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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

HEALTHAXIS INC.
(Exact name of registrant as specified in its charter)

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 53,663,750 shares of common stock, par value $.10, outstanding as of August 10, 2002.

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Healthaxis Inc.

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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) (Unaudited)

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Operations

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

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands) (Unaudited)

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands) (Unaudited)

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands except per share data)
June 30, 2002

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 and six-month periods ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

     Generally accepted accounting principles require management to make estimates and assumptions when preparing financial statements that affect:

	•		The reported amounts of assets and liabilities at the date of the financial statements; and
	•		The reported amounts of revenues and expenses during the reporting period.

     They also require management to make estimates and assumptions regarding any contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

     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, 2001.

General

     Healthaxis is a technology services firm committed to providing innovative and configurable web-based connectivity and applications solutions for health benefit distribution and administration. These solutions, which are comprised of software products and related services, are designed to assist health insurance payers, third-party and first-party administrators, intermediaries and employers provide enhanced services to members, employees and providers through the application of Healthaxis’ flexible technology to legacy systems, either on a fully integrated or on an Application Service Provider (“ASP”) basis. Healthaxis believes that its solutions enable a client to reduce their administrative costs and improve their profitability.

     Healthaxis is a Pennsylvania corporation organized in 1982. Healthaxis’ common stock trades on the Nasdaq SmallCap Market under the symbol “HAXS.” The operations of Healthaxis during 2001 were conducted primarily through its subsidiary, Healthaxis.com, Inc. In the fourth quarter of 2001 the Company reorganized and formed a new subsidiary, Healthaxis, Ltd., through which all operations are now conducted. Unless otherwise indicated, or the context otherwise requires, all references in this document to the Company or Healthaxis include Healthaxis Inc. and all of its subsidiaries.

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Note B — Accounting Policies and Recently Adopted Accounting Pronouncements

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 debentures into the computation of diluted earnings per share would be anti-dilutive generally due to the Company’s net loss. Accordingly, these items have not been included in the computation.

Goodwill and Other Intangible Assets

     Effective January 1, 2002, the Company adopted Statements of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142 (January 1, 2002), annually thereafter and upon the occurrence of any event that indicates potential impairments. The Company will perform its annual impairment review during the fourth quarter of each year, commencing in the fourth quarter of 2002.

     SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment; while the second phase (if necessary), measures the impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The Company’s reporting units are generally consistent with the operating segments underlying the segments identified in Note F — Segment Reporting. This methodology differs from the Company’s previous policy, as permitted under accounting standards existing at that time, of using undiscounted cash flows on an enterprise-wide basis to determine if goodwill is recoverable.

     Upon adoption of SFAS No. 142 and completion of the required transition testing in the second quarter of 2002, the Company recorded as of January 1, 2002 a one-time, non-cash charge of $6,674 to reduce the carrying value of its goodwill. Such charge is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. In calculating the impairment charge, the fair value of the impaired reporting units underlying the segments were estimated using a discounted cash flow methodology.

Long-Lived Assets

     In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of.” The primary objectives of SFAS No. 144 are to develop one accounting model based on the framework established in SFAS No. 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The Company adopted SFAS No. 144 as of January 1, 2002. There has been no significant impact resulting from the adoption of SFAS No. 144.

     The Company records impairment losses on long-lived assets when events and circumstances indicate that such assets might be impaired and the estimated fair value of the asset is less than its recorded amount. Conditions that would necessitate an impairment assessment included material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon acquired products, services or technologies, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable.

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     The Company reviews its long-lived assets and certain intangible assets for impairment on a quarterly basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows expected to be generated by that asset. An impairment loss is recognized for the amount by which the carrying amount of the assets exceeds the fair value of the assets estimated using discounted cash flows.

Note C — Termination of UICI Technology Services Agreement

     On June 11, 2002, the Company initiated and entered into an agreement with UICI terminating the amended Information Technology Services Agreement (the “Agreement”) between the two parties. The Agreement was originally entered into on January 3, 2000 in conjunction with the merger of Healthaxis.com, Inc and Insurdata Incorporated. Under the terms of the termination agreement, UICI made a one-time cash payment to Healthaxis in the amount of $6,500 and tendered 500,000 shares of Healthaxis common stock back to the Company. In return, approximately 165 Healthaxis employees that were previously dedicated to providing services to UICI under the Agreement were transferred to and became employees of UICI on June 15, 2002. Due to the related party nature of the transaction, the Company has recorded the net proceeds, totaling $6,359, as a contribution of capital from a significant shareholder.

Discontinued Operations

The Company has previously reported the revenues and expenses associated with the Agreement as those from the Outsourcing segment. As a result of the termination of the Agreement, the Company’s financial statements have been prepared with the Outsourcing segment results of operations presented as discontinued operations. All historical financial statements presented have been restated to conform to this presentation.

Impairment charges of $484 and $3,080 related to goodwill and customer base, respectively, allocated to the Outsourcing segment have been recorded as a loss on disposal of discontinued operations.

The operating results of the discontinued Outsourcing segment are as follows:

Note D — Related Party Transactions

     At June 30, 2002, UICI owned approximately 45% of the Company’s outstanding common stock and owned warrants to purchase 222,396 shares of the Company’s common stock at prices ranging from $3.01 to $12.00 per share. At June 30, 2002, UICI also owned $1,666, face value, of the Company’s convertible debentures that were convertible into 185,185 common shares.

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     UICI and its subsidiaries and affiliates (collectively “UICI”) have in the past constituted, in the aggregate, Healthaxis’ largest customer. Services to UICI are provided pursuant to various written agreements, the most significant of which has been the Information Technology Services Agreement (the “Agreement”). On June 11, 2002, the Company and UICI mutually agreed to an early termination of the Agreement (See Note C). Healthaxis also provides services from continuing operations to certain UICI subsidiaries and affiliates, including the use of certain proprietary workflow and business applications, as well as data capture services. The Company’s revenues from UICI for these services for the three months ended June 30, 2002 and 2001, were $402 (9%) and $2,053 (34%), respectively, of the Company’s revenues from continuing operations. The Company’s revenues from UICI for these services for the six months ended June 30, 2002 and 2001, were $1,245 (13%) and $3,957 (34%), respectively, of the Company’s revenues from continuing operations. As of June 30, 2002, Healthaxis had accounts receivable due from UICI and its subsidiaries and affiliates totaling $139, which represented 5% of the Company’s total accounts receivable.

     For the three and the six months ended June 30, 2002, UICI and its subsidiaries accounted for an aggregate of $3,980 (49%) and $9,323 (52%), respectively, of Healthaxis’ total revenues for the period from both continuing and discontinued operations.

     In conjunction with the termination of the Agreement, the Company paid $100 to a consulting firm, Diamond Cluster International, Inc., affiliated with one of the Company’s directors. In addition, during the three months ended March 31, 2002, the Company paid professional services fees in the amount of $366 to the same consulting firm.

Note E — Intangible Assets

Amortization of intangibles is comprised of the following:

The allocation of intangible assets following our adoption of SFAS No. 142 is summarized in the following table:

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The estimated future annual amortization expense for customer base and developed software is as follows:

Following is a presentation of the results of operations, adjusted to exclude goodwill amortization:

On January 1, 2002, the Company adopted SFAS 142 (See Note B). In the second quarter of 2002, the Company completed a transitional goodwill impairment test, which under SFAS 142 must be completed in the year of adoption. This test resulted in an impairment charge totaling $6,674, related to the Web Technologies operating segment. The impairment charge is shown as a cumulative effect of an accounting change as of January 1, 2002. The following shows the restated results of operations for the three months ended March 31, 2002:

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At June 30, 2002, in connection with the termination of the Agreement with UICI, the Company recorded impairment charges related to goodwill and customer base in the amounts of $484 and $3,080, respectively. The amounts are shown as a loss on the disposal of discontinued operations. The goodwill impairment charge results from a write off of the entire amount of goodwill allocated to the Outsourcing segment as determined under the new rules for goodwill accounting. Likewise, the amount of the customer base impairment charge was based upon a complete write-off of the portion of the assets’ carrying value originally based upon the estimated future cash flows from the Agreement with UICI.

The changes in the carrying amount of goodwill for the six months ended June 30, 2002, are as follows: