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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission file number. . . . . . . . . . . . . . . . . . . . 0-13591

HEALTHAXIS INC.

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: 2,767,592 shares of common stock, par value $.10, outstanding as of November 7, 2003.

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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

(Dollars in thousands) (Unaudited)

See notes to consolidated financial statements.

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Healthaxis Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 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 nine-month period ended September 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

     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, 2002.

General

     Healthaxis is a technology and business process services firm committed to providing innovative and configurable applications solutions and web-based connectivity for health benefit distribution and administration. These solutions, which are comprised of software products and related services, are designed to assist health insurance payers, government agencies, third party administrators and health and welfare plans in providing enhanced services to members, employees, employers 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. These technology solutions are complimented by Healthaxis’ Business Process Outsourcing (“BPO”) services, including mailroom, scan, data capture, and claims adjudication services. These services are offered to its technology clients and on a stand-alone basis.

     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.

Reclassifications of prior period amounts

     Certain prior period amounts have been reclassified to conform with the 2003 presentation or in accordance with applicable accounting requirements.

Earnings Per Share

     Basic loss per share is computed only on the weighted average number of common shares outstanding during the respective periods. Diluted loss per share is computed to show the dilutive effect, if any, of convertible debentures, convertible preferred stock, stock options and warrants. The dilutive effect of stock options and warrants is calculated using the treasury stock method based on the average market price of the stock during the

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respective periods. The effect of including the stock options, warrants and shares issuable upon conversion of the Company’s convertible preferred stock in the computation of diluted earnings per share would be anti-dilutive for the three and nine months ended September 30, 2003. Accordingly, these items have not been included in the computation for those periods. The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share computations for income from continuing operations for the three and the nine months ended September 30, 2002:

Stock-Based Compensation

     The Company selected an accounting policy that 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. Pro forma net loss applicable to the option granted is not likely to be

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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 of grants 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:

Note B – Recently Adopted Accounting Pronouncements

     In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). For most companies, SFAS 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS 4. Upon adoption, any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of Opinion 30 for such classification will be reclassified to conform with the provisions of SFAS 145. The provisions of this statement related to the rescission of SFAS 4 shall be applied in fiscal years beginning after May 15, 2002. The Company adopted the provisions of this statement effective January 1, 2003. As a result, the gains on extinguishments of debt that were previously reported in prior periods as extraordinary items have been reclassified as gains from continuing operations.

     On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 has not had a significant impact on the financial position or results of operations of the Company.

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Note C – 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. As a result of the reverse split, the number of shares outstanding on that date was reduced from 53,528,557 to 5,353,361, and the par value of common stock was decreased $4.8 million. To gain the required approval of this transaction from the Series A Preferred shareholders, the Company paid a one-time consent fee equal to 1 percent, or $235,000, of the then outstanding Series A Preferred stock liquidation value. The payment has been included in dividends on preferred 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 D – Repurchase of Securities Held by UICI and Repricing 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 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 22,239 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 BPO services provided by the Company to the Mega Life & Health Insurance Company (“Mega”), a UICI subsidiary. The amount of the monthly payment will be equal to the greater of one half of the Mega invoice amount for BPO 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.

     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.

Note E – Significant Customer Concentrations

     For the three months and the nine months ended September 30, 2003, four customers (including UICI) accounted for $2.9 million (55%) and $8.8 million (55%), respectively, of the Company’s total revenues. At September 30, 2003, one customer accounted for $1.0 million of the Company’s accounts receivable.

Note F – Contracts in Progress

     The Company uses contract accounting for certain 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. During the nine months ended September 30, 2003, the Company had one contract in progress under each method.

     The Company has accounted for activities under the State of Washington Health Care Authority contract on the percentage of completion method. Due to the uncertainty of the profit margin to be achieved from the

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contract, the Company previously 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. As a result, the estimated total cost to complete the project increased significantly. The Company now estimates that a loss of $129,000 will be incurred on the contract. The entire amount of the estimated loss was recorded in the quarter ended September 30, 2003 as a component of costs of revenue, and future revenue from the project will be recognized as payment milestones are achieved. Costs associated with the project are deferred and recognized in connection with the recognition of revenue. No revenue or costs, other than the estimated loss, related to this contract were recognized during the three months ended September 30, 2003.

As of September 30, 2003, costs, earnings and billings to date on the contract are as follows:

     The Company has accounted for activities under a contract with Affiliated Computer Services (“ACS”) for the State of Georgia Department of Community Health under the completed contract method. In September 2003, the Company was notified by ACS that the portion of the prime contract that the Company was working on had been cancelled. Accordingly, the prime contractor requested that the Company stop work on this contract. Based on these events, management determined that its work under the contract was complete. Previously deferred revenues and costs totaling $550,000 and $567,000, respectively, were recognized during the third quarter of 2003. The Company continues to work with ACS to determine the final amount owed to the Company for the work performed according to the terms of the contract. Any contingent amounts received by Healthaxis as a result of this negotiation will be recorded as revenue in the period that the amount becomes known.

Note G – Other Liabilities

     Other liabilities totaled $1.3 million and $1.1 million at September 30, 2003 and December 31, 2002, respectively and consist of contingent tax liabilities. In June 2003, the Company received a tax refund in the amount of $324,000 that was recorded as a liability pending final resolution of the matter.

Note H – Related Party Transactions

     The Company conducts business with UICI. Prior to September 30, 2003, UICI owned a significant portion of the Company’s outstanding common stock, and also owned preferred stock and warrants. See Note D for a discussion of the repurchase of Healthaxis securities from UICI. The Company previously provided services to a number of UICI subsidiaries and affiliates pursuant to the UICI Information Technology Services Agreement. In June 2002, the Company and UICI terminated this agreement. Revenues from UICI related to these discontinued operations totaled $134,000, and $8.2 million, for the three months and the nine months ended September 30, 2002, respectively (See Note J). Notwithstanding the termination of this agreement and the repurchase of Healthaxis securities from UICI, the Company continues to provide products and services to UICI. For the three months ended September 30, 2003 and 2002, UICI and its subsidiaries and affiliates accounted for $487,000 (9%) and $456,000 (9%), respectively, of the Company’s revenues from continuing operations. For the

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nine months ended September 30, 2003 and 2002, UICI and its subsidiaries and affiliates accounted for $1.4 million (9%), and $1.7 million (12%), respectively, of the Company’s revenues from continuing operations.

Note I – Cumulative Effect of Accounting Change

     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. In the second quarter of 2002, the Company completed a transitional goodwill impairment test. This test resulted in an impairment charge totaling $6.7 million. The impairment charge is shown as a cumulative effect of an accounting change as of January 1, 2002.

Note J – Discontinued Operations

     On June 11, 2002, the Company 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 $6.5 million 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 recorded the net proceeds, $6.4 million, as a contribution of capital from a significant shareholder. A loss on disposal of discontinued operations in the amount of $3.6 million was recorded as a result of the termination. The loss consisted of impairment charges for goodwill and customer base totaling $484,000 and $3.1 million, respectively. The impairment charges result from a write off of the entire amount of goodwill and customer base attributable to the Agreement.

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

The operating results of the discontinued UICI Outsourcing segment for the three and the nine months ended September 30, 2002 are as follows:

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Note K – Gain on Extinguishment of Debt

     On July 31, 2002, Healthaxis completed a transaction in which the holders of its $27.5 million 2% convertible debentures exchanged their debentures for 23,500 shares of Series A Convertible Preferred Stock and a cash payment of $4.0 million. The Company recorded a gain on extinguishment of debt totaling $16.4 million related to the transaction for the difference between the carrying value of the convertible debentures and the estimated fair value of the cash and preferred stock exchanged.

Note L – Segment Reporting

     As of January 1, 2003, the Company’s operating segments were:

	•		Technology & Operations - provides web-enabled systems for enrollment, administration and processing of health insurance claims on an ASP basis, connectivity platforms and solutions for self service (broker, employer, employee and providers), large group enrollment and small group enrollment, sale/distribution and post-sale administration of group and individual insurance policies including health, life and dental insurance.
	•		BPO Services Group - provides electronic data capture, imaging, storage and retrieval of health insurance claims, attachments and other correspondence, and claims pre-adjudication services.

     Prior to 2003, the Company maintained three operating business segments. On January 1, 2003, two of the Company’s three business units (formerly known as Web Connectivity Products and Benefit Administration and Claims Processing Systems) were consolidated into one reporting unit named Technology & Operations. Additional segment reporting changes include a change in the classification of sales and marketing expenses and a change in the classification of other operating expenses. Sales and marketing is included as a component of Corporate Overhead, not allocated to the reporting units as in the past. Certain operating expenses that were previously allocated to all reporting units are now included solely in Technology & Operations. These costs are associated with operating the Healthaxis Customer Care unit and other customer security and infrastructure issues. All segment information has been restated for prior periods to conform with this new presentation.

     Each business segment generally sells its products and services to the same constituent users, generally located in the United States, namely healthcare payers, which include insurance payers, government agencies, third party administrators and health and welfare plans.

     All revenue is specifically associated with a separate business unit and therefore there are no reconciling items. Earnings before interest, income tax, depreciation and amortization (“EBITDA”), as defined, is the primary liquidity measurement used by management to make decisions regarding the segments. EBITDA, as defined by the Company, also excludes restructuring and impairment, severance and non-cash stock based compensation charges (“EBITDA As Defined”). However, EBITDA As Defined is not a measure defined in generally accepted accounting principles (“GAAP”) and should not be construed as an alternative to operating income as determined in accordance with GAAP. EBITDA As Defined does not consider depreciation and amortization of software and equipment, which could be significant with increased capital expenditures. Management does not consider these expenses significant for purposes of evaluating separate business unit liquidity. Management believes that the EBITDA As Defined measurement is useful in monitoring basic cash flow generated and used in the Company’s core operating activities, and in monitoring the effects of changes made by management in the Company’s operations across different time periods. This factor alone is insufficient to measure all of the Company’s operating characteristics and is used in conjunction with GAAP operating income to measure total operating performance. EBITDA As Defined may not be comparable to similarly titled measures reported by other companies. Corporate overhead includes executive management, accounting, legal, human resources, sales,

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marketing, and other expenses. Operating income does not include any cost allocations for corporate overhead. Assets are not allocated to business units for internal reporting purposes and are therefore not included in the segment information below.

The Company’s financial results by business segment are as follows:

A reconciliation of EBITDA As Defined to the most directly comparable GAAP financial measure, Operating loss, is as follows: