SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended.....................March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from...................to.................
Commission file number...................... 0-13591
HEALTHAXIS INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, East Norriton, Pennsylvania 19401
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (610) 279-2500
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 52,775,209 shares of
common stock, par value $.10, outstanding as of May 7, 2001.
Page 1 of 21
Healthaxis Inc.
Table of Contents
Page
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PART I Financial Information
Item 1. Condensed Financial Statements
Consolidated Balance Sheet..............................................................................3
Consolidated Statement of Operations....................................................................4
Consolidated Statement of Changes in Stockholders' Equity...............................................5
Consolidated Statement of Cash Flows..................................................................6-7
Notes to Condensed Consolidated Financial Statements.................................................8-11
Item 2. Management's Discussion and Analysis of Results
Of Operations and Financial Condition...............................................................12-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................16
PART II Other Information
Items 1-5...........................................................................................17-18
Item 6. Reports on Form 8-K.........................................................................18-19
Signatures......................................................................................................20
Exhibit Index...................................................................................................21
Page 2 of 21
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Healthaxis Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
(Dollars in thousands except share and per share data)
March 31, December 31,
2001 2000
--------------- ----------------
Assets
Cash and cash equivalents $ 12,010 $ 17,170
Accounts receivable, net of allowance for doubtful accounts of $286 and $300, respectively 2,486 2,061
Accounts receivable from affiliates 4,905 5,090
Prepaid expenses and other current assets 470 694
Notes receivable 329 577
--------- ---------
Total current assets 20,200 25,592
Property, equipment and software, less accumulated depreciation and
amortization of $10,579 and $10,036, respectively 5,620 6,431
Capitalized software and contract start-up costs, less accumulated amortization of
$643 and $1,478, respectively 7,115 7,240
Goodwill, less accumulated amortization of $2,523 and $34,109 respectively 300,275 648,854
Customer base, less accumulated amortization of $514 and $4,301, respectively 11,827 12,904
Notes receivable from employees 631 631
Note receivable 224 242
Deferred acquisition costs - 801
Assets held for sale 5,165 5,005
Investment in Digital Insurance, Inc. 3,178 3,178
Other assets 120 114
--------- ---------
Total assets $ 354,355 $ 710,992
========= =========
Liabilities and Stockholders' Equity
Accounts payable $ 975 $ 1,275
Accrued liabilities 4,536 5,724
Deferred revenues 2,546 737
Obligations under capital lease 178 269
--------- ---------
Total current liabilities 8,235 8,005
Convertible debentures 27,061 27,367
Post retirement and employment liabilities 1,069 1,072
Other liabilities 10 15
--------- ---------
Total liabilities 36,375 36,459
Commitments and Contingencies
Minority interest in Healthaxis:
Common stock - 442,989
Preferred stock - 15,049
Stockholders' Equity:
Preferred stock, par value $1: authorized 100,000,000,
none issued and outstanding - -
Common stock, par value $.10: authorized 1,900,000,000,
issued and outstanding 52,774,498 and 13,097,618 shares 5,277 1,310
Additional capital 433,298 325,797
Accumulated deficit (119,347) (105,497)
Unearned compensation (1,248) (5,115)
--------- ---------
Total stockholders' equity 317,980 216,495
--------- ---------
Total liabilities and stockholders' equity $ 354,355 $ 710,992
========= =========
See notes to consolidated financial statements.
Page 3 of 21
Healthaxis Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
(Dollars in thousands, except share and per share data)
Three Months Ended,
March 31, March 31,
2001 2000
---------- ---------
Revenue $ 10,837 $ 11,375
Expenses:
Cost of revenues 11,989 12,021
Sales and marketing 1,887 648
General and administrative 8,505 4,446
Research and development 562 141
Amortization of intangibles 6,570 10,498
---------- ---------
Total expenses 29,513 27,754
---------- ---------
Operating loss (18,676) (16,379)
Interest and other income, net 65 (585)
---------- ---------
Loss before minority interest (18,611) (16,964)
Minority interest in loss of subsidiary 3,080 9,360
---------- ---------
Loss from continuing operations (15,531) (7,604)
Loss from discontinued operations - (3,728)
---------- ---------
Net loss before extraordinary item (15,531) (11,332)
Convertible debt restructuring 1,681 -
---------- ---------
Net loss $ (13,850) $ (11,332)
========== =========
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.37) $ (0.58)
Discontinued operations - (0.29)
Extraordinary gain 0.04 -
---------- ---------
Net loss $ (0.33) $ (0.87)
========== =========
Weighted average common shares and equivalents used in computing
loss per share
Basic and diluted 41,759,000 13,051,000
See notes to consolidated financial statements.
Page 4 of 21
Healthaxis Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars and shares in thousands) (Unaudited)
Preferred Stock Common Stock Additional Accumulated Unearned
Shares Amount Shares Amount Capital Deficit Compensation Total
------ ------ ------ ------ ------- ------- ------------ -----
BALANCE, DECEMBER 31, 2000 - $ - 13,098 $ 1,310 $325,797 $(105,497) $ (5,115) $ 216,495
Net loss (13,850) (13,850)
Exchange of options in HAXS Merger 2,208 (1,513) 695
Issuance of common stock in HAXS Merger 39,629 3,963 105,017 108,980
Amortization of unearned compensation 408 408
Stock based compensation 5,036 5,036
Revaluation of unearned compensation (4,972) 4,972 -
Increase in net assets in
Healthaxis.com, Inc. 115 115
Common stock issued in lieu of interest 48 4 97 101
----- ------ ------ ------- -------- --------- -------- --------
BALANCE, MARCH 31, 2001 $ 0 $ 0 52,775 $ 5,277 $433,298 $(119,347) $ (1,248) $317,980
===== ====== ====== ======= ======== ========= ======== ========
See notes to consolidated financial statements.
Page 5 of 21
Healthaxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Three Months Ended
Cash flows from operating activities March 31, March 31,
2001 2000
---------- ----------
Net loss $ (13,850) $ (11,332)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,128 13,427
Bad debt reserve 17 4
Minority interest in loss of subsidiary
Share of Loss from continuing operations (3,080) (9,360)
Share of Loss from discontinued operations - (6,574)
Gain on convertible debt restructuring (1,681) -
Stock option compensation 5,323 1,621
(Gain) loss on disposition of assets (22) 348
Payment of interest with common stock 101 -
Interest on convertible debt (45) 507
Change in:
Accounts receivable (257) (1,624)
Prepaid expense 224 1,053
Other assets, current and deferred income taxes (6) 43
Accounts payable and accrued liabilities (68) (828)
Deferred revenues 1,809 222
Ceding commission and interest - 150
Future policy benefits and claims (3) 12
Other liabilities (3) (338)
--------- ---------
Net cash used in operating activities (3,413) (12,669)
--------- ---------
Cash flows from investing activities
Cash in acquired company - 2,126
Collection of notes receivable 266 -
Investment in capitalized software and contract start-up (1,274) (227)
Proceeds from the sale of equipment 318 (10)
Payment of acquisition costs (480) (1,031)
Purchases of property, equipment and software (484) (2,023)
--------- ---------
Net cash used in investing activities (1,654) (1,165)
--------- ---------
See notes to consolidated financial statements.
Page 6 of 21
Healthaxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands) (Unaudited)
Three Months Ended
March 31, March 31,
2001 2000
--------- ---------
Cash flows from financing activities
Payments on capital leases (93) (147)
Exercise of stock options - 341
Exercise of Healthaxis options - 183
-------- ---------
Net cash (used in) provided by financing activities (93) 377
-------- ---------
Decrease in cash and cash equivalents (5,160) (13,457)
Cash and cash equivalents, beginning of period 17,170 58,069
-------- ---------
Cash and cash equivalents, end of period $ 12,010 $ 44,612
======== =========
Supplemental disclosure of cash flow information:
Interest paid $ 147 $ 184
See notes to consolidated financial statements.
Page 7 of 21
Healthaxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except share and per share data)
Note A - Description of business and basis of presentation
Unaudited Financial Information
The unaudited condensed consolidated financial statements have been prepared by
Healthaxis Inc. and subsidiaries (the "Company" or "HAXS"), 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-month period ended March 31,
2001, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
General
HAXS is a Pennsylvania corporation organized in 1982. HAXS operates as a
technology solutions provider in the market of health care administration. The
Company provides application solutions and services to both healthcare payers
and those entities involved in the distribution and administration of health
insurance. The Company offers a suite of Internet based software applications
and services designed to enhance the efficiency and effectiveness of insurance
plan distribution, claims administration, benefits enrollment, benefits
maintenance and conversion of insurance claims information to electronic form.
In addition, the Company provides systems integration, technology management,
and imaging data capture services.
Note B - Healthaxis Merger with Healthaxis Acquisition Corporation
On January 26, 2001, the shareholders of HAXS and Healthaxis.com, Inc.
("Healthaxis") approved the merger of Healthaxis with a newly formed, wholly
owned subsidiary of HAXS ("the HAXS Merger"). This transaction was completed
pursuant to the terms of the Amended and Restated Agreement on Plan of
Reorganization dated October 26, 2000. In accordance with the terms of the
merger, as amended, on January 26, 2001 HAXS issued 39,629,097 shares of its
common stock to Healthaxis shareholders (a 1.334-to-1 ratio). In addition, HAXS
issued 7,078,485 warrants and options to purchase HAXS common stock to holders
of Healthaxis stock options and warrants which represented the number of
Healthaxis options and warrants outstanding on the date of the merger after
giving effect for the merger ratio. As a result of the HAXS Merger, Healthaxis
will cease to exist, and the newly formed HAXS subsidiary will continue as the
surviving corporation of the merger operating under the Healthaxis name.
The HAXS Merger has been accounted for as a purchase of minority interest. The
purchase price has been determined to be $110,956 which includes the following:
(1) the fair value of the 39,629,097 HAXS shares issued to the holders of
Healthaxis shares totaling $108,980 ($2.75 per share), (2) the fair value of a
portion of the 7,078,485 HAXS options and warrants issued totaling $2,208 less
$1,513 of unearned compensation for the unvested portion of options issued, and
(3) merger costs totaling $1,280. The measurement date for purposes of
calculating the fair value of HAXS common shares issued in the merger is
September 29, 2000, the date the
Page 8 of 21
agreement was revised to reflect the final exchange ratio and certain other
material terms of the merger. The fair value of HAXS shares on or about the
measurement date was determined based upon quoted NASDAQ market prices. The fair
value of HAXS options and warrants issued in the merger was determined using the
Black Scholes option pricing model.
Under the rules for purchase accounting, the assets and liabilities of
Healthaxis, including goodwill, have been revalued as of the date of the merger.
A reduction of goodwill totaling $343,214 has been recorded as a result of the
merger, which occurred on January 26, 2001. The reduction of goodwill results
from a new purchase price used for the purchase of Healthaxis' minority
interest. The new purchase price is based upon the fair value of HAXS common
stock. The significant decrease in fair value of HAXS common stock on September
29, 2000 compared to the fair value of HAXS common stock on December 7, 1999
(the measurement date for the Insurdata Merger) results in a purchase price that
is significantly lower than the Insurdata purchase price. As a result, a
reduction of goodwill originating from the Insurdata Merger has been recorded.
The purchase price allocation is preliminary as information regarding the fair
value of intangibles is being evaluated.
Accounting for the Exchange of Stock Options in the HAXS Merger
The Company accounted for certain of the stock options exchanged in the HAXS
Merger under the rules for purchase accounting. Certain other options exchanged
were accounted for in accordance with the modification accounting guidance
contained in FASB Interpretation ("FIN") 44, Accounting for Certain Transactions
involving Stock Compensation. In order to determine which accounting guidance to
apply to different option groups, the Company relied on the guidance in Emerging
Issues Task Force Issue 00-23, Issues Related to the Accounting for Stock
Compensation Under APB Opinion No. 25 "Accounting for Stock Issued to
Employees", and FASB Interpretation No. 44 " Accounting for Certain Transactions
Involving Stock Compensation". In accordance with the guidance, the Company
included only the options exchanged in the January 2000 merger with Insurdata
Incorporated into the purchase accounting for the HAXS Merger. This option group
includes the Insurdata Founders Plan options. Under the rules for the purchase
of a minority interest, a portion of the intrinsic value of the unvested options
included in the calculation was recorded as unearned compensation. Unearned
compensation is being amortized as compensation expense over the remaining
vesting term of the related options. The Company recognized compensation expense
totaling $408 related to unearned compensation amortization in the three months
ended March 31, 2001.
The options exchanged for the remaining pool of Healthaxis options have been
accounted for under the modification accounting rules of FIN 44. Under FIN 44,
those 1998 Healthaxis Plan options that were re-priced in May 2000, will
continue to be treated as variable option awards even after the merger option
exchange. These options subject to variable accounting have an exercise price of
$2.49 per share. At March 31, 2001, these options were not in the money, which
resulted in no compensation expense for this group for the first quarter of
2001. Those options not re-priced in 2000 remain under the fixed option
accounting rules of modification accounting. Under these rules, these options
were re-measured as of the date of the merger. The intrinsic value of the vested
options exchanged totaling $4,876 was expensed as compensation expense in the
first quarter of 2001. The intrinsic value of the unvested options totaling
$1,476 will be expensed over the remaining vesting period of the options. Total
stock based compensation expense, excluding the unearned compensation
amortization, for the three months ended March 31, 2001 was $5,323.
Page 9 of 21
Note C - Related Party Transactions
Healthaxis conducts a significant amount of business with a major shareholder,
UICI. Healthaxis currently provides services to a number of UICI subsidiaries
and affiliates pursuant to written agreements ranging from one to five years,
with annual renewable options thereafter. These services include the use of
certain of its proprietary workflow and business applications, as well as
systems integration and technology management. UICI and its subsidiaries and
affiliates constitute, in the aggregate, Healthaxis' largest customer. For the
three months ended March 31, 2001, UICI and its subsidiaries and affiliates
accounted for an aggregate of $7,153 (66%) of Healthaxis' total revenues for the
period. As of March 31, 2001, Healthaxis had trade receivables from UICI and its
subsidiaries and affiliates of $2,869 (39%).
On January 25, 2001, Healthaxis entered into a software license agreement with
UICI. Under the agreement, UICI paid a one-time license fee of $1,836 for a
perpetual, enterprise-wide software license. UICI has the option to terminate
the agreement within the first two years, in which case a prorated portion of
the one-time license fee will be refunded. Consequently, the license fee is
being recognized into revenue pro rata over 24 months.
On June 30, 2000, in connection with the sale of the retail website operations,
Healthaxis received an eleven percent ownership interest in Digital Insurance.
During the three months ended March 31, 2001, Healthaxis recognized revenues
totaling $812 from Digital Insurance. In addition, at March 31, 2001, Healthaxis
had an accounts receivable balance due from Digital Insurance totaling $2,036,
which was current.
Note D - Amortization of Intangibles
Amortization of intangibles is comprised of the following for the three months
ended March 31, 2001:
Amortization of goodwill $ 5,365
Amortization of customer base 873
Amortization of developed software 332
-------
$ 6,570
=======
Note E - Restructuring of Convertible Debentures and Extraordinary Gain
On September 28, 2000, HAXS entered into an Amendment to the Securities Purchase
Agreement dated September 14, 1999 between HAXS and the holders of HAXS' $27,500
2% convertible debentures (the "Amendment"). The transactions contemplated by
the Amendment were consummated on January 29, 2001. The terms of the debentures
were amended to, among other things, extend the maturity of the debentures from
September 14, 2002 to September 14, 2005, to change the conversion price from
$20.34 to $9.00 and modify the events of default. Warrants to purchase 202,802
shares of HAXS' common stock issued to the purchasers of the debentures were
also amended to reduce the exercise price from $20.34 to $3.01 and to extend the
exercise period of the warrants for an additional year, or until September 13,
2005.
The Company recorded an extraordinary gain on the restructuring of these
debentures totaling $1,681. The majority of this amount relates to the reversal
of penalties accrued pursuant to a stock registration rights agreement between
the Company and the debenture holders. Under the terms of the Amendment, these
penalties were waived.
Page 10 of 21
Note F - Employee Termination Agreement
On August 15, 2000, Alvin H. Clemens, the Company's then Chairman, and HAXS
entered into an agreement terminating Mr. Clemens' employment contract. Under
the terms of the termination agreement, Mr. Clemens will receive aggregate
payments totaling $2,125 paid in quarterly installments over five years. The
Company may, at its option, make the quarterly payments in shares of HAXS common
stock not to exceed a total of 500,000 shares. Mr. Clemens, at his option, may
request that the Company pay 1/3 of the value of each payment in cash in lieu of
stock to cover income tax liabilities. Except for the general release of
Healthaxis, which became effective as of August 15, 2000, the termination
agreement became effective upon consummation of the HAXS merger. The Company
recorded $2,125 in compensation expense during the three months ended March 31,
2001, which is included in the general and administrative expenses.
Note G - Subsequent Events
Stock Purchase
On April 6, 2001, fourteen members of the executive and senior management team,
along with certain current and former directors, purchased 1,035,725 shares of
the Company's common stock from an unrelated third party in a privately
negotiated transaction. The purchase price was $.60 per share. The purchase was
approved by the Board of Directors of HAXS, which on March 26, 2001 also
approved a loan to members of the management team of $154 collateralized by 100%
of the shares purchased. Interest is payable quarterly at an 8% rate per annum.
Restructuring Plan
On May 11, 2001, the Company approved and began implementing an internal
restructuring plan and re-alignment of operations. The restructuring plan
includes a reduction in workforce of approximately 60 employees, relocation of
the Company's headquarters from Pennsylvania to Texas, elimination of certain
development activities, and a reorganization to more closely align sales,
delivery and customer service and provide for clearer accountability for
business profitability. The Company is evaluating the effects of this
restructuring plan on the carrying value of its assets, including goodwill, and
may have material write-downs of assets if it is determined there is an
impairment of assets, most of which would not affect tangible net worth.
Page 11 of 21
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Forward-Looking Statements
All statements and information contained in this document other than
statements of historical fact, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors, and are based upon a number of assumptions concerning future conditions
that may ultimately prove to be inaccurate, and which may cause actual results
to be materially different from those contemplated by the forward-looking
statements. In addition, many phases of the Company's operations are subject to
influences outside its control including but not limited to disclosure related
to the Restructuring Plan described below. Any one, or any combination of
factors, described in other sections of this document or in the "Risk Factor"
section of our annual report on Form 10-K for the year ended December 31, 2000
could have a material adverse effect on the Company's results of operations.
Recent Developments
Healthaxis Merger with Healthaxis Acquisition Corporation
On January 26, 2001, the shareholders of HAXS and Healthaxis approved the
merger of Healthaxis with a newly formed, wholly owned subsidiary of HAXS ("the
HAXS Merger"). This transaction was completed pursuant to the terms of the
Amended and Restated Agreement on Plan of Reorganization dated September 29,
2000. In accordance with the terms of the merger, as amended, HAXS issued
39,629,097 shares of its common stock to Healthaxis shareholders (a 1.334 to 1
ratio). In addition, HAXS issued 7,078,485 warrants and options to purchase HAXS
common stock to holders of Healthaxis stock options and warrants which
represented the number of Healthaxis options and warrants outstanding on the
date of the merger effected for the merger ratio. As a result of the HAXS
Merger, Healthaxis will cease to exist, and the newly formed HAXS subsidiary
will continue as the surviving corporation of the merger operating under the
Healthaxis name.
Employee Termination Agreement
On August 15, 2000, Mr. Al Clemens, Healthaxis and HAXS entered into a
termination agreement of Mr. Clemens' employment contract which became effective
upon the consummation of the HAXS Merger. Compensation expense totaling $2.1
million has been recorded in the first quarter of 2001.
Restructuring Plan
Subject to an internal restructuring plan and re-alignment of operations
approved by the HAXS Board of Directors on May 11, 2001, the Company took the
following actions:
[ ] Implemented a reorganization plan which created four new business units
[ ] Eliminated approximately 60 employee positions, primarily at its Irving,
Texas and East Norriton, Pennsylvania offices;
[ ] Agreed to move the corporate headquarters from Pennsylvania to Texas; and
[ ] Decided to cease development and marketing of certain products.
Page 12 of 21
During May 2001, management concluded that it was necessary to
significantly modify the operating structure of the Company in order for
Healthaxis to sustain viability and to position itself to grow and become
profitable. Management and the Board of Directors determined that to reach
profitability in an acceptable period of time, certain significant actions were
necessary in the structure and size of the organization. Accordingly, at a
special meeting of the Board of Directors on May 11, 2001, the decision was made
to reduce the size and scope of the organization pursuant to a plan submitted by
the management of the Company.
On May 14, 2001, the Company's plan was implemented and approximately 60
employee positions were eliminated. The affected employees were notified of
their termination, and their termination benefits were communicated to them. As
of May 15, 2001, it is expected that the restructuring plan will be completed on
or before June 30, 2001.
Related solely to its restructuring and reorganization, the Company will
accrue or record certain costs and charges. In summary, as of May 15, 2001 those
costs are generally expected to relate to the following:
[ ] Severance cost for terminated employees - The Company eliminated
approximately 60 positions and terminated approximately that number of
employees on May 14, 2001. The Company has provided affected employees
severance benefits which were generally determined on the basis of the
employee's position and/or years of service at the Company. At a minimum,
each employee will be paid two weeks severance.
[ ] Relocate the corporate headquarters - Healthaxis has been gradually
migrating its corporate headquarters and presence to its Irving, Texas
(Dallas / Fort Worth area) facility. Currently, a majority of the senior
management team (including the Chief Executive Officer, Chief Financial
Officer, and other senior executives), and the majority of the sales and
technical staff , have their offices in Texas. Healthaxis has reduced its
Pennsylvania headquarters staff to approximately 10 persons. As previously
disclosed, the corporate headquarters facility in Pennsylvania is recorded
as an asset held for sale.
[ ] Write down of long-lived assets - The Company's restructuring plan
includes dividing itself into four major business units. These business
units are developing clearly defined business plans that will encompass
several key products. As a result, the Company may decide to abandon the
development and marketing of several other products that do not fit into
the Company's new business strategy. The Company believes that the
completion of business plans may result in an impairment of some assets and
require write-downs.
Related to realignment and reduction-in-force, the Company expects to
record restructuring charges of between $3.2 million and $4.5 million in the
second quarter of 2001. Of this amount, approximately 15% relates to severance
and other personnel costs for the workforce reduction, 50% relates to the
revaluation of certain software and other capitalized costs of the Company, and
the remainder relates to relocating the Company's headquarters. In total,
counting the reduction-in-force and other contemplated expense reductions, the
initiative is designed to save in excess of $11.0 million annually, however
there can be no assurances that the implementation of this initiative will
result in the full amount of the savings.
NASDAQ Listing
On April 23, 2001, the Company was notified by NASDAQ that it had
successfully complied with the exception rendered by the NASDAQ Listing
Qualification's Panel (the "Panel") in January 2001. The Panel determined to
continue the listing of the Company's common stock on the NASDAQ Stock Market.
Page 13 of 21
Results of Operations
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Revenues. Revenue decreased 5% from $11.4 million for the three months
ended March 31, 2000 to $10.8 million for the three months ended March 31, 2001.
The decline was primarily the result of the loss of data capture revenue, net of
new revenue generated from Digital Insurance.
Cost of revenues. Cost of revenues includes all expenses directly
associated with the production of revenue, and consists primarily of salaries
and related benefits, rent, amortization and depreciation, system expenses such
as maintenance and repair, as well as other related consumables. These expenses
were approximately $12.0 million for each of the three months ended March 31,
2000 and March 31, 2001. Cost of revenue as a percentage of revenue increased
slightly from 106% in 2000 to 111% in 2001 due to higher labor costs.
Sales and marketing expenses. Sales and marketing expenses consist
primarily of employee salaries and related benefits, as well as promotional
costs such as direct mailing campaigns, trade shows and media advertising. These
expenses increased from $648,000 for the three months ended March 31, 2000 to
$1.9 million for the three months ended March 31, 2001. Approximately $848,000
of the increase resulted from stock based compensation. The remaining increase
was due primarily to new sales initiatives and an increase in the number of
sales and marketing staff from six to twelve in the corresponding periods.
General and administrative expenses. General and administrative expenses
include executive management, accounting, legal and human resources personnel
and related benefits, as well as expenditures for applicable overhead costs.
These expenses were approximately $4.4 million for the three months ended March
31, 2000 compared to $8.5 million for the three months ended March 31, 2001.
Stock based compensation of approximately $1.4 million was included in 2000 as
compared to $4.3 million in 2001 due primarily to the re-measurement of options
exchanged in the HAXS merger. Severance expenses totaling $2.2 million are
included in 2001, primarily related to Mr. Clemens as described above. There
were no severance charges in the corresponding period in 2000.
Research and development expenses. Research and development expenses are
primarily the salary and related benefits of personnel engaged directly in the
development of new products and the enhancement of existing products, prior to
the establishment of technological feasibility. These expenses increased from
$141,000 for the three months ended March 31, 2000 to $562,000 for the three
months ended March 31, 2001. The increase was due to an increase in the Advanced
Technology Department staff from seven to fourteen and the nature and stage of
the projects being developed. In 2000, most of the projects for this staff were
either billable to clients or capitalized, and accordingly were excluded from
research and development.
Amortization of Intangibles. Expenses related to the amortization of
intangible assets include the amortization of developed software, customer bases
and goodwill. These expenses decreased from $10.5 million for the three months
ended March 31, 2000 to $6.6 million for the three months ended March 31, 2001.
Predominantly all of the decrease was due to the revaluation of intangible
assets at the time of the HAXS Merger on January 26, 2001.
Interest expense and other income, net. Interest expense and other income
changed from a net expense of $585,000 in the three months ended March 31, 2000
to a net income of $65,000 in the three months ended March 31, 2001. The change
was primarily due to a reduction of interest expense resulting from the
settlement of the ceding commission liability with Hannover Re in the fourth
quarter of 2000 and a reduction of the non-cash interest expense related to the
amortization of the discount associated with the convertible debentures.
Page 14 of 21
Minority interest in loss of subsidiary. The minority interest in loss of
subsidiary was $9.4 million for the three months ended March 31, 2000 compared
to $3.1 million for the three months ended March 31, 2001. The reduction was
primarily due to the fact that the minority interest was only recorded for
approximately one month (until the HAXS merger) in 2001 as opposed to the full
three-month period in 2000. Subsequent to the HAXS merger, the Company owned
100% of the Healthaxis subsidiary and therefore no subsequent minority interest
was recorded.
Extraordinary gain. The extraordinary gain of $1.7 million in the three
month ended March 31, 2001 is the result of the restructuring of the terms of
the convertible debentures which was completed on January 29, 2001. The majority
of this gain relates to penalties owed to the debenture holders under a
registration rights agreement, which were forgiven as part of the restructuring
of the terms.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") 44, Accounting for Certain Transactions involving
Stock Compensation, which clarifies the application of APB 25 for certain
issues. The interpretation is effective July 1, 2000, except for the provisions
that relate to modifications that directly or indirectly reduce the exercise
price of an award and the definition of an employee, which are effective after
December 15, 1998. This pronouncement did not have a material impact on prior
financial statements, however the adoption of FIN 44 and related guidance.
resulted in unearned compensation amortization and stock based compensation
charges of approximately $5.7 million being recorded in the first quarter of
2001. The effects are further described in the applicable line item expenses in
the Results of Operations section above.
Liquidity and Capital Resources
General. A major objective of HAXS is to maintain sufficient liquidity to
fund growth and meet all cash requirements with cash and short-term equivalents
on hand plus funds generated from operating cash flow.
During the year ended December 31, 2000, Healthaxis' liquidity requirements
were primarily met through the cash available from the December 7, 1999 equity
financing and operating revenues. Healthaxis believes that its current cash and
cash equivalents will be sufficient to fund Healthaxis' operations through the
end of 2001. Funding the Company's operations on a long-term basis will depend
upon management's ability to significantly reduce expenses (as described above
in "Restructuring Plan") and to generate new revenues. The Company believes the
goals of the restructuring plan are achievable, based upon the information that
management used in developing the plan. There can be no assurances that the
Company will be successful in achieving these goals. Failure to effectively
implement the planned changes or the effects of factors outside the Company's
control could result in further reductions to the workforce, a reduction in the
scope of operations, sales of assets or sales of equity securities in either
private or public transactions. There can be no assurance that under current
conditions, external funds will be available or, if available, will not dilute
shareholders' interests or returns.
Three months ended March 31, 2001 compared to three months ended March 31, 2000
Cash used in operating activities. Cash used from operating activities for
the three months ended March 31, 2001 was $3.4 million as compared to $12.7
million for the three months ended March 31, 2000. The primary reason for the
reduced cash expenditures was the result of discontinuing the operations of the
retail website. This was accomplished via the sale of certain assets and
personnel to Digital Insurance on June 30, 2000. In addition to generating
license fees and professional service revenues, the sale to Digital Insurance
has resulted in decreased cash usage related to operating expenses and sales and
marketing expenses reported in the March 31, 2000 loss from discontinued
operations.
Page 15 of 21
Cash flows from investing activities. Cash used in investing activities for
the three months ended March 31, 2001 was $1.7 million as compared to $1.2
million for the comparable period in 2000. Approximately $2.1 million was
provided in 2000 as result of cash acquired in the Insurdata merger in January
2000. Despite this, the net cash expenditures were up only $489,000 as result of
a decrease in the purchase of property and equipment in 2001.
Cash flows from financing activities. Cash flows from financing activities
decreased by $470,000 as result of $93,000 cash used in the three months ended
March 31, 2001 as opposed to cash generated of $377,000 for the comparable
period in 2000. The primary difference was the result of stock options exercised
in 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Exposure to market risk for changes in interest rates relate primarily to
our short-term investments. We do not use derivative financial instruments. The
primary objective of our investment activities is to preserve principal while
maximizing yields without significantly increasing risk. Due to the nature of
our investments, we believe that there is no material risk exposure.
The Convertible Debentures outstanding at March 31, 2001 are fixed rate
obligations and would not be exposed to the impact of interest rate
fluctuations. To the extent that the Company seeks to refinance these
instruments, the prevailing market interest rates on replacement debt could
exceed rates currently paid thereby increasing interest expense and increasing
net loss.
Page 16 of 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in normal litigation, including that arising in the
ordinary course of its business. Management is of the opinion that no litigation
will have a material adverse effect on the results of operations or financial
position of the Company.
Item 2. Changes in Securities
2.(a) Not applicable
(b) Not applicable
(c) On January 29, 2001, the Company and debenture holders consummated
the transactions which were contemplated by the Amendment to the Securities
Purchase Agreement dated September 28, 2000 and which resulted in amendments to
the Company's $27.5 million 2% convertible debentures due September 14, 2002
(the "Debentures"). The terms of the Debentures were amended to, among other
things, extend the maturity of the Debentures to September 14, 2005, change the
conversion price to $9.00 per share and modify the events of default (the
"Amended Debentures"). The warrants to purchase 202,802 shares of the Company's
Common Stock issued to the purchasers of the Debentures were also amended
effective January 29, 2001 to reduce the exercise price to $3.01 and to extend
the exercise period of the warrants for an additional year, or until September
13, 2005 (the "Amended Warrants"). The current debenture holders include Brown
Simpson Partners I, Ltd., Brown Simpson -- Ord Investments LLC, LBI Group Inc.,
UICI, and Alvin H. Clemens. See the Current Report on Form 8-K, dated January
26, 2001, filed with the SEC on January 30, 2001 for additional information on
these amendments. The issuance of the Amended Debentures and Amended Warrants is
exempt from registration under the Securities Act of 1933 by virtue of Section
3(a)(9).
(d) Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
HAXS held an Annual Meeting of Shareholders on January 26, 2001, at
which time the shareholders voted to elect eight directors to serve until the
next Annual Meeting of Shareholders or until their successors are duly elected,
adopted the restated agreements related to the HAXS Merger, approved the HAXS
Merger, approved the 2000 Stock Option Plan, adopted and approved amendments to
the Amended and Restated Articles of Incorporation, and approved the appointment
of BDO Seidman, LLP as the independent auditors of HAXS for the fiscal year
2000. The following table details the votes received in connection with the
election of directors and on each of the following proposals.
Page 17 of 21
Shares Percentage Shares Shares Broker
Proposal Voted For Voted For Voted Against Abstained Non-Votes
- -------- ---------- ---------- ------------- --------- ---------
Election of Directors: 12,693,538 96.91% 62,604 - -
Ashker 12,633,314 96.46% 122,828 - -
Clemens 12,643,714 96.53% 112,428 - -
Hager 12,686,338 96.86% 69,804 - -
McLaughlin 12,692,138 96.90% 64,004 - -
LeBaron 12,687,488 96.87% 68,654 - -
Mutz 12,689,988 96.89% 66,154 - -
McLane 12,693,138 96.91% 63,004 - -
Maloney 12,692,838 96.91% 63,304 - -
Approval of the Amended and 11,416,332 87.16% 27,613 34,092 1,278,075
Restated Agreement and Plan of
Reorganization and Plan of
Merger each dated October 26,
2000
Approval of Amended Articles of 11,044,464 84.32% 399,461 34,142 1,278,075
Incorporation as described in
Item 3 of the Proxy Statement
Approval of Amendment to 11,382,622 86.91% 51,548 43,897 1,278,075
Amended and Restated Articles
of Incorporation as discussed
in Section 4 of the Proxy
Statement
Approval of Adoption of 2000 10,778,189 82.29% 644,415 55,463 1,278,075
Stock Option Plan
Approve appointment of BDO 12,680,746 96.82% 33,985 41,411 1,278,075
Seidman, LLP as auditors for
2000
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(3.1) Amended and Restated Bylaws effective January 26,
2001 (Incorporated by reference to Exhibit 3.1 of the
Registrant's Form 10K)
(3.2) Amended and Restated Articles of Incorporation
effective January 26, 2001 (Incorporated by reference
to Exhibit 3.2 of the Registrant's Form 10K)
(10.1) Software License Agreement with UICI effective
January 25, 2001
(10.2) Asset Purchase Agreement with UICI effective December
29, 2000
Page 18 of 21
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter
ended March 31, 2001:
1. Current Report reporting the completion of the Reorganization and
description of securities filed with the SEC on January 30, 2001.
2. Current Report reporting the change in date of the annual meeting
filed with the SEC on March 13, 2001.
3. Current Report reporting certain changes to management and the Board
of Directors filed with the SEC on January 3, 2001
Page 19 of 21
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Healthaxis Inc.
Date: March 15, 2001 By: /s/ James W. McLane
------------------------------
James W. McLane, President and
Chief Executive Officer
Date: March 15, 2001 By: /s/ John Carradine
------------------------------
John Carradine, Chief Financial Officer,
Principal Accounting Officer and Treasurer
Page 20 of 21
Exhibit Index
(3.1) Amended and Restated Bylaws effective January 26, 2001 (Incorporated by
reference to Exhibit 3.1 of the Registrant's Form 10K)
(3.2) Amended and Restated Articles of Incorporation effective January 26,
2001 (Incorporated by reference to Exhibit 3.2 of the Registrant's Form
10K)
(10.1) Software License Agreement with UICI effective January 25, 2001
(10.2) Asset Purchase Agreement with UICI effective December 29, 2000
Page 21 of 21