Independent Auditors' Report
Board of Directors and Shareholders
HealthAxis.com, Inc.
East Norriton, Pennsylvania
We have audited the accompanying consolidated balance sheets of HealthAxis.com,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1999 and for the period from March 26, 1998
(inception) through December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 18, on January 7, 2000, the Company acquired Insurdata,
Incorporated and has accounted for that acquisition using the purchase method of
accounting. In addition, as described in Note 19, on June 30, 2000, the Company
agreed to sell substantially all of the assets related to its retail website and
as of that date has accounted for the disposal of the retail website as a
discontinued operation. The continuing operations of HealthAxis.com, Inc. and
Subsidiaries are principally those of Insurdata Incorporated.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HealthAxis.com,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the year ended December 31, 1999 and for the
period from March 26, 1998 (inception) through December 31, 1998, in conformity
with generally accepted accounting principles.
March 16, 2000, except for
Notes 10, 11, 12, 13, 18 and 20 which are as of September 29, 2000
Notes 5, 7, 8 and 19 which are as of October 13, 2000
F-1
HealthAxis.com, Inc.
Restated Consolidated Balance Sheets
(in thousands, except per share and share data)
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 56,444 $ 1,724
Other assets 369 125
- --------------------------------------------------------------------------------------------------------------------
Total current assets 56,813 1,849
Deferred acquisition costs 750 --
Equipment and software, net of accumulated depreciation of
$12 in 1999 and $10 in 1998 159 218
Assets held for sale 7,204 12,902
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 64,926 $ 14,969
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-2
HealthAxis.com, Inc.
Restated Consolidated Balance Sheets
(in thousands, except per share and share data)
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 5,434 $ 2,012
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Preferred stock Series A $.13 cumulative, redeemable and
convertible
Authorized 953,980 shares
Issued and outstanding 545,916 shares -- 2,470
Preferred stock Series B $.13 cumulative, redeemable and
convertible
Issued and outstanding 625,529 shares 2,804 2,735
- --------------------------------------------------------------------------------------------------------------------
2,804 5,205
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $1 par value
Authorized 20,000,000 shares for all issues
Series A
Issued and outstanding 545,916 shares 546 --
Series C
Issued and outstanding 1,526,412 shares 1,526 --
Series D
Issued and outstanding 333,334 shares 333 --
Common stock, no par value
Authorized 100,000,000 shares
Issued and outstanding 20,587,311 shares in 1999 and
16,172,760 shares in 1998 70,506 9,060
Additional paid-in capital 18,285 3,482
Accumulated (deficit) (34,508) (4,790)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 56,688 7,752
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 64,926 $ 14,969
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
HealthAxis.com, Inc.
Restated Consolidated Statements of Operations
(in thousands, except share and per share data)
Period from
March 26,
1998
(inception)
Year ended through
December 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Revenue
Interactive commission and fee revenue $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
Expenses
Operating 504 277
Sales and marketing 447 134
General and administrative 3,345 2,716
- -------------------------------------------------------------------------------------------------------------------
Total expenses 4,296 3,127
- -------------------------------------------------------------------------------------------------------------------
Operating (loss) (4,296) (3,127)
Interest and other income 451 2
Interest expense (9) (141)
- -------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (3,854) (3,266)
Loss from discontinued operations (25,864) (1,524)
- ------------------------------------------------------------------------------------------------------------------
Net (loss) (29,718) (4,790)
Dividends on preferred stock (129) (106)
- -------------------------------------------------------------------------------------------------------------------
Net (loss) applicable to common stock $ (29,847) (4,896)
===================================================================================================================
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.23) $ (0.24)
Discontinued operations (1.54) (0.11)
----------- ----------
Net loss $ (1.77) $ (0.35)
===================================================================================================================
Weighted average common shares and equivalents used
in computing loss per share
Basic and diluted 16,808,000 14,027,000
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
HealthAxis.com, Inc.
Restated Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Preferred Stock Preferred Stock Preferred Stock
Series A Series C Series D
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------
Balance, March 26, 1998 $ -- $ -- $ --
Stock dividend on a 14:1 basis
Capital contribution from parent
company
Stock options and warrants issued
HPS note conversion
Dividends on preferred stock
Net (loss)
- ------------------------------------------------------------------------------------------------------
Balance, December 31, 1998
Reclassification of preferred stock 545,916 546
Additional contribution from parent
company
Preferred shares issued, net of 1,526,412 1,526 333,334 333
issuance costs
Common shares issued, net of
issuance costs
Warrants issued for services
Exercise of stock options
Dividends on preferred stock
Net loss
- ------------------------------------------------------------------------------------------------------
Balance, December 31, 199 545,916 $ 546 1,526,412 $ 1,526 333,334 $ 333
- ------------------------------------------------------------------------------------------------------
[RESTUBBED TABLE]
Common Stock Additional Accumu-
Paid-In lated
Shares Amount Capital (Deficit) Total
- -------------------------------------------------------------------------------------------------
Balance, March 26, 1998 $ -- $ -- $ -- $ --
Stock dividend on a 14:1 basis 12,250,000 --
Capital contribution from parent
company 1,557,395 3,001 3,473 6,474
Stock options and warrants issued 115 115
HPS note conversion 2,365,365 6,059 -- 6,059
Dividends on preferred stock (106) (106)
Net (loss) (4,790) (4,790)
- -------------------------------------------------------------------------------------------------
Balance, December 31, 1998 16,172,760 9,060 3,482 (4,790) 7,752
Reclassification of preferred stock 1,854 -- 2,400
Additional contribution from parent 87 -- 87
company
Preferred shares issued, net of 10,223 -- 12,082
issuance costs
Common shares issued, net of 4,362,051 61,347 61,347
issuance costs
Warrants issued for services 2,768 -- 2,768
Exercise of stock options 52,500 99 -- -- 99
Dividends on preferred stock (129) -- (129)
Net loss (29,718) (29,718)
- -------------------------------------------------------------------------------------------------
Balance, December 31, 199 20,587,311 $ 70,506 $ 18,285 $ (34,508) $ 56,688
- -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
HealthAxis.com, Inc.
Restated Consolidated Statements of Cash Flows
(dollars in thousands)
Period from
March 26,
1998
(inception)
Year ended through
December 31, December 31,
1999 1998
===================================================================================================================
Cash flows from operating activities
Net (loss) $ (29,718) $ (4,790)
Adjustments to reconcile net loss to net cash (used in)
operating activities
Issuance of common stock in lieu of interest on
HPS note -- 106
Depreciation and amortization 16,283 1,172
Noncash compensation expense 120 61
Premium on conversion of HPS convertible note -- 953
Write-off of software costs 749 --
Changes in assets and liabilities
(Increase) in assets
Prepaid interactive marketing expense (4,730) (9,300)
Other assets (244) (70)
Increase in liabilities
Accounts payable and accrued expenses 3,422 2,012
===================================================================================================================
Net cash (used in) operating activities (14,118) (9,856)
===================================================================================================================
Cash flows from investing activities
Purchases of equipment and software (3,814) (1,520)
Payment of deferred acquisition costs (750)
===================================================================================================================
Net cash (used in) investing activities (4,564) (1,520)
- ------------------------------------------------------------------------------------------------------------------
===================================================================================================================
See accompanying notes to consolidated financial statements
F-6
Period from
March 26,
1998
(inception)
Year ended through
December 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Principal payments on capital lease $ (125) $ --
Net proceeds from sales of common stock 61,445 3,000
Net proceeds from sales of preferred stock 12,082 5,100
Proceeds from issuance of HPS convertible note -- 5,000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 73,402 13,100
- -------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 54,720 1,724
Cash and cash equivalents at beginning of period 1,724 --
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 56,444 $ 1,724
- -------------------------------------------------------------------------------------------------------------------
Noncash financing activities
Fair value of warrants issued by HAI and HealthAxis $ 278 $ 2,994
Issuance of warrants in connection with alliance
agreements $ 2,719 $ --
Additional contribution from parent company $ 87 $ --
Issuance of common stock on conversion of HPS note $ -- $ 5,000
Equipment acquired under capital leases $ 154 $ --
Dividends on preferred stock $ 129 $ 106
- ------------------------------------------------------------------------------------------------------------------
Other supplemental disclosure
Interest paid $ 9 $ --
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
1. Nature of HealthAxis.com, Inc. ("HealthAxis" or "the
Company") was incorporated on Operations
March 26, 1998 to sell health insurance
products online.
HealthAxis is a subsidiary of HealthAxis Inc.
("HAI") (formerly Provident American
Corporation), which as of December 31, 1999
owned 66.9% of HealthAxis' capital stock.
On December 7, 1999, the Company announced
that HealthAxis and Insurdata Incorporated, a
subsidiary of UICI, had signed a definitive
agreement to merge the two companies which
was completed on January 7, 2000. See Note 18
for additional information.
On January 26, 2000, HAI and HealthAxis
entered into an Agreement and Plan of
Reorganization and an Agreement and Plan of
Merger pursuant to which HAI will acquire all
of the outstanding shares of HealthAxis it
does not currently own through the merger of
HealthAxis with a wholly-owned subsidiary of
HAI as described in Note 18. The merger is
subject to both HAI and HealthAxis
shareholder approval and is expected to be
completed during the first quarter of 2001.
On June 30, 2000, HealthAxis entered into an
agreement to sell substantially all of the
assets related to the retail website
including the next version of its website
user interface as well as certain other
assets to Digital Insurance, Inc.
("Digital"). This transaction is referred to
as the Digital Sale. See Note 19 for
additional information.
The continuing operations of HealthAxis are
principally those of its merged divisions
related to Insurdata.
2. Restated Financial These financial statements have been
Statements restated to reflect the discontinued
operations associated with the Digital Sale
(as described in Note 20).
3. Summary of Principles of Consolidation
Significant
Accounting The consolidated financial statements
Policies include the accounts of HealthAxis and all
of its subsidiaries. All significant
intercompany accounts andtransactions have
been eliminated. The consolidated financial
activity and amounts of HealthAxis and
subsidiaries are also included in the
consolidated financial statements of HAI.
Use of Estimates
The preparation of financial statements in
conformity with Generally Accepted Accounting
Principles requires management to make
estimates and assumptions that affect the
reported amounts of revenues, expenses,
assets, and liabilities and disclosure of
contingencies. Actual results could differ
from those estimates.
F-8
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Cash and Cash Equivalents
Cash and cash equivalents consist of highly
liquid investments with maturities of three
months or less from date of purchase.
HealthAxis maintains its cash accounts at one
commercial bank. Cash accounts at the bank
often exceed amounts that are insured by the
Federal Deposit Insurance Corporation.
Prepaid Interactive Marketing Expense
Prepaid interactive marketing expense
represents cash and other consideration paid
to Internet portals in accordance with
distribution arrangements for exclusivity and
advertising impressions. Payments related to
exclusivity and advertising are allocated
based upon the terms in the agreement. The
fair value of warrants issued are allocated
to exclusivity and advertising in direct
proportion to amounts paid. Amounts related
to exclusivity are amortized on a
straight-line basis over the respective
contract term. Amounts related to advertising
impressions are expensed as impressions are
delivered under the respective agreements. If
the contract is silent as to the allocation
of costs, then the amounts are amortized on a
straight line basis over the contract term.
See Note 7 and Note 19 for additional
information.
Prepaid Alliance Agreements
Prepaid alliance agreements represent the
fair value of warrants issued to business
partners. The cost associated with services
provided in accordance with each agreement is
amortized on a straight-line basis over the
life of the agreement, or if no term exists
in the agreement, over the term of the
warrants granted. See Note 8 and Note 19 for
additional information.
Equipment and Software
Equipment and software are recorded at cost.
Expenditures for improvements that increase
the estimated useful lives of the assets are
capitalized. Expenditures for repairs and
maintenance are charged to operations as
incurred. Depreciation and amortization is
provided using the straight-line method over
the estimated useful lives of the assets.
Upon sale or retirement, the cost of the
asset and the related accumulated
depreciation and amortization are removed
from the accounts and the resulting gain or
loss, if any, is included in operations. See
Note 5 and Note 19 for additional
information.
F-9
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
During 1998, HealthAxis adopted Statement of
Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for
Internal Use." Accordingly, direct internal
and external costs associated with the
development of the features, content and
functionality of www.healthaxis.com,
HealthAxis' website, incurred during the
application development stage, have been
capitalized, and are amortized on a straight
line basis over the estimated useful life.
Computer hardware and software are
depreciated over three years and furniture is
depreciated over seven years.
The Company has evaluated all software
development projects, that were in progress
as of December 31, 1999, to determine whether
it was probable that any of the projects
would be placed in service. Based on that
evaluation, the Company expects to complete
and put in service all software development
projects that existed as of that date.
Start-Up Costs
In accordance with Statement of Position No.
98-5, "Reporting on the Costs of Start-Up
Activities", start-up costs have been
expensed as incurred.
Recognition of Revenue
The Company sells insurance policies as an
agent over the Internet and receives a
monthly commission and policy fee on each
policy every month in which a policy the
Company sold is in effect with the insurance
carrier. Commissions are determined based on
a percentage of the premium received by the
insurance carrier partner as stipulated by
the Company's contract with the insurance
carrier partner. Policy fees are a flat rate
received for each policy in effect in a
specific month. Commissions are received from
every insurance carrier, whereas policy fees
are received from select insurance carriers
as determined by the Company's contract with
the insurance carrier partner. Due to the
Digital Sale all revenues are included as a
component of discontinued operations. See
Note 19 for additional information.
Deferred Acquisition Costs
The Company has deferred the costs associated
with the pending merger with Insurdata. These
costs include legal, accounting and
investment banking services. These costs will
be included as a component of the purchase
price upon consummation of the merger.
F-10
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Income Taxes
Effective April 1999, HealthAxis is no longer
eligible to participate in the consolidated
federal income tax return of HAI. Deferred
income taxes reflect the net tax effects of
temporary differences between the carrying
amounts of assets and liabilities for
financial reporting purposes and the amounts
used for income tax purposes. See Note 15 for
additional information.
Loss Per Share of Common Stock
HealthAxis presents basic and diluted
earnings per share. Equivalents, including
warrants, stock options, and preferred stock,
were anti-dilutive for all periods presented.
Reclassifications and Restatements of Prior
Year Amounts
Certain prior year amounts have been
reclassified to conform to the current year's
presentation including the restatements
related to discontinued operations.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets and
certain identifiable intangibles for
impairment whenever events or changes in
circumstances indicate that the carrying
amount of an asset may not be recoverable 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" ("SFAS
No. 121"), and on a quarterly basis.
Recoverability of assets held and used is
measured by a comparison of the carrying
amount of an asset to undiscounted pre-tax
future net cash flows expected to be
generated by that asset. An impairment loss
is recognized for the amount by which the
carrying amount of the assets exceeds the
fair value of the assets. To date no such
impairment has been recognized.
SFAS 121 requires that the Company group
assets at the lowest level for which there
are identifiable cash flows that are
independent of cash flows of other groups of
assets. The Company will group assets at the
entity level since the goodwill resulting
from acquisition of Insurdata will be
evaluated concurrently. The fair market value
of impaired assets will be determined using
discounted cash flows.
F-11
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Stock Options and Warrants - Nonemployees
The Company accounts for all options and
warrants granted to nonemployees in
accordance with Financial Accounting
Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation"
("FAS 123"). (See Note 9 for additional
information.)
Stock Options and Warrants - Employees and
Directors
The Company has elected to continue to
account for stock-based compensation for
employees and directors using the intrinsic
value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related
interpretations and to provide additional
disclosures with respect to the pro forma
effects of adoption had the Company recorded
compensation expense as provided in FAS 123.
(See Note 9 for additional information)
In accordance with APB No. 25, compensation
cost for stock options is recognized in
income based on the excess, if any, of the
quoted market price of the stock at the grant
date of the award or other measurement date
over the amount an employee must pay to
acquire the stock.
Recent Accounting Standards
In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments", as
amended by SFAS 137. SFAS 137 delays the
effective date of implementation of SFAS 133
by one year. SFAS 133 established accounting
and reporting standards for derivative
instruments and for hedging activities. SFAS
133 requires that an entity recognize all
derivatives as either assets or liabilities
and measure those instruments at fair market
value. Presently, HealthAxis does not use
derivative instruments either in hedging
activities or as investments. Accordingly,
HealthAxis believes that adoption of SFAS 133
will have no impact on its financial
positions or results of operations.
In December 1999, the Securities and Exchange
Commission staff released Staff Accounting
Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB No. 101"), which
provides guidance on the recognition,
presentation and disclosure of revenue in
financial statements. SAB No. 101 did not
impact the Company's revenue recognition
policies.
In March 2000, the Emerging Issues Task Force
("EITF") reached consensus position in EITF
Issue No. 00-2 "Accounting for Website
Development Costs". This pronouncement
provides guidance in accounting for such
costs. The Company believes that the adoption
of EITF No. 00-2 has no impact on its
financial position or results of operations.
F-12
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
4. Losses and The Company has incurred costs to develop
Uncertainties and enhance its technology, to create and
introduce its website and to establish
marketing, insurance carrier andclaims
administration relationships. As a
result, the Company has incurred significant
losses and expects to continue to incur
losses through December 31, 2000. As
discussed in Notes 18 and 19, the Company has
changed its focus and sold assets related to
its retail website and concentrated its
efforts in promoting the operations of
Insurdata Incorporated which was acquired in
January, 2000.
Insurdata is focused exclusively on providing
Internet connectivity technology solutions
and enterprise application integration
services to both healthcare payers and those
entities involved in the digital distribution
of health insurance. Insurdata has an
established revenue base and services
insurance companies that underwrite policies,
independent entities that administer claims
processing and payment, Blue Cross/Blue
Shield plans, and self-insured employers.
HealthAxis plans to offer a platform of
web-enabled software applications and
services to insurance payers.
During 1999, HealthAxis raised approximately
$76,690 through the sale of its preferred
stock ($12,807) and its common stock
($63,883). The net proceeds have been used to
fund amounts due under its distribution
agreements with the balance to be used by
HealthAxis for its working capital and other
general purposes. As a result of the fund
raising activities described above,
HealthAxis believes that is has sufficient
working capital to fund operations for the
foreseeable future.
F-13
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
5. Equipment and Equipment and software, at cost, consisted of
Software the following:
Estimated
Useful Lives December 31,
(Years) 1999 1998
--------------------------------------------------------------------------------
Leasehold improvements 5 $ 65 $ --
Furniture and equipment 7 47 --
Computer hardware 3 59 228
Computer software 3 -- --
Capitalized software
development costs 3 -- --
--------------------------------------------------------------------------------
Total 171 228
Less accumulated
depreciation and
amortization (12) (10)
--------------------------------------------------------------------------------
Total equipment and software $ 159 $ 218
--------------------------------------------------------------------------------
6. Accounts Payable Accounts Payable and Accrued expenses consisted
and Accrued of the following:
Expenses
December 31, 1999 1998
--------------------------------------------------------------------------------
Accounts payable $ 1,438 $ 481
Due to affiliate -- 93
Dividends payable 129 --
Accrued financing fees 1,277 --
Accrued merger costs 460 --
Accrued payroll and benefits 177 --
Accrued professional fees 387 --
Other accrued expenses 1,345 1,093
Accrued taxes 117 10
Employee withholdings 25 3
Unearned e-commerce revenue -- 332
Deferred revenue 50 --
Capital lease 29 --
--------------------------------------------------------------------------------
Total accounts payable and accrued expenses $ 5,434 $ 2,012
--------------------------------------------------------------------------------
F-14
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
7. Distribution In 1998, HealthAxis entered into various
Agreements distribution agreements with AOL,
CNET, SNAP! And Lycos. Under these
agreements, these internet portals promoted
HealthAxis' products to the online users of
their websites. The initial terms of the
agreements range from 12 to 15 months with
the last agreement expiring in August 2000.
In 1999 and 1998, HealthAxis made payments
and issued warrants, valued using the Black
Scholes Option Pricing Model, aggregating
$16,970 which have been charged to prepaid
interactive marketing expense. The amounts
deferred were allocated based on the terms of
each contract between exclusivity and
impression advertising costs, which totaled
$3,527 and $13,443, respectively. During 1999
and 1998, $3,242 and $11,352 and $381 and
$204 were charged to expense representing
exclusivity and impression advertising,
respectively.
During 1999 and 1998, a total of 830,082,353
and 10,244,130 impressions on HealthAxis'
website by Internet subscribers were
delivered as a result of the agreements.
Each agreement provides for a renewal term
ranging from 12 to 28 months for aggregate
payments of $47.6 million starting in
February 2000. HealthAxis has chosen not to
exercise its option to renew its agreement
with AOL for an additional term and
accordingly, will not pay a $33.5 million
renewal fee. In 2000, approximately $1,160
was paid under the initial agreements with
its distribution partners.
In 1999, HealthAxis entered into a
distribution agreement with Yahoo! that
provided for a guaranteed number of
impressions. The initial term was for five
months beginning in September 1999 at a cost
of $725.
In February 2000, HealthAxis renewed the
contract with Yahoo!. Total payments of
$2,128 were to be paid under the terms of the
contract. In August 2000, the contract was
terminated with a total of $2,853 paid to
Yahoo! over the life of the contracts.
Upon termination of the Yahoo! contract, all
distribution agreements have either been
canceled or expired.
F-15
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
8. Prepaid Alliance During 1999, HealthAxis has negotiated
Agreements several strategic alliance agreements
which provide for the issuance of
warrants to purchase 762,500 shares of
HealthAxis common stock of which 612,500 can
be exercised at prices ranging from
$4.40-$20.00. Warrants to purchase 250,000
common shares will be valued based upon the
HAI stock prior to the completion of each
event as stipulated in the contract.
The warrants have been valued using the Black
Scholes Option Pricing Model at $2,719 and
are being amortized on a straight-line basis
over the term of each agreement or the
expected life of the warrants if there is no
contract term. Amortization of $436 has been
charged to operations as a result of the
agreements during 1999.
Under the terms of each agreement, the
alliance partner has agreed to provide, among
other things:
o Insurance products to be offered on
the Company's web site;
o Underwriting, billing, claims
processing services;
o Technical support for the development
of 3D imaging technology solutions;
o Consulting related to internet
advertising;
o Technical support for the design of
Internet insurance products.
The amortization related to these agreements
began in May 1999 and extends through June of
2002.
All of the rights and obligations under the
terms of these agreements will be assigned to
the acquirer of the retail insurance
operations. As a result, any warrants issued
by HealthAxis for future services will be
cancelled or will expire. See Note 19 for
additional information.
As a result of the sale of the retail
website, there will not be any future benefit
related to these agreements or continued
vesting in relation to these warrants.
Warrants which are vested may be exercised
until they expire in two to four years.
Therefore, the prepaid costs associated with
these warrants are included in Assets Held
for Sale on these restated financial
statements and the amortization is included
in the sale of discontinued operations on
June 30, 2000.
F-16
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
9. Stock Options Options
and Warrants
HealthAxis has a stock option plan, which
provides for the granting of options to
directors and key employees of HealthAxis and
its subsidiaries.
During 1998, HealthAxis adopted the 1998
Stock Option Plan (the "1998 Stock Option
Plan"), which provides for the award of
options and stock purchase rights
(collectively "Awards") to purchase
HealthAxis common stock. Exercise prices are
based on 90% of the per share price paid in
private placement transactions with
unaffiliated third parties for grants prior
to May 1999 and 100% of the per share price
paid in private placement transactions with
unaffiliated third parties thereafter.
During 1998 options to purchase 991,000,
309,000 and 50,000 shares were granted to
Michael Ashker, Chief Executive Officer,
Alvin H Clemens, Chairman of the Board, and
Michael Beausang, the Company's former
Secretary, respectively, and are immediately
exercisable at a price of $1.77 per share
having a term of 10 years. Mr. Clemens'
option to purchase HealthAxis shares has been
terminated by mutual agreement. Options to
purchase 460,000 shares of HealthAxis common
stock awarded at $1.77 per share were awarded
to officers and employees. These options have
a term of five years and vest at a rate of
25% of the initial award on the grant date,
25% of the initial award on February 1, 1999
and the balance in quarterly installments
thereafter. Options to purchase an additional
96,500 shares of common stock were granted to
officers and employees at an exercise price
of $4.00 per share. Such options have a term
of five years and vest at a rate of 25% of
the initial award on the grant date, 25% of
the initial award on November 20, 1999 and
the balance in quarterly installments
thereafter.
During 1999, HealthAxis amended the 1998
Stock Option Plan to increase the number of
shares available pursuant for issuance of
options to 8,600,000. Options granted in 1999
have a term of ten years and vest at a rate
of 20-33% of the initial award on the grant
date, with the balance vesting in quarterly
installments over 2-5 years. Of the options
granted, options to purchase 200,000, 75,000,
60,000 and 20,000 shares were granted to Mr.
Ashker, Mr. Felder, Mr. Hankinson and Ms. del
Rossi, respectively. Mr. Ashker, Mr. Felder,
Mr. Hankinson and Ms. del Rossi are executive
officers of HealthAxis.
F-17
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Stock Purchase Rights ("SPRs") may be granted
either alone, in addition to, or in tandem
with other awards granted under the Stock
Option Plan. SPRs may not be granted at less
than 85% of the fair market value on the date
of grant (or 100% of the fair market per
share for ten percent shareholders) unless
otherwise determined at the time of grant.
Under the terms of the 1998 Stock Option
Plan, the SPRs shall include a stock
repurchase option exercisable by HealthAxis
if the employee is terminated, voluntarily or
involuntarily, following the receipt of the
restricted stock.
The following table lists changes in
outstanding stock options for the HealthAxis
plan:
Weighted
Average
Weighted (Years) Weighted
Number Average Remaining Average
of Exercise Contractual Fair
Shares Price Life Value
----------------------------------------------------------------------------------
Granted during 1998 1,956,500 $ 1.88 $ 0.38
Outstanding, December 31, 1998
Exercisable 1,515,000
1.77 0.36
Exercisable
24,125 4.00 0.80
Not exercisable
345,000 1.77 0.36
Not exercisable
72,375 4.00 0.80
Total outstanding 1,956,500
1.88 0.38
1999
Granted 445,500 $ 4.00 $ 0.80
Granted 758,371 5.77 3.71
Granted 700,750 12.00 7.80
Exercised 1.88
52,500
Canceled/Expired 3.09
732,400
Outstanding, December 31, 1999
Exercisable 1,274,021
1.77 3.7 0.36
Exercisable
146,333 4.00 2.3 0.80
Exercisable
111,332 5.77 8.4 3.71
Exercisable
70,670 12.00 9.1 7.80
Not exercisable
123,854 1.77 3.7 0.36
Not exercisable
145,667 4.00 2.3 0.80
Not exercisable
597,764 5.77 8.4 3.71
Not exercisable
606,580 12.00 9.1 7.80
Total outstanding 3,076,221 5.14
F-18
Prior to the announcement of the merger of
HAI and HealthAxis (the "HAI merger"), the
fair value of HealthAxis' stock was based
upon the value of its common and preferred
stock sold in various private placements of
its stock during 1999. All options and
warrants granted subsequent to the
announcement of the HAI merger will be
measured for compensation purposes using the
fair value of HAI's stock.
In January and February 2000, the Company
granted options to acquire approximately
1,200,000 common shares at $15.00 per share.
The fair value of HAI common stock on the
grant dates approximated $29.00 per share. As
a result, the Company will amortize, for
financial accounting purposes, compensation
costs of approximately $16,800 over the 3-4
year vesting period of the options.
The Company has adopted the disclosure-only
provisions of SFAS 123 "Accounting for Stock
Based Compensation." Accordingly, no
compensation cost has been recognized for
stock option and warrant grants to employees
and employee-directors. The Company continues
to account for stock-based compensation using
the intrinsic value method prescribed in APB
opinion No. 25, "Accounting for Stock Issued
to Employees'. Compensation cost for stock
options, if any, is measured as the excess of
the fair market price of the Company's stock
at the date of grant over the amount an
employee must pay to acquire the stock.
Compensation cost for shares issued under a
performance share plan is recorded based upon
the current market value of the Company's
stock at the end of each period. Had
compensation cost for HealthAxis stock option
grants been determined based on the fair
value at the date of grants in accordance
with the provisions of SFAS No. 123,
HealthAxis would have amortized the cost over
the vesting period of the option. HealthAxis'
1999 and 1998 net loss and net loss per
common share would have been increased to the
following pro forma amounts:
December 31, 1999 1998
--------------------------------------------------------------------------------
Net loss applicable to common
Shares
As reported $ (29,847) $ (4,896)
Pro forma $ (31,277) $ (5,492)
Net loss applicable to common
shares for basic and diluted
As reported $ (1.77) $ (0.35)
Pro forma $ (1.86) $ (0.39)
The fair value of the options and warrants
granted during 1999 and 1998 are estimated on
the date of grant using the Black Scholes
Option Pricing Model. The major assumptions
used and the estimated fair value include no
dividends paid, an expected term of five
years, an expected stock volatility of 1%, a
risk free interest rate of 4.48%. The
weighted average fair value of options
granted in 1999 and 1998 was $.36 and $.38,
respectively.
F-19
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Warrants
The following table presents warrants activity for 1999 and
1998:
Weighted
Average
Weighted (Years) Weighted
Number Average Remaining Average
of Exercise Contractual Fair
Shares Price Life Value
----------------------------------------------------------------------------------------
Granted during 1998 300,000 $ 1.77
Outstanding, December 31, 1998
Exercisable 300,000 1.77
Not exercisable -- --
Total outstanding 300,000 1.77
1999
Granted 825,500 8.21
Exercised -- --
Canceled/Expired -- --
Outstanding, December 31, 1999
Exercisable 300,000 1.77 8.5 $0.56
Exercisable 150,000 4.40 3.8 0.23
Exercisable 7,500 12.00 3.8 0.08
Exercisable 63,000 5.77 3.8
Exercisable 10,000 20.00 3.9 0.05
Exercisable 50,000 15.23 2.4 0.07
Not exercisable 30,000 13.80 4.5 0.07
Not exercisable 75,000 14.50 4.2 0.07
Not exercisable 150,000 16.00 4.5 0.06
Not exercisable 40,000 20.00 3.9 0.05
Not exercisable 250,000 (1)
Total outstanding 1,125,500 $4.77
(1) The price of these warrants is determined based upon
the fair market price of the shares on the date in
the future when the options are earned, which is
based upon performance criteria.
In 1998, HAI issued warrants to purchase 420,000 shares of HAI
common stock of which 400,000 warrants were issued to Lynx
Capital Group, LLC ("Lynx") (see Note 17) and 20,000 warrants
were issued to Robinson, Lerer and Montgomery for services
rendered or to be rendered
F-20
to HealthAxis. The fair value of the warrants issued amounting
to $757 has been accounted for as a capital contribution from
HAI. During 1999 and 1998, $330 and $409 have been charged to
operations, as a result of services performed under the terms
of the agreements.
Lynx (1) provided introduction and frame work for negotiations
with AOL, CNet and Lycos; (2) negotiated and structured the
HPS (Health Plan Services, Inc.) convertible note; and (3)
engaged and directed a third party website technology firm to
build the retail website.
The fair value of the warrants granted above was estimated on
the date of grant using the Black Scholes Option Pricing
Model. The major assumptions used included no dividends and
expected term of 3 years, an average expected stock volatility
of 92.5%, and a risk free interest rate of 4.48%. The weighted
average fair value of the warrants granted was $8.21.
10. Series A During 1998, HealthAxis issued a total of 545,916 shares of
Convertible HealthAxis Cumulative Convertible Series A Preferred Stock,
Preferred par value $1.00. (the "Series A Preferred Stock") to Provident
Stock Indemnity Life Insurance Company ("PILIC"), a subsidiary of
HAI which was sold in November 1999, for a total of $2,400.
Initially, PILIC purchased 405,886 shares of Series A
Preferred Stock at $5.91 per share. The Stock Purchase
Agreement for Series A Preferred Stock with PILIC contained a
price adjustment provision that would require HealthAxis to
issue to PILIC additional shares of Series A Preferred Stock
if HealthAxis sold other shares of common or preferred stock
to another investor at a lower price. As a result of the sale
of Series B Preferred Stock to AOL at $4.40 per share,
HealthAxis issued an additional 140,030 shares of Series A
Preferred Stock to PILIC so that PILIC's price per share would
also equate to $4.40 per share.
Upon issuance, holders of the Series A Preferred Stock were
entitled to cumulative dividends at an annual rate of $0.13
per share. The shares were mandatorily redeemable by the
Company during the redemption period at the original issue
price ($4.40 per share) plus any amount that would yield a 10%
annualized return. As a result of an amendment to the Series A
Preferred Stock Certificate of Designation in 1999, holders of
the Series A Preferred Stock are now entitled to receive
dividends as declared by the Board of Directors of HealthAxis
at its discretion. Also, in 1999, all of the mandatory
redemption provisions were removed. As a result, the Series A
Preferred Stock has been reflected as a component of
stockholders' equity in 1999.
In 1999, HAI purchased all Series A Preferred Stock from PILIC
and transferred 100,000 shares to AHC Acquisition, Inc.
("AHC"), a newly formed Pennsylvania business corporation,
owned by Mr. Alvin H. Clemens (HealthAxis' and HAI's
chairman), for no consideration. In conjunction with the
merger described in Note 18, all of the Series A
Preferred Stock will be converted into common stock of HAI.
F-21
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Shares of Series A Preferred Stock are convertible at any
time, at the option of the holder, into HealthAxis common
stock at a price equal to the original issuance price ($4.40
per share) divided by the conversion price which is defined as
the original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Preferred Stock
Certificate of Designation.
Holders of the Series A Preferred Stock are entitled to vote
on all matters as to which holders of common stock are
entitled to vote. The holders of each share of Series A
Preferred Stock are entitled to the number of votes equal to
the nearest whole number of shares of HealthAxis common stock
into which the holder's Series A Preferred Stock is
convertible. Generally, the holders of Series A Preferred
Stock shall vote together with the holders of HealthAxis
common stock as one class.
In the event of any dissolution, liquidation or winding up of
the affairs of HealthAxis, whether voluntary or otherwise,
after payment or provision for payment of the debts and other
liabilities of HealthAxis and all amounts owed to the Series
B, Series C and Series D Preferred Stock or any other class of
securities of HealthAxis having a dividend payment or other
distribution preference senior to the Series A Preferred Stock
(the "Series A Senior Stock"), the holders of Series A
Preferred Stock shall be entitled to receive $4.40 in cash for
each share of Series A Preferred Stock, plus an amount equal
to all dividends accrued and unpaid on each such share up to
the fixed date for distribution, before any distribution may
be made to the holders of HealthAxis common stock. Each
Preferred Stock Certificate of Designation includes additional
provisions related to liquidation and the order of payment as
it relates to each series of Preferred Stock.
The Series A Preferred Stock is not subject to any sinking
fund or other similar provisions. The holders of Series A
Preferred Stock are not entitled to any preemptive rights
11. Series B During 1998, HealthAxis issued 625,529 shares of Series B
Redeemable convertible preferred stock, par value $1.00 per share (the
Convertible "Series B Preferred Stock") to AOL at $4.40 per share for an
Preferred aggregate purchase price of $2,750, less issuance costs
Stock amounting to $51, of which a portion was used to pay amounts
due to AOL under their distribution agreement with the
Company. In conjunction with the merger described in Note 18,
all of the Series B Preferred Stock will be converted into
common stock of HAI.
Holders of the Series B Preferred Stock are entitled to vote
on all matters as to which holders of common stock are
entitled to vote. The holders of each share of Series B
Preferred Stock are entitled to the number of votes
F-22
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
equal to the nearest whole number of shares of HealthAxis
common stock into which the holder's Series B Preferred Stock
is convertible. Generally, the holders of Series B Preferred
Stock shall vote together with the holders of HealthAxis
common stock as one class.
As a result of an amendment to the Preferred Stock Certificate
of Designation in 1999, holders of the Series B Preferred
Stock are entitled to receive such dividends as declared by
the Board of Directors of HealthAxis in its discretion at a
rate as specified by the Preferred Stock Certificate of
Designation.
In the event of any dissolution, the holders of Series B
Preferred Stock shall be entitled to receive, out of the
assets of HealthAxis legally available for distribution to its
shareholders, the amount of $4.40 in cash for each share of
Series B Preferred Stock, plus an amount equal to all
dividends accrued and unpaid on each such share up to the
fixed date for distribution, before any distribution may be
made to the holders of HealthAxis common stock, or any series
of Series B Junior Stock, including the Series A, Series C and
Series D Preferred Stock. If, after payment or provision for
payment of the debts and other liabilities of HealthAxis, the
remaining net assets of HealthAxis are not sufficient to pay
the holders of the Series B Preferred Stock the full amounts
of their preference, the holders of Series B Preferred Stock
would share ratably in any distribution of assets. After
payment or provision for payment of the debts and other
liabilities of HealthAxis and the full preference amount due
to the holders of any Series of preferred stock, Series A,
Series B, Series C and Series D Preferred Stock and the
HealthAxis common stock will be entitled to receive on a pro
rata basis the remaining assets of HealthAxis available for
distribution to its shareholders. The relative value of a
share of Series A, Series B, Series C and Series D Preferred
Stock for this purpose shall be determined on an as converted
basis.
Holders of the Series B Preferred Stock have the option,
exercisable upon request of the holders of 51% of the
outstanding shares of Series B Preferred Stock within six
months after the later of the occurrence of a Trigger Event as
defined below or notice of a Trigger Event, to cause
HealthAxis to redeem any or all of the shares of Series B
Preferred Stock requested to be redeemed, at a redemption
price per share equal to the original issuance price (subject
to adjustment to reflect stock splits, stock dividends, stock
contributions, recapitalizations and similar occurrences) plus
an amount that would yield a total annualized return of 10%
calculated daily and compounded annually from the later of
either the original issuance date or the date on which the
holder acquired the shares
F-23
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
of Series B Preferred Stock through the date of redemption.
Notice of the exercise of the optional redemption rights with
respect to the Series B Preferred Stock must be given to the
Company pursuant to the notice of optional redemption
provision contained in the Certificate of Designation related
to the Series B Preferred Stock.
Trigger Event is any of the following:
o January 31, 2002, if by then HealthAxis has not
consummated an underwritten public offering for its
account of common stock pursuant to a registration
statement filed under the Securities Act of 1993, as
amended, at a net offering price per share of Common
Stock that represents a pre-offering market
capitalization of no less than $150.0 million and
with aggregate proceeds (net of underwriting
discounts and commissions) to HealthAxis of not less
than $25.0 million;
o HealthAxis' failure to renew or any material breach
by any party other than AOL or termination of the
interactive marketing agreement;
o The date of the occurrence of a liquidation of
HealthAxis;
o March 31, 1999, if by then HealthAxis has not
consummated a Qualified Financing (a transaction
yielding aggregate gross proceeds to HealthAxis of
not less than $7.0 million at a price per share of
common stock equal to at least $3.74);
o May 31, 1999, if by then HealthAxis has not
consummated a Second Qualified Financing (a
transaction yielding aggregate gross proceeds to
HealthAxis of not less than $3.5 million at a price
per share of Common Stock equal to at least $3.74).
On January 31, 2000, the initial term of HealthAxis'
interactive marketing agreement with AOL expired and
HealthAxis chose not to renew this agreement. Accordingly, one
of the above definitions of Trigger Events has been met and
AOL has the option to require HealthAxis to redeem its shares.
Other than the expiration of the interactive marketing
agreement, none of the Trigger Events that could have occurred
in 1999 actually occurred. Additionally, HealthAxis does not
expect additional Trigger Events to occur.
Shares of Series B Preferred Stock are convertible at any
time, at the option of the holder, into HealthAxis common
stock at a price equal to the original issuance price ($4.40
per share) divided by the conversion price which is defined as
the original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Certificate of
Designation related to the Series B Preferred Stock.
The Series B Preferred Stock is not subject to any sinking
fund or other similar provisions. The holders of Series B
Preferred Stock are not entitled to any preemptive rights.
F-24
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
In connection with AOL's purchase of the Series B Preferred
Stock, HealthAxis and AOL entered into a Registration Rights
Agreement ("Registration Agreement") which sets forth the
rights of AOL in connection with the public offering of
HealthAxis' common stock acquired in connection with the
conversion of Series B Preferred Stock or other shares of
common stock acquired through the exercise of warrants granted
to AOL.
Under its Registration Agreement, AOL has the right to demand
registration of its shares of common stock or to have its
shares of common stock included in a registration statement
prepared at the request of HealthAxis or another HealthAxis
shareholder.
12. Series C On March 30, 1999, HealthAxis issued 1,526,412 shares of
Convertible HealthAxis Series C convertible preferred stock at $5.77 per
Preferred share (the "Series C Preferred Stock"), for an aggregate
Stock purchase price of $8,807, less issuance costs of $684 and the
value of HealthAxis warrants issued in connection with the
issuance of Series C Preferred Stock to an investment banker
for services rendered in connection with the Series C
Preferred Stock Offering valued at $278. In conjunction with
the merger described in Note 18, all of the Series C Preferred
Stock will be converted into common stock of HAI.
Holders of the Series C Preferred Stock are entitled to vote
on all matters as to which holders of common stock are
entitled to vote. The holders of each share of Series C
Preferred Stock are entitled to the number of votes equal to
the nearest whole number of shares of common stock into which
the holder's Series C Preferred Stock is convertible.
Generally, the holders of Series C Preferred Stock shall vote
together with the holders of HealthAxis common and preferred
stock as one class.
Holders of the Series C Preferred Stock will be entitled to
dividends, on a pari passu basis with the holders of Series D
Preferred Stock, accruing from the date of issue, as such
dividends are declared by the Board of Directors of HealthAxis
at its discretion at a rate as specified by the Preferred
Stock Certificate of Designation.
In the event of any distribution, liquidation or winding up of
the affairs of HealthAxis, whether voluntary or otherwise,
after payment or provisions for payment of debts an other
liabilities of HealthAxis and payment of all amounts owed to
the holders of the Series B Preferred Stock, the holders of
the Series C Preferred Stock shall be entitled to receive on a
pari passu basis with the holders of Series D Preferred Stock,
out of the assets of HealthAxis legally available for
distribution to its shareholders, an amount in cash equal to
$5.77 ("Series C Offering
F-25
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Price") per share for each share of Series C Preferred Stock,
plus an amount equal to all dividends accrued and unpaid, if
any, on each such share up to the date fixed for distribution,
before any distribution may be made to the holders of
HealthAxis common stock, the Series A Preferred Stock or any
Series C Junior Stock.
The Series C Preferred Stock is not subject to any mandatory
redemption, sinking fund or other similar provisions.
Shares of Series C Preferred Stock are convertible at any
time, at the option of the holder, into HealthAxis common
stock at a price equal to the original issue price ($5.77 per
share) divided by the conversion price which is defined as the
original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Certificate of
Designation related to the Series C Preferred Stock.
13. Series D On July 12, 1999, HealthAxis issued 333,334 shares of
Convertible HealthAxis Series D convertible preferred stock to Intel
Preferred Corporation at $12 per share (the Series D Preferred Stock")
Stock for an aggregate purchase price of $4,000, less issuance costs
of $40. The net proceeds of approximately $3,960, will be used
for working capital and other general corporate purposes,
including marketing expenses, web site enhancements, salary
expenses and advertising and promotional expenses of
HealthAxis. In conjunction with the merger described in Note
18, all of the Series D Preferred Stock will be converted into
common stock of HAI.
In connection with the HealthAxis Series D offering,
HealthAxis Amended and Restated Articles of Incorporation were
amended to authorize an additional 500,000 shares of
HealthAxis Preferred Stock.
Holders of the Series D Preferred Stock are entitled to vote
on all matters as to which holders of common stock are
entitled to vote. The holders of each share of Series D
Preferred Stock are entitled to the number of votes equal to
the nearest whole number of shares of common stock into which
the holder's Series D Preferred Stock is convertible.
Generally, the holders of Series D Preferred Stock shall vote
together with the holders of HealthAxis common and preferred
stock as one class.
Holders of the Series D Preferred Stock will be entitled to
dividends, on a pari passu basis with the holders of Series C
Preferred Stock, accruing from the date of issue, if such
dividends are declared by the Board of Directors of HealthAxis
at its discretion at a rate as specified by the Preferred
Stock Certificate of Designation.
In the event of any distribution, liquidation or winding up of
the affairs of HealthAxis, whether voluntary or otherwise,
after payment or provisions for payment of the debts and other
liabilities of HealthAxis and payment of all amounts owed to
the holders of the Series B Preferred
F-26
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Stock, the holders of the Series D Preferred Stock shall be
entitled to receive, on a pari passu basis with the holders of
the Series C Preferred Stock out of the assets of HealthAxis
legally available for distribution to its shareholders, an
amount in cash equal to $12.00 ("Series D Offering Price") per
share for each share of Series D Preferred Stock, plus an
amount equal to all dividends accrued and unpaid, if any, on
each such share up to the date fixed for distribution, before
any distribution may be made to the holders of HealthAxis
common stock for the Series A Preferred Stock.
The Series D Preferred Stock is not subject to any mandatory
redemption, sinking fund or other similar provisions.
Shares of Series D Preferred Stock are convertible at any
time, at the option of the holder, into HealthAxis common
stock at a price equal to the original issue price ($12.00 per
share) divided by the conversion price which is defined as the
original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Certificate of
Designation related to the Series D Preferred Stock.
14. Stockholders' Amounts included in Additional Paid-In Capital include the
Equity and fair value of warrants issued by HealthAxis or HAI for
Dividend services rendered or to be rendered to HealthAxis.
Restrictions
In August 1998, the Board of Directors declared a 14-for-1
stock dividend of HealthAxis common stock. All share amounts
have been restated to reflect the effects of this dividend.
During 1998, HealthAxis issued a 5.5% convertible note to HPS
for cash of $5,000 which was subsequently converted, together
with accrued interest, into 2,365,365 shares of common stock.
The note was originally convertible into a 12.5% interest in
the Company. As a result of AOL's desire to be the most senior
security upon investment, HealthAxis agreed to give HPS an
additional 2.5% interest in the Company upon conversion of
their note to common stock. As a result, the inducement was
valued at $953 and was charged to operations with a
corresponding credit to additional paid in capital.
On May 11, 1999, HealthAxis completed a private placement of
516,051 shares of HealthAxis common stock to a group of
accredited investors at $12 per share for an aggregate
purchase price of $6,193, less issuance costs of $2. The net
proceeds of $6,191, have and will be used by HealthAxis for
working capital and other general corporate purposes,
including marketing expenses, web site enhancements, salary
expenses and advertising and promotional expenses. Investors
purchasing HealthAxis common stock were provided with
registration rights.
F-27
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
On December 7, 1999, HealthAxis completed a private placement
of 3,846,003 shares of HealthAxis common stock to a group of
accredited investors and HAI at $15 per share for an aggregate
purchase price of approximately $57,690 less issuance costs
estimated to approximate $2,533. HAI purchased 133,333 shares
in the transaction for approximately $2,000. The net proceeds
will be used for HealthAxis' working capital and other general
corporate purposes, including marketing expenses.
Dividends paid by HealthAxis to holders of HealthAxis common
stock are subject to restrictions set for in the Certificates
of Designation related to the Series A, Series B, Series C and
Series D Convertible Preferred Stock. HealthAxis has not nor
does it anticipate paying a cash dividend in the foreseeable
future.
15. Income Taxes Significant components of deferred taxes consisted of the
following:
December 31, 1999 1998
-------------------------------------------------------------
Deferred tax assets
Start-up expenses $ 1,366 $1,707
Net operating loss carryforwards 11,006 --
Other, net (307) (33)
-------------------------------------------------------------
12,065 1,674
Valuation allowance for deferred tax
Assets 12,065 1,674
-------------------------------------------------------------
Net deferred tax assets $ -- $ --
=============================================================
HealthAxis has a net operating loss carryforward ("NOL's") of
approximately $29,000, which is available to offset its future
taxable income through 2014. However, a certain amount of the
NOL's are subject to annual limitations, thereby significantly
reducing their ultimate utilization. Additionally, the
utilization of these NOL's, if available, to reduce future
income taxes will depend on the generation of sufficient
taxable income prior to their expiration.
HealthAxis has established a valuation allowance for deferred
tax assets reflecting uncertainty as to whether the deferred
tax asset is realizable. The change in the valuation allowance
in 1999 amounting to $10,391 results primarily from the
increase in net operating loss carryforwards.
16. Commitments During 1999, HealthAxis entered into capital lease obligation
and with an outside party in the amount of $154 on data processing
Contingencies and other equipment, which are included in property and
equipment. The obligation at December 31, 1999 was $29 with $9
of interest being paid on the lease, with payments of $29 due
in 2000.
F-28
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
HealthAxis leases office space in San Francisco, CA with a
term ending July 31, 2002. Payments through December 31, 1999
were $27, with payments of $55, $55 and $32 in 2000, 2001, and
2002, respectively.
During 1999, HealthAxis and HAI entered into a settlement
agreement with HPS at no cost to resolve a number of disputes
that had arisen between HAI and HPS relative to HPS'
performance of administrative services under the outsourcing
agreement and between HealthAxis and HPS relative to
HealthAxis' performance under the E-Commerce Agreement and the
HPS stock purchase agreement for HealthAxis common stock.
The settlement agreement provided for the following:
o HPS and HAI and its subsidiaries, including
HealthAxis, granted each other a mutual release of
all claims in connection with each party's
performance under the agreements;
o HPS purchased the remaining outstanding shares of one
of PILIC's subsidiaries for $1,500, which was set off
against service fees owed by HAI to HPS;
o HPS exercised a warrant granted in 1998 pursuant to
the terms of the E-Commerce Agreement for 100,000
shares of HAI's common stock for $900, which was set
off against service fees owed by HAI to HPS; and
o HAI agreed to pay the remaining balance of the
service fees owed by it to HPS in the amount of
$1,267 on or before June 30, 1999.
Litigation
HealthAxis is involved in disputes and litigation in the
normal course of business. Management is of the opinion that
neither the litigation nor the claims (if any) will have a
material adverse effect on the results of operations or
financial position of HealthAxis.
Government Legislation and Regulation
HealthAxis' business is subject to a changing legislative and
regulatory environment. Some of the proposed changes include
initiatives to restrict insurance pricing and the application
of underwriting standards and healthcare reform. Proposals on
national healthcare reform have been under consideration that
could significantly change the way
F-29
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
healthcare is financed and provided. The effects on HealthAxis
of comprehensive healthcare reforms, if enacted, may have a
material adverse impact upon the ability of HealthAxis to
profitably engage in the sale of accident and health insurance
products.
17. Related Michael Ashker, the Chief Executive Officer and President of
Party HAI and HealthAxis also served as the sole manager of Lynx
Transactions through December 1999. Lynx is party to a consulting agreement
with HAI whereby Lynx provided various services to HealthAxis
during 1998 approximating $23 in fees and expenses as well as
warrants to purchase 400,000 shares of HAI common stock. These
warrants were expensed and recorded as an equity investment by
HAI as determined using the Black Scholes option pricing
model.
A former Director of HealthAxis and HAI, is a partner in a law
firm which provides legal services to HealthAxis which
approximated $64 and $100 for the years ended December 31,
1999 and 1998, respectively.
A technology consulting firm owned by HealthAxis' former Chief
Information Systems Officer provided information systems
consulting services to HealthAxis approximating $1,398 and
$690 for the periods ended December 31, 1999 and 1998,
respectively.
18. Mergers Merger of Insurdata into HealthAxis.com
On December 7, 1999, HealthAxis, and Insurdata Incorporated, a
subsidiary of UICI announced the signing of a definitive
agreement to merge the two companies. The combined entity will
retain the HealthAxis.com name. Under the terms of the
transaction, Insurdata's shareholders will receive
approximately 50 percent of the newly combined company. The
transaction closed on January 7, 2000.
In accordance with the terms of the Merger Agreement, each
outstanding share of Insurdata common stock (the "Insurdata
Common Stock"), was converted into the right to receive 1.33
shares (the "Exchange Ratio") of HealthAxis common stock (the
"HealthAxis Common Stock"). HealthAxis issued 21,807,567
shares of HealthAxis Common Stock to Insurdata shareholders.
UICI received 18,943,678 shares of HealthAxis Common Stock, an
additional 2,439,885 shares of HealthAxis Common Stock which
are held by the voting trust (described herein) and other
shareholders of Insurdata received 424,004 shares of
HealthAxis Common Stock. Subsequent to such date, 10,103,217
shares of HealthAxis Common Stock held by UICI were
transferred to a voting trust. See "Voting Trust Agreements."
The merger of Insurdata and HealthAxis was accounted for by
HealthAxis under the purchase method of accounting in
accordance with APB No. 16 whereas HealthAxis, by virtue of
its holding a majority of the voting interest was determined
to be the accounting acquirer. As a
F-30
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
result, the net assets of Insurdata will be recorded at their
fair value with the excess of the HealthAxis purchase price
over the fair value of the net assets acquired being goodwill
is being amortized on a straight-line basis over twenty years.
The Merger Agreement provides that each option to purchase
shares of Insurdata Common Stock under Insurdata's stock
option plans which are outstanding on the Effective Date,
whether or not exercisable, shall be converted into and become
a right to purchase shares of HealthAxis Common Stock,
generally in accordance with the terms of the Insurdata stock
option plans and Insurdata option agreements pursuant to which
such options were granted, except that from and after the
Effective Date, (i) the number of shares of HealthAxis subject
to each Insurdata option shall be equal to the number of
shares of Insurdata Common Stock subject to such option prior
to the Effective Date multiplied by the exchange ratio (with
fractional shares rounded down to the nearest share and cash
being payable for any fraction of a share) and (ii) the
exercise price per share of HealthAxis Common Stock
purchasable thereunder shall be that specified in the
Insurdata option divided by the exchange ratio (rounded up to
the nearest one hundredth).
On the date of merger, HealthAxis converted options to
purchase 1,834,500 shares of Insurdata Common Stock into
options to purchase 2,439,885 shares of HealthAxis Common
Stock. The fair value of the HealthAxis options granted to
Insurdata optionholders was determined using the Black Scholes
option pricing model and was included in the purchase price of
Insurdata.
The Merger is intended to constitute reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as
amended.
F-31
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
The chart below identifies the equity ownership of HealthAxis
Common and Preferred Stock before and after the merger of
Insurdata. The chart excludes options and warrants to purchase
HealthAxis stock.
March 14, 2000 December 31, 1999
----------------------------------------------------------------------------------------
Shares Percentage Shares Percentage
----------------------------------------------------------------------------------------
HAI 15,801,644 34.8% 15,801,644 66.9%
UICI and subsidiaries 17,810,229 39.2% 866,551 3.7%
AHC acquisition 100,000 0.2% 100,000 0.4%
Other shareholders' interest
11,714,199 25.8% 6,850,310 29.0%
----------------------------------------------------------------------------------------
Total 45,426,072 100.0% 23,618,505 100.0%
========================================================================================
Voting Trust Agreements
The Merger Agreement also provides for a voting trust
agreement (the "Voting Trust Agreement") which established a
trust to hold shares of Insurdata Common Stock which are
currently held of record by UICI, but as to which UICI has
granted options to purchase such shares to certain employees
of Insurdata pursuant to its Insurdata Founders' Program.
These shares were converted into 2,439,885 shares of
HealthAxis Common Stock in the Merger. The initial trustees of
this trust are Michael Ashker, Alvin Clemens, Edward W.
LeBaron, Jr. and Henry Hager (the "Trustees"). All of the
initial Trustees are also directors of HAI and Messrs. Ashker
and Clemens are also directors and officers of HealthAxis.
Pursuant to the terms of the Voting Trust Agreement, a
majority of the Trustees have the power to vote the shares
held by the trust in their discretion at all meetings of
shareholders or pursuant to actions by unanimous consent. The
Voting Trust Agreement terminates upon the earlier of the
distribution of the shares subject to such agreement or July
1, 2003. Upon the termination of this Voting Trust Agreement
or upon any dissolution or total or partial liquidation of
HealthAxis, whether voluntary or involuntary, the Trustees
shall direct that all shares remaining in the Trust and all
moneys, securities, rights or property attributable to the
shares be distributed to UICI.
Following the completion of the Insurdata merger, UICI, and
Messrs. Ashker, LeBaron and Maloney entered into a voting
trust agreement ("the UICI Voting Trust") which provides for
the establishment of a trust to hold 10,103,217 shares of
HealthAxis common stock held by UICI. The initial trustees of
the UICI Voting Trust are Michael Ashker,
F-32
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Edward W. LeBaron, Jr. and Dennis B. Maloney who are referred
to as the trustees. All of the trustees are also directors of
HealthAxis and Messrs. Ashker and LeBaron are directors of
HAI. Messrs. Ashker and Maloney are also officers of
HealthAxis. A majority of the trustees have the power to vote
the shares held by the UICI Voting Trust in their discretion
at all meetings of shareholders or pursuant to actions by
unanimous consent. UICI retains dispositive power and the
ability to receive all dividends on the shares held in the
UICI Voting Trust. Pursuant to the UICI Voting Trust
agreement, if one of the trustees is no longer able to serve
as trustee, the other two trustees may select by unanimous
vote a new trustee from the members of the board of directors
of HAI or HealthAxis who are not selected by UICI. The UICI
Voting Trust agreement also provides that if UICI decides to
sell any of its shares of HealthAxis common stock, half of the
shares sold must be shares subject to the UICI Voting Trust.
The UICI Voting Trust agreement terminates upon the earlier of
February 11, 2020; such time as UICI owns less than 20% of the
outstanding common stock of HealthAxis or HAI; upon another
person acquiring 51% or more of the outstanding shares of
HealthAxis; or July 31, 2000 if transactions contemplated by
the merger of HealthAxis into HealthAxis Acquisition
Corporation are not completed.
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. The amended agreement
also reduced the shares in the trust to 6,433,069 shares.
Technology Outsourcing Agreement
In accordance with the Merger Agreement, UICI and its
affiliates and Insurdata shall enter into a Technology
Outsourcing Agreement pursuant to which Insurdata will provide
UICI and its affiliates with technology support services, data
processing services and other software and hardware based
services.
UICI Registration Rights Agreement
HealthAxis and UICI also entered into a registration right
agreement that provides for the registration of HealthAxis
shares received by UICI in the Merger.
F-33
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
HealthAxis Merger with HealthAxis Acquisition Corporation
On December 7, 1999, HAI announced plans to move forward with
its original plan to merge with its subsidiary, HealthAxis.
Management of the respective companies signed the merger
agreement on January 26, 2000. HAI's board of directors
approved the merger on January 26, 2000 and on the same date
HealthAxis' board of directors also approved the merger. On
September 28, 2000, HAI, HealthAxis and HealthAxis Acquisition
Corp., the wholly-owned subsidiary of HAI, entered into the
Amended and Restated Agreement and Plan of Reorganization (the
"Amended and Restated Merger Agreement") which provides for
the merger of HealthAxis with the wholly-owned subsidiary of
HAI, pursuant to which shareholders of HealthAxis will receive
shares of HAI common stock in exchange for their shares of
HealthAxis (the "Reorganization").
The Amended and Restated Merger Agreement, which amends the
Agreement and Plan of Reorganization dated January 26, 2000,
as subsequently amended on March 27, 2000, among other things,
revises the number of shares of HAI's common stock that will
be exchanged for each outstanding share of HealthAxis common
stock from 1.127 shares to 1.334 shares. The Amended and
Restated Merger Agreement also amends certain of the
representations and warranties, extends the date for
termination of the merger by either party to March 31, 2001,
and provides HealthAxis with the ability to terminate the
merger if HAI has not met certain conditions by October 31,
2000. Under the Amended and Restated Merger Agreement,
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 and Hannover Life Reassurance Company of
America are in the process of negotiating a settlement
regarding the outstanding amount.
As a result of these changes, HAI intends to file an amendment
to its Registration Statement on Form S-4 to reflect these
changes as well as respond to SEC Staff comments.
The merger documents provide for the merger of HealthAxis with
and into a newly formed, wholly owned subsidiary of HAI. As a
result of the merger, HealthAxis will cease to exist, and the
former shareholders of HealthAxis will become shareholders of
HAI. The HAI subsidiary will continue as the surviving
corporation of the merger and will retain all of its separate
corporate existence, with all its rights and powers unaffected
by the merger. The merger is subject to both HAI and
HealthAxis shareholder approval.
F-34
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
HealthAxis anticipates that the merger will constitute a tax
free "reorganization" within the meaning of the Internal
Revenue Code of 1986.
HealthAxis anticipates that HAI will issue a total of
approximately 39,629,133 shares of HAI common stock to
HealthAxis shareholders in the merger. It is also anticipated
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.
Based on the number of shares of HAI common stock to be issued
in the merger, excluding shares subject to stock options and
warrants to be assumed by HAI, following the merger, existing
HAI shareholders will own approximately 25% and former
HealthAxis shareholders will own approximately 75% of the
outstanding common stock of HAI. The merger will be accounted
for by HAI as a purchase of minority interest in which the
preferred and common stock of HealthAxis will be converted
into HAI common stock eliminating all minority interest in
HealthAxis.
HealthAxis options and warrants outstanding will be exchanged
for options and warrants in HAI. As a result of the merger and
exchange, a remeasurement of the HealthAxis options is
anticipated. As a result of the remeasurement, the fair value
of options exchanged in the merger will be included as
additional consideration. The allocation to unearned
compensation for unvested options is based upon the intrinsic
value of options exchanged. It is anticipated that unearned
compensation will be amortized over the remaining vesting
period of the options, averaging three to five years.
Out of pocket costs which are anticipated to include legal,
accounting and investment advisory costs will be included as
additional consideration in the purchase of minority interest
as discussed above.
F-35
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
19. Discontinued On June 30, 2000, as amended on September 29, 2000, HealthAxis
Operations entered into an Asset Purchase Agreement to sell certain
assets used in connection with its retail website to Digital
Insurance, Inc. ("Digital"). Included in the sale was the
retail website'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 to
be received by the Company in return for these assets consists
of: $500,000 in cash at closing, a $500,000 note at closing,
ongoing license fees, a technology services contract, and an
11% equity interest in Digital. 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 transaction was completed on October 13, 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. In accordance with Accounting
Principle Board Opinion No. 30, HealthAxis has accounted for
the disposal of the retail website as a discontinued operation
at June 30, 2000. The operating results of HealthAxis'
eDistribution Group are reported as discontinued operations as
of the measurement date of June 30, 2000 and financial
statements are restated for all periods presented.
In connection with this transaction, 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 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.
F-36
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
Results of discontinued operations:
From
Inception
Year Ended through
December 31, December 31,
1999 1998
------------ -------------
Interactive commission and fee revenue $ 291 $ -
Expenses:
Operating and development 5,504 535
Sales and marketing 19,652 1,161
General and administrative 1,000 (172)
---------- ---------
Total expenses 26,156 1,524
---------- ---------
Loss from discontinued operations $ (25,865) $ (1,524)
========== =========
Assets held for sale at December 31, 1999:
December 31, December 31,
1999 1998
------------ ------------
Prepaid interactive marketing expense $ 1,790 $ 11,654
Prepaid alliance agreements, net of accumulated
amortization of $436 2,282 --
Property, equipment and software, less accumulated
amortization of $1,076 in 1999 and $43 in 1998 3,132 1,248
------- --------
Total assets held for sale $ 7,204 $ 12,902
------- --------
F-37
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
20. Subsequent Events o 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.
o 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 reduces
shares in the trust to 6,433,069 shares.
o Effective August 15, 2000, Al Clemens, HAI's and
HealthAxis' Chairman, HealthAxis and HAI entered into
a termination agreement of Mr. Clemens' current
employment contract. The agreement, among other
things, releases HealthAxis as a party to Mr. Clemens'
amended employment agreement.
o On September 29, 2000, HAI, HealthAxis and HealthAxis
Acquisition Corp., the wholly-owned subsidiary of HAI,
entered into the Amended and Restated Agreement and
Plan of Reorganization (the "Amended and Restated
Merger Agreement") which provides for the merger of
HealthAxis with the wholly-owned subsidiary of HAI,
pursuant to which shareholders of HealthAxis will
receive shares of HAI common stock in exchange for
their shares of HealthAxis (the "Reorganization").
The Amended and Restated Merger Agreement, which
amends the Agreement and Plan of Reorganization dated
January 26, 2000, as subsequently amended on March 27,
2000, among other things, revises the number of shares
of HAI's common stock that will be exchanged for each
outstanding share of HealthAxis common stock from
1.127 shares to 1.334 shares. The Amended and Restated
Merger Agreement also amends certain of the
representations and warranties, extends the date for
termination of the merger by either party to March 31,
2001, and provides HealthAxis with the ability to
terminate the merger if HAI has not met certain
conditions by October 31, 2000. Under the Amended and
Restated Merger Agreement, 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 and Hannover Life Reassurance
Company of America are in the process of negotiating a
settlement regarding the outstanding amount.
F-38
HealthAxis.com, Inc.
Restated Notes to Consolidated Financial Statements
(dollars in thousands)
As a result of these changes, HAI intends to file an
amendment to its Registration Statement on Form S-4 to
reflect these changes as well as respond to SEC Staff
comments.
o HealthAxis and HAI entered into loan agreements dated
as of September 29, 2000, which provides for
HealthAxis to loan HAI of up to $3,404,580. The amount
is evidenced by three promissory notes. HAI's
obligations under these notes are secured pursuant to
a stock pledge and security agreement between HAI and
HealthAxis dated as of September 29, 2000 in which a
maximum of 1,000,000 shares of HealthAxis stock owned
by HAI are pledged as collateral to the loans. The
notes become due and payable on the earlier of March
31, 2001 or the date 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.
F-39
HealthAxis.com, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except share and per share data)
September 30, December 31,
-------------- ---------------
2000 1999
--------------- ---------------
(Unaudited)
Assets........................................................................
Cash and cash equivalents..................................................... $ 25,167 $ 56,444
Accounts receivable, net of allowance for doubtful accounts of $103........... 8,983 -
Prepaid expenses.............................................................. 622 -
Other current assets.......................................................... 1,481 369
--------- --------
Total current assets................................................. 36,253 56,813
Property, equipment and software, less accumulated depreciation and
Amortization of $8,458 and $1,088, respectively........................... 7,191 159
Capitalized software and contract start-up costs, less accumulated amortization
of $1,437..................................................................... 4,884 -
Goodwill, less accumulated amortization of $25,582............................ 656,602 -
Customer base, less accumulated amortization of $3,226....................... 13,979 -
Deferred acquisition costs.................................................... 341 750
Long-term receivables from employees.......................................... 629 -
Investment in Digital Insurance............................................... 3,178
Assets held for sale.......................................................... - 7,204
Other assets.................................................................. 316 -
--------- --------
Total assets......................................................... $ 723,373 $ 64,926
--------- --------
Liabilities and Stockholders' Equity..........................................
Accounts payable.............................................................. $ 636 $ 1,438
Accrued liabilities........................................................... 5,185 3,967
Deferred revenues............................................................. 432 -
Obligations under capital lease............................................... 160 29
--------- --------
Total current liabilities............................................ 6,413 5,434
Obligations under capital lease............................................... 40 -
Other liabilities............................................................. 16 -
--------- --------
Total liabilities.................................................... 6,469 5,434
Commitments:
Preferred Stock Series B $.13 cumulative, redeemable..........................
and convertible preferred: 625,529 shares issued and outstanding......... 2,804 2,804
Stockholders' Equity:
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A cumulative convertible, 545,916 shares issued and outstanding.... 546 546
Series C cumulative convertible, 1,526,412 shares issued and outstanding.. 1,526 1,526
Series D cumulative convertible, 333,334 shares issued and outstanding... 333 333
Common stock, no par value: authorized 100,000,000,
42,477,450 and 20587,314 shares issued and outstanding.................... 795,038 70,506
Additional paid-in capital.................................................... 18,285 18,285
Accumulated deficit........................................................... (94,757) (34,508)
Unearned compensation......................................................... (6,871) -
--------- --------
Total stockholders' equity........................................... 714,100 56,688
--------- --------
Total liabilities and stockholders' equity........................... $ 723,373 $ 64,926
========= ========
See notes to consolidated financial statements.
F-40
HealthAxis.com, Inc. and Subsidiaries
Consolidated Statement of Operations
(Dollars in thousands, except share and per share data) (Unaudited)
Three months ended September 30, Nine months Ended September 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
----- ----- ----- -----
Revenue $ 11,016 $ - $ 32,754 $ -
Expenses:
Cost of revenues 7,481 - 22,850 -
Operating 3,797 192 13,658 296
Sales and marketing 773 115 2,389 282
General and administrative 1,550 873 6,469 2,385
Amortization of intangibles 9,841 - 29,523 -
------------ --------- -------- --------
Total Expenses 23,442 1,180 74,889 2,963
------------ --------- -------- --------
Operating Loss (12,426) (1,180) (42,135) (2,963)
Interest and other income, net 231 113 1,375 206
------------ --------- -------- --------
Loss from continuing operations (12,195) (1,067) (40,760) (2,757)
Loss from discontinued operations - (7,922) (17,540) (16,090)
Loss on sale of discontinued operations - - (1,949) -
------------ --------- -------- --------
Total loss from discontinued operations (12,195) (7,922) (19,489) (16,090)
------------ --------- -------- --------
Net loss (12,195) (8,989) (60,249) (18,847)
Dividends on preferred stock - - - (129)
------------ --------- -------- --------
Net loss applicable common stockholders $ (12,195) $ (8,989) $ (60,249) $ (18,976)
============ ========= ========= =========
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.29) $ (0.07) $ (.98) $ (0.17)
Discontinued operations - (0.47) (0.46) (0.98)
------------ --------- -------- --------
Net loss $ (0.29) $ (0.54) $ (1.44) $ (1.15)
============ ========= ========= =========
Weighted average common shares and equivalents
Used in computing (loss) per share
Basic and diluted 42,477,000 16,739,000 41,910,000 16,479,000
See notes to consolidated financial statements.
F-41
HealthAxis.com, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Preferred Stock Preferred Stock Preferred Stock
Series A Series B Series D Common Stock
------------------- ----------------- ----------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1999 545,916 $ 546 1,526,412 $ 1,526 333,334 $ 333 20,587,311 $ 70,506
Issuance of common stock 21,807,567 710,587
Valuation of Insurdata options
Issuance of stock options 11,901
Amortization of unearned
compensation (1,385)
Stock options exercised 82,572 183
Stock option compensation. 3,246
Net loss
-------- ------ ---------- ------- ------- ----- ---------- ---------
BALANCE, SEPTEMBER 30, 2000 545,916 $ 546 1,526,412 $ 1,526 333,334 $ 333 42,477,450 $ 795,038
======== ====== ========== ======= ======= ===== ========== =========
[RESTUBBED TABLE]
Additional
Paid-In Accumulated Unearned Unearned
----------- ----------- ------------ ---------
Capital Deficit Compensation Total
------- ------- ------------ -----
BALANCE, DECEMBER 31, 1999 $ 18,285 $(34,508) $ -- $ 56,688
Issuance of common stock 710,587
Valuation of Insurdata options (10,691) (10,691)
Issuance of stock options 11,901
Amortization of unearned
compensation 3,820 2,435
Stock options exercised 183
Stock option compensation. 3,246
Net loss (60,249) (60,249)
-------- -------- -------- ---------
BALANCE, SEPTEMBER 30, 2000 $ 18,285 $(94,757) $ (6,871) $ 714,100
======== ======== ======== =========
See notes to consolidated financial statements.
F-42
HealthAxis.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Nine Months Ended
---------------------------------------
Cash flows from operating activities September 30, September 30,
2000 1999
---------------- ------------------
Net loss $ (60,249) $ (18,847)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of discontinued operations 7,750 -
Depreciation and amortization 32,327 10,059
Bad debt reserve 25 -
Stock option compensation 3,246 48
Loss on disposition of assets 514 -
Change in:
Accounts receivable (2,498) -
Prepaid expense 134 (3,620)
Other current assets 335
Other assets (57)
Accounts payable and accrued liabilities (1,761) 1,098
Accrued liabilities (4,129)
Deferred revenues 35 (266)
Other liabilities (352) (64)
--------- ---------
Net cash used in operating activities (24,680) (11,592)
--------- ---------
Cash flows from investing activities
Cash in acquired company 2,126 -
Payment of acquisition costs (1,031)
Investment in capitalized software and contract start-up (2,646) -
Investment in contract start up (28) -
Issuance of notes receivable (1,380) -
Purchases of property, equipment and software (3,692) (1,604)
--------- ---------
Net cash used in investing activities (6,651) (1,604)
--------- ---------
F-43
HealthAxis.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands) (Unaudited)
Nine Months Ended
---------------------------------------
September 30, September 30,
2000 1999
---------------- ------------------
Cash flows from financing activities
Payments on capital leases (129) -
Costs incurred for issuing stock (725)
Net proceeds from sales of HealthAxis common stock - 6,281
Net proceeds from the sales of HealthAxis preferred stock - 12,807
Exercise of HealthAxis options 183 -
--------- --------
Net cash (used in) provided by financing activities 54 18,363
--------- --------
(Decrease) in cash and cash equivalents (31,277) 5,167
Cash and cash equivalents, beginning of period 56,444 1,724
--------- --------
Cash and cash equivalents, end of period $ 25,167 $ 6,891
========= ========
Supplemental disclosure of cash flow information:
Interest paid $ 66 $ 6
Dividends on Preferred Stock $ - $ 129
Non-cash financing activities
Issuance of warrants $ - $ 914
Adjust value of common stock issuance $ - $ 87
Non-cash investing activities
In 1999, the Company received capital lease obligations in
connection with the acquisition of certain equipment $ - $ 154
See notes to consolidated financial statements.
F-44
HealthAxis.com, 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.com, Inc. and subsidiaries (the "Company" or "HealthAxis"), 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
nine month periods ended September 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 Financial Statements for
the year ended December 31, 1999 included herein.
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"). 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.
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 September 30, 2000, HealthAxis Incorporated ("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 September 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, affiliates of HAI had, as of September 30, 2000, voting power for an
additional 19.5% of HealthAxis' common and preferred stock. As a result of HAI
and its affiliates (who are members of either or both the HAI and HealthAxis
Board of Directors) having voting power with respect to a total of 54.2% of
HealthAxis' common and preferred stock, HAI has operating control and
consolidates HealthAxis for financial reporting purposes.
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 nominated by or
agreed upon by UICI) and UICI. At September 30, 2000, two HealthAxis' board
members also served on the Board of Directors of UICI, four of HealthAxis' board
members also served on the Board of Directors of HAI and two are either an
officer or a consultant of HealthAxis.
F-45
HealthAxis.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dollars in Thousands
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.
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
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. 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.
F-46
HealthAxis.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dollars in Thousands
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
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.
Unaudited pro forma financial information for the three and nine months ended
September 30, 1999, as though the Insurdata Merger had occurred on January 1,
1999, is as follows:
Three Months Nine Months
Ended Ended
------------- -------------
September 30, 1999
----------------------------------
Revenues $ 11,337 $ 31,837
Net Loss $ (18,361) $ (48,246)
Net loss per common share $ (0.48) $ (1.49)
Weighted average common shares
outstanding (basic and diluted) 38,547,000 32,287,000
Note C - Discontinued Operations
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. Included in the sale was the 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 those
assets consisted of: $500 in cash; a $500 note; 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 Accounting Principles Board
Opinion Number 30, HealthAxis has reported the operations of the eDistribution
group as discontinued operations for all the periods presented. The operating
results of HealthAxis' eDistribution Group are reported as discontinued
operations as of the measurement date of June 30, 2000 and the financial
statements are restated for all periods presented. The sale of assets to Digital
Insurance, Inc. has been recorded as of September 30, 2000 because the sale was
a material subsequent event that was consummated prior to the issuance of the
interim financial statements.
F-47
HealthAxis.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dollars in Thousands
In connection with the Digital Sale, HealthAxis and Digital entered into a
Software Licensing and Consulting Agreement under which HealthAxis will provide
specific services to Digital. This agreement 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
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.
A loss on the sale of discontinued operations in the amount of $1,949 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 retail website 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
Cash and note received at closing 1,000
Provision for eDistribution Group's future losses (2,250)
Book value of other eDistribution Group assets (3,877)
---------
Estimated loss on sale of discontinued operations $ (1,949)
========
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 on a prior investment received by Digital.
F-48
HealthAxis.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dollars in Thousands
Following is a summary of the results of the Company's discontinued operations
for the three months and the nine months ended September 30, 2000 and 1999:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2000 1999 2000 1999
-------- ------ ------- -------
Revenues $ 0 $ 84 $ 672 $ 125
Expenses:
Operating and development 0 2,547 5,741 4,473
Sales and marketing 0 5,441 11,496 11,707
General and administrative 0 18 19 35
Amortization of intangibles 0 0 956 0
------- ------- -------- --------
Total expenses 0 8,006 18,212 16,215
------- ------- -------- --------
Operating loss $ 0 $(7,922) $(17,540) $(16,090)
------- ------- -------- --------
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
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 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
F-49
HealthAxis.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dollars in Thousands
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 nine months ended September 30, 2000, UICI and its
subsidiaries and affiliates accounted for an aggregate of $6,629 (60%) and
$20,905 (64%), respectively, of HealthAxis' total revenues. As of September 30,
2000, HealthAxis had trade receivables from UICI and its subsidiaries and
affiliates of $2,774 (31%).
Note F - 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 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. HealthAxis capitalized
$2,646 in software development costs during the nine months ended September 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 $281 and $784 during the three months
and nine months ended September 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 nine months
ended September 30, 2000 totaled $28. HealthAxis recorded amortization expense
relating to contract start-up costs of $65 and $239 during the three months and
the nine months ended September 30, 2000, respectively.
Note G - Amortization of Intangibles
Amortization of intangibles is comprised of the following for the three months
and the nine months ended September 30, 2000:
Three Months Nine Months
Ended Ended
----------------------------
September 30, 2000
----------------------------
Amortization of goodwill $ 8,527 $ 25,581
Amortization of customer base 1,075 3,226
Amortization of developed software 239 716
-------- ----------
$ 9,841 $ 29,523
======== ==========
F-50
HealthAxis.com, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dollars in Thousands
At September 30, 2000, the Company performed an impairment evaluation
of long-lived assets and determined that none were impaired. The Company
currently knows of no events that would allow for the write down of goodwill
other than the revaluation associated with the HAI merger.
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, HealthAxis has recorded compensation expense of $2,331
for the nine months ended September 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 and September 22, 2000, the board of directors of HealthAxis
granted 227,425 and 145,200 options, respectively, under the 1998 Plan. These
options were granted with exercise prices equaling the quoted market share price
of HAI on the date of grant. No stock based compensation has been recorded
related to these grants as the exercise prices of the options equaled the deemed
fair value of HealthAxis' common stock on the dates 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 I - Commitments and Contingencies
Effective August 15, 2000, Al Clemens, HAI's and HealthAxis's Chairman,
HealthAxis and HAI entered into a termination agreement of Mr. Clemens' current
employment contract, which, among other things, releases of HealthAxis from the
current employment contract.
F-51