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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
|_| 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)
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2500 DeKalb Pike
Pennsylvania East Norriton, Pennsylvania 19401 23-2214195
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(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
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(610) 279-2500
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(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
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
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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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
20, 2000 as reported on the NASDAQ National Market System, was approximately
$144,535,904. Shares of 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 20, 2000, the Registrant had 13,087,618
shares of Common Stock outstanding.
The Exhibit Index is located on Page 123
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HealthAxis Inc.
Table of Contents
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Page
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PART I..............................................................................................1
Item 1. Description of Business.............................................................1
Item 2. Description of Properties..........................................................51
Item 3. Legal Proceedings..................................................................52
Item 4. Submission of Matters to a Vote of Security Holders................................52
PART II............................................................................................53
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............53-55
Item 6. Selected Financial Data............................................................56-57
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................58-62
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................62
Item 8. Financial Statements and Supplementary Data........................................63
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................................114
Part III..........................................................................................115
Item 10 Directors and Executive Officers of the Registrant................................115-117
Item 11. Executive Compensation............................................................118-123
Item 12. Security Ownership of Certain Beneficial Owners and Management....................124-126
Item 13. Certain Relationships and Related Transactions....................................126-128
Part IV...........................................................................................129
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................129
EXHIBIT INDEX.....................................................................................129
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PART I
Item 1. Description of Business
THE COMPANY
General
HealthAxis Inc. ("HAI"), formerly Provident American Corporation, is a
Pennsylvania corporation organized in 1982. Until November 30, 1999, HAI was
regulated as an insurance holding company by the states in which its formerly
wholly owned insurance subsidiary, Provident Indemnity Life Insurance Company
("PILIC"), was licensed. Currently, the operations of HAI and its subsidiaries
(the "Company") are principally those of its subsidiary, HealthAxis.com, Inc.
("HealthAxis").
HealthAxis was formed on March 26, 1998 to sell insurance products on
the Internet. As of December 31, 1999 and March 14, 2000, HAI owned 66.9% and
34.8%, respectively of HealthAxis' common and preferred stock. During 1999,
HealthAxis expanded from 15 to 105 employees, entered into carrier partner
agreements with nationally recognized insurance companies to sell their products
on its website, commenced interactive marketing of its website through
agreements with Internet portals, expanded and enhanced its website and raised
capital through several private placements of its securities.
Sale of PILIC
In light of the need to devote capital and focus to HealthAxis, the
continued losses experienced in HAI's group medical insurance products and HAI's
goal to no longer be regulated as an insurance holding company, HAI entered into
various agreements to sell certain of Provident Indemnity Life Insurance
Company's subsidiaries, together with its group medical and life insurance
business, during 1998 and to sell Provident Indemnity Life Insurance Company
during 1999. Due to Provident Indemnity Life Insurance Company's long term
obligations to existing insurance policy holders and Pennsylvania and other
state insurance laws and regulations, HAI would not be able to dispose of
Provident Indemnity Life Insurance Company's operations through voluntary
liquidation but could pursue a sale of Provident Indemnity Life Insurance
Company.
The insurance operations of Provident Indemnity Life Insurance Company
have operated at a loss for a number of years and Provident Indemnity Life
Insurance Company is the defendant in excess of 40 law suits, all of which have
occurred in the ordinary course of its claims administration, but nevertheless
require on-going costs of litigation. Additionally, during 1999, HAI and
Provident Indemnity Life Insurance Company received notice from certain of
Provident Indemnity Life Insurance Company's reinsurers that these reinsurers
disputed amounts that Provident Indemnity Life Insurance Company believed were
owed to it under some of its reinsurance contracts. These reinsurers also gave
notice that an undetermined amount of time would be required to quantify the
disputed amounts and resolve payment. As a result, HAI and Provident Indemnity
Life Insurance Company were unable to predict the amount of this risk, the
timing or possibility of resolving these disputes or whether costly litigation
would be necessary to recover the disputed reinsurance reimbursements. Following
several unsuccessful attempts to sell Provident Indemnity Life Insurance Company
to unaffiliated third parties, Alvin H. Clemens, the Chairman of HAI and
HealthAxis, agreed to purchase Provident Indemnity Life Insurance Company so
that HealthAxis could pursue its ecommerce strategy.
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On August 16, 1999, HAI entered into an agreement that provided for AHC
Acquisition, Inc., a company solely owned by Mr. Clemens, to acquire Provident
Indemnity Life Insurance Company for an aggregate payment by HAI of $14.7
million to Provident Indemnity Life Insurance Company. This transaction was
completed on November 30, 1999. In accordance with the terms of the stock
purchase agreement, HAI:
o purchased HAI's headquarters located at 2500 DeKalb Pike from Provident
Indemnity Life Insurance Company for its book value of $4.7 million;
o agreed to exercise its option to purchase 545,916 shares of HealthAxis Series
A preferred stock from Provident Indemnity Life Insurance Company for $2.8
million (HAI made the $2.8 million payment for the shares of HealthAxis Series
A preferred stock pursuant to the option agreement between HAI and Provident
Indemnity Life Insurance Company and the payment equates to a $4.71 price per
share. The $4.71 price represented the price per share paid by Provident
Indemnity Life Insurance Company for these shares plus interest at the rate of
8% per annum thereon from the date of acquisition of these shares by Provident
Indemnity Life Insurance Company through November 30, 1999, the date of
exercise);
o made a $7.2 million capital contribution from HAI to Provident Indemnity Life
Insurance Company in order to eliminate a statutory deficiency, to enable
Provident Indemnity Life Insurance Company to maintain adequate capital to
meet its liabilities including pay-out obligations under existing insurance
policies, and to provide Provident Indemnity Life Insurance Company with
sufficient capital and surplus so that the Insurance Department of the
Commonwealth of Pennsylvania would grant the required approval of the sale of
Provident Indemnity Life Insurance Company; and
o transferred 100,000 shares of the HealthAxis Series A preferred stock and the
associated registration rights previously granted to Provident Indemnity Life
Insurance Company, to AHC Acquisition, Inc.
The terms of the sale of Provident Indemnity Life Insurance Company to
AHC Acquisition, Inc. were approved by the Insurance Department of the
Commonwealth of Pennsylvania, the regulatory agency that oversees insurance
company operations in Pennsylvania. The sale of Provident Indemnity Life
Insurance Company was also approved by the disinterested members of the board of
directors of HAI with Mr. Clemens abstaining from voting on this matter.
AHC Acquisition, Inc. did not pay any cash in exchange for its
acquisition of Provident Indemnity Life Insurance Company, however, pursuant to
these transactions, HAI was released from any liability for Provident Indemnity
Life Insurance Company's current liabilities to its existing insurance policy
holders nor subject to any risk associated with Provident Indemnity Life
Insurance Company's disputes with certain of its reinsurers. Additionally,
following the sale of Provident Indemnity Life Insurance Company, HAI is not
required to:
o recognize the operating losses of Provident Indemnity Life Insurance Company
on a consolidated basis;
o make any contributions to the capital and surplus of Provident Indemnity Life
Insurance Company should Provident Indemnity Life Insurance Company's capital
and surplus become impaired; and
o bear the administrative cost of the continued operation of Provident Indemnity
Life Insurance Company.
All of these obligations were assumed by AHC Acquisition, Inc. when it
acquired Provident Indemnity Life Insurance Company. HAI recognized a $10.3
million loss on the sale of Provident Indemnity Life Insurance Company which
included a write-off of assets in the amount of $2.7 million together with HAI's
November 30, 1999 capital contribution to Provident Indemnity Life Insurance
Company in the amount of $7.2 million and the value of the HealthAxis Series A
preferred stock transferred to AHC Acquisition, Inc. in the amount of $0.4
million.
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Financial Highlights
The following are the financial highlights for the Company.
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Years ended December 31,
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1999 1998 1997
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(Dollars in thousands)
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Total revenue................................. $ -- $ -- $ --
Net loss in continuing operations............. $ (9,090) $ (4,107) $ (1,731)
Net loss in discontinued operations........... $(37,441) $ (8,049) $(16,694)
Net loss applicable to common stock........... $(46,601) $(12,410) $(18,573)
Total assets.................................. $ 79,602 $ 24,568 $ 12,333
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The Company's Insurance and Retail Website Operations are presented as
discontinued operations. The Company's revenues and net loss in continuing
operations are primarily that of HAI and HealthAxis. The Company's financial
results prior to January 7, 2000 exclude Insurdata Incorporated ("Insurdata")
which merged with HealthAxis on January 6, 2000.
Recent Developments
HAI changed its name from Provident American Corporation to HealthAxis
Inc. and its symbol on the NASDAQ National Market from "PAMC" to "HAXS"
effective February 1, 2000.
On December 6, 1999 HealthAxis and Insurdata, a provider of Internet
based software applications and services for insurance payers which include
insurance companies and other entities responsible for the processing and
payment of insurance claims, signed a definitive agreement to merge the two
companies. Insurdata was a subsidiary of UICI. As a result of this merger,
Insurdata became HealthAxis' application solutions group. The companies
completed the merger on January 7, 2000. See "Description of the Business of
HealthAxis - Historical Development and Insurdata Merger."
On January 26, 2000, HAI and HealthAxis entered into an Agreement and
Plan of Reorganization and Agreement and Plan of Merger pursuant to which HAI
will acquire all of the outstanding shares of HealthAxis that it does not
currently own through the merger of HealthAxis with a wholly owned subsidiary of
HAI. This transaction is referred to as the reorganization. In connection with
this reorganization, on February 11, 2000, HAI filed a Registration Statement on
Form S-4 with the Securities and Exchange Commission to seek shareholder
approval of the reorganization and register the HAI common stock to be issued to
the HealthAxis shareholders.
Subsequent to year-end, HealthAxis entered into an Asset Purchase
Agreement dated June 30, 2000 to sell assets related to its retail website to
Digital Insurance, Inc. On September 29, 2000, HealthAxis and Digital Insurance,
Inc. entered into an Amendment to the Asset Purchase Agreement, which amended,
among other things, the payment terms in the original agreement. This
transaction was consummated on October 13, 2000. In this document, we refer to
this transaction as the Digital sale.
Under the terms of the Asset Purchase Agreement, as amended, HealthAxis
transfered or assigned the assets used in connection with its retail
website to Digital Insurance, Inc., including:
o 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;
o Physical assets, including: call center equipment and software,
computer hardware and software, and furniture or equipment used to
conduct HealthAxis' retail website business;
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o Agreements with carrier partners, the insurance companies whose
products are sold on the website;
o Agreements with affinity partners, the retail partners with similar
target audiences as the website;
o Portal marketing agreements;
o Additional agreements, including: agreements related to the affiliate
partner program, service agreements, and independent contractor
agreements;
o Goodwill associated with the transferred assets and assigned
agreements;
o All of HealthAxis' rights under manufacturers' and vendors'
warranties relating to the transferred assets; and
o All existing in-force insurance policies.
The book value of these assets amounted to $3,877,000. In conjunction
with the Digital sale, $5,801,000 in goodwill was also written off.
The terms of the Asset Purchase Agreement required Digital Insurance,
Inc. to pay HealthAxis the following consideration:
o $500,000 in cash;
o a promissory note in the amount of $500,000;
o 11%, on a fully-diluted basis, of the outstanding shares of Digital
Insurance, Inc.; and
o a portion of Digital Insurance Inc.'s net commission revenues
received by Digital Insurance, Inc. through the acquired website user
interface or an affinity partner.
Pursuant to the term of the promissory note, the remaining $500,000
will be paid in two installments over the next 10 months provided that no
installment is required to be paid prior to Digital Insurance, Inc.'s final
acceptance of the new version 3.0 of the retail website user interface and
HealthAxis' completion of certain software and integration services.
Under the Asset Purchase Agreement, as amended, HealthAxis has the
right, subject to certain restrictions, to maintain its 11% ownership interest
in Digital Insurance, Inc. by purchasing additional securities in any future
equity offerings by Digital Insurance, Inc.
HealthAxis and Digital Insurance, Inc. also entered into a Software
License and Consulting Agreement that provides HealthAxis with:
o A perpetual nonexclusive license to use and sublicense, subject to
certain restrictions, the website user interface sold to Digital
Insurance, Inc.;
o Licensing fees over the next 30 months of $3.0 million for software
owned by HealthAxis that will be used by Digital Insurance, Inc. in
conjunction with the user interface it purchased; and
o Service fees over the next 12 months of a minimum of $3.0 million for
services relating to customizing, maintaining and upgrading the user
interface and other software.
The fair value of the shares of Digital Insurance, Inc. common stock
received by HealthAxis has been determined to be $297,000 and is included as an
asset on the consolidated financial statements of HealthAxis. The determination
of fair value was based upon a business enterprise valuation of Digital
Insurance, Inc., which included an analysis of estimated future discounted cash
flows.
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The sale of the retail insurance operations to Digital Insurance, Inc.
was accounted for as discontinued operations as of June 30, 2000. Accordingly,
the loss on the sale of the retail insurance operations which amounted to $3.8
million and the loss from operations through the date the Digital sale was
completed which amounted to $6.3 million were recorded by HealthAxis in the
financial statements for the six months ended June 30, 2000.
Since completion of the Digital sale, HealthAxis is focused exclusively
on providing Internet based application solutions and services to both
healthcare payers and those entities involved in the distribution and
administration of health insurance and will no longer be an Internet based
insurance agency.
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FORWARD LOOKING STATEMENTS
All statements and information herein, other than statements of
historical fact, are forward looking statements that are based upon a number of
assumptions concerning future conditions that may ultimately prove to be
inaccurate. Many phases of the Company's operations are subject to influences
outside its control. Any one, or any combination of factors described under
"Risk Factors" or in other sections of this document could have a material
adverse effect on the Company's results of operations.
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RISK FACTORS
Shareholders should consider carefully the risks associated with the
ownership of HAI's common stock. These risks are described in detail below.
Shareholders should consider carefully these risk factors, together with all
other information in this Annual Report on Form 10-K/A.
Because HealthAxis has a history of operating losses, investors could lose all
or a portion of their investment.
Since its inception, HealthAxis has incurred significant losses and may
continue to incur losses for the foreseeable future. As of December 31, 1999,
HealthAxis had an accumulated deficit of approximately $70.5 million.
HealthAxis' limited operating history makes it difficult to evaluate HealthAxis'
future prospects. Furthermore, you must consider HealthAxis' prospects in light
of the risks, expenses and difficulties frequently encountered by companies in
new, unproven and rapidly evolving markets. HealthAxis expects negative cash
flow from operations to continue for the foreseeable future.
If the healthcare industry does not accept HealthAxis' new information
technology, or acceptance occurs at a slower pace than anticipated, HealthAxis
may never increase revenues and generate net income.
HealthAxis believes 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 currently anticipated by HealthAxis, HealthAxis would not sell a
sufficient amount of its 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.
HealthAxis' 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 HAI's common stock.
HealthAxis' principal online competitors for online insurance sales are
Intuit's InsureMarket (www.insuremarket.com), Quotesmith (www.quotesmith.com),
Insweb (www.insweb.com) and ehealthinsurance.com (www.ehealthinsurance.com). In
addition, in the area of health insurance sales, HealthAxis competes with large
insurance and financial service companies with established insurance agent
networks as well as with independent insurance agents and brokers. HealthAxis
believes that the application solutions group's major competitors include
Healtheon/WebMD, RIMS, Erisco, El Dorado, TXEN, a division of Nichols Research
Corp., and Amisys Managed Care Systems, Inc., a division of HBOC. The
application solutions group also competes with the internal information
resources and systems of certain of its prospective and existing clients. These
competitors could develop or offer superior functionality with respect to
specific or overall applications. Some of HealthAxis' current and potential
competitors are larger, better capitalized and have greater financial and
operating resources than HealthAxis. These competitors may be able to respond
more quickly to changes in consumer preferences and be able to devote greater
resources to the development, promotion and sale of their products or to claims
processing services than HealthAxis. See "Description of the Business of
HealthAxis - Competition."
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If HealthAxis is unable to continue to secure the additional financing over the
long term, HealthAxis may not have sufficient capital to continue its operations
and expand its business, and investors could lose all or a portion of their
investment.
HealthAxis may be required to raise additional funds over the long-term
to sustain its operations or to take advantage of opportunities to expand its
activities. Although HealthAxis believes that the funds previously raised during
fiscal 1999 will be sufficient to fund HealthAxis' operations through the first
quarter of 2001 and HealthAxis believes it will be cash flow positive by the
second quarter of 2001, unforeseen events may render these funds insufficient.
As a result, HealthAxis may need to seek external debt and/or equity financing.
Adequate funds on terms acceptable to HealthAxis, whether through additional
equity financing, debt financing or other sources, may not be available when
needed or may result in significant dilution to existing shareholders. The
inability to obtain sufficient funds from operations or external sources would
jeopardize HealthAxis' future operations and expansion.
Errors in the application solutions could detract from the reliability and
quality of the application solutions group's information systems which, in turn,
would result in decreased sales, a loss of revenue, and a decrease in the value
of HAI's common stock.
The application solutions group devotes substantial resources to
meeting the demands of the claims and administration segment of the healthcare
industry for a high level of reliability and quality from its information
systems. Through extensive client acceptance testing requirements, historically
the application solutions group has experienced only a limited number of
significant errors, however application solutions like most software
applications, depending on the complexity of the specific application, may
contain undetected errors. These errors may result in loss of data, a reduction
in the ability to process transactions, or loss of, or delay in, market
acceptance of its application solutions. HealthAxis has attempted to limit
contractually and through insurance coverage its damages arising from negligent
acts, errors, mistakes or omissions in its application solutions or in rendering
the application solutions group's services; however, these contractual
protections could be unenforceable or insufficient to protect HealthAxis from
liability for damages in connection with the successful assertion of one or more
large lawsuits.
If HealthAxis is unable to protect its proprietary technology, its competitors
could use its proprietary technology to complete against it and its revenues
would be reduced.
HealthAxis' success depends to a significant extent on its ability to
protect the proprietary and confidential aspects of its application solutions
and the tradenames associated with them. HealthAxis' application solutions are
not patented and existing copyright laws offer only limited practical
protection. These legal protections afforded to HealthAxis or precautions taken
by HealthAxis may be inadequate to prevent misappropriation of our technology or
the tradenames associated with them. Any infringement or misappropriation of
HealthAxis' proprietary application solutions or the related tradenames could
have the effect of allowing competitors to use its proprietary information to
compete against HealthAxis or result in costly litigation in order to protect
its rights. In addition, these limited protections do not prevent independent
third-party development of functionally equivalent or superior technologies,
products or services.
HealthAxis may be subject to trademark and service mark infringement claims,
which 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,
HealthAxis could be subject to claims that its technology infringes on the
proprietary rights of third parties. These claims, even if without merit, could
subject HealthAxis to costly litigation and could direct the time and attention
of its technical and management teams. Further, if a court determined that
HealthAxis infringed on the intellectual property rights of a third party,
HealthAxis could be required to:
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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, or
o pay substantial damages awards.
If HealthAxis 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 HealthAxis' operations and
revenues. Additionally, in December 1998, a third party notified Insurdata
Incorporated that it believed Insurdata Incorporated had infringed upon a common
law trademark held by such party through its use of the name "Insur-Web" because
a similar name is currently being utilized by the third party.
If HealthAxis is unable to register the service marks "HealthAxis" and
"HealthAxis.com," HealthAxis will not be able to take advantage of the benefits
and protections provided by owning a registered service mark.
HealthAxis was notified by the U.S. Patent and Trademark Office that it
had preliminarily denied registration of the service marks "HealthAxis" and
"HealthAxis.com" on the basis of potential confusion with an allegedly similar
registered service mark. HealthAxis is attempting to overcome the U.S. Patent
and Trademark Office's preliminary denial by negotiating a consent with the
party holding the similar mark. Subsequent to year end, this party has agreed to
HealthAxis' registration of these marks. Until the U.S. Patent and Trademark
Office approves this agreement, HealthAxis can not provide any assurance as to
whether or not it will be successful in overcoming the U.S. Patent and Trademark
Office's preliminary denial of registration. See "Description of the Business of
HealthAxis -- Intellectual Property and Technology."
As a result of the lack of a backup site, a catastrophic loss at HealthAxis'
data center or a data center of HealthAxis' key business partners could cause
significant interruptions in its ability to provide services and loss of
revenues.
The eDistribution group and certain key business partners maintain
critical computer operations at a single facility and does not currently have a
back-up site. In the event of a catastrophic loss at this single facility or its
business partners' facilities, which are outside its control, HealthAxis would
experience a significant interruption of its business and a reduction of
revenues until an alternative site is established. Further, contractual
limitations relating to those losses or available insurance may be insufficient
to compensate HealthAxis for losses due to HealthAxis' inability or its business
partners' inability to provide services to its clients for a prolonged period.
See "Description of the Business of HealthAxis -- Intellectual Property and
Technology."
HealthAxis' failure to meet performance standards described in its service
agreements could result in additional losses or decreased revenues.
Many of HealthAxis' service agreements contain performance standards.
Historically, HealthAxis has failed and it currently anticipates that it will
continue to fail to meet certain performance standards related to turnaround
times, availability and quality standards, set forth in its various agreements.
HealthAxis' failure to meet these standards could result in the termination of
these agreements as well as financial penalties from current clients and
decrease sales to potential clients. These penalties range from less than 1% to
a maximum of 3% to 6% (for data capture agreements) of the aggregate amount
payable under these agreements. If the eDistribution group's network
infrastructure is unable to support the variety and number of transactions and
users anticipated, or if HealthAxis is unable to maintain performance standards,
HealthAxis may experience decreased sales, decreased revenues and continued
losses.
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The loss of one or more of the application solutions group's large clients would
result in decreased sales and revenues.
HealthAxis expects that a small number of clients, including UICI and
its subsidiaries, which are in the aggregate HealthAxis' largest client, will
continue to account for a substantial portion of HealthAxis' total revenues for
the foreseeable future. For the year ended December 31, 1999, UICI and its
subsidiaries accounted for an aggregate of approximately $28.2 million of
HealthAxis' pro forma total revenues, which represent approximately 66% of pro
forma revenues for the period. A portion of HealthAxis' revenue from UICI in the
past was for year 2000 services that have been substantially completed. UICI
experienced financial difficulties during fiscal 1999. Management is unable to
predict whether UICI will continue to experience financial difficulties in the
future. HealthAxis would suffer a decrease in revenues if UICI or its
subsidiaries experience financial difficulties impacting UICI's ability to pay
HealthAxis for services.
Other large clients include Continental Casualty Company and National
Capital Administrative Services. In 1998, these clients accounted for 19% of
HealthAxis' pro forma revenues. In 1999, Continental Casualty accounted for 4%
of HealthAxis' pro forma revenues. In 1999, National Capital Administrative
Services was de-centralized into multiple separately contracted smaller
entities, none of which are individually significant. The loss of one or more of
these significant clients, or the failure to generate anticipated revenue from
these clients, would result in decreased sales and revenues. See "Description of
the Business of HealthAxis -- Application Solutions Group's Clients and -
Relationships with HAI and UICI."
HealthAxis' operations outside of the United States may subject it to additional
risks, which could result in decreased revenues and a decrease in the value of
HAI's common stock.
HealthAxis conducts operations related to the conversion of insurance
claims information to electronic form in Jamaica through an indirect subsidiary.
This Jamaican subsidiary and HealthAxis' subsidiary in Utah provide these
services to some of HealthAxis' application solutions clients in addition to
clients that only contract for these data capture services. For the year ended
December 31, 1999, HealthAxis earned 6% of its total revenues from its Jamaican
operations. HealthAxis' management has limited experience in the area of foreign
operations and may be unable to predict which risks are most likely to present
problems or resolve these problems when or if they occur. There is less
government regulation in Jamaica and difficulty in enforcing 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 or diplomatic developments which could affect HealthAxis'
Jamaican operations and assets.
Currently, HealthAxis' Jamaican subsidiary is able to take advantage of
the Jamaican labor market which provides both competent and less expensive
labor. As of December 31, 1999, HealthAxis' Jamaican subsidiary had 153
employees. If the risks or problems posed by conducting operations in Jamaica
require excessive financial or managerial resources or we are forced to relocate
these operations, the application solutions group's costs to provide these
services would increase and profits may decrease.
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Internet and Insurance Related Risks
If a sufficient number of consumers and payers do not accept the Internet as a
medium for health insurance sales and administration, HealthAxis may be unable
to increase revenues and decrease losses.
HealthAxis' future success will depend in part on its ability to
significantly increase revenues, which will require the development and
widespread acceptance of the Internet as a medium for insurance sales. Consumers
who are willing to purchase relatively simple, low cost and low risk items such
as compact discs, flowers, books and groceries over the Internet may not be
willing to purchase complicated and higher cost items such as health and related
insurance policies in the same manner. Further, consumers who buy other items on
the Internet may prefer to discuss insurance decisions with an insurance agent
in person instead of buying insurance through the Internet. Finally, consumers
may be unwilling to divulge highly personal medical information through the
Internet.
If insurance payers do not accept the Internet as a medium for policy
sales and claims administration, HealthAxis will not be able to increase
revenues through sales of its application solutions. The health insurance
industry's traditional paper based methods are well-established and the industry
may be resistant to change.
In order to maintain compliance with insurance regulations, HAI may need to
expend financial and managerial resources which could reduce HAI's revenues and
the value of HAI's common stock.
The insurance industry is highly regulated and the regulations that
govern HealthAxis, its customers and its carrier partners are subject to change.
Changes in these regulations could require HealthAxis to expend additional
financial and managerial resources in order to comply with any revised or new
regulations, to maintain its license and to revise its application solutions.
HealthAxis' carrier partners are also subject to extensive supervision and
regulation at the state level. HealthAxis could be adversely affected if its
carrier partners are unable to obtain approval for the products that HealthAxis
plans to offer on its website.
Unlike competitors who are referral based, HealthAxis also faces
regulatory risk because most of the laws and regulations governing insurance
agents contemplate or assume paper-based transactions and do not currently
address the delivery of required disclosures or other documents through
electronic communications. Additionally, many states have not yet enacted laws
or regulations which specifically allow for electronic signatures instead of
traditional signatures. Until these laws and regulations are revised to clarify
their applicability to electronic commerce, HealthAxis will face uncertainty as
to compliance with these laws and regulations. If HealthAxis' policies and
procedures are not acceptable to any regulatory body examining its activities in
light of these potentially different laws and regulations, its operating
expenses could increase significantly. See "Description of the Business of
HealthAxis -- Regulation."
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Investment Related Risks
Because members of management of HAI and UICI will own a substantial portion of
HAI's common stock upon completion of the merger, other shareholders will not
have the ability to control company actions that may be in their best interest.
Upon completion of the reorganization with HAI, UICI and certain
members of management will own or control approximately 49% of HAI's outstanding
common stock. Additionally, pursuant to a shareholders' agreement to be entered
into between UICI and certain members of HAI management, including Messrs.
Ashker and Clemens, UICI and members of current management will have the right
to nominate for election three directors, and mutually nominate for election
three additional directors. As a result, UICI and members of current management,
acting together, will have sufficient voting power to influence the outcome of
all corporate matters submitted to the vote of shareholders or be in a position
to refrain from taking action favored by unaffiliated shareholders. These
individuals and UICI may make decisions which are not in the best interest of
the shareholders. See "Description of the Business of HealthAxis - Relationship
with HAI and UICI."
In addition, the concentration of ownership in UICI and members of
current management could have the effect of delaying or preventing a change in
control of HAI and may eliminate the opportunity for HAI shareholders to realize
a premium over the then-prevailing market price for their shares. Sales by UICI
or current members of management of a significant number of shares of HAI
following the reorganization could have an adverse affect upon the prevailing
market price of HAI common stock. See "Description of the Business of HealthAxis
-- Relationship with HAI and UICI."
Share ownership of current management and UICI may result in the inability of
public shareholders to replace current management.
Upon completion of the reorganization, UICI and some members of current
management, including Messrs. Ashker and Clemens, will own or control a
significant percentage of HAI common stock. In addition, some members of the
board of directors including Messrs. Ashker and Clemens, by virtue of their
positions as trustees of certain voting trusts, have shared voting power with
the other trustees over 20% of HealthAxis' outstanding capital stock. Acting
together, UICI and these individuals will control the nominees for election as
directors as well as other matters submitted to shareholders. See "Item 13 -
Certain Relationships and Related Transactions."
Potential conflicts of interest could arise because some people will serve as
directors of both HAI and UICI.
Various conflicts of interest could arise because persons serving as
directors of both HAI and UICI may have conflicting duties to each entity. Upon
completion of the reorganization, Gregory T. Mutz, Chief Executive Officer of
UICI, and Patrick J. McLaughlin who are directors of UICI and will become
directors of HAI. The relationship of these individuals could also create, or
appear to create, potential conflicts of interest when these directors are faced
with decisions that could have different implications for UICI and for HAI. For
example, conflicts may arise related to the foregoing relationships between UICI
and HAI related to the nature, quality or pricing of services rendered by HAI to
UICI or by UICI to HAI or sales or distributions by UICI of all or a portion of
its ownership interest in HAI. Given the relationship of these individuals with
UICI, their vote may result in a more favorable resolution of a matter to UICI
than HAI. See "Description of the Business of HealthAxis -- Relationship with
HAI and UICI."
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Because HealthAxis' agreements with UICI have not been subject to arm's-length
negotiations, these agreements may 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, none of the terms of Insurdata
Incorporated's contracts with UICI and its subsidiaries, including the
outsourcing agreement entered into between Insurdata Incorporated and UICI, were
subject to arm's-length negotiations between the parties. As a result of UICI's
control of Insurdata Incorporated prior to the Insurdata merger, none of the
terms of Insurdata Incorporated's contracts with UICI and its subsidiaries,
including the outsourcing agreement entered into between Insurdata Incorporated
and UICI, were subject to arm's-length negotiations between the parties. As a
result, these agreements include terms and conditions that may be less favorable
to HealthAxis than terms contained in agreements negotiated with third parties.
For example, the 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.
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. While
HealthAxis intends to negotiate the terms of the renewal with UICI upon
expiration of the outsourcing agreement and any new agreement thereafter, UICI,
as HealthAxis' largest customer and, upon completion of the HAI merger, the
holder of a substantial amount of HAI's common stock, will likely receive terms
more favorable to UICI than terms contained in agreements negotiated with third
parties. Conflicts of interest may arise between HealthAxis and UICI relating to
their ongoing relationships, including the nature, quality and pricing of
services rendered by HealthAxis to UICI and its subsidiaries or by UICI and its
subsidiaries to HealthAxis, or sales or distributions by UICI of all or any
portion of its ownership interest in HealthAxis. Given the considerable level of
control UICI will have following the closing of the HAI merger, HAI and
HealthAxis may receive a less favorable resolution than if it were dealing with
an unaffiliated party. See "Description of the Business of HealthAxis --
Relationship with HAI and UICI."
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DESCRIPTION OF THE BUSINESS OF HEALTHAXIS
General
HealthAxis is a leading online insurance provider of fully integrated,
end-to-end solutions which utilize the Internet for health insurance
distribution and administration. HealthAxis serves both consumers and insurance
companies that underwrite policies, independent entities that administer claims
processing and payment, Blue Cross/Blue Shield plans, and self-insured
employers. These entities which are responsible for the processing and payment
of insurance claims are referred to as payers in the insurance industry and in
this document. HealthAxis' eDistribution group (formerly the consumer services
group) is an online retailer of health insurance products and related consumer
services. HealthAxis' application solutions group offers a platform of Internet
based application solutions and services to payers designed to enhance the
efficiency and effectiveness of the claims administration, benefits enrollment,
benefits maintenance and conversion of insurance claims information to
electronic form involved in the administration of health insurance. The
application solutions group also provides the administrative backbone for the
eDistribution group thereby creating a full service, Internet based insurance
agency.
Through its consumer-oriented website, www.healthaxis.com, HealthAxis
offers consumers access to educational materials, personal profiling tools,
instant quotes, and the ability to purchase health insurance entirely within the
online environment. The HealthAxis website guides a consumer through every step
in the health insurance purchase process, from education and price quotation
through enrollment and post sale service. HealthAxis believes that no other
insurance website currently matches HealthAxis' ability to cover all pre- and
post-sale activities completely online. HealthAxis believes that its
consumer-focused online distribution service enhances both the decision-making
and purchasing experience, by giving prospective customers relevant,
personalized and real-time information along with the convenience of shopping
online 24 hours a day, seven days a week. HealthAxis believes its website
provides a superior decision-making and purchasing experience to those currently
available through either the traditional distribution system or online
competitors.
HealthAxis does not underwrite insurance, but functions strictly as an
online insurance agency. By selling directly to consumers via the Internet,
HealthAxis can significantly reduce the cost of product distribution as compared
to the traditional agent-based distribution system. HealthAxis targets the
individual and small group health insurance markets through its website,
www.healthaxis.com. (References in this document to consumers or customers refer
to individuals as well as small groups served by the website.) HealthAxis'
website is accessible directly, or through one of HealthAxis' marketing
partners, which include affinity relationships, affiliate programs and Internet
portals with which HealthAxis entered into an agreement. HealthAxis will target
the large group market with ancillary insurance products by cross-selling into
the application solutions group's client base of large group employers.
HealthAxis' eDistribution group has entered into carrier partner
agreements with 12 insurance companies, including Aetna US HealthCare, Aegon,
UICI, US Life, WellPoint Health Network Inc. and Fortis Health. HealthAxis has
also entered into a national marketing alliance with the National Blue Cross and
Blue Shield Association. These insurance companies which have entered into
agreements with HealthAxis are referred to as carrier partners. These carrier
partners have agreed to distribute health insurance products online through the
HealthAxis website. HealthAxis' network of carrier partners provides products in
all 50 states and the District of Columbia, including major medical, individual
medical, small group medical, dental, vision, life, prescription drug and
disability insurance. Individual medical from WellPoint, major medical from
Celtic and Ceres Group, small group medical from Aetna, dental/vision from
Security Life, short term medical and student medical plans from Fortis, and a
prescription drug benefit card plan offered by Aegon are currently available for
purchase on the HealthAxis website. HealthAxis intends to regularly add new
plans and new carriers to its website. HealthAxis' objective is to offer its
customers a choice of carriers in each market.
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HealthAxis' application solutions group provides integrated proprietary
application solutions that utilize the Internet to address the workflow and
processing inefficiencies embedded in the healthcare insurance industry. The
software enables carriers, independent entities that administer claims
processing and payment and large group employers to reduce costs and improve
customer service through the use of online benefits enrollment and
administration services. These application solutions increase the efficiency of
a client's operations by eliminating paper-based processes and improving the
client's ability to capture, process and share data with plan members and other
industry participants within the healthcare system. These products, in
conjunction with HealthAxis' online distribution capabilities, create an
Internet based insurance agency which provides all the services of a traditional
insurance agency without assuming any underwriting risk.
The application solutions group offers the suite of proprietary
integrated workflow and business application solutions described below. The
application solutions group suite of application solutions includes Insur-Web,
Insur-Image, Insur-Voice, Insur-Enroll, Insur-Admin and Insur-Claim.
In addition, the application solutions group offers the following
products and services:
o systems integration and technology management;
o imaging and electronic data capture services; and
o web based image storage and retrieval.
The application solutions group's clients include large insurance
carriers, Blue Cross and Blue Shield organizations, independent entities that
administer claims processing and payment, self-funded employers, and other
industry participants. The application solutions group also offers systems
integration, technology management and data capture services to these same
customer client groups.
The application solutions group has over 20 years of experience
building software applications and developing systems for the healthcare payer
industry. The application solutions group's current client base represents
approximately 800,000 insured lives (excluding covered dependents) enrolled
under the proprietary software applications and approximately 2,000,000 claims
per month through the data capture services. Prior to its merger into
HealthAxis, Insurdata (now HealthAxis' application solutions group) generated
approximately $38.2 million in revenues for the year ended December 31, 1998 and
approximately $42.9 million in revenues for the year ended December 31, 1999.
Historical Development and Insurdata Merger
HAI incorporated HealthAxis in March 1998 for the purpose of selling
insurance products on the Internet. The health insurance expertise supplied by
HAI based upon its 100 years of experience as an underwriter of individual
health insurance policies was critical in the initial stages of HealthAxis'
development as an online insurance agency. HAI also provided capital resources
as well as the initial products sold on the HealthAxis website. During 1998 and
1999, HealthAxis entered into marketing agreements with several Internet portals
in order to build HealthAxis brand awareness. During 1999, HealthAxis expanded
from 15 to 105 employees, entered into carrier partner agreements with
nationally recognized insurance companies to sell products on its website,
commenced interactive marketing of its website through agreements with Internet
portals, expanded and enhanced its website and raised capital through several
private placements of its securities.
In December 1998, HealthAxis initiated online insurance distribution
through America Online and the World Wide Web through the "soft launch" of one
of HAI's products in 18 states. The objective of the soft launch was to provide
a controlled environment through which HealthAxis could minimize service
problems in the delivery of insurance products. HealthAxis is currently licensed
in 50 states and the District of Columbia either directly or through its agency
employees or wholly owned subsidiaries.
During 1998, the board of directors of HAI made a strategic decision to
sell its insurance underwriting business and focus its capital and managerial
resources on e-commerce sales of insurance through HealthAxis. In pursuit of
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this goal, between December 1998 and November 1999, HAI sold its traditional
insurance businesses in a series of unrelated transactions, including the sale
of PILIC to AHC Acquisition, Inc. As a result of these sales, at the end of
1999, HealthAxis was HAI's only operating subsidiary. During 1999, HealthAxis
continued to focus on expanding the geographic scope and diversity of the
products offered on its website through its carrier partner agreements with
nationally recognized insurance companies. Throughout 1999, HealthAxis continued
to integrate new carrier partner products on its website and made additional
technological enhancements to its website.
HealthAxis determined that, despite its efforts to hire information
technology employees, it would need to outsource certain aspects of the carrier
integration process to Insurdata Incorporated, a subsidiary of UICI, in order to
more rapidly integrate carrier partners on its website. Insurdata Incorporated's
expertise in this area highlighted HealthAxis' need to upgrade its technical
capabilities in order to capitalize on the competitive advantage created by
rapidly integrating new carrier partners on its website. In August 1999,
HealthAxis began negotiations with Insurdata to merge Insurdata into HealthAxis.
HealthAxis' reasons for pursuing the merger with Insurdata included the
following:
o Acquire technical expertise. Insurdata had over 300 technology
professionals with substantial experience in the workflows applicable
to the health insurance industry's business processes. HealthAxis'
management believed its technological leadership in the healthcare
payer segment of the insurance industry would be invaluable to
HealthAxis' growth.
o Accelerate carrier partner integration process. Management believed
Insurdata's technological expertise and staff of information
technology professionals were critical to the acceleration of the
carrier partner integration process.
o Increased revenues. Insurdata's revenues were $42.9 million in 1999.
o Enhance attraction of products and services to insurance payers.
Management believed that the addition of the ability to offer an
end-to-end Internet based set of services to insurance payers was
more attractive to insurance industry participants than solely
distribution services.
o Improve ability to raise capital. Management believed that an
established revenue base, seasoned management and significantly
greater technological resources would improve HealthAxis' ability to
raise capital.
On December 6, 1999, HealthAxis, Insurdata, HAI and UICI entered into
an agreement and plan of merger which set forth the terms and conditions under
which Insurdata was merged with and into HealthAxis. As part of this merger,
Insurdata became HealthAxis' application solutions group. The companies
completed the merger on January 7, 2000. As a condition to the merger, UICI
required HealthAxis to raise at least $55 million in additional capital in order
for HealthAxis to implement its business plan.
Since its inception, HealthAxis has funded its operations through
capital contributions from HAI and the sale of its common and preferred stock or
debt convertible into common stock in a series of private placements. On
December 7, 1999, HealthAxis completed a $57.7 million private placement of
3,846,003 shares of its common stock at $15.00 per share to accredited
investors, including the purchase of 133,333 shares of HealthAxis common stock
by HAI. The private placement of at least $55.0 million was a condition to the
completion of the Insurdata merger.
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The table below identifies the equity ownership of HealthAxis common
and preferred stock before and after the merger of Insurdata. The table excludes
options and warrants to purchase HealthAxis stock.
<TABLE>
<CAPTION>
March 14, 2000 December 31, 1999
------------------------------ ------------------------------
Shares Percentage Shares Percentage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
HAI 15,801,644 34.7% 15,801,644 66.9%
UICI and subsidiaries 17,810,229(2) 39.1% 866,551 3.7%
AHC Acquisition (1) 100,000 0.2% 100,000 0.4%
Michael Ashker - - - -
Minority Interest 11,796,767 26.0% 6,850,310 29.0%
---------- ------- ---------- -------
Total 45,508,640 100.0% 23,618,505 100.0%
========== ====== ========== ======
</TABLE>
(1) AHC Acquisition Inc. is owned by Alvin, H. Clemens who is the Chairman of
HAI and HealthAxis.
(2) Excludes 2.0 million shares of HealthAxis common stock that UICI sold to a
single institutional investor.
As a result of the merger with Insurdata and the December 7, 1999
private placement effected as a condition to the merger, UICI became the largest
shareholder of HealthAxis holding 43.6% of HealthAxis' capital stock and HAI's
ownership of HealthAxis was reduced to 34.8%. In March 2000, UICI privately
placed 2.0 million shares of its HealthAxis common stock with a single
institutional investor. As a result of this sale, UICI currently owns 39.2% of
HealthAxis.
Additionally, in connection with the Insurdata merger, UICI entered
into two voting trust agreements. These agreements grant voting power over a
portion of the HealthAxis common stock held by UICI to the trustees who are also
directors of HAI and HealthAxis. Pursuant to the terms of certain voting trust
agreements, UICI's voting control is limited to 19.1% of HealthAxis' outstanding
equity securities. In connection with the completion of the Insurdata merger,
HAI, UICI, HealthAxis and Michael Ashker, President and Chief Executive of
HealthAxis and HAI, entered into a shareholders' agreement. Under the terms of
the shareholders' agreement, the board of directors of HAI will consist of up to
nine members. UICI and HAI may each independently nominate three nominees to the
board, and, the remaining three directors will be nominated by mutual agreement
of HAI (acting by the vote of a majority of the members of the board who were
not nominated by or agreed to by UICI) and UICI. This provision of the
shareholders' agreement will terminate with respect to UICI when UICI owns less
than 20% of the HAI common stock on a fully diluted basis. In connection with
the reorganization, this agreement will be terminated and the parties to this
agreement as well as Alvin Clemens and HealthAxis Acquisition, Inc. will enter
into a similar agreement.
Subsequent to year end, HealthAxis entered into an agreement to sell
the assets related to its retail website to Digital Insurance, Inc. For a
discussion of this asset sale which was completed on October 13, 2000, see
"Recent Developments." As a result of this asset sale and as of June 30, 2000,
HealthAxis discontinued the operations of its eDistribution group.
Health Insurance Industry
The health insurance industry represents one of the largest segments of
the U.S. economy. In 1995, the last year for which industry figures are
available, the Health Insurance Association of America reported that total
premium revenues for commercial insurers, Blue Cross and Blue Shield plans,
self-insured plans and HMOs equaled approximately $321 billion. The Health
Insurance Association of America projected a growth rate of 5% to 7% for 1996
and 1997. These insurance payers collectively provided health insurance coverage
to over 185 million Americans in 1995. The remainder of the population was
either uninsured (roughly 44 million persons) or covered by a government program
such as Medicare or Medicaid.
The method of distributing health insurance varies by market segment.
Insurance payers employ a captive sales force to market their products to large
and mid-sized employer groups by targeting the human resource departments of
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these entities. Small group (generally 100 lives and fewer) and individual plans
are sold primarily through independent agents directly to the consumer/small
group decision maker. The traditional system serving individuals and small
groups consists of a hierarchy of master general agents, general agents and
agents, each of whom creates incremental cost as product flows downstream from
the underwriter to the consumer. Agents represent the principal point of
interaction with the consumer and are responsible for closing sales. Agents
solicit prospects at the local level and help consumers select a policy. This
highly labor-intensive system of distribution has existed since the emergence of
insurance as a mass market product. HealthAxis believes that the expenses
associated with this distribution system represents approximately 20% of the
total cost of an individual health insurance product, creating a
disintermediation opportunity.
HealthAxis believes that agents, in addition to generating significant
selling costs for insurers, often create a shopping experience that is less than
ideal for the buyer. Based upon its research, HealthAxis believes prospective
consumers view meetings with agents as inconvenient and dislike sales pressure
that is perceived to accompany these meetings. Agents represent the "sellers"
(i.e. insurance carriers) and not the "purchaser" of the insurance product.
HealthAxis' goal is to position itself as the customer's "trusted advisor."
HealthAxis believes the Internet can be a significant force in
transforming the distribution and marketing of health insurance in the small
group and individual retail markets by reducing distribution costs and improving
the shopping experience. The type of labor intensive, high-cost distribution
system that is currently utilized in the health insurance industry is highly
vulnerable to the disintermediation of agents from the sales process. HealthAxis
also believes that insurance, as an information-based product, is better suited
to Internet distribution than physical products such as books and furniture,
items for which the "packing and shipping" components can entirely offset the
efficiency of online sales. The Internet offers consumers the ability to "shop"
for insurance in an environment that offers 24 hours a day/seven days a week
availability, information access, and the ability to control the pace of the
buying process, without agent pressure.
HealthAxis believes that the rapid growth of the Internet has helped to
accelerate the development of the market opportunity in Internet insurance
distribution. Rapid increases in the number of websites, number of web users,
access to the web, and dollar amounts of transactions conducted via the web
illustrate the significance of the web as both a center of commerce as well as a
mass medium. According to the Emarketer, an Internet market research firm, the
number of U.S. online users was approximately 58 million in 1999 and is
estimated to increase to approximately 88 million in 2002. The increase in web
users is attributable to a number of factors, including the decreasing cost and
wider availability of both personal computers and online access as well as an
increase in the types of goods, services and content available through the
Internet. Emarketer estimates the total value of goods and services purchased
over the Internet will grow from $38.9 billion in 1998 to $654.4 billion in
2003.
Plan Administration. Healthcare plan administration involves providers,
payers, managed care organizations, reinsurance carriers, preferred provider
organizations, medical and dental claim review staffs, employers and employees.
Unlike other insurance types, healthcare insurance administration results in
extensive interaction between the consumer and the insurance carrier due to the
high number of claims submitted. Each of these participants must be able to
share, process and access data in order to perform their respective roles in the
healthcare system. However, the fragmentation within the healthcare industry
complicates this task.
It is estimated 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, consequently, increasing costs. This burden, coupled with
the fact that the industry has historically under-invested in information
technology, 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
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the higher transaction processing costs incurred within the health insurance
industry. HealthAxis believes that the estimated cost to process a healthcare
claim can range from $8.00 to $18.50, versus less than $1.00 for a banking
transaction.
HealthAxis believes that the healthcare industry has historically
under-invested in information technology due to the limited suitability of
existing technological platforms in addressing the needs of the industry. The
high degree of interaction 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 the
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,
HealthAxis believes the online consumer will demand Internet access to
healthcare eligibility information, claims status and provider information.
The HealthAxis Solution
HealthAxis provides a comprehensive set of technology-based solutions
for the health insurance industry. The HealthAxis solution addresses both the
consumer's needs for a more cost-efficient and information-rich purchase
experience and the payer community's need to achieve cost efficiencies in their
operations. HealthAxis provides fully integrated insurance distribution and
administration solutions which utilize the Internet, serving both consumers and
insurance payers. HealthAxis is composed of the eDistribution group and the
application solutions group.
The End-to-End Solutions Provider
------------ ---------------
Payors Customers
------------ ---------------
Insurance
Carriers Large Groups
TPAs
Individuals
Blue Cross/ ---------------------
Blue Shield (logo) HealthAxis.com
--------------------- Small Groups
Self-Funded
Employers ----------------
Health Insurance
------------ Retail and
WorkFlow Administative
Applications Support Web Site
------------ ----------------
The eDistribution group is an online retailer of health insurance
products and related consumer services. The eDistribution group targets both the
individual and small group insurance markets through its website,
www.healthaxis.com. The HealthAxis website provides a fully integrated
transaction platform for the sale of health insurance over the Internet.
HealthAxis believes its website provides a superior decision-making and
purchasing experience to those currently available through either the
traditional agent-based distribution system or online competitors. The
HealthAxis website guides a consumer through every step in the health insurance
purchase process from education and price quotation through enrollment and post
sale service. HealthAxis believes that no other insurance website currently
matches HealthAxis' ability to cover all pre-and post-sale activities.
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HealthAxis' application solutions group provides integrated proprietary
application solutions that utilize the Internet to address the workflow and
processing inefficiencies embedded in the healthcare insurance industry. The
software enables carriers, independent entities that administer claims
processing and payment and large group employers to reduce costs and improve
customer service through the use of online benefits enrollment and
administration services. These application solutions increase the
efficiency of a client's operations by eliminating paper-based processes and
improve the client's ability to capture, process and share data with plan
members and other industry participants within the healthcare system, including
providers, payers, managed care organizations, agents, reinsurance carriers,
employees and employers. In addition, the application solutions group offers
these customers related systems integration, technology management and data
capture services to these same customer groups.
The HealthAxis Strategy
HealthAxis' strategy consists of five principal components:
o Expand Sales Force to Capitalize on Leading Technology.
o Provide High Levels of Value and Service to Consumers.
o Accelerate Carrier Partner Integration by Utilizing Technical
Expertise of the Application Solutions Group's Staff.
o Cross-Sell Payer Services to Carrier Partners and Consumer
Services to Existing Application Solutions Group Client Base.
o Develop Multiple Distribution Channels.
Expand Sales Force to Capitalize on Leading Technology. The application
solutions group has established product leadership through its application
solutions: Insur-Web, Insur-Enroll and Insur-Image. HealthAxis is committed to
capitalizing on its product strength by expanding its sales force in order to
increase the market share of these products.
Provide High Levels of Value and Service to Consumers. A key element of
HealthAxis' strategy is to offer a customer-focused environment on its website
that provides the consumer with access to relevant, timely product information
and an array of interactive profiling tools to provide a customized,
user-friendly purchasing experience.
Accelerate Carrier Partner Integration by Utilizing Technical Expertise
of the Application Solutions Group's Staff. A key synergy between the
eDistribution group and the application solutions group is the applicability of
the application solutions group's technical expertise to the carrier partner
integration process. The application solutions group's technical staff, with
over 300 professionals and over 20 years of experience working with health
insurance payers, is expected to support and expedite the carrier partner
integration process.
Cross-Sell Payer Services to Carrier Partners and Consumer Services to
Existing Application Solutions Group Client Base. HealthAxis intends to
cross-sell its distribution services to the application solutions group's
existing client base of large employer groups to provide these clients'
employees with access to ancillary health insurance products not offered by the
employer including vision care, disability coverage and long term care insurance
with integrated, product distribution through the Internet. Concurrently, the
application solutions group intends to cross-sell its proprietary software
services to the eDistribution group's existing carrier partners. Certain of the
carrier partners are among the largest payers in the United States and represent
a potential source of revenues for the application solutions group's
administration services.
Develop Multiple Distribution Channels. HealthAxis targets its
individual, small business and large group customers through multiple channels
of distribution. For the individual and small group markets, HealthAxis utilizes
both its own website at www.healthaxis.com and an affinity marketing
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program. The affinity marketing program involves distribution partnerships with
companies for which HealthAxis provides a cobranded or private label health
insurance distribution platform. The affinity marketing program seeks to
leverage the market position of well known brands to reach targeted customer
types. The affinity marketing program will reach customers of HealthAxis'
distribution partners as well as the distribution partners' employees.
HealthAxis has developed affinity marketing relationships with Fidelity National
Financial, Digital Insight, Insurance.com and others. Additionally, HealthAxis
can utilize the application solutions group's client relationships to sell
ancillary insurance products, including disability plans, life insurance,
critical care coverage and vision care to large group employers.
Revenue Model
HealthAxis derives a variety of recurring revenue streams from its
various business activities.
eDistribution Group Revenues. The eDistribution group generates
revenues from both commissions from the sale of insurance policies and
volume-based marketing assessments. HealthAxis charges its carrier partners a
commission, which is levied as a percentage of the dollar amount of premiums
sold through HealthAxis for each carrier partner's products. Due to the
efficiency of the online channel, HealthAxis believes it can charge a commission
that is lower than that assessed by traditional agents, resulting in cost
savings to both the insurer and the consumer. The commission fee is the
principal source of revenue for the eDistribution group. In addition, carrier
partners are charged a carrier marketing fee based upon actual premium revenue
of the particular product line. The concept behind the carrier marketing fee is
to charge the carrier partner an amount similar to what it would allocate to
advertising/marketing the same product through traditional agent distribution
channels. Carrier marketing revenues vary among the portfolio of carrier
partners based upon a variety of factors. While this amount varies by carrier,
HealthAxis believes that the industry average is between 2-4% of premiums.
HealthAxis executes the complete sale of insurance policies rather than
generating referrals or leads to insurance agents. Instead of collecting a
one-time referral fee, the eDistribution group earns monthly revenues for the
duration of each policy that is sold through HealthAxis. Further, by remaining
the main point of contact for the consumers, HealthAxis will benefit as policies
are renewed.
Application Solutions Group Revenues. The application solutions group
generates transaction-based revenues through multi-year or annually renewable
contracts with its clients for its proprietary applications. These contracts
generally include an up-front payment intended to recoup certain start-up costs
incurred by the application solutions group in serving new clients. Typically,
these costs are associated with converting the client's existing system,
training and other costs incurred to tailor a specific solution for a client.
The principal revenue obtained from these contracts is a per-transaction fee,
the unit of measure which varies based upon the particular application solution.
Some applications are priced on a per-employee per-month or on a per-member
(including dependents) per-month basis while others are on a per-image and
per-transaction basis. The application solutions group charges its clients for
its systems integration and technology services on a time and materials basis.
The application solutions group charges its clients for its data capture
services, where it converts the client's data from a paper based format to an
electronic format, on a per-claim basis.
Products
HealthAxis provides a comprehensive product set with solutions for both
consumers and payers. HealthAxis is capable of providing software services
across both the administration and distribution segments of the health insurance
market. The following describes the products offered by both HealthAxis'
eDistribution group and application solutions group.
eDistribution Group
HealthAxis' website is located at www.healthaxis.com. HealthAxis
believes its website provides a superior retail experience when compared to
those currently available either through the traditional distribution system or
online competitors. The website can be accessed directly or through one of
HealthAxis' portal marketing partners.
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<PAGE>
www.healthaxis.com presents a consumer with the following:
o Access to insurance information and personal profiling tools;
o Opportunity to buy online from among a choice of products from
leading health insurance providers;
o Affordable products priced to reflect the efficiencies of
Internet based distribution;
o Informed assistance from licensed professionals through chat,
phone or e-mail; and
o Ongoing customer service through plan and policy information
maintained in the customer's personal space.
HealthAxis launched its service in December 1998 through America Online
Inc. This launch involved a single carrier with product distribution in 18
states. The soft launch phase was designed to aid HealthAxis in understanding
both the marketplace and the capabilities of its platform. In August 1999,
HealthAxis officially launched its website with the addition of its second
carrier partner, which expanded HealthAxis' geographic scope to include 38
states and the District of Columbia. As of March 27, 2000, HealthAxis offered
individual medical, small group medical, short-term medical, student medical,
dental, vision, and prescription plans, with at least one product available in
each of the 50 states and the District of Columbia. Products of additional
carrier partners are anticipated to be added during 2000. HealthAxis is licensed
in 50 states and the District of Columbia either directly or through its agency
employees or wholly owned subsidiaries. See "Description of Business of
HealthAxis -- Regulation."
Product Set. HealthAxis intends to offer a full range of health and
related insurance products. HealthAxis' objective is to provide "one stop
shopping" for health insurance products. HealthAxis' goal is to offer consumers
and small businesses a choice of products from among a selection of quality
insurance providers. HealthAxis' insurance product portfolio will include the
following:
o Individual Medical o Critical Care o College Student Medical
o Small Group Medical o Long-Term Disability o Senior Medical
o Prescription o Long-Term Care o Senior Life
o Vision o Term Life o Other health related products
o Dental o Short-Term Medical
As of January 31, 2000, HealthAxis had entered into agreements with 12
carrier partners plus a national marketing agreement with the Blue Cross and
Blue Shield Association. In addition to its current carrier partner
relationships, HealthAxis continues to work towards implementing additional
relationships to enhance the depth and breadth of the product portfolio.
Relevant Information and Customized Advice. HealthAxis believes
consumer education is an important component of establishing a relationship with
the prospective customer. Consumers can use www.healthaxis.com to gather
information about insurance products, the application and underwriting process,
and which products are relevant to his or her needs and budget. Resources are
available both online and via the customer care center, which can be reached by
telephone, live "chat", or e-mail. HealthAxis is building an extensive
personalization capability that will enable users to self-profile their health
insurance needs. Such online profiling tools will provide an important level of
customization to the buyer's shopping experience.
Quotes. HealthAxis provides instant quotes on available plans. Quotes
for these plans are returned in seconds. In most cases, the consumer can proceed
directly from his or her quote to an application to purchase the desired policy.
In limited instances, the assistance of one of HealthAxis' licensed insurance
advisors will be required to complete the purchase.
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Application Process. HealthAxis allows a customer to apply for most of
its policies online, without traditional paper applications. In order to offer
electronic applications, HealthAxis creates, in conjunction with its carrier
partners, an online version of the product's application form. HealthAxis
believes the online form provides both a convenience to its consumers and a cost
savings to its carrier partners. All of HealthAxis' online applications can be
saved so that the consumer may store partially completed forms in a
password-protected area for subsequent use. HealthAxis includes in its online
forms an array of context-sensitive information to help guide the consumer
through the application process. This context-based help is complemented by the
availability of licensed insurance professionals via live "chat", e-mail, and a
toll free telephone number. Upon completion of an application form, a consumer
simply clicks the "send" button to submit the application to HealthAxis, which
automatically forwards it to the appropriate carrier partner. A consumer then
receives an instant message that confirms receipt of the application.
In some cases, HealthAxis will integrate a carrier partners' products
on an interim basis, which may involve selling its plan through
www.healthaxis.com prior to the completion of the full integration process. In
such instances, HealthAxis' fully licensed insurance advisors will physically
mail an application to the prospective applicant and receive the paper
application back from the applicant. HealthAxis' objective is to integrate all
of its carrier partners' products into its website so that all documentation is
available electronically.
Customer Care Center. HealthAxis operates a customer care center in its
East Norriton headquarters in order to provide consumers a variety of customer
support options, including online "live chat" and telephone assistance. The
customer care center staff is composed predominantly of fully licensed insurance
professionals. HealthAxis believes these professionals play an important role in
ensuring both customer satisfaction and sales conversion.
As fully licensed insurance professionals, the customer care center
staff can assist applicants through the entire purchase process, including:
o evaluating the customer's insurance needs;
o evaluating insurance plans; and
o completing and submitting an application.
The customer care center staff is trained in both insurance and technology to
assist customers with product issues, processing questions and technical matters
including web browser difficulties. HealthAxis' customer service representatives
are available seven days a week.
Underwriting. HealthAxis does not engage in insurance underwriting.
HealthAxis' role is to provide an online platform that connects the applicants
and the insurance underwriters. HealthAxis believes its primary function once an
application has been submitted is to serve as the conduit for communications
between the applicant and the carrier partner. In most cases, applications
submitted by customers are electronically transmitted to the appropriate carrier
partner or to the carrier partner through its designated independent
underwriter.
Insurance products vary in the extent of review required for each
applicant. For example, products like dental insurance, vision care, and
short-term medical coverage are typically issued without underwriting.
Non-underwritten products lend themselves to rapid online fulfillment, given the
lack of review required to issue the policy. Other products, like medical
insurance, long-term care, or life insurance require underwriting. In such
instances, the underwriting process itself is substantially similar to the
traditional system. Carrier partner representatives receive the application
electronically from HealthAxis' web servers. Upon receipt, the underwriters
review the application and contact the applicant, if necessary, to conduct
further inquiry. Each carrier partner adheres to its own underwriting standards
with respect to the issuance and rating of policies. HealthAxis attempts to
select carrier partners for which efficient product fulfillment is a high
priority.
Policy Issuance Process. The policy issuance process varies with the
type of product purchased. For example, for a fully integrated major medical
plan, the new HealthAxis policyholder is mailed a plastic identification card
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with an accompanying welcome letter. The letter directs the policyholder to his
or her HealthAxis personal space, a fully secure, online, password protected
environment, where HealthAxis has deposited an electronic copy of the policy
certificate. The carrier partner is not required to mail physical materials to
the applicant beyond any plastic identification card that may be attached to the
product. All materials formerly delivered in paper form are now delivered
electronically to the applicant through the personal space. The electronic
materials include plan information and the doctor/hospital network directory.
HealthAxis believes that its ability to transform the costly paper flow
historically associated with traditional policy issuance to an efficient
electronic document flow represents a cost savings for the carrier partner.
Post-sale Customer Care. HealthAxis provides each customer with online
access to his or her policy information. Depending on the specific product
purchased, the customer may also gain online access to billing data, claims
history and claims status reports. These records are viewable on
www.healthaxis.com. In his or her personal space, the customer's can not only
view information, but also maintain and update his or her personal data.
HealthAxis believes that delivering post-sale services online provides
both a convenience to customers and a cost savings to insurers. Under the
traditional agent-based system, the customer would be required to call either
the agent who sold the product or the underwriter's customer service center. In
contrast, a HealthAxis customer, having purchased a fully integrated plan, can
conveniently access his or her plan information 24 hours a day/seven days a week
without initiating a conversation with a sales agent. Concurrently, the carrier
partners benefit from reduced customer service expenses, because policyholder
records can be automatically updated without manual intervention by the carrier
partner's staff. HealthAxis believes that its ability to deliver post-sale
services to its customers is unique.
Billing Process. A consumer can select from payment methods, including
credit card or an automatic debit from a bank account. The website is fully
enabled to process both credit card and monthly bank account debit transactions.
Application Solutions Group
HealthAxis' application solutions group is a provider of proprietary
applications that address the specific workflow and processing needs of the
administration segment of the healthcare insurance industry in an efficient and
cost-effective manner. The application solutions group, through its proprietary
enrollment and plan administration applications, provides Internet enrollment
and online access to claims and eligibility data. The application solutions
group's services include proprietary workflow and Internet-enabled business
applications that enhance transaction processing and promote the flow of
information among constituent users, including providers, payers, managed care
and case management organizations, reinsurance carriers, agents, preferred
provider organizations, medical and dental claim review staffs, employers and
employees. In addition, the application solutions group offers related systems
integration, technology infrastructure management and data capture services.
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--------------------------------------------------------------------------------
Data Capture Services
--------------------------------------------------------------------------------
Workflow and Business Systems Integration
Administration Applications:
Insur-Web, Insur-Image, Custom Applications
Insur-Voice, Insur-Enroll,
Insur-Admin, Insur-Claims
---------------------------------------- ---------------------------------------
Technology Infrastructure Management
--------------------------------------------------------------------------------
Proprietary Applications. The application solutions group offers the
suite of proprietary workflow and business applications described below. These
products are offered to HealthAxis' clients on a per-employee per-month basis,
where the client pays the application solutions group a monthly fee for each
enrollee it administers. HealthAxis typically enters into multi-year contracts
with clients to whom it supplies these services.
Workflow Applications
Insur-Web. Insur-Web is the application solutions group's web-enabling
technology that provides an Internet gateway to the application solutions
group's other proprietary business applications. By enabling the application
solutions group's business applications to work via the Internet, the
application solutions group allows its clients to provide direct access to
systems and data within a secure environment; thereby lowering transaction costs
and shortening cycle times for their constituent users. In addition to password
protection, Insur-Web employs firewalls, logging tools, encryption technology
and virus detection software packages that are designed to prevent unauthorized
access to the extranet. Insur-Web can serve as the gateway to the application
solutions group's proprietary applications or to the client's legacy systems.
This product was released in 1999.
Insur-Image. Insur-Image is a seamless scanning, optical character
recognition and data verification workflow system specifically engineered for
claims processing that enables payers to create a paperless environment.
HealthAxis uses Insur-Image claim forms to capture, in digital form, claims,
attachments and related correspondence. Insur-Image contains a form
identification process that automatically identifies the type of claim form and
routes it to the appropriate next step in the workflow process, thereby
eliminating the need for manual pre-sorting. The image is then processed by an
optical character recognition/intelligent character recognition engine. The
engine extracts the data from the claim image, thereby minimizing the need for
manual data entry. Insur-Image then applies a data verification technology known
as Sorted Character Image Verification, to increase data accuracy and measure
quality. Insur-Image provides long-term archival image storage. Management
believes that the speed and accuracy of its Insur-Image application gives
HealthAxis a competitive advantage in the industry. Insur-Image can be used in
conjunction with HealthAxis' Insur-Claims system, or can be integrated with an
organization's existing claims processing system. This system has been in
service for more than five years.
Insur-Voice. Insur-Voice is a scaleable, flexible, interactive voice
response system that provides employees, providers and employers 24-hour a day
access to information thereby improving service while reducing customer service
costs. Insur-Voice reduces administrative costs by automating the processing of
customer inquiries through the use of a menu-driven telephone interface. Using
Insur-Voice, the application solutions group's clients can provide a variety of
services including interactive enrollment, benefit modification, automated
access to provider directories, preferred provider organization pricing,
automated eligibility verification and claim status reporting. Insur-Voice can
be integrated with the application solutions group's other proprietary
application solutions or can be integrated into the client's existing system.
This product has been in operation for more than five years.
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Business Administration Applications
Insur-Enroll. Insur-Enroll is an Internet and interactive voice
response enabled enrollment and eligibility function. Insur-Enroll provides
24-hour interactive enrollment, eligibility and life event management
capabilities. Insur-Enroll supports an unlimited number of benefit plans
including health, dental, life, vision and accident and disability, and medical
and dependent care flexible spending accounts. Using employee specific
demographic information, Insur-Enroll automatically computes coverage levels and
pre- and post-tax deductions. A least-cost routing feature allows Insur-Enroll
to forward customized forms and confirmation statements to employees
automatically through e-mail, fax or regular mail. HealthAxis believes that less
than 10% of plan enrollments are executed using the Internet and that this
number is expected to increase to over 60% within the next several years.
HealthAxis believes that the utilization of the Internet for enrollment services
presents a significant cost saving opportunity to insurers, benefit
administrators, independent entities that administer claims processing and
payment, consultants, self-administered groups and employers, and a significant
market opportunity for the application solutions group. The solution was
successfully deployed in 1999.
Insur-Admin. Insur-Admin is a comprehensive benefits administration
system that features enrollment, group and individual billing and premium
collection and reconciliation for independent entities that administer claims
processing and payment, insurers, self-administered groups, health plan network
managers and healthcare purchasing cooperatives. Insur-Admin accommodates both
interactive and batch enrollment into a wide spectrum of coverages. It allows
organizations to track an infinite number of divisions, subdivisions, locations,
health classifications and work groupings. Insur-Admin interfaces with a plastic
card production system thereby reducing the time required to produce
identification cards. A billing function included in Insur-Admin manages
individual and group billing and premium collection and reconciliation including
the ability to service multi-employer groups that have joined together to
negotiate insurance rates. Insur-Admin manages all aspects of Consolidated
Omnibus Budget Reconciliation Act, including calculating and collecting
Consolidated Omnibus Budget Reconciliation Act premiums, tracking qualifying
events and issuing rights and qualification letters and billing coupon books.
The system performs Health Insurance Portability and Accountability Act
compliance activities, including capturing prior coverage credit days and
issuing Health Insurance Portability and Accountability Act certificates upon
termination of coverage. Insur-Admin also manages medical and dependent care
flexible savings accounts. By integrating Insur-Admin with the application
solutions group's Insur-Web, Insur-Image and Insur-Voice applications, clients
achieve enhanced workflow efficiencies. Insur-Admin can be implemented in a
stand-alone mode, or can be integrated with the application solutions group's
claim payment systems. This system has been in service for more than five years.
Insur-Claims. Insur-Claims is a comprehensive claims processing system
for health, dental, vision, short-term disability, executive reimbursement and
medical and dependent care flexible spending accounts. A rules-based approach
allows Insur-Claims to be fully customized, which allows the system to handle
complex benefit structures and provider reimbursement arrangements. Insur-Claims
also includes auto adjudication and preferred provider organization repricing
functions, which further increases the efficiency of the system. Insur-Claims is
utilized by independent entities that administer claims processing and payment,
insurers and self-administered groups. Insur-Claims also facilitates utilization
management, including pre-certifications, referrals and authorizations,
re-bundling and unbundling edits, and 1099 and tax processing. Insur-Claims also
accepts electronic data interchange or "EDI" transactions. Insur-Claims can be
integrated with the application solutions group's Insur-Web and Insur-Voice
applications to provide on-demand access to benefit coverage information such as
enrollment and claim status, either through the Internet or over the telephone.
This system, combined with Insur-Voice, also enhances the ability of customer
service representatives to assist consumers by automatically routing and
displaying customer-specific data to a customer service representative upon
receipt of a phone call. This system has been in operation for more than five
years.
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HealthAxis retains physical and operational control of its proprietary
applications which allows the application solutions group to cost-effectively
perform application system maintenance and upgrades as all clients utilize the
same version of each application. In addition to reducing the costs associated
with tracking and distributing application versions, the application solutions
group does not incur expenses associated with supporting multiple versions of
the same application. Management believes that this approach also reduces the
administrative burden on the client, thereby increasing overall client
satisfaction.
Systems Integration and Technology Management. Through its systems
integration and technology management services, the application solutions group
provides cost-effective design, development and implementation of technical
solutions for payers. These services can be supplied independently or as a
complete package pursuant to which the application solutions group assumes
complete responsibility for the client's information technology operation as is,
and, where appropriate, converts the client to the application solutions group's
systems. These services are provided to HealthAxis' clients on a time and
materials basis. The application solutions group's systems integration services
consist of four primary offerings:
o Information technology planning. The application solutions
group's information technology planning services match systems
requirements with the clients' long-term business needs to
establish the application, data and technology framework.
o Multi-vendor system integration. Through its multi-vendor
systems integration services, the application solutions group
delivers solutions composed of custom and packaged software,
hardware and communications technologies. This service
encompasses defining user and architecture requirements and
performing systems design, vendor management, integration
testing and implementation.
o Application software maintenance. The application solutions
group offers a variety of management functions in connection
with its application software maintenance services, including
the management of the client's application software portfolio
of legacy and newly-developed systems. The application
solutions group's application management services include
consulting and implementation of application enhancements,
corrective and adaptive maintenance and application support,
including training. In situations in which a third party
application software package is a suitable alternative to
custom development, the application solutions group undertakes
a suitability analysis, evaluates and selects an application
package, performs modifications, implements the solution and
trains users.
o Workflow automation. The application solutions group's
workflow automation services provide consulting and solution
integration focused on improving productivity by automating
data capture and shortening processing times. The application
solutions group utilizes both its proprietary workflow
solutions and custom solutions within its workflow automation
services. The application solutions group also offers systems
operations for MVS mainframe processors, UNIX and NT server
environments, network management for voice, data and e-mail
systems (including on LAN environments) and comprehensive
client support through its help desk functions.
The application solutions group 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 from planning, including business analysis and, where applicable,
business process reengineering, to development, including programming, to
implementation, including technology integration. Insur-Method also encompasses
project management through a detailed budgeting process. The application
solutions group also utilizes Insur-Method in its applications maintenance
services to manage application upgrades, track service levels and measure
programmer productivity and maintenance costs. These services are provided
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exclusively to the healthcare administration industry and are generally provided
in connection with one of the proprietary applications. By focusing on
healthcare administration, HealthAxis believes it can bring greater value to
clients.
Imaging and Electronic Data Capture. The application solutions group
performs imaging or data capture outsourcing services to efficiently convert
paper transactions in the form of healthcare claims into electronic
transactions. As a complement to its imaging services, the application solutions
group also provides mailroom services pursuant to which the application
solutions group receives and sorts incoming healthcare claim forms prior to
imaging. Processing paper based claims is inherently inefficient and
time-consuming. Paper claim forms undergo several processes from the time they
are received and sorted in the payer's mailroom to the time the relevant data is
captured and entered into the payer's system. These cumbersome processes,
coupled with the high volume of claims processed by typical payers, results in a
significant and expensive administrative burden on payers.
The application solutions group utilizes a combination of advanced
technology and strong management practices in favorable labor markets in the
rural U.S. and Jamaica to efficiently capture and convert large volumes of
claims. The resulting data is downloaded to the client's internal claims
adjudication database or, for those clients utilizing the application solutions
group's claim processing solutions, to the application solutions group's data
center for adjudication and payment. HealthAxis offers these services to its
clients on a per claim or per image basis.
Web Based Image Storage and Retrieval. In tandem with claims data
capture, the application solutions group provides claims image retrieval
services via the Internet. This service features multi-level search capabilities
for locating claim images, as well as the ability to dynamically assign claims
to various work queues. All claim types are supported including dental X-rays.
Image retrieval can be done from standard desktop personal computer using a web
browser.
The application solutions group's imaging and electronic data capture
services are provided on a per image basis. The application solutions group
provides these services pursuant to multi-year or annually renewable contracts.
Claims capture is a vital component of efficient healthcare administration. This
service complements all other products and services. In addition, it provides a
good entry point with new carrier clients and provides cost efficiencies.
Technology Development
The application solutions group has an internal technology unit led by
the Chief Technology Officer. This unit is designed to support the application
solutions group's operating units and their clients through continuing research,
development, evaluation and implementation of new technologies. The application
solutions group uses a team approach throughout the development phase of new
products and product enhancements which involves the active participation of the
application solutions group's other business units in the early stages of
development. This early involvement is essential to the development and
successful implementation of effective technology solutions.
In addition to project specific tasks, the application solutions
group's technology unit continues to enhance the application solutions group's
proprietary applications and to develop and test new solutions, including the
testing and analysis of applications available in the market. The application
solutions group's advanced technology unit is involved in research and
development in six core technology areas: web services, workflow, transaction
processing, database services, indexing services and communication.
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Carrier Partners
HealthAxis seeks to form alliances with nationally recognized insurance
carriers committed to developing the lower cost electronic channel as an
important means of distributing healthcare insurance products. Because
HealthAxis does not engage in underwriting, HealthAxis relies exclusively on its
carrier partners, the insurance providers from which HealthAxis sources its
products, in order to be able to offer products to individual and small group
consumers. All insurance plans sold on www.healthaxis.com are underwritten by
HealthAxis' carrier partners, and not by HealthAxis.
As of December 31, 1999, HealthAxis had signed agreements with 12
carrier partners. The carrier partner portfolio covers important medical
insurance categories, including individual medical, small group medical, dental,
vision, disability, term life, prescription drug, and more. HealthAxis has
signed most of its carrier partners to exclusive agreements. Under the carrier
partner agreements, HealthAxis becomes the sole online distribution intermediary
able to build electronic linkages into the carrier partner's systems. These
exclusivity provisions generally apply for one to two years from the launch of
the product(s) on the website. HealthAxis continues to market to new insurance
carriers to increase the product selection available on its website. Subsequent
to year end and as part of the sale of the assets related to its retail website,
HealthAxis agreed to assign all of its rights and obligations under its carrier
partner agreements to Digital Insurance, Inc.
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HealthAxis' current portfolio of carrier partners appears in the table below:
<TABLE>
<CAPTION>
HealthAxis Carrier Partners
(as of December 31, 1999)
Carrier Partner AM Best Rating(1) State Availability Products/Services
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Aegon NR-5(2) 49 states Discount PCS Plan*
Accidental Death &
Dismemberment
Medicare Supplemental
2. Aetna/US HealthCare A- 50 states (small group) Small Group Medical*
3 states (individual) Individual Medical
3. Ameritas A+ 49 states 10 year and 20 year Term Life
Group Dental
4. Blue Cross of A 7 states Individual Medical*
CA/WellPoint Small Group Medical
5. Celtic Life Insurance A- 35 states Major Medical*
Co.
6. Ceres Group (Provident B 24 states Major Medical*
American Life & Health Small Group Medical
Insurance Company)
7. Fortis Health A+ 44 states Short-term Medical*
Student Medical*
Long-term Care
8. HPA/Clarendon A++ 35 states Flexible Term Medical
9. Life Insurance Company A 50 states Accidental Death and
of North America (a Dismemberment
CIGNA Company) First Diagnosis Cancer
10. Security Life B+ 41 states Individual Dental/Vision*
Group Dental/Vision
Fully insured PCS
11. UICI Midwest Life A 38 states Individual Medical
12. US Life/American A+ 50 states Group Dental/Vision
General Short-term Disability
Long-term Disability
Group Term Life
</TABLE>
-------------------
(1) AM Best Company Inc. is an independent third party that rates insurance
companies.
(2) AM Best "NR-5" rating can be assigned to a company for which AM Best
prepares standard financial reports, but are not to be formally evaluated
for the purpose of assigning rating opinions at HealthAxis' request.
(*) Indicates products currently available on the HealthAxis website, however,
these products may not be available in all the carrier partners' available
states.
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As of March 27, 2000, HealthAxis offers products of the Ceres Group,
Blue Cross of CA/WellPoint, Aetna, Celtic, Security Life, Fortis Health and
Aegon through its website. The products offered include major medical insurance,
individual medical insurance, small group medical insurance, short-term medical
insurance, a student medical insurance product and a prescription plan.
HealthAxis has at least one product available in each of 50 states and the
District of Columbia.
The two principal steps in establishing a carrier partner relationship
are carrier partner development and carrier partner integration. Carrier partner
development is the sales process involved in identifying potential carrier
partners and entering into a carrier partner agreement. Carrier partner
integration is the process by which a newly signed carrier partner links its
legacy systems to HealthAxis' web servers for the purpose of distributing
products through HealthAxis' website.
Carrier Partner Development. HealthAxis employs stringent value
criteria in selecting new Carrier Partners. HealthAxis looks for the following
characteristics:
o Do consumers need the product?
o Does the carrier partner's products fill a gap in HealthAxis' present
product portfolio, either in terms of product type or geography?
o Does the product represent a potentially significant revenue source?
o Is the product competitive in its features and price?
o Is the carrier partner committed to e-commerce?
o Is the carrier partner willing to provide product priced for the lower
cost of the Internet channel?
o Is the carrier partner capable of working with HealthAxis to
create the electronic connection between HealthAxis' servers
and the carrier partner's systems?
Carrier Partner Integration. The carrier partner integration process is
the key to building a robust product portfolio. A product cannot be sold on
HealthAxis' website until the integration team has embedded the carrier's plan
including the plan description, rating engines, provider network information and
application forms, into the website. The complexity of health insurance
underwriting workflows requires a carrier integration staff that has expertise
in both technology and insurance in order to be able to efficiently execute
their tasks. The eDistribution group anticipates that it will be able to
leverage the application solutions group's workflow application experience to
expedite the carrier partner integration process.
Carrier partner integration is a multi-step process that takes two to
six months to complete. The HealthAxis integration team generates both
functional and technical specification documents. Once the requirements are
understood, the HealthAxis team begins the programming activities that will
execute the newly designed, electronic workflows. Because each carrier utilizes
different workflows and means of handling data, HealthAxis believes the
application solutions group's substantial experience in the healthcare industry
can be invaluable in resolving complex programming problems.
Application Solutions Group Clients
As of January 7, 2000, HealthAxis' application solutions group had a
total of 37 clients, which include insurance carriers, independent entities that
administer claims processing and payment, Blue Cross/Blue Shield organizations
and self-administered employers. Contracts with these payers are for a
multi-year (generally three year) term with annual renewals thereafter.
The application solutions group's business model of offering its
proprietary applications on a transaction basis, plus the difficulty of
migrating to a new system, makes it administratively and economically burdensome
for such clients to switch to a competitor. As a result of this model and a
generally high level of client satisfaction, HealthAxis' application solutions
group has enjoyed long-term client relationships. See "Risk Factors - Business
Related Risks - The loss of one or more of the application solutions group's
large clients would have a detrimental affect on HealthAxis' financial
condition."
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As a result of the parent-subsidiary relationship between the
application solutions group (formerly, Insurdata) and UICI, the application
solutions group has historically derived a large percentage of its revenues from
UICI and its subsidiaries. UICI and its subsidiaries accounted for approximately
60% of Insurdata's total revenues for the year ended December 31, 1999. A
portion of the application solutions group's revenue from UICI in the past was
for Year 2000 services which have been substantially completed. UICI and its
subsidiaries are currently the application solutions group's primary client for
its system integration and technology management services. HealthAxis believes
that the percentage of the application solutions group's revenues attributable
to UICI and its subsidiaries will decline as HealthAxis' marketing efforts
continue to expand HealthAxis' base of external clients. See "Risk Factors --
The loss of one or more of the application solutions group's large clients would
result in decreased sales and revenues" and "Risk Factors -- Because members of
management of HAI and UICI will own a substantial portion of HAI's common stock
upon completion of the merger, other shareholders will not have the ability to
control company actions that may be in their best interest."
In addition to UICI and its subsidiaries, two clients, Continental
Casualty Company and National Capital Administrative Services, have historically
accounted for a substantial portion of the application solutions group's
revenue. Continental Casualty Company accounted for approximately 8% of revenues
in 1998 and less than 4% of revenues in 1999. National Capital Administrative
Services accounted for 11% of the application solutions group's revenues in
1998. In 1999, the National Capital Administrative Services account was
de-centralized into multiple, separately contracted smaller entities. None of
those smaller entities generated revenues which were individually significant.
Sales and Marketing
eDistribution Group
The primary target markets are the small group market and the
individual market. Within the individual market, the targeted consumers are
individuals who are not covered by a corporate sponsored health plan. Potential
individual consumers include people who are self-employed individuals, part-time
employees, full-time independent contractors or other individuals who rely upon
self-provided health insurance coverage. Within the small group market,
HealthAxis intends to focus its marketing efforts on groups of 25 or less,
including small office and home office-based individuals. The average size of a
group sale should increase over time. The cost-savings resulting from buying
direct can be substantial when experienced by multiple employees even for very
small groups.
The eDistribution group intends to utilize the application solutions
group's large employer relationships to market ancillary health insurance
products such as vision care and disability plans to members of large groups.
HealthAxis believes this type of worksite marketing program represents an
economical means of acquiring new consumers. The application solutions group's
presence in worksites gives the eDistribution group a unique marketing advantage
relative to stand-alone health insurance retailers lacking this ready access to
the large group workplace.
HealthAxis believes its ability to create and continue to strengthen
its brand identity is critical to achieving widespread acceptance, particularly
in light of the competitive nature of HealthAxis' business. Promoting and
positioning its brand identity will depend largely on the success of HealthAxis'
marketing efforts and the ability of HealthAxis to provide high quality
insurance products and services. In order to promote its brand identity,
HealthAxis will need to increase its marketing efforts and its financial
commitment to create and maintain brand awareness and loyalty among Internet
users.
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Strategic Alliances. HealthAxis' portal marketing agreements were the
focus of HealthAxis' marketing efforts in 1999. HealthAxis' marketing effort in
2000 will feature an emphasis on affinity relationships rather than portal
agreements. HealthAxis has entered into agreements with over 30 affinity
partners, including E*trade, TD Waterhouse, Digital Insight, Insurance.com and
Fidelity National Financial. Affinity relationships may be defined as retailing
partnerships with companies that share the eDistribution group's target
audiences. In general, these affinity relationships differ from portal marketing
agreements in that payments to the affinity partners are performance-based,
which decreased HealthAxis' initial risk.
Life Event Marketing. HealthAxis' market research indicates that the
purchase of health insurance is generally associated with a variety of
identifiable life events. These events represent situations in which a potential
consumer may recognize a heightened need for insurance and include, among other
things, change in job, graduation from college, marriage, birth of a child,
divorce, relocation, starting a new business and discontinuing operations of an
existing business. These life events generally require the establishment of new
financial and healthcare relationships. Identifying these events and targeting
individuals experiencing such events are important elements of HealthAxis'
marketing strategy.
Direct Marketing. HealthAxis plans to use direct marketing techniques
to target new and existing customers with promotions. HealthAxis plans to e-mail
to potential customers highlighting HealthAxis products and the advantages of
Internet based insurance product purchases. The Internet allows rapid and
effective experimentation and analysis, instant user feedback and efficient
personalization of insurance products for each customer, all of which HealthAxis
seeks to incorporate in its marketing activities. Direct e-mail to HealthAxis
consumers also will be an important driver of HealthAxis' cross-selling efforts.
HealthAxis' customer relationship will allow HealthAxis to target existing
customers with offers for related, ancillary healthcare insurance products. For
example, following the customer's initial purchase of an individual health
insurance policy, HealthAxis might send that person an e-mail introducing a
long-term disability product.
Application Solutions Group
The application solutions group recently implemented a coordinated
sales and marketing effort. The goals for this sales and marketing effort are
to:
o Target potential clients for the application solutions group's
services;
o Identify opportunities to cross-sell additional services to
application solutions group's existing clients;
o Cross-sell to carrier partners the services of the application
solutions group;
o Assist clients in growing their own businesses, creating
additional revenue for the application solutions group; and
o Increase the application solutions group's visibility within
the industry.
In the past, new external clients were generally added as a result of referrals
or as a result of direct contact initiated by the client due to the application
solutions group's reputation in the industry.
The application solutions group's current marketing program is designed
to raise the visibility of the application solutions group and its products and
services, in order to increase sales opportunities. In the past, new external
clients were generally added as a result of references or direct contact
initiated by the client due to the application solutions group's reputation in
the industry. The application solutions group now utilizes the services of an
outside advertising firm specializing in the technology sector. The current
marketing program consists of multiple channels to reach the application
solutions group's target audience. The application solutions group's website,
currently at www.insurdata.com, allows prospective clients access to product and
service descriptions and Company news. The application solutions group issues
press releases regularly through the Internet, public wire services and selected
trade publications and pursues advertising and editorial opportunities in key
industry trade publications. Both the application solutions group and the
eDistribution group also exhibit at industry trade shows and conduct direct mail
campaigns highlighting HealthAxis' products and services to targeted audiences.
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Marketing Agreements
As part of the sale of assets related to the retail website to Digital
Insurance Inc., HealthAxis agreed to assign all of its rights and obligations
under the following interactive marketing agreements to Digital Insurance, Inc.
Agreement with America Online, Inc. HealthAxis' interactive marketing
agreement with AOL provided that HealthAxis would be the exclusive third party
direct marketer of certain types of health insurance policies and, subject to
certain restrictions, the non-exclusive third party marketer of certain other
types of insurance policies. Under the interactive marketing agreement, AOL
advertised the products to its subscribers on AOL's online network and the
products were sold online through HealthAxis' website. On March 29, 1999,
HealthAxis and America Online, Inc. entered into the second amendment to the
interactive marketing agreement, which provided HealthAxis with access to
CompuServe and Netscape Netcenter, which HealthAxis believed would expand its
marketing scope. The second amendment also provided for a four month "wind down"
period in the event HealthAxis elected not to exercise its option to renew its
agreement with AOL for an additional term. HealthAxis has paid America Online,
Inc. a total of $10.0 million pursuant to this agreement. Additionally, in
connection with services rendered by America Online, Inc. to HealthAxis pursuant
to the interactive marketing agreement, HAI issued to America Online, Inc. two
warrants for 300,000 shares of HAI common stock. The first warrant for 300,000
shares of HAI stock is exercisable at $4.48 per share, and the second warrant is
exercisable for 300,000 shares of HAI common stock at $3.38 per share. This
second warrant will terminate if America Online, Inc. choose to exercise a third
warrant issued by HealthAxis in connection with the interactive marketing
agreement for 300,000 shares of HealthAxis common stock for $1.77 per share. The
initial term of the interactive marketing agreement expired on January 31, 2000.
HealthAxis has determined not to exercise its option to renew its agreement with
America Online, Inc.
Agreement with Lycos, Inc. HealthAxis' amended agreement with Lycos,
Inc. provides that Lycos will make HealthAxis the exclusive provider of medical,
HMO, PPO, indemnity, vision, prescription, long-term care, and long-term
disability insurance, for a total of approximately $9.1 million, of which $1.7
million has been paid. The term of the agreement will extend for twenty-four
months from the launch of the co-branded version of HealthAxis' site if certain
sales goals are met. The initial term of 12 months ending April 30, 2000 had a
total cost of $2.5 million. HealthAxis has determined not to exercise its option
to renew its agreement with Lycos.
Agreement with CNet, Inc. In June 1998, HealthAxis entered into a
promotional agreement with CNet whereby CNet would exclusively promote
HealthAxis' products on CNet's websites. This agreement was amended on April 14,
1999 to, among other things, revise the current payment schedule and remove
Snap! as a party to allow HealthAxis to enter into a separate agreement with
Snap! Under the agreement with CNet, CNet promoted HealthAxis as its exclusive
provider of certain insurance products for approximately $2.4 million during the
initial term of the agreement, which extended until August 31, 2000. As of March
1, 2000, HealthAxis paid CNet approximately $650,000. As of March 27, 2000,
HealthAxis and CNet had mutually agreed to terminate the agreement on May 31,
2000.
Agreement with Snap!, LLC. In April 1999, HealthAxis, CNet and Snap!
amended their marketing agreement to remove Snap! as a party so that HealthAxis
and Snap!, now a separate entity from CNet, could enter into a new agreement.
This agreement allows for HealthAxis to participate in Snap!'s "Insurance
Center" and provides for strategic placements across various channels. The
initial term of this agreement is through August 31, 2000, for an approximate
cost of $1.5 million. HealthAxis has the option to renew this agreement with
Snap! through August 31, 2001. Subsequent to year end, HealthAxis and Snap! have
mutually agreed to terminate the agreement on June 15, 2000.
Yahoo! Marketing Agreement. On August 12, 1999, HealthAxis entered into
a targeted marketing agreement with Yahoo! which provides HealthAxis with
impressions in selected areas. The agreement terminated on January 31, 2000. On
February 7, 2000, HealthAxis entered into a new agreement which terminates on
December 31, 2000, for an approximate cost of $3.6 million. Subsequent to year
end, HealthAxis has decided to terminate this agreement on August 1, 2000
pursuant to the optional early termination provision in this agreement.
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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 registered the name "HealthAxis.com" with
Internic, a private corporation organized by U.S. government which
administers Internet domain names. HealthAxis has applied for registration of
the service marks "HealthAxis.com" and "HealthAxis" with the U.S. Patent and
Trademark Office. HealthAxis was notified by the U. S. Patent and Trademark
Office that it had preliminarily denied registration of the service marks
"HealthAxis" and "HealthAxis.com" on the basis of potential confusion with an
allegedly similar registered service mark. HealthAxis is attempting to overcome
the U.S. Patent and Trademark Office's preliminary denial by negotiating a
consent with the party holding the similar mark. Subsequent to year end, this
party has agreed to HealthAxis' registration of these marks. Until the U.S.
Patent and Trademark Office approves this agreement, HealthAxis can not provide
any assurance as to whether it will be successful in overcoming the U.S. Patent
and Trademark Office's preliminary denial of registration. HealthAxis has
applied for or registered the following trademarks with the U.S. Patent and
Trademark Office: Insur-Web, Insur-Voice, Insur-Image, Insur-Enroll, Insur-Admin
and Insur-Claims. HealthAxis has determined not to file applications for these
marks in foreign countries at this time. HealthAxis' sales materials, content
and software are protected by copyright.
In December 1998, a third party notified Insurdata that it believed
Insurdata had infringed upon a common law trademark held by such party through
its use of the name "Insur-Web" because a similar name is currently being
utilized by the third party. HealthAxis does not believe that its use of the
name Insur-Web constitutes an infringement of this party's rights and intends to
defend itself against any infringement claim asserted. No assurance can be given
as to whether Insurdata will ultimately prevail in any action that may be
brought by this party. See "Risk Factors -- If HealthAxis is unable to protect
its proprietary technology, its competitors could use its proprietary technology
to compete against it and its revenues and profitability would be reduced."
The source code and design of HealthAxis' software will be protected by
HealthAxis through applicable trade secret law. HealthAxis also intends to use
confidentiality agreements with its employees to further protect its source
codes and software.
Third Party Technology, Website Ownership and Maintenance. HealthAxis
relies on a variety of technology that it licenses from third parties, including
its database and Internet server software, which is used in HealthAxis' website
to perform key functions. Web design and maintenance are currently performed by
in house technicians in order to permit HealthAxis to maintain control over its
Internet platform. HealthAxis anticipates updating its website on an ongoing
basis.
The satisfactory performance, reliability and availability of
HealthAxis' website, transaction processing systems and network infrastructure
is critical to HealthAxis' eDistribution group's reputation and its ability to
attract and retain customers and maintain adequate policyholder service levels.
HealthAxis will continually review and seek to upgrade its technical
infrastructure and provide for certain system redundancies and backup power to
limit the likelihood of systems overload or failure HealthAxis believes that as
part of doing business on the Internet, it will, from time to time, experience
periodic system interruptions. Any unexpectedly high volume of traffic on
HealthAxis' website or in the number of applications placed by consumers may
require HealthAxis to expand and upgrade further its technology, transaction
processing systems and network infrastructure to accommodate that substantial
increase in volume. HealthAxis will continue in its efforts to expand and
upgrade its system.
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Website Technology. The technology supporting the website itself
consists of a scalable client/server architecture in a fully load balanced
environment using redundant Sun Enterprise servers. HealthAxis' applications are
specifically designed for the website and are written in the programming
language Java under a Sun implementation of the Unix operating system.
HealthAxis has used RAID technology to provide a greater degree of reliability
for data contained in its Oracle 8 based database. The host for the website is
Best Internet Communications, Inc., located in San Francisco, California. The
infrastructure, web applications software and the web servers are owned by
HealthAxis. HealthAxis continually monitors website statistics, network
performance and service levels.
Back End Processing Technology. HealthAxis has created an executive
information system operating in an Oracle 8 environment on a Sun computer
running Unix. HealthAxis' systems have back up and recovery programs in place.
HealthAxis uses multiple web servers within a single site but plans to
distribute its servers to multiple sites for greater redundancy.
Communications. All of the above installations are interconnected using
high-speed private telecommunications links. All transmissions between the
consumer, website, and carrier partners or independent entities that administer
claims processing and payment will be secured using "Secured Socket Layer" (SSL
version 3). Domestic encryption is used where applicable (i.e., 128 bit)
including all server to server communications. A minimum export encryption is
also used (i.e., 40 bit).
Application Solutions Group Web Technologies. The technology supporting
the application solutions group's Web services are based on a distributed
computing environment relying primarily on Microsoft technology platforms. Web
servers are based on Internet Information Server 4.0, middle tier business logic
is placed in Microsoft Transaction Server 2.0, and databases are based on
Microsoft SQL Server 7.0 and 6.5. The current computing platform consists of
over 50 NT servers. Additional software utilized includes workflow and print
tools from JetForm. PDF technology has been licensed from Active4 Technologies.
DataCenter Core Processing Environment. The application solutions group
also has connectivity to several back end computing environments. The main data
center is located in North Richland Hills, Texas and is a 8,500 sq. foot
facility with the following processing equipment and systems:
o 16 IBM RS6000 processors running AIX (ranging up to the H70
class computing platform)
o IBM mainframe 9672/R35 (180Mips) running OS/390
o Two terabytes of DASD (1.3 available) and two Storage Tek tape
silohs (6000 tapes each)
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, and core routers are Cisco with Bay routers for WAN
connectivity. Internet firewall technology is based on Cisco PIX firewalls. The
facility has redundant backbone connections for the WAN and Internet. There is
UPS and diesel power backup. Off-sight disaster recovery is through Comdisco.
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Competition
HealthAxis believes it provides a unique combination of Internet based
consumer services and business to business application solutions. HealthAxis
also believes that its ability to offer both payers and consumers an electronic
platform gives HealthAxis a unique competitive advantage among its peers.
HealthAxis competes with other insurance online providers and traditional,
agent-based insurance distribution system participants.
Online Insurance Competition. HealthAxis' principal online competitors
are Intuit's InsureMarket (www.insuremarket.com), QuoteSmith
(www.quotesmith.com), Insweb (www.insweb.com) and ehealthinsurance.com
(www.ehealthinsurance.com). Insweb and Insuremarket are both built around an
agent-referral business model pursuant to which prospective applicants are given
a price quote, but must utilize a referral to a traditional agent in order to
apply for and buy a policy. In addition, neither company is focused on the
health insurance market as is HealthAxis. Quotesmith is an agency that uses its
website to initiate a sales process that ultimately resembles the traditional,
paper-heavy process, not an e-commerce model. Ehealthinsurance.com's business
model more closely resembles HealthAxis' transaction-oriented focus. However,
HealthAxis believes it currently has more carrier partners and broader
distribution than does ehealthinsurance.com. In addition, ehealthinsurance.com
does not offer the transaction processing on its website and requires actual
signatures.
HealthAxis believes that the principal competitive factors in the
online insurance distribution market will be price and convenience, as well as,
name recognition and reputation, product selection, Internet access to claims
information, ease of use, site content, quality of claims processing services
and technical experience. Relative to both traditional agents and agent-referral
online services, HealthAxis believes that its online transaction-based business
model affords it a competitive advantage in the low cost delivery of health
insurance plans to consumers and small groups.
The principal competitive factors for the application solutions 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. HealthAxis believes that
application solutions group's major competitors include Healtheon/WebMD, RIMS,
Erisco, El Dorado, TXEN, a division of Nichols Research Corp., and Amisys
Managed Care Systems, Inc., a division of HBOC. See "Risk Factors -- HealthAxis'
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 HAI's common
stock."
Privacy Policy
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. The application
solutions group 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' customers. 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), but HealthAxis' insurance
may not be adequate to cover all costs incurred in defense of potential claims.
To address consumer concerns over the security of transactions
conducted on the Internet and other online services and the privacy of users,
HealthAxis has adopted a privacy policy for information of users of its website.
HealthAxis does not disclose any personally identifiable information of a
consumer to HealthAxis' carrier partners until the consumer submits an
application. HealthAxis does not sell or otherwise make available to any other
party any personally identifiable information of the consumers. Personally
identifiable non-medical information may be used internally in order to
continuously improve the content of the website and the consumer's shopping
experience. Aggregated statistical information, without individual
identification, is analyzed by HealthAxis in order to improve the overall
product offering and may be shared with HealthAxis' carrier partners for that
purpose. HealthAxis is a licensee of the TRUSTe Privacy Program and adheres to
their standards regarding the protection of personally identifiable information
of Internet users.
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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.
Insurance Related. As a result of the business activities presently
being conducted by HealthAxis, HealthAxis has organized HealthAxis.com Insurance
Services, Inc., a Pennsylvania corporation, which has also organized subsidiary
companies in four states. HealthAxis.com Insurance Services, Inc., either
directly or through its agency employees or wholly owned subsidiaries, is
licensed with state insurance departments to sell insurance and receive
commissions from the sale of insurance in all 50 states and the District of
Columbia. As a licensed agency, HealthAxis.com Insurance Services, Inc. is
subject to the regulation and examination by the Insurance Departments or
commissions in the states in which HealthAxis.com Insurance Services, Inc. is
licensed. HealthAxis, either directly or through wholly-owned subsidiaries doing
business in certain states, is subject to the laws and regulations of such
insurance departments where such laws and regulations are primarily intended to
benefit purchasers of insurance and generally grant supervisory agencies broad
administrative powers, including the power to restrict the carrying on of
business for failure to comply with such laws and regulations. In such event,
the possible sanctions that may be imposed include the suspension of individual
employees, limitations on engaging in business for specific periods, censures
and fines. Advertisements in connection with insurance products sold through
HealthAxis' website are regulated by state insurance departments and
commissions. See "Risk Factors -- In order to maintain compliance with insurance
regulations, HealthAxis may need to expend financial and managerial resources
which could reduce HealthAxis' revenues and the value of HAI's common stock."
There have been, and currently are, a number of proposals introduced in
the United States Congress to reform the current healthcare system. There are
proposals pending in state legislatures to reform the healthcare system as well.
Many states have already enacted comprehensive healthcare reform legislation and
a number of legislative and regulatory proposals are currently being considered
at the state and federal level. Legislative proposals have included:
o requirements with respect to mandated universal health insurance
coverage;
o restrictions on preexisting condition limitations;
o community rating standards;
o guaranteed issue and renewal requirements;
o restrictions on premium increases;
o differential limitations in rates for new and renewal business or
for demographic groups; and
o underwriting practice restrictions.
These reforms generally include the formation of voluntary purchasing
alliances for small employers (typically with less than 50-100 employees). They
also require insurers to:
o accept all qualified small employer groups as a condition of
providing small group insurance;
o prohibit the imposition of preexisting condition limitations or
medical condition terminations; and
o phase out experience-rating for small employer groups.
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Certain jurisdictions also have enacted so-called "any willing
provider" laws which may decrease the demand for managed care plans. Healthcare
industry participants may react to these proposals and the uncertainty
surrounding these proposals by curtailing or deferring investments, including
investments in the application solutions group's applications and services.
HealthAxis is unable to predict whether, or in what form, these proposals will
be enacted or the specific effects these proposals will have on HealthAxis'
business.
Management of HealthAxis
The following table sets forth information regarding the directors and
executive officers of HealthAxis as of March 14, 2000.
<TABLE>
<CAPTION>
Name Age Position with HealthAxis
----------------------------------- --------- --------------------------------------------------------------
<S> <C> <C>
Michael Ashker................... 47 President, Chief Executive Officer and Director
Alvin H. Clemens................. 62 Chairman of the Board
Henry G. Hager.................. 64 Director
Patrick J. McLaughlin............ 42 Director
Edward W. LeBaron, Jr............ 68 Director
Gregory T. Mutz.................. 54 Director
Dennis B. Maloney................ 53 Chief Operating Officer and Director
Anthony R. Verdi................. 51 Treasurer and Chief Financial Officer
Elaine del Rossi................. 56 Senior Vice President - Sales and Marketing
Andrew Felder.................... 33 Executive Vice President - Strategy and Corporate Development
Michael G. Hankinson............. 43 Vice President, General Counsel and Secretary
</TABLE>
Michael Ashker has been President, Chief Executive Officer and a
Director of HealthAxis since March 1998. Mr. Ashker has been a Director of HAI
since December 1998 and President and Chief Executive Officer of HAI since
August 1999. Mr. Ashker was the Managing Director of Lynx Capital Group LLC, an
independent investment advisor and fund management firm, from September 1995 to
January, 2000. Prior to such time, he was a Money Manager for Kidder Peabody &
Co. from 1991 to 1995, for Bateman, Eichler, Hill and Richards from 1988 to
1991, and for Shearson/American Express from 1984 to 1988.
Alvin H. Clemens has been Chairman of the Board of HealthAxis since
March 1998. Mr. Clemens has been Chairman of the Board of HAI and subsidiary
companies since October 1989 and was Chief Executive Officer of HAI from 1989 to
1999. Mr. Clemens was also President of HAI and Provident Indemnity Life
Insurance Company Life Insurance Company from 1993 to 1996. Prior to such time
he was President of Maine National Life Insurance Company from 1989 to 1995 and
Owner and Chairman of the Board of Maine National Life Insurance Company from
1985 to 1989. Mr. Clemens was President and Director of Academy Life Insurance
Company and Pension Life Insurance Company of America from 1970 to 1985. Mr.
Clemens was Chairman and Chief Executive Officer of Academy Insurance Group
Inc., from 1967 to 1985.
Henry G. Hager has been a Director of HAI since 1996 and a Partner in
the law firm of Stradley Ronon from 1994 through December of 1999. He currently
is Counsel at Stradley Ronon and has been President and Chief Executive Officer
of The Insurance Federation of Pennsylvania since 1985. Mr. Hager also serves as
a director of American Waterworks Company, a public company. Mr. Hager joined
HealthAxis' board in January 2000.
Edward W. LeBaron, Jr. has been a Director of HAI since 1998 and a
Director of Lynx Capital Group, LLC since January 1997. Prior to such time, Mr.
LeBaron was an attorney and Partner in the Political Law Group of Pillsbury,
Madison & Sutro from 1989 to 1994. Mr. LeBaron joined HealthAxis' board in
January 2000.
Gregory T. Mutz has served as a Director and President and Chief
Executive Officer of UICI since January 1999 and has served as a director of
HealthAxis since January 2000. Mr. Mutz was a director of Insurdata from May
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1999 to January 2000. Mr. Mutz has served as Chairman of the Board of Amli
Realty Co. since 1980, as Chairman of the Board of Trustees of Amli Residential
Properties Trust since 1994, and as Chairman of Amli Commercial Properties Trust
since 1997. Mr. Mutz has also served as Chairman of the Board of Excell Global
Services since 1997. He has been a Director of the National Multifamily Housing
Council since 1995 and a Director of Alleghany/Chicago Trust since 1996. Mr.
Mutz also served as a Director of Baldwin & Lyons from 1978 until 1997 and as a
Director of Avtel Communications from 1997 until 1998.
Dennis B. Maloney became HealthAxis' Chief Operating Officer and a
director in January 2000. Prior to such time Mr. Maloney was President and Chief
Executive Officer of Insurdata since January 1997 and was on the Board of
Directors of Insurdata from March 1997 to January 2000. From 1976 until October
1996, Mr. Maloney served in various capacities with SHL Systemhouse, Inc., a
technology company, most recently as President of its outsourcing division. Mr.
Maloney is a director of JetForm Corporation, a public company.
Patrick J. McLaughlin has served as a director of HealthAxis since
February, 2000 and has served as a director of UICI since January 1999. Mr.
McLaughlin has also served as a director of Universal American Financial
Corporation since 1995. Mr. McLaughlin has been the Managing Director of Emerald
Capital Group, Ltd., an asset management and consulting firm specializing in the
insurance industry, since April 1993. Prior to such time, he was Executive Vice
President and Chief Investment Officer of Life Partners Group, Inc. from April
1990 to April 1993 and Managing Director of Conning & Company from August 1989
to April 1990. He served as Senior Vice President and Chief Investment Officer
of ICH Corporation from March 1987 to August 1989.
Anthony R. Verdi has been the Chief Financial Officer and Treasurer of
HealthAxis since November 1999. He also serves as Chief Operating Officer of HAI
and subsidiaries since December 1997. He served as President of Provident
Indemnity Life Insurance Company from December 1998 through October 1999 and as
Treasurer and Chief Financial Officer of the HAI and subsidiaries from 1990
through 1997. Prior to 1990, he was Vice President and Controller of
Inter-County Hospitalization Plan Inc. and he served as Assistant Controller
Academy Insurance Group Inc. from 1971 through 1986.
Elaine del Rossi has been Senior Vice President - Sales and Marketing
of HealthAxis since November, 1999. Prior to such time, she served as President
of Health Options 2000 Consulting, a sales, marketing and business consultant to
major healthcare companies from March 1997 to November 1999. From September 1994
to March 1997, she served as Senior Vice President of Sales/Marketing for
AmeriChoice Medicaid HMO.
Andrew Felder has been Executive Vice President - Strategy and
Corporate Development of HealthAxis since January 1999. He also served as Chief
Operating Officer of HealthAxis from March 1998 to March 1999. Prior to such
time, Mr. Felder was a self-employed management consultant to Lynx Capital Group
LLC, from July 1997 to February 1998 during which time he co-founded
JusticeLink, Inc., a Dallas, Texas Internet company that provides electronic
document filing services to the justice community. He also was employed as the
Vice President of Strategic Planning at Wells Fargo Bank, from July 1995 to
February 1997 and the Manager of Strategic Planning at Dole Food Company, from
July 1992 to July 1995.
Michael G. Hankinson has been the Vice President and General Counsel of
HealthAxis since April, 1999. He became Secretary of HealthAxis in November,
1999. Prior to joining HealthAxis, Mr. Hankinson served as Senior Vice
President, Secretary and General Counsel with Gramercy Insurance Co. from
September 1992 to June 1998. Prior to such time, Mr. Hankinson was an
environmental attorney with Olin Corporation from 1991 to August 1992 and an
Instructor in Management in the College of Business Administration at Fairleigh
Dickinson University from August 1986 to August 1992.
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Employees
As of January 7, 2000, the Company had 1,070 employees, including 450
full-time professional employees, 477 full time data capture employees and
approximately 143 part-time data capture employees. None of HealthAxis'
employees is represented by a labor union or collective bargaining agreement.
HealthAxis considers its employee relations to be good.
As a result of the completion of the merger with Insurdata, HealthAxis'
future success depends upon the ability of its current executive officers to
establish clear lines of responsibility and authority, to work effectively as a
team, and to gain the trust and confidence of its employees. See "-- Management
of HealthAxis." HealthAxis' future success also depends on its ability to
identify, attract, hire, train, retain and motivate other highly skilled
technical, managerial, marketing and consumer service personnel. Competition for
technically skilled personnel is intense, but HealthAxis will continue its
efforts to attract, integrate and retain sufficiently qualified personnel,
including software developers and other technical experts. HealthAxis does not
have employment agreements with its key personnel.
Relationship with UICI
UICI is a diversified financial services company that offers insurance
and selected financial services to niche consumer and institutional markets.
UICI issues health insurance policies covering individuals and families
to self-employed association groups and student markets. UICI also offers health
insurance products for self-employed individuals who work for small businesses.
UICI also offers a range of health insurance products, including catastrophic
hospital and basic hospital-medical expense plans, choice-of-doctor plans and
managed care options, including a preferred provider organization plan and other
coverage modifications. UICI markets these higher deductible products through
"dedicated" agency sales forces comprised of independent contractor agents that
primarily sell UICI's products. For the student market, UICI offers tailored
insurance programs that generally provide single school year coverage to
individual students at colleges and universities. UICI also issues life and
annuity insurance products to selected niche markets and UICI acquires blocks of
life insurance and annuity policies from other insurers on an opportunistic
basis.
UICI also issues life and annuity insurance products to selected niche
markets, and UICI acquires blocks of life insurance and annuity policies from
other insurers on an opportunistic basis. The life and annuity insurance
policies issued by UICI are marketed through a dedicated agency sales force.
UICI also provides underwriting, claims management and claims
administrative services to third party insurance carriers (primarily to Aegon
USA, Inc. related to products coinsured by UICI), independent entities that
administer claims processing and payment, Blue Cross/Blue Shield organizations
and self-administered employer healthcare plans.
Through its United CreditServ, Inc. subsidiary, UICI has marketed
credit support services to individuals with no, or troubled, credit experience
and assists them in obtaining a nationally recognized credit card. The credit
cards have been issued by United Credit National Bank, an indirect wholly owned
subsidiary of UICI. During the year ended December 31, 1999, UICI's credit card
subsidiary incurred a pre-tax operating loss in the amount of approximately
$145.0 million. As a result of its continuing difficulties with its credit card
operations, in March 2000 UICI announced that it will exit from its United
CreditServ credit card business and, as a result, UICI has designated the unit
as a discontinued operation for financial reporting purposes. Accordingly, in
addition to the $145.0 million of pre-tax operating losses incurred by United
CreditServ in 1999, UICI recorded as additional expense in 1999 the amount of
$130.0 million, representing its current estimate of pre-tax loss upon disposal
of the unit.
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United Credit National Bank is currently subject to the terms of a
consent order issued by the Office of the Comptroller of the Currency. In
accordance with the terms of the consent order, United Credit National Bank has
ceased all activities with two marketing entities that solicited credit card
applications from United Credit National Bank, and United Credit National Bank
is further prohibited under the terms of the consent order from introducing new
products or services without approval by the Office of the Comptroller of the
Currency.
Educational Finance Group, Inc. (in which UICI holds a 75% interest),
markets, originates, funds and services primarily Federally guaranteed student
loans and is a leading provider of student tuition installment plans.
UICI and its subsidiaries constitute, in the aggregate, the application
solutions group's largest client. For the years ended December 31, 1997, 1998
and 1999, UICI and its subsidiaries accounted for an aggregate of approximately
$12.6 million, $24.9 million and $28.1 million, respectively, of Insurdata's
historical revenues, which represent approximately 43%, 56% and 60%,
respectively, of Insurdata's revenues for such periods. A portion of the
application solutions group's revenue from UICI in the past was for Year 2000
services which have been substantially completed. UICI and its subsidiaries are
expected to remain the application solutions group's largest client for the
foreseeable future. To the extent UICI or its subsidiaries experience financial
difficulties impacting UICI's ability to pay HealthAxis for services, the
financial performance of HealthAxis may be negatively impacted. HealthAxis
believes that the percentage of the application solutions group's revenues
attributable to UICI and its subsidiaries will decline as HealthAxis' marketing
efforts continue to build HealthAxis' base of external clients.
As a result of UICI's control of Insurdata prior to the merger, none of
the terms of contracts entered into between Insurdata and UICI and its
subsidiaries, which were assumed by HealthAxis, resulted from arm's-length
negotiations. See "Risk Factors -- Potential conflicts of interest could arise
because some people serve as directors and officers of either HAI or UICI and
HealthAxis," "Risk Factors -- HealthAxis and UICI may be unable to resolve
conflicts which arise regarding the products and services provided by HealthAxis
or any resolution may be less favorable than if HealthAxis were dealing with an
unaffiliated party," and "Risk Factors -- Because none of the HealthAxis
intercompany agreements are subject to arm's-length negotiations, these
agreements may be less favorable to HealthAxis than agreements negotiated with
third parties."
Arrangements and Transactions with HAI and UICI
HealthAxis and HAI have entered into various agreements, the material
terms of which are summarized below. These agreements were developed in the
context of a parent/subsidiary relationship and therefore none of the terms of
these agreements are the result of arm's-length negotiations between independent
parties. HealthAxis and UICI have entered into a carrier partner agreement and
plan to enter into agreements for the purpose of defining their ongoing
relationships, the material terms of which are summarized below. UICI and
Insurdata have also entered into various agreements, all of which were assumed
by HealthAxis in connection with its merger with Insurdata. These agreements
were developed in the context of a parent/subsidiary relationship and therefore
are not the result of arm's-length negotiations between independent parties. The
agreements, or the transactions provided for therein, may not be effected on
terms at least as favorable to HealthAxis as could have been obtained from
unaffiliated third parties. See "Risk Factors -- Business Related Risks -- The
loss of one or more of the application solutions group's large clients would
result in decreased sales and revenues." and "Risk Factors -- Investment Related
Risks -- Because members of management of HAI and UICI will own a substantial
portion of HAI's common stock upon completion of the merger, other shareholders
will not have the ability to control company actions that may be in their best
interest."
Additional or modified arrangements and transactions may be entered
into by HealthAxis and either HAI or UICI, including its subsidiaries. Any such
future arrangements and transactions will be determined through negotiation
between HealthAxis and either HAI or UICI, and it is possible that conflicts of
interest will be involved.
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The following is a summary of the current and contemplated arrangements
and transactions between HealthAxis and either HAI or UICI. The descriptions of
the proposed agreements set forth below are intended to be summaries and, while
the proposed material terms of the agreements being negotiated are set forth
herein, the provisions are subject to change and the descriptions are qualified
in their entirety by reference to the relevant agreements at such time as they
are reduced to writing.
Capital Contributions to HealthAxis by HAI and its former subsidiary.
Since HealthAxis' inception, HAI has made the following capital contributions to
HealthAxis:
o During 1998, HAI issued the following warrants for the purchase of
shares of HAI common stock in exchange for services provided to
HealthAxis.
<TABLE>
<CAPTION>
Warrant Holder Shares Exercise Price Fair Value
----------------------------- -------------- -------------------- ---------------------
<S> <C> <C> <C>
America Online Inc. 300,000 $4.480 $ 989,700
America Online Inc. 300,000 $3.380 $ 1,660,050
Lynx Capital LLC 400,000 $4.516 $ 663,071
HealthPlan Services 100,000 $9.000 $ 160,210
--------- -----------
Total 1,100,000 $ 3,473,031
</TABLE>
o During March 1998, 875,000 shares of common stock were issued to HAI
at $0.10 per share, for an investment of $87,500. During August
1998, there was a stock split, giving HAI an additional 12,250,000
shares of HealthAxis common stock.
o During September 1988, Provident Indemnity Life Insurance Company, a
former wholly owned subsidiary of HAI, purchased 545,916 shares of
HealthAxis Series A preferred stock at $4.40 per share for an
investment of $2,400,000.
o During November 1998, HAI invested $3,000,000 to purchase 682,395
shares of HealthAxis common stock at $4.40 per share.
o During December 1999, HAI invested $2,000,000 to purchase 133,333
shares of HealthAxis common stock at $15.00 per share.
Sale of HealthAxis Securities held by Provident Indemnity Life
Insurance Company to HAI. On March 24, 1999, Provident Indemnity Life Insurance
Company, a subsidiary of HAI, granted HAI the option to purchase all of the
545,916 shares of HealthAxis' Series A preferred stock owned by it at a purchase
price of $4.71 per share plus 8% interest calculated quarterly and compounded
annually from the date of Provident Indemnity Life Insurance Company's
acquisition to the date of HAI's purchase. The option expires on December 17,
2003. HealthAxis exercised this option on November 30, 1999.
Sale of Provident Indemnity Life Insurance Company. On August 16, 1999,
HAI entered into an agreement which provided for AHC Acquisition, Inc., a
company solely owned by Alvin H. Clemens, to acquire Provident Indemnity Life
Insurance Company for an aggregate payment by HAI of $14.7 million to Provident
Indemnity Life Insurance Company. This transaction was completed on November 30,
1999. In accordance with the terms of the stock purchase agreement, HAI:
o purchased HAI's headquarters located at 2500 DeKalb Pike from
Provident Indemnity Life Insurance Company for its book value of
$4.7 million;
o agreed to exercise its option to purchase 545,916 shares of
HealthAxis Series A preferred stock from Provident Indemnity Life
Insurance Company for $2.8 million (HAI made the $2.8 million
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payment for the shares of HealthAxis Series A preferred stock
pursuant to the option agreement between HAI and Provident Indemnity
Life Insurance Company and the payment equates to a $4.71 price per
share. The $4.71 price represented the price per share paid by
Provident Indemnity Life Insurance Company for these shares plus
interest at the rate of 8% per annum thereon from the date of
acquisition of these shares by Provident Indemnity Life Insurance
Company through November 30, 1999, the date of exercise);
o made a $7.2 million capital contribution from HAI to Provident
Indemnity Life Insurance Company in order to eliminate a statutory
deficiency, to enable Provident Indemnity Life Insurance Company to
maintain adequate capital to meet its liabilities including pay-out
obligations under existing insurance policies, and to provide
Provident Indemnity Life Insurance Company with sufficient capital
and surplus so that the Insurance Department of the Commonwealth of
Pennsylvania would grant the required approval of the sale of
Provident Indemnity Life Insurance Company; and
o transferred 100,000 shares of the HealthAxis Series A preferred
stock and the associated registration rights previously granted to
Provident Indemnity Life Insurance Company, to AHC Acquisition, Inc.
AHC Acquisition, Inc. Registration Rights Agreement Related to Series A
Preferred Stock. When HealthAxis proposes to register any shares of common stock
from authorized but unissued common shares or treasury shares under the
Securities Act (other than on a Form S-4 or Form S-8), HealthAxis is required to
give notice to the holders of Series A preferred stock and the holders of common
stock acquired upon the conversion of Series A preferred stock of the proposed
registration and to include their shares of common stock received upon the
conversion of the Series A preferred stock in such registration, subject to
certain conditions including the right of the underwriter of the offering to
limit the number of shares sold by the holders if the underwriter advised
HealthAxis and the holders in writing that the number of shares required to be
included by the holders would interfere with the successful marketing of the
shares offered. These piggyback registration rights are subject to the priority
rights granted to HealthPlan Services, holders of the Series B preferred stock,
certain warrant holders, and the holders of the Series C preferred stock and
Series D preferred stock. Subject to rights granted to HealthPlan Services,
holders of the Series B preferred stock, certain warrant holders and holders of
the Series C preferred stock and Series D preferred stock, the holders of at
least 60% of the then outstanding shares of Series A preferred stock may also
require HealthAxis to file one registration statement (a "demand registration")
under the Securities Act with respect to the common stock acquired upon the
conversion of the Series A preferred stock held by the holders desiring to
participate, subject to certain conditions. This demand may not be made earlier
than: (i) November 13, 2001 or (ii) six months after HealthAxis' initial public
offering. The Company is required to pay all registration expenses other than
any underwriting discounts and commissions for any underwriter or broker-dealer
acting on behalf of the holders of the Series A preferred stock. AHC
Acquisition, Inc. is a wholly owned by Alvin H. Clemens.
Lease Agreement. HealthAxis leases its headquarters from HAI in East
Norriton, Pennsylvania at a cost of $61,500 per month.
Insurdata Merger. On December 6, 1999, HealthAxis, Insurdata
Incorporated, HAI and UICI entered into an agreement and plan of merger which
set forth the terms and conditions under which Insurdata Incorporated was merged
with and into HealthAxis. The companies completed the Insurdata merger on
January 7, 2000.
In accordance with the terms of the Insurdata merger agreement, each
share of Insurdata Incorporated common stock outstanding immediately prior to
the effective date of the merger, except as provided in the merger agreement,
was exchanged for 1.33 shares of HealthAxis common stock. In connection with the
Insurdata merger, UICI received 18,943,678 shares of HealthAxis common stock.
The voting trust created by UICI in connection with the Insurdata merger,
described below, received 2,439,885 shares of HealthAxis common stock and other
shareholders of Insurdata Incorporated received 424,004 shares of HealthAxis
common stock. Each holder of Insurdata Incorporated common stock entitled to
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receive a fraction of a share of HealthAxis common stock received cash instead
of the fraction of a share, in an amount determined by multiplying the fraction
by $15.00. Each option to purchase shares of Insurdata Incorporated common
stock, under Insurdata Incorporated's stock option plans, outstanding on the
date the merger was completed, was converted into an option to purchase the
number of shares of HealthAxis common stock determined by the formula in the
merger agreement. The exercise price was also adjusted based on the exchange
ratio. The Insurdata merger was intended to be a reorganization under Section
368(a) of the Internal Revenue Code of 1986 and was accounted for as a purchase
under generally accepted accounting principles.
The table below identifies the equity ownership by HAI, UICI, Michael
Ashker and Alvin Clemens of HealthAxis common and preferred stock before and
after the Insurdata merger. This table excludes options and warrants to purchase
HealthAxis stock.
<TABLE>
<CAPTION>
March 14, 2000 December 31, 1999
---------------------------- ------------------------
Shares Percentage Shares Percentage
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
HAI........................... 15,801,644 34.7% 15,801,644 66.9%
UICI and subsidiaries......... 17,810,229 (2) 39.1% 866,551 3.7%
Alvin Clemens (1)............. 100,000 0.2% 100,000 0.4%
Michael Ashker................ - - - -
Minority Interest............. 11,796,767 26.0% 6,850,310 29.0%
---------- ----- ---------- -------
Total......................... 45,508,640 100.0% 23,618,505 100.0%
========== ===== ========== =======
</TABLE>
(1) Represents shares held by AHC Acquisition Inc. which is owned by Alvin H.
Clemens, the Chairman of HAI and HealthAxis.
(2) Excludes 2.0 million shares of HealthAxis common stock that UICI sold to a
single institutional investor.
UICI Outsourcing Agreement. UICI and its affiliates and HealthAxis have
entered into a technology outsourcing agreement. The terms of this agreement
were negotiated between Insurdata and UICI prior to HealthAxis' acquisition of
Insurdata. Pursuant to the terms of this agreement, HealthAxis will provide UICI
and its affiliates with technology support services, system integration
services, data processing services, local area network and other
telecommunications services, and other software and hardware based services for
an initial term of five years. 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 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.
The agreement requires both UICI and HealthAxis to contribute facilities and
equipment. Under the terms of the agreement, UICI is also required to contribute
certain UICI-owned software. Third party software may also be used to provide
the services required under the agreement. The agreement provides that Insurdata
assigns and transfers to UICI any and all right, title and interest that
Insurdata may have, or claim to have, to materials that were previously
developed by Insurdata for UICI under certain existing agreements. All materials
developed by HealthAxis during the term of the agreement will belong to UICI.
UICI may, at its option, grant a license to these materials back to HealthAxis
subject to payment of certain royalties from HealthAxis to UICI. The agreement
established certain service levels and availability standards and imposes
penalties if such standards are not met. Under the terms of the agreement,
HealthAxis may not stop providing services due to a dispute between the parties.
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Generally, the services provided under the agreement must be billed at
HealthAxis' cost plus a ten percent pre-tax profit margin. 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
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 Amended and Restated Carrier Partner Agreement. On March 30, 1999,
HealthAxis entered into an amended and restated carrier partner agreement with
UICI and two of UICI's subsidiaries, MEGA Life & Health Insurance Company and
Midwest National Life Insurance Company of Tennessee. Pursuant to the UICI
carrier partner agreement, certain insurance products and services of UICI's
insurance subsidiaries will be offered through HealthAxis' website to consumers.
In addition, HealthAxis agreed to issue to UICI a warrant to purchase up to
150,000 shares of HealthAxis common stock, subject to adjustment, at $4.40 per
share and 7,500 shares of HealthAxis common stock, subject to adjustment, at
$12.00 per share.
Shareholders' Agreement. HAI, UICI, Michael Ashker, and HealthAxis
intend to enter into a shareholders' agreement. Under the terms of the
shareholders' agreement, the board of directors of HealthAxis shall consist of
up to nine members. UICI and HAI may each independently nominate three nominees
to the board. The remaining three directors will be nominated by mutual
agreement of HAI and UICI. Each party is obligated to vote its shares in favor
of the directors nominated by the other party.
Subject to certain limitations, the shareholders' agreement also
provides that UICI and HAI both have the right to purchase its proportionate
number, or any greater or lesser number, of any additional securities that
HealthAxis may, from time to time, propose to sell and issue. HealthAxis is
required to provide UICI and HAI prior written notice of its intention to issue
such additional securities. Upon receipt of this notice, UICI and HAI have
twenty days to agree to purchase their proportional shares, or any greater or
lesser number, for the price and upon the terms specified in the notice. If UICI
and HAI fail to exercise their purchase rights, HealthAxis has twenty days to
complete the sale of the securities at a price not less than the price specified
in the notice. This provision of the shareholders' agreement terminates at such
time as the HealthAxis common stock is registered under the Exchange Act.
In addition to the preemptive rights set forth above, the shareholders'
agreement also provides that Michael Ashker, UICI and HAI have the right of
first refusal to purchase shares of HealthAxis should one of the other parties
to this agreement desire to transfer his or its HealthAxis securities. The party
desiring to transfer his or its securities is required to provide the other
parties, referred to as the electing parties, with written notice, at least
twenty days prior to the proposed transfer setting forth the terms of the offer
to sell the HealthAxis securities. The electing parties have ten days from the
receipt of notice to elect to purchase that number of securities determined by
the formula set forth in the agreement. If an electing party fails to exercise
its right to purchase, or exercises its right to a portion smaller than it is
entitled, the party transferring his shares has ten days to sell any remaining
securities at the price and on terms no less favorable than specified in the
offer to the electing parties.
Subject to certain conditions set forth in the shareholders' agreement,
the shareholders' agreement also provides that HealthAxis can cause UICI to
transfer up to 1,255,000 shares of its HealthAxis common stock to unaffiliated
third parties.
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The shareholders' agreement also provides UICI with the right, in its
sole and absolute discretion, to approve:
o the calculation of the amount and amortization period of all
goodwill and other intangibles created in connection with the
merger, subject to compliance with generally accepted accounting
principles; and
o provided UICI owns at least 20% of the HealthAxis common stock, the
entering into of any merger or similar agreement between HAI and
HealthAxis.
It is currently intended that this agreement will terminate in
connection with the reorganization and will be replaced by the shareholders'
agreement attached as an exhibit to the agreement and plan of reorganization.
In a separate letter to HealthAxis and HAI, dated December 6, 1999,
UICI indicated that it would vote in favor of a business combination between HAI
and HealthAxis provided the following conditions were satisfied:
o UICI has the right to assess and approve, in its reasonable
discretion, the mathematical calculation of the merger terms;
o UICI has received an opinion of counsel, or other reasonable
assurance, that the merger, viewed alone and together with the
merger of HealthAxis and Insurdata Incorporated, will be tax free to
the constituent corporations and UICI;
o UICI has the right to make any and all reasonable and appropriate
due diligence inquiries it and its counsel deem advisable with
respect to any contingent claims or residual liabilities that may
reside at HAI; and
o In the event that UICI determines that there may be an unacceptable
level of risk associated with the claims or liabilities, UICI may
require that an appropriate reserve, escrow or similar arrangement
be made for the claims or liabilities or an appropriate indemnity be
given by a credit-worthy third party. In either event, UICI will be
willing to set an appropriate cap on the escrow or indemnity and
limit the time period during which the escrow or indemnity will be
in effect.
Voting Trusts. UICI has entered into two voting trust agreements. These
agreements grant voting power over a portion of the HealthAxis common stock held
by UICI to the trustees who are directors of HealthAxis and HAI. For a
description of the terms of these trusts, see Note 25 of the Notes to the
Consolidated Financial Statements included herein.
Licensing Systems Integration and Technology Management Agreements. The
application solutions group provides application solutions, systems integration
and technology management services to UICI and its subsidiaries.
HealthAxis' application solutions group 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 licensing of certain of its proprietary work flow and
business applications as well as systems integration and technology management.
UICI and its subsidiaries and affiliates constitute, in the aggregate,
HealthAxis' largest customer. For the years ended December 31, 1997, 1998 and
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1999, UICI and its subsidiaries and affiliates, including the subsidiaries and
affiliates discussed below, accounted for an aggregate of $12.6 million (48%),
$24.8 million (65%) and $28.2 million (60%), respectively, of Insurdata's
historical total revenues for such periods. As of December 31, 1997, 1998 and
1999, Insurdata Incorporated had trade receivables from UICI and its
subsidiaries and affiliates of $2.2 million, $2.2 million and $3.2 million,
respectively. In addition to trade receivables, Insurdata Incorporated also held
various notes receivable from UICI and its subsidiaries and affiliates,
amounting to $0.2 million and $4.5 million at December 31, 1996 and 1997,
respectively. These notes bore interest at rates ranging from 8.25% to 10.5%.
Total interest income from these notes for the years ended December 31, 1996,
1997 and 1998 was approximately $166,000, $514,000 and $125,000, respectively.
These notes were paid off in 1998.
Human Resource Services. Commencing in 1996, UICI provides human
resource administrative services to the application solutions group, including
payroll services and employee benefit management pursuant to a one year
agreement which expired on December 31, 1999 with annual renewals thereafter.
Either party upon 90 days' notice may cancel this agreement. In addition to
reimbursement on a dollar-for-dollar basis for wage and benefit costs, UICI
charges the application solutions group an administrative fee of $10
per-employee per-pay period pursuant to a written agreement, which fee is
intended to reimburse UICI for the overhead it incurs in providing these
services. HealthAxis expects that UICI will continue to provide these services
for a limited period of time. HealthAxis has also engaged other UICI
subsidiaries to provide services such as printing and newsletter publication. It
is intended that the UICI subsidiaries will continue to provide these services
for a limited period of time into the future.
Lease Agreements. HealthAxis leases two facilities from certain
subsidiaries of UICI. HealthAxis leases office space located in Hurst, Texas,
pursuant to a written agreement that expired on December 31, 1999 and currently
continues on a month to month basis. HealthAxis leases additional office space
in Dallas, Texas, on a month-to-month basis under a verbal agreement. Insurdata
paid an aggregate of approximately $112,000, $255,000 and $369,000 under these
leasing arrangements for the years ended December 31, 1997, 1998 and 1999,
respectively. HealthAxis believes that the terms of these lease arrangements are
no less favorable to it than could have been obtained in a transaction with an
unaffiliated party.
UICI Administrators, Inc. HealthAxis' application solutions group also
currently provides certain work flow and business applications to UICI
Administrators, Inc., an entity that provides administrative services and is
owned by UICI, pursuant to a written service license agreement. UICI
Administrators in turn operates through an agreement with Healthcare Management
Administrators, Inc., an entity owned by Ronald L. Jensen, the Chairman of UICI
and a former director of HealthAxis. HealthAxis' agreement with UICI
Administrators is for a three-year term expiring in December 2001, with
automatic annual renewal provisions thereafter, subject to prior notice of
non-renewal. For the years ended December 31, 1997, 1998 and 1999, UICI
Administrators accounted for an aggregate of $1.6 million, $2.1 million and $3.0
million respectively, of Insurdata's revenues under the agreement, which
represent approximately, 5%, 5% and 6%, respectively, of Insurdata's historical
revenues for such periods. The amounts paid by UICI Administrators are included
in the UICI and subsidiaries numbers included above.
Insurdata provided accounting and management services to UICI
Administrators. In exchange for these services, UICI Administrators pays
HealthAxis a fee based upon the salary, benefits and time commitment of
Insurdata's employees actually performing the services. The fee is intended to
reimburse HealthAxis for the costs of providing these services and therefore
such fees are offset against the related expenses. Fees received by Insurdata
from UICI Administrators amounted to $2,000, $134,000 and $143,000 for the years
ended December 31, 1997, 1998 and 1999, respectively. In addition to the
accounting services provided by Insurdata, it's President and Chief Executive
Officer provides certain management oversight of UICI Administrators. Neither
the President nor Insurdata receives any compensation in exchange for the
President's services. HealthAxis ceased providing these services following the
completion of the HealthAxis merger with Insurdata.
During 1999, Insurdata Incorporated entered into a contract with UICI
Administrators and an unrelated third party for both programming services and
ongoing processing of medical insurance claims and Medicare claims. The contract
provides for HealthAxis to receive an approximate $1.1 million fixed fee for
programming services payable initially in cash up to $640,000 as programming
services are performed and then by a $460,000 non-interest bearing note with an
estimated value of approximately $370,000 using an estimated implied interest
rate of 8.75%. The note will be paid in equal monthly installments of $7,666
over the five-year life of the contract. The note is collateralized by the
proceeds of the cancellation provisions within the UICI Administrators' contract
with the unrelated third party. HealthAxis recorded approximately $812,000 in
48
<PAGE>
programming pro forma revenues under this contract during the year ended
December 31, 1999. The arrangement with UICI Administrators provided for the
customary transaction and processing fees over the term of the contract.
Winterbrook VSO. Winterbrook VSO provides certain sales and marketing
services for HealthAxis' imaging and electronic data capture services pursuant
to a verbal brokerage agreement. Winterbrook VSO is owned by Ronald L. Jensen,
current Chairman of UICI and a former director of HealthAxis until February
2000. Under the agreement that expired June 30, 1997, Winterbrook VSO receives a
commission computed on the amount of recurring license fees under client
contracts that Winterbrook VSO brokered on behalf of HealthAxis. During 1996 and
1997, Insurdata advanced funds to Winterbrook VSO against future commissions to
be earned by Winterbrook VSO under the brokerage agreement. The advances were
not made pursuant to a written promissory note and did not bear interest. The
outstanding balance of the advances was approximately $100,000 and $90,000 as of
December 31, 1996 and 1997, respectively. Insurdata paid Winterbrook VSO, or
offset against the outstanding balance of any advances, as applicable, an
aggregate of approximately $132,000, $191,000 and $258,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. At December 31, 1999, the
balance of commissions owed to Winterbrook VSO was approximately $58,000. Mr.
Jensen purchased Winterbrook VSO from UICI in July 1997.
Netlojix Communications, Inc. Netlojik Communications, Inc., a
telephone company in which Ronald L. Jensen, Chairman of UICI and a former
director of HealthAxis, and his five adult children and their affiliated trusts
own a controlling interest, provides telephone services to the UICI and certain
subsidiaries, including Insurdata (now HealthAxis' application solutions group)
pursuant to a written agreement. This agreement for a 15 month term expiring
November 2000 with automatic monthly renewal provisions thereafter, subject to
30 days' notice of non-renewal. In 1997 and 1998 and until August 1, 1999,
Matrix Telecom, a subsidiary of Netlojix Communications, Inc. provided telephone
services to Insurdata. For the years ended December 31, 1997, 1998 and 1999,
Insurdata paid these entities approximately $46,000, $132,000 and $243,000,
respectively.
Sale of Subsidiaries. Effective October 1, 1999, Insurdata Incorporated
sold its Insurdata Administrators division, which provided benefits
administration services and its 100% member interest in Insurdata Marketing
Services, LLC to a subsidiary of UICI for a sales price in cash of approximately
$459,000 and $399,000, respectively. The price approximated Insurdata
Incorporated's net book value of the Insurdata Administrators division and
Insurdata Marketing Services, LLC at the time of the sale.
The book value of the assets and liabilities of the Insurdata
Administrators division and Insurdata Marketing Services, LLC at September 30,
1999 were as follows:
Cash and current equivalents $ 598,000
Other current assets 415,000
Non-current assets 960,000
Liabilities (1,115,000)
-----------
Shareholders equity and
Member interest (net book value) $ (858,000)
===========
HealthPlan Services and UICI. On October 5, 1999, UICI and HealthPlan
Services entered into a definitive agreement that provides for the purchase of
HealthPlan Services by UICI in a stock-for-stock merger transaction. Subsequent
to year end, UICI and HealthPlan Services announced that they had mutually
agreed to terminate this acquisition.
49
<PAGE>
Employee Loans. On October 18, 1999, Insurdata made loans aggregating
$631,000 to certain of its executive officers, including Dennis B. Maloney, who
is HealthAxis' Chief Operating Officer. These loans were extended by Insurdata
for the purpose of enabling such individuals to exercise options to purchase
Insurdata common stock issued under Insurdata's Founders' Plan. Each of the
loans is due on December 31, 2002 and bears interest at a rate of 6% per annum,
with interest payable quarterly. If the employee is terminated and there is a
public market for the shares, the due date on the loan is accelerated to 90 days
from the later of termination or the establishment of a public market. The
largest outstanding balance on the loans was $631,000 during 1999. The
outstanding balance on these loans was $631,000 at December 31, 1999. These
loans are now held by HealthAxis and are secured by the HealthAxis common stock.
Item 2. Description of Properties
HAI owns its headquarters located at 2500 DeKalb Pike in East Norriton,
Pennsylvania. The headquarters is approximately 47,000 square feet and is
situated on approximately 6.5 acres. HealthAxis leases 41,000 square feet of the
headquarters from HAI and the remaining 6,000 square feet is leased to PILIC or
used by HAI. In addition, HealthAxis leases office space at the following
locations:
Address Square Feet
----------------------------------------------------------- ---------------
5215 North O'Connor Blvd, 800 Central Tower, Irving, TX 37,900
2121 Precinct Line Road, Hurst TX (1) 20,000
4001 McEwen, Dallas, TX (1) 4,000
990 West Atherton Dr, Ste. 200 Salt Lake City, UT 5,000
670 East Main St, Castledale, UT 5,450
1200 East Ephraim Canyon, Ephraim, UT 10,000
Montego Bay Free Zone, Bldg No. 2, Montego Bay, Jamaica 5,000
1-3 Pimento Way, Montego Freeport, Montego Bay, Jamaica 10,000
577 Howard Street, San Francisco, CA 2,100
------------------------
(1) Leased by HealthAxis from UICI or one of its subsidiaries.
The Company believes its existing facilities are suitable to conduct
its present business.
Item 3. Legal Proceedings
The Company is involved in normal litigation, including that arising in
the ordinary course of its 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.
Item 4. Submission of Matters to a Vote of Security Holders
HAI held an annual meeting of shareholders on December 14, 1999, at
which time the shareholders voted to elect eight directors to serve until the
next Annual Meeting of Shareholders and until their successors are duly elected
and approved the appointment of BDO Seidman, LLP as the independent auditors of
HAI for the fiscal year 1999.
50
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PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
The following table shows the range of quarterly high and low sale
prices for HAI's common stock. HAI's common stock is listed on the NASDAQ
National Market with the exception of the period June 12, 1998 through November
6, 1998. During this time period HAI's stock was delisted due to the delayed
filing of HAI's December 31,1997 Annual Report on Form 10-K and the March 31,
1998 Quarterly Report on Form 10-Q. During this period, HAI's common stock
traded on OTC Bulletin Board. Trading on NASDAQ National Market resumed on
November 9, 1998 as a result of filing HAI's December 31, 1997 Annual Report on
Form 10-K and the timely filing of all 1998 Quarterly Form 10-Q reports.
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- --------------------- -------------------
High Low High Low High Low
-------- ------ -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter 14-3/8 6-1/4 6-15/16 2-1/4 14-3/8 8-5/8
Second Quarter 42-1/4 11-1/2 6-15/16 3-5/16 10-1/2 3-3/4
Third Quarter 37 12-3/4 8-1/4 3 5-1/8 3
Fourth Quarter 40 13 14-1/8 2-3/4 3-7/8 2-1/8
</TABLE>
On March 20, 2000, the closing price of HAI's common stock was $15.50.
On that same date, there were approximately 3,200 shareholders.
Dividends
HAI has not paid a cash dividend on its Common Stock since 1982. HAI
currently intends to retain all earnings to finance the expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future.
Dividends paid by HAI over and above the financial assets of HAI are
dependent upon the ability of HealthAxis to pay dividends to HAI. HAI is
restricted from declaring and paying dividends by provisions of a guarantee
agreement between HAI and RCH which HAI entered into in connection with a
reinsurance agreement between PILIC and RCH.
Dividend payments by HealthAxis are subject to restrictions set for in
the Certificates of Designation related to the Series A, Series B, Series C and
Series D Convertible Preferred Stock. HealthAxis does not anticipate paying cash
dividends for the foreseeable future.
HAI paid cash dividends on the Series A and Series B Preferred Stock at
the rate of $0.0636363 and $0.109090, respectively, per quarter from 1993 to
June 1999. All Series A and Series B Preferred Stock was converted into common
stock in 1999 and 1996, respectively.
HealthAxis declared dividends on the Series A and Series B Preferred
Stock at the rate of $0.025 per quarter from November 1998 to March 1999.
51
<PAGE>
Recent Sales of Unregistered Securities
During 1999, HAI issued common stock, convertible debentures and
warrants, in private offerings, which were not registered with the Securities
and Exchange Commission. The following provides information regarding such
transactions which were engaged in by HAI as part of its capital raising
efforts, in connection with the conversion of its preferred stock and for
compensatory reasons.
The following HAI common stock transactions were engaged in with the
individuals identified below as part of compensatory arrangements with
employees, payment for consulting services and in connection with the conversion
of preferred stock:
<TABLE>
<CAPTION>
Aggregate
Name of Person Number Purchase Nature of
Date of Transaction Purchasing Securities Of Shares Price Transaction
------------------- --------------------- --------- --------- -----------
<S> <C>
March 31, 1999 Edward Bolton 25,000 N/A Stock issued pursuant to
employment agreement
September 9, 1999 Alvin H. Clemens 550,000 N/A Conversion of Preferred Shares
into Common Stock
May 18, 1999 Anthony R. Verdi 5,500 N/A Conversion of Preferred Shares
into Common Stock
</TABLE>
In September 1999 HAI completed a private placement of Convertible
Debentures in the amount of $27,500,000 due September 14, 2002. The debentures
are convertible into HAI's common stock at a conversion price of $20.34 per
share (the "Conversion Price"). As part of the transaction, HAI issued to the
purchasers currently exercisable warrants to purchase 202,802 shares of its
common stock at an exercise price equal to the Conversion Price ($20.34 per
share) (the "Warrants"). No fees or commissions or similar payments with respect
to this transaction were paid other than a $650,000 finders fee. See Note 12 to
the Consolidated Financial Statements included herein for a further explanation.
On September 28, 2000, HAI entered into an Amendment to the Securities Purchase
Agreement dated September 14, 1999 between HAI and the holders of the debentures
to modify the terms. See Note 27 to the Consolidated Financial Statements
included herein for a further explanation.
During 1999 HealthAxis issued common and preferred stock and warrants,
in private offerings, which were not registered with the Securities and Exchange
Commission. The following provides information regarding such transactions which
were engaged in by HealthAxis as part of its capital raising efforts and for
compensatory reasons to various strategic partners.
In March 1999 HealthAxis entered into an Amended and Restated Carrier
Partner Agreement with UICI, pursuant to which HealthAxis issued a warrant to
UICI to purchase 400,000 shares of HealthAxis common stock at $4.40 per share
which was subsequently amended to provide for warrants to purchase 150,000
shares at $4.40 and 7,500 shares at $12.00, with a five-year term. See Note 6 to
the Consolidated Financial Statements included herein for a further explanation.
In March 1999 HealthAxis completed a private placement of 1,526,412
shares of HealthAxis Series C Convertible Preferred Stock to a group of
accredited investors at $5.77 per share for an aggregate purchase price of
$8,807,397, less issuance cost of $683,501. See Note 20 to the Consolidated
Financial Statements included herein for a further explanation.
In May 1999 HealthAxis entered into a Strategic Alliance Agreement with
First Health Group Corp. ("First Health"), pursuant to which HealthAxis issued a
warrant to First Health for 50,000 shares of HealthAxis common stock at $20.00
per share, with a three-year term. See Note 6to the Consolidated Financial
Statements included herein for a further explanation.
In May 1999 HealthAxis completed a private placement of 516,051 shares
of HealthAxis common stock to a group of accredited investors at $12.00 per
share for an aggregate purchase price of $6,192,612, less issuance cost of
$1,585. See Note 15 to the Consolidated Financial Statements included herein for
a further explanation.
52
<PAGE>
In June 1999 HealthAxis issued a warrant to ING Barring, Inc. ("ING
Barring") for 63,000 shares of HealthAxis common stock at $5.77 per share, with
a five-year term commencing on March 30, 1999. This warrant was issued in
settlement of its obligations pursuant to the engagement letter dated December
22, 1998 between ING Barring and HealthAxis and in connection with the
settlement agreement and mutual release dated June 16, 1999.
In July 1999 HealthAxis completed a private placement of 333,334 shares
of HealthAxis Series D Preferred Stock issued to Intel Corp. at $12.00 per share
for an aggregate purchase price of $4,000,000. See Note 21 to the Consolidated
Financial Statements included herein for a further explanation
In July 1999, HealthAxis entered into a Strategic Alliance Agreement
with Intel Corp., pursuant to which HealthAxis issued a warrant to Intel Corp.
for 75,000 shares of Series D preferred stock at $14.50 per share, with a
five-year term.
In October 1999, HealthAxis entered into an agreement with Aetna US
HealthCare, Inc. which provides for the issuance to Aetna US HealthCare, Inc. of
a warrant for 150,000 shares of HealthAxis common stock with a term of three
years. The exercise price with respect to 50,000 shares is based on an average
closing price of HAI common stock related to the date of the agreement. The
exercise price with respect to the second 50,000 shares is a 125% of the price
with respect to the first 50,000 shares. The exercise price with respect to the
third 50,000 shares is a 125% of the price with respect to the second 50,000
shares.
In November 1999, HealthAxis entered into an agreement with the
National Blue Cross and Blue Shield Association that provides for the issuance
to the National Blue Cross and Blue Shield Association of warrants for up to
330,000 shares of HealthAxis common stock. The exercise price with respect to
30,000 shares is $13.30 with a term of 18 months. The exercise price with
respect to 150,000 shares is $16.00 with a term of 18 months. The exercise price
with respect to 150,000 shares is based on a percentage of an average closing
price of HAI common stock related to the date upon which the National Blue Cross
and Blue Shield Association attains certain performance goals with a term of 24
months from the date certain of Blue Cross and Blue Shield Organizations'
products are launched on HealthAxis' website.
In December 1999 HealthAxis completed a private placement of 3,846,003
shares of HealthAxis common stock to a group of accredited investors and HAI at
$15.00 per share for an aggregate purchase price of $57,690,045, less issuance
cost of $2,533,000. See Note 15 to the Consolidated Financial Statements
included herein for a further explanation.
No commissions have been paid in connection with the above HealthAxis
sales, except with regard to the HealthAxis Series C Preferred Stock and
HealthAxis common stock issued in December, 1999. In connection with the Series
C Preferred Stock a placement fee of $300,000 was paid and warrants to ING
Barring as previously described were issued. In connection with the December
1999 offering, placement fees of $1.9 million were paid to Donaldson Lufkin and
Jenrette ($1.5 million), Thomas Weisel Partners LLC ($300,000), and Stephens,
Inc. ($100,000).
Item 6. Selected Financial Data.
The following selected consolidated financial information has been
derived from the consolidated financial statements of HAI and should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this report which have been audited by BDO Seidman, LLP
for 1999, 1998 and 1997, and by PricewaterhouseCoopers, LLP for 1996 and 1995.
HAI's financial results include that of its subsidiary, HealthAxis. All
information has been restated to present as discontinued operations HAI's
insurance operations and HealthAxis' retail website operations.
53
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- --------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue......................................... $ - $ - $ - $ - $ -
----------- ---------- ---------- --------- ---------
Expenses:
Operating expenses......................... 504 277 - - -
Sales and marketing........................ 447 134 - - -
General and administrative................. 7,457 3,967 1,908 744 271
Amortization of goodwill................... 765 - - - -
---------- ---------- ---------- --------- ---------
Total expenses......................... 9,173 4,378 1,908 744 271
---------- ---------- ---------- --------- ---------
Operating loss............................. (9,173) (4,378) (1,908) (744) (271)
Interest and other income, net............. (925) (222) 177 (13) (14)
Loss before minority interest.............. (10,098) (4,600) (1,731) (757) (285)
Minority interest in loss of subsidiary......... (1,008) (493) - - -
---------- ---------- ---------- --------- ---------
Loss from continuing operations................. (9,090) (4,107) (1,731) (757) (285)
Loss from sale of discontinued operations....... (10,263) - - - -
Income (loss) from discontinued operations...... (27,178) (8,049) (16,694) 16,877 (3,416)
---------- ---------- ---------- --------- ---------
Net income (loss).......................... (46,531) (12,156) (18,425) 16,120 (3,701)
Dividends on preferred stock.................... 70 254 148 194 334
---------- ---------- ---------- --------- ---------
Net income (loss) applicable to common stock.... $ (46,601) $ (12,410) $ (18,573) $ 15,926 $ (4,035)
========== ========== ========== ========= =========
Basic and diluted income (loss) per share of common
stock):
Continuing operations...................... $(0.75) $(0.42) $(0.19) $(0.10) $(0.06)
Discontinued operations.................... (3.05) (0.78) (1.65) 1.76 (0.38)
--------- --------- --------- -------- --------
Net income (loss).......................... $(3.80) $(1.20) $(1.84) $ 1.66 $(0.44)
========= ========= ========= ======== ========
Weighted average common shares and equivalents
used in computing basic and diluted income
(loss) per share........................... 12,260,000 10,331,000 10,090,000 9,610,000 9,100,000
Basic and diluted dividends per share paid on
common stock............................... -- -- -- -- $ 0.02
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets........................................ $79,602 $24,568 $12,333 $8,935 $3,702
Loans payable....................................... -- 3,865 5,077 298 830
Convertible debenture............................... 25,019 -- -- -- --
Ceding commission liability......................... 5,600 5,000 -- -- --
Preferred stockholders' equity...................... -- 557 580 580 1,006
Book value per common share (1)..................... 0.97 0.43 0.34 2.13 0.26
Pro forma book value per common share (2)........... 0.97 0.46 0.37 2.07 0.33
</TABLE>
----------------------
(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
conversion of Series A and Series B preferred stock into common stock of
HAI on a share-for-share basis in 1995 and conversion of Series A preferred
stock into common stock in 1996, 1997 and 1998 on a share-for-share basis.
55
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Year ended December 31, 1999 compared to year ended December 31, 1998.
Net loss applicable to common stock. Net loss applicable to common
stock was $46.6 million or ($3.80) per basic and diluted share in 1999 compared
to net loss of $12.4 million or ($1.20) per basic and diluted share in 1998. The
Company's 1999 results included a net loss from discontinued operations of $37.4
million as compared to $8.0 million loss from discontinued operations in 1998.
Additionally the Company experienced increased expenses in HAI during 1999
compared to 1998.
Interactive commission and fee revenue. There were no revenues due to
the discontinued operations of all the Company's prior operations.
Operating expenses. Operating and development expenses of $504 thousand
in 1999 increased from $277 thousand in 1998 primarily due to higher HealthAxis
expense due to employee and recruiting expenses related to general operations.
Operating expenses primarily include technical salaries and benefits for
employees who provide internal support.
In March 2000, the Emerging Issues Taskforce issued Abstract No. 00-2,
Accounting for Website Development costs, ("EITF No. 00-2") which provides
additional authoritative guidance on how to account for costs incurred in the
planning, developing and operating of a website. Management has reviewed the
impact of EITF No. 00-2 on its current policy and has determined that there will
be no impact as a result of adopting this standard.
Sales and marketing expenses. Sales and marketing expenses of $447
thousand in 1999 increased from $134 thousand in 1998 due primarily to salaries
and benefits of the sales force.
General and administrative expenses. General and administrative
expenses of $7.5 million in 1999 increased from $4.0 million in 1998 due
primarily to employee and recruiting expenses relating to the increase in
HealthAxis' administrative and executive staff. The increase was also due to
professional fees and overhead expenses, which increased $400 thousand from $2.2
million for 1998 to $2.6 million in 1999. General and administrative expenses
include executive management, accounting, legal, and human resource personnel
and expenditures for applicable overhead costs.
Amortization of goodwill. Amortization of goodwill of $765 thousand in
1999 relates to HAI's purchase of 1,415,000 shares of HealthAxis common stock
from HealthPlan Services Inc. Amortization of HAI's $7.9 million of goodwill in
1999 includes 3 1/2 months amortization for the purchase of these shares and
accordingly will be higher in 2000. Further, HealthAxis anticipates recognizing
approximately $682 million of goodwill as a result of the January 7, 2000 merger
of Insurdata into HealthAxis to be amortized on a straight line basis over a 20
year period.
Interest income. Interest income of $656 thousand in 1999 increased
from $92 thousand in 1998 as it relates to interest earned in short term
investments.
Interest expense. Interest expense of $1.6 million in 1999 includes
$0.7 million on convertible debentures, $0.6 million of accrued interest on
ceding commission liability and $0.2 million on loans payable and $0.1 million
of interest on other obligations. Interest expense increased in 1999 compared to
1998 due to the 1999 issuance of convertible debentures and the December 31,
1998 execution of a reinsurance agreement which gave rise to the ceding
commission liability and interest thereon.
Net loss from discontinued operations. Net loss from discontinued
operations of $37.4 million included a $10.3 million loss on the sale of PILIC,
$8.0 million loss in discontinued insurance operations and $19.1 million loss in
discontinued retail website operations as compared to $6.7 million loss in
56
<PAGE>
discontinued insurance operations and $1.3 million in discontinued retail
website operations in 1998. HAI's discontinued insurance operations were
conducted through its former wholly owned life insurance company Provident
Indemnity Life Insurance Company ("PILIC") sold November 30, 1999 and PILIC's
subsidiaries which during 1997 through 1998 were Provident American Life and
Health Insurance Company ("PALHIC") sold December 31, 1998, Montgomery
Management Corporation ("MMC") of which 80% was sold during 1998 and the
remainder sold during 1999 and NIA Corporation ("NIA") sold December 31, 1998.
The insurance operations are being reported as discontinued operations for all
periods presented. 1998 results included realized gains on the sale of PALHIC,
MMC and NIA of $3 million. HAI's discontinued retail website operations were
conducted through its subsidiary, HealthAxis, which was incepted in March, 1998.
The retail website operations are being reported as discontinued operations for
all periods presented.
The Company has recorded a loss on the sale of subsidiary of $10.3
million in connection with the sale of PILIC which includes a write-off of net
assets including unamortized deferred policy acquisition costs, property and
equipment, net of accumulated depreciation in the amount of $2.7 million plus
HAI's November 30, 1999 capital contribution to PILIC in the amount of $7.2
million and the value of the Series A Preferred Stock transferred to AHC in the
amount of $0.4 million. No consideration was received from AHC as the
liabilities assumed exceeded the value of the assets acquired. The value of the
Series A Preferred Stock was based on the historical issuance cost by HealthAxis
to PILIC during 1998.
Insurdata merger. On December 7, 1999, HealthAxis and Insurdata
Incorporated, a subsidiary of UICI, announced the signing of a definitive
agreement to merge the two companies, with the combined entity retaining the
HealthAxis name. Under the terms of the transaction, Insurdata's shareholders
received 49% of the newly combined company. The transaction, which closed on
January 7, 2000, will be accounted for under the purchase method of accounting
in accordance with APB No. 16 and HealthAxis, by virtue of its holding a
majority of the voting interest, was determined to be the acquirer for
accounting purposes. HealthAxis anticipates that revenues and expenses will
increase as a result of the Insurdata merger. Insurdata Incorporated revenues,
excluding the non merging subsidiaries, were $42.9 million on a pro forma basis
during 1999. It is anticipated that Insurdata's technological expertise and
established customer base will benefit HealthAxis' future operations by
improving the process of implementing carrier products on the website and
website development, thereby increasing cost efficiency, increasing revenues
with their established customer base, the potential to cross market products to
HealthAxis' and Insurdata's clients and providing each company with exposure to
additional potential clients.
Agreement and Plan of Reorganization between HAI and HealthAxis. On
January 26, 2000, HAI, HealthAxis and a wholly owned subsidiary of HAI entered
into the Agreement and Plan of Reorganization which provides for the merger of
HealthAxis with and into the subsidiary of HAI which will result in former
shareholders of HealthAxis becoming shareholders of HAI. Amended and restated
agreements were entered into on September 29, 2000. This transaction is referred
to as the HAI merger. The HAI subsidiary will continue as the surviving
corporation of the reorganization, will retain all of its separate corporate
existence and will be known as HealthAxis.com Inc. The reorganization will be
accounted for by HAI as a purchase of minority interest in accordance with
generally accepted accounting principles. As a result of the HAI merger, the
preferred and common stock of HealthAxis will be converted to HAI common stock
eliminating all minority interest in HealthAxis and the minority interest net
loss of subsidiary line item on the statement of operations. In addition,
outstanding HealthAxis options and warrants will be converted into options or
warrants to purchase HAI common stock. HAI anticipates that HAI will issue a
total of 39,629,133 shares of HAI common stock to HealthAxis shareholders in the
HAI merger. HAI also anticipates that HAI will issue up to approximately
7,068,046 shares of HAI common stock upon the exercise of options and warrants
to purchase HealthAxis common stock to be assumed by HAI.. There can be no
assurance, however, that the conditions to the reorganization will be satisfied
or that the reorganization documents will not be terminated.
Repricing of Options. On May 24, 2000, the HealthAxis Board of
Directors approved the repricing of 1,773,050 HealthAxis common stock shares
subject to options, which had originally been granted at $12.00 and $15.00. The
repricing of these options to $3.31, which was the closing market price of HAI's
common stock as of the date of the repricing, will be accounted for as variable
options in accordance with Financing Accounting Standards Board Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation issued
in March 2000.
57
<PAGE>
Year ended December 31, 1998 compared to December 31, 1997
Net loss applicable to common stock. Net loss applicable to common
stock was $12.4 million or ($1.20) per basic and diluted share in 1998 compared
to net loss of $18.6 million or ($1.84) per basic and diluted share in 1997.
HAI's 1998 results included a net loss from discontinued operations of $8.0
million as compared to $16.7 million loss from discontinued operations in 1997.
Additionally the Company experienced increased expenses in HAI during 1998.
Operating expenses. Operating expenses of $277 thousand in 1998 were
the result of HealthAxis employee salaries and benefits relating to computer
support.
Sales and marketing expenses. Sales and marketing expenses of $134
thousand in 1998 were primarily due to employee salaries and benefits of
HealthAxis. Sales and marketing expense consist primarily of salaries and
benefits to marketing personnel.
General and administrative expenses. General and administrative
expenses of $4.0 million in 1998 increased from $1.9 million in 1997 due
primarily to HealthAxis employee and recruiting expenses, which was $0.5 million
in 1998. Professional fees and overhead expenses also increased from $1.9
million in 1997 to $3.2 million in 1998.
Interest expense. Interest expense of $314 thousand in 1998 includes
interest on loans payable.
Net loss from discontinued operations. Net loss from discontinued
operations of $8.0 million in 1998 as compared to $16.7 million loss in
discontinued operations in 1997. Results for 1998 included substantially higher
group medical benefit expense partially offset by realized gains on the sale of
PALHIC, MMC and NIA.
Liquidity and Capital Resources
A major objective of the Company is to maintain sufficient liquidity to
fund growth and meet all cash requirements with cash and short term equivalents
plus funds generated from operating cash flow.
Prior to 1999 HAI's liquidity requirements were primarily created and
met by HAI's discontinued operations. During 1999, HAI's liquidity requirements
were primarily created and met by HealthAxis and HAI through the private
placement of debt and equity securities. During 1999 the primary uses of cash
for HAI were the operation of PILIC and HAI's November 30, 1999 sale of PILIC,
HAI's purchases of HealthAxis stock and HealthAxis' operating costs and payments
to America Online, Inc. ("AOL"), Lycos, Inc. ("Lycos"), CNet, Inc. ("CNet"),
Snap! LLC ("Snap!") and Yahoo! Inc, ("Yahoo!").
Cash and cash equivalents as of December 31, 1999 amounted to $58.1
million of which $56.5 million was in HealthAxis and was partially attributable
to the December private placement of common stock and $1.6 million was in HAI
and is the net remaining funds from the September 1999 issuance of convertible
debentures. HAI anticipates the need to obtain cash advances from HealthAxis
during 2000 to fund HAI's costs of the Pending Merger involving HealthAxis and a
wholly-owned subsidiary and HAI corporate expenditures.
Net cash used in operating activities of $49.8 million in 1999 was
primarily the result of claim payments to policyholders in HAI's discontinued
operations and operating losses in HAI and HealthAxis.
58
<PAGE>
HAI does not anticipate that future cash used or provided from
operations will include amounts related to HAI's Discontinued Insurance
Operations which was sold effective November 30, 1999. Amounts due from
reinsurers, amounts due from a third party administrator and future policy
benefits and claims relate to HAI's discontinued operations.
During 1999 HealthAxis made the final payment of $1.5 million to AOL
under the initial term of Second Amendment to the Amended and Restated
Interactive Marketing Agreement with AOL. Additionally, HealthAxis paid $3.3
million to Lycos, CNet, Snap! and Yahoo! which are included in prepaid
interactive marketing expense.
During 1999 HealthAxis completed private offerings of approximately
$74.7 million the net proceeds of which have been used to and are anticipated to
be used to fund amounts due under HealthAxis' distribution agreements with AOL,
Lycos, CNet and Snap! and an Advertising Agreement with Yahoo! with the balance
intended to be used by HealthAxis for its working capital and other general
purposes.
During 1999 HAI issued 2% convertible debentures in the amount of $27.5
million the net proceeds of which were used for working capital and other
general corporate purposes, including approximately $8.2 million to purchase
HealthAxis Common Stock, $14.7 million to sell the Insurance Operations and
retain the Company's home office and purchase 545,916 shares of HealthAxis
Series A Preferred Stock and $2.0 million to purchase 133,333 shares of
HealthAxis common stock.
Non-cash repayment of notes payable represented $1.5 million of
consideration for the Company's sale of MMC common stock and for HPS' exercise
of its warrant obtained in 1998 in connection with the HPS E-Commerce Agreement
to purchase 100,000 shares of HAI Common Stock for $0.9 million. Non cash
issuance of warrants relates to HealthAxis.
During 1999 HAI purchased 1,415,000 shares of HealthAxis common stock
from a third party and has agreed to pay the seller $0.4 million to complete the
transaction.
During 1998 and 1999, HealthAxis entered into agreements with AOL,
Lycos, CNet, Snap! and Yahoo!. In connection with these agreements, the Company
has paid $4.7 million in cash and warrants during 1999 and is required to pay $5
million in 2000. As a result of HealthAxis' decision to shift its marketing
strategy in 2000, these contracts were terminated and this amount was reduced to
$3.5 million. The Company believes that its current cash and cash equivalents
will be sufficient to fund HealthAxis' obligations under these agreements and
current operations through March 31, 2001. However, subsequent equity or debt
financings will be necessary to enable the Company to fund future operations and
continue to implement its current business strategies.
HAI has no material commitments for capital expenditures at December
31, 1999 and such expenditures totaled approximately $4.2 million in 1999. Such
expenditures were primarily for HealthAxis' equipment, software, furniture and
building improvements.
On January 7, 2000, HealthAxis and Insurdata Incorporated, a subsidiary
of UICI completed the merger of the two companies. HealthAxis anticipates that
it will pay out of pocket merger costs of approximately $1.4 million during
2000. Historically Insurdata has been funded primarily through cash generated
from operations. At December 31, 1999 Insurdata's cash balance was $2.1 million,
current liabilities were $4.5 million of which anticipated 2000 payments under
certain employee compensation plans are $1.1 million and capital purchase
commitments are $1 million.
On December 7, 1999, HAI announced plans to move forward with the
reorganization of HealthAxis and on September 29, 2000 entered into amended
agreements. The Company anticipates that it will pay out of pocket merger costs
of approximately $2.1 million during 2000 and 2001.
59
<PAGE>
Payment of dividends paid by HealthAxis to HAI is subject to
restrictions set for in the Certificate of Designation related to HealthAxis
Series A, B, C and D Convertible Preferred Stock. HAI and HealthAxis do not
anticipate paying cash dividends on common stock or on any class of HealthAxis
preferred stock in the foreseeable future.
HAI does not anticipate paying cash dividends on common stock or on any
series or class of HealthAxis preferred stock in the foreseeable future.
Impact of Inflation
Higher interest rates, which have traditionally accompanied inflation,
affect the Company's short-term investment revenue.
Inflation has significantly increased the cost of health care. The
adequacy of premium rates in relation to the level of health claims is
constantly monitored and, where appropriate, premium rates on such policies,
when appropriate, are increased as policy benefits increase. Failure to make
such increases commensurate with health care cost increases may result in a loss
to HealthAxis' insurance carriers. Implementation by HealthAxis' insurance
carriers of changes in premium rates may affect HealthAxis commission revenue
and may increase HealthAxis operating expense.
Year 2000 Compliance
Year 2000 issues are the result of computer programs being written
using two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in system failures or miscalculations
causing disruptions in operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities
To date, the Company has experienced very few Year 2000 problems with
those problems centering on life administration processing sold to PILIC on
November 30, 1999 with no further liability to the Company regarding Year 2000
issues. The cost of programming changes as of December 31, 1999 was less than
$150,000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Convertible Debentures outstanding at December 31, 1999 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.
60
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Report of Independent Certified Public Accountants 62
Restated Consolidated Balance Sheets - December 31, 1999 and 1998 63
Restated Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997 64
Restated Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 65
Restated Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 66 to 67
Notes to Consolidated Financial Statements 68 to 112
61
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
HealthAxis Inc.
East Norriton, Pennsylvania
We have audited the accompanying consolidated balance sheets of HealthAxis Inc.
and Subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 generally accepted auditing
standards. 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.
As described in Note 25, on January 7, 2000, the Company acquired Insurdata,
Incorporated and has accounted for that acquisition using the purchase method of
accounting. In addition, as described in Note 26, on June 30, 2000, the Company
agreed to sell substantially all of the assets related to its retail website and
as of that date has accounted for the disposal of the retail website as a
discontinued operation. The continuing operations of Healthaxis, Inc. and
Subsidiaries are principally those of Insurdata Incorporated.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HealthAxis Inc.
and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Philadelphia, PA.
March 16, 2000, except for
Notes 11, 14, 17, 18, 19, 20, 26 and 28 which are as of September 29, 2000 and
Notes 6, 7, 8 and 27 which are as of October 13, 2000
62
<PAGE>
HealthAxis Inc. and Subsidiaries
Restated Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
(Dollars in thousands except share data) 1999 1998
----- ----
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 58,069 $ 1,724
Loans receivable from officer, director and stockholder - 1,328
Other current assets 549 1,699
-------- --------
Total current assets 58,618 4,751
Deferred acquisition costs 750 -
Property, equipment and software, less accumulated depreciation and
amortization of $1,529 and $3,099 5,610 6,703
Goodwill, less accumulated amortization of $765 7,114 -
Assets held for sale- retail website 7,204 12,902
Other assets 306 212
-------- --------
Total assets $ 79,602 $ 24,568
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Unearned revenue $ - $ 332
Accounts payable 1,823 481
Accrued expenses 4,656 1,103
Loans payable - 3,865
Net liabilities held for sale-insurance operations - 2,250
Other current liabilities 500 640
-------- ---------
Total current liabilities 6,979 8,671
Convertible debentures 25,019 -
Federal income taxes 585 -
Ceding commission liability 5,600 5,000
Post retirement and employment liabilities 1,030 969
Capital lease obligations 117 496
-------- --------
Total liabilities 39,330 15,136
Commitments and Contingencies
Minority interest in HealthAxis:
Common stock 12,603 1,132
Preferred stock 15,049 2,805
Stockholders' Equity:
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A cumulative convertible, issued and outstanding 0 and 556,600 - 557
Series B cumulative convertible, none issued and outstanding - -
Common stock, par value $.10: authorized 50,000,000,
issued and outstanding 13,027,668 and 11,488,911 1,303 1,149
Common stock, Class A, par value $.10: authorized 20,000,000, - -
none issued and outstanding
Additional paid-in capital 81,798 27,002
Accumulated other comprehensive income - 666
Accumulated deficit (70,481) (23,879)
-------- --------
Total stockholders' equity 12,620 5,495
-------- --------
Total liabilities and stockholders' equity $ 79,602 $ 24,568
======== ========
</TABLE>
See notes to consolidated financial statements.
63
<PAGE>
HealthAxis Inc. and Subsidiaries
Restated Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands, except share and per share data) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue:
Interactive commission and fee revenue $ - $ - $ -
--------- ---------- ---------
Expenses:
Operating and development 504 277 -
Sales and marketing 447 134 -
General and administrative 7,457 3,967 1,908
Amortization of goodwill 765 - -
--------- --------- --------
Total expenses 9,173 4,378 1,908
--------- --------- --------
Operating loss (9,173) (4,378) (1,908)
Interest income 656 92 212
Interest expense (1,581) (314) (35)
--------- --------- --------
Net Interest (925) (222) 177
---------- ---------- --------
Loss before minority interest (10,098) (4,600) (1,731)
Minority interest in loss of subsidiary (1,008) (493) -
--------- ---------- ---------
Loss from continuing operations (9,090) (4,107) (1,731)
---------- ---------- ----------
Loss from sale of discontinued operations (10,263) - -
Loss from discontinued operations:
Insurance operations (8,052) (6,748) (16,694)
Retail website operations (19,126) (1,301) -
---------- ---------- ----------
Total loss from discontinued operations (37,441) (8,049) (16,694)
---------- ---------- ----------
Net loss (46,531) (12,156) (18,425)
Dividends on preferred stock 70 254 148
---------- --------- ---------
Net loss applicable to common stock $ (46,601) $ (12,410) $ (18,573)
========== ========== ==========
Loss per share of common stock (basic and diluted)
Continuing operations $ (0.75) $ (0.42) $ (0.19)
Discontinued operations (3.05) (0.78) (1.65)
--------- --------- ---------
Net loss $ (3.80) $ (1.20) $ (1.84)
========= ========= =========
Weighted average common shares and equivalents used in computing
loss per share
Basic and diluted 12,260,000 10,331,000 10,090,000
</TABLE>
See notes to consolidated financial statements.
64
<PAGE>
HealthAxis Inc. and Subsidiaries
Restated Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Accumulated Comprehensive
(Dollars in thousands) Shares Amount Shares Amount Capital Deficit Income (Loss)
------ ------ ------ ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 580 $580 10,079 $1,008 $12,945 $ 7,105 $491
Comprehensive income:
Net loss 1997 (18,425)
Other comprehensive loss (306)
Comprehensive loss
Stock options and warrants exercised 30 2 96
Compensation expense on stock issuance 100 11 478
Compensation expense on stock option 248
grants
Cash dividends declared on preferred stock (148)
---- ---- ------ ------- ------- --------- ----
BALANCE, DECEMBER 31, 1997 580 580 10,209 1,021 13,767 (11,468) 185
Comprehensive income:
Net loss 1998 (12,156)
Other comprehensive income 481
Comprehensive loss
Issuance of common stock 410 41 1,616
Stock options and warrants exercised 882 89 2,991
Increase in net assets in HealthAxis 4,210
Warrants issued 4,469
Conversion of preferred stock (23) (23) 24 2 21
Cancellation of treasury stock (36) (4) (72)
Cash dividends declared on preferred stock (255)
---- ---- ------ ------- ------- --------- ----
BALANCE, DECEMBER 31, 1998 557 557 11,489 1,149 27,002 (23,879) 666
Comprehensive income:
Net loss 1999 (46,531)
Other comprehensive loss (666)
Comprehensive loss
Issuance of common stock 25 3 267
Stock options and warrants exercised 956 95 5,876
Increase in net assets in HealthAxis 44,395
Warrants and non employee options issued 3,757
Conversion of preferred stock (557) (557) 557 56 501
Cash dividends declared on preferred stock (71)
---- ---- ------ ------- ------- --------- ----
BALANCE, DECEMBER 31, 1999 - $ - 13,027 $ 1,303 $81,798 $ (70,481) $ -
==== ==== ====== ======= ======= ========= ====
</TABLE>
<PAGE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Treasury
Stock
(Dollars in thousands) (at cost) Total
--------- -----
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 $(76) $ 22,053
Comprehensive income:
Net loss 1997 (18,425)
Other comprehensive loss (306)
-------
Comprehensive loss (18,731)
--------
Stock options and warrants exercised 98
Compensation expense on stock issuance 489
Compensation expense on stock option 248
grants
Cash dividends declared on preferred stock (148)
---- --------
BALANCE, DECEMBER 31, 1997 (76) 4,009
Comprehensive income:
Net loss 1998 (12,156)
Other comprehensive income 481
-------
Comprehensive loss (11,675)
-------
Issuance of common stock 1,657
Stock options and warrants exercised 3,080
Increase in net assets in HealthAxis 4,210
Warrants issued 4,469
Conversion of preferred stock -
Cancellation of treasury stock 76 -
Cash dividends declared on preferred stock (255)
---- --------
BALANCE, DECEMBER 31, 1998 - 5,495
Comprehensive income:
Net loss 1999 (46,531)
Other comprehensive loss (666)
-------
Comprehensive loss (47,197)
-------
Issuance of common stock 270
Stock options and warrants exercised 5,971
Increase in net assets in HealthAxis 44,395
Warrants and non employee options issued 3,757
Conversion of preferred stock -
Cash dividends declared on preferred stock (71)
---- --------
BALANCE, DECEMBER 31, 1999 $ - $ 12,620
==== ========
</TABLE>
See notes to consolidated financial statements.
65
<PAGE>
HealthAxis Inc. and Subsidiaries
Restated Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (46,531) $ (12,156) $ (18,425)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Loss from discontinued operations 8,763 - -
Issuance of common stock - 106 -
Depreciation and amortization 17,739 1,622 4,286
Net realized gain on investments - (270) (750)
Net realized gain on sale of subsidiaries - (3,002) -
Issuances of warrants 1,394 1,314 -
Write off of goodwill - 1,193 -
Minority interest in loss of subsidiary (7,747) (716) -
Interest on loan conversion - 953 -
Shares issued for services 270 - -
Loss on disposition of software 749 - -
Interest on convertible debt 573 - -
Noncash expense for service agreements 556 - -
(Increase) decrease in
Premium due and uncollected, unearned premium and
premium received in advance 354 (1,403) 130
Prepaid interactive marketing expense (4,729) (9,300) -
Due to/from reinsurers 10,030 (5,666) (7,520)
Due from third party administrator 6,849 (6,849) -
Deferred policy acquisition costs, net 2,106 (607) 1,641
Accrued investment income 152 190 226
Other assets, current and deferred income taxes and
other liabilities 2,099 2,474 (3,222)
Accrued commissions and expenses 2,963 (3,067) 1,272
Ceding commission and interest 600 5,000 -
Future policy benefits and claims (45,940) 12,696 16,951
--------- --------- ---------
Net cash (used in) operating activities (49,750) (17,488) (5,411)
--------- --------- ---------
Cash flows from investing activities
Payments for sale of subsidiary (14,700) - -
Purchases of bonds - (2,674) (25,128)
Purchases of equity securities - (99) (100)
Sales of bonds 6,656 11,244 35,879
Sales of equity securities - 24 4,420
Sale of subsidiaries - 9,853 -
Sale of investment in real estate - 1,162 -
Maturities of investments and loans 45 14 250
Payment of acquisition costs (750) - -
Proceeds from loans receivable 1,328 - -
Loans to officer, director and shareholder - (85) (1,032)
Purchases of property, equipment and software (4,169) (1,960) (3,206)
---------- --------- --------
Net cash provided by investing activities (11,590) 17,479 11,083
---------- --------- --------
</TABLE>
See notes to consolidated financial statements.
66
<PAGE>
HealthAxis Inc. and Subsidiaries
Restated Consolidated Statements of Cash Flows (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash flows from financing activities
Withdrawals from contract holder deposit funds - (249) (589)
Principal payments on capital lease (379) - -
Proceeds from note payable - - 5,039
Repayments of notes payable - (1,212) (260)
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 1,657 835
Net proceeds from the sales of preferred stock 12,082 2,699 -
Exercise of stock options 5,052 1,680 -
Net proceeds from issuance of convertible note - 5,000 -
Dividends paid on preferred stock (71) (148) (148)
-------- -------- --------
Net cash provided by financing activities 93,224 9,427 4,877
-------- -------- --------
Increase in cash and cash equivalents 31,884 9,418 10,549
Cash and cash equivalents, beginning of period 26,185 16,767 6,218
-------- -------- --------
Cash and cash equivalents, end of period $ 58,069 $ 26,185 $ 16,767
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 78 $ 416 $ 97
Income taxes (refunded), net $ - $ (5,218) $ (1,490)
Non-cash financing activities
Issuance of warrants $ 6,808 $ 3,428 $ -
Exercise of options $ 900 $ 1,400 $ -
Repayment of loans payable $ (2,400) $ - $ -
Conversion of preferred stock to common stock $ 557 $ - $ -
</TABLE>
See notes to consolidated financial statements.
67
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated to Consolidated Financial Statements
(Dollars in thousands)
Note 1 - Nature of Operations
HealthAxis Inc. ("HAI"), formerly Provident American Corporation, is a
Pennsylvania corporation organized in 1982 and until November 30, 1999, the date
the insurance operations were transferred and treated as discontinued, was
regulated as an insurance holding company by the states in which its former
wholly-owned insurance company, Provident Indemnity Life Insurance Company
("PILIC"), was licensed.
HealthAxis.com, Inc. ("HealthAxis") was formed on March 26, 1998 to
sell insurance products on the Internet. As of December 31, 1999, HAI owned
66.9% of HealthAxis' common and preferred stock. On January 7, 2000, HealthAxis
and Insurdata Incorporated, a subsidiary of UICI ("UICI") merged as described in
Note 25.
On January 26, 2000, HAI and HealthAxis entered into an Agreement and
Plan of Reorganization and Agreement and Plan of Merger pursuant to which HAI
will acquire all of the outstanding shares of HealthAxis it does not currently
own through the merger of HealthAxis with a wholly-owned subsidiary of HAI as
described in Note 26. The merger is subject to both HAI and HealthAxis
shareholder approval and is expected to be completed during the fourth quarter
of 2000 or the first quarter of 2001.
On June 30, 2000, HealthAxis entered into an agreement to sell
substantially all of the assets related to the retail website including the next
version of its website user interface as well as certain other assets to Digital
Insurance, Inc. ("Digital"). This transaction is referred to as the Digital
Sale. See Note 27 for additional information.
The continuing operations of HAI and its subsidiaries ("the Company")
are principally those of the subsidiaries related to the Insurdata merger.
Note 2 - Restated Financial Statements
These financial statements have been restated to reflect the
discontinued operations associated with the Digital Sale (as described in Note
27)
Note 3 - Significant Accounting Policies
Principles of consolidation: The consolidated financial statements of
HAI include the accounts of HAI and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of estimates: The preparation of financial statements in conformity
with GAAP 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 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.
68
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Prepaid interactive marketing expense represents cash and other
consideration paid in accordance with its distribution arrangements for
exclusivity and advertising impressions. Payments related to exclusivity and
advertising are allocated based upon the terms in the agreement. The fair value
of warrants issued are allocated to exclusivity and advertising in direct
proportion to amounts paid. Amounts related to exclusivity are amortized on a
straight-line basis over the respective contract term. Amounts related to
advertising impressions are expensed as impressions are delivered under the
respective agreements. If the contract is silent as to the allocation of costs
then the amounts are amortized on a straight-line basis over the contract term.
See Note 5 and Note 26 for additional information.
Prepaid alliance agreements represent the fair value of warrants issued
to its business partners. The cost associated with services provided in
accordance with each agreement is amortized on a straight-line basis over the
life of the agreement, or if no term exists on the agreement, over the expected
term of the warrants granted. See Note 6 and Note 26 for additional information.
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 is provided using the straight-line
method over the estimated useful lives of the assets. Upon sale or retirement,
the cost of the asset and the related accumulated depreciation and amortization
are removed from the accounts and the resulting gain or loss, if any, is
included in operations. See Note 7 and Note 26 for additional information.
The Company adopted Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," during 1998.
Accordingly, 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 amortized on a straight line basis over the estimated
useful life.
The Company has evaluated all software development projects that were
in progress as of December 31, 1999 to determine whether it was probable that
any of the projects would be placed in service. Based on that evaluation, the
Company expects to complete and put in service all software development projects
that existed as of year-end.
Start-up costs: In accordance with AICPA Statement of Position No. 98-5
"Reporting on the Costs of Start-Up Activity", start-up costs have been expensed
as incurred.
Recognition of revenue: HealthAxis sells insurance policies as an agent
over the Internet and receives a monthly commission and policy fee on each
policy every month in which a policy the Company sold is in effect with the
insurance carrier. Commissions are determined based on a percentage of premium
received by the insurance carrier as stipulated by HealthAxis' contract with the
insurance carrier. Policy fees are a flat rate received for each policy in
effect in a specific month. Commissions are received from every insurance
carrier, whereas policy fees are received from select insurance carriers as
determined by HealthAxis' contract with the insurance carrier partner. Due to
the Digital Sale all revenues are included as a component of discontinued
operations. See Note 26 for additional information.
Goodwill represents the purchase of a minority interest in HealthAxis
and is being amortized on a straight-line basis over 3 years. See Note 16 for
additional information.
69
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Income taxes: The Company files a consolidated federal income tax
return with its greater than 80% owned subsidiaries, which allocates income
taxes based upon the taxable income of the companies included in the return.
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 15 for
additional information.
Deferred acquisition costs: The Company has deferred the costs
associated with the pending merger with Insurdata. These costs include legal,
accounting and investment banking services. These costs will be included as a
component of the purchase price upon consummation of the Insurdata Merger.
Loss per share of common stock: The Company presents basic and diluted
loss per share. Equivalents, including warrants, stock options, and preferred
stock, were anti-dilutive for all periods presented.
Reclassifications and restatement of prior year amounts: Certain prior
year amounts have been reclassified to conform to the current year's
presentation including the restatement related to discontinued operations.
Impairment of long-lived assets: The Company reviews its long-lived
assets and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121") and on a quarterly basis.
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. To date no such impairment has been recognized.
SFAS 121 requires that the Company group assets at the lowest level for
which there are identifiable cash flows that are independent of cash flows of
other groups of assets. The Company will group assets at the entity level since
the goodwill resulting from acquisition of Insurdata will be evaluated
concurrently. The fair market value of impaired assets will be determined using
discounted cash flows.
Stock Options and Warrants - Nonemployees: The Company accounts for all
options and warrants granted to non-employees in accordance with Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). See Note 22 for additional information.
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 prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations and to provide additional disclosures with respect to the pro
forma effects of adoption had the Company recorded compensation expense as
provided in FAS 123. See Note 22 for additional information.
In accordance with APB No. 25, compensation cost for stock options is
recognized in income based on the excess, if any, of the quoted market price of
the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock.
70
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Recent accounting standards: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments"("SFAS 133 as amended by SFAS 137"). SFAS
137 delays the effective date of implementation of SFAS 133 by one year. SFAS
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair market value. Presently, the Company does not use derivative instruments
either in hedging activities or as investments. Accordingly, the Company
believes that adoption of SFAS 133 will have no impact on its financial
positions or results of operations.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 did not impact the
Company's revenue recognition policies.
In March 2000, the Emerging Issues Task Force ("EITF") reached a
consensus position in EITF Issue No. 00-2, "Accounting for Website Development
Costs". This pronouncement provides guidance in accounting for such costs. The
Company believes that the adoption of EITF 00-2 has no impact on its financial
position or results of operations.
Note 4 - Losses and Uncertainties
HealthAxis has incurred costs to develop and enhance its technology,
to create and introduce its website and to establish marketing, insurance
carrier and claims administration relationships. As a result, the Company has
incurred significant losses and expects to continue to incur losses through
December 31, 2000. As discussed in Notes 26, 27 and 28, HealthAxis has changed
its focus and has sold substantially all of its assets related to its retail
website and concentrate its efforts on promoting the operations of Insurdata
Incorporated which was acquired in January, 2000.
Insurdata is focused exclusively on providing Internet connectivity
technology solutions and enterprise application integration services to both
healthcare payers and those entities involved in the digital distribution of
health insurance. Insurdata has an established revenue base and services
insurance companies that underwrite policies, independent entities that
administer claims processing and payment, Blue Cross/Blue Shield plans, and
self-insured employers. HealthAxis plans to offer a platform of web-enabled
software applications and services to insurance payers.
During 1999, the Company raised approximately $102,200 through the sale
of convertible debentures ($27,500), HealthAxis preferred stock ($12,800) and
HealthAxis common stock ($61,900). The net proceeds have been used to fund
amounts due under HealthAxis' distribution agreements (Note 6), the purchase of
common stock of HealthAxis (Note 16), the sale of the insurance operations (Note
5) with the balance to be used by HealthAxis for its working capital and other
general purposes. As a result of the fund raising activities described above,
the Company believes that is has sufficient working capital to fund operations
until the Company's operations generate positive cash flow, which is expected to
be in the second quarter of 2001.
71
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 5 - Discontinued Insurance Operations
On November 30, 1999, in accordance with the amended Stock Purchase
Agreement ("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, HAI's chairman for no consideration.
In anticipation of the transfer, HAI, in order to eliminate a statutory
capital deficiency, contributed $7,200. Also, HAI purchased from PILIC the
office building located on DeKalb Pike in East Norriton, PA for $4,700 and
545,916 shares of HealthAxis Series A Preferred Stock for $2,800 and assumed the
related employee obligations which are described in Note 24 amounting to $1,030
as of December 31, 1999.
The Board of Directors of HAI received a fairness opinion by Advest,
Inc., a subsidiary of The Advest Group, Inc., dated October 20, 1999 (the
"Fairness Opinion"). The Fairness Opinion cites the financial terms of the
transaction, and notes that the PILIC shares proposed to be purchased by AHC
will continue to be subject to the Stock Pledge Agreement dated December 29,
1998 by HAI in favor of Reassurance Company of Hannover ("RCH"). See Note 14 for
additional information. The Fairness Opinion concludes that the financial terms
of the transaction are fair, from a financial point of view, to HAI and its
shareholders.
Concurrent with the transfer of PILIC, HAI conveyed at its historical
cost of $440,100,000 shares of the Series A preferred stock to AHC together
with registration rights previously granted to PILIC.
In accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30") the operating results of PILIC and all of
the other insurance operations are being reported as discontinued operations for
all periods presented.
As a result of the transfer of PILIC, HAI has 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.
The Stock Purchase Agreement includes various warranties,
representations, covenants and conditions, including but not limited to certain
non-compete and non-solicitation agreements with AHC regarding the future sale
of health insurance products for a three-year period commencing on December 31,
1998 by licensed insurance agents of PILIC.
72
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Results of discontinued insurance operations:
<TABLE>
<CAPTION>
11 Months Ended Years Ended
November 30, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue:
Net premium revenue $ 7,197 $ 69,617 $ 57,246
Net investment income 2,395 3,672 3,275
Realized gain on investments 6 270 750
Ceding allowance, net of policy acquisition costs - 799 -
Realized gain on the sale of subsidiary 1,500 3,002 -
Other revenue 890 47 547
-------- -------- --------
Total revenue 11,988 77,407 61,818
-------- -------- --------
Benefits and expenses:
Death and other policy benefits:
Life 3,315 7,518 8,008
Accident and health, net of reinsurance 7,661 47,509 38,981
Annuity contracts and other considerations 622 353 737
Commissions, net of ceding allowance and
deferred acquisition costs 1,486 7,139 6,813
Other operating expenses, net of ceding allowance
and deferred acquisition costs 6,683 19,607 13,358
Amortization of deferred policy acquisition costs 252 2,049 10,943
Depreciation and amortization of goodwill - 1,010 4,261
--------- -------- ---------
Total benefits and expenses 20,019 85,185 83,101
--------- -------- --------
Loss before income taxes (8,031) (7,778) (21,283)
Provision (benefit) for income taxes:
Current 21 (1,030) (5,205)
Deferred - - 616
--------- ---------- --------
Total income taxes 21 (1,030) (4,589)
--------- ---------- ---------
Loss from discontinued operations $ (8,052) $ (6,748) $(16,694)
========== ========== =========
</TABLE>
73
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Net liabilities of subsidiary held for sale:
December 31,
1998
-----------
Assets
Investments
Securities available for sale $31,880
Policy loans 560
Other invested assets 529
-------
Total investments 32,969
Cash and cash equivalents 24,461
Amounts due from third party administrator 6,849
Premiums due and uncollected 1,167
Amounts due from reinsurers 22,222
Accrued investment income 421
Unamortized deferred policy acquisition costs 2,106
Other assets 1,927
-------
Total assets 92,122
-------
Liabilities
Liabilities
Future policy benefits
Life $42,546
Annuity and other 4,871
Policy claims 42,481
Premiums received in advance and unearned 3
Amounts due to reinsurers 501
Accounts payable 1,626
Accrued commissions and expenses 985
Federal income taxes 1,222
Other liabilities 137
-------
Total liabilities 94,372
-------
Net liabilities held for sale - insurance operations $ 2,250
========
1998 Sales of Insurance Operations:
On December 31, 1998 the Company sold all of the outstanding shares of
PALHIC and National Insurance Administrators ("NIA") to Central Reserve Life
Insurance Company ("CRLC"). The Company recognized a loss of approximately
$1,000 on the sale of these subsidiaries which has been included in discontinued
operations.
In February 1998 the Company sold for $4,000, 49% of Montgomery
Management Corporation ("MMC") common stock along with a warrant to purchase an
additional 31% of MMC's common stock for one dollar. During the fourth quarter
of 1998 the buyer exercised the warrant to purchase the additional 31% of MMC's
common stock for $8. The Company recognized a $4,008 pre-tax gain on the sale of
MMC. In 1999, PILIC subsequently sold its remaining interest in MMC and realized
a gain on the sale of MMC of $1,500 which is included in its discontinued
operations.
74
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 6 - Distribution Agreements
In 1998, HealthAxis entered into various distribution agreements with
America OnLine ("AOL"), CNet, SNAP and Lycos. Under these agreements, these
internet portals will promote HealthAxis' products to the online users of their
websites. The initial terms of the agreements range from 12 to 15 months with
the last agreement expiring in August 2000.
In 1999 and 1998, HealthAxis made payments and issued warrants, valued
using the Black Scholes Option Pricing model, aggregating $16,970 which have
been charged to prepaid interactive marketing expense. The amounts deferred were
allocated based on the terms of each contract between exclusivity and impression
advertising costs, which totaled $3,527, and $13,443, respectively. During 1999
and 1998, $3,242 and $11,352 and $381 and $204 were charged to expense
representing exclusivity and impression advertising, respectively.
During 1999 and 1998, a total of 830,082,353 and 10,244,130 impressions
on HealthAxis's were delivered as a result of the agreements.
Each agreement provided for an optional renewal term ranging from 12 to
28 months for aggregate payments of $47.6 million starting in February 2000.
HealthAxis has chosen not to exercise its option to renew its agreement with AOL
for an additional term and accordingly will not pay the $33.5 million renewal
fee. In 2000, approximately $1,160 was paid under the initial agreements with
its distribution partners.
In 1999, HealthAxis entered into a distribution agreement with Yahoo!
Inc. ("Yahoo!") that provided for a guaranteed number of impressions. The
initial term was for five months beginning in September 1999 at a cost of $725.
In February 2000, HealthAxis renewed the contract with Yahoo!. Total
payments of $2,128 were paid under the terms of the contract. In August 2000,
the contract was terminated with a total of $2,853 paid to Yahoo! over the life
of the contracts.
Upon termination of the Yahoo! contract, all distribution agreements
have either been canceled or have expired.
75
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 7 - Prepaid Alliance Agreements
During 1999, HealthAxis has negotiated several strategic alliance
agreements which provide for the issuance of warrants to purchase 762,500 shares
of HealthAxis common stock of which 512,500 can be excised at prices ranging
from $4.40-$20.00. Warrants to purchase 250,000 common shares will be valued
based upon the closing price of HAI stock prior to the completion of each event
as stipulated in the contract.
The warrants have been valued using the Black Scholes Option Pricing
Model at $2,719 and are being amortized on a straight-line basis over the term
of each agreement or the expected life of the warrants if there is no contract
term. Amortization of $436 has been charged to operations as a result of the
agreements during 1999.
Under the terms of each agreement, the alliance partner has agreed to
provide, among other things:
o Insurance products to be offered on HealthAxis' web site;
o Underwriting, billing, claims processing services;
o Technical support for the development of 3D imaging technology solutions;
o Consulting related to internet advertising;
o Technical support for the design of Internet insurance products.
The amortization related to these agreements began in May 1999 and extends
through June of 2002.
All of the rights and obligations under the terms of these agreements
will be assigned to the acquirer of the retail website segment. As a result, any
warrants previously issued by HealthAxis for future services will be cancelled
or will expire. See Note 27 for additional information.
As a result of the sale of the retail website, there will not be any
future benefit related to these agreements or continued vesting in relation to
these warrants. Warrants which are vested may be exercised until they expire in
two to four years. Therefore, the prepaid costs associated with these warrants
are included in Assets of Subsidiary Held for Sale on these restated financial
statements and the amortization is included in the sale of discontinued
operations on June 30, 2000.
76
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 8 - Property, Equipment and Software
Property, equipment and software, at cost, consist of the following (in
thousands):
<TABLE>
<CAPTION>
Useful Lives December 31,
(Years) 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Building 20 $ 4,700 $ 5,101
Building improvements 10 715 1,227
Computer equipment 3 337 229
Office furniture and equipment 7-10 653 3,202
Computer software 1-3 388 0
Less accumulated depreciation and amortization (1,183) (3,056)
--------- -------
$ 5,610 $ 6,703
======== =======
</TABLE>
Note 9 - Loans Receivable - Officer and Director and Stockholder
Loans receivable from officer, director and stockholder amounting to
$1,328 at December 31, 1998 bore interest at rates ranging from 5.33% to 9.50%,
and were collateralized primarily by the Company's common stock and were repaid
during 1999 in accordance with their terms.
Note 10 - Accrued Expenses
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
Payroll and benefits $ 269 $ -
Interest 164 -
Accrued property, equipment and software 851 608
Accrued taxes, licenses and fees 117 10
Accrued professional fees 2,804 127
Other 451 358
------- -------
$ 4,656 $ 1,103
======= =======
</TABLE>
77
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 11 - Convertible Debentures
On September 15, 1999 HAI issued 2% convertible debentures
("Debentures") in the amount of $27,500 due September 14, 2002. The Debentures
bear interest at the rate of 2% per annum, payable in cash or equivalent value
of HAI's common stock, semi annually on January 1 and July 1 of each year,
beginning on January 1, 2000. Accrued, unpaid and past due amounts bear interest
at the rate of 15% per annum. Except with respect to overdue interest it is
assumed that HAI will make all payments of interest in common stock, subject to
those shares being registered, unless HAI notifies the holder in writing
otherwise.
The Debentures are convertible into HAI's common stock at a conversion
price of $20.34 per share, which represented a 15% premium over the average of
the closing price of $18.00 per share on September 13, 1999 and $17.375 per
share on September 14, 1999. As part of the transaction, HAI issued to the
Purchasers warrants to purchase 202,802 shares of its common stock at an
exercise price equal to the conversion price ($20.34 per share) (the
"Warrants"). The Warrants have a term of five years, were valued at $2,317 and
have been accounted for as a cost of issuing the Debentures. The cost of issuing
the Debentures of $3,052 consisted of the value of the Warrants and other costs,
which will be amortized over the anticipated life of the Debentures as interest
expense, which is expected to be eighteen months.
In a separate but related transaction Alvin H. Clemens, Chairman of
HAI, among other things, has assigned to HAI options to purchase 202,802 shares
with a per share range of $.91 to $11.00 of common stock as described in Note
22. The net result of this assignment is that the number of Warrants issued to
the purchasers of the Debentures is equal to the number of options retired by
Mr. Clemens.
The securities issued pursuant to this transaction are exempt from the
registration requirements of the Securities Exchange Act of 1933 (the
"Securities Act"), as provided under Rule 506 and under Section 4(2) of the
Securities Act. The Company also executed a registration rights agreement, which
requires the Company to file a "Shelf" registration statement under Rule 415 of
the Securities Act. Subject to certain limitations the registration statement is
to remain effective until four years from the date the registration statement is
declared effective by the Securities and Exchange Commission. There is also a
one time underwritten registration obligation which provide for a piggy-back
registration right. In the event the Company does not fulfill obligations under
this agreement, it is subject to certain financial penalties.
The Convertible Debentures were amended in September 2000. See Note 28
for additional information.
78
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Note 12 - HPS Agreements
Loans Payable to HPS: The Company received $5,000 from Health Plan
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 off in June 1999.
Settlement Agreement with HPS: During 1999, HAI entered into a
settlement agreement with HPS at no cost to resolve a number of disputes that
had arisen between the Company and HPS relative to HPS' performance of
administrative services under an outsourcing agreement. The companies agreed to
settle all differences and claims related to the HPS outsourcing agreement and
certain actions taken by HealthAxis regarding HealthAxis' obligations under
certain agreements between the parties.
Also in accordance with the terms of the settlement agreement, HPS
exercised a warrant granted in 1998 and purchased 100,000 shares of the common
stock of HAI for a purchase price of $900. The purchase price was paid by a set
off of a like amount against the loan owed to HPS. The Company paid the
remaining balance of the loan amounting to $1,267 on June 30, 1999.
Note 13 -Capital and Operating Lease Obligations
At December 31, 1999 and 1998, the Company's capital lease obligations
amounted to $525 and $840, respectively. Interest expense for each of the three
years for the period ended December 31, 1999 amounted to $77, $101 and $88,
respectively. Minimum payments are $408 in 2000 and $117 in 2001.
HealthAxis leases office space in San Francisco, CA whose term ends
July 31, 2002. Payments through December 31, 1999 are $27, with payments of $55,
$55 and $32 due in 2000, 2001, and 2002, respectively.
Note 14 - Ceding Commission Liability
Effective December 31, 1998, HAI and PILIC signed an agreement to
reinsure 100% of its group medical and group life in-force business and sell the
Company's group medical marketing, sales distribution rights and all of the
outstanding capital stock of PALHIC to CRLC (the "CRLC Agreement").
Under the CRLC Agreement, PALHIC reinsured 100% of its business to
PILIC, which in turn reinsured through a 100% coinsurance agreement, all of the
Company's group medical and group life business to RCH. In addition, PILIC sold
all of the outstanding shares of PALHIC and NIA to CRLC for an amount equal to
PALHIC's capital and surplus. The Company transferred all rights and control
regarding the Company's licensed insurance agents and entered into a non-compete
and non-solicitation agreements with CRLC regarding the Company's licensed
insurance agents with respect to the future sale of health insurance products
for a three year period.
Effective December 31, 1998, PILIC entered into a coinsurance agreement
with 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"). PILIC recognized the $10,000 as ceding
commission revenue net of transaction costs of $417 and HAI recognized a $5,000
ceding commission liability because of the negative financial history of the
business. As a result of the transaction, PILIC wrote off unamortized deferred
acquisition costs and restructuring costs aggregating $4,200.
79
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
If RCH fails to earn the guaranteed amount within five years of the
date of the closing of the CRLC transaction, HAI must repay RCH the lesser of
the guaranteed amount less RCH's actual profits on the inforce business, or
$5,000, plus 12% interest. The Company incurred $600 of interest expense during
1999. In the unlikely event that future profits exceed the guaranteed amount,
then PILIC is entitled to receive an additional payment from RCH equal to
two-thirds of the policy fees collected during 1999 and one-third of the policy
fees collected during 2000.
As security for HAI's guarantee, HAI executed a security agreement in
favor of RCH secured by the stock of PILIC. This agreement provides that RCH
will take ownership of PILIC if the Company defaults on its guarantee to RCH.
HAI provided various affirmative covenants regarding corporate existence;
compliance with laws; furnishing various notices to RCH; inspection and audit
rights and insurance coverage. Additionally, HAI provided certain negative
covenants with regard to selling, assigning, leasing or otherwise disposing of
HAI or PILIC assets; entering into agreements materially and adversely effecting
HAI's or PILIC's ability to carry on business; entering into an agreement
materially and adversely effecting HAI or PILIC ability to perform obligations
under the Guaranty, the reinsurance agreement with RCH, the Stock Purchase
Agreement and other related agreements. There also exist various provisions
regarding HAI or PILIC incurring or creating indebtedness or declaring
dividends. As described in Note 5, HAI's obligation to RCH remains after the
transfer of PILIC.
In September 2000, the Company and RCH were in discussions to reach a
settlement in this matter. See Note 28 for additional information.
Note 15 - Income Taxes
Significant components of deferred taxes consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----- ----
<S> <C> <C>
Deferred tax assets:
Policy reserves $ - $ 2,542
Start up expenses 1,366 -
Advance premiums - 2
Post employment and retirement benefits 361 207
Net operating and capital loss carryforwards 26,700 5,551
Accrued expense 32 49
Unearned ceding commission 1,960 1,750
Other, net (284) 555
------ -------
30,135 10,656
Valuation allowance for deferred tax assets 30,135 9,341
------ -------
- 1,315
======= =======
Deferred tax liabilities:
Policy acquisition costs - 187
Real estate - 720
Unrealized appreciation of investments - 359
Deferred and uncollected premiums, net - 408
------- --------
- 1,674
------- -------
Net deferred tax (liability) $ - $ (359)
======= ========
</TABLE>
80
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Effective April 1, 1999, HealthAxis was no longer eligible to
participate in the Company's consolidated federal income tax return. The
HealthAxis net operating loss carryforward, on a separate company basis, amounts
to approximately $29,000 and is available to offset its future taxable income
through 2014.
The Company and its other subsidiaries have net consolidated operating
loss carryforwards ("NOL's") approximating $17,000, of which $15,000 is
available to offset future taxable income through 2014. Approximately $2,000 of
the consolidated NOL's result from a 1989 acquisition and expire between 2000
and 2004 and are subject to annual limitations approximating $24, thereby
significantly reducing their ultimate utilization.
Capital losses may be used only to offset capital gains and may be
carried back three years and forward five years. At December 31, 1999, the
Company had a capital loss carryforward of approximately $32,000, which expires
in 2004.
As a result of all of the capital transactions of both HAI and
HealthAxis including the merger with Insurdata, the amount of NOL carryforwards
may be limited. Additionally, the utilization of these NOL's, if available, to
reduce future income taxes will depend on the generation of sufficient taxable
income prior to their expiration.
The Company has established a valuation allowance for deferred tax
assets reflecting uncertainty as to whether the deferred tax asset is fully
realizable. The change in valuation allowance in 1999 amounting to $20,794
results primarily from the increase in NOL's, net of those components applicable
to PILIC which was sold November 30, 1999.
The reconciliation of income tax expense (benefit) to the amount
computed by applying the appropriate statutory income tax rate (35%) to (loss)
before income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Amount computed at statutory rate $(19,023) $ (4,866) $ (7,740)
Change in valuation allowance 20,794 5,418 2,324
Permanent differences (1,771) (167) 600
Reversal of prior year federal income taxes - (1,031) -
Other, net - (385) 227
-------- -------- --------
Total income tax (benefit) $ - $ (1,031) $ (4,589)
======== ======== ========
</TABLE>
Note 16 - HealthAxis.com, Inc. Equity Transactions
On May 11, 1999, HealthAxis completed a private placement of 516,051
shares of HealthAxis common stock to a group of accredited investors at $12 per
share for an aggregate purchase price of $6,193, less issuance costs of $2. The
net proceeds of $6,191, have and will be used by HealthAxis for working capital
and other general corporate purposes, including marketing expenses, web site
enhancements, salary expenses and advertising and promotional expenses.
Investors purchasing HealthAxis common stock were provided with registration
rights.
During 1999, HAI purchased 1,415,000 shares of HealthAxis common stock
from HPS for an aggregate purchase price of $8,203 of which $375 remains
outstanding at December 31, 1999. HAI has accounted for the purchase of minority
interest in accordance with Interpretation 26 of Accounting Principles Board
Opinion 16 "Acquisition of Minority Interest" as goodwill to be amortized
straight-line over three years.
81
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
On December 7, 1999, HealthAxis completed a private placement of
3,846,003 shares of HealthAxis common stock to a group of accredited investors
and HAI at $15 per share for an aggregate purchase price of approximately
$57,690 less issuance costs approximating $2,533. HAI purchased 133,333 shares
in the transaction for approximately $2,000. The net proceeds will be used for
HealthAxis' working capital and other general corporate purposes, including
marketing expenses.
The chart below identifies the equity ownership of HealthAxis. The
chart excludes options and warrants to purchase HealthAxis stock and the January
7, 2000 merger of Insurdata described in Note 26:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
Shares Percentage Shares Percentage
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
HAI 15,801,644 66.9% 14,353,311 82.8%
Minority Interest 7,816,861 33.1% 2,990,894 17.2%
----------- ------ ----------- -------
Total 23,618,505 100.0% 17,344,205 100.0%
========== ====== ========== ======
</TABLE>
Note 17 - Series A Convertible Preferred Stock
During 1998, HealthAxis issued a total of 545,916 shares of HealthAxis
Cumulative Convertible Series A Preferred Stock, par value $1.00 (the "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 HealthAxis to issue to PILIC additional shares of Series A
Preferred Stock if HealthAxis 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 AOL at $4.40 per share, HealthAxis 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.
Upon issuance, holders of the Series A Preferred Stock were entitled to
cumulative dividends at an annual rate of $0.13 per share. The shares were
mandatorily redeemable by the Company during the redemption period at the
original issue price ($4.40 per share) plus any amount that would yield a 10%
annualized return. As a result of an amendment to the Series A Preferred Stock
Certificate of Designation in 1999, holders of the Series A Preferred Stock are
now entitled to receive dividends as declared by the Board of Directors of
HealthAxis at its discretion. Also, all of the mandatory redemption provisions
were removed. As a result, the Series A Preferred Stock has been reflected as a
component of stockholders' equity in 1999.
In 1999, HAI purchased all Series A Preferred Stock from PILIC and
transferred 100,000 shares to AHC Acquisition, Inc. ("AHC"), a newly formed
Pennsylvania business corporation, owned by Mr. Alvin H. Clemens (HealthAxis'
and HAI's chairman), for no consideration. In conjunction with the merger
described in Note 26, all of the Series A Preferred Stock will be converted into
common stock of HAI.
Shares of Series A Preferred Stock are convertible at any time, at the
option of the holder, into HealthAxis common stock at a price equal to the
original issuance price ($4.40 per share) divided by the conversion price which
is defined as the original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Preferred Stock Certificate of
Designation.
82
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
Holders of the Series A Preferred Stock are entitled to vote on all
matters as to which holders of common stock are entitled to vote. The holders of
each share of Series A Preferred Stock are entitled to the number of votes equal
to the nearest whole number of shares of HealthAxis common stock into which the
holder's Series A Preferred Stock is convertible. Generally, the holders of
Series A Preferred Stock shall vote together with the holders of HealthAxis
preferred and common stock as one class.
In the event of any dissolution, liquidation or winding up of the
affairs of HealthAxis, whether voluntary or other wise, after payment or
provision for payment of the debts and other liabilities of HealthAxis and all
amounts owed to the Series B, Series C and Series D Preferred Stock or any other
class of securities of HealthAxis having a dividend payment or other
distribution preference senior to the Series A Preferred Stock (the "Series A
Senior Stock"), the holders of Series A Preferred Stock shall be entitled to
receive $4.40 in cash for each share of Series A Preferred Stock, plus an amount
equal to all dividends accrued and unpaid on each such share up to the fixed
date for distribution, before any distribution may be made to the holders of
HealthAxis' common stock. Each Preferred Stock Certificate of Designation
includes additional provisions related to liquidation and the order of payment
as it relates to each series of Preferred Stock.
The Series A Preferred Stock is not subject to any sinking fund or
other similar provisions. The holders of Series A Preferred Stock are not
entitled to any preemptive rights.
Note 18 - Series B Convertible Preferred Stock
During 1998, HealthAxis issued 625,529 shares of Series B convertible
preferred stock, par value $1.00 per share (the "Series B Preferred Stock") to
AOL at $4.40 per share for an aggregate purchase price of $2,750, less issuance
costs amounting to $51, of which a portion was used to pay amounts due to AOL
under their distribution agreement with the Company. In conjunction with the
merger described in Note 26, all of the Series B Preferred Stock will be
converted into common stock of HAI.
Holders of the Series B Preferred Stock are entitled to vote on all
matters as to which holders of common stock are entitled to vote. The holders of
each share of Series B Preferred Stock are entitled to the number of votes equal
to the nearest whole number of shares of HealthAxis common stock into which the
holder's Series B Preferred Stock is convertible. Generally, the holders of
Series B Preferred Stock shall vote together with the holders of HealthAxis
common stock as one class.
As a result of an amendment to the Preferred Stock Certificate of
Designation in 1999, holders of the Series B Preferred Stock are entitled to
receive such dividends as declared by the Board of Directors of HealthAxis in
its discretion at a rate as specified by the Preferred Stock Certificate of
Designation.
83
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
In the event of any dissolution, the holders of Series B Preferred
Stock shall be entitled to receive, out of the assets of HealthAxis legally
available for distribution to its shareholders, the amount of $4.40 in cash for
each share of Series B Preferred Stock, plus an amount equal to all dividends
accrued and unpaid on each such share up to the fixed date for distribution,
before any distribution may be made to the holders of HealthAxis' common stock,
or any series of Series B Junior Stock, including the Series A, Series C and
Series D Preferred Stock. If, after payment or provision for payment of the
debts and other liabilities of HealthAxis, the remaining net assets of
HealthAxis are not sufficient to pay the holders of the Series B Preferred Stock
the full amounts of their preference, the holders of Series B Preferred Stock
would share ratably in any distribution of assets. After payment or provision
for payment of the debts and other liabilities of HealthAxis and the full
preference amount due to the holders of any Series of preferred stock, Series A,
Series B, Series C and Series D Preferred Stock and the HealthAxis common stock
will be entitled to receive on a pro rata basis the remaining assets of
HealthAxis available for distribution to its shareholders. The relative value of
a share of Series A, Series B, Series C and Series D Preferred Stock for this
purpose shall be determined on an as converted basis.
Holders of the Series B Preferred Stock have the option, exercisable
upon request of the holders of 51% of the outstanding share of Series B
Preferred Stock within six months after the later of the occurrence of a Trigger
Event as defined in the Certificate of Designation or notice of a Trigger Event,
to cause HealthAxis to redeem any or all of the shares of Series B Preferred
Stock requested to be redeemed, at a redemption price per share equal to the
original issuance price (subject to adjustment to reflect stock splits, stock
dividends, stock contributions, recapitalizations and similar occurrences) plus
an amount that would yield a total annualized return of 10% calculated daily and
compounded annually from the later of either the original issuance date or the
date on which the holder acquired the shares of Series B Preferred Stock through
the date of redemption. Notice of the exercise of the optional redemption rights
with respect to the Series B Preferred Stock must be given to the Company
pursuant to the notice of optional redemption provision contained in the
Certificate of Designation related to the Series B Preferred Stock.
Trigger Event is any of the following:
o January 31, 2002, if by then HealthAxis has not consummated an
underwritten public offering for its account of common stock
pursuant to a registration statement filed under the Securities Act
of 1993, as amended, at a net offering price per share of Common
Stock that represents a pre-offering market capitalization of no
less than $150.0 million and with aggregate proceeds (net of
underwriting discounts and commissions) to HealthAxis of not less
than $25.0 million;
o HealthAxis' failure to renew or any material breach by any party
other than AOL or termination of the interactive marketing
agreement;
o The date of the occurrence of a liquidation of HealthAxis;
o March 31, 1999, if by then HealthAxis has not consummated a
Qualified Financing (a transaction yielding aggregate gross proceeds
to HealthAxis of not less than $7.0 million at a price per share of
common stock equal to at least $3.74);
o May 31, 1999, if by then HealthAxis has not consummated a Second
Qualified Financing (a transaction yielding aggregate gross proceeds
to HealthAxis of not less than $3.5 million at a price per share of
Common Stock equal to at least $3.74).
84
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
On January 31, 2000, the initial term of HealthAxis' interactive
marketing agreement with AOL expired and HealthAxis chose not to renew this
agreement. Accordingly, one of the above definitions of Trigger Events has been
met and AOL has the option to require HealthAxis to redeem its shares. Other
than the expiration of the interactive marketing agreement, none of the Trigger
Events that could have occurred in 1999 actually occurred. Additionally,
HealthAxis does not expect additional Trigger Events to occur.
Shares of Series B Preferred Stock are convertible at any time, at the
option of the holder, into HealthAxis common stock at a price equal to the
original issuance price ($4.40 per share) divided by the conversion price which
is defined as the original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Certificate of Designation related to
the Series B Preferred Stock.
The Series B Preferred Stock is not subject to any sinking fund or
other similar provisions. The holders of Series B Preferred Stock are not
entitled to any preemptive rights.
In connection with AOL's purchase of the Series B Preferred Stock,
HealthAxis and AOL entered into a Registration Rights Agreement ("Registration
Agreement") which sets forth the rights of AOL in connection with the public
offering of HealthAxis' common stock acquired in connection with the conversion
of Series B Preferred Stock or other shares of common stock acquired through the
exercise of warrants granted to AOL.
Under its Registration Agreement, AOL has the right to demand
registration of its shares of common stock or to have its shares of common stock
included in a registration statement prepared at the request of HealthAxis or
another HealthAxis shareholder.
Note 19 - Series C Convertible Preferred Stock
On March 30, 1999, HealthAxis issued 1,526,412 shares of HealthAxis
Series C convertible preferred stock at $5.77 per share (the "Series C Preferred
Stock"), for an aggregate purchase price of $8,807, less issuance costs of $684
and the value of HealthAxis warrants issued in connection with the issuance of
Series C Preferred Stock to an investment banker for services rendered in
connection with the Series C Preferred Stock Offering valued at $278. In
conjunction with the merger described in Note 25, all of the Series C Preferred
Stock will be converted into common stock of HAI.
Holders of the Series C Preferred Stock are entitled to vote on all
matters as to which holders of common stock are entitled to vote. The holders of
each share of Series C Preferred Stock are entitled to the number of votes equal
to the nearest whole number of shares of common stock into which the holder's
Series C Preferred Stock is convertible. Generally, the holders of Series C
Preferred Stock shall vote together with the holders of HealthAxis common and
preferred stock as one class.
Holders of the Series C Preferred Stock will be entitled to dividends
accruing from the date of issue, is such dividends are declared by the Board of
Directors of HealthAxis at its discretion at a rate as specified by the
Preferred Stock Certificate of Designation.
85
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements - (Continued)
(Dollars in thousands)
In the event of any distribution, liquidation or winding up of the
affairs of HealthAxis, whether voluntary or otherwise, after payment or
provisions for payment of debts and other liabilities of HealthAxis and payment
of all amounts owed to the holders of the Series B Preferred Stock, the holders
of the Series C Preferred Stock shall be entitled to receive on a pari passu
basis with the Series D Preferred Stock, out of the assets of HealthAxis legally
available for distribution to its shareholders, an amount in cash equal to $5.77
("Series C Offering Price") per share for each share of Series C Preferred
Stock, plus an amount equal to all dividends accrued and unpaid, if any, on each
such share up to the date fixed for distribution, before any distribution may be
made to the holders of HealthAxis' common stock for the Series A Preferred Stock
or Series C Junior Stock.
The Series C Preferred Stock is not subject to any mandatory
redemption, sinking fund or other similar provisions.
Shares of Series C Preferred Stock are convertible at any time, at the
option of the holder, into HealthAxis common stock at a price equal to the
original issue price ($5.77 per share) divided by the conversion price which is
defined as the original issuance price adjusted for future issuances of
HealthAxis common stock as defined in Certificate of Designation related to the
Series C Preferred Stock.
Note 20 - Series D Convertible Preferred Stock
On July 12, 1999, HealthAxis issued 333,334 shares of HealthAxis Series
D convertible preferred stock to Intel Corporation at $12 per share for an
aggregate purchase price of $4,000, less issuance costs of $40 (the "Series D
Preferred Stock"). The net proceeds of approximately $3,960, have been used for
working capital and other general corporate purposes, including marketing
expenses, web site enhancements, salary expenses and advertising and promotional
expenses of HealthAxis. In conjunction with the merger described in Note 26, all
of the Series D Preferred Stock will be converted into common stock of HAI.
In connection with the HealthAxis Series D offering, HealthAxis'
Amended and Restated Articles of Incorporation were amended to authorize an
additional 500,000 shares of HealthAxis Preferred Stock.
Holders of the Series D Preferred Stock are entitled to vote on all
matters as to which holders of common stock are entitled to vote. The holders of
each share of Series D Preferred Stock are entitled to the number of votes equal
to the nearest whole number of shares of common stock into which the holder's of
the Series D Preferred Stock is convertible. Generally, the holders of Series D
Preferred Stock shall vote together with the holders of HealthAxis common and
preferred stock as one class.
Holders of the Series D Preferred Stock will be entitled to dividends
accruing from the date of issue, if such dividends are declared by the Board of
Directors of HealthAxis at its discretion at a rate as specified by the
Preferred Stock Certificate of Designation.
In the event of any distribution, liquidation or winding up of the
affairs of HealthAxis, whether voluntary or otherwise, after payment or
provisions for payment of the debts and other liabilities of HealthAxis and
payment of all amounts owed to the holders of the Series B Preferred Stock, the
holders of the Series D Preferred Stock shall be entitled to receive, on a pari
passu basis with the Series C Preferred Stock out of the assets of HealthAxis
legally available for distribution to its shareholders, an amount in cash equal
to $12.00 ("Series D Offering Price") per share for each share of Series D
Preferred Stock, plus an amount equal to all dividends accrued and unpaid, if
any, on each such share up to the date fixed for distribution, before any
distribution may be made to the holders of HealthAxis' common stock for the
Series A Preferred Stock.
86
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The Series D Preferred Stock is not subject to any mandatory
redemption, sinking fund or other similar provisions.
Shares of Series D Preferred Stock are convertible at any time, at the
option of the holder, into HealthAxis common stock at a price equal to the
original issue price ($12.00 per share) divided by the conversion price which is
defined as the original issuance price adjusted for future issuances of
HealthAxis common stock as defined in the Certificate of Designation related to
the Series D Preferred Stock.
Note 21 - Stockholders' Equity and Dividend Restrictions
Letter Agreement between the Company and Alvin H. Clemens: On September
9, 1999, the Company and Mr. Clemens, the Company's Chairman, entered into an
agreement whereby Mr. Clemens agreed to convert approximately 557,000 shares of
Series A Preferred Stock, amend his agreement to purchase 550,000 shares of the
Company's Series A Preferred Stock in exchange for an option to purchase the
Company's common stock, released all right, title and interest to options to
purchase 202,802 shares of the Company's common stock and a 1997 agreement to
grant options to Mr. Clemens to purchase shares of the Company's Series A
Preferred Stock successively upon each exercise by Mr. Clemens of his existing
option and each subsequently granted option to purchase shares of Series A
Preferred Stock from time-to-time. The exercise prices of the options to
purchase common stock range from $3.64 to $8.75 per share and have a weighted
average price per share of $4.56. In consideration of the aforementioned the
Company paid Mr. Clemens $650 which was accounted for as compensation expense.
Dividend restrictions: Dividends paid by the Company over and above the
financial assets of HAI are dependent on the ability of HealthAxis to pay
dividends to HAI. Dividends paid by HealthAxis to HAI are subject to
restrictions described in Notes 17, 18, 19 and 20. HAI and HealthAxis have not
paid nor anticipate paying cash dividends on common stock in the foreseeable
future.
Note 22 - Stock Options and Warrants
Options: The Company has stock option plans, which provide for the
granting of options to directors and key employees of the Company and its
subsidiaries and certain former field representatives and agents.
The Incentive Stock Option Plan for Employees authorized the granting
of options for up to 650,000 shares of the Company's common stock to key
managerial employees of the Company, which are exercisable for up to five years
at a price not less than the fair market value of the shares on the date of
grant. All options granted under the Incentive Stock Option Plan have been
granted at 100% of the fair market value of the shares on the date of grant. The
Incentive Stock Option Plan for Employees expired during 1996 and the Company
adopted the 1996 Employee Incentive Stock Option Plan ("1996 Employee Plan"),
which was amended in 1997 to increase the number of shares issuable thereunder
from 950,000 shares to 1,250,000 shares of the Company's common stock to key
employees of the Company and its subsidiaries and affiliates, exercisable for up
to five years from the effective date of the grant at a price not less than the
fair market value of the shares on the effective date of grant. All options
granted under the 1996 Employee Plan have been granted at 100% of the fair
market value of the shares on the effective date of the grant, with the
exception of an option granted to Mr. Clemens, which was granted at 110% of the
fair market value.
87
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The Non-Qualified Stock Option Plan for Directors ("Directors' Plan")
was amended in 1996 to increase the number of shares authorized for the issuance
thereunder from 585,000 shares to 1,010,000 shares and to incorporate prior
amendments. Options granted under the Directors' Plan are exercisable for up to
ten years from the date of grant at a price of not less than the fair market
value of the shares on the date of the grant. All options granted under the
Directors' Plan have been granted at 100% of the fair market value of the shares
on the date of grant. During 1997, pursuant to the Directors' Plan, the Company
granted to each Director, with the exception of Mr. Clemens, an option to
purchase 30,000 shares of the Company's common stock at an exercise price of
$2.75 per share.
Also during 1997, the Company approved the adoption of a Military Stock
Option Plan and a 1997 Insurance Agent Stock Option Plan ("Agents Plan"),
designed to replace and supercede all previous stock option plans for
non-employee agents. Each Plan is administered by the Option Administration
Committee. Options have been granted at fair market value and are subject to
certain other vesting or performance conditions, and the Company has reserved
750,000 shares of the Company's common stock for issuance under each Plan.
Options have been issued under each Plan only to insurance agents who are
licensed to sell insurance by a life insurance subsidiary of the company, and
are exercisable for up to five years from the effective date of the grant.
In June 1998, HealthAxis adopted the 1998 Stock Option Plan (the "1998
Stock Option Plan") which provides for the award of options and stock purchase
rights (collectively "Awards") to purchase HealthAxis common stock. Exercise
prices are based on 90% of the per share price paid in private placement
transactions with unaffiliated third parties for grants prior to May 1999 and
100% of the per share price paid in private placement transactions with
unaffiliated third parties thereafter. During 1998 options to purchase 991,000,
309,000 and 50,000 shares were granted to Mr. Ashker, Mr. Clemens and Mr.
Beausang, respectively, and are immediately exercisable at a price of $1.77 per
share having a term of 10 years. Mr. Clemens option to purchase HealthAxis
shares has since been terminated by mutual agreement. Options to purchase
460,000 shares of HealthAxis common stock awarded at $1.77 per share were
awarded to officers and employees during 1998. These options have a term of five
years and vest at a rate of 25% of the initial award on the grant date, 25% of
the initial award on February 1, 1999 and the balance in quarterly installments
thereafter. Options to purchase an additional 96,500 shares of common stock were
granted to officers and employees at an exercise price of $4.00 per share. Such
options have a term of five years and vest at a rate of 25% of the initial award
on the grant date, 25% of the initial award on November 20, 1999 and the balance
in quarterly installments thereafter.
During 1999 HealthAxis amended the Stock Option Plan to increase the
number of shares available pursuant for issuance of options to 8,600,000.
Options granted in 1999 have a term of ten years and vest at a rate of 20-33% of
the initial award on the grant date, with the balance vesting in quarterly
installments over 2 to 5 years. Of the options granted, options to purchase
200,000, 75,000, 60,000 and 20,000 shares were granted to Mr. Ashker, Mr.
Felder, Mr. Hankinson and Ms. del Rossi, respectively. Mr. Ashker, Mr. Felder,
Mr. Hankinson and Ms. del Rossi are executive officers of HealthAxis.
88
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
During the first quarter of 2000, the HAI board of directors adopted
the 2000 Stock Option Plan, subject to approval by the shareholders which is
required by NASDAQ and for options granted pursuant to the plan to qualify as
incentive stock options and for the 2000 Stock Option Plan to satisfy one of the
conditions of Section 162(m) of the Internal Revenue Code applicable to
performance-based compensation. Employees, officers and directors of HAI, as
well as certain consultants of HAI, are eligible to receive options under the
2000 Stock Option Plan. The purpose of the 2000 Stock Option Plan is to provide
additional incentive to these individuals by encouraging them to invest in HAI's
common stock and thereby acquire a further proprietary interest in HAI and an
increased personal interest in HAI's continued success and progress. HAI is
currently evaluating the possibility of merging HAI's existing director and
employee stock option plans into the 2000 Stock Option Plan. To date, no grants
have been awarded under 2000 Stock Option Plan.
Stock Purchase Rights ("SPRs") may be granted either alone, in addition
to, or in tandem with other awards granted under the 1998 Stock Option Plan.
SPRs may not be granted at less than 85% the fair market value on the date of
grant (or 100% of the fair market per share for ten percent shareholders) unless
otherwise determined at the time of grant under the terms of the 1998 Stock
Option Plan, the SPRs shall include a stock repurchase option exercisable by the
Company if the employee is terminated, voluntarily or involuntarily, following
the receipt of the restricted stock.
89
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The following table lists changes in outstanding stock options for all
HAI option plans:
<TABLE>
<CAPTION>
Number Range of Weighted Average
of Shares Exercise Prices Exercise Price
---------- --------------- ----------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1997
Exercisable 356,217 $8.38 - 12.25 $6.70
Not exercisable 868,628 2.00 - 12.25 9.35
Total outstanding 1,224,845 2.00 - 12.25 8.73
1997
Granted 1,197,000 2.47 - 5.00 4.03
Exercised 30,450 2.00 - 3.64 3.23
Canceled/expired 113,000 2.00 - 10.00 9.43
Outstanding, December 31, 1997
Exercisable 943,972 2.38 - 12.25 5.99
Not exercisable 1,334,423 2.47 - 12.25 6.51
Total outstanding 2,278,395 2.38 - 12.25 6.30
Weighted Average
(Years) Remaining
Contractual Life
------------------
1998
Granted 167,500 4.44 - 6.00 4.97
Exercised 410,258 3.13 - 7.00 4.04
Canceled/expired 278,195 3.52 - 11.00 9.85
Outstanding, December 31, 1998
Exercisable 944,133 2.35 - 12.25 6.58
Not exercisable 813,309 2.35 - 10.00 5.63
Total outstanding 1,757,442 2.38 - 12.25 6.14
1999
Granted 344,831 3.44 - 14.63 9.51
Exercised 778,925 2.38 - 12.25 6.35
Canceled/expired 327,831 2.47 - 14.63 6.50
Outstanding, December 31, 1999
Exercisable 159,050 2.38 - 3.52 2.86 7.1
Exercisable 262,352 4.44 - 5.00 4.98 3.2
Exercisable 66,275 6.00 - 7.50 6.97 5.1
Exercisable 150,000 8.75 8.75 6.5
Exercisable 146,750 10.00 10 2.1
Exercisable 75,000 14.63 14.63 2.8
Not exercisable 4,000 3.4375 3.44 1.2
Not exercisable 41,490 4.44 - 5.00 4.86 3.1
Not exercisable 66,600 6.00 - 7.50 7.39 1.2
Not exercisable 24,000 10.00 10.00 1.2
Total outstanding 995,517 2.38 - 14.63 6.96 4.4
</TABLE>
90
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The following table lists options granted by HealthAxis under the 1998
Stock Plan:
<TABLE>
<CAPTION>
Weighted Average Weighted Average Weighted
Number Exercise (Years) Remaining Average
Of Shares Price Contractual Life Fair Value
---------- ----------------- ------------------ -----------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1998 - - - -
1998
Granted 1,956,500 $1.88 $0.38
Outstanding, December 31, 1998
Exercisable 1,515,000 1.77 0.36
Exercisable 24,125 4.00 0.80
Not exercisable 345,000 1.77 0.36
Not exercisable 72,375 4.00 0.80
---------
Total outstanding 1,956,500 1.88 0.38
1999
Granted 445,500 4.00 0.80
Granted 758,371 5.77 3.71
Granted 700,750 12.00 7.80
Exercised 52,500 1.88
Canceled/Expired 732,400 3.09
Outstanding, December 31, 1999
Exercisable 1,274,021 1.77 3.7 0.36
Exercisable 146,333 4.00 2.3 0.80
Exercisable 111,332 5.77 8.4 3.71
Exercisable 70,670 12.00 9.1 7.80
Not exercisable 123,854 1.77 3.7 0.36
Not exercisable 145,667 4.00 2.3 0.80
Not exercisable 597,764 5.77 8.4 3.71
Not exercisable 606,580 12.00 9.1 7.80
---------
Total outstanding 3,076,221 5.14
=========
</TABLE>
In addition, Mr. Clemens directly owns options to purchase 253,376
shares of the Company's common stock at $.9091 per share expiring from time to
time between November 1999 through December 2004. Mr. Clemens indirectly owns
options to purchase 32,960 shares of the Company's common stock at $.9091 per
share expiring from time to time between November 1999 and December 2004. Mr.
Clemens disclaims beneficial ownership of all other options of any partnership
in which Mr. Clemens directly or indirectly is a partner.
91
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
In addition, a partnership of which Mr. Clemens is a partner owns
options to purchase 1,000,000 shares of the Company's common stock at $.9091 per
share expiring from time to time between November 1999 through December 2004.
Mr. Clemens also owns an option to purchase up to 397,198 shares of Series A
Preferred Stock at $3.64 per share (fair market value at date of grant)
exercisable on or before March 31, 2003. This option was amended to eliminate
the right to convert the option shares into any class of securities other than
into shares of HAI's common stock.
The Stock Option Plan for Executives ("Executive Plan") was amended in
1996 and authorizes the granting of options to purchase up to 3,850,000 shares
of the Company's Series A Convertible Preferred Stock ("Series A Preferred
Stock"), which are exercisable for up to ten years from the effective date of
grant at a price not less than the fair market value of the shares on the date
of grant. Also in 1997, the Company granted Mr. Clemens an option to purchase
shares of the Company's Series A Preferred Stock successively upon each exercise
by Mr. Clemens of his existing option and each subsequently granted option to
purchase shares of Series A Preferred Stock from time-to-time, limited in the
aggregate to (i) that the number shares of Series A Preferred Stock which, when
exercised, shall permit Mr. Clemens to acquire the right to vote not more than
55% of the shares of the Company's common stock owned, either directly or
beneficially, by Mr. Clemens at such time, (ii) the shares of Series A Preferred
Stock which are, as of the date of any such exercise, authorized and unissued;
and (iii) an option to purchase more than 550,000 shares of Series A Preferred
Stock in any six month period shall be prohibited except upon the occurrence of
a "change of control" (within the meaning of the Securities Exchange Act of
1934, as amended). Mr. Clemens relinquished all rights to the 1997 grant as part
of the letter agreement between HAI and Mr. Clemens dated September 9, 1999
described in Note 24.
92
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Warrants:
The following table lists changes in outstanding stock options for all HAI
warrants:
<TABLE>
<CAPTION>
Number Range of Weighted Average
of Shares Exercise Prices Exercise Price
--------- --------------- ----------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1997
Exercisable 250,000 $5.00 - $9.00 $7.55
Not exercisable 0
Total outstanding 250,000 5.00 - 9.00 7.55
1997
Granted 175,000 10.00 10.00
Outstanding, December 31, 1997
Exercisable 373,333 4.00 - 14.00 9.10
Not exercisable 51,667 4.00 - 5.00 4.68
Total outstanding 425,000 4.00 - 14.00 6.30
Weighted Average
(Years) Remaining
Contractual Life
-----------------
1998
Granted 1,325,000 2.81 - 9.00 4.35
Canceled/expired 50,000 5.00 5.00
Outstanding, December 31, 1998
Exercisable 1,626,583 2.81 - 9.00 5.46
Not exercisable 73,417 3.28 - 5.00 3.71
Total outstanding 1,700,000 2.81 -14.00 5.38
1999
Granted 254,469 3.28 - 25.00 12.86
Exercised 250,000 3.50 - 9.00 8.20
Canceled/expired 75,000 3.28 - 5.00 3.85
Outstanding, December 31, 1999
Exercisable 433,167 2.81 - 3.38 3.26 6.63
Exercisable 740,000 4.00 - 5.00 4.50 3.08
Exercisable 100,000 7.38 7.38 2.0
Exercisable 100,000 14.00 14.00 3.0
Exercisable 202,802 20.34 20.34 4.7
Not exercisable 8,500 3.28 3.28 3.7
Not exercisable 10,000 5.00 5.00 0.4
Not exercisable 35,000 25.00 25.00 4.6
Total outstanding 1,629,469 2.81 - 25.00 7.33 4.4
</TABLE>
93
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The following table presents HealthAxis warrants activity for 1999 and 1998:
<TABLE>
<CAPTION> Weighted
Average
Weighted (Years) Weighted
Number Average Remaining Average
of Exercise Contractual Fair
Shares Price Life Value
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Granted during 1998 300,000 $ 1.77
Outstanding, December 31, 1998
Exercisable 300,000 1.77
Not exercisable -- --
Total outstanding 300,000 1.77
1999
Granted 825,500 8.21
Exercised -- --
Canceled/Expired -- --
Outstanding, December 31, 1999
Exercisable 300,000 1.77 8.5 0.56
Exercisable 150,000 4.40 3.8 0.23
Exercisable 7,500 12.00 3.8 0.08
Exercisable 63,000 5.77 3.8 0.17
Exercisable 10,000 20.00 3.9 0.05
Exercisable 50,000 15.23 2.4 0.07
Not exercisable 250,000 (1)
Not exercisable 30,000 13.80 4.5 0.07
Not exercisable 75,000 14.50 4.2 0.07
Not exercisable 150,000 16.00 4.5 0.06
Not exercisable 40,000 20.00 3.9 0.05
Total outstanding 1,125,500 4.77
</TABLE>
(1) The price of these warrants is determined based upon the fair market
price of the shares on the date in the future when the options are
earned, which is based upon performance criteria.
On June 6, 1996, the Company issued 100,000 stock purchase warrants to an
unaffiliated party at $9.00 per share that are exercisable through June 6, 2001.
The Company issued a warrant to an exclusive consultant of the Company to
purchase 100,000 shares of the Company's common stock at the market price per
share as of each of January 1, 1996, 1997, and 1998, provided PILIC has realized
new annualized premium sales production of at least $35,000, $45,000, and
$50,000, respectively, for each of these calendar years. PILIC has realized the
annualized premium threshold for the years ending December 31, 1996, 1997 and
1998 and accordingly, the consultant is entitled to exercise 100,000 warrants at
$7.375 for 1996, 100,000 at $14.00 per share for 1997 and 100,000 at $2.81 per
share for 1998.
During 1997 the Company issued warrants to two exclusive insurance
agents, who were directors of a subsidiary of HAI, for the purchase of 50,000
shares of the Company's common stock at $5.00 per share. These warrants become
exercisable throughout 2001. The Company also issued a warrant exercisable at
any time to an employee for the purchase of 25,000 shares of the Company's
common stock at $4.00 per share.
94
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Effective January 1, 1996, the Company has adopted the disclosure-only
provisions of SFAS 123 "Accounting for Stock Based Compensation." Accordingly,
no compensation cost has been recognized for stock option and warrant grants to
employees and employee-directors. The Company continues to account for
stock-based compensation using the intrinsic value method prescribed in APB
opinion No. 25, "Accounting for Stock Issued to Employees'. Compensation cost
for stock options, if any, is measured as the excess of the quoted market price
of the Company's stock at the date of grant over the amount an employee must pay
to acquire the stock. Compensation cost for shares issued under performance
share plan is recorded based upon the current market value of the Company's
stock at the end of each period. 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 would have amortized the
cost over the vesting period of the option which generally is five years for the
1996 Employee Plan and three years for the Directors Plan and 1998 Employee
Plan. The Company's net loss and net loss per common share would have been
increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Net loss applicable to common shares
as reported $(46,601) $(12,410) $ (18,573)
pro forma $(48,192) $(13,319) $ (20,505)
Net loss applicable to common shares Basic & Diluted Basic & Diluted Basic & Diluted
--------------- --------------- ---------------
as reported $(3.80) $(1.20) $ (1.84)
pro forma $(3.93) $(1.27) $ (2.03)
</TABLE>
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 warrants granted in 1996,
and the following:
<TABLE>
<CAPTION>
Expected Expected Risk Free Weighted
Term Stock Interest Average
In Years Volatility Rate Fair Value
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
For options granted in 1997
---------------------------
1996 Employee Plan & Employee Warrant 5 63% 5.50% $1.42
Directors Plan 5 63% 5.50% $1.36
Military Market Plan & Warrants 5 63% 5.50% $1.13
For options granted in 1998
---------------------------
1996 Employee Plan & Warrants 1 - 5 57% - 98% 4.48% $3.74
HealthAxis.com, Inc. 1998 Stock Plan 5 100% 4.48% $0.38
For options granted in 1999
---------------------------
1996 Employee Plan .5 - 5 58% - 100% 4.48% $4.65
Directors Plan 10 58% 4.48% $2.12
HealthAxis.com, Inc. 1998 Stock Plan 5 100% 4.48% $0.36
</TABLE>
95
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
In January and February 2000, HealthAxis granted options to acquire
approximately 1,200,000 HealthAxis common shares at $15.00 per share. The fair
value of HAI common stock on the grant dates approximated $29.00 per share. As a
result, the Company will amortize, for 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 a co-defendant in litigation in the customary settlement
of insurance claims through PILIC. Management is of the opinion that neither the
litigation nor these claims will have a material adverse effect on the results
of operations or financial position of the Company.
The Agreement in connection with the transfer of PILIC to AHC
stipulated that any future cost associated with the termination of certain
employees in connection with any of the transactions contemplated in the
Agreement shall be borne by HAI. The amount to be charged to expense during the
first quarter of 2000 as a result of the termination of these employees will be
approximately $1,700, which includes salary and benefit costs.
The Company's business is subject to a changing legislative and
regulatory environment. Some of the proposed changes include initiatives to
restrict insurance pricing and the application of underwriting standards; reform
health care; and restrict investment practices. Proposals on national health
care reform have been under consideration that could significantly change the
way healthcare is financed and provided. The effects on the Company of
comprehensive healthcare reforms, which, if enacted, may have a material adverse
impact upon the ability of the Company to profitably engage in the selling of
accident and health insurance.
During 1999, HealthAxis and HAI entered into a settlement agreement at
no cost to resolve a number of disputes that had arisen between HAI and HPS
relative to HPS' performance of administrative services under the outsourcing
agreement and between HealthAxis and HPS relative to HealthAxis' performance
under the ECommerce Agreement and the HPS stock purchase agreement for
HealthAxis common stock.
The settlement agreement provided for the following:
o HPS and HAI and its subsidiaries, including HealthAxis,
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 HAI to HPS;
o HPS exercised a warrant granted in 1998 pursuant to the terms
of the ECommerce Agreement for 100,000 shares of HAI's common
stock for $900, which was set off against service fees owed by
HAI to HPS; and
o HAI 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.
96
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Note 24 - Post Retirement and Post Employment Liabilities and Employee Benefit
Plans
The post retirement liability relates to the future cost of life and
health insurance coverage for approximately 18 retired PILIC employees. Post
employment liabilities relate to the costs of life, health and dental insurance
coverage for three former executives of PILIC and HAI and Mr. Clemens. These
liabilities were assumed by HAI in accordance with the terms of the transfer of
PILIC described in Note 5 and Note 23.
HAI sponsors a defined contribution retirement savings plan under
section 401(k) of the Internal Revenue Code covering substantially all
employees. Employees may contribute up to 15% of compensation, of which the
Company will match 50% of the first 5%. All contributions are subject to
limitations imposed by IRS regulations. Effective January 1, 1995, employees
were given the option to invest the "employer match" portion of their
contribution in common stock of the Company. At December 31, 1999 and 1998, the
plan held 3,995 and 5,736 shares, respectively, of the Company's common stock.
All employee contributions are immediately vested, and the Company
contribution becomes 20% vested after two years of service. Thereafter, an
additional 20% becomes vested for each year of service up to six years. The
benefit expense under this plan amounted to $53, $82 and $78 for 1999, 1998 and
1997, respectively.
Note 25 - Related Party Transactions
On November 30, 1999 HAI sold PILIC to AHC owned by the Alvin Clemens,
the Company's Chairman, as described in Note 5.
Legal fees to the law firm of a former director and general counsel and
secretary of the Company in 1999, 1998 and 1997, approximated $497, $332 and
$282, respectively.
Consulting expenses paid to a shareholder of the Company and former
Chief Executive Officer of a former subsidiary amounted to $300 each in 1998 and
1997. The shareholder provided the Company with exclusive marketing, sales and
product design services as part of a 36-month consulting agreement, which
expired December 1998.
Computer software development and consulting expense paid to an entity
controlled by a former employee of the Company in 1999 and 1998 approximated
$1,398 and $1,759, respectively.
Michael Ashker, the Chief Executive Officer and President of HAI and
HealthAxis also served as the sole manager of Lynx Capital Group ("LCG") through
December, 1999. LCG is party to a consulting agreement with HAI whereby LCG
provided various services during 1998 approximately $23 in fees and expenses as
well as options to purchase 400,000 shares of HAI common stock.
97
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Note 26 - Mergers
Merger of Insurdata into HealthAxis.com: On December 7, 1999,
HealthAxis and Insurdata Incorporated, a subsidiary of UICI announced the
signing of a definitive agreement to merge the two companies. The combined
entity has retained the HealthAxis.com name. Under the terms of the transaction,
Insurdata's shareholders have received approximately 50 percent of the newly
combined company. The transaction closed on January 7, 2000.
In accordance with the terms of the Merger Agreement, each outstanding
share of Insurdata Common Stock (the "Insurdata Common Stock"), was converted
into the right to receive 1.33 shares (the "Exchange Ratio") of HealthAxis
Common Stock (the "HealthAxis Common Stock"). HealthAxis issued 21,807,567
shares of HealthAxis Common Stock to Insurdata shareholders. UICI received
18,943,678 shares, an additional 2,439,885 are held by the voting trust
(described herein) and other shareholders of Insurdata received 424,004 shares .
Subsequent to such date, 10,103,217 shares of HealthAxis Common Stock held by
UICI were transferred to a voting trust. See "Voting Trust Agreements."
The merger of Insurdata and HealthAxis was accounted for by HealthAxis
under the purchase method of accounting in accordance with APB No. 16 whereas
HealthAxis, by virtue of its holding a majority of the voting interest was
determined to be the accounting acquirer. As a result, the net assets of
Insurdata will be recorded at their fair value with the excess of the
HealthAxis' purchase price over the fair value of the net assets acquired being
goodwill being amortized on a straight line basis over three years.
The Merger Agreement provides that each option to purchase shares of
Insurdata Common Stock under Insurdata's stock option plans which were
outstanding on the Effective Date, whether or not exercisable, were converted
into and became a right to purchase shares of HealthAxis Common Stock, generally
in accordance with the terms of the Insurdata stock option plans and Insurdata
option agreements pursuant to which such options were granted, except that from
and after the Effective Date, (i) the number of shares of HealthAxis subject to
each Insurdata option shall be equal to the number of shares of Insurdata Common
Stock subject to such option prior to the Effective Date multiplied by the
exchange ratio (with fractional shares rounded down to the nearest share and
cash being payable for any fraction of a share) and (ii) the exercise price per
share of HealthAxis Common Stock purchasable thereunder shall be that specified
in the Insurdata option divided by the exchange ratio (rounded up to the nearest
one hundredth).
On the date of merger, HealthAxis converted options to purchase
1,834,500 shares of Insurdata Common Stock into options to purchase 2,439,885
shares of HealthAxis Common Stock. The fair value of the HealthAxis options
granted to Insurdata optionholders was determined using the Black Scholes option
pricing model and was included in the purchase price of Insurdata.
The Merger is intended to constitute a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended.
98
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The chart below identifies the equity ownership of HealthAxis common
and preferred stock before and after the merger of Insurdata. The chart excludes
options and warrants to purchase HealthAxis stock.
<TABLE>
<CAPTION>
March 14, 2000 December 31, 1999
----------------------------- ------------------------------
Shares Percentage Shares Percentage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
HAI 15,801,644 34.8% 15,801,644 66.9%
UICI and subsidiaries 17,810,229 39.2% 866,551 3.7%
AHC Acquisition 100,000 0.2% 100,000 0.4%
Michael Ashker - - - -
Other shareholders' interest 11,714,199 25.8% 6,850,310 29.0%
---------- ------ ---------- ------
Total 45,426,072 100.0% 23,618,505 100.0%
========== ====== ========== ======
</TABLE>
Voting Trust Agreements: The Merger Agreement also provides for a voting trust
agreement (the "Voting Trust Agreement") which established a trust to hold
shares of Insurdata Common Stock which are currently held of record by UICI, but
as to which UICI has granted options to purchase such shares to certain
employees of Insurdata pursuant to its Insurdata Founders' Program. These shares
were converted into 2,439,885 shares of HealthAxis Common Stock in the Merger.
The initial trustees of this trust are Michael Ashker, Alvin Clemens, Edward W.
LeBaron, Jr. and Henry Hager (the "Trustees"). All of the initial Trustees are
also directors of HAI and Messrs. Ashker and Clemens are also directors and
officers of HealthAxis. Pursuant to the terms of the Voting Trust Agreement, a
majority of the Trustees have the power to vote the shares held by the trust in
their discretion at all meetings of shareholders or pursuant to actions by
unanimous consent. The Voting Trust Agreement terminates upon the earlier of the
distribution of the shares subject to such agreement or July 1, 2003. Upon the
termination of this Voting Trust Agreement or upon any dissolution or total or
partial liquidation of HealthAxis, whether voluntary or involuntary, the
Trustees shall direct that all shares remaining in the Trust and all moneys,
securities, rights or property attributable to the shares be distributed to
UICI.
Following the completion of the Insurdata merger, UICI, and Messrs. Ashker,
LeBaron and Maloney entered into a voting trust agreement ("the UICI Voting
Trust") which provides for the establishment of a trust to hold 10,103,217
shares of HealthAxis common stock held by UICI. The initial trustees of the UICI
Voting Trust are Michael Ashker, Edward W. LeBaron, Jr. and Dennis B. Maloney
who are referred to as the trustees. All of the trustees are also directors of
HealthAxis and Messrs. Ashker and LeBaron are directors of HAI. Messrs. Ashker
and Maloney are also officers of HealthAxis. A majority of the trustees have the
power to vote the shares held by the UICI Voting Trust in their discretion at
all meetings of shareholders or pursuant to actions by unanimous consent. UICI
retains dispositive power and the ability to receive all dividends on the shares
held in the UICI Voting Trust. Pursuant to the UICI Voting Trust agreement, if
one of the trustees is no longer able to serve as trustee, the other two
trustees may select by unanimous vote a new trustee from the members of the
board of directors of HAI or HealthAxis who are not selected by UICI. The UICI
Voting Trust agreement also provides that if UICI decides to sell any of its
shares of HealthAxis common stock, half of the shares sold must be shares
subject to the UICI Voting Trust. The UICI Voting Trust agreement terminates
upon the earlier of February 11, 2020; such time as UICI owns less than 20% of
the outstanding common stock of HealthAxis or HAI; upon another person acquiring
51% or more of the outstanding shares of HealthAxis; or July 31, 2000 if
transactions contemplated by the merger of HealthAxis into HealthAxis
Acquisition Corporation are not completed.
99
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The UICI Voting Trust agreement, dated February 11, 2000, was amended, effective
July 31, 2000, to among other things, extend the termination date of the trust
if the HAI merger is not consummated to March 31, 2001, and revise the procedure
by which a successor trustee is elected. The amended agreement also reduced the
shares in the trust to 6,433,069 shares.
Technology Outsourcing Agreement: In accordance with the Merger Agreement, UICI
and its affiliates and Insurdata shall enter into a Technology Outsourcing
Agreement pursuant to which Insurdata will provide UICI and its affiliates with
technology support services, data processing services and other software and
hardware based services.
UICI Registration Rights Agreement: HealthAxis and UICI also entered into a
registration right agreement that provides for the registration of HealthAxis
shares received by UICI in the Merger.
HealthAxis Merger with HealthAxis Acquisition Corporation: On December
7, 1999, HAI announced plans to move forward with its original plan to merge
with its subsidiary, HealthAxis. Management of the respective companies signed
the merger agreement on January 26, 2000. The merger was approved by HAI's board
of directors on January 26, 2000 and by HealthAxis' board of directors on
January 26, 2000. HAI and HealthAxis entered into amended and restated
agreements on September 29, 2000, which, among other things, changed the
exchanged ratio from 1.127 to 1.334.
The merger documents provide for the merger of HealthAxis with and into
a newly formed, wholly owned subsidiary of HAI. As a result of the merger,
HealthAxis will cease to exist, and the former shareholders of HealthAxis will
become shareholders of HAI. The HAI subsidiary will continue as the surviving
corporation of the merger and will retain all of its separate corporate
existence, with all its rights and powers unaffected by the merger. The merger
is subject to both HAI and HealthAxis shareholder approval.
The amended merger agreements provide for the conversion of each
outstanding share of HealthAxis common and preferred stock into 1.334 shares
("the exchange ratio") of HAI common stock. The Company anticipates that the
merger will constitute a tax free "reorganization" within the meaning of the
Internal Revenue Code of 1986.
The Company anticipates that HAI will issue a total of 39,629,133
shares of HAI common stock to HealthAxis shareholders in the merger. The Company
also anticipates that HAI will issue up to approximately 7,068,046 shares of HAI
common stock upon the exercise of options and warrants to purchase HealthAxis
common stock to be assumed by HAI.
Based on the number of shares of HAI common stock to be issued in the
merger, excluding shares subject to stock options and warrants to be assumed by
HAI, following the merger, existing HAI shareholders will own approximately 25%
and former HealthAxis shareholders will own approximately 75% of the outstanding
common stock of HAI. The merger will be accounted for by HAI as a purchase of
minority interest in which the preferred and common stock of HealthAxis will be
converted into HAI common stock eliminating all minority interest in HealthAxis.
HealthAxis options and warrants outstanding will be exchanged for
options and warrants in HAI. As a result of the merger and exchange a
remeasurement of the HealthAxis options is anticipated. As a result of the
remeasurement, the fair value of options exchanged in the merger will be
included as additional consideration. The allocation to unearned compensation
for unvested options is based upon the intrinsic value of options exchanged. It
is anticipated that unearned compensation will be amortized over the remaining
vesting period of the options, averaging three to five years.
100
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Out of pocket costs which are anticipated to include legal, accounting
and investment advisory costs will be included as additional consideration in
the purchase of minority interest, as discussed above.
Note 27 - Disposals
On June 30, 2000, HealthAxis entered into an Asset Purchase Agreement
to sell certain assets used in connection with its retail website to Digital
Insurance, Inc. ("Digital"). On September 29, 2000, HealthAxis and Digital
entered into an Amendment to the Asset Purchase Agreement which amends among
other things, the payment terms in the original agreement. 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. The consideration received by HealthAxis in return for these assets
consists of: $500,000 in cash at closing, a $500,000 note at closing, ongoing
license fees, a technology services contract, and an 11% equity interest in
Digital. The transaction was completed on October 13, 2000. In accordance with
APB 30, HealthAxis has accounted for the disposal of the retail website as a
discontinued operation. These financial statements for all periods presented
have been restated to reflect the discontinued operations of the retail website.
In connection with this transaction, HealthAxis and Digital entered
into a Software License and Consulting Agreement that provides HealthAxis with:
a perpetual nonexclusive license to use and sublicense, subject to certain
restrictions, the retail website user interface sold to Digital Insurance;
licensing fees over the next 30 months of $3.0 million for software owned by
HealthAxis that will be used by Digital in conjunction with the user interface
it purchased; and service fees over the next 12 months of a minimum of $3.0
million for services relating to customizing, maintaining and upgrading the user
interface and other software.
On September 29, 2000, HealthAxis and Digital amended the Asset
Purchase Agreement and the related Software Licensing and Consulting Agreement
to modify the payment terms.
101
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Results of discontinued retail website operations:
<TABLE>
<CAPTION>
From Inception
Year ended through
December 31, December 31,
1999 1998
----------- --------------
<S> <C> <C>
Interactive commission and fee revenue $ 291 $ -
Expenses:
Operating and development 5,504 535
Sales and marketing 19,652 1,162
General and administrative 1,000 (173)
--------- --------
Total expenses 26,156 1,524
--------- --------
Loss before minority interest (25,865) (1,524)
Minority interest in loss of discontinued operations (6,739) (223)
--------- --------
Loss from discontinued operations $ (19,126) $ (1,301)
========= ========
Assets of subsidiary held for sale at:
December 31, December 31,
1999 1998
------------ ------------
Prepaid interactive marketing expense $ 1,790 $ 11,654
Prepaid alliance agreements, net of accumulated
amortization of $436 2,283 __
Property, equipment and software, less accumulated
amortization of $1,076 in 1999 and $43 in 1998 3,131 1,248
--------- --------
Total assets held for sale $ 7,204 $ 12,902
========= ========
</TABLE>
102
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
Note 28 - Subsequent Events
Option Repricing: On May 24, 2000, the board of directors of HealthAxis
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 HAI's
common stock as reported on the NASDAQ National Market on the date of the
repricing. In accordance with FASB Interpretation 44, Accounting for Certain
Transactions involving Stock Compensation, HealthAxis will account for these
options as a variable award commencing July 1, 2000.
Agent Stock Options Amended: On September 29, 2000, the Company entered
into an agreement with certain of its former agents which would, among other
things, reduced the exercise price of the options to purchase 318,042 shares of
the Company's common stock from original exercise prices ranging from $4.75 to
$14.63 per share to $4.25 per share and reduced the payments required to be made
pursuant to a registration rights agreement with such individuals in the event
the Company does not register the shares issuable upon the exercise of the
options within certain specified time frames. Effective July 1, 2000, the
Company will remeasure these options in accordance with FASB Interpretation 44,
Accounting for Certain Transactions involving Stock Compensation.
NASDAQ Delisting: The Company was notified by NASDAQ that it does not
meet the NASDAQ maintenance criteria for continued listing due to the decline in
its stock price and its Common Stock will be delisted on November 9, 2000 if it
does not achieve compliance by November 7, 2000. Under applicable NASDAQ rules,
the Company may appeal the delisting by filing a request for appeal which will
stay the delisting of the Common Stock pending the appeal panel's decision. The
Company currently intends to appeal the delisting decision in light of the
pending HAI merger. The Company believes that it will be in compliance with
these requirements upon completion of the HAI merger.
Loan Agreements: HealthAxis and HAI entered into loan agreements dated
as of September 29, 2000, which provides for HealthAxis to loan HAI of up to
$3,404,580. The amount is evidenced by three promissory notes. HAI's obligations
under these notes are secured pursuant to a stock pledge and security agreement
between HAI and HealthAxis dated as of September 29, 2000 in which a maximum of
1,000,000 shares of HealthAxis stock owned by HAI are pledged as collateral to
the loans. These notes become due and payable on the earlier of March 31, 2000
or the date the HAI merger is consummated. The interest on the principal under
each note will accrue at 12% per annum from the date of the note until the date
the note terminates.
Convertible Debentures: On September 28, 2000, HAI entered into an
Amendment to the Securities Purchase Agreement dated September 14, 1999 between
HAI and the holders of HAI's $27.5 million 2% convertible debentures due
September 14, 2002, which were initially issued in a private placement to
institutional investors on September 15, 1999. In accordance with the terms of
the Amendment, the terms of the debentures were amended to, among other things,
extend the maturity of the debentures to September 14, 2005, to change the
conversion price to $9.00 per share and to modify the events of default. Based
upon the revised conversion price upon the closing of this transaction, the
amended debentures will be convertible into 3,055,555 shares of HAI's common
stock. The terms of the Warrants to purchase 202,802 shares of HAI's common
stock issued to the purchasers of the debentures were also amended to reduce the
exercise price to $3.01 and to extend the exercise period of the warrants for an
additional year, or until September 13, 2005. In addition, as part of this
transaction, HAI and the holders of the debentures intend to enter into an
Amended and Restated Registration Rights Agreement.
103
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
The Amendment to the Securities Purchase Agreement provides that, among
other things, the amendments to the debentures, warrants and the registration
rights agreement will take effect on or before the fifth business day after
HAI's shareholders have approved the HAI merger. The holders of the debentures
have agreed to conditionally waive and suspend any and all past or current
defaults or violations arising under the debenture or the registration rights
agreement, and to forbear from enforcing any and all past or current defaults or
violations by HAI arising under the debentures or the registration rights
agreement as well as any prospective defaults or violations arising under these
agreements from September 28, 2000 through the closing date of the HAI merger.
The Amendment to the Securities Purchase Agreement provides that the waiver of
any and all defaults will be null and void if:
o HAI and HealthAxis fail to execute the Amended and Restated
Agreement and Plan of Reorganization by October 2, 2000 (The
agreement was signed on September 29, 2000.);
o a majority of HAI's shareholders do not approve the HAI merger
on or prior to March 31, 2001; or
o the HAI merger is otherwise suspended, terminated or publicly
abandoned prior to March 31, 2001.
HAI also agreed not to sell any shares of its capital stock or stock of
HealthAxis without the prior consent of holders of more than 50% of the
outstanding principal amount of the amended debentures, although it is permitted
to pledge up to 1,000,000 shares of the HealthAxis stock owned by it to secure
the repayment of certain loan aggregating $3,404,589 made or proposed to be made
to HAI by HealthAxis. HAI also agreed to refile this joint proxy
statement/prospectus on Form S-4 with the SEC on or prior to October 31, 2000
and to use its commercially reasonable best efforts to promptly respond to
comments received from the SEC and, assuming this joint proxy
statement/prospectus on Form S-4 is declared effective by the SEC, to hold a
meeting of shareholders to approve the HAI merger.
Employee Termination Agreement: On August 15, 2000, Mr. Clemens,
HealthAxis and HAI entered into a termination agreement of Mr. Clemens' current
employment contract. Pursuant to the terms of the termination agreement, Mr.
Clemens waived his right to all compensation and fringe benefits under his
employment contract. Mr. Clemens also agreed to a general release of any and all
claims against HealthAxis and HAI and to abide by non-competition and
confidentiality provisions set forth in the termination agreement. Under the
terms of Mr. Clemens' termination agreement, Mr. Clemens will receive $106,250
quarterly over five years for an aggregate payment of $2,125,000, subject to
certain limitations described below. HAI may, at its option, make the quarterly
payments due to Mr. Clemens in shares of HAI common stock based on the average
trading price of HAI common stock over a 20 day trading period immediately
before the date the payment is due, provided that, the number of shares issued
for any quarterly payment may not exceed 35,416 shares and the aggregate number
of shares paid over the five year period may not exceed 500,000 shares. Mr.
Clemens may receive all or a portion of each such quarterly payment in cash.
Once Mr. Clemens has received 500,000 shares or their cash equivalent, HAI will
have no further payment obligation to him even if the total amount received by
him is less than $2,125,000. The first quarterly payment will be payable upon
the earlier of the consummation of the HAI merger, or June 30, 2001. The
termination agreement provides Mr. Clemens with piggy-back registration rights
for any shares of HAI common stock that are issued to him pursuant to the terms
of the termination agreement. The termination agreement also provides that
HealthAxis will employ Mr. Clemens as Chairman of HealthAxis. Mr. Clemens'
employment will be at will and not pursuant to the terms of any employment
104
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Restated Consolidated Financial Statements -- (Continued)
(Dollars in thousands)
contract and his compensation will consist of $100,000 per year, benefits
generally available to HealthAxis' employees and a bonus, if any, as determined
by the HealthAxis Board of Directors. Pursuant to a separate letter agreement,
HAI has agreed to provide health insurance for Mr. Clemens and his family, use
of an office, automobile and secretarial support. It is also expected that HAI
will extend the period of exercise of Mr. Clemens' 397,198 stock options for an
additional three years through July 7, 2006. Except for the general release of
HealthAxis which is effective as of August 15, 2000, the termination agreement
becomes effective upon consummation of the HAI merger. If the HAI merger is not
consummated by June 30, 2001, all of the terms of the termination agreement,
except for the release of HealthAxis, will be void, and Mr. Clemens' amended
employment agreement would again be in effect. Upon the completion of the merger
between HAI and Healthaxis the Company expects to record a charge of $2,125,000.
Settlement with Hanover Life
Under the Amended and Restated Merger Agreements, HealthAxis may terminate the
Reorganization if HAI is not unconditionally and irrevocably released from the
guarantee agreement with Hanover Life Reassurance Company of America by
October 31, 2000. HAI was not released from this guarantee until December 12,
2000. Under the settlement agreement, HAI paid Hanover Life $4.25 million in
exchange for a release from all liability under the guarantee agreement
including a $5.6 million ceding commission liability. As of December 13,
2000, HealthAxis has determined not to exercise its option to terminate the
merger for this reason but reserves the right to do so in the future.
105
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
106
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
<TABLE>
<CAPTION>
Director or
Principal Occupation Executive Year Term
Name Age For Past Five Years Officer Since Will Expire
---- --- ------------------- ------------- -----------
<S> <C> <C> <C> <C>
Michael Ashker 47 Director; President and Chief Executive Officer of 1998 2000
HAI since August 1999 and Director, President and
Chief Executive Officer of HealthAxis since March
1998; Managing Director and Portfolio Manager of
Lynx Capital Group LLC until 1999 and Managing
Member of Lynx Venture Partners I, LLC from 1995
to 1998.
Alvin H. Clemens 62 Director; Chairman of the Board of HAI and 1989 2000
subsidiary companies since October 1989; Chairman
of HealthAxis since 1998; Chief Executive Officer
of HAI from 1989 to 1999 and President of HAI 1993
- 1996; President of -PILIC since November 1999.
Harold M. Davis 64 Director; Chairman of the Board of Realen Homes, 1989 2000
Inc. since 1968.
Francis L. Gillan III 45 Chief Financial Officer and Treasurer of HAI and 1999 N/A
PILIC since January 1999; Treasurer of PILIC and
PALHIC since 1998; Controller of PILIC and PALHIC
1996 - 1998; Director of P&C Planning and Expense
Analysis, Providian Direct Insurance 1994-1996.
Henry G. Hager 65 Director; Of Counsel in the law firm of Stradley, 1996 2000
Ronon, Stevens and Young since January 2000;
Partner in the law firm of Stradley, Ronon,
Stevens and Young from 1994 to 1999; President and
Chief Executive Officer of The Insurance
Federation of Pennsylvania since 1985; Director of
American Waterworks Company, a publicly held
company.
George W. Karr, Jr. 61 Director; Co-Chairman of Karr Barth Associates, 1996 2000
Inc. since 1998; Chief Executive Officer of Karr
Barth Associates 1984-1998.
Edward W. LeBaron 70 Director; Director of HealthAxis since January 1998 2000
2000; Director of Lynx Capital Group, LLC from
January 1997 to January 2000; Partner in the law
firm of Pillsbury Madison & Sutro from 1989 to
1997; Attorney, Political Law Group, Pillsbury
Madison & Sutro 1989-1997; Chief Executive Officer
of Pacific Casino Management 1995-1996; Director
of Tom Brown, Inc., a publicly held company.
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
Director or
Principal Occupation Executive Year Term
Name Age For Past Five Years Officer Since Will Expire
---- --- ------------------- ------------- -----------
<S> <C> <C> <C> <C>
Theophile Joseph 63 Director; Chairman of Mignatti Construction 1998 2000
Mignatti, Jr. Company since 1998; President and Chief Executive
Officer of Mignatti Ventures since 1989.
P. Glenn Moyer 64 Director; Private Practice Attorney since 1992; 1989 2000
Director, Maine National 1985-1995.
Anthony R. Verdi 51 Chief Operating Officer of HAI since December 1990 N/A
1997; Chief Financial Officer and Treasurer of
HealthAxis since November 1999; Chief Operating
Officer of PILIC and PALHIC 1997-1998; President
of PILIC since December 1998; Treasurer and Chief
Financial Officer of HAI, PILIC and PALHIC
1990-1997.
</TABLE>
During 1999, HAI's Board of Directors held nine (9) meetings. All
Directors attended at least 75% of the aggregate meetings of the Board and the
Committees on which they served.
Messrs. Michael Ashker, Francis L. Gillan III and Anthony R. Verdi are
the executive officers of HAI. Messrs. Gillan and Verdi are not directors.
108
<PAGE>
Committees of the Board of Directors
HAI's Board of Directors has standing an Executive/Compensation/
Nominating Committee and an Audit Committee.
The Executive/Compensation/Nominating Committee, on which Messrs.
Clemens, Ashker, Davis and Mignatti currently serve, is appointed to act when a
meeting of the full Board of Directors is not feasible, administers HAI's
compensation matters and nominates directors and determine replacements for
directors when membership on the Board of Directors ends prior to the expiration
of a term. The Executive/Compensation/ Nominating Committee held two (2)
meetings during 1999.
The Audit Committee is appointed to recommend the selection of HAI's
auditors, review the scope and results of audits, review the adequacy of HAI's
accounting, financial and operating systems and supervise special
investigations. The Audit Committee held two (2) meetings in 1999. The Audit
Committee is currently comprised of Messrs. Hager, Davis and Moyer. Mr. Ashker
serves as an alternate.
The Option Administration Committee was established by the Board of
Directors on July 16, 1996 and currently consists of Messrs. Clemens, LeBaron
and Verdi. Any options to be granted to Messrs. Clemens or Verdi are subject to
the approval of only Messrs. Hager, Karr and Moyer, who are outside directors of
HAI and, as such, are disinterested persons. The Option Administration Committee
did not meet during 1999.
Director Compensation
Directors who are not employees of HAI are paid a fee of $1,000 for
attendance at each meeting of the Board of Directors of HAI, with no fee being
paid for attendance at meetings of any of HAI's subsidiaries, and $500 for
attendance at each meeting of any committee of the Board. During 1999 HAI
granted options to purchase an aggregate of 20,000 shares of HAI's common stock
at the price of $7.50 per share to Directors.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act ("Section 16(a)") requires HAI's
directors, executive officers, and persons who own more than 10% of a registered
class of HAI's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and other equity
securities of HAI. Officers, directors and greater than 10% stockholders are
requires by SEC regulation to furnish HAI with copies of all Section 16(a) forms
they file.
To HAI's knowledge, based solely on a review of the copies of such
reports furnished to HAI and written representations that no other reports were
required during the fiscal year ended December 31, 1999, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
109
<PAGE>
Item 11. Executive Compensation.
Employment and Other Agreements
Effective February 19, 1997, HAI and Mr. Clemens entered into a new
employment agreement which replaced Mr. Clemens' prior employment contract dated
as of January 1, 1993. Pursuant to the agreement, HAI employed Mr. Clemens as
Chief Executive Officer for a five-year term ending December 31, 2002. Unless
otherwise terminated, the term shall automatically be extended at the end of
each year after December 31, 1997, in order that at all times, on each December
31st during the duration of the agreement, there will be an unexpired five-year
term. The employment agreement was amended on July 28, 1999 to change Mr.
Clemens' executive position to Chairman of the Board of Directors and Chairman
of the Executive/Compensation/Nominating Committee. Mr. Clemens was paid a base
salary in 1999 of $413,184. Mr. Clemens' contract entitles him to an annual cost
of living increase, and additional incentive or bonus compensation as deemed
appropriate from time to time by the board of directors of HAI. The agreement
further provided for group life, health, disability, major medical, and other
insurance coverages for Mr. Clemens and his family, and upon termination,
provides termination benefits which include the provision of health insurance
for Mr. Clemens and his spouse for life, a salary benefit of five times base
salary in the event of Mr. Clemens' death, disability, or termination without
cause, and includes certain restrictions on Mr. Clemens competition and
disclosure of confidential information, along with options to purchase 50,000
shares of HAI's common stock granted under HAI's Non-Qualified Option Plan for
Directors and the 1996 Employee Incentive Stock Option Plan. Mr. Clemens
released and assigned all rights in and to the options to purchase shares under
these two plans in a letter agreement dated September 9, 1999.
110
<PAGE>
The following three tables show information relating to the Chairman of
the Board, President and Chief Executive Officer and the most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000 during
the calendar years specified therein.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
===================================================================================================================
Long-Term
Compensation
Annual Compensation Awards
===================================================================================================================
Securities
Underlying
Options All Other
Name and Principal Salary Bonus (HAI/HealthAxis) Compensation(1)
Position Year ($) ($) (#) ($)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael Ashker, (2) 1999 120,000 50,000 5,000/200,000 (3) -
CEO and President of HAI 1998 92,308 0/991,000 (4) 80,000
and HealthAxis
-------------------------------------------------------------------------------------------------------------------
Alvin H. Clemens, (5) 1999 413,184 17,764
Chairman of the Board of 1998 413,896 0/309,000 (6) 17,714
HAI and HealthAxis 1997 417,453 305,850 18,288
-------------------------------------------------------------------------------------------------------------------
Andrew Felder, (7) 1999 120,000 0/ 75,000 (4) $10,000
Executive Vice President - 1998 64,615 0/175,000 (4) -
Strategy and Corporate
Development of HealthAxis
-------------------------------------------------------------------------------------------------------------------
Francis L. Gillan III, (8) 1999 110,000 20,000/0 (9) $3,579
CFO and Treasurer of HAI
-------------------------------------------------------------------------------------------------------------------
Anthony R. Verdi, (10) 1999 150,000 25,000/5,000 (11) 44,941
COO of HAI and 1998 151,392 10,144
CFO of HealthAxis 1997 151,335 9,295
===================================================================================================================
</TABLE>
(1) Includes for 1999, 1998 and 1997 , respectively, (a) HAI contributions to
savings plan (Mr. Clemens $4,000, $4,000 and $4,000; Mr. Gillan $3,579; Mr.
Verdi $3,461, $3,317 and $3,595 ), (b) automobile expense allowances (Mr.
Clemens $11,280, $11,280 and $11,998; and Mr. Verdi $5,700, $5,700 and
$5,700), (c) consulting fees (Mr. Ashker $80,000 and Mr. Felder $10,000)
and (d) payout of accumulated vacation (Mr. Verdi $34,615).
(2) Mr. Ashker joined HealthAxis as President and CEO on April 1, 1998 and
became President and CEO of HAI in August, 1999. In 1999, Mr. Ashker was
paid $120,000 as a salary by HealthAxis and a $50,000 bonus paid by HAI. In
1998, all of Mr. Ashker's annual compensation was paid by HealthAxis and
$80,000 of other compensation was paid by HAI.
(3) Includes options to purchase 200,000 shares of HealthAxis common stock and
an option to purchase 5,000 shares of HAI.
(4) Represents options to purchase HealthAxis common stock.
(5) Mr. Clemens received a salary during 1999 from HAI but did not receive a
salary from HealthAxis.
(6) Mr. Clemens was granted options to purchase 309,000 shares of HealthAxis
common stock, however, these grants to Mr. Clemens were terminated during
1999.
111
<PAGE>
(7) During 1999, Mr. Felder's salary of $120,000 was paid by HealthAxis. In
1998, Mr. Felder also served as a consultant to HAI and was paid $10,000.
(8) Mr. Gillan became CFO and Treasurer of HAI on January 14, 1999.
(9) Represents options to purchase shares of HAI's common stock.
(10) Mr. Verdi received his annual salary and other annual compensation from
HAI.
(11) Includes options to purchase 25,000 shares of HAI's common stock and 5,000
shares of HealthAxis common stock.
112
<PAGE>
HealthAxis Inc. and HealthAxis.com, Inc.
Aggregate Option Exercises in 1999 and Year-End Values
<TABLE>
<CAPTION>
=====================================================================================================================
Number of Value of
Shares Underlying Unexercised
Acquired Value Unexercised In-the-Money
On Exercise Realized Options Options at
Name (#) ($) At 12/31/99 12/31/99
---------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alvin H. Clemens (1)
Chairman of the Board
Exercisable (HAI) - -
Unexercisable (HAI) -
Michael Ashker
CEO and President
Exercisable (HAI) - 5,000 115,625
Unexercisable (HAI) - - -
Exercisable (HealthAxis) - 1,057,668 30,138,117
Unexercisable (HealthAxis) - 133,332 3,085,538
Andrew Felder
Executive VP-Strategy and Corporate
Development of HealthAxis
Exercisable (HealthAxis) - - 140,626 3,877,963
Unexercisable (HealthAxis) 109,374 2,824,287
Francis L. Gillan III
CFO and Treasurer
Exercisable (HAI) 17,000 331,469 7,500 183,875
Unexercisable (HAI) 23,000 552,750
Anthony R. Verdi
COO
Exercisable (HAI) 22,000 578,906 40,000 992,500
Unexercisable (HAI) - - 35,000 841,875
Exercisable (HealthAxis) - - - -
Unexercisable (HealthAxis) - - 5,000 78,125
=====================================================================================================================
</TABLE>
(1) As of December 31, 1999, the above table excludes non-compensatory stock
options to purchase 1,253,376 shares of common stock at $0.90 issued to Mr.
Clemens in 1989 of which Mr. Clemens disclaims beneficial ownership of
967,040 shares owned by a partnership of which Mr. Clemens is a partner;
excludes an option to purchase 397,198 shares of Series A cumulative
preferred stock at $3.64 issued on April 1, 1993 in connection with the
purchase by Mr. Clemens of other shares of preferred stock at such time. By
letter agreement dated September 9, 1999, the option to purchase shares of
Series A cumulative preferred stock was amended to eliminate the right to
convert these options into any class of securities of HAI other than HAI's
common stock.
113
<PAGE>
HealthAxis Inc. and HealthAxis.com, Inc.
Option Grants in 1999
<TABLE>
<CAPTION>
==================================================================================================================================
Potential Realizable Value
At Assumed Annual Rates
Number of % of Total Of Stock Appreciation for
Securities Options Exercise Option Term
Options Granted to Price Expiation
Name Granted Employees $/Share Date 5% 10%
----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alvin H. Clemens
Chairman of HAI and - - - - - -
HealthAxis
Michael Ashker 5,000 (1) .87% $7.50 3/4/09 $24,093 $60,576
CEO and President of HAI 200,000 (2) 9.36% $7.48 11/22/09 $563,514 $1,496,650
and HealthAxis
Andrew Felder
Executive VP-Strategy & 75,000 (2) 5.41% $7.85 11/22/09 $184,061 $585,758
Corporate Development
Of HealthAxis
Francis L. Gillan III
CFO and Treasurer of HAI 20,000 (1) 3.49% $7.50 3/4/07 $61,065 $142,308
Anthony R. Verdi 25,000 (1) 4.36% $7.50 3/4/07 $76,331 $177,885
COO of HAI and 5,000 (2) .36%
CFO of HealthAxis
==================================================================================================================================
</TABLE>
(1) Options granted to purchase HAI's common stock.
(2) Options granted under the HealthAxis 1998 Stock Plan to purchase HealthAxis
common stock which are convertible into 1.127 shares of HAI's common stock.
114
<PAGE>
The following individuals were not included in the above charts because
they did not receive compensation in excess of $100,000 from HealthAxis or HAI
during 1999: Elaine del Rossi joined HealthAxis as Senior Vice President - Sales
and Marketing on November 15, 1999. In 1999, Ms. del Rossi was granted options
to purchase 20,000 shares of HealthAxis common stock at $12.00 per share of
which none have vested. Michael G. Hankinson joined HealthAxis as Vice President
and General Counsel in April, 1999. In 1999, Mr. Hankinson was granted options
to purchase 50,000 shares of HealthAxis common stock none of which have vested
at $5.77 per share and 10,000 shares of HealthAxis common stock, of which 3,334
have vested, at $12.00 per share. Dennis B. Maloney became HealthAxis' Chief
Operating Officer in January, 2000. In 1999, Mr. Maloney served as President and
Chief Executive Officer of Insurdata Incorporated and was paid $240,000 in
salary and $17,048 in additional compensation. HealthAxis expects that all three
individuals will be paid compensation in excess of $100,000 during fiscal 2000.
115
<PAGE>
Stock Option Plans
HAI maintains stock option plans for executives, officers, employees or
directors of HAI and its subsidiaries and affiliates. HealthAxis also maintains
a stock option plan that includes grants to executives, directors, employees and
consultants.
The 1993 Incentive Stock Option Plan for Employees was discontinued,
and effective July 16, 1996, HAI's Board of Directors adopted the 1996 Employee
Incentive Stock Option Plan ("1996 Employee Plan"), which was approved by HAI's
shareholders at the 1997 Annual Meeting of Shareholders. The 1996 Employee Plan
was amended in 1997 to increase the number of shares issuable thereunder from
950,000 shares to 1,250,000 shares of HAI's common voting stock to key employees
of HAI and its subsidiaries and affiliates, exercisable for up to five years
from the effective date of the grant at a price not less than the fair market
value of the shares on the effective date of grant. All options granted under
the 1996 Employee Plan have been granted at 100% of the fair market value of the
shares on the effective date of the grant, with the exception of an option
granted Mr. Clemens, which was granted at 110% of the fair market value on the
date of the grant. During 1999, a total of 125,000 options were exercised under
the 1993 Employee Plan and a total of 265,400 options were exercised under the
1996 Employee Plan. On March 13, 1998 the employees owning options under the
1996 Employee Plan were given the right to reduce the grant by half in
consideration of the reduction of the exercise price by one half. Of the total
grants under the 1996 Employee Plan for 1998, 115,000 were as a result of this
election.
The Non-Qualified Stock Option Plan for Directors ("Directors Plan")
was amended and restated effective as of July 16, 1996 in order to increase the
number of shares authorized for the issuance thereunder by 356,500 shares and to
incorporate prior amendments. Options granted under the Directors' Plan are
exercisable for up to ten years from the date of grant at a price of not less
than the fair market value of the shares on the date of the grant. All options
granted under the Director's Plan have been granted at 100% of the fair market
value of the shares on the date of grant. During 1999, HAI granted options to
purchase an aggregate of 20,000 shares of HAI's common stock at a price of $7.50
per share under the Directors Plan. During 1999, a total of 135,000 options were
exercised under the Directors' Plan.
The Stock Option Plan for Executives ("Executive Plan") was amended and
restated effective December 11, 1996 and authorizes the granting of options to
purchase up to 3,850,000 shares of HAI's Series A Cumulative Convertible
Preferred Stock ("Series A Preferred Stock"), which are exercisable for up to
ten years from the effective date of grant at a price of not less than the fair
market value of the shares on the date of grant. No options were granted under
the Executive Plan during 1999.
116
<PAGE>
In June 1998, HealthAxis adopted the HealthAxis.com Inc., 1998 Stock
Option Plan (the "1998 Stock Option Plan") which provides for the award of
options and stock purchase rights (collectively "Awards") to purchase HealthAxis
common stock. During 1998, 2,900,000 shares were authorized to be granted under
the 1998 Stock Option Plan of which 1,956,500 shares have been granted as of
December 31, 1998. During 1998 options to purchase 991,000, 309,000 and 50,000
shares were granted to Mr. Ashker, Mr. Clemens and Mr. Beausang, a former
director of HealthAxis, respectively, and are immediately exercisable at a price
of $1.77 per share having a term of 10 years. Mr. Clemens' option to purchase
HealthAxis shares has since been terminated by mutual agreement. Options to
purchase 460,000 shares of HealthAxis common stock awarded at $1.77 per share
were awarded to officers and employees during 1998. These options have a term of
five years and vest at a rate of 25% of the initial award on the grant date, 25%
of the initial award on February 1, 1999 and the balance in quarterly
installments thereafter. Options to purchase an additional 96,500 shares of
HealthAxis common stock were granted to officers and employees at an exercise
price of $4.00 per share. Such options have a term of five years and vest at a
rate of 25% of the initial award on the grant date, 25% of the initial award on
November 20, 1999 and the balance in quarterly installments thereafter.
During 1999, HealthAxis amended the Stock Option Plan to increase the
total shares to 8,600,000. Such options have a term of ten years and vest at a
rate of 20-33% of the initial award on the grant date, with the balance vesting
quarterly or annually over 2 to 5 years. During 1999 HealthAxis granted
1,904,621 options under the 1998 Stock Options Plan exercisable at prices
ranging from $4.00 to $12.00 vesting over periods ranging from 2 to 5 years. Of
the options granted, options to purchase 200,000, 75,000, 60,000 and 20,000
shares were granted to Mr. Ashker, Mr. Felder, Mr. Hankinson, and Ms. del Rossi,
respectively. Mr. Felder, Mr. Ashker, Ms. del Rossi and Mr. Hankinson are
executive officers of HealthAxis.
During the first quarter of 2000, the HAI board of directors adopted
the 2000 Stock Option Plan, subject to approval by the shareholders which is
required by NASDAQ and for the plan to qualify as incentive stock options and
for the 2000 Stock Option Plan to satisfy one of the conditions of Section
162(m) of the Internal Revenue Code applicable to performance-based
compensation. Employees, officers and directors of HAI, as well as certain
consultants of HAI, are eligible to receive options under the 2000 Stock Option
Plan. The purpose of the 2000 Stock Option Plan is to provide additional
incentive to these individuals by encouraging them to invest in HAI's common
stock and thereby acquire a further proprietary interest in HAI and an increased
personal interest in HAI's continued success and progress. HAI is currently
evaluating the possibility of merging HAI's existing director and employee stock
option plans into the 2000 Stock Option Plan. To date, no grants have been
awarded under 2000 Stock Option Plan.
As of December 31, 1999 there were options to purchase 3,076,221 of
HealthAxis common stock outstanding at an average exercise price of $5.14 under
the 1998 Stock Option Plan.
HAI's Stock Option Plans are administered by the Option Administration
Committee. The respective administrators of the Stock Option Plans are
authorized to select optionees, determine the number of shares for which options
are granted to each optionee, the exercise price of the options, and the other
terms and conditions of the options.
117
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 20, 2000, the amount and
percentage of HAI's outstanding common stock beneficially owned by (i) each
person who is known by HAI to be the beneficial owner of more than 5% of HAI's
outstanding common stock; (ii) each director; (iii) each person who was an
executive officer during 1999; and (iv) all officers and directors of HAI as a
group.
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------
No. of Shares Percent
Name of Beneficially of
Beneficial Owner Owned(1) Class(2)
---------------- -------------- -------------
<S> <C> <C>
Alvin H. Clemens 2,499,500(3)(4) 18.2%
907 Exeter Crest
Villanova, PA 19085
Michael Ashker 394,776(5) 2.9%
c/o HealthAxis.com, Inc.
2500 DeKalb Pike
Norristown, PA 19404
Harold M. Davis 175,000(7) 1.3%
c/o Realen Properties
1000 Chesterbrook Blvd.; Suite 100
Berwyn, PA 19312
Francis L. Gillan III 7,500(8) (9)
c/o HealthAxis, Inc.
2500 DeKalb Pike
Norristown, PA 19404
Henry G. Hager 65,000(7) (9)
7 Jorrocks Lane
Malvern, PA 19355
George W. Karr, Jr. 77,000(7) (9)
Karr Barth Associates, Inc.
40 Monument Road
Bala Cynwyd, PA 19004-1797
Edward W. LeBaron, Jr. 43,571(6) (9)
Lynx Private Equity Partners, LLC
2601 Fair Oaks Boulevard; Suite 150
Sacramento, CA 95864
Theophile J. Mignatti, Jr. 35,000(3)(6)(10) (9)
Mignatti Companies
2310 Terwood Drive; P. O. Box 249
Huntingdon Valley, PA 19006
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
P. Glenn Moyer 51,100(11) (9)
P. O. Box 438
9 Main Street
Souderton, PA 18964
Anthony R. Verdi 89,974(12) (9)
c/o HealthAxis, Inc.
2500 DeKalb Pike
Norristown, PA 19404
Taunus Corporation 760,803(13) 5.9%
31 West 52nd Street
New York, NY 10019
ALL DIRECTORS AND OFFICERS
AS A GROUP (10 persons,
common stock) 3,438,421(14) 24.0%
</TABLE>
(1) Information furnished by directors and officers.
(2) Calculated as a percentage of outstanding shares plus each individual's
options to purchase common shares (or all directors and officers as a
group).
(3) Mr. Clemens' daughter is married to Mr. Mignatti's son.
(4) Includes options granted to Mr. Clemens to purchase an additional 253,376
shares of HAI's common stock at a price of $.91 per share granted pursuant
to the Amended and Restated Stock Option Agreement dated as of February 27,
1989 and options to purchase 397,198 shares of common stock at an option
price of $3.64 per share granted to Mr. Clemens pursuant to a Stock Option
Agreement dated April 1, 1993 which was amended effective September 9,
1999. Mr. Clemens disclaims beneficial ownership of 616,000 shares of HAI's
common stock given by him to the Mark Twain Trust in 1991 and 967,040
options to purchase additional shares of HAI's common stock owned by a
partnership in which Mr. Clemens is a partner.
(5) Includes 89,776 shares of common stock owned by Mr. Ashker, 5,000 shares of
common stock subject to options granted at an exercise price of $7.50 under
the HAI Stock Option Plan of Directors and 300,000 shares of common stock
subject to warrants granted at an exercise price of $4.516 which were
assigned to Mr. Ashker from Lynx Capital Group, LLC, which are currently
exercisable.
(6) Includes an option to purchase 5,000 shares of HAI's common stock.
(7) Includes options to purchase 55,000 shares of HAI's common stock.
(8) Includes an option to purchase 7,500 shares of HAI's common stock.
(9) Less than 1%.
(10) Includes 20,000 shares held in wife's name (deceased).
119
<PAGE>
(11) Includes options to purchase 50,000 shares of HAI's common stock.
(12) Includes options to purchase 40,000 shares of HAI's common stock.
(13) Information with regard to Taunus Corporation has been derived from a
Schedule 13G filed by Taunus Corporation and DB Alex.Brown LLC with the
Securities and Exchange Commission on February 14, 2000. Taunus Corp.
reported sole voting power with respect to 708,003 shares of HAI common
stock and sole dispositive power over 760,803 shares of HAI common stock.
DB Alex.Brown LLC reported sole voting and dispositive power with respect
to 678,500 shares of HAI common stock, which are included in the 760,803
shares reported by Taunus Corp.
(14) Includes stock and options of all officers and directors to purchase an
aggregate of 97,474 shares and 1,164,747 shares, respectively, and stock
and options granted to Mr. Clemens as described in Note 4.
Item 13. Certain Relationships and Related Transactions.
Notes Receivable - Officers and Directors
HAI had loans receivable from related parties with: Mr. Alvin Clemens,
Chairman of the Board, Chief Executive Officer and a shareholder of HAI, which
was collateralized by 128,478 shares of HAI's common stock ("Shares") owned by
Mr. Clemens; Mr. John Gillin, a former Director and shareholder of HAI, which
was collateralized by 10,000 shares and a stock option grant to purchase 30,000
shares, both owned by Mr. Gillin. Mr. Clemens' loan was paid in full during
September 29, 1999. Mr. Gillin's loan was repaid in full during January 1999.
The following table details the loan receivable at December 31, 1999.
Clemens Gillin
------- ------
Amounts due at December 31, 1999
Loan principal $ - $ -
Accrued interest $ - $ -
Highest outstanding balance $681,443 $165,723
1999 Interest income $ 23,851 $ -
Interest rate 5.33% 8.50%
120
<PAGE>
Business transactions with Related Parties
Pursuant to agreements effective as of September 9, 1999 between HAI
and Mr. Clemens, Mr. Clemens:
o assigned his rights to acquire up to an additional 3,300,000
shares pursuant to the March 10, 1997 agreement to HAI,
o released and assigned all of his right in and to options to
purchase 152,802 shares of HAI's preferred stock to HAI, and
o amended an option to purchase the remaining 397,198 shares of HAI
preferred stock to eliminate the right to exercise all of the
options to purchase any HAI preferred stock and to retain only the
right to receive HAI common stock upon the exercise of the
options.
Michael Ashker, a director and the President and Chief Executive
Officer of HealthAxis and HAI, beneficially owns 394,776 shares of HAI's common
stock (including options granted pursuant to HAI's stock option plans and
warrants and shares of HAI common stock, as described below). Mr. Ashker has
been granted options to purchase 991,000 shares of the HealthAxis common stock
at an exercise price of $1.77, all of which are currently exercisable. Mr.
Ashker was also awarded options to purchase 145,000 shares of HealthAxis common
stock at an exercise price of $5.77, 55,000 shares of HealthAxis common stock at
an exercise price of $12.00 and 100,000 shares of HealthAxis' common stock at an
exercise price of $15.00 that are exercisable over a two year period commencing
in April, 1999, November 1999, and February, 2000, respectively.
As of December 31, 1999, Mr. Ashker resigned as sole manager of Lynx
Capital Group, LLC which acts as an investment advisor to and general partner of
Lynx Tech Fund, LP, an investment limited partnership. At the same time, Lynx
Capital Group, LLC transferred the 400,000 currently exercisable warrants to
purchase HAI common stock granted pursuant to a consulting agreement between HAI
and Lynx Capital Group, LLC to Mr. Ashker, Deidre Holt, George Stephenson,
Andrew Felder and Kenneth Brown. Lynx Capital Group, LLC transferred warrants to
purchase 300,000 shares of HAI common stock to Mr. Ashker, warrants to purchase
25,000 shares of HAI common stock to Ms. Holt, warrants to purchase 30,000
shares of HAI common stock to Mr. Felder, warrants to purchase 15,000 shares of
HAI common stock to Mr. Stephenson and warrants to purchase 5,000 shares of HAI
common stock to Mr. Brown. Mr. Brown is currently the sole manager of Lynx
Capital Group, LLC. Mr. Brown is also a registered representative of Van Kasper
& Company, a broker-dealer and has discretion over brokerage accounts that are
invested in HAI common stock. Mr. Ashker was formerly a registered
representative of Van Kasper & Company. Edward W. LeBaron, Jr, who is currently
serving as a director of HAI and HealthAxis, also resigned as a member of Lynx
Capital Group, LLC as of December 31, 1999. In a Form 4, filed on December 9,
1999, Mr. LeBaron reported that he beneficially owned 33,571 shares of HAI
common stock. In a Schedule 13D dated February 14, 2000, Lynx Capital Group, LLC
reported shared voting and dispositive power with Lynx Tech Fund LP over 323,300
shares. Mr. Brown reported sole voting and dispositive power over 5,000 shares
of HAI common stock and shared voting and dispositive power over 323,300 shares
of HAI common stock. Additionally, Van Kasper & Company reported shared voting
and dispositive power over 175,000 shares of HAI common stock.
As of November 13, 1998, Lynx Private Equity Partners I, LLC purchased
250,000 shares of HAI common stock for an aggregate purchase price of $875,000.
Mr. LeBaron was the sole manager of Lynx Private Equity Partners I, LLC.
Pursuant to the limited liability company agreement of Lynx Private Equity
Partner I, LLC, Mr. Ashker had the authority to vote the shares of HAI held by
Lynx Private Equity Partners I, LLC. On November 11, 1999, Lynx Private Equity
Partners I, LLC dissolved and transferred its shares of HAI common stock to Mr.
Ashker, Mr. LeBaron and Lynx Tech Fund, LP. These shares transferred by Lynx
Private Equity Partners I, LLC are included in the beneficial ownership
discussed above.
121
<PAGE>
In addition, Messrs. Ashker and Clemens, by virtue of their positions
as trustees of certain voting trusts, have shared voting power with the other
trustees over 25.4% of HealthAxis' outstanding capital stock at March 31, 2000.
Michael F. Beausang, Jr., Esquire, HAI's Secretary and a former
Director of HealthAxis and HAI, is a partner in the law firm of Butera,
Beausang, Cohen & Brennan. This law firm performs legal services for HealthAxis
and HAI and in 1999, HAI paid Butera Beausang Cohen & Brennan $497,308.
On August 16, 1999, HAI entered into an agreement which provided for
AHC Acquisition, Inc., a company solely owned by Alvin H. Clemens, to acquire
PILIC for an aggregate payment by HAI of $14.7 million to PILIC. This
transaction was completed on November 30, 1999. In accordance with the terms of
the stock purchase agreement, HAI:
o purchased the Company's headquarters located at 2500 DeKalb Pike from PILIC
for its fair market value of $4.7 million;
o agreed to exercise its option to purchase 545,916 shares of HealthAxis
Series A preferred stock from PILIC for $2.8 million (HAI made the $2.8
million payment for the shares of HealthAxis Series A preferred stock
pursuant to the option agreement between HAI and PILIC and the payment
equates to a $4.71 price per share. The $4.71 price represented the price
per share originally paid by PILIC for these shares, plus interest at the
rate of 8% per annum thereon from the date of acquisition of these shares by
PILIC through November 30, 1999, the date of exercise).
o made a $7.2 million capital contribution from HAI to PILIC in order to
eliminate a statutory deficiency, to enable PILIC to maintain adequate
capital to meet its liabilities including pay-out obligations under existing
insurance policies and to provide PILIC with sufficient capital and surplus
so that the Insurance Department of the Commonwealth of Pennsylvania would
grant the required approval of the sale of PILIC; and
o transferred 100,000 shares of HealthAxis Series A preferred stock and the
associated registration rights previously granted to PILIC to AHC
Acquisition, Inc.
HAI recognized a $10.3 million loss on the sale of PILIC which included
a write-off of assets relating to the amount of $2.7 million together with HAI's
November 30, 1999 capital contribution to PILIC in the amount of $7.2 million
and the value of the HealthAxis Series A preferred stock transferred to AHC
Acquisition, Inc. in the amount of $0.4 million. The terms of the sale of PILIC
to AHC Acquisition, Inc. were approved by the Insurance Department of the
Commonwealth of Pennsylvania, the regulatory agency that oversees insurance
company operations in Pennsylvania. The sale of PILIC was also approved by the
disinterested members of the board of directors of HAI with Mr. Clemens
abstaining from voting on this matter.
122
<PAGE>
PART IV
<TABLE>
<CAPTION>
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.
<S> <C>
(1) List of Financial Statements: Page
----
Report of Independent Certified Public Accountants 71
Consolidated Financial Statements:
Consolidated Balance Sheets -
December 31, 1999 and 1998 72
Consolidated Statements of Operations -
Years ended December 31, 1999, 1998 and 1997 73
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1999, 1998 and 1997 74
Consolidated Statements of Cash Flows -
Years ended December 31, 1999, 1998 and 1997 75 to 76
Notes to Consolidated Financial Statements 77 to 119
(3) Exhibits:
The Exhibits listed on the accompanying Exhibit Index immediately following the
Signature page are filed as part of, or incorporated by reference
into, this Report.
(b) Reports on Form 8-K:
(1) December 9, 1999 - Item 2 - Acquisition or Disposition of Assets Item 7 -
Financial Statement and Exhibits
(2) January 21, 2000 - Item 2 - Acquisition or Disposition of Assets Item 7 -
Financial Statements and Exhibits
(3) February 2, 2000 - Item 5 - Other Events
Item 7 - Financial Statements and Exhibits
(c) Reports on Form 8-K/A:
(1) Amended and supplemented information filed on February 17, 2000 regarding the
original Form 8-K filed January 21, 2000.
</TABLE>
123
<PAGE>
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: December 15, 2000 By: /s/ Michael Ashker
------------------------------------------
Michael Ashker
President and Chief Executive Officer
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael Ashker Chief Executive Officer and President and December 15, 2000
---------------------------------------- Director (principal executive officer)
Michael Ashker
/s/ Anthony R. Verdi Chief Operating Officer, Chief Financial Officer December 15, 2000
---------------------------------------- and Treasurer (principal financial and
Anthony R. Verdi accounting officer)
---------------------------------------- Chairman of the Board of Directors
Alvin H. Clemens
---------------------------------------- Director
Harold M. Davis
---------------------------------------- Director
Henry G. Hager
---------------------------------------- Director
George W. Karr, Jr.
---------------------------------------- Director
Edward W. LeBaron, Jr.
---------------------------------------- Director
Theophile J. Mignatti
---------------------------------------- Director
P. Glenn Moyer
</TABLE>
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------- ----------------------- -------------
<S> <C> <C>
(2)(A) 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)(B) 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)(C) 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)(D) 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)(E) Agreement and Plan of Reorganization dated January 26, 2000 among the
Registrant, HealthAxis and HealthAxis Acquisition Corp. (included in the
Joint Proxy Statement/Prospectus as Appendix A). Incorporated by reference
to Exhibit 2.1 to Registrant's Form S-4 filed February 11, 2000.
(2)(F) Amendment No. 1 to Agreement and Plan of Reorganization dated March 27,
2000 among the Registrant, HealthAxis and HealthAxis Acquisition Corp. **
(2)(G) Agreement and Plan of Merger dated January 26, 2000 among the Registrant,
HealthAxis and HealthAxis Acquisition Corp. (included in the Joint Proxy
Statement/Prospectus as Appendix B). Incorporated by reference to Exhibit
2.2 to Registrant's Form S-4 filed February 11, 2000. **
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------- ----------------------- -------------
<S> <C> <C>
(3)(A) Articles of Incorporation of the Registrant, as amended, incorporated by
reference to Exhibit (3)(A) to Registrant's Form 10 Registration Statement
No. 0-13591, as amended. Amendment to Registrants Articles of Incorporation
dated December 5, 1989, incorporated by reference to Exhibit (C)(2) to
Registrant's Form 8-K dated December 29, 1989.
(3)(B) Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 to
Registrant's Form S-4 filed February 11, 2000.
(4)(A) Form of Registrant's Common Stock Certificate. **
(4)(B) Amended and Restated Statement With Respect To Shares - Domestic Business
Corporation For Provident American Corporation. Series A Cumulative
Convertible Preferred Stock, $1.00 Par Value. Incorporated by reference to
Exhibit (4)(A) to Registrant's Quarterly Report on Form 10-Q for the
Quarterly period ended September 30, 1993.
(4)(C) Amended and Restated Statement With Respect To Shares - Domestic Business
Corporation For Provident American Corporation. Series B Cumulative
Convertible Preferred Stock, $1.00 Par Value. Incorporated by reference to
Exhibit (4)(B) to Registrant's Quarterly Report on Form 10-Q for the
Quarterly period ended September 30, 1993.
(10)(A) * Employment Contract dated April 1, 1991 among Registrant, Provident
Indemnity Life Insurance Company, Maine National Life Insurance Company and
Alvin H. Clemens. Incorporated by reference to Exhibit (10)(A) to
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1993.
(10)(B) * 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)(C) 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------- ----------------------- -------------
<S> <C> <C>
(10)(D) * 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)(E) * 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)(F) * 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)(G) * 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)(H) * 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)(I) * 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.
(10)(J) * 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)(K) Amendment to Amended and Restated Option Agreement, dated as of September
9, 1999. **
(10)(L) * 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------- ----------------------- -------------
<S> <C> <C>
(10)(M) * 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)(N) * Employment Contract, dated February 19, 1997 among Registrant, Provident
Indemnity Life Insurance Company, Provident American Life & Health
Insurance Company and Alvin H. Clemens. Incorporated by reference to
Exhibit (10)(HH) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
(10)(O) Promissory Note; Pledge and Security Agreement, dated April 8, 1996
between Registrant and Alvin H. Clemens. Incorporated by reference to
Exhibit (10)(II) to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
(10)(P) * 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)(Q) * 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)(R) * 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)(S) Promissory Note with Amendments; Pledge and Security Agreement; and Escrow
Agreement, dated April 2, 1996 between Registrant and John T. Gillin.
Incorporated by reference to Exhibit (10)(MM) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------- ----------------------- -------------
<S> <C> <C>
(10)(T) * 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)(U) Amendment to Promissory Note, dated April 8, 1997 between Registrant and
Alvin H. Clemens. Incorporated by reference to Exhibit (10)(GG) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(10)(V) Promissory Note, dated July 28, 1997 between Registrant and Alvin H.
Clemens. Incorporated by reference to Exhibit (10)(HH) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
(10)(W) Second Amendment to Promissory Note, dated February 1, 1997; Third
Amendment to Promissory Note, dated April 30, 1997, between Registrant and
John T. Gillin. Incorporated by reference to Exhibit (10)(II) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(10)(X) Services Agreement with Amendment to Services Agreement, dated February 1,
1998 between Provident Indemnity Life Insurance Company, Provident American
Life and Health Insurance Company, HealthPlan Services Corporation and
HealthPlan Services, Inc. Incorporated by reference to Exhibit (10)(JJ) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(10)(Y) Inducement Agreement, dated October 16, 1997 between Registrant and
HealthPlan Services, Inc. Incorporated by reference to Exhibit (10)(KK) to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(10)(Z) The Provident and HealthPlan Services E-Commerce Agreement, dated May 29,
1998 and effective February 1, 1998 between Registrant, Insurion, Inc.,
Provident Health Services, Inc. and HealthPlan Services, Inc. Incorporated
by reference to Exhibit (10)(LL) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------- ----------------------- -------------
<S> <C> <C>
(10)(AA) Amended and Restated Interactive Marketing Agreement, dated February 1,
1998 between Provident Health Services, Inc. and American Online, Inc.
Incorporated by reference to Exhibit 1 to Registrant's Form 8-K/A dated
June 8, 1998.
(10)(BB) MGU Stock Purchase Agreement, dated February 27, 1998 between Montgomery
Management Corporation and HealthPlan Services, Inc. Incorporated by
reference to Exhibit (10)(NN) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
(10)(CC) 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)(DD) Interactive Marketing Agreement between Registrant's wholly owned
subsidiary, Provident Health Services, Inc. and American Online, Inc.,
dated March 20, 1998. Incorporated by reference to Exhibit 1 to
Registrant's Form 8-K/A dated June 12, 1998.
(10)(EE) 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)(FF) Agreement dated September 15, 1998 between Provident Indemnity Life
Insurance Company and HealthAxis related to the Series A Convertible
Preferred Shares. Incorporated by reference to Exhibit 10.5 to Registrant's
Form 8-K dated December 23, 1998.
(10)(GG) Certificate of Designation related to the Series A Convertible Preferred
Stock of HealthAxis. **
(10)(HH) Certificate of Designation related to the Series B Convertible Preferred
Stock of HealthAxis. **
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
------- ----------------------- -------------
<S> <C> <C>
(10)(II) Certificate of Designation related to the Series C Convertible Preferred
Stock of HealthAxis. **
(10)(JJ) Certificate of Designation related to the Series D Convertible Preferred
Stock of HealthAxis. **
(10)(KK) Stock Purchase Agreement, dated December 29, 1998, between Central Reserve
Life Corporation, Registrant and Registrant's wholly owned subsidiary,
Provident Indemnity Life Insurance Company. Incorporated by reference to
Exhibit 99.1 to Registrant's Form 8-K dated January 15, 1999.
(10)(LL) Guarantee Agreement, dated December 29, 1998, by Registrant in favor of
RCH as agent on behalf of itself and CRCL. Incorporated by reference to
Exhibit 99.2 to Registrant's Form 8-K dated January 15, 1999.
(10)(MM) Stock Pledge Agreement dated, December 29, 1998, by Registrant in favor of
RCH as agent for itself and CRLC. Incorporated by reference to Exhibit
99.3 to Registrant's Form 8-K dated January 15, 1999.
(10)(NN) Reinsurance Agreement among PILIC, RCH and CRLC (effective date December
31, 1998). Incorporated by reference to Exhibit 99.4 to Registrant's Form
8-K dated January 15, 1999.
(10)(OO) Assignment and Assumption of Contracts dated December 31, 1998 among CRLC,
Registrant, PILIC and Provident Health Services, Inc. Incorporated by
reference to Exhibit 99.6 to Registrant's Form 8-K dated January 15, 1999.
(10)(PP) Individual Medical Products Carrier Partner Agreement, dated December 29,
1998, among and between HealthAxis.com, Inc., PALHIC and CRLC. Incorporated
by reference to Exhibit 99.7 to Registrant's Form 8-K dated January 15,
1999.
(10)(QQ) 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.
</TABLE>
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<CAPTION>
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Number Description of Exhibits Numbered Page
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(10)(RR) Promotion Agreement dated June 27, 1998 between Insurion, Inc. and CNet,
Inc. (This document has been redacted to remove certain portions for which
confidential treatment has been requested by the Company pursuant to Rule
24b-2) and the First Amendment thereto dated November 13, 1998.
Incorporated by reference to Exhibit 10.3 to Registrant's Form 8-K/A dated
January 19, 1999.
(10)(SS) Amended and Restated Agreement dated November 13, 1998 between Lycos, Inc.
and Insurion, Inc. (This document has been redacted to remove certain
portions for which confidential treatment has been requested by the
Registrant pursuant to Rule 24b-2). Incorporated by reference to Exhibit
10.4 to Registrant's Form 8-K/A dated January 19, 1999.
(10)(TT) Revolving Promissory Note between Registrant and PILIC dated July 1, 1998.
Incorporated by reference to Exhibit (10)(CCC) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
(10)(UU) Consulting Agreement between Registrant and Robinson, Lerer & Montgomery,
LLC dated January 25, 1999. Incorporated by reference to Exhibit (10)(DDD)
to Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
(10)(VV) Second Amendment to Promissory Note dated as of the 24th day of March 1999,
by and between Alvin H. Clemens and Registrant. Incorporated by reference
to Exhibit (10)(EEE) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
(10)(WW) Second Amendment to Pledge and Security Agreement dated as of the 24th day
of March 1999, by and between Alvin H. Clemens and Registrant.
Incorporated by reference to Exhibit (10)(FFF) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
(10)(XX) Stockholders Agreement dated November 13, 1998. Incorporated by reference
to Exhibit 10.2 to Registrant's Form 8-K filed April 30, 1999.
</TABLE>
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<CAPTION>
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Number Description of Exhibits Numbered Page
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(10)(YY) 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)(ZZ) Second Amendment to the Promotion Agreement between Insurion, Inc. and
Cnet, Inc. (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 10.2 to Registrant's
Form 8-K/A filed May 14, 1999.
(10)(AAA) Settlement Agreement among the Registrant, Provident Indemnity Life
Insurance Company, individually and as Assignee of Provident American Life
& Health Insurance Company, HealthAxis.com, Inc., HealthPlan Services,
Inc., HealthPlan Services Corporation and Montgomery Management
Corporation, effective as of March 31, 1999. Incorporated by reference in
Exhibits to Registrant's Form 8-K filed June 22, 1999.
(10)(BBB) Registration Rights Agreement between the Registrant and the Purchasers
dated September 14, 1999. Incorporated by reference to Exhibit 2 to
Registrant's Form 8-K filed September 22, 1999.
(10)(CCC) Form of Debenture issued by the Registrant to the Purchasers dated
September 14, 1999. Incorporated by reference to Exhibit 3 to Registrant's
Form 8-K filed September 22, 1999.
(10)(DDD) Form of Warrant issued by the Registrant to the Purchasers dated September
14, 1999. Incorporated by reference to Exhibit 4 to Registrant's Form 8-K
filed September 22, 1999.
(10)(EEE) 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.
</TABLE>
133
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<CAPTION>
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Number Description of Exhibits Numbered Page
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(10)(FFF) 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)(GGG) Intentionally omitted.
(10)(HHH) Shareholders' Agreement between Registrant, HealthAxis.com, Inc. UICI and
Michael Ashker dated January 7, 2000. Incorporated by reference to Exhibit
99.4 to Registrant's Form 8-K filed December 8, 1999.
(10)(III) Amendment No. 1 to Shareholders' Agreement between Registrant, UICI,
HealthAxis and Michael Ashker dated February 11, 2000. **
(10)(JJJ) Voting Trust Agreement between UICI and Messrs. Ashker, Clemens, LeBaron
and Hager dated January 7, 2000. Incorporated by reference to Exhibit 99.5
to Registrant's Form 8-K filed December 8, 1999.
(10)(KKK) 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)(LLL) Registration Rights Agreement between HealthAxis and UICI dated January 7,
1999. Incorporated by reference to Exhibit 99.10 to Registrant's Form 8-K
filed December 8, 1999.
(10)(MMM) 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)(NNN) First Amendment to Employment Contract dated July 28, 1999 among the
Registrant, Provident Indemnity Life Insurance Company and Alvin H.
Clemens. **
</TABLE>
134
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<CAPTION>
Exhibit Sequentially
Number Description of Exhibits Numbered Page
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(10)(OOO) Voting Trust Agreement between HAI, HealthAxis, UICI, Michael Ashker,
Dennis Maloney and Edward LeBaron, Jr., dated February 11, 2000.
Incorporated by reference to Exhibit 10.1 to Registrant's Form S-4 filed
February 11, 2000.
(10)(PPP) Registrant's 2000 Stock Option Plan. **
(10)(QQQ) 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. **
(10)(RRR) License and Services Agreement between Insurdata and UICI Administrators,
Inc. dated January 1, 1999. **
(10)(SSS) Insurdata Incorporated 1999 Stock Option Plan. **
(10)(TTT) Letter Lease Agreement dated May 28, 1997 between UICI and Insurdata. **
(10)(UUU) Agreement between UICI (including Insurdata Inc.) and Netlojix
Communications, Inc. dated August 1, 1999. **
(10)(VVV) Intentionally omitted.
(10)(WWW) Lease Agreement dated December 1, 1999 between the registrant and
HealthAxis.com **
(11) Computation of Earnings Per Share. **
(21) Subsidiaries of Registrant. **
(23)(A) Consent of Independent Accountants.
(27) Financial Data Schedule. **
</TABLE>
* Indicates management contract or compensatory plan or arrangement.
** Indicates documents were previously filed in Form 10-K filed with the
SEC on March 30, 2000.
135
<PAGE>
Exhibit (23)(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
HealthAxis Inc.
East Norriton, PA
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of the Registration Statement on Forms S-8 (File No.
333-15997, File No. 3 333-71223, File No. 33383091) of our report dated March
16, 2000 except for Notes 11, 14, 17, 18, 1 9, 20, 26 and 28 which are as of
September 29, 2000 and Notes 6, 7 8 and 27 which are as of October 13, 2000,
relating to the consolidated financial statements of HealthAxis Inc. for each of
the three years in the period ended December 31, 1999 included in the Company's
Annual Report on Form 10-K/A.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Philadelphia, PA
December 15, 2000
