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 September 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 by check mark whether the registrant is an accelerated file (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock, par value $.01 per share, outstanding on
November 13, 2002 was 33,053,220.
HEALTHEXTRAS, INC.
Third 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
September 30, 2002 (Unaudited).........................................1
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2002 (Unaudited)................................2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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
Item 4. Controls and Procedures.........................................13
PART II OTHER INFORMATION
SIGNATURES
CERTIFICATIONS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HEALTHEXTRAS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2001 2002
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 33,009,143 $ 22,668,488
Accounts receivable, net ......................... 22,410,968 26,077,810
Deferred charges:
Direct ......................................... 1,204,526 1,025,623
Marketing and promotion ........................ 881,832 1,511,047
Other current assets ............................. 653,627 923,321
------------ ------------
Total current assets ......................... 58,160,096 52,206,289
Fixed assets, net .................................. 5,056,235 5,189,127
Intangible assets, net ............................. 4,449,487 6,323,073
Goodwill ........................................... 17,566,866 20,758,074
Restricted cash .................................... 1,000,000 1,000,000
Other assets ....................................... 1,920,651 1,820,445
------------ ------------
Total assets ................................. $ 88,153,335 $ 87,297,008
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 24,994,834 $ 22,206,604
Accrued expenses and other current liabilities ... 3,985,101 2,698,204
Notes payable .................................... 8,883,069 9,056,000
Deferred revenue ................................. 4,509,055 3,902,541
------------ ------------
Total liabilities ............................ 42,372,059 37,863,349
------------ ------------
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 September 30, 2002, respectively ........... 318,680 322,781
Additional paid-in capital ....................... 69,747,302 70,224,154
Deferred compensation ............................ (107,665) (19,995)
Retained earnings (accumulated deficit) .......... (24,720,841) (21,093,281)
------------ ------------
Total stockholders' equity ................... 45,237,476 49,433,659
------------ ------------
Total liabilities and stockholders' equity ... $ 88,153,335 $ 87,297,008
============ ============
The accompanying notes are an integral part of these financial statements
1
HEALTHEXTRAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
------------- ------------- ------------- -------------
Three months ended Three months ended
September 30, September 30,
2001 2002 2001 2002
------------- ------------- ------------- -------------
Revenue ................................................ $ 28,403,303 $ 63,906,765 $ 72,229,524 $ 173,807,699
Expenses:
Direct ................................................. 19,168,972 54,756,821 51,507,751 144,073,833
Selling, general and administrative .................... 9,459,381 7,609,837 28,386,720 26,034,646
------------- -------------- ------------- -------------
Total operating expenses ............................ 28,628,353 62,366,658 79,894,471 170,108,479
------------- -------------- ------------- -------------
Operating income (loss) ............................. (225,050) 1,540,107 (7,664,947) $ 3,699,220
Interest income (expense), net ......................... 259,652 (23,062) 983,680 (26,668)
------------- -------------- ------------- -------------
Net income (loss) before minority interest........... 34,602 1,517,045 (6,681,267) 3,672,552
------------- -------------- ------------- -------------
Minority interest ...................................... -- -- -- 44,992
------------- -------------- ------------- -------------
Net income (loss) ................................... $ 34,602 $ 1,517,045 $ (6,681,267) $ 3,627,560
============= ============== ============= =============
Net income (loss) per share, basic ..................... $ 0.00 $ 0.05 $ (0.23) $ 0.11
Net income (loss) per share, diluted ................... $ 0.00 $ 0.05 $ (0.23) $ 0.11
Weighted average shares of common stock
outstanding (in thousands) - basic .................... 28,916 32,291 29,071 32,204
Weighted average shares of common stock
outstanding (in thousands) - diluted................... 29,789 32,495 29,071 32,496
The accompanying notes are an integral part of these financial statements
2
HEALTHEXTRAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended
September 30,
2001 2002
------------- -------------
Cash flows from operating activities:
Net loss .......................................... $ (6,681,267) $ 3,627,560
Depreciation expense .............................. 1,118,521 944,925
Non-cash charges (credits) ........................ 5,692,461 (920,846)
Loss on disposal of fixed assets .................. -- 115,821
Amortization of goodwill .......................... 461,129 --
Amortization of intangible and other assets ....... -- 327,769
Minority interest ................................. -- 44,992
Changes in assets and liabilities:
Accounts receivable, net ......................... (2,448,067) (3,666,842)
Other assets ..................................... (122,468) (420,843)
Deferred charges ................................. (782,677) (450,312)
Accounts payable and accrued expenses ............ 279,135 (4,052,593)
Deferred revenue ................................. (972,432) (606,514)
------------ ------------
Net cash used in operating activities ........... (3,455,665) (5,056,883)
------------ ------------
Cash flows from investing activities:
Capital expenditures .............................. (1,148,542) (1,193,638)
Return of deposit ................................. -- 600,000
Purchase of intangible assets ..................... -- (450,000)
Business acquisitions and related costs ........... (608,225) (12,273,603)
------------ ------------
Net cash used in investing activities ........... (1,756,767) (13,317,241)
------------ ------------
Cash flows from financing activities:
Proceeds received from exercise of stock options .. -- 33,469
Proceeds from new common shares issued ............ 12,601,202 --
Repurchase and retirement of common stock ......... (4,305,000) --
Proceeds from borrowings .......................... -- 12,500,000
Repayment of borrowings ........................... -- (4,500,000)
------------ ------------
Net cash provided by financing activities ....... 8,296,202 8,033,469
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,083,770 (10,340,655)
Cash and cash equivalents at the beginning
of period ......................................... 28,921,312 33,009,143
------------ ------------
Cash and cash equivalents at the end of period ..... $ 32,005,082 $ 22,668,488
============ ============
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 nine months ended September 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 nine month periods ended
September 30, 2001, the Company recorded non-cash direct expenses of $488,000
and $5.6 million, respectively, related to the warrant agreement. To comply with
EITF 01-9, such amounts have been reclassified as a reduction to revenue from
the marketing partners for the three and nine month periods, respectively, ended
September 30, 2001.
From July 1, 2001 through December 31, 2001, the Company 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 $1.0 million of total
non-cash credits was recorded as revenue in the nine month period ended
September 30, 2002. Because the balance of the warrant charge was reversed in
the second quarter and coincided with the end of the second warrant measurement
period, no other non-cash charges or credits relating to this warrant
measurement period will be reflected in the Company's future financial
statements. The final measurement period is for the twelve months ending June
30, 2003 and the Company does not expect to record any additional charges
relating to such measurement period based upon the marketing partners' expected
performance and the higher thresholds applicable to the final measurement
period.
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 Nine Months Ended
September September
----------------------------------- -----------------------------------
2001 2002 2001 2002
----------------- ----------------- ----------------- ----------------
Net income (loss), as reported ......... $ 34,602 $ 1,517,045 $ (6,681,267) $ 3,627,560
Goodwill amortization .................. 153,710 -- 461,129 --
---------- ----------- ------------ -----------
Net income (loss), as adjusted ......... $ 188,312 $ 1,517,045 $ (6,220,138) $ 3,627,560
========== =========== ============ ===========
Net income (loss) per share, basic, as
reported ............................... $ -- $ 0.05 $ (0.23) $ 0.11
Goodwill amortization .................. 0.01 -- 0.01 --
---------- ----------- ------------ -----------
Net income (loss) per share basic, as
adjusted .......................... $ 0.01 $ 0.05 $ (0.22) $ 0.11
========== =========== ============ ===========
Net income (loss) per share, diluted, as
reported ............................ $ -- $ 0.05 $ (0.23) $ 0.11
Goodwill amortization .................. 0.01 -- 0.01 --
---------- ----------- ------------ -----------
Net income (loss) per share, diluted, as
adjusted ............................ $ 0.01 $ 0.05 $ (0.22) $ 0.11
========== =========== ============ ===========
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 ended
March 31, 2002, June 30, 2002, and September 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 recorded during
the three month period ended June 30, 2002 (700,000)
--------------
Balance as of September 30, 2002 $ 20,758,074
==============
As of September 30, 2002, intangible assets consisted of the following:
As of September 30, 2002
------------------------
Gross Earnings Accumulated
Amount Amortization
-------------- ------------
Customer contracts and relationships $ 5,700,000 $ (242,249)
Other PBM contracts 945,200 (79,878)
---------- -------------
$ 6,645,200 $ (322,127)
============= =============
Amortization expense for the three and nine month periods ended September
30, 2002, was approximately $107,000 and $276,000, respectively.
Estimated Amortization Expense
------------------------------
For year ending December 31, Amount
2002 $ 380,000
2003 416,000
2004 416,000
2005 416,000
2006 416,000
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 Nine Months Ended
September September
---------------------------------- -----------------------------------
2001 2002 2001 2002
---------------- ----------------- ----------------- ----------------
(proforma) (actual) (proforma) (actual)
Revenue ......................... $ 44,193,268 $ 63,906,765 $ 120,048,823 $ 173,807,699
Net income ...................... $ 735,920 $ 1,517,045 $ (4,173,478) $ 3,627,560
Net income per share, basic ..... $ 0.02 $ 0.05 $ (0.14) $ 0.11
Net income per share, diluted ... $ 0.02 $ 0.05 $ (0.14) $ 0.11
Weighted average shares of common
stock, basic (in thousands) .. 29,586 32,291 29,752 32,204
Weighted average shares of common
stock, diluted (in thousands) 30,460 32,495 29,752 32,496
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 September 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 is being 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. 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 in 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 September 30, 2002, was 4.06%. Interest is payable in arrears on the fifth
day of each month. Interest expense for the three month and nine month periods
ended September 30, 2002 was $84,000 and $167,000 respectively. The outstanding
balance on the credit facility at September 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.
The remaining $1,056,000 notes payable balance, due to the Catalyst minority
acquistion as explained in Note 3 of the Notes to the Consolidated Financial
Statements, is to be settled by March 1, 2003.
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
$589,000 has been paid or written off by the Company, and the remaining $83,000
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 nine months ended September 30, 2002, and September 30, 2001.
7
For the three months ended September 30, 2002:
Supplemental
Health &
PBM Disability Total
------------- -------------- -------------
Revenue $ 48,836,612 $ 15,070,153 $ 63,906,765
Operating expenses 46,825,858 15,540,800 62,366,658
Net income (loss) 2,018,425 (501,380) 1,517,045
Total assets 53,957,755 33,339,253 87,297,008
Accounts receivable 24,206,114 1,871,696 26,077,810
Accounts payable 21,675,657 530,947 22,206,604
For the three months ended September 30, 2001:
Supplemental
Health &
PBM Disability Total
------------- -------------- -------------
Revenue $ 7,563,360 $ 20,839,943 $ 28,403,303
Operating expenses 7,649,807 20,978,546 28,628,353
Net income (loss) (73,608) 108,210 34,602
Total assets 5,053,057 52,996,924 58,049,981
For the nine months ended September 30, 2002:
Supplemental
Health &
PBM Disability Total
------------- -------------- -------------
Revenue $ 120,922,210 $ 52,885,489 $ 173,807,699
Operating expenses 117,338,776 52,769,703 170,108,479
Net income (loss) 3,633,718 (6,158) 3,627,560
For the nine months ended September 30, 2001:
Supplemental
Health &
PBM Disability Total
------------- -------------- -------------
Revenue $ 22,883,696 $ 49,345,828 $ 72,229,524
Operating expenses 23,132,044 56,762,427 79,894,471
Net loss (201,823) (6,479,444) (6,681,267)
Total assets 5,053,057 52,996,924 58,049,981
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 nine month periods ended September 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 September 30,
2002, the dilutive effect (203,000 shares determined using the treasury stock
method) of stock options to purchase 810,000 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 5.3 million outstanding
common stock options and warrants for the three month period ended September 30,
2002, has been excluded from the computation of diluted net income per share as
the effect would be antidilutive.
For the nine month period ended September 30, 2002, the dilutive effect
(238,000 shares determined using the treasury stock method) of stock options to
purchase 810,000 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 nine month period.
The dilutive effect of 5.3 million outstanding common stock options and warrants
for the nine month period ended September 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 Pharmacy Benefit Management ("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 cash compensation, and transaction processing
fees. Direct expenses are a function of the level of membership during the
10
period and 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 September 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 SEPTEMBER 30, 2002, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUE. Revenue from operations for the third quarter of 2002 was
$63.9 million, compared to $28.4 million for the third quarter of 2001. The
pharmacy benefit management services segment revenue contributed $41.3 million
of the revenue increase, while revenue for the supplemental health and
disability segment decreased by $5.8 million. Total revenue in the three month
period increased 546% and decreased 28% in the pharmacy benefit management
services segment and the supplemental health and disability segment,
respectively. The PBM increase was due to the Catalyst acquisition and an
approximate 165,000 increase in lives added during the third quarter of 2002.
The reduction of revenue for the supplemental health and disability segment
reflects an ongoing reduction in payments from business partners for new member
enrollments.
DIRECT EXPENSES. Direct expenses for the period ended September 30,
2002 of $54.8 million consisted of $45.2 million in direct costs associated with
the pharmacy benefit management services segment and $9.6 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
$19.2 million, consisting of approximately $7.0 million and $12.2 million
attributable to the pharmacy benefit management services and supplemental health
and disability segments, respectively. The PBM increase is due to the Catalyst
acquisition and an approximate 165,000 increase in lives added during the third
quarter of 2002. The 21% decrease in direct expenses for the supplemental health
and disability segment is commensurate to the decrease in this segment's revenue
as described above. The direct expenses of $54.8 million and $19.2 million for
the three month periods ended September 30, 2002, and September 30, 2001,
represented 88% and 67% of operating expenses for the respective periods.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for the three month period ended September 30, 2002,
totaled $7.6 million or 12% of total operating expenses, $1.6 million of which
related to the Company's pharmacy benefit management services segment, while the
remaining $6.0 million related to the management of the supplemental health and
disability segment. These expenses included $848,000 for creative development,
product endorsements and market research, $2.7 million in direct marketing, $2.0
million in compensation and benefits, $1.1 million in professional fees,
insurance and taxes, $366,000 in facility costs, $244,000 in travel expenses and
$396,000 in depreciation and amortization.
Selling, general and administrative expenses for the same period in
2001 were approximately $9.5 million or 32% of total operating expenses,
$792,000 of which related to the Company's pharmacy benefit management services
segment, while $8.7 million related to the supplemental health and disability
segment. These expenses include $690,000 for creative development, product
endorsements and market research, $6.3 million in direct marketing, $1.5 million
in compensation and benefits, $64,000 in professional fees, insurance and taxes,
$261,000 in facility costs, $194,000 in travel expenses, and $511,000 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
third quarter 2002 was ($23,062), compared to $259,652 in the third quarter of
2001, a decrease of $283,000 principally attributable to lower invested
balances, interest rates, and interest of $84,000 on the borrowings initiated in
2002.
NET INCOME. Net income for the third quarter of 2002 was $1.5 million
compared to a $35,000 net income for the third quarter of 2001, an increase of
$1.5 million. As a percentage of revenue, net income increased from .12% to
2.37%.
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUE. Revenue from operations for the nine month period ended
September 30, 2002, was $173.8 million, compared to $72.2 million for the nine
month period ended September 30, 2001. The pharmacy benefit management services
segment revenue contributed $98.0 million of the revenue increase, while revenue
for the supplemental health and disability segment increased by $3.5 million.
Total revenue in the nine month period increased 428% and 7% in the pharmacy
benefit management services segment and the supplemental health and disability
segment, respectively. The PBM increase was due to the Catalyst acquisition and
the new PBM business contracts resulting in an addition of approximately 260,000
lives during the nine months ended September 30, 2002. Due to the Company's
adoption of EITF 01-9, revenue for 2001 has been reduced by $5.6 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 nine month period ended
September 30, 2002 of $144.0 million consisted of $112.2 million in direct costs
associated with the pharmacy benefit management services segment and $31.8
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 $51.5 million, consisting of approximately $21.2
million and $30.3 million attributable to the pharmacy benefit management
services and supplemental health and disability segments, respectively. The PBM
increase is due to the Catalyst acquisition and the new PBM business contracts
resulting in an addition of approximately 260,000 lives during the nine months
ended September 30, 2002. The direct expenses of $144.0 million and $51.5
million for the nine month periods ended September 30, 2002 and September 30,
2001, represented 85% and 65% of operating expenses for the respective periods.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for the nine month period ended September 2002, totaled
$26.0 million or 15% of total operating expenses, $5.0 million of which was
related to the Company's pharmacy benefit management services segment, while the
remaining $21.0 million related to the management of supplemental health and
disability segment. These expenses include $3.2 million for creative
development, product endorsement and market research, $11.1 million in direct
marketing, $5.8 million in compensation and benefits, $3.0 million in
professional fees, insurance and taxes, $1.0 million in facility costs, $596,000
in travel expenses and $1.2 million in depreciation and amortization.
Selling, general and administrative expenses for the same period in
2001, were approximately $28.4 million or 35.3% of total operating expenses,
$2.1 million of which related to the Company's pharmacy benefit management
services segment, while $26.3 million related to the supplemental health and
disability segment. These expenses included $3.1 million for creative
development, product endorsements, market research, $17.3 million in direct
marketing, $4.2 million in compensation and benefits, $644,000 in professional
fees, insurance and taxes, $731,000 in facility costs, $521,000 in travel
expenses and $1.6 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 (expense), net for nine months
ended September 30, 2002 was ($26,668) compared to $983,680 in the third quarter
of 2001, a decrease of $1.0 million or 103% principally attributable to lower
invested balances, interest rates, and $167,000 of interest on the borrowings
initiated in 2002.
MINORITY INTEREST. Minority interest for the nine month period ended
September 30, 2002, was approximately $45,000; there was no minority interest at
September 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 future financial statements.
12
NET INCOME, (LOSS). Net income for the nine month period ended
September 30, 2002 was $3.6 million compared to $6.7 million net loss for the
comparable period in of 2001, an increase of $10.3 million. As a percentage of
revenue, net income increased from (9)% to 2%.
LIQUIDITY AND CAPITAL RESOURCES
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Cash and cash equivalents at September 30, 2002, totaled $22.7 million
compared to $33.0 million at December 31, 2001. During the first nine months of
2002, the Company received $8.0 million in cash from financing activities and
paid $12.0 million for business acquisitions and related costs.
CASH USED IN OPERATING, ACTIVITIES. Cash used for operating activities
during the first nine months of 2002 was $5.1 million compared to the cash used
for operating activities of $3.5 million during the first nine months of 2001.
The outflow is due to a large reduction in accounts payable (principally
attributable to Catalyst), accrued expenses, and an increase in deferred
charges.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities
for the first nine months of 2002 was $13.3 million compared to $1.8 million for
the first nine months of 2001. The increase is primarily attributed to the
payments totaling $12.3 million to satisfy the Catalyst acquisition promissory
notes.
CASH FROM FINANCING ACTIVITIES. Cash provided by financing activities
for the first nine months of 2002 was $8.0 million compared to $8.3 million for
the first nine 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 September
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, including
amounts in the revolving credit facility, 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)
ITEM 4. CONTROLS AND PROCEDURES
Management is responsible for the preparation, integrity and objectivity of
the Consolidated Financial Statements and the other information included in this
report. The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
accordingly include certain amounts that represent management's best estimates
and judgments. Actual amounts could differ from those estimates.
Within the 90 days prior to the date of this report the Company carried out
an evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the company's
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934, as amended. Based upon the evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company required to be included in the Company's
reports filed with the SEC.
The Company's Audit Committee of the Board of Directors, which is comprised
solely of independent directors, meets regularly with senior financial personnel
and independent accountants to review the Consolidated Financial Statements and
financial information.
There have been no significant changes in the Company's internal controls or
in the other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
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 (Not Applicable)
- ------ ----------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES (Not Applicable)
- ------- -------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Not Applicable)
- ------- ----------------------------------------------------
ITEM 5. OTHER INFORMATION
- ------- -----------------
The Company has submitted, via correspondence to the Securities and Exchange
Commission, the certifications required by Section 906 of the recently enacted
Sarbanes 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. (5)
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 (6)
10.13 Form of HealthExtras, Inc. 2000 Directors' Stock Option Plan (6)
10.14 Warrant Agreement by and among HealthExtras, Inc. and J.C. Penney
Life Insurance Company (6)
10.15 Amended Agreement by and between Cambria Productions, Inc. f/s/o
Christopher Reeve and HealthExtras, Inc.(6)
21.1 Subsidiaries of Registrant (7)
- ------------------
(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.
(5) Incorporated herein by reference into this document from the Exhibits
to the Form 10-K for the year ended December 31, 1999.
(6) Incorporated herein by reference into this document from the Exhibits
to the Form 10-K for the year ended December 31, 2000.
(7) Incorporated herein by reference into this document from the Exhibits
to the Form 10-K for the year ended December 31, 2001.
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: November 14, 2002 By: /s/ David T. Blair
-------------------------------------
David T. Blair
Chief Executive Officer and Director
Date: November 14, 2002 By: /s/ Michael P. Donovan
-------------------------------------
Michael P. Donovan
Chief Financial Officer and
Chief Accounting Officer
16
CERTIFICATIONS UNDER RULES 13a-14 AND 15d-14 OF
THE SECURITIES EXCHANGE ACT OF 1934
I, David T. Blair certify that:
1. I have reviewed this quarterly report on Form 10-Q of HealthExtras,
Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report or conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could aversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ David T. Blair
------------------------
David T. Blair
Chief Executive Officer
CERTIFICATIONS UNDER RULES 13a-14 AND 15d-14 OF
THE SECURITIES EXCHANGE ACT OF 1934
I, Michel P. Donovan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HealthExtras,
Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the discourse controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Michael P. Donovan
-----------------------
Michael P. Donovan
Chief Financial Officer