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. . . . . . . . . . . September 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: 52,955,713 shares of
common stock, par value $.10, outstanding as of October 31, 2001.
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
Item 2. Management's Discussion and Analysis of Results
Of Operations and Financial Condition.....................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk................25
PART II Other Information
Items 1-5.................................................................26
Item 6. Reports on Form 8-K...............................................26
Signatures.........................................................................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)
September 30, December 31,
2001 2000
------------- ------------
Assets
Cash and cash equivalents $ 12,265 $ 17,170
Accounts receivable, net of allowance for doubtful accounts of $178 and $300, respectively 1,998 2,061
Accounts receivable from affiliates 2,601 5,090
Prepaid expenses and other current assets 560 1,271
--------- ---------
Total current assets 17,424 25,592
Property, equipment and software, less accumulated depreciation and
amortization of $12,007 and $10,036, respectively 4,355 6,431
Capitalized software and contract start-up costs, less accumulated amortization of $1,299
and $1,478, respectively 2,499 7,240
Goodwill, less accumulated amortization of $887 and $34,109, respectively 24,954 648,854
Customer base, less accumulated amortization of $1,832 and $4,301, respectively 7,290 12,904
Assets held for sale 3,500 5,005
Investment in Digital Insurance, Inc. 227 3,178
Notes receivable and other assets 697 1,788
--------- ---------
Total assets $ 60,946 $ 710,992
========= =========
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 4,261 $ 6,999
Deferred revenues 2,426 737
Obligations under capital lease 42 269
--------- ---------
Total current liabilities 6,729 8,005
Convertible debentures 27,109 27,367
Post retirement and employment liabilities 1,090 1,087
--------- ---------
Total liabilities 34,928 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 52,955,002 and 13,097,618 shares, respectively 5,295 1,310
Additional capital 433,289 325,797
Accumulated deficit (412,250) (105,497)
Unearned compensation (316) (5,115)
--------- ---------
Total stockholders' equity 26,018 216,495
--------- ---------
Total liabilities and stockholders' equity $ 60,946 $ 710,992
========= =========
See notes to condensed consolidated financial statements.
Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue $ 11,218 $ 11,016 $ 33,552 $ 32,754
Expenses:
Cost of revenues 9,893 11,181 32,748 36,125
Sales and marketing 320 773 2,893 2,389
General and administrative 1,192 2,924 11,386 10,464
Research and development 301 97 1,222 383
Restructuring and impairment charges -- -- 281,272 --
Amortization of intangibles 1,264 9,841 12,769 30,837
------------ ------------ ------------ ------------
Total expenses 12,970 24,816 342,290 80,198
------------ ------------ ------------ ------------
Operating loss (1,752) (13,800) (308,738) (47,444)
Interest and other income (expense), net (1,654) (916) (2,776) (1,093)
------------ ------------ ------------ ------------
Loss before minority interest (3,406) (14,716) (311,514) (48,537)
Minority interest in loss of subsidiary -- 7,786 3,080 26,854
------------ ------------ ------------ ------------
Loss from continuing operations (3,406) (6,930) (308,434) (21,683)
Loss from discontinued operations -- -- -- (6,341)
Loss on sale of discontinued operations -- -- -- (2,802)
------------ ------------ ------------ ------------
Loss on discontinued operations -- -- -- (9,143)
------------ ------------ ------------ ------------
Net loss before extraordinary item (3,406) (6,930) (308,434) (30,826)
Convertible debt restructuring -- -- 1,681 --
------------ ------------ ------------ ------------
Net loss $ (3,406) $ (6,930) $ (306,753) $ (30,826)
============ ============ ============ ============
Loss per share of common stock (basic and diluted)
Continuing operations $ (.06) $ (.53) $ (6.27) $ (1.66)
Discontinued operations -- -- -- (.70)
Extraordinary gain -- .04 --
------------ ------------ ------------ ------------
Net loss $ (.06) $ (.53) $ (6.23) $ (2.36)
============ ============ ============ ============
Weighted average common shares and equivalents
used in computing (loss) per share
Basic and diluted 52,933,000 13,098,000 49,200,000 13,079,000
See notes to condensed consolidated financial statements.
Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(In thousands) (Unaudited)
Common Stock Additional Accumulated Unearned
Shares Amount Capital Deficit Compensation Total
------ ------ ------- ------- ------------ -----
BALANCE, December 31, 2000 13,098 $1,310 $325,797 $(105,497) $(5,115) $ 216,495
Net loss -- -- -- (306,753) -- (306,753)
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) -- 1,340 936
Stock based compensation -- -- 5,198 -- -- 5,198
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 228 22 330 -- 352
------ ------ -------- --------- ------- ---------
BALANCE, September 30, 2001 52,955 $5,295 $433,289 $(412,250) $ (316) $ 26,018
====== ====== ======== ========= ======= =========
See notes to condensed consolidated financial statements.
Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands) (Unaudited)
Nine Months Ended
September 30, September 30,
2001 2000
------------- -------------
Cash flows from operating activities
Net loss $(306,753) $ (30,826)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on sale of discontinued operations -- 2,802
Depreciation and amortization 16,574 39,755
Bad debt reserve 33 25
Minority interest in loss of subsidiary:
Share of loss from continuing operations (3,080) (26,854)
Share of loss from discontinued operations -- (11,199)
Gain on convertible debt restructuring (1,681) --
Stock option compensation 5,485 4,066
Loss on disposition of assets 8 516
Interest on convertible debt 3 1,696
Non-cash portion of restructuring charge 280,923 --
Investment in Digital Insurance, Inc. impairment charge 2,872 --
Payments of interest and severance with common stock 352 --
Change in:
Accounts receivable 2,519 (2,498)
Prepaid expense and other current assets 206 134
Other assets, current and deferred income taxes (37) 340
Accounts payable and accrued liabilities (1,518) (5,831)
Deferred revenues 1,689 35
Ceding commission and interest -- 450
Future policy benefits and claims and other 5 (321)
--------- ---------
Net cash used in operating activities (2,400) (27,710)
--------- ---------
Cash flows from investing activities
Cash in acquired company -- 2,126
Collection on notes receivable, net 832 --
Investment in capitalized software and contract start-up (2,272) (2,674)
Payment of acquisition costs (471) (1,031)
Purchases of property, equipment and software, net (762) (3,723)
Other 397 --
--------- ---------
Net cash used in investing activities (2,276) (5,302)
--------- ---------
Cash flows from financing activities
Payments on capital leases (229) (411)
Exercise of stock options -- 341
Exercise of Healthaxis options -- 183
--------- ---------
Net cash (used in) provided by financing activities (229) 113
--------- ---------
Decrease in cash and cash equivalents (4,905) (32,899)
Cash and cash equivalents, beginning of period 17,170 58,069
--------- ---------
Cash and cash equivalents, end of period $ 12,265 $ 25,170
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 370 $ 532
========= =========
See notes to condensed consolidated financial statements.
Healthaxis Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands except 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 nine-month period ended September
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
healthcare 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 Health 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 stockholders 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.
Under the rules for purchase accounting, the assets and liabilities of
Healthaxis, including goodwill, have been revalued as of the date of the merger.
Upon finalization of the purchase price allocation, a reduction of goodwill
totaling $337,424 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 merger
between Healthaxis.com, Inc and Insurdata Incorporated) 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 $90 and $936 related to unearned compensation amortization for the
three and the nine-months ended September 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 September 30, 2001, these options were not in the money,
which resulted in no compensation expense for this group through September 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 $5,485 for the three months and the nine-months ended September
30, 2001, respectively.
Note C - Related Party Transactions
UICI
Healthaxis conducts a significant amount of business with a major stockholder,
UICI. Healthaxis currently provides services to a number of UICI subsidiaries
and affiliates pursuant to written agreements ranging from original terms of 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
nine-months ended September 30, 2001, UICI and its subsidiaries and affiliates
accounted for an aggregate of $7,960 (71%) and $22,693 (68%), respectively, of
Healthaxis' total revenues for the period. As of September 30, 2001, Healthaxis
had trade receivables from UICI and its subsidiaries and affiliates of $2,601
(57%).
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 had the option to terminate
the agreement within the first two years, in which case a prorated portion of
the one-time license fee would be refunded. Consequently, the license fee
revenue was deferred and was being recognized into revenue pro rata over 24
months. On September 24, 2001 this agreement was amended to shorten the original
refund period from December 2002 to March 2002. The remaining amount refundable
was agreed to be $840 as of September 30, 2001 and such amount will be recorded
as revenue on a prorata basis over the remaining 6 month term of the amended
contract. Revenue recognized over the three and nine months ended September 30,
2001 under this agreement was $538 and $997, respectively.
On May 29, 2001, Healthaxis entered into an agreement with a subsidiary of UICI
for the development and integration of software for compliance with HIPAA. This
is a fixed price agreement totaling $515 payable upon the achievement of certain
milestones. Revenues were recognized using the percentage-of-completion method
in proportion to the hours expended compared to the total hours projected for
the project and was completed in the third quarter of 2001. Revenue recognized
for the three and nine-months ended September 30, 2001 under this agreement was
$412 and $515, respectively.
As of November 7, 2001 UICI's ownership included 8,581,714 shares of HAXS common
stock, which were subject to a Voting Trust, pursuant to which trustees
unaffiliated with UICI had the right to vote. On November 7, 2001, the Voting
Trust was amended to effectively terminate as of November 7, 2001 and to be of
no further force and effect. The termination of the voting trust did not result
in any accounting effects.
On January 26, 2001, as a condition to the consummation of the Amended and
Restated Agreement and Plan of Merger between Healthaxis Inc. and
Healthaxis.com, Inc., dated October 26, 2000, each of HAXS, UICI, Michael Ashker
and Alvin H. Clemens entered into a shareholders' agreement. The agreement
principally provided that nominees for election to the Board of Directors would
be (i) limited to nine (9) directors and (ii) determined by Healthaxis and UICI
each nominating up to three (3) directors, and Healthaxis and UICI jointly
nominating up to three (3) directors. The parties to the shareholders' agreement
entered into a new agreement to terminate the shareholders' agreement effective
November 7, 2001.
In consideration of the termination of the Shareholders' Agreement, on November
7, 2001, UICI and HAXS entered into a Proxy Agreement (the "Proxy") which
provides that in the event of the termination of the Voting Trust, UICI shall
grant a proxy to the HAXS Board of Directors, with full power of substitution
for and in the name, place and stead of UICI to appear at the annual meeting of
stockholders of HAXS, and at any postponement or adjournment thereof, and to
vote 33 1/3% of the number of shares of HAXS held of record from time to time by
UICI or its Affiliates for the sole purpose of electing directors to the Board
of Directors of HAXS, with all the powers and authority UICI would possess if
personally present. The voting rights granted by UICI thereunder shall require
the votes to be cast in favor of the nominees that a majority of the directors
shall have recommended stand for election. The Proxy does not confer upon the
proxies a voting right for any other purpose.
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 provided 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 per
month effective June 1, 2001 continuing through the earlier 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 full time equivalents, Web hosting services, shared
telecommunications cost, and rent and operating expenses in Healthaxis' East
Norriton, Pennsylvania 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 then current estimate of the
investment's net realizable value. In October 2001, Digital Insurance completed
an equity financing of $6.0 million, for which Healthaxis waived its preemptive
rights to participate. Based upon the dilution and the share price for the newly
issued preferred stock, the Company determined that an other than temporary
decline in value occurred and took an additional write down of $1.7 million in
the third quarter of 2001. At September 30, 2001, the Company's investment in
Digital Insurance is valued at $.07 per share. As a result of the additional
equity financing of Digital Insurance, Healthaxis' ownership was reduced to
approximately 2.5% of the fully diluted shares of Digital Insurance.
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 $(70) and $1,937, net in
compensation expense related to this agreement during the three and the
nine-months ended September 30, 2001, respectively, which is included in general
and administrative expenses.
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 the Company.
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 "Insurdata
Merger"), 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 sustain operations for the long-term.
However, at March 31, 2001, the Company's cash and liquid investments had been
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
its 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 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.
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 $281.3 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.
o 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
conditions in the capital markets, 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 report by
Gartner, Inc. has predicted that competitors in this sector
will be unstable through 2004. Gartner further projected
that competition and solution redundancy will cause at least
60% of competitors 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 better
position to withstand these volatile conditions.
4. Management believes 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.
Note H - Segment Reporting
Segment information is presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise
and Related Information. This standard is based on a management approach, which
requires segmentation based upon the Company's internal organization and
disclosure of revenue and operating income based upon internal accounting
methods. The Company's financial reporting systems present various data for
management to operate the business, including profit and loss statements
prepared on a basis not consistent with accounting principles generally accepted
in the United States. Assets are not allocated to business units for internal
reporting purposes and are therefore not included in the segment information
below.
In May of 2001, the Company implemented a restructuring plan which, among other
things, created four separate business units, each with accountability for
profitable operations beginning July 1, 2001. Each business unit is deemed to be
a reporting segment under the guidance of SFAS No.131. The Company assessed that
preparing comparable segment information for prior years is not practical due to
the difference in prior accounting information.
The Company's operating segments are:
i) Application Solutions Group, which provides web-enabled systems for
enrollment, administration and processing of health insurance claims
on an Application Service Provider basis.
ii) Web Technology Group, which provides web-enabled platforms and
solutions for the enrollment, sale/ distribution and post-sale
administration of group and individual insurance policies including
health, life and dental insurance, as well as software solutions for
ensuring compliance with HIPAA.
iii) Imaging Services Group, which provides electronic data capture,
imaging, storage and retrieval of health insurance claims, attachments
and other correspondence.
iv) Outsourcing Group, which provides system integration and consulting
work for the Company's largest single customer, UICI, pursuant to a
technology outsourcing agreement, generally on a cost plus 10% basis.
Each business segment generally sells its products and services to the same
constituent users, namely healthcare payers, which include insurance companies,
third party administrators, brokers, Blue Cross/Blue Shield plans and
self-insured employees.
All revenue is specifically associated with a separate business unit and
therefore there are no reconciling items. Portions of revenue generated from
UICI and its subsidiaries are earned under contracts or agreements other than
the technology outsourcing agreement. Those revenues are included in the
appropriate business unit. Earnings before income tax, depreciation and
amortization (EBITDA) is the primary measurement used by management to make
decisions regarding the segments. EBITDA excludes severance and non-cash stock
based compensation charges. Corporate overhead includes executive management,
accounting, legal and human resources, restructuring charges and other expenses.
Operating income does not include any cost allocations for corporate overhead
except in the case of the Outsourcing segment. Corporate overhead costs are
generally fixed and therefore do not necessarily fluctuate with either an
increase or decease in Outsourcing revenue.
Web Application Imaging Corporate Consolidated
Outsourcing Technology Solutions Services Overhead Total
----------- ---------- --------- -------- -------- -----
Three Months Ended September 30, 2001
- -------------------------------------
Revenue $ 5,349 $ 1,642 $3,069 $1,158 $ -- $ 11,218
EBITDA 1,010 (140) 829 (53) (1,204) 442
Depreciation and amortization 101 189 270 193 1,432 2,185
Operating income (loss) 464 (329) 560 (246) (2,202) (1,752)
Nine Months Ended September 30, 2001
- ------------------------------------
Revenue $16,125 $ 4,378 $9,235 $3,815 $ -- $ 33,552
EBITDA 3,010 (2,430) 948 (101) (4,655) (3,227)
Depreciation and amortization 352 681 967 575 13,999 16,574
Operating income (loss) 1,330 (3,111) (18) (675) (306,264) (308,738)
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.
Corporate Developments in 2001
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 on January 26, 2001.
Compensation expense totaling $1.9 million, net has been recorded during the
nine months ended September 30, 2001.
Restructuring Plan
In May 2001, the Company implemented a restructuring plan as further described
in Note G to the Condensed Consolidated Financial Statements above. 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 severance costs for terminated employees,
relocation of the corporate headquarters, write down of long-lived assets and
write down of goodwill.
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. Based upon the results of the third quarter of 2001, management
believes it has achieved the goals of the restructuring plan and achieved the
anticipated level of savings for the first full quarter since implementation.
The Company was successful in lowering the headcount, eliminating the
development and marketing of certain products, lowering operating costs and
moving the headquarters from Pennsylvania to Texas. The effect of these changes,
along with the write-down of long-lived assets and write-down of goodwill, is
reflected in the quarterly comparisons below. Q1 is before the restructuring
plan, Q2 is the period of implementation and Q3 is the first full quarter after
implementation.
2001 (in 000s)
-----------------------------------
Q1 Q2 Q3
-- -- --
Cash operating costs $13,692 $ 12,311 $10,776
Amortization/depreciation 7,719 5,823 2,094
Stock based compensation 5,731 519 170
Severance 2,371 (118) (70)
Restructuring charges -- 281,272 --
Digital Insurance Amendments
The Company's relationship and history with Digital Insurance is further
described in Note C to the Condensed Consolidated Financial Statements above.
Effective May 31, 2001, the Company amended its agreements with Digital
Insurance and agreed to settle all amounts due (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 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 of either May 31, 2002, or the date
Digital Insurance gives written notice to Healthaxis that it no longer utilizes
certain software as provided by Healthaxis.
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 then current estimate of the
investment's net realizable value. In October 2001, Digital Insurance completed
an equity financing of $6.0 million, for which Healthaxis waived its preemptive
rights to participate. Based upon the dilution and the share price for the newly
issued preferred stock, the Company has taken an additional write down of $1.7
million in the third quarter of 2001 such that its investment in Digital
Insurance is valued at $.07 per share. As a result of the additional equity
financing of Digital Insurance, Healthaxis' ownership was reduced to
approximately 2.5% of the fully diluted shares of Digital Insurance.
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.
Termination of the Shareholders' Agreement
On January 26, 2001, as a condition to the consummation of the Amended and
Restated Agreement and Plan of Merger between Healthaxis Inc. ("HAXS") and
Healthaxis.com, Inc. ("Healthaxis"), dated October 26, 2000, each of HAXS, UICI,
Michael Ashker and Alvin H. Clemens entered into that certain Shareholders'
Agreement dated January 26, 2001 (the "Shareholders' Agreement"), which
terminated that certain Shareholders' Agreement dated January 7, 2000, by and
among Healthaxis.com, Inc., the Company, UICI, Ashker and Clemens.
The Shareholders' Agreement principally provided that nominees for election to
the Board of Directors would be (i) limited to nine (9) directors and (ii)
determined by Healthaxis and UICI each nominating up to three (3) directors
(respectively, the "Healthaxis nominees" and the "UICI nominees"), and
Healthaxis and UICI jointly nominating up to three (3) directors (the "Joint
Nominees"). Termination of the Shareholders' Agreement required the mutual
agreement of all parties thereto.
On November 7, 2001, the parties to the Shareholders' Agreement entered into an
Agreement of Termination of the Shareholders' Agreement ("Termination
Agreement"). Under the terms of the Termination Agreement, the Shareholders'
Agreement is terminated effective November 7, 2001.
Board of Directors
As a result of the Termination Agreement, director nominees are now determined
by the HAXS Board of Directors Compensation & Nominating Committee. The Board of
Directors is also authorized to fill vacancies on the Board of Directors by
director vote. At its Board Meeting of November 7, 2001, the directors elected
James L. Hopkins to fill one of the vacancies created by the resignations on
November 7, 2001, of directors Gregory T. Mutz, President & CEO of UICI and
Patrick J. McLaughlin, a principal of Emerald Capital Group, Ltd and member of
the Board of Directors of UICI. Mr. Hopkins was also named as Chair of the Audit
Committee. As of November 7, 2001, HAXS now has the following eight (8)
directors: James W. McLane, Michael Ashker, Dennis B. Maloney, Alvin H. Clemens,
Henry H. Hager, Kevin F. Hickey, Kevin Brown and James L. Hopkins.
James L. Hopkins
James L. Hopkins is former Chairman and CEO of Micrografx, Inc., a Dallas, Texas
based company that develops and sells application software for the personal
computer industry. In October, 2001, Micrografx was acquired by Corel
Corporation. Prior to joining Micrografx, Mr. Hopkins was Managing Director from
September 1999 to October 2000 of Hoak, Breedlove, Wesneski & Co., an investment
banking firm company serving technology companies. From May 1999 to September
1999, he was Sr. Vice President of Finance and Strategic Planning of 3dfx
Interactive, Inc., a California based developer of semiconductors and circuit
boards for 3D graphics displays. Mr. Hopkins served as CFO and Vice President of
Strategic Marketing from January 1995 through May 1999 for STB Systems, Inc, a
Texas based developer of multimedia subsystems for personal computers. Prior to
1995, Mr. Hopkins held various executive and consulting positions with both
public and private entities.
Proxy Agreement
In addition to the Shareholders' Agreement, on January 26, 2001, UICI, HAXS and
Healthaxis.com, Inc., with Michael Ashker, Dennis B. Maloney and Edward W.
LeBaron, Jr., designated as Trustees, also entered into that certain Amended and
Restated Voting Trust dated January 26, 2001 (the "Voting Trust"), pursuant to
which the Trustees thereunder have certain rights with respect to 8,581,714
shares of HAXS common stock with respect to which UICI holds an economic
interest.
In consideration of the termination of the Shareholders' Agreement, on November
7, 2001, UICI and HAXS entered into a Proxy Agreement (the "Proxy") which
provides that in the event of the termination of the Voting Trust, UICI shall
grant a proxy to the HAXS Board of Directors, with full power of substitution
for and in the name, place and stead of UICI to appear at the annual meeting of
stockholders of HAXS, and at any postponement or adjournment thereof, and to
vote thirty-three and one-third percent (33 1/3%) of the number of shares of
HAXS held of record from time to time by UICI or its Affiliates for the sole
purpose of electing directors to the Board of Directors of HAXS, with all the
powers and authority UICI would possess if personally present. The voting rights
granted by UICI thereunder shall require the votes to be cast in favor of the
nominees that a majority of the directors shall have recommended stand for
election. The Proxy does not confer upon the proxies a voting right for any
other purpose.
The Proxy shall terminate at the earlier to occur of (i) the tenth anniversary
of the effective date of the Proxy Agreement, (ii) such date as UICI
beneficially holds less than twenty five percent (25%) of the outstanding shares
of common stock of HAXS on a fully diluted basis, (iii) such date as any Person
or Persons acting as a "group" (within the meaning of Rule 13d-5 of the
Securities Exchange Act of 1934, as amended) beneficially holds a greater
percentage of the outstanding shares of HAXS common stock on a fully diluted
basis than the percentage beneficially owned by UICI, or (iv) the filing by HAXS
of a voluntary petition in bankruptcy or the filing by a third party of an
involuntary petition in bankruptcy with respect to HAXS.
Termination of the Voting Trust
As of November 7, 2001 UICI's ownership included 8,581,714 shares of HAXS common
stock, which were subject to a Voting Trust, pursuant to which trustees
unaffiliated with UICI had the right to vote. On November 7, 2001, the Voting
Trust was amended to effectively terminate as of November 7, 2001 and to be of
no further force and effect. The termination of the voting trust did not result
in any accounting effects.
The Voting Trust provides, in part, that UICI may propose any amendment to the
Voting Trust Agreement if such amendment will (i) permit HAXS to continue to
report its financial results consistent with the way in which they have
theretofore been reported and (ii) not require restatement of the financial
statements of HAXS or result in any substantial or material change to such
financial statements. The Company's management believes that the termination of
the voting trust will not result in any such accounting effects.
On November 7, 2001, the Voting Trust was amended to effectively terminate as of
November 7, 2001 and to be of no further force and effect. The Trustees further
agreed to execute and deliver any and all stock powers and other documents of
transfer sufficient to vest title to the Trust Securities in UICI. The
termination of the Voting Trust thereby triggers the Proxy described in the
Proxy Agreement section above as of November 7, 2001.
Results of Operations
- ---------------------
Nine months ended September 30, 2001 compared to nine months ended September 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.
Nine Months Ended, September 30, 2001 (in thousands)
-------------------------------------------------------------
Stock
Operating Depreciation/ Based
Costs Amortization Compensation Total
--------- ------------- ------------ --------
Operating Expenses
Cost of revenue $ 29,476 $ 2,561 $ 711 $ 32,748
Sales and marketing 1,754 31 1,108 2,893
General and administrative 6,631 184 4,571 11,386
Research and development 1,101 92 29 1,222
-------- -------- ------- --------
Subtotal $ 38,962 $ 2,868 $ 6,419 48,249
======== ======== ======= --------
Restructuring charge 281,272
Amortization of intangibles 12,769
--------
Total operating expenses $342,290
========
Nine Months Ended, September 30, 2000 (in thousands)
-------------------------------------------------------------
Stock
Operating Depreciation/ Based
Costs Amortization Compensation Total
--------- ------------- ------------ --------
Operating Expenses
Cost of revenue $ 30,143 $ 2,959 $ 3,023 $ 36,125
Sales and marketing 1,266 7 1,116 2,389
General and administrative 7,930 172 2,362 10,464
Research and development 325 58 -- 383
-------- -------- ------ --------
Subtotal $ 39,664 $ 3,196 $ 6,501 49,361
======== ======== ======= --------
Restructuring charge --
Amortization of intangibles 30,837
--------
Total operating expenses $ 80,198
========
Revenues increased 2% from $32.8 million for the nine-months ended
September 30, 2000 to $33.6 million for the same period in 2001. The increase
was primarily the result of new revenue generated from the agreement with
Digital Insurance and increased revenue from UICI, partially offset by the 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 9% from
$36.1 million for the nine months ended June 30, 2000 to $32.7 million for the
same period in 2001. Cost of revenue as a percentage of revenue declined from
110% in 2000 to 98% in 2001. A reduction of stock based compensation accounted
for $2.3 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.
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 $2.4 million
for the nine-months ended September 30, 2000 to $2.9 million for the same period
in 2001. The 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 first two
quarters of 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 five.
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
$10.5 million for the nine months ended September 30, 2000 compared to $11.4
million for the same period in 2001. Stock based compensation of approximately
$2.4 million was included in 2000 as compared to $4.6 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
$.5 million in 2000, primarily related to Mr. Clemens' severance agreement as
described above. After adjustment for these items, expenses have decreased
approximately $3.0 million as result of the gradual reduction of management and
corporate staff subsequent to the HAXS Merger in January 2001, 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 $.4 million for the
nine-months ended September 30, 2000 to $1.2 million for the same period in
2001. The increase was due to an increase in the Advanced Technology Department
staff from seven to twelve 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 $281.3 million
during the nine months ended September 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 was 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 further discussion of the Restructuring Plan 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 base
and goodwill. These expenses decreased from $30.8 million for the nine-months
ended September 30, 2000 to $12.8 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 has been significantly
reduced.
Interest and other income (expense), net changed from a net expense of
$1.1 million in the nine-months ended September 30, 2000 to a net expense of
$2.8 million in the same period in 2001. In 2000, the balance represented
primarily net interest expense. In 2001, the balance includes the reduction in
value of the investment in Digital Insurance.
Minority interest in loss of subsidiary was $26.9 million for the
nine-months ended September 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 nine
months ended September 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 nine months ended September
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 September 30, 2001 compared to three months ended September
30, 2000.
Three Months Ended, September 30, 2001 (in thousands)
------------------------------------------------------------
Stock
Operating Depreciation/ Based
Costs Amortization Compensation Total
--------- ------------- ------------ --------
Operating Expenses
Cost of revenue $ 9,061 $ 751 $ 81 $ 9,893
Sales and marketing 271 12 37 320
General and administrative 1,106 43 43 1,192
Research and development 268 24 9 301
-------- -------- ------- --------
Subtotal $ 10,706 $ 830 $ 170 11,706
======== ======= ======= --------
Amortization of intangibles 1,264
--------
Total operating expenses $ 12,970
========
Three Months Ended, September 30, 2002 (in thousands)
------------------------------------------------------------
Stock
Operating Depreciation/ Based
Costs Amortization Compensation Total
--------- ------------- ------------ --------
Operating Expenses
Cost of revenue $ 9,287 $ 1,014 $ 880 $ 11,181
Sales and marketing 555 1 217 773
General and administrative 2,008 56 860 2,924
Research and development 97 -- -- 97
-------- -------- ------- --------
Subtotal $ 11,947 $ 1,071 $ 1,957 14,975
======== ======== ======= --------
Amortization of intangibles 9,841
--------
Total operating expenses $ 24,816
========
Revenues increased 2% from $11.0 million for the three months ended
September 30, 2000 to $11.2 million for the same period in 2001. Increased
revenue from UICI was largely offset by reduced revenue from Digital Insurance
(see "Digital Insurance Amendments" above) and the loss of data capture revenue.
The increased revenue from UICI was primarily due to one-time projects in the
quarter and an amendment to a software license agreement as further described in
Note C above.
Cost of revenues decreased 12% from $11.2 million for the three months
ended September 30, 2000 to $9.9 million for the same period in 2001.
Approximately $.8 million of the decrease was due to a reduction in stock based
compensation. The remainder of the decrease 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 from $773,000 for the three
months ended September 30, 2000 to $320,000 for the same period in 2001.
Excluding stock based compensation of $217,000 in 2000 and $37,000 in 2001,
sales and marketing expenses decreased $273,000. 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.
General and administrative expenses decreased 59% from $2.9 million for
the three months ended September 30, 2000 to $1.2 million for the same period in
2001. A decrease in stock based compensation accounts for $817,000 of the
difference. The balance was due to a reduction in the management overhead and
corporate staff that existed after the HAXS merger in January 2001, and the
restructuring plan implemented in May 2001.
Research and development expenses increased from $97,000 for the three
months ended September 30, 2000 to $301,000 for the same period in 2001. The
increase was due to the additional staff.
Amortization of intangibles decreased 87% from $9.8 million for the
three months ended September 30, 2000 to $1.3 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 has been significantly
reduced.
Interest and other income (expense), net was relatively unchanged from
a net expense of $916,000 for the three months ended September 30, 2000 to $1.1
million for the same period in 2001. In 2000, the balance represented primarily
net interest expense. In 2001, the balance represents primarily the reduction in
value of the investment in Digital Insurance.
Minority interest in loss of subsidiary was $7.8 million for the three
months ended September 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.
Recent Accounting Pronouncements
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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
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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. In the third quarter of 2001, cash reserves increased slightly to $12.3
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.
The following table summarizes the significant changes in the Company's cash
balances during the quarter ended September 30, 2001 (in $000):
Cash on hand, June 30, 2001 $ 12,188
EBITDA for third quarter of 2001 442
Net changes in working capital and other (88)
Capital expenditures (48)
Investment in software and other (229)
--------
Cash on hand, September 30, 2001 $ 12,265
========
EBITDA represents the Company's net income 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. 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. There can be no assurances as to when or at what price this
property will ultimately be sold.
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
are 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.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Cash used in operating activities for the nine months ended September
30, 2001 was $2.4 million as compared to $27.7 million for the same period in
2000. 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
Merger 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, particularly accounts
receivable, accounts payable, and accrued liabilities.
Cash used in investing activities for the nine months ended September
30, 2001 was $2.3 million as compared to $5.3 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 in the first nine months of 2001 decreased
$5.1 million primarily resulting from a decrease in capital expenditures for
property and equipment, a decrease in acquisition costs associated with the
merger, and due to collections of certain notes receivable in 2001.
Cash used from financing activities increased by $342,000 as result of
$229,000 cash used in the nine months ended September 30, 2001 as opposed to
cash generated of $113,000 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
short-term investments. The Company does not use derivative financial
instruments. The primary objective of its investment activities is to preserve
principal while maximizing yields without significantly increasing risk. Due to
the nature of the Company's investments, we believe that there is no material
risk exposure.
The Convertible Debentures outstanding at September 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.
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 current 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.
Not Applicable
Item 5. Other Information.
ANY EVENTS BELONG HERE? SHAREHOLDERS AGREEMENT?
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(10.1) Engagement Letter between Healthaxis Inc. and Student
Insurance Division of UICI dated September 21, 2001
(10.2) First Amendment to Software License Agreement with UICI
effective September 24, 2001
(10.3) Agreement of Termination of the Shareholders Agreement dated
November 7, 2001
(10.4) Proxy Agreement dated November 7, 2001
(10.5) Amendment No.1 to Amended and Restated Voting Trust
Agreement dated November 7, 2001
(b) Reports on Form 8-K:
The Company did not file any current reports on Form 8K during the
quarter ended September 30, 2001.
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: November 14, 2001 By: /s/ James W. McLane
------------------------------------------
James W. McLane, Chairman, President
and Chief Executive Officer
Date: November 14, 2001 By: /s/ John Carradine
------------------------------------------
John Carradine, Chief Financial Officer,
Principal Accounting Officer and Treasurer