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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13591
HEALTHAXIS INC.
(Exact name of Registrant as specified in its charter)
5215 N. O'Connor Blvd.
800 Central Tower
Pennsylvania Irving, Texas 75039 23-2214195
- ------------------------------------------ ------------------------------------------ --------------------------------------
(State or other jurisdiction of (Address of principal executive (I.R.S. Employer
incorporation or organization) offices including zip code) Identification Number)
- ------------------------------------------ ------------------------------------------ --------------------------------------
(972) 443-5000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
- -------------------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.10 par value
----------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K: |_|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
8, 2002 as reported on the NASDAQ National Market System, was approximately
$19,957,385. Shares of the Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 8, 2002, the Registrant had 53,352,738 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive Proxy Statement for the
2002 Annual Meeting of Stockholders are incorporated by reference into Part III
hereof.
Healthaxis Inc.
Table of Contents
Page
----
PART I....................................................................................................1
Item 1. Business..................................................................................1
Item 2. Properties...............................................................................21
Item 3. Legal Proceedings........................................................................22
Item 4. Submission of Matters to a Vote of Security Holders......................................22
PART II..................................................................................................23
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................23
Item 6. Selected Financial Data..................................................................23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................37
Item 8. Financial Statements.....................................................................38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................76
PART III.................................................................................................77
Item 10 Directors and Executive Officers of the Registrant.......................................77
Item 11. Executive Compensation...................................................................77
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................77
Item 13. Certain Relationships and Related Transactions...........................................77
PART IV..................................................................................................78
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................78
EXHIBIT INDEX ...........................................................................................80
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PART I
STATEMENTS IN THIS REPORT WHICH ARE NOT PURELY HISTORICAL FACTS, INCLUDING
STATEMENTS REGARDING THE COMPANY'S ANTICIPATIONS, BELIEFS, EXPECTATIONS, HOPES,
INTENTIONS OR STRATEGIES FOR THE FUTURE, MAY BE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. ALL FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE BASED UPON
INFORMATION AVAILABLE TO THE COMPANY ON THE DATE OF THIS REPORT. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ALL FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THE EVENTS
OR RESULTS DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS AND
UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THOSE SET FORTH IN THIS REPORT UNDER
"BUSINESS--RISK FACTORS."
ITEM 1. BUSINESS
GENERAL
Healthaxis is an emerging technology services firm committed to providing
innovative and configurable web-based connectivity and applications solutions
for health benefit distribution and administration. These solutions, which are
comprised of software products and related services, are designed to assist
health insurance payers, third party administrators, intermediaries and
employers provide enhanced services to members, employees and providers through
the application of Healthaxis' flexible technology to legacy systems, either on
a fully integrated or on an Application Service Provider ("ASP") basis.
Healthaxis believes that its solutions enable a client to reduce their
administrative costs, enhance their customer service and improve their
profitability.
Healthaxis' proprietary applications address the specific processing needs
of the administration and distribution segments of the healthcare insurance
industry in an efficient and cost-effective manner. Healthaxis, through its
state-of-the-art applications, provides real-time interaction with plan
documents, enrollment and applications, as well as access to personalized
eligibility and claims data via the Internet. These Internet-enabled business
applications enhance the transaction process and streamline the flow of
information amongst the many systems employed by various constituents within the
healthcare insurance industry. Healthaxis' business solutions include the
automated capture, imaging, storage and retrieval of electronic claims,
attachments, and related correspondence. Healthaxis also offers various related
services, including application systems management and systems integration, data
center, telephony and PC/Lan services.
Healthaxis is staffed by experienced health insurance and technology
professionals who understand the payer world. The team combines extensive health
insurance industry experience with a technical team exclusively focused on the
unique needs of health insurance companies, third party administrators (TPAs),
broker / intermediaries and self-funded employers. Payer solutions are offered
through readily configurable products, such as Insur-Claims, Insur-Admin,
Web-Self Service, Online Enrollment, Retail Distribution, eHealthTalk-HIPAA
solutions and Imaging Services. All of Healthaxis' products are supported by
professional services offered on a consulting basis. Healthaxis' solutions are
sold and supported through the following four strategic business units, which
are closely aligned with their target markets.
o APPLICATION SOLUTIONS GROUP - provides web-enabled systems for
enrollment, administration and processing of health insurance claims
on an Application Service Provider ("ASP") basis.
o WEB TECHNOLOGY GROUP - provides web-enabled connectivity platforms and
solutions for self service (broker, employer, employee and providers),
large group enrollment and small group
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enrollment, sale/distribution and post-sale administration of group
and individual insurance policies including health, life and dental
insurance, and solutions for enabling compliance with HIPAA.
o IMAGING SERVICES GROUP - provides electronic data-capture, imaging,
storage and retrieval of health insurance claims, attachments and
other correspondence.
o OUTSOURCING GROUP - provides system technology support services for
the Company's largest single client, UICI, on an outsourcing basis.
Management of Healthaxis, as well as the composition of the Company's Board
of Directors, was significantly changed during 2001. James W. McLane became the
President and Chief Executive Officer in February 2001 and Chairman in July
2001. John M. Carradine joined in March 2001 as the Chief Financial Officer. A
new leader for the Web Technology Group was installed in May 2001 and a new
sales team began operation in June 2001. In the months following, several goals
were accomplished to re-position the Company for future growth:
o The Company's financial position was improved
o Operating expenses were reduced
o The Company was restructured into four strategic business units
o A cohesive market based strategy was developed
o The sales force was expanded
o The sales pipeline grew significantly
o Several meaningful clients were added
o Strategic partnerships were created with several complementary
enterprises
o The Board of Directors was strengthened
o A values-based culture was instilled in the Company
- TO DELIVER WHAT WE PROMISE
- TO TAKE OWNERSHIP AND ACCOUNTABILITY FOR OUR RESULTS
- TO DO THE RIGHT THING - - - ALL THE TIME
- TO UNDERSTAND THAT RELATIONSHIPS DETERMINE RESULTS
- TO TEAM AND RUN TO WIN
Healthaxis Inc. (the "Company" or "Healthaxis") is a Pennsylvania
corporation organized in 1982. Healthaxis' common stock trades on the Nasdaq
National Market under the symbol "HAXS." The operations of Healthaxis during
2001 were conducted primarily through its subsidiary, Healthaxis.com, Inc. In
the fourth quarter of 2001 the Company reorganized and formed a new subsidiary,
Healthaxis, Ltd., through which all operations are now conducted. Unless
otherwise indicated, or the context otherwise requires, all references in this
document to the Company or Healthaxis include Healthaxis Inc. and all of its
subsidiaries.
HEALTH INSURANCE INDUSTRY
Healthcare plan administration involves providers, payers, managed care
organizations, reinsurance carriers, preferred provider organizations, medical
and dental claim review staffs, employers, and patients. Unlike other types of
insurance, healthcare insurance administration frequently results in extensive
interaction between the patient, the provider, the insurance carrier and the
employer. Each of these participants must be able to share, process, and access
data in order to perform their respective roles in the healthcare system. The
complexity and fragmentation within the healthcare industry complicates this
task.
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Healthaxis believes, based upon industry reports, that over $250 billion
each year is wasted through redundant procedures and excessive administrative
costs. As the overall healthcare industry has increased in size and complexity,
the burden of gathering, processing, and managing the approximately 4.6 billion
claims generated each year has led to significant administrative bureaucracies,
inefficiencies, and high costs. This burden has placed increasing strains on the
profitability of the overall industry, as pricing pressures and other
competitive factors have compressed margins. Recent industry reports conclude
that the health insurance industry is 10 to 15 years behind other
transaction-intensive industries, such as the airline and banking industries, in
its use of information technology. This failure to effectively utilize currently
available technology is reflected in the higher transaction processing costs
incurred within the health insurance industry. According to a recognized
industry source, the estimated total cost to process a paper-based healthcare
claim is up to $12.00, versus $3.00 for electronic healthcare claims.
Additionally, a customer service inquiry can cost up to $7.00 each, versus $.25
for an electronic inquiry.
Healthaxis believes that the healthcare industry has historically
under-invested in information technology due to the limited suitability of
existing technological platforms for addressing the needs of the industry. The
high degree of interaction, complexity and the large volume of transactions
among healthcare providers, insurers, and managed care companies, independent
administrative service organizations, employers, and employees does not lend
itself to traditional client-server or mainframe environments. These systems,
which are designed to operate with dedicated networks, are generally not suited
for interfacing among a number of unrelated external users on a cost-effective
basis. Healthaxis believes the Internet, which facilitates the rapid deployment
of information and provides for cost-effective access to an unlimited number of
users, represents the next phase in the evolution of healthcare information
technology. Due to the transaction-intense nature of healthcare insurance, and
consumer interest in learning more about these transactions, Healthaxis believes
that participants will demand increasing access to healthcare eligibility
information, claims status, and provider information. Healthaxis believes that
less than one-third of healthcare payers have deployed Internet solutions for
transaction processing.
BUSINESS STRATEGY
Healthaxis' goal is to provide its clients with market leading, innovative
and configurable web-based connectivity and applications solutions for health
benefit distribution and administration. To achieve this goal, key elements of
the Company's strategy are as follows:
MAINTAIN INDUSTRY FOCUS: A key component of Healthaxis' market appeal is
its industry focus. By concentrating efforts within the payer-side of healthcare
administration, the Company brings a depth of industry knowledge that few of its
direct competitors can match. The Company has been providing payer-side software
solutions to the market for more than 20 years. Both its products and its
services reflect its extensive base of industry knowledge and experience.
MAINTAIN TECHNOLOGY LEADERSHIP: Healthaxis has consistently been recognized
as a leader in information technology for the healthcare insurance industry.
This recognition comes from various industry consultants and strategic partners
who have reviewed its technology platforms and products, and its clients who use
them. The Company will continue utilizing a dedicated staff of internal
technology professionals to support its operating units and clients through
continuing research, development, evaluation, and implementation of new
technologies. The Company has budgeted for significant investment in technology
features and functionality to continually align its offerings with the market's
needs. The Company also partners with other enterprises offering quality
technology and systems capabilities.
EXPAND SALES CAPABILITIES: A Vice President of Business Development was
hired in 2001 to develop and lead the sales and marketing function against the
payer markets. The sales team needed to
3
significantly grow revenues is being assembled with a focus on adding sales
personnel with specific industry knowledge, reputation and relationships to
effectively take advantage of the Company's opportunities within each business
segment.
CAPITALIZE ON CROSS SELLING OPPORTUNITIES: New client sales are generally
the result of filling a specific need of a prospect with a particular product or
service. Once that product or service is implemented and the relationship
established, the Company seeks to identify additional cross-sell opportunities
where it can demonstrate added value to the client. Most of the Company's
clients have the potential for one or more cross-sell opportunities.
LEVERAGE STRATEGIC PARTNERSHIPS: Healthaxis has developed strategic
relationships in an effort to strengthen its capabilities in the areas of
Business Development, Technology and Delivery / Implementation. The Company
intends to leverage these relationships to expand its client base and enhance
its products and services. The Company's strategic relationships include:
---------------------------- ------------------ --------------- --------------------------
Business Delivery /
Partner Development Technology Implementation
---------------------------- ------------------ --------------- --------------------------
Satyam X X
---------------------------- ------------------ --------------- --------------------------
Washington Publishing X X
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Digital Insurance X
---------------------------- ------------------ --------------- --------------------------
R.E. Nolan X X
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Microsoft X X
---------------------------- ------------------ --------------- --------------------------
BCE Emergis X X
---------------------------- ------------------ --------------- --------------------------
NaviMedix X X X
---------------------------- ------------------ --------------- --------------------------
STRATEGIC BUSINESS UNITS
In May 2001, the Company implemented a restructuring plan which, among
other things, created four business units, each with separate operating
accountability. Each business unit sells its products and services to various
types of healthcare payers, which include insurance companies (carriers), Blue
Cross/Blue Shield plans, TPAs and large employers. The solutions related to
administration and distribution of health insurance plans are also offered
through brokers and intermediaries. The following chart illustrates the
solutions and markets by business unit.
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SOLUTION / MARKET MATRIX
------------------------
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
SOLUTION PRIVATE THIRD BROKERS AND EMPLOYERS
CARRIERS & PARTY INTER-MEDIARIES
BC/BS ADMINISTRATORS
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
APPLICATION SOLUTIONS GROUP
---------------------------
Insur-Admin X X
Insur-Claims X X
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
WEB TECHNOLOGY GROUP
--------------------
Web Self- Service Applications
o Employee module X X
o Employer module X X
o Broker module X X
o Provider module X X
Online Enrollment Applications
o Large group X X X X
o Small group X X X X
Retail Distribution Application X X
eHealthTalk - HIPAA X X
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
IMAGING SERVICES GROUP X X
----------------------
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
OUTSOURCING GROUP X
-----------------
- --------------------------------------- ----------------- -------------------- ----------------- -----------------
APPLICATION SOLUTIONS GROUP
This unit provides web-enabled systems for enrollment, administration and
processing of health insurance claims (e.g., medical, dental, defined
contribution, vision, disability and flexible spending accounts) on an ASP
basis. Its target markets are TPAs and self-funded employers. This group
utilizes a technology platform built around IBM based hardware and software. The
software and processing capabilities are hosted on Healthaxis' site with
clients' processing centers connected through a dedicated data-line network.
The Application Solutions Group analysts come from within the industry and
have extensive knowledge of the environments that use the Company's solutions.
This enables the Company to understand business issues and provide technology
solutions that assist in solving those issues. This same knowledge gives the
Company the ability to understand support issues and assist in providing
resolution in an efficient manner based on the needs of the individual client.
The primary competitors for the Application Solutions Group include
TriZetto (RIMS), Computer Sciences Corporation (TXEN), Eldorado, SPBA, and
Genelco. The Company believes that its products and services described below
compare favorably with those of its competitors in both functionality and
breadth.
5
INSUR-ADMIN. Insur-Admin is a comprehensive benefits administration system
that features enrollment, group and individual billing, and premium collection
and reconciliation. Insur-Admin accommodates both interactive and batch
enrollment for a wide spectrum of coverages. It allows organizations to track
divisions, subdivisions, locations, health classifications, and work groups.
Insur-Admin interfaces with a plastic identification card production system,
thereby reducing the time required to produce identification cards. Insur-Admin
manages all aspects of the Consolidated Omnibus Budget Reconciliation Act
("COBRA"), including calculating and collecting COBRA premiums, tracking
qualifying events, and issuing rights and qualification letters and billing
coupon books. The system performs HIPAA compliant activities, including
capturing prior coverage credit days and issuing HIPAA certificates upon
termination of coverage. Insur-Admin also manages medical and dependent care
flexible savings accounts. Insur-Admin is web-enabled with access being provided
to employers, employees and providers for eligibility status and claims inquiry
and to employers and employees for eligibility, life event changes and
terminations. Insur-Admin can be implemented on a stand-alone basis or can be
integrated with Healthaxis' claim payment system, Insur-Claims.
INSUR-CLAIMS. Insur-Claims is a comprehensive paperless claim processing
system for health, dental, vision, short-term disability, executive
reimbursement, and medical and dependent care flexible spending accounts. A
rules-based approach, which includes un-bundling and re-bundling edits, allows
Insur-Claims to be fully customized and allows the system to handle complex
benefit structures and provider reimbursement arrangements. Through user-defined
rules and batch processing, Insur-Claims can achieve auto-adjudication rates of
up to 50% for medical claims and up to 90% for dental claims. The system has
extensive preferred provider organization capabilities and can perform preferred
provider organization re-pricing functions. Insur-Claims facilitates utilization
management, including pre-certifications, referrals and authorizations.
Insur-Claims accepts electronic data interchange or "EDI" transactions and
automated adjudication of those transactions. Insur-Claims is web-enabled and
can provide claim status inquiry, including access to processed EOBs for the
employee. Insur-Claims is based on a paperless workflow, which begins with the
imaging of all documents. These document images are tied to patients and claims
and provide fast and efficient client service resolution.
Client output from utilizing the licensed software described above is
typically printed documents, such as benefit checks, letters or EOBs. The client
may elect to print, handle and mail such documents. However, in most cases,
these tasks are performed by Healthaxis as an additional billable service.
WEB TECHNOLOGY GROUP
This group provides web-enabled platforms and solutions for the enrollment,
sale / distribution and post-sale administration of group and individual
insurance policies, including health, life and dental insurance, as well as
software solutions for enabling compliance with HIPAA. Its target markets are
health insurance carriers and Blue Cross plans, TPAs, broker/intermediaries and
large employers. A primary focus of the group is bringing Web-based connectivity
to legacy systems in a "bolt-on" fashion. We believe that healthcare payers do
not want to replace legacy systems and are seeking outsourced, e-business
connectivity solutions. Due to the nature of the offerings and to the inherent
differences in the back-end processing systems being served, solutions provided
by the Web Technology Group are configurable and allow for a high degree of
customization. The group utilizes a technology platform built around XML, XSL
and Microsoft Biz-Talk. Solutions may be hosted by Healthaxis or by the client.
The group recently redirected development resources towards tactical products
and solutions in the Web Technology Group in order to meet the market's
connectivity demands.
The primary competitors for the Web Technology Group include TriZetto
(Healthweb), SeeBeyond, PaperFree/Sybase, HealthTrio, Quovadx, eBenX and
SimplyHealth. The products and services provided by the Web Technology Group
are:
6
WEB SELF-SERVICE APPLICATIONS. This solution allows plan members,
employees, employers, brokers and providers to have direct access to plan
documents and personalized benefits information via a secure online personal
space. Through secured inquiry, members and employees have access to their
coverage summary, eligibility and claims status, EOBs, provider directories,
plan change forms, and the ability to track their deductible and FSA accounts.
The system provides members with secure communications directly to their plan's
customer service center via e-mail. Web Self Service provides employer groups
with the same functionality that is provided to their employees, such as
eligibility and claims status inquiry, plan documents and directories, plan
change forms, and more. In addition, employers can view eligibility and claim
experience reports via the Internet or download data to spreadsheets for further
analysis, thereby eliminating a significant portion of printing and postage
costs.
ONLINE ENROLLMENT APPLICATIONS. This solution is an Internet and
interactive voice response based enrollment and eligibility system that provides
employees with the ability to enroll themselves in their employer's
pre-determined health plans and, when necessary, to administer their own
eligibility and life event changes. It supports an unlimited number of benefit
plans, including health, dental, life, vision, accident and disability, as well
as medical and dependent care flexible spending accounts. Using
employee-specific demographic information, the solution automatically computes
coverage levels and pre- and post-tax deductions.
RETAIL DISTRIBUTION APPLICATION. Healthaxis' dynamic Retail Distribution
Application for direct sales of both individual and small group products is
supported by a product rating and comparison engine. Retail Distribution
provides online discovery, quoting, plan comparisons, and electronic application
submission directly to underwriting. Fulfillment material can then be accessed
via the Internet. The system's visual interface is adaptable to the client's
unique "look & feel" and can be co-branded to support strategic partnerships.
EHEALTHTALK-HIPAA. Healthaxis' web-enabling technology provides an Internet
gateway for Healthaxis' other proprietary business applications, as well as
clients' legacy systems. This advanced technology makes it possible for
healthcare organizations to securely import and export non-HIPAA-compliant data
and convert it into a compliant transactional format when transmitting
electronic data across entities. Organizations can save time and money by
avoiding the need to reprogram or replace existing systems in order to comply
with emerging regulatory standards, while taking advantage of the power of the
Internet. In addition to password protection, this solution employs firewalls,
logging tools, encryption technology, and virus detection software packages that
are designed to prevent unauthorized access. eHealthTalk-HIPAA utilizes
Microsoft's BizTalk Server 2000 Accelerator for HIPAA to either translate
non-compliant transactions into certified HIPAA-compliant formats or translate
incoming HIPAA-compliant transactions into proprietary legacy formats. This
approach permits legacy systems to send and receive HIPAA-compliant transactions
while eliminating the need for costly legacy system enhancements, re-coding, or
replacement.
IMAGING SERVICES GROUP
This group performs imaging or data capture outsourcing services to convert
paper transactions in the form of healthcare claims into electronic
transactions. The resulting data is downloaded to the client's internal claims
adjudication database or, for those clients utilizing Healthaxis' claim
processing solutions, to Healthaxis' data center for adjudication and payment.
As a complement to its imaging services, the Imaging Services Group also
provides mailroom services whereby it receives and sorts incoming healthcare
claim forms prior to imaging. Its target markets are health insurance carriers,
Blue Cross plans and TPAs. Its primary competitors are Affiliated Computer
Services, Dakota and GTESS.
The Imaging Services Group utilizes a combination of advanced technology,
including optical character recognition (OCR), using underlying platforms from
Captiva, Cognitronics and Insur-Image
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(Healthaxis' proprietary data capture software). The group operates in favorable
labor markets in the rural U.S. and Jamaica to efficiently capture and convert
large volumes of claims. The Imaging Services Group offers this service to its
clients on a per-claim or per-image basis. This service complements all other
Healthaxis products and services. In addition, it provides a good entry point
with new carrier clients as it usually provides immediate cost savings to the
client.
OUTSOURCING GROUP
This group provides system integration and consulting work for the
Company's largest single client, UICI, pursuant to a technology outsourcing
agreement entered into in January 2000 in conjunction with the merger of
Insurdata and Healthaxis.com., generally on a cost plus 10% basis. Healthaxis
applies strong management practices to the systems delivery process through its
proprietary Insur-Method software development and systems integration life cycle
methodology. Insur-Method is a standardized set of methods and techniques
utilized to ensure successful delivery of projects in a timely and
cost-effective manner and in accordance with client specifications. Insur-Method
encompasses all phases of project development.
The technology platforms serviced by the Outsourcing Group include
mainframe and mid-range servers utilizing workflow software supplied by Eastman
Software. The group competes for UICI revenue dollars with various industry
participants and consultants, as well as UICI's own in-house resources. The
specific services supplied to UICI include:
SYSTEM INTEGRATION SERVICES. This service encompasses the design,
development and implementation of information technology solutions composed of
custom software, package-based application software, hardware and communication
technologies. The SI service consists of four primary functions: Systems
Planning, Custom Software Development, Package Implementation and Multi-Vendor
System Integration.
APPLICATION SYSTEMS MANAGEMENT. This service encompasses the management of
the Application Software portfolio (custom and off-the-shelf software). The ASM
service consists of four primary elements: Application Enhancements, Corrective
Maintenance, Adaptive Maintenance (i.e., upgrades to accommodate hardware and
network software changes) and Application Support.
DATA CENTER SERVICES. This service encompasses providing processing
capability at the infrastructure level, including hardware platforms, operating
systems, application software and utilities. The service includes the provision
of adequate availability of infrastructure and the capacity necessary to deliver
the predefined response times required.
TELEPHONY SERVICES. This service encompasses providing voice services at
the infrastructure level, including recipient wiring/connections, telephone
handsets, operating system software and utilities, dial tone and voicemail
service. It includes the provision of adequate availability and the capacity
necessary to deliver the connectivity required by UICI end users.
PC/LAN SERVICES. This service encompasses providing a reliable distributed
infrastructure, including hardware platforms, network components, operating
systems, application software and utilities. It provides for "Total Life Cycle
(TLC)" services for the management of the environment, including a help desk
facility, dispatching support and maintaining inventory. TLC services also
include equipment ordering, personnel training; technical assistance in using
software products, break/fix management, inventory management and control and
maintenance of current levels of the software.
See "UICI Relationship" below for further information about the Company's
relationship with UICI.
8
SALES AND MARKETING
The Company has developed relationships within the healthcare insurance
industry as a result of its delivery of effective solutions to health insurance
benefit and distribution clients for 20 years. The Company employs a
technically-oriented sales support staff, who are familiar with the Company's
technology and who participate in opportunities to sell the Company's
technology-based solutions. Sales leads are generated through a variety of means
designed to identify the most promising prospects. Once a prospect is
identified, the Company makes a site visit to qualify the prospect and determine
their specific needs. Once specific needs are identified, live demonstrations of
the Company's solutions are scheduled. The team also responds to formal
proposals in situations where the prospect is bidding the work with multiple
vendors.
The Company derives a portion of its business through client referrals. In
addition, it markets its services through a variety of media, including:
o Web site
o Direct mail
o User conferences conducted exclusively for the Company's clients
o Participation in industry conferences and trade shows
o Publication of "white papers" related to specific aspects of the
Company's services
o Informational listings in trade journals
A Vice President of Business Development was recruited in mid 2001 to
develop and lead the sales and marketing function against the health insurance
payer market. The sales team needed to significantly grow the Company's revenue
is being assembled with a focus on adding sales personnel with specific industry
knowledge, reputation and relationships to effectively take advantage of the
Company's opportunities within each business segment.
COMPETITION
Healthaxis believes it has an advantage over its competitors by offering a
broader eBusiness solution to the health insurance payer and distribution
markets, combined in one business operating system based on XML and Microsoft
BizTalk functionality. Additionally, Healthaxis' focus and expertise within the
payer-side of the healthcare industry is an advantage when competing against
companies who service multiple industries or multiple facets of the healthcare
industry.
The principal competitive factors for both the Applications Solutions Group
and the Web Technology Group are the breadth and quality of system and product
offerings, features and functionality, service and support, processing capacity,
and the ability to successfully develop and deploy product improvements. The
principal competitive factors for services provided by the Imaging Services
Group are price and service level commitments. The Outsourcing Group, which
operates solely for UICI, must produce value-added deliverables through industry
knowledge and superior delivery capabilities in order to successfully compete on
projects within UICI.
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Healthaxis' major competitors by business unit are as follows:
o Application Solutions Group - TriZetto (RIMS), Computer Science
Corporation (TXEN), Eldorado, SPBA, and Genelco.
o Web Technology Group - TriZetto (Healthweb), SeeBeyond,
PaperFree/Sybase, HealthTrio, Quovadx, Simply Health and eBenX.
o Imaging Services Group - Affiliated Computer Services, Dakota and
GTESS
o Outsourcing Group - various industry participants and consultants, as
well as in-house staff.
TECHNOLOGY DEVELOPMENT
Healthaxis has an internal technology development department designed to
support its operating units and clients through continuing research,
development, evaluation and implementation of new technologies. Healthaxis uses
a team approach throughout the development phase of new products and product
enhancements, which includes the active participation of Healthaxis' business
units in the early stages of development. This early involvement is essential to
the development and successful implementation of effective technology solutions
meeting the markets' needs.
In addition to project-specific tasks, Healthaxis' technology department
continues to enhance Healthaxis' proprietary applications and to develop and
test new solutions, including the testing and analysis of applications not yet
available in the market. Healthaxis' advanced technology department is involved
in research and development in seven core technology areas: web services,
workflow, transaction processing, database services, indexing services,
communication and connectivity.
INTELLECTUAL PROPERTY AND TECHNOLOGY
PATENT, TRADEMARK, AND COPYRIGHT PROTECTION. Healthaxis' ability to compete
is dependent to a significant degree upon its proprietary systems, technology,
and intellectual property. Healthaxis relies upon a combination of trademark,
copyright, confidentiality agreements and trade secret laws, as well as other
measures to protect its proprietary rights. Healthaxis does not have any patents
or patent applications and currently does not plan to file any patent
applications. Healthaxis has applied for, or registered, the following
trademarks with the U.S. Patent and Trademark Office: Healthaxis,
Healthaxis.com, Insur-Voice, Insur-Image, Insur-Enroll, Insur-Admin,
Insur-Claims, Insur-Dental, Insur-Report and Insur-PPO. Healthaxis has decided
not to file applications for these marks in foreign countries at this time.
Healthaxis' sales materials, content, and software are protected by copyright.
The source code and design of Healthaxis' software are protected through
applicable trade secret law. Healthaxis also uses confidentiality agreements
with its employees to further protect its source codes and software.
INTERNET TECHNOLOGY. The technology supporting Healthaxis' Web services are
based on a distributed computing environment relying primarily on Microsoft
technology platforms. Web servers are based on Internet Information Server 5.0;
middle tier business logic is placed in COM+; and databases are based on
Microsoft SQL Server 2000. The current computing platform consists of over 50
Windows 2000 servers. Additional software utilized includes workflow and print
tools from JetForm. PDF technology has been licensed from Active4 Technologies.
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All of the above installations are interconnected using high-speed private
telecommunications links. All transmissions between the consumer, website and
carriers, or TPAs, are secured using "Secure Sockets Layer" (SSL version 3).
Domestic encryption is used where applicable (I.E., 128 bit), including all
server-to-server communications.
DATACENTER CORE PROCESSING ENVIRONMENT. Healthaxis also has connectivity to
several back-end computing environments. The main data center utilizes 2,000
square feet in a North Richland Hills, Texas facility. This facility has an
un-interruptable power supply system containing both diesel and battery power.
The facility houses the following processing equipment and systems:
o 16 IBM RS6000 processors running AIX (ranging up to the H70 class
computing platform)
o 50+ Windows 2000 servers from Compaq
All NT server equipment is from Compaq and all production servers are
Proliant class servers configured with RAID (or mirroring), dual LAN
connectivity, and redundant power supplies. All networks are switched with Cisco
Catalyst multi-gigabit switching. Internet firewall technology is based on Cisco
PIX firewalls and Cisco equipment is also used as the standard for wide-area
network routing.
A 500 square foot secondary facility is maintained at Healthaxis' corporate
office location in Irving, Texas. This location serves as the primary recovery
facility and has an un-interruptable power system with both diesel and battery
backup. It has multiple network connections to both external service providers
and to the North Richland Hills facility. Off-sight disaster recovery is through
Comdisco. All critical data is backed up and stored at an offsite facility in
the Dallas area.
PRIVACY/SECURITY ISSUES. Healthaxis believes a significant barrier to the
popularity or acceptance of online insurance sales and communications is the
secure transmission of confidential information over public networks. Healthaxis
retains confidential client and patient claim information at its data center.
Computer viruses, break-ins, or other security breaches, could lead to
misappropriation of personal or proprietary information. These security breaches
can also cause interruptions, delays, or cessation in service to Healthaxis'
clients. Healthaxis relies on encryption and authentication technology licensed
from third parties to provide the security and authentication necessary to
effect secure transmission of confidential information, such as names,
addresses, social security numbers, consumer credit card numbers, and claims
information. Healthaxis carries general liability insurance (including errors
and omissions coverage), although Healthaxis' insurance may not be adequate to
cover all costs that could be incurred in the defense of potential claims.
REGULATION
INTERNET RELATED. Although there are currently few laws and regulations
directly applicable to the Internet, it is likely that new laws and regulations
will be adopted in the United States and elsewhere covering issues such as
copyrights, privacy, pricing, sales taxes, and characteristics and quality of
Internet services. The adoption of restrictive laws or regulations could slow
Internet growth, or expose companies engaged in business on the Internet, to
regulation or restrictions on the content available on their websites. The
application of existing laws and regulations governing Internet issues such as
property ownership, libel and personal privacy is also subject to substantial
uncertainty at this time. In addition, current or new government laws and
regulations, or the application of existing laws and regulations, including laws
and regulations governing issues such as property ownership, content, taxation,
defamation, and personal injury, may expose companies engaged in business on the
Internet to significant liabilities.
HIPAA. Pursuant to the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"), the Department of Health and Human Services has issued a
series of extensive regulations setting forth security, privacy and electronic
transaction standards for all health plans, healthcare providers and
11
clearinghouses to follow with respect to identifiable health information. HIPAA
legislation and rule-making is expected to have a significant impact on
applications solutions and technology companies servicing the healthcare
industry. HIPAA seeks to advance the improvement and efficiency of
administrative and financial issues affecting the health care industry by
standardizing the electronic exchange of administrative and financial data and
additionally mandating the protection, security, and privacy of transmitted and
stored patient information. Healthaxis is affected by HIPAA as a business
associate of various clients who are covered entities under HIPAA. As a business
associate, Healthaxis will be contractually obligated to ensure the protection
and privacy of protected health information, which it transmits and stores.
HIPAA compliance on the electronic transaction and code set standards will be
required by October 2002 unless a covered entity submits a request for a
one-year extension and a plan for compliance is submitted. HIPAA compliance on
the privacy standards must be achieved by April 2003.
Healthaxis has consistently monitored the proposed rules and maintained a
state of readiness to deal with implementation of necessary HIPAA changes,
policies and procedures as the rules become applicable. Among other things,
Healthaxis has developed a HIPAA Compliance Implementation Strategy Project Plan
and has designated a Privacy Officer. Healthaxis will carry out this plan and
expects that its systems and operations will be fully compliant with all the
requirements contained in the final rules, as applicable to Healthaxis.
EMPLOYEES
As of December 31, 2001, the Company had 570 employees, including 350
full-time professional employees and 220 data capture employees. None of
Healthaxis' employees is represented by a labor union or collective bargaining
agreement. HAXS considers its employee relations to be good.
Healthaxis' future success depends on its ability to identify, attract,
hire, train, retain, and motivate highly skilled technical, managerial,
marketing and consumer service personnel. Competition for technically skilled
personnel is dependent upon market conditions. The Company will continue its
efforts to attract, integrate, and retain sufficiently qualified personnel,
including software developers and other technical experts.
RELATIONSHIP WITH UICI
On January 7, 2000, Healthaxis merged with Insurdata Incorporated
("Insurdata"), a provider of Internet based software applications and services
for insurance payers. Insurdata was a wholly owned subsidiary of UICI
(NYSE:UCI). UICI is currently the largest single shareholder of Healthaxis,
beneficially owning approximately 46% of the outstanding stock of Healthaxis as
of March 8, 2002. Healthaxis provides services to a number of UICI subsidiaries
and affiliates pursuant to written agreements.
UICI, headquartered in Dallas, offers insurance (primarily health and life)
and selected financial services to niche consumer and institutional markets.
UICI's insurance subsidiaries provide health insurance and related insurance
products. These products are distributed primarily through the Company's
dedicated agency field forces, UGA-Association Field Services and Cornerstone
Marketing of America. Through its Student Insurance Division, UICI provides
tailored health insurance programs for students enrolled in universities,
colleges and kindergarten through grade twelve. UICI provides financial services
and products for college undergraduates and graduate students, including
providing federally-guaranteed student loans, through Academic Management
Services Corp. and UICI manages blocks of life insurance and life insurance
products to select markets through its OKC Division.
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In addition to being Healthaxis' largest shareholder, UICI and its
subsidiaries constitute, in the aggregate, Healthaxis' largest client. For the
year ended December 31, 2001, UICI and its subsidiaries accounted for an
aggregate of $29.7 million of revenues, or 68% of Healthaxis' revenues. See
"Item 13. Certain Relationships and Related Transactions" for a complete
description of the agreements entered into between Healthaxis and UICI or its
subsidiaries that were in effect during 2001. The descriptions of the currently
effective agreements involving UICI that are set forth below are summaries and
are qualified in their entirety by reference to the definitive agreements.
UICI TECHNICAL SERVICES AGREEMENT. UICI and its affiliates and Healthaxis
entered into a technology outsourcing agreement, the terms of which were
negotiated between Insurdata and UICI concurrent with the Healthaxis.com Inc.
acquisition of Insurdata in January 2000. Pursuant to the terms of this
agreement, Healthaxis provides UICI and its affiliates with technology support
services including system integration services, application systems management,
data center services, telephony services and PC/LAN services for an initial term
of five years, commencing in January 2000. At UICI's option, the parties are
required to negotiate, in good faith, a three year renewal term prior to the
expiration of the agreement. If they are unable to agree on renewal prices,
terms and conditions, the agreement will expire at the end of the initial term.
The agreement is terminable without cause by UICI, or the Company, at anytime
upon not less than 180 days notice to the other party. The agreement contains no
minimum or maximum commitments on behalf of UICI and its affiliates, and UICI
and its affiliates are free to obtain the services provided by Healthaxis from
an unrelated third party during the term of the agreement. Revenue recognized
under this agreement declined to $21.4 million in 2001 from $21.7 million in
2000. UICI has advised Healthaxis that it intends to seek to further reduce its
dependence on Healthaxis for services under this Agreement due to UICI's
strategic objective of regaining control of, and managing, its own information
technology staff. UICI has also indicated that it expects that its payments to
Healthaxis under the agreement in 2002 will be less than its payments in 2001,
and will likely decline each year thereafter through the expiration of the
agreement in December 2005. UICI has indicated that it does not intend to renew
the agreement. See " - UICI Relationship."
Generally, the services provided under the agreement must be billed at
Healthaxis' cost plus ten percent. The agreement also requires that if
Healthaxis charges an unaffiliated third party a rate that is lower than it
charges UICI and its affiliates for similar services, UICI and its affiliates
would be entitled to receive the lower rate. At the expiration or termination of
the agreement, UICI has the right to hire certain employees of Healthaxis or its
affiliates who have spent greater than eighty percent of their time providing
services to UICI and its affiliates during the six months preceding the
expiration or termination of the agreement. In addition, at the expiration or
termination of the agreement, Healthaxis is obligated to provide and receive
payment for up to six months of transition assistance services. The parties also
agreed to indemnify and hold one another harmless against certain enumerated
losses and claims.
UICI ADMINISTRATORS, INC. Healthaxis also provides certain data capture and
business applications to UICI Administrators, Inc., a UICI subsidiary that
provides administrative services, pursuant to a written service license
agreement. The agreement with UICI Administrators is for a three-year term that
expired in December 2001, with automatic annual renewal provisions thereafter,
subject to prior notice of non-renewal. For the year ended December 31, 2001,
UICI Administrators accounted for $5.0 million of revenues under this agreement,
which is 11.3% of Healthaxis' total revenues. The amounts paid by UICI
Administrators are included in the UICI and subsidiaries numbers above. Services
under this agreement are provided by the Application Solutions Group and the
Imaging Services Group.
On January 17, 2002, UICI sold UICI Administrators, Inc. to American
Administrative Group, Inc. ("AAG"), a party unrelated to either UICI or
Healthaxis. Healthaxis and AAG are currently operating under a temporary
arrangement whereby services continue to be provided under the same terms as the
expired agreement with UICI Administrators, Inc. Healthaxis and AAG are
negotiating a definitive
13
agreement, which is expected to be completed by June 30, 2002. However, there
can be no assurances that such an agreement will be reached.
SOFTWARE LICENSE. On January 25, 2001, Healthaxis entered into a software
license agreement with UICI. Under the agreement, UICI paid a one-time license
fee of approximately $1.8 million for a perpetual, enterprise-wide software
license. UICI had the option to terminate the agreement within the first two
years of its term, in which case a prorated portion of the one-time license fee
would be refunded. The license fee revenue was deferred and was being recognized
into revenue pro rata over 24 months. On September 24, 2001 this agreement was
amended to shorten the original refund period from December 2002 to March 2002.
The remaining amount refundable of $840,000 in the amended agreement is being
recorded as revenue on a prorata basis over the remaining 6 month term of the
amended contract. Revenue recognized during 2001 under this agreement was
approximately $1.5 million.
SPECIAL PROJECTS. From time to time, Healthaxis undertakes special projects
for UICI. For example, during 2001 Healthaxis developed and integrated some
software for HIPAA compliance for a UICI subsidiary, and also undertook a
website development project for another UICI subsidiary.
WARRANTS AND CONVERTIBLE DEBENTURES. UICI holds approximately $1.7 million
of the Company's 2 % convertible debentures, which are convertible into 185,185
shares of Healthaxis' Common Stock at a conversion price of $9.00 per share. See
Note 13 of Notes to Consolidated Financial Statements. UICI also has 222,396
warrants for the purchase of Healthaxis' Common Stock at exercise prices ranging
from $3.01 to $12.00 per share.
PROXY AGREEMENT. In connection with the termination of a merger related
shareholders' agreement in November 2001, UICI and Healthaxis entered into a
Proxy Agreement that provides for UICI's grant of a proxy to the Healthaxis
Board of Directors to vote 33.3% of the number of Healthaxis shares held of
record from time to time by UICI or its affiliates for the sole purpose of
electing directors to the Board of Directors of Healthaxis. The voting rights
granted by UICI under the Proxy Agreement require that the votes be cast in
favor of the nominees that a majority of the Healthaxis directors shall have
recommended stand for election. The Proxy does not confer any other voting
rights. No UICI directors or personnel are currently Healthaxis directors. It is
not expected that any UICI directors or personnel will stand for election at
Healthaxis' 2002 Annual Meeting of Stockholders.
NATURE OF SOME AGREEMENTS. As a result of UICI's control of Insurdata prior
to Healthaxis' merger with Insurdata, none of the terms of the contracts entered
into between Insurdata and UICI, that were assumed by Healthaxis, resulted from
arms-length negotiations. See "-Risk Factors -- Because Healthaxis' principal
agreement with UICI was not subject to arm's-length negotiations, this agreement
could be less favorable to Healthaxis than agreements negotiated with third
parties" and "- Risk Factors. We are dependent upon our largest client, UICI, to
a significant degree, and the reduction or loss of our business with UICI or
another of our large clients could negatively affect our results of operations".
RISK FACTORS
THIS REPORT AND THE ANNUAL REPORT TO STOCKHOLDERS CONTAIN SOME
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS.
ACTUAL RESULTS AND THE TIMING OF SOME EVENTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER
OF FACTORS, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH BELOW AND ELSEWHERE
IN THIS REPORT. IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE
FOLLOWING FACTORS, WHICH MAY AFFECT HEALTHAXIS' CURRENT POSITION AND FUTURE
PROSPECTS, SHOULD BE CONSIDERED CAREFULLY IN EVALUATING HEALTHAXIS AND AN
INVESTMENT IN ITS COMMON STOCK.
14
BUSINESS RELATED RISKS
- ----------------------
BECAUSE WE HAVE A HISTORY OF OPERATING LOSSES, IT IS DIFFICULT TO EVALUATE OUR
FUTURE PROSPECTS AND TO KNOW WHEN, IF EVER, WE WILL BECOME PROFITABLE.
As of December 31, 2001, we had an accumulated deficit of approximately
$416 million. Our limited operating history as a web-enabling software
development company makes it difficult to evaluate our future prospects and to
know when, if ever, we will become profitable. Furthermore, you must consider
our prospects in light of the risks, expenses and difficulties frequently
encountered by companies in new, unproven, competitive and rapidly evolving
markets. While our restructuring plan implemented in May 2001 brought costs in
line with our revenue base, there can be no assurances that our cash position
will remain stabilized or that we will ever become profitable. These
uncertainties negatively affect our business prospects and our stock price.
IF THE HEALTHCARE INDUSTRY DOES NOT ACCEPT OUR NEW INFORMATION TECHNOLOGY, OR
ACCEPTANCE OCCURS AT A SLOWER PACE THAN ANTICIPATED, WE MAY NEVER INCREASE
REVENUES AND GENERATE NET INCOME.
We believe that the claims and administration segment of the healthcare
industry has historically under-invested in information technology. If the
conversion from traditional paper methods to electronic information exchange
does not continue to occur, or this conversion occurs at levels below those we
currently anticipate, we may not sell a sufficient amount of our products and
services to increase revenues and generate net income. In addition, even if
industry participants convert to electronic information exchange, they may not
elect to use Healthaxis' applications and services.
WE ARE DEPENDENT UPON OUR LARGEST CLIENT, UICI, TO A SIGNIFICANT DEGREE, AND THE
REDUCTION OR LOSS OF OUR BUSINESS WITH UICI, OR ANOTHER OF OUR LARGE CLIENTS,
COULD NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
For the year ended December 31, 2001, UICI and its subsidiaries accounted
for an aggregate of approximately $29.7 million, or 68% of Healthaxis total
revenues. Healthaxis would suffer a decrease in revenues if UICI were not to use
Healthaxis for the full amount or range of services Healthaxis has provided in
the past. Our principal contract with UICI is terminable without cause by UICI,
or the Company, at anytime upon not less than 180 days notice to the other
party. The agreement contains no minimum or maximum commitments on behalf of
UICI and its affiliates, and UICI and its affiliates are free to obtain the
services provided by Healthaxis from an unrelated third party during the term of
the agreement. Revenue recognized under this agreement declined to $21.4 million
in 2001 from $21.7 million in 2000. UICI has advised Healthaxis that it intends
to seek to further reduce its dependence on Healthaxis for services under this
Agreement due to UICI's strategic objective of regaining control of and managing
its own information technology staff. UICI has also indicated that it expects
that its payments to Healthaxis under the agreement in 2002 will be less than
its payments in 2001, and will likely decline each year thereafter through the
expiration of the agreement in 2005, at which time UICI has indicated that it
does not intend to renew the agreement. See "-UICI Relationship."
The $29.7 million in revenues from UICI in 2001 includes $5.0 million from
UICI Administrators, Inc. On January 17, 2002, UICI sold 100% of UICI
Administrators, Inc. to American Administrative Group, Inc. ("AAG"), a party
unrelated to either UICI or Healthaxis. Healthaxis and AAG are currently
operating under a temporary arrangement, whereby services continue to be
provided under the same terms as were provided to UICI Administrators, Inc.
under its prior agreement. Healthaxis and AAG are negotiating a definitive
agreement, which is expected to be completed by June 30, 2002. There can be no
assurances that such an agreement will be reached. If we are not successful in
reaching as agreement with AAG, the loss of this business could negatively
impact our results.
15
Healthaxis' other large client is Digital Insurance, which accounted for
$2.4 million or 5.5% of Healthaxis' total revenues for the year ended December
31, 2001. As of May 31, 2002, the Company will have completed its contractual
obligations to Digital Insurance. While Digital Insurance is expected to
continue to contract for professional services to support and enhance its
Web-site, the total revenue from this client in 2002 is expected to be
significantly less than that recognized in 2001.
BECAUSE HEALTHAXIS' PRINCIPAL AGREEMENT WITH UICI WAS NOT SUBJECT TO
ARM'S-LENGTH NEGOTIATIONS, THIS AGREEMENT COULD BE LESS FAVORABLE TO HEALTHAXIS
THAN AGREEMENTS NEGOTIATED WITH THIRD PARTIES.
As a result of UICI's control of Insurdata Incorporated prior to the merger
of Insurdata Incorporated and Healthaxis, the terms of Insurdata Incorporated's
principal contract with UICI and its subsidiaries was not subject to
arm's-length negotiations between the parties. As a result, this agreement
includes terms and conditions that may be less favorable to Healthaxis than
terms contained in agreements negotiated with third parties. For example, the
technology outsourcing agreement with UICI limits Healthaxis pre-tax profit
margin and provides that if Healthaxis charges an unaffiliated third party a
rate that is lower than it charges UICI and its affiliates for similar services,
UICI and its affiliates would be entitled to receive the lower rate. The
outsourcing agreement terminates after an initial term of five years from
January 2000. However, at UICI's option, Healthaxis is required to negotiate, in
good faith, a three year renewal term prior to the expiration of the agreement.
There are other risks associated with this agreement and our relationship with
UICI detailed in these "Risk Factors".
OUR COMPETITORS MAY BE MORE SUCCESSFUL IN ATTRACTING CUSTOMERS, WHICH COULD
RESULT IN DECREASED SALES, A LOSS OF REVENUE AND A DECREASE IN THE VALUE OF OUR
COMMON STOCK.
Our major competitors are identified in the discussion of each strategic
business unit above under "Business-Competition". We also compete with the
internal information resources and systems of certain of our prospective and
existing clients. Our competitors could develop or offer solutions superior to
those we offer. Some of our current and potential competitors are larger, better
capitalized, have greater financial and operating resources and greater market
share than we do. These competitors may be able to respond more quickly to
changes in customer requirements or preferences. They may also be able to devote
greater resources to claims processing services or to the development, promotion
and sale of their products.
ERRORS IN THE APPLICATION SOLUTIONS COULD DETRACT FROM THE RELIABILITY AND
QUALITY OF OUR INFORMATION SYSTEMS, WHICH, IN TURN, COULD RESULT IN DECREASED
SALES, A LOSS OF REVENUE AND A DECREASE IN THE VALUE OF OUR COMMON STOCK.
We devote substantial resources to satisfying the demands of the claims and
administration segment of the healthcare industry for a high level of
reliability and quality from its information systems. In the course of client
acceptance testing, Healthaxis historically has experienced a limited number of
application solutions errors. However, application solutions may contain
undetected errors. These errors may result in loss of data or a reduction in the
ability to process transactions on a timely basis, which could result in the
loss of existing business and future business, as well as the loss of, or delay
in, market acceptance of Healthaxis' application solutions. We have attempted to
limit contractually, and through insurance coverage, damages arising from
negligent acts, errors, mistakes or omissions in our application solutions or in
rendering the Application Solutions Group's services. However, these contractual
protections could be unenforceable or insufficient to protect us from liability
for damages in connection with the successful assertion of one or more large
lawsuits.
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OUR SIGNIFICANT INDEBTEDNESS COULD ADVERSELY AFFECT OUR BUSINESS.
We have outstanding 2% convertible debentures in the principal amount of
$27.5 million due in 2005. These debentures could have important consequences
for our business. For example, they could increase our vulnerability to general
adverse economic and industry conditions, limit our ability to obtain additional
equity or debt financing, and limit our flexibility in planning for, or reacting
to, changes in our business and the industry.
The semi-annual interest payments on these debentures can be made in cash
or stock, which constitutes a burden on our cash flow or results in further
dilution of our holders of common stock. We expect to repay these debentures
from internally generated cash or from outside financing sources, although there
can be no assurance that we will be successful in this regard.
OUR FUTURE SUCCESS SIGNIFICANTLY DEPENDS ON THE EXPERIENCE OF OUR EXECUTIVE
OFFICERS AND KEY PERSONNEL, AND THE LOSS OF ONE OR MORE OF THEM COULD IMPAIR OUR
ABILITY TO DO BUSINESS.
Our future success depends, in significant part, upon the continued
services of our executive officers and key personnel. The loss of services of
one or more of our executive officers or key employees could have a material
adverse effect on our business, financial condition and results of operations,
and there can be no assurance that we will be able to retain our executive
officers or key personnel. We do not have employment agreements with our
executive officers or key personnel, although we did recently enter into change
of control agreements with the senior most executive officers. These agreements
will operate like an employment agreement in the event of a "change of control"
of Healthaxis.
OUR RELIANCE ON THIRD PARTY VENDORS AND STRATEGIC PARTNERS COULD PLACE US AT
RISK FOR INCREASED EXPENSES, FAILURE TO PERFORM AND/OR LOST CLIENTS.
We are reliant upon third party vendors, such as telecommunication
companies and software providers, for the delivery of our products and services
to our clients. We also are dependent on strategic partners in a number of areas
critical to our business. These parties may have lapses in service, or fail to
provide accurate or timely products, which could adversely affect our client
solutions. Such failure could expose us to performance penalties, result in the
loss of existing clients and cause us to fail to gain future business.
Additionally, such third parties may increase their rates to us causing our
cost-of-sales expenses to be higher than our revenue and pricing models were
designed to cover.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, OUR COMPETITORS COULD
USE OUR PROPRIETARY TECHNOLOGY TO COMPETE AGAINST US AND OUR REVENUES WOULD BE
REDUCED.
Our success depends to a significant extent on our ability to protect the
proprietary and confidential aspects of our solutions and the tradenames
associated with them. Our solutions are not patented and existing copyright laws
offer only limited practical protection. The legal protections afforded to us,
or the precautions we take, may be inadequate to prevent misappropriation of our
technology or the tradenames associated with our solutions. Any infringement or
misappropriation of our proprietary solutions or the related tradenames could
have the effect of allowing competitors to use our proprietary information to
compete against us, or result in costly litigation in order to protect our
rights. In addition, these limited protections do not prevent independent
third-party development of functionally equivalent or superior technologies,
products, or services.
17
WE MAY BE SUBJECT TO TRADEMARK AND SERVICE MARK INFRINGEMENT CLAIMS THAT COULD
RESULT IN COSTLY LITIGATION AND ADDITIONAL LOSSES OR DECREASED REVENUES.
As competing healthcare information systems increase in complexity and
overall capabilities, and the functionality of these systems further overlap, we
could be subject to claims that our technology infringes on the proprietary
rights of third parties. These claims, even if without merit, could subject us
to costly litigation and could command the time and attention of our technical,
legal, and management teams to defend. Further, if a court determined that we
infringed on the intellectual property rights of a third party, we could be
required to:
o Develop non-infringing technology or tradenames;
o Obtain a license to the intellectual property;
o Stop selling the applications or using names that contain the
infringing intellectual property;
o Pay substantial damage awards.
If we cannot develop non-infringing technology or tradenames, or obtain a
license on commercially reasonable terms, any of the above listed potential
court-ordered requirements would adversely impact our operations and revenues.
OUR FAILURE TO MEET PERFORMANCE STANDARDS DESCRIBED IN OUR SERVICE AGREEMENTS
COULD RESULT IN ADDITIONAL LOSSES OR DECREASED REVENUES.
Many of our service agreements contain performance standards. Healthaxis
could fail to meet certain contractual performance standards related to
turnaround times, availability, and quality standards set forth in its client
agreements. Our failure to meet these standards could result in the termination
of these agreements, as well as financial penalties from current clients and
decreased sales to potential clients. These penalties range from less than 1% to
a maximum of 50% of the aggregate amount payable under these agreements. If we
are unable to maintain performance standards, we may experience decreased sales,
decreased revenues, and continued losses.
OUR OPERATIONS OUTSIDE OF THE UNITED STATES MAY SUBJECT US TO ADDITIONAL RISKS,
WHICH COULD RESULT IN DECREASED REVENUES AND A DECREASE IN THE VALUE OF OUR
COMMON STOCK.
We conduct imaging operations related to the conversion of insurance claims
information to electronic form in Jamaica through an indirect subsidiary. For
the year ended December 31, 2001, Healthaxis earned 6.2% of its total revenues
from its Jamaican operations. There is less government regulation in Jamaica and
there may be more difficulty in enforcing Jamaican legal rights. Additionally,
there is the possibility of expropriation or confiscatory taxation, limitations
on the removal of property or other assets, political or social instability,
labor difficulties, or diplomatic developments that could affect our Jamaican
operations and assets.
The proximity of our Jamaican operation to the ocean-front could expose our
facility to damage from a tropical storm. While we maintain insurance coverage
on the facility, we could experience downtime and we could incur additional
expenses related to relocation or repair of the facility should this occur.
Currently, our Jamaican subsidiary is able to take advantage of the
Jamaican labor market, which provides competent and inexpensive labor. As of
December 31, 2001, our Jamaican subsidiary had approximately 150 employees. If
the risks or problems posed by conducting operations in Jamaica
18
require significant financial or managerial resources, or we are forced to
relocate these operations, our costs to provide these services would increase.
FAILURE TO ACHIEVE FORECASTED GROWTH COULD ADVERSELY EFFECT THE MARKET PRICE OF
SHARES OF OUR COMMON STOCK.
On February 7, 2002, management of the Company made a presentation to
financial analysts and investors at the UBS Warburg Global Healthcare Services
Conference. In that presentation, we discussed certain growth expectations and
made other forward-looking statements. Failure to achieve these growth or other
expectations could result in a reduction of the market price for our common
stock. We filed a copy of this presentation with the SEC in a Form 8-K on
February 7, 2002. All of the forward-looking statements made in the presentation
are expressly subject to these "Risk Factors".
INTERNET AND HEALTH INSURANCE INDUSTRY RELATED RISKS
- ----------------------------------------------------
IF A SUFFICIENT NUMBER OF CONSUMERS AND HEALTH INSURANCE PAYERS DO NOT ACCEPT
THE INTERNET AS A MEDIUM FOR HEALTH INSURANCE SALES AND ADMINISTRATION, WE MAY
BE UNABLE TO INCREASE REVENUES AND DECREASE LOSSES.
If insurance payers do not accept the Internet as a medium for policy sales
and claims administration, we may not be able to increase revenues through sales
of our internet based solutions. The health insurance industry's traditional
paper-based methods are well established and the industry is generally slow to
change.
OUR FOCUS ON PROVIDING WEB BASED SOLUTIONS SUBJECTS US TO RISKS ASSOCIATED WITH
THE INTERNET.
Our business model gives rise to numerous risks related to the Internet.
There can be no assurance that our solutions that rely on Internet access will
be protected against disruptions, delays or losses due to technical
difficulties, natural causes or security breaches. These problems may adversely
affect the success of our some of our software hosting services and could
negatively impact our operating results. We may also be subject to any
governmental adoption of regulations that charge Internet access fees or impose
taxes on subscriptions. Currently, there are few laws or regulations that
specifically regulate the Internet; however, such laws and regulations, if
adopted, may increase our operating expenses.
IN ORDER TO MAINTAIN COMPLIANCE WITH APPLICABLE INSURANCE REGULATIONS, WE MAY
NEED TO EXPEND FINANCIAL AND MANAGERIAL RESOURCES THAT COULD INCREASE OUR
EXPENSES AND REDUCE THE VALUE OF OUR COMMON STOCK.
The insurance industry is highly regulated and the regulations that govern
our clients are subject to change. Changes in these regulations could require us
to expend additional financial and managerial resources to revise our products
and services in order to comply.
IN ORDER TO REMAIN COMPETITIVE AS AN APPLICATIONS SOLUTIONS PROVIDER, HEALTHAXIS
MUST DEVELOP SOFTWARE THAT COMPLIES WITH THE ELECTRONIC TRANSACTIONS SETS,
PRIVACY, AND SECURITY PROVISIONS OF THE HEALTH INSURANCE PORTABILITY AND
ACCOUNTABILITY ACT ("HIPAA").
Some of the applications solutions we provide to our clients will require
modifications in order to achieve or maintain HIPAA-compliance. In addition,
certain aspects of Healthaxis' internal operations must become HIPAA compliant.
The timing of compliance with HIPAA requirements varies depending upon the
applicable rule and effectiveness dates. We believe Healthaxis will be able to
meet all the HIPAA requirements currently published for our internal operations
and for our clients. If Healthaxis is unable to deliver applications solutions
which achieve or maintain compliance with the applicable HIPAA rules, then
clients may move business to applications solutions providers whose systems are
or will be
19
HIPAA compliant, and as result, our business would suffer. If Healthaxis'
internal operations are not HIPAA-compliant, then we may also face contractual
liability to the extent our business associate contracts require compliance.
THE INSOLVENCY OF OUR CUSTOMERS, OR THE INABILITY OF OUR CUSTOMERS TO PAY FOR
OUR SERVICES, WOULD DECREASE OUR REVENUE.
Health insurance payer organizations are often required to maintain
restricted cash reserves and satisfy strict balance sheet ratios promulgated by
state regulatory agencies. In addition, health insurance payer organizations are
subject to risks that physician groups or associations within their
organizations become subject to costly litigation or become insolvent, which may
adversely affect the financial stability of the payer organizations. If
insurance payer organizations are unable to pay for our services because of
their need to maintain cash reserves or failure to maintain balance sheet ratios
or solvency, our ability to collect fees for services rendered would be impaired
and our financial condition could be adversely affected.
THE CONSOLIDATION OF HEALTH INSURANCE PAYER ORGANIZATIONS COULD DECREASE THE
NUMBER OF OUR EXISTING AND POTENTIAL CUSTOMERS.
There has been and continues to be acquisition and consolidation activity
in the insurance payer organizations industry. Mergers or consolidations of
payer organizations in the future could decrease the number of our existing and
potential customers. In addition, a smaller market for our products and services
could result in lower revenue.
CHANGES IN GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY COULD ADVERSELY
AFFECT OUR BUSINESS.
During the past several years, the healthcare industry has been subject to
increasing levels of government regulation of, among other things, reimbursement
rates and certain capital expenditures. In addition, proposals to reform the
healthcare system have been considered by Congress. These proposals, if enacted,
may further increase government involvement in healthcare, lower reimbursement
rates and otherwise adversely affect the healthcare industry which could
adversely impact our business. The impact of regulatory developments in the
healthcare industry is complex and difficult to predict, and our business could
be adversely affected by existing or new healthcare regulatory requirements or
interpretations.
INVESTMENT RELATED RISKS
- ------------------------
BECAUSE MEMBERS OF MANAGEMENT AND UICI OWN A SUBSTANTIAL PORTION OF OUR COMMON
STOCK, OTHER SHAREHOLDERS WILL NOT HAVE THE ABILITY TO CONTROL COMPANY ACTIONS
THAT MAY BE IN THEIR BEST INTEREST.
UICI and certain members of Healthaxis current management and Board of
Directors own or control approximately 57.5% of Healthaxis' outstanding common
stock at March 8, 2002. This concentration of ownership could have the effect of
delaying or preventing a change in control of Healthaxis and may eliminate the
opportunity for our shareholders to realize a premium over the then-prevailing
market price for their shares in the event a change of control transaction is
proposed. In addition, several members of Healthaxis' management recently
entered into agreements that provide that they will, under certain
circumstances, be entitled to severance payments in the event of a change of
control. In addition, sales by UICI, members of current management or the Board
of Directors of a significant number of shares of our stock could have an
adverse effect upon the prevailing market price of our common stock.
20
SHARE OWNERSHIP BY CURRENT MANAGEMENT AND UICI MAY RESULT IN THE INABILITY OF
PUBLIC SHAREHOLDERS TO AFFECT THE COMPOSITION OF HEALTHAXIS' BOARD OR TO REPLACE
CURRENT MANAGEMENT.
UICI and certain members of Healthaxis' current management and Board of
Directors own or control a significant percentage of the outstanding Healthaxis
common stock. In addition, by virtue of a Proxy Agreement dated November 7,
2001, UICI conveyed the right to vote 33.3% of its shares to the Healthaxis
Board of Directors for the sole purpose of electing directors. Acting together,
UICI and these individuals can control the nominees for election as directors as
well as other matters submitted to shareholders. As a result, public
shareholders may be unable to affect the composition of the Healthaxis' board or
replace current management.
IF OUR COMMON STOCK IS DELISTED FROM NASDAQ,, THE MARKET PRICE FOR SHARES OF OUR
COMMON STOCK COULD BE ADVERSELY AFFECTED.
NASDAQ generally requires a stock to maintain a price per share of at least
$1.00 to remain listed on its National Market System. Although we have had no
communication from NASDAQ since January 2001, the recent price of our common
stock has generally been below $1.00 per share. If our common stock were
delisted from the National Market System, a procedure exists whereby our common
stock could then be listed on the NASDAQ SmallCap Market, although continued
listing on the SmallCap Market would ultimately require that our common stock
obtain a per share price of at least $1.00 per share. If our common stock were
delisted from the NASDAQ SmallCap Market, we would likely be traded in the
over-the-counter bulletin board market or in the so-called "pink sheets." The
delisting of our common stock from either or both of the NASDAQ National Market
or the NASDAQ SmallCap Market could have an adverse effect on our stock price.
ITEM 2. PROPERTIES
Healthaxis' headquarters is located in a leased facility in Irving, Texas,
a suburb of the Dallas metropolitan area. In December 2001, the Company sold a
47,000 square foot building in East Norriton, Pennsylvania, which had been the
Company's headquarters until the 2001 second quarter. A provision of the sales
agreement allows Healthaxis to continue to occupy up to 2,500 square feet of the
facility through June 30, 2002 free of charge (except for minimal operating
expenses). The Company now owns no real property and conducts its business
through the following leased facilities:
ADDRESS SQUARE FEET LEASE EXPIRATION
- -------------------------------------------------------------------------- ------------- ------------------
5215 North O'Connor Blvd, 800 Central Tower, Irving, TX 31,300 December 2005
5215 North O'Connor Blvd., 800 Central Tower, Irving, TX 6,800 March 2002
670 East Main St, Castledale, UT 5,450 December 2002
1200 East Ephraim Canyon, Ephraim, UT 10,000 Month to month
1-3 Pimento Way, Montego Freeport, Montego Bay, Jamaica 10,000 December 2002
577 Howard Street, San Francisco, CA 2,100 July 2002
The Company believes its existing facilities are suitable to conduct its
present business. The lease on approximately 6,800 square feet of the Irving, TX
space will expire on March 31, 2002. The lease on the 2,100 square feet in San
Francisco, CA will expire on July 31, 2002. The Company does not anticipate
renewing either of these leases or replacing this space elsewhere. The Company
believes that its leased facilities are well maintained and in good operating
condition and are adequate for its present and anticipated levels of operation.
21
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of its
business. Management is of the opinion that no currently pending litigation will
have a material adverse effect on the results of operations or financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
Healthaxis common stock is traded on the Nasdaq National Market under the
symbol "HAXS." The following table shows the range of quarterly high and low
closing sale prices for Healthaxis common stock.
2001 2000
-------------------- ---------------------
HIGH LOW HIGH LOW
-------- ------- --------- ---------
First Quarter................ $ 4.63 $ .75 $ 34.63 $ 13.63
Second Quarter............... 1.59 .66 13.25 3.13
Third Quarter................ 1.16 .76 5.13 2.75
Fourth Quarter............... 1.10 .66 4.43 1.38
On March 8, 2002, the closing price of Healthaxis common stock was $.88. On
that same date, there were 257 shareholders of record, although Healthaxis
believes that the number of beneficial owners of its common stock is
substantially greater.
DIVIDENDS
Healthaxis did not pay a cash dividend on its common stock in 2001 and does not
anticipate paying cash dividends for the foreseeable future. Any payment of cash
dividends in the future will be at the discretion of the board of directors and
subject to some limitations under the Pennsylvania Business Corporation Law and
will depend upon factors such as the Company's earning levels, capital
requirements, financial condition and other factors deemed relevant by the board
of directors.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information has been derived from
the consolidated financial statements of Healthaxis and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as the consolidated financial statements and
notes thereto included elsewhere in this report. The consolidated financial
statements of Healthaxis have been audited by Ernst & Young LLP for 2001, and by
BDO Seidman, LLP for 2000, 1999, 1998 and 1997. Healthaxis' financial results
include those of its subsidiaries. All information has been restated to present
as discontinued operations Healthaxis' insurance operations (effective November
30, 1999) and Healthaxis' retail website operations (effective June 30, 2000).
23
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 43,790 $ 42,796 $ - $ - $ -
----------- ---------- ---------- ---------- ----------
Expenses:
Cost of revenues .......................... 41,993 47,075 504 277 -
Sales and marketing........................ 3,225 3,585 447 134 -
General and administrative................. 13,492 12,380 7,457 3,967 1,908
Research and development 1,479 974 - - -
Restructuring and impairment charges 279,607 - - - -
Loss on sale of building 2,498 - - - -
Amortization of intangibles................ 14,034 40,678 765 - -
---------- ---------- ---------- ---------- ----------
Total expenses......................... 356,328 104,692 9,173 4,378 1,908
---------- ---------- ---------- ---------- ----------
Operating loss............................. (312,538) (61,896) (9,173) (4,378) (1,908)
Interest expense and other income, net..... (2,795) (2,977) (925) (222) 177
----------- ----------- ----------- ----------- ----------
Loss before minority interest.............. (315,333) (64,873) (10,098) (4,600) (1,731)
Minority interest in loss of subsidiary......... 3,080 35,988 1,008 493 -
---------- ---------- ---------- ---------- ----------
Loss before provision for income taxes.......... (312,253) (28,885) (9,090) (4,107) (1,731)
Income tax provision............................ - 585 - - -
---------- ---------- ---------- ---------- ----------
Loss from continuing operations................. (312,253) (28,300) (9,090) (4,107) (1,731)
Loss from sale of discontinued operations....... - (2,300) (10,263) - -
Loss from discontinued operations............... - (6,341) (27,178) (8,049) (16,694)
---------- ----------- ----------- ----------- -----------
Loss before extraordinary item.................. (312,253) (36,941) (46,531) (12,156) (18,425)
Extraordinary gain.............................. 1,681 1,925 - - -
---------- ---------- ---------- ---------- ----------
Net loss................................ (310,572) (35,016) (46,531) (12,156) (18,425)
Dividends on preferred stock.................... - - 70 254 148
---------- ---------- ---------- ---------- ----------
Net loss applicable to common stock............. $ (310,572) $ (35,016) $ (46,601) $ (12,410) $ (18,573)
============ =========== =========== ============ ===========
Basic and diluted loss per share of common stock):
Continuing operations........................ $ (6.22) $ (2.17) $ (0.75) $ (0.42) $ (0.19)
Discontinued operations...................... - (0.66) (3.05) (0.78) (1.65)
Extraordinary gain .......................... .03 .15 - - -
-------- -------- -------- -------- --------
Net loss..................................... $ (6.19) $ (2.68) $ (3.80) $ (1.20) $ (1.84)
========= ========= ========= ========= =========
Weighted average common shares and equivalents
used in computing basic and diluted income
(loss)per share......................... 50,149 13,082 12,260 10,331 10,090
24
AS OF DECEMBER 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
BALANCE SHEET DATA:
Total assets $57,588 $710,992 $79,602 $24,568 $12,333
Loans payable -- -- -- 3,865 5,077
Convertible debenture 27,134 27,367 25,019 -- --
Ceding commission liability -- -- 5,600 5,000 --
Preferred stockholders' liability -- -- -- 557 580
Total stockholders' equity 22,389 216,495 12,620 5,495 4,009
Book value per common share (1) 0.42 16.53 0.97 0.43 0.34
Pro forma book value per common share (2) 0.42 16.53 0.97 0.46 0.37
- ----------------------
(1) Book value per common share is computed by dividing total equity
attributable to common stockholders by the number of common shares
outstanding at the end of each period.
(2) Pro forma book value per common share is computed by dividing total equity
by the number of shares outstanding at the end of each period assuming the
conversion of Series A preferred stock into common stock in 1997 and 1998
on a share-for-share basis.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FORM THOSE
DISCUSSED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER "BUSINESS-RISK FACTORS" ELSEWHERE IN THIS REPORT
OR IN THE INFORMATION INCORPORATED BY REFERENCE IN THIS REPORT. YOU SHOULD READ
THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH "SELECTED CONSOLIDATED
FINANCIAL DATA" INCLUDED IN THIS REPORT, AS WELL AS OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT.
OVERVIEW
Healthaxis is an emerging technology services firm committed to providing
innovative and configurable web-based connectivity and applications solutions
for health benefit distribution and administration. These solutions, which are
comprised of software products and related services, are designed to assist
health insurance payers, third party administrators, intermediaries and
employers provide enhanced services to members, employees and providers through
the application of Heathaxis' flexible technology to legacy systems, either on a
fully integrated or on an Application Service Provider ("ASP") basis. Heathaxis
believes that its solutions enable a client to reduce their administrative costs
and improve profitability, while also facilitating an increase in their market
share.
Management of Healthaxis, as well as the composition of our Board of
Directors, was significantly changed during 2001. James W. McLane became the
President and Chief Executive Officer in February 2001 and John M. Carradine
followed as Chief Financial Officer in March 2001. In the months following,
several goals were accomplished to re-position the Company for future growth:
o The Company's financial position was improved
o Operating expenses were reduced
o The Company was restructured into four strategic business units
o A cohesive market based strategy was developed
o The sales force was expanded
o The sales pipeline grew significantly
o Several meaningful clients were added
o Strategic partnerships were created with several complementary
enterprises
o The Board of Directors was strengthened
o A values-based culture was instilled in the Company
- TO DELIVER WHAT WE PROMISE
- TO TAKE OWNERSHIP AND ACCOUNTABILITY FOR OUR RESULTS
- TO DO THE RIGHT THING - - - ALL THE TIME
- TO UNDERSTAND THAT RELATIONSHIPS DETERMINE RESULTS
- TO TEAM AND RUN TO WIN
26
REVENUE MODEL: Healthaxis derives revenue from a number of sources. Set
forth below is a description of our revenues generated by each of our strategic
business units.
Application Solutions Group revenue is either transaction based or derived
from providing professional services. The transaction revenue is a combination
of a per-employee-per-month ("PEPM") fee for the use of our proprietary
applications and a per document fee for the printing and mailing of system
output (benefit checks, EOBs and letters). The transaction revenue is based on
an ASP model, where we host the hardware and software and perform some print and
mail services on behalf of clients. Professional services revenue is generated
from direct billing for our staff time. These billings are generally derived
from converting a client's existing system, client training and tailoring custom
solutions for a client. Professional services generally are billed on a flat
rate per hour. In some cases, a project may be done for a fixed price. For fixed
price projects, revenue is recognized on the percentage completion basis.
Depending upon the nature and expected profitability of certain projects,
professional service fees and associated costs may be deferred and recognized
over the life of the transaction-based contract. During 2001, approximately 80%
of Application Solutions Group revenues were transaction based and 20% were
derived from professional services.
Web Technology Group revenue is derived from licensing of our proprietary
software products and providing professional services. The licensing revenue is
a combination of per-member-per-month ("PMPM") fees and fixed price license
fees. The fixed price license fees historically have been recognized over a
period of time, due to contract terms (such as a right of return). In the
future, we may enter into one-time license fee agreements, which fees would be
recognized upon the delivery of the product. Professional service revenue is
generated from direct billing for our staff time. These billings generally are
associated with implementation and integration of our software product into our
client's legacy system. Professional services may be billed on a flat rate per
hour, or a project may be undertaken for a fixed price. Revenue on fixed price
projects is recognized on the percentage completion basis. During 2001,
approximately 45% of Web Technology Group revenues were generated from software
licenses and 53% from professional services. The small remainder is from
commissions received from sales through the retail website of Digital Insurance,
which we developed and continue to support.
Imaging Group Revenue is transaction based. Fees for mail handling,
scanning and converting insurance claims from paper to electronic format, and
image storage and retrieval are priced on a per-document or a per-image basis.
Such revenue is recognized in the month the services are performed. Contracts
generally include an up-front payment intended to recoup the start-up costs
incurred in setting up a new client. Such fees, along with the associated costs,
are generally deferred and recognized over the life of the transaction-based
contract.
Outsourcing Group revenue is derived from system integration and consulting
work for the Company's single largest client, UICI, pursuant to a technology
outsourcing agreement on a cost plus 10% basis. We have a dedicated staff of
employees located at various sites, who service this account. Monthly billings
are prepared based upon a multiple of staff salary projected to cover our costs
plus an additional 10%. At the end of each quarter, Healthaxis and UICI review
and agree upon the final costs incurred for the quarter and adjust the billings
to that required to yield the cost plus 10% arrangement. Outsourcing Group
revenue is recognized in the month the services are performed.
RESTRUCTURING PLAN: In May 2001, the Company implemented a restructuring
plan as further described in Note 6 to the Consolidated Financial Statements. In
connection with its restructuring and reorganization, the Company accrued or
recorded restructuring charges of $279.6 million in the second quarter of 2001.
Those costs are generally related to impairment of long-lived assets and
goodwill, and severance costs for terminated employees.
27
In total, counting the reduction-in-force and other expense reductions, the
initiative was designed to save in excess of $11.0 million annually. Based upon
the results of the third and fourth quarter of 2001, management believes it has
achieved the anticipated level of savings. The Company was successful in
lowering headcount, eliminating the development and marketing of certain
products, lowering operating costs and moving its headquarters from Pennsylvania
to Texas. The effect of these changes, along with the related impairment of
long-lived assets and goodwill, is reflected in the quarterly comparisons below.
Q1 is before implementation of the restructuring plan, Q2 is the period of
implementation and Q3 is the first full quarter after implementation.
FISCAL 2001 (IN THOUSANDS)
------------------------------------------------------------
Q1 Q2 Q3 Q4
------------ ------------ ------------ ------------
Cash operating costs $ 13,692 $ 12,311 $ 10,776 $ 9,946
Amortization/depreciation 7,720 5,823 2,094 2,078
Stock based compensation 5,730 519 170 171
Severance 2,371 (118) (70) (75)
Restructuring charges - 279,607 - -
Accrual for taxes - - - 1,085
Loss on sale of building - 1,665 - 833
BUILDING SALE: On December 20, 2001, the Company sold its building and
property located at 2500 Dekalb Pike, East Norriton, PA. Prior to the
restructuring plan described above, this facility served as the Company's
headquarters. The sales price was $3.0 million before commissions, taxes and
other costs of the sale. At closing, we received approximately $2.6 million cash
and will receive an additional $180,000, currently held in escrow, upon the
filing of certain tax returns. In 2001, a write-down and subsequent loss on the
sale of the property totaling $2.5 million was recorded.
UICI RELATIONSHIP: UICI is currently our largest single shareholder
beneficially owning approximately 46% of Healthaxis common stock as of March 8,
2002. UICI and its subsidiaries, in the aggregate, also constitute our largest
single client. During 2001, UICI accounted for 68% of our total revenues. See
"Business - Relationship with UICI" for a summary of our current relationship
with UICI and the agreements under which we provide services to UICI and the
various sources or revenue. See also "Risk Factors - We are dependent upon our
largest client, UICI, to a significant degree, and the reduction or loss of our
business with UCI or another of our large clients could negatively affect our
results of operations" and Note 7 of the Notes to Consolidated Financial
Statements.
DIGITAL INSURANCE MATTERS. The Company's relationship and history with
Digital Insurance is further described in Note 8 to the Consolidated Financial
Statements.
Effective May 31, 2001, the Company amended its agreements with Digital
Insurance and agreed to settle all amounts due (other than trade accounts
receivable) under the original agreements for a lump sum cash payment of $2.0
million, which approximated our carrying value. The amended agreements also
require Digital Insurance to pay Healthaxis $100,000 per month effective June 1,
2001 continuing through the earlier of either May 31, 2002, or the date Digital
Insurance gives written notice to us that it no longer utilizes certain software
as provided by Healthaxis. In 2001, we recognized $2.4 million revenue from
Digital Insurance. As of May 31, 2002 we will have completed our contractual
obligations to Digital Insurance. While we expect Digital Insurance to continue
to contract with us for professional services to support and enhance its
website, we expect the total revenue from this client to be significantly less
in 2002.
28
In October 2001, Digital Insurance completed an equity financing of $6.0
million, for which Healthaxis waived its preemptive rights to participate. Based
upon the dilution and the share price for the newly issued preferred stock, we
wrote down our investment in Digital Insurance to $227,000 ($0.07 per share). As
a result of the additional equity financing of Digital Insurance, Healthaxis'
ownership was reduced to approximately 2.5% of the fully diluted shares of
Digital Insurance.
RESULTS OF OPERATIONS
The Company focuses its cost containment initiatives on operating cash
expenses. Operating depreciation / amortization, stock based compensation,
amortization of intangible assets, loss on sale of building and the
restructuring charge, with the exception of severance payments, are all non-cash
expenses.
Operating depreciation / amortization is the systematic charge to expense
for tangible fixed assets used in the operation of the business. Stock based
compensation is the result of stock options that were granted at an exercise
price below the market price of the Company's common stock in 2000 and are
charged to expense as vested, options that were repriced in 2000 and are
accounted for as variable options with a "mark-to-market" expense charge to the
extent the Company's stock price exceeds $2.49, and charges from the vesting of
an Insurdata option plan that was assumed as part of the Insurdata Merger.
Amortization of intangibles is the systematic expensing of customer base and
developed software. The restructuring charge is described in "Restructuring
Plan" previously discussed. The loss on sale of building is described in
"Building Sale" previously discussed.
The following tables are presented in such a manner that these significant
non-cash expenses are distinguishable in 2001, 2000 and 1999. All information
has been restated to present as discontinued operations Healthaxis' insurance
operations (effective November 30, 1999) and Healthaxis' retail website
operations (effective June 30, 2000).
YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS)
----------------------------------------------------------------------------------------
OPERATING STOCK
OPERATING DEPRECIATION/ BASED % OF
COSTS AMORTIZATION COMPENSATION TOTAL REVENUE
------------------- ---------------- ----------------- ----------------- -------------
Revenue $ 43,790 100%
Revenue
Operating Expenses
Cost of revenues $ 37,898 $ 3,303 $ 792 $ 41,993 96%
Sales and marketing 2,037 43 1,145 3,225 7%
General and administrative 8,659 219 4,614 13,492 31%
Research and development 1,325 115 39 1,479 3%
--------- --------- --------- ----------
Subtotal $ 49,919 $ 3,680 $ 6,590 60,189 137%
========= ========= ========= ----------
Restructuring charge 279,607 639%
Loss on sale of building 2,498 6%
Amortization of intangibles 14,034 32%
----------
Total operating expenses $ 356,328 814%
==========
29
YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
----------------------------------------------------------------------------------------
OPERATING STOCK
OPERATING DEPRECIATION/ BASED % OF
COSTS AMORTIZATION COMPENSATION TOTAL REVENUE
------------------- ---------------- ----------------- ----------------- -------------
Revenue $ 42,796 100%
Operating Expenses
Cost of revenues $ 39,218 $ 3,790 $ 4,067 $ 47,075 110%
Sales and marketing 2,060 7 1,518 3,585 8%
General and administrative 9,127 635 2,618 12,380 29%
Research and development 916 58 - 974 2%
--------- -------- --------- ---------
Subtotal $ 51,321 $ 4,490 $ 8,203 64,014 150%
========= ======== ========= ---------
Restructuring charge - 0%
Loss on sale of building - 0%
Amortization of intangibles 40,678 95%
---------
Total operating expenses $ 104,692 245%
=========
YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
-------------------------------------------------------------------------
OPERATING STOCK
OPERATING DEPRECIATION/ BASED
COSTS AMORTIZATION COMPENSATION TOTAL
------------------- ---------------- ----------------- -----------------
Revenue $ -
========
Operating Expenses
Cost of revenue $ 504 - - $ 504
Sales and marketing 447 - - 447
General and administrative 7,457 - - 7,457
Research and development 0 - - -
============ ============ ============ --------
Subtotal $ 8,408 - - 8,408
============ ============ ============ --------
Restructuring charge -
Loss on sale of building -
Amortization of intangibles 765
--------
Total operating expenses