SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended ............................ 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.
Page 1 of 28
HealthAxis Inc.
Table of Contents
Page
----
PART I Financial Information
Item 1. Restated Condensed Financial Statements
Restated Consolidated Balance Sheets..................................3
Restated Consolidated Statements of Operations........................4
Restated Consolidated Statement of Changes in Stockholders' Equity....5
Restated Consolidated Statement of Cash Flows.......................6-7
Notes to Restated Condensed Consolidated Financial Statements......8-18
Item 2. Management's Discussion and Analysis of Results
Of Operations and Financial Condition.............................19-26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..........................................................26
PART II Other Information
Items 1-5.................................................................27
Item 6. Reports on Form 8-K...............................................27
Signatures....................................................................28
Page 2 of 28
PART I. FINANCIAL INFORMATION
Item 1. Restated Condensed Financial Statements
HealthAxis Inc. and Subsidiaries
Restated 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 6,887 -
Prepaid expenses 619
Other current assets 297 549
---------- --------
Total current assets 39,333 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 $17,054 and $765, respectively 665,130 7,114
Customer base, less accumulated amortization of $2,151 15,054 -
Long-term receivables from employees 629 -
Acquisition costs 341 750
Prepaid alliance agreements, net of accumulated amortization of $436 -
Assets held for sale 4,178 12,458
Other assets 416 305
--------- --------
Total assets $ 742,042 $ 79,602
========= ========
Liabilities and Stockholders' Equity
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 458,617 12,603
Preferred stock 15,049 15,049
Stockholders' Equity:
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 shares 1,310 1,303
Common stock, Class A, par value $.10: authorized 20,000,000, - -
none issued and outstanding
Additional paid-in capital 324,954 81,798
Accumulated deficit (94,377) (70,481)
Unearned compensation (7,528) -
--------- --------
Total stockholders' equity 224,359 12,620
--------- --------
Total liabilities and stockholders' equity $ 742,042 $ 79,602
========= ========
See notes to consolidated financial statements.
Page 3 of 28
HealthAxis Inc. and Subsidiaries
Restated Consolidated Statements 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 7,166 - 15,369 -
Operating 5,902 69 9,861 104
Sales and marketing 968 86 1,616 167
General and administrative 3,094 2,246 7,540 3,426
Amortization of Intangibles 10,498 - 20,996 -
--------- --------- --------- --------
Total Expenses 27,628 2,401 55,382 3,697
--------- --------- --------- --------
Operating Loss (17,266) (2,401) (33,644) (3,697)
Interest income (expense), net 408 (84) (177) (421)
--------- --------- --------- --------
Loss before minority interest (16,858) (2,485) (33,821) (4,118)
Minority interest in loss of subsidiary 9,712 216 19,068 315
--------- --------- --------- --------
Loss from continuing operations (7,146) (2,269) (14,753) (3,803)
Loss from discontinued operations (2,616) (8,235) (6,341) (9,568)
Loss on sale of discontinued operations (2,802) - (2,802) -
--------- --------- --------- --------
Loss on discontinued operations (5,418) (8.235) (9,143) (9,568)
--------- --------- --------- --------
Net loss (12,564) (10,504) (23,896) (13,371)
--------- --------- --------- --------
Dividends on preferred stock - 35 - 69
--------- --------- --------- --------
Net loss applicable common stockholders $ (12,564) $ (10,539) $ (23,896) $(13,440)
========= ========= ========= ========
Loss per share of common stock (basic and
diluted)
Continuing operations $ (0.55) $ (0.19) $ (1.13) $ (0.33)
Discontinued operations (0.41) (0.69) (0.70) (0.81)
--------- --------- --------- --------
Net loss $ (0.96) $ (0.88) $ (1.83) $ (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.
Page 4 of 28
HealthAxis Inc. and Subsidiaries
Restated Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Additional
Preferred Stock Common Stock Paid-In Accumulated Unearned
Shares Amount Shares Amount Capital Deficit Compensation Total
------ ------ ------ ------ ------- ------- ------------ -----
BALANCE, DECEMBER 31, 1999 - $ - 13,027 $ 1,303 $ 81,798 $ (70,481) $ - $ 12,620
Valuation of Insurdata options (10,691) (10,691)
Net loss (23,896) (23,896)
Amortization/forfeiture of unearned 3,163 3,163
compensation
Stock options exercised 71 7 334 341
Issuance of stock in connection with
acquisition of Insurdata Incorporated 242,617 242,617
Stock options issued in lieu of compensation 205 205
------ ------ ------- -------- --------- ---------- --------- --------
BALANCE, June 30, 2000 - $ - 13,098 $ 1,310 $ 324,954 $ (94,377) $ (7,528) $224,359
====== ====== ====== ======= ========= ========== ======== ========
See notes to consolidated financial statements.
Page 5 of 28
HealthAxis Inc. and Subsidiaries
Restated 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 $ (23,896) $ (13,371)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on sale of discontinued operations 2,802 -
Depreciation and amortization 28,168 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 (19,068) (315)
Share of loss from discontinued operations (11,199) (1,409)
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)
Other Current Assets 252
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 (111) 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 (23,529) (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 (1,031) -
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 (used in) provided by investing activities (3,257) 5,539
------- ---------
See notes to consolidated financial statements.
Page 6 of 28
HealthAxis Inc. and Subsidiaries
Restated 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 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 $ - $ 867
Exercise of options and warrants $ - $ 1,513
Repayment of loans payable $ - $ (2,400)
Non-cash investing activities
Sale of subsidiary $ - $ 1,500
See notes to consolidated financial statements.
Page 7 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated 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. 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 as amended and restated on Form 8-K
filed on October 27, 2000.
General
HealthAxis.com, Inc. ("HealthAxis"), the Company's subsidiary, 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 D (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 E). In connection
with this transaction, HealthAxis and Digital entered into additional agreements
also described in Note E.
Prior to the sale of assets to Digital, HealthAxis' eDistribution Group operated
as a retail website. As a result of the sale of assets to Digital, which was
consummated on October 13, 2000, the eDistribution Group will no longer be an
operating segment. HealthAxis' remaining operations provide web-enablement for
both healthcare payers, (including insurance companies, Blue Cross and Blue
Shield Organizations, third-party administrators and large self-funded groups),
and the intermediaries through which product is sold and serviced.
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's 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 (who are members of the HealthAxis Board
of Directors) having voting power with respect to a total of 60.0% of
HealthAxis' common and preferred stock as of June 30, 2000, HAI has operating
control and consolidates HealthAxis
Page 8 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
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.
The Board of Directors of HealthAxis 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 that were not nominated by
or agreed to by UICI) and UICI. At June 30, 2000, the board was comprised of
seven members, with three nominated by HAI, three nominated by UICI and one
nominated by mutual agreement of HAI and UICI. At June 30, 2000, two of
HealthAxis' board members also serve on the Board of Directors of UICI, four of
HealthAxis' board members also serve on the Board of Directors of HAI and the
seventh board member is an officer of HealthAxis.
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 E). 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. On September 29, 2000, HAI and
HealthAxis entered into an Amended and Restated Agreement and Plan of
Reorganization and Amended and Restated Agreement and Plan of Merger, which was
further amended on October 26, 2000, and among other things, adjusted the merger
exchange ratio from 1.127 to 1.334. This transaction is expected to close in the
first quarter of 2001.
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 - Restated Financial Statements
These financial statements have been restated to correct the error of having
previously written off the goodwill and to change the estimate of its life. The
goodwill write off was reversed since no event, as defined by Statement of
Financial Accounting Standards ("SFAS") 121, occurred which would permit the
write off of impaired goodwill at this time. The change in life is related to
further review of Accounting Principles Board ("APB") 17.
Note C - 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. The Company expects that current cash and cash equivalents will
be sufficient to sustain operations for the foreseeable future.
Note D - 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 APB
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.
Page 9 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
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. HealthAxis 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 value of the December 7, 1999 private placement of HealthAxis common
shares in excess of the cash received from their issuance represents additional
value tendered by HealthAxis in a transaction occurring simultaneously with the
purchase of Insurdata. 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, HealthAxis recorded an increase in
minority interest in HealthAxis common stock totaling $481,310, and an increase
to additional paid-in capital of $242,617. 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 20 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. HealthAxis has
recorded the unearned compensation as a reduction of stockholders' equity.
Page 10 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
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 $ (7,514) $ (12,256)
Net loss per common share $ (0.62) $ (1.04)
Weighted average common shares
outstanding (basic and diluted) 12,039,000 11,797,000
Note E - 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. On
September 29, 2000, HealthAxis and Digital entered into an Amendment to the
Asset Purchase Agreement which amends among other things, the payment terms in
the original agreement. 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. This transaction closed on October 13, 2000. The consideration received
by HealthAxis in return for these assets consists of: $500 in cash at closing; a
$500 note 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. In accordance with APB Opinion No. 30, HealthAxis has reported
the operations of the eDistribution Group as a discontinued operation as of the
measurement date of June 30, 2000 and has restated the financial statements for
all periods presented.
In connection with the Digital Sale, HealthAxis and Digital entered into a
Software License and Consulting Agreement that provides HealthAxis with: a
perpetual nonexclusive license to use and sublicense, subject to certain
restrictions, the retail website 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 professional 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 $2,802
has been recorded as of the measurement date, the date of the sale agreement
(June 30, 2000). Included in the loss is $2,250 representing management's
estimate of the
Page 11 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
amount of expected future losses from the eDistribution Group during the
phase-out period from July 1, 2000 to December 31, 2000.
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 $ 3,178
Goodwill attributable to the eDistribution Group (5,801)
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 4,948
-------
Estimated loss on sale of discontinued operations $(2,802)
=======
The fair value of the 3,178,170 shares of Digital Insurance, Inc. common
stock received by HealthAxis has been recorded at the stated value in
the Asset Purchase Agreement and based upon a prior investment received
by Digital.
Page 12 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated 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 1,142 - 1,142
------------------------------------ ------------------------------------
Loss from discontinued operations $ (2,616) $ - $(2,616) $ (5,106) $(3,129) $(8,235)
==================================== ====================================
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 1,409 - 1,409
------------------------------------ ------------------------------------
Loss from discontinued operations $ (6,341) $ - $ (6,341) $ (6,759) $(2,809) $ (9,568)
==================================== ====================================
Page 13 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
Note F - Revenue Recognition
The Company's revenues, through HealthAxis, 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
HealthAxis' 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 HealthAxis' 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 G - 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, HealthAxis had
trade receivables from UICI and its subsidiaries and affiliates of $3,285 (48%).
Note H - Capitalized Software and Contract Start-up Costs
Developed Software
HealthAxis incurs development costs that relate primarily to the development of
new products and major enhancements to existing services and products.
HealthAxis expenses or capitalizes, as appropriate, these development costs in
accordance with SFAS No. 86, Accounting
Page 14 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
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. HealthAxis 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). HealthAxis 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.
Contract Start-up Costs
HealthAxis 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
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. HealthAxis 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 I - Amortization of Intangibles
Amortization of intangibles 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 $ 9,184 $ 18,368
Amortization of customer base 1,075 2,151
Amortization of developed software 239 477
------------ ------------
$ 10,498 $ 20,996
============ ============
Page 15 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
Note J - 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, HAI has recorded compensation expense of $2,331 for the
six months ended June 30, 2000. This expense is based upon the intrinsic value
method under APB 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. Accordingly,
HealthAxis now accounts for these options as a variable award.
Note K - Subsequent Events
UICI Voting Trust Agreement
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 HAI merger is not consummated to March 31, 2001, and revise the procedure
by which a successor trustee is elected. The amended agreement also reduced
the shares in the trust to 6,433,069 shares.
Agent Stock Options Amended
On September 29, 2000, HAI entered into an agreement with certain of its former
agents which, among other things, reduced the exercise price of the options to
purchase 318,042 shares of HAI's common stock from original exercise prices
ranging from $4.75 to $14.63 per share to $4.25 per share. The agreement also
reduced the payments required to be made pursuant to a registration rights
agreement with such individuals in the event HAI does not register the shares
issuable upon the exercise of the options within certain specified time frames.
HAI will account for these awards as variable awards and will recognize an
expense amounting to $500 related to this repricing which will be included in
stock based compensation.
Page 16 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
NASDAQ Delisting
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. The Company has filed a request for appeal of
the delisting that stayed the delisting of the Common Stock pending the appeal
panel's decision. At the NASDAQ hearing on December 8, 2000, the Company
appealed 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. The Company is currently awaiting a response from NASDAQ
regarding this delisting.
HAI Merger
On September 29, 2000, the parties entered into an Amended and Restated
Agreement and Plan of Reorganization, which among other things, set the exchange
ratio at 1.334, extended the date by which either party may terminate the
agreement if the merger is not consummated by March 31, 2001, and to allow
HealthAxis to terminate the agreement if HAI is not unconditionally and
irrevocably released from a guarantee agreement with Hanover Life Reassurance
Company of America by October 31, 2000.
Convertible Debentures
On September 20, 2000, Al Clemens, the Chairman of HAI and HealthAxis, UICI, and
a third party investor purchased $5 million in principal amount of HAI's
convertible debentures at a discount from one of the original debenture holders.
In connection with this transaction, HAI issued a warrant to purchase 50,000
shares of its common stock at an exercise price of $3.01 per share to the
selling debenture holder. HAI will recognize an expense amounting to $115
related to these warrants which will be included in stock based compensation.
On September 28, 2000, HAI entered into an Amendment to the Securities Purchase
Agreement dated September 14, 1999 between HAI and the holders of HAI's $27.5
million 2% convertible debentures due September 14, 2002, which were initially
issued in a private placement to institutional investors on September 15, 1999.
In accordance with the terms of the Amendment, the terms of the debentures were
amended to, among other things, extend the maturity of the debentures to
September 14, 2005, to change the conversion price to $9.00 per share and to
modify the events of default. Based upon the revised conversion price upon the
closing of this transaction, the amended debentures will be convertible into
3,055,555 shares of HAI's common stock. The terms of the Warrants to purchase
202,802 shares of HAI's common stock issued to the purchasers of the debentures
were also amended to reduce the exercise price to $3.01 and to extend the
exercise period of the warrants for an additional year, or until September 13,
2005. In addition, as part of this transaction, HAI and the holders of the
debentures intend to enter into an Amended and Restated Registration Rights
Agreement.
Page 17 of 28
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements
Dollars in Thousands
The Amendment to the Securities Purchase Agreement provides that, among other
things, the amendments to the debentures, warrants and the registration rights
agreement will take effect on or before the fifth business day after HAI's
shareholders have approved the HAI merger. The holders of the debentures have
agreed to conditionally waive and suspend any and all past or current defaults
or violations arising under the debenture or the registration rights agreement,
and to forbear from enforcing any and all past or current defaults or violations
by HAI arising under the debentures or the registration rights agreement as well
as any prospective defaults or violations arising under these agreements from
September 28, 2000 through the closing date of the HAI merger. . Certain
penalties are being accrued at $0.3 million per month beginning in September
2000 and will be due in full if the merger is not approved or is terminated
prior to March 31, 2001. When the merger is final, these penalties will be
reversed.
Employee Termination Agreement
On August 15, 2000, Mr. Clemens, HealthAxis and HAI entered into a termination
agreement of Mr. Clemens' current employment contract. Pursuant to the terms of
the termination agreement, Mr. Clemens will receive aggregate payments of $2,125
paid in quarterly installments over five years. HAI may, at its option, make the
quarterly payments due to Mr. Clemens in shares of HAI common stock not to
exceed 500,000 shares. Except for the general release of HealthAxis which is
effective as of August 15, 2000, the termination agreement becomes effective
upon consummation of the HAI merger. If the HAI merger is not consummated by
June 30, 2001, all of the terms of the termination agreement, except for the
release of HealthAxis, will be void, and Mr. Clemens' amended employment
agreement would again be in effect.
Settlement with Hannover Life
Under the Amended and Restated Merger Agreements, HealthAxis may terminate the
Reorganization if HAI is not unconditionally and irrevocably released from the
guarantee agreement with Hannover Life Reassurance Company of America by October
31, 2000. HAI was not released from this guarantee until December 12, 2000.
Under the settlement agreement, HAI paid Hannover Life $4.25 million in exchange
for a release from all liability under the guarantee agreement including a $5.9
million ceding commission liability. As of December 13, 2000, HealthAxis has
determined not to exercise its option to terminate the merger for this reason
but reserves the right to do so in the future.
Page 18 of 28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
HealthAxis Inc. (the "Company" or "HAI") 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"). 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 merged divisions of Insurdata to HealthAxis as of
January 2000.
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's 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% (15,355,728
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.
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. On September 29, 2000, HAI and
HealthAxis entered into an Amended and Restated Agreement and Plan of Merger,
which was further amended on October 26, 2000, and among other changes, adjusted
the merger exchange ratio from 1.127 to 1.334. This transaction is expected to
close in the first quarter of 2001.
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"), which was amended on September 29, 2000. This transaction
closed on October 13, 2000. HealthAxis anticipates that, by virtue of the
license and service agreements between Digital and HealthAxis, revenues will
increase.
Page 19 of 28
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. The Company filed a request for appeal
which stayed the delisting of the Common Stock pending the appeal panel's
decision. At the NASDAQ hearing on December 8, 2000, the Company appealed 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. The Company is awaiting a response from NASDAQ regarding this delisting.
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 $23.9 million, or ($1.83) 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 $9.1 million as compared to a $9.6 million loss from discontinued
operations for the six months ended June 30, 1999. The loss from continuing
operations increased from a loss of $3.8 million for the six months ended June
30, 1999 to a loss of $14.8 million for the six months ended June 30, 2000 due
to the addition of the operations of the divisions of Insurdata which were
merged in January 2000.
Revenues. Revenue were $21.7 million for the six months ended June 30,
2000 as compared to no revenue for the six months ended June 30, 1999. The
Digital Sale resulted in all revenues from 1999 being reported as discontinued
operations. All revenues in 2000 are derived from the merged divisions of
Insurdata. It is anticipated that revenues will increase, due in part to the
software and consulting services that HealthAxis will provide to Digital, which
began in July 2000 and for the year ended December 31, 2000 are expected to be
$2.1 million.
Cost of revenues. Cost of revenues of $15.4 million for the six months
ended June 30, 2000 represents the expense of the billable hours that generated
professional service revenues, which include the direct costs of employees.
Included in these employee costs for the six months ended June 30, 2000 is $1.1
million in non-cash stock based compensation. HealthAxis expects that the cost
of revenues will increase in direct proportion with revenues. These costs are
related specifically to the addition of the merged divisions of Insurdata;
therefore, there were no similar costs in the comparative six months ended June
30, 1999.
Operating expenses. Operating expenses were $9.9 million for the six
months ended June 30, 2000 as compared to $0.1 million for the six months ended
June 30, 1999, with the increase due to the operations of the merged divisions
of Insurdata. Included in these operating expenses for the six months ended June
30, 2000 is $1.1 million in non-cash stock based compensataion. 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.
Page 20 of 28
Sales and marketing expenses. Sales and marketing expenses were $1.6
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
personnel and additional initiatives, including direct mail, media advertising,
and trade shows, in the six months ended June 30, 2000 as compared to the same
period in 1999. Sales and marketing expense consist primarily of salaries and
benefits to marketing personnel, which included fourteen employees at June 30,
2000 and three employees at June 30, 1999. Included in sales and marketing
expenses for the six months ended June 30, 2000 is $0.9 million in non-cash
stock based compensation. 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 $7.5 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. Employee and recruiting expenses increased
from $1.3 million for the six months ended June 30, 1999 to $4.6 million for the
six months ended June 30, 2000, while professional fees and overhead expenses
increased from $2.1 million for the six months ended June 30, 1999 to $2.9
million for the six months ended June 30, 2000. Included in employee and
recruiting costs for the six months ended June 30, 2000 is $1.4 million in
non-cash stock based compensation. The 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 intangibles. Amortization of intangibles of $21.0
million for the six months ended June 30, 2000 primarily consisted of the
amortization of goodwill of $18.4 million related to the Insurdata Merger. There
was no amortization of intangibles in the comparative period ending June 30,
1999.
Net interest expense, 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 partially offset by HAI's $1.3
million of interest expense on convertible debt.
Net loss from discontinued operations. Net loss from discontinued
operations of $9.1 million included a $2.8 million loss on the sale of certain
assets to Digital 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.
Page 21 of 28
HealthAxis has recorded a loss from discontinued operations of $2.8
million in connection with the sale of certain assets to Digital, which closed
on October 13, 2000. The loss on sale primarily includes goodwill attributable
to the eDistribution Group of $5.8 million and the book value of other
eDistribution Group assets of $3.9 million and as partially offset by the
minority interest in the HealthAxis loss of $6.8 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. These agreements were amended and restated on
September 29, 2000, and further amended and restated on October 26, 2000. 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 a result of the HAI merger, the preferred and common stock of HealthAxis will
be converted to 1.334 shares of 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 39,629,133 shares of HAI
common stock to HealthAxis shareholders in the HAI merger. HAI also anticipates
that HAI will issue up to approximately 7,068,046 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 $12.6 million, or ($0.96) 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 increased
loss was due to the Insurdata merger and offset by the sale of the Insurance
Division in November 1999. The three months ended June 30, 2000 results include
a net loss from discontinued operations of $5.4 million as compared to $8.2
million loss from discontinued operations for the three months ended June 30,
1999.
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. This
increase was related to the addition of the operations of the divisions of
Insurdata.
Page 22 of 28
Cost of revenues. Cost of revenues of $7.2 million for the three months
ended June 30, 2000 represents the expense of the billable hours that generated
professional service revenues, which include the direct costs of employees.
Included in these employee costs for the three months ended June 30, 2000 is
$0.7 million in non-cash stock based compensation. HealthAxis expects that the
cost of revenues will increase in direct proportion with revenues. These costs
are related specifically to the addition of the merged divisions of Insurdata;
therefore, there were no similar costs in the comparative three months ended
June 30, 1999.
Operating expenses. Operating expenses were $5.9 million for the three
months ended June 30, 2000 as compared to approximately $69,000 for the three
months ended June 30, 1999, with the increase due to the operations of the
merged divisions of Insurdata. Included in these operating expenses for the
three months ended June 30, 2000 is $0.3 million in non-cash stock based
compensation. Operating expenses primarily include technical salaries and
benefits for employees who provide support and maintenance to clients and
internal support. Included in these operating expenses for the three months
ended June 30, 2000 is $0.6 million in non-cash stock based compensation.
Sales and marketing expenses. Sales and marketing expenses were $1.0
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 personnel and additional initiatives, including direct
mail, media advertising, and trade shows, in 2000 as compared to 1999. Sales and
marketing expense consist primarily of salaries and benefits to marketing
personnel to support HealthAxis' strategy. Included in sales and marketing
expenses for the three months ended June 30, 2000 is $0.6 million in non-cash
stock based compensation. Sales and marketing expenses are expected to increase
as the sales force is expanded.
General and Administrative Expenses. General and administrative
expenses were $3.1 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. Employee and recruiting expenses increased
from $0.8 million for the three months ended June 30, 1999 to $1.7 million for
the three months ended June 30, 2000, while professional fees and overhead
expenses remained consistent at $1.4 million for both the three months ended
June 30, 1999 and the three months ended June 30, 2000. Included in employee and
recruiting costs for the three months ended June 30, 2000 is $0.3 million in
non-cash stock based compensation. General and administrative expenses include
executive management, accounting, legal and human resource personnel and
expenditures for applicable overhead costs.
Amortization of intangibles. Amortization of intangibles of $10.5
million for the three months ended June 30, 2000 primarily consisted of the
amortization of goodwill of $8.7 million related to the Insurdata Merger. There
was no amortization of intangibles in the comparative period ending June 30,
1999.
Net interest expense, 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 partially offset by HAI's
$0.5 million of interest expense on convertible debt.
Net loss from discontinued operations. Net loss from discontinued
operations of $5.4 million included a $2.8 million loss on the sale of certain
assets to Digital and $2.6 million loss in discontinued
Page 23 of 28
operations as compared to $8.2 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.
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.
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, $31.2 million was owned by HealthAxis. At
December 31, 1999, the Company had a cash balance of $58.1 million, of which
$56.5 million was owned by HealthAxis. 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.
HAI's liquidity needs will be met through loan agreements which
HealthAxis and HAI entered into the loan agreements as of September 29, 2000 in
order to fund the operations and commitments of HAI until the HAI Merger is
consummated. The interest on the principal under each note will accrue at 12%
per annum from the date of the note until the date the note terminates.
During the six months ended June 30, 2000, HealthAxis' 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 $23.5 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 $13.0
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 $0.3 million 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, which was amended and restated on September 29, 2000
and October 26, 2000. The total costs to be capitalized
Page 24 of 28
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,
which was amended on September 29, 2000. This transaction closed on October 13,
2000. In connection with this sale, HealthAxis received $500,000 in cash at
closing and $500,000 as a promissory note. In addition, license fees totaling
$3.0 million are to be paid over thirty months and technology services totaling
a minimum of $3.0 million are to be paid over the next 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 affected 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, HealthAxis has paid $3.8 million through June 30, 2000, which
completes HealthAxis' commitment related to these agreements. During the six
months ending June 30, 1999, HealthAxis had paid $2.6 million in cash in
connection with these agreements. As a result of HealthAxis' change in marketing
strategy during the first quarter of 2000, HealthAxis 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.
On September 28, 2000, HAI entered into an Amendment to the Securities
Purchase Agreement, dated September 14, 1999, between the Company and the
holders of the Company's $27.5 million 2% convertible debentures. The Amendment
to the Securities Purchase Agreement provides that, among other things, the
amendments to the debentures, warrants and the registration rights agreement
will take effect on or before the fifth business day after HAI's shareholders
have approved the HAI Merger. The holders of the debentures have agreed to
conditionally waive and suspend any and all past or current defaults or
violations arising under the debenture or the registration rights agreement, and
to forbear from enforcing any and all past or current defaults or violations by
HAI arising under the debentures or the registration rights agreement as well as
any prospective defaults or violations arising under these agreements from
September 28, 2000 through the closing date of the HAI Merger. Certain penalties
are being accrued at $0.3 million per month beginning in September 2000 and will
be due in full if the merger is not approved or is terminated prior to March 31,
2001.
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.
Page 25 of 28
Impact of Inflation
Higher interest rates, which have traditionally accompanied inflation,
affect the Company's short-term investment revenue.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Convertible Debentures outstanding at June 30, 2000 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.
Page 26 of 28
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.
Page 27 of 28
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HealthAxis Inc.
Date: 12-15-00 By: /s/ Michael Ashker
- ------------------------------------- -------------------------------------
Michael Ashker
President and Chief Executive Officer
Date: 12-15-00 By: /s/ Anthony R. Verdi
- ------------------------------------- -------------------------------------
Anthony R. Verdi
Chief Financial Officer, Principal
Accounting Officer and Treasurer
Page 28 of 28