Bpo Management Services (HAXS) 10-K/A 2004 FY Annual report (amended)

United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A

(Mark One)

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 0-13591

HEALTHAXIS INC.
(Exact name of Registrant as specified in its charter)

Pennsylvania	5215 N. O’Connor Blvd. 800 Central Tower Irving, Texas 75039	23-2214195
(State or other jurisdiction of incorporation or organization)	(Address of principal executive offices including zip code)	(I.R.S. Employer 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:  [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES            NO    X    

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $5,734,687 computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. 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 11, 2005, the Registrant had 3,766,633 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Healthaxis Inc.

Table of Contents

		Page
PART II
Item 6.	Selected Financial Data		2
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		5
Item 8.	Financial Statements and Supplementary Data		20
Item 9A.	Controls and Procedures		52
PART IV
Item 15.	Exhibits and Financial Statement Schedules		54

 

EXPLANATORY NOTE

This Form 10-K/A amends the annual report of Healthaxis Inc. on Form 10-K for the year ended December 31, 2004, filed with the SEC on March 31, 2005, to reflect certain adjustments to the Company’s financial statements for the years ended December 31, 2004 and 2003.

Two items have been identified that require adjustment. One item relates to classification of our payments on a promissory note issued on September 30, 2003, which were netted against accounts receivable for services rendered to the same entity. An adjustment to reflect this offset as a non-cash financing transaction is made to the Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003, in the amounts of $799,000 and $138,000 respectively. The second item relates to the calculation of the fair value of the Company’s modified preferred stock and warrants, as modified and issued on June 30, 2004. This adjustment changes the net loss attributable to common shareholders from $5.7 million ($1.99 per share) to $9.9 million ($3.48 per share) on the Consolidated Statement of Operations for the year ended December 31, 2004. There is no impact to the Consolidated Balance Sheets or the Consolidated Statement of Changes in Stockholders Equity, or to the Company’s net loss as reported for all periods included herein. The restated items are described more fully in Note 18 of the Consolidated Financial Statements and in the Company’s Form 8-K filed with the SEC on October 27, 2005.

As a result of these restatements, this Form 10-K/A contains changes to: Item 6 — Selected Financial Data; Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations; Item 8 — Financial Results and Supplementary Data; and Item 9A — Controls and Procedures. In addition, pursuant to the rules of the SEC, Item 15 of this Form 10-K/A contains the currently dated certificates from our Chief Executive Officer and our Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of our Chief Executive Officer and our Chief Financial Officer are attached to this Form 10-K/A as Exhibits 31.1, 31.2, and 32.1, respectively.

This amendment is limited in scope to the portions of the Form 10-K identified above that reflect the effects of the restatement, and does not amend, update or change any other items or disclosures contained in the Form 10-K.

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Part II

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 McGladrey & Pullen, LLP for 2004 and by Ernst & Young LLP for 2003, 2002 and 2001, and by BDO Seidman, LLP for 2000. Healthaxis’ financial results include those of its subsidiaries. All information was previously restated to present as discontinued operations Healthaxis’ retail website operations (effective June 30, 2000) and Healthaxis’ UICI outsourcing operations under the Services Agreement (effective June 17, 2002).

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	Years Ended December 31,
	2004			2003			2002			2001			2000
	(As Restated)
	(In thousands, except per share data)
Statement of Operations Data:
Revenue	$	16,162		$	20,851		$	19,816		$	23,105		$	21,444
Expenses:
Cost of revenues		15,905			19,573			21,355			24,557			29,741
Sales and marketing		1,475			948			1,951			3,225			3,585
General and administrative		3,489			3298			3,745			13,492			12,380
Research and development		—			30			366			1,479			974
Restructuring and impairment charges		—			—			6,232			279,607			—
Loss on sale of building		—			—			—			2,498			—
Amortization of intangibles		1,032			1,296			1,300			12,471			37,280
Total expenses		21,901			25,145			34,949			337,329			83,960
Operating loss		(5,739	)		(4,294	)		(15,133	)		(314,224	)		(62,516	)
Gain on extinguishments of debt		—			—			16,388			1,681			1,925
Interest expense and other income, net		(219	)		30			(427	)		(2,795	)		(2,977	)
Income (loss) before minority interest		(5,958	)		(4,264	)		828			(315,338	)		(63,568	)
Minority interest in loss of subsidiary		—			—			—			3,080			35,988
Income (loss) before provision for income taxes		(5,958	)		(4,264	)		828			(312,258	)		(27,580	)
Income tax provision		—			—			—			—			585
Income (loss) from continuing operations		(5,958	)		(4,264	)		828			(312,258	)		(26,995	)
Loss from sale of discontinued operations		—			—			(3,564	)		—			(2,300	)
Gain (loss) from discontinued operations		—			—			850			1,686			(5,721	)
Loss before cumulative effect of accounting change		(5,958	)		(4,264	)		(1,886	)		(310,572	)		(35,016	)
Cumulative effect of accounting change		—			—			(6,674	)		—			—
Net loss		(5,958	)		(4,264	)		(8,560	)		(310,572	)		(35,016	)
Less: Cash dividends on preferred stock		—			(690	)		(198	)		—			—
Less: Fair value of consideration transferred over carrying value of preferred stock		(3,973	)		—			—			—			—
Net loss applicable to common stock	$	(9,931	)	$	(4,954	)	$	(8,758	)	$	(310,572	)	$	(35,016	)
Basic and diluted income (loss) per share of common stock:
Continuing operations	$	(3.48	)	$	1.05	)	$	.12		$	(62.27	)	$	(20.64	)
Discontinued operations		—			—			(.51	)		.34			(6.13	)
Cumulative effect charge		—			—			(1.24	)		—			—
Net loss	$	(3.48	)	$	(1.05	)	$	(1.63	)	$	(61.93	)	$	(26.77	)
Weighted average common shares and equivalents used in computing basic and diluted (loss) income per share		2,857			4,699			5,361			5,015			1,308

 

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	As of December 31,
	2004		2003		2002		2001		2000
	(In thousands, except per share data)
Balance Sheet Data:
Cash	$	3,930	$	7,887	$	11,380	$	13,149	$	17,170
Total assets		20,681		27,114		33,657		57,546		711,292
Notes payable (excluding current portion)		2,041		2,697		—		—		—
Convertible debenture		—		—		—		27,134		27,367
Preferred stock		3,100		5,899		6,280		—		—
Total stockholders’ equity including preferred stock		12,822		18,747		27,608		22,389		216,495

 

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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” in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2005 and under “Risk Factors” in the Company’s Registration Statement on Form S-3 filed with the SEC on June 21, 2005. 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 a technology-enhanced provider of fully integrated solutions and services for health benefit administrators and health insurance claim processors. These solutions, which are comprised of software products and related business process services, are designed to assist health insurance payers, third party administrators (“TPA”) and preferred provider organizations (“PPO”) provide enhanced claims related services to members, employees, employers and providers at lower cost. These services are provided through the application of Healthaxis’ flexible technology on an Application Service Provider (“ASP”) basis. These technology solutions are complemented by Healthaxis’ web-based Business Process Outsourcing (“BPO”) services, which are offered to the Company’s ASP clients and on a stand-alone basis. BPO solutions include the automated capture, imaging, storage and retrieval of electronic claims, attachments, and related correspondence, in addition to rules-based claims pre-adjudication and editing and automated PPO routing (via electronic data interchange or “EDI”) and repricing. Healthaxis uses its deep domain expertise in health insurance operations to surround the payment of a health insurance claim, to customize services to meet the specific needs of its customers and to produce value for those customers by tapping unrealized potential in the customers’ operations to achieve best results.

Revenue Model.    The Company’s revenues consist primarily of application service provider (ASP) fees, transaction fees and professional service fees. The ASP services are substantially dependent of the Company’s proprietary software and agreements with customers contain a license for the use of the relevant software. However, the customer does not have the contractual right to take possession of the software. The customer’s access to the Company’s hosted software is through dedicated data lines or the Internet. With some exceptions, the Company has not historically licensed its benefits administration and claims processing software for installation on customers’ systems. No new such licenses were granted in 2004 and the only revenue in 2004 from such licenses were ongoing fees from past licenses that are payable based on customer usage. These revenue sources are described below.

A significant portion of the Company’s revenue is based on providing ASP services to our health insurance company, third-party administrator and self-insured plan customers. The ASP service includes a license to use our benefits administration and claims processing software, including hosting, maintenance and support, which is typically charged on a per-employee-per-month (PEPM), or per-member-per-month (PMPM) basis. In addition, the Company surrounds these hosted software-use rights with such BPO services as imaging, data capture and retrieval, EDI and print and mail services, as well as PPO routing and repricing services, and claims editing services. These services are typically charged on a transaction fee basis, such as per claim, per image and per document. Due to the long-term nature of the ASP arrangement and because all revenue elements included in the collective services are typically not sold separately, the ASP and BPO service revenues are recognized ratably over the term of the agreement and/or as transaction services are provided.

In preparation for providing services under these multi-year ASP contracts, the Company also usually agrees to perform certain start-up activities directly related to customizing and configuring the licensed software and loading insurance plan data for performance under the contract. The Company defers costs and revenues

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relating to these start-up activities and recognizes such costs and revenues ratably over the term of the ASP contract.

Periodically, while an ASP contract is in place, the Company also performs professional services upon request and recognizes the related revenue on a time and materials basis as services are performed. Such professional services are not sold in conjunction with a software license included in the original ASP contract or other revenue elements and, therefore, are accounted for separately from the ASP contact.

The Company uses contract accounting for contracts where significant software modification is performed or where services are performed that are essential to the functionality of the delivered software. Generally, contracts that include significant software modification are accounted for using the percentage of completion method with progress measured based on the cost-to-cost method. Contracts with significant customer acceptance provisions are recognized using the completed contract method upon achieving customer acceptance of the completed project. The Company currently has no contracts in progress for which contract accounting is being applied.

Purchase Agreement with Tak Investments.    The Company entered into a Stock and Warrant Purchase Agreement on February 23, 2005 (the “Purchase Agreement”) with Tak Investments, Inc., a Delaware corporation owned by Mr. Tak (the “Investor”). The issuance of up to 8,333,333 or more shares of the Company’s common stock to the Investor and of the related financing transactions and agreements contemplated by the Purchase Agreement are subject to the approval of the Company’s common shareholders. Under the terms and conditions set forth in the Purchase Agreement, at the closing of the transactions contemplated thereby (the “Closing”) the Company has agreed to issue to the Investor 2,222,222 shares of common stock at a per share purchase price of $2.25 for an aggregate initial investment of $5.0 million. The Investor will also receive at the Closing three warrants (the “Warrants”). The first Warrant, which provides for an exercise price of $2.25 per share of common stock and a term of two years, would permit the Company to call the exercise of up to 3,333,333 shares of common stock (for an aggregate of up to $7.5 million) under certain conditions, but would only permit the Investor to exercise the Warrant for up to 2,222,222 shares of common stock (for an aggregate of $5.0 million). The Company’s ability to call the exercise of the first Warrant is subject to the satisfaction of certain conditions, including unanimous approval of such action by the Company’s Board of Directors (which would require the approval of the Investor’s designees to the Board, as referenced below). The Investor also will receive two additional warrants representing the right to purchase additional common stock at prices of $2.70 and $3.15 per share. The number of shares of common stock subject to these Warrants is dependent upon the amount ultimately invested under the first Warrant. The additional cash investment in the Company under these two warrants could reach $8.1 million.

In connection with the Closing, the Company and the Investor will enter into a number of related agreements. Under the terms of an Investor Rights Agreement, the securities purchased by the Investor will be subject to limited transfer restrictions, and the Investor will have the right to approve certain fundamental corporate activities, the right to participate in other Healthaxis equity financings and, depending upon the size of the Company’s Board of Directors and the Investor’s continuing ownership position in the Company, the right to designate one to three nominees for election to the Company’s Board of Directors. It is expected that following the Closing, the Company’s Board of Directors will be expanded from seven members to nine members and the Investor, therefore, will have the right to designate two new members to the Company’s Board of Directors. The parties also will enter into a Registration Rights Agreement under which the Company agrees to file a registration statement covering the resale of the shares of common stock purchased under the Purchase Agreement or through exercise of the Warrants.

As a condition to the Closing, the Company also will enter into a five year Remote Resourcing Agreement (the “Resourcing Agreement”) with Healthcare BPO Partners L.P., a company affiliated with the Investor and owned by Mr. Tak. Healthcare BPO Partners will provide India-based personnel and infrastructure that will be utilized by the Company to provide business process outsourcing services and other software development and technical support services to support the Company’s operations. The Indian operations, which

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will be dedicated for the Company’s exclusive use, will be managed by the Company and based in Jaipur, India. These new Indian operations will supplement the Company’s existing operations in Utah, Texas and Jamaica. The Resourcing Agreement was reviewed and approved by the Company’s Audit Committee.

Preferred Stock.    Previously, the Company’s Series A Convertible Preferred Stock (“old”) had a stated value of $22.1 million and was convertible into 1,424,258 shares of Healthaxis common stock at a conversion price of $15.50 per share. The terms of the preferred stock provided that cumulative dividends be paid at the rate of 2%, or approximately $442,000 per year, payable semi-annually. In general, the Company could have paid the dividends either in cash or by issuing shares of common stock, although in some circumstances it was required to pay cash dividends. The terms of the preferred stock provided that, in some situations, the holders of the preferred stock could have forced Healthaxis to buy back their shares. The Company believed that the occurrence of the situations where it could be required to buy back shares of preferred stock was within its control. The preferred stock also contained, among other things, provisions providing the holders a preference in the payment of dividends and also a liquidation preference equal to at least the stated value of the preferred stock plus all accrued but unpaid dividends. The holders of the preferred stock did not have general voting rights, although they did have the right to vote separately as a class in connection with some matters.

Healthaxis entered into a Preferred Stock Modification Agreement on May 12, 2004. On June 30, 2004, Healthaxis consummated a transaction modifying the terms of its Series A Convertible preferred stock and providing for the issuance to its preferred shareholders of warrants to purchase shares of the Company’s common stock. Under the terms of the agreements with the preferred shareholders, the then existing shares of the preferred stock were convertible into an aggregate of 3,850,000 shares of the Company’s common stock. The preferred shareholders also received warrants with a term of five years entitling them to purchase up to 1,000,000 shares of common stock at an exercise price of $5.50 per share (subject to a cashless exercise feature that applies under some circumstances). The shares of common stock into which the shares of preferred stock have been, or are in the future, convertible and, with respect to which the warrants are exercisable, represent approximately 54% of our common stock on a fully diluted basis as of December 31, 2004. Holders of the preferred stock have no liquidation preference, no voting rights except as required by law, the right to receive a nominal dividend of $0.0001 per share semi-annually (aggregating to less than $1,000 per year in total) and otherwise on a pro-rata basis to the extent that dividends are paid to holders of common stock, limited anti-dilution rights in the context of stock splits, stock dividends and similar transactions, and no redemption rights.

The new preferred stock is convertible into shares of common stock at the option of a preferred shareholder at any time, and in any amount, on or after June 30, 2005, but prior to that date may only be converted if the preferred shareholder desiring to effect the conversion will not hold, as a result of the conversion, more than 750,000 shares of common stock, or if the common stock is trading on a national stock market and has had a closing price of $8.00 or more for 20 out of the 30 trading days immediately preceding the conversion date (in which case, any number of shares may be converted). Notwithstanding the foregoing, in the event of the transfer of shares of preferred stock in accordance with the terms of the agreements with the preferred shareholders, the preferred stock automatically converts into shares of common stock. Healthaxis may compel conversion of the preferred stock or exercise of the warrants granted to the preferred shareholders under certain circumstances.

Under the agreements with the preferred shareholders, Healthaxis agreed that it will not issue any equity securities in a transaction implying a pre-money valuation of Healthaxis of less than $14.5 million, or at a per share price of less than $2.15 (these restrictions do not apply to the grant of stock options to Healthaxis employees or directors in most circumstances). Further, until June 30, 2005, the preferred shareholders have a right of first refusal to match the terms upon which any third party proposes to purchase from Healthaxis any equity securities having an aggregate purchase price of at least $1.0 million and to match the terms upon which Healthaxis proposes an offering of its common stock (the preferred shareholders have waived this right of first refusal with respect to the transactions with the Investor contemplated by the Purchase Agreement, provided such transactions close by June 30, 2005).

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Prior to conversion, the new preferred stock will only have the right to vote to the extent it is entitled to do so under applicable law. Under applicable law, the new preferred stock is entitled to vote separately as a class in certain instances, including in the event of a merger or consolidation that would effect some types of changes in the Company’s articles of incorporation. To the extent that applicable law entitles the new preferred stock to vote on a given merger or consolidation transaction prior to June 30, 2005, the preferred shareholders have agreed to vote their shares in favor of such a merger or consolidation if the common shareholders have approved the merger or consolidation and the per share price to be received by the preferred shareholders in the merger or consolidation is at least $3.50 in cash for each share of preferred stock. If the Company pursues a merger or consolidation on or after June 30, 2005, the preferred shareholders have agreed to vote their shares in favor of the merger or consolidation if the common shareholders approve the merger or consolidation and if the per share price to be received by the preferred shareholders in the merger or consolidation for each share of preferred stock is at least equal to what they would have received in the merger or consolidation if they had converted their shares of preferred stock into shares of common stock immediately prior to the merger or consolidation.

As required under the preferred stock modification agreements, Healthaxis has registered for resale the shares of common stock issuable upon conversion of the preferred stock or exercise of the warrants. These agreements do, however, place certain restrictions on the private sale or transferability of the securities held by the preferred shareholders, and restrict the number of shares of common stock that may be sold in the public markets below a price of $3.50 per share. These stock transfer restrictions lapse on June 30, 2005. The Company filed a Form S-3 Registration Statement on September 2, 2004 to register for resale the shares of common stock issuable upon conversion of the preferred stock or exercise of the warrants. On October 28, 2004 the Securities and Exchange Commission declared the Registration Statement effective.

Significant Project Update:    As previously disclosed, the Company had a contract for software licensing, development and systems implementation with the State of Washington Health Care Authority (“HCA”), which began in mid 2002. The Company was the prime contractor on the HCA project and utilized the services of an offshore development partner to perform a significant part of the work. Also, as previously disclosed, a dispute arose under the HCA contract in late 2003, which was resolved by the Company and HCA in the second quarter of 2004. Both parties entered into an agreement to terminate the HCA contract. The Company also simultaneously entered into a cancellation agreement with its development partner canceling and terminating its master software services agreement with the development partner and the work order associated with subcontracted portions of the HCA project.

Under the terms of the agreement with HCA, the Company paid HCA $300,000 and transferred title to certain project documentation to HCA. The agreement also contains full mutual releases of all parties including HCA, Healthaxis and the development partner, and an express denial of liability or wrongdoing by all parties.

Under the terms of the agreement between the Company and its development partner, Healthaxis received $208,000 and any rights the development partner may have in the documentation being transferred by Healthaxis to HCA, resulting in a net cash payment by Healthaxis to HCA of $92,000. The agreement also contains full mutual releases between Healthaxis and the development partner, and an express denial of liability or wrongdoing by either party.

The Company entered into these agreements solely to avoid the potential time and cost of dispute resolution. The execution and funding of these agreements resolved all outstanding issues related to the HCA project. The net impact of these transactions is included in general and administrative expense.

Repurchase of Securities Held by UICI.    On September 30, 2003, the Company purchased all Healthaxis securities held by UICI for $3.9 million. The UICI holdings included 2,585,769 shares of Healthaxis common stock, or 48.3% of the Company’s outstanding common stock; 1,424 shares of Series A Convertible Preferred Stock, or 6.1% of the outstanding preferred stock; and warrants to purchase 22,240 shares of common stock.

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The repurchased securities were retired. The total purchase price of $3.9 million included $500,000 cash at closing, and a $3.4 million promissory note, which is due over three years and bears interest at 6%. The promissory note will be paid through deductions from the monthly invoices for BPO services provided by the Company to the Mega Life & Health Insurance Company (“Mega”), a UICI subsidiary. The amount of the monthly payment will be equal to the greater of one half of the Mega invoice amount for BPO services or $65,000. A balloon principal payment is due at the maturity of the note if the note has not been paid through the monthly payments. The balance remaining to be paid as of December 31, 2004, was $2.7 million

November 2002 Cost Reduction Initiative.    On November 12, 2002, a cost reduction initiative was begun which was designed to more closely align expenses with revenues and to enhance the Company’s operating performance. The cost reduction initiative consisted of both a reduction in the Company’s labor force and an across-the-board reduction in salary levels, and planned reductions in certain operating and overhead expenses. The reduction in labor force was effective in mid-November and the reduction in salary levels was effective January 1, 2003.

Convertible Debenture Exchange.    On July 31, 2002 the Company completed a transaction providing for the cancellation of its $27.5 million 2% convertible debentures in exchange for issuance to the debenture holders of shares of Series A Convertible Preferred Stock (“Preferred Stock”) and the payment of $4.0 million cash. The Preferred Stock was convertible into shares of Healthaxis common stock at a conversion price of $15.50 (subject to downward adjustment in certain events), and carried a fixed dividend rate of 2% per annum, payable semi-annually in cash or shares of common stock. As more fully described in Note 10 to Notes to Consolidated Financial Statements, the Preferred Stock contained, among other things, provisions providing the holders a preference in the payment of dividends and also a liquidation preference equal to at least the stated value of the Preferred Stock plus all accrued but unpaid dividends, and in the event of our failure to comply with certain contractual provisions, redemption rights. The holders of the Preferred Stock did not have general voting rights, although they did have the right to vote separately as a class in connection with some matters. As described in “Overview — Preferred Stock” above, the terms of the Series A Preferred Stock were significantly modified on June 30, 2004.

Termination of UICI Services Agreement.    UICI and its subsidiaries, in the aggregate, constituted our largest single client during 2002, accounting for 37% of our total revenues (including revenues from discontinued operations). On June 17, 2002 the Company consummated an agreement providing for the termination of its Services Agreement with UICI. The termination of the Services Agreement substantially reduced Healthaxis’ business relationship with UICI. See Note 12 of Notes to Consolidated Financial Statements for a summary of the terms under which the Services Agreement was terminated. As a result of the termination of the Services Agreement, the Company’s consolidated financial statements have been prepared with the related revenue and expenses presented as discontinued operations. All historical financial statements presented were previously restated to conform to this presentation.

Segments.    The Company has historically presented information regarding two segments based on the Company’s internal organizational structure and financial reporting. During the first quarter of 2004, the Company re-aligned its operations under a single operating manager and further consolidated its operations. As a result of this change, the Company now produces consolidated information on its operations (and on sales, general and administrative), which is regularly reviewed by the executive management committee of the Company in assessing performance and as an aid in making decisions about how resources are allocated. Accordingly, the Company no longer has reportable segments and has discontinued disclosure of segment information for all periods.

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Results of Operations

Year ended December 31, 2004 compared to year ended December 31, 2003

	(Table in thousands)
	Year Ended Dec. 31,
	2004			2003			Change
Revenues	$	16,162		$	20,851		$	(4,689	)
Cost of revenues		15,905			19,573			(3,668	)
Gross profit	$	257		$	1,278		$	(1,021	)
% of revenue		2	%		6	%

 

Revenues were down approximately $4.7 million (22%) in the year ended December 31, 2004 compared to the same period in 2003. Cessation of work on the ACS/State of Georgia project and the State of Washington project, related to the development of benefit administration platforms, accounted for $1.8 million of the reduction. Recurring PEPM license fee revenue declined $578,000 primarily as the result of customers in a terminated or in a run-off stage, while other reductions in the number of covered lives administered by our clients was largely offset by increased revenues from new data mining capabilities offered to the Company’s ASP customers. Transaction fees and other revenue decreased $963,000 as a result of the consolidation of print and mailings across certain customers, and as a result of the decreased number of covered lives. Bundling of checks to the same provider of medical services and combining multiple payers into the same envelope for mailing, resulted in this decreased print and mailing revenue. Professional service fees decreased $723,000 as a result of decreased customers’ dependence upon our technical staff and a decrease in the number of one-time projects, as compared to the same period in 2003. Data capture service revenue declined $654,000 as a result of lower claims volume and due to the reduced number of covered lives in certain customers that use our data capture services.

Cost of revenues includes all expenses directly associated with the production of revenue, and consists primarily of salaries and related benefits, rent, amortization and depreciation, system expenses such as maintenance and repair, as well as other related consumables. Cost of revenues declined $3.7 million (19%) in the year ended December 31, 2004 compared to the same period in 2003. Cost of revenues was 98% of revenues in the 2004 period compared to 94% in the 2003 period. Approximately $1.7 million of the cost decline was related to termination of contract labor and internal costs associated with the ACS/State of Georgia and the State of Washington projects, which were underway in 2003. An additional $524,000 of the decline was due to reduced amortization and depreciation expenses resulting from a decline in capital spending for property, plant and equipment over the last three years. The remaining reduction was largely the result of lower costs for salary, benefits, travel, facilities and other expenses associated with personnel.

	(Table in thousands)
	Year Ended Dec. 31,
	2004			2003			Change
Sales and marketing expense	$	1,475		$	948		$	527
General and administrative expense		3,489			3,298			191
Research and development expense		—			30			(30	)
Amortization of intangibles		1,032			1,296			(264	)
Interest and other income, net		25			139			(114	)
Interest expense		(244	)		(109	)		135

 

10

Sales and marketing expenses consist primarily of employee salaries and related benefits, as well as promotional costs such as direct mailing campaigns, trade shows, media advertising and website development costs. These expenses increased $527,000 (56%) in the year ended December 31, 2004 compared to the same period of 2003. The increase is primarily due to additional personnel and recruiting expenses related to sales and marketing management and staff additions in early 2004, as well as commissions on new 2004 sales.

General and administrative expenses include executive management, accounting, legal and human resources compensation and related benefits, as well as expenditures for applicable overhead costs. These expenses increased $191,000 (6%) in the year ended December 30, 2004 compared to the same period of 2003. The increase was primarily due to the $92,000 settlement on of the State of Washington project and $468,000 of legal, accounting and other professional fees associated with the preferred stock transaction completed in June 2004. These cost increases were partially offset by lower costs for facilities, personnel and insurance totaling $299,000 plus other smaller cost reductions.

Research and development expenses were reduced to zero in the year ended December 31, 2004 compared to $30,000 in the same period of 2003, as the Company has placed a greater emphasis on completing existing development projects and the maintenance of existing customer accounts.

Amortization of intangibles includes the amortization of developed software and customer base acquired in the January 2001 Healthaxis merger. These expenses were reduced $264,000 (20%) in the year ended December 31, 2004 compared to the same period of 2003, as certain acquired developed software was fully amortized in January 2004.

Interest and other income, net decreased $114,000 in the year ended December 31, 2004 compared to the same period of 2003, due primarily to lower balances on notes receivable resulting from the normal course of collections and a write-off of certain retired fixed assets no longer used in the business.

Interest expense increased $135,000 (124%) in the year ended December 31, 2004 compared to the same period of 2003 due to interest payments under the $3.4 million note payable to UICI dated September 30, 2003, related to the Company’s purchase of UICI’s Healthaxis stock and warrants.

Year ended December 31, 2003 compared to year ended December 31, 2002

Technology & Operations

	Year Ended December 31,
	2003			2002			Change
	(In thousands)
Revenues	$	16,097		$	15,671		$	426
Cost of revenues		15,059			16,058			(999	)
Gross profit	$	1,038		$	(387	)	$	1,425
% of revenue		6	%		(2	)%

 

Revenue from Technology & Operations for the year was up $426,000 (3%) from 2002. Changes with the following customers explain the primary reasons for the net increase.

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In 2003, we recognized a total of $894,000 revenue on the ACS / State of Georgia contract. As this contract was accounted for under the completed-contract method, there was no revenue recognized in 2002. The project was halted prior to completion and a termination agreement was entered into in late 2003, which included a mutual release of liability. Healthaxis was paid the money it was owed. In 2003, we added print and distribution services for two existing customers. The increase in revenue of $1.1 million for these two customers is largely the result of providing these new services. Also contributing to the increase in 2003 was a $742,000 increase from a new customer in the fourth quarter 2002.

The 2003 revenue increases described above were partially offset by the following factors. Two contract terminations in 2002 accounted for revenue decreases in 2003 of $1.4 million. Revenue from a third customer declined $452,000 as it reduced its dependence upon our staff to support its retail website. Additionally, our revenue in 2002 included $420,000 in non-recurring fees from a software license agreement with UICI, which was not a part of the UICI discontinued operations.

Other 2003 revenue increases, particularly related to expanding our WebAxis product line, were offset by a decline in 2003 of one-time HIPAA related projects performed in 2002 and by a reduction in 2003 revenue from a customer due to revised pricing and their declining headcount.

Cost of revenues includes all expenses directly associated with the production of revenue, and consists primarily of salaries and related benefits, rent, amortization and depreciation, system expenses such as maintenance and repair, and other related consumables. Cost of revenues from Technology & Operations was reduced $999,000 (6%) from 2002 to 2003. Cost of revenues in 2003 as a percent of revenue was 94% compared to 102% in 2002. The reasons for the net improvement are summarized and described below.

The most significant portion of the net improvement resulted from a reduction in personnel costs, offset by less capitalization for new software development or contract start-up and increased costs attributable to print and distribution revenue. In November 2002, we reduced costs through personnel reductions. In addition, company-wide salary reductions went into effect on January 1, 2003. Personnel expenses decreased $3.5 million in 2003 as a result of this cost containment initiative. The effect of this cost reduction in operations was partially offset by the fact that some employees were re-assigned to expensable projects from capitalizable development projects. The effect of this action was to decrease the expense savings by $961,000 compared to 2002. Also, as noted in the revenue section above, in 2003 we began print and distribution services for two existing customers and added a new customer in the fourth quarter 2002, which also included print and distribution services. The increase in cost of revenues related to these new services was approximately $1.6 million.

As more fully disclosed in “— Overview — Significant Projects” above, a charge was taken in the fourth quarter 2003 related to the State of Washington project. The charge consisted of a $314,000 write-off of all assets and liabilities related to the project, plus an accrual of $106,000 for costs incurred on the project in early 2004 prior to the time that work was stopped. Other factors affecting costs of revenues for Technology & Operations included non-recurring impairment charges related to software and equipment totaling $715,000 in 2002 and reduced amortization and depreciation charges of $560,000 in 2003 as more assets became fully depreciated, reflecting a slower acquisition trend over the last three years. These reductions were partially offset in 2003 by an increase in subcontractor fees of $401,000 related to outsourced work for our two government contracts.

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BPO Services (formerly known as Imaging Services Group)

	Year Ended December 31,
	2003			2002			Change
	(In thousands)
Revenue	$	4,754		$	4,145		$	609
Cost of revenue		4,514			5,297			(783	)
Gross profit	$	240		$	(1,152	)	$	1,392
% of revenue		5	%		(28	%)

 

Revenue from BPO Services for 2003 was up $609,000 (15%) from 2002. In early 2003, we began pre-adjudication processing for an existing imaging and data capture customer. This allowed us to increase transaction counts significantly, which resulted in an additional $532,000 in revenue over 2002. Two new accounts were also added during 2003, which increased revenue by $262,000. We also received increased volumes from UICI during the first three quarters of 2003, which accounted for an additional $320,000 in revenue from this client over 2002.

One customer terminated our services, which resulted in a reduction in revenue of $187,000 in 2003. Additionally, revenue decreased $183,000 for another customer as a result of a price reduction effective in August 2003 and due to reduced volume throughout the year.

Cost of revenue in BPO Services was reduced $783,000 (15%) in 2003 from 2002. Cost of revenues in 2003 as a percent of revenue was 95% compared to 128% in 2002. The positive change resulted from lower depreciation and amortization expense, lower personnel costs in the BPO technical services group, and better productivity in our production centers in Utah and Jamaica. A reduction in capital expenditures during the last three years caused a decrease in depreciation and amortization expense totaling $367,000. The reduction in imaging technical support personnel from twelve to eight was part of the November 2002 staff reduction. Across-the-board salary reductions also went into effect in January 2003. Personnel costs reductions from this group accounted for most of the personnel related cost decrease of $196,000 from 2002. Although revenue increased, variable labor costs did not increase proportionately due to increased operating efficiencies obtained at our production centers. Additionally, capitalization of $153,000 took place in 2003, which had the effect of offsetting costs related to personnel. The capitalized amounts consisted of software development related to Optical Character Recognition (OCR) and start-up costs related to a new customer. The developed software was for internal use and was therefore included in property, equipment and software.

Other Corporate-wide Items:

	(Table in thousands)
	Year Ended December 31,
	2003			2002			Change
Sales and marketing expense	$	948		$	1,951		$	(1,003	)
General and administrative expense		3,298			3,745			(447	)
Research and development expense		30			366			(336	)
Restructuring and impairment charges		—			6,232			(6,232	)
Amortization of intangibles		1,296			1,300			(4	)
Gain on extinguishments of debt		—			16,388			(16,388	)
Interest and other income, net		139			32			107
Interest expense		(109	)		(459	)		(350	)
Loss from sale of discontinued operations		—			(3,564	)		(3,564	)
Gain from discontinued operations		—			850			(850	)
Cumulative effect of accounting change		—			(6,674	)		(6,674	)

 

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Sales and marketing expenses decreased $1.0 million (51%) from 2002. The sales and marketing staff was reduced from seven in September 2002 to three as result of the November 2002 staff reduction. These changes, combined with the 2003 salary reductions, account for approximately $693,000 of the decrease from 2002. Travel expenses dropped $122,000 and cost associated with trade shows and other marketing efforts decreased by $88,000 commensurate with the staff reduction. Stock based compensation also decreased $81,000 from 2002 to 2003.

General and administrative expenses decreased $447,000 (12%) from 2002 despite a gain in 2002 related to the settlement of Al Clemens’ severance liability in the amount of $1.3 million, which decreased general and administrative expenses. See Note 12 to Notes to Consolidated Financial Statements. Excluding this one-time benefit, general and administrative expenses for the 2003 decreased $1.8 million from 2002. The November 2002 staff reductions, combined with the January 2003 salary reductions, accounted for $758,000 of the cost decrease. Professional fees decreased $408,000 compared with 2002. Non-cash stock based compensation expense decreased $271,000 due to the gradual decrease of expense resulting from the remeasurement of stock options at the time of the 2001 Healthaxis merger. Additionally, insurance and other expenses were reduced by $355,000. The Company continues to look for ways to trim administrative expenses.

Research and development expenses decreased $336,000 (92%) from 2002. We have significantly reduced our research and development activities in 2003 compared to 2002 due to a greater emphasis on completing existing development products, and the maintenance of existing customer accounts.

Restructuring and impairment charges were $6.2 million in 2002. Approximately $5.9 million was attributable to the further impairment of goodwill and the remaining $358,000 was due to severance expenses related to terminated employees as a result of the November 2002 cost reduction initiative described previously. There were no similar charges in 2003.

Amortization of intangibles includes the amortization of developed software and client base. This amount was essentially unchanged in 2003 compared to 2002.

Gain on extinguishment of debt in the 2002 period of $16.4 million relates to the July 2002 transaction whereby Healthaxis issued 23,500 shares of Series A Convertible Preferred Stock and paid $4.0 million in exchange for its existing convertible debentures having a face value of $27.5 million.

Interest and other income, net in 2002 includes a non-recurring write down of our investment in Digital Insurance in the amount of $227,000, offset by lower interest income in 2003 as a result of lower notes receivable balances.

Interest expense decreased $350,000 in 2003 from 2002, primarily as a result of the elimination of the $27.5 million of convertible debentures in July 2002. Interest expense in 2002 related to the convertible debentures was $376,000. This reduction was offset slightly by additional interest expense for the $3.4 million note payable to UICI dated September 30, 2003 related to the Company’s purchase of UICI’s Healthaxis stock and warrants.

Loss on disposal from sale of discontinued operations of $3.6 million in 2002 includes the impairment of goodwill and customer base attributable to the disposal of the Outsourcing segment as a result of the termination of the Services Agreement with UICI. There were no similar charges in 2003.

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Gain from discontinued operations relates to the gain from the disposal of the UICI Outsourcing business unit. These operations were discontinued in connection with the June 2002 termination of the UICI Services Agreement.

Cumulative effect of accounting change was recorded as a result of our adoption of SFAS No. 142 “Goodwill and Other Intangible Assets”. No such charge was recorded in 2003.

Liquidity and Capital Resources

Overview of Cash Resources

At December 31, 2004, our cash and cash equivalents amounted to $3.9 million compared to $7.9 million at December 31, 2003. The sources and uses of cash during 2004 are described more fully in “Analysis of Cash Flows” below. We have experienced repeated losses, with the result that our cash resources have declined. The Company’s focus is on positive cash generation. We have been taking measures to address our liquidity needs, including increasing our marketing and sales efforts, implementing further productivity improvements and seeking new sources of capital. To this end, the Company recently entered into a Purchase Agreement with Tak Investments, Inc., and if the related transactions are consummated, the funds from the issuance of shares of the Company’s common stock will provide the Company with an additional source of liquidity. Please see “— Overview — Purchase Agreement with Tak Investments” for a summary of the potential transactions with Tak Investments, Inc. No assurance can be given that the transactions contemplated by the Purchase Agreement will be consummated or that any or all of the foregoing liquidity initiatives will prove successful. We believe that the Company will maintain sufficient liquidity to fund operations for at least the next 12 months, even if one were to assume that the financing transactions contemplated by the Purchase Agreement with Tak Investments, Inc. were not completed. However, in the event that we are unable to maintain or increase our revenues, or effectively reduce our expenses to a level commensurate with our revenues, or raise additional capital, then our business would likely be adversely affected.

The Company is encumbered with certain costs of being a public company, which cause its overhead structure to be higher than that normally associated with a company its size. The Company’s general and administrative expenses as a percent of revenue were 22%, 16% and 19% during 2004, 2003 and 2002 respectively. Management believes the fixed costs of remaining a public company will continue to be a significant burden on operating results until offsetting revenue growth is achieved. The increased percentage in 2004 was primarily the result of increased legal and accounting expenses incurred in connection with the Preferred Stock Modification Agreement (see “— Overview — Preferred Stock” above), and as result of reduced revenues.

With regard to maintaining cash flow from current customers, we are dependent on a small number of clients to generate a significant amount of annual and quarterly revenues. We believe that the relationships with our customers are generally positive. For the year ended December 31, 2004, our four largest customers accounted for 63% of revenues from continuing operations. One of these customers, accounting for 16% of total 2004 revenue, was purchased by another TPA in 2002 and has indicated they will be winding down their use of the Healthaxis system during 2005 and migrating the processing to a system used by its parent company. We believe that we will continue to provide certain services to this customer for 2005 and beyond. However, it is likely that the total revenue from this customer will decrease significantly. New sales made in late 2004 are expected to partially offset this lost revenue, in addition to new sales anticipated in 2005.

Our plans for generating new revenues are based upon recent additions to our sales staff and refinement of our sales processes. We believe that Healthaxis offers competitive, and competitively priced, products and

15

services its target markets. However, there can be no assurances that we will be successful in achieving our revenue growth goals.

Analysis of Cash Flows

Cash used in operating activities for the year ended December 31, 2004 was approximately $2.8 million as compared to $1.2 million and $2.1 million for the same periods in 2003 and 2002, respectively. The increase in cash used in 2004 compared to 2003 was primarily due to a $1.7 million increase in the net loss and an $816,000 reduction in depreciation expenses from 2003, partially offset by an improvement in working capital of $840,000. Cash used in 2004 was roughly the same as in 2002 despite a reduction in the net loss. The net loss in 2002 included a number of non-cash expenses and gains as detailed in the Consolidated Statements of Cash Flows.

Cash used in investing activities for the year ended December 31, 2004 was $891,000 as compared to $1.1 million and $1.7 million for the same periods in 2003 and 2002, respectively. The Company’s investing activities continue to be primarily in the areas of developing software enhancements, contract start-up activities and the acquisition of property, equipment and software. The decrease in cash used in 2004 compared to 2003 was primarily due to a reduction in expenditures for purchased property, equipment and software, partially offset by increased expenses related to internally developed software and job start-up expenses. The decrease in cash used in 2004 compared to 2002 was primarily due to a $1.1 million reduction in internally developed software and job start-up, partially offset by increased costs of purchased property and equipment and smaller collections on notes receivable.

Cash used in financing activities for the year ended December 31, 2004 was $223,000 as compared to $1.2 million for the same period in 2003 and cash generated of $2.0 million in 2002. The decrease in cash used in 2004 compared to 2003 was due to a $467,000 reduction in payments on preferred stock dividends resulting from amending and restating the terms of the preferred stock agreements completed in June 2004. See “Overview — Preferred Stock” above. The initial $500,000 payment to UICI for purchasing Healthaxis’ stock and warrants in 2003 also contributed to the increased expenditures in that year. Subsequent principal and interest payments of $799,000 and $138,000 in 2004 and 2003, respectively, were netted against accounts receivable and therefore are reflected as a non-cash financing activity in the Consolidated Statements of Cash Flows. See “Overview — Repurchase of Securities Held by UICI” above. The $2.0 million cash generated in 2002 was largely the net effect of $6.4 million received from UICI related to the early termination of the Services Agreement, partially offset by a $4.0 million payment on the cancellation of the convertible debentures. Both of these transactions are fully described in the “Overview — Termination of UICI Services Agreement” and the “Overview — Convertible Debenture Exchange” sections above.

Contractual Obligations

The following table summarizes the Company’s known contractual obligations (in $000s) as of December 31, 2004:

	Total		Less than 1 Year		1–3 Years		3–5 Years		After 5 Years
Long term debt obligations (1)	$	2,678	$	637	$	2,041	$	—	$	—
Operating lease obligations (2)		1,089		991		98		—		—
Purchase obligations (3)		370		170		200		—		—
Other long-term liabilities (4)		929		135		174		159		461
Total	$	5,066	$	1,933	$	2,513	$	159	$	461

 

16

(1) Long-term debt obligations relate to the promissory note payable to UICI, excluding related interest.

(2) Operating lease obligations consist primarily of leases of office space and various pieces of equipment.

(3) Purchase obligations consist primarily of contractual obligations for estimated future payments related to the licensing of various software modules that are integrated into Healthaxis’ products.

(4) Other long-term liabilities consist of estimated payments anticipated for funding of post-retirement benefits for a group of former executives of the Company. The benefits consist primarily of medical and dental insurance.

The Company’s commitments to make payments in addition to these contractual commitments are the other accounts payable and short-term liabilities reflected on the Consolidated Balance Sheets.

Critical Accounting Policies

General

Our discussion and analysis of Healthaxis’ financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are those which are most important to the financial statement presentation and that require the most difficult, subjective complex judgments. We believe the following critical accounting policies include the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

See “— Overview — Revenue Model” above.

Capitalized Software

Healthaxis incurs development costs that relate primarily to the development of new products and major enhancements to existing services and products. All development costs related to software development projects incurred prior to the time of completing analysis, design and a detailed project plan are expensed. Costs incurred after completion of the project plan are capitalized until the software is released into production and made available to customers on our system. Once released into production, the capitalized costs are then amortized over the estimated useful life of the asset.

Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted Statements of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142 (January 1, 2002), annually thereafter and upon the occurrence of any event that

17

indicates potential impairments. The Company performs its annual impairment review during the fourth quarter of each year based upon an October 1 date. The Company does not have any intangible assets with an indefinite life.

SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for potential impairment, while the second phase (if necessary), measures the impairment. Goodwill is potentially impaired if the net book value of a reporting unit exceeds its estimated fair value. The Company has a single reporting unit, as defined by SFAS No. 142, for purposes of analyzing goodwill.

In calculating the impairment charges, the fair value of the reporting unit is estimated using a discounted cash flow methodology. This methodology differs from the Company’s previous policy, as permitted under accounting standards existing at that time, of using undiscounted cash flows on an enterprise-wide basis to determine if goodwill is recoverable. The significant assumptions used in these calculations include discount rates and estimated future growth rates and operating margins. A change in any of these assumptions could significantly impact the estimated fair value of the reporting unit.

Impairment of Long-Lived Assets

In 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of.” In accordance with SFAS 144, the Company records impairment losses on long-lived assets when events and circumstances indicate that such assets are not recoverable and impaired such that the estimated fair value of the asset is less than its recorded amount. Conditions that would necessitate an impairment assessment included material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon acquired products, services or technologies, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable.

The Company reviews its long-lived assets and certain intangible assets for impairment on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is generally measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows expected to be generated by that asset. An impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the fair value of the assets estimated using discounted cash flows.

Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that the deferred tax assets will not be realized. As a result of the capital transactions of both Healthaxis and its subsidiaries, including the Insurdata Merger, the HAXS Merger, the re-purchase of all Healthaxis stock and warrants from UICI and the modification to the Preferred Stock agreements, the utilization of NOL carryforwards is limited. Additionally, the utilization of these NOL’s, if available, to reduce future income taxes is dependent on the generation of sufficient taxable income prior to their expiration. As it is considered more likely than not that the deferred tax assets will not be realized, the Company has established a valuation allowance for all net deferred tax assets

Post Retirement Benefits

We have an obligation to provide certain post retirement benefits to a group of retirees formerly employed by a predecessor of the Company. The benefits are lifetime health and life insurance coverage.

18

Because this obligation exists until the death of the participants, actuarial calculations, which include the use of estimates, are used to determine the carrying value of the liability. These estimates include the life expectancy of the participants, a discount rate to calculate the present value of the expected future costs, and growth rates to project anticipated future increases in the cost of the benefits provided. The amount necessary to satisfy this obligation may, therefore, be different than the amount accrued. The most sensitive variable in the calculation is the life expectancy of the participants. The Company uses current mortality tables to project life expectancy. As mortality rates do not change rapidly, the Company does not expect to have material changes to the calculation and therefore to the estimated liability.

Contingent Liabilities

Healthaxis’ policy is to record contingent liabilities that are both measurable and probable. In assessing whether or not to record a contingent liability, both of these criteria may be subjective. The final amount paid, if any, could be different than the amount we have accrued.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements herein for a discussion of the impact on the Company’s financial statements of new accounting standards.

19

Item 8.     Financial Statements and Supplementary Data

	Page
Report of Independent Registered Public Accounting Firm		21
Report of Independent Registered Public Accounting Firm		22
Consolidated Balance Sheets — December 31, 2004 and 2003		23
Consolidated Statements of Operations Years ended December 31, 2004, 2003 and 2002		24
Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2004, 2003 and 2002		25
Consolidated Statements of Cash Flows Years ended December 31, 2004, 2003 and 2002		26
Notes to Consolidated Financial Statements		28

 

20

Report of Independent Registered Public Accounting Firm

To the Board of Directors
Healthaxis Inc. and Subsidiaries
Dallas, Texas

We have audited the consolidated balance sheet of Healthaxis Inc. and Subsidiaries (the “Company”) as of December 31, 2004, and the related consolidated statements of operations, changes in stockholder’s equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthaxis Inc. and Subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

As described in Note 18 to the consolidated financial statements, the 2004 net loss and loss per share attributed to common stockholders as well as certain items in the consolidated statement of cash flows have been restated.

/s/ McGladrey & Pullen, LLP

Dallas, Texas
March 11, 2005, except for Note 18 as to which the date is November 9, 2005

21

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Healthaxis Inc.

We have audited the accompanying consolidated balance sheet of Healthaxis Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthaxis Inc. and Subsidiaries at December 31, 2003, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 7 to the financial statements, the Company changed its method of accounting for goodwill as of January 1, 2002.

/s/ Ernst & Young LLP

Dallas, Texas
March 24, 2004

22

Healthaxis Inc. and Subsidiaries
Consolidated Balance Sheets

(Dollars in thousands except share data)

	December 31,
	2004			2003
Assets
Current assets:
Cash and cash equivalents	$	3,930		$	7,887
Accounts receivable, net of allowance for doubtful accounts of $48 and $44, respectively		2,368			3,077
Prepaid expenses		635			605
Notes receivable		—			124
Total current assets		6,933			11,693
Property, equipment and software, less accumulated depreciation and amortization of $6,661 and $9,952, respectively		966			1,238
Contract start-up costs, less accumulated amortization of $1,199 and $704, respectively		655			759
Capitalized software, less accumulated amortization of $2,760 and $2,199, respectively		688			990
Customer base, less accumulated amortization of $4,130 and $3,121, respectively		84			1,093
Goodwill		11,276			11,276
Notes receivable		23			—
Other assets		56			65
Total assets	$	20,681		$	27,114
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,238		$	981
Accrued liabilities		674			795
Deferred revenues		923			888
Notes payable, current portion		637			599
Current portion, post retirement and employment liabilities		135			117
Total current liabilities		3,607			3,380
Notes payable		2,041			2,697
Post retirement and employment liabilities		794			823
Other liabilities		1,417			1,467
Total liabilities		7,859			8,367
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, par value $1.00: authorized 100,000,000 shares:
Series A Convertible, 3,100,000 shares issued and outstanding (no liquidation preference) Series A cumulative convertible, issued and outstanding 22,076 shares (liquidation preference $22,076)		3,100			5,899
Common stock, par value $.10: authorized 1,900,000,000 shares, Issued and outstanding 3,518,291 and 2,767,592 shares, respectively		352			277
Additional paid-in capital		444,221			441,464
Accumulated deficit		(434,851	)		(428,893	)
Total stockholders’ equity		12,822			18,747
Total liabilities and stockholders’ equity	$	20,681		$	27,114

See notes to consolidated financial statements

23

Healthaxis Inc. and Subsidiaries
Consolidated Statements of Operations

(Dollars in thousands except share data)

	Years Ended December 31,
	2004			2003			2002
	(As Restated)
Revenue	$	16,162		$	19,422		$	17,732
Revenue from affiliates		—			1,429			2,084
Total		16,162			20,851			19,816
Expenses:
Costs of revenues		15,905			19,573			21,355
Sales and marketing		1,475			948			1,951
General and administrative		3,489			3,298			3,745
Research and development		—			30			366
Restructuring and impairment charges		—			—			6,232
Amortization of intangibles		1,032			1,296			1,300
Total expenses		21,901			25,145			34,949
Operating loss		(5,739	)		(4,294	)		(15,133	)
Gain on extinguishment of debt		—			—			16,388
Interest income and other income (expense)		25			139			32
Interest expense		(244	)		(109	)		(459	)
		(219	)		30			15,961
Income (loss) from continuing operations		(5,958	)		(4,264	)		828
Loss from disposal or sale of discontinued operations		—			—			(3,564	)
Gain from discontinued operations		—			—			850
Total loss from discontinued operations		—			—			(2,714	)
Net loss before cumulative effect of accounting change		(5,958	)		(4,264	)		(1,886	)
Cumulative effect of accounting change		-			—			(6,674	)
Net loss		(5,958	)		(4,264	)		(8,560	)
Less: Cash dividends on preferred stock		—			(690	)		(198	)
Less: Fair value of consideration transferred over carrying value of preferred stock		(3,973	)		—			—
Net loss attributable to common stockholders	$	(9,931	)	$	(4,954	)	$	(8,758	)
Income (loss) per share of common stock (basic and diluted)
Continuing operations	$	(3.48	)	$	(1.05	)	$	0.12
Discontinued operations		—			—			(0.51	)
Cumulative effect of accounting change		—			—			(1.24	)
Net loss	$	(3.48	)	$	(1.05	)	$	(1.63	)
Weighted average common shares and equivalents used in computing loss per share — basic and diluted		2,856,532			4,699,244			5,360,954

 

See notes to consolidated financial statements

24

Healthaxis Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity

(Dollars and shares in thousands)

	Preferred Stock						Common Stock						Additional Paid-In			Accumulated			Unearned
	Shares			Amount			Shares			Amount			Capital			Deficit			Compensation			Total
Balance, December 31, 2001		—		$	—			5,298		$	530		$	438,154		$	(416,069	)	$	(226	)	$	22,389
Net loss																	(8,560	)					(8,560	)
Issuance of Series A Convertible Preferred Stock		23			6,280																		6,280
Contribution from UICI								(50	)		(5	)		6,364									6,359
Preferred stock dividends														(198	)								(198	)
Common stock issued in lieu of interest and severance								118			11			893									904
Employee stock option compensation														307									307
Other								(2	)					(6	)								(6	)
Amortization/forfeiture of unearned compensation														(93	)					226			133
Balance, December 31, 2002		23			6,280			5,365			536			445,421			(424,629	)		—			27,608
Net loss																	(4,264	)					(4,264	)
Preferred stock dividends														(690	)								(690	)
Common stock received for payment on note receivable								(12	)					(41	)								(41	)
Repurchase of UICI stock and warrants		(1	)		(381	)		(2,586	)		(259	)		(3,260	)								(3,900	)
Employee stock option compensation														34									34
Balance, December 31, 2003		22			5,899			2,768			277			441,464			(428,893	)		—			18,747
Net loss																	(5,958	)					(5,958	)
Modification of Preferred Stock		3,828			(2,049	)								2,049									—
Conversion of Preferred Stock to Common		(750	)		(750	)		750			75			675									—
Exercise of Stock Options								1															—
Employee stock option compensation		—			—			—			—			33			—			—			33
Balance, December 31, 2004		3,100		$	3,100			3,518		$	352		$	444,221		$	(434,851	)	$	—		$	12,822

 

See notes to consolidated financial statements

25

Healthaxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows

(Dollars in thousands)

	Years Ended December 31,
	2004			2003			2002
	(As Restated)			(As Restated)
Cash flows from operating activities
Net loss	$	(5,958	)	$	(4,264	)	$	(8,560	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on discontinued operations		—			—			3,564
Cumulative effect of accounting change		—			—			6,674
Depreciation and amortization		2,626			3,442			4,669
Amortization of unearned compensation		—			—			133
Gain on restructuring/forgiveness of debt		—			—			(16,388	)
Bad debt reserve expense		9			55			164
Non-cash restructuring and impairment charges		—			—			6,589
Gain on settlement of severance obligation		—			—			(1,345	)
Stock option compensation		33			34			307
Write down of investment in Digital Insurance, Inc.		—			—			227
Common stock issued in lieu of interest and severance		—			—			904
Loss on disposition of assets		53			15			70
Non-cash interest on convertible debt		—			—			57
Changes in operating assets and liabilities:
Accounts receivable		82			110			2,370
Prepaid expenses		(30	)		(32	)		(236	)
Other assets		9			70			19
Costs in excess of billings		—			384			—
Accounts payable and accrued liabilities		359		��	(509	)		(841	)
Deferred revenues		35			(825	)		(437	)
Post retirement and employment liabilities		(11	)		(26	)		(29	)
Other liabilities		(50	)		382			(2	)
Net cash used in operating activities		(2,843	)		(1,164	)		(2,091	)
Cash flows from investing activities
Software and contract start-up costs capitalized		(649	)		(475	)		(1,792	)
Collection on notes receivable, net		101			183			384
Purchases of property, equipment and software and internally developed capitalized software		(343	)		(847	)		(263	)
Net cash used in investing activities		(891	)		(1,139	)		(1,671	)

 

See notes to consolidated financial statements

26

Healthaxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)

(Dollars in thousands)

Cash flows from financing activities
Principal payments on capital lease		—			—			(8	)
Termination of UICI contract		—			—			6,359
Buyback of shares from UICI		—			(500	)		—
Payment on convertible debentures		—			—			(4,000	)
Costs of issuing convertible preferred stock		—			—			(358	)
Payment of preferred stock dividends		(223	)		(690	)		—
Net cash (used in) provided by financing activities		(223	)		(1,190	)		1,993
Decrease in cash and cash equivalents		(3,957	)		(3,493	)		(1,769	)
Cash and cash equivalents, beginning of year		7,887			11,380			13,149
Cash and cash equivalents, end of year	$	3,930		$	7,887		$	11,380
Supplemental disclosure of cash flow information:
Interest paid	$	3		$	14		$	90
Non-cash financing activities:
Exchange of convertible debentures for convertible preferred stock	$	—		$	—		$	6,638
Exchange of convertible preferred stock for new convertible preferred stock	$	2,049		$	—		$	—
Accounts receivable applied to note and interest payable in lieu of cash	$	799		$	138		$	—

 

See notes to consolidated financial statements

27

Healthaxis Inc. and Subsidiaries
Notes To Consolidated Financial Statements

Note 1 — Organization and Summary of Significant Accounting Policies

Healthaxis Inc. (“Healthaxis”), formerly Provident American Corporation, is a Pennsylvania corporation organized in 1982. Healthaxis is a technology-enhanced provider of fully integrated solutions and services for health benefit administrators and health insurance claim processors. These solutions, which are comprised of software products and related business process services, are designed to assist health insurance payers and third party administrators (“TPA”) to provide enhanced services to members, employees, employers and providers at lower cost. These services are provided through the application of Healthaxis’ flexible technology on an Application Service Provider (“ASP”) basis. These technology solutions are complemented by Healthaxis’ Business Process Outsourcing (“BPO”) services, which are offered to the Company’s ASP clients and on a stand-alone basis. BPO solutions include the automated capture, imaging, storage and retrieval of electronic claims, attachments, and related correspondence, in addition to rules-based claims pre-adjudication and automated preferred provider organizations (“PPO”) routing and repricing.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingencies. Actual results could differ from those estimates.

Cash equivalents

Cash equivalents consist of highly liquid investments with maturities of three months or less from date of purchase. The Company maintains its cash accounts at several commercial banks. Cash accounts at each bank often exceed amounts that are insured by the Federal Deposit Insurance Corporation.

Accounts Receivables

Accounts receivable consist primarily of customer billings and unbilled receivables pending billings in accordance with contract terms. An allowance for doubtful accounts is maintained based upon the Company’s history and a periodic review of the accounts. Amounts charged to bad debt expense during the years ended December 31, 2004, 2003 and 2002 were $9,000, $55,000, and $164,000, respectively. As individual accounts are deemed to be uncollectable, they are deducted from the allowance for doubtful accounts. Amounts deducted as such during the years ended December 31, 2004, 2003 and 2002 were $5,000, $206,000,and $19,000, respectively

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Property, equipment and software

Property, equipment and software are recorded at cost. Expenditures for improvements that increase the estimated useful lives of the assets are capitalized. Expenditures for repairs and maintenance are charged to operations as incurred. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets ranging from 1 to 7 years.

Contract Start-up costs

Healthaxis capitalizes costs, including direct labor and fringe benefits, directly attributable to start-up activities for ASP arrangement based long-term contracts. Such costs are amortized ratably over the life of the respective contract. All other start-up costs are expensed as incurred. Contract start-up costs capitalized during the years ended December 31, 2004, 2003, and 2002 totaled $390,000, $171,000, and $714,000, respectively. Healthaxis recorded amortization expense relating to contract start-up costs of $494,000, $561,000, and $434,000, during the years ended December 31, 2004, 2003, and 2002, respectively.

Capitalized software

Healthaxis incurs development costs that relate primarily to the development of new products and major enhancements to existing services and products. All development costs related to internal use software development projects incurred prior to the time of completing analysis, design and a detailed project plan are expensed. Costs incurred after completion of the project plan are capitalized until the software is released into production and made available to customers on our system. These costs are included in property, equipment and software.

Healthaxis has in the past incurred development costs that relate primarily to the development of software to be sold, leased or otherwise marketed. All development costs related to such projects incurred prior to the time a project has reached technological feasibility are expensed. Technological feasibility is determined only after completion of a detailed program design or working model. Software development costs incurred subsequent to reaching technological feasibility are capitalized up to the point of product marketability. These costs are included in capitalized software.

Healthaxis capitalized $259,000, $304,000, and $1.1 million, in software development costs during the years ended December 31, 2004, 2003, and 2002, respectively. All software development costs capitalized are amortized on a straight-line basis over the remaining economic life of the product (generally three years). Healthaxis recorded amortization expense relating to capitalized software development costs totaling $561,000, $816,000, and $614,000 during the years ended December 31, 2004, 2003, and 2002, respectively. Estimated future amortization expense is $461,000, $157,000 and $70,000 for years 2005, 2006 and 2007 respectively.

In 2002, an impairment charge of $592,000 related to developed software was recorded. Impairment was determined based upon on analysis of estimated future cash flows in connection with a decision by management to divert marketing efforts away from a product. The charge, which represents the remaining carrying value of the asset, has been included in costs of revenue.

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Customer Base

Healthaxis’ customer base was recorded as a result of a business combination transaction and is being amortized over a period of four years. Healthaxis recorded amortization expense relating to the customer base costs totaling $1.0 million, $1.0 million, and $1.0 million during the years ended December 31, 2004, 2003, and 2002, respectively. Estimated future amortization expense is $84,000 for year 2005.

Goodwill

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142, annually thereafter and upon the occurrence of any event that indicates potential impairments. The Company performs its annual impairment review during the fourth quarter of each year based upon an October 1 date. The Company does not have any intangible assets with an indefinite life.

SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for potential impairment, while the second phase (if necessary), measures the impairment. Goodwill is potentially impaired if the net book value of a reporting unit exceeds its estimated fair value.

Impairment of long-lived assets

The Company records impairment losses on long-lived assets when events and circumstances indicate that such assets are not recoverable and are impaired such that the estimated fair value of the asset is less than its recorded amount. Conditions that would necessitate an impairment assessment included material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon acquired products, services or technologies, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable.

The Company reviews its long-lived assets and certain intangible assets for impairment on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is generally measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows expected to be generated by that asset. An impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the fair value of the assets estimated using discounted cash flows.

Discontinued Operations

The Company reports discontinued operations as a component of the Company’s operations where the components operations and cash flows have been or will be eliminated from ongoing operations of the Company and the Company will have no significant continuing involvement in the operations of the component after disposal. The results of discontinued operations are reported as a separate component of income, net of income taxes, with all prior periods restated for comparability purposes.

30

Stock-Based Compensation

The Company has elected to continue to utilize the accounting method prescribed by APB Opinion No. 25 “Accounting for Stock Issued to Employees” (APB 25), and provide the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”). Although the Company selected an accounting policy which requires only the excess of the market value of its common stock over the exercise price of options granted to be recorded as compensation expense (intrinsic method), pro forma information regarding net loss is required as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. Pro forma net loss applicable to the option granted is not likely to be representative of the effects on reported net loss for future years. The fair value for these options is estimated at the date of grant using a Black-Scholes option pricing model. Stock compensation determined under the intrinsic method is recognized over the vesting period using the straight-line method.

Had compensation cost for the Company’s stock option grants been determined based on the fair value at the date granted in accordance with the provisions of SFAS 123, the Company’s net loss and net loss per common share would have been increased to the following pro forma amounts:

	(Table in thousands, except per share data)
	2004			2003			2002
Net loss attributable to common shareholders	$	(9,931	)	$	(4,954	)	$	(8,758	)
Stock based compensation expense recorded under the intrinsic value method		33			34			307
Pro forma stock based compensation expense computed under the fair value method		(1,256	)		(1,616	)		(3,117	)
Pro forma net loss applicable to common stock	$	(11,154	)	$	(6,536	)	$	(11,568	)
Loss per share of common stock, basic and diluted:
As reported	$	(3.48	)	$	(1.05	)	$	(1.63	)
Pro forma	$	(3.91	)	$	(1.39	)	$	(2.16	)

 

The fair value of the options and warrants granted are estimated on the date of grant using the Black-Scholes option pricing model. The major assumptions used include no dividends paid, a weighted average expected life of two to three years, expected stock volatility of 60% to 69% and risk free interest rates ranging from 2.75% to 4.85%. The weighted-average grant-date fair value of options granted during 2004 was $1.02.

Revenue recognition

The Company’s revenues consist primarily of application service provider (ASP) fees, transaction fees and professional service fees. The ASP services are substantially dependent of the Company’s proprietary software and agreements with customers contain a license for the use of the relevant software. However, the customer does not have the contractual right to take possession of the software. The customer’s access to the Company’s hosted software is through dedicated data lines or the internet. With some exceptions, the Company has not historically licensed its benefits administration and claims processing software for installation on customers’ systems. No new such licenses were granted in 2004 and the only revenue in 2004 from such licenses were ongoing fees from past licenses that are payable based on customer usage. These revenue sources are described below.

31

A significant portion of the Company’s revenue is based on providing ASP services to our health insurance company, third-party administrator and self-insured plan customers. The ASP service includes a license to use our benefits administration and claims processing software, including hosting, maintenance and support, which is typically charged on a per-employee-per-month (PEPM), or per-member-per-month (PMPM) basis. In addition, the Company surrounds these hosted software-use rights with such BPO services as imaging, data capture and retrieval, EDI and print and mail services, as well as PPO routing and repricing services, and claims editing services. These services are typically charged on a transaction fee basis, such as per claim, per image and per document. Due to the long-term nature of the ASP arrangement, and because all revenue elements included in the collective services are typically not sold separately, the ASP and BPO service revenues are recognized ratably over the term of the agreement and/or as transaction services are provided.

In preparation for providing services under these multi-year ASP contracts, the Company also usually agrees to perform certain start-up activities directly related to customizing and configuring the licensed software and loading insurance plan data for performance under the contract. The Company defers costs and revenues relating to these start-up activities and recognizes such costs and revenues ratably over the term of the ASP contract.

Periodically, while an ASP contract is in place, the Company also performs professional services upon request and recognizes the related revenue on a time and materials basis as services are performed. Such professional services are not sold in conjunction with a software license included in the original ASP contract or other revenue elements and, therefore, are accounted for separately from the ASP contract.

The Company uses contract accounting for contracts where significant software modification is performed or where services are performed that are essential to the functionality of the delivered software. Generally, contracts that include significant software modification are accounted for using the percentage of completion method with progress measured based on the cost-to-cost method. Contracts with significant customer acceptance provisions are recognized using the completed contract method upon achieving customer acceptance of the completed project. The Company currently has no contracts in progress for which contract accounting is being applied.

Income taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that the deferred tax assets will not be realized.

Basic and diluted loss per share of common stock

Basic loss per share is computed only on the weighted average number of common shares outstanding during the respective periods. Diluted earnings per share is computed to show the dilutive effect, if any, of convertible preferred stock, stock options and warrants using the treasury stock method based on the average market price of the stock during the respective periods. The effect of including the convertible preferred stock, stock options and warrants, totaling 5,290,430 and 2,521,437 as of December 31, 2004 and 2003 respectively, into the computation of diluted earnings per share would be anti-dilutive. Accordingly, these items have not been included in the computation. Following is a summary of these securities:

32

	As of December 30,
	2004		2003
Options		1,076,359		936,527
Warrants		1,114,071		160,652
Preferred stock		—		1,424,258
Preferred stock — new		3,100,000		0
Total common shares if converted		5,290,430		2,521,437

 

Segments

The Company has historically presented information regarding two segments based on the Company’s internal organizational structure and financial reporting. During the first quarter of 2004, the Company re-aligned its operations under a single operating manager and further consolidated the operations. As a result of this change, the Company now produces consolidated information on the operations (excluding sales, general and administrative), which is regularly reviewed by the executive management committee of the Company in assessing performance and as an aid in making decisions about how resources are allocated. Accordingly, the Company no longer has reportable segments and has discontinued disclosure of segment information for all periods.

Reclassifications of prior year amounts

Certain prior year amounts have been reclassified to conform with the 2004 presentations.

Stock Split

During 2003, the Company completed a 1-for-10 reverse stock split of its $.10 par value common stock. All references to the number of shares and per share amounts have been adjusted to reflect the reverse split for all periods presented.

Concentrations of Credit Risk and Fair Value of Financial Instruments

The Company’s customers are dispersed across many different geographical areas within the United States. During the year ended December 31, 2004, four customers accounted for 63% of revenues with each customer representing more than 10% as follows:

Customer A	19	%
Customer B	18	%
Customer C	16	%
Customer D	10	%

 

At December 31, 2004, accounts receivable from Customer A accounted for $822,000 or 35% of the accounts receivable balance. This customer is making payments in accordance with the terms of its contract. The Company does not require collateral from its customers. Most customer contracts provide Healthaxis the ability to discontinue monthly ASP services in the event of non-payment, which could be detrimental to the customer. As a result, historical bad debts have not been material. An allowance for doubtful accounts is maintained for estimated losses on specific accounts. Management estimates the allowance for each account, if any, considering the historical payment history of the customer. Generally, uncollectable accounts are charged off when the account becomes nine months old, and the customer has indicated its intent to not pay.

33

The carrying amount of cash and cash equivalents, accounts receivable, notes receivable, notes receivable from employees, accounts payable, notes payable and accrued liabilities approximates fair value due to the short maturities of these instruments. The Company has no derivative financial instruments.

Recent accounting pronouncements

In May 2004 the FASB issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, (“FSP No. 106-2”). FSP No. 106-2 is effective for the first interim period beginning after June 15, 2004 and provides that an employer shall measure the accumulated plan benefit obligation and net periodic postretirement benefit cost taking into account any subsidy received under the Act. The adoption of the Statement did not have a material impact on the Company’s financial condition, results of operations or liquidity.

In December 2005 the FASB issued a revision of Statement of Financial Accounting Standards No. 123 (SFAS 123R), “Accounting for Stock-Based Compensation”. This statement supersedes APB Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees”. Historically, the Company has accounted for employee stock based compensation using the intrinsic method under APB 25 as further described in “Stock-Based Compensation” above. SFAS 123R requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in the financial statements. The effect of the statement will be to require entities to measure the cost of employee services received in exchange for stock options based upon the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. The Company will be required to apply FAS 123R as of the beginning of its first interim period that begins after June 15, 2005, which will be the quarter ending September 30, 2005.

The impact of this Statement will depend upon the transition method selected by the Company and various other factors including our future compensation strategy. The pro-forma costs presented in the table above and in prior filings for the Company have been calculated using a Black-Scholes option pricing model and may not be indicative of the amount which should be expected in the future. No decisions have been made as to which option-pricing model is most appropriate for the Company for future awards.

Note 2 — Significant Contracts

As previously disclosed, the Company had a contract for software licensing, development and systems implementation with the State of Washington Health Care Authority (“HCA”), which began in mid 2002. For the years ending December 31, 2004, 2003 and 2002, HCA accounted for $0 (0%), $946,000 (5%) and $1.0 million (5%), respectively, of the Company’s revenues.

The Company was the prime contractor on the HCA project and utilized the services of an offshore development partner to perform a significant part of the work. Also, as previously disclosed, a dispute arose under the HCA contract in late 2003, which has now been resolved by the Company and HCA entering into an agreement to terminate the HCA contract. The Company has also simultaneously entered into a cancellation agreement with its development partner canceling and terminating its master software services agreement with the development partner and the work order associated with subcontracted portions of the HCA project.

34

Under the terms of the agreement with HCA, the Company paid HCA $300,000 and transferred title to certain project documentation to HCA. The agreement also contains full mutual releases of all parties including HCA, Healthaxis and the development partner, and an express denial of liability or wrongdoing by all parties.

Under the terms of the agreement between the Company and its development partner, Healthaxis received $208,000 and any rights the development partner may have in the documentation being transferred by Healthaxis to HCA, resulting in a net cash payment by Healthaxis to HCA of $92,000. The agreement also contains full mutual releases between Healthaxis and the development partner, and an express denial of liability or wrongdoing by either party.

The Company entered into these agreements solely to avoid the potential time and cost of dispute resolution. The execution and funding of these agreements, which occurred in the second quarter of 2004, resolves all outstanding issues related to the HCA project. The net impact of these transactions is included in general and administrative expense in the accompanying condensed consolidated statement of operations.

The Company has accounted for activities under a contract with Affiliated Computer Services (“ACS”) for the State of Georgia Department of Community Health under the completed contract method. In September 2003, the Company was notified by ACS that the portion of the prime contract that the Company was working on had been cancelled. Accordingly, the prime contractor requested that the Company stop work on this contract. Based on these events, management determined that its work under the contract was complete. Previously deferred revenues and costs totaling $612,000, and $567,000, respectively, were recognized during the third quarter of 2003. During the fourth quarter of 2003, the Company reached a termination agreement with ACS and received an additional $282,000 for all work performed through the date of termination. This receipt was recorded as revenue in that period along with $137,000 of costs paid to a subcontractor. The termination agreement with ACS included a mutual release of liability.

Note 3 — Property, Equipment and Software

Property, equipment and software, at cost, consist of the following:

			(Table in thousands) December 31,
	Useful Lives (Years)		2004			2003
Computer equipment		3	$	4,437		$	7,314
Office furniture and equipment		7		1,027			1,319
Leasehold improvements		3-5		434			537
Computer software		1-3		1,729			2,020
				7,627			11,190
Less accumulated depreciation and amortization				(6,661	)		(9,952	)
			$	966		$	1,238

 

Property, equipment, and software depreciation and amortization expense totaled $562,000, $1.1 million and $2.1 million for the years ended December 31, 2004, 2003 and 2002 respectively. During 2002, the Company recorded an impairment charge related to the disposal of printing equipment in the amount of $123,000. The impairment charge was caused by the Company’s outsourcing of its print and distribution operations.

35

Note 4 — Goodwill

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. During 2002, Healthaxis completed a transitional goodwill impairment test in accordance with the new goodwill accounting standard. This test resulted in a $6.7 million impairment charge, which is shown as a cumulative effect of an accounting change in the accompanying consolidated statements of operations.

In the fourth quarter of 2002, the Company recognized an additional impairment loss of $5.9 million, which is included in restructuring and impairment charges in the accompanying consolidated statement of operations. The Company determined the fair value of its reporting unit using a discounted future cash flows approach. The loss results from revised estimates of future cash flows and the implementation of new guidance related to accounting for the effects of deferred tax assets on the fair value of a reporting unit.

SFAS No. 142 also requires the establishment of an annual impairment date for purposes of evaluating goodwill and other indefinite lived assets on an ongoing basis. Healthaxis selected October 1 as the annual impairment testing date. During the 2004 test, the Company evaluated its goodwill on the basis of a single reporting unit, consistent with segment disclosure requirements and the guidance of SFAS No. 142.

The carrying value of goodwill is $11.3 million as of December 31, 2004 and 2003.

Note 5 — Notes Receivable

Notes receivable consist of the following:

	(Table in thousands) December 31,
	2004		2003
Note receivable from customer, monthly payments of $8, matures December 2004, bears no interest (discounted at 8.75%), unsecured	$	—	$	88
Notes receivable from current and former employees		23		36
Total		23		124
Less current portion		—		(124	)
Notes receivable, non-current	$	23	$	—

 

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Note 6 — Accrued Liabilities and Other Liabilities

Accrued liabilities and other liabilities consist of the following:

	(Table in thousands) December 31,
	2004			2003
Salaries, benefits and payroll taxes	$	590		$	389
Dividends and interest		—			223
Taxes		1,362			1,331
Other		139			319
		2,091			2,262
Less other long-term liabilities		(1,417	)		(1,467	)
Accrued liabilities	$	674		$	795

Other long-term liabilities at December 31, 2004 and 2003 consist of a contingent tax liability and customer deposits.

Note 7 — Notes Payable

On September 30, 2003, the Company purchased all Healthaxis securities held by UICI for $3.9 million. In conjunction with the purchase, the Company entered into a promissory note in the amount of $3.4 million, which is due over three years and bears interest at 6%. The promissory note will be paid through deductions from the monthly invoices for BPO services provided by the Company to the Mega Life & Health Insurance Company (“Mega”), a UICI subsidiary. The amount of the monthly payment will be equal to the greater of one half of the Mega invoice amount for BPO services or $65,000. A balloon principal payment is due at the maturity of the note on September 30, 2006, if the note has not been paid through the monthly payments.

Maturities of the note payable for the years subsequent to December 31, 2004 are as follows:

2005	$    637
2006	2,041
Total	$ 2,678

 

Note 8 — Post Retirement and Post Employment Liabilities and Employee Benefit Plans

Healthaxis has an obligation to provide certain post retirement benefits, primarily lifetime health, dental and life insurance coverage, to a group of individuals consisting of three former executives and 17 retired employees of a predecessor company, as well as the Company’s former Chairman. Because this obligation exists until the death of the participants, actuarial calculations, which include the use of estimates, are used to determine the carrying value of the liability. These estimates include a life expectancy of 85 years, a discount rate of 6% to calculate the present value of the expected future costs, a 3% annual growth factor for life insurance and a range of 6% – 13% annual growth factor for medical insurance. It is reasonably possible that these estimates could change in the near term. The effect of a one-percentage-point increase or decrease in the assumed health care cost trend rate results in an

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approximate $36,000 increase and $36,000 decrease, respectively, on the accumulated post retirement obligation.

Changes in the post retirement and post employment liabilities were as follows:

	(Table in thousands)
Balance at January 1, 2003	$	966
Interest cost		62
Service cost		58
Benefits paid		(146	)
Balance at December 31, 2003		940
Interest cost		54
Service cost		58
Benefits paid		(123	)
Balance at December 31, 2004	$	929

At December 31, 2004 and 2003, the unamortized, unrecognized net obligation existing at the date of the initial application of SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” was $119,000 and $177,000 respectively. The amortization of this transition liability was $58,000 per year for the years ended December 31, 2004, 2003, and 2002, and is included as a component of service cost.

Benefits expected to be paid for each of the next five years and in aggregate for the five years thereafter are as follows:

	(Table in thousands)
2005	$	135
2006		82
2007		83
2008		82
2009		74
2010–2014		473

The Company estimates contributions to be paid under the plan in 2005 will be $135,000, which represents the amount for premiums and other payments under the plan. There are no plan assets related to these post retirement benefit plans.

The Company sponsors a defined contribution retirement savings plan under section 401(k) of the Internal Revenue Code covering substantially all employees. All contributions are subject to limitations imposed by IRS regulations. The total benefit expense under this plan amounted to $153,000, $32,000, and $304,000, for the years ended December 31, 2004, 2003, and 2002, respectively.

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Note 9 — Income Taxes

Significant components of deferred taxes consisted of the following:

	(Table in thousands) December 31,
	2004			2003
Deferred tax assets:
Allowance for doubtful accounts	$	17		$	15
Post employment retirement benefits		325			329
Net operating and capital loss carryforwards		52,342			50,787
Accrued expenses and deferred revenues		590			582
Total deferred tax assets		53,274			51,713
Deferred tax liabilities:
Customer base		(29	)		(383	)
Capitalized software development costs		(475	)		(384	)
Other, net		(348	)		(383	)
Total deferred tax liabilities		(852	)		(1,150	)
Deferred tax asset before valuation allowance		52,422			50,563
Valuation allowance		(52,422	)		(50,563	)
Net deferred tax asset	$	—		$	—

 

The Company’s net operating loss carryforward amounts of $146.4 million begin to expire in 2018 and fully expire in 2025.

As a result of the Company’s numerous capital transactions, the utilization of NOL carryforwards is limited. Additionally, the utilization of these NOL’s, if available, to reduce future income taxes is dependent on the generation of sufficient taxable income prior to their expiration. As it is considered more likely than not that the deferred tax assets will not be realized, the Company has established a valuation allowance for all net deferred tax assets.

The reconciliation of the recorded income tax provision to the benefit expected by applying the appropriate statutory income tax rate (35%) to the loss before income taxes is as follows:

	(Table in thousands) Years Ended December 31,
	2004			2003			2002
Amount computed at statutory rate	$	(2,085	)	$	(1,492	)	$	(2,996	)
Change in valuation allowance		2,065			3,383			(890	)
Expiration/adjustment of net operating losses		—			(1,690	)		4,544
Amortization/impairment of goodwill		—			—			4,561
Gain on extinguishment of debt		—			—			(5,844	)
Other permanent differences		20			(201	)		625
Total income tax benefit	$	—		$	—		$	—

 

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Note 10 — Stockholders’ Equity

Amendment of Convertible Preferred Stock

Previously, the Company’s Series A Convertible Preferred Stock (“old”) had a stated value of $22.1 million and was convertible into 1,424,258 shares of Healthaxis common stock at a conversion price of $15.50 per share. The terms of the preferred stock provided that cumulative dividends be paid at the rate of 2%, or approximately $442,000 per year, payable semi-annually. In general, the Company could have paid the dividends either in cash or by issuing shares of common stock, although in some circumstances it was required to pay cash dividends. The terms of the preferred stock provided that in some situations the holders of the preferred stock could have forced Healthaxis to buy back their shares. The Company believed that the occurrence of the situations where it could be required to buy back shares of preferred stock was within its control. The preferred stock also contained, among other things, provisions providing the holders a preference in the payment of dividends and also a liquidation preference equal to at least the stated value of the preferred stock plus all accrued but unpaid dividends. The holders of the preferred stock did not have general voting rights, although they did have the right to vote separately as a class in connection with some matters. After purchasing the preferred stock held by UICI during 2003, the recorded value as of December 31, 2003 was $5.9 million.

Healthaxis entered into a Preferred Stock Modification Agreement on May 12, 2004. On June 30, 2004, Healthaxis consummated a transaction modifying the terms of its Series A Convertible preferred stock and providing for the issuance to its preferred shareholders of warrants to purchase shares of the Company’s common stock. Under the terms of the agreements with the preferred shareholders, shares of the preferred stock (“new”) were convertible into an aggregate of 3,850,000 shares of the Company’s common stock. The preferred shareholders also received warrants with a term of five years entitling them to purchase up to 1,000,000 shares of common stock at an exercise price of $5.50 per share (subject to a cashless exercise feature that applies under some circumstances). The shares of common stock into which the shares of preferred stock have been or in the future are convertible and with respect to which the warrants are exercisable, represent approximately 54% of the common stock on a fully diluted basis as of December 31, 2004. Holders of the preferred stock have no liquidation preference, no voting rights except as required by law, the right to receive a nominal dividend of $0.0001 per share semi-annually (aggregating less than $1,000 per year in total) and otherwise on a pro-rata basis to the extent that dividends are paid to holders of common stock, limited anti-dilution rights in the context of stock splits, stock dividends and similar transactions, and no redemption rights.

The new preferred stock is convertible into shares of common stock at the option of a preferred shareholder at any time, and in any amount, on or after June 30, 2005, but prior to that date may only be converted if the preferred shareholder desiring to effect the conversion will not hold as a result of the conversion more than 750,000 shares of common stock, or if the common stock is trading on a national stock market and has had a closing price of $8.00 or more for 20 out of the 30 trading days immediately preceding the conversion date (in which case, any number of shares may be converted). Notwithstanding the foregoing, in the event of the transfer of shares of preferred stock in accordance with the terms of the agreements with the preferred shareholders, the preferred stock automatically converts into shares of common stock. Healthaxis may compel conversion of the preferred stock or exercise of the warrants granted to the preferred shareholders under some circumstances.

Under the agreements with the preferred shareholders, Healthaxis agreed that it will not issue any equity securities in a transaction implying a pre-transaction valuation of Healthaxis of less than $14.5 million or at a per share price of less than $2.15 (these restrictions do not apply to the grant of stock options to Healthaxis employees or directors in most circumstances). Further, until June 30, 2005, the

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preferred shareholders have a right of first refusal to match the terms upon which any third party proposes to purchase from Healthaxis any equity securities having an aggregate purchase price of at least $1.0 million and to match the terms upon which Healthaxis proposes an offering of its common stock.

Prior to conversion, the new preferred stock will only have the right to vote to the extent it is entitled to do so under applicable law. Under applicable law, the new preferred stock is entitled to vote separately as a class in certain instances, including in the event of a merger or consolidation that would effect some types of changes in the Company’s articles of incorporation. To the extent that applicable law entitles the new preferred stock to vote on a given merger or consolidation transaction prior to June 30, 2005, the preferred shareholders have agreed to vote their shares in favor of such a merger or consolidation if the common shareholders have approved the merger or consolidation and the per share price to be received by the preferred shareholders in the merger or consolidation is at least $3.50 in cash for each share of preferred stock. If the Company pursues a merger or consolidation on or after June 30, 2005, the preferred shareholders have agreed to vote their shares in favor of the merger or consolidation if the common shareholders approve the merger or consolidation and if the per share price to be received by the preferred shareholders in the merger or consolidation for each share of preferred stock is at least equal to what they would have received in the merger or consolidation if they had converted their shares of preferred stock into shares of common stock immediately prior to the merger or consolidation.

As required under the preferred stock modification agreements, Healthaxis has registered for resale the shares of common stock issuable upon conversion of the preferred stock or exercise of the warrants. These agreements do, however, place certain restrictions on the private sale or transferability of the securities held by the preferred shareholders, and restrict the number of shares of common stock that may be sold in the public markets below a price of $3.50 per share. These stock transfer restrictions lapse on June 30, 2005. The Company filed a Form S-3 Registration Statement on September 2, 2004 to register for resale the shares of common stock issuable upon conversion of the preferred stock or exercise of the warrants. On October 28, 2004 the Securities and Exchange Commission declared the Registration Statement effective.

The Company has recorded this transaction based upon the calculation of the new preferred stock and warrants. The calculated fair value of the new preferred stock is $8.9 million (3,850,000 shares multiplied by the $2.32 closing sale price of the Company’s common stock on the day of the transaction). The Company estimated the fair value of the warrants to be $940,000 using the Black-Scholes pricing model. The total calculated value of the new preferred stock and warrants is therefore $9.9 million. The $4.0 million difference between the calculated fair value of the new preferred stock and warrants and the carrying value of the old preferred stock of $5.9 million is analogous to a dividend to the preferred stockholders and recorded as such in the Company’s Consolidated Statement of Operations.

Additionally, while the old preferred stock had a 2% annual dividend payable semi-annually in January and July, the new preferred stock provides for the payment of a nominal semi-annual dividend (aggregating less than $1,000 per year to all preferred shareholders). In the first quarter of 2004, the Company accrued the $110,000 dividend payable in accordance with the terms of the old preferred stock, but this accrual was reversed in the second quarter of 2004 as a result of the completion of the transaction described above. This amount is also netted out of the net loss applicable to common shareholders on the consolidated statement of operations.

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The Company will not recognize any taxable gain or loss as a result of the closing of the preferred stock modification transaction on June 30, 2004. The closing of the transaction may, however, result in the imposition of substantial limitations on the amount of the Company’s net operating losses that may be applied to any future taxable income of the Company.

Repurchase of Securities Held by UICI and Repricing of Series A Convertible Preferred Stock

On September 30, 2003, the Company purchased all Healthaxis securities held by UICI for $3.9 million. The UICI holdings included 2,585,769 shares of Healthaxis common stock, or 48% of the Company’s outstanding common stock; 1,424 shares of Series A Convertible Preferred Stock, or 6% of the outstanding preferred stock; and warrants to purchase 22,240 shares of common stock. The repurchased securities were retired. The total purchase price of $3.9 million included $500,000 cash at closing, and a $3.4 million promissory note (See Note 7). To obtain the required approval of this transaction from the Series A Preferred shareholders, the Company agreed to reduce the conversion price of the remaining preferred shares from $26.25 to $15.50. The repurchase of the preferred shares held by UICI reduced the total liquidation value of the outstanding Series A Preferred stock from $23.5 million to $22.1 million.

Reverse Stock Split

On August 19, 2003, the Board of Directors authorized a 1-for-10 reverse stock split of the Company’s $.10 par value common stock. As a result of the reverse split, the number of shares outstanding on that date was reduced from 53,528,557 to 5,353,361. To gain the required approval of this transaction from the Series A Preferred shareholders, the Company paid a one-time consent fee equal to 1 percent, or $235,000, of the then outstanding Series A Preferred stock liquidation value. The payment has been included in dividends on preferred stock.

All references in the accompanying financial statements to the number of common shares and per share amounts for prior periods were previously restated to reflect the reverse stock split.

Note 11 — Stock Options and Warrants

From 1996 through 1999, Healthaxis maintained several stock option plans that provided for option grants to directors and key employees of Healthaxis and its subsidiaries. In addition, certain Healthaxis option plans provided for grants to non-employee field representatives and agents related to Healthaxis’ discontinued insurance operations. During 2000, no options were granted and all such plans became inactive. The total number of options outstanding under these plans as of December 31, 2004 is 441,352.

On January 26, 2001, the Healthaxis shareholders approved the 2000 Stock Option Plan (“Healthaxis 2000 Plan”). Under the Healthaxis 2000 Plan, employees, officers and directors of Healthaxis, as well as certain consultants, are eligible to receive Healthaxis options. Nonqualified or incentive stock options may be granted. The plan is administered by the Compensation Committee, which is appointed by the Company’s Board of Directors. The Compensation Committee determines such things as the number of options to be granted to each participant, the exercise price, the vesting schedule and the expiration date. Options awarded under this plan include a mandatory Confidentiality and Non-Interference attachment, whereby the recipient agrees to certain covenants as a prerequisite to receiving the option award. The total number of options outstanding under these plans as of December 31, 2004 is 635,007.

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During the period 1998 through 2001, the Company issued a total of 207,781 warrants in connection with marketing and carrier agreements related to the Company’s now discontinued website operations, and to employees, consultants and agents of the Company. Of that total, 94,071 are outstanding as of December 31, 2004. During 2004, the Company issued 1,020,000 warrants associated with the Company’s new preferred stock (See Note 10), all of which are outstanding as of December 31, 2004.

The following table summarizes the changes in outstanding Healthaxis stock options and warrants:

	Stock Options					Warrants
	Number of Shares			Weighted Average Exercise Price		Number of Shares			Weighted Average Exercise Price
Outstanding at January 1, 2002		823,974		$	23.30		226,911		$	51.70
Granted		151,300			7.10		—			—
Exercised		—			—		—			—
Forfeited		(118,969	)		21.90		—			—
Expired		—			—		(29,170	)		110.30
Outstanding at December 31, 2002		856,305			20.70		197,741			43.10
Granted		186,856			3.40		—			—
Exercised		—			—		—			—
Forfeited		(46,335	)		10.25		—			—
Expired		(60,299	)		34.03		(37,089	)		44.81
Outstanding at December 31, 2003		936,527			16.89		160,652			42.65
Granted		359,700			2.33		1,020,000			5.50
Exercised		(699	)		3.43		—			—
Forfeited		(61,011	)		8.25		—			—
Expired		(158,158	)		22.63		(66,581	)		63.86
Outstanding at December 31, 2004		1,076,359		$	11.67		1,114,071		$	7.26

 

Options/Warrants exercisable at December 31,	Number of Options		Weighted Avg. Exercise Price of Options		Warrants
2002		709,912	$	22.35		195,211
2003		744,280		19.54		160,652
2004		758,828		15.30		1,114,071

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Following is a summary of the status of stock options outstanding at December 31, 2004:

Outstanding Options							Exercisable Options
Exercise Price Range	Number		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
$2.11 – $9.90		712,937		7.86	$	4.30		399,651	$	5.41
$10.00 – $13.30		152,220		3.85		12.91		148,425		12.98
$21.00 – $28.75		61,768		4.55		25.61		61,318		25.65
$30.00 – $43.30		132,434		1.64		33.86		132,434		33.86
$75.00 – $87.50		17,000		1.85		86.03		17,000		86.03
		1,076,359						758,828

 

Total stock based compensation for the years ended December 31, 2004, 2003, and 2002 totaled $33,000, $34,000, and $307,000, respectively.

Note 12 — Related Party and Certain Transactions

UICI

Historically, Healthaxis conducted a significant amount of business with a major shareholder, UICI. Prior to September 30, 2003, UICI owned a significant portion of the Company’s outstanding common stock, and also owned preferred stock and warrants. The repurchase of all such securities from UICI is described below. As of December 31, 2003, UICI owned no Healthaxis securities and is no longer a related party.

Healthaxis previously provided services to a number of UICI subsidiaries and affiliates pursuant to various written agreements. These services included the use of certain of its proprietary workflow and business applications, as well as systems integration and technology management. The most significant of these agreements was the Services Agreement. Healthaxis has previously reported the revenues and expenses associated with the Services Agreement as those from the UICI Outsourcing segment. In June 2002, the Company and UICI terminated the Services Agreement as further described below. Notwithstanding, Healthaxis continues to provide products and services to UICI aside from the terminated Services Agreement.

For the years ended December 31, 2004, 2003, and 2002, UICI and its subsidiaries and affiliates accounted for $1.6 million (10%), $1.8 million (9%) and $2.1 million (11%), respectively, of the Company’s revenues from continuing operations. The 2003 amount includes $1.4 million of revenue prior to September 30, at which time UICI sold its holdings in Healthaxis and is no longer considered an affiliate. In addition, UICI revenue from discontinued operations totaled $8.2 million for the year ended December 31, 2002, as further described below. As of December 31, 2004 and 2003, Healthaxis had accounts receivable due from UICI and its subsidiaries and affiliates totaling $111,000 and $121,000, respectively. These amounts represented 5% and 4% of the Company’s total accounts receivable at December 31, 2004 and 2003, respectively.

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Repurchase of Securities Held by UICI and Repricing of Series A Convertible Preferred Stock

On September 30, 2003, the Company purchased all Healthaxis securities held by UICI for $3.9 million. The UICI holdings included 2,585,769 shares of Healthaxis common stock, or 48% of the Company’s outstanding common stock; 1,424 shares of Series A Convertible Preferred Stock, or 6% of the outstanding preferred stock; and warrants to purchase 22,240 shares of common stock. The repurchased securities were retired. The total purchase price of $3.9 million included $500,000 cash at closing, and a $3.4 million promissory note (See Note 7).

Termination of UICI Technology Services Agreement

On June 11, 2002, the Company initiated and entered into an agreement with UICI terminating the amended Information Technology Services Agreement (the “Services Agreement”) between the two parties. The Services Agreement was originally entered into on January 3, 2000 in conjunction with the merger of Healthaxis.com, Inc and Insurdata Incorporated. Under the terms of the termination agreement, UICI made a one-time cash payment to Healthaxis in the amount of $6.5 million and tendered 50,000 shares of Healthaxis common stock back to the Company. In return, approximately 165 Healthaxis employees that were previously dedicated to providing services to UICI under the Services Agreement were transferred to and became employees of UICI on June 15, 2002. Due to the related party nature of the transaction, the Company has recorded the net proceeds, totaling $6.4 million, as a contribution of capital from a significant shareholder. A loss on disposal of discontinued operations in the amount of $3.6 million was recorded as a result of the termination. The loss consisted of impairment charges for goodwill and customer base totaling $484,000 and $3.1 million, respectively. The impairment charges result from a write off of the entire amount of goodwill and customer base allocable to the Services Agreement.

The Company has previously reported the revenues and expenses associated with the Services Agreement as those from the UICI Outsourcing segment. As a result of the termination of the Services Agreement, the Company’s financial statements have been prepared with the results of these operations presented as discontinued operations. All historical financial statements presented have been restated to conform to this presentation.

The operating results of the discontinued business for the year ended December 31, 2002 are as follows:

	(Table in thousands)
Revenues	$	8,212
Costs of revenues		6,814
Amortization of intangibles		548
Total expenses		7,362
Net income	$	850

 

In conjunction with the termination of the Services Agreement in 2002, the Company paid $100,000 to a consulting firm affiliated with one of the Company’s directors. The Company paid additional professional services fees during the year ended December 31, 2002, in the amount of $366,000 to the same consulting firm.

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Netlojix Communications, Inc., a telephone company in which Ronald L. Jensen, Chairman of UICI and a former director of one of the Company’s subsidiaries, and parties affiliated with Mr. Jensen own a controlling interest, provides telephone and data line services to the Company pursuant to written agreements which expire in September 2005 and December 2006. For the years ended December 31, 2004, 2003 and 2002, Healthaxis paid Netlojix Communications, Inc. approximately $118,000, $158,000, and $279,000, respectively, for services under this agreement.

Alvin H. Clemens Severance Agreement

On August 15, 2000, Alvin H. Clemens and Healthaxis entered into an agreement terminating Mr. Clemens’ employment contract. The termination agreement became effective upon consummation of the HAXS Merger in January 2001. Under the terms of the termination agreement, Mr. Clemens was to receive aggregate payments totaling $2.1 million paid in quarterly installments over five years beginning in the first quarter of 2001. The Company, at its option, could make the quarterly payments in shares of Healthaxis common stock not to exceed a total of 50,000 shares. Mr. Clemens, at his option, could request that the Company pay one-third of the value of each payment in cash in lieu of stock to cover income tax liabilities.

On February 27, 2002, the Board of Directors approved an agreement pursuant to which Mr. Clemens agreed to accept 35,833 shares of the Company’s common stock in full payment and satisfaction of the remainder of the severance obligation. The Company recorded a gain in the first quarter of 2002 totaling $1.3 million related to the settlement of this liability, which was based upon the difference between the carrying amount of the liability and the fair value of the common stock issued to Mr. Clemens.

Transactions with Digital Insurance

In connection with the sale of the retail website operations to Digital Insurance, Healthaxis and Digital Insurance entered into various agreements including an asset purchase agreement, a software license agreement and a consulting agreement. Revenue recognized during the years ended December 31, 2004, 2003 and 2002 under these agreements, as subsequently amended, totaled $30,000, $133,000 and $585,000, respectively.

The asset purchase agreement conveyed an equity interest in Digital Insurance by Healthaxis. During 2002, management concluded that an other-than-temporary decline in the fair value of the investment had occurred and recorded a $227,000 impairment charge equal to the remaining carrying value of the investment. As of December 31, 2004 and 2003, the carrying value of the investment was zero.

Note 13 — Commitments and Contingencies

Legal Proceedings

The Company is involved in normal litigation, including that arising in the ordinary course of business. Management is of the opinion that no pending litigation will have a material adverse effect on the results of operations or financial position of the Company.

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Operating Lease Obligations

The Company leases office space and various pieces of equipment under operating leases expiring in various years through 2007. Rental expense for the years ended December 31, 2004, 2003, and 2002 was $1.2 million, $1.2 million and $1.4 million, respectively. Future minimum rent payments under capital and operating leases through lease termination for each of the next five years and in aggregate are as follows:

	(Table in thousands)
2005	$	991
2006		49
2007		49
	$	1,089

Note 14 — Restructuring and Impairment Charges

In November 2002, Healthaxis began a cost reduction and business effectiveness initiative designed to more closely align expenses with revenues and to enhance the Company’s operating performance. The cost reduction initiative consisted of both a reduction in the Company’s labor force as well as an across-the-board reduction in salary levels. The reduction in labor force was effective in mid-November. The Company recorded severance expenses related to the terminated employees totaling $358,000, which is included in restructuring and impairment charges. The reduction in salary levels was effective January 1, 2003. In addition, the Company recorded an impairment charge to goodwill of $5.9 million in 2002 (See Note 4).

Note 15 — Gain on Extinguishment of Debt

On July 31, 2002, Healthaxis completed a transaction in which the holders of its $27.5 million 2% Convertible Debentures exchanged their debentures for 23,500 shares of Series A Convertible Preferred Stock and a cash payment of $4.0 million. The Company recorded a gain on extinguishment of debt totaling $16.4 million related to the transaction for the difference between the carrying value of the convertible debentures and the estimated fair value of the cash and preferred stock exchanged.

Note 16 — Subsequent Event

The Company entered into a Stock and Warrant Purchase Agreement on February 23, 2005 (the “Purchase Agreement”) with Tak Investments, Inc., a Delaware corporation owned by Mr. Sharad Tak (the “Investor”). The issuance of up to 8,333,333 or more shares of the Company’s common stock to the Investor and of the related financing transactions and agreements contemplated by the Purchase Agreements are subject to the approval of the Company’s common shareholders. Under the terms and conditions set forth in the Purchase Agreement, at the closing of the transactions contemplated thereby (the “Closing”) the Company has agreed to issue to the Investor 2,222,222 shares of common stock at a per share purchase price of $2.25 for an aggregate initial investment of $5.0 million. The Investor will also receive at the Closing three warrants (the “Warrants”). The first Warrant, which provides for an exercise price of $2.25 per share of common stock and a term of two years, would permit the Company to call the exercise of up to 3,333,333 shares of common stock (for an aggregate of up to $7.5 million) under

47

certain conditions, but would only permit the Investor to exercise the Warrant for up to 2,222,222 shares of common stock (for an aggregate of $5.0 million). The Company’s ability to call the exercise of the first Warrant is subject to the satisfaction of certain conditions, including unanimous approval of such action by the Company’s Board of Directors (which would require the approval of the Investor’s designees to the Board, as referenced below). The Investor also will receive two additional warrants representing the right to purchase additional common stock at prices of $2.70 and $3.15 per share. The number of shares of common stock subject to these Warrants is dependent upon the amount ultimately invested under the first Warrant. The additional cash investment in the Company under these two warrants could reach $8.1 million.

In connection with the Closing, the Company and the Investor will enter into a number of related agreements. Under the terms of an Investor Rights Agreement, the securities purchased by the Investor will be subject to limited transfer restrictions, and the Investor will have the right to approve certain fundamental corporate activities, the right to participate in other Healthaxis equity financings and, depending upon the size of the Company’s Board of Directors and the Investor’s continuing ownership position in the Company, the right to designate one to three nominees for election to the Company’s Board of Directors. It is expected that following the Closing, the Company’s Board of Directors will be expanded from seven members to nine members and the Investor therefore will have the right to designate two new members to the Company’s Board of Directors. The parties will also enter into a Registration Rights Agreement under which the Company agrees to file a registration statement covering the resale of the shares of common stock purchased under the Purchase Agreement or through exercise of the Warrants.

As a condition to the Closing, the Company will also enter into a five year Remote Resourcing Agreement (the “Resourcing Agreement”) with Healthcare BPO Partners L.P., a company affiliated with the Investor and owned by Mr. Tak. Healthcare BPO Partners will provide India-based personnel and infrastructure that will be utilized by the Company to provide business process outsourcing services and other software development and technical support services to support the Company’s operations. The Indian operations, which will be dedicated for the Company’s exclusive use, will be managed by the Company and based in Jaipur, India. These new Indian operations will supplement the Company’s existing operations in Utah, Texas and Jamaica.

The transactions with Tak Investments might not close if, for example, the Company’s common shareholders do not approve the transactions or if the conditions in the Stock and Warrant Purchase Agreement with Tak Investments are not satisfied.

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Note 17 — Quarterly Results of Operations (unaudited)

The following is a tabulation of the Company’s quarterly results of operations for the years ended December 31, 2004 and 2003:

	(Table in thousands, except per share amounts)
	2004
	Q1			Q2			Q3			Q4			Total
Revenue	$	4,249		$	3,894		$	3,942		$	4,077		$	16,162
Operating expenses		5,890			5,723			5,220			5,068			21,901
Operating loss		(1,641	)		(1,829	)		(1,278	)		(991	)		(5,739	)
Interest expense and other income, net		(37	)		(48	)		(50	)		(84	)		(219	)
Net loss	$	(1,678	)	$	(1,877	)	$	(1,328	)	$	(1,075	)	$	(5,958	)
Net loss per share of common stock  (basic and diluted)	$	(0.65	)	$	(2.07	)	$	(0.48	)	$	(0.34	)	$	(3.48	)

The net loss per share attributable to common stockholders has been restated from $.54 to $2.07 for the second quarter 2004, and from a loss of $1.99 to $3.48 for the year 2004, as further described in Note 18 below.

	2003
	Q1			Q2			Q3			Q4			Total
Revenue	$	5,231		$	5,483		$	5,352		$	4,785		$	20,851
Operating expenses		6,615			6,419			6,149			5,962			25,145
Operating loss		(1,384	)		(936	)		(797	)		(1,177	)		(4,294	)
Interest expense and other income, net		11			3			3			13			30
Net loss	$	(1,373	)	$	(933	)	$	(794	)	$	(1,164	)	$	(4,264	)
Net loss per share of common stock  (basic and diluted)	$	(0.28	)	$	(0.20	)	$	(0.22	)	$	(0.46	)	$	(1.05	)

Note 18 — Restatement of Financial Statements

The Company has restated certain portions of these consolidated financial statements for the years ended December 31, 2004 and 2003 to correct two items and reflect the corresponding changes described below.

As discussed in Note 7 above, the Company has a promissory note payable to UICI. Because UICI is also a customer of the Company, the promissory note provides for monthly payments to be made to UICI through an offset provision against Healthaxis accounts receivable. Therefore, each month the Company nets the periodic debt payment it owes UICI against accounts receivable from UICI for services rendered. The Company previously reported this repayment procedure in its Consolidated Statements of Cash Flows by reporting a collection in accounts receivable as an increase in working capital, and a source of operating cash flows. It reported the same amount, net of interest, as a payment on the long-term debt as a financing transaction. Payments made in this fashion should be netted against accounts receivable and reflected as non-cash financing transactions in the Consolidated Statements of Cash Flows, and the Company has therefore reclassified payments accordingly, as detailed in the table below:

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(Table in thousands)	2004						2003
	As Previously Reported			Restated			As Previously Reported			Restated
Cash Flows from Operating Activities
Changes in operating assets an liabilities:
Accounts receivable	$	700		$	82		$	214		$	110
Net cash used in operating activities		(2,225	)		(2,843	)		(1,060	)		(1,164	)
Cash Flows from Financing Activities
Payments on note payable to UICI		(618	)		—			(104	)		—
Net cash used in financing activities		(841	)		(223	)		(1,294	)		(1,190	)
Supplemental disclosure of cash flow information:
Interest paid		184			3			48			14
Non-cash Financing Activities
Accounts receivable applied to note and interest payable in lieu of cash	$	—		$	799		$	—		$	138

 

As described in Note 10 above, in June 2004, Healthaxis closed a transaction modifying the terms of its Series A Convertible Preferred Stock and providing for the issuance to its preferred shareholders of warrants to purchase shares of the Company’s common stock. The Company initially recorded this transaction using the estimated fair value that it calculated by performing a valuation of the modified preferred stock and warrants issued in the transaction. The valuation was supported by an independent expert engaged by the Company. The Company has now concluded that the estimated fair value of the preferred stock (convertible into shares of common stock on a one-for-one basis) should be based upon the quoted market price of the Company’s common stock on the date of the transaction. The impact of this change to the Consolidated Statement of Operations is summarized below:

(Table in thousands, except per share data)	2004
	As Previously Reported			Restated
Net loss	$	(5,958	)	$	(5,958	)
Plus: Carrying value of preferred stock over fair value of consideration transferred		261			—
Less: Fair value of consideration transferred over carrying value of preferred stock					(3,973	)
Net loss attributable to common shareholders	$	(5,697	)	$	(9,931	)
Income (loss) per share of common stock
(Basic and fully diluted):	$	(1.99	)	$	(3.48	)

 

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There is no impact to the Company’s Consolidated Balance Sheets or the Consolidated Statements of Changes in Stockholders Equity for any period reported resulting from the two items described above.

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Item 9A. Controls and Procedures

As of December 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15(b). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of December 31, 2004 to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted by it under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

We have re-evaluated our disclosure controls and procedures in light of the factors that led us to make the restatements to the Company’s Consolidated Financial Statements contained in this report. Based on our review and discussion with our audit committee, we determined that the restatements are necessary to properly present the fair value of the modified preferred stock and warrants, and to reflect the non-cash financing transactions, and have amended our Consolidated Financial Statements included in this Form 10-K/A to present them on a comparable basis with subsequent reports. We continue to believe our disclosure controls and procedures were effective at December 31, 2004. This conclusion is based upon the following: 1) The Company views its internal controls over financial reporting as a component of its overall disclosure controls and procedures. 2) The Company believes that the restatement related to the recording of the modified preferred stock transaction was the result of a different interpretation of the relevant accounting guidance, specifically with respect to the calculation of fair value of the modified preferred stock, and that the hiring of an independent valuation expert to support the Company’s internally calculated fair value reflects the Company’s efforts to record an accurate fair value. Furthermore, this transaction is not one that the Company encounters in its the normal course of business and not expected to be a recurring event. 3) The Company believes that the reclassification related to the UICI debt payments should not change the reader’s view on the overall sources and uses of cash for the accounting periods reported, or the readers opinion of the Company’s overall cash position, future obligations or liquidity. Furthermore, the netting process that lead to the reclassification in the Consolidated Statements of Cash Flows was fully disclosed in Note 7 to the Consolidated Financial Statements, as well as in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview —Repurchase of Securities Held by UICI. 4) The restatements had no effect on the Company’s reported net loss on the Statement of Operations, and had no effect on the Consolidated Balance Sheets or Consolidated Statement of Changes in Stockholders’ Equity.

Limitations on Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. The likelihood of achieving the objectives of a control system is affected by limitations inherent in such controls and procedures, including the fact that human judgment in decision-making can be faulty and that breakdowns in internal controls can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. The

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Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls or internal controls for financial reporting will prevent all error and all fraud. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART IV

Item 15.     Exhibits and Financial Statement Schedules

(a) The following consolidated financial statements of Healthaxis Inc. are included in Item 8:

(1) List of Financial Statements:

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets — December 31, 2004 and 2003

Consolidated Statements of Operations — Years ended December 31, 2004, 2003, and 2002

Consolidated Statements of Changes in Stockholders’ Equity — Years ended December 31, 2004, 2003, and 2002

Consolidated Statements of Cash Flows — Years ended December 31, 2004, 2003, and 2002

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules:

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

(3) Exhibits:

The exhibit listing on the accompanying Exhibit Index immediately following the signature page hereof is filed as part of, and is incorporated by reference into, this amendment to this report.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this amendment to this report to be signed on its behalf by undersigned, thereunto duly authorized.

HEALTHAXIS INC.

Date: November 9, 2005 By:     /s/ John M. CarradineJohn M. Carradine
President and Chief Executive Officer
(Duly Authorized Officer)

Signature	Title	Date
/s/ John M. CarradineJohn M. Carradine	Chief Executive Officer, President and Director (principal executive officer)	November 9, 2005
/s/ Jimmy D. TaylorJimmy D. Taylor	Chief Financial Officer (principal financial and accounting officer)	November 9, 2005
*James W. McLane	Chairman of the Board of Directors	November 9, 2005
*James J. Byrne	Director	November 9, 2005
/s/ Aneesh ChopraAneesh Chopra	Director	November 9, 2005
*John W. Coyle	Director	November 9, 2005
*Thomas L. Cunningham	Director	November 9, 2005
*Adam J. Gutstein	Director	November 9, 2005
*Kevin F. Hickey	Director	November 9, 2005
/s/ Barry L. ReisigBarry L. Reisig	Director	November 9, 2005

 

*     Signed by Jimmy D. Taylor, Attorney in Fact

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EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)

Exhibit Number	Description of Exhibits
3.1	Amended and Restated Articles of Incorporation of the Registrant. Incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K dated January 30, 2001.
3.2	Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock of Healthaxis Inc. dated June 30, 2004. Incorporated by reference to Exhibit 10.2 to registrant’s Form 10-Q for the quarterly period ended June 30, 2004.
3.3	Articles of Amendment to the Company’s Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 of Form 8-K filed on August 19, 2003
3.4	Second Amended and Restated Bylaws dated February 25, 2004. Incorporated by reference to Exhibit 3.5 to registrant’s Form 10-K for the year ended December 31, 2003.
4.1	Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock of Healthaxis Inc. dated June 30, 2004. (see Exhibit 3.2 above).
4.2	Specimen Stock Certificate, incorporated by reference to Exhibit 4.1 of Form 8-K filed on August 19, 2003.
10.1†	Amendment to Amended and Restated Option Agreement, dated as of September 9, 1999. Incorporated by reference to Exhibit (10)(K) to Registrant’s Annual Report on form 10-K for the year ended December 31, 1999.
10.2†	Amendment and Restatement of the Registrant’s Stock Option Plan for Directors, effective July 16, 1996. Incorporated by reference to Exhibit (10)(JJ) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1996.
10.3†	Registrant’s Amended and Restated Stock Option Plan for Executives, dated December 11, 1996. Incorporated by reference to Exhibit (10)(LL) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1996.
10.4†	Registrant’s 2000 Stock Option Plan. Incorporated by reference to Exhibit (10)(PPP) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999.
10.5†	Amended and Restated Healthaxis.com 1998 Stock Option Plan filed herewith.

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Exhibit Number	Description of Exhibits
10.6†	Employment Agreement between Healthaxis.com, Inc., Registrant and James McLane. Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed January 3, 2001.
10.7†	Severance Agreement between Healthaxis.com, Inc., Registrant and Michael Ashker. Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed January 3, 2001.
10.8	Prepayment Agreement with Alvin H. Clemens effective March 6, 2002. Incorporated by reference to Exhibit 10.65 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2001.
10.9†	Change in Control Employment Agreement between James. W. McLane and Registrant dated as of January 1, 2002. Incorporated by reference to Exhibit 10.66 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2001.
10.10†	Change in Control Employment Agreement between John Carradine and Registrant dated as of January 1, 2002. Incorporated by reference to Exhibit 10.67 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2001.
10.11†	Change in Control Employment Agreement between Jonathan B. Webb and Registrant dated as of January 1, 2002. Incorporated by reference to Exhibit 10.69 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2001.
10.12†	First Amendment to change in Control Employment Agreement between James W. McLane and Registrant effective January 1, 2003. Incorporated by reference to Exhibit 10.77 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
10.13†	First Amendment to change in Control Employment Agreement between John M. Carradine and Registrant effective January 1, 2003. Incorporated by reference to Exhibit 10.78 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
10.14†	First Amendment to change in Control Employment Agreement between Jonathan B. Webb and Registrant effective January 1, 2003. Incorporated by reference to Exhibit 10.79 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2002.
10.15†	Change in Control Employment Agreement between Jimmy D. Taylor and Registrant dated as of February 25, 2004. Incorporated by reference to Exhibit 10.84 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2003.

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Exhibit Number	Description of Exhibits
10.16†	Change in Control Employment Agreement between Charles S. Ramsburg and Registrant dated as of March 8, 2004. Incorporated by reference to Exhibit 10.85 to Registrant’s Annual Report on Form 10-K for the period ended December 31, 2003.
10.17	Purchase Agreement, dated as of September 30, 2003 between the Company and UICI. Incorporated by reference to Exhibit 10.1 to registrant’s Form 10-Q for the quarterly period ended September 30, 2003.
10.18	Promissory Note, made by the Company, payable to UICI. Incorporated by reference to Exhibit 10.2 to registrant’s Form 10-Q for the quarterly period ended September 30, 2003.
10.19	Preferred Stock Modification Agreement dated May 12, 2004 between Healthaxis Inc. and certain Preferred Shareholders. Incorporated by reference from Appendix A to the Registrant’s Definitive Proxy Statement dated June 1, 2004.
10.20	Investor Rights Agreement dated as of June 30, 2004 between Healthaxis Inc. and certain Preferred Stockholders. Incorporated by reference to Exhibit 10.3 to registrant’s Form 10-Q for the quarterly period ended June 30, 2004.
10.21	Registration Rights Agreement dated as of June 30, 2004 between Healthaxis Inc. and certain Preferred Shareholders. Incorporated by reference to Exhibit 10.4 to registrant’s Form 10-Q for the quarterly period ended June 30, 2004.
10.22	Form of Warrant dated as of June 30, 2004 and executed by Healthaxis Inc. in favor of Brown Simpson Partners I, Ltd. (490,306 common shares), OTAPE LLC (58,072 common shares), LB I Group Inc. (387,117 common shares) and The Pennsylvania State University (64,505 common shares). Incorporated by reference to Exhibit 10.5 to registrant’s Form 10-Q for the quarterly period ended June 30, 2004.
10.23*	Rights Agreement dated as of November 13, 1998 between American Online, Inc. and Registrant.

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Exhibit Number	Description of Exhibits
21.1	Subsidiaries of Registrant. (a) Healthaxis.com, Inc. (b) Healthaxis Managing Partner, LLC. (c) Healthaxis Limited Partner, LLC (d) Healthaxis, Ltd. (e) Healthaxis Imaging Services, LLC. (f) Satellite Image Systems (Jamaica) Limited
23.1**	Consent of McGladrey and Pullen, LLP.
23.2**	Consent of Ernst & Young LLP.
24.1*	Power of Attorney (see signature age)
31.1**	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2**	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1**	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

† Management contract or compensatory plan.

* Previously filed with the Annual Report on Form 10-K on March 31, 2005

** Filed herewith

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