##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 OR [ ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934
 For the transition period from _________ to ________ Commission file number 0-13591 HEALTHAXIS INC.  Pennsylvania
(State or other jurisdiction of
incorporation or organization)
    
    23-2214195
(I.R.S. Employer
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. 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 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 November 5, 2004. Page 1 of 27




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Healthaxis Inc. Table of Contents PagePART I Financial InformationItem 1. Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to 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
    
    
    22Signatures
    
    
    23Exhibit Index
    
    
    24Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO and CFO Pursuant to Section 906
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PART I. FINANCIAL INFORMATION 
 Item 1. Consolidated Financial Statements Healthaxis Inc. and Subsidiaries 
 Consolidated Balance Sheets
  September 30,
    
    December 31,2004
    
    2003UnauditedAssetsCurrent assets:Cash and cash equivalents
    
    $
    4,411
    
    
    $
    7,887Accounts receivable, net of allowance for doubtful accounts of $53 and $44, respectively
    
    
    2,563
    
    
    
    3,077Prepaid expenses and other current assets
    
    
    744
    
    
    
    605Notes receivable, current portion
    
    
    23
    
    
    
    124Total current assets
    
    
    7,741
    
    
    
    11,693Property, equipment and software, less accumulated depreciation and
amortization of $10,387 and $9,952, respectively
    
    
    1,050
    
    
    
    1,238Contract start-up costs, less accumulated amortization of $1,049 and $704, respectively
    
    
    685
    
    
    
    759Capitalized software, less accumulated amortization of $2,641 and $2,199, respectively
    
    
    706
    
    
    
    990Customer base, less accumulated amortization of $3,878 and $3,121, respectively
    
    
    336
    
    
    
    1,093Goodwill
    
    
    11,276
    
    
    
    11,276Notes receivable
    
    
    23
    
    
    
    Other assets
    
    
    45
    
    
    
    65Total assets
    
    $
    21,862
    
    
    $
    27,114Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,280
    
    
    $
    981Accrued liabilities
    
    
    609
    
    
    
    795Deferred revenues
    
    
    898
    
    
    
    888Notes payable, current portion
    
    
    627
    
    
    
    599Total current liabilities
    
    
    3,414
    
    
    
    3,263Notes payable
    
    
    2,211
    
    
    
    2,697Post retirement and employment liabilities
    
    
    929
    
    
    
    940Other liabilities
    
    
    1,418
    
    
    
    1,467Total liabilities
    
    
    7,972
    
    
    
    8,367Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, par value $1.00: authorized 100,000,000 shares:Series A Convertible, 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
    
    
    443,539
    
    
    
    441,464Accumulated deficit
    
    
    (433,776
    )
    
    
    (428,893
    )Total stockholders equity
    
    
    13,890
    
    
    
    18,747Total liabilities and stockholders equity
    
    $
    21,862
    
    
    $
    27,114
 See notes to unaudited consolidated financial statements. Page 3 of 27




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Healthaxis Inc. and Subsidiaries 
 Consolidated Statements of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    3,942
    
    
    $
    5,352
    
    
    $
    12,085
    
    
    $
    16,066Expenses:Costs of revenue
    
    
    3,827
    
    
    
    4,797
    
    
    
    12,204
    
    
    
    14,869Sales and marketing
    
    
    377
    
    
    
    224
    
    
    
    1,011
    
    
    
    762General and administrative
    
    
    764
    
    
    
    804
    
    
    
    2,838
    
    
    
    2,550Research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Amortization of intangibles
    
    
    252
    
    
    
    324
    
    
    
    780
    
    
    
    972Total expenses
    
    
    5,220
    
    
    
    6,149
    
    
    
    16,833
    
    
    
    19,183Operating loss
    
    
    (1,278
    )
    
    
    (797
    )
    
    
    (4,748
    )
    
    
    (3,117
    )Interest income and other income, net
    
    
    11
    
    
    
    22
    
    
    
    51
    
    
    
    74Interest expense
    
    
    (61
    )
    
    
    (19
    )
    
    
    (186
    )
    
    
    (57
    )Net loss
    
    
    (1,328
    )
    
    
    (794
    )
    
    
    (4,883
    )
    
    
    (3,100
    )Less: Preferred stock cash dividends
    
    
    
    
    
    
    (354
    )
    
    
    
    
    
    
    (586
    )Add: Carrying amount of preferred stock over fair value of consideration transferred
    
    
    
    
    
    
    
    
    
    
    261
    
    
    
    Net loss attributable to common shareholders
    
    $
    (1,328
    )
    
    $
    (1,148
    )
    
    $
    (4,622
    )
    
    $
    (3,686
    )Net loss per share of common stock (basic and
diluted)
    
    $
    (0.48
    )
    
    $
    (0.22
    )
    
    $
    (1.67
    )
    
    $
    (0.69
    )Weighted average common shares used in
computing loss per shareBasic and diluted
    
    
    2,768,291
    
    
    
    5,325,794
    
    
    
    2,768,138
    
    
    
    5,350,373
 See notes to unaudited consolidated financial statement Page 4 of 27




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Healthaxis Inc. and Subsidiaries 
 Consolidated Statements of Cash Flows
  Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (4,883
    )
    
    $
    (3,100
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    1,979
    
    
    
    2,626Bad debt reserve
    
    
    9
    
    
    
    51Loss on disposal of fixed assets
    
    
    
    
    
    
    8Stock option compensation
    
    
    24
    
    
    
    26Change in:Accounts receivable
    
    
    505
    
    
    
    (54
    )Prepaid expenses and other current assets
    
    
    (139
    )
    
    
    (189
    )Costs in excess of billings
    
    
    
    
    
    
    (588
    )Other assets
    
    
    20
    
    
    
    70Accounts payable and accrued liabilities
    
    
    336
    
    
    
    446Deferred revenues
    
    
    10
    
    
    
    (498
    )Other liabilities
    
    
    (60
    )
    
    
    214Net cash used in operating activities
    
    
    (2,199
    )
    
    
    (988
    )Cash flows from investing activitiesCollection on notes receivable
    
    
    78
    
    
    
    149Capitalized software and contract start-up costs
    
    
    (429
    )
    
    
    (371
    )Purchases of property, equipment and software
    
    
    (247
    )
    
    
    (623
    )Other
    
    
    
    
    
    
    8Net cash used in investing activities
    
    
    (598
    )
    
    
    (837
    )Cash flows from financing activitiesPayment of preferred stock dividends
    
    
    (223
    )
    
    
    (705
    )Payment to UICI for stock and warrants
    
    
    
    
    
    
    (500
    )Payments on note payable to UICI
    
    
    (458
    )
    
    
    Other
    
    
    2
    
    
    
    Net cash used in financing activities
    
    
    (679
    )
    
    
    (1,205
    )Decrease in cash and cash equivalents
    
    
    (3,476
    )
    
    
    (3,030
    )Cash and cash equivalents, beginning of period
    
    
    7,887
    
    
    
    11,380Cash and cash equivalents, end of period
    
    $
    4,411
    
    
    $
    8,350
 See notes to unaudited consolidated financial statement Page 5 of 27




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Healthaxis Inc. and Subsidiaries 
 Notes to Unaudited Consolidated Financial Statements
 September 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 nine-month period ended September 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 claims
related 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
claims related 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, as well as 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 routing 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 the best results. 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
6,082,159 and 2,571,902 as of September 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 27




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As of September 30,2004
    
    2003Options
    
    
    1,103,087
    
    
    
    954,753Warrants
    
    
    1,129,072
    
    
    
    192,891Preferred stock
    
    
    0
    
    
    
    1,424,258Preferred stock  new
    
    
    3,850,000
    
    
    
    0Total common shares if converted
    
    
    6,082,159
    
    
    
    2,571,902
 Stock-Based Compensation The Company has elected to continue to utilize the accounting method
prescribed by APB Opinion No. 25 Accounting for Stock Issued to Employees
(APB 25), and provide the disclosure requirements of SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS
148). Although the Company selected an accounting policy which requires only
the excess of the market value of its common stock over the exercise price of
options granted to be recorded as compensation expense (intrinsic method), pro
forma information regarding net loss is required as if the Company had
accounted for its employee stock options under the fair value method of SFAS
123. Pro forma net loss applicable to the option granted is not likely to be
representative of the effects on reported net loss for future years. The fair
value for these options is estimated at the date of grant using a Black-Scholes
option pricing model. Stock compensation determined under the intrinsic method
is recognized over the vesting period using the straight-line method. Had compensation cost for the Companys stock option grants been
determined based on the fair value at the date granted in accordance with the
provisions of SFAS 123, the Companys net loss and net loss per common share
would have been increased to the following pro forma amounts: (Table in thousands, except per share data)Three Months Ended Sept. 30,
    
    Nine months Ended Sept. 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (1,328
    )
    
    $
    (794
    )
    
    $
    (4,883
    )
    
    $
    (3,100
    )Effect of dividends on preferred stock
    
    
    
    
    
    
    (354
    )
    
    
    261
    
    
    
    (586
    )Stock based compensation expense recorded
under the intrinsic value method
    
    
    6
    
    
    
    8
    
    
    
    24
    
    
    
    26Pro forma stock based compensation expense
computed under the fair value method
    
    
    (307
    )
    
    
    (407
    )
    
    
    (949
    )
    
    
    (1,243
    )Pro forma net loss
    
    $
    (1,629
    )
    
    $
    (1,547
    )
    
    $
    (5,547
    )
    
    $
    (4,903
    )Loss per share of common stock, basic and
dilutedAs reported
    
    $
    (0.48
    )
    
    $
    (0.22
    )
    
    $
    (1.67
    )
    
    $
    (0.69
    )Pro forma
    
    $
    (0.59
    )
    
    $
    (0.29
    )
    
    $
    (2.00
    )
    
    $
    (0.92
    )
 The Company granted 1,850 options in the third quarter 2004. 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 three years,
expected stock volatility of 69% and risk free interest rates ranging from
2.75% to 3.09%. The weighted-average grant-date fair value of options granted
is $1.02. Page 7 of 27




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Goodwill The carrying value of goodwill at September 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. 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 adoption of the Statement did not 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 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 Sept 30
    
    Nine months Ended Sept 302004
    
    2003
    
    2004
    
    2003Interest cost
    
    $
    13
    
    
    $
    18
    
    
    $
    40
    
    
    $
    47Transition obligation amortization
    
    
    15
    
    
    
    15
    
    
    
    44
    
    
    
    43Net post retirement expense
    
    $
    28
    
    
    $
    33
    
    
    $
    84
    
    
    $
    90
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Note D  Repurchase of Securities Held by UICI Inc. and Reducing Conversion
Price of Series A Convertible Preferred Stock On September 30, 2003, the Company purchased all Healthaxis securities
held by UICI Inc. (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 September 30, 2004, the balance due under the
promissory note is $2.8 million (of which, $627,000 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 September 30, 2004 and 2003, each of four
customers represented greater than 10% of revenues, totaling $2.4 million (62%)
and $2.9 million (55%), respectively, of the Companys total revenues. For the
nine months ended September 30, 2004 and 2003, these four customers accounted
for $7.6 million (63%) and $8.8 million (55%), respectively, of the Companys
total revenues. At September 30, 2004 and December 31, 2003, one customer
accounted for $776, 000 (30%) and $965,000 (31%) of the Companys accounts
receivable, respectively. Note F  Other Liabilities and Contingencies Other liabilities include $1.3 million of contingent tax liabilities at
September 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. For the three months ended September 30, 2004 and 2003, UICI and its
subsidiaries and affiliates accounted for $376, 000 (10%) and $487,000 (9%),
respectively, of the Companys revenues. For the nine months ended September
30, 2004 and 2003, UICI and its subsidiaries and affiliates accounted for $1.2
million (10%) and $1.4 million (9%), respectively, of the Companys revenues.
As of September 30, 2004, Healthaxis had accounts receivable due from UICI and
its subsidiaries and affiliates totaling $107,000, which represented 4% of the
Companys total accounts receivable. The accounts receivable from UICI are
current under the terms and conditions of contract payment. Page 9 of 27




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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 providing for the
issuance to its preferred shareholders of warrants to purchase shares of the
Companys common stock. Under the terms of the agreements with the preferred
shareholders, shares of the preferred stock (new) 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 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 is entitled to vote separately as a
class in certain instances, including in the event of a merger or consolidation
that would effect some types of changes in the Page 10 of 27




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Companys articles of incorporation. To the extent that applicable law
entitles the new preferred stock to vote on a given merger or consolidation
transaction prior to June 30, 2005 the preferred shareholders have agreed to
vote their shares in favor of such a merger or consolidation if the common
shareholders have approved the merger or consolidation and the per share price
to be received by the preferred shareholders in the merger or consolidation is
at least $3.50 in cash for each share of preferred stock. If the Company
pursues a merger or consolidation on or after June 30, 2005, the preferred
shareholders have agreed to vote their shares in favor of the merger or
consolidation if the common shareholders approve the merger or consolidation
and if the per share price to be received by the preferred shareholders in the
merger or consolidation for each share of preferred stock is at least equal to
what they would have received in the merger or consolidation if they had
converted their shares of preferred stock into shares of common stock
immediately prior to the merger or consolidation. 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 filed a Form S-3 Registration Statement on September 2, 2004 to
register for resale the shares of common stock issuable upon conversion of the
preferred stock or exercise of the warrants. On October 28, 2004 the
Securities and Exchange Commission declared the Registration Statement
effective. The Company 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 a 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. 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 both three-month periods ending September 30,
2004 and 2003, the Company earned no revenue from HCA. For the nine months
ended September 30, 2004 and 2003, HCA accounted for $0 and $946,000 (6%),
respectively, of the Companys revenues. Page 11 of 27




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The Company was the prime contractor on the HCA project and utilized the
services of an offshore development partner to perform a significant part of
the work. 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 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 27




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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 routing 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 the best results. 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. 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 benefits administration and claims processing software,
including hosting, maintenance and Page 13 of 27




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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, and PPO routing and repricing 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 benefits administration and claims processing software
for installation on customers systems. 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 an offshore
development partner to perform a significant part of the work. Also, as
previously disclosed, a dispute arose under the HCA contract in late 2003,
which has now been resolved by the Company and HCA entering into an agreement
to terminate the HCA contract. The Company has also simultaneously entered into
a cancellation agreement with its development partner canceling and terminating
its master software services agreement with the development partner and the
work order associated with subcontracted portions of the HCA project. 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 Page 14 of 27




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mutual releases between Healthaxis and the development partner, and an express
denial of liability or wrongdoing by either party. The Company entered into these agreements solely to avoid the potential
time and cost of dispute resolution. The execution and funding of these
agreements, which occurred in the second quarter of 2004, resolves all
outstanding issues related to the HCA project. The net impact of these
transactions is included in general and administrative expense in the
accompanying condensed consolidated statement of operations. Goodwill The carrying value of goodwill at September 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 September 30, 2004 compared to three months ended September 30, 2003 (Table in thousands)Three Months Ended Sept. 30,2004
    
    2003
    
    ChangeRevenues
    
    $
    3,942
    
    
    $
    5,352
    
    
    $
    (1,410
    )Cost of revenues
    
    
    3,827
    
    
    
    4,797
    
    
    
    970Gross profit
    
    $
    115
    
    
    $
    555
    
    
    $
    (440
    )% of revenue
    
    
    3
    %
    
    
    10
    %
 Page 15 of 27




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Revenueswere down approximately $1.4 million (26%) in the three months
ended September 30, 2004 compared to the same period in 2003. Cessation of
work on the ACS/State of Georgia project accounted for $584,000 of the
reduction. Recurring PEPM license fee revenue declined $278,000 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 $188,000 primarily as a result of the
decreased number of covered lives. Professional service fees decreased
$172,000 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 $133,000 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
$970,000 (20%) in the three months ended September 30, 2004 compared to the
same period in 2003. Cost of revenues was 97% of revenues in the 2004 period
compared to 90% in the 2003 period. Many of the components of cost of revenues
are fixed expenses that did not decline proportionately with revenue.
Approximately $294,000 of the cost decline was related to termination of
contract labor, primarily associated with the ACS/State of Georgia project,
which was underway in 2003. Approximately $244,000 was due to lower personnel
costs resulting from staff reductions and another $244,000 was due to lower
vendor costs directly associated with a reduction in transaction and license
fee revenue. An additional $111,000 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. (Table in thousands)Three Months Ended Sept 30,2004
    
    2003
    
    ChangeSales and marketing expense
    
    $
    377
    
    
    $
    224
    
    
    $
    153General and administrative expense
    
    
    764
    
    
    
    804
    
    
    
    (40
    )Research and development expense
    
    
    
    
    
    
    
    
    
    
    Amortization of intangibles
    
    
    252
    
    
    
    324
    
    
    
    (72
    )Interest and other income, net
    
    
    11
    
    
    
    22
    
    
    
    (11
    )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 $153,000 (68%) in the three months ended September
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 decreased
$40,000 (5%) in the three months ended September 30, 2004 compared to the same
quarter of 2003 due primarily to lower personnel costs. 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 September
30, 2004 compared to the same quarter of 2003, as the acquired developed
software was fully amortized in January 2004. Page 16 of 27




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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
September 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. Nine months ended September 30, 2004 compared to nine months ended September 30, 2003 (Table in thousands)Nine months Ended Sept 30,2004
    
    2003
    
    ChangeRevenues
    
    $
    12,085
    
    
    $
    16,066
    
    
    $
    (3,981
    )Cost of revenues
    
    
    12,204
    
    
    
    14,869
    
    
    
    2,665Gross profit
    
    $
    (119
    )
    
    $
    1,197
    
    
    $
    (1,316
    )% of revenue
    
    
    (1
    )%
    
    
    7
    %
 Revenueswere down approximately $4.0 million (25%) in the nine months
ended September 30, 2004 compared to the same period in 2003. Cessation of
work on the ACS/State of Georgia project and the State of Washington project
accounted for $1.5 million of the reduction. Recurring PEPM license fee
revenue declined $587,000 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 $657,000 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 $599,000 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 $518,000 as a result of lower claims volume and due to
the reduced number of covered lives in certain customers which also use our
data capture services. Cost of revenuesdeclined $2.7 million (18%) in the nine months ended
September 30, 2004 compared to the same period in 2003. Cost of revenues was
101% of revenues in the 2004 period compared to 93% in the 2003 period.
Approximately $1.1 million of the cost decline was related to termination of
contract labor, primarily associated with the ACS/State of Georgia and the
State of Washington projects, which were underway in 2003. An additional
$464,000 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. Approximately $342,000 of the savings was
due to lower vendor costs directly associated with a reduction in transaction
revenue. The remaining reduction was largely the result of lower costs for
salary, benefits, travel and other expenses associated with personnel. Page 17 of 27




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(Table in thousands)Nine months Ended Sept 30,2004
    
    2003
    
    ChangeSales and marketing expense
    
    $
    1,011
    
    
    $
    762
    
    
    $
    249General and administrative expense
    
    
    2,838
    
    
    
    2,550
    
    
    
    288Research and development expense
    
    
    
    
    
    
    30
    
    
    
    (30
    )Amortization of intangibles
    
    
    780
    
    
    
    972
    
    
    
    (192
    )Interest and other income, net
    
    
    51
    
    
    
    74
    
    
    
    (23
    )Interest expense
    
    
    (186
    )
    
    
    (57
    )
    
    
    129
 Sales and marketing expensesincreased $249,000 (33%) in the nine months
ended September 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 $288,000 (11%) in the nine
months ended September 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 $452,000 of legal, accounting and other professional
fees primarily associated with the preferred stock transaction. These cost
increases were partially offset by lower personnel and insurance costs totaling
$155,000 plus other smaller cost reductions. Research and development expenseswere reduced to zero in the nine months
ended September 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 $192,000 (20%) in the nine months
ended September 30, 2004 compared to the same period of 2003, as the acquired
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 $129,000 (226%) in the nine months ended
September 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 At September 30, 2004, our cash and cash equivalents amounted to $4.4
million. We have experienced repeated losses, with the result that our cash
resources have declined. The Companys focus is on positive cash generation.
We are taking further measures to address our liquidity needs, including
increasing our marketing and sales efforts, implementing further productivity
improvements and seeking new sources of capital. No assurance can be given
that any or all of these initiatives will prove successful. We believe that
the Company will maintain sufficient liquidity to fund operations for at least
the next 12 months. In the event that we are unable to maintain or increase
our revenues, or effectively reduce our expenses to a level commensurate with
our revenues, or raise additional capital, then our business would likely be
adversely affected. To the extent that we are successful in raising additional
capital to fund the Companys organic and strategic growth through the issuance
of equity securities, our shareholders could experience significant dilution. Page 18 of 27




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Analysis of Cash Flows Cash used in operating activitiesfor the nine months ended September 30,
2004 was approximately $2.2 million as compared to $988,000 for the same period
in 2003, an increase of $1.2 million. The increase in cash used was primarily
due to a $1.8 million increase in the net loss and a $647,000 reduction in
depreciation expenses from 2003, partially offset by an improvement in working
capital of $1.3 million. Cash used in investing activitiesfor the nine months ended September 30,
2004 was $598,000 as compared to $837,000 for the same period in 2003, a
decrease of $239,000 due to less spending on property, equipment, and software.
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 nine months ended September 30,
2004 was $679,000 as compared to $1.2 million for the same period in 2003, for
a decrease of $526, 000. The decreased use of cash was due primarily to a
$482,000 reduction in payments on preferred stock dividends resulting from
amending and restating the terms of the preferred stock agreements. See
Preferred Stock below. The initial payment to UICI for purchasing
Healthaxis stock and warrants in 2003 was balanced to a significant degree in
2004 by payments on the note payable to UICI related the same transaction. See
Repurchase of Securities Held by UICI and Reducing Conversion Price of Series
A Convertible Preferred Stock below. Preferred Stock Previously, the Companys Series A Convertible preferred stock (old) had
a stated value of $22.1 million and was convertible into 1,424,258 shares of
Healthaxis common stock at a conversion price of $15.50 per share. The terms
of the preferred stock provided that cumulative dividends be paid at the rate
of 2%, or approximately $442,000 per year, payable semi-annually. In general,
the Company could have paid the dividends either in cash or by issuing shares
of common stock, although in some circumstances it was required to pay cash
dividends. The terms of the preferred stock provided that in some situations
the holders of the preferred stock could have forced Healthaxis to buy back
their shares. The Company believed that the occurrence of the situations where
it could be required to buy back shares of preferred stock was within its
control. The preferred stock also contained, among other things, provisions
providing the holders a preference in the payment of dividends and also a
liquidation preference equal to at least the stated value of the preferred
stock plus all accrued but unpaid dividends. The holders of the preferred
stock did not have general voting rights, although they did have the right to
vote separately as a class in connection with some matters. Healthaxis entered into a Preferred Stock Modification Agreement on May
12, 2004. On June 30, 2004, Healthaxis consummated a transaction modifying the
terms of its Series A Convertible preferred stock and providing for the
issuance to its preferred shareholders of warrants to purchase shares of the
Companys common stock. Under the terms of the agreements with the preferred
shareholders, 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. Page 19 of 27




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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 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 is entitled to vote separately as a
class in certain instances, including in the event of a merger or consolidation
that would effect some types of changes in the Companys articles of
incorporation. To the extent that applicable law entitles the new preferred
stock to vote on a given merger or consolidation transaction prior to June 30,
2005 the preferred shareholders have agreed to vote their shares in favor of
such a merger or consolidation if the common shareholders have approved the
merger or consolidation and the per share price to be received by the preferred
shareholders in the merger or consolidation is at least $3.50 in cash for each
share of preferred stock. If the Company pursues a merger or consolidation on
or after June 30, 2005, the preferred shareholders have agreed to vote their
shares in favor of the merger or consolidation if the common shareholders
approve the merger or consolidation and if the per share price to be received
by the preferred shareholders in the merger or consolidation for each share of
preferred stock is at least equal to what they would have received in the
merger or consolidation if they had converted their shares of preferred stock
into shares of common stock immediately prior to the merger or consolidation. 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 filed a Form S-3 Registration Statement on September 2, 2004 to
register for resale the shares of common stock issuable upon conversion of the
preferred stock or exercise of the warrants. On October 28, 2004 the
Securities and Exchange Commission declared the Registration Statement
effective. 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 Page 20 of 27




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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
September 30, 2004, the Company paid UICI an aggregate of $199, 000 under
the promissory note, of which $156,000 was principal and $43,000 was interest.
As of September 30, 2004, the balance due under the promissory note is $2.8
million (of which $627, 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 to the Condensed Consolidated Financial
Statements above, the terms of the Series A preferred stock were significantly
modified on June 30, 2004. 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. 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. 
 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
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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, filed 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 12, 2004
    
    By: /s/ James W. McLaneJames W. McLane, President and ChiefExecutive 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, filed herewith.
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