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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 March 31, 2003
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)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to 12(g) of the Act:
Common Stock, $0.01 par value
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 filer (as
defined in Rule 12b-2 of the Exchange Act) Yes X No
--- -------
As of May 13, 2003, there were 32,379,615 shares outstanding of the
Registrant's $0.01 par value common stock.
HEALTHEXTRAS, INC.
First Quarter 2003 Form 10-Q
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2002 and March 31,
2003 (Unaudited).......................................................1
Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and 2003 (Unaudited).....................2
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2002 and 2003 (Unaudited)..................................3
Notes to Financial Statements.............................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......12
Item 4. Controls and Procedures..........................................12
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................12
Item 2 Changes in Securities............................................12
Item 3 Defaults Upon Senior Securities..................................12
Item 4 Submission of Matters to a Vote of Security Holders..............12
Item 5 Other Information................................................12
Item 6 Exhibits and Reports on Form 8-K.................................13
SIGNATURES
CERTIFICATIONS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HEALTHEXTRAS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, March 31,
2002 2003
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 17,531,051 $ 23,947,271
Accounts receivable, net ..................................... 37,799,778 40,472,122
Income taxes receivable ...................................... 2,773,773 2,111,533
Deferred income taxes ........................................ 1,286,313 1,286,313
Deferred charges ............................................. 1,888,072 2,160,361
Other current assets ......................................... 1,282,484 1,333,275
------------ -------------
Total current assets ..................................... 62,561,471 71,310,875
Fixed assets, net .............................................. 4,056,130 3,711,380
Deferred income taxes .......................................... 3,759,152 2,576,152
Intangible assets, net ......................................... 14,185,751 13,981,762
Goodwill ....................................................... 33,538,142 33,666,142
Restricted cash ................................................ 1,000,000 1,000,000
Other assets ................................................... 901,490 873,494
------------ -------------
Total assets ............................................. $ 120,002,136 $ 127,119,805
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 34,451,789 $ 42,697,757
Note payable ................................................. 1,056,000 --
Accrued expenses and other current liabilities ............... 2,156,165 2,006,010
Deferred revenue ............................................. 4,813,555 4,871,443
------------ -------------
Total current liabilities ................................ 42,477,509 49,575,210
Note payable ................................................... 18,000,000 16,000,000
------------ -------------
Total liabilities ........................................ 60,477,509 65,575,210
------------ -------------
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,
32,295,120 and 32,376,787 shares issued and outstanding at
December 31, 2002 and March 31, 2003, respectively ......... 322,951 323,768
Additional paid-in capital ................................... 70,460,184 70,589,898
Accumulated deficit .......................................... (11,243,127) (9,369,071)
Deferred compensation ........................................ (15,381) --
------------ -------------
Total stockholders' equity ............................... 59,524,627 61,544,595
------------ -------------
Total liabilities and stockholders' equity ............... $ 120,002,136 $ 127,119,805
============= =============
The accompanying notes are an integral part of these financial statements
1
HEALTHEXTRAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended
March 31,
----------------------------
2002 2003
------------ ------------
Revenue .................................................... $ 54,652,255 $ 91,734,861
------------ ------------
Direct expenses ............................................ 44,658,086 82,460,106
Selling, general and administrative expenses ............... 9,421,601 6,068,919
------------ ------------
Total operating expenses ................................ 54,079,687 88,529,025
------------ ------------
Operating income ........................................ 572,568 3,205,836
Interest income (expense), net ............................. 56,132 (148,780)
------------ ------------
Income before income taxes and minority interest ........ 628,700 3,057,056
Minority interest .......................................... (44,992) --
------------ ------------
Income before income taxes .............................. 583,708 3,057,056
Provision for income taxes ................................. -- 1,183,000
------------ ------------
Net income .............................................. $ 583,708 $ 1,874,056
============ ============
Earnings per share, basic .................................. $ 0.02 $ 0.06
Earnings per share, diluted ................................ $ 0.02 $ 0.06
Weighted average shares of common stock, basic
(in thousands) ............................................. 32,027 32,337
Weighted average shares of common stock outstanding, diluted
(in thousands) ............................................ 32,076 32,507
The accompanying notes are an integral part of these financial statements
2
HEALTHEXTRAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended
March 31,
----------------------------
2002 2003
------------ ------------
Cash flows from operating activities:
Net income ............................................... $ 583,708 $ 1,874,056
Depreciation expense ..................................... 332,342 395,087
Deferred income taxes .................................... -- 1,183,000
Income taxes receivable .................................. -- 662,240
Noncash charges (credits) ................................ (447,808) 17,912
Amortization of intangibles and other assets ............. 85,661 203,989
Minority interest ........................................ 44,992 --
Changes in assets and liabilities:
Accounts receivable, net ................................ 395,006 (2,672,344)
Other assets ............................................ 151,158 (22,795)
Deferred charges ........................................ (1,988,272) (272,289)
Accounts payable, accrued expenses, and other liabilities (5,228,643) 8,095,813
Deferred revenue ........................................ 49,528 57,888
------------ ------------
Net cash (used in) provided by operating activities .... (6,022,328) 9,522,557
------------ ------------
Cash flows from investing activities:
Capital expenditures ..................................... (205,752) (50,337)
Deposits, restricted cash and other ...................... 600,000 --
Business acquisitions and related payments ............... (8,905,603) (1,056,000)
------------ ------------
Net cash used in investing activities .................. (8,511,355) (1,106,337)
------------ ------------
Cash flows from financing activities:
Proceeds received from exercise of stock options ......... 33,469 --
Proceeds from (repayment of) line of credit .............. 12,500,000 (2,000,000)
------------ ------------
Net cash provided by (used in) financing activities .... 12,533,469 (2,000,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents ...... (2,000,214) 6,416,220
Cash and cash equivalents at the beginning
of period ................................................ 33,009,143 17,531,051
------------ ------------
Cash and cash equivalents at the end of period ............ $ 31,008,929 $ 23,947,271
============ ============
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 three months ended March 31, 2003, are not necessarily
indicative of the result that may be expected for the year ending December 31,
2003. 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, 2002, as filed with the SEC on March 31, 2003. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
SFAS NO. 148
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
FASB statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
application of the transition provisions of SFAS No. 148 is effective for fiscal
years ending after December 15, 2002. The Company has included the proper
disclosures in Note 3 to these Notes To Financial Statements.
FIN NO. 45
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees Including
Indirect Guarantees of Indebtedness of Others", which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year end. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. As of
March 31, 2003, there is no impact on the Company's financial statements as a
result of the issuance of FIN No. 45.
3. STOCK-BASED COMPENSATION
------------------------
At March 31, 2003, the Company has stock-based compensation plans for
employees and directors. Stock-based compensation is accounted for using the
intrinsic-value-based method in accordance with the Accounting Principals Board
Option ("APB") 25, "Accounting for Stock Issued to Employees", and related
Interpretations. No stock-based compensation expense is reflected in net income
as all options granted under these plans had an exercise price equal to the
market
4
value of the underlying common stock on issue date of the grant. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation:
Three months ended
March 31,
2003 2002
---------- ----------
Net income, as reported $1,874,056 $ 583,708
Deduct: Total stock-based employee compensation
expense determined under fair value method for all
awards, net of related tax effects, in 2003 (597,940) (516,137)
---------- ----------
Pro forma net income $1,276,116 $ 67,571
========== ==========
Earnings per share:
Basic - as reported $ 0.06 $ 0.02
Basic - pro forma $ 0.04 $ 0.00
Diluted - as reported $ 0.06 $ 0.02
Diluted - pro forma $ 0.04 $ 0.00
The fair value for these options was estimated at the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for the three months ended March 31, 2003 and 2002:
Three months ended
March 31,
2003 2002
---------------- -----------
Expected term 5 years 5 years
Volatility factor 85.16 - 87.31% 87%
Risk free interest rate 2.70 - 3.19% 4.46 - 5.0%
Dividend yield -- --
Fair value $ 2.79 $ 2.34
4. BUSINESS COMBINATIONS
---------------------
ACQUISITION OF CATALYST
During the first quarter of 2002, the Company purchased the outstanding 20%
minority interest in Catalyst Rx, 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. The stock was transferred to the seller on April 1, 2002, and
$3.1 million was paid on the note in 2002, with the final installment of $1.1
million paid on March 1, 2003.
ACQUISITION OF PNNC
On December 1, 2002, the Company acquired 100% of the common stock of
Pharmacy Network National Corporation ("PNNC"). Total consideration for PNNC
stock was $20.2 million. Total acquisition cost included transaction costs of
approximately $1.4 million. Funding for the $21.6 million cash transaction was
derived from the Company's working capital. The acquistion resulted in goodwill
of approximately $10.6 million and intangible assets of $8.0 million.
5
The following table sets forth certain unaudited proforma financial data
assuming that the acquisition of 100% of Catalyst and PNNC had each been
completed as of January 1, 2002, after giving effect to purchase accounting
adjustments. Amounts are in thousands, except for per share data.
Three Months Ended
March 31,
----------------------------
2002 2003
----------- ---------
(proforma) (actual)
Revenue $ 83,930 $ 91,735
Net income $ 1,557 $ 1,874
Net income per share basic $ 0.05 $ 0.06
Net income per share diluted $ 0.05 $ 0.06
Weighted average shares basic 32,238 32,337
Weighted average shares diluted 32,287 32,507
The proforma results of operations are not necessarily indicative of the
results that would have occurred had the Company owned 100% of Catalyst and PNNC
at January 1, 2001, nor are these results indicative of future operating
results.
5. GOODWILL
--------
The Company adopted SFAS No. 142, and discontinued the amortization of
goodwill and indefinite-lived intangible assets effective January 1, 2002. The
Company completed its initial adoption impairment testing of goodwill and
concluded that no impairment of goodwill exists. The Company performed a similar
test as of December 31, 2002, and concluded that no impairment of goodwill
exists. In the three month period ended March 31, 2003, the Company increased
goodwill by $128,000 due to additional acquisition costs incurred related to the
PNNC acquisition.
6. INTANGIBLE ASSETS
-----------------
As of March 31, 2003, intangible assets consisted of the following:
Amortization Period
-------------------
Catalyst customer contracts $ 5,700,000 20 years
PNNC customer contracts 8,000,000 20 years
Other PBM contracts 945,200 5 - 10 years
--------------
Total intangible assets 14,645,200
Accumulated amortization (663,438)
--------------
Total $ 13,981,762
==============
Catalyst and PNNC customer contracts represent the estimated fair value of
customer contracts held by Catalyst and PNNC at the dates of acquisition. This
estimated fair value and the weighted average useful-lives are based on
income-method valuation calculations, performed by an independent consulting
firm.
The estimated aggregate amortization expense of intangible assets through
2007 is as follows:
2003 $ 816,000
2004 816,000
2005 816,000
2006 816,000
2007 776,000
---------
Total $ 4,040,000
Amortization expense was $67,000 and $204,000 for the three month periods
ended March 31, 2002 and March 31, 2003, respectively.
6
7. NOTES PAYABLE
-------------
At December 31, 2002, the Company had a note payable of $1.1 million
relating to the 2002 purchase of the 20% outstanding minority interest in
Catalyst. The $1.1 million due to the former minority interest holder was paid
on March 1, 2003.
In December 2002, the Company arranged an $18.0 million revolving credit
facility. Borrowings on the credit facility are collateralized by substantially
a1l of the Company's trade receivables. The credit facility contains affirmative
and negative covenants related to indebtedness, other liabilities and
consolidated net worth. The facility bears interest at LIBOR plus 2.75%. The
effective rate at March 31, 2003, was 4.06%. Interest is payable in arrears on
the fifth day of each month. The outstanding balance on the credit facility at
March 31, 2003, was $16.0 million. All principal and accrued interest is due to
the bank on May 31, 2004. Interest expense related to notes payable for the
period ended March 31, 2003, was approximately $184,000.
8. SEGMENT REPORTING
-----------------
The Company operates in two business segments, PBM and supplemental
benefits. The following table represents financial data by segment for the three
months ended March 31, 2003, and March 31, 2002.
For the three months ended March 31, 2003:
Supplemental
PBM Benefits Total
------------- ------------- ------------
Revenue $ 78,418,131 $ 13,316,730 $ 91,734,861
Segment operating expenses 75,934,030 11,151,204 87,085,234
Segment operating income 2,484,101 2,165,526 4,649,627
Total assets 108,953,033 18,166,772 127,119,805
Accounts receivable 40,208,640 263,482 40,472,122
Accounts payable 41,837,386 860,371 42,697,757
Operating expenses of the segments exclude $1.4 million in corporate
overhead that was not allocated by management in assessing segment performance
for the three month period ended March 31, 2003.
7
For the three months ended March 31, 2002:
Supplemental
PBM Benefits Total
------------- ------------- ------------
Revenue $ 34,512,951 $ 20,139,304 $ 54,652,255
Segment operating expenses 33,819,026 19,322,446 53,141,472
Segment operating income 693,925 816,858 1,510,783
Total assets 69,759,573 21,914,612 91,674,185
Accounts receivable 20,007,326 2,008,636 22,015,962
Accounts payable 19,354,917 1,606,214 20,961,131
Operating expenses of the segments exclude $938,000 in corporate overhead
that was not allocated by management in assessing segment performance for the
three month period ended March 31, 2002.
9. PROVISION FOR INCOME TAXES
--------------------------
In the first quarter of 2003, the Company recorded a provision for income
taxes of approximately $1.2 million at an effective rate of 38.6%. In the first
quarter of 2002, the Company recorded no provision for income taxes, as the
Company maintained a full valuation allowance against the Company's deferred tax
assets due to the uncertainty as to their ultimate realization.
10. NET INCOME PER SHARE
--------------------
Basic net income per share is based on the weighted average number of
shares outstanding during the period. Diluted income per share is computed based
on the weighted average number of shares and dilutive common stock equivalent
shares outstanding during the period.
At March 31, 2003, the dilutive effect (170,000 shares using the treasury
stock method) of stock options to purchase approximately 1.1 million shares of
common stock were included in the computation of diluted earnings per common
share because the option price was less than the average market price of the
common shares during the period ended March 31, 2003. The dilutive effect of
approximately 5.7 million outstanding common stock options and warrants for the
period ended March 31, 2003, have been excluded from the computation of diluted
net income per share as the effect would be antidilutive.
At March 31, 2002, the dilutive effect (49,000 shares using the treasury
stock method) of stock options to purchase approximately 272,000 shares of
common stock were included in the computation of diluted earnings per common
share because the option price was less than the average market price of the
common shares during the period ended March 31, 2002. The dilutive effect of
approximately 3.6 million outstanding common stock options and warrants for the
period ended March 31, 2002, have been excluded from the computation of diluted
net income per share as the effect would be antidilutive.
8
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. 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 provider of PBM services and supplemental benefits. The
Company's clients include managed-care organizations, self-insured employers,
third party administrators, as well as individual customers. The PBM segment now
generates the significant majority of our revenues and is expected to be the
primary source of growth and profit potential in the future. The acquisitions of
International Pharmacy Management, Inc. ("IPM"), Catalyst and PNNC have
contributed significantly to the growth of our PBM business.
PHARMACY BENEFIT MANAGEMENT
We have established a nationwide network of over 50,000 retail pharmacies.
In general, clients contract with us to access our negotiated retail pharmacy
network rates, participate in certain rebate arrangements with manufacturers
based on formulary design and benefit from the other care enhancement protocols
in our system. Our primary PBM services consist of the automated online
processing of prescription claims on behalf of our clients. When a member of one
of our clients 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-payment to the retail pharmacy and the pharmacist fills the
prescription. On behalf of our clients, we electronically aggregate pharmacy
benefit claims, which include prescription costs plus our claims processing fees
for consolidated billing and payment. We receive payments from clients, remit
the amounts owed to the retail pharmacies pursuant to our negotiated rates and
retain the difference, including claims processing fees.
Pharmacy benefit claim payments from our clients are recorded as revenues,
and prescription costs to be paid to pharmacies are recorded as direct expenses.
Under our network contracts, we have an independent obligation to pay pharmacies
for the drugs dispensed and accordingly, have assumed that risk independent of
our clients. When the Company administers pharmacy reimbursement contracts and
does not assume a credit risk, the Company records only its administrative or
processing fees as revenue. Member co-payments are not recorded as revenue.
Rebates earned under arrangements with manufacturers are recorded as a reduction
of direct expenses. The portion of manufacturer rebates due to clients is
recorded as a reduction of revenue.
SUPPLEMENTAL BENEFITS PROGRAMS
The Company's supplemental benefits segment generates revenue from the sale
of membership programs which provide insurance and other benefits. The Company
has distribution agreements with many of the nation's largest financial
institutions (the "distributors"), along with leading affinity groups and
associations. Additionally, HealthExtras has a relationship with actor and
advocate Christopher Reeve to promote these benefits programs.
Revenue is generated by payments for program benefits and payments from
certain distributors. 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 distributor for their specific
membership program. The program revenue recognized by HealthExtras includes the
cost of the membership benefits supplied by others, including the insurance
components. Payments from the distributors related to new member enrollments
were recorded as revenue to the extent of the related direct expenses through
September 30, 2002. These payments by distributors were discontinued at that
time under restructured marketing agreements.
9
Direct expenses consist principally of the cost of benefits provided to
program members, distributors' compensation, and transaction processing fees.
Direct expenses are a function of the level of membership during the 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 the Company with out any
related revenue. The Company believes that current enrollment trends will allow
the minimum future commitments at March 31, 2003, to be fully utilized by
current enrollment levels.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
REVENUE. Revenue from operations for the three months ended March 31, 2003,
was $91.7 million consisting of $78.4 million in revenue associated with the PBM
segment and $13.3 million in revenue attributable to the supplemental benefits
segment. PBM segment revenue increased by $43.9 million, including $26.1 million
from PNNC, while the supplemental benefits segment revenue decreased by $6.8
million. Revenue for the first quarter of 2002 was $54.6 million consisting of
approximately $34.5 million and $20.1 million attributable to the PBM and the
supplemental benefits segments, respectively.
DIRECT EXPENSES. Direct expenses for the three months ended March 31, 2003,
were $82.5 million consisting of $72.4 million in direct expenses associated
with the PBM segment and $10.1 million in direct expenses attributable to
supplemental benefits segment. PBM segment direct expenses increased by $40.2
million, including $24.6 million from PNNC, while the supplemental benefits
segment direct expenses decreased by $2.4 million. Direct expenses for the first
quarter of 2002 were $44.7 million consisting of approximately $32.2 million and
$12.5 million attributable to the PBM and supplemental benefits segments,
respectively. The direct expenses of $82.5 million and $44.7 million for the
three month period ended March 31, 2003, and March 31, 2002, represented 93.1%
and 82.6% of operating expenses for the respective periods.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three month period ended March 31, 2003, totaled $6.1 million
or 6.9% of operating expenses, $3.6 million of which was related to the
Company's PBM services segment, $1.1 million of which was related to the
management of the supplemental benefits segment, while the remaining $1.4
million related to corporate overhead. These expenses include approximately
$438,000 for creative development, product endorsement and market research, $2.5
million in compensation and benefits, $814,000 in professional fees, insurance
and taxes, $1.0 million in other expenses, $406,000 in facility costs, $260,000
in travel expenses and $599,000 in depreciation and amortization. The Company
has no direct marketing expense in the first quarter of 2003, as direct
marketing expenses are now paid by the distributor.
Selling, general and administrative expenses for the three month period
ended March 31, 2002 were approximately $9.4 million or 17.4% of total operating
expenses, $1.6 million of which was related to the Company's PBM services
segment, $6.9 million of which related to the management of the supplemental
benefits segment, while the remaining $900,000 related to corporate overhead.
These expenses included approximately $1.3 million for creative development,
product endorsements and market research, $4.1 million in direct marketing, $1.9
million in compensation and benefits, $342,000 in professional fees, insurance
and taxes, $400,000 in other expenses, $672,000 in consolidation and shut down
costs of the Birmingham Alabama location, $335,000 in facility costs, $128,000
in travel expenses, and $222,000 in depreciation and amortization.
INTEREST INCOME (EXPENSE) NET. Interest income (expense), net for the three
months ended March 31, 2003, was approximately $(149,000), compared to
approximately $56,000 of interest income for the three month period ended March
31, 2002. This was principally due to lower interest rates and interest owed on
an increased line of credit initiated in the fourth quarter of 2002. Interest
expense on borrowings for the first quarter of 2003 was approximately $184,000.
10
PROVISION FOR INCOME TAXES. Through the third quarter of 2002, the Company
maintained a full valuation allowance against the Company's deferred tax assets
due to the uncertainty as to their ultimate realization. Due to the recording of
the full valuation allowance, no provision for income taxes was recorded in the
first quarter of 2002. As the Company released its valuation allowance in the
fourth quarter of 2002, the Company, using an effective tax rate of 38.6%,
recorded a provision for income taxes of $1.2 million in the first quarter of
2003. See Note 8 to the Notes to the Consolidated Financial Statements for
further information.
MINORITY INTEREST. There was no minority interest charge for the three
month period ended March 31, 2003, while the Company recorded a minority
interest charge of approximately $45,000 for the three month period ended March
31, 2002. The $45,000 charge represents the net income attributable to the 20%
minority interest holder of Catalyst for the months of January and February
2002. As the Company purchased the remaining minority interest in March 1, 2002,
no additional minority charge for Catalyst will appear on the Company's future
financial statements.
NET INCOME. Net income for the three month period ended March 31, 2003,
was $1.9 million compared to $584,000 for the three month period ended March 31,
2002. As a percentage of revenue net income increased from 1.1% to 2.0%.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash and cash equivalents at March 31, 2003, totaled $23.9 million compared
to $31.0 million at March 31, 2002. During the three month period ended March
31, 2003, the Company generated $9.5 million in cash from operating activities,
paid approximately $50,000 in cash for capital expenditures, repaid
approximately $1.1 million in cash to satisfy the Catalyst acquisition
promissory note and repaid $2.0 million in cash on the revolving credit
facility.
CASH PROVIDED BY OPERATING ACTIVITIES. The Company's overall operating
activities generated $9.5 million of net cash from operations during the first
quarter ended March 31, 2003, a $15.5 million or 258.1% increase from the $6.0
million of net cash utilized in the first quarter ended March 31, 2002. The
increase is primarily due to a $2.5 million increase in income before income
taxes and the timing of payments to vendors included in accounts payable offset
somewhat by the timing of payments from clients included in accounts receivable.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities for
the three months ended March 31, 2003, was $1.1 million compared to $8.5 million
for the three months ended March 31, 2002. The decrease is due to a reduction in
capital expenditures and repayments due on the promissory note regarding the
Catalyst acquistion in the 2002 first quarter. As of March 1, 2003, the
promissory note on the Catalyst acquistion has been satisfied.
CASH FROM FINANCING ACTIVITIES. Cash used in financing activities for the
first three months of 2003 was $2.0 million compared to cash provided by
investing activities of $12.5 million in the first three months of 2002. In
March 2003, the Company made a $2.0 million payment on the Company's outstanding
revolving credit facility; while in the first quarter of 2002, the Company
arranged for a line of credit with a financial institution, of which $4.5
million was outstanding at March 31, 2002, and an $8.0 million revolving credit
facility, of which $8.0 million was outstanding at March 31, 2002.
The Company anticipates continuing to generate positive operating cash
flow, which combined with available cash resources, should 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.
11
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
-----------------------
a) Evaluation of disclosure controls and procedures. The Company maintains
control and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed within 90 days of the filing date of this report, the chief executive
officer and the chief financial officer of the Company concluded that the
Company's disclosure controls and procedures were adequate.
b) Changes in internal controls. The Company made no significant changes in
its internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the chief
executive officer and chief financial officer.
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
In the ordinary course of business, the Company may become subject to legal
proceedings and claims. The Company is not aware of any legal proceedings or
claims which, in the opinion of management, will have a material effect on the
financial condition or results of operations of the Company.
Item 2 CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
12
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
--------------------------------------------------------------------------
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)
11.1 Computation of Per Share Earnings (Incorporated by reference
in Part I, hereto)
99.1 Certifications pursuant to Section 906 of the Sarbanes Oxley
Act of 2002.
- --------------
(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 filed on April 2, 2001.
2. Reports on Form 8-K
On February 3, 2003, the Company filed an amended Current Report on Form
8-K/A which provided the financial statements relating to the acquisition of
Pharmacy Network National Corporation which was initially reported on a Current
Report on Form 8-K on December 16, 2002.
On February 4, 2003, the Company filed a Current Report on Form 8-K
reporting financial results for the quarter ended and year-ended December 31,
2002.
On February 5, 2003, the Company filed an amended Current Report on Form
8-K/A to correct an error that was inadvertently caused in the conversion to
EDGAR format on the Form 8-K/A that was filed by the Company on February 3,
2003.
13
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: May 15, 2003 By: /s/ David T. Blair
-------------------------------
David T. Blair
Chief Executive Officer and Director
Date: May 15, 2003 By: /s/ Michael P. Donovan
-------------------------------
Michael P. Donovan
Chief Financial Officer and
Chief Accounting Officer
14
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 our 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: May 15, 2003 /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, Michael 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 disclosures 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: May 15, 2003 /s/ Michael P. Donovan
------------------------
Michael P. Donovan
Chief Financial Officer