HEALTHEXTRAS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 0-31014

HEALTHEXTRAS, INC.

(Exact name of registrant as specified in its charter)

Delaware

52-2181356

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

2273 Research Boulevard, 2nd Floor, Rockville, Maryland 20850

(Address of principal executive offices, zip code)

(301) 548-2900

(Registrant’s phone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x No ¨

As of August 6, 2004 there were 33,399,269 shares outstanding of the Registrant’s $0.01 par value common stock.

HEALTHEXTRAS, INC.

Second Quarter 2004 Form 10-Q

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	1

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003	2

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003	3

	Notes to Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	19

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5.	Other Information	21

Item 6.	Exhibits and Reports on Form 8-K	21

SIGNATURES		22

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

HEALTHEXTRAS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	June 30, 2004		December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	38,677	$	28,877
Accounts receivable, net of allowance for doubtful accounts of $1,129 and $889 at June 30, 2004 and December 31, 2003, respectively		51,451		51,670
Inventory		398		—
Deferred income taxes		—		1,225
Deferred charges		2,024		1,835
Other current assets		2,262		1,447

Total current assets		94,812		85,054
Fixed assets, net		2,237		2,848
Intangible assets, net of accumulated amortization of $1,853 and $1,287 at June 30, 2004 and December 31, 2003, respectively		22,776		14,324
Goodwill		69,354		37,764
Restricted cash		1,000		1,000
Other assets		568		778

Total assets	$	190,747	$	141,768

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	50,457	$	50,863
Income taxes payable		1,279		—
Accrued expenses and other current liabilities		4,197		2,699
Deferred income taxes		130		—
Note payable		5,000		—
Deferred revenue		5,169		4,717

Total current liabilities		66,232		58,279
Deferred income taxes		3,602		2,511
Note payable		39,338		10,000

Total liabilities		109,172		70,790

Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000 shares authorized, none issued		—		—
Common stock, $0.01 par value, 100,000 shares authorized, 33,384 and 32,603 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively		334		326
Additional paid-in capital		74,604		71,578
Retained earnings (Accumulated deficit)		6,637		(926	)

Total stockholders’ equity		81,575		70,978

Total liabilities and stockholders’ equity	$	190,747	$	141,768

The accompanying notes are an integral part of these financial statements

HEALTHEXTRAS, INC.

CONSLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	For the three months ended June 30,				For the six months ended June 30,
	2004		2003		2004		2003
Revenue	$	114,201	$	94,115	$	224,721	$	185,850

Direct expenses		101,280		83,864		198,975		166,324
Selling, general and administrative expenses		8,186		6,492		15,460		12,561

Total operating expenses		109,466		90,356		214,435		178,885

Operating income		4,735		3,759		10,286		6,965
Interest expense, net		94		114		172		263
Other income		1,977		—		2,024		—

Income before income taxes		6,618		3,645		12,138		6,702
Income tax provision		2,495		1,407		4,576		2,590

Net income	$	4,123	$	2,238	$	7,562	$	4,112

Net income per share, basic	$	0.12	$	0.07	$	0.23	$	0.13
Net income per share, diluted	$	0.11	$	0.07	$	0.21	$	0.13
Weighted average shares of common stock outstanding, basic		33,167		32,403		33,065		32,370
Weighted average shares of common stock outstanding, diluted		36,706		33,280		36,321		32,783

HEALTHEXTRAS, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	For the six months ended June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	7,562		$	4,112
Depreciation expense		762			775
Deferred income taxes		3,725			2,590
Noncash charges		103			100
Amortization of intangibles and other assets		594			408
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable, net		1,149			(2,024	)
Inventory		(7	)		—
Income tax receivable		—			662
Other assets		(617	)		144
Deferred charges		(189	)		(81	)
Accounts payable, accrued expenses, and other liabilities		(1,004	)		6,566
Deferred revenue		451			414

Net cash provided by operating activities		12,529			13,666

Cash flows from investing activities:
Capital expenditures		(151	)		(118	)
Business acquisitions and related payments, net of cash acquired		(37,599	)		(1,056	)

Net cash used in investing activities		(37,750	)		(1,174	)

Cash flows from financing activities:
Proceeds from borrowings		37,338			—
Repayment of line of credit		(3,000	)		(4,000	)
Net proceeds from exercise of stock options		683			139

Net cash provided by (used in) financing activities		35,021			(3,861	)

Net increase in cash and cash equivalents		9,800			8,631
Cash and cash equivalents at the beginning of period		28,877			17,531

Cash and cash equivalents at the end of period	$	38,677		$	26,162

Supplemental disclosure:
Cash paid for interest	$	225		$	354
Cash paid for taxes	$	851		$	37

The accompanying notes are an integral part of these financial statements

HEALTHEXTRAS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by HealthExtras, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated balance sheets, statements of operations and statements of cash flows for the periods presented. Operating results for the six months ended June 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the SEC on March 15, 2004.

2.	BUSINESS COMBINATIONS

Managed Healthcare Systems

On June 18, 2004, the Company acquired 100% of the common stock of Managed Healthcare Systems, Inc. (“MHS”).

The purchase price for the shares of MHS consisted of:

•

an aggregate cash payment of $37,338,000;

•

100,739 shares of the Company’s common stock, valued at $1.5 million.

The Company will issue:

•

two non-negotiable promissory notes, having an aggregate maximum principal amount of $4.0 million payable pursuant to and subject to certain revenue and gross profit criteria attributable to MHS for the twelve months ending June 30, 2005;

•

warrants to purchase, for up to ten years, up to an aggregate of 300,000 shares of the Company’s common stock at a purchase price of $15.75 per share, subject to the provisions in the warrant, including performance-based standards;

•

a contingent earn-out provision could require an additional payment of up to $2.0 million, subject to certain revenue and gross profit criteria attributable to MHS for the twelve months ending June 30, 2005.

Given the contingent nature of the non-negotiable promissory notes and warrants, the cost of the acquisition will be increased as the contingencies are resolved.

The Company’s management has reviewed the specific criteria set forth in Emerging Issues Task Force (“EITF”) 95-8, “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination,” to determine whether the contingent consideration that is based on certain revenue and gross profit measures should be accounted for as an adjustment to the purchase price of MHS or as compensation for services. Management believes that the contingent consideration meets the criteria of being accounted for as an adjustment to the purchase price of MHS.

The acquisition resulted in the recording of goodwill of approximately $30.8 million and intangible assets (customer contracts) of $8.0 million. The allocation of the purchase price to the net assets acquired is in the process of being finalized; thus the allocation of the purchase price to intangible assets is subject to refinement, upon receipt of an independent valuation report.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The acquisition was accounted for as a purchase. Amounts are in thousands.


Description	At June 18, 2004
Current assets, including cash of $769	$	2,106
Intangible assets		8,000
Goodwill		30,840

Total assets acquired		40,946
Current liabilities assumed		(662	)

Net assets acquired	$	40,284

The following table sets forth certain unaudited financial data assuming the acquisition of MHS had been completed as of January 1, 2003, after giving effect to purchase accounting adjustments. Amounts are in thousands, except for per share data.


	For the three months ended June 30,				For the six months ended June 30,
	2004		2003		2004		2003
Revenue	$	118,081	$	98,920	$	232,481	$	195,460
Net income		5,039		3,396		9,362		6,320
Net income per share, basic	$	0.15	$	0.10	$	0.28	$	0.19
Net income per share, diluted	$	0.14	$	0.10	$	0.26	$	0.19
Weighted average per share, basic		33,321		32,578		33,230		32,545
Weighted average per share, diluted		36,861		33,455		36,486		32,958

The pro forma results of operations are not necessarily indicative of the results that would have occurred had the Company owned 100% of MHS at January 1, 2003, nor are these results indicative of future operating results.

In March 2004, the Company entered into an agreement to purchase all of the assets of Diabetic Sense. The financial information regarding this purchase is deemed immaterial and is not included in the above pro forma. See Note 12, “Related Party Transactions” for additional details.

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