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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

HEALTHAXIS INC.

(972) 443-5000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.10 Par Value

     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 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 þ         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K:    o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2).    Yes o         No þ

     The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $11,512,125 computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Shares of the Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     As of March 19, 2003, the Registrant had 53,645,297 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Selected portions of the Registrant’s definitive Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

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HEALTHAXIS INC.

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PART I

      Statements in this Annual Report on Form 10-K and in the Annual Report to Stockholders that are not purely historical facts, including statements regarding the Company’s anticipations, beliefs, expectations, hopes, intentions or strategies for the future, may be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements are based upon information available currently to the Company. 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. All forward-looking statements involve known and unknown risks and uncertainties that could cause actual events or results to differ materially from the events or results described in the forward-looking statements. These risks and uncertainties include, without limitation, those set forth in this report under “Business — Risk Factors.”

General

      Healthaxis is a technology and business process 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, government agencies, third party administrators (“TPA”) 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 complemented by Healthaxis’ Business Process Outsourcing (“BPO”) services that are offered to its technology clients and on a stand-alone basis. Healthaxis believes that its solutions enable its clients to reduce their administrative costs, enhance their customer service, grow their revenues and improve their profitability.

      Healthaxis’ proprietary applications address the specific processing needs of the administration and distribution segments of the healthcare insurance industry in an efficient and cost-effective manner. Healthaxis, through its state-of-the-art applications, provides real-time interaction with plan documents, enrollment and applications, as well as access to personalized eligibility and claims data via the Internet. These Internet-enabled business applications enhance the transaction process and streamline the flow of information among the many systems employed by various constituents within the healthcare insurance industry. Healthaxis’ BPO solutions include the automated capture, imaging, storage and retrieval of electronic claims, attachments, and related correspondence.

      Payer solutions are offered through readily configurable products, such as Insur-Claims, Insur-Admin, WebAxis Self-Service, WebAxis-Enroll, Retail Distribution and Imaging and Data Capture Services. All of Healthaxis’ products are supported by professional services offered on a consulting basis. Healthaxis is staffed by experienced health insurance and technology professionals who understand the payer world. The team combines almost 1,200 years of health insurance industry experience with a technical team exclusively focused on the unique needs of its constituent users.

      The Company continued to build a stronger foundation for the future during 2002:

	•	It realigned its sales force against better defined target markets
	•	It generated nine new significant contracts, which are projected to yield over $11 million in revenue between 2002 and 2005. Most of this projected revenue has yet to be realized.
	•	It completed the development of turnkey web-based self-service capabilities for managed care companies (self-service modules for members, employees and employers) and completed seven implementations of the new web- enrollment product and two more installations of the web-based broker product

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	•	It merged its web technology and benefit administration capabilities in November 2002 to better serve its existing customers and to open up new commercial and government market opportunities. Two significant state contracts reflected this combination of capabilities
	•	It continued to strengthen and broaden its business partnerships to further its business development and technology development efforts
	•	It changed the leadership of its imaging and data capture business to improve productivity and operating results
	•	It converted into cash the UICI Information Technology Services Agreement, which it believes represented a perpetually declining revenue stream and non-strategic business unit
	•	It exchanged all of its long-term debt for shares of preferred stock and a cash payment
	•	It lowered overall operating costs, exclusive of its UICI outsourcing segment, by almost 50% over the past 2 years. The expected operating cost break-even was lowered to the $22 to $23 million range for 2003, depending on the mix of the business
	•	It outsourced some of its non-core functions, such as co-locating its data center to an IBM hosting facility
	•	It preserved cash while investing in technology improvements and productivity initiatives. Its liquid cash resources, coupled with the elimination of its long-term debt, gives it flexibility to pursue a variety of strategic channels

      Healthaxis Inc. (the “Company” or “Healthaxis”) 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 during 2002 were conducted primarily through its 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,” “Healthaxis,” “we,” “our” or “us” include Healthaxis Inc. and all of its subsidiaries.

Health Insurance Industry

      Healthcare plan administration involves all types of healthcare providers, payers, managed care organizations, reinsurance carriers, preferred provider organizations, medical and dental claim review staffs, employers, and patients. Unlike other types of insurance, healthcare insurance administration frequently results in extensive interaction between the patient, the provider, the insurance carrier and the employer. Each of these participants must be able to share, process, and access data in order to perform their respective roles in the healthcare system. The complexity and fragmentation within the healthcare industry complicates this task.

      Healthaxis believes that a significant amount of money is wasted each year through redundant procedures and excessive administrative costs. As the overall healthcare industry has increased in size and complexity, the burden of gathering, processing, and managing the health insurance benefit administration and claims process has led to significant administrative bureaucracies, inefficiencies, and high costs. This burden has placed increasing strains on the profitability of the overall industry, as rising medical loss ratios, demographics, increased drug costs and several other factors have compressed margins. Management believes that the health insurance industry lags behind other transaction-intensive industries, such as the airline and financial services industries, in its use of information technology and appropriate outsourcing arrangements to increase efficiency and effectiveness and reduce administrative costs.

      Healthaxis focuses on the payer side of this industry. Its target markets include commercial insurance carriers, managed care organizations, TPAs, health and welfare plans and government agencies handling benefit administration. Dramatically increasing costs and market demands for more web-based functionality are forcing payers to look outside of their own organizations for solutions. Management believes that IT outsourcing trends are developing, particularly around packaged web applications, which are increasing payers’

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      A recent research note published by Gartner Inc. indicated that packaged web applications are being used more frequently. Their survey revealed that healthcare payer organizations have moved from a predominantly internal development strategy to being increasingly avid users of packaged web applications in 2002 and beyond. In 2002, there was increased demand for robust Web functionality, particularly among purchasers (employers and brokers), many of whom have stated that interactive Web transactions and information will be a future requirement of doing business with healthcare payers. Consumers and providers also have awakened to the efficiencies of healthcare Web transactions. The Web is no longer a differentiator, but a business “must have” to sustain a competitive market position. Management believes that Healthaxis’ web connectivity products and solutions are well positioned to take advantage of this trend.

      Gartner has also indicated a trend toward the use of ASPs by healthcare payer organizations. An ASP is an entity that delivers application functionality and associated services across a network to multiple clients, usually on a subscription or per-user, per-month basis. This model enables the client to control the business process and application while eliminating its need to purchase, maintain and operate application software. The potential benefits of applications hosting — rapid software implementations, cost containment and access to “industrial-strength” applications by small to mid-size organizations — for information and transaction-intensive industries, such as healthcare, are considerable. The research note concludes that the IT outsourcing and ASP trend will continue to gain traction as payers remain challenged by skyrocketing costs, resource contention and administrative inefficiencies. Management believes that Healthaxis is well positioned with its outsourcing and ASP model products and services.

      Lastly, Gartner and other consulting firms have indicated that as organizations continue their competitive quest to provide better value to customers and stockholders, they are increasingly evaluating how to narrow their focus, concentrate their attention on the activities that bring the most value and are beginning to outsource other less strategic functions.

Business Strategy

      Healthaxis’ goal is to provide its clients with market leading, innovative and configurable web-based connectivity and applications solutions and business process outsourcing solutions for health benefit distribution and administration. Its mission is to enable its customers to reduce administrative costs, improve customer service, provide faster and more efficient operations and accelerate revenue growth.

      Its strategic goals to achieve this mission are:

	•	To begin to create a significant health care Business Process Outsourcing (BPO) company (software licensing, IT outsourcing, transaction processing, service centers) linked to offshore software development and processing partners, and to capture a growing share of the large, expanding BPO market in the U.S.
	•	To continue to shift its culture from an operations and technology orientation to a market and customer driven mindset.
	•	To walk its talk with respect to its core values:

	—	Deliver what we promise
	—	Take ownership and accountability for our results
	—	Do the right thing — all the time
	—	Build value-adding mutual relationships
	—	Team and run to win

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      Key objectives to move the Company along its strategic course include the following:

           Grow The Existing Franchise:

	•	Linking web technology design and development capabilities with its rich benefit administration platform for government and commercial markets
	•	Enhancing value-add services to existing TPA customers with such services as re-pricing, printing, reporting, utilization management, COBRA, and elements to strengthen their consumer directed healthcare offerings
	•	Adding web-based enrollment and brokerage capabilities to the benefit administration platform, as well as selling these capabilities on a stand-alone basis
	•	Creating scale, improving productivity and creating differentiation through cost and demonstrated quality in imaging and data capture services
	•	Further penetrating the large market for outsourced web-based application and integration capabilities and business processing services.

      Leverage Strategic Relationships: Healthaxis has developed strategic relationships in an effort to strengthen its capabilities in the areas of business development, technology delivery and implementation. The Company intends to leverage these relationships to expand its client base and enhance its products and services. In some cases, a party with whom it has developed a strategic alliance may also be a key third party vendor on which the Company relies. The Company’s strategic relationships include:

      Consummate Acquisitions or Mergers with Complementary Companies to Deepen and Broaden BPO Capabilities and Create Scale in Target Markets:

      Healthaxis has targeted functional areas where it will search for appropriate acquisitions or mergers with technology solutions / business process service companies:

	•	Imaging and data capture
	•	Claims pre-adjudication
	•	Claims systems and processing

The criteria against which targets and transactions are evaluated include:

	•	Revenues greater than $15 million
	•	Break-even or better at the operating line
	•	More than 10 significant customers, no one of which represents more than 25% of sales
	•	Good customer service reputation / respect in the market
	•	Compatible technology such that the technologies can build on one another

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	•	Achieves synergies of various types
	•	Generates financial strength post acquisition
	•	A combination that creates substantial growth opportunities

Products and Target Markets

      The Company has three groupings of its products and services, which it sells into the following defined target markets (See Note 18 to the Consolidated Financial Statements for discussion of the Company’s business units):

Benefit Administration and Claims Processing Systems

      Healthaxis provides web-enabled systems for the administration and processing of health insurance claims (e.g., medical, dental, defined contribution, vision, disability, health reimbursement accounts and flexible spending accounts) on an application service provider basis. The target markets are third party administrators, health and welfare plans and government agencies providing benefit administration services. The Company utilizes a technology platform built around IBM-based hardware and software. The software and processing capabilities are hosted on Healthaxis’ site located in IBM managed facilities, with clients’ processing centers connected through a dedicated data-line network.

      Healthaxis’ associates come from within the industry and have extensive knowledge of the environments that use the Company’s solutions. This knowledge enables the Company to understand business issues and to provide technology solutions that assist in solving those issues. This same knowledge gives the Company the ability to understand support issues and to assist in providing resolution in an efficient manner, based on the needs of the individual client.

      The primary competitors for this suite of products include TriZetto (RIMS) (Facets), Computer Sciences Corporation (TXEN), QCSI, Eldorado, SPBA, LuminX and Genelco. The Company believes that its products and services described below compare favorably with those of its competitors in both functionality and breadth.

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      Insur-Admin. Insur-Admin is a comprehensive benefits administration system that features enrollment, group and individual billing, and premium collection and reconciliation. Insur-Admin accommodates both interactive and batch enrollment for a wide spectrum of coverages. It allows organizations to track divisions, subdivisions, locations, health classifications, and work groups. Insur-Admin interfaces with a plastic identification card production system to produce identification cards. Insur-Admin manages aspects of the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), including calculating and collecting COBRA premiums, tracking qualifying events, and issuing rights and qualification letters and billing coupon books. The system performs activities compliant under the Health Insurance Portability and Accountability Act (“HIPAA”), including capturing prior coverage credit days and issuing HIPAA certificates upon termination of coverage. Insur-Admin also manages medical and dependent care flexible savings accounts. Insur-Admin is web-enabled with access being provided to employers, employees and providers for eligibility status and claims inquiry and to employers and employees for eligibility, life event changes and terminations. Insur-Admin can be implemented on a stand-alone basis or can be integrated with Healthaxis’ claim payment system, Insur-Claims.

      Insur-Claims. Insur-Claims is a comprehensive paperless claim processing system for employer as well as consumer driven plans, including health, dental, vision, short-term disability, long-term disability, executive reimbursement, health reimbursement accounts, and medical and dependent care flexible spending accounts. A rules-based approach, which includes un-bundling and re-bundling edits, allows Insur-Claims to be fully customized and allows the system to handle complex benefit structures and provider reimbursement arrangements. Through user-defined rules and batch processing, Insur-Claims can achieve auto-adjudication rates of up to 80% for medical claims and up to 90% for dental claims. The system has extensive preferred provider organization capabilities and can perform preferred provider organization re-pricing functions. Insur-Claims facilitates utilization management, including pre-certifications, referrals and authorizations. Insur-Claims accepts electronic data interchange or “EDI” transactions and provides for automated adjudication of those transactions. Insur-Claims is web-enabled and can provide claim status inquiry, including access to processed “explanation of benefits” for the employee. Insur-Claims is based on a paperless workflow, which begins with the imaging of all documents. These document images are tied to patients and claims and provide fast and efficient client service resolution. In addition to this functionality, a Healthcare Reimbursement Account (HRA) capability is being developed by Healthaxis for implementation by clients in 2003.

      Client output from utilizing the licensed software described above is typically printed documents, such as benefit checks, letters or “explanation of benefits.” The client may elect to print, handle and mail such documents. However, in most cases, these tasks are performed by Healthaxis or its designated partner, such as Advanced Business Fulfillment, as an additional billable service.

Web Connectivity Products

      Healthaxis provides HIPAA compliant web-enabled platforms and solutions for the enrollment, sale, distribution and post-sale administration of insurance policies, including health, vision and dental insurance. Its target markets are health insurance carriers and managed care plans, third party administrators, health and welfare plans and government agencies. A primary focus is bringing Web-based connectivity to legacy systems in a “bolt-on” fashion. Management believes that healthcare payers do not want to replace legacy systems and are seeking outsourced, e-business connectivity solutions. Due to the nature of the offerings and to the inherent differences in the back-end processing systems being served, solutions provided by Healthaxis are configurable and allow for a high degree of customization. Solutions may be hosted by Healthaxis or by the client.

      The primary competitors for this suite of products include TriZetto (Healthweb), Selectica, Verilet, HealthTrio, Connecture, and eBenX.

      The products and services provided in this suite of products are:

      WebAxis-Employee/ Member and Employer Self-Service. This solution allows plan members/ employees and employers to have direct access to administrative and claims information via a secure interface. Through an inquiry process, members/ employees have access to coverage, demographics, eligibility, claims

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      WebAxis-Broker. The Broker solution is a highly customizable distribution solution for online quoting and proposal management for small group products. This e-enabled solution permits brokers and agents to more effectively interact with their potential customers, as well as benefit from increased efficiency when working with the carrier. This product supports an expanded broker distribution base, increased consumer-direct sales, higher closing ratios, increased retention rates and opportunities to cross sell ancillary products, reduced turnaround/ fulfillment timeframes, and a reduction in paper usage (handling, printing, and postage). The Broker solution is highly scalable and easily customized to fit a company’s existing “look & feel” to match their unique brand image

      WebAxis-Enroll. Healthaxis’ enrollment solutions provide a 24/7 web-based self-service environment for members/ employees and enrollment administrators alike. These solutions are capable of supporting a wide range of benefit plans, including medical, dental, life, vision, medical and dependent care flexible spending accounts, and accident and disability. Other enrollment information can also be captured and managed including individual and dependent demographic information, other insurance, primary care physician and dental facilities, and beneficiaries.

      Enrollment features also include online plan information and summary plan documents, online help, email capability to enrollment administrator, secure confirmation notifications, bulletin board of web links and supporting documents controlled by the enrollment administrator, secure access, and administration monitoring and reporting.

      Retail Distribution Application. Healthaxis’ Retail Distribution solution is a proprietary Internet-based solution that provides health plans and online resellers with a “direct-to-consumer” retail web interface for the sale of individual and small group insurance products. The system provides consumers with real-time instant quotes, side-by-side plan comparisons, provider look-ups, online forms and applications, and secure electronic enrollment capabilities. Built on top of Healthaxis’ powerful WebAxis platform and software engines, this solution is highly scalable and easily customized to fit a company’s existing “look & feel” to match their unique brand image.

      Derived benefits include expanded distribution, increased consumer-direct sales, increased retention rates, increased opportunities to cross sell ancillary products, reduced turnaround/ fulfillment timeframes, reduction in paper usage (handling, printing, postage), and reduced call center expenses.

Business Process Outsourcing Services

      Healthaxis performs imaging and data capture outsourcing services to convert paper transactions in the form of healthcare claims into electronic transactions. The resulting data is downloaded to the client’s internal claims adjudication database or, for those clients utilizing Healthaxis’ claim processing solutions, to Healthaxis’ data center for adjudication and payment. As a complement to imaging and data capture services, the Company also provides mailroom services whereby it receives and sorts incoming healthcare claim forms prior to imaging. The target markets are health insurance carriers, managed care organizations, health and welfare plans, government agencies and third party administrators. Its primary competitors in this area are Affiliated Computer Services, Dakota, Future Vision and GTESS.

      These services utilize a combination of advanced technology, including optical character recognition (OCR), and underlying platforms from Captiva, Kodak, Cognitronics and Insur-Image (Healthaxis’ proprietary data capture software). The Company operates these services in favorable labor markets in rural Utah and Jamaica to efficiently capture and convert large volumes of claims. Healthaxis offers this service to its clients on a per-claim or per-image basis. This service complements all other Healthaxis products and services. In addition, it provides a good entry point with new carrier clients as it usually provides immediate cost savings to the client.

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Sales and Marketing

      The Company has developed relationships within the healthcare insurance industry as a result of its delivery of effective solutions to health insurance benefit and distribution clients for over 20 years. The Company employs a technically-oriented sales support staff, who are familiar with the Company’s technology and who participate in opportunities to sell the Company’s technology-based solutions. Sales leads are generated through a variety of means designed to identify the most promising prospects. Once a prospect is identified, the Company makes a site visit to qualify the prospect and determine its specific needs. Once specific needs are identified, live demonstrations of the Company’s solutions are scheduled and specific return on investment calculations are performed. The team also responds to formal requests for proposals in situations where the prospect is bidding the work with multiple vendors.

      The Company derives a portion of its business through client referrals. In addition, it markets its services through a variety of media, including:

	•	Web site
	•	Direct mail
	•	User conferences conducted exclusively for the Company’s clients
	•	Participation in industry conferences and trade shows
	•	Publication of “white papers” related to specific aspects of the Company’s services
	•	Informational listings and authored articles in trade journals

      The Company has assembled a sales team with personnel having specific industry knowledge, reputation and relationships to take advantage of the Company’s opportunities within each market segment.

Competition

      Healthaxis believes it has an advantage over its competitors by offering a broader eBusiness solution to the health insurance payer and distribution markets, combined in one business operating system based on Extensible Markup Language (XML) and Microsoft BizTalk functionality. The Company offers flexibility, customization, broad and deep industry expertise, and the ability to connect through any legacy system. Additionally, Healthaxis’ focus and expertise within the payer-side of the healthcare industry is an advantage when competing against companies who service multiple industries or multiple facets of the healthcare industry.

      Healthaxis’ principal competitive factors are the breadth and quality of system and product offerings, features and functionality, service and support, processing capacity, the ability to successfully develop and deploy product improvements, and the deep domain knowledge of its staff. The principal competitive factors for Healthaxis’ BPO services are price, quantity and service level commitments.

      Healthaxis’ major competitors by product are as follows:

	•	Benefit administration and claims processing systems — TriZetto (RIMS) (Facets), Computer Science Corporation (TXEN), QCSI, Eldorado, SPBA, LuminX and Genelco.
	•	Web connectivity products — TriZetto (Healthweb), Selectica, Verilet, HealthTrio, Connecture, and eBenX.
	•	BPO services — Affiliated Computer Services, Dakota, Future Vision and GTESS.

Technology Development

      Healthaxis has a staff of technology professionals to support its products and clients through continuing research, development, evaluation and implementation of new technologies. Healthaxis uses a team approach throughout the development phase of new products and product enhancements. In addition to project-specific

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Intellectual Property and Technology

      Trademark and Copyright Protection. Healthaxis’ ability to compete is dependent to a significant degree upon its proprietary systems, technology, and intellectual property. Healthaxis relies upon a combination of trademark, copyright, confidentiality agreements and trade secret laws, as well as other measures to protect its proprietary rights. Healthaxis does not have any patents or patent applications and currently does not plan to file any patent applications. Healthaxis has applied for, or registered, the following trademarks with the U.S. Patent and Trademark Office: Healthaxis, Healthaxis.com, Insur-Voice, Insur-Image, Insur-Enroll, Insur-Admin, Insur-Claims, Insur-Dental, Insur-Report and Insur-PPO. Healthaxis has decided not to file applications for these marks in foreign countries at this time. Healthaxis’ sales materials, content, and software are protected by copyright. The source code and design of Healthaxis’ software are protected through applicable trade secret law. Healthaxis also uses confidentiality agreements with its employees to further protect its source codes and software.

      Internet Technology. Healthaxis’ web services are based upon a distributed computing environment consisting of over 50 Compaq servers utilizing Microsoft 2000 operating systems. The network is built on various other Microsoft applications for serving-up Internet information, applying certain business logic and storing information in relational databases. Additional software for performing workflow, print and PDF technology is obtained from Jetform. All transactions between Healthaxis and the client or end-user are secured and encrypted where applicable.

      The above hardware and infrastructure reside in an IBM data center, to whom Healthaxis outsourced its data center functions in October 2002. IBM provides fully redundant routing and switching hardware delivered to Healthaxis on redundant (dual) Internet connections utilizing three Internet service providers.

      Data Center Core Processing Environment. Healthaxis has connectivity to several customers via dedicated data lines. The Company’s computer operations reside in a fully redundant, IBM/Equinix data center in Dallas, Texas. The facility houses the following processing equipment and systems:

	•	16 IBM RS6000 processors running on UNIX / AIX operating systems
	•	50+ Compaq servers running on Windows 2000 operating systems

      A 500 square foot secondary facility is maintained at Healthaxis’ corporate office location in Irving, Texas. This location serves as the primary recovery facility and has an un-interruptible power system with both diesel and battery backup. It has multiple network connections to external service providers, as well as to the new IBM data center. All critical data is backed up and stored at an offsite facility in the Dallas area.

      Privacy/ Security Issues. Healthaxis believes a significant barrier to the popularity or acceptance of online insurance sales and communications is the secure transmission of confidential information over public networks. Healthaxis retains confidential client and patient claim information at its data center. Computer viruses, break-ins, or other security breaches, could lead to misappropriation of personal or proprietary information. These security breaches can also cause interruptions, delays, or cessation in service to Healthaxis’ clients. Healthaxis relies on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as names, addresses, social security numbers, consumer credit card numbers, and other private healthcare information. Healthaxis carries general liability insurance (including errors and omissions coverage), although Healthaxis’ insurance may not be adequate to cover all costs that could be incurred in the defense of potential claims.

Regulation

      Internet Related. Although there are currently few laws and regulations directly applicable to the Internet, it is likely that new laws and regulations will be adopted in the United States, and elsewhere,

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      HIPAA. Pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the Department of Health and Human Services has issued a series of extensive regulations setting forth security, privacy and electronic transaction standards for all health plans, healthcare providers and clearinghouses to follow with respect to identifiable health information. HIPAA legislation and rule-making is expected to have a significant impact on applications solutions and technology companies servicing the healthcare industry. HIPAA seeks to advance the improvement and efficiency of administrative and financial issues affecting the health care industry by standardizing the electronic exchange of administrative and financial data and additionally mandating the protection, security, and privacy of transmitted and stored patient information. Healthaxis is affected by HIPAA as a business associate of various clients who are covered entities under HIPAA. As a business associate, Healthaxis will be contractually obligated to ensure the protection and privacy of protected health information, which it transmits and stores. Certain states also impose obligations on business associates to be compliant with the HIPAA privacy rules. HIPAA compliance on the electronic transactions and code set standards was required by October 2002 unless a covered entity submitted a request for a one-year extension and a plan for compliance was submitted. HIPAA compliance on the privacy standards must be achieved by April 2003 and compliance with the security standards by April 2005.

      Healthaxis has consistently monitored the proposed rules and maintained a state of readiness to deal with implementation of necessary HIPAA changes, policies and procedures as the rules become applicable. Among other things, Healthaxis has developed a HIPAA Compliance Implementation Strategy Project Plan and has designated a Privacy Officer. Healthaxis will carry out this plan and expects that its systems and operations will be fully compliant with all the requirements contained in the final rules, as applicable to Healthaxis.

Employees

      As of December 31, 2002, the Company had 255 employees, including 110 full-time professional employees, most of whom are based in Irving, Texas, and 145 data capture employees whom are located in Utah and Jamaica. The number of data capture employees varies with business volume. None of Healthaxis’ employees is represented by a labor union or collective bargaining agreement. The Company considers its employee relations to be good.

      Healthaxis’ future success depends on its ability to identify, attract, hire, train, retain, and motivate highly skilled technical, managerial, marketing and consumer service personnel. Competition for technically skilled personnel is dependent upon market conditions. The Company will continue its efforts to attract, integrate, and retain sufficiently qualified personnel, including software developers and other technical experts.

Relationship with UICI

      On January 7, 2000, Healthaxis merged with Insurdata Incorporated (“Insurdata”), a provider of Internet based software applications and services for insurance payers. Insurdata was a wholly owned subsidiary of UICI (NYSE:UCI). UICI, which through its subsidiaries offers insurance (primarily health and life) and selected financial services to niche consumer and institutional markets, is currently the largest single shareholder of Healthaxis, beneficially owning approximately 47% of the outstanding stock of Healthaxis as of March 19, 2003.

      In addition to being Healthaxis’ largest shareholder, UICI and its subsidiaries constituted, in the aggregate, one of Healthaxis’ largest clients for the years ended December 31, 2002 and 2001. UICI and its subsidiaries accounted for an aggregate of $10.3 million and $29.7 million (37% and 68%) respectively, of

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      See “Item 13. Certain Relationships and Related Transactions” for a complete description of the agreements entered into between Healthaxis and UICI or its subsidiaries that were in effect during 2002. The descriptions of the currently effective agreements involving UICI that are set forth below are summaries and are qualified in their entirety by reference to the definitive agreements.

      Termination of UICI Agreement. On June 17, 2002, the Company consummated an agreement with UICI (the “Termination Agreement”) terminating the Services Agreement between UICI and Healthaxis. Pursuant to the terms of the Services Agreement, Healthaxis provided UICI and its affiliates with technology support services including system integration services, application systems management, data center services, telephony services and PC/LAN services for an initial term of five years, commencing in January 2000. The Services Agreement was terminable without cause by either party, and UICI was not committed to purchase any minimum amount of services from Healthaxis thereunder.

      Under the terms of the Termination Agreement, UICI made a one-time cash payment to the Company in the amount of $6.5 million and tendered 500,000 shares of Healthaxis common stock back to the Company. Approximately 165 Healthaxis employees, previously dedicated to providing services to UICI, were transferred to, and now are employed by, UICI. Approximately 13 previously dedicated employees were terminated by the Company and did not transfer over to UICI in the transaction. As a result, all expenses directly associated with the transferred or terminated employees are no longer incurred by the Company. Under the terms of the Services Agreement, the Company was generally entitled to receive revenues from UICI equaling the sum of the costs allocable under the Services Agreement plus ten percent of such costs. The activities under the Services Agreement had previously been reported as the Company’s Outsourcing segment. As a result of the termination of the Services Agreement, the Outsourcing segment has been accounted for as discontinued operations. See “— Risk Factors — Business Related Risks.”

      Early termination of the Services Agreement was requested by the Company for the following reasons:

	•	Healthaxis’ business strategy is focused on benefit administrator solutions, web connectivity capabilities and imaging and data capture services, and not on running an information technology unit for another company on an outsourced basis. The Services Agreement required significant management attention, which could not be directed toward the effective administration of the Company’s long-term business strategy.
	•	UICI had previously publicly stated that it did not intend to renew the Services Agreement when it expired in December 2005 and that it expected that payments to Healthaxis under the Services Agreement were likely to decline over the remaining term of the agreement, as permitted in the Agreement. Healthaxis’ revenues derived from the Services Agreement declined from $21.4 million in 2000 to $20.7 million in 2001 and were on a downward trend. The future uncertainty associated with the revenues and earnings to be derived from the Services Agreement could be eliminated.
	•	The Termination Agreement provided for the payment of $6.5 million in cash immediately. Management estimated the financial benefit to be received under the Termination Agreement was equal to, or greater than, the amount of which the Company reasonably expected to have received from continuation of the Services Agreement and was, therefore, attractive at this time.

      In addition to the Services Agreement, the Company has provided other services to UICI. These services have included the provision of benefit administrator services to UICIA, a UICI subsidiary that is a third party administrator, and the provision of imaging and data capture services to UICIA and other UICI subsidiaries.

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      The only continuing services that the Company provides to UICI are in the areas of imaging, data capture and EDI transactions. All such services are provided in accordance with contracts negotiated under substantially the same terms and conditions typically afforded other clients. In view of UICI’s substantial ownership of our common stock, any further agreements between UICI and the Company is subject to the approval of the Related Party Transactions Committee of the Company’s board of directors.

      Software License. On January 25, 2001, Healthaxis entered into a software license agreement with UICI. Under the agreement, UICI paid a one-time license fee of approximately $1.8 million for a perpetual, enterprise-wide software license. UICI had the option to terminate the agreement within the first two years of its term, in which case a prorated portion of the one-time license fee would be refunded. The license fee revenue was deferred and was being recognized into revenue pro rata over 24 months. On September 24, 2001 this agreement was amended to shorten the original refund period from December 2002 to March 2002. The remaining amount refundable of $840,000 in the amended agreement was recorded as revenue on a prorata basis over the remaining six-month term of the amended contract. Revenue recognized under this agreement was approximately $1.4 million in 2001 and $420,000 in 2002.

      Warrants, Convertible Debentures and Preferred Stock. UICI previously held approximately $1.7 million of the Company’s 2 % convertible debentures, which were convertible into 185,185 shares of Healthaxis’ Common Stock at a conversion price of $9.00 per share. These convertible debentures were exchanged for 1,424 shares of Preferred Stock and $242,425 cash on July 31, 2002. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview.” UICI continues to also hold 222,396 warrants for the purchase of Healthaxis’ Common Stock at exercise prices ranging from $3.01 to $12.00 per share.

      Proxy Agreement. In connection with the termination of a merger related shareholders’ agreement in November 2001, UICI and Healthaxis entered into a Proxy Agreement that provides for UICI’s grant of a proxy to the Healthaxis Board of Directors to vote 33.3% of the number of Healthaxis shares held of record from time to time by UICI or its affiliates for the sole purpose of electing directors to the Board of Directors of Healthaxis. The voting rights granted by UICI under the Proxy Agreement require that the votes be cast in favor of the nominees that a majority of the Healthaxis directors shall have recommended stand for election. The Proxy does not confer any other voting rights. No UICI directors or personnel are currently Healthaxis directors. It is not expected that any UICI directors or personnel will stand for election at Healthaxis’ 2003 Annual Meeting of Stockholders.

      UICI Administrators, Inc. Healthaxis also provided certain data capture and business applications under a written service license agreement to UICI Administrators, Inc., which was previously a UICI subsidiary that provides administrative services. The agreement with UICI Administrators expired in December 2001, and, on January 17, 2002, UICI sold UICI Administrators, Inc. to American Administrative Group, Inc. (“AAG”), a party unrelated to either UICI or Healthaxis. For the year ended December 31, 2001, UICI Administrators accounted for $5.0 million of revenues under this agreement, which was 11.3% of Healthaxis’ total revenues (including revenues from discontinued operations) for such period. In 2002, we conducted business with AAG without a long-term contract whereby services continued to be provided under the same terms as the expired agreement with UICI Administrators, Inc. For the year ended December 31, 2002, AAG accounted for $4.1 million of Healthaxis revenues under this arrangement, which is 20.5% of Healthaxis revenues. Healthaxis and AAG are negotiating a definitive agreement.

Risk Factors

      This report and the annual report to stockholders contain some forward-looking statements within the meaning of the federal securities laws. Actual results and the timing of some events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors, including, without limitation, those set forth below and elsewhere in this report. In addition to the other

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     Business Related Risks

      As of December 31, 2002, we had an accumulated deficit of approximately $424.60 million, including charges related to our May 2001 restructuring of $279.6 million. The largest of these charges, a $277.2 million goodwill impairment charge, was due to our belief that previous growth expectations could not be met for several reasons, including: (1) a change in our strategic focus; (2) a lack of readily available investment capital to fund previously anticipated growth; (3) the fragmented and volatile nature of the sector in which we operate; (4) the degradation in value of similar types of companies; and (5) our belief that spending by health insurance companies would decline as a result of the economic slowdown in 2001.

      Our recent history of operating losses in our core business, and our limited operating history as a web-enabling software development company and business process outsourcing company, make it difficult to evaluate our future prospects and to know when, if ever, we will become profitable. Furthermore, you should consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in new, unproven, competitive and rapidly evolving markets. While our restructuring plan implemented in May 2001, and our cost reduction initiative in November 2002, brought costs more in line with our revenue base, there can be no assurances that our cash resources will prove adequate, or that we will ever become profitable. These uncertainties negatively affect our business prospects and our stock price.

      For the years ended December 31, 2002 and 2001, UICI and its subsidiaries accounted for an aggregate of approximately $10.3 million and $29.7 million (37% and 68%) respectively, of our total revenues (including revenues from discontinued operations for such periods). On June 11, 2002, we announced our agreement with UICI to an early termination of the Services Agreement, which in 2002 and 2001 accounted for $8.2 million and $20.7 million of our revenues, respectively. Any revenue that we derive from UICI in the future is not expected to be as significant as in the past. This termination will adversely affect our near term revenues, and also our results of operations and financial condition. One reason our results of operations will be negatively affected is because we are unable to reduce some general and administrative and other expenses required to operate as a public company, a portion of which were allocable to the UICI business relationship, and against which we were previously able to earn a profit from UICI. We hope to be able to generate new sources of revenue to replace our business with UICI, but it is unlikely that we will be able to do so in the near term.

      As a result of the termination of the UICI Services Agreement, the business of our remaining clients now represents a more significant component of our continuing operations. For the year ended December 31, 2002, excluding the business generated from UICI under the Services Agreement, our four largest customers (AAG, NCAS (formerly Carefirst Administrators), UICI and Healthscope Benefits) accounted for an aggregate of 57% of revenues with each customer representing more than 10% of revenues. Our largest client, AAG, which accounted for 20.5% of our revenues, is currently doing business with us without a long-term contract, while we and AAG continue to negotiate a definitive agreement. While we expect that a definitive agreement will be executed, there can be no assurance that a definitive agreement will be reached with AAG. We are dependent to a significant degree on our ability to maintain our existing relationships with our clients.

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      Many of our client contracts contain a fixed-price component, and some of these contracts are long-term. Our client contracts typically involve a lengthy implementation period, which makes it more difficult to accurately estimate the costs that we will incur to complete the contract. We sometimes incur costs in excess of our projections and as a result experience lower margins than expected or may incur losses with respect to the project. The nature of our fixed-price arrangements can result in decreased operating margins or increased operating losses, and could materially and adversely affect our business, financial condition and results of operations. This risk is exacerbated in light of the recent termination of the services that we provided to UICI under Services Agreement, which were performed on a cost plus percentage basis.

      We believe that the claims and administration segment of the healthcare industry has historically under-invested in information technology. If the conversion from traditional paper methods to electronic information exchange does not continue to occur, or this conversion occurs at rates below those we currently anticipate, we may not sell a sufficient amount of our products and services to maintain or increase revenues and generate net income. Even if industry participants convert to electronic information exchanges, they may not elect to use Healthaxis’ applications and services. In addition, if companies are unwilling to use third parties to handle the type of mailroom, imaging and data capture services that our BPO Services business unit provides, this portion of our business may not generate revenues at the level we anticipate.

      We compete with a number of competitors in each of our product and market areas. We also compete with the internal information resources and systems of some of our prospective and existing clients. Our competitors could develop or offer solutions superior to those we offer. Some of our current and potential competitors are larger, better capitalized, have greater financial and operating resources and greater market share than we do. These competitors may be able to respond more quickly to changes in customer requirements or preferences. They may also be able to devote greater resources to claims processing services or to the development, promotion and sale of their products.

      We devote substantial resources to satisfying the demands of the claims and administration segment of the healthcare industry for a high level of reliability and quality from its information systems. In the course of client acceptance testing, Healthaxis historically has experienced few application solutions errors. However, application solutions may contain undetected errors. These errors may result in loss of data, or a reduction in the ability to process transactions on a timely basis, which could result in the loss of existing business and future business, as well as the loss of, or delay in, market acceptance of Healthaxis’ application solutions. We have attempted to limit contractually, and through insurance coverage, damages arising from negligent acts, errors, mistakes or omissions in our application solutions, or in rendering services such as data capture. However, these contractual protections could be unenforceable or insufficient to protect us from liability for damages in connection with the successful assertion of one or more large lawsuits.

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      Our future success depends, in significant part, upon the continued services of our executive officers and key personnel. The loss of services of one or more of our executive officers or key employees could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will be able to retain our executive officers or key personnel. We do not have employment agreements with our executive officers or key personnel, although we have entered into change of control agreements with the senior most executive officers. These agreements will operate like an employment agreement in the event of a “change of control” of Healthaxis. Further, if our Chief Executive Officer, James W. McLane, were to cease to serve as such under some circumstances prior to July 31, 2003, then the conversion price at which shares of Preferred Stock could be converted into shares of common stock would be decreased by five percent.

      We rely in part upon third party vendors for the delivery of our products and services to our clients. We have alternatives in each case, but the alternatives could be expensive and time consuming to implement. If any of these vendors ceased providing the product or service on which we rely, our business could also be interrupted until such time as we are able to replace the product or service and integrate it with our own product and service offering. Such interruptions could be in violation of our service level commitments to our customers. The key third party vendors on which we rely include:

	•	Advanced Business Fulfillment — which prints and mails the majority of output from our claims system, namely beneficiary checks, explanation of benefits and letters.
	•	Gentran — which supplies software that supports our ability to receive and transmit transactions and files electronically.
	•	IBM — which provides our data center facilities.
	•	Ingenix — which provides usual and customary databases that we use for determining the reasonableness of a healthcare provider’s fees, as well as certain clinical logic used in the processing of health insurance claims.
	•	Satyam — which supplies custom software development and programming personnel in support of our systems development and integration contracts.
	•	WorldCom, Netlojix and AT&T — which provide telecommunication lines and Internet gateways through which we connect to our clients.

      Our success depends to a significant extent on our ability to protect the proprietary and confidential aspects of our solutions and the tradenames associated with them. Our solutions are not patented, and existing copyright laws offer only limited practical protection. The legal protections afforded to us, or the precautions we take, may be inadequate to prevent misappropriation of our technology or the tradenames associated with our solutions. Any infringement or misappropriation of our proprietary solutions or the related tradenames could have the effect of allowing competitors to use our proprietary information to compete against us, or result in costly litigation in order to protect our rights. In addition, these limited protections do not prevent independent third-party development of functionally equivalent or superior technologies, products, or services.

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      As competing healthcare information systems increase in complexity and overall capabilities, and the functionality of these systems further overlap, we could be subject to claims that our technology infringes on the proprietary rights of third parties. These claims, even if without merit, could subject us to costly litigation and could command the time and attention of our technical, legal, and management teams to defend. Further, if a court determined that we infringed on the intellectual property rights of a third party, we could be required to:

	•	Develop non-infringing technology or tradenames;
	•	Obtain a license to the intellectual property;
	•	Stop selling the applications or using names that contain the infringing intellectual property; or
	•	Pay substantial damage awards.

      If we cannot develop non-infringing technology or tradenames, or obtain a license on commercially reasonable terms, any of the above listed potential court-ordered requirements could adversely impact our operations and revenues.

      Many of our service agreements contain performance standards. Healthaxis could fail to meet some contractual performance standards related to turnaround times, availability, and quality standards set forth in its service agreements. Our failure to meet these standards could result in the termination of these agreements, as well as financial penalties from current clients and decreased sales to potential clients. These penalties range from less than 1% to a maximum of 50% of the aggregate amount payable under these agreements. Although we are unaware of any current instances of non-performance, if we are unable to maintain performance standards, we may experience decreased sales, decreased revenues, and continued losses.

      We conduct imaging and data capture operations related to the conversion of insurance claims information to electronic form in Jamaica through an indirect subsidiary. For the year ended December 31, 2002, we earned 11.6% of our total revenues from our Jamaican operations. There is less government regulation in Jamaica than in the United States, and there may be more difficulty in enforcing Jamaican legal rights. Additionally, there is the possibility of expropriation or confiscatory taxation, limitations on the removal of property or other assets, political or social instability, labor difficulties, or diplomatic developments that could affect our Jamaican operations and assets. While these factors have not to date had a material adverse impact on our business, if an adverse event occurred, it could materially disrupt our business operations, jeopardizing our ability to meet our contractual obligations and likely leading to higher expenses.

      The proximity of our Jamaican operation to the ocean-front could expose our facility to damage from a tropical storm. While we maintain insurance coverage on the facility, we could experience downtime and could incur additional expenses related to relocation or repair of the facility, should this occur.

      Currently, our Jamaican subsidiary is able to take advantage of the Jamaican labor market, which provides competent and inexpensive labor. As of December 31, 2002, our Jamaican subsidiary had approximately 80 employees. If the risks or problems posed by conducting operations in Jamaica require

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      UICI owns or controls approximately 47% of Healthaxis’ outstanding common stock as of March 19, 2003. Although in June 2002 we terminated the UICI Services Agreement, we continue to provide UICI and its affiliates with some services. In light of the potential for conflicts of interest that would arise if we were to enter into new contracts with UICI, any such contracts are subject to the approval of our Board of Directors and our Related Party Transactions Committee, the latter of which is comprised solely of independent Board members. While we have no intention of entering into any contract with UICI that is less favorable to us than are the contracts that we enter with unrelated third parties, our Related Party Transactions Committee is specifically charged with ensuring that this does not occur.

      As part of our long-term business strategy, we may consider acquisitions of similar or complementary businesses. See “— Business Strategy.” If we are not correct when we assess the value, strengths, weaknesses, liabilities and potential profitability of acquisition candidates, or if we are not successful in integrating the operations of the acquired businesses, the success of the combined business could be compromised. Any future acquisitions will be accompanied by the risks commonly associated with acquisitions. These risks include, among others, potential exposure to unknown liabilities of acquired companies and to acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the acquired companies, the potential disruption to the business of the combined company and potential diversion of management’s time and attention, the impairment of relationships with and the possible loss of key employees and clients as a result of the changes in management, potential future write-downs related to goodwill impairment in connection with acquisitions, and dilution to the stockholders of the combined company if the acquisition is made for stock of the combined company. In addition, asset classes, technologies or businesses of acquired companies may not be effectively assimilated into our business or have a positive effect on the combined company’s revenues or earnings. The combined company may also incur significant expense to complete acquisitions and to support the acquired asset classes and businesses. Further, any such acquisitions may be funded with cash, debt or equity, which could have the effect of diluting the holdings or limiting the rights of stockholders. Finally, we may not be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms.

      Like other companies in the health information technology industry and business process outsourcing industry, it takes us a substantial amount of time to bid for the business of a new client, win the business of a new client, and, finally, convert that business into revenue. These time lags mean that even if we are successful in winning new client business, we may not benefit from the revenues derived from that business for some time. This industry phenomenon may dampen our near term potential growth rates.

      If insurance payers do not accept the Internet as a medium for policy sales, claims and benefit administration and customer relationship management, we may not be able to increase revenues through sales

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      Some of our solutions rely on Internet access and are, therefore, subject to a number of risks, including risks associated with disruptions, delays or losses due to technical difficulties, natural causes or security breaches. These problems may adversely affect the success of some of our software hosting services because our ability to deliver these services to clients is dependent on the use of the Internet as a medium of effective communication. If we were to encounter these problems, we could lose revenues from clients or potential clients and could also incur additional costs, which would negatively impact our operating results.

      The Internet is subject to the risk of changing government regulation. A number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. In particular, we could be subject to the governmental adoption of regulations that charge Internet access fees or impose taxes on subscriptions. Laws or regulations may also be adopted relating to liability for information retrieved from or transmitted over the Internet, on line content regulation, user privacy and the quality of products and services. A number of legislative proposals have been made that would impose additional taxes on the sale of goods and services over the Internet. New legal requirements or interpretations applicable to the Internet could depress our revenues through limitations on the use of the Internet for our solutions or prohibitions on the sale of a particular solution, increase our cost of doing business, or otherwise have a material adverse effect on our business.

      The insurance industry is highly regulated and the regulations that govern our clients are subject to change. Changes in these regulations could require us to expend additional financial and managerial resources to revise our products and services in order to comply.

      Some of the applications solutions we provide to our clients will require modifications in order to achieve or maintain compliance with the Electronic Transactions and Code Sets, Privacy, and Security provisions of the Health Insurance Portability and Accountability Act (“HIPAA”). In addition, some aspects of Healthaxis’ internal operations must become HIPAA-compliant. The timing of compliance with HIPAA requirements varies depending upon the applicable rule and effectiveness dates. We believe Healthaxis will be able to meet the HIPAA requirements currently published for our internal operations and for our clients. If Healthaxis is unable to deliver applications solutions which achieve or maintain compliance with the applicable HIPAA rules, then clients may move business to applications solutions providers whose systems are, or will be, HIPAA-compliant. As a result, our business could suffer. If Healthaxis’ internal operations are not HIPAA-compliant, then we may also face contractual liability to the extent our business associate and other contracts require compliance. Certain states may also impose direct liability in the form of civil penalties for our failure to be HIPAA-compliant. In the event that we lose business to competitors, or are required to pay amounts as a result of contractual liability claims, the market price of our common stock may decline.

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      Health insurance payer organizations are often required to maintain restricted cash reserves and satisfy strict balance sheet ratios promulgated by state regulatory agencies. If insurance payer organizations are unable to pay for our services because of their need to maintain cash reserves or failure to maintain balance sheet ratios or solvency, our ability to collect fees for services rendered would be impaired and our results of operations could be adversely affected.

      There has been, and continues to be, acquisition and consolidation activity in the insurance payer organizations industry. Mergers or consolidations of payer organizations in the future could decrease the number of our existing and potential customers. A smaller market for our products and services could depress our revenue prospects.

      During the past several years, the healthcare industry has been subject to increasing levels of government regulation of, among other things, reimbursement rates and some capital expenditures. In addition, proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates and otherwise adversely affect the healthcare industry, which could adversely impact our clients’ business which could, in turn, adversely affect our business. The impact of regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory requirements or interpretations.

      As more fully described under “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Overview”, and in Note 20 to the Consolidated Financial Statements, in July 2002 we issued shares of Preferred Stock and paid a cash amount in exchange for all of our 2% convertible debentures. A number of the following “risk factors” relate to risks associated with our issuance of the shares of Preferred Stock.

      Our Preferred Stock has economic rights senior to our common stock. For example, the terms of the Preferred Stock provide that if we liquidate Healthaxis, the holders of the Preferred Stock will receive some assets of Healthaxis prior to, and in preference to, our common shareholders. More specifically, in the event of a liquidation, the holders of our Preferred Stock will receive an amount per share equal to the greater of the stated value of the Preferred Stock (currently, $23.5 million) plus all accrued but unpaid dividends, or their pro rata portion of the assets of Healthaxis. In part, this preference means that if we liquidate prior to the conversion of our Preferred Stock, and our total assets available for distribution are less than $23.5 million plus all accrued but unpaid dividends, then our common shareholders will receive nothing in the liquidation. This preference for the Preferred Stock may adversely affect the price of our common stock.

      The terms of the Preferred Stock provide that in some situations the holders of the Preferred Stock can force us to redeem, or buy back, their shares. This redemption may adversely affect us, because we may not

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      The terms of the Preferred Stock provide that cumulative dividends be paid at the rate of 2% per year, payable semi-annually. In general, we may choose to pay the dividends either in cash or by issuing shares of common stock, although in some circumstances we are required to pay cash dividends. Our obligation to pay dividends is not dependent on our financial performance. If we pay cash dividends, our cash resources will be depleted, while if we pay stock dividends, our common shareholders will experience dilution.

      The convertibility of the Preferred Stock into shares of our common stock, and the possibility that the conversion price could be adjusted downward in some limited situations, could dilute our common stock and could adversely affect the price of our common stock. The holders of the Preferred Stock may elect to convert their shares into shares of common stock at any time. Under some limited circumstances involving a substantial increase in the market price of our common stock, we have the right to require the conversion of all of the shares of Preferred Stock. The conversion price for the Preferred Stock is $2.625 per share, although this conversion price is subject to adjustments in some limited situations. If under some circumstances, we issue options or sell stock or stock equivalents at a price per share that is below the then-applicable conversion price of the Preferred Stock, then the conversion price of the Preferred Stock could be adjusted downward, with the result that the number of shares of common stock issuable for each share of Preferred Stock would increase. In addition, the conversion price of the Preferred Stock could be adjusted downward in the event that we declare or pay a dividend or distribute shares of common stock, whether in shares of common stock or in other property, or if we effect a stock split, or if James W. McLane, our chief executive officer, resigns or is terminated without cause on or before July 31, 2003.

      Except as otherwise provided by applicable law, the holders of the Preferred Stock do not have the right to vote together with the holders of common stock. The holders of Preferred Stock do, however, have the right to vote separately as a class in a number of circumstances, specified in the Certificate of Designation, when we propose to take some actions, including:

	•	Changing our charter, bylaws or the Certificate of Designation in ways that would adversely affect the rights of the holders of the Preferred Stock;
	•	In some cases, increasing or decreasing the total number of authorized shares of our common stock or Preferred Stock;
	•	Effecting a reverse stock split of our common stock, declaring or paying any dividends on shares of our common stock, or otherwise redeeming or repurchasing any shares of our common stock in most circumstances;

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	•	Entering into any agreement or arrangement with any of our officers, directors or some other affiliates, except under limited circumstances;
	•	Issuing any securities having a preference over, or being on parity with, the Preferred Stock;
	•	Liquidating, dissolving or winding-up our business or that of any of our subsidiaries;
	•	Entering into any transaction to sell or otherwise dispose of all or substantially of our assets, or entering into some reorganizations, mergers, consolidations or similar transactions, or reclassifications, recapitalizations or other changes to our capital stock;
	•	Selling or otherwise disposing of any material portion of our assets, except under limited circumstances;
	•	Incurring indebtedness or otherwise becoming liable with respect to debts over a specified level, or otherwise pledging any shares of our capital stock other than in the ordinary course of business;
	•	Entering into a new or different line of business, outside of the provision of technology services or software applications; and
	•	Engaging in any transaction involving the sale of securities that would result in an adjustment in the conversion price of the Preferred Stock below a specified level.

      In addition to obtaining the approval of the holders of the Preferred Stock with respect to a proposed sale or other disposition of Healthaxis, or of all or substantially all of its assets, we also are required to notify the holders of Preferred Stock in advance of our entry into any related letter of intent or similar written instrument. In deliberating and taking action to approve or disapprove such a transaction, the holders of Preferred Stock are required to exercise good faith. However, the right of the holders of Preferred Stock to vote against, and thereby block, a sale transaction involving Healthaxis could make Healthaxis less attractive to a third party and could prevent our common shareholders from realizing a premium over the then-prevailing market price for their shares in the event a sale transaction is proposed.

      A substantial number of shares of our common stock became eligible for sale in the public market with our registration statement effective December 13, 2002, related to the resale of the shares of our common stock underlying the Preferred Stock. We are required to keep such registration statement effective for up to two years from the date of effectiveness of such registration statement and, if under some circumstances, the shares of common stock offered thereby cannot be sold under such registration statement, then we are required to pay to the holders of Preferred Stock a registration delay payment penalty. In addition to the stock registration obligations that we owe to the holders of Preferred Stock, we also owe registration obligations to other securityholders. Sales of substantial amounts of our shares of common stock in the public market, or the possibility of these sales, may adversely affect our stock price.

      UICI owns or controls approximately 47% of Healthaxis’ outstanding common stock as of March 19, 2003. In the event UICI did not favor a proposed change of control of Healthaxis, this concentration of ownership could have the effect of delaying or preventing a change in control of Healthaxis and could eliminate the opportunity for our shareholders to realize a premium over the then-prevailing market price for their shares. In addition, sales by UICI of a significant number of shares of our common stock could have an adverse effect upon the prevailing market price of our common stock.

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      UICI and some members of Healthaxis’ current management and Board of Directors collectively own or control a majority of the outstanding Healthaxis common stock. In addition, by virtue of a Proxy Agreement dated November 7, 2001, UICI conveyed the right to vote 33.3% of its shares to the Healthaxis Board of Directors for the sole purpose of electing directors. Acting together, UICI and these individuals can control the election of directors. As a result, public shareholders may be unable to affect the composition of the Healthaxis’ board or replace current management.

      Continued listing on The NASDAQ SmallCap Market of our common stock under the current NASDAQ rules will require that: (a) our common stock obtain a per share price of at least $1.00 per share for 10 consecutive trading days before the expiration of the applicable minimum bid price grace period under the NASDAQ listing rules, and (b) that we otherwise maintain compliance with other applicable listing standards. We believe we maintain compliance with applicable listing standards, except for the per share price requirement. The recent price of our common stock has been below $1.00 per share. If our common stock were delisted from The NASDAQ SmallCap Market, we would likely be traded on the over-the-counter bulletin board market (“OTCBB”), or in the so-called “pink sheets.” Changes to the NASDAQ minimum bid price rules and a proposed new marketplace to replace the OTCBB may impact the time frames and manner for the continued listing of our stock. If our common stock were delisted, fewer investors would have access to trade our common stock, which may result in reduced demand for the stock. In addition, our common stock may become subject to penny stock regulations. The penny stock regulations require that broker-dealers who recommend penny stocks to persons other than institutional accredited investors must make a special suitability determination for the purchaser, receive the purchaser’s written agreement to the transaction prior to the sale and provide the purchaser with risk disclosure documents which identify risks associated with investing in penny stocks. Furthermore, the broker-dealer must obtain a signed and dated acknowledgement from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before effecting a transaction in penny stock. These requirements have historically resulted in reducing the level of trading activity in securities that become subject to the penny stock rules. Holders of our common stock may find it difficult to sell their shares of common stock, which could adversely affect the market price of our common stock.

      Healthaxis’ headquarters is located in a leased facility in Irving, Texas, a suburb of the Dallas metropolitan area. In December 2001, the Company sold a 47,000 square foot building in East Norriton, Pennsylvania, which had been the Company’s headquarters until the second quarter of 2001. The Company now owns no real property and conducts its business through the following leased facilities:

      Utah and Jamaica facilities are utilized exclusively by the Company’s Business Processing Outsourcing Services business unit. The Company believes its existing facilities are suitable to conduct its present business. The Company believes that its leased facilities are well maintained and in good operating condition and are adequate for its present and anticipated levels of operation.

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      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 results of operations or financial position of the Company.

      None.

PART II

Price Range of Common Stock

      The listing of Healthaxis’ common stock was transferred from the NASDAQ National Market to the NASDAQ SmallCap Market on July 16, 2002, where it continues to trade under the symbol HAXS. The continued listing of Healthaxis common stock on the NASDAQ SmallCap Market will be subject to the Company’s continuing qualification with the NASDAQ SmallCap Market listing requirements, including the requirement that the Healthaxis’ common stock obtain a price of $1.00 per share for ten consecutive days before expiration of the applicable bid price requirement grace period. Changes to the NASDAQ minimum bid price rules may impact the time frames and manner for the continued listing of our stock. The following table shows the range of quarterly high and low sale prices for Healthaxis common stock over the last two years.

      On March 19, 2003, the closing price of Healthaxis common stock was $.28. There were 262 shareholders of record as of February 18, 2003 although Healthaxis believes that the number of beneficial owners of its common stock is substantially greater.

Dividends

      Healthaxis did not pay a cash dividend on its common stock in 2002 or 2001 and does not anticipate paying cash dividends on its common stock for the foreseeable future. Any payment of cash dividends on its common stock in the future will be at the discretion of the board of directors and subject to some limitations under the Pennsylvania Business Corporation Law, the Certificate of designation of our Preferred Stock, and will depend upon factors such as the Company’s earning levels, capital requirements, financial condition and other factors deemed relevant by the board of directors.

      The following selected consolidated financial information has been derived from the consolidated financial statements of Healthaxis and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the consolidated financial statements and notes thereto included elsewhere in this report. The consolidated financial statements of Healthaxis have been audited by Ernst & Young LLP for 2002 and 2001, and by BDO Seidman, LLP for 2000, 1999 and 1998. Healthaxis’ financial results include those of its subsidiaries. All information has been restated to present as discontinued operations Healthaxis’ insurance operations (effective November 30, 1999), Healthaxis’ retail

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(1)	Book value per common share is computed by dividing total equity attributable to common stockholders by the number of common shares outstanding at the end of each period.
(2)	Pro forma book value per common share is computed by dividing total equity by the number of shares outstanding at the end of each period assuming the conversion of Series A preferred stock into common stock in 1998 and 2002.

      The following discussion contains forward looking statements that involve risks and uncertainties. Our actual results could differ materially form those discussed in the forward looking statements as a result of various factors, including those set forth under “Business-Risk Factors” elsewhere in this report or in the information incorporated by reference in this report. You should read the following discussion and analysis in conjunction with “Selected Consolidated Financial Data” included in this report, as well as our consolidated financial statements and related notes thereto appearing elsewhere in this report.

Overview

      Healthaxis is a technology and business process 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, 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 that are offered to its technology clients and on a stand-alone basis. Healthaxis believes that its solutions enable a client to reduce their administrative costs, enhance their customer service, grow their revenues and improve their profitability.

      The Company continued to build a stronger foundation for the future during 2002:

	•	It realigned its sales force against better defined target markets
	•	It generated nine new significant contracts, which are projected to yield over $11 million in revenue between 2002 and 2005. Most of this projected revenue has yet to be realized.
	•	It completed the development of turnkey web-based self-service capabilities for managed care companies (self-service modules for members, employees and employers) and completed seven implementations of the new web-enrollment product and two more installations of the web-based broker product
	•	It merged its web technology and benefit administration capabilities, in November 2002, to better serve its existing customers and to open up new commercial and government market opportunities. Two significant state contracts reflected this combination of capabilities

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	•	It continued to strengthen and broaden its business partnerships to further its business development and technology development efforts
	•	It changed the leadership of its Imaging and Data Capture business to improve productivity and operating results
	•	It converted into cash the UICI Information Technology Services Agreement, which it believes represented a perpetually declining revenue stream and non-strategic business unit
	•	It exchanged all of its long-term debt for shares of preferred stock and a cash payment
	•	It lowered overall operating costs, exclusive of its UICI outsourcing segment, by almost 50% over the past 2 years. The expected operating cost break-even was lowered to the $22 to $23 million range for 2003, depending on the mix of the business
	•	It outsourced some of its non-core functions, such as co-locating its data center to an IBM hosting facility
	•	It preserved cash while investing in technology improvements and productivity initiatives. Its liquid cash resources, coupled with the elimination of its long-term debt, gives it flexibility to pursue a variety of strategic channels

      Revenue Model. Healthaxis derives revenue from a number of sources. Set forth below is a description of our revenues generated by each of our suite of products and solutions.

      Revenues generated by our benefits administration and claims processing systems are either transaction based or derived from providing professional services. The transaction revenue is a combination of a per-employee-per-month fee for the use of our proprietary applications and a per document fee for the printing and mailing of system output (benefit checks, explanations of benefits and letters). The transaction revenue is based on an application service provider model, where we host the hardware and software and perform some print and mail services on behalf of clients. Professional services revenue is generated from direct billing for our staff time. These billings are generally derived from converting a client’s existing system, client training and tailoring custom solutions for a client. Professional services generally are billed on a flat rate per hour. In some cases, a project may be done for a fixed price. During 2002, approximately 82% of revenues from this suite of products were transaction based and 18% were derived from professional services.

      Revenues generated by our web connectivity (WebAxis) products are derived from licensing of our proprietary software products and providing professional services. The licensing revenue is a combination of per-member-per-month fees and fixed price license fees. The fixed price license fees historically have been recognized over a period of time, due to contract terms (such as a right of return). In the future, we may enter into one-time license fee agreements, which fees may be recognized upon the delivery of the product. Professional service revenue is generated from direct billing for our staff time. These billings generally are associated with implementation and integration of our software product into our client’s legacy system. Professional services may be billed on a flat rate per hour, or a project may be undertaken for a fixed price. Revenue on fixed price projects is recognized on the percentage of completion basis. Contracts generally include an up-front payment intended to recoup the start-up costs incurred in setting up a new client. Such fees, along with the associated costs, are generally deferred and recognized over the life of the transaction-based contract. During 2002, approximately 36% of revenues from this suite of products were generated from software licenses and 64% from professional services.

      Revenues generated from BPO services are transaction based. Fees for mail handling, scanning and converting insurance claims from paper to electronic format, and image storage and retrieval, are priced on a per-document or a per-image basis. Such revenue is recognized in the month the services are performed. Contracts generally include an up-front payment intended to recoup the start-up costs incurred in setting up a new client. Such fees are generally deferred and recognized over the life of the transaction-based contract.

      November 2002 Cost Reduction Initiative. On November 12, 2002, Healthaxis began a cost reduction initiative designed to more closely align expenses with revenues and to enhance the Company’s operating

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      Management believes that the cost reduction initiative serves not only the Company’s financial goals, but is also consistent with its strategic business goals. Healthaxis has spent significant resources in the past two years developing certain products and functionality. That development effort is now substantially complete and the level of human resources necessary to sustain the effort is no longer required. In addition, the Company now outsources portions of its software development work to Satyam Computer Services Ltd., a leading global consulting and IT services company based in India. The Company will now focus on selling these capabilities to new customers, as well as using them to strengthen relationships with existing customers. In addition, the Company has, in recent periods, sharpened its focus on more specific target markets with more specific product offerings, the effect of which has been to reduce its human resource requirements. Hence, management believes that its reduced labor force will be able to effectively serve its existing customer base, while also focusing on new market opportunities.

      May 2001 Restructuring Plan. The foregoing 2002 cost reduction initiative is in addition to the Company’s May 2001 restructuring plan, which is further described in Note 7 to the Consolidated Financial Statements. In connection with its restructuring and reorganization, the Company accrued or recorded restructuring charges of $279.6 million in the second quarter of 2001. Those costs are generally related to impairment of long-lived assets and goodwill, and severance costs for terminated employees. In total, counting the reduction-in-force and other expense reductions, the May 2001 initiative was designed to save in excess of $11.0 million annually. Based upon the results for 2002 and the latter half of 2001, management believes that it has achieved the anticipated level of savings. The Company was successful in lowering headcount, eliminating the development and marketing of certain products, lowering operating costs and moving its headquarters from Pennsylvania to Texas.

      Convertible Debenture Exchange. On July 31, 2002 the Company completed a transaction providing for the cancellation of its $27.5 million 2% convertible debentures in exchange for issuance to the debenture holders of shares of Series A Convertible Preferred Stock (“Preferred Stock”) and the payment of $4.0 million cash. The Preferred Stock is convertible into shares of Healthaxis common stock at a conversion price of $2.625 (subject to downward adjustment in certain events), and carries a fixed dividend rate of 2% per annum, payable semi-annually in cash or shares of common stock. As more fully described in Note 20 to the Consolidated Financial Statements, the Preferred Stock 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 (currently $23.5 million) plus all accrued but unpaid dividends, and in the event of our failure to comply with certain contractual provisions, redemption rights. 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. See “Business — Risk Factors — Capital Structure and Trading Market Risks.”

      The issuance of the shares of Preferred Stock and the corresponding extinguishment of long-term debt reflects continuing efforts to strengthen the Company’s capital structure. We believe the existence of the long-term debt was a negative factor in the minds of existing customers, potential customers and shareholders. We also considered factors mitigating against issuing the Preferred Stock and paying cash in exchange for the convertible debentures. These factors included, for example, the need to pay $4.0 million in cash to effect the exchange. Had the Company not entered into the exchange, it could have had additional liquidity for ongoing operations. The convertible debentures did not mature until September 2005, and therefore, did not represent an immediate use of liquidity. It is also possible that a different transaction could have been negotiated at a later date, or the convertible debentures could have been paid in full when due through the issuance of other financial securities. On balance, after consideration of all the factors, we concluded that the existence of the

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      UICI Relationship: UICI is currently our largest single shareholder, beneficially owning approximately 47% of Healthaxis common stock as of March 19, 2003. UICI and its subsidiaries, in the aggregate, also constituted our largest single client during 2002 and 2001, accounting for 37% and 68%, respectively, of our total revenues (including revenues from discontinued operations for such periods). On June 17, 2002 the Company consummated an agreement providing for the termination of our Services Agreement with UICI. The termination of the Services Agreement substantially reduced Healthaxis’ business relationship with UICI. See “Business — Relationship with UICI” for a summary of the terms under which the Services Agreement was terminated, as well as other information regarding our relationship with UICI. See also Note 5 of the Notes to Consolidated Financial Statements. Healthaxis previously reported the revenues and expenses associated with the Services Agreement as those of our Outsourcing segment. As a result of the termination of the Services Agreement, the Company’s consolidated 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.

Results of Operations

      The Company focuses its cost containment initiatives on cash operating expenses. Operating depreciation / amortization, stock based compensation, amortization of intangible assets, loss on sale of building and the restructuring and impairment charges, with the exception of severance payments, are all non-cash expenses.

      Operating depreciation / amortization is the systematic charge to expense for property, equipment, and software used in the operation of the business. Stock based compensation is the result of stock options that were granted at an exercise price below the market price of the Company’s common stock in 2000 and are charged to expense as vested, options that were repriced in 2000 and are accounted for as variable options with a “mark-to-market” expense charge to the extent the Company’s stock price exceeds $2.49, and charges from the vesting of an Insurdata option plan that was assumed as part of the Insurdata Merger. Amortization of intangibles is the systematic expensing of customer base and developed software. The restructuring charges are described in “November 2002 Cost Reduction Initiative” and “May 2001 Restructuring Plan” previously discussed. The loss on sale of building relates to the Company’s sale of its prior headquarters building and property located in Pennsylvania.

      The following tables are presented in such a manner that these significant non-cash expenses are distinguishable in 2002, 2001 and 2000. All information has been restated to present as discontinued

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