UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ____
Commission File Number 0-31014
HEALTHEXTRAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2181356
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2273 Research Boulevard, 2nd Floor, Rockville, Maryland 20850
-------------------------------------------------------------
(Address of principal executive offices, zip code)
(301) 548-2900
--------------
(Registrant's phone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
The number of shares of common stock, par value $.01 per share, outstanding on
August 13, 2002 was 33,053,220.
HEALTHEXTRAS, INC.
Second Quarter 2002 Form 10-Q
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001 and
June 30, 2002 (Unaudited).........................................1
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2001 and 2002 (Unaudited)..........................2
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2002 (Unaudited)...............................3
Notes to Financial Statements.........................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................................13
PART II OTHER INFORMATION
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
HEALTHEXTRAS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2001 2002
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 33,009,143 $ 24,282,872
Accounts receivable, net 22,410,968 21,410,331
Deferred charges:
Direct 1,204,526 1,227,656
Marketing and promotion 881,832 2,022,093
Other current assets 653,627 907,406
-------------- --------------
Total current assets 58,160,096 49,850,358
Fixed assets, net 5,056,235 4,916,844
Intangible assets, net 4,449,487 6,280,061
Goodwill 17,566,866 20,758,074
Restricted cash 1,000,000 1,000,000
Other assets 1,920,651 1,862,107
-------------- --------------
Total assets $ 88,153,335 $ 84,667,444
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,994,834 $ 16,904,819
Accrued expenses and other current liabilities 3,985,101 3,974,239
Notes payable 8,883,069 11,168,000
Deferred revenue 4,509,055 4,732,995
-------------- --------------
Total liabilities 42,372,059 36,780,053
============== ==============
Minority interest 543,800 --
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, none issued -- --
-
Common stock, $0.01 par value, 100,000,000 shares
authorized, 31,868,012 and 32,278,120 shares
issued and outstanding at December 31, 2001
and June 30, 2002, respectively 318,680 322,781
Additional paid-in capital 69,747,302 70,224,154
Deferred compensation (107,665) (49,219)
Retained earnings (accumulated deficit) (24,720,841) (22,610,325)
-------------- --------------
Total stockholders' equity 45,237,476 47,887,391
-------------- --------------
Total liabilities and stockholders' equity $ 88,153,335 $ 84,667,444
============== ==============
The accompanying notes are an integral part of these financial statements
1
HEALTHEXTRAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the three months ended
June 30, June 30,
-------------------------- ---------------------------
2001 2002 2001 2002
----------- ----------- ----------- ------------
(unaudited) (unaudited)
Revenue $22,054,784 $55,248,679 $43,826,221 $109,900,934
----------- ----------- ----------- ------------
Expenses:
Direct 16,912,036 44,658,926 32,338,779 89,317,012
Selling, general and administrative 9,302,808 9,003,208 18,927,034 18,424,809
----------- ----------- ----------- ------------
Total operating expenses 26,214,844 53,662,134 51,265,813 107,741,821
----------- ----------- ----------- ------------
Operating income (loss) (4,160,060) 1,586,545 (7,439,592) 2,159,113
Interest income (expense), net 336,121 (59,738) 723,723 (3,606)
----------- ----------- ----------- ------------
Income (loss) before minority interest (3,823,939) 1,526,807 (6,715,869) 2,155,507
Minority interest -- -- -- 44,992
----------- ----------- ----------- ------------
Net income (loss) $(3,823,939) $ 1,526,807 $(6,715,869) $ 2,110,515
=========== =========== =========== ============
Net income (loss) per share, basic $ (0.13) $ 0.05 $ (0.23) $ 0.07
Net income (loss) per share, diluted $ (0.13) $ 0.05 $ (0.23) $ 0.07
Weighted average shares of common stock, basic
(in thousands) 29,182 32,291 29,150 32,160
Weighted average shares of common stock
outstanding diluted (in thousands) 29,182 32,501 29,150 32,280
The accompanying notes are an integral part of these financial statements
2
HEALTHEXTRAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
June 30,
----------------------------
2001 2002
------------ ------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ (6,715,869) $ 2,110,515
Depreciation expense 761,634 655,938
Non-cash charges (credits) 5,175,067 (950,070)
Loss on disposal of fixed assets -- 115,821
Amortization of goodwill 307,419 --
Amortization of intangibles and other assets -- 194,139
Minority interest -- 44,992
Changes in assets and liabilities:
Accounts receivable, net (2,637,563) 1,000,637
Other assets 5,117 (419,949)
Deferred charges (162,674) (1,163,391)
Accounts payable and accrued expenses (228,027) (8,278,342)
Deferred revenue (792,133) 223,940
------------ ------------
Net cash used in operating activities (4,287,029) (6,465,770)
------------ ------------
Cash flows from investing activities:
Capital expenditures (607,113) (632,367)
Return of deposit -- 600,000
Purchase of intangible assets -- (300,000)
Business acquisitions and related costs (608,225) (9,961,603)
------------ ------------
Net cash used in investing activities (1,215,338) (10,293,970)
------------ ------------
Cash flows from financing activities:
Proceeds received from exercise of stock options -- 33,469
Proceeds from new common shares issued 121,800 --
Proceeds from borrowings -- 12,500,000
Repayment of borrowings -- (4,500,000)
Purchase of treasury stock (90,000) --
------------ ------------
Net cash provided by financing activities 31,800 8,033,469
------------ ------------
Net decrease in cash and cash equivalents (5,470,567) (8,726,271)
Cash and cash equivalents at the beginning
of period 28,921,312 33,009,143
------------ ------------
Cash and cash equivalents at the end of period $ 23,450,745 $ 24,282,872
============ ============
The accompanying notes are an integral part of these financial statements
3
HEALTHEXTRAS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
HealthExtras, Inc. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC") for interim financial reporting.
These consolidated financial statements are unaudited and, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments
and accruals, necessary for a fair presentation of the consolidated balance
sheets, operating results and cash flows for the periods presented. Operating
results for the six months ended June 30, 2002, are not necessarily indicative
of the result that may be expected for the year ending December 31, 2002.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been omitted in accordance with the rules and
regulations of the SEC. These consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and
accompanying notes, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, as filed with the SEC on March 29, 2002. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
2. ACCOUNTING CHANGES
EITF 01-9
---------
Effective January 1, 2002, the Company adopted "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products", ("EITF
01-9"), which was issued in November 2001. The Company's adoption of EITF 01-9
resulted in changing the way the Company recognizes the cost of consideration
provided to a marketing partner under a warrant agreement. Effective January 1,
2002, the charge for this consideration is to be recorded as a reduction to
revenue from the marketing partner rather than as a charge to direct expense, as
reflected in prior periods. During the three and six month periods ended June
30, 2001, the Company recorded non-cash direct expenses of $3.8 million and $5.1
million, respectively, related to the warrant agreement. To comply with EITF
01-9, the $3.8 million and $5.1 million non-cash warrant expenses have been
reclassified as a reduction to revenue from the marketing partner for the three
and six month periods ended June 30, 2001.
During 2001, the Company also recorded $1.0 million in non-cash direct
expense related to common stock warrants expected to be issued to a marketing
partner contingent on the marketing partner exceeding a specific annualized
revenue threshold. Due to the lower fair market value of the warrants at March
31, 2002, the Company recognized a non-cash credit of $477,000 in the period
ended March 31, 2002. In the second quarter of 2002, it was determined that the
marketing partner did not exceed the specific annualized revenue thresholds;
thus, the Company reversed the remaining charge of $531,000 for the warrant
agreement. To comply with EITF 01-9, the $531,000 non-cash credit was recorded
as revenue in the period ended June 30, 2002, for a total non-cash credit of
$1.0 million for the six months ended June 30, 2002.
4
FAS 142
-------
In July 2001, the Financial Accounting Standards Board issued FAS 142,
"Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 addresses the
accounting for goodwill and intangible assets subsequent to their acquisition.
FAS 142 provides that goodwill and indefinite-lived assets will no longer be
amortized and that these assets must be tested at least annually for impairment
beginning in the year of adoption. FAS 142 also provides that the amortization
of intangible assets with finite lives is not limited to 40 years. The Company
adopted the provisions of FAS 142 effective January 1, 2002. The Company has
completed its impairment testing of goodwill and concluded that no impairment of
goodwill exists. The following table reflects consolidated results adjusted as
though the adoption of FAS 142 occurred as of January 1, 2001:
Three Months Ended Six Months Ended
June June
------------------------------- ------------------------------
2001 2002 2001 2002
-------------- ------------- ------------- -------------
Net income (loss), as reported $ (3,823,939) $ 1,526,807 $ (6,715,869) $ 2,110,515
Goodwill amortization 153,711 -- 307,419 --
-------------- ------------- ------------- -------------
Net income (loss), as adjusted $ (3,670,228) $ 1,526,807 $ (6,408,450) $ 2,110,515
============== ============= ============= =============
Net income (loss) per share, basis, as
reported $ (0.13) $ 0.05 $ (0.23) $ 0.07
Goodwill amortization 0.01 -- 0.01 --
-------------- ------------- ------------- -------------
Net income (loss) per share basic, as
adjusted $ (0.12) $ 0.05 $ (0.22) $ 0.07
============= ============= ============= =============
Net income (loss) per share, diluted, as
reported $ (0.13) $ 0.05 $ (0.23) $ 0.07
Goodwill amortization 0.01 -- 0.01 --
-------------- ------------- ------------- -------------
Net income (loss) per share, diluted, as
adjusted $ (0.12) $ 0.05 $ (0.22) $ 0.07
============== ============= ============= =============
3. ACQUISITION
During the first quarter of 2002, the Company purchased the outstanding 20%
minority interest in Catalyst, Inc. and Catalyst Consultants ("Catalyst") for
319,033 shares of the Company's stock valued at $1.1 million and notes payable
of $4.2 million. At the time of the minority interest acquisition, the Company
estimated and recorded $3.9 million of goodwill and $1.0 million of intangible
assets. For additional information concerning the 2001 purchase of the 80%
ownership of Catalyst, refer to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, as filed with the SEC on March 29, 2002.
During the second quarter of 2002, the Company finalized its allocation of
the purchase price (including the acquisition of the remaining minority
interest) of the Catalyst acquisition resulting in the increase in intangible
assets and the decrease in goodwill of $700,000. All intangible assets relating
to the Catalyst acquisition are being amortized over a twenty-year period.
5
The changes in the carrying amount of goodwill for three month periods
ending March 31, 2002, and June 30, 2002, are as follows:
Balance as of January 1, 2002 $ 17,566,866
Goodwill acquired during the three
month period ended March 31, 2002 3,891,208
Reduction of Goodwill during
the three month period ended June 30, 2002 (700,000)
--------------
Balance as of June 30, 2002 $ 20,758,074
==============
As of June 30, 2002, intangible assets consisted of the following:
As of June 30, 2002
-------------------
Gross Earnings Accumulated
Amount Amortization
------------- ------------
Customer contracts and relationships $ 5,700,000 $ (167,999)
Other PBM contracts 795,200 (47,140)
--------------- -------------
$ 6,495,200 $ (215,139)
=============== =============
Amortization expense for the three and six month periods ended June 30,
2002, was approximately $85,000 and $151,000, respectively.
Estimated Amortization Expense
------------------------------
For year ending December 31, Amount
2002 $ 367,000
2003 395,000
2004 395,000
2005 395,000
2006 355,000
The following table sets forth certain unaudited proforma financial data
assuming that the acquisition of 100% of Catalyst occurred on January 1, 2001,
after giving effect to purchase accounting adjustments.
Three Months Ended Six Months Ended
June June
--------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ -------------
(proforma) (actual) (proforma) (actual)
Revenue $ 38,069,451 $ 55,248,679 $ 75,855,555 $ 109,900,934
Net income $ (3,142,855) $ 1,526,807 $ (5,353,702) $ 2,110,515
Net income per share, basic $ (0.11)$ 0.05 $ (0.18) $ 0.07
Net income per share, diluted $ (0.11)$ 0.05 $ (0.18) $ 0.07
Weighted average shares of common
stock, basic (in thousands)
29,868 32,291 29,836 32,160
Weighted average shares of common
stock, diluted (in thousands)
29,868 32,501 29,836 32,280
6
4. DEFERRED CHARGES
On April 1, 2002, the Company issued common stock warrants to Health Care
Horizons, Inc. d/b/a Cimarron Heath Plan ("Cimarron") that gives Cimarron the
right to purchase 250,000 shares of the Company's common stock for $5.22 per
share. The warrants are exercisable at any time after the grant date, with the
condition that the Company must be the exclusive provider of Pharmacy Benefit
Management ("PBM") services to Cimarron on the date of the exercise. The term of
the PBM contract is from July 1, 2002, to June 30, 2009. In accordance with EITF
96-18 "Accounting for Equity Instrument that Are Issued to Other Than Employees
for Acquiring or in Conjunction With Selling, Goods or Services," the
measurement date was determined to be the grant date, April 1, 2002. Using an
equity-pricing model, the value of the 250,000 warrants was estimated to be
$400,000 and was recorded as a deferred charge at April 1, 2002. This deferred
charge will be recognized over the life of the seven-year contract beginning
July 2002, on a straight line basis.
5. NOTES PAYABLE
On January 22, 2002, the Company arranged a line of credit for $5.0 million
to support the working capital requirements of the Company's acquisition of
Catalyst Inc. and Catalyst Consultants ("Catalyst"). The line of credit was
collateralized by a certificate of deposit with an approximate balance of $5.6
million held by the lending financial institution. Under the terms of the
agreement, all outstanding principal and accrued interest were to be paid on or
before July 22, 2002. The note bore a rate of 4.59% per annum, which was paid
monthly. The Company repaid the outstanding principal of $4.5 million April
2002.
In March 2002, the Company arranged an $8 million revolving credit facility.
Borrowings on the credit facility are collateralized by substantially all of the
Company's trade receivables. The credit agreement contains affirmative and
negative covenants related to indebtedness, capital expenditures, and
consolidated net worth.
The facility bears interest at LIBOR plus 2.25%. The effective interest rate
at June 30, 2002, was 5.06%. Interest is payable in arrears on the fifth day of
each month. Interest expense for the three month and six month periods ended
June 30, 2002 was $82,800. The outstanding balance on the credit facility at
June 30, 2002, was $8.0 million. All principal and accrued interest is due to
the bank on May 31, 2003, however, the facility must be fully repaid for at
least 30 consecutive days prior to the expiration date.
6. CONSOLIDATION EXPENSES
In accordance with EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and the Costs to Exit an Activity," the Company recognized
a non-recurring charge of approximately $672,000 in the three month period ended
March 31, 2002 associated with the consolidation of its Birmingham, Alabama
operations. The charge primarily consisted of a write-down of fixed assets and
inventory, severance payments, and the balance due on the office. A total of
$559,000 has been paid or written off by the Company, and the remaining $113,000
is recorded in accrued liabilities. The liabilities will be paid within a
twelve-month period beginning March 31, 2002. The facility was closed effective
February 28, 2002 and the operations were consolidated within the Company's
Rockville, MD and Las Vegas, NV offices.
7. SEGMENT REPORTING
The Company operates in two market segments as a provider of PBM services to
plan sponsors and as a provider of supplemental health programs and disability
to individuals. The following table represents financial data by segment for the
three months and six months ended June 30, 2002, and June 30, 2001.
7
For the three months ended June 30, 2002:
Supplemental
Health &
PBM Disability Total
------------- ------------- --------------
Revenue $ 37,572,648 $ 17,676,031 $ 55,248,679
Operating expenses 36,405,222 17,256,912 53,662,134
Net income 1,190,714 336,092 1,526,807
Total assets 53,956,939 30,710,505 84,667,444
Accounts receivable 19,745,173 1,665,158 21,410,331
Accounts payable 16,739,209 165,610 16,904,819
For the three months ended June 30, 2001:
Supplemental
Health &
PBM Disability Total
------------- ------------- --------------
Revenue $ 7,658,676 $ 14,396,108 $ 22,054,784
Operating expenses 7,717,115 18,497,729 26,214,844
Net loss (43,250) (3,780,689) (3,823,939)
Total assets 4,783,747 44,122,973 48,906,720
For the six months ended June 30, 2002:
Supplemental
Health &
PBM Disability Total
------------- ------------- --------------
Revenue $ 72,085,598 $ 37,815,336 $ 109,900,934
Operating expenses 70,512,918 37,228,903 107,741,821
Net income 1,615,294 495,221 2,110,515
For the six months ended June 30, 2001:
Supplemental
Health &
PBM Disability Total
------------- ------------- --------------
Revenue $ 15,320,336 $ 28,505,885 $ 43,826,221
Operating expenses 15,482,239 35,783,574 51,265,813
Net loss (128,215) (6,587,654) (6,715,869)
Total assets 4,783,747 44,122,973 48,906,720
8
8. NET INCOME (LOSS) PER SHARE
Basic income (loss) per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted income per common
share is computed using the combination of dilutive common share equivalents and
the weighted average number of common shares outstanding during the period.
For the three and six month periods ended June 30, 2001, the diluted
net loss per share was equal to basic net loss per share since the Company
operated at a loss position. For the three month period ended June 30, 2002, the
dilutive effect (210,000 shares determined using the treasury stock method) of
stock options to purchase 671,000 shares of common stock was included in the
computation of diluted earnings per common share because the option exercise
price was less than the average market price of the common shares during the
three month period. The dilutive effect of 3.9 million outstanding common stock
options and warrants for the period ended June 30, 2002, has been excluded from
the computation of diluted net income per share as the effect would be
antidilutive.
For the six month period ended June 30, 2002, the dilutive effect
(209,000 shares determined using the treasury stock method) of stock options to
purchase 601,000 shares of common stock was included in the computation of
diluted earnings per common share because the option exercise prices was less
than the average market price of the common shares during the six month period.
The dilutive effect of 3.9 million outstanding common stock options and warrants
for the six month period ended June 30, 2002, has been excluded from the
computation of dilutive net income per share as the effect would be
antidilutive.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the interim
consolidated financial statements presented in Item 1. Certain statements
contained herein may constitute forward-looking statements (see "Certain Factors
That May Affect Future Operating Results or Stock Prices") within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements may be identified by words including "anticipate", "believe",
"estimate", "expect" and similar expressions. These forward-looking statements
involve a number of risks and uncertainties. We undertake no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this report. Readers are urged to
carefully review and consider the various disclosures made in this report and in
our other filings with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect our business.
OVERVIEW
- --------
HealthExtras is a diversified provider of pharmacy, health and
disability benefits. The Company currently provides benefits to over 1.5 million
members and the Company's clients include managed care organizations, large
employer groups, unions and government agencies, as well as individual
customers. The acquisitions of International Pharmacy Management, Inc. ("IPM"),
now operating as HealthExtrasRx, and Catalyst have created a strong foundation
for the PBM business of the Company. The PBM segment is the largest revenue
generating segment and the Company expects the PBM business to be the primary
source of growth and profit potential in the years ahead.
PHARMACY BENEFIT MANAGEMENT
Our primary PBM services consist of the automated online processing of
prescription claims on behalf of our employer and managed care customers. When a
member of one of our customer accounts presents a prescription or health plan
identification card to a retail pharmacist in our network, our system provides
the pharmacist with accesses to online information regarding eligibility,
patient history, health plan formulary listings, and contractual reimbursement
rates. The member generally pays a co-pay to the retail pharmacy and the
pharmacist fills the prescription. On behalf of our customer accounts, we
electronically aggregate pharmacy benefit claims, which include prescription
costs plus our claims processing fees, for consolidated billing and payment. We
receive payments from customer accounts and remit the amounts owed to the retail
pharmacies pursuant to our negotiated rates and retain the difference, including
claims processing fees.
We have established a nationwide network of over 50,000 retail
pharmacies. In general, self-insured employers and managed care organizations
contract with us to benefit from our negotiated retail pharmacy network rates,
participate in certain rebate arrangements with manufacturers based on formulary
design and to access the other care enhancement protocols in our system. Under
these contracts, we have an independent obligation to pay network retail
pharmacies for the drugs dispensed and accordingly have assumed that risk
independent of our customers. Pharmacy benefit claim payments from our health
plan sponsors are recorded as revenues, and prescription costs paid to retail
pharmacies are recorded in direct expenses. Member payments are not recorded as
revenue.
SUPPLEMENTAL HEALTH AND DISABILITY PROGRAMS
The Company's secondary segment, supplemental health and disability
programs, generates revenue from the sale of membership programs which provide
disability insurance benefits. We focus on the distribution of our programs to
customers of our financial institution partners. Christopher Reeve is featured
prominently in our marketing campaigns for these programs.
Revenue is generated by payments for program benefits and payments from
certain business partners. In general, program revenue is recognized based on
the number of members enrolled in each reporting period multiplied by the
applicable fee collected from the member or paid by the marketing partner for
their specific membership program. The program revenue recognized by
HealthExtras includes the cost of the membership benefits, which are supplied by
others, including the insurance components. Payments from business partners
related to new member enrollments are recorded as revenue to the extent of
related direct expenses, which to date have exceeded payments from business
partners.
Direct expenses consist principally of the cost of benefits provided to
program members, business partner compensation, and transaction processing fees.
Direct expenses are a function of the level of membership during the period and
10
the specific set of program features selected by members. The coverage
obligations of our benefit suppliers and the related expense are determined
monthly, as are the remaining direct expenses.
Revenue from program payments received, and related direct expenses,
are deferred to the extent that they are applicable to future periods or to any
refund guarantee we offer. HealthExtras has committed to minimum premium volumes
with respect to the insurance features of its programs supplied by others. In
the event that there were insufficient members to utilize the minimum premium
commitment, the differential would be expensed by HealthExtras without any
related revenue. HealthExtras believes that current enrollment trends will allow
the minimum future commitments at June 30, 2002, to be fully utilized by current
enrollment levels.
The preparation of financial statements in conformity with general
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. For more information about the Company's accounting policies
and estimates, refer to "Critical Accounting Policies and Estimates" in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, as
filed with the SEC on March 29, 2002.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 2002, COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
REVENUE. Revenue from operations for the second quarter of 2002 was
$55.2 million, compared to $22.1 million for the second quarter of 2001. The
pharmacy benefit management services segment revenue contributed $30.0 million
of the revenue increase, while revenue for the supplemental health and
disability segment increased by $3.3 million. Total revenue in the three month
period increased 391% and 23% in the pharmacy benefit management services
segment and the supplemental health and disability segment, respectively. The
PBM increase was principally due to the Catalyst acquisition. Due to the
Company's adoption of EITF 01-9, previously reported revenue for the second
quarter of 2001 has been reduced by $3.8 million in the comparative financial
statements. For more information about the adoption of EITF 01-9, see Note 2 of
the Notes to the Consolidated Financial Statements.
DIRECT EXPENSES. Direct expenses for the period ended June 30, 2002 of
$44.7 million consisted of $34.9 million in direct costs associated with the
pharmacy benefit management services segment and $9.8 million attributable to
benefit costs and compensation to our distribution partners for supplemental
health and disability products. Direct expenses for the same period in 2001 were
$16.9 million, consisting of approximately $9.9 million and $7.0 million
attributable to the pharmacy benefit management services and supplemental health
and disability segments, respectively. The PBM increase is principally due to
the Catalyst acquisition. The direct expenses of $44.7 million and $16.9 million
for the three month period ended June 30, 2002, and June 30, 2001, represented
83% and 65% of operating expenses for the respective periods.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for the three month period ended June 30, 2002, totaled
$9.0 million or 17% of total operating expenses, $1.5 million of which related
to the Company's pharmacy benefit management services segment, while the
remaining $7.5 million related to the management of the supplemental health and
disability segment. These expenses included $1.1 million for creative
development, product endorsements and market research, $4.3 million in direct
marketing, $1.7 million in compensation and benefits, $849,000 in professional
fees, insurance and taxes, $376,000 in facility costs, $196,000 in travel
expenses and $426,000 in depreciation and amortization.
Selling, general and administrative expenses for the same period in
2001 were approximately $9.3 million or 35% of total operating expenses,
$639,000 of which related to the Company's pharmacy benefit management services
segment, while $8.6 million related to the supplemental health and disability
segment. These expenses include $684,000 for creative development, product
endorsements and market research, $6.0 million in direct marketing, $1.4 million
in compensation and benefits, $285,000 in professional fees, insurance and
taxes, $234,000 in facility costs, $158,000 in travel expenses, and $544,000 in
depreciation and amortization.
The decrease in deprecation and amortization expense is primarily
attributable to the Company ceasing amortization of goodwill, pursuant to the
adoption of FAS 142. For more information about the adoption of FAS 142, see
Note 2 of the Notes to the Consolidated Financial Statements.
11
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net for the
second quarter 2002 was ($59,700), compared to $336,100 in the second quarter of
2001, a decrease of $396,000 principally attributable to lower invested
balances, interest rates, and interest on the borrowings initiated in 2002.
NET INCOME (LOSS). Net income for the second quarter of 2002 was $1.5
million compared to a $3.8 million net loss for the second quarter of 2001, an
increase of $5.3 million. As a percentage of revenue, net income increased from
(17)% to 3%.
SIX MONTHS ENDED JUNE 30, 2002, COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
REVENUE. Revenue from operations for the six month period ended June
30, 2002, was $109.9 million, compared to $43.8 million for the six month period
ended June 30, 2001. The pharmacy benefit management services segment revenue
contributed $56.9 million of the revenue increase, while revenue for the
supplemental health and disability segment increased by $9.3 million. Total
revenue in the six month period increased 606% and 12% in the pharmacy benefit
management services segment and the supplemental health and disability segment,
respectively. The PBM increase was principally due to the Catalyst acquisition.
Due to the Company's adoption of EITF 01-9, revenue for the second quarter of
2001 has been reduced by $5.1 million in the comparative financial statements.
For more information about the adoption of EITF 01-9, see Note 2 of the Notes to
the Consolidated Financial Statements.
DIRECT EXPENSES. Direct expenses for the six month period ended June
30, 2002 of $89.3 million consisted of $67.1 million in direct costs associated
with the pharmacy benefit management services segment and $22.2 million
attributable to benefit costs and compensation to our distribution partners for
supplemental health and disability products. Direct expenses for the same period
in 2001 were $32.3 million, consisting of approximately $14.2 million and $18.1
million attributable to the pharmacy benefit management services and
supplemental health and disability segments, respectively. The PBM increase is
principally due to the Catalyst acquisition. The direct expenses of $89.3
million and $32.3 million for the six month periods ended June 30, 2002 and June
30, 2001, represented 83% and 63% of operating expenses for the respective
periods.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for the six month period ended June 2002, totaled $18.4
million or 17% of total operating expenses, $3.4 million of which was related to
the Company's pharmacy benefit management services segment, while the remaining
$15.0 million related to the management of supplemental health and disability
segment. These expenses include $2.5 million for creative development, product
endorsement and market research, $8.4 million in direct marketing, $3.8 million
in compensation and benefits, $1.8 million in professional fees, insurance and
taxes, $757,000 in facility costs, $319,000 in travel expenses and $850,000 in
depreciation and amortization.
Selling, general and administrative expenses for the same period in
2001, were approximately $18.9 million or 37% of total operating expenses, $1.3
million of which related to the Company's pharmacy benefit management services
segment, while $17.6 million related to the supplemental health and disability
segment. These expenses included $2.4 million for creative development, product
endorsements, market research, $11.0 million in direct marketing, $2.7 million
in compensation and benefits, $580,000 in professional fees, insurance and
taxes, $470,000 in facility costs, $327,000 in travel expenses and $1.1 million
in depreciation and amortization.
The decrease in deprecation and amortization expense is primarily
attributable to the Company ceasing amortization of goodwill, pursuant to the
adoption of FAS 142. For more information about the adoption of FAS 142, see
Note 2 of the Notes to the Consolidated Financial Statements.
INTEREST INCOME (EXPENSE), NET. Interest income expense, net for six
months ended June 30, 2002 was ($3,600) compared to $724,000 in the second
quarter of 2001, a decrease of $727,000 or 100% principally attributable to
lower invested balances, interests rates, and interest on the borrowings
initiated in 2002.
MINORITY INTEREST. Minority interest for the six month period ended
June 30, 2002, was approximately $45,000; there was no minority interest at June
30, 2001. This charge represents the net income attributable due to the 20%
minority interest holder of Catalyst for the months of January and February
2002. As the Company purchased the remaining minority interest on March 1, 2002,
no additional minority interest charge for Catalyst will appear on the Company's
financial statements.
NET INCOME, (LOSS). Net income for the six month period ended June 30,
2002 was $2.1 million compared to $6.7 million net loss for the comparable
period in of 2001, an increase of $8.8 million. As a percentage of revenue, net
income increased from (15)% to 2%.
12
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents at June 30, 2002, totaled $24.3 million
compared to $33.0 million at December 31, 2001. During the first six months of
2002, the Company received $8.0 million in cash from financing activities, paid
$10 million for business acquisitions and related costs, and used $6.9 million
of the borrowed funds and $1.4 million of the Company's cash to reduce
outstanding payables and accrued expenses in order to negotiate more favorable
rates with specific vendors.
CASH USED IN OPERATING, ACTIVITIES. Cash used for operating activities
during the first six months of 2002 was $6.5 million compared to the cash used
for operating activities of $4.3 million during the first six months of 2001.
The variance is due to a large reduction in accounts payable, accrued expenses,
and an increase in deferred charges.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities
for the first six months of 2002 was $10.3 million compared to $1.2 million for
the first six months of 2001. The increase is primarily attributed to the
payments of $8.9 million in January 2002, and $1.1 million in April 2002, to
satisfy the Catalyst acquisition promissory notes.
CASH FROM FINANCING ACTIVITIES. Cash provided by financing activities
for the first six months of 2002 was $8.0 million compared to $31,800 for the
first six months of 2001. In January 2002, the Company arranged a line of credit
for $5.0 million to support the working capital requirements of the Company's
acquisition of Catalyst. The Company repaid the outstanding principal of $4.5
million in April 2002. In March 31, 2002, the Company also arranged an $8.0
million revolving credit facility. The amount was fully drawn at June 2002. All
principal and accrued interest is due to the bank on May 31, 2003.
By managing accounts receivable to conform more closely to our payment
obligations to suppliers, the Company should be able to generate positive
operating cash flow which combined with available cash resources will be
sufficient to meet our planned working capital, capital expenditures and
business expense requirements. However, there can be no assurance that we will
not require additional capital. Even if such funds are not required, we may seek
additional equity or debt financing. We cannot be assured that such financing
will be available on acceptable terms, if at all, or that such financing will
not be dilutive to our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Included in Management's Discussion and Analysis of Financial
Condition and Results of Operations)
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
The Company is not aware of any material pending legal proceedings, other
than ordinary routine litigation incidental to its business. In addition, the
Company is not aware of any routine legal proceedings which, in the opinion of
management, will have a material affect on the financial condition or results of
operations of the Company.
ITEM 2 CHANGES IN SECURITIES
- ------ ---------------------
In connection with the execution of a Pharmaceutical Services Agreement, the
Company issued a total of 250,000 common stock warrants on April 1, 2002. The
Company relied upon the exemption from the registration requirements of the
Securities Act of 1933 provided by Section 4 (2) of the Act. For more
information about the Company issued common stock warrants, see Note 4 of the
Notes to the Consolidated Financial Statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES (Not Applicable)
- ------- -------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ----------------------------------------------------
The annual meeting of the stockholders for the company was held on June 4,
2002. The following matters were submitted to a vote of the stockholders:
1. The following individuals were elected to the Board of Directors for a
three-year term with the indicated votes.
For Against Abstain
---------- -------- -------
David T. Blair................ 30,363,330 525,650 None
Frederick H. Graefe........... 30,561,507 327,473 None
Thomas J. Graf................ 30,561,507 327,473 None
2. The appointment of PricewatersCoopers LLP as independent auditors of the
Company was ratified by a count of 30,726,194 affirmative votes,
151,386 negative votes, and 11,400 abstentions.
There were no broker non-votes reported with respect to any of the matters
subject to shareholder vote.
ITEM 5. OTHER INFORMATION
- ------- -----------------
The Company has submitted, via correspondence to the Securities and Exchange
Commission, the certifications required by Section 906 of the recently enacted
Sarbans Oxley Act.
14
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
- ------- ---------------------------------
1. The following exhibits are filed as part of this report unless noted
otherwise:
Exhibit No. Description
-----------------------------------------------------------------
2.1 Form of Reorganization Agreement by and among HealthExtras, Inc.,
HealthExtras, LLC and Capital Z Healthcare Holding Corp (1)
2.2 CatalystRx, Inc. Securities Purchase Agreement Dated as of November
14, 2001 by and among HealthExtras, Inc. as the Purchaser, Catalyst
Rx, Inc. and Kevin C. Hooks as the Seller (2)
2.3 Catalyst Consultants, Inc. Securities Purchase Agreement Dated as of
November 14, 2001 by and among HealthExtras, Inc. as the purchaser,
Catalyst Consultants, Inc. and Kevin C. Hooks as the Seller (2)
3.1(a) Certificate of Incorporation of HealthExtras, Inc( 1)
3.1(b) Form of Amended and Restated Certificate of Incorporation (1)
3.2 Bylaws of HealthExtras, Inc. (1)
4.1 Specimen Stock Certificate of HealthExtras, Inc.
4.2 Form of Stockholders' Agreement (1)
10.1 Form of Employment Agreement between HealthExtras, Inc. and David T.
Blair (1)
10.2 Form of Employment Agreement between HealthExtras, Inc. and certain
Executive Officers (1)
10.3 Reserved
10.4 Reserved
10.5 Reserved
10.6 Agreement by and between Cambria Productions, Inc. f/s/o Christopher
Reeve and HealthExtras, Inc. (1) (3)
10.7 Indemnification Agreement (1)
10.8 Sublease Agreement by and between United Payors & United Providers,
Inc. and HealthExtras, Inc.
10.9 Form of HealthExtras, Inc. 1999 Stock Option Plan (1)
10.10 Form of Registration Rights Agreement (1)
10.11 Securities Purchase Agreement by and among HealthExtras, Inc., as the
Purchaser, and TD Javelin Capital Fund, L.P., (4)
10.12 Form of HealthExtras, Inc. 2000 Stock Option Plan
10.13 Form of HealthExtras, Inc. 2000 Directors' Stock Option Plan
10.14 Warrant Agreement by and among HealthExtras, Inc. and J.C. Penney
Life Insurance Company
10.15 Amended Agreement by and between Cambria Productions, Inc. f/s/o
Christopher Reeve and HealthExtras, Inc.
21.1 Subsidiaries of Registrant
- ------------------
(1) Incorporated herein by reference into this document from the
Exhibits to the Form S-1 Registration Statement, as amended,
Registration No. 333-83761, initially filed on July 26, 1999.
(2) Incorporated herein by reference into this document from the
Exhibits to the Form 8-K initially filed on November 29, 2001.
(3) Confidential treatment requested for portion of agreement pursuant to
Section 406 of Regulation C. promulgated under the Securities Act of
1933, as amended.
(4) Incorporated herein by reference into this document from the
Exhibits to the Form 8-K initially filed on November
21, 2000.
2. Reports on Form 8-K
None
15
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HealthExtras, Inc.
Date: August 14, 2002 By: /s/ David T. Blair
-------------------------------------
David T. Blair
Chief Executive Officer and Director
Date: August 14, 2002 By: /s/ Michael P. Donovan
-------------------------------------
Michael P. Donovan
Chief Financial Officer and
Chief Accounting Officer
16