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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13591
HEALTHAXIS INC.
(Exact name of Registrant as specified in its charter)
5215 N. O'Connor Blvd.
800 Central Tower
Pennsylvania Irving, Texas 75039 23-2214195
- ------------------------------------------ ------------------------------------------ --------------------------------------
(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
- ------------------------------------------ ------------------------------------------ --------------------------------------
(972) 443-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
- -------------------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.10 par value
----------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K: |_|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
8, 2002 as reported on the NASDAQ National Market System, was approximately
$19,957,385. Shares of the Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 8, 2002, the Registrant had 53,352,738 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive Proxy Statement for the
2002 Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
Healthaxis Inc.
Table of Contents
Page
----
PART I....................................................................................................1
Item 1. Business..................................................................................1
Item 2. Properties...............................................................................21
Item 3. Legal Proceedings........................................................................22
Item 4. Submission of Matters to a Vote of Security Holders......................................22
PART II..................................................................................................23
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................23
Item 6. Selected Financial Data..................................................................23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................37
Item 8. Financial Statements.....................................................................38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................76
PART III.................................................................................................77
Item 10 Directors and Executive Officers of the Registrant.......................................77
Item 11. Executive Compensation...................................................................77
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................77
Item 13. Certain Relationships and Related Transactions...........................................77
PART IV..................................................................................................78
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................78
EXHIBIT INDEX ...........................................................................................80
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PART I
STATEMENTS IN THIS REPORT WHICH ARE NOT PURELY HISTORICAL FACTS, INCLUDING
STATEMENTS REGARDING THE COMPANY'S ANTICIPATIONS, BELIEFS, EXPECTATIONS, HOPES,
INTENTIONS OR STRATEGIES FOR THE FUTURE, MAY BE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ALL FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE BASED UPON
INFORMATION AVAILABLE TO THE COMPANY ON THE DATE OF THIS REPORT. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ALL FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THE EVENTS
OR RESULTS DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS AND
UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH IN THIS REPORT UNDER
"BUSINESS--RISK FACTORS."
ITEM 1. BUSINESS
GENERAL
Healthaxis is an emerging technology services firm committed to providing
innovative and configurable web-based connectivity and applications solutions
for health benefit distribution and administration. These solutions, which are
comprised of software products and related services, are designed to assist
health insurance payers, third party administrators, intermediaries and
employers provide enhanced services to members, employees and providers through
the application of Healthaxis' flexible technology to legacy systems, either on
a fully integrated or on an Application Service Provider ("ASP") basis.
Healthaxis believes that its solutions enable a client to reduce their
administrative costs, enhance their customer service and improve their
profitability.
Healthaxis' proprietary applications address the specific processing needs
of the administration and distribution segments of the healthcare insurance
industry in an efficient and cost-effective manner. Healthaxis, through its
state-of-the-art applications, provides real-time interaction with plan
documents, enrollment and applications, as well as access to personalized
eligibility and claims data via the Internet. These Internet-enabled business
applications enhance the transaction process and streamline the flow of
information amongst the many systems employed by various constituents within the
healthcare insurance industry. Healthaxis' business solutions include the
automated capture, imaging, storage and retrieval of electronic claims,
attachments, and related correspondence. Healthaxis also offers various related
services, including application systems management and systems integration, data
center, telephony and PC/Lan services.
Healthaxis is staffed by experienced health insurance and technology
professionals who understand the payer world. The team combines extensive health
insurance industry experience with a technical team exclusively focused on the
unique needs of health insurance companies, third party administrators (TPAs),
broker / intermediaries and self-funded employers. Payer solutions are offered
through readily configurable products, such as Insur-Claims, Insur-Admin,
Web-Self Service, Online Enrollment, Retail Distribution, eHealthTalk-HIPAA
solutions and Imaging Services. All of Healthaxis' products are supported by
professional services offered on a consulting basis. Healthaxis' solutions are
sold and supported through the following four strategic business units, which
are closely aligned with their target markets.
o APPLICATION SOLUTIONS GROUP - provides web-enabled systems for
enrollment, administration and processing of health insurance claims
on an Application Service Provider ("ASP") basis.
o WEB TECHNOLOGY GROUP - provides web-enabled connectivity platforms and
solutions for self service (broker, employer, employee and providers),
large group enrollment and small group
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enrollment, sale/distribution and post-sale administration of group
and individual insurance policies including health, life and dental
insurance, and solutions for enabling compliance with HIPAA.
o IMAGING SERVICES GROUP - provides electronic data-capture, imaging,
storage and retrieval of health insurance claims, attachments and
other correspondence.
o OUTSOURCING GROUP - provides system technology support services for
the Company's largest single client, UICI, on an outsourcing basis.
Management of Healthaxis, as well as the composition of the Company's Board
of Directors, was significantly changed during 2001. James W. McLane became the
President and Chief Executive Officer in February 2001 and Chairman in July
2001. John M. Carradine joined in March 2001 as the Chief Financial Officer. A
new leader for the Web Technology Group was installed in May 2001 and a new
sales team began operation in June 2001. In the months following, several goals
were accomplished to re-position the Company for future growth:
o The Company's financial position was improved
o Operating expenses were reduced
o The Company was restructured into four strategic business units
o A cohesive market based strategy was developed
o The sales force was expanded
o The sales pipeline grew significantly
o Several meaningful clients were added
o Strategic partnerships were created with several complementary
enterprises
o The Board of Directors was strengthened
o A values-based culture was instilled in the Company
- TO DELIVER WHAT WE PROMISE
- TO TAKE OWNERSHIP AND ACCOUNTABILITY FOR OUR RESULTS
- TO DO THE RIGHT THING - - - ALL THE TIME
- TO UNDERSTAND THAT RELATIONSHIPS DETERMINE RESULTS
- TO TEAM AND RUN TO WIN
Healthaxis Inc. (the "Company" or "Healthaxis") is a Pennsylvania
corporation organized in 1982. Healthaxis' common stock trades on the Nasdaq
National Market under the symbol "HAXS." The operations of Healthaxis during
2001 were conducted primarily through its subsidiary, Healthaxis.com, Inc. In
the fourth quarter of 2001 the Company reorganized and formed a new subsidiary,
Healthaxis, Ltd., through which all operations are now conducted. Unless
otherwise indicated, or the context otherwise requires, all references in this
document to the Company or Healthaxis include Healthaxis Inc. and all of its
subsidiaries.
HEALTH INSURANCE INDUSTRY
Healthcare plan administration involves providers, payers, managed care
organizations, reinsurance carriers, preferred provider organizations, medical
and dental claim review staffs, employers, and patients. Unlike other types of
insurance, healthcare insurance administration frequently results in extensive
interaction between the patient, the provider, the insurance carrier and the
employer. Each of these participants must be able to share, process, and access
data in order to perform their respective roles in the healthcare system. The
complexity and fragmentation within the healthcare industry complicates this
task.
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Healthaxis believes, based upon industry reports, that over $250 billion
each year is wasted through redundant procedures and excessive administrative
costs. As the overall healthcare industry has increased in size and complexity,
the burden of gathering, processing, and managing the approximately 4.6 billion
claims generated each year has led to significant administrative bureaucracies,
inefficiencies, and high costs. This burden has placed increasing strains on the
profitability of the overall industry, as pricing pressures and other
competitive factors have compressed margins. Recent industry reports conclude
that the health insurance industry is 10 to 15 years behind other
transaction-intensive industries, such as the airline and banking industries, in
its use of information technology. This failure to effectively utilize currently
available technology is reflected in the higher transaction processing costs
incurred within the health insurance industry. According to a recognized
industry source, the estimated total cost to process a paper-based healthcare
claim is up to $12.00, versus $3.00 for electronic healthcare claims.
Additionally, a customer service inquiry can cost up to $7.00 each, versus $.25
for an electronic inquiry.
Healthaxis believes that the healthcare industry has historically
under-invested in information technology due to the limited suitability of
existing technological platforms for addressing the needs of the industry. The
high degree of interaction, complexity and the large volume of transactions
among healthcare providers, insurers, and managed care companies, independent
administrative service organizations, employers, and employees does not lend
itself to traditional client-server or mainframe environments. These systems,
which are designed to operate with dedicated networks, are generally not suited
for interfacing among a number of unrelated external users on a cost-effective
basis. Healthaxis believes the Internet, which facilitates the rapid deployment
of information and provides for cost-effective access to an unlimited number of
users, represents the next phase in the evolution of healthcare information
technology. Due to the transaction-intense nature of healthcare insurance, and
consumer interest in learning more about these transactions, Healthaxis believes
that participants will demand increasing access to healthcare eligibility
information, claims status, and provider information. Healthaxis believes that
less than one-third of healthcare payers have deployed Internet solutions for
transaction processing.
BUSINESS STRATEGY
Healthaxis' goal is to provide its clients with market leading, innovative
and configurable web-based connectivity and applications solutions for health
benefit distribution and administration. To achieve this goal, key elements of
the Company's strategy are as follows:
MAINTAIN INDUSTRY FOCUS: A key component of Healthaxis' market appeal is
its industry focus. By concentrating efforts within the payer-side of healthcare
administration, the Company brings a depth of industry knowledge that few of its
direct competitors can match. The Company has been providing payer-side software
solutions to the market for more than 20 years. Both its products and its
services reflect its extensive base of industry knowledge and experience.
MAINTAIN TECHNOLOGY LEADERSHIP: Healthaxis has consistently been recognized
as a leader in information technology for the healthcare insurance industry.
This recognition comes from various industry consultants and strategic partners
who have reviewed its technology platforms and products, and its clients who use
them. The Company will continue utilizing a dedicated staff of internal
technology professionals to support its operating units and clients through
continuing research, development, evaluation, and implementation of new
technologies. The Company has budgeted for significant investment in technology
features and functionality to continually align its offerings with the market's
needs. The Company also partners with other enterprises offering quality
technology and systems capabilities.
EXPAND SALES CAPABILITIES: A Vice President of Business Development was
hired in 2001 to develop and lead the sales and marketing function against the
payer markets. The sales team needed to
3
significantly grow revenues is being assembled with a focus on adding sales
personnel with specific industry knowledge, reputation and relationships to
effectively take advantage of the Company's opportunities within each business
segment.
CAPITALIZE ON CROSS SELLING OPPORTUNITIES: New client sales are generally
the result of filling a specific need of a prospect with a particular product or
service. Once that product or service is implemented and the relationship
established, the Company seeks to identify additional cross-sell opportunities
where it can demonstrate added value to the client. Most of the Company's
clients have the potential for one or more cross-sell opportunities.
LEVERAGE STRATEGIC PARTNERSHIPS: Healthaxis has developed strategic
relationships in an effort to strengthen its capabilities in the areas of
Business Development, Technology and Delivery / Implementation. The Company
intends to leverage these relationships to expand its client base and enhance
its products and services. The Company's strategic relationships include:
---------------------------- ------------------ --------------- --------------------------
Business Delivery /
Partner Development Technology Implementation
---------------------------- ------------------ --------------- --------------------------
Satyam X X
---------------------------- ------------------ --------------- --------------------------
Washington Publishing X X
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Digital Insurance X
---------------------------- ------------------ --------------- --------------------------
R.E. Nolan X X
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Microsoft X X
---------------------------- ------------------ --------------- --------------------------
BCE Emergis X X
---------------------------- ------------------ --------------- --------------------------
NaviMedix X X X
---------------------------- ------------------ --------------- --------------------------
STRATEGIC BUSINESS UNITS
In May 2001, the Company implemented a restructuring plan which, among
other things, created four business units, each with separate operating
accountability. Each business unit sells its products and services to various
types of healthcare payers, which include insurance companies (carriers), Blue
Cross/Blue Shield plans, TPAs and large employers. The solutions related to
administration and distribution of health insurance plans are also offered
through brokers and intermediaries. The following chart illustrates the
solutions and markets by business unit.
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SOLUTION / MARKET MATRIX
------------------------
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
SOLUTION PRIVATE THIRD BROKERS AND EMPLOYERS
CARRIERS & PARTY INTER-MEDIARIES
BC/BS ADMINISTRATORS
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
APPLICATION SOLUTIONS GROUP
---------------------------
Insur-Admin X X
Insur-Claims X X
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
WEB TECHNOLOGY GROUP
--------------------
Web Self- Service Applications
o Employee module X X
o Employer module X X
o Broker module X X
o Provider module X X
Online Enrollment Applications
o Large group X X X X
o Small group X X X X
Retail Distribution Application X X
eHealthTalk - HIPAA X X
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
IMAGING SERVICES GROUP X X
----------------------
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
OUTSOURCING GROUP X
-----------------
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
APPLICATION SOLUTIONS GROUP
This unit provides web-enabled systems for enrollment, administration and
processing of health insurance claims (e.g., medical, dental, defined
contribution, vision, disability and flexible spending accounts) on an ASP
basis. Its target markets are TPAs and self-funded employers. This group
utilizes a technology platform built around IBM based hardware and software. The
software and processing capabilities are hosted on Healthaxis' site with
clients' processing centers connected through a dedicated data-line network.
The Application Solutions Group analysts come from within the industry and
have extensive knowledge of the environments that use the Company's solutions.
This enables the Company to understand business issues and provide technology
solutions that assist in solving those issues. This same knowledge gives the
Company the ability to understand support issues and assist in providing
resolution in an efficient manner based on the needs of the individual client.
The primary competitors for the Application Solutions Group include
TriZetto (RIMS), Computer Sciences Corporation (TXEN), Eldorado, SPBA, and
Genelco. The Company believes that its products and services described below
compare favorably with those of its competitors in both functionality and
breadth.
5
INSUR-ADMIN. Insur-Admin is a comprehensive benefits administration system
that features enrollment, group and individual billing, and premium collection
and reconciliation. Insur-Admin accommodates both interactive and batch
enrollment for a wide spectrum of coverages. It allows organizations to track
divisions, subdivisions, locations, health classifications, and work groups.
Insur-Admin interfaces with a plastic identification card production system,
thereby reducing the time required to produce identification cards. Insur-Admin
manages all aspects of the Consolidated Omnibus Budget Reconciliation Act
("COBRA"), including calculating and collecting COBRA premiums, tracking
qualifying events, and issuing rights and qualification letters and billing
coupon books. The system performs HIPAA compliant activities, including
capturing prior coverage credit days and issuing HIPAA certificates upon
termination of coverage. Insur-Admin also manages medical and dependent care
flexible savings accounts. Insur-Admin is web-enabled with access being provided
to employers, employees and providers for eligibility status and claims inquiry
and to employers and employees for eligibility, life event changes and
terminations. Insur-Admin can be implemented on a stand-alone basis or can be
integrated with Healthaxis' claim payment system, Insur-Claims.
INSUR-CLAIMS. Insur-Claims is a comprehensive paperless claim processing
system for health, dental, vision, short-term disability, executive
reimbursement, and medical and dependent care flexible spending accounts. A
rules-based approach, which includes un-bundling and re-bundling edits, allows
Insur-Claims to be fully customized and allows the system to handle complex
benefit structures and provider reimbursement arrangements. Through user-defined
rules and batch processing, Insur-Claims can achieve auto-adjudication rates of
up to 50% for medical claims and up to 90% for dental claims. The system has
extensive preferred provider organization capabilities and can perform preferred
provider organization re-pricing functions. Insur-Claims facilitates utilization
management, including pre-certifications, referrals and authorizations.
Insur-Claims accepts electronic data interchange or "EDI" transactions and
automated adjudication of those transactions. Insur-Claims is web-enabled and
can provide claim status inquiry, including access to processed EOBs for the
employee. Insur-Claims is based on a paperless workflow, which begins with the
imaging of all documents. These document images are tied to patients and claims
and provide fast and efficient client service resolution.
Client output from utilizing the licensed software described above is
typically printed documents, such as benefit checks, letters or EOBs. The client
may elect to print, handle and mail such documents. However, in most cases,
these tasks are performed by Healthaxis as an additional billable service.
WEB TECHNOLOGY GROUP
This group provides web-enabled platforms and solutions for the enrollment,
sale / distribution and post-sale administration of group and individual
insurance policies, including health, life and dental insurance, as well as
software solutions for enabling compliance with HIPAA. Its target markets are
health insurance carriers and Blue Cross plans, TPAs, broker/intermediaries and
large employers. A primary focus of the group is bringing Web-based connectivity
to legacy systems in a "bolt-on" fashion. We believe that healthcare payers do
not want to replace legacy systems and are seeking outsourced, e-business
connectivity solutions. Due to the nature of the offerings and to the inherent
differences in the back-end processing systems being served, solutions provided
by the Web Technology Group are configurable and allow for a high degree of
customization. The group utilizes a technology platform built around XML, XSL
and Microsoft Biz-Talk. Solutions may be hosted by Healthaxis or by the client.
The group recently redirected development resources towards tactical products
and solutions in the Web Technology Group in order to meet the market's
connectivity demands.
The primary competitors for the Web Technology Group include TriZetto
(Healthweb), SeeBeyond, PaperFree/Sybase, HealthTrio, Quovadx, eBenX and
SimplyHealth. The products and services provided by the Web Technology Group
are:
6
WEB SELF-SERVICE APPLICATIONS. This solution allows plan members,
employees, employers, brokers and providers to have direct access to plan
documents and personalized benefits information via a secure online personal
space. Through secured inquiry, members and employees have access to their
coverage summary, eligibility and claims status, EOBs, provider directories,
plan change forms, and the ability to track their deductible and FSA accounts.
The system provides members with secure communications directly to their plan's
customer service center via e-mail. Web Self Service provides employer groups
with the same functionality that is provided to their employees, such as
eligibility and claims status inquiry, plan documents and directories, plan
change forms, and more. In addition, employers can view eligibility and claim
experience reports via the Internet or download data to spreadsheets for further
analysis, thereby eliminating a significant portion of printing and postage
costs.
ONLINE ENROLLMENT APPLICATIONS. This solution is an Internet and
interactive voice response based enrollment and eligibility system that provides
employees with the ability to enroll themselves in their employer's
pre-determined health plans and, when necessary, to administer their own
eligibility and life event changes. It supports an unlimited number of benefit
plans, including health, dental, life, vision, accident and disability, as well
as medical and dependent care flexible spending accounts. Using
employee-specific demographic information, the solution automatically computes
coverage levels and pre- and post-tax deductions.
RETAIL DISTRIBUTION APPLICATION. Healthaxis' dynamic Retail Distribution
Application for direct sales of both individual and small group products is
supported by a product rating and comparison engine. Retail Distribution
provides online discovery, quoting, plan comparisons, and electronic application
submission directly to underwriting. Fulfillment material can then be accessed
via the Internet. The system's visual interface is adaptable to the client's
unique "look & feel" and can be co-branded to support strategic partnerships.
EHEALTHTALK-HIPAA. Healthaxis' web-enabling technology provides an Internet
gateway for Healthaxis' other proprietary business applications, as well as
clients' legacy systems. This advanced technology makes it possible for
healthcare organizations to securely import and export non-HIPAA-compliant data
and convert it into a compliant transactional format when transmitting
electronic data across entities. Organizations can save time and money by
avoiding the need to reprogram or replace existing systems in order to comply
with emerging regulatory standards, while taking advantage of the power of the
Internet. In addition to password protection, this solution employs firewalls,
logging tools, encryption technology, and virus detection software packages that
are designed to prevent unauthorized access. eHealthTalk-HIPAA utilizes
Microsoft's BizTalk Server 2000 Accelerator for HIPAA to either translate
non-compliant transactions into certified HIPAA-compliant formats or translate
incoming HIPAA-compliant transactions into proprietary legacy formats. This
approach permits legacy systems to send and receive HIPAA-compliant transactions
while eliminating the need for costly legacy system enhancements, re-coding, or
replacement.
IMAGING SERVICES GROUP
This group performs imaging or data capture outsourcing services to convert
paper transactions in the form of healthcare claims into electronic
transactions. The resulting data is downloaded to the client's internal claims
adjudication database or, for those clients utilizing Healthaxis' claim
processing solutions, to Healthaxis' data center for adjudication and payment.
As a complement to its imaging services, the Imaging Services Group also
provides mailroom services whereby it receives and sorts incoming healthcare
claim forms prior to imaging. Its target markets are health insurance carriers,
Blue Cross plans and TPAs. Its primary competitors are Affiliated Computer
Services, Dakota and GTESS.
The Imaging Services Group utilizes a combination of advanced technology,
including optical character recognition (OCR), using underlying platforms from
Captiva, Cognitronics and Insur-Image
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(Healthaxis' proprietary data capture software). The group operates in favorable
labor markets in the rural U.S. and Jamaica to efficiently capture and convert
large volumes of claims. The Imaging Services Group offers this service to its
clients on a per-claim or per-image basis. This service complements all other
Healthaxis products and services. In addition, it provides a good entry point
with new carrier clients as it usually provides immediate cost savings to the
client.
OUTSOURCING GROUP
This group provides system integration and consulting work for the
Company's largest single client, UICI, pursuant to a technology outsourcing
agreement entered into in January 2000 in conjunction with the merger of
Insurdata and Healthaxis.com., generally on a cost plus 10% basis. Healthaxis
applies strong management practices to the systems delivery process through its
proprietary Insur-Method software development and systems integration life cycle
methodology. Insur-Method is a standardized set of methods and techniques
utilized to ensure successful delivery of projects in a timely and
cost-effective manner and in accordance with client specifications. Insur-Method
encompasses all phases of project development.
The technology platforms serviced by the Outsourcing Group include
mainframe and mid-range servers utilizing workflow software supplied by Eastman
Software. The group competes for UICI revenue dollars with various industry
participants and consultants, as well as UICI's own in-house resources. The
specific services supplied to UICI include:
SYSTEM INTEGRATION SERVICES. This service encompasses the design,
development and implementation of information technology solutions composed of
custom software, package-based application software, hardware and communication
technologies. The SI service consists of four primary functions: Systems
Planning, Custom Software Development, Package Implementation and Multi-Vendor
System Integration.
APPLICATION SYSTEMS MANAGEMENT. This service encompasses the management of
the Application Software portfolio (custom and off-the-shelf software). The ASM
service consists of four primary elements: Application Enhancements, Corrective
Maintenance, Adaptive Maintenance (i.e., upgrades to accommodate hardware and
network software changes) and Application Support.
DATA CENTER SERVICES. This service encompasses providing processing
capability at the infrastructure level, including hardware platforms, operating
systems, application software and utilities. The service includes the provision
of adequate availability of infrastructure and the capacity necessary to deliver
the predefined response times required.
TELEPHONY SERVICES. This service encompasses providing voice services at
the infrastructure level, including recipient wiring/connections, telephone
handsets, operating system software and utilities, dial tone and voicemail
service. It includes the provision of adequate availability and the capacity
necessary to deliver the connectivity required by UICI end users.
PC/LAN SERVICES. This service encompasses providing a reliable distributed
infrastructure, including hardware platforms, network components, operating
systems, application software and utilities. It provides for "Total Life Cycle
(TLC)" services for the management of the environment, including a help desk
facility, dispatching support and maintaining inventory. TLC services also
include equipment ordering, personnel training; technical assistance in using
software products, break/fix management, inventory management and control and
maintenance of current levels of the software.
See "UICI Relationship" below for further information about the Company's
relationship with UICI.
8
SALES AND MARKETING
The Company has developed relationships within the healthcare insurance
industry as a result of its delivery of effective solutions to health insurance
benefit and distribution clients for 20 years. The Company employs a
technically-oriented sales support staff, who are familiar with the Company's
technology and who participate in opportunities to sell the Company's
technology-based solutions. Sales leads are generated through a variety of means
designed to identify the most promising prospects. Once a prospect is
identified, the Company makes a site visit to qualify the prospect and determine
their specific needs. Once specific needs are identified, live demonstrations of
the Company's solutions are scheduled. The team also responds to formal
proposals in situations where the prospect is bidding the work with multiple
vendors.
The Company derives a portion of its business through client referrals. In
addition, it markets its services through a variety of media, including:
o Web site
o Direct mail
o User conferences conducted exclusively for the Company's clients
o Participation in industry conferences and trade shows
o Publication of "white papers" related to specific aspects of the
Company's services
o Informational listings in trade journals
A Vice President of Business Development was recruited in mid 2001 to
develop and lead the sales and marketing function against the health insurance
payer market. The sales team needed to significantly grow the Company's revenue
is being assembled with a focus on adding sales personnel with specific industry
knowledge, reputation and relationships to effectively take advantage of the
Company's opportunities within each business segment.
COMPETITION
Healthaxis believes it has an advantage over its competitors by offering a
broader eBusiness solution to the health insurance payer and distribution
markets, combined in one business operating system based on XML and Microsoft
BizTalk functionality. Additionally, Healthaxis' focus and expertise within the
payer-side of the healthcare industry is an advantage when competing against
companies who service multiple industries or multiple facets of the healthcare
industry.
The principal competitive factors for both the Applications Solutions Group
and the Web Technology Group are the breadth and quality of system and product
offerings, features and functionality, service and support, processing capacity,
and the ability to successfully develop and deploy product improvements. The
principal competitive factors for services provided by the Imaging Services
Group are price and service level commitments. The Outsourcing Group, which
operates solely for UICI, must produce value-added deliverables through industry
knowledge and superior delivery capabilities in order to successfully compete on
projects within UICI.
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Healthaxis' major competitors by business unit are as follows:
o Application Solutions Group - TriZetto (RIMS), Computer Science
Corporation (TXEN), Eldorado, SPBA, and Genelco.
o Web Technology Group - TriZetto (Healthweb), SeeBeyond,
PaperFree/Sybase, HealthTrio, Quovadx, Simply Health and eBenX.
o Imaging Services Group - Affiliated Computer Services, Dakota and
GTESS
o Outsourcing Group - various industry participants and consultants, as
well as in-house staff.
TECHNOLOGY DEVELOPMENT
Healthaxis has an internal technology development department designed to
support its operating units and clients through continuing research,
development, evaluation and implementation of new technologies. Healthaxis uses
a team approach throughout the development phase of new products and product
enhancements, which includes the active participation of Healthaxis' business
units in the early stages of development. This early involvement is essential to
the development and successful implementation of effective technology solutions
meeting the markets' needs.
In addition to project-specific tasks, Healthaxis' technology department
continues to enhance Healthaxis' proprietary applications and to develop and
test new solutions, including the testing and analysis of applications not yet
available in the market. Healthaxis' advanced technology department is involved
in research and development in seven core technology areas: web services,
workflow, transaction processing, database services, indexing services,
communication and connectivity.
INTELLECTUAL PROPERTY AND TECHNOLOGY
PATENT, TRADEMARK, AND COPYRIGHT PROTECTION. Healthaxis' ability to compete
is dependent to a significant degree upon its proprietary systems, technology,
and intellectual property. Healthaxis relies upon a combination of trademark,
copyright, confidentiality agreements and trade secret laws, as well as other
measures to protect its proprietary rights. Healthaxis does not have any patents
or patent applications and currently does not plan to file any patent
applications. Healthaxis has applied for, or registered, the following
trademarks with the U.S. Patent and Trademark Office: Healthaxis,
Healthaxis.com, Insur-Voice, Insur-Image, Insur-Enroll, Insur-Admin,
Insur-Claims, Insur-Dental, Insur-Report and Insur-PPO. Healthaxis has decided
not to file applications for these marks in foreign countries at this time.
Healthaxis' sales materials, content, and software are protected by copyright.
The source code and design of Healthaxis' software are protected through
applicable trade secret law. Healthaxis also uses confidentiality agreements
with its employees to further protect its source codes and software.
INTERNET TECHNOLOGY. The technology supporting Healthaxis' Web services are
based on a distributed computing environment relying primarily on Microsoft
technology platforms. Web servers are based on Internet Information Server 5.0;
middle tier business logic is placed in COM+; and databases are based on
Microsoft SQL Server 2000. The current computing platform consists of over 50
Windows 2000 servers. Additional software utilized includes workflow and print
tools from JetForm. PDF technology has been licensed from Active4 Technologies.
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All of the above installations are interconnected using high-speed private
telecommunications links. All transmissions between the consumer, website and
carriers, or TPAs, are secured using "Secure Sockets Layer" (SSL version 3).
Domestic encryption is used where applicable (I.E., 128 bit), including all
server-to-server communications.
DATACENTER CORE PROCESSING ENVIRONMENT. Healthaxis also has connectivity to
several back-end computing environments. The main data center utilizes 2,000
square feet in a North Richland Hills, Texas facility. This facility has an
un-interruptable power supply system containing both diesel and battery power.
The facility houses the following processing equipment and systems:
o 16 IBM RS6000 processors running AIX (ranging up to the H70 class
computing platform)
o 50+ Windows 2000 servers from Compaq
All NT server equipment is from Compaq and all production servers are
Proliant class servers configured with RAID (or mirroring), dual LAN
connectivity, and redundant power supplies. All networks are switched with Cisco
Catalyst multi-gigabit switching. Internet firewall technology is based on Cisco
PIX firewalls and Cisco equipment is also used as the standard for wide-area
network routing.
A 500 square foot secondary facility is maintained at Healthaxis' corporate
office location in Irving, Texas. This location serves as the primary recovery
facility and has an un-interruptable power system with both diesel and battery
backup. It has multiple network connections to both external service providers
and to the North Richland Hills facility. Off-sight disaster recovery is through
Comdisco. All critical data is backed up and stored at an offsite facility in
the Dallas area.
PRIVACY/SECURITY ISSUES. Healthaxis believes a significant barrier to the
popularity or acceptance of online insurance sales and communications is the
secure transmission of confidential information over public networks. Healthaxis
retains confidential client and patient claim information at its data center.
Computer viruses, break-ins, or other security breaches, could lead to
misappropriation of personal or proprietary information. These security breaches
can also cause interruptions, delays, or cessation in service to Healthaxis'
clients. Healthaxis relies on encryption and authentication technology licensed
from third parties to provide the security and authentication necessary to
effect secure transmission of confidential information, such as names,
addresses, social security numbers, consumer credit card numbers, and claims
information. Healthaxis carries general liability insurance (including errors
and omissions coverage), although Healthaxis' insurance may not be adequate to
cover all costs that could be incurred in the defense of potential claims.
REGULATION
INTERNET RELATED. Although there are currently few laws and regulations
directly applicable to the Internet, it is likely that new laws and regulations
will be adopted in the United States and elsewhere covering issues such as
copyrights, privacy, pricing, sales taxes, and characteristics and quality of
Internet services. The adoption of restrictive laws or regulations could slow
Internet growth, or expose companies engaged in business on the Internet, to
regulation or restrictions on the content available on their websites. The
application of existing laws and regulations governing Internet issues such as
property ownership, libel and personal privacy is also subject to substantial
uncertainty at this time. In addition, current or new government laws and
regulations, or the application of existing laws and regulations, including laws
and regulations governing issues such as property ownership, content, taxation,
defamation, and personal injury, may expose companies engaged in business on the
Internet to significant liabilities.
HIPAA. Pursuant to the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"), the Department of Health and Human Services has issued a
series of extensive regulations setting forth security, privacy and electronic
transaction standards for all health plans, healthcare providers and
11
clearinghouses to follow with respect to identifiable health information. HIPAA
legislation and rule-making is expected to have a significant impact on
applications solutions and technology companies servicing the healthcare
industry. HIPAA seeks to advance the improvement and efficiency of
administrative and financial issues affecting the health care industry by
standardizing the electronic exchange of administrative and financial data and
additionally mandating the protection, security, and privacy of transmitted and
stored patient information. Healthaxis is affected by HIPAA as a business
associate of various clients who are covered entities under HIPAA. As a business
associate, Healthaxis will be contractually obligated to ensure the protection
and privacy of protected health information, which it transmits and stores.
HIPAA compliance on the electronic transaction and code set standards will be
required by October 2002 unless a covered entity submits a request for a
one-year extension and a plan for compliance is submitted. HIPAA compliance on
the privacy standards must be achieved by April 2003.
Healthaxis has consistently monitored the proposed rules and maintained a
state of readiness to deal with implementation of necessary HIPAA changes,
policies and procedures as the rules become applicable. Among other things,
Healthaxis has developed a HIPAA Compliance Implementation Strategy Project Plan
and has designated a Privacy Officer. Healthaxis will carry out this plan and
expects that its systems and operations will be fully compliant with all the
requirements contained in the final rules, as applicable to Healthaxis.
EMPLOYEES
As of December 31, 2001, the Company had 570 employees, including 350
full-time professional employees and 220 data capture employees. None of
Healthaxis' employees is represented by a labor union or collective bargaining
agreement. HAXS considers its employee relations to be good.
Healthaxis' future success depends on its ability to identify, attract,
hire, train, retain, and motivate highly skilled technical, managerial,
marketing and consumer service personnel. Competition for technically skilled
personnel is dependent upon market conditions. The Company will continue its
efforts to attract, integrate, and retain sufficiently qualified personnel,
including software developers and other technical experts.
RELATIONSHIP WITH UICI
On January 7, 2000, Healthaxis merged with Insurdata Incorporated
("Insurdata"), a provider of Internet based software applications and services
for insurance payers. Insurdata was a wholly owned subsidiary of UICI
(NYSE:UCI). UICI is currently the largest single shareholder of Healthaxis,
beneficially owning approximately 46% of the outstanding stock of Healthaxis as
of March 8, 2002. Healthaxis provides services to a number of UICI subsidiaries
and affiliates pursuant to written agreements.
UICI, headquartered in Dallas, offers insurance (primarily health and life)
and selected financial services to niche consumer and institutional markets.
UICI's insurance subsidiaries provide health insurance and related insurance
products. These products are distributed primarily through the Company's
dedicated agency field forces, UGA-Association Field Services and Cornerstone
Marketing of America. Through its Student Insurance Division, UICI provides
tailored health insurance programs for students enrolled in universities,
colleges and kindergarten through grade twelve. UICI provides financial services
and products for college undergraduates and graduate students, including
providing federally-guaranteed student loans, through Academic Management
Services Corp. and UICI manages blocks of life insurance and life insurance
products to select markets through its OKC Division.
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In addition to being Healthaxis' largest shareholder, UICI and its
subsidiaries constitute, in the aggregate, Healthaxis' largest client. For the
year ended December 31, 2001, UICI and its subsidiaries accounted for an
aggregate of $29.7 million of revenues, or 68% of Healthaxis' revenues. See
"Item 13. Certain Relationships and Related Transactions" for a complete
description of the agreements entered into between Healthaxis and UICI or its
subsidiaries that were in effect during 2001. The descriptions of the currently
effective agreements involving UICI that are set forth below are summaries and
are qualified in their entirety by reference to the definitive agreements.
UICI TECHNICAL SERVICES AGREEMENT. UICI and its affiliates and Healthaxis
entered into a technology outsourcing agreement, the terms of which were
negotiated between Insurdata and UICI concurrent with the Healthaxis.com Inc.
acquisition of Insurdata in January 2000. Pursuant to the terms of this
agreement, Healthaxis provides UICI and its affiliates with technology support
services including system integration services, application systems management,
data center services, telephony services and PC/LAN services for an initial term
of five years, commencing in January 2000. At UICI's option, the parties are
required to negotiate, in good faith, a three year renewal term prior to the
expiration of the agreement. If they are unable to agree on renewal prices,
terms and conditions, the agreement will expire at the end of the initial term.
The agreement is terminable without cause by UICI, or the Company, at anytime
upon not less than 180 days notice to the other party. The agreement contains no
minimum or maximum commitments on behalf of UICI and its affiliates, and UICI
and its affiliates are free to obtain the services provided by Healthaxis from
an unrelated third party during the term of the agreement. Revenue recognized
under this agreement declined to $21.4 million in 2001 from $21.7 million in
2000. UICI has advised Healthaxis that it intends to seek to further reduce its
dependence on Healthaxis for services under this Agreement due to UICI's
strategic objective of regaining control of, and managing, its own information
technology staff. UICI has also indicated that it expects that its payments to
Healthaxis under the agreement in 2002 will be less than its payments in 2001,
and will likely decline each year thereafter through the expiration of the
agreement in December 2005. UICI has indicated that it does not intend to renew
the agreement. See " - UICI Relationship."
Generally, the services provided under the agreement must be billed at
Healthaxis' cost plus ten percent. The agreement also requires that if
Healthaxis charges an unaffiliated third party a rate that is lower than it
charges UICI and its affiliates for similar services, UICI and its affiliates
would be entitled to receive the lower rate. At the expiration or termination of
the agreement, UICI has the right to hire certain employees of Healthaxis or its
affiliates who have spent greater than eighty percent of their time providing
services to UICI and its affiliates during the six months preceding the
expiration or termination of the agreement. In addition, at the expiration or
termination of the agreement, Healthaxis is obligated to provide and receive
payment for up to six months of transition assistance services. The parties also
agreed to indemnify and hold one another harmless against certain enumerated
losses and claims.
UICI ADMINISTRATORS, INC. Healthaxis also provides certain data capture and
business applications to UICI Administrators, Inc., a UICI subsidiary that
provides administrative services, pursuant to a written service license
agreement. The agreement with UICI Administrators is for a three-year term that
expired in December 2001, with automatic annual renewal provisions thereafter,
subject to prior notice of non-renewal. For the year ended December 31, 2001,
UICI Administrators accounted for $5.0 million of revenues under this agreement,
which is 11.3% of Healthaxis' total revenues. The amounts paid by UICI
Administrators are included in the UICI and subsidiaries numbers above. Services
under this agreement are provided by the Application Solutions Group and the
Imaging Services Group.
On January 17, 2002, UICI sold UICI Administrators, Inc. to American
Administrative Group, Inc. ("AAG"), a party unrelated to either UICI or
Healthaxis. Healthaxis and AAG are currently operating under a temporary
arrangement whereby services continue to be provided under the same terms as the
expired agreement with UICI Administrators, Inc. Healthaxis and AAG are
negotiating a definitive
13
agreement, which is expected to be completed by June 30, 2002. However, there
can be no assurances that such an agreement will be reached.
SOFTWARE LICENSE. On January 25, 2001, Healthaxis entered into a software
license agreement with UICI. Under the agreement, UICI paid a one-time license
fee of approximately $1.8 million for a perpetual, enterprise-wide software
license. UICI had the option to terminate the agreement within the first two
years of its term, in which case a prorated portion of the one-time license fee
would be refunded. The license fee revenue was deferred and was being recognized
into revenue pro rata over 24 months. On September 24, 2001 this agreement was
amended to shorten the original refund period from December 2002 to March 2002.
The remaining amount refundable of $840,000 in the amended agreement is being
recorded as revenue on a prorata basis over the remaining 6 month term of the
amended contract. Revenue recognized during 2001 under this agreement was
approximately $1.5 million.
SPECIAL PROJECTS. From time to time, Healthaxis undertakes special projects
for UICI. For example, during 2001 Healthaxis developed and integrated some
software for HIPAA compliance for a UICI subsidiary, and also undertook a
website development project for another UICI subsidiary.
WARRANTS AND CONVERTIBLE DEBENTURES. UICI holds approximately $1.7 million
of the Company's 2 % convertible debentures, which are convertible into 185,185
shares of Healthaxis' Common Stock at a conversion price of $9.00 per share. See
Note 13 of Notes to Consolidated Financial Statements. UICI also has 222,396
warrants for the purchase of Healthaxis' Common Stock at exercise prices ranging
from $3.01 to $12.00 per share.
PROXY AGREEMENT. In connection with the termination of a merger related
shareholders' agreement in November 2001, UICI and Healthaxis entered into a
Proxy Agreement that provides for UICI's grant of a proxy to the Healthaxis
Board of Directors to vote 33.3% of the number of Healthaxis shares held of
record from time to time by UICI or its affiliates for the sole purpose of
electing directors to the Board of Directors of Healthaxis. The voting rights
granted by UICI under the Proxy Agreement require that the votes be cast in
favor of the nominees that a majority of the Healthaxis directors shall have
recommended stand for election. The Proxy does not confer any other voting
rights. No UICI directors or personnel are currently Healthaxis directors. It is
not expected that any UICI directors or personnel will stand for election at
Healthaxis' 2002 Annual Meeting of Stockholders.
NATURE OF SOME AGREEMENTS. As a result of UICI's control of Insurdata prior
to Healthaxis' merger with Insurdata, none of the terms of the contracts entered
into between Insurdata and UICI, that were assumed by Healthaxis, resulted from
arms-length negotiations. See "-Risk Factors -- Because Healthaxis' principal
agreement with UICI was not subject to arm's-length negotiations, this agreement
could be less favorable to Healthaxis than agreements negotiated with third
parties" and "- Risk Factors. We are dependent upon our largest client, UICI, to
a significant degree, and the reduction or loss of our business with UICI or
another of our large clients could negatively affect our results of operations".
RISK FACTORS
THIS REPORT AND THE ANNUAL REPORT TO STOCKHOLDERS CONTAIN SOME
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS.
ACTUAL RESULTS AND THE TIMING OF SOME EVENTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER
OF FACTORS, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH BELOW AND ELSEWHERE
IN THIS REPORT. IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE
FOLLOWING FACTORS, WHICH MAY AFFECT HEALTHAXIS' CURRENT POSITION AND FUTURE
PROSPECTS, SHOULD BE CONSIDERED CAREFULLY IN EVALUATING HEALTHAXIS AND AN
INVESTMENT IN ITS COMMON STOCK.
14
BUSINESS RELATED RISKS
- ----------------------
BECAUSE WE HAVE A HISTORY OF OPERATING LOSSES, IT IS DIFFICULT TO EVALUATE OUR
FUTURE PROSPECTS AND TO KNOW WHEN, IF EVER, WE WILL BECOME PROFITABLE.
As of December 31, 2001, we had an accumulated deficit of approximately
$416 million. Our limited operating history as a web-enabling software
development company makes it difficult to evaluate our future prospects and to
know when, if ever, we will become profitable. Furthermore, you must consider
our prospects in light of the risks, expenses and difficulties frequently
encountered by companies in new, unproven, competitive and rapidly evolving
markets. While our restructuring plan implemented in May 2001 brought costs in
line with our revenue base, there can be no assurances that our cash position
will remain stabilized or that we will ever become profitable. These
uncertainties negatively affect our business prospects and our stock price.
IF THE HEALTHCARE INDUSTRY DOES NOT ACCEPT OUR NEW INFORMATION TECHNOLOGY, OR
ACCEPTANCE OCCURS AT A SLOWER PACE THAN ANTICIPATED, WE MAY NEVER INCREASE
REVENUES AND GENERATE NET INCOME.
We believe that the claims and administration segment of the healthcare
industry has historically under-invested in information technology. If the
conversion from traditional paper methods to electronic information exchange
does not continue to occur, or this conversion occurs at levels below those we
currently anticipate, we may not sell a sufficient amount of our products and
services to increase revenues and generate net income. In addition, even if
industry participants convert to electronic information exchange, they may not
elect to use Healthaxis' applications and services.
WE ARE DEPENDENT UPON OUR LARGEST CLIENT, UICI, TO A SIGNIFICANT DEGREE, AND THE
REDUCTION OR LOSS OF OUR BUSINESS WITH UICI, OR ANOTHER OF OUR LARGE CLIENTS,
COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
For the year ended December 31, 2001, UICI and its subsidiaries accounted
for an aggregate of approximately $29.7 million, or 68% of Healthaxis total
revenues. Healthaxis would suffer a decrease in revenues if UICI were not to use
Healthaxis for the full amount or range of services Healthaxis has provided in
the past. Our principal contract with UICI is terminable without cause by UICI,
or the Company, at anytime upon not less than 180 days notice to the other
party. The agreement contains no minimum or maximum commitments on behalf of
UICI and its affiliates, and UICI and its affiliates are free to obtain the
services provided by Healthaxis from an unrelated third party during the term of
the agreement. Revenue recognized under this agreement declined to $21.4 million
in 2001 from $21.7 million in 2000. UICI has advised Healthaxis that it intends
to seek to further reduce its dependence on Healthaxis for services under this
Agreement due to UICI's strategic objective of regaining control of and managing
its own information technology staff. UICI has also indicated that it expects
that its payments to Healthaxis under the agreement in 2002 will be less than
its payments in 2001, and will likely decline each year thereafter through the
expiration of the agreement in 2005, at which time UICI has indicated that it
does not intend to renew the agreement. See "-UICI Relationship."
The $29.7 million in revenues from UICI in 2001 includes $5.0 million from
UICI Administrators, Inc. On January 17, 2002, UICI sold 100% of UICI
Administrators, Inc. to American Administrative Group, Inc. ("AAG"), a party
unrelated to either UICI or Healthaxis. Healthaxis and AAG are currently
operating under a temporary arrangement, whereby services continue to be
provided under the same terms as were provided to UICI Administrators, Inc.
under its prior agreement. Healthaxis and AAG are negotiating a definitive
agreement, which is expected to be completed by June 30, 2002. There can be no
assurances that such an agreement will be reached. If we are not successful in
reaching as agreement with AAG, the loss of this business could negatively
impact our results.
15
Healthaxis' other large client is Digital Insurance, which accounted for
$2.4 million or 5.5% of Healthaxis' total revenues for the year ended December
31, 2001. As of May 31, 2002, the Company will have completed its contractual
obligations to Digital Insurance. While Digital Insurance is expected to
continue to contract for professional services to support and enhance its
Web-site, the total revenue from this client in 2002 is expected to be
significantly less than that recognized in 2001.
BECAUSE HEALTHAXIS' PRINCIPAL AGREEMENT WITH UICI WAS NOT SUBJECT TO
ARM'S-LENGTH NEGOTIATIONS, THIS AGREEMENT COULD BE LESS FAVORABLE TO HEALTHAXIS
THAN AGREEMENTS NEGOTIATED WITH THIRD PARTIES.
As a result of UICI's control of Insurdata Incorporated prior to the merger
of Insurdata Incorporated and Healthaxis, the terms of Insurdata Incorporated's
principal contract with UICI and its subsidiaries was not subject to
arm's-length negotiations between the parties. As a result, this agreement
includes terms and conditions that may be less favorable to Healthaxis than
terms contained in agreements negotiated with third parties. For example, the
technology outsourcing agreement with UICI limits Healthaxis pre-tax profit
margin and provides that if Healthaxis charges an unaffiliated third party a
rate that is lower than it charges UICI and its affiliates for similar services,
UICI and its affiliates would be entitled to receive the lower rate. The
outsourcing agreement terminates after an initial term of five years from
January 2000. However, at UICI's option, Healthaxis is required to negotiate, in
good faith, a three year renewal term prior to the expiration of the agreement.
There are other risks associated with this agreement and our relationship with
UICI detailed in these "Risk Factors".
OUR COMPETITORS MAY BE MORE SUCCESSFUL IN ATTRACTING CUSTOMERS, WHICH COULD
RESULT IN DECREASED SALES, A LOSS OF REVENUE AND A DECREASE IN THE VALUE OF OUR
COMMON STOCK.
Our major competitors are identified in the discussion of each strategic
business unit above under "Business-Competition". We also compete with the
internal information resources and systems of certain of our prospective and
existing clients. Our competitors could develop or offer solutions superior to
those we offer. Some of our current and potential competitors are larger, better
capitalized, have greater financial and operating resources and greater market
share than we do. These competitors may be able to respond more quickly to
changes in customer requirements or preferences. They may also be able to devote
greater resources to claims processing services or to the development, promotion
and sale of their products.
ERRORS IN THE APPLICATION SOLUTIONS COULD DETRACT FROM THE RELIABILITY AND
QUALITY OF OUR INFORMATION SYSTEMS, WHICH, IN TURN, COULD RESULT IN DECREASED
SALES, A LOSS OF REVENUE AND A DECREASE IN THE VALUE OF OUR COMMON STOCK.
We devote substantial resources to satisfying the demands of the claims and
administration segment of the healthcare industry for a high level of
reliability and quality from its information systems. In the course of client
acceptance testing, Healthaxis historically has experienced a limited number of
application solutions errors. However, application solutions may contain
undetected errors. These errors may result in loss of data or a reduction in the
ability to process transactions on a timely basis, which could result in the
loss of existing business and future business, as well as the loss of, or delay
in, market acceptance of Healthaxis' application solutions. We have attempted to
limit contractually, and through insurance coverage, damages arising from
negligent acts, errors, mistakes or omissions in our application solutions or in
rendering the Application Solutions Group's services. However, these contractual
protections could be unenforceable or insufficient to protect us from liability
for damages in connection with the successful assertion of one or more large
lawsuits.
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OUR SIGNIFICANT INDEBTEDNESS COULD ADVERSELY AFFECT OUR BUSINESS.
We have outstanding 2% convertible debentures in the principal amount of
$27.5 million due in 2005. These debentures could have important consequences
for our business. For example, they could increase our vulnerability to general
adverse economic and industry conditions, limit our ability to obtain additional
equity or debt financing, and limit our flexibility in planning for, or reacting
to, changes in our business and the industry.
The semi-annual interest payments on these debentures can be made in cash
or stock, which constitutes a burden on our cash flow or results in further
dilution of our holders of common stock. We expect to repay these debentures
from internally generated cash or from outside financing sources, although there
can be no assurance that we will be successful in this regard.
OUR FUTURE SUCCESS SIGNIFICANTLY DEPENDS ON THE EXPERIENCE OF OUR EXECUTIVE
OFFICERS AND KEY PERSONNEL, AND THE LOSS OF ONE OR MORE OF THEM COULD IMPAIR OUR
ABILITY TO DO BUSINESS.
Our future success depends, in significant part, upon the continued
services of our executive officers and key personnel. The loss of services of
one or more of our executive officers or key employees could have a material
adverse effect on our business, financial condition and results of operations,
and there can be no assurance that we will be able to retain our executive
officers or key personnel. We do not have employment agreements with our
executive officers or key personnel, although we did recently enter into change
of control agreements with the senior most executive officers. These agreements
will operate like an employment agreement in the event of a "change of control"
of Healthaxis.
OUR RELIANCE ON THIRD PARTY VENDORS AND STRATEGIC PARTNERS COULD PLACE US AT
RISK FOR INCREASED EXPENSES, FAILURE TO PERFORM AND/OR LOST CLIENTS.
We are reliant upon third party vendors, such as telecommunication
companies and software providers, for the delivery of our products and services
to our clients. We also are dependent on strategic partners in a number of areas
critical to our business. These parties may have lapses in service, or fail to
provide accurate or timely products, which could adversely affect our client
solutions. Such failure could expose us to performance penalties, result in the
loss of existing clients and cause us to fail to gain future business.
Additionally, such third parties may increase their rates to us causing our
cost-of-sales expenses to be higher than our revenue and pricing models were
designed to cover.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, OUR COMPETITORS COULD
USE OUR PROPRIETARY TECHNOLOGY TO COMPETE AGAINST US AND OUR REVENUES WOULD BE
REDUCED.
Our success depends to a significant extent on our ability to protect the
proprietary and confidential aspects of our solutions and the tradenames
associated with them. Our solutions are not patented and existing copyright laws
offer only limited practical protection. The legal protections afforded to us,
or the precautions we take, may be inadequate to prevent misappropriation of our
technology or the tradenames associated with our solutions. Any infringement or
misappropriation of our proprietary solutions or the related tradenames could
have the effect of allowing competitors to use our proprietary information to
compete against us, or result in costly litigation in order to protect our
rights. In addition, these limited protections do not prevent independent
third-party development of functionally equivalent or superior technologies,
products, or services.
17
WE MAY BE SUBJECT TO TRADEMARK AND SERVICE MARK INFRINGEMENT CLAIMS THAT COULD
RESULT IN COSTLY LITIGATION AND ADDITIONAL LOSSES OR DECREASED REVENUES.
As competing healthcare information systems increase in complexity and
overall capabilities, and the functionality of these systems further overlap, we
could be subject to claims that our technology infringes on the proprietary
rights of third parties. These claims, even if without merit, could subject us
to costly litigation and could command the time and attention of our technical,
legal, and management teams to defend. Further, if a court determined that we
infringed on the intellectual property rights of a third party, we could be
required to:
o Develop non-infringing technology or tradenames;
o Obtain a license to the intellectual property;
o Stop selling the applications or using names that contain the
infringing intellectual property;
o Pay substantial damage awards.
If we cannot develop non-infringing technology or tradenames, or obtain a
license on commercially reasonable terms, any of the above listed potential
court-ordered requirements would adversely impact our operations and revenues.
OUR FAILURE TO MEET PERFORMANCE STANDARDS DESCRIBED IN OUR SERVICE AGREEMENTS
COULD RESULT IN ADDITIONAL LOSSES OR DECREASED REVENUES.
Many of our service agreements contain performance standards. Healthaxis
could fail to meet certain contractual performance standards related to
turnaround times, availability, and quality standards set forth in its client
agreements. Our failure to meet these standards could result in the termination
of these agreements, as well as financial penalties from current clients and
decreased sales to potential clients. These penalties range from less than 1% to
a maximum of 50% of the aggregate amount payable under these agreements. If we
are unable to maintain performance standards, we may experience decreased sales,
decreased revenues, and continued losses.
OUR OPERATIONS OUTSIDE OF THE UNITED STATES MAY SUBJECT US TO ADDITIONAL RISKS,
WHICH COULD RESULT IN DECREASED REVENUES AND A DECREASE IN THE VALUE OF OUR
COMMON STOCK.
We conduct imaging operations related to the conversion of insurance claims
information to electronic form in Jamaica through an indirect subsidiary. For
the year ended December 31, 2001, Healthaxis earned 6.2% of its total revenues
from its Jamaican operations. There is less government regulation in Jamaica and
there may be more difficulty in enforcing Jamaican legal rights. Additionally,
there is the possibility of expropriation or confiscatory taxation, limitations
on the removal of property or other assets, political or social instability,
labor difficulties, or diplomatic developments that could affect our Jamaican
operations and assets.
The proximity of our Jamaican operation to the ocean-front could expose our
facility to damage from a tropical storm. While we maintain insurance coverage
on the facility, we could experience downtime and we could incur additional
expenses related to relocation or repair of the facility should this occur.
Currently, our Jamaican subsidiary is able to take advantage of the
Jamaican labor market, which provides competent and inexpensive labor. As of
December 31, 2001, our Jamaican subsidiary had approximately 150 employees. If
the risks or problems posed by conducting operations in Jamaica
18
require significant financial or managerial resources, or we are forced to
relocate these operations, our costs to provide these services would increase.
FAILURE TO ACHIEVE FORECASTED GROWTH COULD ADVERSELY EFFECT THE MARKET PRICE OF
SHARES OF OUR COMMON STOCK.
On February 7, 2002, management of the Company made a presentation to
financial analysts and investors at the UBS Warburg Global Healthcare Services
Conference. In that presentation, we discussed certain growth expectations and
made other forward-looking statements. Failure to achieve these growth or other
expectations could result in a reduction of the market price for our common
stock. We filed a copy of this presentation with the SEC in a Form 8-K on
February 7, 2002. All of the forward-looking statements made in the presentation
are expressly subject to these "Risk Factors".
INTERNET AND HEALTH INSURANCE INDUSTRY RELATED RISKS
- ----------------------------------------------------
IF A SUFFICIENT NUMBER OF CONSUMERS AND HEALTH INSURANCE PAYERS DO NOT ACCEPT
THE INTERNET AS A MEDIUM FOR HEALTH INSURANCE SALES AND ADMINISTRATION, WE MAY
BE UNABLE TO INCREASE REVENUES AND DECREASE LOSSES.
If insurance payers do not accept the Internet as a medium for policy sales
and claims administration, we may not be able to increase revenues through sales
of our internet based solutions. The health insurance industry's traditional
paper-based methods are well established and the industry is generally slow to
change.
OUR FOCUS ON PROVIDING WEB BASED SOLUTIONS SUBJECTS US TO RISKS ASSOCIATED WITH
THE INTERNET.
Our business model gives rise to numerous risks related to the Internet.
There can be no assurance that our solutions that rely on Internet access will
be protected against disruptions, delays or losses due to technical
difficulties, natural causes or security breaches. These problems may adversely
affect the success of our some of our software hosting services and could
negatively impact our operating results. We may also be subject to any
governmental adoption of regulations that charge Internet access fees or impose
taxes on subscriptions. Currently, there are few laws or regulations that
specifically regulate the Internet; however, such laws and regulations, if
adopted, may increase our operating expenses.
IN ORDER TO MAINTAIN COMPLIANCE WITH APPLICABLE INSURANCE REGULATIONS, WE MAY
NEED TO EXPEND FINANCIAL AND MANAGERIAL RESOURCES THAT COULD INCREASE OUR
EXPENSES AND REDUCE THE VALUE OF OUR COMMON STOCK.
The insurance industry is highly regulated and the regulations that govern
our clients are subject to change. Changes in these regulations could require us
to expend additional financial and managerial resources to revise our products
and services in order to comply.
IN ORDER TO REMAIN COMPETITIVE AS AN APPLICATIONS SOLUTIONS PROVIDER, HEALTHAXIS
MUST DEVELOP SOFTWARE THAT COMPLIES WITH THE ELECTRONIC TRANSACTIONS SETS,
PRIVACY, AND SECURITY PROVISIONS OF THE HEALTH INSURANCE PORTABILITY AND
ACCOUNTABILITY ACT ("HIPAA").
Some of the applications solutions we provide to our clients will require
modifications in order to achieve or maintain HIPAA-compliance. In addition,
certain aspects of Healthaxis' internal operations must become HIPAA compliant.
The timing of compliance with HIPAA requirements varies depending upon the
applicable rule and effectiveness dates. We believe Healthaxis will be able to
meet all the HIPAA requirements currently published for our internal operations
and for our clients. If Healthaxis is unable to deliver applications solutions
which achieve or maintain compliance with the applicable HIPAA rules, then
clients may move business to applications solutions providers whose systems are
or will be
19
HIPAA compliant, and as result, our business would suffer. If Healthaxis'
internal operations are not HIPAA-compliant, then we may also face contractual
liability to the extent our business associate contracts require compliance.
THE INSOLVENCY OF OUR CUSTOMERS, OR THE INABILITY OF OUR CUSTOMERS TO PAY FOR
OUR SERVICES, WOULD DECREASE OUR REVENUE.
Health insurance payer organizations are often required to maintain
restricted cash reserves and satisfy strict balance sheet ratios promulgated by
state regulatory agencies. In addition, health insurance payer organizations are
subject to risks that physician groups or associations within their
organizations become subject to costly litigation or become insolvent, which may
adversely affect the financial stability of the payer organizations. If
insurance payer organizations are unable to pay for our services because of
their need to maintain cash reserves or failure to maintain balance sheet ratios
or solvency, our ability to collect fees for services rendered would be impaired
and our financial condition could be adversely affected.
THE CONSOLIDATION OF HEALTH INSURANCE PAYER ORGANIZATIONS COULD DECREASE THE
NUMBER OF OUR EXISTING AND POTENTIAL CUSTOMERS.
There has been and continues to be acquisition and consolidation activity
in the insurance payer organizations industry. Mergers or consolidations of
payer organizations in the future could decrease the number of our existing and
potential customers. In addition, a smaller market for our products and services
could result in lower revenue.
CHANGES IN GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY COULD ADVERSELY
AFFECT OUR BUSINESS.
During the past several years, the healthcare industry has been subject to
increasing levels of government regulation of, among other things, reimbursement
rates and certain capital expenditures. In addition, proposals to reform the
healthcare system have been considered by Congress. These proposals, if enacted,
may further increase government involvement in healthcare, lower reimbursement
rates and otherwise adversely affect the healthcare industry which could
adversely impact our business. The impact of regulatory developments in the
healthcare industry is complex and difficult to predict, and our business could
be adversely affected by existing or new healthcare regulatory requirements or
interpretations.
INVESTMENT RELATED RISKS
- ------------------------
BECAUSE MEMBERS OF MANAGEMENT AND UICI OWN A SUBSTANTIAL PORTION OF OUR COMMON
STOCK, OTHER SHAREHOLDERS WILL NOT HAVE THE ABILITY TO CONTROL COMPANY ACTIONS
THAT MAY BE IN THEIR BEST INTEREST.
UICI and certain members of Healthaxis current management and Board of
Directors own or control approximately 57.5% of Healthaxis' outstanding common
stock at March 8, 2002. This concentration of ownership could have the effect of
delaying or preventing a change in control of Healthaxis and may eliminate the
opportunity for our shareholders to realize a premium over the then-prevailing
market price for their shares in the event a change of control transaction is
proposed. In addition, several members of Healthaxis' management recently
entered into agreements that provide that they will, under certain
circumstances, be entitled to severance payments in the event of a change of
control. In addition, sales by UICI, members of current management or the Board
of Directors of a significant number of shares of our stock could have an
adverse effect upon the prevailing market price of our common stock.
20
SHARE OWNERSHIP BY CURRENT MANAGEMENT AND UICI MAY RESULT IN THE INABILITY OF
PUBLIC SHAREHOLDERS TO AFFECT THE COMPOSITION OF HEALTHAXIS' BOARD OR TO REPLACE
CURRENT MANAGEMENT.
UICI and certain members of Healthaxis' current management and Board of
Directors own or control a significant percentage of the outstanding Healthaxis
common stock. In addition, by virtue of a Proxy Agreement dated November 7,
2001, UICI conveyed the right to vote 33.3% of its shares to the Healthaxis
Board of Directors for the sole purpose of electing directors. Acting together,
UICI and these individuals can control the nominees for election as directors as
well as other matters submitted to shareholders. As a result, public
shareholders may be unable to affect the composition of the Healthaxis' board or
replace current management.
IF OUR COMMON STOCK IS DELISTED FROM NASDAQ,, THE MARKET PRICE FOR SHARES OF OUR
COMMON STOCK COULD BE ADVERSELY AFFECTED.
NASDAQ generally requires a stock to maintain a price per share of at least
$1.00 to remain listed on its National Market System. Although we have had no
communication from NASDAQ since January 2001, the recent price of our common
stock has generally been below $1.00 per share. If our common stock were
delisted from the National Market System, a procedure exists whereby our common
stock could then be listed on the NASDAQ SmallCap Market, although continued
listing on the SmallCap Market would ultimately require that our common stock
obtain a per share price of at least $1.00 per share. If our common stock were
delisted from the NASDAQ SmallCap Market, we would likely be traded in the
over-the-counter bulletin board market or in the so-called "pink sheets." The
delisting of our common stock from either or both of the NASDAQ National Market
or the NASDAQ SmallCap Market could have an adverse effect on our stock price.
ITEM 2. PROPERTIES
Healthaxis' headquarters is located in a leased facility in Irving, Texas,
a suburb of the Dallas metropolitan area. In December 2001, the Company sold a
47,000 square foot building in East Norriton, Pennsylvania, which had been the
Company's headquarters until the 2001 second quarter. A provision of the sales
agreement allows Healthaxis to continue to occupy up to 2,500 square feet of the
facility through June 30, 2002 free of charge (except for minimal operating
expenses). The Company now owns no real property and conducts its business
through the following leased facilities:
ADDRESS SQUARE FEET LEASE EXPIRATION
- -------------------------------------------------------------------------- ------------- ------------------
5215 North O'Connor Blvd, 800 Central Tower, Irving, TX 31,300 December 2005
5215 North O'Connor Blvd., 800 Central Tower, Irving, TX 6,800 March 2002
670 East Main St, Castledale, UT 5,450 December 2002
1200 East Ephraim Canyon, Ephraim, UT 10,000 Month to month
1-3 Pimento Way, Montego Freeport, Montego Bay, Jamaica 10,000 December 2002
577 Howard Street, San Francisco, CA 2,100 July 2002
The Company believes its existing facilities are suitable to conduct its
present business. The lease on approximately 6,800 square feet of the Irving, TX
space will expire on March 31, 2002. The lease on the 2,100 square feet in San
Francisco, CA will expire on July 31, 2002. The Company does not anticipate
renewing either of these leases or replacing this space elsewhere. The Company
believes that its leased facilities are well maintained and in good operating
condition and are adequate for its present and anticipated levels of operation.
21
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of its
business. Management is of the opinion that no currently pending litigation will
have a material adverse effect on the results of operations or financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
Healthaxis common stock is traded on the Nasdaq National Market under the
symbol "HAXS." The following table shows the range of quarterly high and low
closing sale prices for Healthaxis common stock.
2001 2000
-------------------- ---------------------
HIGH LOW HIGH LOW
-------- ------- --------- ---------
First Quarter................ $ 4.63 $ .75 $ 34.63 $ 13.63
Second Quarter............... 1.59 .66 13.25 3.13
Third Quarter................ 1.16 .76 5.13 2.75
Fourth Quarter............... 1.10 .66 4.43 1.38
On March 8, 2002, the closing price of Healthaxis common stock was $.88. On
that same date, there were 257 shareholders of record, although Healthaxis
believes that the number of beneficial owners of its common stock is
substantially greater.
DIVIDENDS
Healthaxis did not pay a cash dividend on its common stock in 2001 and does not
anticipate paying cash dividends for the foreseeable future. Any payment of cash
dividends in the future will be at the discretion of the board of directors and
subject to some limitations under the Pennsylvania Business Corporation Law and
will depend upon factors such as the Company's earning levels, capital
requirements, financial condition and other factors deemed relevant by the board
of directors.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information has been derived from
the consolidated financial statements of Healthaxis and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as the consolidated financial statements and
notes thereto included elsewhere in this report. The consolidated financial
statements of Healthaxis have been audited by Ernst & Young LLP for 2001, and by
BDO Seidman, LLP for 2000, 1999, 1998 and 1997. Healthaxis' financial results
include those of its subsidiaries. All information has been restated to present
as discontinued operations Healthaxis' insurance operations (effective November
30, 1999) and Healthaxis' retail website operations (effective June 30, 2000).
23
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 43,790 $ 42,796 $ - $ - $ -
----------- ---------- ---------- ---------- ----------
Expenses:
Cost of revenues .......................... 41,993 47,075 504 277 -
Sales and marketing........................ 3,225 3,585 447 134 -
General and administrative................. 13,492 12,380 7,457 3,967 1,908
Research and development 1,479 974 - - -
Restructuring and impairment charges 279,607 - - - -
Loss on sale of building 2,498 - - - -
Amortization of intangibles................ 14,034 40,678 765 - -
---------- ---------- ---------- ---------- ----------
Total expenses......................... 356,328 104,692 9,173 4,378 1,908
---------- ---------- ---------- ---------- ----------
Operating loss............................. (312,538) (61,896) (9,173) (4,378) (1,908)
Interest expense and other income, net..... (2,795) (2,977) (925) (222) 177
----------- ----------- ----------- ----------- ----------
Loss before minority interest.............. (315,333) (64,873) (10,098) (4,600) (1,731)
Minority interest in loss of subsidiary......... 3,080 35,988 1,008 493 -
---------- ---------- ---------- ---------- ----------
Loss before provision for income taxes.......... (312,253) (28,885) (9,090) (4,107) (1,731)
Income tax provision............................ - 585 - - -
---------- ---------- ---------- ---------- ----------
Loss from continuing operations................. (312,253) (28,300) (9,090) (4,107) (1,731)
Loss from sale of discontinued operations....... - (2,300) (10,263) - -
Loss from discontinued operations............... - (6,341) (27,178) (8,049) (16,694)
---------- ----------- ----------- ----------- -----------
Loss before extraordinary item.................. (312,253) (36,941) (46,531) (12,156) (18,425)
Extraordinary gain.............................. 1,681 1,925 - - -
---------- ---------- ---------- ---------- ----------
Net loss................................ (310,572) (35,016) (46,531) (12,156) (18,425)
Dividends on preferred stock.................... - - 70 254 148
---------- ---------- ---------- ---------- ----------
Net loss applicable to common stock............. $ (310,572) $ (35,016) $ (46,601) $ (12,410) $ (18,573)
============ =========== =========== ============ ===========
Basic and diluted loss per share of common stock):
Continuing operations........................ $ (6.22) $ (2.17) $ (0.75) $ (0.42) $ (0.19)
Discontinued operations...................... - (0.66) (3.05) (0.78) (1.65)
Extraordinary gain .......................... .03 .15 - - -
-------- -------- -------- -------- --------
Net loss..................................... $ (6.19) $ (2.68) $ (3.80) $ (1.20) $ (1.84)
========= ========= ========= ========= =========
Weighted average common shares and equivalents
used in computing basic and diluted income
(loss)per share......................... 50,149 13,082 12,260 10,331 10,090
24
AS OF DECEMBER 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
BALANCE SHEET DATA:
Total assets $57,588 $710,992 $79,602 $24,568 $12,333
Loans payable -- -- -- 3,865 5,077
Convertible debenture 27,134 27,367 25,019 -- --
Ceding commission liability -- -- 5,600 5,000 --
Preferred stockholders' liability -- -- -- 557 580
Total stockholders' equity 22,389 216,495 12,620 5,495 4,009
Book value per common share (1) 0.42 16.53 0.97 0.43 0.34
Pro forma book value per common share (2) 0.42 16.53 0.97 0.46 0.37
- ----------------------
(1) Book value per common share is computed by dividing total equity
attributable to common stockholders by the number of common shares
outstanding at the end of each period.
(2) Pro forma book value per common share is computed by dividing total equity
by the number of shares outstanding at the end of each period assuming the
conversion of Series A preferred stock into common stock in 1997 and 1998
on a share-for-share basis.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FORM THOSE
DISCUSSED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER "BUSINESS-RISK FACTORS" ELSEWHERE IN THIS REPORT
OR IN THE INFORMATION INCORPORATED BY REFERENCE IN THIS REPORT. YOU SHOULD READ
THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH "SELECTED CONSOLIDATED
FINANCIAL DATA" INCLUDED IN THIS REPORT, AS WELL AS OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT.
OVERVIEW
Healthaxis is an emerging technology services firm committed to providing
innovative and configurable web-based connectivity and applications solutions
for health benefit distribution and administration. These solutions, which are
comprised of software products and related services, are designed to assist
health insurance payers, third party administrators, intermediaries and
employers provide enhanced services to members, employees and providers through
the application of Heathaxis' flexible technology to legacy systems, either on a
fully integrated or on an Application Service Provider ("ASP") basis. Heathaxis
believes that its solutions enable a client to reduce their administrative costs
and improve profitability, while also facilitating an increase in their market
share.
Management of Healthaxis, as well as the composition of our Board of
Directors, was significantly changed during 2001. James W. McLane became the
President and Chief Executive Officer in February 2001 and John M. Carradine
followed as Chief Financial Officer in March 2001. In the months following,
several goals were accomplished to re-position the Company for future growth:
o The Company's financial position was improved
o Operating expenses were reduced
o The Company was restructured into four strategic business units
o A cohesive market based strategy was developed
o The sales force was expanded
o The sales pipeline grew significantly
o Several meaningful clients were added
o Strategic partnerships were created with several complementary
enterprises
o The Board of Directors was strengthened
o A values-based culture was instilled in the Company
- TO DELIVER WHAT WE PROMISE
- TO TAKE OWNERSHIP AND ACCOUNTABILITY FOR OUR RESULTS
- TO DO THE RIGHT THING - - - ALL THE TIME
- TO UNDERSTAND THAT RELATIONSHIPS DETERMINE RESULTS
- TO TEAM AND RUN TO WIN
26
REVENUE MODEL: Healthaxis derives revenue from a number of sources. Set
forth below is a description of our revenues generated by each of our strategic
business units.
Application Solutions Group revenue is either transaction based or derived
from providing professional services. The transaction revenue is a combination
of a per-employee-per-month ("PEPM") fee for the use of our proprietary
applications and a per document fee for the printing and mailing of system
output (benefit checks, EOBs and letters). The transaction revenue is based on
an ASP model, where we host the hardware and software and perform some print and
mail services on behalf of clients. Professional services revenue is generated
from direct billing for our staff time. These billings are generally derived
from converting a client's existing system, client training and tailoring custom
solutions for a client. Professional services generally are billed on a flat
rate per hour. In some cases, a project may be done for a fixed price. For fixed
price projects, revenue is recognized on the percentage completion basis.
Depending upon the nature and expected profitability of certain projects,
professional service fees and associated costs may be deferred and recognized
over the life of the transaction-based contract. During 2001, approximately 80%
of Application Solutions Group revenues were transaction based and 20% were
derived from professional services.
Web Technology Group revenue is derived from licensing of our proprietary
software products and providing professional services. The licensing revenue is
a combination of per-member-per-month ("PMPM") fees and fixed price license
fees. The fixed price license fees historically have been recognized over a
period of time, due to contract terms (such as a right of return). In the
future, we may enter into one-time license fee agreements, which fees would be
recognized upon the delivery of the product. Professional service revenue is
generated from direct billing for our staff time. These billings generally are
associated with implementation and integration of our software product into our
client's legacy system. Professional services may be billed on a flat rate per
hour, or a project may be undertaken for a fixed price. Revenue on fixed price
projects is recognized on the percentage completion basis. During 2001,
approximately 45% of Web Technology Group revenues were generated from software
licenses and 53% from professional services. The small remainder is from
commissions received from sales through the retail website of Digital Insurance,
which we developed and continue to support.
Imaging Group Revenue is transaction based. Fees for mail handling,
scanning and converting insurance claims from paper to electronic format, and
image storage and retrieval are priced on a per-document or a per-image basis.
Such revenue is recognized in the month the services are performed. Contracts
generally include an up-front payment intended to recoup the start-up costs
incurred in setting up a new client. Such fees, along with the associated costs,
are generally deferred and recognized over the life of the transaction-based
contract.
Outsourcing Group revenue is derived from system integration and consulting
work for the Company's single largest client, UICI, pursuant to a technology
outsourcing agreement on a cost plus 10% basis. We have a dedicated staff of
employees located at various sites, who service this account. Monthly billings
are prepared based upon a multiple of staff salary projected to cover our costs
plus an additional 10%. At the end of each quarter, Healthaxis and UICI review
and agree upon the final costs incurred for the quarter and adjust the billings
to that required to yield the cost plus 10% arrangement. Outsourcing Group
revenue is recognized in the month the services are performed.
RESTRUCTURING PLAN: In May 2001, the Company implemented a restructuring
plan as further described in Note 6 to the Consolidated Financial Statements. In
connection with its restructuring and reorganization, the Company accrued or
recorded restructuring charges of $279.6 million in the second quarter of 2001.
Those costs are generally related to impairment of long-lived assets and
goodwill, and severance costs for terminated employees.
27
In total, counting the reduction-in-force and other expense reductions, the
initiative was designed to save in excess of $11.0 million annually. Based upon
the results of the third and fourth quarter of 2001, management believes it has
achieved the anticipated level of savings. The Company was successful in
lowering headcount, eliminating the development and marketing of certain
products, lowering operating costs and moving its headquarters from Pennsylvania
to Texas. The effect of these changes, along with the related impairment of
long-lived assets and goodwill, is reflected in the quarterly comparisons below.
Q1 is before implementation of the restructuring plan, Q2 is the period of
implementation and Q3 is the first full quarter after implementation.
FISCAL 2001 (IN THOUSANDS)
------------------------------------------------------------
Q1 Q2 Q3 Q4
------------ ------------ ------------ ------------
Cash operating costs $ 13,692 $ 12,311 $ 10,776 $ 9,946
Amortization/depreciation 7,720 5,823 2,094 2,078
Stock based compensation 5,730 519 170 171
Severance 2,371 (118) (70) (75)
Restructuring charges - 279,607 - -
Accrual for taxes - - - 1,085
Loss on sale of building - 1,665 - 833
BUILDING SALE: On December 20, 2001, the Company sold its building and
property located at 2500 Dekalb Pike, East Norriton, PA. Prior to the
restructuring plan described above, this facility served as the Company's
headquarters. The sales price was $3.0 million before commissions, taxes and
other costs of the sale. At closing, we received approximately $2.6 million cash
and will receive an additional $180,000, currently held in escrow, upon the
filing of certain tax returns. In 2001, a write-down and subsequent loss on the
sale of the property totaling $2.5 million was recorded.
UICI RELATIONSHIP: UICI is currently our largest single shareholder
beneficially owning approximately 46% of Healthaxis common stock as of March 8,
2002. UICI and its subsidiaries, in the aggregate, also constitute our largest
single client. During 2001, UICI accounted for 68% of our total revenues. See
"Business - Relationship with UICI" for a summary of our current relationship
with UICI and the agreements under which we provide services to UICI and the
various sources or revenue. See also "Risk Factors - We are dependent upon our
largest client, UICI, to a significant degree, and the reduction or loss of our
business with UCI or another of our large clients could negatively affect our
results of operations" and Note 7 of the Notes to Consolidated Financial
Statements.
DIGITAL INSURANCE MATTERS. The Company's relationship and history with
Digital Insurance is further described in Note 8 to the Consolidated Financial
Statements.
Effective May 31, 2001, the Company amended its agreements with Digital
Insurance and agreed to settle all amounts due (other than trade accounts
receivable) under the original agreements for a lump sum cash payment of $2.0
million, which approximated our carrying value. The amended agreements also
require Digital Insurance to pay Healthaxis $100,000 per month effective June 1,
2001 continuing through the earlier of either May 31, 2002, or the date Digital
Insurance gives written notice to us that it no longer utilizes certain software
as provided by Healthaxis. In 2001, we recognized $2.4 million revenue from
Digital Insurance. As of May 31, 2002 we will have completed our contractual
obligations to Digital Insurance. While we expect Digital Insurance to continue
to contract with us for professional services to support and enhance its
website, we expect the total revenue from this client to be significantly less
in 2002.
28
In October 2001, Digital Insurance completed an equity financing of $6.0
million, for which Healthaxis waived its preemptive rights to participate. Based
upon the dilution and the share price for the newly issued preferred stock, we
wrote down our investment in Digital Insurance to $227,000 ($0.07 per share). As
a result of the additional equity financing of Digital Insurance, Healthaxis'
ownership was reduced to approximately 2.5% of the fully diluted shares of
Digital Insurance.
RESULTS OF OPERATIONS
The Company focuses its cost containment initiatives on operating cash
expenses. Operating depreciation / amortization, stock based compensation,
amortization of intangible assets, loss on sale of building and the
restructuring charge, with the exception of severance payments, are all non-cash
expenses.
Operating depreciation / amortization is the systematic charge to expense
for tangible fixed assets used in the operation of the business. Stock based
compensation is the result of stock options that were granted at an exercise
price below the market price of the Company's common stock in 2000 and are
charged to expense as vested, options that were repriced in 2000 and are
accounted for as variable options with a "mark-to-market" expense charge to the
extent the Company's stock price exceeds $2.49, and charges from the vesting of
an Insurdata option plan that was assumed as part of the Insurdata Merger.
Amortization of intangibles is the systematic expensing of customer base and
developed software. The restructuring charge is described in "Restructuring
Plan" previously discussed. The loss on sale of building is described in
"Building Sale" previously discussed.
The following tables are presented in such a manner that these significant
non-cash expenses are distinguishable in 2001, 2000 and 1999. All information
has been restated to present as discontinued operations Healthaxis' insurance
operations (effective November 30, 1999) and Healthaxis' retail website
operations (effective June 30, 2000).
YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS)
----------------------------------------------------------------------------------------
OPERATING STOCK
OPERATING DEPRECIATION/ BASED % OF
COSTS AMORTIZATION COMPENSATION TOTAL REVENUE
------------------- ---------------- ----------------- ----------------- -------------
Revenue $ 43,790 100%
Revenue
Operating Expenses
Cost of revenues $ 37,898 $ 3,303 $ 792 $ 41,993 96%
Sales and marketing 2,037 43 1,145 3,225 7%
General and administrative 8,659 219 4,614 13,492 31%
Research and development 1,325 115 39 1,479 3%
--------- --------- --------- ----------
Subtotal $ 49,919 $ 3,680 $ 6,590 60,189 137%
========= ========= ========= ----------
Restructuring charge 279,607 639%
Loss on sale of building 2,498 6%
Amortization of intangibles 14,034 32%
----------
Total operating expenses $ 356,328 814%
==========
29
YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
----------------------------------------------------------------------------------------
OPERATING STOCK
OPERATING DEPRECIATION/ BASED % OF
COSTS AMORTIZATION COMPENSATION TOTAL REVENUE
------------------- ---------------- ----------------- ----------------- -------------
Revenue $ 42,796 100%
Operating Expenses
Cost of revenues $ 39,218 $ 3,790 $ 4,067 $ 47,075 110%
Sales and marketing 2,060 7 1,518 3,585 8%
General and administrative 9,127 635 2,618 12,380 29%
Research and development 916 58 - 974 2%
--------- -------- --------- ---------
Subtotal $ 51,321 $ 4,490 $ 8,203 64,014 150%
========= ======== ========= ---------
Restructuring charge - 0%
Loss on sale of building - 0%
Amortization of intangibles 40,678 95%
---------
Total operating expenses $ 104,692 245%
=========
YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
-------------------------------------------------------------------------
OPERATING STOCK
OPERATING DEPRECIATION/ BASED
COSTS AMORTIZATION COMPENSATION TOTAL
------------------- ---------------- ----------------- -----------------
Revenue $ -
========
Operating Expenses
Cost of revenue $ 504 - - $ 504
Sales and marketing 447 - - 447
General and administrative 7,457 - - 7,457
Research and development 0 - - -
============ ============ ============ --------
Subtotal $ 8,408 - - 8,408
============ ============ ============ --------
Restructuring charge -
Loss on sale of building -
Amortization of intangibles 765
--------
Total operating expenses $ 9,173
========
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES increased 2%, from $42.8 million for the year ended December 31,
2000 to $43.8 million for the same period in 2001. The increase was primarily
the result of new revenue generated from one new client and one maturing client
in our Application Solutions Group, as well as increased revenue from UICI and
Digital Insurance, partially offset by the loss of two clients and reduced
volume on another client in our Imaging Services Group.
COST OF REVENUES includes all expenses directly associated with the
production of revenue, and consists primarily of salaries and related benefits,
rent, amortization and depreciation of tangible assets, system expenses such as
maintenance and repair, as well as other related consumables. These costs
decreased 11% from $47.1 million for the year ended December 31, 2000 to $42.0
million for the same period in 2001. Cost of revenues as a percentage of revenue
declined from 110% in 2000 to 96% in 2001. A reduction of stock based
compensation accounted for $3.3 million of the decrease. The remainder was
30
due primarily to the reduced labor force and expense savings achieved pursuant
to the restructuring plan implemented in May 2001, as described previously.
SALES AND MARKETING EXPENSES consist primarily of employee salaries and
related benefits, as well as promotional costs, such as direct mailing
campaigns, trade shows and media advertising. These expenses decreased 10% from
$3.6 million for the year ended December 31, 2000 to $3.2 million for the same
period in 2001. After netting out stock based compensation charges of $1.5
million in 2000 and $1.1 million in 2001, the expenses were approximately the
same.
GENERAL AND ADMINISTRATIVE EXPENSES include executive management,
accounting, legal and human resources compensation and related benefits, as well
as expenditures for applicable overhead costs. These expenses increased 9% from
$12.4 million for the year ended December 31, 2000 compared to $13.5 million for
the same period in 2001. Stock based compensation of approximately $2.6 million
was included in 2000 as compared to $4.6 million in 2001 due primarily to the
re-measurement of options exchanged in the HAXS Merger (which merger is
described in Note 4 of the Notes to Consolidated Financial Statements).
Severance expenses totaling $2.1 million are included in 2001, as compared to
none in 2000, primarily related to 2001 severance payments made to Mr. Clemens,
the Company's former Chairman of the Board. Mr. Clemens and Healthaxis entered
into a termination agreement of Mr. Clemens' employment contract, which became
effective upon the consummation of the HAXS Merger on January 26, 2001. Net
severance expense totaling $1.8 million was recorded during 2001 related to Mr.
Clemens. An accrual of $1.1 million was also made in the fourth quarter of 2001
related to a contingent tax liability. The Company has taken a tax position on a
matter that, if challenged, could result in payment of the amount accrued. After
adjustment for these items, general and administrative operating costs have
decreased approximately $4.1 million from 2000 as a result of the gradual
reduction of management and corporate staff subsequent to the HAXS Merger in
January 2001 and the restructuring plan implemented in May 2001.
RESEARCH AND DEVELOPMENT EXPENSES are primarily the salary and related
benefits of personnel engaged directly in the development of new products and
the enhancement of existing products, prior to the establishment of
technological feasibility. These expenses increased 52% from $1.0 million for
the year ended December 31, 2000 to $1.5 million for the same period in 2001. In
2000, several projects were either billable to clients or capitalized, and
accordingly were excluded from research and development. In 2001, much of the
effort of the staff was for the development for the Company's new web-based
products and is included in research and development expenses.
RESTRUCTURING AND IMPAIRMENT CHARGES were approximately $279.6 million
during the year ended December 31, 2001. These charges were recorded pursuant to
the Company's adoption of an internal restructuring plan approved by the Board
of Directors on May 11, 2001 and implemented on May 14, 2001. Approximately
$277.2 million of this charge was attributable to the impairment of goodwill.
The remainder is to record other costs of the restructuring, including severance
payments for terminated employees, costs associated with relocating the
corporate headquarters from Pennsylvania to Texas and the reduction of other
long lived assets, primarily resulting from the decision to cease development
and marketing of certain products. See further discussion of the Restructuring
Plan previously discussed. There were no such charges during the comparable
period in 2000.
LOSS ON SALE OF BUILDING of $2.5 million in 2001 represents the write-down
and the loss on the eventual sale of our building and property in Pennsylvania.
See Building Sale previously discussed. There were no comparable expenses in
2000.
AMORTIZATION OF INTANGIBLES includes the amortization of developed
software, client base and goodwill. These expenses decreased 65% from $40.7
million for the year ended December 31, 2000 to $14.0 million for the same
period in 2001. The decrease was primarily due to the revaluation of these
31
assets at the time of the HAXS Merger on January 26, 2001 and the impairment of
goodwill in the second quarter of 2001.
INTEREST EXPENSE AND OTHER INCOME, NET changed from a net expense of $3.0
million in the year ended December 31, 2000 to a net expense of $2.8 million in
the same period in 2001. Interest income was approximately $1.5 million less in
2001 than 2000 due to lower cash reserves. Interest expense was approximately
$2.5 million lower in 2001 than 2000 because of the restructuring of the
Company's convertible debentures, which resulted in lower interest costs.
Additionally, 2000 included $600,000 in interest expense related to the ceding
commission liability that was settled prior to 2001and a $1.4 million charge for
accrued penalties on the convertible debentures, which were subsequently waived
upon completion of the HAXS merger in January 2001. The reversal of the accrued
penalties was accounted for as an extraordinary gain in 2001. Finally, the 2001
results include the $3.0 million write-down of our investment in Digital
Insurance as previously discussed.
MINORITY INTEREST IN LOSS OF SUBSIDIARY was $36.0 million for the year
ended December 31, 2000 compared to $3.1 million for the same period in 2001.
Minority interest was only recorded for approximately one month in 2001 (the
HAXS Merger closed in January 2001), compared to the full twelve-month period in
2000. Subsequent to the HAXS Merger, the Company owned 100% of the Healthaxis
subsidiary and, therefore, no subsequent minority interest was recorded.
NET LOSS FROM DISCONTINUED OPERATIONS of $8.6 million for the year ended
December 31, 2000 included a $2.3 million loss on the sale of certain assets to
Digital Insurance and a $6.3 million loss related to the operations that were
discontinued. There were no comparable expenses in 2001.
EXTRAORDINARY GAIN of $1.7 million in the year ended December 31, 2001 is
the result of the restructuring of the Company's convertible debentures, which
was completed on January 29, 2001. The majority of this gain relates to
penalties owed to the debenture holders under a registration rights agreement,
which were forgiven as part of the restructuring of the terms. The gain of $1.9
million in 2000 relates to the settlement of the ceding commission liability
with RCH. Prior to the settlement, the book value of the ceding commission
liability was $6.0 million. In December 2000, the Company settled the debt for a
cash payment of approximately $4.1 million. See Note 16 of Notes to Consolidated
Financial Statements.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES were $42.8 million for the year ended December 31, 2000 as
compared to no revenue for the year ended December 31, 1999. The sale of our
retail web-site business to Digital Insurance resulted in all revenues from 1999
being reported as discontinued operations. All revenues in 2000 are derived from
the merged divisions of Insurdata.
COST OF REVENUES were $47.1 million for the year ended December 31, 2000,
as compared to $504,000 for the year ended December 31, 1999, with the increase
due to the addition of the operations of the merged divisions of Insurdata.
Included in these operating expenses for 2000 was $4.1 million in non-cash stock
based compensation related primarily to the repricing of options in May 2000.
SALES AND MARKETING EXPENSES were $3.6 million for the year ended December
31, 2000 as compared to $447,000 for the year ended December 31, 1999. This
increase was due primarily to increased personnel and additional initiatives,
including direct mail, media advertising, and trade shows in the year ended
December 31, 2000, as compared to the same period in 1999. Included in the sales
and marketing expenses for 2000 is $1.5 million in non-cash stock based
compensation previously described.
32
GENERAL AND ADMINISTRATIVE EXPENSES increased 66% to $12.4 million for the
year ended December 31, 2000, as compared to $7.5 million for the year ended
December 31, 1999. This increase was due primarily to the Insurdata merger.
Employee and recruiting expenses increased from $2.7 million for the year ended
December 31, 1999 to $9.3 million for the year ended December 31, 2000, while
outside professional fees and overhead expenses decreased from $4.8 million for
the year ended December 31, 1999 to $3.1 million for the year ended December 31,
2000. Included in these employee costs for 2000 is $2.6 million in non-cash
stock based compensation previously described.
RESEARCH AND DEVELOPMENT EXPENSES were approximately $1.0 million for the
year ended December 31, 2000 as compared to none for the comparable period in
1999. The change is the result of the Insurdata Merger (which merger is
described in Note 4 of the Notes to Consolidated Financial Statements) in
January 2000.
AMORTIZATION OF INTANGIBLES of $40.7 million for the year ended December
31, 2000 primarily consisted of the amortization of goodwill of $34.1 million
related to the Insurdata Merger. Amortization of intangibles of $765,000 for the
year ended December 31, 1999 consisted of the amortization of goodwill related
to the purchase of Healthaxis.com stock by Healthaxis.
MINORITY INTEREST IN LOSSES OF SUBSIDIARY was approximately $36.0 million
for the year ended December 31, 2000 as compared to $1.0 million for the
comparable period in 1999. The Insurdata Merger in January 2000 resulted in
larger losses due in large part to the amortization of goodwill and intangible
assets resulting from that merger. The Insurdata Merger also increased the
holdings of the minority shareholders to approximately 63% in 2000, which
results in a larger portion of the loss being allocated to the minority
shareholders.
INTEREST EXPENSE AND OTHER INCOME, NET was $3.0 million for the year ended
December 31, 2000 as compared to $925,000 for the year ended December 31, 1999.
The increase in expense was due primarily to the interest on convertible
debentures and penalties accrued to the holders of the convertible debentures
related to a stock registration rights agreement. Total interest expense for
2000 was $4.8 million, including $1.4 million attributable to the accrued
penalties, which were subsequently waived upon completion of the HAXS Merger in
January 2001, at which point these penalties were reversed. Interest income for
2000 totaled $2.3 million and resulted from Healthaxis' higher cash balances
throughout 2000 compared to 1999. In addition, Healthaxis recorded losses of
$0.5 million in 2000 on the disposition of fixed assets related to the closing
of offices in Salt Lake City, UT and Montego Bay, Jamaica.
NET LOSS FROM DISCONTINUED OPERATIONS of $8.6 million, which was comprised
of a $2.3 million loss on the sale of certain assets to Digital Insurance and a
$6.3 million loss related to discontinued operations for the year ended December
31, 2000. In 1999, the loss from discontinued operations of $37.4 million was
comprised of the loss on the sale of the insurance operations to PILIC totaling
$10.3 million, the loss from the insurance operations prior to their sale in
November 1999 totaling $8.1 million, and the loss from the retail website
operations that were sold in 2000 totaling $19.1 million. The retail website and
the insurance operations are being reported as discontinued operations for all
periods presented.
EXTRAORDINARY GAIN of $1.9 million in 2000 relates to the settlement of the
ceding commission liability with RCH. Prior to the settlement, the book value of
the ceding commission liability totaled $6.0 million. In December 2000, the
Company settled the debt for a cash payment of approximately $4.1 million. There
were no extraordinary items in 1999. See Note 16 of Notes to Consolidated
Financial Statements.
33
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. A major objective of HAXS is to maintain sufficient liquidity to
fund growth and meet all cash requirements with cash and short-term equivalents
on hand plus funds generated from operating cash flow. Our cash balances were as
follows during 2001:
January 1 - $17.2 million
March 31 - $12.0 million
June 30 - $12.2 million
September 30 - $12.3 million
December 31 - $13.2 million
In the second quarter, we received a $2.0 million lump sum payment from
Digital Insurance as previously described. In the fourth quarter, we sold our
building in Pennsylvania for a net cash amount of $2.6 million with an
additional $180,000 due upon final tax filings. Along with these events, the
significant improvement in cash flow from the 2001 first quarter is the result
of cost containment measures put in place following the HAXS Merger on January
26, 2001 and further savings recognized through the restructuring plan
implemented on May 14, 2001.
CASH USED IN OPERATING ACTIVITIES for the year ended December 31, 2001 was
$3.9 million as compared to $31.6 million for the same period in 2000. The
reduced cash expenditure was the result of discontinuing the operations of the
retail website effective June 30, 2000, and the combined effects of the cost
containment measures put into place following the HAXS Merger in January 2001
and savings resulting from the restructuring plan implemented in May 2001. Use
of cash in 2000 included approximately $3.7 million related to the ceding
commission liability, compared to none in 2001. Changes in working capital,
particularly accounts receivable, accounts payable, and accrued liabilities,
generated a use of cash of $131,000 in 2001 as opposed to approximately $6.7
million in 2000.
CASH GENERATED FROM INVESTING ACTIVITIES for the year ended December 31,
2001 was $94,000 as compared to cash used of $9.3 million for the comparable
period in 2000. Approximately $2.1 million was provided in 2000 as a result of
cash acquired in the Insurdata Merger in January 2000. Net of this Insurdata
cash, the cash used in investing activities in 2001 decreased $11.5 million from
the prior year. Approximately $3.5 million of this cash improvement was the
result of a reduction in the purchase of fixed assets, and an additional $3.1
million was the result of the sale of our building and property in Pennsylvania
and the sale of equipment. Approximately $3.1 million was the result of lowering
our expenditures on capitalized software and contract start up. An additional
$1.7 million of the cash improvement resulted from collection on notes
receivable and reduced acquisition costs.
CASH USED FROM FINANCING ACTIVITIES increased by $233,000 as a result of
$263,000 cash used in 2001 for capital lease payments as compared to $554,000 in
2000 offset by $524,000 cash received in 2000 from the exercise of stock
options.
OBLIGATIONS: In 1999, the Company issued 2% convertible debentures in the
amount of $27.5 million. These debentures, as amended, are due on September 14,
2005 and may be converted into common stock at a conversion price of $9.00 per
share at the option of the holder. Interest is paid semi-annually on January 1
and July 1 of each year and, at the Company's option, may be paid in cash or in
stock. See Note 13 of Notes to Consolidated Financial Statements.
The Company also has certain capital and operating lease commitments
totaling $4.1 million over the next five years. These leases are primarily for
office space and data processing equipment. We have no other significant cash
commitments other than the day to day operations of the business. See Note 15 of
Notes to Consolidated Financial Statements
34
We expect the current cash reserves and the cash generating from future
operations will be sufficient to fund our operations for the next 12 months.
Funding operations on a longer-term basis will depend upon our ability to
continue controlling costs (as described previously in "Restructuring Plan") and
to generate new revenues. There can be no assurances that we will be successful
in achieving these goals. If external funds are necessary to support our
business operations, there can be no assurance that under current conditions
such funds would be available or, if available, would not dilute shareholders'
interests or returns.
CRITICAL ACCOUNTING POLICIES
GENERAL. Our discussion and analysis of Healthaxis' financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent FROM other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Critical accounting policies are those which are most important to the
financial statement presentation and that require the most difficult, subjective
complex judgments. We believe the following critical accounting policies include
the more significant judgments and estimates used in the preparation of our
consolidated financial statements.
REVENUE RECOGNITION: Some of our revenues are generated from complex
arrangements, which require significant revenue recognition judgments
particularly in the areas of customer acceptance, installation, and
collectibility. Additionally, some of our revenues are generated from
fixed-price contracts, which require the accurate estimation of the cost, scope
and duration of each engagement. Revenue and the related costs for these
projects are recognized on percentage-of-completion, using the
time-to-completion method to measure the percent complete with revisions to
estimates reflected in the period in which changes become known. If we do not
accurately estimate the resources required or the scope of work to be performed,
or do not manage our projects properly within the planned periods of time or
satisfy our obligations under the contracts, then future margins may be
negatively affected or losses on existing contracts may need to be recognized.
GOODWILL AND INTANGIBLE IMPAIRMENT: On January 7, 2000 Healthaxis.com
completed a merger with Insurdata Incorporated (the "Insurdata Merger"). The
transaction was accounted for using the purchase method of accounting and
Healthaxis was determined to be the accounting acquirer. The purchase price
allocation resulted in the recording of goodwill and other intangible assets,
namely, developed software and customer base. On January 26, 2001, Healhaxis.com
merged into Healthaxis (the "HAXS Merger"). The transaction was accounted for as
a purchase of minority interest, which resulted in a reduction of the goodwill
and revaluation of the intangible assets.
In May 2001 the company implemented a restructuring plan and realignment of
operations modifying the structure and size of the organization. In addition, we
abandoned the development and marketing of certain products that no longer fit
our business strategy. Our policy is to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. The restructuring was the culmination of such
events and, therefore, we evaluated the carrying value of long-lived assets,
including enterprise level goodwill and intangible assets. Adjustments to
goodwill and developed software were recorded at that time.
35
In assessing the recoverability of goodwill and other intangible assets, we
must make assumptions as to the estimated useful life of the asset and
discounted cash flows, which require the use of discount rates and estimates of
future revenue streams.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the statements. Other intangible assets will continue to be amortized over
their useful lives. In 2002, the Company will apply the new rules and perform
the first of the required impairment tests of goodwill as of January 1, 2002.
Upon adoption, the Company will no longer amortize its goodwill. The Company has
not determined whether the tests, required under the new guidance to be
performed by June 2002, will result in any impairment of its goodwill.
INVESTMENT VALUATION: We account for investments in which we do not have
significant control on the cost basis. We record impairment charges when we
believe an investment has experienced a decline in value that is other than
temporary. Currently, our only such investment is in a non-publicly traded
entity whose value is difficult to determine. We have based the carrying value
on the number of shares that we own and the price of the investment entity's
most recently completed equity transaction. Changes in circumstances relative to
this investment could result in additional future reductions to the carrying
value, however the current carrying value of our investment is less than
$250,000.
POST RETIREMENT BENEFITS: We have an obligation to provide certain post
retirement benefits to a group of retirees formerly employed by the Company. The
benefits are lifetime health and life insurance coverage. Because this
obligation exists until the death of the participants, actuarial calculations,
which include the use of estimates, are used to determine the carrying value of
the liability. These estimates include the life expectancy of the participants,
a discount rate to calculate the present value of the expected future costs, and
growth rates to project anticipated future increases in the cost of the benefits
provided. The amount necessary to satisfy this obligation may therefor be
different than the amount accrued.
CONTINGENT LIABILITIES: Healthaxis' policy is to record contingent
liabilities that are both measurable and probable. We have recorded such a tax
liability based upon the amount that we would pay if our tax position were
rejected by the taxing authority. The final amount paid, if any, could be
different than the amount we have accrued.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting
Principles Board Opinion No. 16 "Business Combinations" and SFAS No. 38
"Accounting for Pre-acquisition Contingencies," and eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001. SFAS
No. 141 also includes new criteria to recognize intangible assets separately
from goodwill. The requirements of SFAS 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001 (i.e., the acquisition date is July 1, 2001 or after).
SFAS No. 142, supersedes APB Opinion No. 17, "Intangible Assets," and
states that goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed for impairment annually, or more frequently if
impairment indicators arise. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their useful lives.
The discontinuing
36
of amortization provisions under SFAS No. 142 of goodwill and indefinite lived
intangible assets apply to assets acquired after June 30, 2001. In addition, the
impairment provisions of SFAS 142 apply to assets acquired prior to July 1, 2001
upon adoption of SFAS 142. The Company incurred $10,443 of amortization expense
in 2001 related to goodwill that will not be incurred in future periods under
this new guidance.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of." The primary objectives of SFAS No. 144 is to develop one
accounting model based on the framework established in SFAS No. 121 for
long-lived assets to be disposed of by sale, and to address significant
implementation issues. The provisions of this statement are effective for fiscal
years beginning after December 15, 2001. The Company is evaluating the impact of
SFAS No. 144 on its financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Exposure to market risk for changes in interest rates relate primarily to
short-term investments. The Company does not use derivative financial
instruments. The primary objective of its investment activities is to preserve
principal while maximizing yields without significantly increasing risk. Due to
the nature of the Company's investments, we believe that there is no material
risk exposure.
Our cash equivalents and other investment instruments are exposed to
financial market risk due to fluctuation in interest rates, which may affect our
interest income. These instruments are not entered into for trading purposes. We
do not expect our interest income to be significantly affected by a sudden
change in market interest rates.
The convertible debentures outstanding at December 31, 2001 are fixed rate
obligations and would not be exposed to the impact of interest rate
fluctuations. To the extent that the Company seeks to refinance these
instruments, the prevailing market interest rates on replacement debt could
exceed rates currently paid thereby increasing interest expense and increasing
net loss.
37
ITEM 8. FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors........................................... 39
Report of Independent Certified Public Accountants....................... 40
Consolidated Balance Sheets - December 31, 2001 and 2000................. 41
Consolidated Statements of Operations
Years ended December 31, 2001, 2000 and 1999.......................... 42
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999.......................... 43
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999.......................... 44
Notes to Consolidated Financial Statements............................... 46
38
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Healthaxis Inc.
We have audited the accompanying consolidated balance sheet of Healthaxis Inc.
and Subsidiaries as of December 31, 2001 and the related consolidated statement
of operations, stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's Management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Healthaxis Inc. and
Subsidiaries at December 31, 2001, and the consolidated results of their
operations and cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Dallas, Texas
February 26, 2002, except for Note 26, as to which the date is March 6, 2002.
39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Healthaxis Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheet of Healthaxis Inc.
and Subsidiaries as of December 31, 2000 and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards general accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Healthaxis Inc. and
Subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2000, in conformity with accounting principles general accepted in the United
States of America.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Dallas, TX
March 16, 2001
40
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share data)
DECEMBER 31,
2000 2001
--------- ---------
ASSETS
Cash and cash equivalents $ 13,149 $ 17,170
Accounts receivable, net of allowance for doubtful accounts of $50 and $300, respectively 2,594 2,061
Accounts receivable from affiliates 3,286 5,090
Prepaid expenses and other current assets 412 694
Notes receivable 119 577
--------- ---------
Total current assets 19,560 25,592
Property, equipment and software, less accumulated depreciation and
amortization of $10,311 and $10,036, respectively 3,451 6,431
Capitalized software and contract start-up costs, less accumulated
amortization of $1,327 and $1,478, respectively 2,525 7,240
Customer base, less accumulated amortization of $2,379 and $4,301, respectively 6,743 12,904
Goodwill, less accumulated amortization of $1,533 and $34,109, respectively 24,308 648,854
Notes receivable from employees 311 631
Notes receivable 308 242
Deferred acquisition costs - 801
Assets held for sale - 5,005
Investment in Digital Insurance, Inc. 227 3,178
Other assets 155 114
--------- ---------
Total assets $ 57,588 $ 710,992
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,188 $ 1,275
Accrued liabilities 2,920 5,724
Deferred revenues 1,867 737
Obligations under capital leases 8 269
--------- ---------
Total current liabilities 5,983 8,005
Convertible debentures 27,134 27,367
Post retirement and employment liabilities 995 1,072
Other liabilities 1,087 15
--------- -----------
Total liabilities 35,199 36,459
Commitments and contingencies
Minority interest in COM
Common stock - 442,989
Preferred stock - 15,049
Stockholders' Equity:
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A cumulative convertible, no shares issued or outstanding - -
Series B cumulative convertible, no shares issued or outstanding - -
Common stock, par value $.10: authorized 50,000,000 shares,
issued and outstanding 52,978,613 and 13,097,618 shares 5,298 1,310
Common stock, Class A, par value $.10: authorized 20,000,000
shares, none issued and outstanding - -
Additional paid-in capital 433,386 325,797
Accumulated deficit (416,069) (105,497)
Unearned compensation (226) (5,115)
--------- ---------
Total stockholders' equity 22,389 216,495
--------- ---------
Total liabilities and stockholders' equity $ 57,588 $ 710,992
========= =========
See notes to consolidated financial statements.
41
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
YEARS ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
Revenue $ 14,133 $ 13,301 $ -
Revenue from affiliates 29,657 29,495 -
--------- ---------- ----------
Total 43,790 42,796 -
Expenses:
Costs of revenues 41,993 47,075 504
Sales and marketing 3,225 3,585 447
General and administrative 13,492 12,380 7,457
Research and development 1,479 974 -
Restructuring and impairment charges 279,607 - -
Loss on sale of building 2,498 - -
Amortization of intangibles 14,034 40,678 765
--------- ---------- ----------
Total expenses 356,328 104,692 9,173
--------- ---------- ----------
Operating loss (312,538) (61,896) (9,173)
Interest expense and other income, net (2,795) (2,977) (925)
--------- ---------- ----------
Loss before minority interest (315,333) (64,873) (10,098)
Minority interest in loss of subsidiary 3,080 35,988 1,008
--------- ---------- ----------
Loss before provision for income taxes (312,253) (28,885) (9,090)
Income tax provision - 585 -
--------- ---------- ----------
Loss from continuing operations (312,253) (28,300) (9,090)
--------- ---------- ----------
Loss from sale of discontinued operations - (2,300) (10,263)
Loss from discontinued operations:
Insurance operations - - (8,052)
Retail website operations - (6,341) (19,126)
--------- ---------- ----------
Total loss from discontinued operations - (8,641) (37,441)
--------- ---------- ----------
Loss before extraordinary item (312,253) (36,941) (46,531)
Extraordinary gain 1,681 1,925 -
--------- ---------- ----------
Net loss (310,572) (35,016) (46,531)
Dividends on preferred stock - - 70
--------- ---------- ----------
Net loss applicable to common stockholders $(310,572) $ (35,016) $ (46,601)
========== =========== ===========
Loss per share of common stock (basic and diluted)
Continuing operations $ (6.22) $ (2.17) $ (0.75)
Discontinued operations - (0.66) (3.05)
Extraordinary gain .03 .15 -
--------- ---------- ----------
Net loss $ (6.19) $ (2.68) $ (3.80)
========== =========== ===========
Weighted average common shares and equivalents used in computing
loss per share
Basic and diluted 50,149,000 13,082,000 12,260,000
See notes to consolidated financial statements.
42
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss)
------ ------ ------ ------ ------- ------- -------------
BALANCE, DECEMBER 31, 1998 557 $ 557 11,489 $ 1,149 $ 27,002 $ (23,879) $ 666
Comprehensive income:
Net loss 1999 (46,531)
Other comprehensive income (666)
Comprehensive loss
Issuance of common stock 25 3 267
Stock options and warrants exercised 956 95 5,876
Increase in net assets in COM 44,395
Warrants and non employee options issued 3,757
Conversion of preferred stock (557) (557) 557 56 501
Cash dividends declared on preferred (71)
------ ------ ------ ------- --------- ---------- ------------
stock
BALANCE, DECEMBER 31, 1999 - - 13,027 1,303 81,798 (70,481) -
Net loss 2000 (35,016)
35,016)
Stock options and warrants exercised 71 7 334
Increase in net assets in COM 242,845
Employee stock option compensation 820
Valuation of Insurdata options
Amortization/forfeiture of unearned
compensation
------ ------ ------ -------- --------- ---------- ------------
BALANCE, DECEMBER 31, 2000 - - 13,098 1,310 325,797 (105,497) -
Net loss 2001 (310,572)
Issuance of common stock in HAXS Merger 39,629 3,963 105,017
Exchange and revaluation of options in
HAXS Merger (2,764)
Increase in net assets in COM 115
Common stock issued in lieu of interest and 252 25 348
severance
Employee stock option compensation 5,277
Amortization/forfeiture of unearned
compensation (404)
------ ------ ------ -------- --------- ---------- ------------
BALANCE, DECEMBER 31, 2001 - $ - 52,979 $ 5,298 $ 433,386 $ (416,069) $ -
= ====== ====== ======== ========= ========== ============
Unearned
Compensation Total
------------ -------
BALANCE, DECEMBER 31, 1998 $ - $ 5,495
Comprehensive income:
Net loss 1999 (46,531)
Other comprehensive income (666)
---------
Comprehensive loss (47,197)
---------
Issuance of common stock 270
Stock options and warrants exercised 5,971
Increase in net assets in COM 44,395
Warrants and non employee options issued 3,757
Conversion of preferred stock -
Cash dividends declared on preferred (71)
------------ ----------
stock
BALANCE, DECEMBER 31, 1999 - 12,620
Net loss 2000 (35,016)
35,016)
Stock options and warrants exercised 341
Increase in net assets in COM 242,845
Employee stock option compensation 820
Valuation of Insurdata options (10,691) (10,691)
Amortization/forfeiture of unearned
compensation 5,576 5,576
------------ ----------
BALANCE, DECEMBER 31, 2000 (5,115) 216,495
Net loss 2001 (310,572)
Issuance of common stock in HAXS Merger 108,980
Exchange and revaluation of options in
HAXS Merger 3,459 695
Increase in net assets in COM 115
Common stock issued in lieu of interest and 373
severance
Employee stock option compensation 5,277
Amortization/forfeiture of unearned
compensation 1,430 1,026
------------ ----------
BALANCE, DECEMBER 31, 2001 $ (226) $ 22,389
============ ==========
See notes to consolidated financial statements.
43
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEARS ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES 2001 2000 1999
---- ---- ----
Net loss $ (310,572) $ (35,016) $ (46,531)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sale of discontinued operations - 2,300 8,763
Depreciation and amortization 18,745 51,742 17,739
Issuances of warrants - - 1,394
Loss on building 2,498 - -
Gain on restructuring/forgiveness of debt (1,681) (1,925) -
Bad debt reserve (89) 680 -
Non-cash restructuring and impairment charges 279,258 - -
Minority interest in loss of subsidiary (3,080) (47,187) (7,747)
Stock option compensation 5,564 4,927 -
Write down of investment in Digital Insurance, Inc. 2,872 - -
Common stock issued for services, interest and severance 373 - 270
(Gain) loss on disposition of assets (6) 721 749
Non-cash interest on convertible debt 28 2,348 573
Non-cash expense for service agreements - - 556
Changes in operating assets and liabilities net of
amounts acquired or divested:
Accounts receivable 1,540 (1,868) -
Premium due and uncollected, unearned premium and
premium received in advance - - 354
Prepaid expenses 282 69 (4,729)
Due to/from reinsurers - - 10,030
Due from third party administrator - - 6,849
Deferred policy acquisition costs, net - - 2,106
Accrued investment income - - 152
Other assets, current and deferred income taxes and
other liabilities (40) 733 2,099
Accounts payable and accrued liabilities (1,671) (4,880) 2,963
Income taxes payable - (585) -
Deferred revenues 1,130 340 -
Ceding commission and interest - (3,675) 600
Future policy benefits and claims (77) 42 (45,940)
Other liabilities 1,074 (355) -
---------- --------- ---------
Net cash used in operating activities (3,852) (31,589) (49,750)
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for sale of subsidiary - (14,700)
Cash in acquired company - 2,126 -
Investment in capitalized software and contract start-up (2,513) (5,576) -
Proceeds from sale of bonds - - 6,656
Proceeds from sale of building 2,626 - -
Proceeds from sale of equipment 523 - -
Payment of acquisition costs (471) (1,491) (750)
Collection on notes receivable, net 712 52 1,328
Purchases of property, equipment and software (862) (4,391) (4,169)
Other 79 - 45
---------- --------- ---------
Net cash provided by (used in) investing activities 94 (9,280) (11,590)
---------- --------- ---------
44
HEALTHAXIS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease (263) (554) (379)
Repayment of loans payable - - (1,465)
Purchase of Healthaxis common stock - - (8,203)
Net proceeds from the sale of convertible debt - - 26,763
Net proceeds from the sales of Healthaxis common stock - - 59,445
Net proceeds from the sales of preferred stock - - 12,082
Exercise of stock options - 341 5,052
Exercise of Healthaxis stock options - 183 -
Dividends paid on preferred stock - - (71)
--------- -------- --------
Net cash (used in) provided by financing activities (263) (30) 93,224
--------- -------- --------
(Decrease) increase in cash and cash equivalents (4,021) (40,899) 31,884
Cash and cash equivalents, beginning of period 17,170 58,069 26,185
--------- -------- --------
Cash and cash equivalents, end of period $ 13,149 $ 17,170 $ 58,069
========= ======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 323 $ 574 $ 78
Non-cash investing activities
Issuance of common stock and options in connection
with HAXS and Insurdata mergers, respectively $ 111,188 $ 722,488 $ -
Receipt of Digital Insurance, Inc. common shares - 3,178 -
Issuance of note to Digital Insurance, Inc. - 500 -
Non-cash financing activities
Issuance of warrants $ - $ - $ 6,808
Exercise of options - - 900
Repayment of loans payable - - (2,400)
Conversion of preferred stock to common stock - - 557
See notes to consolidated financial statements
45
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Healthaxis Inc. ("Healthaxis"), formerly Provident American Corporation, is a
Pennsylvania corporation organized in 1982. Healthaxis.com, Inc. ("COM"), a
consolidated subsidiary of Healthaxis, was formed on March 26, 1998. Healthaxis
operates as a technology solutions provider in the health care administration
market. Healthaxis provides application solutions and services to both
healthcare payers and those entities involved in the distribution and
administration of health insurance. Healthaxis offers a suite of Internet based
software applications and services designed to enhance the efficiency and
effectiveness of insurance plan distribution, claims administration, benefits
enrollment, benefits maintenance and conversion of insurance claims information
to electronic form. In addition, Healthaxis provides systems integration,
technology management, and data capture services.
Until November 30, 1999, Healthaxis was a regulated insurance holding company
owning 100% of Provident Indemnity Life Insurance Company ("PILIC"). On November
30, 1999, Healthaxis sold PILIC. As a result, the results of operations of PILIC
prior to the sale are presented as a discontinued business segment (See Note 5).
On January 7, 2000, COM completed a merger with Insurdata Incorporated
("Insurdata"), a subsidiary of UICI (See Note 4). COM emerged as the surviving
entity. Prior to this merger, COM was engaged in the marketing and sale of
health insurance products over the Internet through a retail website. On June
30, 2000, COM entered into an agreement to sell substantially all of the assets
used in connection with the retail website operations (See Note 5). As a result,
the retail website operations are presented as a discontinued business segment.
The continuing operations of Healthaxis and its subsidiaries ("the Company") are
principally those obtained in the Insurdata merger.
On January 26, 2000, Healthaxis and COM entered into an Agreement and Plan of
Reorganization and Agreement and Plan of Merger pursuant to which Healthaxis
would acquire all of the outstanding shares of COM it did not currently own
through the merger of COM with a wholly-owned subsidiary of Healthaxis ("HAXS
Merger"). On September 29, 2000, Healthaxis and COM entered into an Amended and
Restated Agreement and Plan of Reorganization and Amended and Restated Agreement
and Plan of Merger that, among other things, adjusted the merger exchange ratio
from 1.127 to 1.334. On January 26, 2001, the shareholders of Healthaxis and COM
approved this merger and the transaction was consummated.
The Company's operations during 2001 were conducted primarily through its
subsidiary, COM. In December 2001 the Company reorganized and formed a new
subsidiary, Healthaxis, Ltd., through which all operations are now conducted.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
46
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues, expenses, assets, and liabilities and
disclosure of contingencies. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities of three
months or less from date of purchase. The Company maintains its cash accounts at
several commercial banks. Cash accounts at each bank often exceed amounts that
are insured by the Federal Deposit Insurance Corporation.
PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software are recorded at cost. Expenditures for
improvements that increase the estimated useful lives of the assets are
capitalized. Expenditures for repairs and maintenance are charged to operations
as incurred. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets ranging from 1 to 20 years.
CAPITALIZED SOFTWARE
Healthaxis incurs development costs that relate primarily to the development of
new products and major enhancements to existing services and products. All
development costs related to software development projects incurred prior to the
time a project has reached technological feasibility are expensed. Software
development costs incurred subsequent to reaching technological feasibility are
capitalized up to the point of product marketability. If the process of
developing a new product or major enhancement does not include a detailed
program design, technological feasibility is determined only after completion of
a working model. Healthaxis capitalized $1,586, $5,238, and $0 in software
development costs during the years ended December 31, 2001, 2000, and 1999,
respectively. All software development costs capitalized are amortized over the
remaining economic life of the product (generally three to five years) using the
greater of the amount calculated under (i) the gross revenue method or (ii) the
straight-line method. Healthaxis recorded amortization expense relating to
capitalized software development costs totaling $1,044, $341, and $0 during the
years ended December 31, 2001, 2000, and 1999, respectively.
Direct internal and external costs associated with the development of the
features, content and functionality of WWW.HEALTHAXIS.COM, Healthaxis' web site,
incurred during the application development stage, have been capitalized and are
being amortized on a straight line basis over the estimated useful life.
START-UP COSTS
Healthaxis capitalizes costs, including direct labor and fringe benefits,
directly attributable to contract start-up activities. Such costs are amortized
over the life of the respective contract. All other start-up costs not directly
related to contracts are expensed. Contract start-up costs capitalized during
the years ended December 31, 2001, 2000, and 1999 totaled $928, $338, and $0,
respectively. Healthaxis recorded amortization expense relating to contract
start-up costs of $468, $299, and $0 during the years ended December 31, 2001,
2000, and 1999, respectively.
47
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on goodwill and other intangible assets
when events and circumstances indicate that such assets might be impaired and
the estimated fair value of the asset is less than its recorded amount.
Conditions that would necessitate an impairment assessment included material
adverse changes in operations, significant adverse differences in actual results
in comparison with initial valuation forecasts prepared at the time of
acquisition, a decision to abandon acquired products, services or technologies,
or other significant adverse changes that would indicate the carrying amount of
the recorded asset might not be recoverable.
The Company reviews its long-lived assets and certain intangible assets for
impairment on a quarterly basis or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets held and used is measured by a comparison of the
carrying amount of an asset to undiscounted pre-tax future net cash flows
expected to be generated by that asset. An impairment loss is recognized for the
amount by which the carrying amount of the assets exceeds the fair value of the
assets estimated using discounted cash flows.
DEFERRED ACQUISITION COSTS
The Company defers the costs associated with pending mergers. These costs
include legal, accounting and investment banking services. These costs are
included as a component of the purchase price upon consummation of the merger.
Deferred acquisition costs at December 31, 2000 relate to the pending merger
between Healthaxis and COM
INVESTMENT VALUATION
The Company accounts for investments in which it does not have significant
control on the cost basis. Impairment charges are recorded when management
believes that an investment has experienced a decline in value that is other
than temporary.
STOCK OPTIONS AND WARRANTS - NONEMPLOYEES
The Company accounts for all options and warrants granted to non-employees at
fair value (See Note 22).
STOCK OPTIONS AND WARRANTS - EMPLOYEES AND DIRECTORS
The Company has elected to continue to account for stock-based compensation for
employees and directors using the intrinsic value method of option accounting
and to provide additional disclosures with respect to the pro forma effects had
the Company recorded compensation expense based upon the fair value of the
options granted.
Compensation cost for stock options is recognized based on the intrinsic value
of options granted. The excess fair value, if any, of the underlying stock on
the grant date over the options exercise price is recognized as compensation
expense over the option vesting period using the straight-line method (See Note
22).
48
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
REVENUE RECOGNITION
The Company's revenues consist primarily of professional services fees, software
license fees, and transaction fees.
Professional services are either time-and-materials or fixed-price arrangements.
Time-and-materials arrangements are billed on a fee per hour or per day basis,
or on a cost plus 10% basis. In general, revenue from time-and-materials
arrangements is recognized as services are provided so long as collection of the
resulting receivable is reasonably assured. Revenue from fixed price contracts
is recognized under the percentage of completion method, using the
time-to-completion method to measure the percent complete. The cumulative impact
of any revision in estimates of the percent complete or recognition of losses on
loss contracts is generally reflected in the period in which the changes or
losses become known. In circumstances where professional services fees are
provided at below market rates in connection with a longer-term processing
contract, such revenue and the related costs are deferred and recognized ratably
over the remaining life of the respective contract.
Revenue from software license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable and collection is probable. If the fee due from the customer is not
fixed or determinable, revenue is recognized as payments become due from the
customer. If collection is not considered probable, revenue is recognized when
the fee is collected.
When more than one product or service is provided to a customer under one
arrangement such as software products, upgrades, enhancements, post-contract
customer support, installation, and training, the Company allocates revenue to
each element of the arrangement based on the relative fair values of the
elements.
Revenue from transaction fees consists of fees billed on a fee-per-unit basis
such as charges per covered member per month, per claim processed, and per
document imaged. Although transaction fees are often billed one month in
advance, transaction revenue is recorded at the time that the transaction
occurs.
The Company accounts for non-monetary transactions at values based on similar
cash transactions that have occurred within six months prior to the date of the
exchange.
INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes (See Note 18). Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that the deferred tax assets will not be
realized.
49
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
BASIC AND DILUTED LOSS PER SHARE OF COMMON STOCK
Basic loss per common share calculations are determined by dividing the loss
available to common stockholders by the weighted average number of shares of
common stock outstanding. Diluted loss per share is determined by dividing the
losses available to common stockholders by the weighted average number of shares
of common stock and dilutive common stock equivalents outstanding. All of the
Company's warrants, stock options, and convertible debentures were anti-dilutive
for all periods presented, and therefore are not included in the diluted loss
per common share calculations.
SEGMENTS
The Company presents information regarding its segments based on the Company's
internal organization and presents revenue and operating results based on
internal accounting methods. The Company's financial reporting systems present
various data for management to operate the business, including profit and loss
statements prepared on a basis not consistent with accounting principles
generally accepted in the United States.
RECLASSIFICATIONS OF PRIOR YEAR AMOUNTS
Certain prior year amounts have been reclassified to conform with the 2001
presentation or in accordance with applicable accounting requirements.
RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting
Principles Board Opinion No. 16 "Business Combinations" and SFAS No. 38
"Accounting for Pre-acquisition Contingencies," and eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations that were initiated prior to July 1, 2001. SFAS
No. 141 also includes new criteria to recognize intangible assets separately
from goodwill. The requirements of SFAS 141 are effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001 (i.e., the acquisition date is July 1, 2001 or after).
SFAS No. 142, supersedes APB Opinion No. 17, "Intangible Assets," and states
that goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed for impairment annually, or more frequently if
impairment indicators arise. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their useful lives.
The discontinuing of amortization provisions under SFAS No. 142 of goodwill and
indefinite lived intangible assets apply to assets acquired after June 30, 2001.
In addition, the impairment provisions of SFAS 142 apply to assets acquired
prior to July 1, 2001 upon adoption of SFAS 142. The Company incurred $10,443 of
amortization expense in 2001 related to goodwill that will not be incurred in
future periods under this new guidance.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed
of." The primary objectives of SFAS No. 144 is to develop one accounting model
based on the framework established in SFAS No. 121 for long-lived assets to be
disposed of by sale, and to address significant implementation issues. The
provisions of this statement are effective for fiscal years beginning after
December 15, 2001. The Company is evaluating the impact of SFAS No. 144 on its
financial position and results of operations.
50
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 3 - CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
UICI, the Company's largest client and majority shareholder, accounted for
$3,286 or 56% of the Company's accounts receivable as of December 31, 2001.
Otherwise, concentrations of credit risk with respect to accounts receivable are
limited due to the number clients, as well as their dispersion across many
different geographical areas within the United States. The Company does not
require collateral from its customers. An allowance for doubtful accounts is
maintained for estimated losses resulting from the inability of our clients to
make required payments. Historically, bad debts have not been material.
The carrying amount of cash and cash equivalents, accounts receivable, accounts
receivable from affiliate, notes receivable, notes receivable from employees,
accounts payable, and accrued liabilities approximates fair value due to the
short maturities of these instruments.
The Company estimates the fair value of the convertible debentures to be
$18,664. This estimate was calculated by discounting the future cash flows of
the debentures at a discount rate of 14% and considers the estimated fair value
of the equity conversion rights.
The Company has no involvement with derivative financial instruments, including
those for speculative or trading purposes.
NOTE 4 - MERGERS
2000 INSURDATA MERGER
On January 7, 2000, COM completed a merger with Insurdata, a health care
technology company and a majority owned subsidiary of UICI ("Insurdata Merger").
The transaction was accounted for using the purchase method of accounting. COM
was determined to be the accounting acquirer. As a result, the net assets of
Insurdata were recorded at their fair value with the excess of the purchase
price over the fair value of the net assets acquired allocated to goodwill.
In connection with the Insurdata Merger, each outstanding share of Insurdata
common stock converted into the right to receive 1.33 shares of COM common
stock. COM issued 21,807,567 shares of COM common stock to Insurdata
shareholders. In connection with the Insurdata Merger, COM also issued 426,930
options to purchase COM common stock to existing Insurdata option holders. The
fair value of the consideration given by COM for the acquisition of Insurdata
under the purchase method of accounting totaled $723,927. This purchase price
consideration consisted of: (1) the fair value of the COM common shares issued
to Insurdata shareholders totaling $654,799 ($30.03 per share), (2) the fair
value of COM options granted to Insurdata option holders under Insurdata stock
option plans totaling $11,901 (average fair value of $27.87 per option), (3) the
difference between the fair value of shares issued in the December 7, 1999
private placement and the $15 issue price totaling $55,788, and (4) merger costs
totaling $1,439. The fair value per share of COM common stock was determined
based upon the quoted NASDAQ market price of Healthaxis common stock on the
measurement date of December 7, 1999. The value of the December 7, 1999 private
placement of COM common shares in excess of the cash received from their
issuance represents additional value tendered by COM in a transaction occurring
simultaneously with the purchase of Insurdata. The fair value of the COM options
granted to Insurdata option holders was determined using the Black-Scholes
option pricing model.
51
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
The fair value of the Insurdata assets acquired and liabilities assumed through
the Insurdata Merger were:
Cash and cash equivalents $ 2,126
Accounts receivable, net 5,834
Property, equipment and software 6,278
Capitalized software 2,862
Unearned compensation 10,691
Customer base 17,205
Goodwill 682,964
Other assets 1,768
Other liabilities (5,801)
-----------
$ 723,927
===========
In connection with the Insurdata Merger, Healthaxis recorded an increase in
minority interest in COM common stock totaling $479,775, and an increase to
additional paid-in capital of $242,713.
The amount allocated to unearned compensation was based upon the intrinsic value
of the unvested COM options issued to Insurdata option holders discussed above
and was amortized over the remaining vesting term of the options. COM recorded
the unearned compensation as a reduction of stockholders' equity.
Pro forma financial information for the year ended December 31, 1999, as though
the Insurdata Merger had occurred on January 1, 1999, is as follows:
Revenues $ 42,897
Net loss $ (61,275)
Net loss per common share $ (5.00)
Weighted average common shares outstanding (basic and diluted) 12,260,000
2001 HAXS MERGER
On January 26, 2001, the stockholders of Healthaxis and COM approved the merger
of COM with a newly formed, wholly owned subsidiary of Healthaxis ("HAXS
Merger"). This transaction was completed pursuant to the terms of the Amended
and Restated Agreement and Plan of Reorganization dated October 26, 2000. In
accordance with the terms of the agreement, as amended, on January 26, 2001
Healthaxis issued 39,629,097 shares of its common stock to COM shareholders (a
1.334-to-1 ratio). In addition, Healthaxis issued 7,078,485 warrants and options
to purchase Healthaxis common stock to holders of COM stock options and warrants
which represented the number of COM options and warrants outstanding on the date
of the HAXS Merger after giving effect for the merger ratio. As a result of the
HAXS Merger, COM ceased to exist, and the newly formed Healthaxis subsidiary
continued as the surviving corporation operating under the Healthaxis.com name.
The HAXS Merger was accounted for as a purchase of minority interest. The
purchase price was determined to be $110,956 which included the following: (1)
the fair value of the 39,629,097 Healthaxis shares issued to the holders of COM
shares totaling $108,980 ($2.75 per share), (2) the fair value of a portion of
the 7,078,485 Healthaxis options and warrants issued totaling $2,208 less $1,513
of unearned compensation, which represents the intrinsic value of the unvested
portion of options issued, and (3) acquisition costs totaling $1,280.
Additionally, unearned compensation of $4,972 remaining from the options issued
in connection with the Insurdata Merger were revalued at the date of the HAXS
Merger resulting in a reclassification between unearned compensation and
additional paid-in capital. The measurement date for
52
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
purposes of calculating the fair value of Healthaxis common shares issued in the
HAXS Merger was September 29, 2000, the date the agreement was revised to
reflect the final exchange ratio and certain other material terms. The fair
value of Healthaxis shares on or about the measurement date was determined based
upon quoted NASDAQ market prices. The fair value of Healthaxis options and
warrants issued in the HAXS Merger was determined using the Black-Scholes option
pricing model.
The assets and liabilities of COM, including goodwill, were revalued as of the
date of the HAXS Merger. Upon finalization of the purchase price allocation, a
reduction of goodwill totaling $337,424 was recorded. The new purchase price was
based upon the fair value of Healthaxis common stock. The significant decrease
in fair value of Healthaxis common stock on September 29, 2000 compared to the
fair value of Healthaxis common stock on December 7, 1999 (the measurement date
for the Insurdata Merger) resulted in a purchase price that was significantly
lower than the Insurdata Merger purchase price. As a result, a reduction of
goodwill originating from the Insurdata Merger was recorded in 2001.
The stock options not included in the purchase accounting discussed above and
the repriced options discussed below, have been accounted for as a modification
of a stock-based compensation arrangement. The value of the options exchanged
was determined by the excess of the fair value of the Company's common stock
over the exercise price of the options. The value of the unvested options of
$1,476 is being expensed ratably over the remaining vesting period. The
remaining $4,876 related to the vested options was expensed in 2001 as
compensation.
The COM options repriced in May 2000, continue to be treated as variable option
awards. During 2001, no compensation expense was recognized for the repriced
options as the exercise price of $2.49 per share exceeded the market value of
the Company's common stock.
NOTE 5 - DISCONTINUED OPERATIONS
DISCONTINUED RETAIL WEBSITE OPERATIONS
On June 30, 2000, COM entered into an Asset Purchase Agreement to sell certain
assets used in connection with its retail website to Digital Insurance, Inc.
("Digital Insurance"). Included in the sale was the current and next generation
of the retail website user interface (the presentation layer of the website that
includes the graphical templates that create the look and feel of the website),
all existing in-force insurance policies, certain physical assets, and
agreements, including, but not limited to portal marketing agreements and
agreements related to the affiliate partner program. This transaction closed on
October 13, 2000. The consideration received by COM in return for those assets
consisted of: $500 in cash; a $500 note; 11% of the outstanding shares of
Digital Insurance, on a fully-diluted basis, at closing; and a portion of
Digital Insurance's net commission revenues received by Digital Insurance
through the acquired website user interface or an affinity partner indefinitely.
The Company has reported the operations of the retail website as discontinued
operations as of the measurement date of June 30, 2000. The 11% ownership in
Digital Insurance was accounted for under the cost method. The value assigned to
the shares totaled $3,178 and was based upon previous equity transactions by
Digital Insurance.
As a result of this sale to Digital Insurance, a loss on the sale of
discontinued operations in the amount of $2,300 was recorded during the year
ended December 31, 2000. Included in the loss was a write off of goodwill
totaling $5,801, before minority interest, relating to the net book value of the
goodwill recorded in 1999 that was attributable to the retail website
operations.
53
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
Following is the results of the retail website operations included in the loss
from discontinued operations for all periods presented:
YEARS ENDED DECEMBER 31,
2000 1999
----------------------------
Revenue $ 672 $ 291
Expenses:
Costs of revenue 6,697 5,504
Sales and marketing 11,496 19,652
General and administrative 19 1,000
----------------------------
Total expenses 18,212 26,156
----------------------------
Operating loss before minority interest (17,540) (25,865)
Minority interest in loss 11,199 6,739
----------------------------
Loss from discontinued operations $ (6,341) $ (19,126)
============================
DISCONTINUED INSURANCE OPERATIONS
On November 30, 1999, in accordance with an amended Stock Purchase Agreement,
all of the issued and outstanding shares of the common stock of PILIC and its
other inactive subsidiaries were transferred to AHC Acquisition, Inc. ("AHC"), a
newly formed Pennsylvania business corporation, owned by Mr. Alvin H. Clemens,
Healthaxis' chairman, for no consideration.
In anticipation of the transfer, Healthaxis, in order to eliminate a statutory
capital deficiency, contributed $7,200 to PILIC. Also, Healthaxis purchased from
PILIC the office building located in East Norriton, Pennsylvania for $4,700,
545,916 shares of COM Series A Preferred Stock for $2,800, and assumed the
related post retirement and employee obligations (See Note 24) amounting to
$1,029 as of December 31, 1999.
Concurrent with the transfer of PILIC, Healthaxis conveyed at its historical
cost, 100,000 shares of the Series A preferred stock to AHC together with
registration rights previously granted to PILIC.
The operating results of PILIC and all of the other insurance operations are
reported as discontinued operations for all periods presented.
As a result of the transfer of PILIC, Healthaxis recorded a loss of $10,263,
which included a write-off of assets relating to PILIC including unamortized
deferred policy acquisition costs and property and equipment, net of accumulated
depreciation in the amount of $2,623, a capital contribution of $7,200 and the
value of the preferred stock transferred to AHC which amounted to $440.
54
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
RESULTS OF DISCONTINUED INSURANCE OPERATIONS:
YEAR ENDED
DECEMBER 31, 1999
---------------------
Revenue:
Net premium revenue $ 7,197
Net investment income 2,395
Realized gain on investments 6
Ceding allowance, net of policy acquisition costs -
Realized gain on the sale of subsidiary 1,500
Other revenue 890
---------
Total revenue 11,988
---------
Benefits and expenses:
Death and other policy benefits:
Life 3,315
Accident and health, net of reinsurance 7,661
Annuity contracts and other considerations 622
Commissions, net of ceding allowance and
deferred acquisition costs 1,486
Other operating expenses, net of ceding allowance
and deferred acquisition costs 6,683
Amortization of deferred policy acquisition costs 252
Depreciation and amortization of goodwill -
---------
Total benefits and expenses 20,019
---------
Loss before income taxes (8,031)
Provision (benefit) for income taxes:
Current 21
Deferred -
---------
Total income taxes 21
---------
Loss from discontinued operations $ (8,052)
=========
55
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 6 - RESTRUCTURING AND IMPAIRMENT CHARGES
At a special meeting of the Board of Directors held on May 11, 2001, the Board
approved a restructuring plan and realignment of operations modifying the
structure and size of the Company. The plan included the following actions:
o Implementation of a reorganization plan which created four new
business units, each with accountability for operations beginning
July 1, 2001;
o Elimination of approximately 60 employee positions, primarily at its
Irving, Texas and East Norriton, Pennsylvania offices;
o Relocation of the corporate headquarters from Pennsylvania to Texas;
and
o Cessation of development and marketing of certain products.
The Company accrued or recorded charges totaling $279.6 million. Those costs are
generally related to the following:
o SEVERANCE COST FOR TERMINATED EMPLOYEES - Approximately $350 of the
restructuring charge related to the elimination of approximately 60
positions and termination of approximately that number of employees
on May 14, 2001. The Company provided affected employees severance
benefits which were generally determined on the basis of the
employee's position and/or years of service at the Company.
o IMPAIRMENT OF LONG-LIVED ASSETS - The Company abandoned the
development and marketing of certain products that no longer fit
into its business strategy and wrote off approximately $1.9 million
of software and other capitalized costs.
o IMPAIRMENT OF GOODWILL - As part of its restructuring and internal
re-organization, management evaluated enterprise level goodwill for
impairment and recorded an impairment charge of $277.2 million. The
factors that influenced management's evaluation are more fully
discussed in the section below.
IMPAIRMENT OF GOODWILL
The Company determined that certain events occurred in May 2001 that indicated a
potential impairment in the recorded value of goodwill. During May 2001, it
became apparent that previous growth expectations could not be met for several
reasons, including:
1. The restructuring, in general, resulted in a change in the strategic focus
of the Company. The Company experienced significant management changes
prior to May 2001, including a change in CEO, COO, CFO, and SVP of Sales.
New management abandoned the development and marketing of certain products
that no longer fit its business strategy and revised the Company's revenue
growth expectations accordingly.
2. A lack of readily available investment capital to fund previously
anticipated growth. Previous plans anticipated the ability to obtain
additional equity funding, if and when necessary, to sustain the growth
model. The Company's new management team determined that due to the current
conditions in the
56
capital markets, the availability of additional equity capital was less
certain in the short term and that the Company's current cash on hand must
be optimized. The restructuring of the Company was intended to serve this
purpose.
3. The sector in which the Company operates is currently fragmented and
volatile. The sector has been clouded by new entrants, consolidations,
partnerships and failures which make it difficult to compare functions or
evaluate redundancy. Volatility is evidenced by the significantly reduced
stock prices and market capitalization levels of the Company's competitors.
These conditions contrast dramatically with those conditions that existed
at the time of the Insurdata Merger in January 2000. While no assurances
can be made regarding the Company's success, management believes that the
restructuring has placed the Company in a better position to withstand
these volatile conditions.
4. Management believes the economic slow-down in 2001 affected the spending
capacity of healthcare insurance companies on information technology
solutions and has, therefore, lowered the Company's growth expectations
from earlier projections at the time of the Insurdata Merger in January
2000.
The Company evaluated the book value of goodwill along with the estimated useful
life of the asset (20 years). Based upon ongoing changes in the marketplace, in
addition to recent changes within the Company itself, management determined that
it was appropriate to reduce the useful life of goodwill from 20 years to 10
years. The Company initially evaluated the book value of goodwill using an
estimate of the future undiscounted cash flows of the business enterprise over
the adjusted estimated useful life. This analysis indicated that the goodwill
was impaired as the carrying value of goodwill exceeded the undiscounted cash
flows. The Company then proceeded to analyze future cash flows on a discounted
basis using a discount rate of 33%, which was based upon a detailed analysis of
the Company's current risk profile. The Company's future cash flows were
estimated by management and included revenue growth rates ranging from 10% to
40%, however, no assurances can be made that these growth rates can be achieved.
The analysis of discounted future cash flows resulted in a write down in the
book value of goodwill totaling $277.2 million.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company conducts a significant amount of business with a major shareholder,
UICI. The Company is currently economically dependent upon UICI. Any change in
the Company's relationship with UICI could have a material, adverse effect on
the Company's operations. At December 31, 2001, UICI owned 46% of the Company's
outstanding common stock and owns warrants to purchase 222,396 shares of the
Company's common stock at prices ranging from $3.01 to $12.00. UICI also owns
$1,666, face value, of the Company's convertible debentures that are convertible
into 185,185 common shares.
The Company currently provides services to a number of UICI subsidiaries and
affiliates pursuant to written agreements ranging from one to five years, with
annual renewable options thereafter. These services include the use of certain
of its proprietary workflow and business applications, as well as systems
integration and technology management. The most significant of the agreements is
the UICI outsourcing agreement ("Technology Outsourcing Agreement"), which is
generally a cost plus ten percent contract. UICI has indicated that it does not
intend to renew the Technology Outsourcing Agreement when it expires in December
2005 and the agreement may be cancelled by either party for convenience upon
giving 180-day notice. The Technology Outsourcing Agreement contains no minimum
or maximum commitments on behalf of UICI and its affiliates, and UICI and its
affiliates are free to obtain the services provided by Healthaxis from an
unrelated third party during the term of the agreement.
UICI and its subsidiaries and affiliates constitute, in the aggregate, the
Company's largest customer. For the years ended December 31, 2001, 2000, and
1999, UICI and its subsidiaries and affiliates accounted for an
57
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
aggregate of $29,657 (68%), $27,402 (64%), and $0 (0%), respectively, of the
Company's total revenues. As of December 31, 2001 and 2000, Healthaxis had
accounts receivable due from UICI and its subsidiaries and affiliates totaling
$3,286, and $3,028, respectively. These amounts represented 56% and 42% of the
Company's total accounts receivable at December 31, 2001 and 2000, respectively.
On January 25, 2001, Healthaxis entered into a software license agreement with
UICI. Under the agreement, UICI paid a one-time license fee of $1,837 for a
perpetual, enterprise-wide software license. UICI had the option to terminate
the agreement within the first two years of its term, in which case a prorated
portion of the one-time license fee would be refunded. The license fee revenue
was deferred and was being recognized into revenue pro rate over 24 months. On
September 24, 2001, this agreement was amended to shorten the original refund
period from December 2002 to March 2002. The remaining refundable amount of
$840,000, as detailed in the amended agreement, is being recorded as revenue pro
rata over the remaining six-month term of the amended contract. Revenue
recognized during 2001 under this agreement was $1,417.
On December 29, 2000, Healthaxis entered into an asset purchase agreement with a
wholly owned UICI subsidiary. Under the agreement, Healthaxis purchased certain
claims processing software developed by UICI for a purchase price of $1,600,
which approximated UICI's book value of the asset. The software was written off
in May 2001 in connection with the Company's restructuring.
On September 20, 2000, Al Clemens and UICI, together with an unrelated third
party investor, purchased $5 million in principal amount of the convertible
debentures at a discount from one of the original holders of the debentures. In
connection with this transaction, Healthaxis issued a warrant to purchase 50,000
shares of its common stock at an exercise price of $3.01 to the selling
debenture holder. The Company recognized a non-cash expense totaling $115
related to this transaction.
On November 30, 1999 Healthaxis sold PILIC to AHC which was owned by Alvin
Clemens, the Company's then Chairman (See Note 5).
Legal fees paid to the law firm of a former director and general counsel and
secretary of the Company in 2000 and 1999 were $5 and $497, respectively.
During the year ended December 31, 2000, the Company entered into a consulting
services agreement with a current director in the amount of $180. This amount
was fully accrued in 2000 and will be paid through early 2002.
Netlojix Communications, Inc., a telephone company in which Ronald L. Jensen,
Chairman of UICI and a former director of COM, and parties affiliated with Mr.
Jensen own a controlling interest, provides telephone services to the Company
pursuant to a written agreement dated September 6, 2000. The agreement will
expire in August 2002. For the year ended December 31, 2001 and 2000, Healthaxis
paid Netlojix Communications, Inc. approximately $500 and $404, respectively,
for services under this agreement.
AL CLEMENS SEVERANCE AGREEMENT
On August 15, 2000, Alvin H. Clemens, the Company's then Chairman, and
Healthaxis entered into an agreement terminating Mr. Clemens' employment
contract. The termination agreement became effective upon consummation of the
HAXS Merger in January 2001. Under the terms of the termination agreement, Mr.
Clemens was to receive aggregate payments totaling $2,125 paid in quarterly
installments over five years beginning in the first quarter of 2001. The
Company, at its option, could make the quarterly payments in shares of
Healthaxis common stock not to exceed a total of 500,000 shares. Mr. Clemens, at
his option,
58
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
could request that the Company pay one-third of the value of each payment in
cash in lieu of stock to cover income tax liabilities. The Company recorded
$1,862, of compensation expense related to this agreement during 2001, which is
included in general and administrative expenses.
During 2001, the Company elected to make the quarterly severance payments in
common stock, to the extent offset by Mr. Clemens' elections to receive
one-third of such value in cash. The Company issued 94,444 shares to Mr. Clemens
in 2001 under this arrangement. At December 31, 2001, the accrued liability
relating to this arrangement totaled $1,700. On February 27, 2002, the Board of
Directors approved an agreement to settle the remaining amount due under the
agreement for 358,332 shares of common stock (See Note 26).
NOTE 8 - TRANSACTIONS WITH DIGITAL INSURANCE
In connection with the sale of the retail website operations to Digital
Insurance (See Note 5), Healthaxis and Digital Insurance entered into a Software
Licensing and Consulting Agreement that provided Healthaxis with: a perpetual
nonexclusive license to use and sublicense, subject to certain restrictions, the
user interface sold to Digital Insurance; licensing fees over 30 months of $3.0
million for software owned by Healthaxis that would be used by Digital Insurance
in conjunction with the user interface it purchased; and professional service
fees over 12 months of a minimum of $3.0 million for services relating to
customizing, maintaining and upgrading the user interface and other software.
Effective May 31, 2001, the Company entered into an Amended Asset Purchase
Agreement and Amended Software Licensing and Consulting Agreement. Under the
terms of these amendments, the Company agreed to settle all amounts due from
Digital Insurance (other than trade accounts receivable) under the original
agreements for a lump sum cash payment of $2,000, which approximated the
Company's carrying values.
Revenue recognized during the years ended December 31, 2001 and 2000 under these
agreements totaled $2,422 and $2,093, respectively.
The following table shows the aggregate amounts paid by Digital Insurance, prior
to and including the $2,000 lump sum payment, as compared to the original
contracted amount:
ORIGINAL AMOUNT
COMMITMENT RECEIVED
---------- ---------
Purchase price $ 1,000 $ 1,000
Professional services 3,000 3,000
License fees 3,000 813
--------- ---------
Total $ 7,000 $ 4,813
========= =========
The amendments further require Digital Insurance to pay Healthaxis $100 per
month effective June 1, 2001 continuing through the earlier of either May 31,
2002, or the date Digital Insurance gives written notice to Healthaxis that
Digital Insurance no longer utilizes the user interface sold by Healthaxis. This
$100 represents a guaranteed monthly minimum commitment and will cover a
dedicated staff of approximately 5.5 full time equivalents, Web hosting
services, shared telecommunications cost, and rent and operating expenses in
Healthaxis' former East Norriton, Pennsylvania facility.
In conjunction with management's periodic review of long-lived assets, a write
down of the Company's investment in Digital Insurance, which was obtained in
connection with the sale of the Company's retail
59
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
website operations (See Note 5), of $1.2 million was recorded during the second
quarter of 2001. This write down was based upon the Company's then current
estimate of the investment's net realizable value. In October 2001, Digital
Insurance completed an equity financing of $6.0 million, for which Healthaxis
waived its preemptive rights to participate. Based upon the dilution and the
share price for the newly issued preferred stock, the Company determined that an
other than temporary decline in value occurred and took an additional write down
of $1.7 million in the third quarter of 2001. At December 31, 2001, the
Company's investment in Digital Insurance is valued at $227 ($.07 per share). As
a result of the additional equity financing of Digital Insurance, Healthaxis'
ownership was reduced to approximately 2.5% of the fully diluted shares of
Digital Insurance.
NOTE 9 - ASSETS HELD FOR SALE AND LOSS ON BUILDING
Assets held for sale at December 31, 2000, represents the book value of the
Company's former headquarters building in East Norriton, Pennsylvania. On
December 22, 2001, the Company sold the building for a gross sales price of
$3,000, which resulted in a realized loss of $2,498. The net cash proceeds from
the sale totaled $2,626.
NOTE 10 - NOTES RECEIVABLE AND NOTES RECEIVABLE FROM EMPLOYEES
Notes receivable from employees bear interest at rates ranging between 6% and
8%. Of the $311 outstanding at December 31, 2001, $184 is due December 31, 2002,
with the remainder due March 31, 2004.
Notes receivable consist of the following: DECEMBER 31,
2001 2000
--------- ----------
Note receivable from Digital Insurance, $250 due
March 1, 2001, $250 due July 1, 2001, bears interest at
9.5%, unsecured $ - $ 500
Line of credit due from customer, due in equal monthly
principal payments through December 2005, bears interest
at prime plus 2%, unsecured 175 -
Note receivable from a subsidiary of UICI, monthly
payments of $8, matures December 2004, bears no interest
(discounted at 8.75%), unsecured 242 309
Other 10 10
-------- --------
Total 427 819
Less current portion (119) (577)
-------- --------
Notes receivable, non-current $ 308 $ 242
======== ========
60
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 11 - PROPERTY, EQUIPMENT AND SOFTWARE
Property, equipment and software, at cost, consist of the following:
USEFUL LIVES DECEMBER 31,
(YEARS) 2001 2000
-------------------------------------------------
Computer equipment 3 $ 8,724 $ 9,456
Office furniture and equipment 7-10 1,926 3,607
Leasehold improvements 3-5 1,094 1,476
Computer software 1-3 2,018 1,928
---------------------------------
13,762 16,467
Less accumulated depreciation and amortization (10,311) (10,036)
---------------------------------
$ 3,451 $ 6,431
=================================
Depreciation and amortization expense totaled $3,026 year ended December 31,
2001.
NOTE 12 - ACCRUED LIABILITIES AND OTHER LIABILITIES
Accrued liabilities and other liabilities consist of the following:
DECEMBER 31,
2001 2000
---------------------------------
Salaries, benefits and payroll taxes $ 502 $ 917
Severance 1,829 751
Interest and penalties 301 1,451
Due to UICI 198 2,059
Professional services 9 332
Taxes 1,085 -
Other 83 229
---------------------------------
4,007 5,739
Less other liabilities (1,087) (15)
---------------------------------
Accrued liabilities $ 2,920 $ 5,724
=================================
Other liabilities at December 31, 2001 consists primarily of a contingent tax
liability in the amount of $1,085.
NOTE 13 - CONVERTIBLE DEBENTURES
On September 15, 1999 Healthaxis issued 2% convertible debentures ("Debentures")
in the amount of $27,500 with an original due date of September 14, 2002. The
Debentures bear interest at the rate of 2% per annum, payable in cash or the
equivalent value of Healthaxis' common stock, semi annually on January 1 and
July 1 of each year, beginning on January 1, 2000. Except with respect to
overdue interest it is assumed that Healthaxis will make all payments of
interest in common
61
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
stock, subject to those shares being registered, unless Healthaxis notifies the
holder in writing otherwise.
As part of the transaction, Healthaxis issued to the Debenture holders warrants
to purchase 202,802 shares of its common stock at an exercise price equal to the
conversion price ($20.34 per share) ("Warrants"). The Warrants had a term of
five years, were valued at $2,317 and were accounted for as a cost of issuing
the Debentures. The total cost of issuing the Debentures was $3,052 and
consisted of the value of the Warrants and other costs, which have been
amortized over the anticipated life of the Debentures as interest expense.
In conjunction with the sale of the Debentures, Healthaxis also executed a
registration rights agreement, which required Healthaxis to register the
underlying shares issuable upon the conversion of the Debentures or the exercise
of the Warrants by August 28, 2000. As of December 31, 2000, the SEC had not
declared the registration statement effective and the Company accrued penalties
as required under the registration rights agreement totaling $1,419 through a
charge to interest expense.
During January 2001, the Company completed a restructuring of its Debentures
that resulted in a reduction of the conversion rate from $20.34 per share to
$9.00 per share, an extension of the maturity date from September 14, 2002 to
September 14, 2005, and a modification of the events of default. In addition,
the terms of the Warrants to purchase 202,802 shares of Healthaxis' common stock
issued to the purchasers of the Debentures were also amended to reduce the
exercise price to $3.01 per share and to extend the exercise period of the
warrants for an additional year, or until September 13, 2005. Based upon the
revised conversion price, the amended Debentures are convertible into 3,055,555
shares of Healthaxis' common stock. As a result of the significance of the
modifications, the original instrument was considered extinguished, and a new
instrument issued. The Debentures were recorded at their estimated fair value of
$27,000. The fair value of the Debentures was estimated based on an estimated
discount rate and consideration of the estimated fair value of the adjusted
equity conversion rights. As a result of the transaction, the Company recorded
and extraordinary gain of $1,681, which represents the excess of the carrying
value over the estimated fair value of the debt.
During the year ended December 31, 2001, the Company recorded $824 in interest
expense related to the Debentures. Of this amount $265 was paid via the issuance
of 157,454 shares of the Company's common stock, and $274 related to the
non-cash amortization of the debt discount.
NOTE 14 - HPS AGREEMENTS
LOANS PAYABLE TO HPS: The Company received $5,000 from HealthPlan Services, Inc.
("HPS") in the fourth quarter of 1997, which was accounted for as loan payable,
discounted at a rate of 9.25% resulting in a $3,865 amount which was to be
amortized over five years with payments of $95,000 per month including interest.
The loan was paid in June 1999.
SETTLEMENT AGREEMENT WITH HPS: During 1999, COM and Healthaxis entered into a
settlement agreement at no cost to resolve a number of disputes that had arisen
between Healthaxis and HPS relative to HPS' performance of administrative
services under the outsourcing agreement and between COM and HPS
62
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
relative to COM' performance under the ECommerce Agreement and the HPS stock
purchase agreement for COM common stock.
The settlement agreement provided for the following:
o HPS and Healthaxis and its subsidiaries, including COM, granted each
other a mutual release of all claims in connection with each party's
performance under the agreements;
o HPS purchased the remaining outstanding shares of one of PILIC's
subsidiaries for $1,500, which was set off against service fees owed
by Healthaxis to HPS;
o HPS exercised a warrant granted in 1998 pursuant to the terms of the
ECommerce Agreement for 100,000 shares of Healthaxis' common stock
for $900, which was set off against service fees owed by Healthaxis
to HPS; and
o Healthaxis agreed to pay the remaining balance of the service fees
owed by it to HPS in the amount of $1,267 on or before June 30,
1999.
NOTE 15 -CAPITAL AND OPERATING LEASE OBLIGATIONS
The Company leases office space and various pieces of equipment under operating
leases expiring in various years through 2005. In addition, the Company also
leases certain equipment under capital leases expiring in 2002. Future minimum
rent payments under capital and operating leases for each of the next five years
and in aggregate are as follows:
OPERATING CAPITAL
--------- --------
2002 $ 1,340 $ 9
2003 1,051 -
2004 984 -
2005 966 -
2006 2 -
--------- --------
$ 4,343 9
=========
Less amount representing interest (1)
--------
Present value of future minimum lease payments 8
Less current portion (8)
--------
$ -
========
At December 31, 2001 and 2000, the Company had computer equipment with an
original cost of $446 under capital leases. Accumulated amortization of this
equipment totaled $275 and $186 at December 31, 2001 and 2000, respectively.
63
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 16 - CEDING COMMISSION LIABILITY AND EXTRAORDINARY ITEM
In December 1998, PILIC entered into a coinsurance agreement with Hannover Life
Reassurance Company of America ("RCH") whereby PILIC received a $10,000 ceding
commission which consisted of a $5,000 non-refundable payment and a $5,000
payment contingent upon RCH's earning at least $10,000 in future profits from
the ceded inforce business, plus 12% interest (the "Guaranteed Amount").
Healthaxis recognized a $5,000 ceding commission liability because of the
negative financial history of the business. At no point did RCH earn the
Guaranteed Amount from the ceded business. As such, Healthaxis incurred $575 and
$600 of interest expense during 2000 and 1999, respectively.
On December 1, 2000, Healthaxis entered into a settlement agreement with RCH.
Under the terms of the agreement, RCH released Healthaxis from all liability
under Healthaxis' original guarantee, in return for a cash payment of $4,250.
Healthaxis recognized a gain on forgiveness of debt totaling $1,925 related to
the transaction, which is reflected as an extraordinary gain in 2000.
NOTE 17 - SEGMENT REPORTING
As discussed previously, in May of 2001, the Company implemented a restructuring
plan which, among other things, created four separate business units, each with
accountability for operations beginning July 1, 2001. Each business unit is
deemed to be a reporting segment. During the current year, primarily as a result
of a change in the Company's chief operating decision maker, the Company
underwent a fundamental reorganization and redesign of its internal financial
reporting system. As a result of the reorganization and redesign, it is
impractical to restate the Company's results for the prior periods to conform
with the current presentation. In addition, it is not necessary to restate the
current year presentation to conform with that of the prior periods, as the
Company operated in only one segment prior to the current year.
Assets are not allocated to business units for internal reporting purposes and
are therefore not included in the segment information below.
The Company's operating segments are:
o Application Solutions Group - provides web-enabled systems for
enrollment, administration and processing of health insurance claims
on an Application Service Provider basis.
o Web Technology Group - provides web-enabled connectivity platforms
and solutions for self service (broker, employer, employee and
providers), large group enrollment and small group enrollment,
sale/distribution and post-sale administration of group and
individual insurance policies including health, life and dental
insurance, and solutions for enabling compliance with HIPAA.
o Imaging Services Group - provides electronic data capture, imaging,
storage and retrieval of health insurance claims, attachments and
other correspondence.
o Outsourcing Group - provides system technology support services on
an outsourcing basis to the Company's largest client, UICI.
Each business segment generally sells its products and services to the same
constituent users, generally located in the United States, namely healthcare
payers, which include insurance companies, third party administrators, brokers,
Blue Cross/Blue Shield plans and self-insured employers.
64
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
All revenue is specifically associated with a separate business unit and
therefore there are no reconciling items. Portions of revenue generated from
UICI and its subsidiaries are earned under contracts or agreements other than
the Technology Outsourcing Agreement and such revenues are included in the
appropriate business unit. Earnings before income tax, depreciation and
amortization ("EBITDA") is the primary measurement used by management to make
decisions regarding the segments. EBITDA, as defined by the Company, also
excludes restructuring, severance and non-cash stock based compensation charges
("EBITDA As Defined"). Corporate overhead includes executive management,
accounting, legal and human resources, and other expenses. Although the
Company's restructuring affected all of the Company's segments, it is included
as a component of corporate overhead as this presentation is consistent with how
management views the operations. Operating income does not include any cost
allocations for corporate overhead except in the case of the outsourcing
segment. Corporate overhead costs are generally fixed and therefore do not
necessarily fluctuate with either an increase or decease in outsourcing revenue.
WEB APPLICATION IMAGING CORPORATE CONSOLIDATED
OUTSOURCING TECHNOLOGY SOLUTIONS SERVICES OVERHEAD TOTAL
----------- ---------- --------- -------- -------- -----
Year Ended December 31, 2001
- ----------------------------
Revenue $ 20,685 5,949 12,307 $ 4,849 $ - 43,790
EBITDA As Defined 3,682 (2,512) 1,841 (248) (5,699) (2,936)
Depreciation and amortization 433 866 1,250 768 14,396 17,713
Operating income (loss) 1,483 (3,378) 591 (1,016) (307,720) (310,040)
The Outsourcing Group accounts for approximately 47% of the Company's total
revenue for 2001 and is the result of a technical services agreement with the
Company's largest client, UICI. The contract term is 5 years commencing January
2000 and, generally the services provided under the agreement must be billed at
Healthaxis' cost plus ten percent.
The Company's core products are sold through the Application Solutions Group and
the Web Technology Group, and most of the Company's research and development
efforts are concentrated in these areas. The Application Solutions Group is a
mature business with over 20 years history and client base. The Web Technology
Group is a relatively new business, built to take advantage of the Company's
internet expertise and the healthcare industry's movement to web-enable legacy
systems. The Imaging Services Group serves as an entry point for new clients,
through cost savings, and introduces cross-selling opportunities for other
Company products.
The Imaging Services Group includes a processing center in Jamaica.
Approximately 6.2% of the Company's total revenues in 2001 were derived from the
Jamaican operation, which processes claims for the Company's domestic (U.S.
based) clients. Additionally, the Jamaican operation accounts for approximately
$375 of the net book value of the Company's fixed assets at December 31, 2001,
primarily consisting of data processing equipment, software and furniture. Any
interruptions of service in the Jamaican operation could result in downtime and
additional expense to repair the facility, relocate the operation or divert the
processing to the Company's U.S. based centers.
65
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 18 - INCOME TAXES
Significant components of deferred taxes consisted of the following:
DECEMBER 31,
2001 2000
---- ----
Deferred tax assets:
Reserve for bad debt $ 18 $ 106
Start up expenses 416 965
Post employment retirement benefits 348 375
Net operating and capital loss carryforwards 48,442 45,117
Accrued expenses and deferred revenues 1,556 206
------------- -----------
Total deferred tax assets 50,780 46,769
------------- -----------
Deferred tax liabilities:
Customer base (2,360) (4,516)
Capitalized software development costs (224) (1,689)
Other, net (128) (47)
------------- -----------
Total deferred tax liabilities (2,712) (6,252)
------------- -----------
Deferred tax asset before valuation allowance 48,068 40,517
Valuation allowance (48,068) (40,517)
------------- -----------
Net deferred tax asset $ - $ -
============= ===========
Effective April 1, 1999, COM was no longer eligible to participate in the
Company's consolidated federal income tax return. However, from January 26, 2001
(date of HAXS Merger) forward, COM will be included in the Company's
consolidated federal income tax return. The Company's net operating loss
carryforward amounts total $138,000 and are available to offset its future
taxable income through 2016.
Approximately $2,000 of the consolidated net operating losses result from a 1989
acquisition. These NOLs expire between 2001 and 2004 and are subject to annual
limitations of $24, thereby significantly reducing their ultimate utilization.
As a result of the capital transactions of both Healthaxis and COM, including
the Insurdata Merger and the HAXS Merger, the utilization of NOL carryforwards
is limited. Additionally, the utilization of these NOL's, if available, to
reduce future income taxes is dependent on the generation of sufficient taxable
income prior to their expiration.
As it is considered more likely than not that the deferred tax assets will not
be realized, the Company has established a valuation allowance for all net
deferred tax assets.
66
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
The reconciliation of the recorded income tax provision to the benefit expected
by applying the appropriate statutory income tax rate (35%) to the loss before
income taxes is as follows:
YEARS ENDED DECEMBER 31,
2001 2000 1999
------ ------ ------
Amount computed at statutory rate $(109,778) $(30,397) $ (19,023)
Change in valuation allowance 6,962 12,396 20,794
Amortization/impairment of goodwill 100,676 13,700 276
Other permanent differences 2,140 4,189 (2,047)
Reversal of prior year federal income taxes - (585) -
Other, net - 112 -
--------- -------- ---------
Total income tax benefit $ - $ (585) $ -
========= ======== =========
NOTE 19 - COM EQUITY
The Company's primary operations occurred in COM, a controlled subsidiary. Prior
to the HAXS Merger, a substantial amount of the Company's equity was obtained
through the sale of COM equity instruments with such transactions included in
the Company's financial statements through consolidation. The following
summarizes the significant equity events at COM that contributed to the
Company's increase in additional paid in capital in the consolidated statements
of changes in stockholders' equity. During the years ended December 31, 2001,
2000, and 1999 the increase in net assets in COM totaled $115, $242,845, and
$44,395, respectively. This increase relates to the consolidated Company's share
of equity transactions that occurred at COM. The remaining portion of the COM
equity transactions not included in the increase in net assets of COM have been
recorded as a component of minority interest.
On May 11, 1999, COM completed a private placement of 516,051 shares of COM
common stock to a group of accredited investors at $12.00 per share for an
aggregate purchase price of $6,193, less issuance costs of $2. Investors
purchasing COM common stock were provided with registration rights.
On December 7, 1999, COM completed a private placement of 3,846,003 shares of
COM common stock to a group of accredited investors and Healthaxis at $15.00 per
share for an aggregate purchase price of $57,690 less issuance costs of $2,533.
Healthaxis purchased 133,333 shares in the transaction for approximately $2,000.
During 1999, Healthaxis purchased 1,415,000 shares of COM common stock from HPS
for an aggregate purchase price of $8,203. Healthaxis accounted for the purchase
of minority interest as goodwill amortized over three years.
On January 7, 2000, COM issued 21,807,567 common shares in connection with the
Insurdata Merger (See Note 4).
COM SERIES A CONVERTIBLE PREFERRED STOCK
During 1998, COM issued a total of 545,916 shares of COM Cumulative Convertible
Series A Preferred Stock, par value $1.00 ("Series A Preferred Stock") to PILIC
for $2,400. Initially, PILIC purchased 405,886 shares of Series A Preferred
Stock at $5.91 per share. The Stock Purchase Agreement for Series A Preferred
Stock with PILIC contained a price adjustment provision that would require COM
to issue to PILIC
67
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
additional shares of Series A Preferred Stock if COM sold other shares of common
or preferred stock to another investor at a lower price. As a result of the sale
of Series B Preferred Stock to America Online ("AOL") at $4.40 per share, COM
issued an additional 140,030 shares of Series A Preferred Stock to PILIC so that
PILIC's price per share would also equate to $4.40 per share.
In 1999, Healthaxis purchased all Series A Preferred Stock from PILIC and
transferred 100,000 shares to AHC, a newly formed Pennsylvania business
corporation, owned by Alvin H. Clemens, the Company's then Chairman, for no
consideration. On January 26, 2001, in connection with the HAXS Merger, the
100,000 shares of Series A Preferred Stock were converted into 133,000
Healthaxis common shares based on the terms of the HAXS Merger.
COM SERIES B CONVERTIBLE PREFERRED STOCK
During 1998, COM issued 625,529 shares of Series B convertible preferred stock,
par value $1.00 per share ("Series B Preferred Stock") to AOL at $4.40 per share
for an aggregate purchase price of $2,750, less issuance costs of $51. On
January 26, 2001, in connection with the HAXS Merger, all of the Series B
Preferred shares were converted into 834,455 shares of Healthaxis common stock.
COM SERIES C CONVERTIBLE PREFERRED STOCK
On March 30, 1999, COM issued 1,526,412 shares of COM Series C convertible
preferred stock at $5.77 per share ("Series C Preferred Stock"), for an
aggregate purchase price of $8,807, less issuance costs of $684 and $278
representing the value of COM warrants issued to an investment banker for
services rendered in connection with the Series C Preferred Stock Offering. On
January 26, 2001, in connection with the HAXS Merger, all of the Series C
Preferred shares were converted into 2,036,232 shares of Healthaxis common
stock.
COM SERIES D CONVERTIBLE PREFERRED STOCK
On July 12, 1999, COM issued 333,334 shares of COM Series D convertible
preferred stock at $12 per share for an aggregate purchase price of $4,000, less
issuance costs of $40 ("Series D Preferred Stock"). On January 26, 2001, in
connection with the HAXS Merger, all of the Series D Preferred shares were
converted 444,667 shares of Healthaxis common stock.
NOTE 20 - STOCKHOLDERS' EQUITY
At December 31, 2001, common stock reserved for future issuance is as follows:
Conversion of Debentures 3,055,555
Options issued in HAXS Merger 5,146,771
Healthaxis 2000 Option Plan 10,000,000
Warrants 2,269,112
Other inactive option plans 2,389,497
-------------------
Total 22,860,935
===================
On September 9, 1999, Healthaxis and Mr. Clemens, Healthaxis' then Chairman,
entered into an agreement whereby Mr. Clemens agreed to; 1) convert
approximately 557,000 shares of Healthaxis' Series A Preferred Stock, 2) amend
his agreement to purchase 550,000 shares of Healthaxis' Series A Preferred Stock
in
68
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
exchange for an option to purchase Healthaxis common stock, and 3) release all
right, title and interest to options to purchase 202,802 shares of Healthaxis'
common stock. The exercise prices of the options to purchase common stock range
from $3.64 to $8.75 per share and had a weighted average price per share of
$4.56. In consideration of the aforementioned Healthaxis paid Mr. Clemens $650
which was accounted for as compensation expense.
NOTE 21 - AMORTIZATION OF INTANGIBLES
Amortization of intangibles relates to the amortization of goodwill, customer
base, and capitalized software resulting from the Insurdata and HAXS Mergers and
the amortization of goodwill resulting from the purchase of COM common shares
from a minority shareholder in 1999. The customer base and capitalized software
resulting from the Insurdata Merger are being amortized over their estimated
useful lives of 4 and 3 years, respectively. The goodwill resulting from the
Insurdata and HAXS Mergers was being amortized over 20 years until May 2001 at
which time the estimated life was reduced to 10 years in connection with the
Company's restructuring (See Note 6)
The goodwill resulting from the 1999 purchase of COM shares from a minority
shareholder was being amortized over 3 years until June 30, 2000, at which time
the remaining net book value was recognized as a component of the loss on the
sale of the discontinued retail website operations.
Following is a summary of the amortization of intangibles:
YEARS ENDED DECEMBER 31,
2001 2000 1999
------------- ------------- -----------
Capitalized software $ 853 $ 954 $ -
Goodwill 10,443 35,423 765
Customer base 2,738 4,301 -
---------- ---------- --------
$ 14,034 $ 40,678 $ 765
========== ========== ========
69
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 22 - STOCK OPTIONS AND WARRANTS
HEALTHAXIS STOCK OPTIONS AND WARRANTS
The following table summarizes the changes in outstanding Healthaxis stock
options and warrants:
STOCK OPTIONS WARRANTS
------------------------------------- ----------------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------------------- ----------------------------------
Outstanding at January 1, 1999 3,408,016 $3.93 1,700,000 $ 5.38
Granted 344,831 9.51 254,469 12.86
Exercised (778,925) 6.35 (250,000) 8.20
Canceled/forfeited (327,831) 6.50 (75,000) 3.85
------------------------------------- ----------------------------------
Outstanding at December 31, 1999 2,646,091 3.60 1,629,469 7.33
Granted - - 53,333 3.03
Exercised (28,450) 6.59 (41,500) 3.57
Canceled/forfeited (44,875) 7.97 (25,000) 5.00
------------------------------------- ----------------------------------
Outstanding at December 31, 2000 2,572,766 3.02 1,616,302 7.32
Granted 6,919,918 2.20 952,810 5.25
Exercised - - -
Canceled/forfeited (1,252,949) 3.03 (300,000) 3.38
------------------------------------- ----------------------------------
Outstanding at December 31, 2001 8,239,735 $2.33 2,269,112 $ 5.17
===================================== ==================================
Options/Warrants Exercisable at December 31,
1999 2,555,491 1,575,969
2000 2,538,266 1,591,002
2001 6,621,557 2,243,812
Following is a summary of the status of stock options outstanding at December
31, 2001:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------------------ -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
------------------------------------------------------------ -------------------------------
$.68 - $.98 1,388,876 6.1 yrs $ .90 1,294,476 $ .91
$1.00 - $1.70 2,539,111 3.6 yrs $ 1.31 2,025,549 $ 1.36
$2.10 - $3.64 3,217,579 4.8 yrs $ 2.77 2,209,763 $ 2.84
$4.25 - $5.00 875,769 1.8 yrs $ 4.35 874,269 $ 4.35
$7.50 - $10.00 218,400 3.8 yrs $ 8.85 217,50 $ 8.86
--------- ---------
8,239,735 6,621,557
========= =========
70
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
Total stock based compensation for the years ended December 31, 2001, 2000, and
1999 totaled $5,564, $4,927, and $0, respectively.
From 1996 through 1999, Healthaxis maintained several stock option plans that
provided for option grants to directors and key employees of Healthaxis and its
subsidiaries. In addition, certain Healthaxis option plans provided for grants
to non-employee field representatives and agents related to Healthaxis'
discontinued insurance operations. During 2000, no options were granted by
Healthaxis and all such plans became inactive.
On January 26, 2001 the Healthaxis shareholders approved the 2000 Stock Option
Plan ("Healthaxis 2000 Plan"). Under the Healthaxis 2000 Plan, employees,
officers and directors of Healthaxis, as well as certain consultants, are
eligible to receive Healthaxis options.
During the year ended December 31, 2001, the Healthaxis granted 866,054 under
the Healthaxis 2000 Plan. The remaining 6,053,864 options granted by Healthaxis
relate to the issuance of options to the former COM option holders pursuant to
the terms of the HAXS Merger (See Note 4).
In the first quarter of 2000, Healthaxis accelerated the vesting of stock
options granted to certain terminated employees and recorded $205 of
compensation expense related to this event.
On September 20, 2000, Healthaxis issued 50,000 warrants to a selling Debenture
holder in connection with the sale of Debentures to UICI and Al Clemens (See
Note 7). The warrants have an exercise price of $3.01. The Company recognized
expense totaling $115 related to this transaction which represented the fair
value of the warrants determined using the Black-Scholes option pricing model.
On September 29, 2000, Healthaxis entered into an agreement with certain of its
former agents that reduced the exercise price of existing options to purchase
318,042 shares of Healthaxis' common stock from original exercise prices ranging
from $4.75 to $14.63 per share to $4.25 per share. The agreement also reduced
the payments required to be made pursuant to a registration rights agreement
with such individuals relating to the shares issuable upon the exercise of such
options. Healthaxis recorded a charge of $500 during the year ended December 31,
2000, relating to this repricing of non-employee options.
COM STOCK OPTIONS AND WARRANTS
During the first quarter of 2000, the board of directors of COM granted
1,178,200 options under its 1998 Stock Option Plan ("1998 Plan"). All such
options were granted with an exercise price of $15.00 per share, which
represented the fair value of the COM common stock based upon privately
negotiated equity transactions. Since this grant price was below the fair market
value of Healthaxis' common stock on the dates of the grants, COM recorded
compensation expense totaling $4,107 during 2000.
On May 24, 2000, the board of directors of COM repriced 1,773,050 existing
options. The options affected had original exercise prices ranging from $12.00
to $15.00 per share. The exercise price of these options was adjusted to $3.31
based upon the quoted market share price of Healthaxis' common stock as reported
on the NASDAQ National Market on the date of the repricing. COM accounted for
these options as a variable award subsequent to the repricing. In January 2001,
these awards were exchanged for Healthaxis options under the terms of the HAXS
Merger and continue to be accounted for under variable option accounting. The
fair value of Healthaxis' stock at December 31, 2001 and 2000, was below the new
exercise prices and as such, no compensation cost has been recognized during the
years ended December 31, 2001 and 2000 due to the repricing.
71
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
WARRANTS
During 1998 and 1999, COM issued a total of 1,125,000 warrants. Of these
warrants, all but 63,000 were issued in connection with marketing and carrier
agreements related to COM's discontinued retail website operations. The 63,000
warrants issued in 1999 were issued in connection with the issuance of Series C
Preferred Stock and were recorded as a direct financing cost. On January 26,
2001, pursuant to the terms of the HAXS Merger, the Company issued 952,810
warrants in exchange for the outstanding COM warrants. These warrants were
included as a component of the HAXS Merger purchase price based upon their fair
value.
PRO FORMA INFORMATION
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock Based Compensation". Had compensation cost for the
Company's stock option grants been determined based on the fair value at the
date of grants in accordance with the provisions of SFAS 123, the Company's net
loss and net loss per common share would have been increased to the following
pro forma amounts:
2001 2000 1999
---- ---- ----
Net loss applicable to common shares
as reported $(310,572) $(35,016) $(46,601)
Pro forma $(317,195) $(37,655) $(48,192)
Net loss applicable to common shares Basic & Diluted Basic & Diluted Basic & Diluted
--------------- --------------- ---------------
as reported $(6.19) $(2.68) $(3.80)
Pro forma $ (6.33) $(2.88) $(3.93)
The fair value of the options and warrants granted are estimated on the date of
grant using the Black-Scholes option pricing model. The major assumptions used
and the estimated fair value include no dividends paid, assumed forfeitures of
10% annually for non-vested options and the following:
EXPECTED EXPECTED RISK FREE WEIGHTED
TERM STOCK INTEREST AVERAGE
IN YEARS VOLATILITY RATE FAIR VALUE
-------- ---------- ---- ----------
FOR OPTIONS GRANTED IN 1999
1996 Employee Plan .5 - 5 58% - 100% 4.48% $4.65
Directors Plan 10 58% 4.48% $2.12
1998 Plan 5 100% 4.48% $5.71
FOR OPTIONS GRANTED IN 2000
1998 Plan 3 100% 4.75% $2.11
FOR OPTIONS GRANTED IN 2001
Options issued in HAXS Merger 2.5 - 9.75 100% 4.48% $3.13
Healthaxis 2000 Plan 3 100% 4.48% $1.05
In January and February 2000, COM granted options to acquire approximately
1,200,000 COM common shares at $15.00 per share. The fair value of Healthaxis
common stock (used by management to estimate the fair value of COM stock) on the
grant dates approximated $29.00 per share. As a result, the Company will
amortize, for
72
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
financial accounting purposes, compensation costs of approximately $16,800 over
the 3-4 year vesting period of the options.
NOTE 23 - COMMITMENTS AND CONTINGENCIES
The Company is involved in normal litigation, including that arising in the
ordinary course of business. Management is of the opinion that no litigation
will have a material adverse effect on the results of operations or financial
position of the Company.
NOTE 24 - POST RETIREMENT AND POST EMPLOYMENT LIABILITIES AND EMPLOYEE BENEFIT
PLANS
Healthaxis has an obligation to provide certain post retirement benefits,
primarily lifetime health, dental and life insurance coverage, to a group of
individuals consisting of three former PILIC executives, 18 retired PILIC
employees, and the Company's former Chairman. These liabilities were assumed by
Healthaxis in accordance with the terms of the transfer of PILIC (See Note 5).
Because this obligation exists until the death of the participants, actuarial
calculations, which include the use of estimates, are used to determine the
carrying value of the liability. These estimates include a life expectancy of 83
years, a discount rate of 7.25% to calculate the present value of the expected
future costs, a 3% annual growth factor for life insurance and a range of 5% -
10% annual growth factor for medical insurance. As of December 31, 2001, the
Company has $995 recorded related to post retirement and post employment
liabilities.
Changes in the post retirement and past employment liabilities were as follows:
Balance at January 1, 2000 $1,029
Interest cost 73
Service cost 86
Payments (116)
--------------
Balance at December 31, 2000 1,072
Interest cost 57
Service cost (14)
Payments (120)
--------------
Balance at December 31, 2001 $995
==============
At December 31, 2001, the unamortized, unrecognized net obligation existing at
the date of the initial application of SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions" was $293. The amortization of this
transition liability was $58 per year for the years ended December 31, 2001,
2000, and 1999, and is included as a component of service cost.
The Company sponsors a defined contribution retirement savings plan under
section 401(k) of the Internal Revenue Code covering substantially all
employees. All contributions are subject to limitations imposed by IRS
regulations. The total benefit expense under this plan amounted to $558, $547,
and $53 for the years ended December 31, 2001, 2000, and 1999, respectively.
73
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 25 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the Company's quarterly results of operations
for the years 2001 and 2000:
2001
Q1 Q2 Q3 Q4 TOTAL
---------------------------------------------------------------
Revenue $ 10,837 $ 11,497 $ 11,218 $ 10,238 $ 43,790
Operating expenses 29,513 299,807 12,970 14,038 356,328
---------- --------- --------- --------- -----------
Operating loss (18,676) (288,310) (1,752) (3,800) (312,538)
Interest expense and other income, net 65 (1,187) (1,654) (19) (2,795)
---------- --------- --------- --------- -----------
Income before minority interest (18,611) (289,497) (3,406) (3,819) (315,333)
Minority interest in loss of subsidiary 3,080 - - - 3,080
---------- --------- --------- --------- -----------
Net loss before taxes (15,531) (289,497) (3,406) (3,819) (312,253)
Income tax provision - - - - -
---------- --------- --------- --------- -----------
Net loss before extraordinary item (15,531) (289,497) (3,406) (3,819) (312,253)
Extraordinary gain 1,681 - - - 1,681
---------- --------- --------- --------- -----------
Net loss from continuing operations (13,850) (289,497) (3,406) (3,819) (310,572)
Loss on disposal of discontinued operations - - - - -
Loss from discontinued operations - - - - -
---------- --------- --------- --------- -----------
Net loss $ (13,850) $(289,497) $ (3,406) $ (3,819) $ (310,572)
========== ========= ========= ========= ===========
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.37) $ (5.48) $ (0.06) $ (0.07) $ (6.22)
Extraordinary gain 0.04 - - - 0.03
---------- --------- --------- --------- -----------
Net loss $ (0.33) $ (5.48) $ (0.06) $ (0.07) $ (6.19)
========== ========= ========= ========= ===========
2000
Q1 Q2 Q3 Q4 TOTAL
---------------------------------------------------------------
Revenue $ 11,375 $ 10,363 $ 11,016 $ 10,042 $ 42,796
Operating expenses 27,754 27,628 24,816 24,494 104,692
---------- ----------- ---------- ---------- -----------
Operating loss (16,379) (17,265) (13,800) (14,452) (61,896)
Interest expense and other income, net (585) 408 (916) (1,884) (2,977)
---------- ----------- ---------- ---------- -----------
Income before minority interest (16,964) (16,857) (14,716) (16,336) (64,873)
Minority interest in loss of subsidiary 9,360 9,708 7,786 9,134 35,988
---------- ----------- ---------- ---------- -----------
Net loss before taxes (7,604) (7,149) (6,930) (7,202) (28,885)
Income tax provision - - - 585 585
---------- ----------- ---------- ---------- -----------
Net loss before extraordinary item (7,604) (7,149) (6,930) (6,617) (28,300)
Extraordinary gain - - - 1,925 1,925
---------- ----------- ---------- ---------- -----------
Net loss from continuing operations (7,604) (7,149) (6,930) (4,692) (26,375)
Loss on disposal of discontinued operations - (2,802) - 502 (2,300)
Loss from discontinued operations (3,728) (2,613) - - (6,341)
---------- ----------- ---------- ---------- -----------
Net loss $ (11,332) $ (12,564) $ (6,930) $ (4,190) $ (35,016)
========== =========== ========== ========== ===========
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.58) $ (0.55) $ (0.53) $ (0.51) $ (2.17)
Discontinued operations (0.29) (0.41) - 0.04 (0.66)
Extraordinary gain - - - .15 .15
Net loss $ (0.87) $ (0.96) $ (0.53) $ (0.32) $ (2.68)
========== =========== ========== ========== ===========
74
HEALTHAXIS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in thousands, except share and per share data)
NOTE 26 - SUBSEQUENT EVENTS
On August 15, 2000, Alvin H. Clemens, the Company's then Chairman, and
Healthaxis entered into an agreement terminating Mr. Clemens' employment
contract. The termination agreement became effective upon the consummation of
the HAXS Merger in January 2001. Under the terms of the termination agreement,
Mr. Clemens was to receive aggregate payments totaling $2,125 paid in quarterly
installments over five years beginning in the first quarter of 2001. The
Company, at its option, could make the quarterly payments in shares of
Healthaxis common stock not to exceed a total of 500,000 shares.
On March 6, 2002, the Company and Mr. Clemens entered into an agreement pursuant
to which Mr. Clemens agreed to accept 358,332 shares of the Company's common
stock in full payment and satisfaction of the remainder of the severance
obligation. The Company recorded a gain in the first quarter of 2002 totaling
$1,345 related to the settlement of this liability, which was based upon the
difference between the carrying amount of the liability and the fair value of
the common stock issued to Mr. Clemens.
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
BDO Seidman, LLP, the independent accountants who had been engaged by
Healthaxis Inc. (the "Company") as the principal accountants to audit the
Company's consolidated financial statements, was dismissed effective April 17,
2001. On April 24, 2001, the Company engaged Ernst & Young, LLP as the Company's
new principal independent accountants to audit the Company's consolidated
financial statements for the year ending December 31, 2001.
The decision to change the Company's independent accountants from BDO
Seidman, LLP to Ernst & Young, LLP was recommended by the Audit Committee of the
Board of Directors and approved by the Company's Board of Directors.
The reports of BDO Seidman, LLP, on the financial statements of the
Company during the two-year period ended December 31, 2000, did not contain an
adverse opinion, or a disclaimer of opinion, and were not qualified or modified
as to uncertainty, audit scope, or accounting principles.
During the two-year period ended December 31, 2000, and interim period
from January 1, 2001 through the date of dismissal of BDO Seidman, LLP, the
Company did not have any disagreements with BDO Seidman, LLP, on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
BDO Seidman, LLP, would have caused it to make a reference to the subject matter
of the disagreements in connection with its reports.
Prior to engaging Ernst & Young, LLP, Healthaxis had not consulted
Ernst & Young, LLP, regarding the application of accounting principles to a
specified transaction, completed or proposed, or the type of audit opinion that
might be rendered on the registrant's financial statements.
76
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be included in Item 10 of Part III of this
Form 10-K is incorporated by reference from information from the Company's
definitive proxy statement, for its 2002 annual meeting of stockholders, to be
filed with the SEC not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be included in Item 11 of Part III of this
Form 10-K is incorporated by reference from information from the Company's
definitive proxy statement, for its 2002 annual meeting of stockholders, to be
filed with the SEC not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be included in Item 12 of Part III of this
Form 10-K is incorporated by reference from information from the Company's
definitive proxy statement, for its 2002 annual meeting of stockholders, to be
filed with the SEC not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be included in Item 13 of Part III of this
Form 10-K is incorporated by reference from information from the Company's
definitive proxy statement, for its 2002 annual meeting of stockholders, to be
filed with the SEC not later than 120 days after the end of the fiscal year
covered by this report.
77
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The materials set forth below are filed as part of this report.
(1) List of Financial Statements: Page
----
Report of Independent Auditors 39
Report of Independent Certified Public Accountants 40
Consolidated Balance Sheets -
December 31, 2001 and 2000 41
Consolidated Statements of Operations -
Years ended December 31, 2001, 2000, and 1999 42
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2001, 2000, and 1999 43
Consolidated Statements of Cash Flows -
Years ended December 31, 2001, 2000, and 1999 44
Notes to Consolidated Financial Statements 46
(3) Exhibits:
--------
The Exhibits listed on the accompanying Exhibit Index
immediately following the Financial Statement Schedules are
filed as part of, and are incorporated by reference into, this
Report.
(b) Reports on Form 8-K:
None
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by undersigned, thereunto duly authorized.
HEALTHAXIS INC.
Date: March 22, 2002 By: /s/ James W. Mclane
----------------------------------
James W. McLane
Chairman of the Board, President,
Chief Executive Officer
(Duly Authorized Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James W. McLane and John Carradine and
each of them, his true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, to sign any and all amendments to this
Annual Report on Form 10-K and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ James W. Mclane Chairman of the Board, President and Chief March 22, 2002
- ---------------------------------------- Executive Officer (principal executive officer)
James W. McLane
/s/ John M. Carradine Chief Financial Officer and Treasurer (Principal March 22, 2002
- ----------------------------------------- financial and accounting officer)
John M. Carradine
/s/ Michael Ashker Director March 21, 2002
- -----------------------------------------
Michael Ashker
/s/ Kevin Brown Director March 22, 2002
- -----------------------------------------
Kevin Brown
/s/ Alvin H. Clemens Director March 22, 2002
- -----------------------------------------
Alvin H. Clemens
/s/ Adam J. Gutstein Director March 20, 2002
- ----------------------------------------
Adam J. Gutstein
/s/ Henry G. Hager Director March 20, 2002
- ----------------------------------------
Henry G. Hager
/s/ Kevin F. Hickey Director March 21, 2002
- ----------------------------------------
Kevin F. Hickey
/s/ James L. Hopkins Director March 22, 2002
- ----------------------------------------
James L. Hopkins
/s/ Dennis B. Maloney Director March 22, 2002
- ----------------------------------------
Dennis B. Maloney
79
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description of Exhibits
2.1 Stock Exchange Agreement, dated June 18, 1996 among
Registrant, Richard E. Field, Arthur J. Ivey and Richard
E. Field & Associates, Inc. Incorporated by reference to
Exhibit (2)(D) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
2.2 Stock Purchase Agreement between Registrant and AHC
Acquisition, Inc., dated August 16, 1999. Incorporated
by reference to Exhibit 10.1 to Registrant's Form 8-K
filed August 27, 1999.
2.3 Securities Purchase Agreement between Registrant and
the Purchasers dated September 14, 1999. Incorporated by
reference to Exhibit 1 to Registrant's Form 8-K filed
September 22, 1999.
2.4 Amendment to Securities Purchase Agreement between the
Registrant and the Purchasers dated September 28, 2000.
Incorporated by reference to Exhibit 10.2 to
Registrant's Form 8-K filed October 11, 2000.
2.5 Agreement and Plan of Merger between Registrant,
HealthAxis.com, Inc., UICI and Insurdata Incorporated
dated December 6, 1999. Incorporated by reference to
Exhibit 99.3 to Registrant's Form 8-K filed December 8,
1999.
2.6 Amended and Restated Agreement and Plan of
Reorganization dated October 26, 2000 among the
Registrant, HealthAxis and HealthAxis Acquisition Corp.
Incorporated by reference to Exhibit 99.2 to
Registrant's Form 8-K filed January 30, 2001.
2.7 Agreement and Plan of Merger dated October 26, 2000
among the Registrant, HealthAxis and HealthAxis
Acquisition Corp. (included as exhibit to Amended and
Restated Agreement and Plan of Reorganization).
Incorporated by reference to Exhibit 99.2 to
Registrant's Form 8-K filed January 30, 2001.
3.1 Amended and Restated Articles of Incorporation of the
Registrant. Incorporated by reference to Exhibit 3.1 to
Registrant's Form 8-K dated January 30, 2001.
3.2 Amended and Restated Bylaws. Incorporated by reference
to Exhibit 3.2 to Registrant's Form 8-K filed January
30, 2001.
4.1 Form of Registrant's Common Stock Certificate.
Incorporated by reference to Exhibit 4(A) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.
80
Exhibit
Number Description of Exhibits
10.1 Premium Production and Stock Option Agreement dated
January 19, 1991 among Registrant, Provident Indemnity
Life Insurance Company and Premarco, Inc. Incorporated
by reference to Exhibit (10)(E) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1990.
10.2 Registrant's 1983 Incentive Stock Option Plan and
Management Contracts thereunder. Incorporated by
reference to Exhibit (10)(C)(17) to Registrant's Form 10
Registration Statement No. 0-13591, as amended. 10.3
Registrant's 1985 Non-Qualified Stock Option Plan.
Incorporated by reference to Exhibit (10)(C)(1) to
Registrant's Form 10 Registration Statement No. 0-13591,
as amended.
10.4 Registrant's 1991 Executive Stock Option Plan.
Incorporated by reference to Exhibit (10)(O) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991.
10.5 Registrant's 401(k) Profit Sharing Plan and Trust.
Incorporated by reference to Exhibit (10)(P) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1991.
10.6 Amendment dated November 17, 1992 to Premium Production
and Stock Option Agreement dated January 19, 1991 among
Registrant, Provident Indemnity Life Insurance Company
and Premarco, Inc., Incorporated by reference to
Exhibit (10)(S) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992.
10.7 Amended and Restated Provident American Corporation
Incentive Stock Option Plan for Field Representatives
and Agents dated January 1, 1991. Incorporated by
reference to Exhibit (10)(T) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1992.
10.8 Third Amendment to the Amended and Restated Stock
Option Agreement dated April 1, 1993 among Registrant,
Provident Indemnity Life Insurance Company and Alvin H.
Clemens. Incorporated by reference to Exhibit (10)(B)
to Registrant's Quarterly Report on Form 10-Q for the
Quarterly period ended September 30, 1993.
81
Exhibit
Number Description of Exhibits
10.9 Option Agreement dated as of April 1, 1993 granting
Alvin H. Clemens the right to purchase 500,000 shares
of Series A Preferred Stock. Incorporated by reference
to Exhibit (10)(C) to Registrant's Quarterly Report on
Form 10-Q for the Quarterly period ended September 30,
1993.
10.10 Amendment to Amended and Restated Option Agreement,
dated as of September 9, 1999. Incorporated by reference
to Exhibit (10)(K) to Registrant's Annual Report on
form10-K for the year ended December 31, 1999.
10.11 Fourth Amendment to Registrant's Incentive Stock Option
Plan for Field Representatives and Agents, effective
January 1, 1995. Incorporated by reference to Exhibit
(10)(CC) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
10.12 Registrant's Life and Health Insurance Agent
Non-Qualified Stock Option Plan, effective January 2,
1996. Incorporated by reference to Exhibit (10)(EE) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.13 Amendment and Restatement of the Registrant's Stock
Option Plan for Directors, effective July 16, 1996.
Incorporated by reference to Exhibit (10)(JJ) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
10.14 Registrant's 1996 Employee Incentive Stock Option Plan,
effective July 16, 1996. Incorporated by reference to
Exhibit (10)(KK) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
10.15 Registrant's Amended and Restated Stock Option Plan for
Executives, dated December 11, 1996. Incorporated by
reference to Exhibit (10)(LL) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1996.
10.16 Stock Option/Warrant Agreement, dated January 1, 1996
between Registrant and Richard E. Field. Incorporated by
reference to Exhibit (10)(QQ) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1996.
10.17 First Amendment to the Amended and Restated Interactive
Marketing Agreement between America Online, Inc. and
Provident Health Services, Inc. and HealthAxis.
Incorporated by reference to Exhibit 10.2 to
Registrant's Form 8-K/A dated January 19, 1999.
82
Exhibit
Number Description of Exhibits
10.18 Second Amendment to the Amended and Restated Interactive
Marketing Agreement between America Online, Inc. and
Provident Health Services, Inc. and HealthAxis. (This
document has been redacted to remove certain portions
for which confidential treatment has been requested by
the Company pursuant to Rule 24b-2). Incorporated by
reference to Exhibit 10.1 to Registrant's Form 8-K/A
filed May 14, 1999.
10.19 Lynx Capital Group, LLC Consulting Agreement, dated
March 31, 1998 between Provident Indemnity Life
Insurance Company, Provident American Life and Health
Insurance Company and Lynx Capital Group, LLC.
Incorporated by reference to Exhibit (10)(OO) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.20 Share Purchase Agreement dated November 13, 1998 between
Registrant, Lynx Private Equity Partners I, LLC, James
Burke, Craig Gitlitz, Craig Gitlitz IRA and Interhotel
Company Ltd. Incorporated by reference to Exhibit 10.1
to Registrant's Form 8-K dated December 23, 1998.
10.21 Severance Agreement between Registrant and Anthony R.
Verdi effective March 1, 2001. Incorporated by reference
to Exhibit 10 to Registrant's Quarterly Report on Form
10-Q for the period ended March 31, 2000.
10.22 Amended and Restated Registration Rights Agreement
between the Registrant and the Purchasers dated January
29, 2001.
10.23 Form of Amended Debenture issued by the Registrant to
the Purchasers dated September 28, 2000. Incorporated by
reference to Exhibit 10.2 to Registrant's Form 8-K filed
October 11, 2000.
10.24 Form of Amended Warrant issued by the Registrant to the
Purchasers dated September 28, 2000. Incorporated by
reference to Exhibit 10.2 to Registrant's Form 8-K filed
October 11, 1999.
10.25 Letter Agreement between the Registrant and Alvin H.
Clemens dated September 9, 1999. Incorporated by
reference to Exhibit 5 to Registrant's Form 8-K filed
September 22, 1999.
10.26 Securities Purchase Agreement between HealthAxis and the
Purchasers (including the Registrant) dated December 3,
1999. Incorporated by reference to Exhibit 99.1 to
Registrant's Form 8-K filed December 8, 1999.
10.27 Shareholders' Agreement between Registrant, UICI, Alvin
H. Clemens and Michael Ashker dated January 26, 2001.
83
Exhibit
Number Description of Exhibits
10.28 Amended and Restated Voting Trust Agreement between
UICI and Messrs. Ashker, LeBaron and Maloney dated July
31, 2000. Incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2000.
10.29 Transition Agreement between the Registrant's
subsidiary, HealthAxis.com, Inc., and Insurdata
Incorporated dated December 6, 1999. Incorporated by
reference to Exhibit 99.6 to Registrant's Form 8-K filed
December 8, 1999.
10.30 Letter Agreement between the Registrant, UICI and
HealthAxis dated December 6, 1999. Incorporated by
reference to Exhibit 99.11 to Registrant's Form 8-K
filed December 8, 1999.
10.31 Voting Trust Agreement between HAI, HealthAxis, UICI,
Messrs. Ashker, Clemens, Hager and LeBaron, dated
January 7, 2000. Incorporated by reference to Exhibit
99.5 to Registrant's Form 8-K filed December 8, 1999.
10.32 Registrant's 2000 Stock Option Plan. Incorporated by
reference to Exhibit (10)(PPP) to Registrant's Annual
Report on Form 10-K for the year ended December 31,
1999.
10.33 Amended and Restated Healthaxis.com 1998 Stock Option
Plan.
10.34 Agreement between Insurdata Imaging Services, The Mega
Life and Health Insurance Company and Mid-West National
Life Insurance Company of Tennessee effective May 1,
1999; with First Amendment effective January 1, 2000.
Incorporated by reference to Exhibit (10)(QQQ) to
Registrant' s Annual Report on Form 10-K for the year
ended December 31, 1999.
10.35 License and Services Agreement between Insurdata and
UICI Administrators, Inc. dated January 1, 1999.
Incorporated by reference to Exhibit (10)(RRR) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.36 Insurdata Incorporated 1999 Stock Option Plan.
Incorporated by reference to Exhibit (10)(SSS) to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.37 Letter Lease Agreement dated May 28, 1997 between UICI
and Insurdata. Inc. Incorporated by reference to Exhibit
(10)(TTT) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999.
10.38 Agreement between UICI (including Insurdata Inc.) and
Netlojix Communications, Inc. dated August 1, 1999.
Incorporated by reference to Exhibit (10)(UUU) to
Registrant's Annual Report on
84
Exhibit
Number Description of Exhibits
Form 10-K for the year ended December 31, 1999.
10.39 Termination Agreement of Employment Contract and First
Amendment to Employment Contract between Registrant,
HealthAxis.com, Inc. and Alvin H. Clemens, dated as of
August 15, 2000. Incorporated by reference to Exhibit
10.3 to Registrant's Form 8-K filed October 11, 2000.
10.40 Letter Agreement dated September 26, 2000 between
Registrant, HealthAxis.com, Inc. and Alvin H. Clemens.
Incorporated by reference to Exhibit 10.4 to
Registrant's Form 8-K filed October 11, 2000.
10.41 Letter Agreement dated September 19, 2000 related to
benefits between Registrant, HealthAxis.com, Inc. and
Alvin H. Clemens. Incorporated by reference to Exhibit
10.5 to Registrant's Form 8-K filed October 11, 2000.
10.42 Subordination Agreement dated October 6, 2000 among
Registrant, HealthAxis.com, Inc. and certain Debenture
holders. Incorporated by reference to Exhibit 10.11 to
Registrant's Form 8-K filed October 11, 2000.
10.43 Asset Purchase Agreement dated June 30, 2000, between
HealthAxis.com, Inc. and Digital Insurance, Inc.
Incorporated by reference to Exhibit 10.1 of Form 8-K
filed July 20, 2000.
10.44 Amendment to Asset Purchase Agreement dated September
29, 2000 between HealthAxis.com, Inc. and Digital
Insurance, Inc. Incorporated by reference to Exhibit
10.3 to Registrant's Form 8-K filed October 27, 2000.
10.45 Software License and Consulting Agreement dated June 30,
2000, between HealthAxis.com, Inc. and Digital
Insurance, Inc. Incorporated by reference to Exhibit
10.2 of Form 8-K dated filed July 20, 2000.
10.46 Amendment to Software License and Consulting Agreement
dated September 29, 2000 between HealthAxis.com, Inc.
and Digital Insurance, Inc. Incorporated by reference to
Exhibit 10.4 to Registrant's Form 8-K filed October 27,
2000.
10.47 Settlement Agreement and Release dated December 1, 2000,
between HealthAxis Inc. and Hannover Life Reassurance
Company of America. Incorporated by reference to Exhibit
10.1 to Registrant's Form 8-K filed December 14, 2001.
10.48 Agreement for the Sale of Commercial Real Estate, dated
December 11, 2000 between HealthAxis Inc. and
HealthAxis.com, Inc. Incorporated by reference to
Exhibit 10.2 to Registrant's Form 8-K filed December 14,
2001.
85
Exhibit
Number Description of Exhibits
10.49 Employment Agreement between HealthAxis.com, Inc.,
Registrant and James McLane. Incorporated by reference
to Exhibit 10.1 to Registrant's Form 8-K filed January
3, 2001.
10.50 Severance Agreement between HealthAxis.com, Inc.,
Registrant and Michael Ashker. Incorporated by reference
to Exhibit 10.2 to Registrant's Form 8-K filed January
3, 2001.
10.51 Severance Agreement between HealthAxis.com, Inc.,
Registrant and Andrew Felder and Mutual Release of
Liability between HealthAxis.com, Inc., Registrant and
Andrew Felder. Incorporated by reference to Exhibit 10.3
to Registrant's Form 8-K filed January 3, 2001.
10.52 Software License Agreement with UICI effective January
25, 2001. Incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2001.
10.53 Asset Purchase Agreement with UICI effective December
29, 2000. Incorporated by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the
period ended March 31, 2001.
10.54 Healthaxis Inc. and the Mega Life and Health Insurance
Company dated May 29, 2001. Incorporated by reference to
Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2001.
10.55 Amendment No. 2 to Asset Purchase Agreement with Digital
Insurance effective May 31, 2001. Incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2001.
10.56 Amendment No. 2 to Software License and Consulting
Agreement with Digital Insurance dated March 23, 2001.
Incorporated by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2001.
10.57 Amendment No. 3 to Software License and Consulting
Agreement with Digital Insurance dated May 31, 2001.
Incorporated by reference to Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2001.
86
Exhibit
Number Description of Exhibits
10.58 Amendment to Commercial Sublease Agreement with Digital
Insurance effective June 1, 2001. Incorporated by
reference to Exhibit 10.5 to Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 2001.
10.59 Severance Agreement for Michael G. Hankinson effective
July 31, 2001. Incorporated by reference to Exhibit 10.6
to Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2001.
10.60 Engagement Letter between Healthaxis Inc. and Student
Insurance Division of UICI dated September 21, 2001.
Incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 2001.
10.61 First Amendment to Software License Agreement with UICI
effective September 24, 2001. Incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report on
Form 10-Q for the period ended September 30, 2001.
10.62 Agreement of Termination of the Shareholders Agreement
dated November 7, 2001. Incorporated by reference to
Exhibit 10.3 to Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 2001.
10.63 Proxy Agreement dated November 7, 2001. Incorporated by
reference to Exhibit 10.4 to Registrant's Quarterly
Report on Form 10-Q for the period ended September 30,
2001.
10.64 Amendment No.1 to Amended and Restated Voting Trust
Agreement dated November 7, 2001. Incorporated by
reference to Exhibit 10.5 to Registrant's Quarterly
Report on Form 10-Q for the period ended September 30,
2001.
10.65 Prepayment Agreement with Alvin H. Clemens effective
March 6, 2002 filed herewith.
10.66 Change in Control Employment Agreement between James.
W. McLane and Registrant dated as of January 1, 2002
filed herewith.
10.67 Change in Control Employment Agreement between John
Carradine and Registrant dated as of January 1, 2002
filed herewith.
10.68 Change in Control Employment Agreement between Nancy
Lockerman Mendoza and Registrant dated as of January 1,
2002 filed herewith.
87
Exhibit
Number Description of Exhibits
10.69 Change in Control Employment Agreement between Jonathan
B. Webb and Registrant dated as of January 1, 2002 filed
herewith.
10.70 Change in Control Employment Agreement between Emry P.
Sisson and Registrant dated as of January 1, 2002 filed
herewith.
10.71 Letter Agreement between Diamond Cluster International
North America Inc. and Registrant dated January 3, 2002
filed herewith.
21.1 Subsidiaries of Registrant.
(a) Healthaxis.com, Inc.
(b) Healthaxis Managing Partner, LLC.
(c) Healthaxis Limited Partner, LLC
(d) Healthaxis, Ltd.
(e) Healthaxis Imaging Services, LLC.
(f) Satellite Image Systems (Jamaica) Limited
23.1 Consent of Ernst & Young LLP filed herewith.
23.2 Consent of BDO Seidman, LLP filed herewith.
24.1 Power of Attorney (see signature page)
88