SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended. . . . . . . . . . . . . . . . . June 30, 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.)
5215 N. O'Connor Blvd., 800 Central Tower, Irving, Texas 75039
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (972) 443-5000
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: 52,932,102 shares of
common stock, par value $.10, outstanding as of July 16, 2001.
Page 1 of 27
Healthaxis Inc.
Table of Contents
Page
----
PART I Financial Information
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets...................................................................3
Condensed Consolidated Statements of Operations.........................................................4
Condensed Consolidated Statement of Changes in Stockholders' Equity.....................................5
Condensed Consolidated Statement of Cash Flows..........................................................6
Notes to Condensed Consolidated Financial Statements.................................................7-13
Item 2. Management's Discussion and Analysis of Results
Of Operations and Financial Condition...............................................................14-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................24
PART II Other Information
Items 1-5..............................................................................................25
Item 6. Reports on Form 8-K............................................................................26
Signatures......................................................................................................27
Page 2 of 27
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Healthaxis Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands except share and per share data) (Unaudited)
June 30, December 31,
2001 2000
--------- ---------
Assets
Cash and cash equivalents $ 12,188 $ 17,170
Accounts receivable, net of allowance for doubtful accounts of $287 and $300, respectively 2,540 2,061
Accounts receivable from affiliates 2,646 5,090
Prepaid expenses and other current assets 592 1,271
------- ---------
Total current assets 17,966 25,592
Property, equipment and software, less accumulated depreciation and
amortization of $11,291 and $10,036, respectively 5,023 6,431
Capitalized software and contract start-up costs, less accumulated amortization of $1,113
and $1,478, respectively 5,531 7,240
Goodwill, less accumulated amortization of $1,892 and $34,109, respectively 19,278 648,854
Customer base, less accumulated amortization of $1,285 and $4,301, respectively 11,056 12,904
Assets held for sale 3,500 5,005
Investment in Digital Insurance, Inc. 1,907 3,178
Notes receivable and other assets 725 1,788
--------- ---------
Total assets $ 64,986 $ 710,992
========= =========
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 5,198 $ 6,999
Deferred revenues 2,450 737
Obligations under capital lease 107 269
--------- ---------
Total current liabilities 7,755 8,005
Convertible debentures 27,085 27,367
Post retirement and employment liabilities and other 1,081 1,087
--------- ---------
Total liabilities 35,921 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 52,821,720 and 13,097,618 shares, respectively 5,282 1,310
Additional capital 433,033 325,797
Accumulated deficit (408,844) (105,497)
Unearned compensation (406) (5,115)
--------- ---------
Total stockholders' equity 29,065 216,495
--------- ---------
Total liabilities and stockholders' equity $ 64,986 $ 710,992
========= =========
See notes to condensed consolidated financial statements.
Page 3 of 27
Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in thousands, except share and per share data) (Unaudited)
Three Months Ended June 30, Six months Ended June 30,
2001 2000 2001 2000
------ ------ ------ ------
Revenue
$ 11,497 $ 10,363 $ 22,334 $ 21,738
Expenses:
Cost of revenues 10,866 12,923 22,855 24,944
Sales and marketing 686 968 2,573 1,616
General and administrative 1,689 3,094 10,194 7,540
Research and development 359 145 921 286
Restructuring and impairment charges 282,464 - 282,464 -
Amortization of intangibles 4,935 10,498 11,505 20,996
--------- -------- --------- ---------
Total Expenses 300,999 27,628 330,512 55,382
--------- -------- --------- ---------
Operating loss (289,502) (17,265) (308,178) (33,644)
Interest income (expense), net 5 408 70 (177)
--------- -------- --------- ---------
Loss before minority interest (289,497) (16,857) (308,108) (33,821)
Minority interest in loss of subsidiary - 9,708 3,080 19,068
--------- -------- --------- ---------
Loss from continuing operations (289,497) (7,149) (305,028) (14,753)
Loss from discontinued operations - (2,613) - (6,341)
Loss on sale of discontinued operations - (2,802) - (2,802)
--------- -------- --------- ---------
Loss on discontinued operations - (5,415) - (9,143)
--------- -------- --------- ---------
Net loss before extraordinary item (289,497) (12,564) (305,028) (23,896)
Convertible debt restructuring - - 1,681 -
--------- -------- --------- ---------
Net loss $(289,497) $(12,564) $(303,347) $ (23,896)
========= ======== ========= =========
Loss per share of common stock (basic and
diluted)
Continuing operations $(5.48) $(.55) $ (6.45) $ (1.13)
Discontinued operations - (.41) - (.70)
Extraordinary gain - - .04 -
--------- -------- --------- ---------
Net loss $(5.48) $ (0.96) $ (6.41) $ (1.83)
========= ======== ========= =========
Weighted average common shares and equivalents
Used in computing (loss) per share
Basic and diluted 52,784,000 13,098,000 47,302,000 13,072,000
See notes to condensed consolidated financial statements.
Page 4 of 27
Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Additional
Preferred Stock Common Stock Paid-In Accumulated Unearned
Shares Amount Shares Amount Capital Deficit Compensation Total
------ ------ ------ ------ ------- ------- ------------ -----
BALANCE, DECEMBER 31, 2000 - $ - 13,098 $ 1,310 $ 325,797 $ (105,497) $(5,115) $ 216,495
Net loss - - - - - (303,347) - (303,347)
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/forfeiture of
unearned compensation - - - - (404) - 1,250 846
Stock based compensation - - - - 5,117 - - 5,117
Revaluation of unearned
compensation - - - - (4,972) - 4,972 -
Increase in net assets of
Healthaxis.com, Inc. - - - - 115 - - 115
Common stock issued in lieu of
interest and severance - - 95 9 155 - - 164
---- ------ ------ ------- --------- ---------- ------- ---------
BALANCE, June 30, 2001 - $ - 52,822 $ 5,282 $ 433,033 $ (408,844) $ (406) $ 29,065
==== ====== ====== ======= ========= ========== ======= =========
See notes to condensed consolidated financial statements.
Page 5 of 27
Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Six Months Ended
Cash flows from operating activities June 30, June 30,
2001 2000
---------- ---------
Net loss $ (303,347) $ (23,896)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on sale of discontinued operations - 2,802
Depreciation and amortization 14,304 28,168
Bad debt reserve 33 6
Minority interest in loss of subsidiary:
Share of loss from continuing operations (3,080) (19,068)
Share of loss from discontinued operations - (11,199)
Gain on convertible debt restructuring (1,681) -
Stock option compensation 5,404 2,766
Loss on disposition of assets 93 80
Interest on convertible debt (21) 1,026
Non-cash portion of restructuring charge 282,115 -
Payments of interest and severance with common stock 164 -
Change in:
Accounts receivable 1,932 (1,059)
Prepaid expense and other current assets 173 389
Other assets, current and deferred income taxes (36) (111)
Accounts payable and accrued liabilities (581) (3,649)
Deferred revenues 1,713 242
Ceding commission and interest - 300
Future policy benefits and claims and other (4) (326)
---------- ---------
Net cash used in operating activities (2,819) (23,529)
---------- ---------
Cash flows from investing activities
Cash in acquired company - 2,126
Collection on notes receivable, net 804 -
Investment in capitalized software and contract start-up (2,015) (1,320)
Payment of acquisition costs (471) (1,031)
Purchases of property, equipment and software, net (396) (3,034)
Other 79 2
---------- ---------
Net cash used in investing activities (1,999) (3,257)
---------- ---------
Cash flows from financing activities
Payments on capital leases (164) (277)
Exercise of stock options - 341
Exercise of Healthaxis options - 183
---------- ---------
Net cash (used in) provided by financing activities (164) 247
---------- ---------
Decrease in cash and cash equivalents (4,982) (26,539)
Cash and cash equivalents, beginning of period 17,170 58,069
---------- ---------
Cash and cash equivalents, end of period $ 12,188 $ 31,530
========== =========
Supplemental disclosure of cash flow information:
Interest paid $ 199 $ 532
See notes to condensed consolidated financial statements.
Page 6 of 27
Healthaxis Inc. and Subsidiaries
Notes to Condensed 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 six-month period ended June 30,
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, with headquarters in
Irving, Texas. HAXS operates as a technology solutions provider in the market of
health care administration and distribution. 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. The Company also offers
technology solutions to assist its clients in becoming compliant with the
requirements of the Healthcare Insurance Portability and Accountability Act
(HIPAA). 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 and 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
ceased to exist, and the newly formed HAXS subsidiary continued 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) acquisition 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 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.
Page 7 of 27
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.
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 $438 and $846 related to unearned compensation amortization for the
three and the six-months ended June 30, 2001, respectively.
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 June 30, 2001, these options were not in the money, which
resulted in no compensation expense for this group through June 30, 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. Stock based
compensation expense, excluding the unearned compensation amortization, totaled
$81 and $5,404 for the three months and the six-months ended June 30, 2001,
respectively.
Page 8 of 27
Note C - Related Party Transactions
UICI
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. The agreements may be cancelled by
UICI for convenience or for cause upon giving 180-day notice. In addition, the
agreements contain no minimum or maximum commitments on behalf of UICI, and UICI
is free to obtain the services provided by Healthaxis from unrelated parties.
These services include the use of certain of Healthaxis' 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 and the six-months ended
June 30, 2001, UICI and its subsidiaries and affiliates accounted for an
aggregate of $7,580 (66%) and $14,733 (66%), respectively, of Healthaxis' total
revenues for the period. As of June 30, 2001, Healthaxis had trade receivables
from UICI and its subsidiaries and affiliates of $2,646 (51%).
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 May 29, 2001, Healthaxis entered into an Engagement Letter with a subsidiary
of UICI for the development and integration of software for compliance with the
Healthcare Insurance Portability and Accountability Act (HIPAA). This is a fixed
price agreement totaling $515 payable upon the achievement of certain
milestones. Revenues are recognized using the percentage-of-completion method in
proportion to the hours expended compared to the total hours projected for the
project. Revenue of $103 has been recognized through June 30, 2001 under this
agreement.
Digital Insurance
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 Insurance"). This transaction closed on October 13, 2000. The
consideration received by Healthaxis at closing in return for those assets
consisted of: $0.5 million in cash; a $0.5 million note; 11% of the outstanding
shares of Digital Insurance, on a fully-diluted basis; and a portion of Digital
Insurance's net commission revenues received by Digital Insurance through the
acquired website user interface or an affinity partner indefinitely. Healthaxis
has reported the operations of the retail website as discontinued operations as
of the measurement date of June 30, 2000. Additionally, the Company recorded a
loss on the sale of the discontinued operations as of June 30, 2000.
In connection with this sale, Healthaxis and Digital insurance entered into a
Software Licensing and consulting Agreement that provides Healthaxis with: a
perpetual nonexclusive license to use and sublicense, subject to certain
restrictions, the user interface sold to Digital Insurance; licensing fees over
30 months of $3.0 million for software owned by Healthaxis that will be used by
Digital Insurance in conjunction with the user interface it purchased; and
professional service fees over 12 months starting July 2000 of a minimum of $3.0
million for services relating to customizing, maintaining and upgrading the user
interface and other software.
Effective May 31, 2001, the Company entered into an Amended Asset Purchase
Agreement and Amended Software Licensing and Consulting Agreement. Under the
terms of these amendments, the Company agreed to settle all amounts due from
Digital Insurance (other than trade accounts receivable) under the original
agreements for a lump sum cash payment of $2.0 million which approximated the
Company's carrying values.
Page 9 of 27
The following table (in thousands) shows the aggregate amounts paid by Digital
Insurance, prior to and including the $2.0 million lump sum payment, as compared
to the original contracted amount:
Original Amount
Commitment Received
---------- --------
Purchase price $ 1,000 $ 1,000
Professional services 3,000 3,000
License fees 3,000 813
--------- ---------
Total $ 7,000 $ 4,813
========= =========
The amendment provides that in the event Digital Insurance has not completed an
equity financing of at least $4.0 million on or before March 31, 2002, then
Healthaxis shall be entitled to receive any and all amounts which would have
otherwise become due under the original agreements, including accrued interest.
The amendments further require Digital Insurance to pay Healthaxis $100 per
month effective June 1, 2001 continuing through the earlier to occur of either
May 31, 2002, or the date Digital Insurance gives written notice to Healthaxis
that Digital Insurance no longer utilizes the Non-Retail Presentation Layer
Software and Other Common Modules as provided by Healthaxis. This $100
represents a guaranteed monthly minimum commitment and will cover a dedicated
staff of approximately 5.5 FTEs (full time equivalents), Web hosting services,
shared telecommunications cost, and rent and operating expenses in Healthaxis'
East Norriton, PA facility.
In conjunction with management's review of long-lived assets at June 30, 2001, a
write down of the Company's investment in Digital Insurance totaling
approximately $1.2 million was recorded during the second quarter of 2001. This
write down was based upon the Company's current estimate of the investment's net
realizable value.
Note D - 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 in the first quarter of 2001. The majority of this
amount relates to the reversal of penalties accrued pursuant to a registration
rights agreement between the Company and the debenture holders. Under the terms
of the Amendment, these penalties were waived.
Note E - 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
beginning in the first quarter of 2001. 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 $(118) and $2,007 in
compensation expense during the three and the six months ended June 30, 2001,
respectively, which is included in general and administrative expenses.
Page 10 of 27
Note F - 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 of $154 in aggregate to members of the management team for up to
50% of the purchase price of the stock, collateralized by 100% of the shares
purchased by those managers borrowing funds. Interest is payable quarterly at an
8% rate per annum.
Note G - Restructuring Plan
In May of 2001, certain events as described below were concluded which lead
management to question the long-term value of certain assets of Healthaxis.
Accordingly, Management has prepared its evaluation of those assets and has
concluded that in some cases there has, in fact, been an impairment of value. A
description of the events resulting in the impairment follows:
At the time of the merger between Healthaxis.com and Insurdata, the combined
entities had total cash and liquid investments of approximately $60.0 million.
The Company believed that pursuant to its plans, the existing liquidity of the
Company and the prospective operations of the combined entities would be
sufficient to continue investing for the long-term. However, at March 31, 2001,
the Company's cash and liquid investments were reduced to approximately $12.0
million through continuing losses and business investments.
On February 1, 2001, James W. McLane became the Chief Executive Officer of the
Company. In light of the Company's existing financial condition, and because of
the diminishing liquidity position, Mr. McLane was instructed by the Board of
Directors to evaluate the Company's organization, business operations, and
corporate strategy and to recommend changes to each as he believed necessary. On
March 19, 2001, Mr. McLane hired a new Chief Financial Officer to assist in this
process.
During May 2001, based on the evaluation of Mr. McLane and the senior management
team, the Board of Directors accepted the recommendations of management that to
reach profitability in an acceptable period of time and to reposition the
Company for growth, certain significant actions were necessary. Accordingly, at
a special meeting of the Board of Directors held on May 11, 2001, the Board
approved a restructuring plan and realignment of operations modifying the
structure and size of the organization. The plan included the following actions:
o Implementation of a reorganization plan which created four new business
units, each with accountability for profitable operations beginning July
1, 2001
o Elimination of approximately 60 employee positions, primarily at its
Irving, Texas and East Norriton, Pennsylvania offices;
o Relocation of the corporate headquarters from Pennsylvania to Texas; and
o Cessation of development and marketing of certain products.
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. The
restructuring plan has now been substantially completed.
Page 11 of 27
APB Opinion No. 17, Intangible Assets, and SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
require the review for impairment of long-lived assets and identifiable
intangibles that are used in operations whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable. The May restructuring was the culmination of such events and,
therefore, the Company recorded the appropriate write-downs and accruals in the
second quarter of 2001.
Related to its restructuring and reorganization, the Company accrued or recorded
restructuring charges of $282.5 million in the second quarter of 2001. Those
costs are generally related to the following:
o Severance cost for terminated employees - Approximately $350 of the
restructuring charge relates to the elimination of approximately 60
positions and termination of 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 was paid two weeks severance.
o Relocation of the corporate headquarters - Approximately $1.7 million
relates to the write down of the former corporate headquarters in
Pennsylvania to its estimated realizable value. The Company's estimate
of realizable value was based upon recent offers less estimated disposal
costs.
o Write down of long-lived assets - The Company abandoned the development
and marketing of certain products that no longer fit into the Company's
new business strategy and wrote off approximately $1.9 million of
certain software and other capitalized costs.
[X] Write down of Goodwill - The Company's accounting policy has been to
review all long-lived and intangible assets on a quarterly basis for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As part of its
restructuring and internal re-organization, management also evaluated
enterprise level goodwill for impairment.
During its evaluation of assets at June 30, 2001, the Company determined
that certain events occurred in May 2001 that were indicators of
potential impairment of the value of goodwill. During May 2001, it
became apparent that previous growth expectations could not be met for
several reasons, including:
1. The restructuring, in general, which resulted in a change in the
strategic focus of the Company. As noted above, the Company
experienced significant management changes prior to May 2001,
including a change in CEO, COO, CFO, and SVP of Sales. New
management abandoned the development and marketing of certain
products that no longer fit its business strategy and revised
the Company's revenue growth expectations accordingly.
2. A lack of readily available investment capital to fund
previously anticipated growth. Previous plans anticipated the
ability to obtain additional equity funding, if and when
necessary, to sustain the growth model. The Company's new
management team has determined that due to the current market,
the availability of additional equity capital is less certain in
the short term and that the Company's current cash on hand must
be optimized. The restructuring of the Company was intended to
serve this purpose.
3. The E-Healthcare sector in which the Company operates is
currently fragmented and volatile. The sector has been clouded
by new entrants, consolidations, partnerships and failures which
make it difficult to compare functions or evaluate redundancy.
Volatility is evidenced by the significantly reduced stock
prices and market capitalization levels of the Company's
competitors. A recent Gartner report has predicted that vendors
in this sector will be unstable through 2004. Gartner further
projected that competition and solution redundancy will cause at
least 60% of vendors existing in 2000 and 2001 to be acquired or
fail by 2005. These conditions contrast dramatically with those
conditions that existed at the time of the Insurdata merger in
January 2000. While no assurances can be made regarding the
Company's success, management believes that the restructuring
has placed the Company in a position to withstand these volatile
conditions.
Page 12 of 27
4. The slow-down in 2001 of the US economy has affected the
spending capacity of Healthcare insurance companies on
information technology solutions and has, therefore, lowered the
Company's growth expectations from earlier projections at the
time of the Insurdata merger in January 2000.
The Company evaluated the book value of goodwill along with the
estimated useful life of the asset (20 years). Based upon ongoing
changes in the E-Healthcare marketplace, in addition to recent changes
within the Company itself, management determined that it was appropriate
to reduce the useful life of goodwill from 20 years to 10 years. The
Company initially evaluated the book value of goodwill using an estimate
of the future undiscounted cash flows of the business enterprise over
the adjusted estimated useful life. This analysis indicated that the
goodwill was impaired. The Company then proceeded to analyze future cash
flows on a discounted basis using a discount rate of 33%. The 33%
discount rate was based upon a detailed analysis and the Company's
current risk profile. The Company's future cash flows were estimated by
management and included revenue growth rates ranging from 10% to 40%.
However, no assurances can be made that these growth rates can be
achieved. The analysis of discounted future cash flows resulted in a
write down in the book value of goodwill totaling $277.2 million, which
is included in restructuring and impairment charges.
Page 13 of 27
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 Factors" 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 and Plan of Reorganization dated October 26, 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. The newly formed HAXS subsidiary was the
surviving corporation of the merger and operates 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
In May of 2001, certain events as described below were concluded which lead
management to question the long-term value of certain assets of Healthaxis.
Accordingly, Management has prepared its evaluation of those assets and has
concluded that in some cases there has, in fact, been an impairment of value. A
description of the events resulting in the impairment follows:
At the time of the merger between Healthaxis.com and Insurdata, the combined
entities had total cash and liquid investments of approximately $60.0 million.
The Company believed that pursuant to its plans, the existing liquidity of the
Company and the prospective operations of the combined entities would be
sufficient to continue investing for the long-term. However, at March 31, 2001,
the Company's cash and liquid investments were reduced to approximately $12.0
million through continuing losses and business investments.
On February 1, 2001, James W. McLane became the Chief Executive Officer of the
Company. In light of the Company's existing financial condition, and because of
the diminishing liquidity position, Mr. McLane was instructed by the Board of
Directors to evaluate the Company's organization, business operations, and
corporate strategy and to recommend changes to each as he believed necessary. On
March 19, 2001, Mr. McLane hired a new Chief Financial Officer to assist in this
process.
Page 14 of 27
During May 2001, based on the evaluation of Mr. McLane and the senior management
team, the Board of Directors accepted the recommendations of management that to
reach profitability in an acceptable period of time and to reposition the
Company for growth, certain significant actions were necessary. Accordingly, at
a special meeting of the Board of Directors held on May 11, 2001, the Board
approved a restructuring plan and realignment of operations modifying the
structure and size of the organization. The plan included the following actions:
o Implementation of a reorganization plan which created four new business
units, each with accountability for profitable operations beginning July
1, 2001
o Elimination of approximately 60 employee positions, primarily at its
Irving, Texas and East Norriton, Pennsylvania offices;
o Relocation of the corporate headquarters from Pennsylvania to Texas; and
o Cessation of development and marketing of certain products.
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. The
restructuring plan has now been substantially completed.
In total, counting the reduction-in-force and other contemplated expense
reductions, the initiative was designed to save in excess of $11.0 million
annually. There can be no assurances that the implementation of this initiative
will result in this full amount of the savings.
APB Opinion No. 17, Intangible Assets, and SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,
require the review for impairment of long-lived assets and identifiable
intangibles that are used in operations whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable. The May restructuring was the culmination of such events and,
therefore, the Company recorded the appropriate write-downs and accruals in the
second quarter of 2001.
Related to its restructuring and reorganization, the Company accrued or recorded
restructuring charges of $282.5 million in the second quarter of 2001. Those
costs are generally related to the following:
o Severance cost for terminated employees - Approximately $350,000 of the
restructuring charge relates to the elimination of approximately 60
positions and termination of 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 was paid two weeks severance.
o Relocation of the corporate headquarters - Approximately $1.7 million
relates to the write down of the former corporate headquarters in
Pennsylvania to its estimated realizable value. The Company's estimate
of realizable value was based upon recent offers less estimated disposal
costs.
o Write down of long-lived assets - The Company abandoned the development
and marketing of certain products that no longer fit into the Company's
new business strategy and wrote off approximately $1.9 million of
certain software and other capitalized costs.
[X] Write down of Goodwill - The Company's accounting policy has been to
review all long-lived and intangible assets on a quarterly basis for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As part of its
restructuring and internal re-organization, management also evaluated
enterprise level goodwill for impairment.
Page 15 of 27
During its evaluation of assets at June 30, 2001, the Company determined
that certain events occurred in May 2001 that were indicators of
potential impairment of the value of goodwill. During May 2001, it
became apparent that previous growth expectations could not be met for
several reasons, including:
1. The restructuring, in general, which resulted in a change in the
strategic focus of the Company. As noted above, the Company
experienced significant management changes prior to May 2001,
including a change in CEO, COO, CFO, and SVP of Sales. New
management abandoned the development and marketing of certain
products that no longer fit its business strategy and revised
the Company's revenue growth expectations accordingly.
2. A lack of readily available investment capital to fund
previously anticipated growth. Previous plans anticipated the
ability to obtain additional equity funding, if and when
necessary, to sustain the growth model. The Company's new
management team has determined that due to the current market,
the availability of additional equity capital is less certain in
the short term and that the Company's current cash on hand must
be optimized. The restructuring of the Company was intended to
serve this purpose.
3. The E-Healthcare sector in which the Company operates is
currently fragmented and volatile. The sector has been clouded
by new entrants, consolidations, partnerships and failures which
make it difficult to compare functions or evaluate redundancy.
Volatility is evidenced by the significantly reduced stock
prices and market capitalization levels of the Company's
competitors. A recent Gartner report has predicted that vendors
in this sector will be unstable through 2004. Gartner further
projected that competition and solution redundancy will cause at
least 60% of vendors existing in 2000 and 2001 to be acquired or
fail by 2005. These conditions contrast dramatically with those
conditions that existed at the time of the Insurdata merger in
January 2000. While no assurances can be made regarding the
Company's success, management believes that the restructuring
has placed the Company in a position to withstand these volatile
conditions.
4. The slow-down in 2001 of the US economy has affected the
spending capacity of Healthcare insurance companies on
information technology solutions and has, therefore, lowered the
Company's growth expectations from earlier projections at the
time of the Insurdata merger in January 2000.
The Company evaluated the book value of goodwill along with the
estimated useful life of the asset (20 years). Based upon ongoing
changes in the E-Healthcare marketplace, in addition to recent changes
within the Company itself, management determined that it was appropriate
to reduce the useful life of goodwill from 20 years to 10 years. The
Company initially evaluated the book value of goodwill using an estimate
of the future undiscounted cash flows of the business enterprise over
the adjusted estimated useful life. This analysis indicated that the
goodwill was impaired. The Company then proceeded to analyze future cash
flows on a discounted basis using a discount rate of 33%. The 33%
discount rate was based upon a detailed analysis and the Company's
current risk profile. The Company's future cash flows were estimated by
management and included revenue growth rates ranging from 10% to 40%.
However, no assurances can be made that these growth rates can be
achieved. The analysis of discounted future cash flows resulted in a
write down in the book value of goodwill totaling $277.2 million, which
is included in restructuring and impairment charges.
Digital Insurance Amendments
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 Insurance"). This transaction closed on October 13, 2000. The
consideration received by Healthaxis at closing in return for those assets
consisted of: $0.5 million in cash; a $0.5 million note; 11% of the outstanding
shares of Digital Insurance, on a fully-diluted basis; and a portion of Digital
Insurance's net commission revenues received by Digital Insurance through the
acquired website user interface or an affinity partner indefinitely. Healthaxis
has reported the operations of the retail website as discontinued operations as
of the measurement date of June 30, 2000. Additionally, the Company recorded a
loss on the sale of the discontinued operations as of June 30, 2000.
Page 16 of 27
In connection with this sale, Healthaxis and Digital insurance entered into a
Software Licensing and consulting Agreement that provides Healthaxis with: a
perpetual nonexclusive license to use and sublicense, subject to certain
restrictions, the user interface sold to Digital Insurance; licensing fees over
30 months of $3.0 million for software owned by Healthaxis that will be used by
Digital Insurance in conjunction with the user interface it purchased; and
professional service fees over 12 months starting July 2000 of a minimum of $3.0
million for services relating to customizing, maintaining and upgrading the user
interface and other software.
Effective May 31, 2001, the Company entered into an Amended Asset Purchase
Agreement and Amended Software Licensing and Consulting Agreement. Under the
terms of these amendments, the Company agreed to settle all amounts due from
Digital Insurance (other than trade accounts receivable) under the original
agreements for a lump sum cash payment of $2.0 million which approximated the
Company's carrying values.
The following table (in thousands) shows the aggregate amounts paid by Digital
Insurance, prior to and including the $2.0 million lump sum payment, as compared
to the original contracted amount:
Original Amount
Commitment Received
---------- --------
Purchase price $ 1,000 $ 1,000
Professional services 3,000 3,000
License fees 3,000 813
--------- --------
Total $ 7,000 $ 4,813
========= ========
The amendment provides that in the event Digital Insurance has not completed an
equity financing of at least $4.0 million on or before March 31, 2002, then
Healthaxis shall be entitled to receive any and all amounts which would have
otherwise become due under the original agreements, including accrued interest.
The amendments further require Digital Insurance to pay Healthaxis $100,000 per
month effective June 1, 2001 continuing through the earlier to occur of either
May 31, 2002, or the date Digital Insurance gives written notice to Healthaxis
that Digital Insurance no longer utilizes the Non-Retail Presentation Layer
Software and Other Common Modules as provided by Healthaxis. This $100,000
represents a guaranteed monthly minimum commitment and will cover a dedicated
staff of approximately 5.5 FTEs (full time equivalents), Web hosting services,
shared telecommunications cost, and rent and operating expenses in Healthaxis'
East Norriton, PA facility.
In conjunction with management's review of long lived assets at June 30, 2001, a
write down of the Company's investment in Digital Insurance totaling
approximately $1.2 million was recorded during the second quarter of 2001. This
write down was based upon the Company's current estimate of the investment's net
realizable value.
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 17 of 27
Results of Operations
Six months ended June 30, 2001 compared to six months ended June 30, 2000.
The Company focuses its cost containment initiatives on operating cash
expenses. Stock based compensation, amortization of intangible assets and the
restructuring charge, with the exception of severance payments, are all non-cash
expenses. The following table is therefore presented in such a manner that these
expenses can be distinguished.
Six Months Ended, June 30, 2001 (in thousands)
----------------------------------------------
Stock
Operating Depreciation/ Based
Costs Amortization Compensation Total
---------------- ----------------- ---------------- ----------------
Operating Expenses
Cost of revenue $ 20,415 $ 1,810 $ 630 $ 22,855
Sales and marketing 1,482 20 1,071 2,573
General and administrative 5,526 140 4,528 10,194
Research and development 833 68 20 921
-------- ------- ------ --------
Subtotal $ 28,256 $ 2,038 $6,249 $ 36,543
======== ======= ====== ========
Restructuring charge 282,464
Amortization of intangibles 11,505
--------
Total operating expenses $330,512
========
Six Months Ended, June 30, 2000 (in thousands)
----------------------------------------------
Stock
Operating Depreciation/ Based
Costs Amortization Compensation Total
---------------- ----------------- ---------------- ----------------
Operating Expenses
Cost of revenue 20,856 1,945 2,143 $ 24,944
Sales and marketing 711 6 899 1,616
General and administrative 5,922 116 1,502 7,540
Research and development 228 58 0 286
-------- ------- ------ --------
Subtotal $ 27,717 $2,125 $4,544 34,386
======== ======= ====== ========
Restructuring charge -
Amortization of intangibles 20,996
--------
Total operating expenses $ 55,382
========
Revenues increased 3% from $21.7 million for the six-months ended June
30, 2000 to $22.3 million for the same period in 2001. The increase was
primarily the result of new revenue generated from Digital Insurance and
increased revenue from UICI, partially offset by loss of some data capture
revenue.
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 costs decreased 8% from
$24.9 million for the six months ended June 20, 2000 to $22.8 million for the
same period in 2001. Cost of revenue as a percentage of revenue declined from
115% in 2000 to 102% in 2001. A reduction of stock based compensation accounted
for $1.5 million of the decrease. The remainder was due primarily to the reduced
labor force and expense savings pursuant to the restructuring plan implemented
in May 2001 as described above.
Page 18 of 27
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 $1.6 million
for the six-months ended June 30, 2000 to $2.6 million for the same period in
2001. Approximately $172,000 of the increase resulted from stock based
compensation as result of an option re-measurement in January 2001 related to
the HAXS merger. 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. As part of the restructuring plan
implemented in May 2001, the sales staff was transferred to the operating
divisions to more closely align sales and delivery, and the staff was reduced to
seven from twelve.
General and administrative expenses include executive management,
accounting, legal and human resources compensation and related benefits, as well
as expenditures for applicable overhead costs. These expenses were approximately
$7.5 million for the six months ended June 30, 2000 compared to $10.2 million
for the same period in 2001. Stock based compensation of approximately $1.5
million was included in 2000 as compared to $4.5 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, as compared to $0.5 million
in 2000, primarily related to Mr. Clemens' severance agreement as described
above.. After adjustment for these items, expenses have decreased significantly
as result of the gradual reduction of management and corporate staff subsequent
to the Insurdata merger in January 2000, and the restructuring plan implemented
in May 2001.
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 $286,000 for the
six-months ended June 30, 2000 to $921,000 for the same period in 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. In
2001, much of the effort of the staff was for the development for the Company's
new, web-based products and is included in research and development expenses.
Restructuring and Impairment Charges were approximately $282.5 million
during the six months ended June 30, 2001. These charges were recorded pursuant
to the Company's adoption of an internal restructuring plan approved by the
Board of Directors on May 11, 2001 and implemented on May 14, 2001.
Approximately $277.2 million of this charge is attributable to the write-down of
goodwill from $296.5 million to $19.3 million. The remainder is to record other
costs of the restructuring including severance payments for terminated
employees, costs associated with relocating the corporate headquarters from
Pennsylvania to Texas and the reduction of other long lived assets, primarily
resulting from the decision to cease development and marketing of certain
products. See Restructuring Plan section above. There were no such charges
during the comparable period in 2000.
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 $21.0 million for the six-months
ended June 30, 2000 to $11.5 million for the same period in 2001. Predominantly
all of the decrease was due to the revaluation of these assets at the time of
the HAXS Merger on January 26, 2001. Due to the write down of goodwill in the
second quarter of 2001, amortization will be significantly reduced in future
periods.
Interest expense and other income, net changed from a net expense of
$177,000 in the six-months ended June 30, 2000 to a net income of $70,000 in the
same period in 2001. The change was 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 19 of 27
Minority interest in loss of subsidiary was $19.1 million for the
six-months ended June 30, 2000 compared to $3.1 million for the same period in
2001. The reduction was due to the fact that the minority interest was only
recorded for approximately one month (until the HAXS merger) in 2001, compared
to the full six-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.
Net loss from discontinued operations of $9.1 million for the six
months ended June 30, 2000 included a $2.8 million loss on the sale of certain
assets to Digital Insurance and $6.3 million loss related to the operations that
were discontinued. There were no such charges for the same period in 2001.
Extraordinary gain of $1.7 million in the six months ended June 30,
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.
Three months ended June 30, 2001 compared to three months ended June 30, 2000.
Three Months Ended, June 30, 2001 (in thousands)
------------------------------------------------
Stock
Operating Depreciation/ Based
Costs Amortization Compensation Total
---------------- ----------------- ---------------- ----------------
Operating Expenses
Cost of revenue $ 9,903 $ 774 $ 189 $ 10,866
Sales and marketing 598 11 77 686
General and administrative 1,377 69 243 1,689
Research and development 315 34 10 359
-------- ------ ------ --------
Subtotal $ 12,193 $ 888 $ 519 13,600
======== ====== ====== ========
Restructuring charge 282,464
Amortization of intangibles 4,935
--------
Total operating expenses $300,999
========
Three Months Ended, June 30, 2000 (in thousands)
------------------------------------------------
Stock
Operating Depreciation/ Based
Costs Amortization Compensation Total
---------------- ----------------- ---------------- ----------------
Operating Expenses
Cost of revenue $ 10,610 $1,067 $1,246 $ 12,923
Sales and marketing 424 - 544 968
General and administrative 2,698 59 337 3,094
Research and development 114 31 0 145
-------- ------ ------ --------
Subtotal $ 13,846 $1,157 $2,127 17,130
======== ====== ====== ========
Restructuring charge -
Amortization of intangibles 10,498
--------
Total operating expenses $ 27,628
========
Page 20 of 27
Revenues increased 11% from $10.4 million for the three months ended
June 30, 2000 to $11.5 million for the same period in 2001. The increase was due
primarily to the addition of the Digital Insurance contract, which totaled
approximately $1.0 million for the second quarter of 2001. Increased revenue
from UICI of $645,000 was largely offset by the loss of a data capture client.
Cost of revenues decreased 16% from $12.9 million for the three months
ended June 30, 2000 to $10.9 million for the same period in 2001. Approximately
$1.1 million of the decrease was due to a reduction in stock based compensation.
The remainder was largely a result of the reduction in the labor force pursuant
to the restructuring plan and a reduction in contract labor expenses.
Sales and marketing expenses decreased 29% from $968,000 for the three
months ended June 30, 2000 to $686,000 for the same period in 2001. Excluding
stock based compensation of $544,000 in 2000 and $77,000 in 2001, sales and
marketing expenses increased $185,000. The increase is due to an increase in
staff from six in early 2000 to twelve in April 2001. As part of the
restructuring plan implemented in May 2001, the sales staff was transferred to
the operating divisions to more closely align sales and delivery, and the staff
was reduced to seven.
General and administrative expenses decreased 45% from $3.1 million for
the three months ended June 30, 2000 to $1.7 million for the same period in
2001. A decrease in stock based compensation accounts for $93,000 of the
difference. The balance was due to a reduction in the management overhead and
corporate staff that existed after the Insurdata merger in January 2000.
Research and development expenses increased from $145,000 for the three
months ended June 30, 2000 to $359,000 for the same period in 2001. The increase
was due to the additional staff.
Restructuring and Impairment Charges were approximately $282.5 million
during the three months ended June 30, 2001. These charges were recorded
pursuant to the Company's adoption of an internal restructuring plan approved by
the Board of Directors on may 11, 2001 and implemented on May 14, 2001.
Approximately $277.2 million of this charge is attributable to the write-down of
goodwill from $296.5 million to $19.3 million. The remainder is to record other
costs of the restructuring including severance payments for terminated
employees, costs associated with relocating the corporate headquarters from
Pennsylvania to Texas and the reduction of other long lived assets, primarily
resulting from the decision to cease development and marketing of certain
products. See Restructuring Plan section above. There were no such charges
during the comparable period in 2000.
Amortization of Intangibles decreased 53% from $10.5 million for the
three months ended June 30, 2000 to $4.9 million for the same period in 2001.
The reduction is due to the revaluation of goodwill and intangible assets
resulting from the HAXS merger in January 2001. Due to the write down of
goodwill in the second quarter of 2001, amortization will be significantly
reduced in future periods.
Interest expense and other income, net decreased from income of
$408,000 for the three months ended June 30, 2000 to $5,000 for the same period
in 2001 due to the reduced cash reserves held by the Company and the loss of
interest income from Digital Insurance in June 2001 as result of the amended
agreements described above.
Minority interest in loss of subsidiary was $9.7 million for the three
months ended June 30, 2000 compared to zero for the same period in 2001.
Subsequent to the HAX merger on January 26, 20001, the Company owned 100% of the
Healthaxis subsidiary and therefore no subsequent minority interest was
recorded.
Net loss from discontinued operations of $5.4 million for the three
months ended June 30, 2000 included a $2.8 million loss on the sale of certain
assets to Digital Insurance and $2.6 million loss related to the operations that
were discontinued. There were no such charges for the same period in 2001.
Page 21 of 27
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives will
no longer be amortized but will be subject to annual impairment tests in
accordance with the statements. Other intangible assets will continue to be
amortized over their useful lives.
Beginning in the first quarter of 2002, the Company will apply the new
rules and perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002. Upon adoption, the
Company will no longer amortize its goodwill. No other significant impact is
anticipated.
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 first quarter of 2001, the Company's cash reserves decreased
$5.0 million from $17.2 million to $12.0 million. During the second quarter of
2001, cash reserves increased slightly from $12.0 million to $12.2 million.
After adjusting for the $2.0 million lump sum payment from Digital Insurance as
described above, cash used during the second quarter was approximately $1.8
million. The significant reduction of cash used quarter over quarter is the
result of cost containment measures put in place following the HAXS Merger on
January 26, 2001 and further savings recognized through the restructuring plan
implemented on May 14, 2001. Management believes the full impact of the
restructuring plan will be in effect in the third quarter of 2001.
The following table summarizes the significant changes in the Company's cash
balances during the quarter ended June 30, 2001:
Cash on hand, March 31, 2001 $ 12,010
EBITDA for second quarter of 2000 (814)
Settlement with Digital 2,000
Changes in working capital (326)
Collection of notes receivable, net 288
Capital expenditures (229)
Investment in software and other (741)
--------
Cash on hand, June 30, 2001 $ 12,188
========
EBITDA represents the Company's net loss before interest, taxes and
amortization adjusted for the Company's restructuring and impairment charges and
severance expense.
Additionally, the Company has listed for sale its building in
Pennsylvania, which is now carried on the books at $3.5 million, but has been
previously appraised for $5.4 million. Management is aggressively pursuing this
sale and expects the cash generated therefrom and current cash reserves will be
sufficient to fund the HAXS operations for the foreseeable future.
Page 22 of 27
Funding the Company's operations on a long-term basis will depend upon
management's ability to continue controlling its costs (as described above in
"Restructuring Plan") and to generate new revenues. There can be no assurances
that the Company will be successful in achieving these goals. If external funds
were necessary to support the Company's business operations, there can be no
assurance that under current conditions such funds would be available or, if
available, would not dilute shareholders' interests or returns.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Cash used in operating activities for the six months ended June 30,
2001 was $2.8 million as compared to $23.5 million for the same period in 2001.
The reduced cash expenditure was the result of discontinuing the operations of
the retail website effective June 30, 2000, and the combined effects of the cost
containment measures put into place following the HAXS Merge on January 26, 2001
and savings resulting from the restructuring plan implemented May 14, 2001. Also
contributing to the reduction of cash used was the positive impact of changes in
working capital accounts, particularly accounts receivable and accounts payable.
Cash used in investing activities for the six months ended June 30,
2001 was $2.0 million as compared to $3.3 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. Net of this Insurdata cash, the cash
used in investing activities decreased $3.4 million primarily resulting from a
decrease in capital expenditures for property and equipment.
Cash used from financing activities increased by $411,000 as result of
$164,000 cash used in the six months ended June 30, 2001 as opposed to cash
generated of $247,000 for the comparable period in 2000. The primary difference
was the result of stock options exercised in 2000.
Page 23 of 27
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 June 30, 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 24 of 27
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. Change in securities.
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 May 18, 2001,
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. The following table details the votes received in connection with the
election of directors.
Shares Percentage Shares Voted Shares Broker
Proposal Voted For Voted For Against Abstained Non-Votes
-------- ------- --------- ------- --------- ---------
Election of Directors: 45,180,565 85.61% 43,830 - -
Ashker 45,173,630 85.60% 50,765 - -
Clemens 45,146,592 85.55% 77,803 - -
Hager 45,176,865 85.60% 47,530 - -
McLaughlin 45,180,565 85.61% 43,830 - -
LeBaron 45,177,865 85.60% 46,530 - -
Mutz 45,179,965 85.61% 44,430 - -
McLane 45,180,365 85.61% 44,030 - -
Maloney 45,178,349 85.61% 46,046 - -
Item 5. Other Information.
Effective April 27, 2001, Dennis Maloney resigned as the Chief
Operating Officer of the Company and members of the existing management team
assumed the day to day responsibilities. Mr. Maloney continues to serve on the
Board of Directors.
Effective July 1, 2001, James W. McLane, the President and CEO
of the Company, was elected as Chairman of the Board of Directors. He succeeded
Michael Ashker who continues to serve on the Board.
Page 25 of 27
Effective July 31, 2001 Michael G. Hankinson entered into a
severance agreement pursuant to which he resigned as a full time executive
officer of the Company. Mr. Hankinson shall remain as Secretary and General
Counsel under a month to month retention arrangement. The severance agreement is
attached as Exhibit 10.6 of this filing.
Effective August 1, 2001 the Company added Kevin F. Hickey and
Kevin Brown to the Board of Directors. On the same day, Edward W. LaBaron, Jr.
resigned from the Board.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(10.1) Engagement Letter between Healthaxis Inc.
and the Mega Life and Health Insurance
Company dated May 29, 2001
(10.2) Amendment No. 2 to Asset Purchase Agreement
with Digital Insurance effective May 31,
2001
(10.3) Amendment No. 2 to Software License and
Consulting Agreement with Digital Insurance
dated March 23, 2001
(10.4) Amendment No. 3 to Software License and
Consulting Agreement with Digital Insurance
dated May 31, 2001
(10.5) Amendment to Commercial Sublease Agreement
with Digital Insurance effective June 1,
2001
(10.6) Severance Agreement for Michael G. Hankinson
effective July 31, 2001
(b) Reports on Form 8-K:
The Company filed the following current report on
Form 8K during the quarter ended June 30, 2001 to
report:
(1) the Company's change of independent
accountants filed on April 24, 2001
(2) the resignation of the Company's Chief
Operating Officer filed on April 24, 2001
Page 26 of 27
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Healthaxis Inc.
Date: August 3, 2001 By: /s/ James W. McLane
--------------------------------------------------
James W. McLane, Chairman, President and Chief
Executive Officer
Date: August 3, 2001 By: /s/ John Carradine
--------------------------------------------------
John Carradine, Chief Financial Officer, Principal
Accounting Officer and Treasurer
Page 27 of 27
EXHIBITS INDEX
Exhibit
Number Description
-------- -----------
(10.1) Engagement Letter between Healthaxis Inc. and the Mega Life
and Health Insurance Company dated May 29, 2001
(10.2) Amendment No. 2 to Asset Purchase Agreement with Digital
Insurance effective May 31, 2001
(10.3) Amendment No. 2 to Software License and Consulting Agreement
with Digital Insurance dated March 23, 2001
(10.4) Amendment No. 3 to Software License and Consulting Agreement
with Digital Insurance dated May 31, 2001
(10.5) Amendment to Commercial Sublease Agreement with Digital
Insurance effective June 1, 2001
(10.6) Severance Agreement for Michael G. Hankinson effective July
31, 2001