis has the option to renew this agreement with
Snap! through August 31, 2001.
Yahoo! Marketing Agreement. On August 12, 1999, HealthAxis entered into
a targeted marketing agreement with Yahoo!. The agreement terminated on January
31, 2000. On February 7, HealthAxis entered into a new agreement which
terminates on December 31, 2000, for an approximate cost of $3.6 million.
Intellectual Property and Technology
Patent, Trademark and Copyright Protection. HealthAxis' ability to
compete is dependent to a significant degree upon its proprietary systems,
technology, and intellectual property. HealthAxis relies upon a combination of
trademark, copyright, confidentiality agreements and trade secret laws as well
as other measures to protect its proprietary rights. HealthAxis does not have
any patents or patent applications and currently does not plan to file any
patent applications. HealthAxis has registered the name "HealthAxis.com" with
Internic, a private corporation organized by U.S. government which administers
Internet domain names. HealthAxis has applied for registration of the trademark
"HealthAxis.com" and "HealthAxis" with the U.S. Patent and Trademark Office.
HealthAxis was notified by the U. S. Patent and Trademark Office that it had
preliminarily denied registration of the service marks "HealthAxis" and
"HealthAxis.com" on the basis of potential confusion with an allegedly similar
registered service mark. HealthAxis is attempting to overcome the U.S. Patent
and Trademark Office's preliminary denial by negotiating a consent with the
party holding the similar mark. This party has verbally agreed to HealthAxis'
registration of these marks. Until HealthAxis reaches a final agreement with
this party and the U.S. Patent and Trademark Office approves this agreement,
HealthAxis can not provide any assurance as to whether it will be successful in
overcoming the U.S. Patent and Trademark Office's denial. HealthAxis has applied
for or registered the following trademarks with the U.S. Patent and Trademark
Office: Insur-Web, Insur-Voice, Insur-Image, Insur-Enroll, Insur-Admin and
Insur-Claims. HealthAxis has determined not to file applications for these marks
in foreign countries at this time. HealthAxis' sales materials, content and
software are protected by copyright.
In December 1998, a third party notified Insurdata that it believed
Insurdata had infringed upon a common law trademark held by such party through
its use of the name "Insur-Web" because a similar name is currently being
utilized by the third party. HealthAxis does not believe that its use of the
name Insur-Web constitutes an infringement of this party's rights and intends to
defend itself against any infringement claim asserted. No assurance can be given
as to whether Insurdata will ultimately prevail in any action that may be
brought by this party. See "Risk Factors -- Business Related Risks -- HealthAxis
may be unable to protect is proprietary technology."
The source code and design of HealthAxis' software will be protected by
HealthAxis through applicable trade secret law. HealthAxis also intends to use
confidentiality agreements with its employees to further protect its source
codes and software.
Third-Party Technology, Website Ownership and Maintenance. HealthAxis
relies on a variety of technology that it licenses from third parties, including
its database and Internet server software, which is used in HealthAxis' website
to perform key functions. Web design and maintenance are currently performed by
in house technicians in order to permit HealthAxis to maintain control over its
35
Internet platform. HealthAxis anticipates updating its website on an ongoing
basis. See "Risk Factors -- HealthAxis depends upon technology licensed from
third parties for the success of its operations."
The satisfactory performance, reliability and availability of
HealthAxis' website, transaction processing systems and network infrastructure
is critical to HealthAxis' consumer services group's reputation and its ability
to attract and retain customers and maintain adequate policyholder service
levels. HealthAxis will continually review and seek to upgrade its technical
infrastructure and provide for certain system redundancies and backup power to
limit the likelihood of systems overload or failure HealthAxis believes that as
part of doing business on the Internet, it will, from time to time, experience
periodic system interruptions. Any unexpectedly high volume of traffic on
HealthAxis' website or in the number of applications placed by consumers may
require HealthAxis to expand and upgrade further its technology, transaction
processing systems and network infrastructure to accommodate that substantial
increase in volume. HealthAxis will continue in its efforts to expand and
upgrade its system..
Website Technology. The technology supporting the website itself
consists of a scalable client/server architecture in a fully load balanced
environment using redundant Sun Enterprise servers. HealthAxis' applications are
specifically designed for the website and are written in the programming
language Java under a Sun implementation of the Unix operating system.
HealthAxis has used RAID technology to provide a greater degree of reliability
for data contained in its Oracle 8 based database. The host for the website is
Best Internet Communications, Inc., located in San Francisco, California. The
infrastructure, web applications software and the web servers are owned by
HealthAxis. HealthAxis continually monitors website statistics, network
performance and service levels.
Back End Processing Technology. HealthAxis has created an executive
information system operating in an Oracle 8 environment on a Sun computer
running Unix. HealthAxis' systems have back up and recovery programs in place.
HealthAxis uses multiple web servers within a single site but plans to
distribute its servers to multiple sites for greater redundancy.
Communications. All of the above installations are interconnected using
high-speed private telecommunications links. All transmissions between the
consumer, website, and carrier partners or independent entities that administer
claims processing and payment will be secured using "Secured Socket Layer" (SSL
version 3). Domestic encryption is used where applicable (i.e., 128 bit)
including all server to server communications. A minimum export encryption is
also used (i.e., 40 bit).
Application Solutions Group Web Technologies. The technology supporting
the application solutions group's Web services are based on a distributed
computing environment relying primarily on Microsoft technology platforms. Web
servers are based on Internet Information Server 4.0, middle tier business logic
is placed in Microsoft Transaction Server 2.0, and databases are based on
Microsoft SQL Server 7.0 and 6.5. The current computing platform consists of
over 50 NT servers. Additional software utilized includes workflow and print
tools from JetForm. PDF technology has been licensed from Active4 Technologies.
36
DataCenter Core Processing Environment. The application solutions group
also has connectivity to several back end computing environments. The main data
center is located in North Richland Hills, Texas and is a 8,500 sq. foot
facility with the following processing equipment and systems:
o 16 IBM RS6000 processors running AIX (ranging up to the H70 class
computing platform)
o IBM mainframe 9672/R35 (180Mips) running OS/390
o Two terrabytes of DASD (1.3 available) and two Storage Tek tape
silohs (6000 tapes each)
All NT server equipment is from Compaq and all production servers are Proliant
class servers configured with RAID (or mirroring), dual LAN connectivity, and
redundant power supplies. All networks are switched with Cisco Catalyst
multi-gigabit switching, and core routers are Cisco with Bay routers for WAN
connectivity. Internet firewall technology is based on Cisco PIX firewalls. The
facility has redundant backbone connections for the WAN and Internet. There is
UPS and diesel power backup. Off-sight disaster recovery is through Comdisco.
Competition
HealthAxis believes it provides a unique combination of Internet based
consumer services and business to business software applications. HealthAxis
also believes that its ability to offer both payers and consumers an electronic
platform gives HealthAxis a unique competitive advantage among its peers.
HealthAxis competes with other insurance online providers and traditional,
agent-based insurance distribution system participants.
Online Insurance Competition. HealthAxis' principal online competitors
are Intuit's InsureMarket (www.insuremarket.com), Quotesmith
(www.quotesmith.com), Insweb (www.insweb.com) and ehealthinsurance.com
(www.ehealthinsurance.com). Insweb and Insuremarket are both built around an
agent-referral business model pursuant to which prospective applicants are given
a price quote, but must utilize a referral to a traditional agent in order to
apply for and buy a policy. In addition, neither company is focused on the
health insurance market as is HealthAxis. Quotesmith is an agency that uses its
website to initiate a sales process that ultimately resembles the traditional,
paper-heavy process, not an e-commerce model. Ehealthinsurance.com's business
model more closely resembles HealthAxis' transaction-oriented focus. However,
HealthAxis believes it currently has more carrier partners and broader
distribution than does ehealthinsurance.com. In addition, ehealthinsurance.com
does not offer the transaction processing on its website and requires actual
signatures.
HealthAxis believes that the principal competitive factors in the
online insurance distribution market will be price and convenience, as well as,
name recognition and reputation, product selection, Internet access to claims
information, ease of use, site content, quality of claims processing services
and technical experience. Relative to both traditional agents and agent-referral
online services, HealthAxis believes that its online transaction-based business
model affords it a competitive advantage in the low cost delivery of health
insurance plans to consumers and small groups.
The principal competitive factors for the application solutions group
are the breadth and quality of system and product offerings, features and
functionality, service and support, processing capacity and the ability to
successfully develop and deploy product improvements. HealthAxis believes that
application solutions group's major competitors include Healtheon/WebMD, RIMS,
Erisco, El Dorado, TXEN, a division of Nichols Research Corp., and Amisys
Managed Care Systems, Inc., a division of HBOC. See "Risk Factors -- Competition
from entities with longer operating histories and greater financial resources
than HealthAxis may have a material adverse effect on its business."
37
Privacy Policy
HealthAxis believes a significant barrier to the popularity or
acceptance of online insurance sales and communications is the secure
transmission of confidential information over public networks. The application
solutions group retains confidential client and patient claim information at its
data center. Computer viruses, break-ins or other security breaches could lead
to misappropriation of personal or proprietary information. These security
breaches can also cause interruptions, delays or cessation in service to
HealthAxis' customers. HealthAxis relies on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information, such as names, addresses, social security numbers, consumer credit
card numbers and claims information. HealthAxis carries general liability
insurance (including errors and omissions coverage), but HealthAxis' insurance
may not be adequate to cover all costs incurred in defense of potential claims.
To address consumer concerns over the security of transactions
conducted on the Internet and other online services and the privacy of users may
also inhibit the growth of the Internet and of online services. HealthAxis has
adopted a privacy policy for information of users of its website. HealthAxis
does not disclose any personally identifiable information of a consumer to
HealthAxis' carrier partners until the consumer submits an application.
HealthAxis does not sell or otherwise make available to any other party any
personally identifiable information of the consumers. Personally identifiable
non-medical information may be used internally in order to continuously improve
the content of the website and the consumer's shopping experience. Aggregated
statistical information, without individual identification, is analyzed by
HealthAxis in order to improve the overall product offering and may be shared
with HealthAxis' carrier partners for that purpose. HealthAxis is a licensee of
the TRUSTe Privacy Program and adheres to their standards regarding the
protection of personally identifiable information of Internet users.
Regulation
Internet Related. Although there are currently few laws and regulations
directly applicable to the Internet, it is likely that new laws and regulations
will be adopted in the United States and elsewhere covering issues such as
copyrights, privacy, pricing, sales taxes and characteristics and quality of
Internet services. The adoption of restrictive laws or regulations could slow
Internet growth or expose companies engaged in business on the Internet to
regulation or restrictions on the content available on their websites. The
application of existing laws and regulations governing Internet issues such as
property ownership, libel and personal privacy is also subject to substantial
uncertainty at this time. In addition, current or new government laws and
regulations, or the application of existing laws and regulations, including laws
and regulations governing issues such as property ownership, content, taxation,
defamation and personal injury, may expose companies engaged in business on the
Internet to significant liabilities.
Insurance Related. As a result of the business activities presently
being conducted by HealthAxis, HealthAxis has organized HealthAxis.com Insurance
Services, Inc., a Pennsylvania corporation, which has also organized subsidiary
companies in four states. HealthAxis.com Insurance Services, Inc., either
directly or through its agency employees or wholly owned subsidiaries, is
licensed with state insurance departments to sell insurance and receive
commissions from the sale of insurance in all 50 states and the District of
Columbia. As a licensed agency, HealthAxis.com Insurance Services, Inc. is
subject to the regulation and examination by the Insurance Departments or
commissions in the states in which HealthAxis.com Insurance Services, Inc. is
licensed. HealthAxis, either directly or through wholly-owned subsidiaries doing
business in certain states, is subject to the laws and regulations of such
insurance departments where such laws and regulations are primarily intended to
benefit purchasers of insurance and generally grant supervisory agencies broad
38
administrative powers, including the power to restrict the carrying on of
business for failure to comply with such laws and regulations. In such event,
the possible sanctions that may be imposed include the suspension of individual
employees, limitations on engaging in business for specific periods, censures
and fines. Advertisements in connection with insurance products sold through
HealthAxis' website are regulated by state insurance departments and
commissions. See "Risk Factors -- Internet Related Risk -- Insurance regulations
may increase HealthAxis' costs to maintain compliance."
There have been, and currently are, a number of proposals introduced in
the United States Congress to reform the current healthcare system. There are
proposals pending in state legislatures to reform the healthcare system as well.
Many states have already enacted comprehensive healthcare reform legislation and
a number of legislative and regulatory proposals are currently being considered
at the state and federal level. Legislative proposals have included:
o requirements with respect to mandated universal health insurance
coverage;
o restrictions on preexisting condition limitations;
o community rating standards;
o guaranteed issue and renewal requirements;
o restrictions on premium increases;
o differential limitations in rates for new and renewal business or for
demographic groups; and
o underwriting practice restrictions.
These reforms generally include the formation of voluntary purchasing
alliances for small employers (typically with less than 50-100 employees). They
also require insurers to:
o accept all qualified small employer groups as a condition of
providing small group insurance;
o prohibit the imposition of preexisting condition limitations or
medical condition terminations; and
o phase out experience-rating for small employer groups.
Certain jurisdictions also have enacted so-called "any willing
provider" laws which may decrease the demand for managed care plans. Healthcare
industry participants may react to these proposals and the uncertainty
surrounding these proposals by curtailing or deferring investments, including
investments in the application solutions group's applications and services.
HealthAxis is unable to predict whether, or in what form, these proposals will
be enacted or the specific effects these proposals will have on HealthAxis'
business.
Management of HealthAxis
The following table sets forth information regarding the directors and
executive officers of HealthAxis.
Name Age Position with HealthAxis
- ----------------------------------- --------- --------------------------------------------------------------
Michael Ashker................... 47 President, Chief Executive Officer and Director
Alvin H. Clemens................. 62 Chairman of the Board
Henry G. Hager.................. 64 Director
Patrick J. McLaughlin............ 42 Director
Edward W. LeBaron, Jr............ 68 Director
Gregory T. Mutz.................. 54 Director
Dennis B. Maloney................ 53 Chief Operating Officer and Director
Anthony R. Verdi................. 51 Treasurer and Chief Financial Officer
Elaine del Rossi................. 56 Senior Vice President - Sales and Marketing
Andrew Felder.................... 33 Executive Vice President - Strategy and Corporate
Development
Michael G. Hankinson............. 43 Vice President, General Counsel and Secretary
39
Michael Ashker has been President, Chief Executive Officer and a
Director of HealthAxis since March 1998. Mr. Ashker has been a Director of HAI
since December 1998 and President and Chief Executive Officer of HAI since
August 1999. Mr. Ashker was the Managing Director of Lynx Capital Group LLC, an
independent investment advisor and fund management firm, from September 1995 to
January, 2000. Prior to such time, he was a Money Manager for Kidder Peabody &
Co. from 1991 to 1995, for Bateman, Eichler, Hill and Richards from 1988 to
1991, and for Shearson/American Express from 1984 to 1988.
Alvin H. Clemens has been Chairman of the Board of HealthAxis since
March 1998. Mr. Clemens has been Chairman of the Board of HAI and subsidiary
companies since October 1989 and was Chief Executive Officer of HAI from 1989 to
1999. Mr. Clemens was also President of HAI and Provident Indemnity Life
Insurance Company Life Insurance Company from 1993 to 1996. Prior to such time
he was President of Maine National Life Insurance Company from 1989 to 1995 and
Owner and Chairman of the Board of Maine National Life Insurance Company from
1985 to 1989. Mr. Clemens was President and Director of Academy Life Insurance
Company and Pension Life Insurance Company of America from 1970 to 1985. Mr.
Clemens was Chairman/Chief Executive Officer of Academy Insurance Group Inc.,
from 1967 to 1985.
Henry G. Hager has been a Director of HAI since 1996, a Partner in the
law firm of Stradley Ronon from 1994 through December of 1999. He currently is
Counsel at Stradley Ronon and has been President and Chief Executive Officer of
The Insurance Federation of Pennsylvania since 1985. Mr. Hager also serves as a
director of American Waterworks Company, a public company. Mr. Hager joined
HealthAxis' board in January 2000.
Edward W. LeBaron, Jr. has been a Director of HAI since 1998 and a
Director of Lynx Capital Group, LLC since January 1997. Prior to such time, Mr.
LeBaron was an attorney and Partner in the Political Law Group of Pillsbury,
Madison & Sutro from 1989 to 1994. Mr. LeBaron joined HealthAxis' board in
January 2000.
Gregory T. Mutz has served as a Director and President and Chief
Executive Officer of UICI since January 1999 and has served as a director of
HealthAxis since January 2000. Mr. Mutz was a director of Insurdata from May
1999 to January 2000. Mr. Mutz has served as Chairman of the Board of Amli
Realty Co. since 1980, as Chairman of the Board of Trustees of Amli Residential
Properties Trust since 1994, and as Chairman of Amli Commercial Properties Trust
since 1997. Mr. Mutz has also served as Chairman of the Board of Excell Global
Services since 1997. He has been a Director of the National Multifamily Housing
Council since 1995 and a Director of Alleghany/Chicago Trust since 1996. Mr.
Mutz also served as a Director of Baldwin & Lyons from 1978 until 1997 and as a
Director of Avtel Communications from 1997 until 1998.
Dennis B. Maloney became HealthAxis' Chief Operating Officer and a
director in January 2000. Prior to such time Mr. Maloney was President and Chief
Executive Officer of Insurdata since January 1997 and was on the Board of
Directors of Insurdata from March 1997 to January 2000. From 1976 until October
1996, Mr. Maloney served in various capacities with SHL Systemhouse, Inc., a
technology company, most recently as President of its outsourcing division. Mr.
Maloney is a director of JetForm Corporation, a public company.
40
Patrick J. McLaughlin has served as a director of HealthAxis since
February, 2000 and has served as a director of UICI since January 1999. Mr.
McLaughlin has also served as a director of Universal American Financial
Corporation since 1995. Mr. McLaughlin has been the Managing Director of Emerald
Capital Group, Ltd., an asset management and consulting firm specializing in the
insurance industry, since April 1993. Prior to such time, he was Executive Vice
President and Chief Investment Officer of Life Partners Group, Inc. from April
1990 to April 1993 and Managing Director of Conning & Company from August 1989
to April 1990. He served as Senior Vice President and Chief Investment Officer
of ICH Corporation from March 1987 to August 1989.
Anthony R. Verdi has been the Chief Financial Officer and Treasurer of
HealthAxis since November 1999. He also serves as Chief Operating Officer of HAI
and subsidiaries since December 1997. He served as President of Provident
Indemnity Life Insurance Company from December 1998 through October 1999 and as
Treasurer and Chief Financial Officer of the HAI and subsidiaries from 1990
through 1997. Prior to 1990, he was Vice President and Controller of
Inter-County Hospitalization Plan Inc. and he served as Assistant Controller
Academy Insurance Group Inc. from 1971 through 1986.
Elaine del Rossi has been Senior Vice President - Sales and Marketing
of HealthAxis since November, 1999. Prior to such time, she served as President
of Health Options 2000 Consulting, a sales, marketing and business consultant to
major healthcare companies from March 1997 to November 1999. From September 1994
to March 1997, she served as Senior Vice President of Sales/Marketing for
AmeriChoice Medicaid HMO.
Andrew Felder has been Executive Vice President - Strategy and
Corporate Development of HealthAxis since January 1999. He also served as Chief
Operating Officer of HealthAxis from March 1998 to March 1999. Prior to such
time, Mr. Felder was a self-employed management consultant to Lynx Capital Group
LLC, from July 1997 to February 1998 during which time he co-founded
JusticeLink, Inc., a Dallas, Texas Internet company that provides electronic
document filing services to the justice community. He also was employed as the
Vice President of Strategic Planning at Wells Fargo Bank, from July 1995 to
February 1997 and the Manager of Strategic Planning at Dole Food Company, from
July 1992 to July 1995.
Michael G. Hankinson has been the Vice President and General Counsel of
HealthAxis since April, 1999. He became Secretary of HealthAxis in November,
1999. Prior to joining HealthAxis, Mr. Hankinson served as Senior Vice
President, Secretary and General Counsel with Gramercy Insurance Co. from
September 1992 to June 1998. Prior to such time, Mr. Hankinson was an
environmental attorney with Olin Corporation from 1991 to August 1992 and an
Instructor in Management in the College of Business Administration at Fairleigh
Dickinson University from August 1986 to August 1992.
Employees
As of January 7, 2000, the Company had 1,070 employees, including 450
full-time professional employees, 477 full time data capture employees and
approximately 143 part-time data capture employees. None of HealthAxis'
employees is represented by a labor union or collective bargaining agreement.
HealthAxis considers its employee relations to be good.
41
As a result of the completion of the merger with Insurdata, HealthAxis'
future success depends upon the ability of its current executive officers to
establish clear lines of responsibility and authority, to work effectively as a
team, and to gain the trust and confidence of its employees. See "-- Management
of HealthAxis." HealthAxis' future success also depends on its ability to
identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, marketing and consumer service personnel. Competition for
technically skilled personnel is intense, and there is no certainty that
HealthAxis will be able to successfully attract, integrate or retain
sufficiently qualified personnel, including software developers and other
technical experts. The failure to attract and retain the necessary personnel
could restrict HealthAxis' growth.
Relationship with UICI
UICI is a diversified financial services company that offers insurance
and financial services to niche consumer and institutional markets. UICI also
provides technology and outsourcing solutions to the insurance and health
services communities.
UICI issues health insurance policies to the self-employed and student
markets. UICI also issues health insurance policies for the self-employed
market, which includes self-employed individuals who work for small businesses
with five or fewer employees. UICI offers a range of health insurance products,
including catastrophic hospital and basic hospital-medical expense plans,
choice-of-doctor plans and managed care options, including a preferred provider
organization plan and other coverage modifications. For the student market, UICI
offers tailored insurance programs that generally provide single school year
coverage to individual students, primarily at universities, but also at public
and private schools for students in kindergarten through grade 12. UICI also
issues life and annuity insurance products to selected niche markets and UICI
acquires blocks of life insurance and annuity policies from other insurers on an
opportunistic basis.
UICI also provides underwriting, claims management and claims
administrative services to third-party insurance carriers (primarily to Aegon
USA, Inc. related to products coinsured by UICI), independent entities that
administer claims processing and payment, Blue Cross/Blue Shield organizations
and self-administered employer healthcare plans.
UICI assists individuals with no, or troubled, credit in obtaining a
nationally recognized credit card. Through its Educational Finance Group, Inc.
subsidiary, UICI markets, originates, funds and services primarily
Federally-guaranteed student loans. Through its National Motor Club unit, UICI
also markets and provides over 450,000 members with benefits such as road and
towing assistance, trip routing, emergency travel assistance and accident
related indemnity benefits.
UICI and its subsidiaries constitute, in the aggregate, the application
solutions group's largest client. For the years ended December 31, 1997, 1998
and 1999, UICI and its subsidiaries accounted for an aggregate of approximately
$12.6 million, $24.9 million and $28.1 million, respectively, of Insurdata's
historical revenues, which represent approximately 43%, 56% and 60%,
respectively, of Insurdata's revenues for such periods. A portion of the
application solutions group's revenue from UICI in the past was for Year 2000
services which have been substantially completed. UICI and its subsidiaries are
expected to remain the application solutions group's largest client for the
foreseeable future. HealthAxis believes that the percentage of the application
solutions group's revenues attributable to UICI and its subsidiaries will
decline as HealthAxis' marketing efforts continue to build HealthAxis' base of
external clients.
42
As a result of UICI's control of Insurdata prior to the merger, none of
the terms of contracts entered into between Insurdata and UICI and its
subsidiaries, which were assumed by HealthAxis, resulted from arm's-length
negotiations. See "Risk Factors -- Potential conflicts of interest could arise
because some people serve as directors, officers or employees of HAI or UICI,"
"Risk Factors -- Potential conflicts of interest may arise between HealthAxis
and UICI regarding the products and services provided by HealthAxis," and "Risk
Factors -- None of the HealthAxis intercompany agreements are subject to
arm's-length negotiations."
Arrangements and Transactions with HAI and UICI
HealthAxis and HAI have entered into various agreements, the material
terms of which are summarized below. These agreements were developed in the
context of a parent/subsidiary relationship and therefore none of the terms of
these agreements are the result of arm's-length negotiations between independent
parties. HealthAxis and UICI have entered into a carrier partner agreement and
plan to enter into agreements for the purpose of defining their ongoing
relationships, the material terms of which are summarized below. UICI and
Insurdata have also entered into various agreements, all of which were assumed
by HealthAxis in connection with its merger with Insurdata. These agreements
were developed in the context of a parent/subsidiary relationship and therefore
are not the result of arm's-length negotiations between independent parties.
There can be no assurance that each of such agreements, or the transactions
provided for therein, will be effected on terms at least as favorable to
HealthAxis as could have been obtained from unaffiliated third parties. See
"Risk Factors -- Business Related Risks -- The loss of one or more of the
application solutions group's large clients would have a detrimental effect on
HealthAxis' financial condition." and "Risk Factors -- Investment Related Risks
- -- UICI may make decisions which some shareholders do not consider to be in
their best interest."
Additional or modified arrangements and transactions may be entered
into by HealthAxis and either HAI or UICI, including its subsidiaries. Any such
future arrangements and transactions will be determined through negotiation
between HealthAxis and either HAI or UICI, and it is possible that conflicts of
interest will be involved.
The following is a summary of the current and contemplated arrangements
and transactions between HealthAxis and either HAI or UICI. The descriptions of
the proposed agreements set forth below are intended to be summaries and, while
the proposed material terms of the agreements being negotiated are set forth
herein, the provisions are subject to change and the descriptions are qualified
in their entirety by reference to the relevant agreements at such time as they
are reduced to writing.
AHC Acquisition, Inc. Registration Rights Agreement Related to Series A
Preferred Stock. When HealthAxis proposes to register any shares of common stock
from authorized but unissued common shares or treasury shares under the
Securities Act (other than on a Form S-4 or Form S-8), HealthAxis is required to
give notice to the holders of Series A preferred stock and the holders of common
stock acquired upon the conversion of Series A preferred stock of the proposed
registration and to include their shares of common stock received upon the
conversion of the Series A preferred stock in such registration, subject to
certain conditions including the right of the underwriter of the offering to
limit the number of shares sold by the holders if the underwriter advised
HealthAxis and the holders in writing that the number of shares required to be
included by the holders would interfere with the successful marketing of the
shares offered. These piggyback registration rights are subject to the priority
rights granted to HealthPlan Services, holders of the Series B preferred stock,
certain warrant holders, and the holders of the Series C preferred stock and
Series D preferred stock. Subject to rights granted to HealthPlan Services,
holders of the Series B preferred stock, certain warrant holders and holders of
the Series C preferred stock and Series D preferred stock, the holders of at
least 60% of the then outstanding shares of Series A preferred stock may also
require HealthAxis to file one registration statement (a "demand registration")
43
under the Securities Act with respect to the common stock acquired upon the
conversion of the Series A preferred stock held by the holders desiring to
participate, subject to certain conditions. This demand may not be made earlier
than: (i) November 13, 2001 or (ii) six months after HealthAxis' initial public
offering. The Company is required to pay all registration expenses other than
any underwriting discounts and commissions for any underwriter or broker-dealer
acting on behalf of the holders of the Series A preferred stock. AHC
Acquisition, Inc. is a wholly owned by Alvin H. Clemens.
Lease Agreement. HealthAxis leases its headquarters from HAI in East
Norriton, Pennsylvania at a cost of $61,500 per month.
UICI Outsourcing Agreement. UICI and its affiliates and HealthAxis have
entered into a technology outsourcing agreement. Pursuant to this agreement,
HealthAxis provides UICI and its affiliates with technology support services,
system integration services, data processing services, local area network and
other software and hardware based services. The terms of this agreement were
negotiated between Insurdata and UICI prior to HealthAxis' acquisition of
Insurdata. Pursuant to the terms of this agreement, HealthAxis will provide UICI
and its affiliates with technology support services, system integration
services, data processing services, local area network and other
telecommunications services, and other software and hardware based services for
an initial term of five years. At UICI's option, the parties are required to
negotiate, in good faith, a three year renewal term prior to the expiration of
the agreement. If they are unable to agree on renewal prices, terms and
conditions, the agreement will expire at the end of the initial term. The
agreement contains no minimum or maximum commitments on behalf of UICI and its
affiliates, and UICI and its affiliates are free to obtain the services provided
by HealthAxis from an unrelated third party during the term of the agreement.
The agreement requires both UICI and HealthAxis to contribute facilities and
equipment. Under the terms of the agreement, UICI is also required to contribute
certain UICI-owned software. Third party software may also be used to provide
the services required under the agreement. The agreement provides that Insurdata
assigns and transfers to UICI any and all right, title and interest that
Insurdata may have, or claim to have, to materials that were previously
developed by Insurdata for UICI under certain existing agreements. All materials
developed by HealthAxis during the term of the agreement will belong to UICI.
UICI may, at its option, grant a license to these materials back to HealthAxis
subject to payment of certain royalties from HealthAxis to UICI. The agreement
established certain service levels and availability standards and imposes
penalties if such standards are not met. Under the terms of the agreement,
HealthAxis may not stop providing services due to a dispute between the parties.
Generally, the services provided under the agreement must be billed at
HealthAxis' cost plus a ten percent pre-tax profit margin. The agreement also
requires that if HealthAxis charges an unaffiliated third party a rate that is
lower than it charges UICI and its affiliates for similar services, UICI and its
affiliates would be entitled to receive the lower rate. At the expiration or
termination of the agreement, UICI has the right to hire certain employees of
HealthAxis or its affiliates who have spent greater than eighty percent of their
time providing services to UICI and its affiliates during the six months
preceding the expiration or termination of the agreement. In addition, at the
expiration or termination of the agreement, HealthAxis is obligated to provide
up to six months of transition assistance services. The parties also agreed to
indemnify and hold one another harmless against certain enumerated losses and
claims.
UICI Amended and Restated Carrier Partner Agreement. On March 30, 1999,
HealthAxis entered into an amended and restated carrier partner agreement with
UICI and two of UICI's subsidiaries, MEGA Life & Health Insurance Company and
Midwest National Life Insurance Company of Tennessee. Pursuant to the UICI
carrier partner agreement, certain insurance products and services of UICI's
insurance subsidiaries will be offered through HealthAxis' website to consumers.
In addition, HealthAxis agreed to issue to UICI a warrant to purchase up to
150,000 shares of HealthAxis common stock, subject to adjustment, at $4.40 per
share and 7,500 shares of HealthAxis common stock, subject to adjustment, at
$12.00 per share.
44
Shareholders' Agreement. HAI, UICI, Michael Ashker, and HealthAxis
intend to enter into a shareholders' agreement. Under the terms of the
shareholders' agreement, the board of directors of HealthAxis shall consist of
up to nine members. UICI and HAI may each independently nominate three nominees
to the board. The remaining three directors will be nominated by mutual
agreement of HAI and UICI. Each party is obligated to vote its shares in favor
of the directors nominated by the other party.
Subject to certain limitations, the shareholders' agreement also
provides that UICI and HAI both have the right to purchase its proportionate
number, or any greater or lesser number, of any additional securities that
HealthAxis may, from time to time, propose to sell and issue. HealthAxis is
required to provide UICI and HAI prior written notice of its intention to issue
such additional securities. Upon receipt of this notice, UICI and HAI have
twenty days to agree to purchase their proportional shares, or any greater or
lesser number, for the price and upon the terms specified in the notice. If UICI
and HAI fail to exercise their purchase rights, HealthAxis has twenty days to
complete the sale of the securities at a price not less than the price specified
in the notice. This provision of the shareholders' agreement terminates at such
time as the HealthAxis common stock is registered under the Exchange Act.
In addition to the preemptive rights set forth above, the shareholders'
agreement also provides that Michael Ashker, UICI and HAI have the right of
first refusal to purchase shares of HealthAxis should one of the other parties
to this agreement desire to transfer his or its HealthAxis securities. The party
desiring to transfer his or its securities is required to provide the other
parties, referred to as the electing parties, with written notice, at least
twenty days prior to the proposed transfer setting forth the terms of the offer
to sell the HealthAxis securities. The electing parties have ten days from the
receipt of notice to elect to purchase that number of securities determined by
the formula set forth in the agreement. If an electing party fails to exercise
its right to purchase, or exercises its right to a portion smaller than it is
entitled, the party transferring his shares has ten days to sell any remaining
securities at the price and on terms no less favorable than specified in the
offer to the electing parties.
Subject to certain conditions set forth in the shareholders' agreement,
the shareholders' agreement also provides that HealthAxis can cause UICI to
transfer up to 1,255,000 shares of its HealthAxis common stock to unaffiliated
third parties.
The shareholders' agreement also provides UICI with the right, in its
sole and absolute discretion, to approve among other things, the merger or
similar agreement between HAI and HealthAxis as well as the calculation and
amount of goodwill and other intangibles. See Note 25 of the Notes to the
Consolidated Financial Statements included herein for additional information on
the conditions under which UICI agreed to approve the merger.
It is currently intended that this agreement will terminate in
connection with the reorganization and will be replaced by the shareholders'
agreement attached as an exhibit to the agreement and plan of reorganization.
Voting Trusts. UICI has entered into two voting trust agreements. These
agreements grant voting power over a portion of the HealthAxis common stock held
by UICI to the trustees who are directors of HealthAxis. For a description of
the terms of these trusts, see Note 25 of the Notes to the Consolidated
Financial Statements included herein.
45
Licensing Systems Integration and Technology Management Agreements. The
applications solutions group provides software applications, systems integration
and technology management services to UICI and its subsidiaries.
Human Resource Services. Commencing in 1996, UICI provides human
resource administrative services to the applications solutions group, including
payroll services and employee benefit management pursuant to a one year
agreement which expires on December 31, 1999 with annual renewals thereafter.
Either party upon 90 days' notice may cancel this agreement. In addition to
reimbursement on a dollar-for-dollar basis for wage and benefit costs, UICI
charges the applications solutions group an administrative fee of $10
per-employee per-pay period pursuant to a written agreement, which fee is
intended to reimburse UICI for the overhead it incurs in providing these
services. HealthAxis expects that UICI will continue to provide these services
for a limited period of time. HealthAxis has also engaged other UICI
subsidiaries to provide services such as printing and newsletter publication. It
is intended that the UICI subsidiaries will continue to provide these services
in the future.
Lease Agreements. HealthAxis leases two facilities from certain
subsidiaries of UICI. HealthAxis leases office space located in Hurst, Texas,
pursuant to a written agreement that expired on December 31, 1999 and currently
continues on a month to month basis. HealthAxis leases additional office space
in Dallas, Texas, on a month-to-month basis under a verbal agreement. Insurdata
paid an aggregate of approximately $112,000, $255,000 and $369,000 under these
leasing arrangements for the years ended December 31, 1997, 1998 and 1999,
respectively. HealthAxis believes that the terms of these lease arrangements are
no less favorable to it than could have been obtained in a transaction with an
unaffiliated party.
UICI Administrators, Inc. HealthAxis' application solutions group also
currently provides certain work flow and business applications to UICI
Administrators, Inc., independent entities that administer claims processing and
payment owned by UICI, pursuant to a written service license agreement. UICI
Administrators in turn operates through an agreement with Healthcare Management
Administrators, Inc., an entity owned by Ronald L. Jensen, the Chairman of UICI
and a former director of HealthAxis. HealthAxis' agreement with UICI
Administrators is for a three-year term expiring in December 2001, with
automatic annual renewal provisions thereafter, subject to prior notice of
non-renewal. For the years ended December 31, 1997, 1998 and 1999, UICI
Administrators accounted for an aggregate of $1.6 million, $2.1 million and $3.0
million respectively, of Insurdata's revenues under the agreement, which
represent approximately, 5%, 5% and 6%, respectively, of Insurdata's historical
revenues for such periods. The amounts paid by UICI Administrators are included
in the UICI and subsidiaries numbers included above.
Insurdata provided accounting and management services to UICI
Administrators. In exchange for these services, UICI Administrators pays
HealthAxis a fee based upon the salary, benefits and time commitment of
Insurdata's employees actually performing the services. The fee is intended to
reimburse HealthAxis for the costs of providing these services and therefore
such fees are offset against the related expenses. Fees received by Insurdata
from UICI Administrators amounted to $2,000, $134,000 and $142,000 for the years
ended December 31, 1997, 1998 and 1999, respectively. In addition to the
accounting services provided by Insurdata, it's President and Chief Executive
Officer provides certain management oversight of UICI Administrators. Neither
the President nor Insurdata receives any compensation in exchange for the
President's services. HealthAxis ceased providing these services following the
completion of the HealthAxis merger with Insurdata.
Winterbrook VSO. Winterbrook VSO provides certain sales and marketing
services for HealthAxis' imaging and electronic data capture services pursuant
to a verbal brokerage agreement. Winterbrook VSO is owned by Ronald L. Jensen,
46
current Chairman of UICI and a former director of HealthAxis until February
2000. Under the agreement that expired June 30, 1997, Winterbrook VSO receives a
commission computed on the amount of recurring license fees under client
contracts that Winterbrook VSO brokered on behalf of HealthAxis. During 1996 and
1997, Insurdata advanced funds to Winterbrook VSO against future commissions to
be earned by Winterbrook VSO under the brokerage agreement. The advances were
not made pursuant to a written promissory note and did not bear interest. The
outstanding balance of the advances was approximately $100,000 and $90,000 as of
December 31, 1996 and 1997, respectively. Insurdata paid Winterbrook VSO, or
offset against the outstanding balance of any advances, as applicable, an
aggregate of approximately $132,000, $191,000 and $258,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. At December 31, 1999, the
balance of commissions owed to Winterbrook VSO was approximately $58,000. Mr.
Jensen purchased Winterbrook VSO from UICI in July 1997.
Netlojix Communications, Inc. Netlojik Communications, Inc., a
telephone company in which Ronald L. Jensen, Chairman of UICI and a former
director of HealthAxis, and his five adult children and their affiliated trusts
own a controlling interest, provides telephone services to UICI and certain
subsidiaries, including Insurdata (now HealthAxis application solutions group)
pursuant to a written agreement. This agreement for a 15 month term expiring
November 2001 with automatic monthly renewal provisions thereafter, subject to
30 days' notice of non-renewal. In 1997 and 1998 and until August 1, 1999,
Matrix Telecom, a subsidiary of Net Loji Communications, Inc. provided telephone
services to Insurdata. For the years ended December 31, 1997, 1998 and 1999,
Insurdata paid Matrix approximately $46,000, $132,000 and $243,000,
respectively, under the agreement. In 1997 and 1998 and until August 1, 1999,
Matrix Telecom, a subsidiary of Netlojik Communications, Inc., provided
telephone services to Insurdata Incorporated.
HealthPlan Services and UICI. On October 5, 1999, UICI and HealthPlan
Services entered into a definitive agreement that provides for the purchase of
HealthPlan Services by UICI in a stock-for-stock merger transaction. No
assurance can be given that this transaction will be completed.
Employee Loans. On October 18, 1999, Insurdata made loans aggregating
$631,000 to certain of its executive officers, including Dennis B. Maloney, who
is HealthAxis' Chief Operating Officer. These loans were extended by Insurdata
for the purpose of enabling such individuals to exercise options to purchase
Insurdata common stock issued under Insurdata's Founders' Plan. Each of the
loans is due on December 31, 2002 and bears interest at a rate of 6% per annum,
with interest payable quarterly. If the employee is terminated and there is a
public market for the shares, the due date on the loan is accelerated to 90 days
from the later of termination or the establishment of a public market. The
largest outstanding balance on the loans was $631,000 during 1999. The
outstanding balance on these loans was $631,000 at December 31, 1999. These
loans are now held by HealthAxis and are secured by the HealthAxis common stock.
47
Item 2. Description of Properties.
HAI owns its headquarters located at 2500 DeKalb Pike in East Norriton,
Pennsylvania. The headquarters is approximately 47,000 square feet and is
situated on approximately 6.5 acres. HealthAxis leases 41,000 square feet of the
headquarters from HAI with the balance leased to PILIC or used by HAI. In
addition, HealthAxis leases office space at the following locations:
Address Square Feet
-----------
5215 North O'Connor Blvd, 800 Central Tower, Irving, TX 31,325
2121 Precinct Line Road, Hurst TX (1) 20,000
4001 McEwen, Dallas, TX (1) 4,000
990 West Atherton Dr, Ste. 200 Salt Lake City, UT 5,000
670 East Main St, Castledale, UT 5,450
1200 East Ephraim Canyon, Ephraim, UT 10,000
Montego Bay Free Zone, Bldg No. 2, Montego Bay, Jamaica 5,000
1-3 Pimento Way, Montego Freeport, Montego Bay, Jamaica 10,000
577 Howard Street, San Francisco, CA 2,100
- ------------------------
(1) Leased by HealthAxis from UICI or one of its subsidiaries.
The Company believes its existing facilities are suitable to conduct
its present business.
Item 3. Legal Proceedings.
The Company is involved in normal litigation, including that arising in
the ordinary course of its business. Management is of the opinion that no
litigation will have a material adverse effect on the results of operations or
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
HAI held an annual meeting of shareholders on December 14, 1999, at
which time the shareholders voted to elect eight directors to serve until the
next Annual Meeting of Shareholders and until their successors are duly elected
and approved the appointment of BDO Seidman, LLP as the independent auditors of
HAI for the fiscal year 1999.
48
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
The following table shows the range of quarterly high and low sale
prices for HAI's common stock. HAI's common stock is listed on the NASDAQ
National Market with the exception of the period June 12, 1998 through November
6, 1998. During this time period HAI's stock was delisted due to the delayed
filing of HAI's December 31,1997 Annual Report on Form 10-K and the March 31,
1998 Quarterly Report on Form 10-Q. During this period, HAI's common stock
traded on OTC Bulletin Board. Trading on NASDAQ National Market resumed on
November 9, 1998 as a result of filing HAI's December 31, 1997 Annual Report on
Form 10-K and the timely filing of all 1998 Quarterly Form 10-Q reports.
1999 1998 1997
--------------------------- ----------------------------- -----------------------
High Low High Low High Low
-------- ------- -------- ------- -------- -----
First Quarter 14-3/8 6-1/4 6-15/16 2-1/4 14-3/8 8-5/8
Second Quarter 42-1/4 11-1/2 6-15/16 3-5/16 10-1/2 3-3/4
Third Quarter 37 12-3/4 8-1/4 3 5-1/8 3
Fourth Quarter 40 13 14-1/8 2-3/4 3-7/8 2-1/8
On March 20, 2000, the closing price of HAI's common stock was $15.50.
On that same date, there were approximately 3,200 shareholders.
Dividends
HAI has not paid a cash dividend on its Common Stock since its
inception in 1982. HAI currently intends to retain all earnings to finance the
expansion of its business and does not anticipate paying cash dividends in the
foreseeable future.
Dividends paid by HAI over and above the financial assets of HAI are
dependent upon the ability of HealthAxis to pay dividends to HAI. HAI is
restricted from declaring and paying dividends by provisions of a guarantee
agreement between HAI and RCH which HAI entered into in connection with a
reinsurance agreement between PILIC and RCH.
Dividend payments by HealthAxis are subject to restrictions set for in
the Certificates of Designation related to the Series A, Series B, Series C and
Series D Convertible Preferred Stock. HealthAxis does not anticipate paying cash
dividends for the foreseeable future.
HAI paid cash dividends on the Series A and Series B Preferred Stock at
the rate of $0.0636363 and $0.109090, respectively, per quarter from 1993 to
June 1999. All Series A and Series B Preferred Stock was converted into common
stock in 1999 and 1996, respectively.
49
HealthAxis declared dividends on the Series A and Series B Preferred
Stock at the rate of $0.025 per quarter from November 1998 to March 1999.
Recent Sales of Unregistered Securities
During 1999, HAI issued common stock, convertible debentures and
warrants, in private offerings, which were not registered with the Securities
and Exchange Commission. The following provides information regarding such
transactions which were engaged in by HAI as part of its capital raising
efforts, in connection with the conversion of its preferred stock and for
compensatory reasons.
The following HAI common stock transactions were engaged in with the
individuals identified below as part of compensatory arrangements with
employees, payment for consulting services and in connection with the conversion
of preferred stock:
Aggregate
Name of Person Number Purchase Nature of
Date of Transaction Purchasing Securities Of Shares Price Transaction
------------------- --------------------- --------- ----- -----------
March 31, 1999 Edward Bolton 25,000 N/A Stock issued pursuant to
employment agreement
September 9, 1999 Alvin H. Clemens 550,000 N/A Conversion of Preferred
Shares into Common Stock
May 18, 1999 Anthony R. Verdi 5,500 N/A Conversion of Preferred
Shares into Common Stock
In September 1999 HAI completed a private placement of Convertible
Debentures in the amount of $27,500,000 due September 14, 2002. The debentures
are convertible into HAI's common stock at a conversion price of $20.34 per
share (the "Conversion Price"). As part of the transaction, HAI issued to the
purchasers currently exercisable 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"). No fees or commissions or similar payments with respect
to this transaction were paid other than a $650,000 finders fee. See in [Note 12
to the Consolidated Financial Statements included herein for a further
explanation.
During 1999 HealthAxis issued common and preferred stock and warrants,
in private offerings, which were not registered with the Securities and Exchange
Commission. The following provides information regarding such transactions which
were engaged in by HealthAxis as part of its capital raising efforts and for
compensatory reasons to various strategic partners.
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 400,000 shares of HealthAxis common stock at $4.40 per share
which was subsequently amended to provide for warrants to purchase 150,000
shares at $4.40 and 7,500 shares at $12.00, with a five-year term. See Note 6 to
the Consolidated Financial Statements included herein for a further explanation.
50
In March 1999 HealthAxis completed a private placement of 1,526,412
shares of HealthAxis Series C 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 20 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 6 to the Consolidated Financial
Statements included herein for a further explanation.
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 $6,192,612, less issuance cost of
$1,585. See in Note 15 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.
In July 1999 HealthAxis completed a private placement of 333,334 shares
of HealthAxis Series D Preferred Stock issued to Intel Corp. at $12.00 per share
for an aggregate purchase price of $4,000,000. See in Note 21 to the
Consolidated Financial Statements included herein for a further explanation
In July 1999, HealthAxis entered into a Strategic Alliance Agreement
with Intel Corp., pursuant to which HealthAxis issued a warrant to Intel Corp.
for 75,000 shares of Series D preferred stock at $14.50 per share, with a
five-year term.
In October 1999, HealthAxis entered into an agreement with Aetna US
HealthCare, Inc. which provides for the issuance to Aetna US HealthCare, Inc. of
a warrant for 150,000 shares of HealthAxis common stock with a term of three
years. The exercise price with respect to 50,000 shares is based on an average
closing price of HAI common stock related to the date of the agreement. The
exercise price with respect to the second 50,000 shares is a 125% of the price
with respect to the first 50,000 shares. The exercise price with respect to the
third 50,000 shares is a 125% of the price with respect to the second 50,000
shares.
51
In November 1999, HealthAxis entered into an agreement with the
National Blue Cross and Blue Shield Association that provides for the issuance
to the National Blue Cross and Blue Shield Association of warrants for up to
330,000 shares of HealthAxis common stock. The exercise price with respect to
30,000 shares is $13.30 with a term of 18 months. The exercise price with
respect to 150,000 shares is $16.00 with a term of 18 months. The exercise price
with respect to 150,000 shares is based on a percentage of an average closing
price of HAI common stock related to the date upon which the National Blue Cross
and Blue Shield Association attains certain performance goals with a term of 24
months from the date certain of Blue Cross and Blue Shield Organizations'
products are launched on HealthAxis' website.
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 $2,533,000. See Note 15 to the Consolidated Financial Statements
included herein for a further explanation.
No commissions have been paid in connection with the above HealthAxis
sales, except with regard to the HealthAxis Series C Preferred Stock and
HealthAxis common stock issued in December, 1999. In connection with the Series
C Preferred Stock a placement fee of $300,000 was paid and warrants to ING
Barring as previously described were issued. In connection with the December
1999 offering, placement fees of $1.9 million were paid to Donaldson Lufkin and
Jenrette ($1.5 million), Thomas Weisel Partners LLC ($300,000), and Stephens,
Inc. ($100,000).
52
Item 6. Selected Financial Data.
The following selected consolidated financial information has been
derived from the consolidated financial statements of HAI and should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this report which have been audited by BDO Seidman, LLP
for 1999, 1998 and 1997, and by PricewaterhouseCoopers, LLP for 1996 and 1995.
HAI's financial results include that of its subsidiary, HealthAxis.
Years Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except share and per share data)
Statement of Operations Data:
Revenue:
Interactive commission and fee revenue $ 291 $ - $ - $ - $ -
---------- ------------ ------------ ------------ ----------
Expenses:
Operating expenses 6,008 812 - - -
Sales and marketing 20,099 1,295 - - -
General and administrative 8,457 3,795 1,908 744 271
Amortization of Goodwill 765 - - - -
----------- ----------- ------------ ------------ ----------
Total expenses 35,329 5,902 1,908 744 271
----------- ----------- ------------ ------------ ----------
Operating loss (35,038) (5,902) (1,908) (744) (271)
----------- ----------- ------------ ------------ ----------
Interest income 656 92 212 41 87
Interest expense (1,581) (314) (35) (54) (101)
----------- ----------- ------------ ------------ ----------
Loss before minority interest (35,963) (6,124) (1,731) (757) (285)
Minority interest in loss of subsidiary (7,747) (716) - - -
----------- ----------- ------------ ------------ ----------
Loss from continuing operations (28,216) (5,408) (1,731) (757) (285)
Loss from sale of discontinued operations (10,263) - - - -
Income (loss) from discontinued operations (8,052) (6,748) (16,694) 16,877 (3,416)
----------- ----------- ------------ ------------ ----------
Income (loss) before dividends (46,531) (12,156) (18,425) 16,120 (3,701)
Dividends on preferred stock 70 254 148 194 334
----------- ----------- ------------ ------------ ----------
Net income (loss) applicable to common stock $ (46,601) $ (12,410) $ (18,573) $ 15,926 $ (4,035)
----------- ----------- ------------ ------------ ----------
Income (loss) per share of common stock (basic)
Continuing operations $ (2.31) $ (0.55) $ (0.19) $ (0.10) $ (0.06)
Discontinued operations (1.49) (0.65) (1.65) 1.76 (0.38)
----------- ----------- ------------ ------------ ----------
Net income (loss) $ (3.80) $ (1.20) $ (1.84) $ 1.66 $ (0.44)
=========== =========== ============ ============ ==========
Income (loss) per share of common stock (diluted)
Continuing operations $ (2.31) $ (0.55) $ (0.19) $ (0.09) $ (0.06)
Discontinuing operations $ (1.49) $ (0.65) $ (1.65) $ 1.45 $ (0.38)
----------- ----------- ------------ ------------ ----------
Net income (loss) $ (3.80) $ (1.20) $ (1.84) $ 1.36 $ (0.44)
=========== =========== ============ ============ ==========
Weighted average common shares and equivalents
used in computing loss per share
Basic 12,260,000 10,331,000 10,090,000 9,610,000 9,100,000
Diluted 12,260,000 10,331,000 10,090,000 11,674,000 9,100,000
53
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Balance Sheet Data:
Total assets $79,602 $24,568 $12,333 $ 8,935 $3,702
Loans payable - 3,865 5,077 298 830
Convertible debenture 25,019 - - - -
Ceding commission liability 5,600 5,000 - - -
Stockholders' equity 12,620 5,495 4,009 22,053 3,424
Stockholders' equity per common share (1) $ 0.97 $ 0.48 $ 0.38 $ 2.08 $ 0.34
(1) Assumes conversion of Series A and Series B Preferred stock into common
stock of HAI on a share-for-share basis in 1995 and conversion of Series A
Preferred stock in 1998, 1997 and 1996 on a share-for-share basis.
(2) As the result of the discontinuation of the insurance operations the
Selected Financial Data has been restated for all years presented.
54
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
1999 Results compared to 1998 Results
Net loss applicable to common stock was $46.6 million or ($3.80) per
basic and diluted share in 1999 compared to net loss of $12.4 million or ($1.20)
per basic and diluted share in 1998. The Company's 1999 results included a net
loss from discontinued operations of $18.3 million as compared to $6.7 million
loss from discontinued operations in 1998. Additionally the Company experienced
increased expenses in both HealthAxis and HAI during 1999 compared to 1998.
Interactive commission and fee revenue of $0.3 million represents
commission and administrative fees earned on individual health insurance
policies sold on HealthAxis' website. There were no revenues in 1998 due to the
launch of HealthAxis' website, which is the only source of revenue, on December
3, 1998. Revenue related to HealthAxis' website is anticipated to grow in 2000
as a result of growth in first year, renewal commissions and fees, and the
introduction of new products onto the website.
Operating expenses of $6.0 million in 1999 increased from $0.8 million
in 1998 primarily due to higher HealthAxis expense due to employee and
recruiting expenses related to planning and scheduling website implementation of
carriers, website enhancements, and general operations. Operating expenses
increase as more carriers and products are integrated into HealthAxis' website.
Sales and marketing expense of $20.1 million in 1999 increased from
$1.3 million in 1998 due primarily to the amortization of HealthAxis'
interactive marketing agreements with Internet portals based on the number of
HealthAxis' Internet advertisements that it placed on distribution partners' web
pages and viewed by Internet users ("impressions"). Interactive marketing
amortization was $14.6 million in 1999 compared to $0.6 million in 1998.
Interactive marketing amortization expense represents the cost of exclusivity
and Internet advertisements delivered to HealthAxis from strategically selected
websites. Amortization of HealthAxis' interactive marketing agreements in 2000
is anticipated to approximate $11.2 million. In addition, HealthAxis employee
and recruiting expense increased.
General and Administrative Expenses of $8.5 million in 1999 increased
from $3.8 million in 1998 due primarily to employee and recruiting expenses
relating to the increase in HealthAxis' administrative and executive staff. 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.
Amortization of goodwill of $0.8 million in 1999 relates to HAI's
purchase of 1,415,000 shares of HealthAxis common stock from HealthPlan Services
Inc. Amortization of HAI's $7.9 million of goodwill in 1999 includes 3 1/2
months amortization for the purchase of these shares and accordingly will be
higher in 2000. Further, HealthAxis anticipates recognizing approximately $623
million of goodwill as a result of the January 7, 2000 merger of Insurdata into
HealthAxis to be amortized on a straight line basis over a 3 year period.
55
Interest income of $0.7 million in 1999 relates to interest earned in
short term investments. There was no corresponding income during 1998.
Interest expense of $1.6 million in 1999 includes $0.7 million on
convertible debentures, $0.6 million of accrued interest on ceding commission
liability and $0.2 million on loans payable and $0.1 million of interest on
other obligations. Interest expense increased in 1999 compared to 1998 due to
the 1999 issuance of convertible debentures and the December 31, 1998 execution
of a reinsurance agreement which gave rise to the ceding commission liability
and interest thereon.
Net loss from discontinued operations of $18.3 million included a $10.3
million loss on the sale of PILIC and $8.0 million loss in discontinued
operations as compared to $6.7 million loss in discontinued operations in 1998.
HAI's discontinued operations were conducted through its former wholly owned
life insurance company Provident Indemnity Life Insurance Company ("PILIC") sold
November 30, 1999 and PILIC's subsidiaries which during 1997 through 1998 were
Provident American Life and Health Insurance Company ("PALHIC") sold December
31, 1998, Montgomery Management Corporation ("MMC") of which 80% was sold during
1998 and the remainder sold during 1999 and NIA Corporation ("NIA") sold
December 31, 1998. The insurance operations are being reported as discontinued
operations for all periods presented. 1998 results included realized gains on
the sale of PALHIC, MMC and NIA of $3 million.
The Company has recorded a loss on the sale of subsidiary of $10.3
million in connection with the sale of PILIC which includes a write-off of net
assets including unamortized deferred policy acquisition costs, property and
equipment, net of accumulated depreciation in the amount of $2.7 million plus
HAI's November 30, 1999 capital contribution to PILIC in the amount of $7.2
million and the value of the Series A Preferred Stock transferred to AHC in the
amount of $0.4 million. No consideration was received from AHC as the
liabilities assumed exceeded the value of the assets acquired. The value of the
Series A Preferred Stock was based on the historical issuance cost by HealthAxis
to PILIC during 1998.
On December 7, 1999, HealthAxis and Insurdata Incorporated, a
subsidiary of UICI, announced the signing of a definitive agreement to merge the
two companies, with the combined entity retaining the HealthAxis name. Under the
terms of the transaction, Insurdata's shareholders received approximately 50
percent of the newly combined company. The transaction, which closed on January
7, 2000, will be accounted for under the purchase method of accounting in
accordance with APB No. 16 and HealthAxis, by virtue of its holding a majority
of the voting interest, was determined to be the acquirer for accounting
purposes. HealthAxis anticipates that revenues will increase as a result of
including Insurdata's revenues which during 1999 were $42.9 million. It is
anticipated that Insurdata's technological expertise and established customer
base will benefit HealthAxis' future operations by improving the process of
implementing carrier products on the website and website development, increasing
revenues with their established customer base, the potential to cross market
products to HealthAxis' and Insurdata's clients and providing each company with
exposure to additional potential clients.
56
On January 26, 2000, HAI, HealthAxis and a wholly owned subsidiary of
HAI entered into the Agreement and Plan of Reorganization which provides for the
merger of HealthAxis with and into the subsidiary of HAI which will result in
former shareholders of HealthAxis becoming shareholders of HAI. This transaction
is referred to as the reorganization. The HAI subsidiary will continue as the
surviving corporation of the reorganization, will retain all of its separate
corporate existence and will be known as HealthAxis.com Inc. The reorganization
will be accounted for by HAI as a recapitalization in accordance with generally
accepted accounting principles. As a recapitalization, HAI capital stock issued
to HealthAxis stockholders will be accounted for at the historical cost and the
net assets of HAI will be recorded at historical cost. As a result of the
recapitalization, the preferred and common stock of HealthAxis will be converted
to HAI common stock eliminating all minority interest in HealthAxis and the
minority interest net loss of subsidiary line item on the statement of
operations. In addition, outstanding HealthAxis options and warrants will be
converted into options or warrants to purchase HAI common stock. HAI anticipates
that HAI will issue a total of 33,386,730 shares of HAI common stock to
HealthAxis shareholders in the reorganization. HAI also anticipates that HAI
will issue up to approximately 6,072,728 shares of HAI common stock upon the
exercise of options and warrants to purchase HealthAxis common stock to be
assumed by HAI of which HAI anticipates recording approximately $61 million of
prepaid compensation which will be expensed over the vesting period of the
options. There can be no assurance, however, that the conditions to the
reorganization will be satisfied or that the reorganization documents will not
be terminated.
1998 Results compared to 1997 Results
Net loss applicable to common stock was $12.4 million or ($1.20) per
basic and diluted share in 1998 compared to net loss of $18.6 million or ($1.84)
per basic and diluted share in 1997. HAI's 1998 results included a net loss from
discontinued operations of $6.7 million as compared to $16.7 million loss from
discontinued operations in 1997. Additionally the Company experienced increased
expenses in both HealthAxis and HAI during 1998, which related to the start-up
of HealthAxis.
Operating expenses of $0.8 million in 1998 were the result of
HealthAxis consulting fees relating to carrier partner integration planning and
website design.
Sales and marketing expense of $1.3 million in 1998 were primarily due
to the amortization of expenses related to HealthAxis' interactive marketing
agreements based on the number of impressions received by the HealthAxis
website.
General and Administrative Expenses of $3.8 million in 1998 increased
from $1.9 million in 1997 due primarily to HealthAxis employee and recruiting
expenses along with professional fees and overhead expenses.
Interest expense of $0.3 million in 1998 includes interest on loans
payable.
Net loss from discontinued operations of $6.7 million in 1998 as
compared to $16.7 million loss in discontinued operations in 1997. Results for
1998 included substantially higher group medical benefit expense partially
offset by realized gains on the sale of PALHIC, MMC and NIA.
57
Liquidity and Capital Resources
A major objective of the Company is to maintain sufficient liquidity to
fund growth and meet all cash requirements with cash and short term equivalents
plus funds generated from operating cash flow.
Prior to 1999 HAI's liquidity requirements were primarily created and
met by HAI's discontinued operations. During 1999, HAI's liquidity requirements
were primarily created and met by HealthAxis and HAI through the private
placement of debt and equity securities. During 1999 the primary uses of cash
for HAI were the operation of PILIC and HAI's November 30, 1999 sale of PILIC,
HAI's purchases of HealthAxis stock and HealthAxis' operating costs and payments
to America Online, Inc. ("AOL"), Lycos, Inc. ("Lycos"), CNet, Inc. ("CNet"),
Snap! LLC ("Snap!") and Yahoo! Inc, ("Yahoo!").
Cash and cash equivalents as of December 31, 1999 amounted to $58.1
million of which $56.5 million was in HealthAxis and was partially attributable
to the December private placement of common stock and $1.6 million was in HAI
and is the net remaining funds from the September 1999 issuance of convertible
debentures. HAI anticipates the need to obtain cash advances from HealthAxis
during 2000 to fund HAI's costs of the Pending Merger involving HealthAxis and a
wholly-owned subsidiary and HAI corporate expenditures.
Net cash used in operating activities of $40.0 million in 1999 was
primarily the result of claim payments to policyholders in HAI's discontinued
operations and operating losses in HAI and HealthAxis.
HAI does not anticipate that future cash used or provided from
operations will include amounts related to HAI's Discontinued Insurance
Operations which was sold effective November 30, 1999. Amounts due from
reinsurers, amounts due from a third party administrator and future policy
benefits and claims relate to HAI's discontinued operations.
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 $3.3
million to Lycos, CNet, Snap! and Yahoo! which are included in prepaid
interactive marketing expense.
During 1999 HealthAxis completed private offerings of approximately
$74.7 million the net proceeds of which have been used to and are anticipated to
be used to fund amounts due under HealthAxis' distribution agreements with AOL,
Lycos, CNet and Snap! and an Advertising Agreement with Yahoo! with the balance
intended to be used by HealthAxis for its working capital and other general
purposes.
During 1999 HAI issued 2% convertible debentures in the amount of $27.5
million the net proceeds of which were used for working capital and other
general corporate purposes, including approximately $8.2 million to purchase
HealthAxis Common Stock, $14.7 million to sell the Insurance Operations and
retain the Company's home office and 445,916 shares of HealthAxis Series A
Preferred Stock and $2 million to purchase 133,333 shares of HealthAxis common
stock.
58
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 $0.9 million. Non cash
issuance of warrants relates to HealthAxis.
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 and HealthAxis do not
anticipate paying cash dividends on Common Stock or on any class of HealthAxis
preferred stock in the foreseeable future.
The Company believes that the merger between HealthAxis and Insurdata
will benefit the Company and its shareholders because the Company will:
o increase its revenues, as demonstrated by the increase in revenues
from $291,000 in 1999 to a combined revenue of $43.2 million for
1999;
o improve its ability to raise capital by providing an established
revenue base, seasoned management and significantly greater
technological resources; and
o increase product offerings and client exposure, which will
potentially enable the Company to generate additional revenues.
o acquire technical expertise and accelerate the carrier partner
integration process, which would allow HealthAxis to make more
quickly additional products available of its website and accelerate
its growth.
Historically Insurdata has been funded primarily through cash generated
from operations. At December 31, 1999 Insurdata's cash balance was $2.1 million,
current liabilities were $4.5 million of which anticipated 2000 payments under
certain employee compensation plans are $1.1 million and capital purchase
commitments are $1 million.
HAI believes the reorganization will benefit the Company and its
shareholders because it will:
o improve the Company's ability to raise capital on more favorable
terms than in the private equity markets;
o eliminate investor confusion stemming from HAI's long history as a
health insurance underwriter; and
o streamline corporate structure to eliminate dual shareholder
approvals in connection with annual meetings and other shareholder
actions and their associated costs.
During 1999 HAI purchased 1,415,000 shares of HealthAxis common stock
and has agreed to pay the seller $0.4 million to complete the transaction.
During 1998 and 1999, HealthAxis entered into agreements with AOL,
Lycos, CNet, Snap! and Yahoo!. In connection with these agreements, the Company
has paid $4.7 million in cash and warrants during 1999 and is required to pay $5
million in 2000. The Company believes that its current cash and cash equivalents
will be sufficient to fund HealthAxis' obligations under these agreements and
current
59
operations through March 31, 2001. However, subsequent equity or debt financings
will be necessary to enable the Company to fund future operations and continue
to implement its current business strategies.
HAI has no material commitments for capital expenditures at December
31, 1999 and such expenditures totaled approximately $4.2 million in 1999. Such
expenditures were primarily for HealthAxis' equipment, software, furniture and
building improvements.
On January 7, 2000, HealthAxis and Insurdata Incorporated, a subsidiary
of UICI completed the merger of the two companies. HealthAxis anticipates that
it will pay out of pocket merger costs of approximately $0.6 million during
2000.
On December 7, 1999, HAI announced plans to move forward with its
original plan to merge with its subsidiary, HealthAxis. The merger was approved
by HAI's board of directors on January 26, 2000 and by HealthAxis' board of
directors on January 26, 2000. The Company anticipates that it will pay out of
pocket merger costs of approximately $2.2 million during 2000.
HAI does not anticipate paying cash dividends on common stock or on any
series or 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 expense.
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
To date, the Company has experienced very few Year 2000 problems with
those problems centering on life administration processing sold to PILIC on
November 30, 1999 with no further liability to the Company regarding Year 2000
issues. The cost of programming changes as of December 31, 1999 was less than
$150,000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Convertible Debentures outstanding a December 31, 1999 are fixed
rate obligations and would not be exposed to the impact of interest rate
fluctuations. To the extent that the Company seeks to refinance these
instruments, the prevailing market interest rates on replacement debt could
exceed rates currently paid thereby increasing interest expense and increasing
net loss.
60
Item 8. Financial Statements and Supplementary Data.
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets - December 31, 1999 and 1998 F-2
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-39
61
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
62
PART III
Item 10. Directors and Executive Officers of the Registrant.
Director or
Principal Occupation Executive Year Term
Name Age For Past Five Years Officer Since Will Expire
---- --- ------------------- ------------- -----------
Michael Ashker 47 Director; President, Chief Executive Officer of HAI 1998 2000
since August 1999 and Director, President and Chief
Executive Officer of HealthAxis since March 1998;
Managing Director and Portfolio Manager of Lynx
Capital Group LLC and Managing Member of Lynx
Venture Partners I, LLC from 1995 to 1998.
Alvin H. Clemens 62 Director; Chairman of the Board of HAI and 1989 2000
subsidiary companies since October 1989; Chairman
of HealthAxis since 1998; Chief Executive Officer
of HAI from 1989 to 1999 and President of HAI 1993
- 1996; President of -PILIC since November 1999.
Harold M. Davis 64 Director; Chairman of the Board of Realen Homes, 1989 2000
Inc. since 1968.
Francis L. Gillan III 45 Chief Financial Officer and Treasurer of HAI and 1999 N/A
PILIC since January 1999; Treasurer of PILIC and
PALHIC since 1998; Controller of PILIC and PALHIC
1996 - 1998; Director of P&C Planning and Expense
Analysis, Providian Direct Insurance 1994-1996.
Henry G. Hager 65 Director; Of Counsel in the law firm of Stradley, 1996 2000
Ronon, Stevens and Young since January 2000;
Partner in the law firm of Stradley, Ronon, Stevens
and Young from 1994 to 1999; President and Chief
Executive Officer of The Insurance Federation of
Pennsylvania since 1985; Director of American
Waterworks Company, a publicly held company.
George W. Karr, Jr. 61 Director; Co-Chairman of Karr Barth Associates, 1996 2000
Inc. since 1998; Chief Executive Officer of Karr
Barth Associates 1984-1998.
Edward W. LeBaron 70 Director; Director of HealthAxis since January 1998 2000
2000; Director of Lynx Capital Group, LLC from
January 1997 to January 2000; Partner in the law
firm of Pillsbury Madison & Sutro from 1989 to
1997; Attorney, Political Law Group, Pillsbury
Madison & Sutro 1989-1997; Chief Executive Officer
of Pacific Casino Management 1995-1996; Director of
Tom Brown, Inc., a publicly held company.
63
Director or
Principal Occupation Executive Year Term
Name Age For Past Five Years Officer Since Will Expire
---- --- ------------------- ------------- -----------
Theophile Joseph Mignatti, 63 Director; Chairman of Mignatti Construction 1998 2000
Jr. Company since 1998; President and Chief Executive
Officer of Mignatti Ventures since 1989.
P. Glenn Moyer 64 Director; Private Practice Attorney since 1992; 1989 2000
Director, Maine National 1985-1995.
Anthony R. Verdi 51 Chief Operating Officer of HAI since December 1990 N/A
1997; Chief Financial Officer and Treasurer of
HealthAxis since November 1999; Chief Operating
Officer of PILIC and PALHIC 1997-1998; President
of PILIC since December 1998; Treasurer and Chief
Financial Officer of HAI, PILIC and PALHIC
1990-1997.
During 1999, HAI's Board of Directors held nine (9) meetings. All
Directors attended at least 75% of the aggregate meetings of the Board and the
Committees on which they served.
Messrs. Michael Ashker, Francis L. Gillan III and Anthony R. Verdi are
the executive officers of HAI. Messrs. Gillan and Verdi are not directors.
64
Committees of the Board of Directors
HAI's Board of Directors has standing an Executive/Compensation/
Nominating Committee and an Audit Committee.
The Executive/Compensation/Nominating Committee, on which Messrs.
Clemens, Ashker, Davis and Mignatti currently serve, is appointed to act when a
meeting of the full Board of Directors is not feasible, administers HAI's
compensation matters and nominates directors and determine replacements for
directors when membership on the Board of Directors ends prior to the expiration
of a term. The Executive/Compensation/ Nominating Committee held two (2)
meetings during 1999.
The Audit Committee is appointed to recommend the selection of HAI's
auditors, review the scope and results of audits, review the adequacy of HAI's
accounting, financial and operating systems and supervise special
investigations. The Audit Committee held two (2) meetings in 1999. The Audit
Committee is currently comprised of Messrs. Hager, Davis and Moyer. Mr. Ashker
serves as an alternate.
The Option Administration Committee was established by the Board of
Directors on July 16, 1996 and currently consists of Messrs. Clemens, LeBaron
and Verdi. Any options to be granted to Messrs. Clemens or Verdi are subject to
the approval of only Messrs. Hager, Karr and Moyer, who are outside directors of
HAI and, as such, are disinterested persons. The Option Administration Committee
did not meet during 1999.
Director Compensation
Directors who are not employees of HAI are paid a fee of $1,000 for
attendance at each meeting of the Board of Directors of HAI, with no fee being
paid for attendance at meetings of any of HAI's subsidiaries, and $500 for
attendance at each meeting of any committee of the Board. During 1999 HAI
granted options to purchase an aggregate of 20,000 shares of HAI's common stock
at the price of $7.50 per share to Directors.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act ("Section 16(a)") requires HAI's
directors, executive officers, and persons who own more than 10% of a registered
class of HAI's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of HAI. Officers, directors and greater than 10% stockholders are
requires by SEC regulation to furnish HAI with copies of all Section 16(a) forms
they file.
To HAI's knowledge, based solely on a review of the copies of such
reports furnished to HAI and written representations that no other reports were
required during the fiscal year ended December 31, 1999, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
65
Item 11. Executive Compensation.
Employment and Other Agreements
Effective February 19, 1997, HAI and Mr. Clemens entered into a new
employment agreement which replaced Mr. Clemens' prior employment contract dated
as of January 1, 1993. Pursuant to the agreement, HAI employed Mr. Clemens as
Chief Executive Officer for a five-year term ending December 31, 2002. Unless
otherwise terminated, the term shall automatically be extended at the end of
each year after December 31, 1997, in order that at all times, on each December
31st during the duration of the agreement, there will be an unexpired five-year
term. The employment agreement was amended on July 28, 1999 to change Mr.
Clemens' executive position to Chairman of the Board of Directors and Chairman
of the Executive/Compensation/Nominating Committee. Mr. Clemens was paid a base
salary in 1999 of $413,184. Mr. Clemens' contract entitles him to an annual cost
of living increase, and additional incentive or bonus compensation as will be
deemed appropriate from time to time by the board of directors of HAI. The
agreement further provides for group life, health, disability, major medical,
and other insurance coverages for Mr. Clemens and his family, and upon
termination, provides termination benefits which include the provision of health
insurance for Mr. Clemens and his spouse for life, a salary benefit of five
times base salary in the event of Mr. Clemens' death, disability, or termination
without cause, and includes certain restrictions on Mr. Clemens competition and
disclosure of confidential information, along with options to purchase 50,000
shares of HAI's common stock granted under HAI's Non-Qualified Option Plan for
Directors and the 1996 Employee Incentive Stock Option Plan. Mr. Clemens
released and assigned all rights in and to the options to purchase shares under
these two plans in a letter agreement dated September 9, 1999.
66
The following three tables show information relating to the Chairman of
the Board, President and Chief Executive Officer and the most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 during
the calendar years specified therein.
SUMMARY COMPENSATION TABLE
=====================================================================================================================
Long-Term
Compensation
Annual Compensation Awards
Securities
Underlying
Options All Other
Name and Principal Salary Bonus (HAI/HealthAxis) Compensation(1)
Position Year ($) ($) (#) ($)
- ---------------------------- ---------- --------------- --------------- ---------------------- ----------------------
Michael Ashker, (2) 1999 120,000 50,000 5,000/200,000 (3) -
CEO and President of HAI 1998 92,308 0/991,000 (4) 80,000
and HealthAxis
- ---------------------------- ---------- --------------- --------------- ---------------------- ----------------------
Alvin H. Clemens, (5) 1999 413,184 17,764
Chairman of the Board of 1998 413,896 0/309,000 (6) 17,714
HAI and HealthAxis 1997 417,453 305,850 18,288
- ---------------------------- ---------- --------------- --------------- ---------------------- ----------------------
Andrew Felder, (7) 1999 120,000 0/ 75,000 (4) $10,000
Executive Vice President - 1998 64,615 0/175,000 (4) -
Strategy and Corporate
Development of HealthAxis
- ---------------------------- ---------- --------------- --------------- ---------------------- ----------------------
Francis L. Gillan III, (8) 1999 110,000 20,000/0 (9) $ 3,579
CFO and Treasurer of HAI
- ---------------------------- ---------- --------------- --------------- ---------------------- ----------------------
Anthony R. Verdi, (10) 1999 150,000 25,000/5,000 (11) 44,941
COO of HAI and 1998 151,392 10,144
CFO of HealthAxis 1997 151,335 9,295
=====================================================================================================================
(1) Includes for 1999, 1998 and 1997, respectively, (a) HAI contributions to
savings plan (Mr. Clemens $4,000, $4,000 and $4,000; Mr. Gillan $3,579; Mr.
Verdi $3,461, $3,317 and $3,595), (b) automobile expense allowances (Mr.
Clemens $11,280, $11,280 and $11,998; and Mr. Verdi $5,700, $5,700 and
$7,700), (c) consulting fees (Mr. Ashker $80,000 and Mr. Felder $10,000)
and (d) payout of accumulated vacation (Mr. Verdi $34,615).
(2) Mr. Ashker joined HealthAxis as President and CEO on April 1, 1998 and
became President and CEO of HAI in August, 1999. In 1999, Mr. Ashker was
paid $120,000 as a salary by HealthAxis and a $50,000 bonus paid by HAI. In
1998, all of Mr. Ashker's annual compensation was paid by HealthAxis and
$80,000 of other compensation was paid by HAI.
(3) Includes options to purchase 200,000 shares of HealthAxis common stock and
an option to purchase 5,000 shares of HAI.
(4) Represents options to purchase HealthAxis common stock.
(5) Mr. Clemens received a salary during 1999 from HAI but did not receive a
salary from HealthAxis.
67
(6) Mr. Clemens was granted options to purchase 309,000 shares of HealthAxis
common stock, however, these grants to Mr. Clemens were terminated during
1999.
(7) During 1999, Mr. Felder's salary of $120,000 was paid by HealthAxis. In
1998, Mr. Felder also served as a consultant to HAI and was paid $10,000.
(8) Mr. Gillan became CFO and Treasurer of HAI on January 14, 1999.
(9) Represents options to purchase shares of HAI's common stock.
(10) Mr. Verdi received his annual salary and other annual compensation from
HAI.
(11) Includes options to purchase 25,000 shares of HAI's common stock and 5,000
shares of HealthAxis common stock.
68
HealthAxis Inc. and HealthAxis.com, Inc.
Aggregate Option Exercises in 1999 and Year-End Values
=======================================================================================================================
Number of Value of
Shares Underlying Unexercised
Acquired Value Unexercised In-the-Money
On Exercise Realized Options Options at
Name (#) ($) At 12/31/99 12/31/99
- ------------------------------------------- ---------------- ---------------- -------------------- --------------------
(a) (b) (c) (d) (e)
- ------------------------------------------- ---------------- ---------------- -------------------- --------------------
Alvin H. Clemens (1)
Chairman of the Board
Exercisable (HAI) - -
Unexercisable (HAI) -
Michael Ashker
CEO and President
Exercisable (HAI) - 5,000 115,625
Unexercisable (HAI) - - -
Exercisable (HealthAxis) - 1,057,668 30,138,117
Unexercisable (HealthAxis) - 133,332 3,085,538
Andrew Felder
Executive VP-Strategy and Corporate
Development of HealthAxis
Exercisable (HealthAxis) - - 140,626 3,877,963
Unexercisable (HealthAxis) 109,374 2,824,287
Francis L. Gillan III
CFO and Treasurer
Exercisable (HAI) 17,000 331,469 7,500 183,875
Unexercisable (HAI) 23,000 552,750
Anthony R. Verdi
COO
Exercisable (HAI) 22,000 578,906 40,000 992,500
Unexercisable (HAI) - - 35,000 841,875
Exercisable (HealthAxis) - - - -
Unexercisable (HealthAxis) - - 5,000 78,125
=======================================================================================================================
(1) As of December 31, 1999, the above table excludes non-compensatory stock
options to purchase 1,253,376 shares of common stock at $0.90 issued to Mr.
Clemens in 1989 of which Mr. Clemens disclaims beneficial ownership of
967,040 shares owned by a partnership of which Mr. Clemens is a partner;
excludes an option to purchase 397,198 shares of Series A cumulative
preferred stock at $3.64 issued on April 1, 1993 in connection with the
purchase by Mr. Clemens of other shares of preferred stock at such time. By
letter agreement dated September 9, 1999, the option to purchase shares of
Series A cumulative preferred stock was amended to eliminate the right to
convert these options into any class of securities of HAI other than HAI's
common stock.
69
HealthAxis Inc. and HealthAxis.com, Inc.
Option Grants in 1999
===================================================================================================================================
Potential Realizable Value
Number of % of Total At Assumed Annual Rates
Securities Options Exercise Of Stock Appreciation for
Options Granted to Price Expiation Option Term
Name Granted Employees $/Share Date 5% 10%
- ----------------------------- ---------------- --------------- ---------------- ---------------- ----------------- ----------------
(a) (b) (c) (d) (e) (f) (g)
- ----------------------------- ---------------- --------------- ---------------- ---------------- ----------------- ----------------
Alvin H. Clemens
Chairman of HAI and - - - - - -
HealthAxis
Michael Ashker 5,000 (1) .87% $7.50 3/4/09 $24,093 $60,576
CEO and President of HAI 200,000 (2) 9.36% $7.48 11/22/09 $563,514 $1,496,650
and HealthAxis
Andrew Felder
Executive VP-Strategy & 75,000 (2) 5.41% $7.85 11/22/09 $184,061 $585,758
Corporate Development
Of HealthAxis
Francis L. Gillan III
CFO and Treasurer of HAI 20,000 (1) 3.49% $7.50 3/4/07 $61,065 $142,308
Anthony R. Verdi 25,000 (1) 4.36% $7.50 3/4/09 $76,331 $177,885
COO of HAI and 5,000 (2) .36%
CFO of HealthAxis
===================================================================================================================================
(1) Options granted to purchase HAI's common stock.
(2) Options granted under the HealthAxis 1998 Stock Plan to purchase HealthAxis
common stock which are convertible into 1.127 shares of HAI's common stock.
70
The following individuals were not included in the above charts because
they did not receive compensation in excess of $100,000 from HealthAxis or HAI
during 1999: Elaine del Rossi joined HealthAxis as Senior Vice President - Sales
and Marketing on November 15, 1999. In 1999, Ms. del Rossi was granted options
to purchase 20,000 shares of HealthAxis common stock at $12.00 per share of
which none have vested. Michael G. Hankinson joined HealthAxis as Vice President
and General Counsel in April, 1999. In 1999, Mr. Hankinson was granted options
to purchase 50,000 shares of HealthAxis common stock none of which have vested
at $5.77 per share and 10,000 shares of HealthAxis common stock, of which 3,334
have vested, at $12.00 per share. Dennis B. Maloney became HealthAxis' Chief
Operating Officer in January, 2000. In 1999, Mr. Maloney served as President and
Chief Executive Officer of Insurdata Incorporated and was paid $240,000 in
salary and $72,048 in bonus. HealthAxis expects that all three individuals will
be paid compensation in excess of $100,000 during fiscal 2000.
71
Stock Option Plans
HAI maintains stock option plans for executives, officers, employees or
directors of HAI and its subsidiaries and affiliates. HealthAxis also maintains
a stock option plan that includes grants to executives, directors, employees and
consultants.
The 1993 Incentive Stock Option Plan for Employees was discontinued,
and effective July 16, 1996, HAI's Board of Directors adopted the 1996 Employee
Incentive Stock Option Plan ("1996 Employee Plan"), which was approved by HAI's
shareholders at the 1997 Annual Meeting of Shareholders. The 1996 Employee Plan
was amended in 1997 to increase the number of shares issuable thereunder from
950,000 shares to 1,250,000 shares of HAI's common voting stock to key employees
of HAI and its subsidiaries and affiliates, exercisable for up to five years
from the effective date of the grant at a price not less than the fair market
value of the shares on the effective date of grant. All options granted under
the 1996 Employee Plan have been granted at 100% of the fair market value of the
shares on the effective date of the grant, with the exception of an option
granted Mr. Clemens, which was granted at 110% of the fair market value on the
date of the grant. During 1999, a total of 125,000 options were exercised under
the 1993 Employee Plan and a total of 265,400 options were exercised under the
1996 Employee Plan. On March 13, 1998 the employees owning options under the
1996 Employee Plan were given the right to reduce the grant by half in
consideration of the reduction of the exercise price by one half. Of the total
grants under the 1996 Employee Plan for 1998, 115,000 were as a result of this
election.
The Non-Qualified Stock Option Plan for Directors ("Directors Plan")
was amended and restated effective as of July 16, 1996 in order to increase the
number of shares authorized for the issuance thereunder by 356,500 shares and to
incorporate prior amendments. Options granted under the Directors' Plan are
exercisable for up to ten years from the date of grant at a price of not less
than the fair market value of the shares on the date of the grant. All options
granted under the Director's Plan have been granted at 100% of the fair market
value of the shares on the date of grant. During 1999, HAI granted options to
purchase an aggregate of 20,000 shares of HAI's common stock at a price of $7.50
per share under the Directors Plan. During 1999, a total of 135,000 options were
exercised under the Directors' Plan.
The Stock Option Plan for Executives ("Executive Plan") was amended and
restated effective December 11, 1996 and authorizes the granting of options to
purchase up to 3,850,000 shares of HAI's Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock"), which are exercisable for up to
ten years from the effective date of grant at a price of not less than the fair
market value of the shares on the date of grant. No options were granted under
the Executive Plan during 1999.
72
In June 1998, HealthAxis adopted the HealthAxis.com Inc., 1998 Stock
Option Plan (the "1998 Stock Option Plan") which provides for the award of
options and stock purchase rights (collectively "Awards") to purchase HealthAxis
common stock. During 1998, 2,900,000 shares were authorized to be granted under
the 1998 Stock Option Plan of which 1,956,500 shares have been granted as of
December 31, 1998. During 1998 options to purchase 991,000, 309,000 and 50,000
shares were granted to Mr. Ashker, Mr. Clemens and Mr. Beausang, a former
director of HealthAxis, respectively, and are immediately exercisable at a price
of $1.77 per share having a term of 10 years. Mr. Clemens' option to purchase
HealthAxis shares has since been terminated by mutual agreement. Options to
purchase 460,000 shares of HealthAxis common stock awarded at $1.77 per share
were awarded to officers and employees during 1998. These options have a term of
five years and vest at a rate of 25% of the initial award on the grant date, 25%
of the initial award on February 1, 1999 and the balance in quarterly
installments thereafter. Options to purchase an additional 96,500 shares of
HealthAxis common stock were granted to officers and employees at an exercise
price of $4.00 per share. Such options have a term of five years and vest at a
rate of 25% of the initial award on the grant date, 25% of the initial award on
November 20, 1999 and the balance in quarterly installments thereafter.
During 1999, HealthAxis amended the Stock Option Plan to increase the
total shares to 8,600,000. Such options have a term of ten years and vest at a
rate of 20-33% of the initial award on the grant date, with the balance vesting
quarterly or annually over 2 to 5 years. During 1999 HealthAxis granted
1,904,621 options under the 1998 Stock Options Plan exercisable at prices
ranging from $4.00 to $12.00 vesting over periods ranging from 2 to 5 years. Of
the options granted, options to purchase 200,000, 75,000, 60,000 and 20,000
shares were granted to Mr. Ashker, Mr. Felder, Mr. Hankinson, and Ms. del Rossi,
respectively. Mr. Felder, Mr. Ashker, Ms. del Rossi and Mr. Hankinson are
executive officers of HealthAxis.
During the first quarter of 2000, the HAI board of directors adopted
the 2000 Stock Option Plan, subject to approval by the shareholders which is
required by NASDAQ and for the plan to qualify as incentive stock options and
for the 2000 Stock Option Plan to satisfy one of the conditions of Section
162(m) of the Internal Revenue Code applicable to performance-based
compensation. Employees, officers and directors of HAI, as well as certain
consultants of HAI, are eligible to receive options under the 2000 Stock Option
Plan. The purpose of the 2000 Stock Option Plan is to provide additional
incentive to these individuals by encouraging them to invest in HAI's common
stock and thereby acquire a further proprietary interest in HAI and an increased
personal interest in HAI's continued success and progress. HAI is currently
evaluating the possibility of merging HAI's existing director and employee
stock option plans into the 2000 Stock Option Plan. To date, no grants have been
awarded under 2000 Stock Option Plan.
As of December 31, 1999 there were options to purchase 3,076,221 of
HealthAxis common stock outstanding at an average exercise price of $5.14 under
the 1998 Stock Option Plan.
HAI's Stock Option Plans are administered by the Option Administration
Committee. The respective administrators of the Stock Option Plans are
authorized to select optionees, determine the number of shares for which options
are granted to each optionee, the exercise price of the options, and the other
terms and conditions of the options.
73
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 20, 2000, the amount and
percentage of HAI's outstanding common stock beneficially owned by (i) each
person who is known by HAI to be the beneficial owner of more than 5% of HAI's
outstanding common stock; (ii) each director; (iii) each executive officer and
(iv) all officers and directors of HAI as a group.
Common Stock
---------------------------
No. of Shares Percent
Name of Beneficially of
Beneficial Owner Owned(1) Class(2)
- ---------------- -------------- ------------
Alvin H. Clemens 2,499,500(3)(4) 18.2%
907 Exeter Crest
Villanova, PA 19085
Michael Ashker 718,076(5)(6) 5.5%
c/o HealthAxis.com, Inc.
2500 DeKalb Pike
Norristown, PA 19404
Harold M. Davis 175,000(7) 1.3%
c/o Realen Properties
1000 Chesterbrook Blvd.; Suite 100
Berwyn, PA 19312
Francis L. Gillan III 7,500(8) (9)
c/o HealthAxis, Inc.
2500 DeKalb Pike
Norristown, PA 19404
Henry G. Hager 65,000(7) (9)
7 Jorrocks Lane
Malvern, PA 19355
George W. Karr, Jr. 77,000(7) (9)
Karr Barth Associates, Inc.
40 Monument Road
Bala Cynwyd, PA 19004-1797
Edward W. LeBaron, Jr. 43,571(6) (9)
Lynx Private Equity Partners, LLC
2601 Fair Oaks Boulevard; Suite 150
Sacramento, CA 95864
Theophile J. Mignatti, Jr. 35,000(3)(6)(10) (9)
Mignatti Companies
2310 Terwood Drive; P. O. Box 249
Huntingdon Valley, PA 19006
74
P.Glenn Moyer 51,100(11) (9)
P.O. Box 438
9 Main Street
Souderton, PA 18964
Anthony R. Verdi 89,974(12) (9)
c/o HealthAxis, Inc.
2500 DeKalb Pike
Norristown, PA 19404
Taunus Corporation 760,803(13) 5.9%
31 West 52nd Street
New York, NY 10019
ALL DIRECTORS AND OFFICERS
AS A GROUP (10 PERSONS FOR
COMMON) 3,762,721(14) 26.8%
(1) Information furnished by directors and officers.
(2) Calculated as a percentage of outstanding shares plus each individual's
options to purchase common shares (or all Directors and Officers as a
Group).
(3) Mr. Clemens' daughter is married to Mr. Mignatti's son.
(4) Includes options granted to Mr. Clemens to purchase an additional 253,376
shares of HAI's common stock at a price of $.91 per share granted pursuant
to the Amended and Restated Stock Option Agreement dated as of February 27,
1989 and options to purchase 397,198 shares of common stock at an option
price of $3.64 per share granted to Mr. Clemens pursuant to a Stock Option
Agreement dated April 1, 1993 which was amended effective September 9,
1999. Mr. Clemens disclaims beneficial ownership of 616,000 shares of HAI's
Common Stock given by him to the Mark Twain Trust in 1991 and 967,040
options to purchase additional shares of HAI's common stock owned by a
partnership in which Mr. Clemens is a partner.
(5) The information in regard to Mr. Ashker has been derived from an amendment
to a Schedule 13D filed by Mr. Ashker and others with the Securities and
Exchange Commission on November 16, 1999. Mr. Ashker is presently serving
as President, CEO and a director of HAI and HealthAxis. Sole and shared
voting power is claimed with regard to 394,776 and 323,300 shares,
respectively. See also "Item 13 - Certain Relationships and Related
Transactions" for a description of transactions between Mr. Ashker, Lynx
Capital Group, LLC and HAI. Schedule 13D/A was filed on behalf of Mr.
Ashker and others on November 16, 1999, indicating that Mr. Ashker
beneficially owned less than ten percent (10%) of HAI's outstanding Common
Stock as of such date. The Schedule 13D/A was also filed on behalf of Lynx
Capital Group, LLC, a California limited liability company; Van Kasper &
Company, a broker-dealer and California corporation; Lynx Tech Fund, L.P.,
an investment limited partnership of which Lynx Capital Group, LLC serves
as investment advisor; and Edward W. LeBaron, Jr., Kenneth Brown and Deidre
Holt. Each of the above entities also claims beneficial ownership of
various amounts of HAI's Common Stock.
(6) Includes an option to purchase 5,000 shares of HAI's common stock.
(7) Includes options to purchase 55,000 shares of HAI's common stock.
(8) Includes an option to purchase 7,500 shares of HAI's common stock.
75
(9) Less than 1%.
(10) Includes 20,000 shares held in wife's name (deceased).
(11) Includes options to purchase 50,000 shares of HAI's common stock.
(12) Includes options to purchase 40,000 shares of HAI's common stock.
(13) Information with regard to Taunus Corporation has been derived from a
Schedule 13G filed by Taunus Corporation and DB Alex.Brown LLC with the
Securities and Exchange Commission on February 14, 2000. Taunus Corp.
reported sole voting power with respect to 708,003 shares of HAI common
stock and sole dispositive power over 760,803 shares of HAI common stock.
DB Alex.Brown LLC reported sole voting and dispositive power with respect
to 678,500 shares of HAI common stock, which are included in the 760,803
shares reported by Taunus Corp.
(14) Includes stock and options of all officers and directors to purchase an
aggregate of 97,474 shares and 1,164,747 shares, respectively, and stock
and options granted to Mr. Clemens as described in note 4.
Item 13. Certain Relationships and Related Transactions.
Notes Receivable - Officers and Directors
HAI had loans receivable from related parties with: Mr. Alvin Clemens,
Chairman of the Board, Chief Executive Officer and a shareholder of HAI, which
was collateralized by 128,478 shares of HAI's common stock ("Shares") owned by
Mr. Clemens; Mr. John Gillin, a former Director and shareholder of HAI, which
was collateralized by 10,000 shares and a stock option grant to purchase 30,000
shares, both owned by Mr. Gillin. Mr. Clemens' loan was paid in full during
September 29, 1999. Mr. Gillin's loan was repaid in full during January 1999.
The following table details the loan receivable at December 31, 1999.
Clemens Gillin
------- ------
Amounts due at December 31, 1999
Loan principal $ - $ -
Accrued interest - -
Highest outstanding balance $681,443 $165,723
1999 Interest income $ 23,851 $ -
Interest rate 5.33% 8.50%
76
Business transactions with Related Parties
Pursuant to agreements effective as of September 9, 1999 between HAI
and Mr. Clemens, Mr. Clemens:
o assigned his rights to acquire up to an additional 3,300,000 shares
pursuant to the March 10, 1997 agreement to HAI,
o released and assigned all of his right in and to options to purchase
152,802 shares of HAI's preferred stock to HAI, and
o amended an option to purchase the remaining 397,198 shares of HAI preferred
stock to eliminate the right to exercise all of the options to purchase any
HAI preferred stock and to retain only the right to receive HAI common
stock upon the exercise of the options.
Michael Ashker, a director and the President and Chief Executive
Officer of HealthAxis and HAI, beneficially owns 718,076 shares of HAI's common
stock (including options). In an amended Schedule 13D, filed November 16, 1999,
filed by Mr. Ashker, Lynx Capital Group, Van Kasper & Company, Lynx Technology
Fund, L.P., Lynx Healthtech Fund, LLC, Kenneth Brown, Deidre Holt and Edward W.
LeBaron, Jr., Mr. Ashker reported sole voting and dispositive power with respect
to 394,776 shares of HAI common stock and shared voting and dispositive power
with respect to 323,300 shares. Mr. Ashker was the sole manager of Lynx Capital
Group, which acts as an investment advisor to and general partner of Lynx
Technology Fund, an investment limited partnership. Mr. LeBaron was a member of
and Ms. Holt was a consultant to Lynx Capital Group. Lynx Capital Group, which
acts as the general partner for Lynx Technology Fund is currently managed solely
by Mr. Brown. Van Kasper is a broker-dealer and has discretion over brokerage
accounts that are invested in HAI common stock. Mr. Ashker was formerly a
registered representative of Van Kasper. Mr. LeBaron is currently serving on the
Board of Directors of HAI and on the Board of Directors of HealthAxis. Mr.
LeBaron reported sole voting and dispositive power with respect to the 38,571
shares of HAI common stock. Pursuant to a consulting agreement between HAI and
Lynx Capital Group, Lynx Capital Group was granted currently exercisable
warrants to purchase 400,000 shares of HAI's common stock which are included in
the amounts beneficially owned. Of this amount, Lynx Capital Group transferred
warrants to purchase 300,000 shares of HAI common stock to Mr. Ashker, warrants
to purchase 25,000 shares of HAI common stock to Ms. Holt, warrants to purchase
30,000 shares of HAI common stock to Mr. Felder, warrants to purchase 15,000
shares of HAI common stock to George Stephenson and warrants to purchase 5,000
shares of HAI common stock to Kenneth Brown. Additionally, Mr. Ashker has been
granted an option to purchase 991,000 shares of the HealthAxis common stock at
an exercise price of $1.77, all of which are currently exercisable. Mr. Ashker
was also awarded options to purchase 145,000 shares of HealthAxis common stock
at an exercise price of $5.77 that are exercisable over a two year period
commencing in April, 1999 and options to purchase 55,000 shares of HealthAxis
common stock at an exercise price of $12.00 over a two year period commencing in
November 1999.
In addition, Messrs. Ashker and Clemens, by virtue of their positions
as trustees of certain voting trusts, have shared voting power with the other
trustees over 25.4% of HealthAxis' outstanding capital stock at March 31, 2000.
77
As of November 13, 1998, Lynx Private Equity Partners I, LLC purchased
250,000 shares of HAI common stock for an aggregate purchase price of $875,000.
Edward W. LeBaron was the sole manager of Lynx Private Equity Partners and is a
member of the Board of Directors of HAI and HealthAxis. Pursuant to the limited
liability company agreement of Lynx Private Equity Partners, Michael Ashker had
the authority to vote the shares of HAI held by Lynx Private Equity Partners. On
November 11, 1999, Lynx Private Equity Partners dissolved and transferred its
shares of HAI stock to Michael Ashker, Edward LeBaron and Lynx Technology Fund,
LP.
Michael F. Beausang, Jr., Esquire, HAI's Secretary and a former
Director of HealthAxis and HAI, is a partner in the law firm of Butera,
Beausang, Cohen & Brennan. This law firm performs legal services for HealthAxis
and HAI and in 1999, HAI paid Butera Beausang Cohen & Brennan $497,308.
On August 16, 1999, HAI entered into a stock purchase agreement with
AHC Acquisition, Inc., a company owned by Alvin H. Clemens, the Chairman of
HealthAxis and HAI, which provided for the sale of PILIC to AHC Acquisition,
Inc. for an aggregate payment of $14.7 million. This transaction was completed
on November 30, 1999. In accordance with the terms of the stock purchase
agreement, HAI:
o purchased the Company's headquarters located at 2500 DeKalb Pike from PILIC
for $4.7 million;
o agreed to exercise its option to purchase 545,916 shares of HealthAxis
Series A preferred stock from PILIC for $2.8 million; and
o made a $7.2 million capital contribution from HAI to PILIC in order to
provide adequate capitalization in light of the liabilities assumed in the
transaction.
HAI made the $2.8 million payment for the shares of HealthAxis Series A
preferred stock pursuant to the option agreement between HAI and PILIC. The
payment equates to a $4.71 price per share plus interest at the rate of 8% per
annum thereon from the date of acquisition of these shares by PILIC through
November 30, 1999, the date of exercise. The $4.71 price represented the price
per share originally paid by PILIC for these shares. HAI agreed to make a $7.2
million capital contribution to PILIC to comply with insurance regulations that
required PILIC to maintain adequate capital to meet its liabilities, which
included pay-out obligations under existing insurance policies. Also, in
accordance with the terms of the stock purchase agreement, and in order to
compensate AHC Acquisition, Inc. for assuming PILIC's liabilities, HAI
transferred 100,000 shares of the HealthAxis Series A preferred stock, and the
associated registration rights previously granted to PILIC, to AHC Acquisition,
Inc. HAI recognized a $10.3 million loss on the sale of PILIC, which included a
write-off of assets in the amount of $2.6 million together with HAI's November
30, 1999 capital contribution to PILIC in the amount of $7.2 million and the
value of the HealthAxis Series A preferred stock transferred to AHC Acquisition,
Inc. in the amount of $0.4 million. The terms of the sale of PILIC to AHC
Acquisition, Inc. were approved by the Insurance Department of the Commonwealth
of Pennsylvania, the regulatory agency that oversees insurance company
operations in Pennsylvania. The sale of PILIC was also approved by the
disinterested members of the board of directors of HAI with Mr. Clemens
abstaining from voting on this matter.
78
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The materials set forth below are filed as part of this report.
(1) List of Financial Statements: Page
----
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements:
Consolidated Balance Sheets -
December 31, 1999 and 1998 F-2
Consolidated Statements of Operations -
Years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flow -
Years ended December 31, 1999, 1998 and 1997 F5 to F-6
Notes to Consolidated Financial Statements F-7 to F-39
(3) Exhibits:
--------
The Exhibits listed on the accompanying Exhibit Index
immediately following the Financial Statement Schedules are
filed as part of, or incorporated by reference into, this
Report.
(b) Reports on Form 8-K:
(1) December 9, 1999 - Item 2 - Acquisition or Disposition of
Assets Item 7 - Financial Statement and Exhibits
(2) January 21, 2000 - Item 2 - Acquisition or Disposition of
Assets Item 7 - Financial Statements and Exhibits
(3) February 2, 2000 - Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
(c) Reports on Form 8-K/A:
(1) Amended and supplemented information filed on February 17,
2000 regarding the original Form 8-K filed January 21, 2000.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by undersigned, thereunto duly authorized.
HEALTHAXIS INC.
Date: March 23, 2000 By: /s/ Michael Ashker
-------------------------------------
Michael Ashker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
/s/ Michael Ashker Chief Executive Officer and President March 23, 2000
- ---------------------------------------- (principal executive officer)
Michael Ashker
/s/ Francis L. Gillan, III Chief Financial Officer and Treasurer March 23, 2000
- ---------------------------------------- (principal financial and accounting officer)
Francis L. Gillan, III
/s/ Alvin H. Clemens Chairman of the Board of Directors March 23, 2000
- ----------------------------------------
Alvin H. Clemens
/s/ Harold M. Davis Director March 23, 2000
- ----------------------------------------
Harold M. Davis
/s/ Henry G. Hager Director March 23, 2000
- ----------------------------------------
Henry G. Hager
/s/ George W. Karr, Jr. Director March 23, 2000
- ----------------------------------------
George W. Karr, Jr.
/s/ Edward W. LeBaron, Jr. Director March 23, 2000
- ----------------------------------------
Edward W. LeBaron, Jr.
/s/ Theophile J. Mignatti Director March 23, 2000
- ----------------------------------------
Theophile J. Mignatti
/s/ P. Glenn Moyer Director March 23, 2000
- ----------------------------------------
P. Glenn Moyer
/s/ Anthony R. Verdi Chief Operating Officer March 23, 2000
- ----------------------------------------
Anthony R. Verdi
80
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(2)(A) Stock Exchange Agreement, dated June 18, 1996 among Registrant, Richard
E. Field, Arthur J. Ivey and Richard E. Field & Associates, Inc.
Incorporated by reference to Exhibit (2)(D) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(2)(B) Stock Purchase Agreement between Registrant and AHC Acquisition, Inc.,
dated August 16, 1999. Incorporated by reference to Exhibit 10.1 to
Registrant's Form 8-K filed August 27, 1999.
(2)(C) Securities Purchase Agreement between Registrant and the Purchasers
dated September 14, 1999. Incorporated by reference to Exhibit 1 to
Registrant's Form 8-K filed September 22, 1999.
(2)(D) Agreement and Plan of Merger between Registrant, HealthAxis.com, Inc.,
UICI and Insurdata Incorporated dated December 6, 1999. Incorporated by
reference to Exhibit 99.3 to Registrant's Form 8-K filed December 8,
1999.
(2)(E) Agreement and Plan of Reorganization dated January 26, 2000 among the
Registrant, HealthAxis and HealthAxis Acquisition Corp. (included in the
Joint Proxy Statement/Prospectus as Appendix A). Incorporated by
reference to Exhibit 2.1 to Registrant's Form S-4 filed February 11,
2000.
(2)(F) Amendment No. 1 to Agreement and Plan of Reorganization dated
March 27, 2000 among the Registrant, HealthAxis and HealthAxis
Acquisition Corp.
(2)(G) Agreement and Plan of Merger dated January 26, 2000 among the
Registrant, HealthAxis and HealthAxis Acquisition Corp. (included in the
Joint Proxy Statement/Prospectus as Appendix B). Incorporated by
reference to Exhibit 2.2 to Registrant's Form S-4 filed February 11,
2000.
81
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(3)(A) Articles of Incorporation of the Registrant, as amended, incorporated by
reference to Exhibit (3)(A) to Registrant's Form 10 Registration
Statement No. 0-13591, as amended. Amendment to Registrants Articles of
Incorporation dated December 5, 1989, incorporated by reference to
Exhibit (C)(2) to Registrant's Form 8-K dated December 29, 1989.
(3)(B) Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 to
Registrant's Form S-4 filed February 11, 2000.
(4)(A)* Form of Registrant's Common Stock Certificate.
(4)(B) Amended and Restated Statement With Respect To Shares - Domestic
Business Corporation For Provident American Corporation. Series A
Cumulative Convertible Preferred Stock, $1.00 Par Value. Incorporated by
reference to Exhibit (4)(A) to Registrant's Quarterly Report on Form
10-Q for the Quarterly period ended September 30, 1993.
(4)(C) Amended and Restated Statement With Respect To Shares - Domestic
Business Corporation For Provident American Corporation. Series B
Cumulative Convertible Preferred Stock, $1.00 Par Value. Incorporated by
reference to Exhibit (4)(B) to Registrant's Quarterly Report on Form
10-Q for the Quarterly period ended September 30, 1993.
(10)(A)* Employment Contract dated April 1, 1991 among Registrant, Provident
Indemnity Life Insurance Company, Maine National Life Insurance Company
and Alvin H. Clemens incorporated by reference to Exhibit (10)(A) to
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1993.
(10)(B)* Premium Production and Stock Option Agreement dated January 19, 1991
among Registrant, Provident Indemnity Life Insurance Company and
Premarco, Inc. incorporated by reference to Exhibit (10)(E) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1990.
(10)(C) Registrant's 1983 Incentive Stock Option Plan and Management Contracts
thereunder, incorporated by reference to Exhibit (10)(C)(17) to
Registrant's Form 10 Registration Statement No. 0-13591, as amended.
82
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(D)* Registrant's 1985 Non-Qualified Stock Option Plan, incorporated by
reference to Exhibit (10)(C)(1) to Registrant's Form 10 Registration
Statement No. 0-13591, as amended.
(10)(E)* Registrant's 1991 Executive Stock Option Plan incorporated by reference
to Exhibit (10)(O) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1991.
(10)(F)* Registrant's 401(k) Profit Sharing Plan and Trust incorporated by
reference to Exhibit (10)(P) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1991.
(10)(G)* Amendment dated November 17, 1992 to Premium Production and Stock Option
Agreement dated January 19, 1991 among Registrant, Provident Indemnity
Life Insurance Company and Premarco, Inc., incorporated by reference to
Exhibit (10)(S) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.
(10)(H)* Amended and Restated Provident American Corporation Incentive Stock
Option Plan for Field Representatives and Agents dated January 1, 1991,
incorporated by reference to Exhibit (10)(T) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992.
(10)(I)* Third Amendment to the Amended and Restated Stock Option Agreement dated
April 1, 1993 among Registrant, Provident Indemnity Life Insurance
Company and Alvin H. Clemens, incorporated by reference to Exhibit
(10)(B) to Registrant's Quarterly Report on Form 10-Q for the Quarterly
period ended September 30, 1993.
(10)(J)* Option Agreement dated as of April 1, 1993 granting Alvin H. Clemens the
right to purchase 500,000 shares of Series A Preferred Stock,
incorporated by reference to Exhibit (10)(C) to Registrant's Quarterly
Report on Form 10-Q for the Quarterly period ended September 30, 1993.
(10)(K) Amendment to Amended and Restated Option Agreement, dated as of
September 9, 1999.
(10)(L)* Fourth Amendment to Registrant's Incentive Stock Option Plan for Field
Representatives and Agents, effective January 1, 1995. Incorporated by
reference to Exhibit (10)(CC) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
83
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(M)* Registrant's Life and Health Insurance Agent Non-Qualified Stock Option
Plan, effective January 2, 1996. Incorporated by reference to Exhibit
(10)(EE) to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
(10)(N)* Employment Contract, dated February 19, 1997 among Registrant, Provident
Indemnity Life Insurance Company, Provident American Life & Health
Insurance Company and Alvin H. Clemens. Incorporated by reference to
Exhibit (10)(HH) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
(10)(O) Promissory Note; Pledge and Security Agreement, dated April 8, 1996
between Registrant and Alvin H. Clemens. Incorporated by reference to
Exhibit (10)(II) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
(10)(P)* Amendment and Restatement of the Registrant's Stock Option Plan for
Directors, effective July 16, 1996. Incorporated by reference to Exhibit
(10)(JJ) to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996.
(10)(Q)* Registrant's 1996 Employee Incentive Stock Option Plan, effective July
16, 1996. Incorporated by reference to Exhibit (10)(KK) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
(10)(R)* Registrant's Amended and Restated Stock Option Plan for Executives,
dated December 11, 1996. Incorporated by reference to Exhibit (10)(LL)
to Registrant's Annual Report on Form 10-K for the year ended December
31, 1996.
(10)(S) Promissory Note with Amendments; Pledge and Security Agreement; and
Escrow Agreement, dated April 2, 1996 between Registrant and John T.
Gillin. Incorporated by reference to Exhibit (10)(MM) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996.
84
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(T)* Stock Option/Warrant Agreement, dated January 1, 1996 between Registrant
and Richard E. Field. Incorporated by reference to Exhibit (10)(QQ) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996.
(10)(U) Amendment to Promissory Note, dated April 8, 1997 between Registrant and
Alvin H. Clemens. Incorporated by reference to Exhibit (10)(GG) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(10)(V) Promissory Note, dated July 28, 1997 between Registrant and Alvin H.
Clemens. Incorporated by reference to Exhibit (10)(HH) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
(10)(W) Second Amendment to Promissory Note, dated February 1, 1997; Third
Amendment to Promissory Note, dated April 30, 1997, between Registrant
and John T. Gillin. Incorporated by reference to Exhibit (10)(II) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(10)(X) Services Agreement with Amendment to Services Agreement, dated February
1, 1998 between Provident Indemnity Life Insurance Company, Provident
American Life and Health Insurance Company, HealthPlan Services
Corporation and HealthPlan Services, Inc. Incorporated by reference to
Exhibit (10)(JJ) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
(10)(Y) Inducement Agreement, dated October 16, 1997 between Registrant and
HealthPlan Services, Inc. Incorporated by reference to Exhibit (10)(KK)
to Registrant's Annual Report on Form 10-K for the year ended December
31, 1997.
(10)(Z) The Provident and HealthPlan Services E-Commerce Agreement, dated May
29, 1998 and effective February 1, 1998 between Registrant, Insurion,
Inc., Provident Health Services, Inc. and HealthPlan Services, Inc.
Incorporated by reference to Exhibit (10)(LL) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
85
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(AA) Amended and Restated Interactive Marketing Agreement, dated February 1,
1998 between Provident Health Services, Inc. and American Online, Inc.
Incorporated by reference to Exhibit 1 to Registrant's Form 8-K/A dated
June 8, 1998.
(10)(BB) MGU Stock Purchase Agreement, dated February 27, 1998 between Montgomery
Management Corporation and HealthPlan Services, Inc. Incorporated by
reference to Exhibit (10)(NN) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
(10)(CC) Lynx Capital Group, LLC Consulting Agreement, dated March 31, 1998
between Provident Indemnity Life Insurance Company, Provident American
Life and Health Insurance Company and Lynx Capital Group, LLC.
Incorporated by reference to Exhibit (10)(OO) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
(10)(DD) Interactive Marketing Agreement between Registrant's wholly owned
subsidiary, Provident Health Services, Inc. and American Online, Inc.,
dated March 20, 1998. Incorporated by reference to Exhibit 1 to
Registrant's Form 8-K/A dated June 12, 1998.
(10)(EE) Share Purchase Agreement dated November 13, 1998 between Registrant,
Lynx Private Equity Partners I, LLC, James Burke, Craig Gitlitz, Craig
Gitlitz IRA and Interhotel Company Ltd. Incorporated by reference to
Exhibit 10.1 to Registrant's Form 8-K dated December 23, 1998.
(10)(FF) Agreement dated September 15, 1998 between Provident Indemnity Life
Insurance Company and HealthAxis related to the Series A Convertible
Preferred Shares. Incorporated by reference to Exhibit 10.5 to
Registrant's Form 8-K dated December 23, 1998.
(10)(GG) Certificate of Designation related to the Series A Convertible Preferred
Stock of HealthAxis.
(10)(HH) Certificate of Designation related to the Series B Convertible Preferred
Stock of HealthAxis.
86
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(II) Certificate of Designation related to the Series C Convertible Preferred
Stock of HealthAxis.
(10)(JJ) Certificate of Designation related to the Series D Convertible Preferred
Stock of HealthAxis.
(10)(KK) Stock Purchase Agreement, dated December 29, 1998, between Central
Reserve Life Corporation, Registrant and Registrant's wholly owned
subsidiary, Provident Indemnity Life Insurance Company. Incorporated by
reference to Exhibit 99.1 to Registrant's Form 8-K dated January 15,
1999.
(10)(LL) Guarantee Agreement, dated December 29, 1998, by Registrant in favor of
RCH as agent on behalf of itself and CRCL. Incorporated by reference to
Exhibit 99.2 to Registrant's Form 8-K dated January 15, 1999.
(10)(MM) Stock Pledge Agreement dated, December 29, 1998, by Registrant in favor
of RCH as agent for itself and CRLC. Incorporated by reference to
Exhibit 99.3 to Registrant's Form 8-K dated January 15, 1999.
(10)(NN) Reinsurance Agreement among PILIC, RCH and CRLC (effective date December
31, 1998). Incorporated by reference to Exhibit 99.4 to Registrant's
Form 8-K dated January 15, 1999.
(10)(OO) Assignment and Assumption of Contracts dated December 31, 1998 among
CRLC, Registrant, PILIC and Provident Health Services, Inc. Incorporated
by reference to Exhibit 99.6 to Registrant's Form 8-K dated January 15,
1999.
(10)(PP) Individual Medical Products Carrier Partner Agreement, dated December
29, 1998, among and between HealthAxis.com, Inc., PALHIC and CRLC.
Incorporated by reference to Exhibit 99.7 to Registrant's Form 8-K dated
January 15, 1999.
(10)(QQ) First Amendment to the Amended and Restated Interactive Marketing
Agreement between America Online, Inc. and Provident Health Services,
Inc. and HealthAxis. Incorporated by reference to Exhibit 10.2 to
Registrant's Form 8-K/A dated January 19, 1999.
87
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(RR) Promotion Agreement dated June 27, 1998 between Insurion, Inc. and CNet,
Inc. (This document has been redacted to remove certain portions for
which confidential treatment has been requested by the Company pursuant
to Rule 24b-2) and the First Amendment thereto dated November 13, 1998.
Incorporated by reference to Exhibit 10.3 to Registrant's Form 8-K/A
dated January 19, 1999.
(10)(SS) Amended and Restated Agreement dated November 13, 1998 between Lycos,
Inc. and Insurion, Inc. (This document has been redacted to remove
certain portions for which confidential treatment has been requested by
the Registrant pursuant to Rule 24b-2). Incorporated by reference to
Exhibit 10.4 to Registrant's Form 8-K/A dated January 19, 1999.
(10)(TT) Revolving Promissory Note between Registrant and PILIC dated July 1,
1998. Incorporated by reference to Exhibit (10)(CCC) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998.
(10)(UU) Consulting Agreement between Registrant and Robinson, Lerer &
Montgomery, LLC dated January 25, 1999. Incorporated by reference to
Exhibit (10)(DDD) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
(10)(VV) Second Amendment to Promissory Note dated as of the 24th day of March
1999, by and between Alvin H. Clemens and Registrant. Incorporated by
reference to Exhibit (10)(EEE) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1998.
(10)(WW) Second Amendment to Pledge and Security Agreement dated as of the 24th
day of March 1999, by and between Alvin H. Clemens and Registrant.
Incorporated by reference to Exhibit (10)(FFF) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
(10)(XX) Stockholders Agreement dated November 13, 1998. Incorporated by
reference to Exhibit 10.2 to Registrant's Form 8-K filed April 30, 1999.
88
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(YY) Second Amendment to the Amended and Restated Interactive Marketing
Agreement between America Online, Inc. and Provident Health Services,
Inc. and HealthAxis. (This document has been redacted to remove certain
portions for which confidential treatment has been requested by the
Company pursuant to Rule 24b-2). Incorporated by reference to Exhibit
10.1 to Registrant's Form 8-K/A filed May 14, 1999.
(10)(ZZ) Second Amendment to the Promotion Agreement between Insurion, Inc. and
Cnet, Inc. (This document has been redacted to remove certain portions
for which confidential treatment has been requested by the Company
pursuant to Rule 24b-2). Incorporated by reference to Exhibit 10.2 to
Registrant's Form 8-K/A filed May 14, 1999.
(10)(AAA) Settlement Agreement among the Registrant, Provident Indemnity Life
Insurance Company, individually and as Assignee of Provident American
Life & Health Insurance Company, HealthAxis.com, Inc., HealthPlan
Services, Inc., HealthPlan Services Corporation and Montgomery
Management Corporation, effective as of March 31, 1999. Incorporated by
reference in Exhibits to Registrant's Form 8-K filed June 22, 1999.
(10)(BBB) Registration Rights Agreement between the Registrant and the Purchasers
dated September 14, 1999. Incorporated by reference to Exhibit 2 to
Registrant's Form 8-K filed September 22, 1999.
(10)(CCC) Form of Debenture issued by the Registrant to the Purchasers dated
September 14, 1999. Incorporated by reference to Exhibit 3 to
Registrant's Form 8-K filed September 22, 1999.
(10)(DDD) Form of Warrant issued by the Registrant to the Purchasers dated
September 14, 1999. Incorporated by reference to Exhibit 4 to
Registrant's Form 8-K filed September 22, 1999.
(10)(EEE) Letter Agreement between the Registrant and Alvin H. Clemens dated
September 9, 1999. Incorporated by reference to Exhibit 5 to
Registrant's Form 8-K filed September 22, 1999.
89
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(FFF) Securities Purchase Agreement between HealthAxis and the Purchasers
(including the Registrant) dated December 3, 1999. Incorporated by
reference to Exhibit 99.1 to Registrant's Form 8-K filed December 8,
1999.
(10)(GGG) Intentionally omitted.
(10)(HHH) Shareholders' Agreement between Registrant, HealthAxis.com, Inc. UICI
and Michael Ashker dated January 7, 2000. Incorporated by reference to
Exhibit 99.4 to Registrant's Form 8-K filed December 8, 1999.
(10)(III) Amendment No. 1 to Shareholders' Agreement between Registrant, UICI,
HealthAxis and Michael Ashker dated February 11, 2000.
(10)(JJJ) Voting Trust Agreement between UICI and Messrs. Ashker, Clemens, LeBaron
and Hager dated January 7, 2000. Incorporated by reference to Exhibit
99.5 to Registrant's Form 8-K filed December 8, 1999.
(10)(KKK) Transition Agreement between the Registrant's subsidiary,
HealthAxis.com, Inc., and Insurdata Incorporated dated December 6, 1999.
Incorporated by reference to Exhibit 99.6 to Registrant's Form 8-K filed
December 8, 1999.
(10)(LLL) Registration Rights Agreement between HealthAxis and UICI dated January
7, 1999. Incorporated by reference to Exhibit 99.10 to Registrant's Form
8-K filed December 8, 1999.
(10)(MMM) Letter Agreement between the Registrant, UICI and HealthAxis dated
December 6, 1999. Incorporated by reference to Exhibit 99.11 to
Registrant's Form 8-K filed December 8, 1999.
(10)(NNN) First Amendment to Employment Contract dated July 28, 1999 among the
Registrant, Provident Indemnity Life Insurance Company and Alvin H.
Clemens.
90
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------ ----------------------- -------------
(10)(OOO) Voting Trust Agreement between HAI, HealthAxis, UICI, Michael Ashker,
Dennis Maloney and Edward LeBaron, Jr., dated February 11, 2000.
Incorporated by reference to Exhibit 10.1 to Registrant's Form S-4 filed
February 11, 2000
(10)(PPP) Registrant's 2000 Stock Option Plan.
(10)(QQQ) Agreement between Insurdata Imaging Services, The Mega Life and Health
Insurance Company and Mid-West National Life Insurance Company of
Tennessee effective May 1, 1999; with First Amendment effective January
1, 2000.
(10)(RRR) License and Services Agreement between Insurdata and UICI
Administrators, Inc. dated January 1, 1999.
(10)(SSS) Insurdata Incorporated 1999 Stock Option Plan
(10)(TTT) Letter Lease Agreement dated May 28, 1997 between UICI and Insurdata.
(10)(UUU) Agreement between UICI (including Insurdata Inc.) and Netlojix
Communications, Inc. dated August 1, 1999.
(10)(VVV) Intentionally omitted.
10) (WWW) Lease Agreement dated December 1, 1999 between the Registrant and
HealthAxis.com
(11) Computation of Earnings Per Share.
(21) Subsidiaries of Registrant.
(23)(A) Consent of Independent Accountants.
(27) Financial Data Schedule.
* Indicates management contract or compensatory plan or arrangement.
91
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
HealthAxis Inc.
East Norriton, Pennsylvania
We have audited the accompanying consolidated balance sheets of HealthAxis Inc.
and Subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HealthAxis Inc.
and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Philadelphia, Pennsylvania
March 16, 2000
F-1
HealthAxis Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, December 31,
(Dollars in thousands except share data) 1999 1998
----- ----
Assets
- ------
Cash and cash equivalents $ 58,069 $ 1,724
Prepaid interactive marketing expense 1,790 11,655
Loans receivable from officer, director and stockholder - 1,328
Other current assets 549 1,699
-------- ---------
Total current assets 60,408 16,406
Acquisition costs 750 -
Prepaid alliance agreements, net of accumulated amortization of $436 2,283 -
Property, equipment and software, less accumulated depreciation and
amortization of $2,259 and $3,099 8,742 7,950
Goodwill, less accumulated amortization of $765 7,114 -
Other assets 305 212
-------- ---------
Total assets $ 79,602 $ 24,568
======== =========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Unearned revenue $ - $ 332
Accounts payable 1,823 481
Accrued expenses 4,656 1,103
Loans payable - 3,865
Net liabilities of subsidiary held for sale - 2,250
Other current liabilities 500 640
-------- ---------
Total current liabilities 6,979 8,671
Convertible debentures 25,019 -
Federal income taxes 585 -
Ceding commission liability 5,600 5,000
Post retirement and employment liabilities 1,030 969
Capital lease obligations 117 496
-------- ---------
Total liabilities 39,330 15,136
Commitments and Contingencies Minority interest in HealthAxis:
Common stock 12,603 1,132
Preferred stock 15,049 2,805
Stockholders' Equity:
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A cumulative convertible, issued and outstanding 0 and 556,600 - 557
Series B cumulative convertible, none issued and outstanding - -
Common stock, par value $.10: authorized 50,000,000,
issued and outstanding 13,027,668 and 11,488,911 1,303 1,149
Common stock, Class A, par value $.10: authorized 20,000,000,
none issued and outstanding - -
Additional paid-in capital 81,798 27,002
Accumulated other comprehensive income - 666
Accumulated deficit (70,481) (23,879)
-------- ---------
Total stockholders' equity 12,620 5,495
-------- ---------
Total liabilities and stockholders' equity $ 79,602 $ 24,568
======== =========
See notes to consolidated financial statements.
F-2
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31,
(Dollars in thousands, except share and per share data) 1999 1998 1997
---- ---- ----
Revenue:
Interactive commission and fee revenue $ 291 $ - $ -
-------- -------- --------
Expenses:
Operating expenses 6,008 812 -
Sales and marketing 20,099 1,295 -
General and administrative 8,457 3,795 1,908
Amortization of goodwill 765 - -
-------- -------- --------
Total expenses 35,329 5,902 1,908
-------- -------- --------
Operating loss (35,038) (5,902) (1,908)
Interest income 656 92 212
Interest expense (1,581) (314) (35)
-------- -------- --------
Loss before minority interest (35,963) (6,124) (1,731)
Minority interest in loss of subsidiary (7,747) (716) -
-------- -------- --------
Loss from continuing operations (28,216) (5,408) (1,731)
Loss from sale of discontinued operations (10,263) - -
Loss from discontinued operations (8,052) (6,748) (16,694)
-------- -------- --------
Net loss before dividends (46,531) (12,156) (18,425)
Dividends on preferred stock 70 254 148
-------- -------- --------
Net loss applicable to common stock $(46,601) $(12,410) $(18,573)
======== ======== ========
Loss per share of common stock (basic and diluted)
Continuing operations $ (2.31) $ (0.55) $(0.19)
Discontinued operations (1.49) (0.65) (1.65)
-------- -------- --------
Net loss $ (3.80) $ (1.20) $(1.84)
======== ======== ========
Weighted average common shares and equivalents used in computing
loss per share
Basic and diluted 12,260,000 10,331,000 10,090,000
See notes to consolidated financial statements.
F-3
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Additional
Preferred Stock Common Stock Paid-In Accumulated
(Dollars in thousands) Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------
BALANCE, DECEMBER 31, 1996 580 $580 10,079 $1,008 $12,945 $ 7,105
Comprehensive income:
Net loss 1997 (18,425)
Other comprehensive loss
Comprehensive loss
Stock options and warrants exercised 30 2 96
Compensation expense on stock issuance 100 11 478
Compensation expense on stock option grants 248
Cash dividends declared on preferred stock (148)
------ ------ ------ ------ ------- ---------
BALANCE, DECEMBER 31, 1997 580 580 10,209 1,021 13,767 (11,468)
Comprehensive income:
Net loss 1998 (12,156)
Other comprehensive income
Comprehensive loss
Issuance of common stock 410 41 1,616
Stock options and warrants exercised 882 89 2,991
Increase in net assets in HealthAxis. 4,210
Warrants issued 4,469
Conversion of preferred stock (23) (23) 24 2 21
Cancellation of treasury stock (36) (4) (72)
Cash dividends declared on preferred stock (255)
------ ------ ------ ------ ------- ---------
BALANCE, DECEMBER 31, 1998 557 557 11,489 1,149 27,002 (23,879)
Comprehensive income:
Net loss 1999 (46,531)
Other comprehensive loss
Comprehensive loss
Issuance of common stock 25 3 267
Stock options and warrants exercised 956 95 5,876
Increase in net assets in HealthAxis 44,395
Warrants and non employee options issued 3,757
Conversion of preferred stock (557) (557) 557 56 501
Cash dividends declared on preferred stock (71)
------ ------ ------ ------ ------- ---------
BALANCE, DECEMBER 31, 1999 - $ - 13,027 $1,303 $81,798 $(70,481)
====== ====== ====== ====== ======= =========
[RESTUBBED]
Accumulated
Other Treasury
Comprehensive Stock
(Dollars in thousands) Income (Loss) (at cost) Total
------------- ------- -----
BALANCE, DECEMBER 31, 1996 $491 $(76) $22,053
Comprehensive income:
Net loss 1997 (18,425)
Other comprehensive loss (306) (306)
-------
Comprehensive loss (18,731)
-------
Stock options and warrants exercised 98
Compensation expense on stock issuance 489
Compensation expense on stock option grants 248
Cash dividends declared on preferred stock (148)
------- ------- -------
BALANCE, DECEMBER 31, 1997 185 (76) 4,009
Comprehensive income:
Net loss 1998 (12,156)
Other comprehensive income 481 481
-------
Comprehensive loss (11,675)
-------
Issuance of common stock 1,657
Stock options and warrants exercised 3,080
Increase in net assets in HealthAxis. 4,210
Warrants issued 4,469
Conversion of preferred stock -
Cancellation of treasury stock 76 -
Cash dividends declared on preferred stock (255)
------- ------- -------
BALANCE, DECEMBER 31, 1998 666 - 5,495
Comprehensive income:
Net loss 1999 (46,531)
Other comprehensive loss (666) (666)
-------
Comprehensive loss (47,197)
-------
Issuance of common stock 270
Stock options and warrants exercised 5,971
Increase in net assets in HealthAxis 44,395
Warrants and non employee options issued 3,757
Conversion of preferred stock -
Cash dividends declared on preferred stock (71)
------- ------- -------
BALANCE, DECEMBER 31, 1999 $ - $ - $12,620
======= ======= =======
See notes to consolidated financial statements.
F-4
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
Cash flows from operating activities 1999 1998 1997
--------- --------- ---------
Net loss $ (46,531) $ (12,156) $ (18,425)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Loss from discontinued operations 8,763 - -
Issuance of common stock - 106 -
Depreciation and amortization 17,739 1,622 4,286
Net realized gain on investments - (270) (750)
Net realized gain on sale of subsidiaries - (3,002) -
Issuances of warrants 1,394 1,314 -
Write off of goodwill - 1,193 -
Minority interest in net loss of subsidiary (7,747) (716) -
Interest on loan conversion - 953 -
Shares issued for services 270 - -
Loss on disposition of software 749 - -
Interest on convertible debt 573 - -
Noncash expense for service agreements 556 - -
(Increase) decrease in
Premium due and uncollected, unearned premium and
premium received in advance 354 (1,403) 130
Prepaid interactive marketing expense (4,729) (9,300) -
Due to/from reinsurers 14,911 (5,666) (7,520)
Due from third party administrator 6,849 (6,849) -
Deferred policy acquisition costs, net 2,106 (607) 1,641
Accrued investment income 152 190 226
Other assets, current and deferred income taxes and
other liabilities 2,099 2,474 (3,222)
Accrued commissions and expenses 2,963 (3,067) 1,272
Ceding commission and interest 600 5,000 -
Future policy benefits and claims (41,060) 12,696 16,951
--------- --------- ---------
Net cash (used in) operating activities (39,989) (17,488) (5,411)
--------- --------- ---------
Cash flows from investing activities
Purchases of bonds - (2,674) (25,128)
Purchases of equity securities - (99) (100)
Sales of bonds 6,656 11,244 35,879
Sales of equity securities - 24 4,420
Sale of subsidiaries - 9,853 -
Sale of investment in real estate - 1,162 -
Maturities of investments and loans 45 14 250
Proceeds from loans receivable 1,328 - -
Loans to officer, director and shareholder - (85) (1,032)
Purchases of property, equipment and software (4,169) (1,960) (3,206)
--------- --------- ---------
Net cash provided by investing activities 3,860 17,479 11,083
--------- --------- ---------
See notes to consolidated financial statements.
F-5
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
Years Ended December 31,
1999 1998 1997
------- ------- -------
Cash flows from financing activities
Withdrawals from contractholder deposit funds - (249) (589)
Principal payments on capital lease (379) - -
Proceeds from note payable - - 5,039
Repayments of notes payable - (1,212) (260)
Repayment of loans payable (1,465) - -
Payment of acquisition costs (750) - -
Purchase of HealthAxis common stock (8,203) - -
Net proceeds from the sale of convertible debt 26,763 - -
Net proceeds from the sales of HealthAxis common stock 59,445 1,657 835
Net proceeds from the sales of preferred stock 12,082 2,699 -
Exercise of stock options 5,052 1,680 -
Net proceeds from issuance of convertible note - 5,000 -
Dividends paid on preferred stock (71) (148) (148)
------- ------- -------
Net cash provided by financing activities 92,474 9,427 4,877
------- ------- -------
Increase in cash and cash equivalents 56,345 9,418 10,549
Cash and cash equivalents, beginning of period 1,724 16,767 6,218
------- ------- -------
Cash and cash equivalents, end of period $58,069 $26,185 $16,767
------- ------- -------
Supplemental disclosure of cash flow information:
Interest paid $ 78 $ 416 $ 97
Income taxes (refunded), net $ - $(5,218) $(1,490)
Non-cash financing activities
Issuance of warrants $ 6,808 $ 3,428 $ -
Exercise of options $ 900 $ 1,400 $ -
Repayment of loans payable $(2,400) $ - $ -
Conversion of preferred stock to common stock $ 557 $ - $ -
Non-cash investing activities
In 1999 and 1998, HAI incurred capital lease obligations in
connection with the acquisition of certain equipment.
See notes to consolidated financial statements.
F-6
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands)
Note 1 - Nature of Operations
HealthAxis Inc. ("HAI"), formerly Provident American Corporation, is a
Pennsylvania corporation organized in 1982 and until November 30, 1999, the date
the insurance operations were transferred and treated as discontinued, was
regulated as an insurance holding company by the states in which its former
wholly-owned insurance company, Provident Indemnity Life Insurance Company
("PILIC"), was licensed. The continuing operations of HAI and its subsidiaries
("the Company") are principally those of its majority-owned subsidiary
HealthAxis.com, Inc. ("HealthAxis").
HealthAxis was formed on March 26, 1998 to sell insurance products on
the Internet. As of December 31, 1999, HAI owned 66.9% of HealthAxis' common and
preferred stock. On January 7, 2000, HealthAxis and Insurdata Incorporated, a
subsidiary of UICI ("UICI") merged as described in Note 25.
On January 26, 2000, HAI and HealthAxis entered into an Agreement and
Plan of Reorganization and Agreement and Plan of Merger pursuant to which HAI
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 HAI as
described in Note 25.
The Company's sole operating segment is that of an Internet-based
insurance agency conducted through HealthAxis.
Note 2 - Significant Accounting Policies
Principles of consolidation: The consolidated financial statements of
HAI include the accounts of HAI and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of estimates: The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of revenues, expenses, assets, and liabilities and disclosure
of contingencies. Actual results could differ from those estimates.
Cash equivalents consist of highly liquid investments with maturities
of three months or less from date of purchase. The Company maintains its cash
accounts at several commercial banks. Cash accounts at each bank often exceed
amounts that are insured by the Federal Deposit Insurance Corporation.
Prepaid interactive marketing expense represents cash and other
consideration paid in accordance with its distribution arrangements for
exclusivity and advertising impressions. Amounts related to exclusivity are
amortized on a straight-line basis over the respective contract term. Amounts
related to advertising impressions are expensed as impressions are delivered.
See Note 5.
F-7
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Prepaid alliance agreements represent the fair value of warrants issued
to its business partners. The cost associated with services provided in
accordance with each agreement is amortized on a straight-line basis over the
life of the agreement, or if no term exists on the agreement, over the expected
term of the warrants granted. See Note 6.
Property, equipment and software are recorded at cost. Expenditures for
improvements that increase the estimated useful lives of the assets are
capitalized. Expenditures for repairs and maintenance are charged to operations
as incurred. Depreciation and amortization is provided using the straight-line
method over the estimated useful lives of the assets. Upon sale or retirement,
the cost of the asset and the related accumulated depreciation and amortization
are removed from the accounts and the resulting gain or loss, if any, is
included in operations. See Note 7.
The Company adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," during 1998.
Accordingly, direct internal and external costs associated with the development
of the features, content and functionality of www.healthaxis.com, HealthAxis'
web site, incurred during the application development stage, have been
capitalized, and are amortized over the estimated useful life on a straight line
basis.
In 2000, HealthAxis established a plan to transfer the website to a
different computer language platform. As a result, the costs associated with the
existing website will be amortized over the remaining useful life, which
coincides with the expected conversion to a new platform, which is currently
planned for the third quarter of 2000. Other computer hardware and software are
depreciated over three years and furniture is depreciated over seven years.
Start-up costs: In accordance with AICPA Statement of Position No. 98-5
"Reporting on the Costs of Start-Up Activity", start-up costs have been expensed
as incurred.
Recognition of revenue: Commission and policy fee revenue is recognized
in the month that the insurance carrier earns the premium on which commissions
are based.
Goodwill represents the purchase of a minority interest in HealthAxis
and is being amortized on a straight-line basis over 3 years. See Note 15.
Income taxes: The Company files a consolidated federal income tax
return with its greater than 80% owned subsidiaries, which allocates income
taxes based upon the taxable income of the companies included in the return.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. See Note 14.
Loss per share of common stock: The Company presents basic and diluted
loss per share. Equivalents, including warrants, stock options, and preferred
stock, were anti-dilutive for all periods presented.
F-8
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Reclassifications and restatement of prior year amounts: Certain prior
year amounts have been reclassified to conform to the current year's
presentation including the restatement related to discontinued operations.
Impairment of long-lived assets: Long-lived assets and certain
identifiable intangibles including goodwill are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. See Note 4.
Recent accounting standards: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments"("SFAS 133 as amended by SFAS 137"). SFAS
137 delays the effective date of implementation of SFAS 133 by one year. SFAS
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair market value. Presently, the Company does not use derivative instruments
either in hedging activities or as investments. Accordingly, the Company
believes that adoption of SFAS 133 will have no impact on its financial
positions or results of operations.
Note 3 - 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 for the foreseeable future. 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, the Company raised approximately $102,183 through the sale
of convertible debentures ($27,500), HealthAxis preferred stock ($12,800) and
HealthAxis common stock ($61,883). The net proceeds have been used to and are
anticipated to be used to fund amounts due under HealthAxis' distribution
agreements (Note 5), the purchase of common stock of HealthAxis (Note 15), the
sale of the insurance operations (Note 4) with the balance 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 future operations and continue to
implement its current business strategies beyond such date.
F-9
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
In January 2000, HealthAxis acquired Insurdata, Incorporated.
Management believes that the acquisition will provide HealthAxis with additional
technical expertise and the ability to accelerate the carrier partner
integration process, which will reduce the amount of time needed to make
HealthAxis' website fully functional. In addition, Insurdata has an established
revenue base of insurance payers, commercial insurance carriers, third party
administrators and self insured employers. HealthAxis plans to offer a platform
of web-enabled software applications and services to insurance payers.
Effective with the Insurdata merger, HealthAxis is a leading online
insurance provider of fully integrated, end-to-end solutions for health
insurance distribution and administration which utilize the Internet. HealthAxis
serves both consumers and insurance companies that underwrite policies,
independent entities that administer claims processing and payment, Blue
Cross/Blue Shield plans, and self-insured employers.
Note 4 - Discontinued Operations
On November 30, 1999, in accordance with the amended Stock Purchase
Agreement ("Agreement") all of the issued and outstanding shares of the common
stock of PILIC and its other inactive subsidiaries were transferred to AHC
Acquisition, Inc. ("AHC"), a newly formed Pennsylvania business corporation,
owned by Mr. Alvin H. Clemens, HAI's chairman for no consideration.
In anticipation of the transfer, HAI, in order to eliminate a statutory
capital deficiency, contributed $7,200. Also, HAI purchased from PILIC the
office building located on DeKalb Pike in East Norriton, PA for $4,700 and
545,916 shares of HealthAxis Series A Preferred Stock for $2,800 and assumed all
related employee obligations which are described in Note 23 amounting to $1,030
as of December 31, 1999.
The Board of Directors of HAI received a fairness opinion by 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 proposed to be purchased by AHC
will continue to be subject to the Stock Pledge Agreement dated December 29,
1998 by HAI in favor of Reassurance Company of Hannover ("RCH"). See Note 13.
The Fairness Opinion concludes that the financial terms of the transaction are
fair, from a financial point of view, to HAI and its shareholders.
F-10
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Concurrent with the transfer of PILIC, HAI conveyed at its historical
cost of $440, 100,000 shares of the Series A preferred stock to AHC together
with registration rights previously granted to PILIC.
In accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30") the operating results of PILIC and all of
the other insurance operations are being reported as discontinued operations for
all periods presented.
As a result of the transfer of PILIC, HAI has recorded a loss of
$10,263 which included a write-off of assets relating to PILIC including
unamortized deferred policy acquisition costs and property and equipment, net of
accumulated depreciation in the amount of $2,623, a capital contribution of
$7,200 and the value of the preferred stock transferred to AHC which amounted to
$440.
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.
F-11
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Results of discontinued operations:
11 Months Ended Years Ended
November 30, December 31,
1999 1998 1997
---- ---- ----
Revenue:
Net premium revenue $ 7,197 $ 69,617 $ 57,246
Net investment income 2,395 3,672 3,275
Realized gain on investments 6 270 750
Ceding allowance, net of policy acquisition costs - 799 -
Realized gain on the sale of subsidiary 1,500 3,002 -
Other revenue 890 47 547
--------- --------- ---------
Total revenue 11,988 77,407 61,818
--------- --------- ---------
Benefits and expenses:
Death and other policy benefits:
Life 3,315 7,518 8,008
Accident and health, net of reinsurance 7,661 47,509 38,981
Annuity contracts and other considerations 622 353 737
Commissions, net of ceding allowance and
deferred acquisition costs 1,486 7,139 6,813
Other operating expenses, net of ceding allowance
and deferred acquisition costs 6,683 19,607 13,358
Amortization of deferred policy acquisition costs 252 2,049 10,943
Depreciation and amortization of goodwill - 1,010 4,261
--------- --------- ---------
Total benefits and expenses 20,019 85,185 83,101
--------- --------- ---------
Loss before income taxes (8,031) (7,778) (21,283)
Provision (benefit) for income taxes:
Current 21 (1,030) (5,205)
Deferred - - 616
--------- --------- ---------
Total income taxes 21 (1,030) (4,589)
--------- --------- ---------
Loss from discontinued operations $ (8,052) $ (6,748) $(16,694)
========== ========== =========
F-12
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Net liabilities of subsidiary held for sale:
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 24,461
Amounts due from third party administrator 6,849
Premiums due and uncollected 1,167
Amounts due from reinsurers 22,222
Accrued investment income 421
Unamortized deferred policy acquisition costs 2,106
Other assets 1,927
-------
Total assets 92,122
-------
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 3
Amounts due to reinsurers 501
Accounts payable 1,626
Accrued commissions and expenses 985
Federal income taxes 1,222
Other liabilities 137
-------
Total liabilities 94,372
-------
Net liabilities of subsidiary held for sale $ 2,250
========
1998 Sales of Insurance Operations:
On December 31, 1998 the Company sold all of the outstanding shares of
PALHIC and National Insurance Administrators ("NIA") to Central Reserve Life
Insurance Company ("CRLC"). The Company recognized a loss of approximately
$1,000 on the sale of these subsidiaries which has been included in discontinued
operations.
In February 1998 the Company sold for $4,000, 49% of Montgomery
Management Corporation ("MMC") common stock along with a warrant to purchase an
additional 31% of MMC's common stock for one dollar. During the fourth quarter
of 1998 the buyer exercised the warrant to purchase the additional 31% of MMC's
common stock for $8. The Company recognized a $4,008 pre-tax gain on the sale of
MMC. In 1999, PILIC subsequently sold its remaining interest in MMC and realized
a gain on the sale of MMC of $1,500 which is included in its discontinued
operations.
F-13
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 5 - Distribution Agreements
In 1998, HealthAxis entered into various distribution agreements with
America On-Line ("AOL"), CNet, Snap! and Lycos. Under these agreements, these
Internet portals will promote HealthAxis' products to the online users of their
websites. The initial terms of the agreements range from 12 to 15 months with
the last agreement expiring in August 2000.
In 1999 and 1998, HealthAxis made payments and issued warrants, valued
using the Black Scholes option pricing model, aggregating $16,970 which have
been charged to prepaid interactive marketing expense. The amounts deferred were
allocated based on the terms of each contract between exclusivity and impression
advertising costs, which totaled $3,527, and $13,443, respectively. During 1999
and 1998, $3,242 and $11,352 and $381 and $204 were charged to expense
representing exclusivity and impression advertising, respectively.
During 1999 and 1998, a total of 830,082,353 and 10,244,130 impressions
were delivered as a result of the agreements.
F-14
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Each agreement provides for a renewal term ranging from 12 to 28 months
for aggregate payments of $47.6 million starting in February 2000 and beyond.
HealthAxis has chosen not to exercise its option to renew its agreement with AOL
for an additional term and accordingly will not pay the $33.5 million renewal
fee. HealthAxis and AOL are currently negotiating terms of a new agreement. In
2000, approximately $1,160 remains outstanding under the initial agreements with
its distribution partners.
In 1999, HealthAxis entered into a distribution agreement with Yahoo!
Inc. ("Yahoo!") that provides for a guaranteed number of impressions. The
initial term was for five months beginning in September 1999 at a cost of $725.
In February 2000, HealthAxis entered into a new contract with Yahoo!.
Total payments of $3,600 will be paid in four installments; $1,244 upon signing
of agreement, $884 on April 1, 2000 and July 1, 2000, and $589 on or before
October 1, 2000.
Note 6 - Prepaid Alliance Agreements
During 1999, HealthAxis has negotiated several strategic alliance
agreements which provide for the issuance of warrants to purchase 762,500 shares
of HealthAxis common stock of which 612,500 can be excised at prices ranging
from $4.40-$20.00. Warrants to purchase 150,000 common shares will be valued at
a 10% discount from the five-day average closing price of HAI stock prior to the
completion of each event as stipulated in the contract.
The warrants have been valued using the Black Scholes option pricing
model at $2,719 and are being amortized on a straight-line basis over the term
of each agreement or the expected life of the warrants if there is no contract
term. Amortization of $436 has been charged to operations as a result of the
agreements during 1999.
The services to be performed by the strategic alliances include, among
other things, marketing and technical support to assist in establishing products
on the website, reaching established sales volume and establishing additional
strategic alliances for HealthAxis.
F-15
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 7 - Property, Equipment and Software
Property, equipment and software, at cost, consist of the following
(in thousands):
Useful December 31,
Lives
(Years) 1999 1998
----------- ------ -------
Building 20 $ 4,700 $ 5,101
Building improvements 10 715 1,227
Computer equipment 3 2,088 1,330
Office furniture and equipment 7-10 989 3,293
Computer software 1-3 2,509 98
Less accumulated depreciation and amortization (2,259) (3,099)
------- --------
$ 8,742 $ 7,950
======= ========
Note 8 - Loans Receivable - Officer and Director and Stockholder
Loans receivable from officer, director and stockholder amounting to
$1,328 at December 31, 1998 bore interest at rates ranging from 5.33% to 9.50%,
and were collateralized primarily by the Company's common stock and were repaid
during 1999 in accordance with their terms.
Note 9 - Accrued Expenses
December 31,
1999 1998
-------- --------
Payroll and benefits $ 269 $ -
Interest 164 -
Accrued property, equipment and software 851 608
Accrued taxes, licenses and fees 117 10
Accrued professional fees 2,804 127
Other 451 358
------- -------
$ 4,656 $ 1,103
======= =======
F-16
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 10 - Convertible Debentures
On September 15, 1999 HAI 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 HAI's common stock, semi annually on January 1 and July 1 of each year,
beginning on January 1, 2000. Accrued, unpaid and past due amounts bear interest
at the rate of 15% per annum. Except with respect to overdue interest it is
assumed that HAI will make all payments of interest in common stock, subject to
those shares being registered, unless HAI notifies the holder in writing
otherwise.
The Debentures are convertible into HAI's common stock at a conversion
price of $20.34 per share, 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, HAI 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, which is expected to be eighteen months.
In a separate but related transaction, Alvin H. Clemens, Chairman of
HAI, among other things, has assigned to HAI options to purchase 202,802 shares
with a per share range of $.91 to $11.00 of common stock as described in Note
23. 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.
The securities issued pursuant to this transaction were 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. The Company also executed a registration rights agreement, which
requires the Company to file 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 at any time the "Shelf"
registration is not effective. In the event the Company does not fulfill
obligations under this agreement, it is subject to certain financial penalties.
F-17
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Note 11 - HPS Agreements
Loans Payable to HPS: The Company received $5,000 from Health Plan
Services, Inc. ("HPS") in the fourth quarter of 1997 which was accounted for as
loan payable, discounted at a rate of 9.25% resulting in a $3,865 amount which
was to be amortized over five years with payments of $95,000 per month including
interest. The loan was paid off in June 1999.
Settlement Agreement with HPS: During 1999 HAI entered into a
settlement agreement at no cost to resolve a number of disputes that had arisen
between the Company and HPS relative to HPS' performance of administrative
services under an outsourcing agreement. 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 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 loan owed to HPS. The Company paid the
remaining balance of the loan amounting to $1,267 on June 30, 1999.
Note 12 - Capital and Operating Lease Obligations
At December 31, 1999 and 1998, the Company's capital lease obligations
amounted to $525 and $840, respectively. Interest expense for each of the three
years for the period ended December 31, 1999 amounted to $77, $101 and $88,
respectively. Minimum payments are $408 in 2000 and $117 in 2001.
HealthAxis leases office space in San Francisco, CA whose term ends
July 31, 2002. Payments through December 31, 1999 are $27, with payments of $55,
$55 and $32 due in 2000, 2001, and 2002, respectively.
Note 13 - Ceding Commission Liability
Effective December 31, 1998, HAI 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 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.
F-18
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
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. The Company incurred $600 of interest expense during
1999. 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 4, HAI's obligation to RCH remains after the
transfer of PILIC.
F-19
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Note 14 - Income Taxes
Significant components of deferred taxes consisted of the following:
1999 1998
---------- -------
Deferred tax assets:
Policy reserves $ - $ 2,542
Start up expenses 1,366 -
Advance premiums - 2
Post employment and retirement benefits 361 207
Net operating and capital loss carryforwards 26,700 5,551
Accrued expense 32 49
Unearned ceding commission 1,960 1,750
Other, net (284) 555
-------- -------
30,135 10,656
Valuation allowance for deferred tax assets 30,135 9,341
-------- -------
- 1,315
======== =======
Deferred tax liabilities:
Policy acquisition costs - 187
Real estate - 720
Unrealized appreciation of investments - 359
Deferred and uncollected premiums, net - 408
-------- -------
- 1,674
-------- -------
Net deferred tax (liability) $ - $ (359)
======== =======
Effective April 1, 1999, HealthAxis was no longer eligible to
participate in the Company's consolidated federal income tax return. The
HealthAxis net operating loss carryforward, on a separate company basis, amounts
to approximately $29,000 and is available to offset its future taxable income
through 2014.
The Company and its other subsidiaries have net consolidated operating
loss carryforwards ("NOL's") approximating $17,000, of which $15,000 is
available to offset future taxable income through 2014. Approximately $2,000 of
the consolidated NOL's result from a 1989 acquisition and expire between 2000
and 2004 and are subject to annual limitations approximating $24, thereby
significantly reducing their ultimate utilization.
Capital losses may be used only to offset capital gains and may be
carried back three years and forward five years. At December 31, 1999, the
Company had a capital loss carryforward of approximately $32,000, which expires
in 2004.
As a result of all of the capital transactions of both HAI and
HealthAxis including the merger with Insurdata, the amount of NOL carryforwards
may be limited. Additionally, the utilization of these NOL's, if available, to
reduce future income taxes will depend on the generation of sufficient taxable
income prior to their expiration.
F-20
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The Company has established a valuation allowance for deferred tax
assets reflecting uncertainty as to whether the deferred tax asset is fully
realizable. The change in valuation allowance in 1999 amounting to $20,794
results primarily from the increase in NOL's, net of those components applicable
to PILIC which was sold November 30, 1999.
The reconciliation of income tax expense (benefit) to the amount
computed by applying the appropriate statutory income tax rate (35%) to income
(loss) before income taxes is as follows:
Years Ended December 31,
1999 1998 1997
-------- -------- --------
Amount computed at statutory rate $(19,023) $ (4,866) $ (7,740)
Change in valuation allowance 20,794 5,418 2,324
Permanent differences (1,771) (167) 600
Reversal of prior year federal income taxes - (1,031) -
Other, net - (385) 227
-------- -------- --------
Total income tax (benefit) $ - $ (1,031) $ (4,589)
======== ======== ========
Note 15 - HealthAxis.com, Inc. Equity Transactions
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 and will be 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.
During 1999, HAI purchased 1,415,000 shares of HealthAxis common stock
from HPS for an aggregate purchase price of $8,203 of which $375 remains
outstanding at December 31, 1999. HAI has accounted for the purchase of minority
interest as goodwill to be amortized straight-line over three years.
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 approximating $2,533. HAI purchased 133,333 shares
in the transaction for approximately $2,000. The net proceeds will be used for
HealthAxis' working capital and other general corporate purposes, including
marketing expenses.
F-21
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The chart below identifies the equity ownership of HealthAxis. The
chart excludes options and warrants to purchase HealthAxis stock and the January
7, 2000 merger of Insurdata described in Note 25:
December 31, 1999 December 31, 1998
----------------- -----------------
Shares Percentage Shares Percentage
---------- ---------- ------ ----------
HAI 15,801,644 66.9% 14,353,311 82.8%
Minority Interest 7,816,861 33.1% 2,990,894 17.2%
---------- ------ ---------- ------
Total 23,618,505 100.0% 17,344,205 100.0%
========== ====== ========== ======
Note 16 - Series A Convertible Preferred Stock
During 1998, HealthAxis sold 545,916 shares of HealthAxis Series A
Preferred Stock, par value $1.00 (the "Series A Preferred Stock") to PILIC for
$2,400. During 1999, HAI purchased all of the Series A Preferred Stock from
PILIC and transferred 100,000 shares to AHC Acquisition as described in Note 4.
At December 31, 1999, the 100,000 shares owned by AHC has been reflected as
minority interest. In conjunction with the merger described in Note 25, the
Series A Preferred Stock will be converted into common stock of HAI.
Shares of Series A Preferred Stock are convertible at any time, at the
option of the holder, into HealthAxis common stock at a price equal to the
original issuance price ($4.40 per share) divided by the conversion price which
is defined as the original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Preferred Stock Certificate of
Designation.
As a result of an amendment to the Series A Preferred Stock Certificate
of Designation in 1999, holders of the Series A Preferred Stock are entitled to
receive such dividends as declared by the Board of Directors of HealthAxis at
its discretion.
Holders of the Series A Preferred Stock are entitled to vote on all
matters as to which holders of common stock are entitled to vote. The holders of
each share of Series A Preferred Stock are entitled to the number of votes equal
to the nearest whole number of shares of HealthAxis common stock into which the
holder's Series A Preferred Stock is convertible. Generally, the holders of
Series A Preferred Stock shall vote together with the holders of HealthAxis
preferred and common stock as one class.
In the event of any dissolution, liquidation or winding up of the
affairs of HealthAxis, whether voluntary or other wise, after payment or
provision for payment of the debts and other liabilities of HealthAxis and all
amounts owed to the Series B, Series C and Series D Preferred Stock or any other
class of securities of HealthAxis having a dividend payment or other
distribution preference senior to the Series A Preferred Stock (the "Series A
Senior Stock"), the holders of Series A Preferred Stock shall be entitled to
receive $4.40 in cash for each share of Series A Preferred Stock, plus an amount
equal to all dividends accrued and unpaid on each such share up to the fixed
date for distribution, before any distribution may be made to the holders of
HealthAxis' common stock. Each Preferred Stock Certificate of Designation
includes additional provisions related to liquidation and the order of payment
as it relates to each series of Preferred Stock.
The Series A Preferred Stock is not subject to any sinking fund or
other similar provisions. The holders of Series A Preferred Stock are not
entitled to any preemptive rights.
F-22
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Note 17 - Series B Convertible Preferred Stock
During 1998, HealthAxis issued 625,529 shares of Series B convertible
preferred stock, par value $1.00 per share (the "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 was used to pay amounts due to AOL
under an agreement. In conjunction with the merger described in Note 25, all of
the Series B Preferred Stock will be converted into common stock of HAI.
Holders of the Series B Preferred Stock are entitled to vote on all
matters as to which holders of common stock are entitled to vote. The holders of
each share of Series B Preferred Stock are entitled to the number of votes equal
to the nearest whole number of shares of HealthAxis common stock into which the
holder's Series B Preferred Stock is convertible. Generally, the holders of
Series B Preferred Stock shall vote together with the holders of HealthAxis
common and preferred stock as one class.
As a result of an amendment to the Preferred Stock Certificate of
Designation in 1999, holders of the Series B Preferred Stock are entitled to
receive such dividends as declared by the Board of Directors of HealthAxis in
its discretion at a rate as specified by the Preferred Stock Certificate of
Designation.
In the event of any dissolution, the holders of Series B Preferred
Stock shall be entitled to receive, out of the assets of HealthAxis legally
available for distribution to its shareholders, the amount of $4.40 in cash for
each share of Series B Preferred Stock, plus an amount equal to all dividends
accrued and unpaid on each such share up to the fixed date for distribution,
before any distribution may be made to the holders of HealthAxis' common stock,
or any series of Series B Junior Stock, including the Series A, Series C and
Series D Preferred Stock. If, after payment or provision for payment of the
debts and other liabilities of HealthAxis, the remaining net assets of
HealthAxis are not sufficient to pay the holders of the Series B Preferred Stock
the full amounts of their preference, the holders of Series B Preferred Stock
would share ratably in any distribution of assets. After payment or provision
for payment of the debts and other liabilities of HealthAxis and the full
preference amount due to the holders of any series of Preferred Stock, Series A,
Series B, Series C and Series D Preferred Stock and the HealthAxis common stock
will be entitled to receive on a pro rata basis the remaining assets of
HealthAxis available for distribution to its shareholders. The relative value of
a share of Series A, Series B, Series C and Series D Preferred Stock for this
purpose shall be determined on an as converted basis.
Holders of the Series B Preferred Stock have the option, exercisable
upon request of the holders of 51% of the outstanding share of Series B
Preferred Stock within six months after the later of the occurrence of a Trigger
Event as defined in the Certificate of Designation or notice of a Trigger Event,
to cause HealthAxis to redeem any or all of the shares of 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 Series B Preferred Stock through
the date of redemption. Notice of the exercise of the optional redemption rights
with respect to the Series B Preferred Stock must be given to the Company
pursuant to the notice of optional redemption provision contained in the
Certificate of Designation related to the Series B Preferred Stock.
F-23
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Shares of Series B Preferred Stock are convertible at any time, at the
option of the holder, into HealthAxis common stock at a price equal to the
original issuance price ($4.40 per share) divided by the conversion price which
is defined as the original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Certificate of Designation related to
the Series B Preferred Stock.
All of the outstanding shares of Series B Preferred Stock shall be
converted into a number of shares of HealthAxis common stock at the conversion
price (as defined above) upon the earlier of: (i) consummation of an
underwritten public offering of the HealthAxis common stock of HealthAxis at a
net offering price per share that represents a pre-offering market
capitalization of not less than $150.0 million and aggregate proceeds (net of
underwriting commissions and discounts) to HealthAxis of not less than $25,000,
or (ii) a qualified merger.
In connection with AOL's purchase of the Series B Preferred Stock,
HealthAxis and AOL entered into a Registration Rights Agreement ("Registration
Agreement") which sets forth the rights of AOL in connection with the public
offering of a HealthAxis common stock acquired in connection with the conversion
of Series B Preferred Stock or other shares of common stock acquired through the
exercise of warrants granted to AOL.
The Series B Preferred Stock is not subject to any sinking fund or
other similar provisions. The holders of Series B Preferred Stock are not
entitled to any preemptive rights.
Note 18 - Series C Convertible Preferred Stock
On March 30, 1999, HealthAxis issued 1,526,412 shares of HealthAxis
Series C convertible preferred stock at $5.77 per share (the "Series C Preferred
Stock"), for an aggregate purchase price of $8,807, less issuance costs of $684
and the value of HealthAxis warrants issued in connection with the issuance of
Series C Preferred Stock to certain professional services firms valued at $278.
In conjunction with the merger described in Note 25, all of the Series C
Preferred Stock will be converted into common stock of HAI.
Holders of the Series C Preferred Stock are entitled to vote on all
matters as to which holders of common stock are entitled to vote. The holders of
each share of Series C Preferred Stock are entitled to the number of votes equal
to the nearest whole number of shares of common stock into which the holder's
Series C Preferred Stock is convertible. Generally, the holders of Series C
Preferred Stock shall vote together with the holders of HealthAxis common and
preferred stock as one class.
F-24
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Holders of the Series C Preferred Stock will be entitled to dividends
accruing from the date of issue, is such dividends are declared by the Board of
Directors of HealthAxis at its discretion at a rate as specified by the
Preferred Stock Certificate of Designation.
In the event of any distribution, liquidation or winding up of the
affairs of HealthAxis, whether voluntary or otherwise, after payment or
provisions for payment of debts and other liabilities of HealthAxis and payment
of all amounts owed to the holders of the Series B Preferred Stock, the holders
of the Series C Preferred Stock shall be entitled to receive on a pari passu
basis with the Series D Preferred Stock, out of the assets of HealthAxis legally
available for distribution to its shareholders, an amount in cash equal to $5.77
("Series C Offering Price") per share for each share of Series C Preferred
Stock, plus an amount equal to all dividends accrued and unpaid, if any, on each
such share up to the date fixed for distribution, before any distribution may be
made to the holders of HealthAxis' common stock for the Series A Preferred
Stock.
If after payment or provision for payment of the debts and other
liabilities of HealthAxis, the full amount due to holders of the Series B
Preferred Stock and distribution to the holders of Series D and the Series A
Preferred Stock the full amount of their preference, holders of the Series C
Preferred Stock shall be entitled to share on a pro rata basis the remaining
assets of HealthAxis available for distribution to shareholders with holders of
the common stock and the Series A, Series B and Series C Preferred Stock. The
relative value of a share of Series A, Series B, Series C and Series D Preferred
Stock for this purpose shall be determined on an as converted basis.
The Series C Preferred Stock is not subject to any mandatory
redemption, sinking fund or other similar provisions.
Each share of Series C Preferred Stock is convertible at any time at
the option of the holder into a number of shares of fully-paid and
non-assessable share of common stock equal to the Series C Offering Price per
share divided by the Series C conversion price (as defined below).
The Series C conversion price on the Series C Preferred Stock shall be
$5.77 per share subject to adjustment from time to time in the event of: (i) the
issuance of HealthAxis common stock as a dividend or distribution on the
HealthAxis common stock; (ii) the combination, subdivision or reclassification
of the HealthAxis common stock; (iii) the distribution to all holders of
HealthAxis common stock of the evidences of HealthAxis' indebtedness or assets;
or (iv) the sale of HealthAxis common stock at a price per share, or the
issuance of options, warrants or convertible securities with an exercise or
conversion price per share, less than Series C conversion price, except for
excluded shares. No fractional share will be issued upon conversion, but any
fractions will be adjusted in cash on the basis of the then current market price
of the HealthAxis common stock. Payment of accumulated and unpaid dividends will
be made upon conversion to the extent of legally available funds as prescribed
by statute.
All of the outstanding shares of Series C Preferred Stock will be
converted into a number of shares of HealthAxis common stock at the conversion
price upon the earlier of: (i) the consummation of an underwritten public
offering of the HealthAxis common stock of HealthAxis at a net offering price
per share that represents a pre-offering market capitalization of not less than
$200.0 million and aggregate proceeds to HealthAxis of not less than $25.0
million or (ii) a Qualified Merger.
F-25
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Note 19 - Series D Convertible Preferred Stock
On July 12, 1999, HealthAxis issued 333,334 shares of HealthAxis Series
D convertible preferred stock to Intel Corporation at $12 per share for an
aggregate purchase price of $4,000, less issuance costs of $40 (the "Series D
Preferred Stock"). The net proceeds of approximately $3,960, have been 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 conjunction with the merger described in Note 25, all
of the Series D Preferred Stock will be converted into common stock of HAI.
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.
Holders of the Series D Preferred Stock are entitled to vote on all
matters as to which holders of common stock are entitled to vote. The holders of
each share of Series D Preferred Stock are entitled to the number of votes equal
to the nearest whole number of shares of common stock into which the holder's of
the Series D Preferred Stock is convertible. Generally, the holders of Series D
Preferred Stock shall vote together with the holders of HealthAxis common and
preferred stock as one class.
Holders of the Series D Preferred Stock will be entitled to dividends
accruing from the date of issue, if such dividends are declared by the Board of
Directors of HealthAxis at its discretion at a rate as specified by the
Preferred Stock Certificate of Designation.
In the event of any distribution, liquidation or winding up of the
affairs of HealthAxis, whether voluntary or otherwise, after payment or
provisions for payment of the debts and other liabilities of HealthAxis and
payment of all amounts owed to the holders of the Series B Preferred Stock, the
holders of the Series D Preferred Stock shall be entitled to receive, on a pari
passu basis with the Series C Preferred Stock out of the assets of HealthAxis
legally available for distribution to its shareholders, an amount in cash equal
to $12.00 ("Series D Offering Price") per share for each share of Series D
Preferred Stock, plus an amount equal to all dividends accrued and unpaid, if
any, on each such share up to the date fixed for distribution, before any
distribution may be made to the holders of HealthAxis' common stock or the
Series A Preferred Stock.
If after payment or provision for payment of the debts and other
liabilities of HealthAxis, the full amount due to holders of the Series B,
Series C and Series D Preferred Stock and the distribution to the holders of the
Series A Preferred Stock the full amount of their preference, holders of the
Series D Preferred Stock shall be entitled to share on a pro rata basis the
remaining assets of HealthAxis available for distribution to shareholders with
holders of the common stock and the Series A, Series B and Series C Preferred
Stock. The relative value of a share of Series A, Series B, Series C and Series
D Preferred Stock for this purpose shall be determined on an as converted basis.
The Series D Preferred Stock is not subject to any mandatory
redemption, sinking fund or other similar provisions.
F-26
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Each share of Series D Preferred Stock is convertible at any time at
the option of the holder into a number of shares of fully-paid and
non-assessable shares of common stock equal to the quotient obtained by
dividing: (i) the Offering Price per share by; (ii) the Series D conversion
price (as defined below).
The Series D conversion price on the Series D Preferred Stock shall be
the offering price of $12.00 per share subject to adjustment from time to time
in the event of: (i) the issuance of HealthAxis common stock as a dividend or
distribution on the HealthAxis Common Stock; (ii) the combination, subdivision
or reclassification of the HealthAxis common stock; (iii) the distribution to
all holders of HealthAxis common stock of evidences of HealthAxis' indebtedness
or assets (including securities, but excluding cash dividends or distributions
paid out of earned surplus); or (iv) the sale of HealthAxis common stock at a
price per share, or the issuance of options, warrants or convertible securities
with an exercise or conversion price per share, less than the then Series D
conversion price, except for excluded shares. No adjustment in the conversion
price will be required until cumulative adjustments require an adjustment of at
least 1-1/2% in the conversion price. No fractional shares will be issued upon
conversion, but any fractions will be adjusted in cash on the basis of the then
current market price of the HealthAxis common stock. payment of accumulated and
unpaid dividends will be made upon conversion to the extent of legally available
funds as prescribed by statute.
All of the outstanding shares of Series D Preferred Stock will be
converted into a number of shares of common stock at the conversion price upon
the earlier of: (i) the consummation of a underwritten public offering of the
common stock of HealthAxis at a net offering price per share that represents a
pre-offering market capitalization of not less than $200.0 million and aggregate
proceeds (net of underwriting commissions and discounts) to HealthAxis of not
less than $25.0 million or (ii) a Qualified Merger.
Note 20 - Stockholders' Equity and Dividend Restrictions
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 approximately 557,000 shares of
Series A Preferred Stock, 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.
Dividend restrictions: Dividends paid by the Company over and above the
financial assets of HAI are dependent on the ability of HealthAxis to pay
dividends to HAI. Dividends paid by HealthAxis to HAI are subject to
restrictions described in Notes 16, 17, 18 and 19. HAI and HealthAxis have not
paid nor anticipate paying cash dividends on common stock in the foreseeable
future.
F-27
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 21 - Stock Options and Warrants
Options: The Company has stock option plans, which provide for the
granting of options to directors and key employees of the Company and its
subsidiaries and certain former field representatives and agents.
The Incentive Stock Option Plan for Employees authorized the granting
of options for up to 650,000 shares of the Company's common stock to key
managerial employees of the Company, which are exercisable for up to five years
at a price not less than the fair market value of the shares on the date of
grant. All options granted under the Incentive Stock Option Plan have been
granted at 100% of the fair market value of the shares on the date of grant. The
Incentive Stock Option Plan for Employees expired during 1996 and the Company
adopted the 1996 Employee Incentive Stock Option Plan ("1996 Employee Plan"),
which was amended in 1997 to increase the number of shares issuable thereunder
from 950,000 shares to 1,250,000 shares of the Company's common stock to key
employees of the Company and its subsidiaries and affiliates, exercisable for up
to five years from the effective date of the grant at a price not less than the
fair market value of the shares on the effective date of grant. All options
granted under the 1996 Employee Plan have been granted at 100% of the fair
market value of the shares on the effective date of the grant, with the
exception of an option granted to Mr. Clemens, which was granted at 110% of the
fair market value.
The Non-Qualified Stock Option Plan for Directors ("Directors' Plan")
was amended in 1996 to increase the number of shares authorized for the issuance
thereunder from 585,000 shares to 1,010,000 shares and to incorporate prior
amendments. Options granted under the Directors' Plan are exercisable for up to
ten years from the date of grant at a price of not less than the fair market
value of the shares on the date of the grant. All options granted under the
Directors' Plan have been granted at 100% of the fair market value of the shares
on the date of grant. During 1997, pursuant to the Directors' Plan, the Company
granted to each Director, with the exception of Mr. Clemens, an option to
purchase 30,000 shares of the Company's common stock at an exercise price of
$2.75 per share.
Also during 1997, the Company approved the adoption of a Military Stock
Option Plan and a 1997 Insurance Agent Stock Option Plan ("Agents Plan"),
designed to replace and supercede all previous stock option plans for
non-employee agents. Each Plan is administered by the Option Administration
Committee. Options have been granted at fair market value and are subject to
certain other vesting or performance conditions, and the Company has reserved
750,000 shares of the Company's common stock for issuance under each Plan.
Options have been issued under each Plan only to insurance agents who are
licensed to sell insurance by a life insurance subsidiary of the company, and
are exercisable for up to five years from the effective date of the grant.
In June 1998, HealthAxis adopted the 1998 Stock Option Plan (the "1998
Stock Option Plan") which provides for the award of options and stock purchase
rights (collectively "Awards") to purchase HealthAxis common stock. Exercise
prices are based on 90% of the per share price paid in private placement
transactions with unaffiliated third parties for grants prior to May 1999 and
100% of the per share price paid in private placement transactions with
unaffiliated third parties thereafter. During 1998 options to purchase 991,000,
309,000 and 50,000 shares were granted to Mr. Ashker, Mr. Clemens and
F-28
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Mr. Beausang, respectively, and are immediately exercisable at a price of $1.77
per share having a term of 10 years. Mr. Clemens option to purchase HealthAxis
shares has since been terminated by mutual agreement. Options to purchase
460,000 shares of HealthAxis common stock awarded at $1.77 per share were
awarded to officers and employees during 1998. These options have a term of five
years and vest at a rate of 25% of the initial award on the grant date, 25% of
the initial award on February 1, 1999 and the balance in quarterly installments
thereafter. Options to purchase an additional 96,500 shares of common stock were
granted to officers and employees at an exercise price of $4.00 per share. Such
options have a term of five years and vest at a rate of 25% of the initial award
on the grant date, 25% of the initial award on November 20, 1999 and the balance
in quarterly installments thereafter.
During 1999 HealthAxis amended the Stock Option Plan to increase the
number of shares available pursuant for issuance of options to 8,600,000.
Options granted in 1999 have a term of ten years and vest at a rate of 20-33% of
the initial award on the grant date, with the balance vesting in quarterly
installments over 2 to 5 years. Of the options granted, options to purchase
200,000, 75,000, 60,000 and 20,000 shares of HealthAxis common stock were
granted to Mr. Ashker, Mr. Felder, Mr. Hankinson and Ms. del Rossi,
respectively. Mr. Ashker, Mr. Felder, Mr. Hankinson and Ms. del Rossi are
executive officers of HealthAxis.
During the first quarter of 2000, the HAI board of directors adopted
the 2000 Stock Option Plan, subject to approval by the shareholders which is
required by NASDAQ and for options granted pursuant to the plan to qualify as
incentive stock options and for the 2000 Stock Option Plan to satisfy one of the
conditions of Section 162(m) of the Internal Revenue Code applicable to
performance-based compensation. Employees, officers and directors of HAI, as
well as certain consultants of HAI, are eligible to receive options under the
2000 Stock Option Plan. The purpose of the 2000 Stock Option Plan is to provide
additional incentive to these individuals by encouraging them to invest in HAI's
common stock and thereby acquire a further proprietary interest in HAI and an
increased personal interest in HAI's continued success and progress. HAI is
currently evaluating the possibility of merging HAI's existing director and
employee stock option plans into the 2000 Stock Option Plan. To date, no grants
have been awarded under 2000 Stock Option Plan.
Stock Purchase Rights ("SPRs") may be granted either alone, in addition
to, or in tandem with other awards granted under the 1998 Stock Option Plan.
SPRs may not be granted at less than 85% the fair market value on the date of
grant (or 100% of the fair market per share for ten percent shareholders) unless
otherwise determined at the time of grant under the terms of the 1998 Stock
Option Plan, the SPRs shall include a stock repurchase option exercisable by the
Company if the employee is terminated, voluntarily or involuntarily, following
the receipt of the restricted stock.
F-29
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The following table lists changes in outstanding stock options for all
HAI option plans:
Number Range of Weighted Average
of Shares Exercise Prices Exercise Price
---------- --------------- ----------------
Outstanding, January 1, 1997
Exercisable 356,217 $8.38 - 12.25 $6.70
Not exercisable 868,628 2.00 - 12.25 9.35
Total outstanding 1,224,845 2.00 - 12.25 8.73
1997
Granted 1,197,000 2.47 - 5.00 4.03
Exercised 30,450 2.00 - 3.64 3.23
Canceled/expired 113,000 2.00 - 10.00 9.43
Outstanding, December 31, 1997
Exercisable 943,972 2.38 - 12.25 5.99
Not exercisable 1,334,423 2.47 - 12.25 6.51
Total outstanding 2,278,395 2.38 - 12.25 6.30
1998
Granted 167,500 4.44 - 6.00 4.97 Weighted Average
Exercised 410,258 3.13 - 7.00 4.04 (Years) Remaining
Canceled/expired 278,195 3.52 - 11.00 9.85 Contractual Life
-----------------
Outstanding, December 31, 1998
Exercisable 944,133 2.35 - 12.25 6.58
Not exercisable 813,309 2.35 - 10.00 5.63
Total outstanding 1,757,442 2.38 - 12.25 6.14
1999
Granted 344,831 3.44 - 14.63 9.51
Exercised 778,925 2.38 - 12.25 6.35
Canceled/expired 327,831 2.47 - 14.63 6.50
Outstanding, December 31, 1999
Exercisable 159,050 2.38 - 3.52 2.86 7.1
Exercisable 262,352 4.44 - 5.00 4.98 3.2
Exercisable 66,275 6.00 - 7.50 6.97 5.1
Exercisable 150,000 8.75 8.75 6.5
Exercisable 146,750 10.00 10 2.1
Exercisable 75,000 14.63 14.63 2.8
Not exercisable 4,000 3.4375 3.44 1.2
Not exercisable 41,490 4.44 - 5.00 4.86 3.1
Not exercisable 66,600 6.00 - 7.50 7.39 1.2
Not exercisable 24,000 10.00 10.00 1.2
Total outstanding 995,517 2.38 - 14.63 6.96 4.4
F-30
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The following table lists options granted by HealthAxis under the 1998
Stock Plan:
Weighted Average Weighted Average Weighted
Number Exercise (Years) Remaining Average
Of Shares Price Contractual Life Fair Value
--------- ---------------- ----------------- ----------
Outstanding, January 1, 1998 - - - -
1998
Granted 1,956,500 $1.88 $0.38
Outstanding, December 31, 1998
Exercisable 1,515,000 1.77 0.36
Exercisable 24,125 4.00 0.80
Not exercisable 345,000 1.77 0.36
Not exercisable 72,375 4.00 0.80
---------
Total outstanding 1,956,500 1.88 0.38
1999
Granted 445,500 4.00 0.80
Granted 758,371 5.77 3.71
Granted 700,750 12.00 7.80
Exercised 52,500 1.88
Canceled/Expired 732,400 3.09
Outstanding, December 31, 1999
Exercisable 1,274,021 1.77 3.7 0.36
Exercisable 146,333 4.00 2.3 0.80
Exercisable 111,332 5.77 8.4 3.71
Exercisable 70,670 12.00 9.1 7.80
Not exercisable 123,854 1.77 3.7 0.36
Not exercisable 145,667 4.00 2.3 0.80
Not exercisable 597,764 5.77 8.4 3.71
Not exercisable 606,580 12.00 9.1 7.80
---------
Total outstanding 3,076,221 5.14
=========
In addition, Mr. Clemens directly owns options to purchase 253,376
shares of the Company's common stock at $.9091 per share expiring from time to
time between November 1999 through December 2004. Mr. Clemens indirectly owns
options to purchase 32,960 shares of the Company's common stock at $.9091 per
share expiring from time to time between November 1999 and December 2004. Mr.
Clemens disclaims beneficial ownership of all other options of any partnership
in which Mr. Clemens directly or indirectly is a partner.
F-31
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
In addition, a partnership of which Mr. Clemens is a partner owns
options to purchase 1,000,000 shares of the Company's common stock at $.9091 per
share expiring from time to time between November 1999 through December 2004.
Mr. Clemens also owns an option to purchase up to 397,198 shares of Series A
Preferred Stock at $3.64 per share (fair market value at date of grant)
exercisable on or before March 31, 2003. This option was amended to eliminate
the right to convert the option shares into any class of securities other than
into shares of HAI's common stock.
The Stock Option Plan for Executives ("Executive Plan") was amended in
1996 and authorizes the granting of options to purchase up to 3,850,000 shares
of the Company's Series A Convertible Preferred Stock ("Series A Preferred
Stock"), which are exercisable for up to ten years from the effective date of
grant at a price not less than the fair market value of the shares on the date
of grant. Also in 1997, the Company granted Mr. Clemens an option 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, limited in the
aggregate to (i) that the number shares of Series A Preferred Stock which, when
exercised, shall permit Mr. Clemens to acquire the right to vote not more than
55% of the shares of the Company's common stock owned, either directly or
beneficially, by Mr. Clemens at such time, (ii) the shares of Series A Preferred
Stock which are, as of the date of any such exercise, authorized and unissued;
and (iii) an option to purchase more than 550,000 shares of Series A Preferred
Stock in any six month period shall be prohibited except upon the occurrence of
a "change of control" (within the meaning of the Securities Exchange Act of
1934, as amended). Mr. Clemens relinquished all rights to the 1997 grant as part
of the letter agreement between HAI and Mr. Clemens dated September 9, 1999
described in Note 23.
Warrants: On June 6, 1996, the Company issued 100,000 stock purchase
warrants to an unaffiliated party at $9.00 per share that are exercisable
through June 6, 2001. The Company issued a warrant to an exclusive consultant of
the Company to purchase 100,000 shares of the Company's common stock at the
market price per share as of each of January 1, 1996, 1997, and 1998, provided
PILIC has realized new annualized premium sales production of at least $35,000,
$45,000, and $50,000, respectively, for each of these calendar years. PILIC has
realized the annualized premium threshold for the years ending December 31,
1996, 1997 and 1998 and accordingly, the consultant is entitled to exercise
100,000 warrants at $7.375 for 1996, 100,000 at $14.00 per share for 1997 and
100,000 at $2.81 per share for 1998.
During 1997 the Company issued warrants to two exclusive insurance
agents, who were directors of a subsidiary of HAI, for the purchase of 50,000
shares of the Company's common stock at $5.00 per share. These warrants become
exercisable throughout 2001. The Company also issued a warrant exercisable at
any time to an employee for the purchase of 25,000 shares of the Company's
common stock at $4.00 per share.
F-32
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Effective January 1, 1996, the Company has adopted the disclosure-only
provisions of SFAS 123 "Accounting for Stock Based Compensation." Accordingly,
no compensation cost has been recognized for stock option and warrant grants to
employees and employee-directors. The Company continues to account for
stock-based compensation using the intrinsic value method prescribed in APB
opinion No. 25, "Accounting for Stock Issued to Employees". Compensation cost
for stock options, if any, is measured as the excess of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. Compensation cost for shares issued under performance
share plan is recorded based upon the current market value of the Company's
stock at the end of each period. Had compensation cost for the Company's stock
option grants been determined based on the fair value at the date of grants in
accordance with the provisions of SFAS 123, the Company would have amortized the
cost over the vesting period of the option which generally is five years for the
1996 Employee Plan and three years for the Directors Plan and 1998 Employee
Plan. The Company's net loss and net loss per common share would have been
increased to the following pro forma amounts:
1999 1998 1997
--------- --------- ---------
Net loss applicable to common shares
as reported $(46,601) $(12,410) $ (18,573)
pro forma $(48,192) $(13,319) $ (20,505)
Net loss applicable to common shares Basic & Diluted Basic & Diluted Basic & Diluted
--------------- --------------- ---------------
as reported $(3.80) $(1.20) $ (1.84)
pro forma $(3.93) $(1.27) $ (2.03)
F-33
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The fair value of the options and warrants granted are estimated on the
date of grant using the Black Scholes option pricing model. The major
assumptions used and the estimated fair value include no dividends paid, assumed
forfeitures of 10% annually for non-vested options and warrants granted in 1996,
and the following:
Expected Expected Risk Free Weighted
Term Stock Interest Average
In Years Volatility Rate Fair Value
-------- ---------- --------- ----------
For options granted in 1997
1996 Employee Plan & Employee Warrant 5 63% 5.50% $1.42
Directors Plan 5 63% 5.50% $1.36
Military Market Plan & Warrants 5 63% 5.50% $1.13
For options granted in 1998
1996 Employee Plan & Warrants 1 - 5 57% - 98% 4.48% $3.74
HealthAxis.com, Inc. 1998 Stock Plan 5 100% 4.48% $0.38
For options granted in 1999
1996 Employee Plan .5 - 5 58% - 100% 4.48% $4.65
Directors Plan 10 58% 4.48% $2.12
HealthAxis.com, Inc. 1998 Stock Plan 5 100% 4.48% $0.36
Note 22 - Commitments and Contingencies
The Company is a co-defendent in litigation in the customary settlement
of insurance claims through PILIC. Management is of the opinion that neither the
litigation nor these claims will have a material adverse effect on the results
of operations or financial position of the Company.
In addition, the Agreement also stipulated that any future cost
associated with the termination of certain employees in connection with any of
the transactions contemplated in the Agreement shall be borne by HAI. The amount
to be charged to expense as a result of the termination of these employees will
be approximately $1,700, which includes salary and benefit costs.
The Company's business is subject to a changing legislative and
regulatory environment. Some of the proposed changes include initiatives to
restrict insurance pricing and the application of underwriting standards; reform
health care; and restrict investment practices. Proposals on national health
care reform have been under consideration that could significantly change the
way healthcare is financed and provided. The effects on the Company of
comprehensive healthcare reforms, which, if enacted, may have a material adverse
impact upon the ability of the Company to profitably engage in the sale of
accident and health insurance.
F-34
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 23 - Post Retirement and Post Employment Liabilities and Employee
Benefit Plans
The post retirement liability relates to the future cost of life and
health insurance coverage for approximately 18 retired PILIC employees. Post
employment liabilities relate to the costs of life, health and dental insurance
coverage for three former executives of PILIC and HAI and Mr. Clemens. These
liabilities were assumed by HAI in accordance with the terms of the transfer of
PILIC described in Note 4.
HAI sponsors a defined contribution retirement savings plan under
section 401(k) of the Internal Revenue Code covering substantially all
employees. Employees may contribute up to 15% of compensation, of which the
Company will match 50% of the first 5%. All contributions are subject to
limitations imposed by IRS regulations. Effective January 1, 1995, employees
were given the option to invest the "employer match" portion of their
contribution in common stock of the Company. At December 31, 1999 and 1998, the
plan held 3,995 and 5,736 shares, respectively, of the Company's common stock.
All employee contributions are immediately vested, and the Company
contribution becomes 20% vested after two years of service. Thereafter, an
additional 20% becomes vested for each year of service up to six years. The
benefit expense under this plan amounted to $53, $82 and $78 for 1999, 1998 and
1997, respectively.
Note 24 - Related Party Transactions
On November 30, 1999 HAI sold PILIC to AHC owned by the Alvin Clemens,
the Company's Chairman, as described in Note 4.
Legal fees to the law firm of a former director and general counsel and
secretary of the Company in 1999, 1998 and 1997, approximated $497, $332 and
$282, respectively.
Consulting expenses paid to a shareholder of the Company and former
Chief Executive Officer of a former subsidiary amounted to $300 each in 1998 and
1997. The shareholder provided the Company with exclusive marketing, sales and
product design services as part of a 36-month consulting agreement, which
expired December 1998.
Computer software development and consulting expense paid to an entity
controlled by a former employee of the Company in 1999 and 1998 approximated
$1,398 and $1,759, respectively.
Michael Ashker, the Chief Executive Officer and President of HAI and
HealthAxis also served as the sole manager of Lynx Capital Group ("LCG") through
December, 1999. LCG is party to a consulting agreement with HAI whereby LCG
provided various services. During 1998 approximately $23 in fees and expenses as
well as options to purchase 400,000 shares of HAI common stock were granted to
LCG.
F-35
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 25 - Subsequent Events
Merger of Insurdata into HealthAxis.com: On December 7, 1999,
HealthAxis and Insurdata Incorporated, a subsidiary of UICI announced the
signing of a definitive agreement to merge the two companies. The combined
entity has retained the HealthAxis.com name. Under the terms of the transaction,
Insurdata's shareholders have received approximately 50 percent of the newly
combined company. The transaction closed on January 7, 2000.
In accordance with the terms of the Merger Agreement, each outstanding
share of Insurdata Common Stock (the "Insurdata Common Stock"), was converted
into the right to receive 1.33 shares (the "Exchange Ratio") of HealthAxis
Common Stock (the "HealthAxis Common Stock"). The Company issued 21,807,567
shares of HealthAxis Common Stock to Insurdata shareholders. Of the total of
42,392,381 shares of HealthAxis Common Stock outstanding, UICI received
18,943,678 shares of HealthAxis Common Stock, 2,439,885 shares of HealthAxis
Common Stock are held by the voting trust (described herein) and other
shareholders of Insurdata received 424,004 shares of HealthAxis Common Stock.
Subsequent to such date, 10,103,217 shares of HealthAxis Common Stock held by
UICI were transferred to a voting trust. See "Voting Trust Agreements."
The merger of Insurdata and HealthAxis will be accounted for by
HealthAxis under the purchase method of accounting in accordance with APB No. 16
whereas HealthAxis, by virtue of its holding a majority of the voting interest
was determined to be the accounting acquirer. As a result, the net assets of
Insurdata will be recorded at their fair value with the excess of the
HealthAxis' purchase price over the fair value of the net assets acquired being
goodwill being amortized on a straight line basis over three years.
The Merger Agreement provides that each option to purchase shares of
Insurdata Common Stock under Insurdata's stock option plans which were
outstanding on the Effective Date, whether or not exercisable, were converted
into and became a right to purchase shares of HealthAxis Common Stock, generally
in accordance with the terms of the Insurdata stock option plans and Insurdata
option agreements pursuant to which such options were granted, except that from
and after the Effective Date, (i) the number of shares of HealthAxis subject to
each Insurdata option shall be equal to the number of shares of Insurdata Common
Stock subject to such option prior to the Effective Date multiplied by the
exchange ratio (with fractional shares rounded down to the nearest share and
cash being payable for any fraction of a share) and (ii) the exercise price per
share of HealthAxis Common Stock purchasable thereunder shall be that specified
in the Insurdata option divided by the exchange ratio (rounded up to the nearest
one hundredth).
The Merger is intended to constitute a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended.
F-36
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The chart below identifies the equity ownership of HealthAxis common
and preferred stock before and after the merger of Insurdata. The chart excludes
options and warrants to purchase HealthAxis stock.
March 14, 2000 December 31, 1999
-------------- -----------------
Shares Percentage Shares Percentage
------ ---------- ------ ----------
HAI 15,801,644 34.8% 15,801,644 66.9%
UICI and subsidiaries 17,810,229 39.2% 866,551 3.7%
AHC Acquisition 100,000 0.2% 100,000 0.4%
Michael Ashker - - - -
Minority Interest 11,714,199 25.8% 6,850,310 29.0%
---------- ------ ---------- ------
Total 45,426,072 100.0% 23,618,505 100.0%
========== ====== ========== ======
Voting Trust Agreements: The Merger Agreement also provides for a
voting trust agreement (the "Voting Trust Agreement") which established a trust
to hold shares of Insurdata Common Stock which are currently held of record by
UICI, but as to which UICI has granted options to purchase such shares to
certain employees of Insurdata pursuant to its Insurdata Founders' Program.
These shares were converted into 2,439,885 shares of HealthAxis Common Stock in
the Merger. The initial trustees of this trust are Michael Ashker, Alvin
Clemens, Edward W. LeBaron, Jr. and Henry Hager (the "Trustees"). All of the
initial Trustees are also directors of HAI and Messrs. Ashker and Clemens are
also directors and officers of HealthAxis. Pursuant to the terms of the Voting
Trust Agreement, a majority of the Trustees have the power to vote the shares
held by the trust in their discretion at all meetings of shareholders or
pursuant to actions by unanimous consent. The Voting Trust Agreement terminates
upon the earlier of the distribution of the shares subject to such agreement or
July 1, 2003. Upon the termination of this Voting Trust Agreement or upon any
dissolution or total or partial liquidation of HealthAxis, whether voluntary or
involuntary, the Trustees shall direct that all Shares remaining in the Trust
and all moneys, securities, rights or property attributable to the Shares be
distributed to UICI.
F-37
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Following the completion of the Insurdata merger, UICI, and Messrs.
Ashker, LeBaron and Maloney entered into a voting trust agreement ("the UICI
Voting Trust") which provides for the establishment of a trust to hold
10,103,217 shares of HealthAxis common stock held by UICI. The initial trustees
of the UICI Voting Trust are Michael Ashker, Edward W. LeBaron, Jr. and Dennis
B. Maloney who are referred to as the trustees. All of the trustees are also
directors of HealthAxis and Messrs. Ashker and LeBaron are directors of HAI.
Messrs. Ashker and Maloney are also officers of HealthAxis. A majority of the
trustees have the power to vote the shares held by the UICI Voting Trust in
their discretion at all meetings of shareholders or pursuant to actions by
unanimous consent. UICI retains dispositive power and the ability to receive all
dividends on the shares held in the UICI Voting Trust. Pursuant to the UICI
Voting Trust agreement, if one of the trustees is no longer able to serve as
trustee, the other two trustees may select by unanimous vote a new trustee from
the members of the board of directors of HAI or HealthAxis who are not selected
by UICI. The UICI Voting Trust agreement also provides that if UICI decides to
sell any of its shares of HealthAxis common stock, half of the shares sold must
be shares subject to the UICI Voting Trust. The UICI Voting Trust agreement
terminates upon the earlier of February 11, 2020; such time as UICI owns less
than 20% of the outstanding common stock of HealthAxis or HAI; upon another
person acquiring 51% or more of the outstanding shares of HealthAxis; or July
31, 2000 if transactions contemplated by the merger of HealthAxis into
HealthAxis Acquisition Corporation are not completed. During March 2000, UICI
sold 1,000,000 shares held in the UICI Voting Trust.
Technology Outsourcing Agreement: In accordance with the Merger
Agreement, UICI and its affiliates and Insurdata entered into a Technology
Outsourcing Agreement pursuant to which Insurdata will provide UICI and its
affiliates with technology support services, data processing services and other
software and hardware based services.
UICI Registration Rights Agreement: HealthAxis and UICI also entered
into a registration rights agreement which provides for the registration of
HealthAxis shares received by UICI in the Merger.
HealthAxis Merger with HealthAxis Acquisition Corporation: On December
7, 1999, HAI announced plans to move forward with its original plan to merge
with its subsidiary, HealthAxis. Management of the respective companies signed
the merger agreement on January 26, 2000. The merger was approved by HAI's board
of directors on January 26, 2000 and by HealthAxis' board of directors on
January 26, 2000.
The merger documents provide for the merger of HealthAxis with and into
a newly formed, wholly owned subsidiary of HAI. As a result of the merger,
HealthAxis will cease to exist, and the former shareholders of HealthAxis will
become shareholders of HAI. The HAI subsidiary will continue as the surviving
corporation of the merger and will retain all of its separate corporate
existence, with all its rights and powers unaffected by the merger. The merger
is subject to both HAI and HealthAxis shareholder approval.
The merger provides for the conversion of each outstanding share of
HealthAxis common and preferred stock into 1.127 shares ("the exchange ratio")
of HAI common stock. The Company anticipates that the merger will constitute a
tax free "reorganization" within the meaning of the Internal Revenue Code of
1986.
F-38
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Continued)
(Dollars in thousands)
The Company anticipates that HAI will issue a total of 33,386,730
shares of HAI common stock to HealthAxis shareholders in the merger. The Company
also anticipates that HAI will issue up to approximately 6,072,728 shares of HAI
common stock upon the exercise of options and warrants to purchase HealthAxis
common stock to be assumed by HAI.
Based on the number of shares of HAI common stock to be issued in the
merger, excluding shares subject to stock options and warrants to be assumed by
HAI, following the merger, existing HAI shareholders will own approximately 28%
and former HealthAxis shareholders will own approximately 72% of the outstanding
common stock of HAI.
The merger will be accounted for by HAI as a recapitalization in which
the preferred and common stock of HealthAxis will be converted into HAI common
stock eliminating all minority interest in HealthAxis.
HealthAxis options and warrants outstanding will be exchanged for
options and warrants in HAI. As a result of the recapitalization and exchange a
remeasurement of the HealthAxis options is anticipated. As a result of the
remeasurement, the intrinsic value of vested options will be expensed upon
completion of the merger. The intrinsic value of unvested options will be
recorded as prepaid compensation and will be charged to operations over the
vesting period of these options.
Out of pocket costs which are anticipated to include legal, accounting
and investment advisory costs as well as severance costs for employees whose
positions will be eliminated as a result of the mergers will be expensed upon
completion of the merger.
F-39