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 September 30, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 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) |
800 King Farm Boulevard, 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 November 5, 2004 there were 33,475,470, shares outstanding of the Registrant’s $0.01 par value common stock.
Second Quarter 2004 Form 10-Q
TABLE OF CONTENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
| September 30, 2004 |
December 31, 2003 |
|||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 34,847 | $ | 28,877 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $1,122 and $889 at September 30, 2004 and December 31, 2003, respectively |
61,420 | 51,670 | ||||||
| Inventory |
373 | — | ||||||
| Deferred income taxes |
1,225 | 1,225 | ||||||
| Deferred charges |
2,006 | 1,835 | ||||||
| Other current assets |
3,876 | 1,447 | ||||||
| Total current assets |
103,747 | 85,054 | ||||||
| Fixed assets, net |
6,200 | 2,848 | ||||||
| Intangible assets, net of accumulated amortization of $2,316 and $1,287 at September 30, 2004 and December 31, 2003, respectively |
22,319 | 14,324 | ||||||
| Goodwill |
69,354 | 37,764 | ||||||
| Restricted cash |
1,000 | 1,000 | ||||||
| Other assets |
214 | 778 | ||||||
| Total assets |
$ | 202,834 | $ | 141,768 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 60,896 | $ | 50,863 | ||||
| Income taxes payable |
3,047 | — | ||||||
| Accrued expenses and other current liabilities |
2,872 | 2,699 | ||||||
| Note payable |
5,000 | — | ||||||
| Deferred revenue |
4,128 | 4,717 | ||||||
| Total current liabilities |
75,943 | 58,279 | ||||||
| Deferred income taxes |
2,511 | 2,511 | ||||||
| Note payable |
38,088 | 10,000 | ||||||
| Other liabilities |
4 | — | ||||||
| Total liabilities |
116,546 | 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, 33,450 and 32,603 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively |
335 | 326 | ||||||
| Additional paid-in capital |
75,019 | 71,578 | ||||||
| Comprehensive loss |
(4 | ) | — | |||||
| Retained earnings (Accumulated deficit) |
10,938 | (926 | ) | |||||
| Total stockholders’ equity |
86,288 | 70,978 | ||||||
| Total liabilities and stockholders’ equity |
$ | 202,834 | $ | 141,768 | ||||
The accompanying notes are an integral part of these financial statements
1
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| For the three months ended September 30, |
For the nine months ended September 30, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||
| Revenue (excludes member co-payments of $62,069, $35,238, $147,724 and $102,785 for the three month periods ended September 30, 2004 and 2003 and the nine month periods ended September 30, 2004 and 2003, respectively) |
$ | 143,193 | $ | 95,003 | $ | 367,915 | $ | 280,853 | ||||
| Direct expenses |
126,847 | 83,909 | 325,822 | 250,232 | ||||||||
| Selling, general and administrative expenses |
9,131 | 6,428 | 24,591 | 18,990 | ||||||||
| Total operating expenses |
135,978 | 90,337 | 350,413 | 269,222 | ||||||||
| Operating income |
7,215 | 4,666 | 17,502 | 11,631 | ||||||||
| Interest expense, net |
352 | 98 | 524 | 362 | ||||||||
| Other income |
41 | — | 2,065 | — | ||||||||
| Income before income taxes |
6,904 | 4,568 | 19,043 | 11,269 | ||||||||
| Income tax provision |
2,603 | 1,763 | 7,179 | 4,353 | ||||||||
| Net income |
$ | 4,301 | $ | 2,805 | $ | 11,864 | $ | 6,916 | ||||
| Net income per share, basic |
$ | 0.13 | $ | 0.09 | $ | 0.36 | $ | 0.21 | ||||
| Net income per share, diluted |
$ | 0.12 | $ | 0.08 | $ | 0.32 | $ | 0.21 | ||||
| Weighted average shares of common stock outstanding, basic |
33,415 | 32,466 | 33,182 | 32,402 | ||||||||
| Weighted average shares of common stock outstanding, diluted |
36,869 | 35,034 | 36,712 | 33,622 | ||||||||
The accompanying notes are an integral part of these financial statements
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| For the nine months ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net income |
$ | 11,864 | $ | 6,916 | ||||
| Depreciation expense |
1,022 | 1,156 | ||||||
| Deferred income taxes |
— | 4,353 | ||||||
| Income tax refunds, net |
— | 2,445 | ||||||
| Non-cash charges |
151 | 143 | ||||||
| Loss on disposal of fixed assets |
38 | — | ||||||
| Amortization of intangibles and other assets |
1,066 | 612 | ||||||
| Changes in assets and liabilities, net of effects from acquisitions: |
||||||||
| Accounts receivable, net |
(8,819 | ) | (7,135 | ) | ||||
| Inventory |
17 | — | ||||||
| Income taxes payable, net |
3,047 | — | ||||||
| Other assets |
(1,891 | ) | 327 | |||||
| Deferred charges |
(171 | ) | 42 | |||||
| Accounts payable, accrued expenses, and other liabilities |
8,183 | 9,493 | ||||||
| Deferred revenue |
(589 | ) | (747 | ) | ||||
| Net cash provided by operating activities |
13,918 | 17,605 | ||||||
| Cash flows from investing activities: |
||||||||
| Capital expenditures |
(5,514 | ) | (223 | ) | ||||
| Proceeds from sale of fixed assets |
1,101 | — | ||||||
| Business acquisitions and related payments, net of cash acquired |
(37,599 | ) | (1,056 | ) | ||||
| Net cash used in investing activities |
(42,012 | ) | (1,279 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Proceeds from borrowings |
37,338 | — | ||||||
| Repayment of line of credit |
(4,250 | ) | (6,000 | ) | ||||
| Net proceeds from exercise of stock options |
976 | 383 | ||||||
| Net cash provided by (used in) financing activities |
34,064 | (5,617 | ) | |||||
| Net increase in cash and cash equivalents |
5,970 | 10,709 | ||||||
| Cash and cash equivalents at the beginning of period |
28,877 | 17,531 | ||||||
| Cash and cash equivalents at the end of period |
$ | 34,847 | $ | 28,240 | ||||
| Supplemental disclosure: |
||||||||
| Cash paid for interest |
$ | 612 | $ | 477 | ||||
| Cash paid for taxes |
$ | 4,133 | $ | 35 | ||||
The accompanying notes are an integral part of these financial statements
3
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 nine months ended September 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. Certain prior period amounts have been reclassified to conform to the current period presentation.
| 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 also issued:
| • | 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 which 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 September 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.
4
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 pro forma financial data assuming the acquisition of MHS had been completed as of the beginning of the periods presented, after giving effect to purchase accounting adjustments. Amounts are in thousands, except for per share data.
| For the three months ended September 30, |
For the nine months ended September 30, | |||||||||||
| 2004 |
2003 |
2004 |
2003 | |||||||||
| actual | pro forma | |||||||||||