##### 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 THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended. . . . . . . . . . . . . . . . .March 31, 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
(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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 2,768,292 shares of common
stock, par value $.10, outstanding as of May 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
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II Other InformationItems 1-5
    
    
    20Item 6. Exhibits and Reports on Form 8-K
    
    
    20Signatures
    
    
    21Exhibit Index
    
    
    22Certification Pursuant to Section 302Certification Pursuant to Section 302Ceritifcation Pursuant to Section 906
  Page 2 of 25




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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) March 31
    
    December 312004
    
    2003Unaudited
    
    AuditedAssetsCash and cash equivalents
    
    $
    6,794
    
    
    $
    7,887Accounts receivable, net of allowance for doubtful accounts of $48 and $44, respectively
    
    
    2,501
    
    
    
    3,077Prepaid expenses and other current assets
    
    
    692
    
    
    
    605Notes receivable
    
    
    67
    
    
    
    124Total current assets
    
    
    10,054
    
    
    
    11,693Property, equipment and software, less accumulated depreciation and
amortization of $10,117 and $9,952, respectively
    
    
    1,126
    
    
    
    1,238Contract start-up costs, less accumulated amortization of $812 and $704, respectively
    
    
    754
    
    
    
    759Capitalized software, less accumulated amortization of $2,372 and $2,199, respectively
    
    
    845
    
    
    
    990Customer base, less accumulated amortization of $3,374 and $3,121, respectively
    
    
    841
    
    
    
    1,093Goodwill
    
    
    11,276
    
    
    
    11,276Notes receivable
    
    
    23
    
    
    
    Other assets
    
    
    76
    
    
    
    65Total assets
    
    $
    24,995
    
    
    $
    27,114Liabilities and Stockholders EquityAccounts payable
    
    $
    1,114
    
    
    $
    981Accrued liabilities
    
    
    549
    
    
    
    795Deferred revenues
    
    
    843
    
    
    
    888Notes payable, current portion
    
    
    608
    
    
    
    599Total current liabilities
    
    
    3,114
    
    
    
    3,263Notes payable
    
    
    2,542
    
    
    
    2,697Post retirement and employment liabilities
    
    
    931
    
    
    
    940Other liabilities
    
    
    1,438
    
    
    
    1,467Total liabilities
    
    
    8,025
    
    
    
    8,367Commitments and contingencies
    
    
    
    
    
    
    Stockholders Equity:Preferred stock, par value $1.00: authorized 100,000,000 shares:Series A cumulative convertible, 22,076 shares issued and outstanding,
($22,076 liquidation preference)
    
    
    5,899
    
    
    
    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
    
    
    441,365
    
    
    
    441,464Accumulated deficit
    
    
    (430,571
    )
    
    
    (428,893
    )Total stockholders equity
    
    
    16,970
    
    
    
    18,747Total liabilities and stockholders equity
    
    $
    24,995
    
    
    $
    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 EndedMarch 31,
    
    March 31,2004
    
    2003Revenue
    
    $
    4,249
    
    
    $
    5,231Expenses:Cost of revenues
    
    
    4,353
    
    
    
    5,097Sales and marketing
    
    
    293
    
    
    
    255General and administrative
    
    
    968
    
    
    
    909Research and development
    
    
    
    
    
    
    30Amortization of intangibles
    
    
    276
    
    
    
    324Total expenses
    
    
    5,890
    
    
    
    6,615Operating loss
    
    
    (1,641
    )
    
    
    (1,384
    )Interest and other income, net
    
    
    27
    
    
    
    30Interest expense
    
    
    (64
    )
    
    
    (19
    )Net loss
    
    
    (1,678
    )
    
    
    (1,373
    )Preferred stock dividends
    
    
    (110
    )
    
    
    (115
    )Net loss attributable to common shareholders
    
    $
    (1,788
    )
    
    $
    (1,488
    )Net loss per share of common stock (basic and diluted)
    
    $
    (0.65
    )
    
    $
    (0.28
    )Weighted average common shares and equivalents used
in computing loss per shareBasic and diluted
    
    
    2,767,830
    
    
    
    5,365,000
 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) Three Months EndedMarch 31,
    
    March 31,2004
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (1,678
    )
    
    $
    (1,373
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    697
    
    
    
    938Bad debt reserve
    
    
    4
    
    
    
    44Stock option compensation
    
    
    9
    
    
    
    9Change in:Accounts receivable
    
    
    572
    
    
    
    (1,292
    )Prepaid expenses and other current assets
    
    
    (98
    )
    
    
    (330
    )Accounts payable and accrued liabilities
    
    
    
    
    
    
    523Deferred revenues
    
    
    (45
    )
    
    
    461Other liabilities
    
    
    (38
    )
    
    
    (28
    )Net cash used in operating activities
    
    
    (577
    )
    
    
    (1,048
    )Cash flows from investing activitiesCollection of notes receivable
    
    
    34
    
    
    
    19Investment in capitalized software and contract start-up
    
    
    (131
    )
    
    
    (104
    )Purchases of property, equipment and software
    
    
    (52
    )
    
    
    (86
    )Net cash used in investing activities
    
    
    (149
    )
    
    
    (171
    )Cash flows from financing activitiesPayment of preferred stock dividends
    
    
    (223
    )
    
    
    (237
    )Payments on note payable to UICI
    
    
    (146
    )
    
    
    Exercise of stock options
    
    
    2
    
    
    
    Net cash used in financing activities
    
    
    (367
    )
    
    
    (237
    )Decrease in cash and cash equivalents
    
    
    (1,093
    )
    
    
    (1,456
    )Cash and cash equivalents, beginning of period
    
    
    7,887
    
    
    
    11,380Cash and cash equivalents, end of period
    
    $
    6,794
    
    
    $
    9,924Supplemental disclosure of cash flow information:Interest paid
    
    $
    51
    
    
    $
    19
 See notes to consolidated financial statements. Page 5 of 25




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Healthaxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands except share and per share data)
March 31, 2003 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 three-month period ended March 31, 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) provide enhanced services to
members, employees, employers and providers at lower cost. These services are
provided through the application of Healthaxis flexible technology to legacy
systems, 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. 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 only on the weighted average number
of common shares outstanding during the respective periods, and the dilutive
effect of stock options and warrants is excluded. Diluted earnings per share
is computed to show the dilutive effect, if any, of 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 stock options,
warrants and shares issuable upon conversion of the Companys convertible
preferred stock, totaling 2,359,580 and 2,067,729 as of March 31, 2003 and 2002
respectively, into the computation of diluted earnings per share would be
anti-dilutive. Accordingly, these items have not been included in the
computation. Page 6 of 25




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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: Three Months ended March 31,2004
    
    2003Net loss, as reported
    
    $
    (1,678
    )
    
    $
    (1,373
    )Dividends on preferred stock
    
    
    (110
    )
    
    
    (115
    )Stock based compensation expense recorded
under the intrinsic value method
    
    
    9
    
    
    
    9Pro forma stock based compensation
expense computed under the fair value
method
    
    
    (281
    )
    
    
    (442
    )Pro forma net loss
    
    $
    (2,060
    )
    
    $
    (1,921
    )Loss per share of common stock, basic and diluted
as reported
    
    $
    (0.65
    )
    
    $
    (0.28
    )Pro forma
    
    $
    (0.74
    )
    
    $
    (0.36
    )
 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 the
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. Page 7 of 25




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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 In December 2003, the FASB issued a revised Statement of Financial
Accounting Standards No. 132, or SFAS 132R, Employers Disclosures about
Pensions and Other Postretirement Benefits, an Amendment of FASB Statements No.
87, 88, and 106, and a Revision of FASB Statement No. 132. This statement
revises employers disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, Employers Accounting for Pensions, No.
88, Employers Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits and No. 106, Employers Accounting
for Postretirement Benefits Other Than Pensions. The new fiscal disclosure
requirements have been included in Note 13Post Retirement and Post Employment
Liabilities and Employee Benefit Plans to the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31,
2003. The new interim disclosure requirements have been included in Note CPost
Retirement Benefits below. In December of 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) was enacted. The Act introduced a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health benefit plans that provide a benefit that meets
certain criteria. The companys postretirement plans covering retirees
currently provide certain prescription benefits to eligible participants. In
January 2004, the FASB issued FASB Staff Position (FSP) No. 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. FSP No. 106-1 permits the
sponsor of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Act and requires certain disclosures pending further consideration of the
underlying accounting issues. The company has made the one-time election to
defer accounting for the effects of the Act until authoritative guidance on the
accounting for the federal subsidy is issued. 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: Three Months Ended March 31,2004
    
    2003Interest cost
    
    $
    13
    
    
    $
    16Transition obligation amortization
    
    
    15
    
    
    
    15Net post retirement expense
    
    $
    28
    
    
    $
    31
 Under the Financial Staff Position No. 106-1 (FSP 106-1), the Company has
made a one-time election to defer recognizing the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 until
authoritative guidance on the accounting for the federal subsidy is issued. Page 8 of 25




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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 $3,900. The UICI holdings included 2,585,769 shares of
Healthaxis common stock, or 48.3 percent of the Companys outstanding common
stock; 1,424 shares of Series A Convertible Preferred Stock, or 6.1 percent of
the outstanding preferred stock; and warrants to purchase 22,240 shares of
common stock. The repurchased securities were retired. The total purchase
price of $3,900 included $500 cash at closing, and a $3,400 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. 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 March 31, 2004 and
2003, the balance due under the promissory note is $3,150 (of which $608 is
classified as short-term) and $0, respectively. 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 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 $23,500 to $22,076. Note E  Significant Customer Concentrations For the three months ended March 31, 2004 and 2003, four customers
accounted for $2,674 (63%) and $2,451 (47%), respectively, of the Companys
total revenues. At March 31, 2004 and December 31, 2003, one customer
accounted for $860 (34%) and $965 (30%) of the Companys accounts receivable,
respectively. Note F  Other Liabilities and Contingencies Other liabilities include $1,303 of contingent tax liabilities at March
31, 2004 and December 31, 2003. Healthaxis had a fixed fee 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 and
utilized the services of a development partner to perform a significant part of
the work. The Companys financial obligation to the development partner was
based on a fixed fee arrangement (a fixed percentage of the total revenue) and
did not vary, regardless of the resources expended by the development partner.
Payments to the development partner were contingent on the receipt by the
Company of payments from HCA. This project was originally targeted for
completion in June 2003. Billing under the contract was contingent upon the achievement of certain
milestones and acceptance by HCA. Revenues from the HCA contract were
recognized under the percentage of completion method of contract accounting.
Due to the uncertainty of the profit margin to be achieved from the contract,
the Company initially recognized revenue only to the extent costs were incurred
under a zero margin approach. During the third quarter of 2003, the estimated
project completion date was extended from March 2004 to June 2004. In
addition, significant additional resources were applied to the project and the
estimated total cost to complete the project increased significantly. Starting
in July 2003, the Company determined that progress to completion and revenue
under the contract would only be recognized as payment milestones were
achieved. No milestones have been formally accepted by HCA since July 2003
and, as a result, no additional revenue has been recognized since that time. On December 30, 2003, the Company received a notification from HCA stating
that the Company was in breach of the contract and claiming various damages.
The Company notified HCA that it was not in breach and Page 9 of 25




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denied all demands and claims. In January 2004, the Company received a
second letter from HCA in the nature of a formal notice and cure letter
indicating that HCA intended to terminate the contract if the Company did not
cure the alleged breaches. The Company again denied all claims and demands and
notified HCA of potential claims the Company believes it has against HCA. In late February 2004, the parties entered discussions relating to a
mutually acceptable termination of the contract and work on the project was
stopped by mutual agreement shortly thereafter. Solely to avoid the time and
cost of dispute resolution, the Company proposed a settlement but HCA declined
the proposal and subsequently requested a full or partial refund of all amounts
previously paid. The Company does not believe that it has breached its obligations to HCA,
or that HCA is entitled to any refund under the circumstances. Even if the
Company is deemed to be in breach, the contract with HCA contains a number of
provisions that substantially limit both the types and amounts of damages that
HCA may be entitled to receive. In addition, the Companys agreement with its
development partner contains an indemnification of the Company that may cover
all or a portion of any damages that may be awarded to HCA. The Company and HCA are continuing to discuss terms for a mutually
acceptable termination of the contract. Both parties have agreed to
participate in a non-binding mediation session, anticipated to take place in
mid-May, 2004. In the event these discussions are not successful, either the
Company or HCA may invoke formal dispute resolution. In the event formal
dispute resolution becomes necessary, the Company intends to vigorously defend
the claims made by HCA and will pursue all available claims it has against HCA.
The Company believes it is not possible to estimate the amount of a probable
loss, if any, that might result from some adverse aspects of the ongoing
settlement discussions or dispute resolution process. Furthermore, the Company
believes that the development partner is contractually obligated to, either
partially or wholly, indemnify the Company for any losses. However, until the
matter is settled or otherwise resolved, the full effect of the indemnification
can not be determined. As of March 31, 2004, the Company had collected $930 under the contract.
The Company took a charge of $420 in the fourth quarter of 2003 to write-off
all recorded assets and liabilities related to this project. Under the terms
of the contract between the Company and the development partner, no amounts are
due to the development partner until receipt of payments by the Company from
HCA. Therefore, the Company eliminated the amount due to the development
partner, which had been based on amounts expected to be collected from HCA.
The fourth quarter 2003 charge also included an accrual for development costs
incurred in 2004 that will not be realized. Although the ultimate disposition of this matter cannot be predicted with
certainty, it is the opinion of the Companys management that the outcome of
this matter will not have a materially adverse effect on the consolidated
financial condition of the Company, but could affect the consolidated results
of operations and cash position in a future period. 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
$3,900 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 March 31, 2004 and 2003, UICI and its
subsidiaries and affiliates accounted for $415 (10%) and $455 (9%),
respectively, of the Companys revenues. As of March 31, 2004, Healthaxis had
accounts receivable due from UICI and its subsidiaries and affiliates totaling
$146, which represented 6% of the Companys total accounts receivable. Page 10 of 25




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Note H  Subsequent Event On May 12, 2004, the Company signed an agreement with its four Series A
Convertible Preferred Stock shareholders, to amend and restate the terms of all
outstanding shares of the Companys Series A Convertible Preferred Stock. Under
the terms of the agreement, the new preferred stock would be convertible into
an aggregate of 3,850,000 shares of the Companys common stock, and warrants to
purchase up to 1,000,000 additional shares of common stock. The warrants would
have a term of 5 years and an exercise price of $5.50 per share. The new
preferred stock would have no liquidation preference, no voting rights except
as required by law, the right to receive a nominal dividend of less than $1,000
per year in the aggregate payable to the holders of the new preferred stock and
other dividends only 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. However, the new
preferred stock would be convertible into shares representing approximately 58%
of the Companys outstanding common stock on an as-converted basis. This compares to the approximately 34% of the Companys outstanding common
stock, on an as-converted basis, into which the existing Series A Convertible
Preferred Stock is convertible. After also
including the warrants and the Companys other common stock equivalents, the
new preferred stock and warrants would be convertible into, or exercisable for,
shares representing approximately 57% of the Companys fully diluted shares. The agreement would require the Company to
register the securities for resale, but would place limited restrictions on the
private sale or transferability of the securities held by the preferred
shareholders, and would restrict the number of shares of common stock into
which the new preferred stock or warrants may be sold in the public markets
below a price of $3.50 per share. The proposed transaction is subject to
certain conditions, including approval by the holders of the Companys common
stock. Further details of the proposed transactions will be contained in a
proxy statement to be filed by the Company with the Securities and Exchange
Commission seeking common shareholder approval. Page 11 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. 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 to legacy
systems, 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. 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. 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 Page 12 of 25




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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. Significant Project Update: Healthaxis had a fixed fee 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 and
utilized the services of a development partner to perform a significant part of
the work. The Companys financial obligation to the development partner was
based on a fixed fee arrangement (a fixed percentage of the total revenue) and
did not vary, regardless of the resources expended by the development partner.
Payments to the development partner were contingent on the receipt by the
Company of payments from HCA. This project was originally targeted for
completion in June 2003. Billing under the contract was contingent upon the achievement of certain
milestones and acceptance by HCA. Revenues from the HCA contract were
recognized under the percentage of completion method of contract accounting.
Due to the uncertainty of the profit margin to be achieved from the contract,
the Company initially recognized revenue only to the extent costs were incurred
under a zero margin approach. During the third quarter of 2003, the estimated
project completion date was extended from March 2004 to June 2004. In
addition, significant additional resources were applied to the project and the
estimated total cost to complete the project increased significantly. Starting
in July 2003, the Company determined that progress to completion and revenue
under the contract would only be recognized as payment milestones were
achieved. No milestones have been formally accepted by HCA since July 2003
and, as a result, no additional revenue has been recognized since that time. On December 30, 2003, the Company received a notification from HCA stating
that the Company was in breach of the contract and claiming various damages.
The Company notified HCA that it was not in breach and denied all demands and
claims. In January 2004, the Company received a second letter from HCA in the
nature of a formal notice and cure letter indicating that HCA intended to
terminate the contract if the Company did not cure the alleged breaches. The
Company again denied all claims and demands and notified HCA of potential
claims the Company believes it has against HCA. In late February 2004, the parties entered discussions relating to a
mutually acceptable termination of the contract and work on the project was
stopped by mutual agreement shortly thereafter. Solely to avoid the time and Page 13 of 25




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cost of dispute resolution, the Company proposed a settlement but HCA
declined the proposal and subsequently requested a full or partial refund of
all amounts previously paid. The Company does not believe that it has breached its obligations to HCA,
or that HCA is entitled to any refund under the circumstances. Even if the
Company is deemed to be in breach, the contract with HCA contains a number of
provisions that substantially limit both the types and amounts of damages that
HCA may be entitled to receive. In addition, the Companys agreement with its
development partner contains an indemnification of the Company that may cover
all or a potion of any damages that may be awarded to HCA. The Company and HCA are continuing to discuss terms for a mutually
acceptable termination of the contract. Both parties have agreed to
participate in a non-binding mediation session, anticipated to take place in
mid-May, 2004. In the event these discussions are not successful, either the
Company or HCA may invoke formal dispute resolution. In the event formal
dispute resolution becomes necessary, the Company intends to vigorously defend
the claims made by HCA and will pursue all available claims it has against HCA.
The Company believes it is not possible to estimate the amount of a probable
loss, if any, that might result from some adverse aspects of the ongoing
settlement discussions or dispute resolution process. Furthermore, the Company
believes that the development partner is contractually obligated to, either
partially or wholly, indemnify the Company for any losses. However, until the
matter is settled or otherwise resolved, the full effect of the indemnification
can not be determined. As of March 31, 2004, the Company had collected $930,000 under the
contract. The Company took a charge of $420,000 in the fourth quarter of 2003
to write-off all recorded assets and liabilities related to this project.
Under the terms of the contract between the Company and the development
partner, no amounts are due to the development partner until receipt of
payments by the Company from HCA. Therefore, the Company eliminated the amount
due to the development partner, which was based on amounts expected to be
collected from HCA. The fourth quarter 2003 charge also included an accrual
for development costs incurred in 2004 that will not be realized. Although the ultimate disposition of this matter cannot be predicted with
certainty, it is the opinion of the Companys management that the outcome of
this matter will not have a materially adverse effect on the consolidated
financial condition of the Company, but could affect the consolidated results
of operations and cash position in a future period. 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. Page 14 of 25




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Results of Operations Three months ended March 31, 2004 compared to three months ended March 31, 2003(Tables in Thousands) Three Months Ended March 31,2004
    
    2003
    
    ChangeRevenues
    
    $
    4,249
    
    
    $
    5,231
    
    
    $
    (982
    )Cost of revenues
    
    
    4,353
    
    
    
    5,097
    
    
    
    (744
    )Gross profit
    
    $
    (104
    )
    
    $
    134
    
    
    $
    (238
    )% of revenue
    
    
    (2
    )%
    
    
    2
    %
 Revenueswere down approximately $982,000 (19%) in the first quarter of
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 $370,000 of the reduction. Customers in a
terminated or in a run-off stage resulted in a reduction of $227,000 and
reduced headcount and transaction counts on two other customers resulted in a
decline of $130,000. Reduction in the amount of project related work and the
expiration of a stream of deferred revenue associated with another customer
resulted in a reduction of $175,000. A new contract, signed in late 2003,
started production in the first quarter of 2004 and resulted in $58,000 of
increased revenue over the same period in 2003. 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 or revenues declined
$744,000 (15%) in the first quarter of 2004 compared to the same period in
2003. Cost of revenues was 102% of revenues in 2004 compared to 98% in 2003.
Approximately $284,000 of the decline was related to contract labor associated
with the State of Washington project, which was underway in 2003. An
additional $175,000 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. Three Months Ended March 31,2004
    
    2003
    
    ChangeSales and marketing expense
    
    $
    293
    
    
    $
    255
    
    
    $
    38General and administrative expense
    
    
    968
    
    
    
    909
    
    
    
    59Research and development expense
    
    
    
    
    
    
    30
    
    
    
    (30
    )Amortization of intantibles
    
    
    276
    
    
    
    324
    
    
    
    (48
    )Interest and other income, net
    
    
    27
    
    
    
    30
    
    
    
    (3
    )Interest expense
    
    
    (64
    )
    
    
    (19
    )
    
    
    (45
    )
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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 $38,000 (15%) compared to the first quarter of
2003. The increase is primarily due to additional recruiting expenses related
to sales and marketing management and staff additions to the sales team 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
$59,000 (6%) compared to the first quarter of 2003. The increase was primarily
due to a net increase in professional fees such as legal, accounting and
insurance, driven principally by Healthaxis being a public rather than
privately held company. Research and development expensesare primarily the salary and related
benefits of personnel engaged directly in the development of new products and
the enhancement of existing products, prior to the establishment of
technological feasibility. These expenses were reduced to zero compared to
$30,000 in the first quarter of 2003 as the Company placed a greater emphasis
on completing existing development products and the maintenance of existing
customer accounts in the first quarter of 2004. Amortization of intangiblesincludes the amortization of developed
software and customer base acquired in the January 2001 Healthaxis merger.
These expenses were reduced $48,000 (15%) compared to the first quarter of 2003
as the developed software became fully amortized in January 2004. Interest and other income, netwas relatively unchanged from the first
quarter of 2003. Interest expenseincreased $45,000 (237%) compared to the first 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. 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 well 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 three months ended March 31,
2004 was approximately $577,000 as compared to $1.0 million for the same period
in 2003. The reduction in cash used was despite a $305,000 increase in the
operating loss and $241,000 reduction in depreciation expenses from 2003.
These factors were more than offset by a $1.1 million difference in operating
asset and liability accounts due largely to changes in accounts receivable. Cash used in investing activitiesfor the three months ended March 31,
2004 was $149,000 as compared to $171,000 for the same period in 2003.
Additional investments in capitalized software and start-up costs were offset
by reduced purchases of property, equipment and software. Page 16 of 25




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Cash used in financing activitiesfor the three months ended March 31,
2004 was $367,000 as compared to $237,000 for the same period in 2003. 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 The Series A Convertible Preferred Stock (Preferred Stock) has a stated
value of $22.1 million and is convertible into shares of Healthaxis common
stock at a conversion price of $15.50. The terms of the Preferred Stock
provide that cumulative dividends be paid at the rate of 2% per year, payable
semi-annually. In general, the Company may choose to pay the dividends either
in cash or by issuing shares of common stock, although in some circumstances it
is required to pay cash dividends. The terms of the Preferred Stock provide
that in some situations the holders of the Preferred Stock can force Healthaxis
to buy back their shares. The Company believes that the occurrence of the
situations where it can be required to buy back shares of Preferred Stock is
within its control. This event might adversely affect Healthaxis, because it
may not have the cash necessary to effect the buy back or because cash that
could have been used to make investments in Healthaxis business will instead
be paid to the holders of our Preferred Stock. While the Company believes
that, currently, there is no cause for a forced buy back, the situations in
which it can be required to buy back shares of Preferred Stock involve
situations where specific events or transactions are effected by Healthaxis
without, generally, the affirmative vote or consent of the holders of at least
60% of the then outstanding Preferred Stock, or Healthaxis is found to have
made an incorrect representation or warranty in the Certificate of Designation
or other documents executed in connection with the issuance of the Preferred
Stock. The Preferred Stock also contains, 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 do not have general voting rights, although they do have the right to
vote separately as a class in connection with some matters. On May 12, 2004, the Company signed an agreement with its four Series A
Convertible Preferred Stock shareholders, to amend and restate the terms of all
outstanding shares of the Companys Series A Convertible Preferred Stock. Under
the terms of the agreement, the new preferred stock would be convertible into
an aggregate of 3,850,000 shares of the Companys common stock, and warrants to
purchase up to 1,000,000 additional shares of common stock. The warrants would
have a term of 5 years and an exercise price of $5.50 per share. The new
preferred stock would have no liquidation preference, no voting rights except
as required by law, the right to receive a nominal dividend of less than $1,000
per year in the aggregate payable to the holders of the new preferred stock and
other dividends only 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. However, the new
preferred stock would be convertible into shares representing approximately 58%
of the Companys outstanding common stock on an as-converted basis. This compares to the approximately 34% of the Companys outstanding common
stock, on an as-converted basis, into which the existing Series A Convertible
Preferred Stock is convertible. After also
including the warrants and the Companys other common stock equivalents, the
new preferred stock and warrants would be convertible into, or exercisable for,
shares representing approximately 57% of the Companys fully diluted shares. The agreement would require the Company to
register the securities for resale, but would place limited restrictions on the
private sale or transferability of the securities held by the preferred
shareholders, and would restrict the number of shares of common stock into
which the new preferred stock or warrants may be sold in the public markets
below a price of $3.50 per share. The proposed transaction is subject to
certain conditions, including approval by the holders of the Companys common
stock. Further details of the proposed transactions will be contained in a
proxy statement to be filed by the Company with the Securities and Exchange
Commission seeking common shareholder approval. Page 17 of 25




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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 outstanding common stock;
1,424 shares of Series A Convertible Preferred Stock, or 6.1% of the
outstanding preferred stock; and warrants to purchase 22,240 shares of common
stock. 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 will be 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 March 31, 2004, the balance due under the promissory note is
$3.2 million, of which $608,000 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 conversion price of
the remaining preferred shares from $26.25 to $15.50. The repurchase of the
preferred shares held by UICI reduced the total liquidation value of the
outstanding Series A Preferred Stock from $23.5 million to $22.1 million. 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 the 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 Preferred Stock and the interest rate on our note
payable are fixed at 2% and 6%, respectively, and therefore are not subject to
market fluctuations. 
 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 Page 18 of 25




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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 19 of 25




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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. 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. Not Applicable Item 5. Other Information. Not Applicable. 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits (10.1)
    
    Change in Control Employee Agreement between Jimmy D.
Taylor and Registrant dated as of February 25, 2004
(incorporated by reference to Exhibit 10.84 to Registrants
Annual Report on Form 10-K for the period ended December
31, 2003).(10.2)
    
    Change in Control Employee Agreement between Charles S.
Ramsburg and Registrant dated as of February 25, 2004
(incorporated by reference to Exhibit 10.85 to Registrants
Annual Report on Form 10-K for the period ended December
31, 2003).(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 filed a current report on Form 8-K on March 29,
2004, in which it disclosed, under Item 9, a press release
dated March 29, 2004, announcing the fourth quarter 2003
financial results. Page 20 of 25




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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: May 12, 2004
    By:
    /s/ James W. McLaneJames W. McLane, President and ChiefExecutive Officer (Principal Executive
Officer) By:
    /s/ John CarradineJohn Carradine, Chief Financial Officer(Principal Financial Officer) and
Treasurer Page 21 of 25




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Exhibit Index (10.1)
    
    Change in Control Employee Agreement between Jimmy D. Taylor
and Registrant dated as of February 25, 2004 (incorporated by
reference to Exhibit 10.84 to Registrants Annual Report on Form
10-K for the period ended December 31, 2003).(10.2)
    
    Change in Control Employee Agreement between Charles S.
Ramsburg and Registrant dated as of February 25, 2004
(incorporated by reference to Exhibit 10.85 to Registrants Annual
Report on Form 10-K for the period ended December 31, 2003).(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 22 of 25