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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended. . . . . . . . . . . . . . . . .June 30, 2004 OR o
    
    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.  Pennsylvania
    
    23-2214195(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 5215 N. OConnor Blvd., 800 Central Tower, 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. x o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). o x
 Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 2,768,291 shares of common
stock, par value $.10, outstanding as of August 5, 2004. Page 1 of 25




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Healthaxis Inc. Table of Contents PagePART I Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21PART II Other InformationItems 1-5
    
    
    22Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    23Signatures
    
    
    24Exhibit Index
    
    
    25Amended and Restated Certificate of Designation of Series A Convertible Preferred StockInvestor Rights AgreementRegistration Rights AgreementForm of WarrantCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906
 Page 2 of 25




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1.     Condensed Consolidated Financial Statements Healthaxis Inc. and Subsidiaries 
 Condensed Consolidated Balance Sheets
 (In thousands except share and per share data) (Unaudited) June 30
    
    December 312004
    
    2003UnauditedAssetsCurrent assets:Cash and cash equivalents
    
    $
    5,856
    
    
    $
    7,887Accounts receivable, net of allowance for doubtful accounts of $52 and $44, respectively
    
    
    2,153
    
    
    
    3,077Prepaid expenses and other current assets
    
    
    773
    
    
    
    605Notes receivable
    
    
    45
    
    
    
    124Total current assets
    
    
    8,827
    
    
    
    11,693Property, equipment and software, less accumulated depreciation and
amortization of $10,256 and $9,952, respectively
    
    
    1,072
    
    
    
    1,238Contract start-up costs, less accumulated amortization of $924 and $704, respectively
    
    
    726
    
    
    
    759Capitalized software, less accumulated amortization of $2,506 and $2,199, respectively
    
    
    769
    
    
    
    990Customer base, less accumulated amortization of $3,626 and $3,121, respectively
    
    
    589
    
    
    
    1,093Goodwill
    
    
    11,276
    
    
    
    11,276Notes receivable
    
    
    23
    
    
    
    Other assets
    
    
    45
    
    
    
    65Total assets
    
    $
    23,327
    
    
    $
    27,114Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,413
    
    
    $
    981Accrued liabilities
    
    
    512
    
    
    
    795Deferred revenues
    
    
    829
    
    
    
    888Notes payable, current portion
    
    
    617
    
    
    
    599Total current liabilities
    
    
    3,371
    
    
    
    3,263Notes payable
    
    
    2,376
    
    
    
    2,697Post retirement and employment liabilities
    
    
    930
    
    
    
    940Other liabilities
    
    
    1,438
    
    
    
    1,467Total liabilities
    
    
    8,115
    
    
    
    8,367Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, par value $1.00: authorized 100,000,000 shares:Series A Convertible Preferred Stock, 3,850,000 issued and outstanding (no
liquidation preference)
    
    
    3,850
    
    
    
    Series A cumulative convertible, 22,076 issued and outstanding ($22,076
liquidation preference)
    
    
    
    
    
    
    5,899Common stock, par value $.10: authorized 1,900,000,000 shares,
issued and outstanding 2,768,291 and 2,767,592 shares
    
    
    277
    
    
    
    277Additional paid-in capital
    
    
    443,533
    
    
    
    441,464Accumulated deficit
    
    
    (432,448
    )
    
    
    (428,893
    )Total stockholders equity
    
    
    15,212
    
    
    
    18,747Total liabilities and stockholders equity
    
    $
    23,327
    
    
    $
    27,114
 See notes to consolidated financial statements. Page 3 of 25




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Healthaxis Inc. and Subsidiaries 
 Condensed Consolidated Statements of Operations
 (In thousands, except share and per share data) (Unaudited) Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    3,894
    
    
    $
    5,483
    
    
    $
    8,143
    
    
    $
    10,714Expenses:Costs of revenue
    
    
    4,024
    
    
    
    4,975
    
    
    
    8,377
    
    
    
    10,072Sales and marketing
    
    
    341
    
    
    
    283
    
    
    
    634
    
    
    
    538General and administrative
    
    
    1,106
    
    
    
    837
    
    
    
    2,074
    
    
    
    1,746Research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Amortization of intangibles
    
    
    252
    
    
    
    324
    
    
    
    528
    
    
    
    648Total expenses
    
    
    5,723
    
    
    
    6,419
    
    
    
    11,613
    
    
    
    13,034Operating loss
    
    
    (1,829
    )
    
    
    (936
    )
    
    
    (3,470
    )
    
    
    (2,320
    )Interest income and other income, net
    
    
    13
    
    
    
    22
    
    
    
    40
    
    
    
    52Interest expense
    
    
    (61
    )
    
    
    (19
    )
    
    
    (125
    )
    
    
    (38
    )Net loss
    
    
    (1,877
    )
    
    
    (933
    )
    
    
    (3,555
    )
    
    
    (2,306
    )Less: Preferred stock cash dividends
    
    
    110
    
    
    
    (117
    )
    
    
    
    
    
    
    (232
    )Add:
Carrying amount of preferred stock over fair value of consideration transferred
    
    
    261
    
    
    
    
    
    
    
    261
    
    
    
    Net loss attributable to common shareholders
    
    $
    (1,506
    )
    
    $
    (1,050
    )
    
    $
    (3,294
    )
    
    $
    (2,538
    )Net loss per share of common stock (basic and
diluted)
    
    $
    (0.54
    )
    
    $
    (0.20
    )
    
    $
    (1.19
    )
    
    $
    (0.47
    )Weighted average common shares used in
computing loss per shareBasic and diluted
    
    
    2,768,291
    
    
    
    5,361,222
    
    
    
    2,768,061
    
    
    
    5,362,885
 See notes to consolidated financial statement Page 4 of 25




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Healthaxis Inc. and Subsidiaries 
 Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Six Months EndedJune 30,
    
    June 30,2004
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (3,555
    )
    
    $
    (2,306
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    1,334
    
    
    
    1,796Bad debt reserve
    
    
    8
    
    
    
    48Loss on disposal of fixed assets
    
    
    
    
    
    
    8Stock option compensation
    
    
    18
    
    
    
    18Change in:Accounts receivable
    
    
    916
    
    
    
    (163
    )Prepaid expenses and other current assets
    
    
    (168
    )
    
    
    (376
    )Costs in excess of billings
    
    
    
    
    
    
    (158
    )Other assets
    
    
    20
    
    
    
    (29
    )Accounts payable and accrued liabilities
    
    
    372
    
    
    
    460Deferred revenues
    
    
    (59
    )
    
    
    (139
    )Other liabilities
    
    
    (39
    )
    
    
    287Net cash used in operating activities
    
    
    (1,153
    )
    
    
    (554
    )Cash flows from investing activitiesCollection on notes receivable
    
    
    56
    
    
    
    92Capitalized software and contract start-up costs
    
    
    (273
    )
    
    
    (205
    )Purchases of property, equipment and software
    
    
    (137
    )
    
    
    (219
    )Other
    
    
    
    
    
    
    8Net cash used in investing activities
    
    
    (354
    )
    
    
    (324
    )Cash flows from financing activitiesPayment of preferred stock dividends
    
    
    (223
    )
    
    
    (237
    )Payments on note payable to UICI
    
    
    (303
    )
    
    
    Other
    
    
    2
    
    
    
    Net cash used in financing activities
    
    
    (524
    )
    
    
    (237
    )Decrease in cash and cash equivalents
    
    
    (2,031
    )
    
    
    (1,115
    )Cash and cash equivalents, beginning of period
    
    
    7,887
    
    
    
    11,380Cash and cash equivalents, end of period
    
    $
    5,856
    
    
    $
    10,265
 See notes to consolidated financial statement Page 5 of 25




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Healthaxis Inc. and Subsidiaries 
 Notes to Consolidated Financial Statements
June 30, 2004
 Note A  Description of business and basis of presentation Unaudited Financial Information The unaudited condensed 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, although the Company believes that the accompanying disclosures
are adequate to make the information presented not misleading. Results of
operations for the six-month period ended June 30, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. 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 for the year ended December 31, 2003. 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 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, either on
a fully integrated or 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 technology
clients and on a stand-alone basis. BPO solutions include mailroom services
and the automated capture, imaging, storage and retrieval of electronic claims,
attachments, and related correspondence, in addition to rules-based claims
pre-adjudication and automated PPO repricing. Healthaxis Inc. is a Pennsylvania corporation, which was organized in
1982. Healthaxis common stock trades on the NASDAQ SmallCap 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. Earnings Per Share Basic earnings per share is computed on the weighted average number of
common shares outstanding, while the dilutive effect of convertible preferred
stock, stock options and warrants is excluded. 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
6,092,598 and 2,031,359 as of June 30, 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: Page 6 of 25




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As of June 302004
    
    2003Options
    
    
    1,127,026
    
    
    
    943,600Warrants
    
    
    1,115,572
    
    
    
    192,521Preferred stock
    
    
    0
    
    
    
    895,238Preferred stock -  new
    
    
    3,850,000
    
    
    
    0Total
    
    
    6,092,598
    
    
    
    2,031,359
 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: (In thousands, except per share data)Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (1,877
    )
    
    $
    (933
    )
    
    $
    (3,555
    )
    
    $
    (2,306
    )Effect of dividends on preferred stock
    
    
    371
    
    
    
    (117
    )
    
    
    261
    
    
    
    (232
    )Stock based compensation expense recorded
under the intrinsic value method
    
    
    9
    
    
    
    9
    
    
    
    18
    
    
    
    18Pro forma stock based compensation expense
computed under the fair value method
    
    
    (361
    )
    
    
    (395
    )
    
    
    (642
    )
    
    
    (837
    )Pro forma net loss
    
    $
    (1,858
    )
    
    $
    (1,436
    )
    
    $
    (3,918
    )
    
    $
    (3,357
    )Loss per share of common stock, basic and
dilutedAs reported
    
    $
    (0.54
    )
    
    $
    (0.20
    )
    
    $
    (0.47
    )
    
    $
    (0.47
    )Pro forma
    
    $
    (0.67
    )
    
    $
    (0.27
    )
    
    $
    (1.42
    )
    
    $
    (0.63
    )
 Page 7 of 25




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Goodwill The carrying value of goodwill at June 30, 2004 is $11.3 million. The
Company performs its annual impairment review during the fourth quarter of each
year or upon the occurrence of any event that indicates potential impairment.
It is possible that the carrying amount of goodwill could be effected in the
near term because of the impact that the Companys continued operating losses
could have on the estimates used by management to calculate the fair value of
the reporting units. Segments The Company has historically presented information regarding its 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 the operations of the Company (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. 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. All references in
the accompanying financial statements to the number of common shares and
per-share amounts for prior periods have been restated to reflect the reverse
stock split. Note B  Recently Adopted Accounting Pronouncements On May 19, 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
(APBO) and net periodic postretirement benefit cost taking into account any
subsidy received under the Act. The Company is evaluating the impact of the
Acts benefits and subsidies on the Companys accumulated benefit obligation
for postretirement benefits. The Company does not expect that the adoption of
the Statement will have a material impact on the Companys financial condition,
results of operations or liquidity. Note C  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, 17 retired employees, and
the Companys former Chairman. The following table sets forth the components
of net postretirement benefit expense for all plans: Page 8 of 25




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(Table in thousands)Three Months Ended June 30
    
    Six Months Ended June 302004
    
    2003
    
    2004
    
    2003Interest cost
    
    $
    13
    
    
    $
    16
    
    
    $
    27
    
    
    $
    31Transition obligation amortization
    
    
    15
    
    
    
    14
    
    
    
    29
    
    
    
    29Net post retirement expense
    
    $
    28
    
    
    $
    30
    
    
    $
    56
    
    
    $
    60
 Note D  Repurchase of Securities Held by UICI and Reducing Conversion Price 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 48.3% 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%. The
promissory note is 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. As of June 30, 2004, the balance due under the promissory note is
$3.0 million (of which, $617,000 is classified as short-term). To gain the required approval of this transaction from the Series A
Preferred shareholders, the Company agreed to reduce the per share conversion
price of the then 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. As described under Note H, the terms of the Series A preferred stock
were significantly modified on June 30, 2004. Note E  Significant Customer Concentrations For the three months ended June 30, 2004 and 2003, each of four customers
represented greater than 10% of revenues, totaling $2.5 million (63%) and $3.0
million (54%), respectively, of the Companys total revenues. For the six
months ended June 30, 2004 and 2003, these four customers accounted for $5.1
million (63%) and $5.9 million (55%), respectively, of the Companys total
revenues At June 30, 2004 and December 31, 2003, one customer accounted for
$814,000 (46%) and $965,000 (30%) of the Companys accounts receivable,
respectively. Note F  Other Liabilities and Contingencies Other liabilities include $1.3 million of contingent tax liabilities at
June 30, 2004 and December 31, 2003. Note G  Related Party Transactions Historically, Healthaxis conducted a significant amount of business with a
major shareholder, UICI. As further described in Note D above, on September
30, 2003, the Company purchased all Healthaxis securities held by UICI for $3.9
million and UICI is no longer considered an affiliate. Notwithstanding,
Healthaxis continues to provide certain services to UICI and its subsidiaries
pursuant to written agreements. Page 9 of 25




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For the three months ended June 30, 2004 and 2003, UICI and its
subsidiaries and affiliates accounted for $397,000 (10%) and $487,000 (9%),
respectively, of the Companys revenues. For the six months ended June 30,
2004 and 2003, UICI and its subsidiaries and affiliates accounted for $811,000
(10%) and $942,000 (9%), respectively, of the Companys revenues. As of June
30, 2004, Healthaxis had accounts receivable due from UICI and its subsidiaries
and affiliates totaling $128,000, which represented 6% of the Companys total
accounts receivable. Note H  Amendment of 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 resulting in 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) are 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 are convertible and with respect to which the warrants are exercisable,
represent approximately 55% of the common stock on a fully diluted basis as of
June 30, 2004. Holders of the preferred stock will 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-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 Page 10 of 25




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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. 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 would be entitled to vote separately as
a class in certain instances, including in the event of an amendment to
Healthaxis articles of incorporation, which may occur should Healthaxis decide
to engage in some types of mergers or consolidations. To the extent that the
new preferred stock is so entitled to vote, 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. The agreements require Healthaxis to register for resale the shares of
common stock issuable upon conversion of the preferred stock or exercise of the
warrants, but 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 estimated the fair value of the new preferred stock at June
30, 2004 to be $4.8 million. The estimate assumes a willing buyer and a
willing seller in an arms-length negotiation and considers factors such as the
price per share of the common stock on the date of closing, the trading
restrictions imposed on the new preferred stock through June 30, 2005 and the
marketability of the new preferred stock based upon the number of shares of
common stock into which the preferred stock is convertible (55% on an fully
diluted basis). The Company estimated the fair value of the warrants to be
$815,000 using the Black-Scholes pricing model, based upon volatility of the
common stock since the announcement of the preferred stock modification
transactions. The $261,000 difference between the carrying value of the old
preferred stock of $5.9 million and the fair value of the new preferred stock
and warrants has been recorded as additional paid in capital and, in accordance
with EITF D-42, The Effect on the Calculation of Earnings per Share for the
Redemption or Induced Conversion of Preferred Stock, is reflected as carrying
amount of preferred stock over fair value of consideration in the 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
condensed consolidated statement of operations. 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. Page 11 of 25




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Note I  Significant Contract 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 three months ended June 30, 2004 and 2003,
HCA accounted for $0 and $576,000 (10.5%), respectively, of the Companys
revenues. For the six months ended June 30, 2004 and 2003, HCA accounted for
$0 and $946,000 (9%), respectively, of the Companys revenues. The Company was the prime contractor on the HCA project and utilized the
services of a development partner to perform a significant part of the work. 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. 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 has 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. Page 12 of 25




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Item 2.     Managements Discussion and Analysis of Results of Operations and Financial Condition 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, 2003, and under the caption Proposal I  Approval of
Issuance of Common Stock and Related Securities Transactions-Factors Affecting
Current Common Shareholders in the Companys Proxy Statement dated June 1,
2004. 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 and third party administrators (TPA) provide enhanced services to
members, employees, employers and providers at lower cost. These services are
provided through the application of Healthaxis flexible technology, either on
a fully integrated or 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 technology
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 PPO 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 the best results. Revenue Model.The Companys revenues consist primarily of software-use
license fees, transaction fees and professional services. These revenue
sources are described below. A significant portion of the Companys revenue is based on providing
application service provider (ASP) services to our insurance, third-party
administrator and self-insured plan customers. The ASP service includes a
license to use our 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 software-use rights
with such services as imaging, data capture and retrieval, EDI and print and
mail 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 software license under the ASP arrangement and because all
revenue elements included in the collective services are typically not sold
separately, the ASP service revenues are recognized ratably over the term of
the agreement and/or as transaction services are provided. With some
exceptions, the Company has not historically sold its software for installation
on customers systems. Page 13 of 25




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In preparation for providing services under these multi-year ASP
contracts, the Company also usually contracts 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 or other revenue elements and
therefore are separate from the sale of software licenses. 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. If the ultimate achievement of customer billing
milestones is not reasonably assured, revenue recognition is discontinued until
those payment milestones have been achieved. The assumptions used for
recording revenue are adjusted in the period of change to reflect revisions.
Contracts with significant customer acceptance provisions are recognized using
the completed contract method upon achieving customer acceptance of the
completed project. The cumulative impact of any revision in estimates of the
percent complete or recognition of losses on loss contracts is generally
reflected in the period in which the changes or losses become known. The
Company currently has no contracts in progress for which contract accounting is
being applied. 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 a 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. 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 has 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. Page 14 of 25




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Goodwill The carrying value of goodwill at June 30, 2004 is $11.3 million. The
Company performs its annual impairment review during the fourth quarter of each
year or upon the occurrence of any event that indicates potential impairment.
It is possible that the carrying amount of goodwill could be effected in the
near term because of the impact that the Companys continued operating losses
could have on the estimates used by management to calculate the fair value of
the reporting units. 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. 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 for the
year ended December 31, 2003. Results of Operations Three months ended June 30, 2004 compared to three months ended June 30, 2003 (Table in thousands)Three Months Ended June 30,2004
    
    2003
    
    ChangeRevenues
    
    $
    3,894
    
    
    $
    5,483
    
    
    $
    (1,589
    )Cost of revenues
    
    
    4,024
    
    
    
    4,975
    
    
    
    951Gross profit
    
    $
    (130
    )
    
    $
    508
    
    
    $
    (638
    )% of revenue
    
    
    (3
    )%
    
    
    9
    %
 Page 15 of 25




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Revenueswere down approximately $1.6 million (29%) in the three months
ended June 30, 2004 compared to the same period in 2003. Cessation of work on
the State of Washington project, as more fully described under   Overview-
Significant Project Update above, accounted for $576,000 of the reduction.
Customers in a terminated or in a run-off stage resulted in a reduction in
recurring PEPM license fees of $146,000, while other reductions in the number
of covered lives administered by our clients was largely offset by increased
revenues from new data mining services. Transaction fee revenue decreased
$376,000 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 decreased print and
mailing revenue. This evolution was necessary to remain competitive within the
industry. Professional service fees decreased $239,000 as a result of
decreased customer dependence upon our technical staff and a decrease in the
number of one-time projects, compared to the same period in 2003. Data capture
service revenue declined $214,000 as a result of lower claims volume and, in
part, to the reduced number of lives covered by certain customers which also
use our data capture services. Cost of revenuesincludes 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
$951,000 (19%) in the three months ended June 30, 2004 compared to the same
period in 2003. Cost of revenues was 103% of revenues in 2004 compared to 91%
in 2003. Many of the components of cost of revenues are fixed expenses that
did not decline proportionately with revenue. Approximately $500,000 of the
cost decline was related to termination of the contract labor associated with
the State of Washington project, which was underway in 2003. An additional
$144,000 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 and other expenses
associated with personnel. (Table in thousands)Three Months Ended June 30,2004
    
    2003
    
    ChangeSales and marketing expense
    
    $
    341
    
    
    $
    283
    
    
    $
    58General and administrative expense
    
    
    1,106
    
    
    
    837
    
    
    
    269Research and development expense
    
    
    
    
    
    
    
    
    
    
    Amortization of intangibles
    
    
    252
    
    
    
    324
    
    
    
    (72
    )Interest and other income, net
    
    
    13
    
    
    
    22
    
    
    
    (9
    )Interest expense
    
    
    (61
    )
    
    
    (19
    )
    
    
    (42
    )
 Sales and marketing expensesconsist primarily of employee salaries and
related benefits, as well as promotional costs such as direct mailing
campaigns, trade shows and media advertising. Company wide sales and
marketing expenses increased $58,000 (20%) in the three months ended June 30,
2004 compared to the same quarter of 2003. The increase is primarily due to
additional personnel expenses related to sales and marketing management and
staff additions in early 2004. General and administrative expensesinclude executive management,
accounting, legal and human resources compensation and related benefits, as
well as expenditures for applicable overhead costs. These expenses increased
$269,000 (32%) in the three months ended June 30, 2004 compared to the same
quarter of 2003. The increase was primarily due to the $92,000 settlement on
of the State of Washington project and $341,000 of legal and other professional
fees associated with the preferred stock transaction, partially offset by
approximately $60,000 in personnel savings. Page 16 of 25




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Amortization of intangiblesincludes the amortization of developed
software and customer base acquired in the January 2001 Healthaxis merger.
These expenses were reduced $72,000 (22%) in the three months ended June 30,
2004 compared to the same quarter of 2003, as the developed software was fully
amortized in January 2004. Interest and other income, netdecreased slightly from the same quarter of
2003 due primarily to lower balances on notes receivable resulting from the
normal course of collections. Interest expenseincreased $42,000 (221%) in the three months ended June
30, 2004 compared to the same quarter 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. Six months ended June 30, 2004 compared to six months ended June 30, 2003 (Table in thousands)Six Months Ended June 30,2004
    
    2003
    
    ChangeRevenues
    
    $
    8,143
    
    
    $
    10,714
    
    
    $
    (2,571
    )Cost of revenues
    
    
    8,377
    
    
    
    10,072
    
    
    
    (1,695
    )Gross profit
    
    $
    (234
    )
    
    $
    642
    
    
    $
    (876
    )% of revenue
    
    
    (3
    )%
    
    
    6
    %
 Revenueswere down approximately $2.6 million (24%) in the six months
ended June 30, 2004 compared to the same period in 2003. Cessation of work on
the State of Washington project, as more fully described under   Overview-
Significant Project Update above, accounted for $946,000 of the reduction.
Recurring PEPM license fee revenue declined $308,000 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 services. Transaction fee revenue
decreased $468,000 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
decreased print and mailing revenue. This evolution was necessary to remain
competitive within the industry. Professional service fees decreased $427,000
as a result of decreased customers dependence upon our technical staff and to
a decrease in the number of one-time projects, as compared to the same period
in 2003. Data capture service revenue declined $385,000 as a result of lower
claims volume and due, in part, to the reduced number of covered lives in
certain customers which also use our data capture services. Cost of revenuesdeclined $1.7 million (17%) in the six months ended June
30, 2004 compared to the same period in 2003. Cost of revenues was 103% of
revenues in 2004 compared to 94% in 2003. Approximately $785,000 of the cost
decline was related to termination of the contract labor associated with the
State of Washington project, which was underway in 2003. An additional
$352,000 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 and other expenses
associated with personnel. Page 17 of 25




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(Table in thousands)Six Months Ended June 30,2004
    
    2003
    
    ChangeSales and marketing expense
    
    $
    634
    
    
    $
    538
    
    
    $
    (96
    )General and administrative expense
    
    
    2,074
    
    
    
    1,746
    
    
    
    (328
    )Research and development expense
    
    
    
    
    
    
    30
    
    
    
    30Amortization of intangibles
    
    
    528
    
    
    
    648
    
    
    
    120Interest and other income, net
    
    
    40
    
    
    
    52
    
    
    
    12Interest expense
    
    
    (125
    )
    
    
    (38
    )
    
    
    (87
    )
 Sales and marketing expensesincreased $96,000 (18%) in the six months
ended June 30, 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. General and administrative expensesincreased $328,000 (19%) in the six
months ended June 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 $373,000 of legal and other professional fees associated with the
preferred stock transaction , partially offset by lower personnel and insurance
costs totaling $90,000 plus other smaller cost reductions. Research and development expenseswere reduced to zero in the six months
ended June 30, 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 intangibleswas reduced $120,000 (19%) in the six months
ended June 30, 2004 compared to the same period of 2003, as the developed
software was fully amortized in January 2004. Interest and other income, netdecreased slightly from the same period in
2003 due primarily to lower balances on notes receivable resulting from the
normal course of collections. Interest expenseincreased $87,000 (229%) in the six months ended June 30,
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. Liquidity and Capital Resources Overview of Cash Resources A major objective of Healthaxis is to maintain sufficient liquidity to
fund growth and meet all cash requirements with cash and short-term equivalents
on hand plus funds generated from operating cash flow. We believe that our
current cash reserves and the cash generated by future operations will be
sufficient to fund operations for at least the next 12 months. Funding
operations on a longer-term basis will depend upon our ability to continue
controlling costs, maintain existing customer relationships, and generate new
revenues. Analysis of Cash Flows Cash used in operating activitiesfor the six months ended June 30, 2004
was approximately $1.2 million as compared to $554,000 for the same period in
2003, an increase of $599,000. The increase in cash used was Page 18 of 25




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primarily due to a $1.2 million increase in the net loss and a $462,000
reduction in depreciation expenses from 2003 due, partially offset by an
improvement in working capital of $1.2 million. Cash used in investing activitiesfor the six months ended June 30, 2004
was $354,000 as compared to $324,000 for the same period in 2003, a nominal
increase of $30,000. 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. Cash used in financing activitiesfor the six months ended June 30, 2004
was $524,000 as compared to $237,000 for the same period in 2003, for an
increase of $287,000. The increased use of cash was due primarily to payments
on the note payable to UICI related to the repurchase of all of their
Healthaxis securities on September 30, 2003. See Repurchase of Securities
Held by UICI and Reducing Conversion Price of Series A Convertible Preferred
Stock below. Preferred Stock On June 30, 2004, Healthaxis consummated a transaction modifying the terms
of its Series A Convertible preferred stock and resulting in 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 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 are
convertible and with respect to which the warrants are exercisable represent
approximately 55% of our common stock on a fully diluted basis as of June 30,
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 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-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. To the extent that the preferred stock is entitled to vote under
applicable law, which may occur should the Company decide to pursue certain
types of mergers or consolidations, 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 Page 19 of 25




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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. The agreements require Healthaxis to register for resale the shares of
common stock issuable upon conversion of the preferred stock or exercise of the
warrants, but 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. Repurchase of Securities Held by UICI and Reducing Conversion Price 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 48.3% 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%. The
promissory note will be 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 three-month period ended June 30, 2004, the Company paid
UICI an aggregate of $157,000 under the promissory note. As of June 30,
2004, the balance due under the promissory note is $3.0 million, of which
$617,000 is classified as short-term. Lease and Other Commitments Healthaxis also has certain capital and operating lease commitments over
the next five years. These leases are primarily for office space and data
processing equipment. Healthaxis has no other significant cash commitments
other than those required by the normal day-to-day operations of its business. Recently Adopted Accounting Pronouncements See Note B to the Condensed Consolidated Financial Statements herein for a
discussion of the impact on the Companys financial statements of new
accounting standards. Page 20 of 25




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##### Table of Contents



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 old preferred stock was fixed at 2%, while the
dividend rate on our new preferred stock as described in Note H above, 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. Page 21 of 25




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##### Table of Contents



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.
    Changes in 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. The Annual Meeting of the Common Shareholders of Healthaxis Inc. was held on
June 30, 2004 in Irving, Texas for the purpose of considering and acting upon
the following: SharesShares
    
    Percentage
    
    Voted
    
    Shares
    
    BrokerProposal
    
    Voted For
    
    Voted For
    
    Against
    
    Abstained
    
    Non-Votes#1 Approval of the
issuance of new shares
relating to the
modification of the
Series A Preferred Stock
and grant of related
Warrants
    
    
    953,994
    
    
    
    91
    %
    
    
    93,010
    
    
    
    5,572
    
    
    
    #2 Election of Directors:Michael Ashker
    
    
    2,583,213
    
    
    
    97
    %
    
    
    72,695
    
    
    
    
    
    
    
    James J. Byrne
    
    
    2,615,325
    
    
    
    98
    %
    
    
    40,583
    
    
    
    
    
    
    
    John W. Coyle
    
    
    2,597,914
    
    
    
    98
    %
    
    
    57,994
    
    
    
    
    
    
    
    Thomas L. Cunningham
    
    
    2,597,864
    
    
    
    98
    %
    
    
    58,044
    
    
    
    
    
    
    
    Adam J. Gutstein
    
    
    2,450,575
    
    
    
    92
    %
    
    
    205,333
    
    
    
    
    
    
    
    Kevin F. Hickey
    
    
    2,303,203
    
    
    
    87
    %
    
    
    352,705
    
    
    
    
    
    
    
    James W. McLane
    
    
    2,627,114
    
    
    
    99
    %
    
    
    28,794
    
    
    
    
    
    
    
    # 3 Ratification of
Ernst & Young LLP
    
    
    2,598,018
    
    
    
    98
    %
    
    
    55,270
    
    
    
    2,620
    
    
    
    
  Item 5.
    Other Information. Not Applicable. Page 22 of 25




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##### Table of Contents



Item 6.
    Exhibits and Reports on Form 8-K. (a)
    
    Exhibits(10.1
    )
    
    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)(10.2
    )
    
    Amended and Restated Certificate of Designation of
Series A Convertible Preferred Stock, dated as of June 30,
2004(10.3
    )
    
    Investor Rights Agreement dated as of June 30, 2004
between Healthaxis Inc. and certain Preferred Stockholders(10.4
    )
    
    Registration Rights Agreement dated as of June 30, 2004
between Healthaxis Inc. and certain Preferred Shareholders(10.5
    )
    
    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).(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, filed herewith.(b)
    
    Reports on Form 8-K:
 The Company furnished/filed a current report on Form 8-K on May
12, 2004, in which it disclosed, under Item 12, a press release
dated May 12, 2004, announcing the first quarter 2004 financial
results; and under Item 5, an agreement with its four Series A
Convertible Preferred Stock shareholders subject to certain
conditions including approval by the holders of the Companys
common stock. The Company furnished a current report on Form 8-K on June 1, 2004, in which it
disclosed, under Item 9, the resolution of a dispute with the State of
Washington Health CareAuthority. Page 23 of 25




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##### Table of Contents



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: August 12, 2004
    
    By: /s/ James W. McLaneJames W. McLane, President and Chief
Executive Officer (Principal Executive
Officer)By: /s/ John CarradineJohn Carradine, Chief Financial Officer
(Principal Financial Officer) and
Treasurer
 Page 24 of 25




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##### Table of Contents



Exhibit Index (10.1)
    
    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)(10.2)
    
    Amended and Restated Certificate of Designation of
Series A Convertible Preferred Stock, dated as of June 30,
2004(10.3)
    
    Investor Rights Agreement dated as of June 30, 2004
between Healthaxis Inc. and certain Preferred Stockholders(10.4)
    
    Registration Rights Agreement dated as of June 30, 2004
between Healthaxis Inc. and certain Preferred Shareholders(10.5)
    
    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).(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, filed herewith.
 Page 25 of 25