Bpo Management Services (HAXS) 10-Q 2005 Q3 Quarterly report

United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended . . . . . . . . . . . .September 30, 2005

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	23-2214195
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

7301 North State Highway 161, Suite 300, Irving, Texas 75039
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (972) 443-5000

Former name, former address and former fiscal year, if changed since last report: N/A

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

  Yes [X] No [  ]

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

  Yes [  ] No [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

  Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 5,988,855 shares of common stock, par value $.10, outstanding as of November 5, 2005.

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Healthaxis Inc.

Table of Contents

	Page
PART I  Financial Information
Item 1.  Consolidated Financial Statements		3
Consolidated Balance Sheets		3
Consolidated Statements of Operations		4
Consolidated Statements of Cash Flows		5
Notes to Consolidated Financial Statements		7
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.  Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.  Controls and Procedures		19
PART II  Other Information
Item 1.  Legal Proceedings		20
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3.  Defaults Upon Senior Securities		20
Item 4.  Submission of Matters to a Vote of Security Holders		20
Item 5.  Other Information		20
Item 6.  Exhibits		20
Signatures		21
Exhibit Index		22

 

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PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Healthaxis Inc. and Subsidiaries
Consolidated Balance Sheets

(In thousands except share and per share data) (Unaudited)

	September 30, 2005			December 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	5,767		$	3,930
Accounts receivable, net of allowance for doubtful accounts of $7 and $48, respectively		2,278			2,368
Prepaid expenses		760			635
Total current assets		8,805			6,933
Property, equipment and software, less accumulated depreciation and amortization of $8,835 and $9,421, respectively		1,716			1,654
Contract start-up costs, less accumulated amortization of $1,574 and $1,199, respectively		339			655
Customer base, less accumulated amortization of $4,214 and $4,130, respectively		—			84
Goodwill		11,276			11,276
Other assets		83			56
Total assets	$	22,219		$	20,658
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,540		$	1,238
Accrued liabilities		713			674
Accrued charge on lease abandonment		219			—
Deferred revenues		708			923
Current portion of notes payable		667			637
Current portion of post retirement and employment liabilities		117			135
Current portion of capital lease obligations		176			—
Total current liabilities		4,140			3,607
Notes payable, net of current portion		1,523			2,041
Post retirement and employment liabilities, net of current portion		795			794
Capital lease obligations, net of current portion		91			—
Other liabilities		406			1,417
Total liabilities		6,955			7,859
Commitments and contingencies
Stockholders’ Equity:
Preferred stock, par value $1.00: authorized 100,000,000 shares:
Series A Convertible, 2,851,658 and 3,100,000 shares issued and outstanding, respectively (no liquidation preference)		2,852			3,100
Common stock, par value $.10: authorized 1,900,000,000 shares, issued and outstanding 5,988,855 and 3,518,291 shares, respectively		599			352
Additional paid-in capital		448,481			444,221
Notes receivable from employees		(23	)		(23	)
Accumulated deficit		(436,645	)		(434,851	)
Total stockholders’ equity		15,264			12,799
Total liabilities and stockholders’ equity	$	22,219		$	20,658

 

See notes to unaudited consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Consolidated Statements of Operations

(In thousands, except share and per share data) (Unaudited)

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2005			2004			2005			2004
										(As Restated)
Revenues	$	3,843		$	3,942		$	11,980		$	12,085
Expenses:
Costs of revenue		3,432			3,827			11,224			12,204
Sales and marketing		326			377			793			1,011
General and administrative		551			764			2,008			2,838
Reversal of contingent tax liability		—			—			(979	)		—
Lease abandonment charge		23			—			523			—
Amortization of intangibles		—			252			84			780
Total expenses		4,332			5,220			13,653			16,833
Operating loss		(489	)		(1,278	)		(1,673	)		(4,748	)
Interest income and other income, net		34			11			62			51
Interest expense		(56	)		(61	)		(183	)		(186	)
Net loss		(511	)		(1,328	)		(1,794	)		(4,883	)
Add: Fair value of consideration transferred over carrying value of preferred stock		—			—			—			(3,973	)
Net loss attributable to common shareholders	$	(511	)	$	(1,328	)	$	(1,794	)	$	(8,856	)
Net loss per share of common stock (basic and diluted)	$	(0.09	)	$	(0.48	)	$	(0.37	)	$	(3.20	)
Weighted average common shares used in computing loss per share
Basic and diluted		5,988,855			2,768,291			4,883,492			2,768,138

 

See notes to unaudited consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Nine Months Ended
	Sept. 30, 2005			Sept. 30, 2004
				(As Restated)
Cash flows from operating activities
Net loss	$	(1,794	)	$	(4,883	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,183			1,979
Bad debt reserve		(41	)		9
Loss on disposal of fixed assets		6			—
Reversal of tax accrual		(979	)		—
Stock option compensation		—			24
Change in:
Accounts receivable		(357	)		47
Prepaid expenses and other current assets		(125	)		(139	)
Other assets		(27	)		20
Accounts payable and accrued liabilities		341			336
Accrued charge on lease abandonment		219			—
Deferred revenues		(215	)		10
Other liabilities		(36	)		(60	)
Net cash used in operating activities		(1,825	)		(2,657	)
Cash flows from investing activities
Collection on notes receivable		—			78
Capitalized software and contract start-up costs		(59	)		(429	)
Purchases of property, equipment and software		(547	)		(247	)
Proceeds from sale of property, equipment and software		9			—
Net cash used in investing activities		(597	)		(598	)
Cash flows from financing activities
Net proceeds from issuance of common stock		4,259			—
Payment of preferred stock dividends		—			(223	)
Other		—			2
Net cash generated (used) in financing activities		4,259			(221	)
Increase (decrease) in cash and cash equivalents		1,837			(3,476	)
Cash and cash equivalents, beginning of period		3,930			7,887
Cash and cash equivalents, end of period	$	5,767		$	4,411

 

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Supplemental disclosure of cash flow information
Interest paid	$	4	$	2
Non-cash financing activities:
Exchange of convertible preferred stock for new convertible preferred stock	$	—	$	2,049
Accounts receivable applied to note and interest payable in lieu of cash	$	609	$	597
Fixed assets purchased on capital lease	$	254	$	—

 

See notes to unaudited consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
September 30, 2005

Note A — Description of business and basis of presentation

Unaudited Financial Information

The unaudited consolidated financial statements have been prepared by Healthaxis Inc. and its subsidiaries (“Healthaxis” or the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments consisting of normal recurring entries, which, in the opinion of the Company, are necessary to present fairly the results for the interim periods. The interim financial statements do not include all disclosures provided in fiscal year end financial statements prepared in accordance with accounting principles generally accepted in the United States of America, although the Company believes that the accompanying disclosures are adequate to make the information presented not misleading. Results of operations for the three and nine-month periods ended September 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004.

General

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 capabilities and 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.

Reclassification and restatement of prior year amounts

Certain prior year amounts have been reclassified to conform with the current year presentation or in accordance with applicable accounting requirements. Net loss attributable to common shareholders for the nine-months ended September 30, 2004 has been restated to correct an error in the Consolidated Statements of Operations. The Consolidated Statements of Cash Flows for the nine-months ended September 30, 2004 has also been restated to reflect the reclassification of a non-cash financing activity. These restatements are more fully described in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004.

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Earnings Per Share

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 11,433,588 and 6,082,159 shares at September 30, 2005 and 2004 respectively, in 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:

	2005		2004
Options		1,355,244		1,103,087
Warrants		7,226,686		1,129,072
Preferred stock		2,851,658		3,850,000
Total common shares if converted		11,433,588		6,082,159

 

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 options granted is not likely to be representative of the effects on reported net loss for future periods. 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:

	(In thousands, except per share data)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
										(As Restated)
Net loss, attributable to common shareholders	$	(511	)	$	(1,328	)	$	(1,794	)	$	(8,856	)
Stock based compensation expense recorded under the intrinsic value method		—			6			—			24
Pro forma stock based compensation expense computed under the fair value method		(34	)		(307	)		(257	)		(949	)
Pro forma net loss	$	(545	)	$	(1,629	)	$	(2,051	)	$	(9,781	)
Loss per share of common stock, basic and diluted
As reported	$	(0.09	)	$	(0.48	)	$	(0.37	)	$	(3.20	)
Pro forma	$	(0.09	)	$	(0.59	)	$	(0.42	)	$	(3.53	)

 

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The Company granted 24,000 options in the third quarter 2005. 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 7 years, expected stock volatility of 122% and weighted average risk free interest rates of 4.30%. The weighted-average grant-date fair value of options granted during 2005 was $.84.

Note B — Post Retirement Benefits

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 Provident American Corporation, which became Healthaxis, and the Company’s former Chairman. The following table sets forth the components of net postretirement benefit expense for all plans:

	(Table in thousands)
	Three Months Ended September 30				Nine Months Ended September 30
	2005		2004		2005		2004
Interest cost	$	14	$	13	$	41	$	40
Transition obligation amortization		14		15		43		44
Net post retirement expense	$	28	$	28	$	84	$	84

 

Note C — Significant Customer Concentrations

For the three months ended September 30, 2005 and 2004, each of four customers represented greater than 10% of revenues, totaling $2.5 million (65%) and $2.4 million (62%), respectively, of the Company’s total revenues. For the nine months ended September 30, 2005 and 2004, these four customers accounted for $7.8 million (65%) and $7.6 million (63%), respectively, of the Company’s total revenues. At September 30, 2005 and December 31, 2004, one customer accounted for $857,000 (38%) and $822,000 (35%) of the Company’s accounts receivable, respectively. This customer is making payments in accordance with the terms of its contract.

Note D — Other Liabilities and Contingencies

Other liabilities include $324,000 and $1.3 million of contingent tax liabilities at September 30, 2005 and December 31, 2004. In the second quarter of 2005, the Company reversed a contingent tax liability of approximately $979,000 as the related limitation period had expired.

Note E — Financing Transaction

In May 2005, the Company closed a financing transaction with Tak Investments, Inc. (the “Investor”), a Delaware corporation owned by Mr. Sharad Tak. Under the terms and conditions of the agreement with the Investor, the Company issued 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 also received three warrants at the closing. The first warrant, which provides for an exercise price of $2.25 per share of common stock and a term of two years, permits the Company to call the exercise of up to 3,333,333 shares of common stock under certain conditions, but only permits the Investor to exercise the warrant for up to 2,222,222 shares of common stock. The second warrant, which has an exercise price of $2.70 and a three-year term, permits the Investor to purchase up to 1,388,889 additional shares of common stock. Of that total, 555,556 shares are immediately available to be exercised by the Investor and 833,333 shares are dependent upon the amount ultimately invested under the first

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warrant. The third warrant, which has an exercise price of $3.15 and a four-year term, permits the Investor to purchase up to 1,388,889 additional shares of common stock. Of that total, 555,556 shares are immediately available to be exercised by the Investor and 833,333 shares are dependent upon the amount ultimately invested under the first warrant.

As a part of the closing, the Company also entered into a five year Remote Resourcing Agreement with Healthcare BPO Partners L.P., a company affiliated with the Investor and owned by Mr. Tak. Healthcare BPO Partners, based in Jaipur India, provides personnel and infrastructure that is 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 services outsourced to this offshore vendor supplement the Company’s existing wholly-owned operations in Utah, Texas and Jamaica. As a part of the Resourcing Agreement, Healthcare BPO Partners also provides data center hosting services, at its Vienna Virginia facility, to Healthaxis. For the three and nine months ended September 30, 2005, the Company incurred costs of $112,000 and $192,000, respectively, related to the Resourcing Agreement. As of September 30, 2005, the Company had accounts payable to Healthcare BPO Partners of $80,000.

Note F— Real Estate Lease

In April 2005, the Company entered into a lease for approximately 20,000 square feet of office space located at 7301 North State Highway 161, Irving, Texas. The new lease was entered into for the purpose of relocating the corporate headquarters from the Company’s prior location at 5215 North O’Connor Blvd, Irving, Texas, where the Company occupied approximately 31,300 square feet. Lease payments on the new lease will start on January 1, 2006, which coincides with the termination of the North O’Connor Blvd. lease on December 31, 2005.

In June 2005, the Company substantially completed the move of its headquarters and incurred certain costs related to the relocation of personnel and equipment and recorded a lease abandonment charge of $500,000 as of the cease-use date in the second quarter 2005. This charge consists of relocation costs incurred to date and the write-off of certain assets abandoned in the move, plus a $440,000 accrual for the future rent and rent related obligations of the former headquarters. The accrued rent and rent related obligations are being paid on a monthly basis through December 31, 2005 in accordance with the lease terms. As of September 30, 2005, the accrued liability was $219,000. Additional expenses related to the abandonment, such as the Company’s pro-rata share of utility costs and equipment de-installation charges have been expensed as incurred in the lease abandonment charge. For the three and nine months ended September 30, 2005, the lease abandonment charge was $23,000 and $523,000, respectively.

Lease payment obligations under the new lease start in January 2006 and end in June 2010. Rental expense is based upon the total rental payments taken on a straight-line basis over the 63-month term of the lease, including the rent abatement period from April to December 2005. The new lease also provides terms under which ownership of certain furniture and equipment will be conveyed to the Company in April 2007, providing that the Company has met its obligations under the lease at that time. A capital lease obligation of $254,000 was recorded in the second quarter of 2005 to recognize that portion of the total payments, which are allocated to the acquisition of the furniture and equipment. Allocation of the total lease payment between the office space and the furniture and equipment acquisition was based upon a third-party appraisal of the fair market value of the furniture and equipment.

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

Forward-Looking Statements

All statements other than statements of historical fact contained in this report, including statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” concerning the Company’s financial position and liquidity, results of operations, prospects for future growth, and other matters are forward-looking statements. These statements may be identified with words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “should,” “could,” “goal,” “target,” “designed,” “on track,” “comfortable with,” “optimistic” and other similar expressions, and constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include the risks and uncertainties identified in Healthaxis documents filed with, or furnished to, the Securities and Exchange Commission, including without limitation those identified under the caption “Business—Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2004, and under the caption “Risk Factors” in the Company’s Registration Statement on Form S-3 filed with the SEC on June 27, 2005. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on forward-looking statements.

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 capabilities and 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.

Healthaxis Inc. is a Pennsylvania corporation, which was organized in 1982. Healthaxis’ common stock trades on the NASDAQ Capital Market under the symbol “HAXS.” The operations of Healthaxis are conducted through its subsidiary, Healthaxis, Ltd. Unless otherwise indicated, or the context otherwise requires, all references in this document to the “Company,” “Healthaxis,” “we,” “our” or “us” include Healthaxis Inc. and all of its subsidiaries. Healthaxis maintains a website at www.healthaxis.com. The Healthaxis Code of Conduct can be found on the Healthaxis website. Information found on the Healthaxis website is not a part of this report.

Revenue Model

The Company’s revenues consist primarily of application service provider (ASP) fees, transaction fees and professional service fees, as further described below. The ASP services are substantially dependent on the Company’s proprietary software, and agreements with customers contain a license for the use of the relevant software. These licenses provide for use of the software in the Company’s hosted environment and do not give the

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customer 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 and no new such licenses have been granted in 2005 or 2004.

A significant portion of the Company’s revenues 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 contact.

Financing Transaction:

Following approval by the Company’s common shareholders, on May 13, 2005 the Company closed a financing transaction with Tak Investments, Inc. (the “Investor”), a Delaware corporation owned by Mr. Sharad Tak. Under the terms and conditions of the Stock and Warrant Purchase Agreement with the Investor (the “Purchase Agreement”), the Company issued 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 also received three warrants (the “Warrants”) at the Closing. The first Warrant, which provides for an exercise price of $2.25 per share of common stock and a term of two years, permits 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 only permits 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 requires the approval of the Investor’s designees to the Board, as referenced below). The Investor also received two additional warrants representing the right to purchase additional shares of common stock at prices of $2.70 and $3.15 per share. The number of shares of common stock subject to these two additional Warrants is dependent upon the amount ultimately exercised under the first Warrant, but could total up to an additional 2,777,778 shares of common stock and could provide additional cash to the Company of up to $8.1 million.

In connection with the closing, the Company and the Investor entered into a number of related agreements. Under the terms of an Investor Rights Agreement, the securities purchased by the Investor are subject to limited transfer restrictions, and the Investor has 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

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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. In accordance with the terms of the Investor Rights Agreement, the Investor recently designated and the Board of Directors elected two additional members to the Board of Directors. The parties also entered 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 part of the closing, the Company also entered into a five year Remote Resourcing Agreement with Healthcare BPO Partners L.P., a company affiliated with the Investor and owned by Mr. Tak. Healthcare BPO Partners, based in Jaipur India, provides personnel and infrastructure that is utilized by the Company to provide business process outsourcing services and other software development and technical support services to support the Company’s operations. Services outsourced to this offshore vendor supplement the Company’s existing wholly-owned operations in Utah, Texas and Jamaica. As a part of the Resourcing Agreement, Healthcare BPO Partners also provides data center hosting services, at its Vienna Virginia facility, to Healthaxis.

Preferred Stock:

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 are convertible into shares of the Company’s common stock on a one-for-one basis. The preferred shareholders also received warrants with a term of five years entitling them to purchase shares of common stock, on a one-for-one basis, at an exercise price of $5.50 per share (subject to a cashless exercise feature that applies under some circumstances). As of November 5, 2005, there are 2,851,658 preferred shares and 1,000,000 warrants outstanding. The shares of common stock into which the shares of preferred stock are convertible and with respect to which the warrants are exercisable represent approximately 22% of our common stock on a fully diluted basis as of that date. 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 shares of preferred stock are 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. However, the agreements restrict the number of shares of common stock that may be sold in the public markets below a price of $3.50 per share. 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.

Critical Accounting Policies

Critical accounting policies are those which are most important to the financial statement presentation and that require the most difficult, subjective complex judgments. There have been no changes in the Company’s critical accounting policies as described in the Company’s Form 10-K/A for the year ended December 31, 2004.

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Results of Operations

Three months ended September 30, 2005 compared to three months ended September 30, 2004

	(Table in thousands) Three Months Ended Sept. 30,
	2005			2004			Change
Revenues	$	3,843		$	3,942		$	(99	)
Cost of revenues		3,432			3,827			(395	)
Gross profit	$	411		$	115		$	296
% of revenue		11	%		3	%

 

Revenues were down approximately $99,000 (3%) in the three months ended September 30, 2005 compared to the same period in 2004. Increases in transaction revenue of $62,000 and recurring PEPM license fee revenue of $130,000 were primarily the result of an increased number of covered lives with one of our larger clients. This increase was more than offset by a decline of $215,000 in data capture revenue primarily the result of a customer in a run-off stage and reduced professional service fees for project work.

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 $395,000 (10%) in the three months ended September 30, 2005 compared to the same period in 2004. Cost of revenues was 89% of revenues in the 2005 period compared to 97% in the 2004 period. Approximately $288,000 of the decrease in costs was due to lower personnel and contractor costs resulting from staff reductions. An additional $140,000 of the decline in costs was due to reduced facilities costs related to the Company’s new headquarters.

	(Table in thousands) Three Months Ended Sept. 30,
	2005			2004			Change
Sales and marketing expense	$	326		$	377		$	(51	)
General and administrative expense		551			764			(213	)
Lease abandonment charge		23			—			23
Amortization of intangibles		—			252			(252	)
Interest and other income, net		34			11			23
Interest expense		(56	)		(61	)		5

 

Sales and marketing expenses consist primarily of employee salaries and related benefits, as well as promotional costs such as direct mailing campaigns, trade shows and media advertising. Sales and marketing expenses decreased $51,000 (14%) in the three months ended September 30, 2005 compared to the same quarter of 2004 due to lower personnel and consulting costs.

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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 decreased $213,000 (28%) in the three months ended September 30, 2005 compared to the same quarter of 2004. Approximately $138,000 of the decrease in costs was due to lower personnel and contractor costs resulting from staff reductions and the related reductions in travel, entertainment and office supplies. Approximately $43,000 of the decline was due to a reduction in outside professional fees for legal, accounting and consulting expenses. An additional $17,000 of the decline in costs was due to reduced facilities costs related to the Company’s new headquarters.

Lease abandonment charge consists of expenses related to the Company’s former headquarters, which was abandoned in favor of a new office lease in June 2005. The $23,000 charge in the three months ended September 30, 2005 includes on-going expenses related to the abandonment, such as the Company’s pro rata share of utility costs and equipment de-installation charges. There was no such charge in 2004.

Amortization of intangibles includes the amortization of the customer base acquired in the January 2001 Healthaxis merger. These expenses were reduced $252,000 in the three months ended September 30, 2005 compared to the same quarter of 2004, as the Company’s intangible assets were fully amortized in January 2005.

Interest and other income, net increased $23,000 (209%) in the three months ended September 30, 2005 compared to the same quarter of 2004 due primarily to higher balances of cash resulting from the financing transaction completed in May 2005.

Interest expense decreased $5,000 in the three months ended September 30, 2005 compared to the same quarter of 2004, due to a decline in the balance of the note payable to UICI.

Nine months ended September 30, 2005 compared to nine months ended September 30, 2004

	(Table in thousands) Nine Months Ended Sept 30,
	2005			2004			Change
Revenues	$	11,980		$	12,085		$	(105	)
Cost of revenues		11,224			12,204			(980	)
Gross profit	$	756		$	(119	)	$	875
% of revenue		6	%		(1	)%

 

Revenues were down $105,000 in the nine months ended September 30, 2005 compared to the same period in 2004. The loss of a data capture client, now in a run-off stage, resulted in a $554,000 reduction in data capture revenue. This decline was offset by increases in transaction revenue of $121,000 and recurring PEPM license fee revenue of $349,000, which was primarily the result of an increased number of covered lives with one of our larger clients.

Cost of revenues declined $980,000 (8%) in the nine months ended September 30, 2005 compared to the same period in 2004. Cost of revenues was 94% of revenues in 2005 compared to 101% in 2004. Approximately $733,000 of the decrease in costs was due to lower personnel and contractor costs resulting from staff reductions. An additional $132,000 of the decline in costs was due to reduced costs of travel and entertainment, supplies and other costs related to the staff reductions. In addition, facilities costs decreased $176,000 due to the lower costs associated with the Company’s new headquarters. Additional reductions in technology and data line costs were offset by additional costs related to the increased transaction revenue.

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	(Table in thousands) Nine Months Ended Sept. 30,
	2005			2004			Change
Sales and marketing expense	$	793		$	1,011		$	(218	)
General and administrative expense		2,008			2,838			(830	)
Reversal of contingent tax liability		(979	)		—			(979	)
Lease abandonment charge		523			—			523
Amortization of intangibles		84			780			(696	)
Interest and other income, net		62			51			11
Interest expense		(183	)		(186	)		3

 

Sales and marketing expenses decreased $218,000 (22%) in the nine months ended September 30, 2005 compared to the same period of 2004. Lower personnel costs, consulting fees and the related decrease in travel and supplies resulted in a decline of $246,000. This decline in expenses was partially offset by an increase of $25,000 in marketing expenses, including collateral material and trade show attendance.

General and administrative expenses decreased $830,000 (29%) in the nine months ended September 30, 2005 compared to the same period of 2004. $763,000 of the decline was due to a reduction in outside professional fees for legal, accounting and consulting services. Approximately $452,000 of that decline was specifically related to expenses incurred in 2004 for the preferred stock conversion. Lower personnel costs, consulting fees and the related decrease in travel and entertainment, partially offset by increased property taxes, resulted in the remaining reduction.

Reversal of contingent tax liability of $979,000 was recorded as a credit to the Statement of Operations in the second quarter of 2005 as a result of the expiration of the applicable statute of limitation period. There was no such credit for in 2004.

Lease abandonment charge consists of expenses related to the Company’s former headquarters, which was abandoned in June 2005 in favor of a new office lease completed in April 2005. The $523,000 charge in the nine months ended September 30, 2005 includes relocation costs incurred to date and the write-off of certain assets abandoned in the move, plus an accrual for the future rent and certain rent related obligations of the former headquarters. There was no such charge in 2004.

Amortization of intangibles was reduced $696,000 (89%) in the nine months ended September 30, 2005 compared to the same period of 2004, as the Company’s intangible assets were fully amortized in January 2005.

Interest and other income, net increased $11,000 in the nine months ended September 30, 2005 compared to the same period of 2004 due primarily to higher balances of cash resulting from the financing transaction completed in May 2005.

Interest expense was relatively unchanged during the nine months ended September 30, 2005 compared to the same period of 2004. Interest expense is primarily related to the note payable to UICI.

Liquidity and Capital Resources

Overview of Cash Resources

At September 30, 2005, our cash and cash equivalents amounted to $5.8 million compared to $3.9 million at December 31, 2004 and $2.6 million at March 31, 2005. The sources and uses of cash during the first nine

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months of 2005 are described more fully in “—Analysis of Cash Flows” below. The Company entered into a Purchase Agreement with Tak Investments, Inc., which closed on May 13, 2005, and which provided the Company with an additional source of liquidity as more fully described in“ — Overview — Financing Transaction” above. Upon closing, the Company received $5.0 million in gross proceeds in exchange for 2,222,222 shares of the Company’s common stock and warrants. Additionally, the Company has taken other actions to address its operating losses, which have historically resulted in declining cash balances. These steps include increasing the Company’s marketing and sales efforts and implementing further productivity improvements. The Company’s focus is on revenue generation and positive cash flow, however there can be no assurances if or when that will occur. We believe that the Company will maintain sufficient liquidity to fund operations for at least the next 12 months.

The Company recently signed a multi-year contract to provide a wide variety of it’s standard recurring- revenue services to a new customer. The Company will be required to expend substantial resources, in the form of both human and capital expenditures, during the implementation phase of the contract which is expected to extend over a period as long as the next 12 months. As a result, the Company expects a negative short-term impact on cash flow until deferred collection provisions present in the contract are fulfilled and on-going profits expected to be generated from the recurring revenue stream start to be realized. The Company does not believe that the short-term impact of this project implementation will impact the Company’s ability to maintain sufficient liquidity to fund operations for at least the next 12 months. The implementation effort and terms of this agreement are typical for Healthaxis’ contracts of this scope and nature.

Analysis of Cash Flows

Cash used in operating activities for the nine months ended September 30, 2005 was approximately $1.8 million as compared to $2.7 million for the same period in 2004. The net loss as adjusted for non-cash operating activities was $1.6 million in 2005 compared to $2.9 million in 2004, or an improvement of $1.3 million. The reduced net loss in 2005 was partially offset by changes in various working capital accounts, primarily accounts receivable. Changes in working capital used $200,000 cash in the 2005 period as opposed to $214,000 cash generated for the comparable period in 2004.

Cash used in investing activities for the nine months ended September 30, 2005 was $597,000 as compared to $598,000 for the same period in 2004. The Company’s investing activities continue to be primarily in the areas of developing software enhancements, contract start-up activities and acquisition of property, equipment and software. The primary use of cash in the 2005 period was $547,000 for property, equipment and software. This excludes $254,000 for furniture and fixtures acquired with a capital lease in connection with the new office lease, entered into in April 2005, for relocation of the Company’s headquarters. See “- Lease and Other Commitments” below.

Cash generated in financing activities for the nine months ended September 30, 2005 was approximately $4.3 million as compared to cash used of $221,000 for the same period in 2004. Proceeds from the sale of common stock in May 2005, as further described in “— Overview —Financing Transaction” above, was the source of $4.3 million in cash, net of closing and transaction costs. In addition, $223,000 preferred stock dividend payments were made in January 2004. In June 2004, the terms of the preferred stock were amended and now contain only a nominal dividend aggregating to less than $1,000 per year. See “-Overview — Preferred Stock” above. Principal and interest payments on our note payable to UICI of $609,000 during 2005 and $597,000 in the comparable period in 2004 were netted against accounts receivable from UICI. The Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 have been reclassified to reflect this as a non-cash financing activity. See “—Note Payable to UICI” below. Other non-cash financing activities included the purchase of fixed assets on capital leases of $254,000 for the nine months ended September 30, 2005.

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Note Payable to 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 then outstanding common stock; 1,424 shares of Series A Convertible preferred stock, or 6.1% of the then 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, which is due over three years and bears interest at 6%. Monthly payments on the promissory note are paid through deductions from the monthly invoices for services provided by the Company to certain UICI subsidiaries. The amount of the monthly payment is equal to the greater of one half of the invoice amount for such 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. During the nine-month period ended September 30, 2005, the Company netted against accounts receivable an aggregate of $609,000 under the promissory note, of which $487,000 was principal and $122,000 was interest. This is reflected as a non-cash financing transaction in the Company’s Consolidated Statements of Cash Flows. As of September 30, 2005, the balance due under the promissory note is $2.2 million (of which $667,000 is classified as short-term).

Lease and Other Commitments

Healthaxis has certain capital and operating lease commitments over the next five years. These leases are primarily for office space and data processing equipment. In April 2005, the Company entered into a lease for approximately 20,000 square feet of office space located at 7301 North State Highway 161, Irving, Texas. The new lease was entered into with the intent of relocating the corporate headquarters from the Company’s former location at 5215 North O’Connor Blvd, Irving, Texas, where the Company occupied approximately 31,300 square feet. Lease payments on the new lease will start on January 1, 2006, which coincides with the termination of the North O’Connor Blvd. lease on December 31, 2005. The new lease also provides terms under which ownership of certain furniture and equipment will be conveyed to the Company in April 2007, provided that the Company has met its obligations under the lease at that time. While the Company plans to continue to make payments on the North O’Connor lease until its expiration in December 2005, the relocation of employees, equipment and related materials was substantially completed in the second quarter of 2005. As such, the Company accrued a lease abandonment charge, based upon the future lease payment obligation as of the cease-use date plus other relocation expenses. Based upon the reduced square footage and the lower rental rate per square foot of the new facility, the Company expects a cash savings of over $700,000 per year, including lease expenses, utilities, parking, and property taxes, commencing in January 2006.

Healthaxis has no other significant cash commitments other than those required by the normal day-to-day operation of its business.

Recently Adopted Accounting Pronouncements

None

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Exposure to market risk for changes in interest rates relate primarily to short-term investments. The Company does not use derivative financial instruments. The primary objective of its investment activities is to preserve principal while maximizing yields without significantly increasing risk. Due to the nature of the Company’s investments, we believe that there is no material risk exposure.

Our cash equivalents and other investment instruments are exposed to financial market risk due to fluctuation in interest rates, which may affect our interest income. These instruments are not entered into for trading purposes. We do not expect our interest income to be significantly affected by a sudden change in market interest rates.

The dividend rate on our preferred stock is fixed at a nominal rate of $0.0001 per share of the new preferred stock, payable semi-annually (aggregating less than $1,000 in dividend payments to all preferred shareholders annually). The interest rate on our note payable is fixed at 6%. The fair value of these instruments is therefore subject to market fluctuation as interest rates change.

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company 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-14. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of the end of the period covered by this report. There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 Company’s management, including the Chief Executive Officer and Chief Financial Officer, do 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 II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable

Item 3. Defaults Upon Senior Securities.

Not applicable

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

Not applicable

Item 5. Other Information.

Not Applicable.

Item 6. Exhibits

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	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

 

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Healthaxis Inc.
Date: November 14, 2005	By: /s/ John M. Carradine John M. Carradine, President and Chief Executive Officer (Principal Executive Officer)
	By: /s/ Jimmy D. TaylorJimmy D. Taylor, Chief Financial Officer (Principal Financial Officer)

 

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Exhibit Index

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	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

 

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