SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended................................. June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from..................... to.....................
Commission file number....................................... 0-13591
HEALTHAXIS INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, East Norriton, Pennsylvania 19401
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (610) 279-2500
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 13,097,618 shares of
common stock, par value $.10, outstanding as of August 11, 2000.
1
HealthAxis Inc.
Table of Contents
Page
----
PART I Financial Information
Item 1. Condensed Financial Statements
Consolidated Balance Sheets...........................................3
Consolidated Statements of Operations.................................4
Consolidated Statement of Changes in Stockholders' Equity.............5
Consolidated Statement of Cash Flows................................6-7
Notes to Condensed Consolidated Financial Statements...............8-15
Item 2. Management's Discussion and Analysis of Results
Of Operations and Financial Condition.............................16-21
PART II Other Information
Items 1-5............................................................22
Reports on Form 8-K .................................................22
Signatures....................................................................23
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
HealthAxis Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except share and per share data)
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
Assets
Cash and cash equivalents $ 31,530 $ 58,069
Accounts receivable, net of allowance for doubtful accounts of $103 7,887 -
Prepaid expenses 619
Other current assets 297 549
-------- --------
Total current assets 40,333 58,618
Property, equipment and software, less accumulated depreciation and
amortization of $17,041 and $2,259, respectively 13,085 357
Capitalized software and contract start-up costs, less accumulated amortization of $1,091 3,876 -
Goodwill, less accumulated amortization of $765 - 7,114
Customer base, less accumulated amortization of $2,151 15,054 -
Long-term receivables from employees 629 -
Acquisition costs - 750
Prepaid alliance agreements, net of accumulated amortization of $436 -
Assets held for sale - 12,458
Other assets 712 305
-------- --------
Total assets $ 73,689 $ 79,602
======== ========
Liabilities and Stockholders' Equity (Deficiency)
Accounts payable $ 619 $ 1,823
Accrued liabilities 8,609 4,746
Deferred revenues 639 -
Obligations under capital lease 413 410
-------- --------
Total current liabilities 10,280 6,979
Convertible debentures 26,045 25,019
Federal income taxes 585 585
Ceding commission liability 5,900 5,600
Post retirement and employment liabilities 1,053 1,030
Obligations under capital lease 135 117
Other liabilities 19 -
-------- --------
Total liabilities 44,017 39,330
Commitments and Contingencies Minority interest in HealthAxis:
Common stock 31,876 12,603
Preferred stock 15,049 15,049
Stockholders' Equity (Deficiency):
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A cumulative convertible, none issued and outstanding - -
Series B cumulative convertible, none issued and outstanding - -
Common stock, par value $.10: authorized 50,000,000,
issued and outstanding 13,097,618 and 13,027,668 1,310 1,303
Common stock, Class A, par value $.10: authorized 20,000,000, - -
none issued and outstanding
Additional paid-in capital 324,963 81,798
Accumulated deficit (335,998) (70,481)
Unearned compensation (7,528) -
-------- --------
Total stockholders' equity (deficiency) (17,253) 12,620
-------- --------
Total liabilities and stockholders' equity (deficiency) $ 73,689 $ 79,602
======== ========
See notes to consolidated financial statements.
3
HealthAxis Inc. and Subsidiaries
Consolidated Statement of Operations
(Dollars in thousands, except share and per share data) (Unaudited)
Three months ended June 30, Six months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenue $ 10,362 $ - $ 21,738 $ -
Expenses:
Cost of revenues 6,508 - 14,247 -
Operating 5,297 69 8,815 104
Sales and marketing 424 86 716 167
General and administrative 2,759 2,246 6,246 3,426
Amortization of assets related to acquisition 38,223 - 76,864 -
--------- -------- --------- ---------
Total Expenses 53,211 2,401 106,888 3,697
--------- -------- --------- ---------
Operating Loss (42,849) (2,401) (85,150) (3,697)
Interest and other income, net 408 (84) (177) (421)
--------- -------- --------- ---------
Loss before minority interest (42,441) (2,485) (85,327) (4,118)
Minority interest in loss of subsidiary 26,262 283 51,943 314
--------- -------- --------- ---------
Loss from continuing operations (16,179) (2,202) (33,384) (3,804)
Loss from discontinued operations (2,616) (8,302) (6,341) (9,567)
Loss on sale of discontinued operations (225,792) - (225,792) -
--------- -------- --------- ---------
Net loss (244,587) (10,504) (265,517) (13,371)
--------- -------- --------- ---------
Dividends on preferred stock - 35 - 69
--------- -------- --------- ---------
Net loss applicable common stockholders $(244,587) $(10,539) $(265,517) $ (13,440)
========= ======== ========= =========
Loss per share of common stock (basic and
diluted)
Continuing operations $ (1.24) $ (.19) $ (2.55) $ (.33)
Discontinued operations (17.43) (.69) (17.76) (.81)
--------- -------- --------- ---------
Net loss $ (18.67) $ (.88) $ (20.31) $ (1.14)
========= ======== ========= =========
Weighted average common shares and equivalents
Used in computing (loss) per share
Basic and diluted 13,098,000 12,039,000 13,072,000 11,797,000
See notes to consolidated financial statements.
4
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars and shares in thousands) (Unaudited)
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
BALANCE, DECEMBER 31, 1999 - $ - 13,027 $1,303
Valuation of Insurdata options
Net loss
Amortization/forfeiture of unearned
compensation
Stock options exercised 71 7
Issuance of stock in connection with the acquisition
of Insurdata
Stock options issued in lieu of compensation
------- ------- ------ -------
BALANCE, June 30, 2000 - $ - 13,098 $ 1,310
======= ======= ====== =======
Additional
Paid-In Accumulated Unearned
Capital Deficit Compensation Total
------- ------- ------------ -----
BALANCE, DECEMBER 31, 1999 $ 81,798 $ (70,481) $ - $ 12,620
Valuation of Insurdata options (10,691) (10,691)
Net loss (265,517) (265,517)
Amortization/forfeiture of unearned 3,163 3,163
compensation
Stock options exercised 334 341
Increase in net assets in HealthAxis.com, Inc. 242,626 242,626
Stock options issued in lieu of compensation 205 205
--------- --------- -------- ---------
BALANCE, June 30, 2000 $ 324,963 $(335,998) $( 7,528) $ (17,253)
========= =========== ======== =========
See notes to consolidated financial statements.
5
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Six Months Ended
Cash flows from operating activities June 30, June 30,
2000 1999
------------------ ------------------
Net loss $ (265,517) $ (13,371)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on sale of discontinued operations 225,792 -
Depreciation and amortization 79,332 5,708
Net realized gain on sale of subsidiaries - (1,500)
Bad debt reserve 6 -
Minority interest in loss of subsidiary:
Share of loss from continuing operations (51,943) (314)
Share of loss from discontinued operations (11,199) (1,410)
Stock option compensation 2,766 -
Loss on disposition of assets 80 -
Interest on convertible debt 1,026 -
Change in:
Accounts receivable (1,059) -
Premium due and uncollected, unearned premium and
premium received in advance - (144)
Prepaid expense 137 (2,610)
Due to/from reinsurers - (14,659)
Due from third party administrator - 6,849
Deferred policy acquisition costs, net - (99)
Accrued investment income - 76
Other assets, current and deferred income taxes 142 81
Accounts payable and accrued liabilities (3,649) -
Accrued commissions and expenses - (322)
Deferred revenues 242 -
Ceding commission and interest 300 300
Future policy benefits and claims 23 (15,059)
Other liabilities (349) _ -
---------- ---------
Net cash used in operating activities (23,870) (36,474)
---------- ---------
Cash flows from investing activities
Sales of bonds - 5,979
Cash in acquired company 2,126 -
Investment in capitalized software and contract start-up (1,320) -
Other 2 -
Payment of acquisition costs (690) -
Maturities of investments and loans - 21
Loans to officer, director and shareholder - 686
Purchases of property, equipment and software (3,034) (1,147)
---------- ---------
Net cash provided by (used in) investing activities (2,916) 5,539
---------- ---------
See notes to consolidated financial statements.
6
HealthAxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands) (Unaudited)
Six Months Ended
June 30, June 30,
2000 1999
------------------ ------------------
Cash flows from financing activities
Withdrawals from contract holder deposit funds - (250)
Payments on capital leases (277) -
Repayment of loans payable - (1,465)
Net proceeds from sales of HealthAxis common stock - 6,281
Net proceeds from the sales of HealthAxis preferred stock - 8,123
Exercise of stock options 341 4,665
Exercise of HealthAxis options 183 -
Dividends paid on preferred stock - (70)
-------- --------
Net cash (used in) provided by financing activities 247 17,284
-------- --------
(Decrease) in cash and cash equivalents (26,539) (13,651)
Cash and cash equivalents, beginning of period 58,069 26,185
-------- --------
Cash and cash equivalents, end of period $ 31,530 $ 12,534
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 532 $ 453
Non-cash financing activities
Issuance of warrants $ 0 $ 867
Exercise of options and warrants $ 0 $ 1,513
Repayment of loans payable $ 0 $ (2,400)
Non-cash investing activities
Sale of subsidiary $ 0 $ 1,500
See notes to consolidated financial statements.
7
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dollars in Thousands
Note A - Description of business and basis of presentation
Unaudited Financial Information
The unaudited condensed consolidated financial statements have been prepared by
HealthAxis Inc. (formerly Provident American Corporation) and subsidiaries (the
"Company" or "HAI"), pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments which, in the opinion of the
Company, are necessary to present fairly the results for the interim periods.
Certain financial information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the accompanying disclosures are
adequate to make the information presented not misleading. Results of operations
for the three and six month periods ended June 30, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
General
HealthAxis.com, Inc. ("HealthAxis") was formed as a Pennsylvania corporation on
March 26, 1998. On January 7, 2000, HealthAxis completed a merger with Insurdata
Incorporated ("Insurdata") as described in Note B (the "Insurdata Merger"). As a
result of the merger, Insurdata became HealthAxis' application solutions group
and HealthAxis' former business became the eDistribution group. On June 30,
2000, HealthAxis entered into an Asset Purchase Agreement to sell certain assets
used in connection with its retail website, to Digital Insurance, Inc.
("Digital"), (see Note C). In connection with this transaction, HealthAxis and
Digital entered into additional agreements also described in Note C.
The Company's eDistribution group provided healthcare payers with a fully
functional, Internet platform for the distribution of health insurance products
to the individual, small group and large group markets both on a direct basis
and through existing intermediaries such as agents and benefits consulting
firms. After the close of the pending sale of certain assets to Digital, the
eDistribution group will no longer exist. The Company's application solutions
group provides proprietary Web-enabled enrollment, administration and claims
processing applications to healthcare payers, including insurance companies,
third-party administrators and large self-funded groups.
As of December 31, 1999 and June 30, 2000, HAI owned 66.9% (15,801,644 shares
owned out of 23,618,505 shares outstanding) and 34.7%, (15,801,644 shares owned
out of 45,508,640 shares outstanding), respectively, of HealthAxis' common and
preferred stock. As of June 30, 2000, HAI owned 36.2% (15,355,728 shares owned
out of 42,477,449 shares outstanding) of HealthAxis' common stock. Due to
various voting trust agreements, HAI and its affiliates had, as of June 30,
2000, voting power for an additional 25.3% of HealthAxis' common and preferred
stock. As a result of HAI and its affiliates having voting power with respect to
a total of 60.0% of HealthAxis' common and preferred stock as of June 30, 2000,
HAI consolidates HealthAxis for financial reporting purposes. Due to amendments
made to a voting trust, HAI and its affiliates have voting power with respect to
a total of 54.2% of HealthAxis' common and preferred stock as of July 31, 2000.
On November 30, 1999, the Company sold its remaining insurance operations, which
were conducted through Provident Indemnity Life Insurance Company ("PILIC"). In
addition, on June 30, 2000, HealthAxis entered into an Asset Purchase Agreement
to sell certain assets to Digital (see Note C). As a result, the financial
statements have been restated to reflect the results of operations of PILIC and
the eDistribution group as those of discontinued business segments.
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 plans to
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 HAI merger. In connection with this merger, 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 HAI
merger and register the HAI common stock to be issued to the HealthAxis
shareholders. The Form S-4 regarding this transaction is currently pending at
the Securities and Exchange Commission. This transaction is expected to close
in the fourth quarter of 2000 or the first quarter of 2001.
8
On January 27, 2000, the Company filed an amendment to its Amended and Restated
Articles of Incorporation changing its name from Provident American Corporation
to HealthAxis Inc. Effective February 1, 2000, the Company changed its symbol
under which its common stock trades on the NASDAQ National Market to "HAXS".
Note B - Merger with Insurdata Incorporated
On January 7, 2000, HealthAxis completed a merger with Insurdata, a health care
technology company and a majority owned subsidiary of UICI (the "Insurdata
Merger"). The transaction was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, Business Combinations. HealthAxis,
by virtue of its holding a majority of the voting power, was determined to be
the accounting acquirer. As a result, the net assets of Insurdata have been
recorded at their fair value with the excess of the purchase price over the fair
value of the net assets acquired allocated to goodwill.
In connection with the Insurdata Merger, each outstanding share of Insurdata
common stock was converted into the right to receive 1.33 shares of HealthAxis
common stock. The Company issued 21,807,567 shares of HealthAxis common stock to
Insurdata shareholders. In connection with the Insurdata Merger, HealthAxis also
issued 426,930 options to purchase HealthAxis common stock to existing Insurdata
optionholders. The fair value of the consideration given by HealthAxis for the
acquisition of Insurdata under the purchase method of accounting totaled
$723,927. This purchase price consideration consisted of: (1) the fair value of
the HealthAxis common shares issued to Insurdata shareholders totaling $654,799
($30.03 per share), (2) the fair value of HealthAxis options granted to
Insurdata optionholders under Insurdata stock option plans totaling $11,901
(average fair value of $27.87 per option), (3) the difference between the fair
value of shares issued in the December 7, 1999 private placement and the $15
issue price totaling $55,788, and (4) merger costs totaling $1,439. The fair
value per share of HealthAxis common stock was determined based upon the quoted
NASDAQ market price of HAI common stock on the measurement date of December 7,
1999. The fair value of the HealthAxis options granted to Insurdata
optionholders was determined using the Black Scholes option pricing model.
The fair value of the Insurdata assets acquired and liabilities assumed through
the Insurdata Merger were:
Cash and cash equivalents $ 2,126
Accounts receivable, net 5,834
Fixed assets 6,278
Developed software 2,862
Unearned compensation 10,691
Customer base 17,205
Goodwill 682,184
Other assets 1,768
Other liabilities (5,021)
---------
$ 723,927
=========
In connection with the Insurdata Merger, the Company recorded an increase in
minority interest in HealthAxis common stock totaling $479,775, and an increase
to additional paid-in capital of $242,713. The increase in additional paid-in
capital represents dilution to minority shareholders resulting from the
Insurdata Merger.
Developed software, customer base, and goodwill are being amortized over their
estimated useful lives of 3, 4 and 5 years, respectively. The amount allocated
to unearned compensation is based upon the intrinsic value of the unvested
HealthAxis options issued to Insurdata optionholders discussed above and is
being amortized over the remaining vesting term of the options. The Company has
recorded the unearned compensation as a reduction of stockholders' equity.
9
Unaudited pro forma financial information for the three and six months ended
June 30, 1999, as though the Insurdata Merger had occurred on January 1, 1999,
is as follows:
Three Months Six Months
Ended Ended
------------------ -----------------
June 30, 1999
------------------------------------
Revenues $ 10,504 $ 20,500
Net Loss $ (16,814) $ (30,856)
Net loss per common share $ (1.40) $ (2.62)
Weighted average common shares outstanding (basic and diluted) 12,039,000 11,797,000
Note C - Discontinued Operations
On November 30, 1999, the Company sold PILIC, a wholly owned subsidiary, to AHC
Acquisition, Inc., a corporation owned by Mr. Alvin H. Clemens, HAI's chairman
of the board of directors. PILIC represented the last of the Company's remaining
insurance operations. The operating results of PILIC have been reported as
discontinued operations for all periods presented.
On June 30, 2000, HealthAxis entered into an Asset Purchase Agreement to sell
certain assets used in connection with its retail website to Digital. Included
in the sale was the eDistribution group's current and next generation of the
retail website user interface (the presentation layer of the website that
includes the graphical templates that create the look and feel of the website),
all existing in-force insurance policies, certain physical assets, and
agreements, including, but not limited to portal marketing agreements and
agreements related to the affiliate partner program. The consideration received
by the Company in return for these assets consists of: $1 million in cash at
closing; 11% of the outstanding shares of Digital, on a fully-diluted basis, at
closing; and a portion of Digital's net commission revenues received by Digital
through the acquired website user interface or an affinity partner. Under the
Asset Purchase Agreement, either party has the right to terminate the
transaction if these conditions and other conditions in the Asset Purchase
Agreement are not satisfied by September 15, 2000. The Company currently
anticipates that the transaction will be completed in the third or fourth
quarter of 2000. No assurances can be given as to whether or not the
transactions will be completed or, if completed, the timing thereof, the receipt
of required contractual approvals, or the completion of the necessary
conditions. The Company has recorded this transaction in accordance with the
rules for the accounting for discontinued operations. The operating results of
HealthAxis' eDistribution group are reported as discontinued operations for all
periods presented.
In connection with this transaction, HealthAxis and Digital entered into a
Software Licensing and Consulting Agreement that provides HealthAxis with: a
perpetual nonexclusive license to use and sublicense, subject to certain
restrictions, the user interface sold to Digital Insurance; licensing fees over
the next 30 months of $3.0 million for software owned by HealthAxis that will be
used by Digital in conjunction with the user interface it purchased; and service
fees over the next 12 months of a minimum of $3.0 million for services relating
to customizing, maintaining and upgrading the user interface and other software.
An estimated loss on the sale of discontinued operations in the amount of
$225,792 has been recorded as of the date of the sale agreement. Included in the
loss is $2,250 representing management's estimate of the amount of expected
future losses from the eDistribution group during the phase-out period from July
1, 2000 to December 31, 2000.
Also included in the estimated loss is a write down of net goodwill attributable
to the eDistribution group totaling $619,767. Management determined that the
goodwill was impaired based upon an analysis of future net cash flows in
accordance with Statement of Financial Accounting Standards No. 121. Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. The loss on impairment is included in the loss on the sale of discontinued
operations as it directly relates to the change in the Company's business focus
away from the eDistribution group and towards the application solutions group.
A summary of the major components of the estimated loss on the sale of the
assets to Digital on June 30, 2000 is as follows:
Value of Digital shares received $ 297
Goodwill attributable to the eDistribution group (619,767)
Cash to be received at closing 1,000
Provision for eDistribution group's future losses (2,250)
Book value of other eDistribution group assets (3,877)
Minority interest share of loss 398,805
---------
Estimated loss on sale of discontinued operations $(225,792)
==========
10
HealthAxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dollars in Thousands
Following is a summary of the results of the Company's discontinued operations
including both the discontinued insurance operations and eDistribution group
operations for the three months and the six months ended June 30, 2000 and 1999:
Three Months Ended
---------------------------------------------------------------------------
June 30, 2000 June 30, 1999
------------------------------------ ------------------------------------
eDistribution Insurance eDistribution Insurance
Group Operations Total Group Operations Total
------------------------------------ ------------------------------------
Revenue:
Insurance operations revenue $ - $ - $ - $ - $ 3,057 $ 3,057
Interactive commission and fee revenue 375 - 375 35 - 35
-------- ------ ------- ------- ------- -------
Total Revenue 375 - 375 35 3,057 3,092
Expenses:
Insurance operations expenses - - - 6,183 6,183
Operating and development 2,826 - 2,826 1,666 - 1,666
Sales and marketing 4,289 - 4,289 4,605 - 4,605
General and administrative 18 - 18 12 - 12
Amortization of assets related to acquisition 479 - 479 - - -
-------- ------ ------- ------- ------- -------
Total expenses 7,612 - 7,612 6,283 6,183 12,466
-------- ------ ------- ------- ------- -------
Operating loss (7,237) - (7,237) (6,248) (3,126) (9,374)
Interest and other income,net
- - - - - -
-------- ------ ------- ------- ------- -------
Loss before income taxes and minority interest (7,237) - (7,237) (6,248) (3,126) (9,374)
Provision for income taxes - - - - (3) (3)
-------- ------ ------- ------- ------- -------
Loss before minority interest (7,237) - (7,237) (6,248) (3,129) (9,377)
Minority interest in loss of subsidiary 4,621 - 4,621 1,075 - 1,075
-------- ------ ------- ------- ------- -------
Loss from discontinued operations $ (2,616) $ - $(2,616) $(5,173) $(3,129) $(8,302)
======== ====== ======= ======= ======= =======
11
Six Months Ended
----------------------------------------------------------------------------
June 30, 2000 June 30, 1999
--------------------------------------- ----------------------------------
eDistribution Insurance eDistribution Insurance
Group Operations Total Group Operations Total
--------------------------------------- ----------------------------------
Revenue:
Insurance operations revenue $ - $ $ - $ - $7,461 $7,461
-
Interactive commission and fee revenue 672 - 672 41 - 41
-------- ------ ------- ------- ------- -------
Total Revenue 672 - 672 41 7,461 7,502
Expenses:
Insurance operations expenses - - - - 10,251 10,251
Operating and development 5,741 - 5,741 1,926 - 1,926
Sales and marketing 11,496 - 11,496 6,268 - 6,268
General and administrative 18 - 18 15 - 15
Amortization of assets related to acquisition 956 - 956 - - -
-------- ------ ------- ------- ------- -------
Total expenses 18,211 - 18,211 8,209 10,251 18,460
-------- ------ ------- ------- ------- -------
Operating loss (17,539) - (17,539) (8,168) (2,790) (10,958)
Interest and other income,net (1) - (1) - - -
-------- ------ ------- ------- ------- -------
Loss before income taxes and minority interest (17,540) - (17,540) (8,168) (2,790) (10,958)
Provision for income taxes - - - - (19) (19)
-------- ------ ------- ------- ------- -------
Loss before minority interest (17,540) - (17,540) (8,168) (2,809) (10,977)
Minority interest in loss of subsidiary 11,199 - 11,199 1,410 - 1,410
-------- ------ ------- ------- ------- -------
Loss from discontinued operations $ (6,341) $ - (6,341) $ (6,758) $ (2,809) $(9,567)
======== ====== ======= ======= ======= =======
12
Note D - Revenue Recognition
The Company's revenues consist primarily of transaction fees, professional
services fees, and data capture fees.
Transaction revenues are earned on a fee-per-unit basis. Depending on the
product or service provided, the fee may be a charge per covered life or member,
per transaction processed, per document or electronic transmission, or per unit
serviced (such as per PC for LAN support). Transaction revenue is derived from
the Company's workflow and business applications, data capture outsourcing
services and technology management services. Transaction revenue is recorded in
the month the services are rendered.
Professional service revenue consists of time and materials projects and fixed
price projects. Time and materials projects are billed on a fee per hour or per
day, or based upon a multiple of monthly salary, dependent upon the nature of
the project. Such revenue is recorded as the services are performed.
Professional services revenue on fixed price projects is recognized using the
percentage-of-completion method in proportion to the hours expended compared to
the total hours projected for the project. Changes in estimates of
percentage-of-completion are recognized in the period in which they are
determined. Provisions for estimated losses, if any, are made in the period in
which the loss first becomes apparent. Professional service revenue is derived
from the Company's system integration, consulting and programming services, as
well as customization and implementation performed in conjunction with workflow
and business application software.
Data Capture revenues are earned on a fee per unit basis, typically per claim or
per document. These fees are recorded in the month the services are rendered.
Note E - Related Party Transactions
HealthAxis conducts a significant amount of business with a major shareholder,
UICI. HealthAxis currently provides services to a number of UICI subsidiaries
and affiliates pursuant to written agreements ranging from one to five years,
with annual renewable options thereafter. These services include the use of
certain of its proprietary workflow and business applications, as well as
systems integration and technology management. UICI and its subsidiaries and
affiliates constitute, in the aggregate, HealthAxis' largest customer. For the
three months and the six months ended June 30, 2000, UICI and its subsidiaries
and affiliates accounted for an aggregate of $6,935 (67%) and $14,276 (66%),
respectively, of HealthAxis' total revenues. As of June 30, 2000, the Company
had trade receivables from UICI and its subsidiaries and affiliates of $3,285
(42%).
Note F - Capitalized Software and Contract Start-up Costs
Developed Software
The Company incurs development costs that relate primarily to the development of
new products and major enhancements to existing services and products. The
Company expenses or capitalizes, as appropriate, these development costs in
accordance with Statement of Financial Accounting Standards No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. All
development costs related to software development projects incurred prior to the
time a project has reached technological feasibility are expensed. Software
development costs incurred subsequent to reaching technological feasibility are
capitalized. If the process of developing a new product or major enhancement
does not include a detailed program design, technological feasibility is
determined only after completion of a working model. The Company capitalized
$1,292 in software development costs during the six months ended June 30, 2000.
All software development costs capitalized are amortized using an amount
determined as the greater of (i) the gross revenue method or (ii) the
straight-line method over the remaining economic life of the product (generally
three to five years). The Company recorded amortization expense relating to
capitalized software development costs of $258 and $503 during the three months
and six months ended June 30, 2000, respectively, which is included in merger
related costs (see Note G).
Contract Start-up Costs
The Company capitalizes costs directly attributable to contract start-up
activities in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Costs capitalized
include direct labor and fringe benefits. Such costs are amortized over the life
of the respective contract. All other start-up costs not directly related to
13
contracts are expensed in accordance with SOP 98-5, Reporting on the Costs of
Start-up Activities. Contract start-up costs capitalized during the six months
ended June 30, 2000 totaled $28. The Company recorded amortization expense
relating to contract start-up costs of $86 and $174 during the three months and
the six months ended June 30, 2000, respectively.
Note G - Amortization of assets related to acquisition
The Company records expenses stemming from the Insurdata Merger and the HAI
merger related costs. Such costs include the amortization of acquired
intangibles and unearned compensation, plus other administrative costs and
expenses associated with both mergers. Merger related costs is comprised of the
following for the three months and the six months ended June 30, 2000:
Three Months Six Months
Ended Ended
------------ --------------
June 30, 2000
----------------------------------
Amortization of goodwill $ 34,766 $69,532
Amortization of customer base 1,075 2,151
Amortization of developed software 258 503
Amortization of unearned compensation 981 1,777
Stock based compensation 1,143 2,561
Other merger costs - 340
-------- -------
$ 38,223 $76,864
======== =======
Note H - HealthAxis.com, Inc. Stock Options
During the first quarter of 2000, the board of directors of HealthAxis granted
1,178,200 options under its 1998 Stock Option Plan (the "1998 Plan"). All such
options were granted with an exercise price of $15.00 per share, which
represented the fair value of the HealthAxis common stock as determined by the
Board of Directors based upon privately negotiated equity transactions. Since
this grant price was below the public fair market value of HAI's common stock on
the dates of the grants, the Company has recorded compensation expense of $2,331
for the six months ended June 30, 2000 which is included in merger related
costs. This expense is based upon the intrinsic value method under Accounting
Principles Board opinion No. 25 Accounting for Stock Issued to Employees.
On May 24, 2000, the board of directors of HealthAxis granted 227,425 options
under the 1998 Plan. These options were granted with an exercise price of $3.31
which equaled the quoted market share price of HAI on the date of grant. No
stock based compensation has been recorded related to this grant as the exercise
price of the options equaled the deemed fair value of HealthAxis' common stock
on the date of grant.
On May 24, 2000, the board of directors of HealthAxis repriced 1,773,050
existing options. The options affected had original exercise prices ranging from
$12.00 to $15.00 per share. The exercise price of these options was adjusted to
$3.31 based upon the quoted market share price of HAI's common stock as reported
on the NASDAQ National Market on the date of the repricing. In accordance with
FASB Interpretation 44, Accounting for Certain Transactions involving Stock
Compensation, the Company now accounts for these options as a variable award.
Compensation expense totaling $230 has been recognized in the second quarter of
2000 related to this repricing.
Note I - Subsequent Events
The UICI Voting Trust agreement, dated February 11, 2000, was amended,
effective July 31, 2000, to among other things, extend the termination date of
the trust if the reorganization is not consummated to March 31, 2001, and
revise the procedure by which a successor trustee is elected.
14
The Company is in the process of finalizing an agreement with certain
of its former agents which would, among other things, reduce the exercise price
of the options to purchase 318,042 shares of the Company's common stock from
original exercise prices ranging from $4.75 to $14.63 per share to $4.25 per
share and reduce the payments required to be made pursuant to a registration
rights agreement with such individuals in the event the Company does not
register the shares issuable upon the exercise of the options within certain
specified time frames. No assurance can be given as to whether or when this
transaction will be completed or if completed, whether the final terms will be
consistent with what is set forth above.
The Company was notified by NASDAQ that it does not meet the NASDAQ
maintenance criteria for continued listing due to the decline in its stock
price and its Common Stock will be delisted on November 9, 2000 if it does not
achieve compliance by November 7, 2000. Under applicable NASDAQ rules, the
Company may appeal the delisting by filing a request for appeal which will stay
the delisting of the Common Stock pending the appeal panel's decision. The
Company currently intends to appeal the delisting decision in light of the
pending HAI merge. The Company believes that it will be in compliance with
these requirements upon completion of the HAI merger.
The parties of the HAI merger have entered into an amendment to the
Agreement and Plan of Reorganization, dated January 26, 2000, as amended, to
extend the date by which and either party may terminate the agreement if the
transactions contemplated thereby are not consummated, from July 31, 2000 to
March 31, 2001 and to revise the exchange ratio which is presently contemplated
to be between 1.30 and 1.37 with the final exchange ratio determination subject
to, among other things, the final valuation of certain assets and liabilities
and receipt of a revised fairness opinion from the Company's investment banker.
Additionally, the HealthAxis Board maintains the right to terminate the HAI
merger if certain outstanding matters remain unresolved on September 15, 2000.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
HealthAxis Inc. (the "Company" or"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 former wholly owned insurance subsidiary, Provident Indemnity Life Insurance
Company ("PILIC"), was licensed. Currently, the operations of HAI and its
subsidiaries are those of its subsidiary, HealthAxis.com, Inc. ("HealthAxis"),
which was formed on March 26, 1998.
On November 30, 1999, HAI completed the sale of PILIC to AHC
Acquisition, Inc., a company solely owned by Alvin H. Clemens, the Chairman of
HealthAxis and HAI, (the "Discontinued Insurance Operations").
On December 7, 1999, HealthAxis and Insurdata Incorporated
("Insurdata"), a healthcare technology company and a majority owned subsidiary
of UICI, signed a definitive agreement to merge the two companies (the
"Insurdata merger"). As of December 31, 1999 and June 30, 2000, HAI owned 66.9%
(15,801,644 shares owned out of 23,618,505 shares outstanding) and 34.7%
(15,801,644 shares owned out of 45,508,640 shares outstanding), respectively, of
HealthAxis' common and preferred stock. Due to various voting trust agreements,
HAI and its affiliates had, at June 30, 2000, voting power for an additional
25.3% of HealthAxis' common and preferred stock. As of June 30, 2000, HAI owned
36.2% (15,35,728 shares owned out of 42,477,449 shares outstanding) of
HealthAxis' common stock. As a result of HAI and its affiliates having voting
power with respect to 60.0% of HealthAxis' common and preferred stock as of June
30, 2000, HAI consolidated HealthAxis. As a result of the Insurdata merger,
Insurdata became HealthAxis' application solutions group and HealthAxis' former
business became the eDistribution group. The companies completed the Insurdata
merger on January 7, 2000. The primary cause of the changes in the results of
operations discussed below was the addition of the application solutions group's
operations (the merged divisions of Insurdata) to HealthAxis.
On June 30, 2000, HealthAxis entered into an Asset Purchase Agreement
to sell certain assets used in connection with its retail website, to Digital
Insurance ("Digital"). It is currently anticipated that this transaction will be
completed in the third or fourth quarter of 2000. HealthAxis anticipates that,
by virtue of the license and service agreements between Digital and HealthAxis,
revenues will increase and the Company's net loss will decrease as it relates to
the loss from discontinued operations, which includes the eDistribution group's
development and marketing costs.
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
plans to 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 HAI merger. In connection with this
merger, 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
HAI merger and register the HAI common stock to be issued to the HealthAxis
shareholders. The Form S-4 regarding this transaction is currently pending at
the Securities and Exchange Commission. This transaction is expected to close in
the fourth quarter of 2000 or the first quarter of 2001.
The Company and HealthAxis have entered into an amendment to the
Agreement and Plan of Reorganization, dated January 26, 2000, as amended, to
extend the date by which and either party may terminate the agreement if the
transactions contemplated thereby are not consummated, from July 31, 2000 to
March 31, 2001 and to revise the exchange ratio which is presently contemplated
to be between 1.30 and 1.37 with the final exchange ratio determination subject
to, among other things, the final valuation of certain assets and liabilities
and receipt of a revised fairness opinion from the Company's investment banker.
Additionally, the HealthAxis Board maintains the right to terminate the HAI
merger if certain outstanding matters remain unresolved on September 15, 2000.
The Company was notified by NASDAQ that it does not meet the NASDAQ
maintenance criteria for continued listing due to the decline in its stock price
and that its Common Stock will be delisted on November 9, 2000 if it does not
achieve compliance by November 7, 2000. Under applicable NASDAQ rules, the
Company may appeal the delisting by filing a request for appeal which will stay
the delisting of the Common Stock pending the appeal panel's decision. The
Company currently intends to appeal the delisting decision in light of the
pending HAI merger. The Company believes that it will be in compliance with
these requirements upon completion of the HAI merger.
16
Results of Operations
Six months ended June 30, 2000 compared to six months ended June 30, 1999.
Net loss applicable to common stock. Net loss applicable to common
stock was $265.5 million, or ($20.31) per basic and diluted share for six months
ended June 30, 2000, compared to net loss of $13.4 million, or ($1.14) per basic
and diluted share for six months ended June 30, 1999. The results of operations
from the six months ended June 30, 2000 include a net loss from discontinued
operations of $232.1 million as compared to a $9.6 million loss from
discontinued operations for the six months ended June 30, 1999. The increased
loss was primarily attributable to the intended sale of certain assets to
Digital pursuant to an agreement dated June 30, 2000, which resulted in the
elimination all of the goodwill that had been recorded with the Insurdata
merger.
Revenues. Revenue was $21.7 million for the six months ended June 30,
2000 as compared to no revenue for the six months ended June 30, 1999. Insurdata
Incorporated revenues, excluding the non-merging subsidiaries, were $20.5
million on a pro forma basis for the six months ended June 30, 1999. Revenues
for the six months ended June 30, 2000 increased 6% over the six months ended
June 30, 1999. This increase was primarily attributable to increased revenues
related to the Insur-Enroll product and additional revenues from existing
clients. Although the proposed sale of the assets to Digital will reduce
commission revenues, it is anticipated that revenues will increase, due in part
to the technology services to be provided to Digital.
Cost of revenues. Cost of revenues of $14.2 million for the six months
ended June 30, 2000 was attributable to the expenses relating to HealthAxis'
costs to generate revenues and primarily include salaries and benefits. These
expenses are generally directly affected by the fluctuations in revenue.
Operating expenses. Operating expenses were $8.8 million for the six
months ended June 30, 2000 as compared to $0.1 million for the six months ended
June 30, 1999 due to the operations of the merged divisions of Insurdata.
Operating expenses primarily include technical salaries and benefits for
employees who provide support and maintenance to clients and internal support.
In March 2000, the Emerging Issues Taskforce issued Abstract No. 00-2,
Accounting for Website Development Costs, ("EITF No. 00-2") which provides
additional authoritative guidance on how to account for costs incurred in the
planning, developing and operating of a website. Management has reviewed the
impact of EITF No. 00-2 on its current policy and has determined that there will
be no impact as a result of adopting this standard.
Sales and marketing expenses. Sales and marketing expenses were $0.7
million for the six months ended June 30, 2000 as compared to $0.2 million for
the six months ended June 30, 1999. This increase was due primarily to increased
marketing efforts in 2000 as compared to 1999 related to increased graphics
staff and additional initiatives by the application solutions group. Sales and
marketing expense consist primarily of salaries and benefits to marketing
personnel. To support the business strategy, sales and marketing expenses are
expected to increase as the sales force is expanded.
General and Administrative Expenses. General and administrative
expenses were $6.2 million for the six months ended June 30, 2000 as compared to
$3.4 million for the six months ended June 30, 1999. This increase was due
primarily to the Insurdata merger. The proposed sale of assets to Digital did
not materially affect general and administrative expenses. General and
administrative expenses include executive management, accounting, legal and
human resource personnel and expenditures for applicable overhead costs.
Amortization of assets related to acquisition. Merger related costs of
$76.9 million for the six months ended June 30, 2000 primarily consisted of the
amortization of goodwill of $69.5 million related to the Insurdata Merger and
also included costs incurred in the HAI merger.
17
Net interest and other income, net. Net interest expense was $0.2
million for the six months ended June 30, 2000 as compared to a net expense of
$0.4 million for the six months ended June 30, 1999. The decrease in expense was
due primarily to HealthAxis' higher cash balances throughout the reporting
period compared to the first six months of 1999. HealthAxis invests most of its
cash in highly liquid short-term investments. For the six months ended June 30,
2000, HealthAxis' interest income of $1.1 million was offset by HAI's $1.3
million of interest expense on convertible debt.
Net loss from discontinued operations. Net loss from discontinued
operations of $232.1 million included a $225.8 million loss on the proposed sale
of assets pursuant to the Digital Asset Purchase Ageement which was entered into
with Digital on June 30, 2000 and $6.3 million loss related to discontinued
operations as compared to $9.6 million loss related to discontinued operations
for the six months ended June 30, 1999. The Company's discontinued operations
were conducted through HealthAxis' former eDistribution group for the six months
ended June 30, 1999 and 2000 and through the Discontinued Insurance Operations
for the six months ended June 30, 1999. The eDistribution group and the
Insurance Operations are being reported as discontinued operations for all
periods presented.
The Company has recorded a loss from discontinued operations of $225.8
million in connection with proposed sale of assets which was entered into with
Digital on June 30, 2000. The loss on sale primarily includes the disposal of
goodwill recorded in connection with the Insurdata merger of $619.8 million as
partially offset by the minority interest in the HealthAxis loss of $398.8
million.
Agreement and Plan of Reorganization between HAI and HealthAxis. 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 HAI merger. The HAI subsidiary will continue as the surviving
corporation of the HAI merger, will retain all of its separate corporate
existence and will be known as HealthAxis.com Inc. The HAI merger will be
accounted for by HAI as a purchase of minority interest in accordance with
generally accepted accounting principles. As such, HAI common stock issued to
HealthAxis stockholders will be accounted for at the fair value of HAI common
stock and the net assets of HAI will be recorded at historical cost. As a result
of the HAI merger, 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, HAI will convert outstanding HealthAxis options and
warrants into options or warrants to purchase HAI common stock. HAI anticipates
that HAI will issue a total of between 38,619,095 and 40,698,585 shares of HAI
common stock to HealthAxis shareholders in the HAI merger. HAI also anticipates
that HAI will issue up to between approximately 7,354,142 and 7,750,134 shares
of HAI common stock upon the exercise of options and warrants to purchase
HealthAxis common stock to be assumed by HAI. There can be no assurance,
however, that the conditions to the HAI merger will be satisfied or that the HAI
merger documents will not be terminated.
Repricing of Options. On May 24, 2000, the HealthAxis Board of
Directors approved the repricing of 1,773,050 options to purchase HealthAxis
common stock, which had originally been granted at exercise prices of $12.00 and
$15.00 per share. The repricing of these options to $3.31 per share, which was
the closing market price of a share of HAI's common stock as of the date of the
repricing as reported on the NASDAQ National Market, will be accounted for as
variable options in accordance with Financing Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation issued in March 2000.
Three months ended June 30, 2000 compared to three months ended June 30, 1999.
Net loss applicable to common stock. Net loss applicable to common
stock was $244.6 million, or ($18.67) per basic and diluted share, for three
months ended June 30, 2000 compared to net loss of $10.5 million, or ($0.88) per
basic and diluted share, for three months ended June 30, 1999. The three months
ended June 30, 2000 results include a net loss from discontinued operations of
$228.4 million as compared to $8.3 million loss from discontinued operations for
the three months ended June 30, 1999. The increased loss was primarily
attributable to the proposed sale of assets to Digital pursuant to an agreement
dated June 30, 2000, which resulted in the elimination of all of the goodwill
that had been recorded with the Insurdata merger.
18
Revenues. Revenue was $10.4 million for the three months ended June 30,
2000 as compared to no revenue for the three months ended June 30, 1999.
Insurdata Incorporated revenues, excluding the non-merging subsidiaries, were
$10.5 million on a pro forma basis for the three months ended June 30, 1999. The
decrease was related, in part, to reduced services provided to UICI as offset by
increased services provided to other existing clients.
Cost of revenues. Cost of revenues of $6.5 million for the three months
ended June 30, 2000 was attributable to the expenses relating to HealthAxis'
costs to generate revenues and primarily include salaries and benefits. These
expenses are generally directly affected by the fluctuations in revenue.
Operating expenses. Operating expenses were $5.3 million for the three
months ended June 30, 2000 as compared to approximately $69,000 for the six
months ended June 30, 1999 due to the operations of the merged divisions of
Insurdata. Operating expenses primarily include technical salaries and benefits
for employees who provide support and maintenance to clients and internal
support.
Sales and marketing expenses. Sales and marketing expenses were $0.4
million for the three months ended June 30, 2000 as compared to approximately
$86,000 for the three months ended June 30, 1999. This increase was due
primarily to increased marketing efforts in 2000 as compared to 1999 related to
increased graphics staff and additional initiatives by the application solutions
group. Sales and marketing expense consist primarily of salaries and benefits to
marketing personnel to support the Company's strategy, sales and marketing
expenses are expected to increase as the sales force is expanded.
General and Administrative Expenses. General and administrative
expenses were $2.8 million for the three months ended June 30, 2000 as compared
to $2.2 million for the three months ended June 30, 1999. This increase was due
primarily to the Insurdata merger. General and administrative expenses include
executive management, accounting, legal and human resource personnel and
expenditures for applicable overhead costs.
Amortization of assets related to acquisition. Merger related costs of
$38.2 million for the three months ended June 30, 2000 primarily consisted of
the amortization of goodwill of $34.8 million related to the Insurdata Merger.
Net interest and other income, net. Net interest income was $0.4
million for the three months ended June 30, 2000 as compared to net interest
expense of $84,000 for the three months ended June 30, 1999. For the three
months ended June 30, 2000, HealthAxis' interest income of $0.9 million was
offset by HAI's $0.5 million of interest expense on convertible debt.
Net loss from discontinued operations. Net loss from discontinued
operations of $228.4 million included a $225.8 million loss on the proposed sale
of assets to Digital and $2.6 million loss in discontinued operations as
compared to $8.3 million loss in discontinued operations for the three months
ended June 30, 1999. The Company's discontinued operations were conducted
through its former eDistribution group for the three months ended June 30, 2000
and 1999 and through its Discontinued Insurance Operations for the three months
ended June 30, 1999. The eDistribution group and Insurance Operations are being
reported as discontinued operations for all periods presented.
The Company has recorded a loss from discontinued operations of $225.8
million in connection with the agreement of sale which was entered into with
Digital Insurance on June 30, 2000. The loss on sale primarily includes the
disposal of goodwill recorded in connection with the Insurdata merger of $619.8
million as offset by the minority interest in the loss of $398.8 million.
Liquidity and Capital Resources
General. A major objective of management 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.
19
The primary source of cash was revenues and debt and equity financing.
The primary uses of cash were payments to Internet portals under the interactive
marketing agreements, employee-related expenses, cost of revenues, website
enhancements, and marketing costs. At June 30, 2000, the Company had a cash
balance of $31.5 million. At December 31, 1999, the Company had a cash balance
of $58.0 million. HAI and HealthAxis are working on a formal agreement whereby
HealthAxis will fund HAI operations until the HAI merger closes. HealthAxis
believes that its current cash and cash equivalents will be sufficient to fund
HealthAxis' operations. HealthAxis expects to turn cash flow positive by the
second quarter of 2001.
During the six months ended June 30, 2000, the Company's liquidity
requirements were primarily met through the cash available from the December 7,
1999 equity financing and revenues. The primary uses of cash were operating
costs and payments to Lycos, Inc., Snap!, LLC, CNet Inc. and Yahoo! under the
interactive marketing agreements. During the six months ended June 30, 1999,
HealthAxis' liquidity requirements were primarily met through the issuance of
debt and equity securities. The primary uses of cash were operating costs and
payments made to Internet portals under the interactive marketing agreements.
Net cash used in operating activities of $23.9 million during the six
months ended June 30, 2000 and $36.5 million during the six months ended June
30, 1999 was the result of operating losses. The decrease in usage of $12.6
million was primarily attributable to the elimination of the Discontinued
Insurance Operations.
On January 7, 2000, HealthAxis completed the Insurdata merger. In
connection with this merger, HealthAxis anticipates that revenues will increase
as a result of including revenues of the merged divisions of Insurdata, now the
application solutions group, which during 1999 were $42.9 million. HealthAxis
has paid $340,000 out-of-pocket merger costs as of June 30, 2000 and anticipates
that it will only pay minimal additional merger costs during the remainder of
2000.
On January 26, 2000, HAI and HealthAxis entered into an agreement and
plan of reorganization which provides for the merger of HealthAxis with a wholly
owned subsidiary of HAI. The total amount of the charge to operations is
expected to be $2.1 million, $1.0 million of which occurred as of June 30, 2000,
with the remaining $1.1 million expected in the third and fourth quarters of
2000. The severance costs for eight terminated employees amounts to $600,000 and
includes payroll and related costs. The remaining $1.5 million includes legal,
accounting and investment consulting fees.
On June 30, 2000, HealthAxis entered into an Asset Purchase Agreement
to sell certain assets used in connection with its retail website to Digital. In
connection with this sale, HealthAxis will receive $1.0 million in cash at
closing, which is expected to occur in the third or fourth quarter of 2000, and
ongoing license fees totaling $3.0 million to be paid over ten quarters. In
addition, a technology services contract provides for minimum monthly fees in
the amount of $250,000 to be received for 12 months. In addition to the increase
in revenues, the sale to Digital is expected to result in decreased cash usage
related to the operating expenses and sales and marketing expenses currently
reported in the loss from discontinued operations. General and administrative
expenses are not expected to be effected by this sale.
During 1998 and 1999, HealthAxis entered into agreements with AOL,
Lycos, CNet, Snap! and Yahoo!. In connection with these interactive marketing
agreements, the Company has paid $3.8 million through June 30, 2000, which
completes the Company's commitment related to these agreements. During the six
months ending June 30, 1999, the Company had paid $2.6 million in cash in
connection with these agreements. As a result of the Company's change in
marketing strategy during the first quarter of 2000, the Company did not renew
any of these interactive marketing agreements.
HAI had no future material commitments for capital expenditures at June
30, 2000. Capital expenditures totaled approximately $3.0 million through June
30, 2000 and $1.1 million through June 30, 1999. Capital expenditures were
primarily for equipment, software, furniture and building improvements. At June
30, 2000, approximately $1.1 million was attributable to the expansion of the
imaging division of the application solutions group, which is now complete.
Payment of dividends by HAI are subject to restrictions set forth in
the Certificate of Designation related to HealthAxis Series A, B, C and D
Convertible Preferred Stock. The payment of dividend by HAI are subject to the
receipt of dividends from its subsidiary, HealthAxis. Dividend payments by HAI
are also restricted by various provisions contained in agreements between HAI
and Reassurance Company of Hannover. HAI and HealthAxis do not anticipate paying
cash dividends on common stock or on any class of HealthAxis preferred stock in
the foreseeable future.
20
Impact of Inflation
Higher interest rates, which have traditionally accompanied inflation,
affect the Company's short-term investment revenue.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Change in securities.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(10.1) Amended and Restated Voting Trust Agreement
(11) Computation of Earnings Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed the following current reports:
(1) Item 5 regarding the Company's subsidiary, HealthAxis.com,
Inc, and Digital Insurance, Inc. entering into various
agreements, including an Asset Purchase Agreement, as filed
on July 20, 2000.
22
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HealthAxis Inc.
Date: August 14, 2000 By: /s/ Michael Ashker
- - -------------------------------------- ----------------------------------------------------------------
Michael Ashker, President and Chief Executive Officer
Date: August 14, 2000 By: /s/ Anthony R. Verdi
- - -------------------------------------- ----------------------------------------------------------------
Anthony R. Verdi, Chief Financial Officer, Principal Accounting
Officer and Treasurer
23