UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 1-15535
HEALTHEXTRAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2181356
-------------- -------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2273 Research Boulevard, 2nd Floor, Rockville, Maryland 20850
(Address of principal executive offices, zip code)
(301) 548-2900
(Registrant's phone number, including area code)
Not Applicable
---------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
The number of shares of common stock, par value $.01 per share, outstanding on
July 31, 2000 was 27,600,000.
<PAGE>
HEALTHEXTRAS, INC.
SECOND QUARTER 2000 FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
<S> <C>
Balance Sheets as of December 31, 1999 and June 30, 2000
(Unaudited) ........................................................ 1
Statements of Operations and Comprehensive Loss for the Three
and Six Months Ended June 30, 1999 and 2000 (Unaudited)............ 2
Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 2000 (Unaudited) ................................. 3
Notes to Financial Statements ...................................... 4
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 6
ITEM 3 Quantitative and Qualitative Disclosures About
Market Risk ................................................... 13
PART II OTHER INFORMATION
SIGNATURES
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HEALTHEXTRAS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 46,971,106 $ 41,844,233
Marketable securities of a related party 664,984 --
Accounts receivable 62,795 65,908
Deferred charges:
Direct 1,203,854 308,058
Marketing and promotion 2,316,491 1,001,500
Other current assets 240,153 579,064
------------ ------------
Total current assets 51,459,383 43,798,763
Fixed assets, net 1,904,847 2,320,667
Other assets 297,853 261,927
------------ ------------
Total assets $ 53,662,083 $ 46,381,357
============ ============
Current liabilities:
Accounts payable and accrued expenses $ 1,060,777 $ 3,339,211
Deferred revenue 5,237,210 7,137,909
------------ ------------
Total current liabilities 6,297,987 10,477,120
------------ ------------
Total liabilities 6,297,987 10,477,120
------------ ------------
Commitments
Stockholders' equity
Preferred stock, $0.01 par value,
5,000,000 shares authorized, none
issued -- --
Common stock, $0.01 par value,
100,000,000 shares authorized,
27,600,000 shares issued and
outstanding at December 31, 1999
and June 30, 2000 276,000 276,000
Additional paid-in capital 48,045,635 48,045,635
Accumulated deficit (719,976) (12,105,613)
Deferred compensation (370,232) (311,785)
Accumulated other comprehensive
income 132,669 --
----------- ------------
Total stockholders' equity 47,364,096 35,904,237
----------- ------------
Total liabilities and stockholders'
equity $ 53,662,083 $ 46,381,357
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
HEALTHEXTRAS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenue $ 764,982 $ 8,097,987 $ 1,021,238 $ 13,351,231
------------ ------------ ------------ ------------
Direct expenses 592,297 4,305,600 741,215 6,985,942
Product development and marketing 1,887,782 7,284,715 3,183,705 16,114,024
General and administrative 336,017 1,748,001 757,002 3,368,998
------------ ------------ ------------ ------------
Total operating expenses 2,816,096 13,338,316 4,681,922 26,468,964
------------ ------------ ------------ ------------
Operating loss (2,051,114) (5,240,329) (3,660,684) (13,117,733)
Interest income (expense), net (101,639) 525,569 (189,119) 1,206,326
Other income (expense), net (300) (25,327) (300) 525,770
------------- ------------- ------------- ------------
Net loss (2,153,053) (4,740,087) (3,850,103) (11,385,637)
Unrealized holding gains (losses) on marketable
securities arising during the period 5,039 -- (213,277) (132,669)
------------ ------------- ------------- -------------
Comprehensive loss $ (2,148,014) $ (4,740,087) $ (4,063,380) $(11,518,306)
============= ============= ============= ==============
Basic and diluted net loss per share $ -- $ (0.17) $ -- $ (0.41)
Weighted average shares of common stock
outstanding (in thousands) -- 27,703 -- 27,669
Pro forma basic and diluted net loss per share $ (0.11) $ -- $ (0.21) $ --
Pro forma weighted average shares of common
stock outstanding (in thousands) 19,380 -- 18,535 --
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
HEALTHEXTRAS, INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended June 30,
--------------------------
1999 2000
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,850,103) $(11,385,637)
Depreciation expense -- 123,776
Gain on sale of marketable securities -- (551,735)
Other noncash items 162,796 58,447
Changes in assets and liabilities:
Accounts receivable -- (3,113)
Deferred charges 587,273 2,210,787
Prepaid expenses and other assets -- (81,433)
Accounts payable and accrued expenses 651,855 2,278,434
Contribution payable (100,000) --
Deferred revenue 1,200,020 1,900,699
------------ ------------
Net cash used in operating activities (1,348,159) (5,449,775)
------------ ------------
Cash flows from investing activities:
Maturity of certificate of deposit 700,000 --
Capital expenditures -- (539,596)
Sale of marketable securities -- 1,084,050
Other -- (221,552)
------------ ------------
Net cash provided by investing activities 700,000 322,902
------------ ------------
Cash flows from financing activities:
Capital contribution 5,000,000 --
Proceeds from line of credit 650,000 --
------------ ------------
Net cash provided by financing activities 5,650,000 --
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,001,841 (5,126,873)
Cash and cash equivalents at the beginning
of period 219,285 46,971,106
------------ ------------
Cash and cash equivalents at the end of period $ 5,221,126 $ 41,844,233
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
HEALTHEXTRAS, INC.
NOTES OF FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
HealthExtras, Inc. (the "Company" or "HealthExtras") is a Delaware
corporation organized on July 9, 1999 and the successor to certain predecessor
companies (the "Predecessor Companies"). The Predecessor Companies include:
Sequel Newco, Inc., Sequel Newco Joint Venture (the Joint Venture), Health
Extras Partnership ("HEP"), Sequel Newco, LLP ("SN LLP") and HealthExtras, LLC.
Through December 31, 1998, the Company was considered to be a development stage
enterprise. The Company commenced business operations with its health benefits
program on November 1, 1998; however, all operating revenues were deferred and
were recognized in 1999 in order to coincide with the program member benefits.
Sequel Newco, Inc. ("Sequel"), an Iowa Corporation, was
originally incorporated on October 23, 1996 as PB Newco II, Inc. Sequel's
business, which consisted of developing and evaluating international and
domestic healthcare management service opportunities, was contributed to the
Joint Venture as of January 1, 1997.
The Joint Venture was originally formed on December 1, 1996 and its
business involved the development of provider software applications and the
development of international healthcare management opportunities. Effective
April 7, 1997, the Joint Venture was merged into a limited liability
partnership, SN LLP. SN LLP continued the business of the Joint Venture, i.e.,
the development of provider software applications and the development of
international healthcare management opportunities.
HEP was originally formed on April 7, 1997 and its business involved the
development of supplemental catastrophic health benefit programs. Effective
August 1, 1998, SN LLP and HEP were merged into Health Extras, LLC, a Maryland
limited liability company, with HealthExtras, LLC being the surviving business
entity.
On May 27, 1999, HealthExtras, LLC, which was then a Maryland limited
liability company, contributed substantially all of its assets to HealthExtras,
LLC, a Delaware limited liability company, and Capital Z Healthcare Holding
Corp. invested $5 million in that entity in exchange for a 20% ownership
interest.
On December 17, 1999, in connection with the closing of the initial public
offering of 5,500,000 shares of the Company's common stock at an initial public
offering price of $11.00 per share, HealthExtras, LLC was merged into the
Company with the Company being the surviving entity (the "Reorganization") and
the members of HealthExtras, LLC received an aggregate 22,100,000 shares of the
Company's common stock in exchange for their member interests. The net proceeds
received by the Company for the initial public offering (net of underwriting
commissions and expenses of $5.6 million) were approximately $54.9 million.
The accompanying financial statements include the accounts of the Company
and the Predecessor Companies.
4
<PAGE>
HEALTHEXTRAS, INC.
NOTES OF FINANCIAL STATEMENTS
(Unaudited)
2. NET LOSS PER SHARE
Basic net loss per share is based on the weighted average number of shares
outstanding during the period. Diluted net loss per share is based on the
weighted average number of shares and dilutive common stock equivalent shares
outstanding during the period. Stock options to purchase 2,956,000 shares of
common stock, all at an exercise price of $13.20, were outstanding during the
three and six months ended June 30, 2000 but were excluded from the computation
of diluted net loss per share because the exercise price of the stock options
exceeded the average market price of the common shares, and therefore, were
antidilutive.
Pro forma basic and diluted net loss per share and weighted average shares
outstanding reflect the formation of HealthExtras, Inc. and merger with
HealthExtras, LLC in exchange for Company common stock as if the merger was
effective January 1, 1999.
Pro forma basic net loss per share is computed based on the weighted
average number of outstanding shares of common stock. Pro forma diluted net loss
per share adjusts the pro forma basic shares weighted average for the potential
dilution that could occur if stock options or warrants, if any, were exercised.
Pro forma diluted net loss per share is the same as pro forma basic net loss per
share because there were no dilutive securities outstanding during the three and
six months ended June 3 1999.
3. UNAUDITED INFORMATION
The financial statements for the three and six months ended June 30, 1999
and 2000 have not been audited but, in the opinion of management, include all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the information set forth therein. The results of operations for the
three and six months ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full year or in the future. These financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q may contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve a number of risks and uncertainties. We undertake no
obligation to revise any forward-looking statements in order to reflect events
or circumstances that may arise after the date of this report. Readers are urged
to carefully review and consider the various disclosures made in this report and
in our other filings with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect our business.
OVERVIEW
--------
We expect to generate a significant portion of our revenue from
the sale of membership programs which include health and disability benefits.
While product development has been ongoing for the past several years, we began
revenue-generating activities in January 1999. Prior to that time, we were a
development stage enterprise, which designed and test marketed various benefit
combinations. To date, we have primarily focused on the distribution of our
membership programs to bank customers and building recognition of our program
brand. Christopher Reeve is featured prominently in our online, television and
print marketing campaigns to build brand awareness. Our intent is to effect a
substantial portion of our program distributions over the Internet.
We believe our consumer research and marketing efforts have
given us valuable insight into the consumer perceptions and preferences
regarding the value and limitations of prevailing insurance products.
Accordingly, we believe that our programs are well positioned to address the
needs of our targeted market segments. As of June 30, 2000, more than 280,000
members had enrolled in our programs.
Revenue is generated by payments for program benefits. The
primary determinant of HealthExtras' revenue recognition is monthly program
enrollment. In general, revenue is recognized based on the number of members
enrolled in each reporting period multiplied by the applicable monthly fee for
their specific membership program. The revenue recognized by HealthExtras
includes the cost of the membership benefits, which are supplied by others,
including the insurance components. Revenue from program payments received, and
related direct expenses, are deferred to the extent that they are applicable to
future periods or to any refund guarantee we offer for an initial 90-day period.
As of June 30, 2000, initial revenue was deferred for approximately 67,000
program members.
Direct expenses consist principally of bank marketing and
processing fees and the cost of benefits provided to program members. Direct
expenses are a function of the level of membership during the period and the
specific set of program features selected by members. The coverage obligations
of our benefit suppliers and the related expense are determined monthly, as are
the remaining direct expenses. HealthExtras has historically maintained a
prepaid expense balance with respect to the insura features of its programs.
Where amounts are prepaid, direct expense is recognized based on the actual
membership levels in each program. The carrying value of the prepayment is
adjusted at the end of each quarter based on factors including enrollment levels
in each product, enrollment trends, and the remaining portion of the unexpired
prepayment period. In the event that a period of coverage was purchased in
advance, and there were insufficient members to utilize the coverage, the value
would expire and be expensed by HealthExtras without any related revenue.
6
<PAGE>
Our limited history makes it difficult to evaluate our business
and prospects. We have incurred substantial operating losses since our
inception, and we intend to incur significant marketing and brand development
expenses over the next several years. We anticipate that our operating losses
will continue in the near term. There can be no assurance that we will generate
significant revenues or profitability in the future.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED JUNE 30, 2000 TO THREE MONTHS ENDED JUNE 30, 1999
HealthExtras incurred an operating loss of $5.2 million for the three
months ended June 30, 2000, compared to an operating loss of $2.2 million for
the same period in 1999. Revenue of $8.1 million for the three months ended June
30, 2000 consisted of program member payments earned during the period. Cash
collections from program subscriptions for the three months ended June 30, 2000,
totaled $8.2 million. Revenue and cash collections for the three months ended
June 30, 1999, were $765,000 and $923,000, respectively.
Operating expenses for the three months ended June 30, 2000 totaled
$13.3 million compared to $2.8 million for the same period in 1999. Direct
expenses for the three months ended June 30, 2000 were $4.3 million, or 32% of
total operating expenses, reflecting the cost of the benefits included in our
programs, and compensation payable to our distribution partners. Direct
expenses for the three months ended June 30, 1999 were $592,000, representing
21% of total operating expenses. HealthExtras incurred approximately $7.3
million, or 55% of total operating expenses, in product development and
marketing costs for the three months ended June 30, 2000. These costs included
$324,000 for the creative development of promotional and sales materials,
including television, radio, and print advertisements, $440,000 for media
production, including television, radio, print and Internet advertising,
$5.7 million in media distribution expenses, $279,000 in product endorsement
costs, and $71,000 in market research and ongoing product development. Product
development and marketing costs for the three months ended June 30, 1999 were
approximately $1.9 million, or 67% of total operating expenses, including $1.0
million in creative costs for print advertisements, $308,000 for media
production, including print and Internet advertising, $278,000 in product
endorsement, and approximately $201,000 in market research and product
development. General and administrative expenses for the three months ended June
30, 2000 were $1.7 million, or 13% of total operating expenses, including $1.1
million in compensation and benefits, $116,000 in other personnel costs, $44,000
in telephone and software expenses, $74,000 in professional fees, and $131,000
in facilities expenses. General and administrative expenses for the same period
in 1999 were approximately $336,000, or 12% of total operating expenses,
including $236,000 in compensation and benefits, $21,000 in other personnel
costs, and $78,000 in other expenses. All increases in expenses were generally
attributable to higher levels of operating activities and growth in personnel.
Interest income of $526,000 for the three months ended June 30, 2000
reflects the investment of the net proceeds received upon the closing of the
Company's initial public offering in December 1999.
7
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 TO SIX MONTHS ENDED JUNE 30, 1999
HealthExtras incurred an operating loss of $13.1 million for the six months
ended June 30, 2000, compared to an operating loss of $3.7 million for the same
period in 1999. Revenue of $13.4 million for the six months ended June 30, 2000
consisted of program member payments earned during the period. Cash collections
from program subscriptions for the six months ended June 30, 2000, totaled $15.3
million. Revenue and cash collections for the six months ended June 30, 1999,
were $1.0 million and $2.2 million, respectively.
Operating expenses for the six months ended June 30, 2000 totaled $26.5
million compared to $4.7 million for the same period in 1999. Direct expenses
for the six months ended June 30, 2000 were $7.0 million, or 26% of total
operating expenses, reflecting the cost of the benefits included in our
programs, and compensation payable to our distribution partners. Direct expenses
for the six months ended June 30, 1999 were $741,000, representing 16% of total
operating expenses. HealthExtras incurred approximately $16.1 million, or 61% of
total operating expenses, in product development and marketing costs for the six
months ended June 30, 2000. These costs included $986,000 for the creative
development of promotional and sales materials, including television, radio, and
print advertisements, $3.7 million for media production, including television,
radio, print and Internet advertising, $9.4 million in media distribution
expenses, $557,000 in product endorsement costs, and $265,000 in market research
and ongoing product development. Product development and marketing costs for the
six months ended June 30, 1999 were approximately $3.2 million, or 68% of total
operating expenses, including $1.5 million in creative costs for print
advertisements, $783,000 for media production, including print and Internet
advertising, $555,000 in product endorsement, and approximately $293,000 in
market research and product development. General and administrative expenses for
the six months ended June 30, 2000 were $3.4 million, or 13% of total operating
expenses, including $1.9 million in compensation and benefits, $251,000 in other
personnel costs, $127,000 in telephone and software expenses, and $132,000 in
professional fees. General and administrative expenses for the same period in
1999 were approximately $757,000, or 16% of total operating expenses, including
$378,000 in compensation and benefits, $127,000 in professional services, and
$252,000 in other expenses. All increases in expenses were generally
attributable to higher levels of operating activities and growth in personnel.
Interest income of $1.2 million for the six months ended June 30, 2000
reflects the investment of the net proceeds received upon the closing of the
Company's initial public offering in December 1999. Other income, net for the
six months ended June 30, 2000 consists primarily of a gain of $552,000,
realized on the sale of marketable securities.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Our operations since inception were funded primarily through capital
investments, advances from the Chairman of the Board of the Company and
borrowings under a line of credit. In December 1999, we completed the sale to
the public of 5,500,000 shares of the Company's common stock and received
proceeds (net of underwriting commissions and expenses of $5.6 million) of
approximately $54.9 million. As of June 30, 2000, we had $41.8 million in cash
and cash equivalents, $33.3 in working capital and no debt.
The primary commitment of our capital resources is to fund expenditures
relating to marketing and brand development we intend to incur over the next
several years.
8
<PAGE>
We currently anticipate our available cash resources will be sufficient
to meet our presently anticipated working capital, capital expenditures and
business expansion requirements for approximately the next 24 months. There can
be no assurance that we will not require additional capital prior to the
expiration of that 24-month period. Even if such funds are not required, we may
seek additional equity or debt financing. We cannot assure you that such
financing will be available on acceptable terms, if at all, or that such
financing will not be dilutive to our stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." We will be required to adopt SFAS No. 133 for the
quarter ending March 31, 2001. Because we do not currently hold any derivative
financial instruments and do not expect to engage in hedging activities,
adoption of SFAS No. 133 is expected to have no material impact on our financial
condition or results of operations.
INTEREST RATE AND EQUITY PRICE SENSITIVITY
------------------------------------------
We are subject to interest rate risk on our short-term investments and
equity price risk in our marketable securities. We have determined that a 10%
move in the current weighted average interest rate of our short-term investments
and/or a 10% move in the weighted average market price of our marketable
securities would not have a material effect in our financial position, results
of operations and cash flows in the next year.
YEAR 2000
---------
To date, we have not experienced any significant adverse effects
related to the Year 2000 issue. While we have not experienced any significant
adverse effects to date, there can be no assurance that currently unidentified
Year 2000 issues, if any, will not arise and that these issues will not have a
material adverse effect on us.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS OR STOCK PRICES
------------------------------------------------------------------------
FACTORS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, OUR BUSINESS PROSPECTS ARE
SUBJECT TO A GREAT DEAL OF UNCERTAINTY
----------------------------------------------------------------------------
While our product development efforts have been ongoing for the
past two years, we only began revenue-generating activities in January 1999.
This limited history of operating our business means that our business prospects
are subject to a great deal of uncertainty and risks.
WE HAVE NOT BEEN PROFITABLE AND MAY NOT BECOME PROFITABLE IN THE FUTURE
-----------------------------------------------------------------------
We have incurred operating losses since our inception. Because we plan to
continue to significantly increase our operating expenses in an attempt to
increase our member base, we will need to generate significantly higher revenues
to achieve profitability. Even if we achieve profitability, we may not be able
to maintain profitability in the future. In addition, as our business model
evolves, we expect to introduce a number of new products and services that may
or may not be profitable for uS.
9
<PAGE>
OUR FUTURE PROFITABILITY IS DEPENDENT, TO A SIGNIFICANT EXTENT, UPON INCREASED
CONSUMER DEMAND FOR ADDITIONAL PRODUCTS, WHICH WE ARE IN THE PROCESS OF
DEVELOPING OR MAY DEVELOP IN THE FUTURE
------------------------------------------------------------------------------
Most of our revenue currently is derived from members purchasing
membership programs, which include disability benefits. We believe our future
profitability is dependent upon achieving substantial increases in sales of our
programs, including those providing excess health insurance coverage and other
benefits we are developing or may develop in the future. To the extent these
products include insurance features, they generally will require regulatory
approvals. If we do not achieve these increased sales, we may never achieve
profitability.
IF THE SALE OF OUR MEMBERSHIP PROGRAMS OVER THE INTERNET DOES NOT ACHIEVE
WIDESPREAD CONSUMER ACCEPTANCE, WE MAY NEVER ACHIEVE PROFITABILITY
-------------------------------------------------------------------------
To date, we primarily have promoted our membership programs
through mailings to credit card or other customers of banks. However, we intend
to significantly increase the distribution of our programs over the Internet.
Thus, our future profitability is dependent in large part on our ability to
achieve widespread consumer acceptance of purchasing our programs over the
Internet. The development of an online market for programs, such as those we
offer, has only recently begun, is rapidly evolving and likely will be
characterized by an increasing number of market entrants. Therefore, there is
significant uncertainty with respect to the viability and growth potential of
this market
There can be no assurance that an online market for our programs
will develop or that consumers will significantly increase their use of the
Internet for obtaining the types of products and services included in the
programs that we sell. If an online market for these products fails to develop,
or develops more slowly than we expect, or if our programs do not achieve
widespread market acceptance, the prospects for our achieving profitable
operations will be significantly reduced.
IF WE LOSE ONE OR MORE OF OUR MARKETING RELATIONSHIPS, OUR ACCESS TO POTENTIAL
CUSTOMERS WOULD DECLINE AND SALES AND REVENUES WOULD SUFFER
-----------------------------------------------------------------------------
A substantial majority of all of our programs sold to date have
been through mailings sent by banks to their credit card and other customers. If
we lose one or more of our marketing relationships with credit card issuers and
are unable to replace those relationships with other marketing outlets, our
access to potential customers would decline and sales and revenues would suffer.
IF WE ARE NOT ABLE TO ACHIEVE A HIGH LEVEL OF BRAND RECOGNITION AND CONSUMER
DEMAND FOR OUR PROGRAMS, WE WILL NOT ACHIEVE THE LEVEL OF REVENUES WE NEED TO BE
PROFITABLE
-------------------------------------------------------------------------------
There are a growing number of websites that offer consumers
access to information regarding insurance coverage alternatives and product
pricing. Our programs may be considered to compete with these and other
distribution channels for insurance products. We believe that broader
recognition of the HealthExtras brand and increased consumer demand for our
programs are essential to our future success. To attempt to achieve that
recognition and demand, we intend to continue to pursue an aggressive
brand-enhancement strategy consisting of our traditional print advertising, as
well as national radio and television advertising, online marketing and
promotional efforts. This effort will require significantly greater expenditures
than we have been able to make to date. If these expenditures do not result in a
sufficient increase in revenues, we will not achieve profitability.
10
<PAGE>
THE LOSS OF OUR RELATIONSHIP WITH CHRISTOPHER REEVE TO PROMOTE OUR PROGRAMS
COULD SIGNIFICANTLY IMPAIR OUR BRAND RECOGNITION AND, THUS, OUR ABILITY TO SELL
OUR PROGRAMS
-------------------------------------------------------------------------------
The loss of the Christopher Reeve identification with our
programs, upon termination of our contract or otherwise, could significantly
reduce our ability to sell our programs.
IF WE LOSE OUR RELATIONSHIPS WITH OUR BENEFIT PROVIDERS, WE COULD HAVE
DIFFICULTY MEETING DEMAND FOR THE PRODUCTS AND SERVICES INCLUDED IN THE PROGRAMS
WE SELL
--------------------------------------------------------------------------------
We are dependent on the providers of benefits included in our
programs. These benefits are provided pursuant to arrangements with Reliance
National, Chubb & Son and others that may be terminated on relatively short
notice. If we lose these relationships and are unable to replace them quickly
and cost effectively, we would not be able to satisfy consumer demand for our
programs.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS OF
OPERATIONS WHICH WILL MAKE IT DIFFICULT FOR INVESTORS TO MAKE RELIABLE
PERIOD-TO-PERIOD COMPARISONS AND MAY CONTRIBUTE TO VOLATILITY IN OUR STOCK PRICE
--------------------------------------------------------------------------------
Our quarterly expenses have fluctuated significantly in the
past, and we expect our quarterly revenues and expenses to continue to fluctuate
significantly in the future. The causes for fluctuations could include, among
other factors:
* changes in acceptance levels for our benefit program by consumers;
* our levels of marketing expenditures;
* renewal rate experience for our benefit programs;
* the initiation of new or increased distribution methods, services and
products by our competitors;
* price competition by insurance companies in their sale of insurance
products; and
* the level of Internet use to purchase insurance or similar type products.
We believe that quarter-to-quarter comparisons of our operating
results are not necessarily meaningful and not good indicators of our future
performance. Due to the above-mentioned and other factors, it is possible that
in one or more future quarters our operating results will fall below the
expectations of securities analysts and investors. If this happens, the trading
price of our common stock would likely decrease.
IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, WE WILL NOT BE ABLE TO OPERATE
PROFITABLY
--------------------------------------------------------------------------
We only began offering our programs in November 1998, and we
have been expanding our operations rapidly. Our growth strategy, if successful,
will result in further expansion. We can achieve profitable operation, however,
only if we are able to manage our growth effectively. Our growth in operations
has placed significant demands on our management and other resources, which is
likely to continue. Under these conditions, it is important for us to retain our
existing management and to attract, hire and retain additional highly skilled
and motivated officers, managers and employees and improve existing systems
and/or implement new systems.
We may not be successful in managing or expanding our operations
or maintaining adequate management, financial and operating systems and
controls.
11
<PAGE>
IF THE PROVIDERS OF THE BENEFITS INCLUDED IN OUR PROGRAMS FAIL TO PROVIDE THOSE
BENEFITS, WE COULD BECOME SUBJECT TO LIABILITY CLAIMS BY OUR PROGRAM MEMBERS
--------------------------------------------------------------------------------
We arrange for the provision by others of the benefits included
in our member programs. If the firms with which we have contracted to provide
those benefits fail to provide them as required, or are negligent or otherwise
culpable in providing them, we could become involved in any resulting claim or
litigation.
FACTORS RELATED TO REGULATIONS
IF WE FAIL TO COMPLY WITH ALL OF THE VARIOUS AND COMPLEX LAWS AND REGULATIONS
GOVERNING OUR BUSINESS, WE COULD BE SUBJECT TO FINES, ADDITIONAL LICENSING
REQUIREMENTS OR THE INABILITY TO MARKET IN PARTICULAR JURISDICTIONS
------------------------------------------------------------------------------
Complex laws, rules and regulations of each of the 50 states and
the District of Columbia pertaining to insurance impose strict and substantial
requirements on insurance coverage sold to consumers and businesses. Compliance
with these laws, rules and regulations can be arduous and imposes significant
costs. The underwriter of the insurance benefits included in HealthExtras
programs is responsible for obtaining and maintaining regulatory approvals for
those benefits. If the appropriate regulatory approvals for the insurance
benefits included in our programs are not maintained, we would have to stop
including those benefits. An independent licensed insurance agency is
responsible for the solicitation of insurance benefits involved in HealthExtras
programs. Each jurisdiction's insurance regulator typically has the power, among
other things, to:
* administer and enforce the laws and promulgate rules and regulations
applicable to insurance, including the quotation of insurance premiums;
* approve policy forms and regulate premium rates;
* regulate how, by which personnel and under what circumstances, an
insurance premium can be quoted and published; and
* regulate the solicitation of insurance and license insurance companies,
agents and brokers who solicit insurance.
State insurance laws and regulations are complex and broad in
scope and are subject to periodic modification as well as differing
interpretations. There can be no assurance that insurance regulatory authorities
in one or more states will not determine that the nature of our business
requires us to be licensed under applicable insurance laws. A determination to
that effect or that we or our business partners are not in compliance with
applicable regulations could result in fines, additional licensing requirements
or inability to market our programs in particular jurisdictions. Such penalties
could significantly increase our general operating expenses and harm our
business. In addition, even if the allegations in any regulatory or legal action
against us turn out to be false, negative publicity relating to any such
allegation could result in a loss of consumer confidence and significant damage
to our brand. We believe that because many consumers and insurance companies are
not yet comfortable with the concept of purchasing insurance online, the
publicity relating to any such regulatory or legal issues could significantly
reduce sales of our programs.
12
<PAGE>
REGULATION OF THE SALE OF INSURANCE OVER THE INTERNET AND OF ELECTRONIC COMMERCE
GENERALLY IS UNSETTLED, AND FUTURE LAWS, REGULATIONS AND INTERPRETATIONS COULD
HINDER OUR ABILITY TO OFFER PROGRAMS OVER THE INTERNET
--------------------------------------------------------------------------------
The distribution of our programs including an insurance
component over the Internet subjects us to additional risk as most insurance
laws and regulations have not been modified to clarify or amend their
application to Internet transactions. Currently, many state insurance regulators
and legislators are exploring the need for specific regulation of insurance
sales over the Internet. Such regulation could dampen the growth of the Internet
as a means of providing insurance services. Moreover, application of laws
governing general commerce on the Internet remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws such as those governing insurance,
intellectual property, privacy and taxation apply to the Internet. In addition,
the growth and development of the market for electronic commerce may prompt
calls for more stringent consumer protection laws and regulations that may
impose additional burdens on companies conducting business over the Internet.
Any new laws or regulations or new interpretations of existing laws or
regulations relating to the Internet could hinder our ability to offer programs
over the Internet.
WE COULD BE SUBJECT TO LEGAL LIABILITY BASED UPON THE INFORMATION ON OUR WEBSITE
--------------------------------------------------------------------------------
Our members may rely upon the information published on our
website regarding insurance coverage, exclusions, limitations and ratings, and
the other benefits included in our programs. To the extent that the information
we provide is not accurate, we could be liable for damages. These types of
claims could be time-consuming and expensive to defend, divert management's
attention, and could cause consumers to lose confidence in our service. As a
result, these types of claims, whether or not successful, could harm our
business.
FACTORS RELATED TO THE INTERNET AND ELECTRONIC COMMERCE
IF WE EXPERIENCE FAILURES OF, OR CAPACITY CONSTRAINTS IN, OUR SYSTEMS OR THE
SYSTEMS OF THIRD PARTIES ON WHICH WE RELY, SALES OF OUR PROGRAMS LIKELY WOULD BE
REDUCED AND OUR REPUTATION COULD BE DAMAGED
--------------------------------------------------------------------------------
We use both internally developed and third party systems to
operate the Internet aspects of our business. If the number of users of our
service increases substantially, we will need to significantly expand and
upgrade our technology, transaction processing systems and network
infrastructure. We do not know whether we will be able to accurately project the
rate or timing of any increases, or expand and upgrade our systems and
infrastructure to accommodate any increases in a timely manner. Our ability to
facilitate transactions successfully and provide high quality customer service
also depends on the efficient and uninterrupted operation of our computer and
communications hardware systems. Our service has experienced periodic system
interruptions, and it is likely that these interruptions will continue to occur
from time to time. Additionally, our systems and operations are vulnerable to
damage or interruption from human error, natural disasters, power loss,
telecommunication failures, break-ins, sabotage, computer viruses, acts of
vandalism and similar events. We may not carry sufficient business interruption
insurance to compensate for losses that could occur. Any system failure that
causes an interruption in service or decreases the responsiveness of our service
would impair our revenue-generating capabilities, and could damage our
reputation and our brand name.
13
<PAGE>
IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND PRIVACY OF OUR PROGRAM MEMBERS'
INFORMATION, OUR REPUTATION WOULD BE DAMAGED AND WE COULD BE SUBJECT TO
LITIGATION AND LIABILITY
-----------------------------------------------------------------------------
A significant barrier to electronic commerce and online
communications has been the need for secure transmission of confidential
information over the Internet. Our ability to secure the transmission of
confidential information over the Internet is essential in maintaining consumer
confidence in our service. In addition, because we handle confidential and
sensitive information about our program members, any security breaches would
damage our reputation and could expose us to litigation and liability. We cannot
guarantee that our systems will prevent security breaches.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Included in Management's Discussion and Analysis of Financial
Condition and Results of Operations)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary close of business, the Company may become subject to legal
proceedings and claims. The Company is not aware of any legal proceedings or
claims which, in the opinion of management, will have a material effect on the
financial condition or results of operations of the Company.
14
<PAGE>
ITEM 2 CHANGES IN SECURITIES
On December 14, 1999, the Company's Registration Statement on Form S-1
(File No. 333-83761) was declared effective by the Securities and Exchange
Commission. Pursuant to the Registration Statement, 5,500,000 shares of the
Company's Common Stock, $0.01 par value, were offered and sold at an offering
price of $11.00 per share. The offering was completed on December 17, 1999. The
managing underwriters of the offering were Warburg Dillon Read LLC, PaineWebber
Incorporated, Prudential Securities Incorporated and SG Cowen Securities
Corporation.
The net proceeds to the Company from the sale of the 5,500,000 shares of
common stock were approximately $54.9 million after deducting underwriting
discounts and offering expenses of approximately $4.2 million and $1.4 million,
respectively. As of June 30, 2000, the Company had used approximately $13.1
million of the net proceeds. Of this amount, approximately $2.9 million was used
to repay borrowings under a line of credit and approximately $2.3 million was
used to repay a non-interest bearing loan from the Chairman of the Board of the
Company. The remainder was used to fund operating activities, in particular
those relating to the Company's sales and marketing efforts. The amount of the
net proceeds not used as of June 30, 2000 has been invested in short-term,
investment grade, and interest bearing securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES (NOT APPLICABLE)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held on June 7,
2000. The following matters were submitted to a vote of the stockholders:
1. The following individuals were elected to the Board of Directors
for a three-year term with the indicated votes:
<TABLE>
<CAPTION>
Abstained and
For Withheld Broker Non-Vote
--------- -------- ----------------
<S> <C> <C> <C>
Bette B. Anderson 22,585,620 19,045 --
Thomas L. Blair 22,585,620 19,045 --
Edward S. Civera 22,585,620 19,045 --
Julia M. Lawler 22,585,620 19,045 --
</TABLE>
2. The appointment of PricewaterhouseCoopers LLP as the Company's
independent certified public accountants was ratified by the following vote:
<TABLE>
<CAPTION>
Abstained and
For Withheld Broker Non-Vote
--------- --------- -----------------
<S> <C> <C> <C>
22,591,045 10,920 2,700
</TABLE>
ITEM 5. OTHER INFORMATION (None)
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
1. The following exhibits are filed as part of this report unless
noted otherwise:
Exhibit No. Description
----------- ----------------------------------------------------------------
2.1 Form of Reorganization Agreement by and among HealthExtras, Inc.,
HealthExtras, LLC and Capital Z Healthcare Holding Corp (1)
3.1(a) Certificate of Incorporation of HealthExtras, Inc (1)
3.1(b) Form of Amended and Restated Certificate of Incorporation (1)
3.2 Bylaws of HealthExtras, Inc. (1)
4.1 Specimen Stock Certificate of HealthExtras, Inc. (1)
4.2 Form of Stockholders' Agreement (1)
10.1 Form of Employment Agreement between HealthExtras, Inc. and David
T. Blair (1)
10.2 Form of Employment Agreement between HealthExtras, Inc. and
certain Executive Officers (1)
10.3 Program Administrator's Agreement by and between HealthExtras LLC
and Reliance National Insurance Company (1)
10.4 Agreement between United Payors & United Providers, Inc. and
HealthExtras, Inc. (3)
10.5 Agreement by and between United Payors & United Providers, Inc.
and HealthExtras, LLC. re: network access (1)
10.6 Agreement by and between Cambria Productions, Inc. f/s/o
Christopher Reeve and HealthExtras, Inc. (1) (2)
10.7 Indemnification Agreement (1)
10.8 Sublease Agreement by and between United Payors & United
Providers, Inc. and HealthExtras, Inc. (3)
10.9 Form of HealthExtras, Inc. 1999 Stock Option Plan (1)
10.10 Form of Registration Rights Agreement (1)
27.1 Financial Data Schedule (filed herewith)
--------------
(1) Incorporated herein by reference into this document from the Exhibits to the
Form S-1 Registration Statement, as amended, Registration No. 333-83761,
initially filed on July 26, 1999.
(2) Confidential treatment requested for
portion of agreement pursuant to Section 406 of Regulation C. promulgated under
the Securities Act of 1933, as amended.
(3) Incorporated herein by reference into this document from the Exhibits to the
Form 10-K for the year ended December 31, 1999.
2. REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 2000 By: /s/ Thomas L. Blair
---------------------------
Thomas L. Blair
Chairman of The Board
Date: August 11, 2000 By: /s/ David T. Blair
---------------------------
David T. Blair
Chief Executive Officer and Director
Date: August 11, 2000 By: /s/ Michael P. Donovan
---------------------------
Michael P. Donovan
Chief Financial Officer and
Chief Accounting Officer
16
<PAGE>
