<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): January 7, 2000
---------------
HEALTHAXIS INC.
---------------
(Exact name of registrant as specified in its charter)
Pennsylvania 0-13591 23-2214195
------------ ------- ----------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2500 DeKalb Pike, East Norriton, Pennsylvania 19401
----------------------------------------------------
(Address of principal executive offices/Zip Code)
Former name, former address, and former fiscal year, if changed since last
report: N/A
---
<PAGE>
Item 2. Acquisition or Disposition of Assets
The following information is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the Consolidated Financial Statements of the Company and its subsidiaries, and
the notes thereto, appearing in the Company's reports filed with the Securities
and Exchange Commission ("SEC"). Except for the historical information contained
herein, this Current Report on Form 8-K, contains certain forward-looking
statements regarding the Company's business and prospects that are based upon
numerous assumptions about future conditions which may ultimately prove to be
inaccurate and actual events and results may materially differ from anticipated
results described in such statements. Such forward-looking statements involve
risks and uncertainties, such as historical and anticipated losses; uncertainty
of future results, new business challenges, risks associated with brand
development, competition, funding; need for additional capital, management of
potential growth; dependence on key personnel, dependence on the Internet,
dependence on strategic alliances with Internet partners, ability to grow and
expand services, technological change and new application development, quality
assurance, risk of product-related claims, limited proprietary rights, reliance
on information processing systems, customer concentration, liability for
information transmitted through the Internet, uncertain acceptance of the
Internet as a medium for health insurance sales, risk capacity constrains;
system development and other risks, dependence on third party technology, rapid
technological change, risk of system failure, changes in the insurance industry,
insurance industry factors, health care reform legislation, government
regulation and legal uncertainties, control by HAI and UICI, potential conflicts
of interest, intercompany agreements not subject to arm's-length negotiations,
absence of dividends and anti-takeover measures. Any one or a combination of
these factors could have a material adverse effect on the Company's business,
financial condition and results of operations. These forward-looking statements
represent the Company's judgment as of the date of this report. The Company
disclaims, however, any intent or obligation to update these forward-looking
statements.
1
<PAGE>
BUSINESS COMBINATION WITH INSURDATA INCORPORATED
This amended filing amends and supplements the information contained in
the Current Report on Form 8-K filed on January 21, 2000 and includes Insurdata
Incorporated and Subsidiaries Consolidated Financial Statements for the years
ended December 31, 1996, 1997 and 1998 with Report of Independent Auditors and
unaudited nine months ended September 30, 1998 and 1999. The Insurdata
Incorporated financial statements included in this Form 8-K/A include two
subsidiaries which were not transferred to HealthAxis in connection with the
Insurdata merger. The effect of these non-merging subsidiaries on the December
31, 1998 and September 30, 1999 financial results can be found in the proforma
financial statements included in this Form 8-K/A.
General
On December 6, 1999, HealthAxis.com, Inc. ("HealthAxis"), Insurdata
Incorporated ("Insurdata") and their respective parent corporations, HealthAxis
Inc. (formerly Provident American Corporation) ("HAI" or "the Company") and UICI
entered into an Agreement and Plan of Merger (the "Merger Agreement") which sets
forth the terms and conditions under which Insurdata will be merged with and
into HealthAxis (the "Merger"). The Merger was consummated and effective on
January 7, 2000.
Merger Agreement
In accordance with the terms of the Merger Agreement, each outstanding
share of Insurdata common stock, no par value per share (the "Insurdata Common
Stock"), outstanding immediately prior to the effective date of the Merger (the
"Effective Date"), other than as otherwise provided in the Merger Agreement, was
converted into the right to receive 1.33 shares (the "Exchange Ratio") of
HealthAxis common stock (the "HealthAxis Common Stock"). The Company issued
21,807,567 shares of HealthAxis Common Stock to Insurdata shareholders. Of the
total of 42,392,381 shares of HealthAxis Common Stock outstanding, UICI received
18,943,678 shares of HealthAxis Common Stock, 2,439,885 shares of HealthAxis
Common Stock are held by the voting trust (described herein) and other
shareholders of Insurdata received 424,004 shares of HealthAxis Common Stock.
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."
Each holder of Insurdata Common Stock who would otherwise have been
entitled to receive a fraction of a share of HealthAxis Common Stock (after
taking into account all of the shareholder's certificates) received cash, in
lieu thereof, equal to an amount determined by multiplying such fraction by
$15.00.
The Merger Agreement provides that each option to purchase shares of
Insurdata Common Stock under Insurdata's stock option plans which are
outstanding on the Effective Date, whether or not exercisable, shall be
converted into and become 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).
2
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The Merger is intended to constitute a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended, and is being accounted
for as a purchase under generally accepted accounting principles.
Shareholders' Agreement
In connection with the consummation of the Merger Agreement, HAI, UICI,
Michael Ashker, President and CEO of HealthAxis and HAI, and HealthAxis entered
into a shareholders' agreement (the "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 each independently nominated three
nominees to the board and, 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. This obligation terminates
with respect to each party to the Shareholders' Agreement upon such shareholder
beneficially owning less than 20% of the HealthAxis Common Stock on a fully
diluted basis.
As stated in the Shareholders' Agreement the HealthAxis Board shall
initially consist of seven (7) members consisting of Ronald L. Jensen, Chairman
of UICI, Gregory T. Mutz, President and CEO of UICI and Dennis B. Maloney,
President and CEO of Insurdata being the initial UICI nominees, Michael Ashker,
Alvin H. Clemens, Chairman of HAI and HealthAxis and Edward W. LaBaron, Jr., a
Director of HAI being the initial HAI Nominees and Henry Hager, a Director of
HAI being one of the initial Nominees agreed to by UICI and HAI. It is intended
that Mr. Jensen will be replaced by Mr. Patrick J. McLaughlin, a director of
UICI.
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 Section 12(b) or 12(g)
of the Securities Exchange Act of 1934, as amended.
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 such agreement desire to transfer his or its HealthAxis securities. The party
desiring to transfer his or its securities ("Offeror") must first furnish the
other parties (individually, an "Electing Party" and collectively, 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 which equals the product of the total number
of shares of common stock then beneficially owned by the Electing Party on a
fully diluted basis, and a fraction, the numerator of which shall be the number
of securities to be transferred and the denominator which shall be the total
number of shares of common stock then beneficially owned by the Electing Party
3
<PAGE>
on a fully diluted basis. If an Electing Party fails to exercise its right to
purchase, or exercises its right to a portion smaller than it is entitled, the
Offeror 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. This
provision of the Shareholders' Agreement terminates at such time as the
HealthAxis Common Stock is registered under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended.
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.
The Shareholders' Agreement also provides UICI with the right, in its
sole and absolute discretion, to approve: (i) 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 (ii) provided UICI owns at least 20% of the HealthAxis Common
Stock, the entering into of any merger or similar agreement between HAI and
HealthAxis. In a separate letter to the Company and HAI, dated December 6, 1999,
UICI indicated that it would vote in favor of a business combination between HAI
and HealthAxis on the following terms:
1. UICI reserves the right to assess and approve in its reasonable discretion
the mathematical calculation of the merger terms (e.g., calculation of the
merger exchange ratio and methodology employed to calculate the merger
exchange ratio).
2. UICI must have received an opinion of counsel or other reasonable assurance
that the merger, viewed alone and together with the merger of HealthAxis
and Insurdata, will be tax free to the constituent corporations and UICI;
and
3. UICI reserves 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 (formerly
Provident American Corporation). In the event that UICI determines that
there may be an unacceptable level of risk associated with such claims or
liabilities, UICI may require that provision for such claims, contingencies
and/or residual liabilities be made either (a) in the form of an
appropriate reserve, escrow, holdback or similar arrangement or (b) by
means of an appropriate indemnity with respect to such liabilities from a
credit-worthy third party. In either event, UICI will be willing to set an
appropriate cap on such reserve, escrow, holdback or indemnity and limit
the time period during which such reserve, escrow, holdback or indemnity
will be in effect.
It is anticipated that this shareholders' agreement will be terminated
in connection with the consummation of the reorganization transaction between
the Company and HealthAxis and a new shareholders' agreement entered into which
agreement will be in the form attached as Exhibit C to the Agreement and Plan of
Reorganization, dated January 26, 2000, between the Company, HealthAxis and
HealthAxis Acquisition Corp. which was filed as an exhibit to a Current Report
on Form 8-K filed with the SEC on February 1, 2000.
4
<PAGE>
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. LaBaron, 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.
Technology Outsourcing Agreement
The Merger Agreement also provides that 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. The
Technology Outsourcing Agreement is attached as Exhibit 10.1 hereto.
UICI Registration Rights Agreement
HealthAxis and UICI also entered into a registration rights agreement
which provides for the registration of HealthAxis shares received by UICI in the
Merger.
5
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of business acquired.
Insurdata Incorporated and Subsidiaries Consolidated Financial
Statements for the years ended December 31, 1996, 1997 and 1998 with Report of
Independent Auditors and unaudited nine months ended September 30, 1998 and 1999
are included in exhibit 99.6.
6
<PAGE>
(b) Pro-forma Financial Information.
The following unaudited pro-forma condensed consolidated financial
information is based on the historical financial statements of the HealthAxis,
Insurdata and HAI (formerly Provident American Corporation). The unaudited
pro-forma condensed consolidated balance sheet at September 30, 1999 and the
unaudited pro-forma condensed consolidated statements of operations for the nine
months ended September 30, 1999 and for the year ended December 31, 1998 give
effect to the following transactions, certain of which have not occurred as of
the date hereof, for the statements of operations as if they occurred on January
1, 1998 and for the balance sheet as if they occurred on September 30, 1999.
The pro-forma adjustments are as follows:
o Private placement of approximately 3,846,000 shares of common stock of
HealthAxis on December 7, 1999 with proceeds of approximately $55,700,000
net of issuance costs of $2,160,000.
o The merger of Insurdata and HealthAxis which has been accounted for under
the purchase method 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 have
been recorded at their fair value.
o The proposed merger of HealthAxis Acquisition Corp. a wholly owned
subsidiary of HAI, a corporate shell holding company and HealthAxis will be
accounted for as a recapitalization of HealthAxis (the "Recapitalization").
Upon completion of the Recapitalization, the net assets of HAI will be
recorded at historical cost. The Recapitalization is subject to the
satisfaction of certain conditions precedent including regulatory and
shareholder approvals. No assurance can be given as to whether or when the
merger of HAI will be consummated.
o As a result of the Recapitalization, the preferred stock of HealthAxis will
be converted to common stock.
The unaudited pro-forma condensed consolidated financial statements are
presented for informational purposes only and do not purport to be indicative of
the financial position which would actually have existed or the results of the
operations which would actually have been obtained if the transactions had
occurred in the periods indicated above or which may exist or be obtained in the
future.
The unaudited pro-forma condensed consolidated financial information
should be read in conjunction the notes hereto and the following:
o HAI's historical consolidated financial statements and notes thereto
included in HAI's annual report on Form 10-K/A for the year ended December
31, 1998 and quarterly report on Form 10-Q/A for the nine months ended
September 30, 1999.
7
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o Insurdata's historical consolidated financial statements and notes thereto
included elsewhere for the three years in the period ended December 31,
1998 and the unaudited consolidated financial statements for the nine
months ended September 30, 1999.
o HealthAxis' historical consolidated financial statements and notes included
in the Company's Form S-4 dated and filed with the SEC on February 11,
2000.
8
<PAGE>
HealthAxis Inc. and Subsidiaries
Pro-forma Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except share and per share data)
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Non Merging Insurdata
Insurdata Insurdata Merger
HealthAxis Incorporated Subsidiaries Adjustments Subtotal
---------- ------------ ------------ ----------- --------
(2) (3)
<S> <C> <C> <C> <C> <C>
Revenue:
Commission and fee revenue $ 125 $ 34,945 $ (3,566) $ - $ 31,504
Other revenue - - - - -
-------------------------------------------------------------------------
Total revenue 125 34,945 (3,566) - $ 31,504
Expenses:
Operating and development 3,922 29,322 (3,069) (1,143) (4) 29,032
Sales and marketing 12,100 370 (0) - 12,470
General and administrative 2,542 3,456 (77) 2,448 (5) 8,369
Amortization of value of customers - - - 3,871 (4) 3,871
Amortization of developed software - - - 837 (4) 837
Amortization of goodwill 108 - 155,863 (4) 155,971
Interest expense (206) 9 (13) - (210)
-------------------------------------------------------------------------
Total expenses 18,466 33,157 (3,159) 161,876 210,340
-------------------------------------------------------------------------
Income (loss) from operations (18,341) 1,788 (407) (161,876) (178,836)
Provision (benefit) for income taxes: - 648 (119) - 529
-------------------------------------------------------------------------
Income (loss) from continuing operations $ (18,341) $ 1,140 $ (288) $ (161,876) $(179,365)
=========================================================================
Basic and diluted (loss) per common share from
Continuing operations $ (1.53)
==========
Basic and diluted weighted average common
Shares outstanding 12,021,000 21,807,567
<CAPTION>
HAI
Merger Recapitalization
Adjustments Adjustments Pro Forma
------------- ---------------- ---------
<S> <C> <C> <C>
Revenue:
Commission and fee revenue - $ - $ 31,504
Other revenue - 240 (6) 240
--------------------------------------------------------
Total revenue - 240 31,744
Expenses:
Operating and development - 658 (6) 29,690
Sales and marketing - - 12,470
General and administrative 15,573 (7) 3,668 (5)(6) 27,610
Amortization of value of customers - - 3,871
Amortization of developed software - - 837
Amortization of goodwill - - 155,971
Interest expense - 771 (6) 561
--------------------------------------------------------
Total expenses 15,573 5,097 231,010
--------------------------------------------------------
Income (loss) from operations (15,573) (4,857) (199,266)
Provision (benefit) for income taxes: - - 529
--------------------------------------------------------
Income (loss) from continuing operations $ (15,573) $ (4,857) $ (199,795)
========================================================
Basic and diluted (loss) per common share from
Continuing operations $ (4.40)
==========
Basic and diluted weighted average common
Shares outstanding 11,579,163 45,407,730
</TABLE>
See notes to pro-forma condensed consolidated financial statements.
9
<PAGE>
HealthAxis Inc. and Subsidiaries
Pro-forma Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except share and per share data)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Non Merging Insurdata
Insurdata Insurdata Merger
HealthAxis Incorporated Subsidiaries Adjustments
---------- ------------ ------------ -----------
(2) (3)
<S> <C> <C> <C> <C>
Revenue:
Commission and fee revenue $ - $ 44,233 $ (6,042) $ -
Other revenue - 256 41 -
------------------------------------------------------------------------------
Total revenue - 44,489 (6,001) -
------------------------------------------------------------------------------
Expenses:
Operating and development 812 35,112 (3,326) -
Sales and marketing 1,295 391 - -
General and administrative 2,544 6,147 (1,143) 3,084 (5)
Amortization of value of customers - - - 4,129 (4)
Amortization of developed software - - - 29 (4)
Amortization of goodwill - - - 207,817 (4)
Interest expense 139 - - -
Merger costs
------------------------------------------------------------------------------
Total expenses 4,790 41,650 (4,469) 215,059
------------------------------------------------------------------------------
Income (loss) from operations (4,790) 2,839 (1,532) (215,059)
Provision (benefit) for income taxes: - 880 (511) -
------------------------------------------------------------------------------
Income (loss) from continuing operations $ (4,790) $ 1,959 $ (1,021) $ (215,059)
==============================================================================
Basic and diluted (loss) per common share from
Continuing operations $ (0.46)
===========
Basic and diluted weighted average common
Shares outstanding 10,331,000 $ 21,807,567
<CAPTION>
HAI
Merger Recapitalization
Subtotal Adjustments Adjustments Pro Forma
-------- ----------- ---------------- ---------
<S> <C> <C> <C> <C>
Revenue:
Commission and fee revenue $ 38,191 $ - $ - $ 38,191
Other revenue 297 - 92 (6) 389
--------------------------------------------------------------------------------
Total revenue 38,488 92 38,580
--------------------------------------------------------------------------------
Expenses:
Operating and development 32,598 - - 32,598
Sales and marketing 1,686 - - 1,686
General and administrative 10,632 48,098 (7) 29,684 (5)(6) 88,414
Amortization of value of customers 4,129 - - 4,129
Amortization of developed software 29 - - 29
Amortization of goodwill 207,817 - - 207,817
Interest expense 139 - 175 (6) 314
Merger costs - 3,325 (8) 3,325
--------------------------------------------------------------------------------
Total expenses 257,030 48,098 33,184 338,312
--------------------------------------------------------------------------------
Income (loss) from operations (218,542) (48,098) (33,092) (299,732)
Provision (benefit) for income taxes: 369 - - 369
--------------------------------------------------------------------------------
Income (loss) from continuing operations $ (218,911) $ (48,098) $ (33,092) (300,101)
================================================================================
Basic and diluted (loss) per common share from
Continuing operations $ (6.86)
=======
Basic and diluted weighted average common
Shares outstanding 11,579,163 $ 43,717,730
</TABLE>
See notes to pro-forma condensed consolidated financial statements.
10
<PAGE>
HealthAxis Inc. and Subsidiaries
Pro-forma Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
As of September 30, 1999
<TABLE>
<CAPTION>
Private Non Merging Insurdata
Placement Insurdata Insurdata Merger
HealthAxis Adjustment Incorporated Subsidiaries Adjustments
---------- ---------- ------------ ------------ -----------
(2) (3)
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 6,891 $ 53,540 (1) $ 2,919 $ 259 $ -
Accounts and notes receivable - 5,357 121 -
Prepaid interactive marketing expense 5,657 - -
Prepaid compensation expense - - - 11,741 (5)
Deferred income tax asset - 638 (81) (557) (4)
Other assets 835 4,060 (505) -
--------------------------------------------------------------------------
Total current assets 13,383 53,540 12,974 (206) 11,184
Property and equipment, less accumulated depreciation 3,178 - 5,962 (363) (2,709) (4)
Value of customers - - - 17,205 (4)
Developed software - - - 2,862 (4)
Goodwill, less accumulated amortization 7,673 1,129 - 623,452 (4)(5)
--------------------------------------------------------------------------
Total Assets $ 24,234 $ 53,540 $ 20,065 $ (569) $ 651,994
==========================================================================
Liabilities and Stockholders Equity
Liabilities:
Accounts payable $ 2,882 $ - $ 864 $ (114) $ -
Accrued commissions and expenses 3,287 (274) 600 (4)
Convertible debenture - - -
Federal income taxes 402 81 342 (4)
Ceding commission liability - - -
Other liabilities 769 (262) -
--------------------------------------------------------------------------
Total current liabilities 2,882 5,322 (569) 942
Series B Preferred Stock 2,804 - - -
Stockholders Equity:
Preferred stock 2,405 - - -
Common stock 15,426 53,540 (1) 5,531 - 647,729 (4)
Additional paid-in capital 23,848 - 12,535 (5)
Retained earnings (deficit) (23,131) 9,212 - (9,212) (4)
--------------------------------------------------------------------------
Total Stockholders Equity 18,548 53,540 14,743 - 651,052
--------------------------------------------------------------------------
Total Liabilities and Stockholders Equity $ 24,234 $ 53,540 $ 20,065 $ (569) $ 651,994
==========================================================================
</TABLE>
See notes to pro-forma condensed consolidated financial statements.
11
<PAGE>
HealthAxis Inc. and Subsidiaries
Pro-forma Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
As of September 30, 1999
<TABLE>
<CAPTION>
HAI
Recapitalization Merger
Subtotal Adjustments Adjustments Pro Forma
-------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 63,609 $ 3,208 (6) - $ 66,817
Accounts and notes receivable 5,478 - - 5,478
Prepaid interactive marketing expense 5,657 - - 5,657
Prepaid compensation expense 11,741 - 61,073 (7) 72,814
Deferred income tax asset - - - -
Other assets 4,390 469 (6) (215) (8) 4,644
-----------------------------------------------------------------------
Total current assets 90,875 3,677 - 60,858 155,410
Property and equipment, less accumulated depreciation 6,068 4,542 (6) - 10,610
Value of customers 17,205 - - 17,205
Developed software 2,862 - - 2,862
Goodwill, less accumulated amortization 632,254 - - 632,254
-----------------------------------------------------------------------
Total Assets $ 749,264 $ 8,219 $ 60,858 $ 818,341
=======================================================================
Liabilities and Stockholders Equity
Liabilities:
Accounts payable $ 3,632 $ (1,711) (6) $ - $ 1,921
Accrued commissions and expenses 3,613 2,393 (6) 1,850 (8) 7,856
Convertible debenture - 24,528 (6) - 24,528
Federal income taxes 825 585 (6) - 1,410
Ceding commission liability - 5,450 (6) - 5,450
Other liabilities 507 1,406 (6) - 1,913
-----------------------------------------------------------------------
Total current liabilities 8,577 32,651 1,850 43,078
Series B Preferred Stock 2,804 (2,804) (6) - -
-
Stockholders Equity: -
Preferred stock 2,405 (2,405) (6) - -
Common stock 722,226 (717,593) (6) - 4,633
Additional paid-in capital 36,383 735,454 (6) 110,431 (7)(8) 882,268
Retained earnings (deficit) (23,131) (37,084) (6) (51,423) (7)(8) (111,638)
-----------------------------------------------------------------------
Total Stockholders Equity 737,883 (21,628) 59,008 775,263
-----------------------------------------------------------------------
Total Liabilities and Stockholders Equity $ 749,264 $ 8,219 $ 60,858 $ 818,341
=======================================================================
</TABLE>
See notes to pro-forma condensed consolidated financial statements.
12
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Pro-forma Condensed Consolidated Financial Statements
(Dollars in Thousands except per share data)
1. Adjustment relates to the December 6, 1999 private placement of
approximately $55,700 in common stock of HealthAxis. The adjustment to cash
is net of approximately $2,160 of issuance costs.
2. Historical financial statements of Insurdata.
3. Adjustment relates to Insurdata's sale of Insurdata Marketing Services, LLC
and Insurdata Administrators, a division of Insurdata at book value to UICI
for cash prior to Insurdata's merger into HealthAxis.
4. Adjustment relates to the purchase price of Insurdata and the allocation of
the purchase price to the assets of Insurdata. The amounts are calculated
as follows:
Number of shares issued to UICI 24,577,128
Fair value of shares issued $ 26.58
------------
Fair value of shares issued by HAI $ 653,260
Value of vested options 794
Merger costs 600
------------
654,654
Allocation of Purchase Price:
Insurdata net assets at historical cost 14,743
Less: Goodwill 1,129
Less: Book value of Insurdata capitalized software 2,709
Less: Net deferred taxes 899
------------
Fair value of Insurdata net assets 10,006
Future value of Insurdata customers 17,205
Future value of Insurdata developed software 2,862
------------
Purchase price allocated to specific assets 30,073
------------
Excess of cost over fair value of net assets acquired $ 624,581
============
The fair value HealthAxis shares issued is based on HAI's market
value per share on the date of the merger with Insurdata, adjusted for the
1.127 exchange ratio of HealthAxis common stock into HAI common stock and a
10% liquidity discount for unregistered shares.
The purchase price was allocated to intangible assets acquired as
a result of the Insurdata merger which includes the estimated future value
of Insurdata's customers and developed software which are amortized in
proportion to the estimated future discounted profits over a 4 year life
for customers and a 3 year life for developed software. The excess of cost
over the fair value of assets acquired or Goodwill is amortized on a
straight line basis over a three-year period.
13
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Pro-forma Condensed Consolidated Financial Statements (continued)
(Dollars in Thousands, except per share data)
5. Adjustment relates to the exchange of Insurdata options for options in
HealthAxis as of the date of the merger as described in Note 4. The amounts
are calculated as follows:
Insurdata options converted to HAI options 426,930
Fair value of HAI options $29.36
-------
Total fair value of options of HAI $12,535
=======
Non vested options presented as prepaid compensation
costs $11,741
Vested options presented as additional purchase price 794
-------
$12,535
=======
The fair value of the options is based on the Black Scholes Option Pricing
Model, HAI's closing share price on the date of the merger with Insurdata
adjusted for the 1.127 exchange ratio of HealthAxis common stock into HAI
common stock, the exercise price and assumed holding period of the options
and a 10% liquidity discount for unregistered shares. Prepaid compensation
will be expensed over the vesting period of the options.
6. Adjustments relate to the historical financial statements of HAI excluding
subsidiaries. Adjustments to all of the capital accounts to account for the
mergers are as follows:
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1999 as reported $ 15,426 $ 23,848 $ (23,131) $ 16,143
Private placement of HealthAxis common stock 53,540 - - 53,540
Shares issued to acquire Insurdata 653,260 - - 653,260
Exchange of Insurdata stock options 12,535 - 12,535
Conversion of Preferred stock 5,209 - - 5,209
Recapitalization of HAI (722,802) 735,454 (37,084) (24,432)
Exchange of Options of HealthAxis for HAI - 109,171 (48,098) 61,073
Merger costs charged to operations - 1,260 (3,325) (2,065)
-------------------------------------------------
$ 4,633 $882,268 $(111,638) $775,263
=================================================
</TABLE>
14
<PAGE>
HealthAxis Inc. and Subsidiaries
Notes to Pro-forma Condensed Consolidated Financial Statements (continued)
(Dollars in Thousands, except share and per share data)
The recapitalization of HAI represents the adjustment for the net
liabilities of HAI, which amounted to $24,232 at September 30, 1999.
7. Adjustment relates to the exchange of HealthAxis options for HAI options.
The amounts are calculated as follows:
HealthAxis options converted to HAI options 4,359,328
Intrinsic value of HAI options $25.04
----------
Total intrinsic value of options of HAI $ 109,171
==========
Non vested options presented as prepaid compensation
costs $ 61,073
Vested options presented as merger costs 48,098
----------
$ 109,171
==========
Prepaid compensation will be expensed over the vesting period of the
options. The value of the vested options will be charged to operations in
each period presented.
8. Merger costs include legal, accounting and investment advisory costs
incurred as a result of the merger of HealthAxis into HAI as well as
severance costs for employees whose positions will be eliminated as a
result of the mergers.
15
<PAGE>
(c) Exhibits.
The following exhibits are filed herewith:
S-K Item
Number Description
- -------- -----------
10.1 Technology Outsourcing Agreement dated January 3, 2000
(Incorporated by reference to Exhibit 10.1 of the Form 8-K dated
January 7, 2000 filed with the SEC on January 21, 2000.)
10.2 Shareholders Agreement dated January 7, 2000 (Incorporated by
reference to Exhibit 10.2 of the Form 8-K dated January 7, 2000
filed with the SEC on January 21, 2000.)
10.3 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 of the Form
S-4 dated February 11, 2000 filed with the SEC on February 11,
2000.)
99.1 Press Release dated January 10, 2000 - HealthAxis.com Completes
Insurdata Merger (Incorporated by reference to Exhibit 10.3 of
the Form 8-K dated January 7, 2000 filed with the SEC on January
21, 2000.)
99.2 Agreement and Plan of Merger between HAI, HealthAxis, UICI and
Insurdata Incorporated dates as of December 6, 1999.
(Incorporated by reference to Exhibit 99.3 of the Form 8-K dated
December 6, 1999 filed with the SEC on December 13, 1999.)
99.3 Form of Voting Trust Agreement among UICI and Messrs. Ashker,
Clemens, LaBaron and Hager. (Incorporated by reference to Exhibit
99.5 of the Form 8-K dated December 6, 1999 filed with the SEC on
December 13, 1999.)
99.4 Form of Registration Rights Agreement between HealthAxis and
UICI.(Incorporated by reference to Exhibit 99.10 of the Form 8-K
dated December 6, 1999 filed with the SEC on December 13, 1999.)
99.5 Letter Agreement dated December 6, 1999 between UICI, HealthAxis
and HAI. (Incorporated by reference to Exhibit 99.11 of the Form
8-K dated December 6, 1999 filed with the SEC on December 13,
1999.)
99.6 Insurdata Incorporated and Subsidiaries Consolidated Financial
Statements for the years ended December 31, 1996, 1997 and 1998
with Report of Independent Auditors and unaudited nine months
ended September 30, 1998 and 1999.
99.7 Consent of Ernst & Young LLP
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HEALTHAXIS INC.
Date: February 17, 2000 By: /s/ Francis L. Gillan III
-------------------------
Francis L. Gillan III
Chief Financial Officer and
Treasurer
17
<PAGE>
EXHIBIT INDEX
S-K Item
Number Description
- -------- -----------
10.1 Technology Outsourcing Agreement dated January 3, 2000
(Incorporated by reference to Exhibit 10.1 of the Form 8-K dated
January 7, 2000 filed with the SEC on January 21, 2000.)
10.2 Shareholders Agreement dated January 7, 2000 (Incorporated by
reference to Exhibit 10.2 of the Form 8-K dated January 7, 2000
filed with the SEC on January 21, 2000.)
10.3 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 of the Form
S-4 dated February 11, 2000 filed with the SEC on February 11,
2000.)
99.1 Press Release dated January 10, 2000 - HealthAxis.com Completes
Insurdata Merger (Incorporated by reference to Exhibit 10.3 of
the Form 8-K dated January 7, 2000 filed with the SEC on January
21, 2000.)
99.2 Agreement and Plan of Merger between HAI, HealthAxis, UICI and
Insurdata Incorporated dates as of December 6, 1999.
(Incorporated by reference to Exhibit 99.3 of the Form 8-K dated
December 6, 1999 filed with the SEC on December 13, 1999.)
99.3 Form of Voting Trust Agreement among UICI and Messrs. Ashker,
Clemens, LaBaron and Hager. (Incorporated by reference to Exhibit
99.5 of the Form 8-K dated December 6, 1999 filed with the SEC on
December 13, 1999.)
99.4 Form of Registration Rights Agreement between HealthAxis and
UICI.(Incorporated by reference to Exhibit 99.10 of the Form 8-K
dated December 6, 1999 filed with the SEC on December 13, 1999.)
99.5 Letter Agreement dated December 6, 1999 between UICI, HealthAxis
and HAI. (Incorporated by reference to Exhibit 99.11 of the Form
8-K dated December 6, 1999 filed with the SEC on December 13,
1999.)
99.6 Insurdata Incorporated and Subsidiaries Consolidated Financial
Statements for the years ended December 31, 1996, 1997 and 1998
with Report of Independent Auditors and unaudited nine months
ended September 30, 1998 and 1999.
99.7 Consent of Ernst & Young LLP
18
<PAGE>
Insurdata Incorporated and Subsidiaries
Consolidated Financial Statements
Report of Independent Auditors.................................... F-1
Consolidated Balance Sheets....................................... F-2
Consolidated Statements of Income................................. F-3
Consolidated Statements of Stockholder's Equity................... F-4
Consolidated Statements of Cash Flows............................. F-5
Notes to Consolidated Financial Statements........................ F-7
--------------------------------------------
The Insurdata Incorporated financial statements included in this document
include two subsidiaries which were not transferred to HealthAxis in connection
with the Insurdata merger. The effect of these non-merging subsidiaries on the
December 31, 1998 and September 30, 1999 financial results can be found in the
proforma financial statements included in this Current Report on Form 8-K/A.
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholder
Insurdata Incorporated
We have audited the accompanying consolidated balance sheets of Insurdata
Incorporated and subsidiaries (the Company) as of December 31, 1997 and 1998,
and the related consolidated statements of income, stockholder's equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Insurdata
Incorporated and subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas
June 24, 1999
F-1
<PAGE>
Insurdata Incorporated and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
(Note 1)
ASSETS
<TABLE>
<CAPTION>
December 31 September 30
1997 1998 1999
------- ------- ------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,489 $ 4,450 $ 2,918
Trade accounts receivable, net of allowance of $164,
$69 and $31, in 1997, 1998 and September 30, 1999
(unaudited), respectively 2,324 2,482 2,957
Receivables from affiliates 2,234 2,242 2,301
Notes receivable 42 308 100
Note receivable from affiliates 4,500 - -
Deferred income taxes - 131 178
Other current assets 995 849 1,608
-------- -------- --------
Total current assets 12,584 10,462 10,062
Property and equipment, net 3,972 5,987 5,962
Capitalized software and contract start-up costs, net 1,597 2,374 2,912
Goodwill and intangibles, net 842 920 1,129
Long-term notes receivable 458 292 -
Deferred income taxes 319 - -
-------- -------- --------
Total assets $19,772 $20,035 $20,065
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 347 $ 235 $ 864
Accrued liabilities 2,180 3,175 2,101
Accrued liabilities payable to affiliates 1,199 476 462
Income taxes payable 981 731 187
Deferred revenues 504 377 480
Obligations under capital leases - 179 193
-------- -------- --------
Total current liabilities 5,211 5,173 4,287
Notes payable 46 36 27
Obligations under capital leases - 409 262
Deferred income taxes - 18 402
Phantom stock liability 1,085 687 344
Commitments
Minority interest 1,254 16 -
Stockholder's equity:
Common stock, no par value:
Authorized shares - 50,000,000 issued and
outstanding shares - 16,396,667 6,022 5,531 5,531
Retained earnings 6,240 8,165 9,212
Deferred compensation (86) - -
-------- -------- --------
Total stockholder's equity 12,176 13,696 14,743
-------- -------- --------
Total liabilities and stockholder's equity $ 19,772 $ 20,035 $ 20,065
======== ======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE>
Insurdata Incorporated and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
(Note 1)
<TABLE>
<CAPTION>
Nine Months Ended
Year ended December 31 September 30
1996 1997 1998 1998 1999
--------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $ 10,556 $16,804 $19,325 $14,064 $14,361
Revenue from affiliates 1,843 12,591 24,908 19,008 20,584
--------- ------- ------- ------- -------
Total revenue 12,399 29,395 44,233 33,072 34,945
Operating expenses:
Cost of revenues 7,523 22,016 34,769 25,823 29,023
Selling, general and administrative 3,329 4,526 5,534 3,909 4,030
Amortization of intangible assets and goodwill 31 74 88 64 77
Research and development 513 440 533 417 18
Phantom stock compensation 360 - - - -
Costs of preparing for public offering - - 726 726 -
--------- ------- ------- ------- -------
Total operating expense 11,756 27,056 41,650 30,939 33,148
--------- ------- ------- ------- -------
Operating income 643 2,339 2,583 2,133 1,797
Interest and other income, net 457 541 256 288 (9)
--------- ------- ------- ------- -------
Income before income taxes and minority interest 1,100 2,880 2,839 2,421 1,788
Provision for income taxes 470 1,195 880 733 648
--------- ------- ------- ------- -------
Income before minority interest 630 1,685 1,959 1,688 1,140
Minority interest in (income) loss of subsidiary 126 176 (34) (4) (93)
--------- ------- ------- ------- -------
Net income $ 756 $ 1,861 $ 1,925 $ 1,684 $ 1,047
========= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
Insurdata Incorporated and Subsidiaries
Consolidated Statements of Stockholder's Equity
(In thousands)
(Note 1)
<TABLE>
<CAPTION>
Common Stock
-------------------
Number of Retained Deferred
Shares Amount Earnings Compensation Total
--------- ------- -------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 16,397 $ 5,371 $3,703 $ - $ 9,074
Contribution of Satellite Imaging
Systems LLC from UICI (Note 1) - 3,000 - - 3,000
Distribution to UICI (Note 8) - (257) - - (257)
Deferred compensation from Satellite
Imaging Systems LLC stock grant - 294 - (294) -
Amortization of deferred compensation - - - 61 61
Net income and comprehensive income - - 756 - 756
------ ------- ------ ------- -------
Balance at December 31, 1996 16,397 8,408 4,459 (233) 12,634
Contribution of Insurdata Administrators
from UICI (Note 1) - 273 - - 273
Contribution from UICI (Note 8) - 132 - - 132
Distributions to UICI and minority
interests - (2,791) (80) - (2,871)
Amortization of deferred compensation - - - 147 147
Net income and comprehensive income - - 1,861 - 1,861
------ ------- ------ ------- -------
Balance at December 31, 1997 16,397 6,022 6,240 (86) 12,176
Contribution from UICI (Note 8) - 216 - - 216
Distribution to UICI (Note 1) - (465) - - (465)
Distributions to UICI (Note 1) - (242) - - (242)
Amortization of deferred compensation - - - 86 86
Net income and comprehensive income - - 1,925 - 1,925
------ ------- ------ ------- -------
Balance at December 31, 1998 16,397 5,531 8,165 - 13,696
Net income and comprehensive income
(unaudited) - - 1,047 - 1,047
------ ------- ------ ------- -------
Balance at September 30, 1999 (unaudited) 16,397 $ 5,531 $9,212 - $14,743
====== ======= ====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
Insurdata Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Note 1)
<TABLE>
<CAPTION>
Nine Months Ended
Year ended December 31, September 30,
1996 1997 1998 1998 1999
----------- ------------ ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net income $ 756 $ 1,861 $ 1,925 $ 1,684 $ 1,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense 954 1,193 1,959 1,340 1,516
Amortization of intangibles and goodwill 31 74 88 64 77
Amortization of capitalized software
development and contract start-up costs 427 645 834 620 1,006
Phantom stock compensation 360 - - - -
Minority interest (126) (176) 34 4 93
Compensation from stock grants 61 147 86 86 -
Provision for doubtful accounts 9 155 115 93 16
Loss on disposal of fixed assets 116 89 52 52 -
Purchased in-process research and development - - 189 189 -
Deferred income taxes (134) 125 206 326 337
Changes in operating assets and liabilities:
Trade accounts receivable (654) (802) (273) (215) (491)
Receivables from affiliates (576) (3,694) (8) (787) (59)
Other current assets 153 (138) 146 (107) (256)
Accounts payable and accrued liabilities 63 1,869 883 1,506 (446)
Accrued liabilities payable to affiliates and
phantom stock liability 702 (227) (1,120) (1,193) (357)
Income taxes (104) 926 (250) (632) (544)
Deferred revenues 134 132 (127) (131) 103
Other 20 161 - - -
-------- ------- -------- -------- --------
Net cash provided by operating activities 2,192 2,340 4,739 2,899 2,042
Investing Activities
Capital expenditures (1,221) (2,578) (3,410) (3,023) (1,491)
Collection (issuance) of note receivable - - (100) - 46
Software development and contract start-up costs
capitalized (546) (701) (1,513) (1,137) (1,376)
Payments from (advances to) affiliates 3,984 (4,371) 4,500 4,500 -
Sale of accounts receivable to affiliate - 401 - - -
Purchase of minority interest - - (1,650) (1,650) (500)
-------- ------- -------- -------- --------
Net cash provided by (used in) investing activities 2,217 (7,249) (2,173) (1,310) (3,321)
Financing Activities
Contribution from (distribution to) parent, net 2,743 64 (491) (491) -
Distribution to minority interests - (12) (75) (44) (112)
Payments on capital lease obligations - - (28) (7) (133)
Payments on long-term debt (693) - (11) (8) (8)
Payments on long-term debt with affiliates - (362) - - -
-------- ------- -------- -------- --------
Net cash provided by (used in) financing activities 2,050 (310) (605) (550) (253)
-------- ------- -------- -------- --------
</TABLE>
F-5
<PAGE>
Insurdata Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In thousands)
(Note 1)
<TABLE>
<CAPTION>
Nine Months Ended
Year ended December 31 September 30,
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents 6,459 (5,219) 1,961 1,039 (1,532)
Cash and cash equivalents at beginning of period 1,249 7,708 2,489 2,489 4,450
------- ------- ------- ------ ------
Cash and cash equivalents at end of period $ 7,708 $ 2,489 $ 4,450 $3,528 $2,918
======= ======= ======= ====== ======
Supplemental Cash Flow Information
Cash paid for interest $ 56 $ 263 $ 170 $ 159 $ 122
======= ======= ======= ====== ======
Cash paid for income taxes $ 894 $ 145 $ 846 $ 846 $1,029
======= ======= ======= ====== ======
Supplemental Schedule Of Non-Cash Investing
Activities
Acquisition of equipment under capital leases $ - $ - $ 617 $ 181 $ -
======= ======= ======= ====== ======
</TABLE>
See accompanying notes.
F-6
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Unaudited Financial Information
The financial statements as of September 30, 1999 and for the nine month periods
ended September 30, 1998 and 1999 are unaudited; however, in the opinion of
management such financial statements reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for such periods. The accompanying interim
unaudited financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. Operating results for the nine months
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for the entire year or for any future period.
General
Insurdata Incorporated (the Company) provides comprehensive technology solutions
and related outsourcing services to the claims and administration segment of the
health care industry. The Company's services include proprietary workflow and
Internet-enabled business applications that address transaction processing and
the flow of information among constituent users. In addition, the Company offers
systems integration, technology management and business process outsourcing. The
Company's services enable its clients to reduce administrative costs and improve
customer service in all aspects of health care administration, from eligibility
and enrollment to claim capture, processing, adjudication, payment and customer
service. The Company's clients include insurance carriers, third-party
administrators (TPAs), Blue Cross/Blue Shield organizations, self-administered
employers and preferred provider organizations.
The Company is a wholly owned subsidiary of UICI, a diversified financial
services company. The accompanying consolidated financial statements include the
accounts of the Company and all its subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
In September 1997, the Company acquired a 51% member interest in Insurdata
Imaging Services, LLC (IIS) (formerly Satellite Image Systems, LLC), a provider
of imaging and data capture outsourcing services, from UICI for a purchase price
of $2.8 million. The purchase price approximated UICI's net book value for IIS,
and was paid by the Company by exchanging accounts and notes receivable due from
UICI Administrators. UICI acquired 51% controlling interest of IIS on August 1,
1996, for a cash investment into IIS of $3 million. In May 1998, the Company
acquired the remaining 49% interest in IIS for $1.65 million and annual earn-out
payments through the year 2000 the majority of which were subject to a
cumulative ceiling of approximately $1 million. No earnout payments have been
earned through December 31, 1998.
Effective January 1998, the Company acquired certain assets used in providing
benefits administration services, subsequently renamed Insurdata Administrators
(IA), from a subsidiary of UICI for a purchase price of approximately $465,000.
The price approximated UICI's net book value and was paid by the Company through
a reduction in the principal amount of a note payable by UICI to the Company. As
a result of IA's acquisition by the Company during 1998 and prior common control
by UICI, the accounts of IA are presented on a combined basis with those of the
Company and its subsidiaries prior to the Company's acquisition date.
F-7
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Basis of Presentation (continued)
Effective June 30, 1998, the Company acquired an 85% interest in Insurdata
Marketing Services, LLC (IMS) (formerly Self Funded Strategies, LLC), from UICI
for a cash purchase price of approximately $57,000 presented as a distribution
to UICI in stockholder's equity. The purchase price for UICI's interest in IMS
approximated UICI's net book value for its interest in this entity. UICI
acquired its 85% controlling interest in IMS on October 1, 1995. The Company
distributed earnings of Self Funded Strategies of $185,000 for the six months
ended June 30, 1998 to UICI. As a result of IMS's acquisition by the Company
during 1998 and prior common control by UICI, the accounts of IMS are presented
on a combined basis with those of the Company and its subsidiaries prior to the
Company's acquisition date.
Effective January 1, 1999, the Company exchanged 5% of its member interest in
IMS for a reduction of future contractual commissions payable by IA and IIS to
IMS. Effective September 15, 1999, the Company acquired the 20% minority
membership interest, which included the 5% exchanged earlier in the period, for
a purchase price of $500,000 cash paid at closing. The consideration paid by the
Company exceeded the book value of the interest acquired by approximately
$503,000. The excess was allocated to prepaid commissions and is being amortized
over a five year period.
Consistent with the requirements of Emerging Issues Task Force (EITF) Issue No.
90-5, "Exchange of Ownership Interests Between Entities Under Common Control"
(EITF 90-5), and Interpretation 39 of Accounting Principles Board Opinion No. 16
(APB 16), the financial statements of IIS, IA and IMS have been combined with
the Company's financial statements on an "as-if-pooling-of-interest" basis from
the date control by UICI was established.
Therefore, the IIS, IA and IMS financial statements have been combined with the
Company's financial statements beginning August 1, 1996, January 1, 1997, and
October 1, 1995, respectively. The assets and liabilities of IIS, IA and IMS
included in the consolidated financial statements are stated at UICI's
historical carrying basis. The carrying value of the IIS, IA and IMS net assets
combined on the dates UICI established control has been reflected as a
contribution received from UICI in the Consolidated Statements of Stockholder's
Equity. Consideration paid by the Company to acquire UICI's interest in IIS, IA
and IMS has been reflected as a distribution to UICI in the Consolidated
Statements of Stockholder's Equity. The Company's assets are presented on its
historical basis and do not reflect UICI's price paid to acquire Insurdata,
which exceeded the carrying value of the Company's net assets at the dates of
acquisition of the Company's shares by UICI by approximately $21 million in the
aggregate.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less from the date of purchase to be cash
equivalents.
F-8
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property and equipment are provided on the straight-line basis over the
estimated useful lives of the respective assets or the lease term, if shorter.
Purchased Intangible Assets
Purchased intangible assets, which consist of developed technologies, customer
bases and goodwill, are being amortized on the straight-line basis over three to
twenty years. The carrying value of goodwill is reviewed quarterly and decreased
if facts and circumstances suggest permanent impairment. Developed technologies
and customer base intangibles are reduced to their recoverable value if the
carrying value exceeds expected undiscounted cash flows from the intangible
asset.
Financial Instruments
Financial instruments include cash and cash equivalents, accounts receivable,
accounts payable, obligations under capital leases and the phantom stock
liability. The Company believes that the carrying amounts of these financial
instruments approximate their fair value.
Research and Development Costs
The Company incurs research and development costs that relate primarily to the
development of new products and major enhancements to existing services and
products.
Research and development costs are comprised primarily of salaries and related
benefits. The Company expenses or capitalizes, as appropriate, these research
and development costs in accordance with Statement of Financial Accounting
Standards No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed. All research and development costs related to
software development projects incurred prior to the time a project has reached
technological feasibility are expensed. Software development costs incurred
subsequent to reaching technological feasibility are capitalized. If the process
of developing a new product or major enhancement does not include a detailed
program design, technological feasibility is determined only after completion of
a working model. All software development costs capitalized are amortized using
an amount determined as the greater of (i) the gross revenue method or (ii) the
straight-line method over the remaining economic life of the product (generally
five years). The Company recorded amortization relating to capitalized software
development costs of $427,000, $645,000 and $697,000 in the years ending
December 31, 1996, 1997 and 1998, respectively.
F-9
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Internal-Use Software Development Costs
In March 1998, the AICPA issued Statement of Position (SOP) 98-1, Accounting For
the Costs of Computer Software Developed For or Obtained For Internal-Use. The
SOP, which has been adopted as of January 1, 1999, requires the capitalization
of certain costs in connection with developing or obtaining internal-use
software. Costs capitalized include direct labor and fringe benefits.
Amortization of capitalized software is recognized on a project-by-project
basis, using the straight-line method over periods not exceeding five years,
commencing the month after the date of the project completion.
Revenue Recognition
The Company's revenues consist primarily of transaction revenues and fees from
professional services.
Transaction revenues are earned on a fee-per-unit basis. Depending on the
product or service provided, the fee may be a charge per covered life or member,
per transaction processed, per document or electronic transmission, or per unit
serviced (such as per PC for LAN support). Transaction revenue is derived from
the Company's workflow and business applications, data capture outsourcing
services and technology management services. Transaction revenue is recorded in
the month the services are rendered.
Professional service revenue consists of time and materials projects and fixed
price projects. Time and materials projects are billed on a fee per hour or per
day, or based upon a multiple of monthly salary, dependent upon the nature of
the project. Such revenue is recorded as the services are performed.
Professional services revenue on fixed price projects is recognized using the
percentage-of-completion method in proportion to the hours expended compared to
the total hours projected for the project. Changes in estimates of
percentage-of-completion are recognized in the period in which they are
determined. Provisions for estimated losses, if any, are made in the period in
which the loss first becomes apparent. Professional service revenue is derived
from the Company's system integration, consulting and programming services, as
well as customization and implementation performed in conjunction with workflow
and business application software.
Deferred Revenues
Certain contracts allow the Company to bill in advance of contract performance.
Amounts billed in advance of contract performance are deferred until such
amounts are recognized as revenue, in accordance with the Company's revenue
recognition policy.
F-10
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Revenues and the resulting accounts receivable balances potentially subject the
Company to concentrations of credit risk within the claims and administrative
segment of the health care industry and significant customer relationships. For
the years ended December 31, 1996, 1997 and 1998, the Company's three largest
customers, including UICI and its subsidiaries and affiliates (see Note 4),
accounted for approximately 76%, 69% and 74%, respectively, of the Company's
total revenue. For the years ended December 31, 1996, 1997 and 1998, UICI and
its subsidiaries and affiliates accounted for approximately 15%, 42% and 56%,
respectively, of the Company's total revenue. As of December 31, 1997 and 1998,
the three largest customers accounted for 59% and 63%, respectively, of the
Company's total accounts receivable. For the years ended December 31, 1997 and
1998, UICI and its subsidiaries and affiliates accounted for approximately 43%
and 47%, respectively, of the Company's total accounts receivable (see Note 4).
For the year ended December 31, 1997, two unrelated customers accounted for
approximately 9% and 7%, respectively, of the Company's total accounts
receivable. For the year ended December 31, 1998, the same two unrelated
customers accounted for approximately 11% and 5%, respectively, of the Company's
total accounts receivable. The Company performs periodic credit evaluations of
its customers' financial condition and generally does not require collateral;
however, deposits for future services or products are frequently required.
Credit losses have been within management's expectations.
The Company has entered into processing agreements with its customers that have
specified performance commitments. If the Company does not achieve levels of
performance specified in its contracts the Company may be subject to reduced
revenues, penalties, and/or cash payments to its customers. The Company recorded
approximately $250,000 at September 30,1999 related to performance commitments.
Stock-Based Compensation
The Company has elected to account for stock-based compensation to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market value of the Company's stock at the date
of the grant over the amount an employee must pay to acquire the stock. See Note
7 regarding the pro forma net income as required by the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement No.
123, Accounting for Stock-Based Compensation (Statement 123).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-11
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Start-up Costs
The Company capitalizes costs directly attributable to contract start-up
activities in accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts. Costs capitalized
include direct labor and fringe benefits. Such costs are amortized over the life
of the respective contract. All other start-up costs not directly related to
contracts are expensed in accordance with SOP 98-5, Reporting on the Costs of
Start-up Activities. Total contract start-up costs capitalized during the nine
months ended September 30, 1999 was approximately $566,000.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, which
establishes guidance for the reporting and display of comprehensive income and
its components. The Company adopted this Statement as of January 1, 1998,
however, this standard does not currently impact disclosures as the Company has
no elements of other comprehensive income.
New Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 2000. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.
On December 3, 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
the provisions of which must be applied to the Company s financial statements no
later than the first quarter of 2000. While the SAB does not change existing
rules on revenue recognition, it provides additional guidance for transactions
not specifically addressed by existing rules. The Company has not completed its
review of the effects of the provisions of the SAB.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
3. Costs of Preparing for Public Offering
During 1998 the Company began the process of preparing for an initial public
offering. Due to market conditions the Company placed the public offering of its
securities on hold in September 1998. As a result, the Company expensed $726,000
of offering-related costs in the third quarter of 1998.
F-12
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Related Party Transactions
The Company conducts a significant amount of business with its parent, UICI. The
Company currently provides services to a number of UICI subsidiaries and
affiliates pursuant to written agreements ranging from one to three years, with
annual renewable options thereafter. These services include the licensing of
certain of its proprietary workflow and business applications, as well as
systems integration and technology management. UICI and its subsidiaries and
affiliates constitute, in the aggregate, the Company's largest customer. For the
years ended December 31, 1996, 1997 and 1998, UICI and its subsidiaries and
affiliates, including the subsidiaries and affiliates discussed below, accounted
for an aggregate of $1.8 million (15%), $12.6 million (42%) and $24.9 million
(56%), respectively, of the Company's total revenues for such periods. As of
December 31, 1996, 1997 and 1998, the Company had trade receivables from UICI
and its subsidiaries and affiliates of $1.7 million, $2.2 million and $2.2
million, respectively. In addition to trade receivables, the Company also held
various notes receivable from UICI and its subsidiaries and affiliates,
amounting to $.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.
Commencing in 1996, UICI provides human resource administrative services to the
Company, including payroll services and employee benefit management. In addition
to reimbursement on a dollar-for-dollar basis for wage and benefit costs, UICI
charges the Company 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. For the years ended December 31,
1996, 1997 and 1998, the Company paid UICI an aggregate of approximately $2,000,
$54,000 and $73,000, respectively, in administrative fees under this
arrangement. The Company expects UICI to continue to provide these services for
the foreseeable future. The Company has also engaged other UICI subsidiaries to
provide services such as printing and newsletter publication. For the years
ended December 31, 1997 and 1998, the Company paid these subsidiaries an
aggregate of approximately $23,000 and $18,000, respectively, for such services.
The Company leases two facilities from certain subsidiaries of UICI. The Company
leases office space located in Hurst, Texas, pursuant to a written agreement
that expires on December 31, 1999. The Company leases additional office space in
Dallas, Texas, on a month-to-month basis under a verbal agreement. The Company
paid an aggregate of approximately $112,000 and $255,000 under these leasing
arrangements for the years ended December 31, 1997 and 1998, respectively.
During 1997 and 1998, the Company purchased certain furniture and equipment for
$170,000 and $141,000, respectively, from a subsidiary of UICI for purchase
prices equal to the subsidiary's net book value for such items. Also during
1998, the Company purchased certain furniture and equipment for $195,000 from
BTSI, a UICI affiliate, for a purchase price equal to BTSI's net book value for
such items.
F-13
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Related Party Transactions (continued)
The Company currently provides certain workflow and business applications to
UICI Administrators, Inc. (UICI Administrators), a TPA owned by UICI, pursuant
to a written service license agreement. UICI Administrators in turn operates
through an agreement with Healthcare Management Administrators, Inc. (HMA), an
entity owned by Ronald L. Jensen, a director of the Company and the President,
Chief Executive Officer and Chairman of UICI. The Company's agreement with UICI
Administrators is for a five-year term expiring in December 2001, with automatic
annual renewal provisions thereafter, subject to prior notice of nonrenewal. For
the years ended December 31, 1996, 1997 and 1998, UICI Administrators accounted
for an aggregate of $1.8 million, $2.2 million and $3.0 million, respectively,
of the Company's total revenues under the agreement, which represent
approximately 15%, 8% and 7%, respectively, of the Company's total revenues for
such periods.
The Company provides accounting and management services to UICI Administrators.
In exchange for these services, UICI Administrators pays the Company a fee based
upon the salary, benefits and time commitment of the Company's employees
actually performing the services. The fee is intended to reimburse the Company
for the costs of providing these services and therefore such fees are offset
against the related expenses. Fees received from UICI Administrators amounted to
$44,000, $2,000 and $134,000 for the years ended December 31, 1996, 1997 and
1998, respectively. In addition to the accounting services provided by the
Company, the Company's President and Chief Executive Officer, provides certain
management oversight of UICI Administrators. Neither the President nor the
Company receives any compensation in exchange for the President's services.
During 1999, the Company 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 the
Company 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
fair 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 5
year life of the contract. The note is collateralized by the proceeds of the
cancellation provisions within UICI Administrators' contract with the unrelated
third party. The Company recorded approximately $324,000 in programming revenues
under this contract during the nine months ended September 30, 1999. The
Company's arrangement with UICI Adminsitrators provides for the Company to
receive its customary software licensing and processing fee over the term of the
contract.
HMA, an entity owned by Ronald L. Jensen, provides a significant number of
services to UICI Administrators, which is a customer of the Company. HMA was
formed by Mr. Jensen in July 1997. Along with UICI Administrators, HMA
experienced significant operating losses in 1998. The Company had advanced
approximately $1.1 million to HMA under a written promissory note dated April
30, 1998, that bore interest at prime plus 2% and was payable on demand upon 30
days prior notice. The entire balance of the note was repaid during August 1998.
F-14
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Related Party Transactions (continued)
Winterbrook VSO (VSO), an entity owned by Ronald L. Jensen, provides certain
sales and marketing services for the Company's imaging and electronic data
capture services pursuant to a verbal brokerage agreement that expired June 30,
1997. Under the agreement, VSO receives a commission computed on the amount of
recurring license fees under client contracts that VSO brokered on behalf of the
Company. During 1996 and 1997, the Company advanced funds to VSO against future
commissions to be earned by 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. The Company paid VSO, or offset
against the outstanding balance of any advances, as applicable, fees aggregating
approximately $34,000, $132,000 and $191,000 for the years ended December 31,
1996, 1997 and 1998, respectively. At December 31, 1998, the balance of
commissions owed to VSO was approximately $42,000. Mr. Jensen purchased VSO from
UICI in July 1997.
Matrix Telecom, Inc. (Matrix) (formerly known as Avtel Communications, Inc.), a
telephone company in which Ronald L. Jensen and his five adult children own a
controlling interest, provides telephone services to the Company pursuant to a
written agreement. This agreement was for a one-year term expiring June 13, 1998
with automatic monthly renewal provisions thereafter, subject to 30 days' notice
of non-renewal. Management intends to allow this agreement to renew
automatically for the foreseeable future. For the years ended December 31, 1997
and 1998, the Company paid Matrix approximately $46,000 and $132,000
respectively under the agreement.
National Capital Administrative Services, Inc. (NCAS), a customer of the
Company, was a shareholder of the Company until December 1996. The Company has a
written, annually renewable contract with NCAS pursuant to which NCAS licenses
certain of the Company's workflow and business applications. For the year ended
December 31, 1996, NCAS accounted for approximately $3.0 million of the
Company's total revenues, which represent approximately 24% of the Company's
total revenue for that period.
5. Property and Equipment
Property and equipment, at cost, consist of the following (in thousands):
<TABLE>
<CAPTION>
Useful Lives December 31,
(Years) 1997 1998
------------ ------- ---------
<S> <C> <C> <C> <C>
Computer equipment 3 - 5 $ 8,927 $ 12,100
Office furniture and equipment 5 - 7 1,505 1,748
Computer software 3 - 5 1,739 1,978
Leasehold improvements 3 - 5 816 1,041
Less accumulated depreciation (9,015) (10,880)
------- ---------
$ 3,972 $ 5,987
======= =========
</TABLE>
Accumulated depreciation at September 30, 1999 amount to $12.4 million
(unaudited).
F-15
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Intangible Assets
The Company's intangible assets at December 31, 1996, resulted from the
application of purchase accounting to the acquisition price paid by UICI for IIS
on August 1, 1996. The excess consideration paid by UICI over the fair value of
the net tangible assets of IIS less minority interests determined at the date of
acquisition of approximately $1.6 million was allocated initially to
identifiable intangible assets with the remainder allocated to goodwill.
On May 1, 1998, the Company purchased the remaining 49% member interest in IIS
for $1.65 million. The consideration paid by the Company exceeded the book value
of the interest acquired by approximately $453,000. The excess was allocated to
intangible assets based on appraised values including $189,000 allocated to
in-process research and development. The in-process research and development was
expensed at the date of the acquisition. In addition to the consideration
described above, the purchase of the remaining interest in IIS included annual
earn-out payments through the year 2000 the majority of which was subject to a
cumulative ceiling of approximately $1 million. On August 31, 1999, the Company
exchanged a note receivable from the former shareholders of approximately
$454,000 to settle a majority of the earn-out provision rights. The Company
recorded the carrying value of the note receivable as additional purchase price
on the settlement date, which amount is being amortized over the remaining
useful life of the assets acquired.
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
Useful Lives December 31,
(Years) 1997 1998
------------ ----- -----
<S> <C> <C> <C>
Goodwill 20 $ 621 $ 621
Customer base 10 265 377
Work force 5 61 115
Less accumulated amortization (105) (193)
----- -----
$ 842 $ 920
===== =====
</TABLE>
Accumulated amoritization at September 30, 1999 amount to $270,000 (unaudited).
7. Stock Option Plans
UICI sponsors the Founders' Stock Option Plan pursuant to which UICI and the
Company have granted stock options to certain key employees of the Company to
purchase shares of the Company's Common Stock from UICI. Under the Founders'
Stock Option Plan, UICI has made available for purchase an aggregate of
2,459,500 shares of Common Stock, representing 15% of the total number of shares
of Common Stock held by UICI, at an exercise price of $1.80 per share. Options
awarded under the plan vest ratably over a five-year period and expire 90 days
after the last vesting date. The Founders' Stock Option Plan is administered by
the Company's Board of Directors, which has the authority to determine who will
receive stock options, the number of shares of Common Stock subject to such
stock options and the terms, conditions, restrictions and limitations relating
to an award of stock options, including the time and conditions of vesting and
exercise.
F-16
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
A summary of the Company's stock option activity is as follows:
Number
of Shares
----------
Outstanding at December 31, 1996 -
Granted 2,066,000
Forfeited -
-----------
Outstanding at December 31, 1997 2,066,000
Granted 393,500
Forfeited (198,000)
-----------
Outstanding at December 31, 1998 2,261,500
===========
Options exercisable at December 31,
1997 -
1998 443,200
No options were exercised during 1997 or 1998. Options outstanding at December
31, 1998 have a weighted-average remaining contractual life of 3.65 years. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market value of the underlying stock on the date of grant, no
compensation expense has been recognized.
Effective August 15, 1998, the Company's employees became participants in a UICI
stock option plan pursuant to which UICI has granted stock options to purchase
shares of UICI common stock to certain employees of the Company. There were
418,458 options granted to Insurdata employees, of which 44,456 have been
forfeited as of December 31, 1998. Each option has an exercise price of $15; the
options vest 20% each year beginning on August 15, 1999 and thereafter through
year 2001 and 40% on August 15, 2002. These options are UICI obligations and
have not been included in the Company's stock option information above. The
exercise price of these options equaled the market price of UICI common stock on
the date of grant. As such, no compensation expense has been recognized under
APB 25.
On June 1, 1999 the Company's Board of Directors approved the Insurdata
Incorporated 1999 Stock Option Plan (the "1999 Plan"). The 1999 Plan authorized
management of the Company to grant to employees up to 2,500,000 options to
purchase the Company's common stock. As of September 30, 1999, 271,000 options
have been granted under the 1999 Plan. No compensation expense was recognized as
all options under the 1999 Plan have been granted with an exercise price not
less than the fair value of the common stock on the date of grant.
Pro forma information regarding net income required by Statement 123 has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The weighted-average fair value per
share of options granted by the Company in the Founders Stock Option Plan during
1997 and 1998 was $.41 and $.35, respectively. The weighted-average fair value
per share of options in the UICI Stock Option Plan during 1998 was $3.06. The
fair value of these options was estimated using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1998:
risk-free interest rate of 6.7% in 1997 and 5.71% in 1998, a volatility factor
of 0.38, no dividend yield and an expected life of four years.
F-17
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stock Option Plans (continued)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including, for publicly held companies, expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands):
December 31 December 31
1997 1998
----------- -----------
Pro forma net income $ 1,759 $ 1,587
8. Income Taxes
The Company uses the liability method of accounting for income taxes as required
by Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
Prior to December 31, 1997, the Company filed separate income tax returns.
Commencing with the tax year ending December 31, 1997, the Company is included
in the consolidated income tax returns of UICI.
The Company has a verbal tax sharing agreement with UICI. Under this agreement,
except as described below, the Company remits payments to UICI or receives
payments from UICI for tax expense or benefit computed as if the Company filed a
separate income tax return. Based on this agreement, taxes payable at December
31, 1998, are primarily payable to UICI, not to the taxing authorities. As the
parent of the Company and combined entities, UICI is responsible for making all
federal income tax payments for the combined group. The Company's tax provision
and related tax accounts have been prepared on a separate return basis.
Certain taxable income and losses related to IMS and IIS were included in UICI's
consolidated tax return prior to the Company acquiring those entities.
Subsequent to acquisition of those entities by the Company, such entities were
subject to the Company's verbal tax sharing agreement with UICI. Consequently,
prior to acquisition of such entities settlement of the related tax expense and
benefits through the Company's tax sharing agreement did not occur. The
resulting taxes payable or receivable are reflected in stockholder's equity as a
distribution to UICI of $257,000, a contribution from UICI of $132,000 and a
contribution from UICI of $216,000, for the years ending December 31, 1996, 1997
and 1998, respectively.
IMS and IIS are limited liability corporations (LLCs) which are treated as
partnerships for federal income tax purposes. Accordingly, minority interests in
the LLCs are determined before income tax expense or benefit associated with the
income or loss of the LLC.
F-18
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The components of the provision for income taxes are as follows (in thousands):
December 31
1996 1997 1998
------- ------- ----
Current:
Federal $ 524 $ 916 $535
State 80 154 139
------- ------- ----
Total current 604 1,070 674
Deferred:
Federal (120) 104 172
State (14) 21 34
------- ------- ----
Total deferred (134) 125 206
------- ------- ----
Total provision for income taxes $ 470 $ 1,195 $880
======= ======= ====
The effective income tax rate on income before income taxes differed from the
federal income tax statutory rate for the following reasons (in thousands):
Year ended December 31
1996 1997 1998
------- ------- ------
Income tax provision:
Based upon the federal statutory rate $374 $ 979 $ 965
State income tax, net of federal benefit 44 115 114
Benefit associated with minority interest
in loss of subsidiary 54 73 6
Research and development credit - - (124)
Other (2) 28 (81)
----- ------- ------
$470 $ 1,195 $ 880
===== ====== =======
F-19
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The Company's deferred tax assets and liabilities consist of the following (in
thousands):
December 31
1997 1998
------ -----
Deferred tax assets:
Excess of book over tax depreciation $ 57 $ 57
Basis in limited liability companies 222 81
Phantom stock compensation 549 392
Intangibles - 145
Other 5 -
------ -----
Total deferred tax assets 833 675
Deferred tax liabilities:
Software development costs capitalized 514 562
------ -----
Total deferred tax liabilities 514 562
------ -----
Net deferred tax assets $ 319 $ 113
====== =====
9. Lease Commitments
The Company leases equipment under capital leases and leases its headquarters
and certain other facilities under operating leases. Minimum noncancelable lease
payments required under operating and capital leases for the years subsequent to
December 31, 1998, are as follows (in thousands):
Operating Capital
Leases Leases
---------- ---------
1999 $1,463 $230
2000 788 230
2001 166 206
2002 66 17
---------- ---------
Total $2,483 683
Less amount representing interest (95)
---------
Present value of minimum lease payments 588
Less current portion (179)
---------
$409
=========
Rent expense totaled approximately $525,000, $884,000 and $1,367,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-20
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Employee Benefit Plans
The Company adopted the Insurdata Incorporated 401(k) and Profit Sharing Plan
(the Insurdata Plan) on July 1, 1988, for the benefit of employees meeting
certain age and service requirements. The Insurdata Plan provided for a Company
match of up to 25% of the employee contributions up to a maximum of 2% of
eligible employee compensation. Employee and employer contributions to the Plan
were discontinued effective April 1, 1997, when the Company switched to a plan
offered by its parent company, UICI. Employer matching contributions to the
Insurdata Plan amounted to $11,000 and $3,000 for the years ended December 31,
1996 and 1997, respectively.
Effective April 1, 1997, eligible employees of the Company became participants
in the UICI Employee Stock Ownership Plan (the Plan). On January 1, 1998, the
Plan was converted to the UICI Employee Stock Ownership and Savings Plan, which
is a combination ESOP/401(k) plan. Under the Plan, the Company contributed 3% of
qualified salary up front and matched 50% of employee contributions up to 6% of
eligible employee compensation. All Company contributions are invested in UICI
common stock. Employer contributions to the ESOP were $353,000 and $600,000 for
the years ended December 31, 1997 and 1998, respectively.
Effective January 1, 1997, the Company began participating in the UICI Special
Total Ownership Plan (the STOP Plan). Under the STOP Plan, UICI makes periodic
discretionary contributions to a trust on behalf of employees of UICI and its
subsidiaries, including the Company. The plan invests 100% of these Company
contributions in UICI common stock. The Company recorded compensation expense of
$126,000 and $44,000 related to the STOP Plan for the years ended December 31,
1997 and 1998, respectively.
In 1992, the Company adopted the Insurdata Incorporated Key Person Award Program
(the KPA Plan), which provided for profit sharing and phantom stock awards for
certain key employees of the Company. Except for ongoing payments associated
with awards of phantom stock, the KPA Plan terminated on December 31, 1996.
Under the plan, shares of phantom stock could be redeemed for cash under certain
circumstances, including termination of employment, with payment occurring in
one lump sum without interest or, at the election of the Company, in a maximum
of five equal annual installments, with interest at the lower of the prime rate
or 10%. All shares of phantom stock awarded under the plan were redeemed by the
holders thereof at a market price of $1.80 per share effective December 31,
1996. Payment of the cash value is being made by the Company in five equal
annual installments, including interest. The long-term phantom stock liability
is approximately $1.4 million, $1.1 million and $.7 million at December 31,
1996, 1997 and 1998, respectively. The current phantom stock liability is
approximately $.4 million at December 31, 1996, 1997 and 1998.
The Company awarded a total of 1,050,000 shares of phantom stock under the KPA
Plan. The Company recognized compensation expense for profit sharing of
approximately $172,000 during the year ended December 31, 1996, under the KPA
Plan. The Company recognized compensation expense for phantom stock awards of
approximately $360,000 during the year ended December 31, 1996, under the KPA
Plan.
F-21
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Employee Benefit Plans (continued)
Upon the acquisition of IIS by UICI in August 1996, the management of IIS was
granted a 5% interest in IIS to be earned over a two-year period. The Company
has recorded the related unearned compensation as a reduction of stockholder's
equity. Compensation expense recorded for this agreement was $61,000, $147,000
and $86,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
11. Year 2000 Issue (Unaudited)
Many currently installed computer systems and software products are unable to
distinguish between twentieth century dates and twenty-first century dates. If
not corrected, such computer applications could fail or create erroneous
results. The problems associated with this issue could appear in hardware,
operating systems and other software programs.
The Company is continuing its assessment of Year 2000 issues and taking steps to
prevent these issues from adversely affecting its future operating results. This
readiness process included the formation of a task force to determine which
functionality may be affected, performing remediation as necessary, developing
test procedures and recording results.
In addition to evaluating its own systems for Year 2000 compliance, the Company
is also communicating with its significant suppliers and customers to determine
the extent to which interfaces with such entities are vulnerable to Year 2000
issues and the extent to which any products or services purchased by or from, or
internal systems of, such entities are vulnerable to Year 2000 issues.
The Company's proprietary software used to deliver services to its customers is
designed to be Year 2000 compliant, and management believes them to be so,
without material deviation. The task force is performing ongoing inquiries with
respect to the Year 2000 readiness of its material third-party vendors. While
the task force's current assessment does not suggest it, due to uncertainties
associated with third-party vendors being Year 2000 compliant, the Company is
unable to predict whether a material adverse effect on business, results of
operations or financial condition may result.
With the installation of a Year 2000 system upgrade completed prior to September
30, 1999, the Company believes that all internal financial systems are Year 2000
compliant. The task force completed development of a formal Contingency Plan to
include facilities, additional support requirements and data retrieval prior to
December 31, 1999.
The readiness effort by the task force has been conducted in the ordinary course
of business and has been funded out of operations. The impact on 1998 is
insignificant and the impact on 1999 is expected to be less than $125,000.
F-22
<PAGE>
Insurdata Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Subsequent Events (Unaudited)
Effective October 1, 1999, the Company sold certain assets used in providing
benefits administration services, namely its IA division, to a subsidiary of
UICI for a sales price of approximately $459,000 in cash. The price approximated
the Company's net book value at the time of the sale.
Effective October 1, 1999, the company sold its 100% member interest in IMS to a
subsidiary of UICI for a sales price of $171,337 in cash. The price approximated
the Company's net book value at the time of the sale.
On December 6, 1999, the Company signed a merger agreement with HealthAxis.com,
Inc. (HealthAxis), whereby the Company's shareholders agreed to exchange their
100% ownership of the Company for an ownership interest in the combined entity.
HealthAxis will be the surviving entity of the merger. HealthAxis is a web-based
retailer of health insurance products and related consumer services. It is
anticipated that the merger will be treated as a Tax-Free Reorganization within
the meaning of Section 368 (a) of the Internal Revenue Service Code. Closing of
the transaction occurred on January 7, 2000.
F-23
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
HealthAxis Inc. (formerly Provident American Corporation) on Form S-8 (SEC File
No. 33-43617 effective date October 29, 1991, SEC File No. 33-43615 effective
date October 31, 1991 and SEC File No. 333-71223 effective date January 26,
1999) of our report dated June 24, 1999, with respect to the consolidated
financial statements of Insurdata Incorporated included in this Current Report
on Form 8-K/A.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Dallas, Tx
February 10, 2000
