Healthaxis Inc.
7301 North State Highway 161, Suite 300
Irving, Texas 75039
October 10, 2005
Ms. Stephanie Hunsaker
Associate Chief Accountant
Securities and Exchange Commission
Division of Corporate Finance
Washington, D.C. 20549
By Facsimile: 202-772-9213 3 pages
Re: Healthaxis Inc.
Form 10-K for the Fiscal Year Ended
December 31, 2004
Filed March 31, 2005
Forms 8-K filed March 30, 2005 and May 16, 2005
File No. 000-25797
Dear Ms. Hunsaker:
Thank you for the time you spent in conference with us on October 6 and the open
dialogue regarding the accounting for our preferred stock transaction. As you
can see, we are passionate in our conviction that this transaction has been
properly recorded, with a full understanding of the facts, issues and relevant
authoritative accounting literature. Having not reached an agreement with the
SEC staff in our conference on October 6, we wish to appeal this matter to Ms.
Carol Stacey, Chief Accountant of the Division of Corporate Finance.
Please share our prior correspondence dated August 12 and September 23 with Ms.
Stacey, along with this letter. While I will summarize below what we believe to
be the fundamental difference of opinion, it is important that Ms. Stacey
understand the basis for our position as documented in the prior correspondence.
The fundamental issue in this matter is the fair value of the modified preferred
stock and warrants. This is the central issue, whether you are comparing the
fair value of the new package vs. the book value of the old preferred stock, or
comparing the fair value of the new package to the closing market quote on the
day the transaction was closed (to test for beneficial conversion). GAAP directs
us to determine the fair value using the quoted market price in cases where
there is an active market. We believe that an active market in our stock,
sufficient to determine the fair value of the new package did not exist at the
time of this transaction and still does not exist today. The activity in our
stock on Friday, October 7, illustrates the point. No shares were traded during
the entire day, and the spread between bid and asked price was $1.42 to $1.70 on
100 and 200 shares, respectively.
1
We believe that our circumstances are very different from those contemplated by
the FASB when drafting the "quoted market price" guidance in light of the
following factors:
o The close precedent established by a similar block of shares repurchased
by the Company in an arms-length transaction only nine months earlier in
the UICI transaction (48% of the Company's outstanding common stock was
repurchased at a 40% discount to the then public market price). We
emphatically believe that this was a fair transaction negotiated at
arms-length.
o The number of shares of new preferred stock and warrants issued is
extremely large when compared to the number of shares of common stock
outstanding at the time (3,850,000 shares of new preferred stock and
1,000,000 warrants issued, compared to 2,768,291 shares of common stock
outstanding).
o The number of shares of new preferred stock and warrants compared to the
average daily trading volume of 8,350 shares of our common stock over the
30 trading days preceding the closing of the transaction.
o The preferred stock transaction documents imposed significant restrictions
on the convertibility and transferability of the shares issued.
o Our use of a leading, independent valuation firm to determine the value of
the new package of securities.
o Approval of the accounting treatment of the transaction by two nationally
recognized independent public accounting firms (Ernst & Young LLP
"reviewed" the transaction for purposes of filing the Form 10-Q relating
to the quarter in which the transaction closed, and McGladrey & Pullen,
LLP audited the transaction in connection with the preparation of its
audit report for the year in which the transaction closed).
As we are intimately familiar with the market for our common stock, we strongly
believe that an active market in our stock does not exist. We therefore believe
the basis for our determination of fair value is much more compelling and
supportable than simply basing value on the closing price on a single day of a
highly volatile stock with a very low daily trading volume. We recognize that
the concept of fair value is a complex subject and has been given considerable
thought by the drafters of our GAAP guidance. We do not believe that one size
fits all, and furthermore believe that GAAP would dictate that we record what we
believe to be the real fair value and not record a value that we believe to be
misleading. We believe the issue is obtaining and recording this transaction
based upon an accurate valuation, and that the mechanics used, such as block
discounts, have been a sticking point with the staff.
Finally, we wish to address some specific questions from our conference last
Thursday:
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o The Staff asked why the preferred shareholders would agree to a
transaction that would appear to not be to their benefit. The original
preferred stock (converted from $22 million debt about two years prior)
made it virtually impossible for the company to raise additional capital.
The $22 million liquidation preference, $440,000 annual dividend and the
ability to block strategic transactions were a roadblock to raising new
capital. Eliminating these preferences in exchange for a better conversion
ratio and clearing the way for new financing for the Company (which
occurred in May 2005) was the most logical way for the preferred
shareholders to recover some of their original investment.
o The Staff seems to assign little weight to the UICI transaction, as it
appears to be concerned with the arms-length nature of the transaction.
The current Healthaxis management team negotiated the transaction with
UICI, which is a public company with more than a billion dollar market
capitalization. Healthaxis management strongly believes that there are no
circumstances that would suggest that the transaction with UICI was
negotiated and completed on anything other than an arms-length basis. Page
2 of the Company's September 23 letter sets forth the basis for the
Company's views in this regard.
o The Staff questioned the independence of Huron Consulting Group in their
capacity as the valuation firm determining the value of the new preferred
stock and warrants. The Company had no prior relationship with Huron and,
in fact, Huron was among those suggested to the Company by the Company's
audit firm, Ernst & Young LLP. The Company invites the Staff to learn more
about Huron's reputation for excellence (which can easily be accessed, as
Huron is itself a publicly held company).
We are available for a conference call with Ms. Stacey to discuss our views and
will be in touch with you to make the arrangements. My telephone number is
972-443-5004 should you need to reach me.
Very truly yours,
/s/ Jimmy D. Taylor
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Jimmy D. Taylor
Chief Financial Officer
Cc: Ms. Lisa Mitrovich
Mr. Patrick Gilmore
Mr. James W. McLane, Chairman of the Board
Mr. John M. Carradine, President and Chief Executive Officer
Mr. J. Brent Webb, Secretary and General Counsel
Mr. Thomas L. Cunningham, Audit Committee Chairman
Mr. John McKnight, Locke-Liddell & Sapp, LLP.
Mr. Bob Allen, McGladrey & Pullen, LLP.
Mr. Jay Hanson, McGladrey & Pullen, LLP.