SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13591
HEALTHAXIS INC.
(Exact name of Registrant as specified in its charter)
5215 N. O'Connor Blvd.
800 Central Tower
Pennsylvania Irving, Texas 75039 23-2214195
- ------------------------------------- ------------------------------------ -----------------------------
(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
(972) 443-5000
--------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
--------------------------- --------------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.10 Par Value
----------------------------
Title of Class
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 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K: |_|
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on
March 8, 2002 as reported on the NASDAQ National Market System, was
approximately $19,957,385. Shares of the Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 8, 2002, the Registrant had 53,352,738 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive Proxy Statement for the
2002 Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
Explanatory Note
This Amendment No. 1 to Form 10-K for the year ended December 31, 2001 is being
filed to correct a typographical error that occurred in the initial filing on
March 22, 2002 due to a printer's error. The error was on the headings on the
Consolidated Balance Sheets presented in Item 8 of the original filing. The
headings indicating amounts for the years 2001 and 2000 were reversed. All other
disclosure is unchanged.
ITEM 8. FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors.......................................... 2
Report of Independent Certified Public Accountants...................... 3
Consolidated Balance Sheets - December 31, 2001 and 2000................ 4
Consolidated Statements of Operations
Years ended December 31, 2001, 2000 and 1999......................... 5
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999......................... 6
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999......................... 7
Notes to Consolidated Financial Statements.............................. 9
1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Healthaxis Inc.
We have audited the accompanying consolidated balance sheet of Healthaxis Inc.
and Subsidiaries as of December 31, 2001 and the related consolidated statement
of operations, stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's Management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Healthaxis Inc. and
Subsidiaries at December 31, 2001, and the consolidated results of their
operations and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Dallas, Texas
February 26, 2002, except for Note 26, as to which the date is March 6, 2002.
2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Healthaxis Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheet of Healthaxis Inc.
and Subsidiaries as of December 31, 2000 and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards general accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Healthaxis Inc. and
Subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2000, in conformity with accounting principles general accepted in the United
States of America.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Dallas, TX
March 16, 2001
3
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data)
DECEMBER 31,
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents $ 13,149 $ 17,170
Accounts receivable, net of allowance for doubtful accounts of $50 and $300, respectively 2,594 2,061
Accounts receivable from affiliates 3,286 5,090
Prepaid expenses and other current assets 412 694
Notes receivable 119 577
--------- ---------
Total current assets 19,560 25,592
Property, equipment and software, less accumulated depreciation and
amortization of $10,311 and $10,036, respectively 3,451 6,431
Capitalized software and contract start-up costs, less accumulated
amortization of $1,327 and $1,478, respectively 2,525 7,240
Customer base, less accumulated amortization of $2,379 and $4,301, respectively 6,743 12,904
Goodwill, less accumulated amortization of $1,533 and $34,109, respectively 24,308 648,854
Notes receivable from employees 311 631
Notes receivable 308 242
Deferred acquisition costs - 801
Assets held for sale - 5,005
Investment in Digital Insurance, Inc. 227 3,178
Other assets 155 114
--------- ---------
Total assets $ 57,588 $ 710,992
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,188 $ 1,275
Accrued liabilities 2,920 5,724
Deferred revenues 1,867 737
Obligations under capital leases 8 269
--------- ---------
Total current liabilities 5,983 8,005
Convertible debentures 27,134 27,367
Post retirement and employment liabilities 995 1,072
Other liabilities 1,087 15
--------- -----------
Total liabilities 35,199 36,459
Commitments and contingencies
Minority interest in COM
Common stock - 442,989
Preferred stock - 15,049
Stockholders' Equity:
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A cumulative convertible, no shares issued or outstanding - -
Series B cumulative convertible, no shares issued or outstanding - -
Common stock, par value $.10: authorized 50,000,000 shares,
issued and outstanding 52,978,613 and 13,097,618 shares 5,298 1,310
Common stock, Class A, par value $.10: authorized 20,000,000
shares, none issued and outstanding - -
Additional paid-in capital 433,386 325,797
Accumulated deficit (416,069) (105,497)
Unearned compensation (226) (5,115)
--------- ---------
Total stockholders' equity 22,389 216,495
--------- ---------
Total liabilities and stockholders' equity $ 57,588 $ 710,992
========= =========
See notes to consolidated financial statements.
4
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
YEARS ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
Revenue $ 14,133 $ 13,301 $ -
Revenue from affiliates 29,657 29,495 -
--------- ---------- ----------
Total 43,790 42,796 -
Expenses:
Costs of revenues 41,993 47,075 504
Sales and marketing 3,225 3,585 447
General and administrative 13,492 12,380 7,457
Research and development 1,479 974 -
Restructuring and impairment charges 279,607 - -
Loss on sale of building 2,498 - -
Amortization of intangibles 14,034 40,678 765
--------- ---------- ----------
Total expenses 356,328 104,692 9,173
--------- ---------- ----------
Operating loss (312,538) (61,896) (9,173)
Interest expense and other income, net (2,795) (2,977) (925)
--------- ---------- ----------
Loss before minority interest (315,333) (64,873) (10,098)
Minority interest in loss of subsidiary 3,080 35,988 1,008
--------- ---------- ----------
Loss before provision for income taxes (312,253) (28,885) (9,090)
Income tax provision - 585 -
--------- ---------- ----------
Loss from continuing operations (312,253) (28,300) (9,090)
--------- ---------- ----------
Loss from sale of discontinued operations - (2,300) (10,263)
Loss from discontinued operations:
Insurance operations - - (8,052)
Retail website operations - (6,341) (19,126)
--------- ---------- ----------
Total loss from discontinued operations - (8,641) (37,441)
--------- ---------- ----------
Loss before extraordinary item (312,253) (36,941) (46,531)
Extraordinary gain 1,681 1,925 -
--------- ---------- ----------
Net loss (310,572) (35,016) (46,531)
Dividends on preferred stock - - 70
--------- ---------- ----------
Net loss applicable to common stockholders $(310,572) $ (35,016) $ (46,601)
========== =========== ===========
Loss per share of common stock (basic and diluted)
Continuing operations $ (6.22) $ (2.17) $ (0.75)
Discontinued operations - (0.66) (3.05)
Extraordinary gain .03 .15 -
--------- ---------- ----------
Net loss $ (6.19) $ (2.68) $ (3.80)
========== =========== ===========
Weighted average common shares and equivalents used in computing
loss per share
Basic and diluted 50,149,000 13,082,000 12,260,000
See notes to consolidated financial statements.
5
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss)
------ ------ ------ ------ ------- ------- -------------
BALANCE, DECEMBER 31, 1998 557 $ 557 11,489 $ 1,149 $ 27,002 $ (23,879) $ 666
Comprehensive income:
Net loss 1999 (46,531)
Other comprehensive income (666)
Comprehensive loss
Issuance of common stock 25 3 267
Stock options and warrants exercised 956 95 5,876
Increase in net assets in COM 44,395
Warrants and non employee options issued 3,757
Conversion of preferred stock (557) (557) 557 56 501
Cash dividends declared on preferred (71)
------ ------ ------ ------- --------- ---------- ------------
stock
BALANCE, DECEMBER 31, 1999 - - 13,027 1,303 81,798 (70,481) -
Net loss 2000 (35,016)
35,016)
Stock options and warrants exercised 71 7 334
Increase in net assets in COM 242,845
Employee stock option compensation 820
Valuation of Insurdata options
Amortization/forfeiture of unearned
compensation
------ ------ ------ -------- --------- ---------- ------------
BALANCE, DECEMBER 31, 2000 - - 13,098 1,310 325,797 (105,497) -
Net loss 2001 (310,572)
Issuance of common stock in HAXS Merger 39,629 3,963 105,017
Exchange and revaluation of options in
HAXS Merger (2,764)
Increase in net assets in COM 115
Common stock issued in lieu of interest and 252 25 348
severance
Employee stock option compensation 5,277
Amortization/forfeiture of unearned
compensation (404)
------ ------ ------ -------- --------- ---------- ------------
BALANCE, DECEMBER 31, 2001 - $ - 52,979 $ 5,298 $ 433,386 $ (416,069) $ -
= ====== ====== ======== ========= ========== ============
Unearned
Compensation Total
------------ -------
BALANCE, DECEMBER 31, 1998 $ - $ 5,495
Comprehensive income:
Net loss 1999 (46,531)
Other comprehensive income (666)
---------
Comprehensive loss (47,197)
---------
Issuance of common stock 270
Stock options and warrants exercised 5,971
Increase in net assets in COM 44,395
Warrants and non employee options issued 3,757
Conversion of preferred stock -
Cash dividends declared on preferred (71)
------------ ----------
stock
BALANCE, DECEMBER 31, 1999 - 12,620
Net loss 2000 (35,016)
35,016)
Stock options and warrants exercised 341
Increase in net assets in COM 242,845
Employee stock option compensation 820
Valuation of Insurdata options (10,691) (10,691)
Amortization/forfeiture of unearned
compensation 5,576 5,576
------------ ----------
BALANCE, DECEMBER 31, 2000 (5,115) 216,495
Net loss 2001 (310,572)
Issuance of common stock in HAXS Merger 108,980
Exchange and revaluation of options in
HAXS Merger 3,459 695
Increase in net assets in COM 115
Common stock issued in lieu of interest and 373
severance
Employee stock option compensation 5,277
Amortization/forfeiture of unearned
compensation 1,430 1,026
------------ ----------
BALANCE, DECEMBER 31, 2001 $ (226) $ 22,389
============ ==========
See notes to consolidated financial statements.
6
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES 2001 2000 1999
---- ---- ----
Net loss $ (310,572) $ (35,016) $ (46,531)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sale of discontinued operations - 2,300 8,763
Depreciation and amortization 18,745 51,742 17,739
Issuances of warrants - - 1,394
Loss on building 2,498 - -
Gain on restructuring/forgiveness of debt (1,681) (1,925) -
Bad debt reserve (89) 680 -
Non-cash restructuring and impairment charges 279,258 - -
Minority interest in loss of subsidiary (3,080) (47,187) (7,747)
Stock option compensation 5,564 4,927 -
Write down of investment in Digital Insurance, Inc. 2,872 - -
Common stock issued for services, interest and severance 373 - 270
(Gain) loss on disposition of assets (6) 721 749
Non-cash interest on convertible debt 28 2,348 573
Non-cash expense for service agreements - - 556
Changes in operating assets and liabilities net of
amounts acquired or divested:
Accounts receivable 1,540 (1,868) -
Premium due and uncollected, unearned premium and
premium received in advance - - 354
Prepaid expenses 282 69 (4,729)
Due to/from reinsurers - - 10,030
Due from third party administrator - - 6,849
Deferred policy acquisition costs, net - - 2,106
Accrued investment income - - 152
Other assets, current and deferred income taxes and
other liabilities (40) 733 2,099
Accounts payable and accrued liabilities (1,671) (4,880) 2,963
Income taxes payable - (585) -
Deferred revenues 1,130 340 -
Ceding commission and interest - (3,675) 600
Future policy benefits and claims (77) 42 (45,940)
Other liabilities 1,074 (355) -
---------- --------- ---------
Net cash used in operating activities (3,852) (31,589) (49,750)
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for sale of subsidiary - (14,700)
Cash in acquired company - 2,126 -
Investment in capitalized software and contract start-up (2,513) (5,576) -
Proceeds from sale of bonds - - 6,656
Proceeds from sale of building 2,626 - -
Proceeds from sale of equipment 523 - -
Payment of acquisition costs (471) (1,491) (750)
Collection on notes receivable, net 712 52 1,328
Purchases of property, equipment and software (862) (4,391) (4,169)
Other 79 - 45
---------- --------- ---------
Net cash provided by (used in) investing activities 94 (9,280) (11,590)
---------- --------- ---------
7
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease (263) (554) (379)
Repayment of loans payable - - (1,465)
Purchase of Healthaxis common stock - - (8,203)
Net proceeds from the sale of convertible debt - - 26,763
Net proceeds from the sales of Healthaxis common stock - - 59,445
Net proceeds from the sales of preferred stock - - 12,082
Exercise of stock options - 341 5,052
Exercise of Healthaxis stock options - 183 -
Dividends paid on preferred stock - - (71)
--------- -------- --------
Net cash (used in) provided by financing activities (263) (30) 93,224
--------- -------- --------
(Decrease) increase in cash and cash equivalents (4,021) (40,899) 31,884
Cash and cash equivalents, beginning of period 17,170 58,069 26,185
--------- -------- --------
Cash and cash equivalents, end of period $ 13,149 $ 17,170 $ 58,069
========= ======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 323 $ 574 $ 78
Non-cash investing activities
Issuance of common stock and options in connection
with HAXS and Insurdata mergers, respectively $ 111,188 $ 722,488 $ -
Receipt of Digital Insurance, Inc. common shares - 3,178 -
Issuance of note to Digital Insurance, Inc. - 500 -
Non-cash financing activities
Issuance of warrants $ - $ - $ 6,808
Exercise of options - - 900
Repayment of loans payable - - (2,400)
Conversion of preferred stock to common stock - - 557
See notes to consolidated financial statements
8
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Healthaxis Inc. ("Healthaxis"), formerly Provident American Corporation, is a
Pennsylvania corporation organized in 1982. Healthaxis.com, Inc. ("COM"), a
consolidated subsidiary of Healthaxis, was formed on March 26, 1998. Healthaxis
operates as a technology solutions provider in the health care administration
market. Healthaxis provides application solutions and services to both
healthcare payers and those entities involved in the distribution and
administration of health insurance. Healthaxis offers a suite of Internet based
software applications and services designed to enhance the efficiency and
effectiveness of insurance plan distribution, claims administration, benefits
enrollment, benefits maintenance and conversion of insurance claims information
to electronic form. In addition, Healthaxis provides systems integration,
technology management, and data capture services.
Until November 30, 1999, Healthaxis was a regulated insurance holding company
owning 100% of Provident Indemnity Life Insurance Company ("PILIC"). On November
30, 1999, Healthaxis sold PILIC. As a result, the results of operations of PILIC
prior to the sale are presented as a discontinued business segment (See Note 5).
On January 7, 2000, COM completed a merger with Insurdata Incorporated
("Insurdata"), a subsidiary of UICI (See Note 4). COM emerged as the surviving
entity. Prior to this merger, COM was engaged in the marketing and sale of
health insurance products over the Internet through a retail website. On June
30, 2000, COM entered into an agreement to sell substantially all of the assets
used in connection with the retail website operations (See Note 5). As a result,
the retail website operations are presented as a discontinued business segment.
The continuing operations of Healthaxis and its subsidiaries ("the Company") are
principally those obtained in the Insurdata merger.
On January 26, 2000, Healthaxis and COM entered into an Agreement and Plan of
Reorganization and Agreement and Plan of Merger pursuant to which Healthaxis
would acquire all of the outstanding shares of COM it did not currently own
through the merger of COM with a wholly-owned subsidiary of Healthaxis ("HAXS
Merger"). On September 29, 2000, Healthaxis and COM entered into an Amended and
Restated Agreement and Plan of Reorganization and Amended and Restated Agreement
and Plan of Merger that, among other things, adjusted the merger exchange ratio
from 1.127 to 1.334. On January 26, 2001, the shareholders of Healthaxis and COM
approved this merger and the transaction was consummated.
The Company's operations during 2001 were conducted primarily through its
subsidiary, COM. In December 2001 the Company reorganized and formed a new
subsidiary, Healthaxis, Ltd., through which all operations are now conducted.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
9
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues, expenses, assets, and liabilities and
disclosure of contingencies. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities of three
months or less from date of purchase. The Company maintains its cash accounts at
several commercial banks. Cash accounts at each bank often exceed amounts that
are insured by the Federal Deposit Insurance Corporation.
PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software are recorded at cost. Expenditures for
improvements that increase the estimated useful lives of the assets are
capitalized. Expenditures for repairs and maintenance are charged to operations
as incurred. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets ranging from 1 to 20 years.
CAPITALIZED SOFTWARE
Healthaxis incurs development costs that relate primarily to the development of
new products and major enhancements to existing services and products. All
development costs related to software development projects incurred prior to the
time a project has reached technological feasibility are expensed. Software
development costs incurred subsequent to reaching technological feasibility are
capitalized up to the point of product marketability. If the process of
developing a new product or major enhancement does not include a detailed
program design, technological feasibility is determined only after completion of
a working model. Healthaxis capitalized $1,586, $5,238, and $0 in software
development costs during the years ended December 31, 2001, 2000, and 1999,
respectively. All software development costs capitalized are amortized over the
remaining economic life of the product (generally three to five years) using the
greater of the amount calculated under (i) the gross revenue method or (ii) the
straight-line method. Healthaxis recorded amortization expense relating to
capitalized software development costs totaling $1,044, $341, and $0 during the
years ended December 31, 2001, 2000, and 1999, respectively.
Direct internal and external costs associated with the development of the
features, content and functionality of WWW.HEALTHAXIS.COM, Healthaxis' web site,
incurred during the application development stage, have been capitalized and are
being amortized on a straight line basis over the estimated useful life.
START-UP COSTS
Healthaxis capitalizes costs, including direct labor and fringe benefits,
directly attributable to contract start-up activities. Such costs are amortized
over the life of the respective contract. All other start-up costs not directly
related to contracts are expensed. Contract start-up costs capitalized during
the years ended December 31, 2001, 2000, and 1999 totaled $928, $338, and $0,
respectively. Healthaxis recorded amortization expense relating to contract
start-up costs of $468, $299, and $0 during the years ended December 31, 2001,
2000, and 1999, respectively.
10
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on goodwill and other intangible assets
when events and circumstances indicate that such assets might be impaired and
the estimated fair value of the asset is less than its recorded amount.
Conditions that would necessitate an impairment assessment included material
adverse changes in operations, significant adverse differences in actual results
in comparison with initial valuation forecasts prepared at the time of
acquisition, a decision to abandon acquired products, services or technologies,
or other significant adverse changes that would indicate the carrying amount of
the recorded asset might not be recoverable.
The Company reviews its long-lived assets and certain intangible assets for
impairment on a quarterly basis or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets held and used is measured by a comparison of the
carrying amount of an asset to undiscounted pre-tax future net cash flows
expected to be generated by that asset. An impairment loss is recognized for the
amount by which the carrying amount of the assets exceeds the fair value of the
assets estimated using discounted cash flows.
DEFERRED ACQUISITION COSTS
The Company defers the costs associated with pending mergers. These costs
include legal, accounting and investment banking services. These costs are
included as a component of the purchase price upon consummation of the merger.
Deferred acquisition costs at December 31, 2000 relate to the pending merger
between Healthaxis and COM
INVESTMENT VALUATION
The Company accounts for investments in which it does not have significant
control on the cost basis. Impairment charges are recorded when management
believes that an investment has experienced a decline in value that is other
than temporary.
STOCK OPTIONS AND WARRANTS - NONEMPLOYEES
The Company accounts for all options and warrants granted to non-employees at
fair value (See Note 22).
STOCK OPTIONS AND WARRANTS - EMPLOYEES AND DIRECTORS
The Company has elected to continue to account for stock-based compensation for
employees and directors using the intrinsic value method of option accounting
and to provide additional disclosures with respect to the pro forma effects had
the Company recorded compensation expense based upon the fair value of the
options granted.
Compensation cost for stock options is recognized based on the intrinsic value
of options granted. The excess fair value, if any, of the underlying stock on
the grant date over the options exercise price is recognized as compensation
expense over the option vesting period using the straight-line method (See Note
22).
11
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
REVENUE RECOGNITION
The Company's revenues consist primarily of professional services fees, software
license fees, and transaction fees.
Professional services are either time-and-materials or fixed-price arrangements.
Time-and-materials arrangements are billed on a fee per hour or per day basis,
or on a cost plus 10% basis. In general, revenue from time-and-materials
arrangements is recognized as services are provided so long as collection of the
resulting receivable is reasonably assured. Revenue from fixed price contracts
is recognized under the percentage of completion method, using the
time-to-completion method to measure the percent complete. The cumulative impact
of any revision in estimates of the percent complete or recognition of losses on
loss contracts is generally reflected in the period in which the changes or
losses become known. In circumstances where professional services fees are
provided at below market rates in connection with a longer-term processing
contract, such revenue and the related costs are deferred and recognized ratably
over the remaining life of the respective contract.
Revenue from software license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable and collection is probable. If the fee due from the customer is not
fixed or determinable, revenue is recognized as payments become due from the
customer. If collection is not considered probable, revenue is recognized when
the fee is collected.
When more than one product or service is provided to a customer under one
arrangement such as software products, upgrades, enhancements, post-contract
customer support, installation, and training, the Company allocates revenue to
each element of the arrangement based on the relative fair values of the
elements.
Revenue from transaction fees consists of fees billed on a fee-per-unit basis
such as charges per covered member per month, per claim processed, and per
document imaged. Although transaction fees are often billed one month in
advance, transaction revenue is recorded at the time that the transaction
occurs.
The Company accounts for non-monetary transactions at values based on similar
cash transactions that have occurred within six months prior to the date of the
exchange.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes (See Note 18). Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that the deferred tax assets will not be
realized.
12
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK
Basic loss per common share calculations are determined by dividing the loss
available to common stockholders by the weighted average number of shares of
common stock outstanding. Diluted loss per share is determined by dividing the
losses available to common stockholders by the weighted average number of shares
of common stock and dilutive common stock equivalents outstanding. All of the
Company's warrants, stock options, and convertible debentures were anti-dilutive
for all periods presented, and therefore are not included in the diluted loss
per common share calculations.
SEGMENTS
The Company presents information regarding its segments based on the Company's
internal organization and presents revenue and operating results based on
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.
RECLASSIFICATIONS OF PRIOR YEAR AMOUNTS
Certain prior year amounts have been reclassified to conform with the 2001
presentation or in accordance with applicable accounting requirements.
RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting
Principles Board Opinion No. 16 "Business Combinations" and SFAS No. 38
"Accounting for Pre-acquisition Contingencies," and eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001. SFAS
No. 141 also includes new criteria to recognize intangible assets separately
from goodwill. The requirements of SFAS 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001 (i.e., the acquisition date is July 1, 2001 or after).
SFAS No. 142, supersedes APB Opinion No. 17, "Intangible Assets," and states
that goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed for impairment annually, or more frequently if
impairment indicators arise. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their useful lives.
The discontinuing of amortization provisions under SFAS No. 142 of goodwill and
indefinite lived intangible assets apply to assets acquired after June 30, 2001.
In addition, the impairment provisions of SFAS 142 apply to assets acquired
prior to July 1, 2001 upon adoption of SFAS 142. The Company incurred $10,443 of
amortization expense in 2001 related to goodwill that will not be incurred in
future periods under this new guidance.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of." The primary objectives of SFAS No. 144 is to develop one accounting model
based on the framework established in SFAS No. 121 for long-lived assets to be
disposed of by sale, and to address significant implementation issues. The
provisions of this statement are effective for fiscal years beginning after
December 15, 2001. The Company is evaluating the impact of SFAS No. 144 on its
financial position and results of operations.
13
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 3 - CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
UICI, the Company's largest client and majority shareholder, accounted for
$3,286 or 56% of the Company's accounts receivable as of December 31, 2001.
Otherwise, concentrations of credit risk with respect to accounts receivable are
limited due to the number clients, as well as their dispersion across many
different geographical areas within the United States. The Company does not
require collateral from its customers. An allowance for doubtful accounts is
maintained for estimated losses resulting from the inability of our clients to
make required payments. Historically, bad debts have not been material.
The carrying amount of cash and cash equivalents, accounts receivable, accounts
receivable from affiliate, notes receivable, notes receivable from employees,
accounts payable, and accrued liabilities approximates fair value due to the
short maturities of these instruments.
The Company estimates the fair value of the convertible debentures to be
$18,664. This estimate was calculated by discounting the future cash flows of
the debentures at a discount rate of 14% and considers the estimated fair value
of the equity conversion rights.
The Company has no involvement with derivative financial instruments, including
those for speculative or trading purposes.
NOTE 4 - MERGERS
2000 INSURDATA MERGER
On January 7, 2000, COM completed a merger with Insurdata, a health care
technology company and a majority owned subsidiary of UICI ("Insurdata Merger").
The transaction was accounted for using the purchase method of accounting. COM
was determined to be the accounting acquirer. As a result, the net assets of
Insurdata were recorded at their fair value with the excess of the purchase
price over the fair value of the net assets acquired allocated to goodwill.
In connection with the Insurdata Merger, each outstanding share of Insurdata
common stock converted into the right to receive 1.33 shares of COM common
stock. COM issued 21,807,567 shares of COM common stock to Insurdata
shareholders. In connection with the Insurdata Merger, COM also issued 426,930
options to purchase COM common stock to existing Insurdata option holders. The
fair value of the consideration given by COM for the acquisition of Insurdata
under the purchase method of accounting totaled $723,927. This purchase price
consideration consisted of: (1) the fair value of the COM common shares issued
to Insurdata shareholders totaling $654,799 ($30.03 per share), (2) the fair
value of COM options granted to Insurdata option holders under Insurdata stock
option plans totaling $11,901 (average fair value of $27.87 per option), (3) the
difference between the fair value of shares issued in the December 7, 1999
private placement and the $15 issue price totaling $55,788, and (4) merger costs
totaling $1,439. The fair value per share of COM common stock was determined
based upon the quoted NASDAQ market price of Healthaxis common stock on the
measurement date of December 7, 1999. The value of the December 7, 1999 private
placement of COM common shares in excess of the cash received from their
issuance represents additional value tendered by COM in a transaction occurring
simultaneously with the purchase of Insurdata. The fair value of the COM options
granted to Insurdata option holders was determined using the Black-Scholes
option pricing model.
14
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
The fair value of the Insurdata assets acquired and liabilities assumed through
the Insurdata Merger were:
Cash and cash equivalents $ 2,126
Accounts receivable, net 5,834
Property, equipment and software 6,278
Capitalized software 2,862
Unearned compensation 10,691
Customer base 17,205
Goodwill 682,964
Other assets 1,768
Other liabilities (5,801)
-----------
$ 723,927
===========
In connection with the Insurdata Merger, Healthaxis recorded an increase in
minority interest in COM common stock totaling $479,775, and an increase to
additional paid-in capital of $242,713.
The amount allocated to unearned compensation was based upon the intrinsic value
of the unvested COM options issued to Insurdata option holders discussed above
and was amortized over the remaining vesting term of the options. COM recorded
the unearned compensation as a reduction of stockholders' equity.
Pro forma financial information for the year ended December 31, 1999, as though
the Insurdata Merger had occurred on January 1, 1999, is as follows:
Revenues $ 42,897
Net loss $ (61,275)
Net loss per common share $ (5.00)
Weighted average common shares outstanding (basic and diluted) 12,260,000
2001 HAXS MERGER
On January 26, 2001, the stockholders of Healthaxis and COM approved the merger
of COM with a newly formed, wholly owned subsidiary of Healthaxis ("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 agreement, as amended, on January 26, 2001
Healthaxis issued 39,629,097 shares of its common stock to COM shareholders (a
1.334-to-1 ratio). In addition, Healthaxis issued 7,078,485 warrants and options
to purchase Healthaxis common stock to holders of COM stock options and warrants
which represented the number of COM options and warrants outstanding on the date
of the HAXS Merger after giving effect for the merger ratio. As a result of the
HAXS Merger, COM ceased to exist, and the newly formed Healthaxis subsidiary
continued as the surviving corporation operating under the Healthaxis.com name.
The HAXS Merger was accounted for as a purchase of minority interest. The
purchase price was determined to be $110,956 which included the following: (1)
the fair value of the 39,629,097 Healthaxis shares issued to the holders of COM
shares totaling $108,980 ($2.75 per share), (2) the fair value of a portion of
the 7,078,485 Healthaxis options and warrants issued totaling $2,208 less $1,513
of unearned compensation, which represents the intrinsic value of the unvested
portion of options issued, and (3) acquisition costs totaling $1,280.
Additionally, unearned compensation of $4,972 remaining from the options issued
in connection with the Insurdata Merger were revalued at the date of the HAXS
Merger resulting in a reclassification between unearned compensation and
additional paid-in capital. The measurement date for
15
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
purposes of calculating the fair value of Healthaxis common shares issued in the
HAXS Merger was September 29, 2000, the date the agreement was revised to
reflect the final exchange ratio and certain other material terms. The fair
value of Healthaxis shares on or about the measurement date was determined based
upon quoted NASDAQ market prices. The fair value of Healthaxis options and
warrants issued in the HAXS Merger was determined using the Black-Scholes option
pricing model.
The assets and liabilities of COM, including goodwill, were revalued as of the
date of the HAXS Merger. Upon finalization of the purchase price allocation, a
reduction of goodwill totaling $337,424 was recorded. The new purchase price was
based upon the fair value of Healthaxis common stock. The significant decrease
in fair value of Healthaxis common stock on September 29, 2000 compared to the
fair value of Healthaxis common stock on December 7, 1999 (the measurement date
for the Insurdata Merger) resulted in a purchase price that was significantly
lower than the Insurdata Merger purchase price. As a result, a reduction of
goodwill originating from the Insurdata Merger was recorded in 2001.
The stock options not included in the purchase accounting discussed above and
the repriced options discussed below, have been accounted for as a modification
of a stock-based compensation arrangement. The value of the options exchanged
was determined by the excess of the fair value of the Company's common stock
over the exercise price of the options. The value of the unvested options of
$1,476 is being expensed ratably over the remaining vesting period. The
remaining $4,876 related to the vested options was expensed in 2001 as
compensation.
The COM options repriced in May 2000, continue to be treated as variable option
awards. During 2001, no compensation expense was recognized for the repriced
options as the exercise price of $2.49 per share exceeded the market value of
the Company's common stock.
NOTE 5 - DISCONTINUED OPERATIONS
DISCONTINUED RETAIL WEBSITE OPERATIONS
On June 30, 2000, COM entered into an Asset Purchase Agreement to sell certain
assets used in connection with its retail website to Digital Insurance, Inc.
("Digital Insurance"). Included in the sale was the current and next generation
of the retail website user interface (the presentation layer of the website that
includes the graphical templates that create the look and feel of the website),
all existing in-force insurance policies, certain physical assets, and
agreements, including, but not limited to portal marketing agreements and
agreements related to the affiliate partner program. This transaction closed on
October 13, 2000. The consideration received by COM in return for those assets
consisted of: $500 in cash; a $500 note; 11% of the outstanding shares of
Digital Insurance, on a fully-diluted basis, at closing; 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.
The Company has reported the operations of the retail website as discontinued
operations as of the measurement date of June 30, 2000. The 11% ownership in
Digital Insurance was accounted for under the cost method. The value assigned to
the shares totaled $3,178 and was based upon previous equity transactions by
Digital Insurance.
As a result of this sale to Digital Insurance, a loss on the sale of
discontinued operations in the amount of $2,300 was recorded during the year
ended December 31, 2000. Included in the loss was a write off of goodwill
totaling $5,801, before minority interest, relating to the net book value of the
goodwill recorded in 1999 that was attributable to the retail website
operations.
16
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
Following is the results of the retail website operations included in the loss
from discontinued operations for all periods presented:
YEARS ENDED DECEMBER 31,
2000 1999
----------------------------
Revenue $ 672 $ 291
Expenses:
Costs of revenue 6,697 5,504
Sales and marketing 11,496 19,652
General and administrative 19 1,000
----------------------------
Total expenses 18,212 26,156
----------------------------
Operating loss before minority interest (17,540) (25,865)
Minority interest in loss 11,199 6,739
----------------------------
Loss from discontinued operations $ (6,341) $ (19,126)
============================
DISCONTINUED INSURANCE OPERATIONS
On November 30, 1999, in accordance with an amended Stock Purchase Agreement,
all of the issued and outstanding shares of the common stock of PILIC and its
other inactive subsidiaries were transferred to AHC Acquisition, Inc. ("AHC"), a
newly formed Pennsylvania business corporation, owned by Mr. Alvin H. Clemens,
Healthaxis' chairman, for no consideration.
In anticipation of the transfer, Healthaxis, in order to eliminate a statutory
capital deficiency, contributed $7,200 to PILIC. Also, Healthaxis purchased from
PILIC the office building located in East Norriton, Pennsylvania for $4,700,
545,916 shares of COM Series A Preferred Stock for $2,800, and assumed the
related post retirement and employee obligations (See Note 24) amounting to
$1,029 as of December 31, 1999.
Concurrent with the transfer of PILIC, Healthaxis conveyed at its historical
cost, 100,000 shares of the Series A preferred stock to AHC together with
registration rights previously granted to PILIC.
The operating results of PILIC and all of the other insurance operations are
reported as discontinued operations for all periods presented.
As a result of the transfer of PILIC, Healthaxis recorded a loss of $10,263,
which included a write-off of assets relating to PILIC including unamortized
deferred policy acquisition costs and property and equipment, net of accumulated
depreciation in the amount of $2,623, a capital contribution of $7,200 and the
value of the preferred stock transferred to AHC which amounted to $440.
17
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
RESULTS OF DISCONTINUED INSURANCE OPERATIONS:
YEAR ENDED
DECEMBER 31, 1999
---------------------
Revenue:
Net premium revenue $ 7,197
Net investment income 2,395
Realized gain on investments 6
Ceding allowance, net of policy acquisition costs -
Realized gain on the sale of subsidiary 1,500
Other revenue 890
---------
Total revenue 11,988
---------
Benefits and expenses:
Death and other policy benefits:
Life 3,315
Accident and health, net of reinsurance 7,661
Annuity contracts and other considerations 622
Commissions, net of ceding allowance and
deferred acquisition costs 1,486
Other operating expenses, net of ceding allowance
and deferred acquisition costs 6,683
Amortization of deferred policy acquisition costs 252
Depreciation and amortization of goodwill -
---------
Total benefits and expenses 20,019
---------
Loss before income taxes (8,031) Provision (benefit) for income taxes:
Current 21
Deferred -
---------
Total income taxes 21
---------
Loss from discontinued operations $ (8,052)
=========
18
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 6 - RESTRUCTURING AND IMPAIRMENT CHARGES
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 Company. 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.
The Company accrued or recorded charges totaling $279.6 million. Those costs are
generally related to the following:
o SEVERANCE COST FOR TERMINATED EMPLOYEES - Approximately $350 of the
restructuring charge related to the elimination of approximately 60
positions and termination of approximately that number of employees
on May 14, 2001. The Company 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.
o IMPAIRMENT OF LONG-LIVED ASSETS - The Company abandoned the
development and marketing of certain products that no longer fit
into its business strategy and wrote off approximately $1.9 million
of software and other capitalized costs.
o IMPAIRMENT OF GOODWILL - As part of its restructuring and internal
re-organization, management evaluated enterprise level goodwill for
impairment and recorded an impairment charge of $277.2 million. The
factors that influenced management's evaluation are more fully
discussed in the section below.
IMPAIRMENT OF GOODWILL
The Company determined that certain events occurred in May 2001 that indicated a
potential impairment in the recorded 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, resulted in a change in the strategic focus
of the Company. 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 determined that due to the current
conditions in the
19
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
capital markets, the availability of additional equity capital was 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 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.
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 economic slow-down in 2001 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 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 as the carrying value of goodwill exceeded the undiscounted cash
flows. The Company then proceeded to analyze future cash flows on a discounted
basis using a discount rate of 33%, which was based upon a detailed analysis of
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.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company conducts a significant amount of business with a major shareholder,
UICI. The Company is currently economically dependent upon UICI. Any change in
the Company's relationship with UICI could have a material, adverse effect on
the Company's operations. At December 31, 2001, UICI owned 46% of the Company's
outstanding common stock and owns warrants to purchase 222,396 shares of the
Company's common stock at prices ranging from $3.01 to $12.00. UICI also owns
$1,666, face value, of the Company's convertible debentures that are convertible
into 185,185 common shares.
The Company currently provides services to a number of UICI subsidiaries and
affiliates pursuant to written agreements ranging from one to five years, with
annual renewable options thereafter. These services include the use of certain
of its proprietary workflow and business applications, as well as systems
integration and technology management. The most significant of the agreements is
the UICI outsourcing agreement ("Technology Outsourcing Agreement"), which is
generally a cost plus ten percent contract. UICI has indicated that it does not
intend to renew the Technology Outsourcing Agreement when it expires in December
2005 and the agreement may be cancelled by either party for convenience upon
giving 180-day notice. The Technology Outsourcing Agreement contains no minimum
or maximum commitments on behalf of UICI and its affiliates, and UICI and its
affiliates are free to obtain the services provided by Healthaxis from an
unrelated third party during the term of the agreement.
UICI and its subsidiaries and affiliates constitute, in the aggregate, the
Company's largest customer. For the years ended December 31, 2001, 2000, and
1999, UICI and its subsidiaries and affiliates accounted for an
20
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
aggregate of $29,657 (68%), $27,402 (64%), and $0 (0%), respectively, of the
Company's total revenues. As of December 31, 2001 and 2000, Healthaxis had
accounts receivable due from UICI and its subsidiaries and affiliates totaling
$3,286, and $3,028, respectively. These amounts represented 56% and 42% of the
Company's total accounts receivable at December 31, 2001 and 2000, respectively.
On January 25, 2001, Healthaxis entered into a software license agreement with
UICI. Under the agreement, UICI paid a one-time license fee of $1,837 for a
perpetual, enterprise-wide software license. UICI had the option to terminate
the agreement within the first two years of its term, in which case a prorated
portion of the one-time license fee would be refunded. The license fee revenue
was deferred and was being recognized into revenue pro rate 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 refundable amount of
$840,000, as detailed in the amended agreement, is being recorded as revenue pro
rata over the remaining six-month term of the amended contract. Revenue
recognized during 2001 under this agreement was $1,417.
On December 29, 2000, Healthaxis entered into an asset purchase agreement with a
wholly owned UICI subsidiary. Under the agreement, Healthaxis purchased certain
claims processing software developed by UICI for a purchase price of $1,600,
which approximated UICI's book value of the asset. The software was written off
in May 2001 in connection with the Company's restructuring.
On September 20, 2000, Al Clemens and UICI, together with an unrelated third
party investor, purchased $5 million in principal amount of the convertible
debentures at a discount from one of the original holders of the debentures. In
connection with this transaction, Healthaxis issued a warrant to purchase 50,000
shares of its common stock at an exercise price of $3.01 to the selling
debenture holder. The Company recognized a non-cash expense totaling $115
related to this transaction.
On November 30, 1999 Healthaxis sold PILIC to AHC which was owned by Alvin
Clemens, the Company's then Chairman (See Note 5).
Legal fees paid to the law firm of a former director and general counsel and
secretary of the Company in 2000 and 1999 were $5 and $497, respectively.
During the year ended December 31, 2000, the Company entered into a consulting
services agreement with a current director in the amount of $180. This amount
was fully accrued in 2000 and will be paid through early 2002.
Netlojix Communications, Inc., a telephone company in which Ronald L. Jensen,
Chairman of UICI and a former director of COM, and parties affiliated with Mr.
Jensen own a controlling interest, provides telephone services to the Company
pursuant to a written agreement dated September 6, 2000. The agreement will
expire in August 2002. For the year ended December 31, 2001 and 2000, Healthaxis
paid Netlojix Communications, Inc. approximately $500 and $404, respectively,
for services under this agreement.
AL CLEMENS SEVERANCE AGREEMENT
On August 15, 2000, Alvin H. Clemens, the Company's then Chairman, and
Healthaxis entered into an agreement terminating Mr. Clemens' employment
contract. The termination agreement became effective upon consummation of the
HAXS Merger in January 2001. Under the terms of the termination agreement, Mr.
Clemens was to receive aggregate payments totaling $2,125 paid in quarterly
installments over five years beginning in the first quarter of 2001. The
Company, at its option, could make the quarterly payments in shares of
Healthaxis common stock not to exceed a total of 500,000 shares. Mr. Clemens, at
his option,
21
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
could request that the Company pay one-third of the value of each payment in
cash in lieu of stock to cover income tax liabilities. The Company recorded
$1,862, of compensation expense related to this agreement during 2001, which is
included in general and administrative expenses.
During 2001, the Company elected to make the quarterly severance payments in
common stock, to the extent offset by Mr. Clemens' elections to receive
one-third of such value in cash. The Company issued 94,444 shares to Mr. Clemens
in 2001 under this arrangement. At December 31, 2001, the accrued liability
relating to this arrangement totaled $1,700. On February 27, 2002, the Board of
Directors approved an agreement to settle the remaining amount due under the
agreement for 358,332 shares of common stock (See Note 26).
NOTE 8 - TRANSACTIONS WITH DIGITAL INSURANCE
In connection with the sale of the retail website operations to Digital
Insurance (See Note 5), 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 would be used by Digital Insurance
in conjunction with the user interface it purchased; and professional service
fees over 12 months 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 $2,000, which approximated the
Company's carrying values.
Revenue recognized during the years ended December 31, 2001 and 2000 under these
agreements totaled $2,422 and $2,093, respectively.
The following table shows the aggregate amounts paid by Digital Insurance, prior
to and including the $2,000 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 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 user interface sold 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' former East Norriton, Pennsylvania facility.
In conjunction with management's periodic review of long-lived assets, a write
down of the Company's investment in Digital Insurance, which was obtained in
connection with the sale of the Company's retail
22
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
website operations (See Note 5), of $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 December 31, 2001, the
Company's investment in Digital Insurance is valued at $227 ($.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 9 - ASSETS HELD FOR SALE AND LOSS ON BUILDING
Assets held for sale at December 31, 2000, represents the book value of the
Company's former headquarters building in East Norriton, Pennsylvania. On
December 22, 2001, the Company sold the building for a gross sales price of
$3,000, which resulted in a realized loss of $2,498. The net cash proceeds from
the sale totaled $2,626.
NOTE 10 - NOTES RECEIVABLE AND NOTES RECEIVABLE FROM EMPLOYEES
Notes receivable from employees bear interest at rates ranging between 6% and
8%. Of the $311 outstanding at December 31, 2001, $184 is due December 31, 2002,
with the remainder due March 31, 2004.
Notes receivable consist of the following: DECEMBER 31,
2001 2000
--------- ----------
Note receivable from Digital Insurance, $250 due
March 1, 2001, $250 due July 1, 2001, bears interest at
9.5%, unsecured $ - $ 500
Line of credit due from customer, due in equal monthly
principal payments through December 2005, bears interest
at prime plus 2%, unsecured 175 -
Note receivable from a subsidiary of UICI, monthly
payments of $8, matures December 2004, bears no interest
(discounted at 8.75%), unsecured 242 309
Other 10 10
-------- --------
Total 427 819
Less current portion (119) (577)
-------- --------
Notes receivable, non-current $ 308 $ 242
======== ========
23
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 11 - PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software, at cost, consist of the following:
USEFUL LIVES DECEMBER 31,
(YEARS) 2001 2000
-------------------------------------------------
Computer equipment 3 $ 8,724 $ 9,456
Office furniture and equipment 7-10 1,926 3,607
Leasehold improvements 3-5 1,094 1,476
Computer software 1-3 2,018 1,928
---------------------------------
13,762 16,467
Less accumulated depreciation and amortization (10,311) (10,036)
---------------------------------
$ 3,451 $ 6,431
=================================
Depreciation and amortization expense totaled $3,026 year ended December 31,
2001.
NOTE 12 - ACCRUED LIABILITIES AND OTHER LIABILITIES
Accrued liabilities and other liabilities consist of the following:
DECEMBER 31,
2001 2000
---------------------------------
Salaries, benefits and payroll taxes $ 502 $ 917
Severance 1,829 751
Interest and penalties 301 1,451
Due to UICI 198 2,059
Professional services 9 332
Taxes 1,085 -
Other 83 229
---------------------------------
4,007 5,739
Less other liabilities (1,087) (15)
---------------------------------
Accrued liabilities $ 2,920 $ 5,724
=================================
Other liabilities at December 31, 2001 consists primarily of a contingent tax
liability in the amount of $1,085.
NOTE 13 - CONVERTIBLE DEBENTURES
On September 15, 1999 Healthaxis issued 2% convertible debentures ("Debentures")
in the amount of $27,500 with an original due date of September 14, 2002. The
Debentures bear interest at the rate of 2% per annum, payable in cash or the
equivalent value of Healthaxis' common stock, semi annually on January 1 and
July 1 of each year, beginning on January 1, 2000. Except with respect to
overdue interest it is assumed that Healthaxis will make all payments of
interest in common
24
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
stock, subject to those shares being registered, unless Healthaxis notifies the
holder in writing otherwise.
As part of the transaction, Healthaxis issued to the Debenture holders warrants
to purchase 202,802 shares of its common stock at an exercise price equal to the
conversion price ($20.34 per share) ("Warrants"). The Warrants had a term of
five years, were valued at $2,317 and were accounted for as a cost of issuing
the Debentures. The total cost of issuing the Debentures was $3,052 and
consisted of the value of the Warrants and other costs, which have been
amortized over the anticipated life of the Debentures as interest expense.
In conjunction with the sale of the Debentures, Healthaxis also executed a
registration rights agreement, which required Healthaxis to register the
underlying shares issuable upon the conversion of the Debentures or the exercise
of the Warrants by August 28, 2000. As of December 31, 2000, the SEC had not
declared the registration statement effective and the Company accrued penalties
as required under the registration rights agreement totaling $1,419 through a
charge to interest expense.
During January 2001, the Company completed a restructuring of its Debentures
that resulted in a reduction of the conversion rate from $20.34 per share to
$9.00 per share, an extension of the maturity date from September 14, 2002 to
September 14, 2005, and a modification of the events of default. In addition,
the terms of the Warrants to purchase 202,802 shares of Healthaxis' common stock
issued to the purchasers of the Debentures were also amended to reduce the
exercise price to $3.01 per share and to extend the exercise period of the
warrants for an additional year, or until September 13, 2005. Based upon the
revised conversion price, the amended Debentures are convertible into 3,055,555
shares of Healthaxis' common stock. As a result of the significance of the
modifications, the original instrument was considered extinguished, and a new
instrument issued. The Debentures were recorded at their estimated fair value of
$27,000. The fair value of the Debentures was estimated based on an estimated
discount rate and consideration of the estimated fair value of the adjusted
equity conversion rights. As a result of the transaction, the Company recorded
and extraordinary gain of $1,681, which represents the excess of the carrying
value over the estimated fair value of the debt.
During the year ended December 31, 2001, the Company recorded $824 in interest
expense related to the Debentures. Of this amount $265 was paid via the issuance
of 157,454 shares of the Company's common stock, and $274 related to the
non-cash amortization of the debt discount.
NOTE 14 - HPS AGREEMENTS
LOANS PAYABLE TO HPS: The Company received $5,000 from HealthPlan Services, Inc.
("HPS") in the fourth quarter of 1997, which was accounted for as loan payable,
discounted at a rate of 9.25% resulting in a $3,865 amount which was to be
amortized over five years with payments of $95,000 per month including interest.
The loan was paid in June 1999.
SETTLEMENT AGREEMENT WITH HPS: During 1999, COM and Healthaxis entered into a
settlement agreement at no cost to resolve a number of disputes that had arisen
between Healthaxis and HPS relative to HPS' performance of administrative
services under the outsourcing agreement and between COM and HPS
25
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
relative to COM' performance under the ECommerce Agreement and the HPS stock
purchase agreement for COM common stock.
The settlement agreement provided for the following:
o HPS and Healthaxis and its subsidiaries, including COM, granted each
other a mutual release of all claims in connection with each party's
performance under the agreements;
o HPS purchased the remaining outstanding shares of one of PILIC's
subsidiaries for $1,500, which was set off against service fees owed
by Healthaxis to HPS;
o HPS exercised a warrant granted in 1998 pursuant to the terms of the
ECommerce Agreement for 100,000 shares of Healthaxis' common stock
for $900, which was set off against service fees owed by Healthaxis
to HPS; and
o Healthaxis agreed to pay the remaining balance of the service fees
owed by it to HPS in the amount of $1,267 on or before June 30,
1999.
NOTE 15 -CAPITAL AND OPERATING LEASE OBLIGATIONS
The Company leases office space and various pieces of equipment under operating
leases expiring in various years through 2005. In addition, the Company also
leases certain equipment under capital leases expiring in 2002. Future minimum
rent payments under capital and operating leases for each of the next five years
and in aggregate are as follows:
OPERATING CAPITAL
--------- --------
2002 $ 1,340 $ 9
2003 1,051 -
2004 984 -
2005 966 -
2006 2 -
--------- --------
$ 4,343 9
=========
Less amount representing interest (1)
--------
Present value of future minimum lease payments 8
Less current portion (8)
--------
$ -
========
At December 31, 2001 and 2000, the Company had computer equipment with an
original cost of $446 under capital leases. Accumulated amortization of this
equipment totaled $275 and $186 at December 31, 2001 and 2000, respectively.
26
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 16 - CEDING COMMISSION LIABILITY AND EXTRAORDINARY ITEM
In December 1998, PILIC entered into a coinsurance agreement with Hannover Life
Reassurance Company of America ("RCH") whereby PILIC received a $10,000 ceding
commission which consisted of a $5,000 non-refundable payment and a $5,000
payment contingent upon RCH's earning at least $10,000 in future profits from
the ceded inforce business, plus 12% interest (the "Guaranteed Amount").
Healthaxis recognized a $5,000 ceding commission liability because of the
negative financial history of the business. At no point did RCH earn the
Guaranteed Amount from the ceded business. As such, Healthaxis incurred $575 and
$600 of interest expense during 2000 and 1999, respectively.
On December 1, 2000, Healthaxis entered into a settlement agreement with RCH.
Under the terms of the agreement, RCH released Healthaxis from all liability
under Healthaxis' original guarantee, in return for a cash payment of $4,250.
Healthaxis recognized a gain on forgiveness of debt totaling $1,925 related to
the transaction, which is reflected as an extraordinary gain in 2000.
NOTE 17 - SEGMENT REPORTING
As discussed previously, in May of 2001, the Company implemented a restructuring
plan which, among other things, created four separate business units, each with
accountability for operations beginning July 1, 2001. Each business unit is
deemed to be a reporting segment. During the current year, primarily as a result
of a change in the Company's chief operating decision maker, the Company
underwent a fundamental reorganization and redesign of its internal financial
reporting system. As a result of the reorganization and redesign, it is
impractical to restate the Company's results for the prior periods to conform
with the current presentation. In addition, it is not necessary to restate the
current year presentation to conform with that of the prior periods, as the
Company operated in only one segment prior to the current year.
Assets are not allocated to business units for internal reporting purposes and
are therefore not included in the segment information below.
The Company's operating segments are:
o Application Solutions Group - provides web-enabled systems for
enrollment, administration and processing of health insurance claims
on an Application Service Provider basis.
o Web Technology Group - provides web-enabled connectivity platforms
and solutions for self service (broker, employer, employee and
providers), large group enrollment and small group enrollment,
sale/distribution and post-sale administration of group and
individual insurance policies including health, life and dental
insurance, and solutions for enabling compliance with HIPAA.
o Imaging Services Group - provides electronic data capture, imaging,
storage and retrieval of health insurance claims, attachments and
other correspondence.
o Outsourcing Group - provides system technology support services on
an outsourcing basis to the Company's largest client, UICI.
Each business segment generally sells its products and services to the same
constituent users, generally located in the United States, namely healthcare
payers, which include insurance companies, third party administrators, brokers,
Blue Cross/Blue Shield plans and self-insured employers.
27
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
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 and such 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, as defined by the Company, also
excludes restructuring, severance and non-cash stock based compensation charges
("EBITDA As Defined"). Corporate overhead includes executive management,
accounting, legal and human resources, and other expenses. Although the
Company's restructuring affected all of the Company's segments, it is included
as a component of corporate overhead as this presentation is consistent with how
management views the operations. 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
----------- ---------- --------- -------- -------- -----
Year Ended December 31, 2001
- ----------------------------
Revenue $ 20,685 5,949 12,307 $ 4,849 $ - 43,790
EBITDA As Defined 3,682 (2,512) 1,841 (248) (5,699) (2,936)
Depreciation and amortization 433 866 1,250 768 14,396 17,713
Operating income (loss) 1,483 (3,378) 591 (1,016) (307,720) (310,040)
The Outsourcing Group accounts for approximately 47% of the Company's total
revenue for 2001 and is the result of a technical services agreement with the
Company's largest client, UICI. The contract term is 5 years commencing January
2000 and, generally the services provided under the agreement must be billed at
Healthaxis' cost plus ten percent.
The Company's core products are sold through the Application Solutions Group and
the Web Technology Group, and most of the Company's research and development
efforts are concentrated in these areas. The Application Solutions Group is a
mature business with over 20 years history and client base. The Web Technology
Group is a relatively new business, built to take advantage of the Company's
internet expertise and the healthcare industry's movement to web-enable legacy
systems. The Imaging Services Group serves as an entry point for new clients,
through cost savings, and introduces cross-selling opportunities for other
Company products.
The Imaging Services Group includes a processing center in Jamaica.
Approximately 6.2% of the Company's total revenues in 2001 were derived from the
Jamaican operation, which processes claims for the Company's domestic (U.S.
based) clients. Additionally, the Jamaican operation accounts for approximately
$375 of the net book value of the Company's fixed assets at December 31, 2001,
primarily consisting of data processing equipment, software and furniture. Any
interruptions of service in the Jamaican operation could result in downtime and
additional expense to repair the facility, relocate the operation or divert the
processing to the Company's U.S. based centers.
28
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 18 - INCOME TAXES
Significant components of deferred taxes consisted of the following:
DECEMBER 31,
2001 2000
---- ----
Deferred tax assets:
Reserve for bad debt $ 18 $ 106
Start up expenses 416 965
Post employment retirement benefits 348 375
Net operating and capital loss carryforwards 48,442 45,117
Accrued expenses and deferred revenues 1,556 206
------------- -----------
Total deferred tax assets 50,780 46,769
------------- -----------
Deferred tax liabilities:
Customer base (2,360) (4,516)
Capitalized software development costs (224) (1,689)
Other, net (128) (47)
------------- -----------
Total deferred tax liabilities (2,712) (6,252)
------------- -----------
Deferred tax asset before valuation allowance 48,068 40,517
Valuation allowance (48,068) (40,517)
------------- -----------
Net deferred tax asset $ - $ -
============= ===========
Effective April 1, 1999, COM was no longer eligible to participate in the
Company's consolidated federal income tax return. However, from January 26, 2001
(date of HAXS Merger) forward, COM will be included in the Company's
consolidated federal income tax return. The Company's net operating loss
carryforward amounts total $138,000 and are available to offset its future
taxable income through 2016.
Approximately $2,000 of the consolidated net operating losses result from a 1989
acquisition. These NOLs expire between 2001 and 2004 and are subject to annual
limitations of $24, thereby significantly reducing their ultimate utilization.
As a result of the capital transactions of both Healthaxis and COM, including
the Insurdata Merger and the HAXS Merger, the utilization of NOL carryforwards
is limited. Additionally, the utilization of these NOL's, if available, to
reduce future income taxes is dependent on the generation of sufficient taxable
income prior to their expiration.
As it is considered more likely than not that the deferred tax assets will not
be realized, the Company has established a valuation allowance for all net
deferred tax assets.
29
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
The reconciliation of the recorded income tax provision to the benefit expected
by applying the appropriate statutory income tax rate (35%) to the loss before
income taxes is as follows:
YEARS ENDED DECEMBER 31,
2001 2000 1999
------ ------ ------
Amount computed at statutory rate $(109,778) $(30,397) $ (19,023)
Change in valuation allowance 6,962 12,396 20,794
Amortization/impairment of goodwill 100,676 13,700 276
Other permanent differences 2,140 4,189 (2,047)
Reversal of prior year federal income taxes - (585) -
Other, net - 112 -
--------- -------- ---------
Total income tax benefit $ - $ (585) $ -
========= ======== =========
NOTE 19 - COM EQUITY
The Company's primary operations occurred in COM, a controlled subsidiary. Prior
to the HAXS Merger, a substantial amount of the Company's equity was obtained
through the sale of COM equity instruments with such transactions included in
the Company's financial statements through consolidation. The following
summarizes the significant equity events at COM that contributed to the
Company's increase in additional paid in capital in the consolidated statements
of changes in stockholders' equity. During the years ended December 31, 2001,
2000, and 1999 the increase in net assets in COM totaled $115, $242,845, and
$44,395, respectively. This increase relates to the consolidated Company's share
of equity transactions that occurred at COM. The remaining portion of the COM
equity transactions not included in the increase in net assets of COM have been
recorded as a component of minority interest.
On May 11, 1999, COM completed a private placement of 516,051 shares of COM
common stock to a group of accredited investors at $12.00 per share for an
aggregate purchase price of $6,193, less issuance costs of $2. Investors
purchasing COM common stock were provided with registration rights.
On December 7, 1999, COM completed a private placement of 3,846,003 shares of
COM common stock to a group of accredited investors and Healthaxis at $15.00 per
share for an aggregate purchase price of $57,690 less issuance costs of $2,533.
Healthaxis purchased 133,333 shares in the transaction for approximately $2,000.
During 1999, Healthaxis purchased 1,415,000 shares of COM common stock from HPS
for an aggregate purchase price of $8,203. Healthaxis accounted for the purchase
of minority interest as goodwill amortized over three years.
On January 7, 2000, COM issued 21,807,567 common shares in connection with the
Insurdata Merger (See Note 4).
COM SERIES A CONVERTIBLE PREFERRED STOCK
During 1998, COM issued a total of 545,916 shares of COM Cumulative Convertible
Series A Preferred Stock, par value $1.00 ("Series A Preferred Stock") to PILIC
for $2,400. Initially, PILIC purchased 405,886 shares of Series A Preferred
Stock at $5.91 per share. The Stock Purchase Agreement for Series A Preferred
Stock with PILIC contained a price adjustment provision that would require COM
to issue to PILIC
30
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
additional shares of Series A Preferred Stock if COM sold other shares of common
or preferred stock to another investor at a lower price. As a result of the sale
of Series B Preferred Stock to America Online ("AOL") at $4.40 per share, COM
issued an additional 140,030 shares of Series A Preferred Stock to PILIC so that
PILIC's price per share would also equate to $4.40 per share.
In 1999, Healthaxis purchased all Series A Preferred Stock from PILIC and
transferred 100,000 shares to AHC, a newly formed Pennsylvania business
corporation, owned by Alvin H. Clemens, the Company's then Chairman, for no
consideration. On January 26, 2001, in connection with the HAXS Merger, the
100,000 shares of Series A Preferred Stock were converted into 133,000
Healthaxis common shares based on the terms of the HAXS Merger.
COM SERIES B CONVERTIBLE PREFERRED STOCK
During 1998, COM issued 625,529 shares of Series B convertible preferred stock,
par value $1.00 per share ("Series B Preferred Stock") to AOL at $4.40 per share
for an aggregate purchase price of $2,750, less issuance costs of $51. On
January 26, 2001, in connection with the HAXS Merger, all of the Series B
Preferred shares were converted into 834,455 shares of Healthaxis common stock.
COM SERIES C CONVERTIBLE PREFERRED STOCK
On March 30, 1999, COM issued 1,526,412 shares of COM Series C convertible
preferred stock at $5.77 per share ("Series C Preferred Stock"), for an
aggregate purchase price of $8,807, less issuance costs of $684 and $278
representing the value of COM warrants issued to an investment banker for
services rendered in connection with the Series C Preferred Stock Offering. On
January 26, 2001, in connection with the HAXS Merger, all of the Series C
Preferred shares were converted into 2,036,232 shares of Healthaxis common
stock.
COM SERIES D CONVERTIBLE PREFERRED STOCK
On July 12, 1999, COM issued 333,334 shares of COM Series D convertible
preferred stock at $12 per share for an aggregate purchase price of $4,000, less
issuance costs of $40 ("Series D Preferred Stock"). On January 26, 2001, in
connection with the HAXS Merger, all of the Series D Preferred shares were
converted 444,667 shares of Healthaxis common stock.
NOTE 20 - STOCKHOLDERS' EQUITY
At December 31, 2001, common stock reserved for future issuance is as follows:
Conversion of Debentures 3,055,555
Options issued in HAXS Merger 5,146,771
Healthaxis 2000 Option Plan 10,000,000
Warrants 2,269,112
Other inactive option plans 2,389,497
-------------------
Total 22,860,935
===================
On September 9, 1999, Healthaxis and Mr. Clemens, Healthaxis' then Chairman,
entered into an agreement whereby Mr. Clemens agreed to; 1) convert
approximately 557,000 shares of Healthaxis' Series A Preferred Stock, 2) amend
his agreement to purchase 550,000 shares of Healthaxis' Series A Preferred Stock
in
31
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
exchange for an option to purchase Healthaxis common stock, and 3) release all
right, title and interest to options to purchase 202,802 shares of Healthaxis'
common stock. The exercise prices of the options to purchase common stock range
from $3.64 to $8.75 per share and had a weighted average price per share of
$4.56. In consideration of the aforementioned Healthaxis paid Mr. Clemens $650
which was accounted for as compensation expense.
NOTE 21 - AMORTIZATION OF INTANGIBLES
Amortization of intangibles relates to the amortization of goodwill, customer
base, and capitalized software resulting from the Insurdata and HAXS Mergers and
the amortization of goodwill resulting from the purchase of COM common shares
from a minority shareholder in 1999. The customer base and capitalized software
resulting from the Insurdata Merger are being amortized over their estimated
useful lives of 4 and 3 years, respectively. The goodwill resulting from the
Insurdata and HAXS Mergers was being amortized over 20 years until May 2001 at
which time the estimated life was reduced to 10 years in connection with the
Company's restructuring (See Note 6)
The goodwill resulting from the 1999 purchase of COM shares from a minority
shareholder was being amortized over 3 years until June 30, 2000, at which time
the remaining net book value was recognized as a component of the loss on the
sale of the discontinued retail website operations.
Following is a summary of the amortization of intangibles:
YEARS ENDED DECEMBER 31,
2001 2000 1999
------------- ------------- -----------
Capitalized software $ 853 $ 954 $ -
Goodwill 10,443 35,423 765
Customer base 2,738 4,301 -
---------- ---------- --------
$ 14,034 $ 40,678 $ 765
========== ========== ========
32
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 22 - STOCK OPTIONS AND WARRANTS
HEALTHAXIS STOCK OPTIONS AND WARRANTS
The following table summarizes the changes in outstanding Healthaxis stock
options and warrants:
STOCK OPTIONS WARRANTS
------------------------------------- ----------------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------------------- ----------------------------------
Outstanding at January 1, 1999 3,408,016 $3.93 1,700,000 $ 5.38
Granted 344,831 9.51 254,469 12.86
Exercised (778,925) 6.35 (250,000) 8.20
Canceled/forfeited (327,831) 6.50 (75,000) 3.85
------------------------------------- ----------------------------------
Outstanding at December 31, 1999 2,646,091 3.60 1,629,469 7.33
Granted - - 53,333 3.03
Exercised (28,450) 6.59 (41,500) 3.57
Canceled/forfeited (44,875) 7.97 (25,000) 5.00
------------------------------------- ----------------------------------
Outstanding at December 31, 2000 2,572,766 3.02 1,616,302 7.32
Granted 6,919,918 2.20 952,810 5.25
Exercised - - -
Canceled/forfeited (1,252,949) 3.03 (300,000) 3.38
------------------------------------- ----------------------------------
Outstanding at December 31, 2001 8,239,735 $2.33 2,269,112 $ 5.17
===================================== ==================================
Options/Warrants Exercisable at December 31,
1999 2,555,491 1,575,969
2000 2,538,266 1,591,002
2001 6,621,557 2,243,812
Following is a summary of the status of stock options outstanding at December
31, 2001:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------------------ -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
------------------------------------------------------------ -------------------------------
$.68 - $.98 1,388,876 6.1 yrs $ .90 1,294,476 $ .91
$1.00 - $1.70 2,539,111 3.6 yrs $ 1.31 2,025,549 $ 1.36
$2.10 - $3.64 3,217,579 4.8 yrs $ 2.77 2,209,763 $ 2.84
$4.25 - $5.00 875,769 1.8 yrs $ 4.35 874,269 $ 4.35
$7.50 - $10.00 218,400 3.8 yrs $ 8.85 217,50 $ 8.86
--------- ---------
8,239,735 6,621,557
========= =========
33
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
Total stock based compensation for the years ended December 31, 2001, 2000, and
1999 totaled $5,564, $4,927, and $0, respectively.
From 1996 through 1999, Healthaxis maintained several stock option plans that
provided for option grants to directors and key employees of Healthaxis and its
subsidiaries. In addition, certain Healthaxis option plans provided for grants
to non-employee field representatives and agents related to Healthaxis'
discontinued insurance operations. During 2000, no options were granted by
Healthaxis and all such plans became inactive.
On January 26, 2001 the Healthaxis shareholders approved the 2000 Stock Option
Plan ("Healthaxis 2000 Plan"). Under the Healthaxis 2000 Plan, employees,
officers and directors of Healthaxis, as well as certain consultants, are
eligible to receive Healthaxis options.
During the year ended December 31, 2001, the Healthaxis granted 866,054 under
the Healthaxis 2000 Plan. The remaining 6,053,864 options granted by Healthaxis
relate to the issuance of options to the former COM option holders pursuant to
the terms of the HAXS Merger (See Note 4).
In the first quarter of 2000, Healthaxis accelerated the vesting of stock
options granted to certain terminated employees and recorded $205 of
compensation expense related to this event.
On September 20, 2000, Healthaxis issued 50,000 warrants to a selling Debenture
holder in connection with the sale of Debentures to UICI and Al Clemens (See
Note 7). The warrants have an exercise price of $3.01. The Company recognized
expense totaling $115 related to this transaction which represented the fair
value of the warrants determined using the Black-Scholes option pricing model.
On September 29, 2000, Healthaxis entered into an agreement with certain of its
former agents that reduced the exercise price of existing options to purchase
318,042 shares of Healthaxis' common stock from original exercise prices ranging
from $4.75 to $14.63 per share to $4.25 per share. The agreement also reduced
the payments required to be made pursuant to a registration rights agreement
with such individuals relating to the shares issuable upon the exercise of such
options. Healthaxis recorded a charge of $500 during the year ended December 31,
2000, relating to this repricing of non-employee options.
COM STOCK OPTIONS AND WARRANTS
During the first quarter of 2000, the board of directors of COM granted
1,178,200 options under its 1998 Stock Option Plan ("1998 Plan"). All such
options were granted with an exercise price of $15.00 per share, which
represented the fair value of the COM common stock based upon privately
negotiated equity transactions. Since this grant price was below the fair market
value of Healthaxis' common stock on the dates of the grants, COM recorded
compensation expense totaling $4,107 during 2000.
On May 24, 2000, the board of directors of COM repriced 1,773,050 existing
options. The options affected had original exercise prices ranging from $12.00
to $15.00 per share. The exercise price of these options was adjusted to $3.31
based upon the quoted market share price of Healthaxis' common stock as reported
on the NASDAQ National Market on the date of the repricing. COM accounted for
these options as a variable award subsequent to the repricing. In January 2001,
these awards were exchanged for Healthaxis options under the terms of the HAXS
Merger and continue to be accounted for under variable option accounting. The
fair value of Healthaxis' stock at December 31, 2001 and 2000, was below the new
exercise prices and
34
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
as such, no compensation cost has been recognized during the years ended
December 31, 2001 and 2000 due to the repricing.
WARRANTS
During 1998 and 1999, COM issued a total of 1,125,000 warrants. Of these
warrants, all but 63,000 were issued in connection with marketing and carrier
agreements related to COM's discontinued retail website operations. The 63,000
warrants issued in 1999 were issued in connection with the issuance of Series C
Preferred Stock and were recorded as a direct financing cost. On January 26,
2001, pursuant to the terms of the HAXS Merger, the Company issued 952,810
warrants in exchange for the outstanding COM warrants. These warrants were
included as a component of the HAXS Merger purchase price based upon their fair
value.
PRO FORMA INFORMATION
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock Based Compensation". Had compensation cost for the
Company's stock option grants been determined based on the fair value at the
date of grants in accordance with the provisions of SFAS 123, the Company's net
loss and net loss per common share would have been increased to the following
pro forma amounts:
2001 2000 1999
---- ---- ----
Net loss applicable to common shares
as reported $(310,572) $(35,016) $(46,601)
Pro forma $(317,195) $(37,655) $(48,192)
Net loss applicable to common shares Basic & Diluted Basic & Diluted Basic & Diluted
--------------- --------------- ---------------
as reported $(6.19) $(2.68) $(3.80)
Pro forma $(6.33) $(2.88) $(3.93)
The fair value of the options and warrants granted are estimated on the date of
grant using the Black-Scholes option pricing model. The major assumptions used
and the estimated fair value include no dividends paid, assumed forfeitures of
10% annually for non-vested options and the following:
EXPECTED EXPECTED RISK FREE WEIGHTED
TERM STOCK INTEREST AVERAGE
IN YEARS VOLATILITY RATE FAIR VALUE
-------- ---------- ---- ----------
FOR OPTIONS GRANTED IN 1999
1996 Employee Plan .5 - 5 58% - 100% 4.48% $4.65
Directors Plan 10 58% 4.48% $2.12
1998 Plan 5 100% 4.48% $5.71
FOR OPTIONS GRANTED IN 2000
1998 Plan 3 100% 4.75% $2.11
FOR OPTIONS GRANTED IN 2001
Options issued in HAXS Merger 2.5 - 9.75 100% 4.48% $3.13
Healthaxis 2000 Plan 3 100% 4.48% $1.05
In January and February 2000, COM granted options to acquire approximately
1,200,000 COM common shares at $15.00 per share. The fair value of Healthaxis
common stock (used by management to estimate the fair value
35
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
of COM stock) on the grant dates approximated $29.00 per share. As a result, the
Company will amortize, for financial accounting purposes, compensation costs of
approximately $16,800 over the 3-4 year vesting period of the options.
NOTE 23 - COMMITMENTS AND CONTINGENCIES
The Company is involved in normal litigation, including that arising in the
ordinary course of 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.
NOTE 24 - POST RETIREMENT AND POST EMPLOYMENT LIABILITIES AND EMPLOYEE BENEFIT
PLANS
Healthaxis has an obligation to provide certain post retirement benefits,
primarily lifetime health, dental and life insurance coverage, to a group of
individuals consisting of three former PILIC executives, 18 retired PILIC
employees, and the Company's former Chairman. These liabilities were assumed by
Healthaxis in accordance with the terms of the transfer of PILIC (See Note 5).
Because this obligation exists until the death of the participants, actuarial
calculations, which include the use of estimates, are used to determine the
carrying value of the liability. These estimates include a life expectancy of 83
years, a discount rate of 7.25% to calculate the present value of the expected
future costs, a 3% annual growth factor for life insurance and a range of 5% -
10% annual growth factor for medical insurance. As of December 31, 2001, the
Company has $995 recorded related to post retirement and post employment
liabilities.
Changes in the post retirement and past employment liabilities were as follows:
Balance at January 1, 2000 $1,029
Interest cost 73
Service cost 86
Payments (116)
--------------
Balance at December 31, 2000 1,072
Interest cost 57
Service cost (14)
Payments (120)
--------------
Balance at December 31, 2001 $995
==============
At December 31, 2001, the unamortized, unrecognized net obligation existing at
the date of the initial application of SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" was $293. The amortization of this
transition liability was $58 per year for the years ended December 31, 2001,
2000, and 1999, and is included as a component of service cost.
The Company sponsors a defined contribution retirement savings plan under
section 401(k) of the Internal Revenue Code covering substantially all
employees. All contributions are subject to limitations imposed by IRS
regulations. The total benefit expense under this plan amounted to $558, $547,
and $53 for the years ended December 31, 2001, 2000, and 1999, respectively.
36
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 25 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the Company's quarterly results of operations
for the years 2001 and 2000:
2001
Q1 Q2 Q3 Q4 TOTAL
---------------------------------------------------------------
Revenue $ 10,837 $ 11,497 $ 11,218 $ 10,238 $ 43,790
Operating expenses 29,513 299,807 12,970 14,038 356,328
---------- --------- --------- --------- -----------
Operating loss (18,676) (288,310) (1,752) (3,800) (312,538)
Interest expense and other income, net 65 (1,187) (1,654) (19) (2,795)
---------- --------- --------- --------- -----------
Income before minority interest (18,611) (289,497) (3,406) (3,819) (315,333)
Minority interest in loss of subsidiary 3,080 - - - 3,080
---------- --------- --------- --------- -----------
Net loss before taxes (15,531) (289,497) (3,406) (3,819) (312,253)
Income tax provision - - - - -
---------- --------- --------- --------- -----------
Net loss before extraordinary item (15,531) (289,497) (3,406) (3,819) (312,253)
Extraordinary gain 1,681 - - - 1,681
---------- --------- --------- --------- -----------
Net loss from continuing operations (13,850) (289,497) (3,406) (3,819) (310,572)
Loss on disposal of discontinued operations - - - - -
Loss from discontinued operations - - - - -
---------- --------- --------- --------- -----------
Net loss $ (13,850) $(289,497) $ (3,406) $ (3,819) $ (310,572)
========== ========= ========= ========= ===========
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.37) $ (5.48) $ (0.06) $ (0.07) $ (6.22)
Extraordinary gain 0.04 - - - 0.03
---------- --------- --------- --------- -----------
Net loss $ (0.33) $ (5.48) $ (0.06) $ (0.07) $ (6.19)
========== ========= ========= ========= ===========
2000
Q1 Q2 Q3 Q4 TOTAL
---------------------------------------------------------------
Revenue $ 11,375 $ 10,363 $ 11,016 $ 10,042 $ 42,796
Operating expenses 27,754 27,628 24,816 24,494 104,692
---------- ----------- ---------- ---------- -----------
Operating loss (16,379) (17,265) (13,800) (14,452) (61,896)
Interest expense and other income, net (585) 408 (916) (1,884) (2,977)
---------- ----------- ---------- ---------- -----------
Income before minority interest (16,964) (16,857) (14,716) (16,336) (64,873)
Minority interest in loss of subsidiary 9,360 9,708 7,786 9,134 35,988
---------- ----------- ---------- ---------- -----------
Net loss before taxes (7,604) (7,149) (6,930) (7,202) (28,885)
Income tax provision - - - 585 585
---------- ----------- ---------- ---------- -----------
Net loss before extraordinary item (7,604) (7,149) (6,930) (6,617) (28,300)
Extraordinary gain - - - 1,925 1,925
---------- ----------- ---------- ---------- -----------
Net loss from continuing operations (7,604) (7,149) (6,930) (4,692) (26,375)
Loss on disposal of discontinued operations - (2,802) - 502 (2,300)
Loss from discontinued operations (3,728) (2,613) - - (6,341)
---------- ----------- ---------- ---------- -----------
Net loss $ (11,332) $ (12,564) $ (6,930) $ (4,190) $ (35,016)
========== =========== ========== ========== ===========
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.58) $ (0.55) $ (0.53) $ (0.51) $ (2.17)
Discontinued operations (0.29) (0.41) - 0.04 (0.66)
Extraordinary gain - - - .15 .15
Net loss $ (0.87) $ (0.96) $ (0.53) $ (0.32) $ (2.68)
========== =========== ========== ========== ===========
37
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 26 - SUBSEQUENT EVENTS
On August 15, 2000, Alvin H. Clemens, the Company's then Chairman, and
Healthaxis entered into an agreement terminating Mr. Clemens' employment
contract. The termination agreement became effective upon the consummation of
the HAXS Merger in January 2001. Under the terms of the termination agreement,
Mr. Clemens was to receive aggregate payments totaling $2,125 paid in quarterly
installments over five years beginning in the first quarter of 2001. The
Company, at its option, could make the quarterly payments in shares of
Healthaxis common stock not to exceed a total of 500,000 shares.
On March 6, 2002, the Company and Mr. Clemens entered into an agreement pursuant
to which Mr. Clemens agreed to accept 358,332 shares of the Company's common
stock in full payment and satisfaction of the remainder of the severance
obligation. The Company recorded a gain in the first quarter of 2002 totaling
$1,345 related to the settlement of this liability, which was based upon the
difference between the carrying amount of the liability and the fair value of
the common stock issued to Mr. Clemens.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by undersigned, thereunto duly authorized.
HEALTHAXIS INC.
Date: April 4, 2002
By: /s/ John M. Carradine
-------------------------------------
John M. Carradine
Chief Financial Officer and Treasurer
(Duly Authorized Officer)
39