e10vk
U.S. SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2006
|
|
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission File Number:
001-15667
ACCESS PLANS USA,
INC.
(Exact name of registrant as
specified in its charter)
|
|
|
OKLAHOMA
|
|
73-1494382
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
4929
ROYAL LANE, SUITE 200
IRVING, TEXAS 75063
(Address
of principal executive offices)
(866) 578-1665
(Registrants
telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange
Act:
Common Stock, $0.01 Par Value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined under Rule 405 of the
Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter
periods 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 in this form, and no disclosure will be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. Yes o No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer (as defined by
Rule 12b-2
of the Act).
Large Accelerated
Filer o Accelerated
Filer o Non-accelerated
Filer þ
Indicate by check mark wither the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act)
Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of
June 30, 2006 (the last business day of our most recent
second fiscal quarter), was $22,296,059 based on the closing
sale price on that date.
As of March 30, 2007, 18,011,292 shares of the
issuers common stock, $.01 par value, were outstanding.
ACCESS
PLANS USA, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2006
TABLE OF CONTENTS
2
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements under the captions Item 1.
Description of Business, Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations, and elsewhere in this report
constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of
forward-looking terminology such as anticipates,
believes, expects, may,
will, or should or other variations
thereon, or by discussions of strategies that involve risks and
uncertainties. Our actual results or industry results may be
materially different from any future results expressed or
implied by such forward-looking statements. Some of the factors
that could cause actual results to differ materially are
described under the heading Additional Factors That May
Affect Our Future Results and include general economic and
business conditions, our ability to implement our business
strategies, competition, availability of key personnel,
increasing operating costs, unsuccessful promotional efforts,
changes in brand awareness, acceptance of new product offerings,
retention of members and independent marketing representatives
and changes in, or the failure to comply with government
regulations. Any forward-looking statements contained in this
report represent our judgment as of the date of this report. We
disclaim, however, any intent or obligation to update these
forward-looking statements. As a result, the reader is cautioned
not to place undue reliance on these forward-looking statements.
3
PART I
|
|
ITEM 1.
|
DESCRIPTION
OF BUSINESS
|
Access Plans USA, Inc. (Access Plans) develops and distributes
quality affordable consumer driven health care programs for
individuals, families, affinity groups and employer groups
across the nation. Our products and programs are designed to
deal with the rising costs of health care. They include health
insurance plans and non-insurance health care discount programs
to provide solutions for the millions of Americans who can no
longer afford or do not have access to traditional health
insurance coverage.
Beginning in 2007, our operations are organized under three
business divisions:
Consumer Plan Division. Our Consumer
Plan Division, which operates as The Capella Group, Inc.
(Capella) and is referred to as the Consumer
Healthcare Savings segment, develops and markets non-insurance
medical discount programs through multiple distribution channels.
Insurance Marketing Division. Our
Insurance Marketing Division, which operates as Insuraco USA LLC
(Insuraco), provides web-based technology, specialty
products and marketing of individual health insurance products
and related benefit plans, primarily through a broad network of
independent agency channels.
Regional Health Care Division. Our
Regional Health Care Division, which operates as Access
HealthSource, Inc./Access Administrators, Inc. (AAI)
and is referred to as the Employer and Group Healthcare Services
segment, offers third party claims administration, provider
network management, and utilization management services for
employer groups that utilize partially self funded strategies to
finance their employee benefit programs.
The current organization of our business divisions is a result
of our January 30, 2007, merger with Insurance Capital
Management USA, Inc. (ICM). Other results of our
merger with ICM are:
|
|
|
|
|
We have access to additional distribution channels, including a
large network of insurance agents that ICM has recruited to sell
its products;
|
|
|
|
We gained expertise in taking advantage of electronic technology
and web-based services to shorten product development and
implementation time;
|
|
|
|
We are able to complement our non-insurance medical discount
programs with a broad range of health insurance and specialty
insurance products; and
|
|
|
|
We have reorganized our management team to include key members
of the ICM management team, including ICMs founder, Peter
W. Nauert, who is now our President and Chief Executive Officer
and the Chairman of our Board of Directors. Mr. Nauert, a
former C.E.O. of two public companies, brings us significant
expertise and experience in the health insurance industry.
|
In order to more properly reflect our broadened mission of
providing access to affordable healthcare for all Americans, we
changed our name from Precis, Inc. to Access Plans USA, Inc.
upon the completion of our merger with ICM.
In 2006, we did not have access to ICMs products and
distribution channels and operated three business segments. The
majority of our revenue was derived from our discount medical
programs that continue as one of our primary business segments.
See Note 16 Segmented Information in the
Financial Statements included elsewhere in this Annual Report.
For the year ended December 31, 2006, 65.9% of our
consolidated revenue was from discount medical programs and
33.7% was derived primarily from our third party administration
services that adjudicate and pay medical claims for employers
who maintain self-funded or partially self-funded healthcare
programs. We also operated a financial services division in
2006, but results from that division were not material to our
operations in 2006. Our reportable business segments in 2007
will include those of ICM.
Through 2006, the number of active members in our discount
medical programs continued to decline, leading to decreased
revenues from those operations. We discuss these results in
detail throughout this report. We have taken significant
cost-cutting actions to offset the loss in this revenue and have
taken other actions, including our merger
4
with ICM, to increase membership levels by developing additional
distribution channels and by adding new products and services to
the suite of programs we offer.
Throughout 2006, we have continued the measures and initiatives
to improve our operating efficiencies and performance,
especially through cost reductions. These measures and
initiatives include (i) discontinuance of certain
non-profitable operations, (ii) the conversion of certain
of our customer service and system support functions from a
fixed to a variable cost structure by outsourcing them,
(iii) the termination of certain equipment capital leases,
and (iv) personnel reductions and other cost reduction
actions. The discontinued operations had losses of $910,000 in
2006. The other initiatives resulted in restructuring costs
during the fourth quarter of 2006 of $449,000. Further, AAI
recorded a $4,066,000 impairment to goodwill including tax
considerations of $426,000 that resulted from current and
projected reductions in earnings primarily due to a decline in
the number of lives covered under plans that it administered and
Capella recorded a $2,800,000 impairment to goodwill due to the
continuing decline in members and revenue. Including these
charges, we had a net loss of $7,724,000. Without these charges,
our net income would have been $501,000.
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
the Statements of Beneficial Ownership of Securities on
Forms 3, 4 and 5 for Directors and Officers of the Company
and all amendments to such reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, are available free of charge at the Securities and
Exchange Commission (SEC) website at www.sec.gov. We
have posted on our website, www.accessplansusa.com, our
(1) Code of Conduct, (2) the charters for our Audit
Committee, the Compensation Committee, and the Corporate
Governance and Nominating Committee , and (3) our SEC
filings.
Healthcare
Industry Challenges and Market Opportunity
Our market is directly impacted by the state of turmoil and
crisis in the healthcare industry.
The uninsured. It is estimated that
15.9% of all Americans, or 46.6 million individuals, were
without health insurance coverage in 2005, an increase of
.8 million people compared to 2004. [Source:
U.S. Census Bureau Statistics published by the
U.S. Department of Commerce.] In addition, 8.5% of people
with incomes over $75,000 were uninsured. [Source:
U.S. Census Bureau and Center on Budget and Policy
Priorities, August 2006.]
The percentage of people working full-time without health
insurance in 2005 was 17.7%, an increase from 17.3% in 2004.
[Source: U.S. Census Bureau Statistics
published by U.S. Department of Commerce.] Nationally,
healthcare expenditures topped $1.9 trillion in 2004, up from
$1.2 trillion in 1999. [Source: Centers for Medicare and
Medicaid Services.] Costs of healthcare (in doctors
offices and hospitals) for this patient population are often far
higher than the amount an insured and the insurance company
would pay for the same healthcare services for its insureds. The
growing number of uninsured people have special needs for
accessing affordable health care.
The insured and underinsured. In 2005,
59.5% of the U.S. population participated in
employer-sponsored medical insurance plans, showing a steady
year-by-year
decrease from 62.6% in 2001. [Source: U.S. Census Bureau
and Center on Budget and Policy Priorities, August 2006.] In
addition, data from the Kaiser Family Foundation show that
employers are requiring employees to contribute more in
cost-sharing (premiums, deductibles
and/or
co-payments) for their health insurance. [Source: Kaiser Family
Foundation and Health Research and Educational Trust,
Employer Health Benefits, Annual Salary, 2006.]
Between 2005 and 2006, premiums for employer-sponsored health
insurance rose 7.7%, following consecutive years of double-digit
premium increases. The increases are hitting small employers
(under 200 workers) particularly hard. These small firms are
more likely to have experienced an increase in premiums greater
than 15%. These costs are not only being felt by the employer,
but also by the employees. The average monthly contribution by
workers for single and family healthcare coverage rose from $8
and $52, respectively, in 1988 to $52 and $248, respectively, in
2006. The average cost of family coverage is now nearly
$11,480 per year, including workers contributions of nearly
$2,973. Not surprisingly, employers are looking for
alternatives. [Source: Employer Health Benefits 2006
Summary of Findings, published by the Kaiser Family
Foundation].
Over-utilization of the healthcare system is one of the factors
behind these trends. American citizens are utilizing healthcare
services at an ever-increasing rate. Behind this phenomenon is
the fact that insurance plans and
5
healthcare management organizations are structured to encourage
usage. Small co-payments, generally from $10 or $25 per
office visit, encourage insured consumers to use the healthcare
system more frequently because they do not perceive themselves
ultimately as having to pay the full costs of the medical
services received.
A number of insurers have pulled out of certain states, due to
state regulations that no longer provide for a viable operating
environment for many insurance companies. As a result of these
health coverage cancellations, those formerly insured
individuals and families are required to pay more for their
insurance coverage, cannot obtain any coverage because of
pre-existing conditions or simply remain uninsured for
healthcare.
In addition, recently enacted federal legislation provides for
tax favorable Health Savings Accounts (HSAs).
Individuals with high deductible health insurance coverage can
deduct contributions to their HSA from their reported income for
tax purposes. In 2007, the qualifying health insurance must have
a deductible of at least $1,100 for individuals and $2,200 for
families and the maximum amount that can be contributed is
$2,850 for individuals and $5,650 for families. Amounts
contributed to the HSAs can be used for certain uninsured
medical expenses, but generally cannot be used to pay for the
health insurance premium. Individuals can establish HSAs without
regard to their income and amounts contributed to the HSAs do
not have to be used within a certain time period.
For the insured, these changes in employer-sponsored coverage
also provide an increasing market for specialty plans that
supplement or fill deductible or other gaps in coverage for
millions of Americans.
Self-employed and small
businesses. According to the U.S. Census
Bureau, in 2003, there were over 18 million firms in the
U.S that do not offer an employer-sponsored medical insurance
plan to their employees. There were also over 3.75 million
firms with fewer than 10 employees (with a total of
12.5 million employees). [Source: U.S. Census Bureau,
Statistics of U.S. Businesses.] In addition, small
businesses have accounted for
60-80% of
net new jobs annually over the last decade [Source: Small
Business Administration Office of Advocacy, June 2006].
Individuals working for such small business usually do not have
access to group health insurance at affordable rates. As the
number of uninsured individuals increase, the market for our
non-insurance healthcare savings programs increase.
Senior population. The age 65 and
over segment of the U.S. population is expected to grow
from 35 million in 2000 to over 40 million by 2010,
comprising 13% of the total population by 2010. [Source:
U.S. Census Bureau, 2004.] While the federal Medicare
program covers a portion of health care expenses for senior
Americans, the gaps in coverage provide a significant market for
supplemental plans.
6
Our
Solutions
Through our Consumer Plan Division and our Insurance Marketing
Division, we provide programs that consumers use to save money
on their healthcare costs. Our programs range from traditional
discount medical programs that provide access to networks of
providers that have agreed to provide our members with a reduced
rate for services, to mini-med programs that include
some amount of defined benefit insurance, to major medical
insurance with a variety of deductibles. These programs are
described in more detail in our discussion of our Consumer Plan
Division and our Insurance Marketing Division, but here is a
summary of the range of our programs:
Access
Plans USAs
Complete SPECTRUM of Health Care Programs
In addition, our Insurance Marketing Division also distributes
specialty insurance and benefit programs designed for the senior
market (age 65 and over).
Our Regional Health Care Division provides cost-effective plan
designs, claims management, cost containment, predictive
modeling, wellness programs, and administrative and managed care
services for organizations with self-funded or partially
self-funded health care plans, including large public and
private employers. Our benefit program management services
successfully reduce costs and provide access to affordable
health care by directing our clients to PPO providers and our
own case management services. Together, these services allow
employers and groups to provide substantive healthcare benefits
at a fraction of the cost of traditional health insurance.
None of our products or services is materially affected by
seasonal changes to our markets.
Our
Consumer Plan Division
Our consumer healthcare savings membership programs are offered
under the trade name of Care
Entréetm
or through the trade name of our private label resellers. We
also have developed and are in the process of launching a
7
new series of programs under the trade name of USA Healthcare
Savings. Our healthcare savings programs are not managed care.
Instead, they are based upon and emphasize the following factors:
|
|
|
|
|
Responsibility for the use of healthcare must be put back in the
hands of the patient. Insurance policies with low co-pays and
low deductibles have become very popular; however, these
arrangements actually encourage over-utilization resulting in
increased healthcare costs; and
|
|
|
|
Healthcare must be affordable for the patient, while providing
the medical providers with adequate payment on a timely basis
for services provided.
|
For years, insurance companies have been successful by obtaining
healthcare for their insureds at much lower prices than that
obtainable by the self-insured person. These benefits were
provided through the use of preferred provider organizations
(PPOs), where steerage of patients was promised to
doctors, hospitals and other providers in exchange for lower
rates. In our consumer healthcare savings programs, we have
contracted with some of these same PPOs to provide healthcare
savings to our program members.
We allow the patient and the healthcare provider to decide
treatment protocols with no interference from any third party.
We simply provide our members with access to healthcare
providers in their geographical area that have agreed to provide
their services for a discounted rate. In most cases, the
consumer pays, or makes arrangements to pay, the discounted rate
directly to the provider at the point of service. Some medical
providers chose to send the original full priced bill to us for
repricing. We reprice the bill to the discounted amount and then
notify the provider and the member of the amount that should be
paid. The member then pays the repriced amount directly to the
provider. We are not involved in the making of payments to
providers.
Our programs routinely assist our members in saving an average
of over 35%, and often up to 70%, on their medical costs. In
2006, we examined 166,125 repricing transactions recorded
between September of 2004 and December of 2005. For the ten most
commonly reported procedures, we found the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Code*
|
|
|
Avg.*
|
|
|
Total
|
|
|
Avg.*
|
|
|
Total
|
|
|
%
|
|
|
Total $*
|
|
CPT
|
|
|
CPT Code Description
|
|
Count
|
|
|
Price
|
|
|
Price
|
|
|
Reprice
|
|
|
Reprice
|
|
|
Saved
|
|
|
Savings
|
|
|
|
99213
|
|
|
Office/Outpatient Visit, Est
|
|
|
22,230
|
|
|
$
|
78
|
|
|
$
|
1,742,090
|
|
|
$
|
54
|
|
|
$
|
1,195,689
|
|
|
|
31
|
%
|
|
$
|
546,400
|
|
|
36415
|
|
|
Routine Venipuncture
|
|
|
14,340
|
|
|
|
17
|
|
|
|
239,294
|
|
|
|
8
|
|
|
|
109,202
|
|
|
|
54
|
%
|
|
|
130,092
|
|
|
99214
|
|
|
Office/Outpatient Visit, Est
|
|
|
9,257
|
|
|
|
120
|
|
|
|
1,107,947
|
|
|
|
81
|
|
|
|
745,968
|
|
|
|
33
|
%
|
|
|
361,979
|
|
|
80061
|
|
|
Lipid Panel
|
|
|
8,087
|
|
|
|
76
|
|
|
|
617,355
|
|
|
|
22
|
|
|
|
180,687
|
|
|
|
71
|
%
|
|
|
436,668
|
|
|
85025
|
|
|
Complete CBC w/Auto Diff WBC
|
|
|
6,523
|
|
|
|
31
|
|
|
|
201,589
|
|
|
|
13
|
|
|
|
82,840
|
|
|
|
59
|
%
|
|
|
118,749
|
|
|
80053
|
|
|
Comprehen Metabolic Panel
|
|
|
5,945
|
|
|
|
55
|
|
|
|
326,662
|
|
|
|
18
|
|
|
|
107,756
|
|
|
|
67
|
%
|
|
|
218,906
|
|
|
99212
|
|
|
Office/Outpatient Visit, Est
|
|
|
4,389
|
|
|
|
59
|
|
|
|
259,283
|
|
|
|
39
|
|
|
|
169,697
|
|
|
|
35
|
%
|
|
|
89,586
|
|
|
84443
|
|
|
Assay Thyroid STIM Hormone
|
|
|
4,035
|
|
|
|
81
|
|
|
|
327,724
|
|
|
|
25
|
|
|
|
101,785
|
|
|
|
69
|
%
|
|
|
225,939
|
|
|
99203
|
|
|
Office/Outpatient Visit, New
|
|
|
3,383
|
|
|
|
135
|
|
|
|
457,536
|
|
|
|
95
|
|
|
|
320,028
|
|
|
|
30
|
%
|
|
|
137,507
|
|
|
88142
|
|
|
Cytopath, C/V, Thin Layer
|
|
|
3,151
|
|
|
|
69
|
|
|
|
217,915
|
|
|
|
33
|
|
|
|
104,821
|
|
|
|
52
|
%
|
|
|
113,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,340
|
|
|
|
|
|
|
$
|
5,497,395
|
|
|
|
|
|
|
$
|
3,118,473
|
|
|
|
43
|
%
|
|
$
|
2,378,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Code Count represents the total number of transactions; Avg.
Price reflects the retail rates providers charge the
uninsured; Avg. Reprice reflects the Care Entrée discount
rate; and Total $ Savings reflects the savings by our Care
Entréetm
members. Current Procedural Terminology
(CPT®)
is a registered trademark of the American Medical Association. |
8
Savings from dentists, vision providers, chiropractors and other
services that do not require the use of a medical PPO are more
difficult to track because our members pay a discounted rate at
the point of service that is usually determined by a fee
schedule and does not require our participation to reprice.
Nevertheless, our arrangements with provider networks require
that our members save on their visits. On average, we believe
that our members save 10% to 50% on services from these other
providers.
Our membership program encompasses all aspects of healthcare,
including physicians, hospitals, ancillary services, dentists,
prescription drugs, vision care, hearing aids, chiropractic and
alternative care, air ambulance,
24-hour
nurse hotline assistance, and long-term care. Some aspects of
our programs are not available in all states. In most states,
memberships in our Care
Entréetm
programs range from $9.95 to $69.95 per month per family
depending on the selected options, plus a one-time enrollment
fee of $20.00 to $30.00. Our new USA Healthcare Savings programs
range from $24.50 to $99.50 per month per family. Our third
party marketing partners may sell our programs for other prices.
Typically, these marketers charge from $9.95 to $120.00 per
month per family.
Personal Medical Accounts. During the
fourth quarter of 2002, we implemented escrow account
requirements in response to the market changes in the healthcare
savings industry. We called these accounts Personal Medical
Accounts (PMAs). A great number of our members of
our Care
Entréetm
program were required to establish and maintain a PMA to access
and provide payment for hospital services. Our private label
partners were not required to offer these accounts to their
members. With PMAs, we were able to pre-certify the
members ability to pay based upon the available PMA
balances and to process the members payments directly to
the medical providers. In the fourth quarter of 2006, we
discontinued the PMA program because (i) the program made
our Care Entrée product more difficult to sell,
(ii) the program was expensive to administer, and
(iii) the pre-certification process presented risks to us
because we occasionally did not receive adequate information
from providers to provide an accurate estimate of what the
expected procedure would cost. All PMA money on deposit with us
was returned to the depositors by or during the first quarter of
2007.
Technology
and Member Services
We have made substantial investments in our proprietary
technology and management information systems. These systems
were designed in-house and are used in most aspects of our
business, including:
|
|
|
|
|
maintaining member eligibility and demographic information,
|
|
|
|
maintaining representative information including genealogy
reporting,
|
|
|
|
paying commissions,
|
|
|
|
maintaining a database of all providers and providing provider
locator services,
|
|
|
|
re-pricing and payment of medical bills,
|
|
|
|
drafting members accounts on a monthly basis, and
|
|
|
|
tracking of cash receipts and revenues.
|
We have also established websites for our programs that provide
information about the program, allow for provider searches and
allow new members and representatives to enroll on-line. The
websites also allow representatives, through a password
protected area to access support and training files and to view
their genealogy and commission information. The websites are set
up as self-replicating websites to allow
representatives a copy of the websites under a unique web
address.
In the fourth quarter of 2006, we entered into a one-year
agreement with Lifeguard Emergency Travel, Inc.
(Lifeguard). Under this agreement, Lifeguard
provides certain member support services, claims administration,
and fulfillment services for our members. However, we do remain
responsible for providing these services to our members. Many of
our own member services, claims administration and fulfillment
personnel were hired or otherwise retained by Lifeguard to
provide continuity of services to us and our members. We
retained a senior team of operations staff with expertise in the
functions provided by Lifeguard to serve as secondary customer
support for our members and to also act as a quality assurance
function overseeing the services provided by Lifeguard.
Lifeguards operations are on a separate floor, but within
the same building as our corporate headquarters. The
9
agreement with Lifeguard will renew for an additional one-year
terms unless either we or Lifeguard with proper notice elects
not to renew or extend the agreement. Lifeguard uses a
combination of our proprietary technology and its own
proprietary technology to provide services for our members.
Sales and
Marketing Channels
Our products for consumers are currently offered through three
distribution channels:
Network Marketing. Our Care
Entréetm
programs are distributed by independent commission-based
contractors referred to as independent marketing
representatives (IMRs). Our new USA Healthcare
Savings program also will be distributed through this channel.
Our independent representatives become marketing representatives
by paying an enrollment fee (currently $99.95) and signing a
standard representative agreement, and an annual renewal fee
(currently $49.95). Independent marketing representatives of
Care
Entréetm
are not required to be licensed insurance agents. Independent
marketing representatives are generally paid a 20% commission on
the membership fees of each member they enroll for the life of
that members enrollment with Care
Entréetm
(subject to the representatives continuing to meet certain
commission qualifications). Independent marketing
representatives may also receive commissions equal to the
membership fees if three or more program members are enrolled in
a month. In the month of the membership sales, no override
commissions are paid to the representatives upline.
Independent marketing representatives may also recruit other
representatives and earn override commissions on sales made by
those representatives. We pay a total of up to 35% in override
commissions up through seven levels of marketing
representatives. In addition, we have established bonus pools
that allow independent marketing representatives who have
achieved certain levels to receive additional commissions
measured by our revenues attributable to the Care
Entréetm
programs.
The total regular or ongoing commissions payout, including
overrides based on monthly membership sales after the enrollment
month and the amount contributed by us to the bonus pools, can
be as high as 60% of qualified membership sales. This division
is known as:
Tele-Sales. Through national tele-sales
units, this channel uses traditional direct response
distribution channels: direct mail, outbound telemarketing,
Internet, direct response television, direct response radio,
cross-sell/upsell and alternate media. Our partners in these
efforts utilize a sophisticated system of telephone and web
conferencing with customers to present, explain and complete
enrollment materials online. This increases the efficiency of
the sale and the customers understanding of the product.
We work with the following types of partners:
|
|
|
|
|
TeleService Centers
|
|
|
|
Insurance Agencies with Call Centers
|
|
|
|
Large Companies/Brands Looking for Additional Ways to Monetize
Their Customer Base
|
10
The products in this division are branded as:
Independent Agent Direct. Independent
licensed insurance agents and agencies across the nation can use
these plans to supplement other insurance / health care programs
or on a stand-alone basis for clients who cannot afford or
cannot medically qualify for traditional health insurance
policies. The products in this division, in its early stages of
development, are branded as:
Reliance
on key customers.
No one customer represents more than 10% of the Companys
overall revenue. However, a material portion of AAIs
revenues is derived from its contractual relationships with a
few key governmental entities.
Our
Insurance Marketing Division
The revenue of our Insurance Marketing Division, organized under
our subsidiary Insuraco USA LLC (Insuraco), is
primarily from sales commissions paid to it by the insurance
companies it represents; these sales commissions are generally a
percentage of premium revenue. This division was created after
our merger with ICM in the first quarter of 2007. We have not
reported any results for this division for 2006.
Our strategy is to
|
|
|
|
|
continue to develop products for consumers to provide health
care savings
and/or
insurance protection to families and individuals, including
Americans in their retirement years,
|
|
|
|
enhance our product portfolio by adding new products developed
on our current product platform,
|
|
|
|
expand into additional states where we are not currently
marketing to any significant degree (including Florida,
California and the upper Northeast), and
|
|
|
|
expand the number of insurance carriers that we represent.
|
Our three principal insurance markets are:
|
|
|
|
|
Major medical/individual health insurance,
|
|
|
|
Senior health insurance, managed care, life insurance and
annuity, and
|
|
|
|
Specialty medical and benefit plans for affinity groups,
associations, employer groups and other groups.
|
Distribution
Channels and Operating Divisions
Our insurance marketing operations are comprised of three
distribution channels and a specialty product development
subsidiary:
Americas Health Care/Rx Plan
(AHCP). Distributing major medical and
short-term medical products to small business owners,
self-employed and other individuals and families through
approximately 2,100 independent agents.
11
Adult Care Plans/Rx America
(ACP). Distributing supplemental medical,
life and managed care products to senior Americans through
approximately 2,900 independent agents.
National Direct USA. Distributing major
medical and specialty health plans through tele-sales units.
American Benefit Resource/Rx
(ABR). Specializing in the development and
wholesale marketing of specialty health plans.
Our primary insurance carriers for which we market products have
been:
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
|
|
ICM Revenue
|
|
Insurance Company
|
|
Products
|
|
2005
|
|
|
2006
|
|
|
Continental General Insurance
Company
|
|
Proprietary Major Medical;
Proprietary HSA-qualified High Deductible plans
|
|
$
|
1,340
|
|
|
$
|
1,481
|
|
World Insurance Company
|
|
Proprietary Major Medical;
HSA-qualified High Deductible plans
|
|
|
160
|
|
|
|
864
|
|
Empire Fire and Marine
|
|
Proprietary Major Medical;
Proprietary HSA-qualified High Deductible plans
|
|
|
230
|
|
|
|
724
|
|
Central Reserve Life Insurance
Company
|
|
Medicare Supplement; Final Expense
Life Insurance
|
|
|
1,680
|
|
|
|
1,390
|
|
Companion Life Insurance Company
|
|
Proprietary Mini-Medical plan
|
|
|
610
|
|
|
|
614
|
|
Other Carriers
|
|
|
|
|
60
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,080
|
|
|
$
|
5,352
|
|
|
|
|
|
|
|
|
|
|
|
|
We also market the following recently introduced products and
carriers:
|
|
|
Insurance Company
|
|
Products
|
|
Guarantee Trust Life
|
|
Proprietary Major Medical and
HSA-qualified High Deductible plans
|
Golden Rule Insurance Company
|
|
Major Medical and HSA-qualified
High Deductible plans
|
World Corp Insurance Company
|
|
Medicare Supplement plans
|
The Wellpoint Family of Companies
|
|
Senior Managed Care, Medicare
Advantage products and Medicare Advantage Medical Savings
Accounts (MSAs)
|
12
We have broad national sales coverage. In 2006, 14 states
accounted for approximately 85% of Insuracos revenue and
an additional 32 states accounted for the remaining 15%.
The largest state concentration was in Arizona. The table below
sets forth estimated 2006 revenue by state:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
State
|
|
Revenue
|
|
|
Percent
|
|
|
Arizona
|
|
$
|
629
|
|
|
|
15.4
|
%
|
Illinois
|
|
|
432
|
|
|
|
10.6
|
%
|
Texas
|
|
|
412
|
|
|
|
10.1
|
%
|
Pennsylvania
|
|
|
324
|
|
|
|
7.9
|
%
|
Colorado
|
|
|
270
|
|
|
|
6.6
|
%
|
Tennessee
|
|
|
257
|
|
|
|
6.2
|
%
|
North Carolina
|
|
|
249
|
|
|
|
6
|
%
|
Ohio
|
|
|
190
|
|
|
|
4.6
|
%
|
Michigan
|
|
|
161
|
|
|
|
3.9
|
%
|
Wisconsin
|
|
|
124
|
|
|
|
3
|
%
|
Indiana
|
|
|
114
|
|
|
|
2.8
|
%
|
West Virginia
|
|
|
103
|
|
|
|
2.5
|
%
|
Nebraska
|
|
|
102
|
|
|
|
2.5
|
%
|
Virginia
|
|
|
98
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
3,465
|
|
|
|
84.5
|
%
|
All Other States
|
|
|
633
|
|
|
|
15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,098
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Products
for Consumers
Insuraco has agreements with insurance companies to access
products that we offer for sale through our distribution
channels. The current portfolio of these insurance and financial
service products includes the following:
Major Medical / Individual Health Insurance
Market. The major medical / individual health
insurance market includes the following:
Major Medical Health
Insurance. Insuracos major medical products
include catastrophic, comprehensive, and basic coverage options.
These may include PPO benefit plans, traditional indemnity
health insurance plans, and one-deductible plans.
HSA-Qualified High Deductible Plans. Recently
enacted federal legislation allows individuals who establish
Health Savings Accounts (HSAs) to deduct from their
income taxes the amounts that they contribute to their HSA,
which amounts are then used to pay for qualifying uninsured
medical expenses. Insuraco markets high deductible insurance
plans that qualify for the benefits of HSAs.
Short Term Medical Plans. Insuraco can provide
individuals who are between jobs or who are recent graduates
with low cost, limited health insurance for a limited period of
time, typically six months or one year.
Senior Health Insurance, Managed Care, Life Insurance and
Annuity. Senior health insurance, managed
care, life insurance and annuity includes the following:
Medicare Supplement Plans. Our Medicare
supplement plans provide benefits that supplement the primary
benefits offered by Medicare. According to the Centers for
Medicare and Medicaid Services (CMS), the number of Medicare
enrollees, age 65 and over, more than doubled between 1966
and 2004, growing to 42 million from 19 million.
13
Medicare Advantage Plans. Our Medicare
Advantage Plans are health plan options include:
|
|
|
|
|
Medicare Health Maintenance Organization (HMOs)
|
|
|
|
Preferred Provider Organizations (PPO)
|
|
|
|
Private
Fee-for-Service
Plans
|
Consumers who join a Medicare Advantage Plan generally receive
extra benefits and lower co-payments than in the original
Medicare plan. However, they may have to utilize doctors that
belong to the plan or go to certain hospitals to get services.
To join a Medicare Advantage Plan, consumers must have Medicare
Part A (hospital insurance) and Part B (medical
insurance). They have to pay their monthly Medicare Part B
premium to Medicare. In addition, they may have to pay a monthly
premium to the Medicare Advantage Plan for the extra benefits
that they receive.
Part D Prescription Plans. People who
have Medicare Part A or Medicare Part B can purchase
insurance to pay for part of their prescription drugs. These
plans are provided through private insurance companies and are
available to eligible seniors who enroll within certain
enrollment and eligibility periods.
Final Expense Insurance Plans. Relatively
small face amount life insurance plans designed for senior
Americans to help pay for funeral costs, medical bills and other
final expenses.
Specialty Medical And Benefit
Plans. These products offer healthcare plans
for affinity groups, associations, employer groups and other
groups.
Mini-Medical Plans. These plans are sometimes
referred to as scheduled benefit, limited
benefit or defined benefit policies. These
policies are less expensive than traditional comprehensive
healthcare insurance and usually require the member to undergo
little or no medical underwriting. As such, they are available
to all or most individuals, regardless of their health
conditions. The policies usually operate on an indemnity basis,
reimbursing the member for certain of his or her incurred
healthcare costs. Sometimes, the policies allow the benefit to
be assigned directly to the healthcare provider, eliminating the
need for the member to pay the provider directly and then seek
reimbursement. These policies pay a certain amount for
designated healthcare services. For instance, a member could
choose a program entitling him or her to $250, $500 or
$1,000 per day of hospitalization, with additional
scheduled benefits for intensive care stays and surgery, for up
to 180 days in a calendar year.
Insuracos
Services For Agents and Agencies
Insuraco provides sales and marketing services to its national
network of independent agency channels by leveraging its
industry expertise and relationships to secure access to
proprietary health insurance products. It has specific industry
expertise in designing products that meet the needs of the
consumer and that fit well within the suite of products that are
sold by insurance agents and their agencies. Insuraco has
relationships with numerous well established, highly-rated
insurance companies.
Multiple Carriers for Specific Product
Lines. Insuraco has strategically established
marketing relationships with multiple insurance companies to
provide a wider distribution network across the U.S. This
strategy is designed to maximize marketing penetration with
competitively priced products on a
state-by-state
basis. This strategy is also designed to provide increased
flexibility and security for Insuracos marketing channels
based on ongoing changes in carriers product, pricing and
marketing plans.
Web Based Technology. Utilizing
web-based technology to streamline the agent appointment and
sales application processes with the insurance carriers.
Insuracos integrated agent portal gives agents access to
online:
|
|
|
|
|
real-time rate quoting;
|
|
|
|
agent recruiting, licensing, and contracting;
|
14
|
|
|
|
|
insurance application submission;
|
|
|
|
lead ordering and delivery; and
|
|
|
|
access to brochures, applications, and marketing materials.
|
The benefits of such services include:
|
|
|
|
|
a streamlined underwriting process that automatically limits
application submissions,
|
|
|
|
increasing the issue and placement rate on submitted business,
|
|
|
|
a proprietary pre-scrubbed agent enrollment process
that ensures complete and accurate agent contracting,
|
|
|
|
an efficient way for agents to sell and submit applications over
the phone, and
|
|
|
|
a central repository that agents visit frequently to obtain
important documents and updated materials.
|
Lead Distribution Programs for
Agents. For certain of its distribution
channels, Insuraco uses an electronic system designed to
efficiently connect insurance agents with high-quality leads.
The leads are supplied by select vendors and are then compiled,
sorted, and offered to agents via its on-line lead ordering and
delivery system. Leads are generated through telemarketing,
internet sites and direct mail.
Competitive agent commission rates supplemented by various
agent incentive programs. The Company
provides a comprehensive portfolio of incentives that attract
agents, including annual conventions, sales contests, year-end
bonuses, lead programs, and production club membership programs.
By leveraging Insuracos sales management and marketing
expertise, insurance companies can focus on the administration
of their products, while Insuraco takes care of managing and
motivating the agent force to sell.
Working Capital Requirements. We
require working capital to advance commissions to our agents
prior to our receipt of the underlying commission from the
insurance carrier. We have access to a sufficient amount of
working capital to meet our needs, but our ability to grow this
segment will depend on our ability to gain access to increasing
amounts of working capital sources.
Home Office Support. This includes
agent and product training, a variety of marketing materials and
compilation of weekly newsletters that deliver important news
and updates to our agents. Insuraco provides professional,
quality training for all of its independent agents and
alternative distribution channels. Its training programs include
in-house and
on-site
training schools, DVD programs and webcast sessions. In addition
to product knowledge, Insuraco trains its independent agents in
market conduct standards, regulatory compliance requirements,
and sales techniques. Insuraco creates, prints, and distributes
a variety of marketing materials to promote its products,
including magazine advertising, flyers, postcards, letters,
e-mail
blasts, brochures, and more. Insuraco delivers important news
and updates to its agents on a timely basis with weekly
e-mail
newsletters. These newsletters promote, inform, and entertain
with a combination of news bulletins, agent reports, and
motivational articles.
Our
Regional Health Care Division
We offer full third-party administration services through our
wholly-owned subsidiary, AAI, that we acquired in June 2004.
Through AAI, we provide a wide range of healthcare claims
administration services and other cost containment procedures
that are frequently required by state and local governmental
entities and other large employers that have chosen to self-fund
their required healthcare benefits. With AAIs services we
offer a more complete suite of healthcare service products. Also
through AAI, we provide individuals and employee groups with
15
access to preferred provider networks, medical escrow accounts
and full third-party administration capabilities to adjudicate
and pay medical claims.
In 2006, AAI clients as a group were billed a total of
approximately $400 million for the healthcare expenses
incurred by their group members. Of this amount, the client
group was responsible for paying $120 million after our
repricing. This represented aggregate savings of nearly 70%.
AAI has two subsidiaries, Access Administrators, Inc. and
Advantage Care Network. Access Administrators, Inc. is licensed
by the Texas Department of Insurance as a third party claims
administrator. AAIs utilization review services are
licensed by the Texas Department of Insurance as a utilization
review agent. Advantage Care Network is a comprehensive network
of contracted physicians, hospitals, and other medical service
providers in the
El Paso/Las
Cruces community that also utilizes national networks featuring
over 500,000 contracted medical providers to provide access to
quality and affordable health care services. Access provides
health plan design and administration, claims management and
processing, data and report management, quality assurance,
customer service, reinsurance strategies, coordination of
benefits, subrogation services and auditing for quality
assurance. Access also provides access to effective pharmacy
benefit management cost containment programs to serve both
retail and mail order needs. As a utilization review agent, AAI
clients are provided with utilization management services
including prior-authorizations, utilization review, large case
management, concurrent review, quality management, and
coordination of care for members and their families.
AAI companies, and its predecessors, have been serving partially
self-funded political subdivisions, as well as public/private
employers, in the El Paso region for over twenty-five
years. AAI currently manages over $400 million in claims
annually, claims adjudication and processing services exceeding
700,000 claims per year, and provides effective utilization
management, quality assurance, and cost containment strategies.
Our services are sold through health insurance and employee
benefit brokers and agents. Our primary area of expertise is in
the public-sector market. In the first quarter of 2007, AAI
successfully completed an SAS 70 Type I examination by
independent registered public accountants.
Competition
Consumer Plan Division. Competition for
program members within the healthcare savings industry has
become more intense. We offer membership programs that provide
products and services similar to or directly in competition with
products and services offered by our network-marketing
competitors as well as the providers of the products and
services through other channels of distribution. Competition for
new representatives is intense, as these individuals have a
variety of products that they can choose to market, whether
competing with us in the healthcare market or not.
Our principal competitors are AmeriPlan, Full Access Medical,
New Benefits, Inc., CAREington International, International
Association of Businesses (IAB), and Family Care. We
also compete with all types of network marketing companies
throughout the U.S. for new representatives. Our other
competitors include large retailers, financial institutions,
insurance companies, preferred provider organization networks,
and other organizations, which offer benefit programs to their
customers. Many of our competitors have substantially larger
customer bases and greater financial and other resources.
Insurance Marketing Division. We
compete in the highly competitive individual health insurance
industry. The major medical products and services of the
insurance companies that we offer compete with large national,
regional and specialty health insurers, including Assurant, and
various Blue Cross/Blue Shield companies. Furthermore, senior
managed care, Medicare products and Medicare Advantage medical
savings accounts offered by our ACP Division compete with other
national, regional and specialty insurers, including Universal
American Financial Corp., Bankers Life and Casualty,
United Teachers Associates Insurance Company, Torchmark,
Pacificare, United Healthcare, Mutual of Omaha, Conseco, Inc.,
Blue Cross organizations, US Health, and Medicare HMOs. In
addition, we compete for insurance agencies and their agents to
offer, sell and provide the insurance products and financial
services that we offer.
Many of our competitors in the insurance marketing industry have
substantially greater financial resources, broader product
lines, or greater experience than we do. We compete on the basis
of price, reputation, diversity of
16
product offerings and flexibility of coverage, ability to
attract and retain agents, and the quality and level of services
provided to the independent insurance agencies and their agents.
We face additional competition due to a trend among healthcare
providers and insurance companies to combine and form networks
in order to contract directly with small businesses and other
prospective customers to provide healthcare services. In
addition, because the products and services that we offer are
marketed through independent agents, most of which represent and
offer insurance products of multiple insurance companies, we
compete for the marketing focus of each independent agent.
Regional Healthcare Division. AAI
operates in the El Paso metropolitan market and competes
against regional and national health benefit plans such as Blue
Cross Blue Shield, United Healthcare, CIGNA and Aetna.
Principal Competitive Factors. We
believe that the principal competitive factors in our
industries, some of which are not within our control, include:
|
|
|
|
|
the ability to maintain contracts with reputable preferred
provider organization networks that offer substantial healthcare
savings,
|
|
|
|
the ability to maintain contracts with reputable insurance
companies and insurance agents and agencies,
|
|
|
|
the ability to attract and retain independent marketing
representatives for our Consumer Plan Division,
|
|
|
|
the ability to identify, develop and offer unique membership
healthcare programs,
|
|
|
|
the quality and breadth of the healthcare membership programs
offered,
|
|
|
|
the quality and extent of customer service,
|
|
|
|
the ability to offer substantial savings on major-medical costs
such as hospital and surgical costs,
|
|
|
|
the ability to combine the programs with affordable insurance
plans that have high deductibles or set payment for
hospitalization,
|
|
|
|
|
|
prices of products and service offered,
|
|
|
|
marketing expertise,
|
|
|
|
compensation plans for representatives,
|
|
|
|
the ability to hire and retain employees,
|
|
|
|
the development by others of member programs that are
competitive with our programs,
|
|
|
|
responsiveness to customer needs,
|
|
|
|
the ability to satisfy investigations on the part of state
attorneys general, insurance commissioners and other regulatory
bodies,
|
|
|
|
the ability to finance promotions for the recruiting of members
and representatives, and
|
|
|
|
the ability to effectively market the product on the Internet.
|
Competitive Risk. While we believe that
we are a leader in the industry, there is no assurance that:
|
|
|
|
|
competitors will not develop their own software that re-prices
medical bills or a full-service customer service function
similar to ours,
|
|
|
|
our competitors will not increase their emphasis on programs
similar to our programs to more effectively compete with us,
|
|
|
|
our competitors will not recruit our independent marketing
representatives and insurance agents by offering more attractive
sales commissions,
|
|
|
|
our competitors will not provide programs comparable or superior
to our programs at lower membership fees or lower insurance
premiums,
|
17
|
|
|
|
|
our competitors will not adapt more quickly to evolving industry
trends or changing market requirements,
|
|
|
|
new competitors will not enter the market,
|
|
|
|
other businesses such as insurance companies or preferred
provider organization networks will not themselves introduce
competing programs, and
|
|
|
|
competitors may not develop more effective marketing campaigns
that more effectively utilize direct mail and television
advertising.
|
This increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which
could have a material adverse affect on our business, financial
condition and results of operations.
Business
Objectives and Plans
Our objective is to sustain and expand our leadership position
as a provider of unique healthcare membership service programs
and consumer driven healthcare solutions and as a distributor of
health insurance plans. Key elements of our business plan are as
follows:
Continue to Develop a Broad Spectrum of Unique Healthcare
Service Programs for Broad Markets. Our focus
is on the continued development and introduction of unique
programs that address the health and consumer needs of targeted
consumer groups. By varying the features, including discounts
(medical, consumer and business services), defined benefit
insurance and fully insured health plans, we are able to meet
the product and pricing needs of a broad market. We anticipate
that this will allow us to capture a larger share of the
healthcare market through existing marketing channels and
through establishment of new client relationships.
Continue to Develop a Recurring Revenue
Base. For our Consumer Plan Division, growth
in recurring revenue from the Care
Entréetm
product is dependent on our independent marketing
representatives continuing to market the Care
Entréetm
program memberships and new USA Healthcare Savings memberships
and to recruit new downline independent marketing
representatives. We intend to continually increase our support
for representatives to maximize the volume generated through
this sales channel. Recurring revenue from wholesale and
private-label clients is dependent upon the client continuously
marketing our products to their customer base. We intend to
continue to focus our efforts on retaining our existing clients
and obtaining new wholesale and private label clients through
our direct sales team.
In our Insurance Marketing Division, we intend to continue to
expand our independent agent sales force, our specialty product
lines, our insurance carrier companies we represent and the
geographic jurisdictions in which we distribute products.
In our Regional Health Care Division, we intend to increase the
revenue base of our third-party administration services by
expanding the service area of AAI beyond the metropolitan area
of El Paso, Texas.
Leverage and Develop Multiple Network
Partners. While we currently have a
contractual relationship with a well-recognized and fully
developed preferred provider organization network for access to
savings on doctors, hospitals, and ancillary healthcare
services, we need to continuously assess the capabilities of
that network and work towards providing alternative network
solutions for our members.
Provide High Quality Consumer Service for Our Healthcare
Membership Program. In order to achieve our
anticipated growth and to ensure client, member and marketing
representative loyalty, we continue to develop and invest
significantly in our member service systems. We have developed a
proprietary computer database system that provides our customer
service representatives with immediate access to provider
demographic data, re-pricing information and member information,
including the components of each member program or plan and the
details a member requires to properly utilize the program. In
addition, we have partnered with a third party that has
significant experience in providing member services and
administrative services for healthcare savings programs like
ours.
Provide High Quality Service for our Sales Representatives
and Insurance Agents. In order to achieve our
objectives of increased memberships and product sales, we
concentrate on providing quality service for our sales
representatives in the field. This includes ready telephone
access to support personnel as well as access to websites,
18
conference calls and web-conferencing platforms. We enhance the
value of our programs to these representatives by providing
access to information and support on an ongoing basis.
Continue to Develop and Enhance Our
Technology. We have incorporated numerous
uses for Internet and information technology in our marketing
and service functions. We plan to continue to enhance these
operations to streamline and increase the efficiency of methods
for our sales representatives and agents to enroll in our
programs, submit applications and track their business.
Increase Tele-Sales Operations. We have
initiated a number of affiliations with tele-sales centers and
organizations that utilize tele-sales functions. We intend to
continue pursuing these channels to broaden the distribution of
our products and programs.
Develop Private-Label Product
Offerings. We have implemented a number of
private-label product offerings for specific markets and
entities. We plan to leverage off our current administrative and
product development systems to continue to provide private-label
availability to organizations that can commit to significant
levels of sales of these products.
Distribution of Our Products in Multiple
Languages. Certain of our products are now
available in Spanish, including access to customer service
assistance. We plan to expand Spanish language usage among other
products and implement additional languages for targeted markets
where we believe there will be a significant volume of prospects.
Continue to Expand Our Third-Party Administrator
Services. In response to the needs of our
group customers, we have expanded our third party administrator
(TPA) services. Our acquisition of AAI in 2004
allows us to offer a full-service TPA function that includes
full plan administration, claims adjudication and claims
management services.
Governmental
Regulation
We are subject to federal, state and local laws, regulations,
administrative determinations, court decisions and similar
constraints (hereinafter regulations).
Possible Insurance Company
Regulation. Our discount medical plans are
not insurance and they do not subject us to regulation as an
insurance company or a seller of insurance. However, regulations
in certain states currently regulate or restrict the offering of
our programs.
Occasionally, we receive inquiries from insurance commissioners
in various states that require us to supply information about
our discount healthcare programs, representatives, etc. to the
insurance commissioner or other state regulatory agency. To
date, these agencies have concurred with our view that our
discount healthcare programs are not a form of insurance. There
is no assurance that this situation will not change in the
future, and an insurance commissioner will successfully
challenge our ability to offer our programs without compliance
with state insurance regulation.
State Discount Medical Program
Regulation. Over the last few years, over
twenty states have enacted legislation that specifically
addresses the operation and marketing of discount medical
programs like ours. The laws vary in scope. Some apply to
discounts on all health care purchases. Some regulate only
prescription discounts. Some exclude prescription discounts but
regulate other services. The laws also vary in operation. Some
contain only provisions that relate to the operation and
marketing of discount medical plans and some require licensing
and registration. Because this legislation or regulations are
newly enacted or adopted, we do not know the scope and full
effect on our operations, and there is a risk that compliance
with such legislation
and/or
regulations could have material adverse affects on our
operations and financial condition. There is also the risk that
a state will adopt regulations or enact legislation restricting
or prohibiting the sale of our medical discount programs in the
state. In addition, California views our discount medical plans
as managed care and its Department of Managed Health Care has
taken the position that we must seek and eventually obtain a
license under the Knox-Keene Act. Compliance with these
regulations on a
state-by-state
basis has been expensive and cumbersome.
Compliance with federal and state regulations is generally our
responsibility. The medical discount plan industry is especially
susceptible to charges by the media of regulatory noncompliance
and unfair dealing. As is
19
often the case, the media may publicize perceived non-compliance
with consumer protection regulations and violations of notions
of fair dealing with consumers. Our failure to comply with
current, as well as newly enacted or adopted, federal and state
regulations could have a material adverse effect upon our
business, financial condition and results of operations in
addition to the following:
|
|
|
|
|
non-compliance may cause us to become the subject of a variety
of enforcement or private actions
|
|
|
|
compliance with changes in applicable regulations could
materially increase the associated operating costs;
|
|
|
|
non-compliance with any rules and regulations enforced by a
federal or state consumer protection authority may subject us or
our management personnel to fines or various forms of civil or
criminal prosecution; and
|
|
|
|
non-compliance or alleged non-compliance may result in negative
publicity potentially damaging our reputation, network
relationships, client relationships and the relationship with
program members, representatives and consumers in general.
|
Insurance
Regulations.
Government regulation of health and life insurance, annuities
and healthcare coverage and health plans is a changing area of
law and varies from state to state. Although we are not an
insurance company, the insurance companies from which we obtain
our products and financial services are subject to various
federal and state regulations applicable to their operations.
These insurance companies must comply with constantly evolving
regulations and make changes occasionally to services, products,
structure or operations in accordance with the requirements of
those regulations.
|
|
|
|
|
Similar to the insurance companies providing products and
services offered by us, we are unable to accurately predict
additional government regulations that may be enacted in the
future affecting the insurance industry and the offered products
and service or how existing or future regulations might be
interpreted.
|
|
|
|
Additional governmental regulation or future interpretation of
existing regulations may increase the cost of compliance or
materially affect the insurance products and services offered by
us through independent insurance agencies and their agents and
our operations, products or profitability.
|
|
|
|
We must rely on the insurance companies that provide the
insurance products and financial services offered by Insuraco to
carefully monitor state and federal legislative and regulatory
activity as it affects their insurance products and services.
The Company believes that the insurance products and financial
services that we offer comply in all material respects with all
applicable federal and state regulations.
|
|
|
|
We work closely with independent associations that provide
discounts and other benefits to groups of consumers. Among the
benefits afforded to the members of such associations are
varying forms of insurance. Our ability to offer insurance
products that we are authorized to distribute to these
associations for inclusion in their benefit packages may be
affected by governmental regulation or future interpretation of
existing regulations that may increase the cost of regulatory
compliance or affect the nature and scope of products that we
may make available to such associations.
|
Product Claims and Advertising. The
Federal Trade Commission and certain states regulate
advertising, product claims, and other consumer matters,
including advertising of our products. All advertising,
promotional and solicitation materials used by marketing
representatives require our approval prior to use. The Federal
Trade Commission may institute enforcement actions against
companies for false and misleading advertising of consumer
products. In addition, the Federal Trade Commission has
increased its scrutiny of the use of testimonials, including
those used by us and our marketing representatives. We have not
been the target of Federal Trade Commission enforcement action.
There is no assurance that:
|
|
|
|
|
the Federal Trade Commission will not question our advertising
or other operations in the future,
|
20
|
|
|
|
|
a state will not interpret product claims presumptively valid
under federal law as illegal under that states
regulations, or
|
|
|
|
future Federal Trade Commission regulations or decisions will
not restrict the permissible scope of such claims.
|
We are also subject to the risk of claims by marketing
representatives and their customers who may file actions on
their own behalf, as a class or otherwise, and may file
complaints with the Federal Trade Commission or state or local
consumer affairs offices. These agencies may take action on
their own initiatives against us for alleged advertising or
product claim violations, or on a referral from independent
marketing representatives, customers or others. Remedies sought
in these actions may include consent decrees and the refund of
amounts paid by the complaining independent marketing
representatives or consumer, refunds to an entire class of
independent marketing representatives or customers, client
refunds, or other damages, as well as changes in our method of
doing business. A complaint based on the practice of one
marketing representative, whether or not we authorized the
practice, could result in an order affecting some or all of our
marketing representatives in a particular state. Also, an order
in one state could influence courts or government agencies in
other states considering similar matters. Proceedings resulting
from these complaints could result in significant defense costs,
settlement payments or judgments and could have a material
adverse effect on us.
Network Marketing Organization. Our
network marketing system is subject to a number of federal and
state regulations administered by the Federal Trade Commission
and various state agencies. These regulations are generally
directed at ensuring that advancement, within a network
marketing organization, is based on sales of the
organizations products rather than investment in the
organization or other non-sales related criteria. For instance,
in certain markets there are limits on the extent that marketing
representatives may earn royalties on sales generated by
marketing representatives that were not directly sponsored by
the marketing representative.
Our network marketing organization and activities are subject to
scrutiny by various state and federal governmental regulatory
agencies to ensure compliance with various types of laws and
regulations. These laws and regulations include securities,
franchise investment, business opportunity and criminal laws
prohibiting the use of pyramid or endless
chain types of selling organizations. The compensation
structure of these selling organizations is very complex, and
compliance with all of the applicable laws is uncertain in light
of evolving interpretation of existing laws and the enactment of
new laws and regulations pertaining to this type of product
distribution. As of the date of this report, we are not aware of
any legal actions pending or threatened by any governmental
authority against us regarding the legality of our network
marketing operations.
As of December 31, 2006, we had marketing representatives
in 43 states and the District of Columbia. We review the
requirements of various states, as well as seek legal advice,
regarding the structure and operation of our network marketing
to ensure that it complies with all of the applicable laws and
regulations pertaining to network sales organizations. Based on
these efforts and the experience of our management, we believe
that we are in compliance with all applicable federal and state
regulatory requirements. We have not obtained no-action letters
or advance rulings from any federal or state security regulator
or other governmental agency concerning the legality of our
network operations, nor are we relying on a formal opinion of
counsel to that effect. We accordingly are subject to the risk
that one or more of our network marketing organizations could be
found to not comply with applicable laws and regulations. Our
failure to comply with these regulations could have a material
adverse effect on us in a particular market or in general.
We are subject to the risk of challenges to the legality of our
network marketing organization, including claims by our
marketing representatives, both individually and as a class.
Most likely these claims would be based on the network marketing
organization allegedly being operated as an illegal
pyramid scheme in violation of federal securities
laws, state unfair practice and fraud laws, and the Racketeer
Influenced and Corrupt Organizations Act. In the event of
challenges to the legality of our network marketing organization
by distributors, we would be required to demonstrate that our
network marketing organization complies with applicable
regulatory laws. A final ruling against us could result in a
material liability. Moreover, even if we were successful in
defending against these challenges, the costs of such defense,
both in dollars spent and in management time, could be material
and adversely affect our operating results and financial
condition. In addition, the negative publicity of these
challenges could adversely affect our revenues and ability to
attract and retain marketing representatives.
21
Healthcare Regulation and
Reform. Government regulation and reform of
the healthcare industry may also affect the manner in which
Insuraco conducts its business in the future. There continues to
be diverse legislative and regulatory initiatives at both the
federal and state levels to affect aspects of the nations
health care system. The Gramm-Leach-Bliley Act mandated
restrictions on the disclosure and safeguarding of our
insureds financial information. The USA Patriot Act placed
new federal compliance requirements relating to anti-money
laundering, customer identification and information sharing.
In addition, the Health Insurance Portability and Accountability
Act of 1996 (HIPAA) requires certain guaranteed
issuance and renewability of health insurance coverage for
individuals and small employer groups and limits exclusions on
pre-existing conditions. HIPAA has also mandated the adoption of
extensive standards for the use and disclosure of health
information. HIPAA also mandated the adoption of standards for
the exchange of electronic health information in an effort to
encourage overall administrative simplification and enhance the
effectiveness and the efficiency of the healthcare industry.
HIPAAs Security standards became effective April 20,
2005 and further mandated that specific requirements be met
relating to maintaining the confidentiality and integrity of
electronic health information and protecting it from anticipated
hazards or uses and disclosures that are not permitted.
Our re-pricing software systems are considered HIPAA compliant.
We previously engaged a consulting firm to assist us in our
efforts to continuously comply with all other HIPAA regulations.
We believe that we are in compliance with these regulations. We
plan to continually audit our compliance, and accordingly cannot
give assurance that our costs of continuing to comply with HIPAA
will not be material to us. Sanctions for failing to comply with
standards issued pursuant to HIPAA include criminal penalties
and civil sanctions.
In addition to federal regulation and reform, many states have
enacted, or are considering, various healthcare reform statutes.
These reforms relate to, among other things, managed care
practices, prompt pay payment practices, health insurer
liability and mandated benefits. Most states have also enacted
patient confidentiality laws that prohibit the disclosure of
confidential information. As with all areas of legislation, the
federal regulations establish minimum standards and preempt
conflicting state laws that are less restrictive but will allow
state laws that are more restrictive. The Company expects that
this trend of increased legislation will continue. We are unable
to predict what state reforms will be enacted or how they would
affect our business.
E-Commerce
Regulation. The Company may be subject to
additional federal and state statutes and regulations in
connection with our product strategy, which includes Internet
services and products. On an increasingly frequent basis,
federal and state legislators are proposing laws and regulations
that apply to Internet based commerce and communications. Areas
being affected by this regulation include user privacy, pricing,
content, taxation, copyright protection, distribution and
quality of products, and services. To the extent that our
products and services would be subject to these laws and
regulations, the sale of our products and our business could be
harmed.
Legislative Developments. Numerous
proposals to reform the current healthcare system have been
introduced in the U.S. Congress and in various state
legislatures. Proposals have included, among other things,
modifications to the existing employer-based insurance system, a
quasi-regulated system of managed competition among
health insurers, and a single-payer, public program. Changes in
health care policy could significantly affect our business.
Legislation has been introduced from time to time in the
U.S. Congress that could result in the federal government
assuming a more direct role in regulating insurance companies.
The Company is unable to evaluate new legislation that may be
proposed and when or whether any legislation will be enacted and
implemented. However, many of the proposals, if adopted, could
have a material adverse effect on the Companys business,
financial condition or results of operations; while others, if
adopted, could potentially benefit the Companys business.
22
Employees
As of December 31, 2006, we had 114 full-time
employees in the following departments:
|
|
|
|
|
|
|
Number of
|
|
Department
|
|
Employees
|
|
|
Customer Services and Claims
Administration
|
|
|
64
|
|
Executive and Administration
|
|
|
11
|
|
Information Services
|
|
|
9
|
|
Provider Relations
|
|
|
3
|
|
Finance and Accounting
|
|
|
7
|
|
Sales and Marketing
|
|
|
3
|
|
Data Entry
|
|
|
1
|
|
Quality Assurance
|
|
|
9
|
|
Utilization Review and Management
|
|
|
7
|
|
The total number of our employees after we completed the merger
with ICM in January 2007 increased to 131. Our future
performance depends in significant part upon the continued
service of our key technical and management personnel, and our
continuing ability to attract and retain highly qualified and
motivated personnel in all areas of our operations. Competition
for qualified personnel is intense. We provide no assurance that
we can retain key managerial and technical employees, or that we
can attract, assimilate or retain other highly qualified
personnel in the future. Our employees are not represented by a
labor union. We have not experienced any work stoppages, and
consider our employee relations to be good.
Our Risk
Factors
The matters discussed below and elsewhere in this report should
be considered when evaluating our business operations and
strategies. Additionally, there may be risks and uncertainties
that we are not aware of or that we currently deem immaterial,
which may become material factors affecting our operations and
business success. Many of the factors are not within our
control. We provide no assurance that one or more of these
factors will not:
|
|
|
|
|
adversely affect the market price of our common stock,
|
|
|
|
adversely affect our future operations,
|
|
|
|
adversely affect our business,
|
|
|
|
adversely affect our financial condition,
|
|
|
|
adversely affect our results of operations,
|
|
|
|
require significant reduction or discontinuance of our
operations,
|
|
|
|
require us to seek a merger partner, or
|
|
|
|
require us to sell additional stock on terms that are highly
dilutive to our shareholders.
|
THIS
REPORT CONTAINS CAUTIONARY STATEMENTS RELATING TO FORWARD
LOOKING INFORMATION.
We have included some forward-looking statements in this section
and other places in this report regarding our expectations.
These forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements, or
industry results, to be materially different from any future
results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. Some
of these forward-looking statements can be identified by the use
of forward-looking terminology including believes,
expects, may, will,
should or anticipates or the
23
negative thereof or other variations thereon or comparable
terminology, or by discussions of strategies that involve risks
and uncertainties. You should read statements that contain these
words carefully because they:
|
|
|
|
|
discuss our future expectations,
|
|
|
|
contain projections of our future operating results or of our
future financial condition, or
|
|
|
|
state other forward-looking information.
|
We believe it is important to discuss our expectations. However,
it must be recognized that events may occur in the future over
which we have no control and which we are not accurately able to
predict. Any forward-looking statements contained in this report
represent our judgment as of the date of this report. We
disclaim, however, any intent or obligation to update these
forward-looking statements. As a result, the reader is cautioned
not to place undue reliance on these forward-looking statements.
DURING
2006, 2005 AND 2004 WE HAVE INCURRED LOSSES FROM OPERATIONS IN
THE CONSUMER PLAN DIVISION AND REGIONAL HEALTHCARE
DIVISION AND THESE LOSSES MAY CONTINUE.
During 2006, 2005 and 2004 we incurred losses from continuing
operations of $6,814,000, $13,229,000 and $1,657,000,
respectively and net losses of $7,724,000, $13,371,000 and
$1,956,000, respectively. As part of those operating losses and
net losses, we incurred goodwill impairment charges of
$6,866,000 including tax considerations of $426,000, $12,900,000
and $2,000,000 in 2006, 2005 and 2004, respectively. In 2006, we
recorded goodwill impairment charges of $4,066,000 including tax
considerations of $426,000 for AAI and $2,800,000 for Capella,
respectively. In 2005, we recorded a goodwill impairment charge
of $12,900,000 related to Capella. In 2004, we recorded a
goodwill impairment charge of $2,000,000 related to Foresight,
Inc. (Foresight). Before the goodwill impairment
charges, income from continuing operations was $52,000 in 2006
and $343,000 in 2004 and a loss of $329,000 in 2005. The
operating loss before goodwill impairment charges in 2005 was
primarily attributable to the continuing costs associated with
our Care
Entréetm
medical savings program. There is no assurance that losses from
our Care
Entréetm
medical savings program will not continue or that our other
operations will become or continue to be profitable in 2007 or
thereafter.
OUR
REVENUES IN THE CONSUMER PLAN DIVISION ARE LARGELY
DEPENDENT ON THE INDEPENDENT MARKETING REPRESENTATIVES, WHOSE
REDUCED SALES EFFORTS OR TERMINATION MAY RESULT IN SIGNIFICANT
LOSS OF REVENUES.
Our success and growth depend in large part upon our ability to
attract, retain and motivate the network of independent
marketing representatives who principally market our Care
Entréetm
medical savings program and the USA Healthcare Savings products
that we are introducing in 2007. Our independent marketing
representatives typically offer and sell the Care
Entréetm
program on a part-time basis, and may engage in other business
activities. These marketing representatives may give higher
priority to other products or services, reducing their efforts
devoted to marketing our Care
Entréetm
program. Also, our ability to attract and retain marketing
representatives could be negatively affected by adverse
publicity relating to our Care
Entréetm
program and operations.
Under our network marketing system, the marketing
representatives downline organizations are headed by a
relatively small number of key representatives who are
responsible for a substantial percentage of our total revenues.
The loss of a significant number of marketing representatives,
including any key representatives, for any reason, could
adversely affect our revenues and operating results, and could
impair our ability to attract new distributors.
A
LARGE PART OF OUR REVENUES ARE DEPENDENT ON KEY
RELATIONSHIPS WITH A FEW PRIVATE LABEL RESELLERS AND WE MAY
BECOME MORE DEPENDENT ON SALES BY A FEW PRIVATE LABEL
RESELLERS.
Our revenues from sales of our independent marketing
representatives have declined and continue to decline. As a
result, we have become more dependent on sales made by private
label resellers to whom we sell our discount medical programs.
If sales made by our independent marketing representatives
continue to decline or if our efforts
24
to increase sales through private label resellers succeed, we
may become more dependent on sales made by our private label
resellers. Because a large number of these sales may be made by
a few resellers, our revenues and operating results may be
adversely affected by the loss of our relationship with any of
those private label resellers.
DEVELOPMENT
AND MAINTENANCE OF RELATIONSHIPS WITH PREFERRED PROVIDER
ORGANIZATIONS ARE CRITICAL AND THE LOSS OF SUCH RELATIONSHIPS
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
As part of our business operations, we must develop and maintain
relationships with preferred provider organizations within each
market area that our services are offered. Development and
maintenance of these relationships with healthcare providers
within a preferred provider organization is in part based on
professional relationships and the reputation of our management
and marketing personnel. Because many members that receive
healthcare services are self-insured and responsible for payment
for healthcare services received, failure to pay or late
payments by members may negatively affect our relationship with
the preferred provider organizations. Consequently, preferred
provider organization relationships may be adversely affected by
events beyond our control, including departures of key personnel
and alterations in professional relationships and members
failures to pay for services received. The loss of a preferred
provider organization within a geographic market area may not be
replaced on a timely basis, if at all, and may have a material
adverse effect on our business, financial condition and results
of operations.
WE
CURRENTLY RELY HEAVILY ON ONE KEY PREFERRED PROVIDER
ORGANIZATION AND THE LOSS OF OR A CHANGE IN OUR RELATIONSHIP
WITH THIS PROVIDER COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Private Healthcare Systems (PHCS), a division of
MultiPlan, Inc., is the preferred provider organization through
which most of our members obtain savings on medical services
through our Care Entrée program. The loss of PHCS as a
preferred provider organization or a disruption of our
members access to PHCS could affect our ability to retain
our members and could, therefore, adversely affect our business.
While we currently enjoy a good relationship with PHCS and
MultiPlan, there are no assurances that we will continue to have
a good relationship with them in the future, or that MultiPlan,
having recently acquired PHCS, may choose to change its business
strategy in a way that adversely affects us by either limiting
or terminating our members access to the PHCS network or
by entering into agreements with our competitors to provide
their members access to PHCS.
WE
FACE COMPETITION FOR MARKETING REPRESENTATIVES AS WELL AS
COMPETITIVE OFFERINGS OF HEALTHCARE PRODUCTS AND
SERVICES.
Within the healthcare savings membership industry competition
for members is becoming more intense. We offer membership
programs that provide products and services similar to or
directly in competition with products and services offered by
our network-marketing competitors as well as the providers of
such products and services through other channels of
distribution. Some of our private label resellers have chosen to
sell a product that is competitive to ours in order to maintain
multiple sources for their products. Others may also choose to
sell competing products. Furthermore, marketing representatives
have a variety of products that they can choose to market,
whether competing with us in the healthcare market or not.
Our business operations compete in two channels of competition.
First, we compete based upon the healthcare products and
services offered. These competitors include companies that offer
healthcare products and services through membership programs
much like our programs, as well as insurance companies,
preferred provider organization networks and other organizations
that offer benefit programs to their customers. Second, we
compete with all types of network marketing companies throughout
the U.S. for new marketing representatives. Many of our
competitors have substantially larger customer bases and greater
financial and other resources.
We provide no assurance that our competitors will not provide
healthcare benefit programs comparable or superior to our
programs at lower membership prices or adapt more quickly to
evolving healthcare industry trends or changing industry
requirements. Increased competition may result in price
reductions, reduced gross margins,
25
and loss of market share, any of which could adversely affect
our business, financial condition and results of operations.
There is no assurance that we will be able to compete
effectively with current and future competitors.
GOVERNMENT
REGULATION MAY ADVERSELY AFFECT OR LIMIT OUR
OPERATIONS.
Most of the discount medical programs that we offer through our
Consumer Plan Division are sold without the need for an
insurance license by any federal, state or local regulatory
licensing agency or commission. In comparison, companies that
provide insurance benefits and operate healthcare management
organizations and preferred provider organizations are regulated
by state licensing agencies and commissions. These regulations
extensively cover operations, including scope of benefits, rate
formula, delivery systems, utilization review procedures,
quality assurance, enrollment requirements, claim payments,
marketing and advertising. Several states have enacted laws and
regulations overseeing discount medical plans. We do not know
the full extent of these regulations and additional states may
also impose regulation. Our need to comply with these
regulations may adversely affect or limit our future operations.
The cost of complying with these laws and regulations has and
will likely continue to have a material effect on our financial
position.
Government regulation of health and life insurance, annuities
and healthcare coverage and health plans is a changing area of
law and varies from state to state. Although we are not an
insurance company, the insurance companies from which we obtain
our products and financial services are subject to various
federal and state regulations applicable to their operations.
These insurance companies must comply with constantly evolving
regulations and make changes occasionally to services, products,
structure or operations in accordance with the requirements of
those regulations. We may also be limited in how we market and
distribute our products and financial services as a result of
these laws and regulations.
WE
HAVE A FIDUCIARY RESPONSIBILITY TO OUR MEMBERS THROUGH OUR TOTAL
CARE AND ESSENTIAL CARE PROGRAM OFFERINGS. IN THIS CAPACITY, WE
COULD BE LIABLE FOR THE LOSS OF MEMBERS FUNDS DEPOSITED
WITH US IN PERSONAL MEDICAL ACCOUNTS.
In the fourth quarter of 2002, we initiated a medical savings
program through our Total Care and Essential Care programs that
were processed through our subsidiary, Foresight, and are now
processed through our subsidiary, Access Administrators, Inc.,
as a third-party administrator. Under this medical savings
program, funds collected from members are held in Personal
Medical Accounts for the benefit of the member as a source of
payment for healthcare services obtained through our Total Care
and Essential Care programs. Under the medical savings program
we have a fiduciary responsibility to our members for the funds
held for their benefit much like a trustee. In the unforeseen
event of a loss of these funds while being held by us or our
failure to implement and maintain adequate internal controls, we
will be responsible and liable to the affected members for any
such loss, including any consequential damages suffered by the
members, which liability could be substantial. We have
terminated this program and the amounts held in our
members Personal Medical Accounts has been returned to the
individual account holders. Nevertheless, our risk for the funds
that had been held in those accounts remains with regard to
previously completed transactions.
AS A
RESULT OF THE INTRODUCTION OF PERSONAL MEDICAL ACCOUNTS, OUR
FINANCIAL POSITION AND RESULTS OF OPERATIONS MAY CONTINUE TO BE
ADVERSELY IMPACTED BY A DECREASE IN THE NUMBER OF HEALTHCARE
SAVINGS PROGRAM MEMBERSHIPS THAT WE CAN SELL AND
MAINTAIN.
While we believe that the introduction of our Personal Medical
Accounts (PMAs) was an important product evolution,
the initial impact of this introduction has negatively affected
our business. This impact is the result of additional
difficulties in selling and maintaining memberships in our
program because of the added complexity. Although we have
terminated our PMA program, there is no assurance that we will
be able to overcome these difficulties, and we may not be able
to increase the number of memberships that are sold and
maintained. As a result, our financial position and results of
operations may be negatively affected.
26
THE
FAILURE OF OUR NETWORK MARKETING ORGANIZATION TO COMPLY WITH
FEDERAL AND STATE REGULATION COULD RESULT IN ENFORCEMENT
ACTION AND IMPOSITION OF PENALTIES, MODIFICATION OF OUR NETWORK
MARKETING SYSTEM, AND NEGATIVE PUBLICITY.
Our network marketing organization is subject to federal and
state laws and regulations administered by the Federal Trade
Commission and various state agencies. These laws and
regulations include securities, franchise investment, business
opportunity and criminal laws prohibiting the use of
pyramid or endless chain types of
selling organizations. These regulations are generally directed
at ensuring that product and service sales are ultimately made
to consumers (as opposed to other marketing representatives) and
that advancement within the network marketing organization is
based on sales of products and services, rather than on
investment in the company or other non-retail sales related
criteria.
The compensation structure of a network marketing organization
is very complex. Compliance with all of the applicable
regulations and laws is uncertain because of:
|
|
|
|
|
the evolving interpretations of existing laws and regulations,
and
|
|
|
|
the enactment of new laws and regulations pertaining in general
to network marketing organizations and product and service
distribution.
|
Accordingly, there is the risk that our network marketing system
could be found to not comply with applicable laws and
regulations that could:
|
|
|
|
|
result in enforcement action and imposition of penalty,
|
|
|
|
require modification of the marketing representative network
system,
|
|
|
|
result in negative publicity, or
|
|
|
|
have a negative effect on distributor morale and loyalty.
|
Any of these consequences could have a material adverse effect
on our results of operations as well as our financial condition.
THE
LEGALITY OF OUR NETWORK MARKETING ORGANIZATION IS SUBJECT TO
CHALLENGE BY OUR MARKETING REPRESENTATIVES, WHICH COULD RESULT
IN SIGNIFICANT DEFENSE COSTS, SETTLEMENT PAYMENTS OR JUDGMENTS,
AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Our network marketing organization is subject to legality
challenge by our marketing representatives, both individually
and as a class. Generally, these challenges would be based on
claims that our marketing network program was operated as an
illegal pyramid scheme in violation of federal
securities laws, state unfair practice and fraud laws and the
Racketeer Influenced and Corrupt Organizations Act. Proceedings
resulting from these claims could result in significant defense
costs, settlement payments, or judgments, and could have a
material adverse effect on us.
WE MAY
HAVE EXPOSURE AND LIABILITY RELATING TO NON-COMPLIANCE WITH THE
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 AND
THE COST OF COMPLIANCE COULD BE MATERIAL.
In April 2003 privacy regulations promulgated by The Department
of Health and Human Services pursuant to the Health Insurance
Portability and Accountability Act of 1996 (HIPAA).
HIPAA imposes extensive restrictions on the use and disclosure
of individually identifiable health information by certain
entities. Also as part of HIPAA, the Department of Health and
Human Services has issued final regulations standardizing
electronic transactions between health plans, providers and
clearinghouses. Healthcare plans, providers and claims
administrators are required to conform their electronic and data
processing systems to HIPAA electronic transaction requirements.
While we believe we are currently compliant with these
regulations, we cannot be certain of the extent to which the
27
enforcement or interpretation of these regulations will affect
our business. Our continuing compliance with these regulations,
therefore, may have a significant impact on our business
operations and may be at material cost in the event we are
subject to these regulations. Sanctions for failing to comply
with standards issued pursuant to HIPAA include criminal and
civil sanctions.
DISRUPTIONS
IN OUR OPERATIONS DUE TO IMPLEMENTATION OF OUR MANAGEMENT
INFORMATION SYSTEM MAY OCCUR AND COULD ADVERSELY AFFECT OUR
CLIENT RELATIONSHIPS.
We recently transitioned to our new management information
system. This is a proprietary system and we do not rely on any
third party for its support and maintenance. There is no
assurance that we will be able to continue operating without
experiencing any disruptions in our operations or that our
relationships with our members, marketing representatives or
providers will not be adversely affected or that our internal
controls will not be adversely affected.
WE
HAVE MANY COMPETITORS AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY
WHICH MAY LEAD TO A LACK OF REVENUES AND DISCONTINUANCE OF OUR
OPERATIONS.
We compete with numerous well-established companies that design
and implement membership programs and other healthcare programs.
Some of our competitors may be companies that have programs that
are functionally similar or superior to our programs. Most of
our competitors possess substantially greater financial,
marketing, personnel and other resources than us. They may also
have established reputations relating to their programs.
Due to competitive market forces, we may experience price
reductions, reduced gross margins and loss of market share in
the future, any of which would result in decreases in sales and
revenues. These decreases in revenues would adversely affect our
business and results of operations and could lead to
discontinuance of operations. There can be no assurance that:
|
|
|
|
|
we will be able to compete successfully;
|
|
|
|
our competitors will not develop programs that render our
programs less marketable or even obsolete; or
|
|
|
|
we will be able to successfully enhance our programs when
necessary.
|
THE
GOODWILL ACQUIRED PURSUANT TO OUR ACQUISITIONS OF THE CAPELLA
GROUP AND AAI MAY BECOME FURTHER IMPAIRED AND REQUIRE A
WRITE-DOWN AND THE RECOGNITION OF AN IMPAIRMENT EXPENSE THAT MAY
BE SUBSTANTIAL.
In connection with our acquisitions of The Capella Group and
AAI, we recorded goodwill that had an aggregate asset value of
$7,466,000 at December 31, 2006. This carrying value has
been reduced through impairment charges of $6,866,000 including
tax considerations of $426,000 in 2006, $12,900,000 in 2005, and
$2,000,000 in 2004. In the event that the goodwill is determined
to be further impaired for any reason, we will be required to
write-down or reduce the value of the goodwill and recognize an
additional impairment expense. The impairment expense may be
substantial in amount and, in such case, adversely affect the
results of our operations for the applicable period and may
negatively affect the market value of our common stock.
OUR
SUBSIDIARY, AAI, DERIVES A LARGE PERCENTAGE OF ITS INCOME FROM A
FEW KEY CLIENTS AND THE LOSS OF ANY OF THOSE CLIENTS COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
AAI provides full service third-party administration services to
adjudicate and pay medical claims for employers who have
self-funded all or any portion of their healthcare costs. Their
primary market is governmental entities in the metropolitan area
of El Paso, Texas, including cities and school districts.
There is a limited number of these types of entities within that
metropolitan area. During 2006 we incurred a $4,066,000 goodwill
impairment charge including tax considerations of $426,000 as a
result of the reduction in the number of lives covered under
plans we administer. There is no assurance that AAI will obtain
renewal or extension of those contracts in 2007. The
28
loss of any of these contractual relationships will adversely
affect on our operating results and the loss of more than one of
these contractual relationships could have a material adverse
effect on our financial condition.
WE MAY
FIND IT DIFFICULT TO INTEGRATE ICMS BUSINESS AND
OPERATIONS WITH OUR BUSINESS AND OPERATIONS.
Although we believe that ICMs marketing and distribution
of insurance products and financial services will complement and
fit well with our business and the need for marketing of our
healthcare savings programs and third-party claims
administration services, ICMs business is new to us. Our
unfamiliarity with this business may make it more difficult to
integrate ICMs operations with ours. We will not achieve
the anticipated benefits of the merger-acquisition unless we
successfully integrate the operations of ICM and its
subsidiaries. There can be no assurance that this will occur.
WE ARE
DEPENDENT ON THIRD PARTY SERVICE PROVIDERS AND THE FAILURE OF
SUCH SERVICE PROVIDERS TO ADEQUATELY PROVIDE SERVICES TO US
COULD AFFECT OUR FINANCIAL RESULTS BECAUSE SUCH FAILURE COULD
AFFECT OUR RELATIONSHIP WITH OUR CUSTOMERS.
As a cost efficiency measure, we have entered into agreements
with third parties for their provision of services to us in
exchange for a monthly fee normally calculated on a per member
basis. These services include the enrollment of members through
different media, operation of a member-services call center,
claims administration, billing and collection services, and the
production and distribution of fulfillment member marketing
materials. One of these is our agreement with Lifeguard
Emergency Travel, Inc. (Lifeguard) for the provision
of these services to many of our members and prospective
members. As a result of these outsourcing agreements, we may
lose direct control over these key functions and operations. The
failure by Lifeguard or any of our other third party service
providers to perform the services to the same or similar level
of quality that we could provide could adversely affect our
relationships with our members, customers, marketing
representatives and our ability to retain and attract members,
customers, marketing representatives and, accordingly, have a
material adverse effect on our financial condition and results
of operations.
THE
AVAILABILITY OF OUR INSURANCE PRODUCTS AND FINANCIAL SERVICES
ARE DEPENDENT ON OUR STRATEGIC RELATIONSHIPS WITH VARIOUS
INSURANCE COMPANIES AND THE UNAVAILABILITY OF THOSE PRODUCTS AND
SERVICES FOR ANY REASON MAY RESULT IN SIGNIFICANT LOSS OF
REVENUES.
We are not an insurance company and only market and distribute
insurance products and financial services developed and offered
by insurance companies. We must develop and maintain
relationships with insurance companies that provide products and
services for a particular market segment (the elderly, the young
family, etc.) that we in turn make available to the independent
agents with whom they have contracted to sell the products and
services to the individual consumer. Of the eight insurance
companies with whom ICM and its subsidiaries had strategic
relationships prior to our acquisition, more than 95% of 2006
and 2005 revenue of ICM and its subsidiaries was attributable to
the insurance products and financial services offered by five of
the companies. Thus, we are dependent on a relatively small
number of insurance companies to provide product and financial
services for sale through our channels.
Development and maintenance of relationships with the insurance
companies may in part be based on professional relationships and
the reputation of our management and marketing personnel.
Consequently, the relationships with insurance companies may be
adversely affected by events beyond our control, including
departures of key personnel and alterations in professional
relationships. Our success and growth depend in large part upon
our ability to establish and maintain these strategic
relationships, contractual or otherwise, with various insurance
companies to provide their products and services, including
those insurance products and financial services that may be
developed in the future. The loss or termination of these
strategic relationships could adversely affect our revenues and
operating results. Furthermore, the loss or termination may also
impair our ability to maintain and attract new insurance
agencies and their agents to distribute the insurance products
and services that we offer.
29
WE ARE
DEPENDENT UPON INDEPENDENT INSURANCE AGENCIES AND THEIR AGENTS
TO OFFER AND SELL OUR INSURANCE PRODUCTS AND FINANCIAL
SERVICES.
We are principally dependent upon independent insurance agencies
and their agents to offer and sell the insurance products and
financial services that we offer and distribute. These insurance
agencies and their agents may offer and distribute insurance
products and financial services that are competitive with ours.
These independent agencies and their agents may give higher
priority and greater incentives (financial or otherwise) to
other insurance products or financial services, reducing their
efforts devoted to marketing and distribution of the insurance
products and financial services that we offer. Also, our ability
to attract and retain independent insurance agencies could be
negatively affected by adverse publicity relating to our
products and services or our operations.
Furthermore, of the approximately 5,000 independent agents with
whom ICM and its subsidiaries had active distribution and
marketing relationships prior to our acquisition, more than 80%
of the revenues of ICM and its subsidiaries was attributable to
the product sales and financial services through approximately
1,000 independent insurance agents. These agents report through
approximately 20 independent general agencies. Thus, we are
dependent on a small number of independent insurance agencies
for a very significant percentage of our total insurance
products and financial services revenue.
Development and maintenance of the relationships with
independent insurance agencies and their agents may in part be
based on professional relationships and the reputation of our
management and marketing personnel. Consequently, these
relationships may be adversely affected by events beyond our
control, including departures of key personnel and alterations
in professional relationships. The loss of a significant number
of the independent insurance agencies (and their agents), as
well as the loss of a key agency or its agents, for any reason,
could adversely affect our revenue and operating results, or
could impair our ability to establish new relationships or
continue strategic relationships with independent insurance
agencies and their agents.
WE
FACE INTENSE COMPETITION IN THE MARKET PLACE FOR OUR PRODUCTS
AND SERVICES AS WELL AS COMPETITION FOR INSURANCE AGENCIES AND
THEIR AGENTS FOR THE MARKETING OF THE PRODUCTS AND SERVICES
OFFERED.
Instead of utilizing captive or wholly-owned insurance agencies
for the offer and sale of its products and services, we utilize
independent insurance agencies and their agents as the principal
marketing and distribution channel. Competition for independent
insurance agencies and their agents is intense. Also,
competition from products and services similar to or directly in
competition with the products and services that we offer is
intense, including those products and services offered and sold
through the same channels utilized for distribution of our
insurance products and financial services. Under arrangements
with the independent insurance agencies, the agencies and their
agents may offer and sell a variety of insurance products and
financial services, including those that compete with the
insurance products and financial services that we offer.
Thus, our business operations compete in two channels of
competition. First, we compete based upon the insurance products
and financial services offered. This competition includes
products and services of insurance companies that compete with
the products and services of the insurance companies that we
offered and sell. Second, we compete with all types of marketing
and distribution companies throughout the U.S. for
independent insurance agencies and their agents. Many of our
competitors have substantially larger bases of insurance
companies providing products and services, and longer-term
established relationships with independent insurance agencies
and agents for the sale and distribution of products and
services, as well as greater financial and other resources.
There is no assurance that our competitors will not provide
insurance products and financial services comparable or superior
to those products and services that we offer at lower costs or
prices, greater sales incentives (financial or otherwise) or
adapt more quickly to evolving insurance industry trends or
changing industry requirements. Increased competition may result
in reduced margins on product sales and services, less than
anticipated sales or reduced sales, and loss of market share,
any of which could materially adversely affect our business and
results of operations. There can be no assurance that we will be
able to compete effectively against current and future
competitors.
30
WE ARE
HIGHLY DEPENDENT ON PETER W. NAUERT AND THE LOSS OF HIS SERVICES
WOULD HAVE A SUBSTANTIAL ADVERSE EFFECT ON OUR OPERATIONS AND
FINANCIAL RESULTS.
We are highly dependent upon Peter W. Nauert.
Mr. Nauerts management skills, reputation and
contacts within the insurance industry, including insurance
companies and insurance agencies and their agents, are key
elements of our business plans. The loss of the services of
Mr. Nauert would adversely affect the anticipated growth
and success we expect to obtain following completion of our
merger with ICM.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
We are not an accelerated filer or a large accelerated filer (as
such items are defined in
Rule 12b-2
of the Exchange Act) or a well-known seasoned issuer (as such
term is defined under Rule 405 of the Securities Act).
While this item is not required, we can report that as of the
date of this report, there are no pending unresolved comments
received from the staff of the Securities and Exchange
Commission.
Our corporate offices, operations, and insurance agency are
located in 17,612 square feet at 4929 Royal Lane,
Suite 200, Irving, Texas 75063. The offices are occupied
under a lease agreement with an unaffiliated third party that
expires November 15, 2011. We lease an additional
2,471 square feet for storage from the same unaffiliated
third party under a separate lease that expires January 2,
2010.
AAI occupies 16,780 square feet at 7430 Remcon Circle,
Building C, El Paso, Texas, 79912. These offices are occupied
under a lease agreement with a unaffiliated third party that
expires May 31, 2011. This property was owned by an
affiliated party through January 2007. The rates in this lease
were compared to market rates prior to its execution to ensure
that the terms of the lease were consistent with an impartial,
arms-length arrangement. Total payments of $169,000 were paid to
the affiliated party under this agreement in 2006.
We consider our leased office space to be adequate for our
needs. In the event we are required to relocate our office upon
termination of the existing leases, we believe other office
space is available on comparable lease terms.
The following table presents our commitment under these leases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
Total operating leases on real
property, net of sublease income
|
|
$
|
2,104
|
|
|
$
|
402
|
|
|
$
|
924
|
|
|
$
|
778
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
In the normal course of business, the Company may become
involved in litigation or in settlement proceedings relating to
claims arising out of the Companys operations. Except as
described below, the Company is not a party to any legal
proceedings, the adverse outcome of which, individually or in
the aggregate, could have a material adverse effect on the
Companys business, financial condition and results of
operations.
Kirk, et al v Precis, Inc. and David
May. On September 8, 2003, the case
styled Robert Kirk, Individually and D/B/A US Asian
Advisors, LLC, Eugene M. Kennedy, P.A., Stewart &
Associates, CPAs, P.A. and Kimberly Decamp, Plaintiffs vs.
Precis, Inc. and David May, Defendants was initiated in
the District Court of Tarrant County, Texas, Case No. 236
201 468 03. The plaintiffs Robert Kirk (doing business as US
Asian Advisors, LLC or U.S. Asian Capital Investors, LLC),
Kimberly Decamp and Stewart & Associates, CPAs,
P.A. held warrants exercisable for the purchase of 9,000, 48,000
and 4,000 shares, respectively, of the Companys
common stock for $9.00 per share on or before
February 8, 2005. The plaintiffs Eugene M. Kennedy, P.A.
and Kimberly Decamp held stock options that expired on
June 30, 2003, and that were exercisable for 15,000 and
170,000 shares, respectively, of the Companys common
stock for $9.37 per share. David May was our Secretary and
Vice President and General Counsel through January 5, 2004.
The plaintiffs alleged that they were not allowed to exercise
their stock options and warrants in May 2003 due to actions and
inactions of Mr. May and that these actions and inactions
constitute fraud, misrepresentation,
31
negligence and legal malpractice. All communications with
Mr. May were through the plaintiffs broker,
Burt Martin Arnold Securities, Inc. Plaintiffs sought
damages equal to the difference between the exercise price of
the stock options or warrants and the market value of the
Companys common stock on May 7, 2002 (presumably the
closing sale price of $15.75) or an aggregate sum of $1,592,050,
plus exemplary damages and costs.
On July 13, 2005, the court entered a judgment in the
Companys favor, ordering that the plaintiffs take nothing
by way of their lawsuit. The order set aside a previous jury
verdict in favor of the plaintiffs. The trial courts
judgment was affirmed by the Court of Appeals for the Second
Judicial District of Texas. The plaintiffs may appeal the
appellate courts decision to the Texas Supreme Court.
While the Company cannot offer any assurance as to the outcome
of the appeal, the Company believes that there exists no basis
on which the judgment in the Companys favor will be
overturned.
Zermeno v Precis. The case styled
Manuela Zermeno, individually and on behalf of the
general public; and Juan A. Zermeno, individually and on behalf
of the general public v Precis, Inc., an Oklahoma corporation
and Does 1 through 100, inclusive was filed on
August 14, 2003 in the Superior Court of the State of
California for the County of Los Angeles.
A second case styled California Foundation for Business
Ethics, Inc., a California non-profit corporation, v Precis,
Inc., and Does 1 through 100, inclusive was filed on
September 9, 2003, in the Superior Court of the State of
California for the County of Los Angeles.
The two above cases were removed to the United States District
Court for the Central District of California and consolidated by
order of the court, on December 4, 2003.
The Zermeno plaintiffs are former members of the Care
Entréetm
discount healthcare program who allege that they (for themselves
and for the general public) are entitled to injunctive,
declaratory, and equitable relief. Plaintiffs First
Amended Complaint set forth three distinct claims under
California law. Plaintiffs first cause of action alleged
that the operation of our Care
Entréetm
program violates Health and Safety Code §445
(Section 445) that governs medical referral
services. Next, Plaintiffs alleged that they are entitled to
damages under Civil Code §§1812.119 and 1812.123,
which are part of the broader statutory scheme governing the
operation of discount buying organizations, Civil Code 1812. 100
et. Seq. (Section 1812.100).
Plaintiffs third cause of action sought relief under
Business and Professions Code § 17200,
Californias Unfair Competition Law
(Section 17200).
The Company fully settled all the claims brought by the
California Foundation for Business Ethics, Inc. With the Zermeno
plaintiffs, the Company settled the causes of action related to
Civil Code §§ 1812.100. The claim under
Section 445 and the related claim under Section 17200
remain pending and have been assigned to the Superior Court of
California, Los Angeles County under case number BC 300788. A
negative result in this case would have a material affect on the
Companys financial condition and would limit the
Companys ability (and that of other healthcare discount
programs) to do business in California.
Management believes that the Company have complied with all
applicable statutes in the state of California and regulations.
Although management believes the Plaintiffs claims are
without merit, the Company cannot provide any assurance
regarding the outcome or results of this litigation.
State of Texas v The Capella Group, Inc.
et al. The State of Texas filed a
lawsuit against our subsidiary, The Capella Group, Inc. d/b/a
Care Entrée, and Equal Access Health, Inc. (including
various names under which Equal Access Health, Inc. does
business) on April 28, 2005. Equal Access Health is a third
party marketer of our discount medical card programs, but is
otherwise not affiliated with our subsidiaries or us. The
lawsuit alleges that Care Entrée, directly and through at
least one other party that resells Care Entrées
services to the public, violated certain provisions of the Texas
Deceptive Trade Practices Consumer Protection Act. The lawsuit
seeks, among other things, injunctive relief, unspecified
monetary penalties and restitution. We believe that the
allegations are without merit and are vigorously defending this
lawsuit. The lawsuit was filed in the 98th District Court
of Travis County, Texas as case number GV501264. We have always
insisted that our programs be sold in an honest and forthright
manner and have worked to protect the interests of consumers in
Texas and all other states. Unfavorable findings in this lawsuit
could have a material adverse effect on our financial condition
and results of operations. No assurance can be provided
regarding the outcome or results of this litigation.
32
Investigation of National Center for Employment of the
Disabled, Inc. and Access HealthSource,
Inc.(AAI) In June 2004 the
Company acquired AAI and its subsidiaries from National Center
for Employment of the Disabled, Inc. (now known as Ready One
Industries, NCED). Robert E. Jones, the C.E.O. of
NCED was elected to and served on the Companys Board of
Directors until his March 2006 resignation. Frank Apodaca, the
President and C.E.O. of AAI served as Chief Administrative
Officer for NCED. He also served on the Board of Directors of
NCED until his resignation in March 2006. Until July 2006, his
employment agreement with the Company allowed him to spend up to
20% of his time on matters related to NCEDs operations.
NCED is one of the Companys greater than 10% shareholders
as a result of shares it received from the Companys
acquisition of AAI. The 16,780 square feet of office space
we lease for our AAI operation in El Paso as described in
Item 2 was owned by NCED through January 2007. The rates in
this lease were compared to market rates prior to its execution
to ensure that the terms of the lease were consistent with an
impartial, arms-length arrangement. Total payments of $169,000
were paid to NCED under this agreement in 2006. AAI also earned
revenue from NCED of $729,000 and $684,000 in 2005 and 2006,
respectively.
NCED provides services to the United States government under
various contracts that were awarded to NCED under a federal
program that encouraged the use of facilities whose work force
is composed of 75% or more disabled workers. In 2006,
investigations into NCED revealed that it may not have employed
a sufficient number of disabled workers to meet the
programs requirements. Although the Company believes that
AAI was not involved in the contracting for NCEDs federal
contracts and was not involved in NCEDs operations either
before or after the Companys acquisition of AAI, the
investigation of NCED may lead to allegations that either AAI or
Mr. Apodaca were involved in inappropriate or illegal
activities. The investigation of NCED may also lead to other
investigations of AAI contracting processes and
operations. There are currently no legal actions related to this
matter pending against AAI or Mr. Apodaca. Because of these
investigations and any related allegations or charges and the
associated unfavorable publicity, AAI may lose its local
government clients. The loss of these clients and the resulting
loss of revenue could have a material adverse effect on the
Companys financial condition and result of operations.
States General Life Insurance
Company. In February 2005, States General
Life Insurance Company (SGLIC) was placed in
permanent receivership by the Texas Insurance Commission (The
State of Texas v States General Life Insurance Company, Cause
No. GV-500484,
in the 126th District Court of Travis County, Texas.)
Pursuant to letters dated October 19, 2006, the Special
Deputy Receiver (the SDR) of SGLIC asserted certain
claims against ICM, its subsidiaries, Peter W. Nauert,
ICMs Chairman and Chief Executive Officer, and G. Scott
Smith, a former Executive Officer of ICM, totaling $2,839,000.
The SDR is seeking recovery of certain SGLIC funds that it
alleges were inappropriately transferred and paid to or for the
benefit of ICM, its subsidiaries and Messrs. Nauert and
Smith. These claims are based upon assertions of Texas law
violations, including prohibitions against self-dealing,
participation in breach of fiduciary duty and preferential and
fraudulent transfers. Mr. Nauert was in control and
Chairman of the Board of SGLIC when it was placed in
receivership by the Texas Insurance Commission. The Company, its
subsidiaries and Messrs. Nauert and Smith intend to
exercise their full rights in defense of the SDRs asserted
claims. The SDR filed its own action against SGLIC, pending in
the 126th District Court of Travis County, Texas under
cause
No. GV-500484
and against Messrs. Nauert and Smith, ICM, certain
subsidiaries of ICM and other parties, in the
126th District Court of Travis County, Texas under cause
No. D-1-GN-06-4697.
Access Plans has been named as a defendant in this action as a
successor-in-interest
to ICM. We can not make any assurance of the outcome of this
matter. An adverse ruling in these cases would have a material
adverse effect on our financial position and operations. In
connection with our merger-acquisition of ICM and its
subsidiaries, Mr. Nauert and the Peter W. Nauert Revocable
Trust have agreed to fully indemnify ICM and us against any
losses resulting from this matter.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
We held our annual meeting of shareholders on December 29,
2006. At this meeting, we asked our shareholders to vote on the
election of our Board of Directors and on the ratification of
the engagement of our independent registered public accounting
firm. Of the 13,512,763 shares of our Common Stock
outstanding as of the record date for the meeting, 7,765,880
were represented and voted at the meeting. At the meeting, the
following directors were elected: Kent H. Webb, M.D.,
Nicholas J. Zaffiris, J. French Hill, Kenneth S. George and
Russell
33
Cleveland. Eugene Becker had previously announced that he would
not stand for-election to the Board of Directors and his term,
therefore, expired upon the election of directors. The only
other matter voted upon at the meeting was the ratification of
the engagement of Hein & Associates LLP to audit of our
financial results for year ended December 31, 2006
The vote results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes
|
|
|
|
|
Item
|
|
For
|
|
|
Against
|
|
|
Abstained
|
|
|
Total
|
|
|
Ratification of Hein &
Associates LLP
|
|
|
7,742,350
|
|
|
|
23,100
|
|
|
|
430
|
|
|
|
7,765,880
|
|
Election of Kent H. Webb as
director
|
|
|
7,599,267
|
|
|
|
163,769
|
|
|
|
2,844
|
|
|
|
7,765,880
|
|
Election of Nicholas J. Zaffiris
as director
|
|
|
7,177,579
|
|
|
|
585,457
|
|
|
|
2,844
|
|
|
|
7,765,880
|
|
Election of J. French Hill as
director
|
|
|
7,697,450
|
|
|
|
65,400
|
|
|
|
3,030
|
|
|
|
7,765,880
|
|
Election of Kenneth S. George as
director
|
|
|
7,694,086
|
|
|
|
68,950
|
|
|
|
2,844
|
|
|
|
7,765,880
|
|
Election of Russell Cleveland as
director
|
|
|
7,620,002
|
|
|
|
143,034
|
|
|
|
2,844
|
|
|
|
7,765,880
|
|
PART II
|
|
ITEM 5.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
Our common stock is traded in the
over-the-counter
market and is quoted on the Nasdaq Capital Market System under
the symbol AUSA (formerly PCIS). Prior to February 9, 2000,
there was no public trading market for our common stock. The
closing sale prices reflect inter-dealer prices without
adjustment for retail markups, markdowns or commissions, and may
not reflect actual transactions. The following table sets forth
the high and low closing sale prices of our common stock during
the calendar quarters presented, as reported by the Nasdaq
Capital Market System.
For more information on us, please refer to our website at
www.accessplansusa.com.
|
|
|
|
|
|
|
|
|
|
|
Closing Sale
|
|
|
|
Price
|
|
|
|
Common Stock
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
March 31, 2005
|
|
$
|
2.72
|
|
|
$
|
1.69
|
|
June 30, 2005
|
|
$
|
1.94
|
|
|
$
|
0.78
|
|
September 30, 2005
|
|
$
|
1.51
|
|
|
$
|
1.01
|
|
December 31, 2005
|
|
$
|
1.97
|
|
|
$
|
1.54
|
|
March 31, 2006
|
|
$
|
1.67
|
|
|
$
|
1.25
|
|
June 30, 2006
|
|
$
|
1.69
|
|
|
$
|
1.12
|
|
September 30, 2006
|
|
$
|
2.46
|
|
|
$
|
1.58
|
|
December 31, 2006
|
|
$
|
2.01
|
|
|
$
|
1.34
|
|
On March 30, 2007, the closing sale price of the common
stock as quoted on the Nasdaq Capital Market was $2.35. On
March 30, 2007, there were approximately 255 record holders
of our common stock.
The market price of our common stock is subject to significant
fluctuations in response to, and may be adversely affected by:
|
|
|
|
|
variations in quarterly operating results,
|
|
|
|
changes in earnings estimates by analysts,
|
|
|
|
adverse earnings or other financial announcements of our
customers or clients,
|
34
|
|
|
|
|
announcements and introductions of product or service
innovations or new contracts by us or our competitors, and
|
|
|
|
general stock market conditions.
|
In order to continue inclusion of our common stock on the Nasdaq
Capital Market the minimum listing requirements must be met. If
we fail to meet the minimum requirements, our common stock will
be de-listed by Nasdaq and will become tradable on the
over-the-counter
market, which will adversely affect the sale price of our common
stock. In this event, our common stock will then be traded in
the
over-the-counter
market and may become subject to the penny stock
trading rules.
The
over-the-counter
market is volatile and characterized as follows:
|
|
|
|
|
the
over-the-counter
securities are subject to substantial and sudden price increases
and decreases;
|
|
|
|
at times the price (bid and ask) information for the securities
may not be available;
|
|
|
|
if there are only one or two market makers, there is a risk that
the dealers or group of dealers may control the market in our
common stock and set prices that are not based on competitive
forces; and
|
|
|
|
the actual sale price ultimately obtained for a block of stock
may be substantially below the quoted bid price.
|
Consequently, the market price of our common stock will be
adversely affected if our common stock ceases to be included on
the Nasdaq Capital Market.
Dividend
Policy
Our dividend policy is to retain our earnings, if any, to
support the expansion of our operations. Our board of directors
does not intend to pay cash dividends on our common stock in the
foreseeable future. Any future cash dividends will depend on
future earnings, capital requirements, our financial condition
and other factors deemed relevant by our board of directors.
Securities
Authorized For Issuance Under Equity Compensation
Plans.
The following table sets forth as of December 31, 2006,
information related to each category of equity compensation plan
approved or not approved by our stockholders, including
individual compensation arrangements with our non-employee
directors. The equity compensation plans approved by our
stockholders are our 1999 Stock Option Plan, our 2002 Stock
Option Plan and our 2002 IMR Stock Option Plan. All stock
options, warrants and rights to acquire our equity securities
are exercisable for or represent the right to purchase our
common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and Warrants
|
|
|
Number of Securities
|
|
|
|
Number of
|
|
|
|
|
|
Remaining Available
|
|
|
|
Shares
|
|
|
Weighted Average
|
|
|
for Future Issuance
|
|
|
|
Underlying
|
|
|
Exercise Price of
|
|
|
Under Equity
|
|
Plan Category
|
|
Unexercised
|
|
|
Outstanding
|
|
|
Compensation Plans(1)
|
|
|
Equity compensation plans approved
by our stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 Non employee stock option plan
|
|
|
475,000
|
|
|
$
|
1.99
|
|
|
|
|
|
2002 IMR stock option plan
|
|
|
116,354
|
|
|
|
4.66
|
|
|
|
|
|
1999 stock option plan
|
|
|
836,000
|
|
|
|
1.99
|
|
|
|
579,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,427,354
|
|
|
|
2.21
|
|
|
|
579,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares of our common stock remaining available for
issuance under equity compensation plans is after excluding the
number of securities issuable upon exercise of outstanding
options and warrants |
Unregistered
Securities Sold During Preceding Three Years
Access HealthSource, Inc (AAI). We
acquired AAI in June 2004. The purchase price was in part based
upon a multiple of 3.22 of the earnings before interest, taxes,
depreciation and amortization of AAI for a 2004, 2005 and
35
2006. The total purchase price is $8,244,000 of which $3,632,000
was paid by issuance and delivery of 2,145,483 shares of
our common stock to Ready One Industries (formerly NCED). In
connection with our merger-acquisition of AAI, no sales
commissions or other remuneration were paid and the common stock
shares were issued pursuant to Sections 3(b) and 4(6) of
the Securities Act of 1933, as amended (the Securities
Act)
Insurance Capital Management USA
Inc. On January 30, 2007, we completed
our merger with Insurance Capital Management USA, Inc.
(ICM). Under the terms of the merger, the
shareholders of ICM received shares of our common stock based on
the adjusted earning before income tax, depreciation and
amortization (EBITDA) of ICM and its acquired
subsidiaries. On the closing date, the ICM shareholders received
a total of 4,498,529 of our shares. ICM shareholders may receive
up to an additional 2,257,853 common stock shares of the Company
if the acquired ICM companies achieve adjusted EBITDA of
$1,250,000 over four consecutive calendar quarters ending on or
before December 31, 2007. Based on a preliminary review of
adjusted EBITDA for the acquired ICM companies for the year
ended in December 2006, approximately 2,111,400 shares will
be issued to ICM shareholders during the second quarter of 2007.
In connection with our merger-acquisition of ICM no sales
commissions or other remuneration were paid and the common stock
shares were issued pursuant to Sections 3(b) and 4(6) of
the Securities Act.
36
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected statement of operations and cash flow data
presented below for each of the three years ended on
December 31, 2006, 2005 and 2004 and the balance sheet data
as of December 31, 2006 and 2005 have been derived from our
consolidated financial statements included elsewhere in this
report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Service revenues
|
|
$
|
21,974
|
|
|
$
|
30,028
|
|
|
$
|
37,413
|
|
|
$
|
40,224
|
|
|
$
|
40,455
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
10,514
|
|
|
|
13,138
|
|
|
|
15,826
|
|
|
|
12,043
|
|
|
|
10,208
|
|
Sales and marketing
|
|
|
5,463
|
|
|
|
7,486
|
|
|
|
11,358
|
|
|
|
15,212
|
|
|
|
16,702
|
|
General and administrative
|
|
|
6,776
|
|
|
|
9,769
|
|
|
|
10,385
|
|
|
|
6,014
|
|
|
|
5,694
|
|
Impairment charge for goodwill
|
|
|
6,440
|
|
|
|
12,900
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
29,193
|
|
|
|
43,293
|
|
|
|
39,569
|
|
|
|
33,269
|
|
|
|
32,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(7,219
|
)
|
|
|
(13,265
|
)
|
|
|
(2,156
|
)
|
|
|
6,955
|
|
|
|
7,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
355
|
|
|
|
159
|
|
|
|
(57
|
)
|
|
|
(153
|
)
|
|
|
(67
|
)
|
Net (loss) income before taxes
|
|
|
(6,864
|
)
|
|
|
(13,106
|
)
|
|
|
(2,213
|
)
|
|
|
6,802
|
|
|
|
7,784
|
|
Provision for income taxes
(benefit) expense
|
|
|
(50
|
)
|
|
|
123
|
|
|
|
(556
|
)
|
|
|
2,524
|
|
|
|
2,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations
|
|
|
(6,814
|
)
|
|
|
(13,229
|
)
|
|
|
(1,657
|
)
|
|
|
4,278
|
|
|
|
5,122
|
|
Gain on sale of operations, net of
taxes
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from discontinued
operations, net of taxes
|
|
|
(910
|
)
|
|
|
(442
|
)
|
|
|
(299
|
)
|
|
|
(189
|
)
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
|
(7,724
|
)
|
|
|
(13,371
|
)
|
|
|
(1,956
|
)
|
|
|
4,089
|
|
|
|
5,478
|
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings applicable to
common stockholders
|
|
$
|
(7,724
|
)
|
|
$
|
(13,371
|
)
|
|
$
|
(1,956
|
)
|
|
$
|
4,089
|
|
|
$
|
5,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.51
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.36
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.51
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.36
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,486,562
|
|
|
|
12,432,591
|
|
|
|
11,921,946
|
|
|
|
11,848,789
|
|
|
|
11,790,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
13,486,562
|
|
|
|
12,432,591
|
|
|
|
11,921,946
|
|
|
|
11,924,214
|
|
|
|
11,996,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
725
|
|
|
$
|
514
|
|
|
$
|
1,759
|
|
|
$
|
7,819
|
|
|
$
|
3,989
|
|
Net cash used in investing
activities
|
|
$
|
(3,263
|
)
|
|
$
|
(1,822
|
)
|
|
$
|
(2,595
|
)
|
|
$
|
(945
|
)
|
|
$
|
(920
|
)
|
Net cash used in financing
activities
|
|
$
|
(241
|
)
|
|
$
|
(964
|
)
|
|
$
|
(1,969
|
)
|
|
$
|
(1,398
|
)
|
|
$
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,232
|
|
|
$
|
6,011
|
|
Unrestricted short-term investments
|
|
|
200
|
|
|
|
|
|
Restricted short-term investments
|
|
|
1,420
|
|
|
|
250
|
|
Current assets
|
|
|
6,876
|
|
|
|
14,954
|
|
Working capital
|
|
|
3,996
|
|
|
|
4,692
|
|
Total assets
|
|
|
16,320
|
|
|
|
30,864
|
|
Current liabilities
|
|
|
2,880
|
|
|
|
10,262
|
|
Total liabilities
|
|
|
2,928
|
|
|
|
10,500
|
|
Stockholders equity
|
|
|
13,392
|
|
|
|
20,364
|
|
|
|
|
(1) |
|
We acquired AAI in 2004 for a purchase price of $8,244,000. The
total includes cash payments of $4,232,000 and distribution of
2,145,483 shares with a value of $3,632,000 paid to the
seller and acquisition costs of $380,000 through
December 31, 2006. |
|
(2) |
|
Certain reclassifications have been made to prior period
financial information to conform to the current presentation of
the financial information. |
|
(3) |
|
For the years ended December 31, 2006, 2005, and 2004
outstanding stock options on 43,575, 25,375, and
54,864 shares, respectively, were not included in the
calculation of fully diluted earnings per share because the
inclusion would have been anti-dilutive. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Consumer Healthcare Savings. We offer
savings on healthcare services throughout the United States to
persons who are uninsured and under-insured. These savings are
offered by accessing the same preferred provider organizations
(PPOs) that are utilized by many insurance companies. These
programs are sold primarily through a network marketing strategy
under the name Care
Entrée.tm
We design these programs to benefit healthcare providers as well
as the network members. Providers commonly give reduced or
preferred rates to PPO networks in exchange for steerage of
patients. However, the providers must still file claim forms and
wait 30 to 60 days to be paid for their services. Our
programs utilize these same networks to obtain the same savings
for the Care
Entréetm
program members. However, the healthcare providers are paid
immediately for their services and are not required to file
claim forms. We provide transaction facilitation services to
both the program member and the healthcare provider.
Our Independent Marketing Representatives (IMRs) may
enroll as representatives by paying an enrollment fee and
signing a standard representative agreement. We pay independent
marketing representatives commissions equal to 20% of the
membership fees of members they enroll for the life of that
members enrollment. Independent marketing representatives
can also recruit other representatives and earn override
commissions on sales made by those recruited representatives. In
the month of membership sales, no override commissions are paid
to the representatives upline. The total regular or
ongoing commissions payout, including overrides on monthly
38
membership sales after the enrollment month and our contribution
to the bonus pools, is up to 60% of qualified membership sales.
We also design healthcare membership programs for employer
groups and third party marketers. Memberships in these programs
are offered and sold by direct marketing through direct sales or
in-bound direct marketing. We believe that our clients, their
members and the vendors of the products and services offered
through the programs, all benefit from our membership service
programs. The products and services are bundled, priced and
marketed utilizing relationship marketing strategies or inbound
direct marketing to target the profiled needs of the
clients particular member base. Our memberships sold by
third-party organizations are generally marketed using the
third-partys name or brand or under our wholesale brand
For Your Good Health. We refer to these programs and
membership sales as wholesale programs or private label
programs. While the services offered to consumers by these
private label programs are generally similar to the services we
offer through Care
Entréetm,
each of the private label programs can bundle our services to
fit the needs of their consumers. For instance, some of our
private label programs do not offer a self-funded escrow program
to their members.
Employer and Group Healthcare
Services. For governments and other large,
self-funded employers seeking to reduce their costs of provided
employee healthcare benefits, we offer a more streamlined
version of our healthcare products and programs. In these cases,
we offer access to healthcare through our network of providers
and the efficient repricing of bills through our proprietary
systems. We can offer these services on a price based on either
the number of participants per month or as a percentage of
savings on healthcare costs actually realized. Through AAI, we
provide a wide range of healthcare claims administration
services and other cost containment procedures that are
frequently required by governments and other employers who have
chosen to self fund their employee healthcare benefits. With the
services of AAI, we offer a more complete suite of healthcare
services. We are able to provide individuals and employee groups
access to preferred provider networks, medical savings accounts
and full third party administration capabilities to adjudicate
and pay medical claims. AAIs primary area of expertise is
in the public sector market.
Financial Services
(Discontinued). Until December 2006, we
reported the financial results of our wholly-owned subsidiary
Care Financial of Texas, L.L.C. (Care Financial) and Care 125 in
this segment. Care Financial offered high deductible and
scheduled benefit insurance policies and Care 125 offered life
insurance and annuities, along with Healthcare Savings Accounts
(HSAs), Healthcare Reimbursement Arrangements (HRAs) and medical
and dependent care Flexible Spending Accounts (FSAs). Care 125
was discontinued in December 2006 and Care Financials
results of operations for 2006 were immaterial and are now
included in the Corporate and Other segment.
Rental Purchase And Club Membership Programs
(Discontinued). Until December 2005, through
Foresight, we designed club membership programs for
rental-purchase companies, financial organizations, employer
groups, retailers and association-based organizations.
Memberships in these programs were offered and sold as part of a
point-of-sale
transaction or by direct marketing through direct mail or as
inserts. Program members are offered and provided our
third-party vendors products and services. The products
and services were bundled, priced and marketed to target the
profiled needs of the clients particular customer base.
Most of our club membership programs were sold by third-party
organizations, generally in connection with a
point-of-sale
transaction. We referred to these programs and membership sales
as wholesale programs. In December 2005, we sold substantially
all of the assets of this subsidiary and discontinued its
operations.
Operational
Review
The year ended December 31, 2006 was another year of
significant challenge. We implemented member escrow accounts
during the fourth quarter of 2002 in response to the market
changes in the healthcare savings industry, and on
October 1, 2003, we expanded the escrow requirements to all
programs offering access to medical doctors and physicians. As a
result of this change, we required all of our members (other
than those whose memberships are sold by our private label
partners) to fund and maintain Personal Medical Accounts
(PMAs) to provide the healthcare providers with a
form of payment assurance prior to receipt of healthcare
services. As of December 2006, we discontinued these PMAs and
returned the funds held in escrow to the appropriate members.
39
Our healthcare membership base was approximately 32,000 members
as of December 31, 2006, as compared to 38,000 members as
of December 31, 2005 and 57,000 members as of
December 31, 2004, a decrease of approximately 6,000
members or 15.8% during 2006. The reduction in our healthcare
membership base resulted from declining market share in the
healthcare savings market, due in part to the implementation of
the required PMAs, as well as provider acceptance issues in some
markets. Also, our independent marketing representative base
experienced a significant reduction in 2003 through 2006.
We believe that the PMA requirements implemented in late 2002
negatively impacted our membership base and consequently our
revenues and net earnings in 2006, 2005 and 2004. These accounts
were implemented to help provide assurance of payment to the
healthcare providers and accordingly, their continued
willingness to provide healthcare services to our members. This
strategic move was thought to be necessary as many healthcare
providers throughout the United States were reluctant to accept
a health discount card. In order to address the
issues of assurance of payment to the providers and acceptance
of the discount cards by those providers, we have recently
implemented enhanced levels of customer advocacy in lieu of
PMAs. For healthcare cases that are anticipated to cost a
significant amount, we assign a personal negotiator who will
review our members financial situation and explain cost
savings options that they may want to discuss with their
physician. Depending on their financial resources, our
negotiator may pursue a variety of options with the hospital or
other healthcare facility to make payment arrangements upfront
including helping the member apply for financial assistance or
negotiating a reduced down payment or discounted fee.
We have also developed a line of affordable insurance products
that are sometimes referred to as scheduled benefit,
limited benefit or defined benefit
products. These products may be less expensive than traditional
comprehensive healthcare insurance and usually do not require
the member to undergo any medical underwriting. As such, they
are available to all individuals, regardless of health
condition. The products usually operate on an indemnity basis,
reimbursing the member for certain of his or her incurred costs.
Sometimes, the products allow the benefit to be assigned
directly to the provider, eliminating the need for the member to
pay the provider directly and then seek reimbursement. These
products pay a defined amount for services. For instance, a
member could choose a program entitling him or her to a benefit
payment of $250, $500 or $1,000 per day of hospitalization,
with additional scheduled benefits for intensive care stays and
surgery, for up to 180 days. The sale of some of these
programs requires an insurance license. In this case, we will
sell the products only through our representatives that hold the
appropriate license. Some of these programs, however, will be
offered at no cost to the member as part of the members
enrollment in an association. In this case, the sale of the
membership does not require a license in most states. We
commenced sales of these new products in the first quarter of
2006. While it is too early to assess the market acceptance of
these new products, it is hoped that they and our enhanced
customer advocacy will address the issues of assurance of
payment to the providers and acceptance of the discount cards by
those providers more successfully than the escrow or PMA
products.
Our operating results benefited from the acquisition of AAI in
June of 2004. In 2006, AAI experienced current and projected
reductions in earnings due largely to a decline in the number of
lives covered under plans that are administered by AAI and
recorded a $4,066,000 impairment to goodwill including tax
considerations of $426,000. Excluding this charge, AAI
contributed revenues of $7,409,000 and net earnings (after
taxes) of $1,237,000 in 2006. In 2005, AAI contributed revenues
of $8,288,000 and net earnings (after taxes) of $1,609,000.
While included in operations for only slightly more than six
months during 2004, AAI contributed $3,670,000 or 10% to our
2004 revenue and $299,000 of net earnings (after taxes) to
partially offset our other losses.
In 2005, we introduced Vergance, a new network
marketing distribution channel as a division of the Company.
Vergance offered wellness products, including nutraceuticals
under the retail name Natrience, and discounted
healthcare services under the retail name QuickCare.
Vergance was discontinued in the second quarter of 2006.
Critical
Accounting Policies
Revenue Recognition. Revenue
recognition varies based on source.
Healthcare Membership Revenues. We recognize
our Care
Entréetm
program membership revenues, other than initial enrollment fees,
on each monthly anniversary date. Membership revenues are
reduced by the
40
amount of estimated refunds. For members that are billed
directly, the billed amount is collected almost entirely by
electronic charge to the members credit cards, automated
clearinghouse or electronic check. The settlement of those
charges occurs within a day or two. Under certain private label
arrangements, our private label partners bill their members for
the membership fees and our portion of the membership fees is
periodically remitted to us. During the time from the billing of
these private-label membership fees and the remittance to us, we
record a receivable from the private label partners and record
an estimated allowance for uncollectible amounts. The allowance
of uncollectible receivables is based upon review of the aging
of outstanding balances, the credit worthiness of the private
label partner and its history of paying the agreed amounts owed.
Membership enrollment fees, net of direct costs, are deferred
and amortized over the estimated membership period that averages
eight to ten months. Independent marketing representative fees,
net of direct costs, are deferred and amortized over the term of
the applicable contract. Judgment is involved in the allocation
of costs to determine the direct costs netted against those
deferred revenues, as well as in estimating the membership
period over which to amortize such net revenue. We maintain a
statistical analysis of the costs and membership periods as a
basis for adjusting these estimates from time to time.
AAI Third Party Administration. AAIs
principal sources of revenues include administrative fees for
third party claims administration, network provider fees for the
preferred provider network and utilization and management fees.
These fees are based on monthly or per member per month fee
schedules under specified contractual agreements. Revenues from
these services are recognized in the periods in which the
services are performed and when collection is reasonably assured.
Commission Expense. Commissions are
paid to our independent marketing representatives in the month
following the month in which a member has enrolled in or renewed
our Care
Entréetm
program. Commissions are only paid in the following month when
we have received the related monthly membership fees. We do not
pay advanced commissions on membership sales. Commissions are
based on established commission schedules and are determined and
accrued based upon the recognition of the related healthcare
membership revenue, as described above.
Acquisitions. In 2004, we acquired AAI
for an ultimate purchase price of $8,244,000 (after contingent
consideration) that included $7,764,000 of goodwill, $274,000 of
working capital and $206,000 of fixed assets. In 2006, AAI
recorded a $4,066,000 impairment to goodwill including tax
considerations of $426,000 that resulted from current and
projected reductions in earnings primarily due to a decline in
the number of lives covered under plans that it administers.
Fixed Assets. Property and equipment
are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives of the
related assets for financial reporting purposes. Leasehold
improvements are depreciated using the straight-line method over
the shorter of their estimated useful lives or the lease term.
The estimation of useful lives is based, in part, upon past
experience with similar assets and upon our plans for the
utilization of the assets in the future. We periodically review
fixed assets, including software, whenever events or changes in
circumstances indicate that their carrying amounts may not be
recoverable or their depreciation or amortization periods should
be accelerated. When any value impairment is determined to
exist, the related assets are written down to their fair value.
If we determine that the remaining useful life, based upon known
events and circumstances, should be shortened, the depreciation
or amortization of the related asset is adjusted on a
prospective, going-forward basis based upon the shortened useful
lives.
Intangible Asset Valuation. Our
intangible assets consisted primarily of $7,466,000 of goodwill
as of December 31, 2006. Goodwill represents the excess of
acquisition costs over the fair value of net assets acquired.
Goodwill is not amortized. In 2006, AAI recorded a $4,066,000
impairment to goodwill including tax considerations of $426,000
that resulted from current and projected reductions in earnings
primarily due to a decline in the number of lives covered under
plans that it administered and Capella recorded a charge of
$2,800,000 due to the continuing decline in members and
revenues. In 2005, Capella recorded a charge of $12,900,000 due
to continuing decline in members and revenues to a lower level
than previously predicted and pending litigation and regulatory
41
activity that was announced in the second quarter. In 2004, our
intangible assets were reduced by $2,000,000 to reflect
impairment of the goodwill related to our acquisition in 2000 of
Foresight.
Significant judgments and estimates were required in connection
with the impairment test to determine the estimated future cash
flows and fair value of the reporting unit. We retained and
engaged an independent valuation consultant to estimate fair
values of AAI and Capella using discounted cash flow projections
and other valuation methodologies in evaluating and measuring a
potential goodwill impairment charges. Based upon
managements cash flow projections and the
consultants independent valuation, we recorded a goodwill
impairment related to AAI and Capella in 2006 and Capella in
2005, as previously discussed. To the extent that, in the
future, our estimates change or our stock price decreases,
further goodwill write-downs may occur. Those assessments of the
carrying value of goodwill were each reviewed and approved by
our Audit Committee of our Board of Directors.
Income Taxes. Income taxes are provided
for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of
assets and liabilities for financial and income tax reporting.
The net deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will either
be taxable or deductible when the assets and liabilities are
recovered or settled. During 2006, we evaluated the probability
of recognizing the benefit of deferred tax assets through the
reduction of taxes otherwise payable in the future and increased
the allowance by $339,000 from $116,000 to $455,000 against the
carrying amount of the deferred tax assets because in our
opinion it is more probable than not that some of those assets
will not be realized.
Reclassifications. Certain prior period
amounts have been reclassified to conform to the current
periods presentation.
Results
of Operations
Consumer Healthcare Savings. The
operating results for our Consumer Healthcare Savings segment
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
For the Twelve Months Ended December 31,
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
2004
|
|
|
Revenues
|
|
$
|
14,483
|
|
|
$
|
(6,677
|
)
|
|
|
(31.6
|
)%
|
|
$
|
21,160
|
|
|
$
|
(11,465
|
)
|
|
|
(35.1
|
)%
|
|
$
|
32,625
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
5,581
|
|
|
|
(2,254
|
)
|
|
|
(28.8
|
)%
|
|
|
7,835
|
|
|
|
(5,315
|
)
|
|
|
(40.4
|
)%
|
|
|
13,150
|
|
Sales and marketing
|
|
|
4,775
|
|
|
|
(1,701
|
)
|
|
|
(26.3
|
)%
|
|
|
6,476
|
|
|
|
(4,098
|
)
|
|
|
(38.8
|
)%
|
|
|
10,574
|
|
General and administrative
|
|
|
4,381
|
|
|
|
(1,936
|
)
|
|
|
(30.6
|
)%
|
|
|
6,317
|
|
|
|
(1,389
|
)
|
|
|
(18.0
|
)%
|
|
|
7,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,737
|
|
|
|
(5,891
|
)
|
|
|
(28.6
|
)%
|
|
|
20,628
|
|
|
|
(10,802
|
)
|
|
|
(34.4
|
)%
|
|
|
31,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
(254
|
)
|
|
$
|
(786
|
)
|
|
|
(147.7
|
)%
|
|
$
|
532
|
|
|
$
|
(663
|
)
|
|
|
(55.5
|
)%
|
|
$
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
38.5
|
%
|
|
|
|
|
|
|
|
|
|
|
37.0
|
%
|
|
|
|
|
|
|
|
|
|
|
40.3
|
%
|
Sales and marketing
|
|
|
33.0
|
%
|
|
|
|
|
|
|
|
|
|
|
30.6
|
%
|
|
|
|
|
|
|
|
|
|
|
32.4
|
%
|
General and administrative
|
|
|
30.2
|
%
|
|
|
|
|
|
|
|
|
|
|
29.9
|
%
|
|
|
|
|
|
|
|
|
|
|
23.6
|
%
|
Total operating expenses
|
|
|
101.8
|
%
|
|
|
|
|
|
|
|
|
|
|
97.5
|
%
|
|
|
|
|
|
|
|
|
|
|
96.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenues. Our Consumer Healthcare
Savings programs having been under continuing pressure from
increasing competition and regulatory scrutiny, as well as the
unwillingness of some healthcare providers to accept our savings
cards based on concerns over assurance of payment. In late 2002,
we implemented an escrow account requirement to address provider
concerns over assurance of payment. While this feature had
42
shown limited success in improving acceptance by providers, it
made our programs more complex and difficult to sell. As of
December 2006, we discontinued these PMAs and returned the funds
that we held in those accounts to own customers. In some of the
states in which we have a significant number of members,
especially Florida, Texas and California, our healthcare savings
products are under scrutiny and criticism by state regulators
and officials. This regulatory scrutiny has impaired our ability
to market these products in those states and elsewhere, further
contributing to the decline in membership enrollments and
increases in terminated memberships. The table below reflects
the decline in our Consumer Healthcare Savings program
membership over the preceding eight fiscal quarters:
Care
Entrée Membership
(Count at
End of Quarter)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Qtr
|
|
|
2nd
Qtr
|
|
|
3rd
Qtr
|
|
|
4th
Qtr
|
|
|
1th
Qtr
|
|
|
2nd
Qtr
|
|
|
3rd
Qtr
|
|
|
4th
Qtr
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Member Count End of
Quarter
|
|
|
51,895
|
|
|
|
46,514
|
|
|
|
41,958
|
|
|
|
37,952
|
|
|
|
37,281
|
|
|
|
35,823
|
|
|
|
34,020
|
|
|
|
31,826
|
|
Percent Change
|
|
|
(8.88
|
)%
|
|
|
(10.37
|
)%
|
|
|
(9.79
|
)%
|
|
|
(9.54
|
)%
|
|
|
(1.77
|
)%
|
|
|
(3.91
|
)%
|
|
|
(5.03
|
)%
|
|
|
(6.45
|
)%
|
Average revenue per member, net
of sales and marketing costs
|
|
$
|
25.70
|
|
|
$
|
26.24
|
|
|
$
|
26.16
|
|
|
$
|
24.03
|
|
|
$
|
23.86
|
|
|
$
|
22.54
|
|
|
$
|
22.40
|
|
|
$
|
22.32
|
|
Although the implementation of PMA requirements negatively
impacted our membership base and consequently our revenues and
net earnings in 2004, 2005 and 2006, the escrow requirements
were thought to be necessary to provide some assurance of
payment to the healthcare providers and, accordingly, their
continued willingness to accept our health discount cards and
provide healthcare services to our members. In order to address
the issues of assurance of payment to the providers and
acceptance of the discount cards by those providers, we have
recently implemented enhanced levels of customer advocacy in
lieu of PMAs. We have also developed a line of affordable
insurance products that are sometimes referred to as
scheduled benefit, limited benefit or
defined benefit policies. These products may be less
expensive than traditional comprehensive health insurance and
usually do not require the member to undergo any medical
underwriting. As such, they are available to all individuals,
regardless of health condition. We commenced sales of these new
products in the first quarter of 2006. While it is too early to
assess the market acceptance of these new products, it is hoped
that they and our enhanced customer advocacy will address the
issues of assurance of payment to the providers and acceptance
of the discount cards by those providers more successfully than
the escrow or PMA products.
Throughout 2006, we have continued the measures and initiatives
commenced earlier in the year to improve our operating
efficiencies and performance, especially through cost
reductions. These measures and initiatives include (i) the
conversion of certain of our customer service and system support
functions from a fixed to a variable cost structure by
outsourcing them, (ii) the termination of certain equipment
capital leases, and (iii) personnel reductions and other
cost reduction actions. The resulting restructuring costs
incurred during the fourth quarter of 2006 for these initiatives
were $449,000 that included write-off of assets no longer used
of $252,000, outsourcing vendor integration and moving costs of
$145,000 and personnel severance costs of $52,000. These
measures have successfully reduced the cost structure associated
with our Care
Entréetm
and private label membership programs. During the first quarter
of 2006, we resumed sales of our consumer healthcare savings
products to on or our former private-label reseller who, in
early 2005, had discontinued sales of those products.
Cost of Operations. The decrease in cost of
operations from 2005 to 2006 was due to decreases in variable
costs of $1,273,000 primarily due to decreased provider network
costs and bank fees related to the decreased revenue, along with
reductions in fixed costs of $1,216,000 primarily related to
termination of certain equipment leases and personnel reductions
related to 2005 cost reduction initiatives, offset by fourth
quarter 2006 restructuring costs of $235,000 for certain leased
equipment and inventory write-offs and personnel severance costs
related to our outsourcing initiative. The decrease in cost of
operations from 2004 to 2005 is also due to decreases in
provider network costs and bank fees related to decreased
revenue and reductions in equipment lease and personnel costs
related to 2005 cost reduction initiatives.
43
Sales and Marketing Expenses. The decreases in
sales and marketing expenses from 2005 to 2006 and from 2004 to
2005 were primarily due to decreases in commissions related to
the decreased membership revenue of the Care
Entréetm
program of $2,170,000 and $4,470,000, respectively. These
commission decreases were accentuated by the departure of
independent marketing representatives from the upper ranks of
our multi-level marketing network through which our Care
Entréetm
program is offered and elimination of the associated over-ride
commissions, resulting in a lower percentage of commissions as a
percent of revenue. The decrease from 2005 to 2006 was offset by
an increase in consulting and other marketing costs of $469,000
related to various sales and new product initiatives. The
decrease from 2004 to 2005 was partially offset by $125,000 of
personnel severance costs incurred in 2005.
General and Administrative Expenses. The
decreases in general and administrative expenses from 2005 to
2006 and from 2004 to 2005 are primarily related to cost
reductions measures that included reductions in staffing that
began in 2005. The decrease from 2005 to 2006 was offset by
fourth quarter 2006 restructuring costs of $214,000 related to
our outsourcing initiative.
Employer and Group Healthcare
Services. The operating results for our
Employer and Group Healthcare Services segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
For the Twelve Months Ended December 31,
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
2004
|
|
|
Revenues
|
|
$
|
7,409
|
|
|
$
|
(1,128
|
)
|
|
|
(13.2
|
)%
|
|
$
|
8,537
|
|
|
$
|
4,458
|
|
|
|
109.3
|
%
|
|
$
|
4,079
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
4,933
|
|
|
|
(337
|
)
|
|
|
(6.4
|
)%
|
|
|
5,270
|
|
|
|
2,594
|
|
|
|
96.9
|
%
|
|
|
2,676
|
|
Sales and marketing
|
|
|
659
|
|
|
|
(103
|
)
|
|
|
(13.5
|
)%
|
|
|
762
|
|
|
|
375
|
|
|
|
96.9
|
%
|
|
|
387
|
|
General and administrative
|
|
|
513
|
|
|
|
(247
|
)
|
|
|
(32.5
|
)%
|
|
|
760
|
|
|
|
374
|
|
|
|
96.9
|
%
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,105
|
|
|
|
(687
|
)
|
|
|
(10.1
|
)%
|
|
|
6,792
|
|
|
|
3,343
|
|
|
|
96.9
|
%
|
|
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,304
|
|
|
$
|
(441
|
)
|
|
|
(25.3
|
)%
|
|
$
|
1,745
|
|
|
$
|
1,115
|
|
|
|
177.0
|
%
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
66.6
|
%
|
|
|
|
|
|
|
|
|
|
|
61.7
|
%
|
|
|
|
|
|
|
|
|
|
|
65.6
|
%
|
Sales and marketing
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
9.5
|
%
|
General and administrative
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
9.5
|
%
|
Total operating expenses
|
|
|
82.4
|
%
|
|
|
|
|
|
|
|
|
|
|
79.6
|
%
|
|
|
|
|
|
|
|
|
|
|
84.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17.6
|
%
|
|
|
|
|
|
|
|
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
|
|
15.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenues. The primary element of our
Employer and Group Healthcare Services segment is our
wholly-owned subsidiary, AAI, which we acquired in June 2004,
through which we offer full third-party administration services.
Through AAI, we provide a wide range of healthcare claims
administration services and other cost containment procedures
that are frequently required by state and local governmental
entities and other large employers that have chosen to self fund
their required healthcare benefits. AAI helps us offer a more
complete suite of healthcare service products. Also through AAI,
we provide individuals and employee groups access to preferred
provider networks, medical escrow accounts and full third-party
administration capabilities to adjudicate and pay medical claims.
Employer and Group Healthcare Services revenues during
2006 decreased primarily due to the loss of two major customers
in the latter part of 2005 and a third in June of 2006. Revenues
during 2006 increased from 2004 primarily because results of
operations for AAI were only included since the date of its
acquisition on June 18, 2004. Had AAIs results of
operations been included throughout 2004, revenues for this
segment would have been $6,960,000, while operating income would
have been $734,000. The increase in pro forma
44
revenues and operating income from that year, compared to 2006,
resulted primarily from the addition of a new service contract
and expansion of services to two existing customers.
Cost of Operations. Cost of operations for the
Employer and Group Healthcare Services segment decreased
primarily as a result of the decrease in revenues discussed
above. The increase in cost of operations as a percent of
revenue from 2005 to 2006 is because fixed costs did not decline
proportionately with the revenue decline discussed above.
Sales and Marketing Expenses. The decrease in
sales and marketing expenses from 2005 to 2006 was primarily due
to decreases in sales and public relations activities. AAI
maintains direct relationships with its large self-funded
clients in the El Paso market and does not utilize
advertising or outside sales forces.
General and Administrative Expenses. The
decrease in general and administrative expenses from 2005 to
2006 was primarily due to higher legal services of $100,000 in
2005 for bid responses.
Corporate and Other. The operating
costs for our corporate and other activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
For the Twelve Months Ended December 31,
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
2004
|
|
|
Revenues
|
|
$
|
82
|
|
|
$
|
(249
|
)
|
|
|
(75.2
|
)%
|
|
$
|
331
|
|
|
$
|
(378
|
)
|
|
|
(53.3
|
)%
|
|
$
|
709
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
|
|
|
|
(33
|
)
|
|
|
(100.0
|
)%
|
|
|
33
|
|
|
|
33
|
|
|
|
100.0
|
%
|
|
|
|
|
Sales and marketing
|
|
|
29
|
|
|
|
(219
|
)
|
|
|
(88.3
|
)%
|
|
|
248
|
|
|
|
(149
|
)
|
|
|
(37.5
|
)%
|
|
|
397
|
|
General and administrative
|
|
|
1,882
|
|
|
|
(810
|
)
|
|
|
(30.1
|
)%
|
|
|
2,692
|
|
|
|
399
|
|
|
|
17.4
|
%
|
|
|
2,293
|
|
Goodwill impairment, without tax
considerations
|
|
|
6,440
|
|
|
|
(6,460
|
)
|
|
|
(50.1
|
)%
|
|
|
12,900
|
|
|
|
10,900
|
|
|
|
545.0
|
%
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,351
|
|
|
|
(7,522
|
)
|
|
|
(47.4
|
)%
|
|
|
15,873
|
|
|
|
11,183
|
|
|
|
238.4
|
%
|
|
|
4,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
(8,269
|
)
|
|
$
|
7,273
|
|
|
|
(46.8
|
)%
|
|
$
|
(15,542
|
)
|
|
$
|
(11,561
|
)
|
|
|
290.4
|
%
|
|
$
|
(3,981
|
)
|
Percent of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
56
|
%
|
Sales and marketing
|
|
|
2,295
|
%
|
|
|
|
|
|
|
|
|
|
|
813
|
%
|
|
|
|
|
|
|
|
|
|
|
323
|
%
|
General and administrative
|
|
|
7,854
|
%
|
|
|
|
|
|
|
|
|
|
|
3,897
|
%
|
|
|
|
|
|
|
|
|
|
|
282
|
%
|
Total operating expenses
|
|
|
10,184
|
%
|
|
|
|
|
|
|
|
|
|
|
4,795
|
%
|
|
|
|
|
|
|
|
|
|
|
661
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(10,084
|
)%
|
|
|
|
|
|
|
|
|
|
|
(4,695
|
)%
|
|
|
|
|
|
|
|
|
|
|
(561
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Until December, 2006 we reported the financial results of our
wholly-owned subsidiary Care Financial of Texas, L.L.C. (Care
Financial) as a separate segment, Financial Services. Financial
Services included two divisions Care Financial which
offered high deductible and scheduled benefit insurance policies
and Care 125 which offered life insurance and annuities,
along with Healthcare Savings Accounts (HSAs), Healthcare
Reimbursement Arrangements (HRAs) and medical and dependent care
Flexible Spending Accounts (FSAs). Care 125 was
discontinued in December 2006 and Care Financial is now included
with Corporate and Other.
Service Revenues. Revenues for Care Financial
continue to decline as the Company has de-emphasized this
product line.
Cost of Operations. There are no operational
expenses due to the termination of dedicated support staff.
Sales and Marketing Expenses. The decreases in
sales and marketing expenses for the Care Financial product line
from 2005 to 2006 and from 2004 to 2005 were primarily due to
decreases in commissions related to the decreased sales.
45
General and Administrative Expenses. The
decrease in general and administrative expenses from 2005 to
2006 is primarily due to a $775,000 charge resulting from
severance compensation payable to some of our former officers in
2005.
Impairment Charge for Goodwill. In 2006, AAI
recorded a $3,640,000 impairment to goodwill before tax
considerations of $426,000 that resulted from current and
projected reductions in earnings primarily due to a decline in
the number of lives covered under plans that it administered.
Also in 2006, Capella recorded a charge of $2,800,000 due to the
continuing decline in members and revenues. In 2005, Capella
recorded a charge of $12,900,000 due to continuing decline in
members and revenues to a lower level than previously predicted
and pending litigation and regulatory activity that was
announced in the second quarter. In 2004, our intangible assets
were reduced by $2,000,000 to reflect impairment of the goodwill
related to our acquisition in 2000 of Foresight.
Discontinued Operations. The operating
results for our discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
For the Twelve Months Ended December 31,
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
2004
|
|
|
Service revenues
|
|
$
|
125
|
|
|
$
|
(1,055
|
)
|
|
|
(89.4
|
)%
|
|
$
|
1,180
|
|
|
$
|
274
|
|
|
|
100.0
|
%
|
|
$
|
906
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
94
|
|
|
|
(906
|
)
|
|
|
(90.6
|
)%
|
|
|
1,000
|
|
|
|
276
|
|
|
|
100.0
|
%
|
|
|
724
|
|
Sales and marketing
|
|
|
343
|
|
|
|
(125
|
)
|
|
|
(26.7
|
)%
|
|
|
468
|
|
|
|
337
|
|
|
|
100.0
|
%
|
|
|
131
|
|
General and administrative
|
|
|
598
|
|
|
|
370
|
|
|
|
100.0
|
%
|
|
|
228
|
|
|
|
(301
|
)
|
|
|
100.0
|
%
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,035
|
|
|
|
(661
|
)
|
|
|
(39.0
|
)%
|
|
|
1,696
|
|
|
|
312
|
|
|
|
100.0
|
%
|
|
|
1,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
(910
|
)
|
|
$
|
(394
|
)
|
|
|
76.4
|
%
|
|
$
|
(516
|
)
|
|
$
|
(38
|
)
|
|
|
100.0
|
%
|
|
$
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
75.2
|
%
|
|
|
|
|
|
|
|
|
|
|
84.7
|
%
|
|
|
|
|
|
|
|
|
|
|
79.9
|
%
|
Sales and marketing
|
|
|
274.4
|
%
|
|
|
|
|
|
|
|
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
|
14.5
|
%
|
General and administrative
|
|
|
478.4
|
%
|
|
|
|
|
|
|
|
|
|
|
19.3
|
%
|
|
|
|
|
|
|
|
|
|
|
58.4
|
%
|
Total operating expenses
|
|
|
828.0
|
%
|
|
|
|
|
|
|
|
|
|
|
143.7
|
%
|
|
|
|
|
|
|
|
|
|
|
152.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(728.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
(43.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
(52.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations include the following divisions:
Financial Services Care 125. In
the first quarter of 2004, we initiated Care 125, a division of
AAI, to provide health savings accounts (HSAs), Healthcare
Reimbursement Arrangements (HRAs) and medical and dependent care
Flexible Spending Accounts (FSAs). Care125 services would allow
employers to offer additional benefits to their employees and
give employees additional tools to manage their healthcare and
dependent care expenses. Additionally, Care125 programs and our
medical savings programs could be sold together by agents and
brokers with whom we have contracted to offer a more complete
benefit package to employers. We discontinued this division in
December 2006. This operation had net losses in 2006, 2005 and
2004 of $121,000, $137,000, and $157,000, respectively.
Vergance. In the third quarter of 2005, we
began offering neutraceuticals through the Vergance marketing
group of our Consumer Healthcare Services Division.
Neutraceutical sales consisting of vitamins, minerals and other
nutritional supplements, under the Natrience brand commenced in
late September 2005, but were immaterial through June 30,
2006. Effective June 30, 2006, we discontinued its
operations and wrote off the assets of this division. This
operation had net losses in 2006, 2005 and 2004 of $789,000,
$201,000, and $0, respectively.
46
Member Services. The Foresight Club designed
and offered membership programs for rental-purchase companies,
financial organizations, employer groups, retailers, and
association-based organizations. We sold substantially all of
the operating assets of the Foresight Club Division to Benefit
Marketing Solutions (BMS), an unaffiliated privately
held Norman, Oklahoma company effective December 1, 2005.
Effective December 19, 2005, we dissolved Foresight, Inc.
and transferred its remaining net assets, of approximately
$173,000, to the Consumer Healthcare Services Division. This
dissolution provided a tax benefit of approximately $545,000
related to the goodwill impairment of $2,000,0000 recognized in
2004. This operation had net income in 2005 of $16,000 and a net
loss of $142,000 in 2004.
Income
Tax Provision
SFAS 109, Accounting for Income Taxes, requires the
separate recognition, measured at currently enacted tax rates,
of deferred tax assets and deferred tax liabilities for the tax
effect of temporary differences between the financial reporting
and tax reporting bases of assets and liabilities, and net
operating loss carry forwards for tax purposes. A valuation
allowance must be established for deferred tax assets if it is
more likely than not that all or a portion will not
be realized. At December 31, 2006 and 2005, we had net
deferred tax benefits (before allowance) of $880,000 and
$116,000, respectively, resulting in large part from net
operating loss carry forwards that, if not utilized, will expire
at various dates through 2020. The cumulative net deferred tax
asset as of December 31, 2006 and 2005 was $0 and $0,
respectively. A valuation allowance of $880,000 and $116,000 was
established during 2006 and 2005, respectively, to reduce the
net deferred tax asset to an amount that, in our opinion, is
more likely than not realizable. If we continue to incur net
operating losses, an additional valuation allowance may need to
be established. Valuation allowance adjustments have a direct
impact on net income (loss) in the amount of the allowance.
Liquidity
and Capital Resources
Operating Activities. Net cash provided
by operating activities for the years ended December 31,
2006, 2005 and 2004 was $724,000, $514,000 and $1,759,000,
respectively. The increase in net cash provided by operating
activities of $210,000 from 2005 to 2006 was due primarily to an
increase in federal income tax refunds of $220,000.
Investing Activities. Net cash used in
investing activities for the year ended December 31, 2006,
2005 and 2004 was $3,263,000, $1,822,000 and $2,595,000,
respectively. The increase in net cash used by investing
activities of $1,441,000 was due primarily to an increase in the
amount allocated to restricted short-term investments of
$920,000, increase in the amount allocated to unrestricted
short-term investments of $200,000, increase in purchase of
fixed assets of $512,000 and $475,000 in proceeds from sale of
discontinued operations in 2005, offset by a decrease in cash
used in business combination of $666,000.
Financing Activities. Net cash used in
financing activities for the year ended December 31, 2006
was $241,000 as compared to $964,000 for 2005 and $1,969,000 for
2004. The decrease in net cash used in financing activities in
2006 from 2005 of $723,000 was primarily due to a net decrease
in capitalized lease payment obligation of $379,000, and
treasury stock purchases of $369,000 in 2005.
On December 31, 2006 and 2005, we had working capital of
$3,952,000 and $4,692,000, respectively. This decline is due
primarily to ICM acquisition costs of $560,000.
Other than our $238,000 capital lease obligations, we do not
have any capital commitments. We anticipate that our capital
expenditures for 2007 will not significantly exceed the amount
incurred during 2006. We require working capital to advance
commissions to our agents prior to our receipt of the underlying
commission from the insurance carrier. We have access to a
sufficient amount of working capital to meet our needs, but our
ability to grow this segment will depend on our ability to gain
access to increasing amounts of working capital sources. We
believe that our existing cash and cash equivalents, and cash
provided by operations, will be sufficient to fund our normal
operations and capital expenditures for the next 12 months.
However, growth in our Insurance Marketing Division may
necessitate additional financing to fund future advances.
47
Because our capital requirements cannot be predicted with
certainty, there is no assurance that we will not require any
additional financing during the next 12 months, and if
required, that any additional financing will be available on
terms satisfactory to us or advantageous to our stockholders.
Contractual
Obligations
Operating Leases. We lease various
office spaces. These leases are classified as operating leases
within the meaning of SFAS No. 13, Accounting for
Leases. Our financial commitments under these leases
continue through December 15, 2011 and are $2,104,000 in
the aggregate.
Capital Leases. We have several capital
leases for office equipment. These leases are classified as
capital leases within the meaning of SFAS No. 13,
Accounting for Leases. Our financial commitments under these
leases end in March 2008. Our obligations for those capital
leases as well as operating leases for leased premises, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Dollars in Thousands
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Operating Leases, net of sublease
income
|
|
$
|
2,104
|
|
|
$
|
402
|
|
|
$
|
924
|
|
|
$
|
778
|
|
|
$
|
|
|
Capital Leases
|
|
|
238
|
|
|
|
190
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,342
|
|
|
$
|
592
|
|
|
$
|
972
|
|
|
$
|
778
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The payment amounts for capital leases include $13,000 of
implicit interest.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We do not have any investments in market risk sensitive
investments.
48
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Quarterly
Results Of Operations And Seasonality
The following table presents our unaudited quarterly results of
operations data for each of the eight quarters in 2006 and 2005.
The quarterly information is unaudited but, in the opinion of
management, reflects all adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of the
information for the periods presented. The results of operations
for any quarter are not necessarily indicative of results for
any future period.
Our consolidated financial statements begin on
page F-1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006 Quarter Ended (Unaudited)
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 30
|
|
|
Service revenues
|
|
$
|
6,093
|
|
|
$
|
5,650
|
|
|
$
|
5,299
|
|
|
$
|
4,932
|
|
Total operating expenses
|
|
|
5,888
|
|
|
|
5,793
|
|
|
|
5,585
|
|
|
|
11,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
205
|
|
|
|
(143
|
)
|
|
|
(286
|
)
|
|
|
(6,995
|
)
|
Other income
|
|
|
73
|
|
|
|
91
|
|
|
|
95
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
278
|
|
|
|
(52
|
)
|
|
|
(191
|
)
|
|
|
(6,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(4
|
)
|
|
|
(461
|
)
|
|
|
(20
|
)
|
|
|
435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations
|
|
|
282
|
|
|
|
409
|
|
|
|
(171
|
)
|
|
|
(7,334
|
)
|
(Loss) earnings from discontinued
operations, net of tax
|
|
|
(321
|
)
|
|
|
(588
|
)
|
|
|
(14
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(39
|
)
|
|
$
|
(179
|
)
|
|
$
|
(185
|
)
|
|
$
|
(7,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from discontinued
operations, net of tax
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from discontinued
operations, net of tax
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2005 Quarter Ended (Unaudited)
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 30
|
|
|
Service revenues
|
|
$
|
8,481
|
|
|
$
|
7,760
|
|
|
$
|
7,185
|
|
|
$
|
6,602
|
|
Total operating expenses
|
|
|
8,519
|
|
|
|
18,608
|
|
|
|
6,867
|
|
|
|
9,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(38
|
)
|
|
|
(10,848
|
)
|
|
|
318
|
|
|
|
(2,697
|
)
|
Other income
|
|
|
13
|
|
|
|
26
|
|
|
|
60
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes
|
|
|
(25
|
)
|
|
|
(10,822
|
)
|
|
|
378
|
|
|
|
(2,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
103
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing
operations
|
|
|
(16
|
)
|
|
|
(10,814
|
)
|
|
|
275
|
|
|
|
(2,674
|
)
|
(Loss) earnings from discontinued
operations, net of tax
|
|
|
(35
|
)
|
|
|
(13
|
)
|
|
|
(145
|
)
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings
|
|
$
|
(51
|
)
|
|
$
|
(10,827
|
)
|
|
$
|
130
|
|
|
$
|
(2,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing
operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from discontinued
operations, net of tax
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from continuing
operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.89
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings from discontinued
operations, net of tax
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain reclassifications have been made to prior quarterly
financial information to conform to the current presentation of
the quarterly financial information. |
|
(2) |
|
For the years ended December 31, 2006, 2005, and 2004
outstanding stock options on 43,575, 25,375, and
54,864 shares, respectively, were not included in the
calculation of fully diluted earnings per share because the
inclusion would have been anti-dilutive. |
|
(3) |
|
In the fourth quarter of 2006, a $6,866,000 goodwill impairment
charge including tax considerations of $426,000 was recorded. In
2005, a $9,900,000 goodwill impairment charge was recorded in
the second quarter and an additional $3,000,000 goodwill
impairment charge was recorded in the fourth quarter. |
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
|
We did not have any disagreements with our independent
accountants concerning matters of accounting principle or
financial statement disclosure during 2006 of the type requiring
disclosure hereunder.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Our Chief Executive Officer and our Chief Financial Officer are
primarily responsible for establishing and maintaining
disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934, as amended
(the Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the U.S. Securities and Exchange
Commission. These controls and procedures are designed to ensure
that information required to be disclosed in our reports filed
or submitted under the Exchange Act is accumulated and
communicated to our management, including our principal
executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Furthermore, our Chief Executive Officer and our Chief Financial
Officer are responsible for the design and supervision of our
internal controls over financial reporting that are then
effected by and through our board of directors, management and
other personnel, to provide reasonable assurance regarding the
reliability of our
50
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. These policies and procedures
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of our assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors,
and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial
statements.
|
In connection with our year end close process and the
preparation of this report, an evaluation was performed under
the supervision and with the participation of management,
including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation as
of December 31, 2006, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective as of the evaluation date to provide
reasonable assurance regarding managements disclosure
control objectives.
During the fourth quarter of 2006, there were no significant
changes in our internal control over financial reporting during
the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
We have no information to report that has not been previously
reported on
Form 8-K
during the fourth quarter of 2006.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
|
Our
Directors And Executive Officers
The following table sets forth information with respect to each
of our executive officers and directors. Our directors are
generally elected at the annual stockholders meeting and
hold office until the next annual stockholders meeting or
until their successors are elected and qualified. Our executive
officers are elected by our board of directors and serve at its
discretion. Our bylaws authorize the board of directors to be
constituted of not less than
51
one and the number as our board of directors may determine by
resolution or election. Our board of directors currently
consists of seven members.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Peter W. Nauert(4)
|
|
|
63
|
|
|
Chief Executive Officer,
President, and Chairman of the Board of Directors
|
Robert L. Bintliff
|
|
|
53
|
|
|
Chief Financial Officer and
Treasurer
|
Ian R. Stuart
|
|
|
50
|
|
|
Chief Operating Officer
|
Frank Apodaca
|
|
|
44
|
|
|
Chief Executive Officer and
President of Access HealthSource, Inc.
|
Eliseo Ruiz III
|
|
|
41
|
|
|
Vice President, General Counsel
and Secretary
|
Nancy L. Zalud
|
|
|
53
|
|
|
Vice President of Communications
|
Carl H. Fischer
|
|
|
51
|
|
|
President and Chief Marketing
Officer of Adult Care Plans/Rx America
|
Michael K. Owens, Jr.
|
|
|
32
|
|
|
President of Americas Health
Care/Rx Plan Agency, Inc.
|
Andrew A. Boemi(2)(3)
|
|
|
62
|
|
|
Director
|
Russell Cleveland(1)(4)
|
|
|
68
|
|
|
Director
|
Kenneth S. George(2)(3)
|
|
|
58
|
|
|
Director
|
J. French Hill(2)(4)
|
|
|
50
|
|
|
Director
|
Kent H. Webb, M.D.(1)(5)
|
|
|
49
|
|
|
Director
|
Nicholas J. Zaffiris(1)(3)
|
|
|
43
|
|
|
Director
|
|
|
|
(1) |
|
Member of the Compensation Committee |
|
(2) |
|
Member of the Audit Committee. |
|
(3) |
|
Member of the Corporate Governance and Nominating Committee. |
|
(4) |
|
Member of the Executive Committee. |
|
(5) |
|
Medical Director. |
Peter W. Nauert has served as our Chief Executive
Officer and President since January 30, 2007. He was the
Founder of ICM and served as its Chairman since its inception in
2002. From December 2003 to February 2005, Mr. Nauert was
Chairman of the Board and controlling shareholder of Aegis
Financial Corporation, the parent of States General Life
Insurance Company (SGLIC). Prior to founding ICM,
Mr. Nauert was Chairman and CEO of Ceres Group, Inc., a
publicly traded insurance company, from July 1998 to June 2002.
Mr. Nauert served as Chief Executive Officer of Pioneer
Financial Services from 1982 to 1997. Mr. Nauert received a
Juris Doctor from George Washington University as well as a
Bachelor of Science degree in Business Administration from
Marquette University.
Robert L. Bintliff serves as our Chief Financial
Officer and Treasurer and has been with us since August 2004.
Mr. Bintliffs experience includes six years as an
audit partner with Coopers & Lybrand (at which he was
employed from
1985-1995),
President and Chief Executive Officer of Jim Bridges Acquisition
Company,
(1995-1999)
and as Chief Financial Officer for Comercis, Inc.,
(1999-2001).
Earlier in his career, he served as a senior member of the
financial management team of InterFirst Corporation, a
$9 billion regional bank holding company
(1981-1985).
He had most recently operated his own accounting and management
consulting practice in the Dallas/Fort Worth area
(2001-2004).
Mr. Bintliff holds a B.B.A. in accounting from Texas
Christian University. He is a CPA licensed in Texas, and is a
member of the American Institute of Certified Public Accountants.
Ian R. Stuart has served as our Chief Operations
Officer since January 30, 2007. He joined ICM in
October 2004 and served as ICMs Chief Financial
Officer and Chief Operating Officer. Prior to joining ICM,
Mr. Stuart was employed by Citigroup, from 1991 to 2004,
principally in various divisional chief financial officer roles
in insurance, banking and commercial leasing businesses.
Mr. Stuart began his professional career as an
52
accountant in London, England in 1977 and held several positions
at Price Waterhouse from 1981 to 1991. Mr. Stuart completed
a Hatfield College (England) accounting program in 1976.
Frank Apodaca has served as President and Chief
Executive Officer of our subsidiary, AAI, since June 18,
2004. He served as our Chief Operating Officer from
February 23, 2005 until January 30, 2007, and as our
president from June 10, 2005 to January 30, 2007.
Mr. Apodaca has been the President and Chief Executive
Officer of AA1 since 2000. He holds Group I Health, Life, HMO
and AD&D, and insurance licenses from the Texas Department
of Insurance. He attended the University of Texas at
El Paso from 1989 through 1993, majoring in business
administration.
Eliseo Ruiz III serves as our Vice President,
General Counsel and Secretary. He has been with us since
December 2003. Mr. Ruiz has been a practicing attorney
since November 1991. He most recently was Vice President and
General Counsel of CyberBills, Inc. (and its successor entity)
in San Jose, California from 1999 thru 2002. He also served
as Associate General Counsel at Concentra, Inc. from 1998 thru
1999 and was in private practice from 1991 thru 1997. He holds
an undergraduate degree (Plan II) and a law degree
from the University of Texas at Austin. He is a member of the
State Bar of Texas.
Nancy L. Zalud has served as our Vice President of
Communications since January 30, 2007. She became Senior
Vice President of ICM in February 2005. She is responsible for
corporate communications and marketing communications for ICM
and its subsidiaries and affiliates. Ms. Zalud has more
than 20 years of corporate communications and insurance
industry experience, including investor relations, public
relations and advertising, marketing communications,
policyholder communications and employee communications. Before
joining ICM, she was Senior Vice President for States General
Life Insurance Company from December 2003 to February 2005. She
was a public relations/corporate communications consultant from
June 2002 to December 2003 and Senior Vice President for Ceres
Group, Inc. from January 2000 to June 2002. Ms. Zalud
received a B.S. in journalism from the University of Illinois.
She holds a FLMI designation from the Life Office Management
Association (LOMA).
Carl H. Fischer has been Chief Executive Officer
of American Benefit Resource/Rx, Inc. since September 2006
and President and Chief Marketing Officer of Adult Care Plans/Rx
America since July 2006. From June 1997 to June 2004,
Mr. Fischer held various positions with the Health Division
of Conseco, Inc. in Carmel, Indiana, including Chief
Administrative Officer, Senior Vice President-Marketing, and
President ACSIA-Specialty Benefit Planners. From
1982 to 1997, he held various positions with Pioneer Financial
Services in Schaumburg, Illinois and Dallas, Texas. From 1977 to
1982, he worked for AEGON, Inc. in Cedar Rapids, Iowa, holding
the position of Manager-New Business/Agency Services of Life
Investors Insurance Company of America and Bankers United Life
Assurance Company. Mr. Fischer graduated from Coe College
in Cedar Rapids, Iowa, where he received a B.A. in Economics and
a B.A. in Business Administration in 1982.
Michael K. Owens, Jr. has been with ICM since
January 2002. He has served as President of Americas
Health Care/Rx Plan Agency, Inc., (AHCP) a wholly
owned subsidiary of ICM since January 2006. Prior to joining
ICM, he served as Vice President of Corporate Development for
the Ceres Group, Inc., a publicly-traded insurance company from
January 1999 through June of 2002. From December 2003 to
February 2005, Mr. Owens served as an officer of States
General Life Insurance Company (SGLIC).
Mr. Owens serves on the board of directors for two 501(c)
(3) organizations devoted to childrens charities and
also donates his time to the St. Jude Childrens Research
Hospital and The March of Dimes Birth Defects Foundation.
Mr. Owens received a B.S. in marketing from the University
of Illinois, Chicago, participated in the Economics Advance
program at New York University and received an MBA in finance
from the University of Chicago.
Andrew A. Boemi, has been a Managing Director of
Turnaround Capital Partners LP, a Chicago-based private equity
firm focused on investments in the lower middle market, since
2001. He is a Director of Insurance Capital Management USA Inc.
and serves on the Advisory Board of Gateway Systems, a
privately-held International Treasury and Cash Management
software development firm. Mr. Boemi has served on the
Board of Directors and as Chairman of the Audit Committee of
Ceres Group, Inc., a previously Nasdaq listed insurance holding
company and on the Board of Directors of Pet Ag, a privately
held international manufacturer of milk replacers for pets.
Mr. Boemi is a member of Turnaround Management Association.
He is a graduate of Georgetown University with a B.S. in
Economics and Finance and did graduate work in Finance at
Rutgers University.
53
Russell Cleveland became one of our directors in
September 2005. He is the Founder, President, and Chief
Executive Officer of Renn Capital Group, Inc., a privately held
investment management company. He has held these positions since
1972. Mr. Cleveland has 40 years experience in the
investment business, of which 31 years has been spent as a
portfolio manager specializing in the investment of common
stocks and convertibles of small private and publicly traded
companies. A graduate of Wharton School of Business,
Mr. Cleveland has served as President of the Dallas
Association of Investment Analysts and, during the course of his
career, has served on numerous boards of directors of public and
private companies. Mr. Cleveland currently serves on the
Boards of Directors of Renaissance III, RUSGIT, Cover-All
Technologies, Inc., CaminoSoft Corp., Digital Recorders, Inc.,
Integrated Security Systems, Inc. and Tutogen Medical, Inc., all
of which are publicly traded companies.
Kenneth S. George became one of our directors in
June 2003. Mr. George served two terms as a State
Representative in the Texas House of Representatives from 1999
to 2003. From 1996 until 2001, he was General Partner of
Riverside Acquisitions L.L.C. and was active in commercial real
estate, financial and land transactions. From 1994 through 1995,
Mr. George was Chairman and Chief Executive Officer of
Ameristat, Inc., the largest private ambulance provider in the
state of Texas. From 1988 until 1994, he was Chairman and Chief
Executive Officer of EPIC Healthcare Group, an owner of 36
suburban/rural acute care hospitals with 15,000 employees and
$1.4 billion in revenues. Mr. George has an M.B.A.
from the University of Texas at Austin and a B.A. from
Washington and Lee University.
J. French Hill joined the board of directors
in January 2003. In 1999, Mr. Hill founded Delta
Trust & Banking Corp., a privately held banking, trust
and investment brokerage company headquartered in Little Rock,
AR, following a six year career with Arkansas largest
publicly traded holding company, First Commercial Corp. First
Commercial was sold in 1998 to Regions Financial Corp. (RF). As
an executive officer of First Commercial, Mr. Hill was
chairman of the bank holding companys trust division and
its investment brokerage dealer subsidiary from 1995 until 1998.
He also oversaw a number of other staff functions in the company
from 1993 through 1998 including human resources, executive
compensation, bank compliance, credit review and strategic
planning. During the last five years he has served as a member
of the board of directors of these companies: Delta
Trust & Banking Corp. and its affiliates (1999 to
present); Research Solutions LLC, a privately held company in
the clinical trials business (1999 to present), a privately held
company in the aircraft lighting systems business; and Syair
Designs LLC
(2000-2003).
From May 1989 through January 1993, Mr. Hill was a senior
economic policy official in the George H. W. Bush Administration
on the staff of the White House and as deputy assistant
secretary of the U.S. Treasury. Mr. Hill graduated
magna cum laude in economics from Vanderbilt University.
Kent H. Webb, M.D., a founder of Precis, has
served as one of our Directors since June 1996 (and Medical
Director since August 2001). He served as Chairman of our Board
of Directors until December 2000 and was a member or general
partner of our predecessors Advantage Data Systems, Ltd. and
Medicard Plus ADS Limited Partnership. Dr. Webb
is a general and vascular surgeon and is the cofounder and a
director of Surgical Hospital of Oklahoma. He is a Fellow of the
American College of Surgeons and serves as a Clinical Professor
for the University of Oklahoma. Dr. Webb is a past director
of the Smart Card Industry Association, a nonprofit association.
He is a surgical consultant for the Ethicon Division of
Johnson & Johnson Company, a publicly-held
pharmaceutical and consumer products company. Dr. Webb was
graduated from the University of Oklahoma College of Medicine
and completed his residency in General and Vascular Surgery at
the University of Oklahoma Health Services Center.
Nicholas J. Zaffiris became one of our directors
in August 2002. He is currently the Vice President of Sales and
Account Management, West, at Private Healthcare Systems
(PHCS), a privately-held preferred provider organization, and is
responsible for new sales and existing customer retention and
grants for the Western region of the country. Mr. Zaffiris
joined PHCS in early 1998, and has more than 10 years of
healthcare experience, including client management, sales,
marketing and customer service. Before joining PHCS, he worked
for the National Account Service Company, Blue Cross Blue Shield
of Florida, and served as a Lieutenant in the United States
Navy. Mr. Zaffiris received a B.S. in Political Science
from the United States Naval Academy.
Board
Committees
Our Board of Directors has an Executive Committee, Audit
Committee, a Compensation Committee, and a Corporate Governance
and Nominating Committee.
54
The Executive Committee exercises the authority of the Board of
Directors for matters delegated by the Board of Directors in the
management of the business and affairs of the Company when the
Board of Directors is not in session, but does not set the
policy of the Board of Directors.
The Audit Committee is responsible for the selection and
retention of our independent auditors, reviews the scope of the
audit function of the independent auditors, and reviews audit
reports rendered by the independent auditors. All of the members
of the Audit Committee are all independent directors
as defined in Rule 4200 of the Nasdaq Stock Market, Inc.
marketplace rules (the Nasdaq rules), and two
members serve as the Audit Committees financial experts.
The Compensation Committee reviews our compensation philosophy
and programs, and exercises authority with respect to payment of
direct salaries and incentive compensation to our officers. A
discussion of the Compensation Committee interlocks and insider
participation is provided below under the section heading
Compensation Committee Interlocks and Insider
Participation.
The Governance and Nominating Committee (a) monitors and
oversees matters of corporate governance, including the
evaluation of Board performance and processes and the
independence of directors, and (b) selects,
evaluates and recommends to the Board qualified candidates for
election or appointment to the Board.
Audit
Committee Financial Experts
Our board of directors has determined that Andrew Boemi and J.
French Hill, two of our independent directors and members of our
audit committee, each qualify as a financial expert.
This determination was based upon Mr. Boemis and
Mr. Hills:
|
|
|
|
|
understanding of generally accepted accounting principles and
financial statements;
|
|
|
|
ability to assess the general application of generally accepted
accounting principles in connection with the accounting for
estimates, accruals and reserves;
|
|
|
|
experience preparing, auditing, analyzing or evaluating
financial statements that present the breadth and level of
complexity of accounting issues that are generally comparable to
the breadth and complexity of issues that can reasonably be
expected to be raised by our financial statements, or experience
actively supervising one or more persons engaged in such
activities;
|
|
|
|
understanding of internal controls and procedures for financial
reporting; and
|
|
|
|
understanding of audit committee functions.
|
Mr. Boemis experience and qualification as a
financial expert were acquired through his extensive background
in commercial lending, including management of commercial
lending units of financial institutions, acting as a member of
loan committees, supervising financial analysis, supervising
financial officers and accountants, and overseeing and assessing
company performance. He has served as a seminar lecturer on
accounting and financial matters. Mr. Boemi is currently
Managing Director of a firm that invests in mid-market companies
in early stage turnaround. In this capacity, he evaluates
financial statements and the work of internal accountants and
external auditors. He was previously CEO of a publicly held
multi-bank holding company, supervising the Chief Financial
Officer and the principal officer of the commercial banking
group and interfacing with the companys external auditors.
He previously served as Chairman of the Audit Committee for two
companies. He has a BS degree from Georgetown University in
finance and economics and did graduate work at Rutgers in
banking and finance.
Mr. Hills experience and qualification as a financial
expert were acquired through his extensive background in
financial analysis, investment banking, finance and commercial
banking. He has also participated in the preparation of
financial statements and registration statements filed with the
Securities and Exchange Commission. Mr. Hill also currently
serves on one other audit committees where he has oversight
responsibility of the financial statements and works with the
internal accountants and external auditors on audit
and/or
accounting matters.
55
Compliance
With Section 16(a) Of The Securities Exchange Act Of
1934
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires our directors, officers, and persons who own
more than 10% of our common stock or other registered class of
our equity securities to file reports of ownership and changes
in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10% stockholders are
required to furnish us with copies of all Section 16(a)
forms they file.
Based solely on our review of the copies of the forms we
received covering purchase and sale transactions in our common
stock during 2006, we believe that each person who, at any time
during 2006, was a director, executive officer, or beneficial
owner of more than 10% of our common stock complied with all
Section 16(a) filing requirements during 2006.
Code of
Ethics
On January 29, 2003, our board of directors adopted our
code of ethics that applies to all of our employees and
directors, including our principal executive officer, principal
financial officer, principal accounting officer or controller,
and persons performing similar functions. A copy of the portion
of this code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting
officer or controller, and persons performing similar functions
may be obtained by written request addressed to Eliseo
Ruiz, III, Corporate Secretary, Access Plans USA, Inc.,
4929 Royal Lane, Suite 200, Irving, Texas 75063.
Our code of ethics may be found on our website at
www.accessplansusa.com. We will describe the nature of
amendments to the code of ethics on our website, except that we
may not describe amendments that are purely a technical,
administrative, or otherwise non-substantive. We will also
disclose on our website any waivers from any provision of the
code of ethics that we may grant. Information about amendments
and waivers to our code of ethics will be available on our
website for at least 12 months, and thereafter, the
information will be available upon request for five years.
The adoption of our code of ethics is consistent with the
requirements of the Sarbanes-Oxley Act of 2002.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Report
from the Compensation Committee
Our Compensation Committee reviews and approves compensation and
benefits policies and objectives, determines whether our
executive officers, directors and employees are compensated
according to these objectives, and carries out the
responsibilities of our Board of Directors relating to the
compensation of our executive officers. The Compensation
Committee held three meetings during 2006. The primary goals of
our Compensation Committee in setting executive officer
compensation in 2006 were (i) to provide a competitive
compensation package that would enable us to attract and retain
key executives and (ii) to align the interests of our
executive officers with those of our shareholders and also with
our performance. As a result of our recent merger with ICM, we
have new executive officers, including a new Chief Executive
Officer. We are also operating in a new industry and have
reorganized many of our operations. Accordingly, we expect that
in 2007, our Compensation Committee will review our current
policies and practices with respect to executive compensation
and make changes as may be necessary to reflect our current
position, including the enactment of formal compensation
policies.
Overview
of Executive Compensation
In 2004, we engaged an independent consultant to compare the
primary elements of our executive compensation against a peer
group of comparable companies. Because we were unable to find a
direct peer in our industry with publicly available information,
we relied on a peer group consisting of (i) national
companies in the business services industry with a market
capitalization of less than $100 million,
(ii) companies within the Dallas-Fort Worth
metropolitan area with revenues of at least $30 million and
no more than $60 million and with a total number of
employees of between 50 and 500. We also reviewed the
information of publicly-held competitors although these
companies did not meet the search criteria. We reviewed a
weighted composite of base pay, incentive compensation and stock
options awarded and created a focal point of total cash, which
consisted of base pay and incentive cash compensation. The 2004
study has provided a base of information for subsequent
executive compensation
56
decisions, but is not the sole factor in determining executive
compensation. Other factors are described below. Because of our
recent merger with ICM, our Compensation Committee will consider
resetting that base of information with a new study of companies
within our industry that are similar in size, revenues and
earnings to our current position.
We compete with larger companies for executive level talent.
Accordingly, our Compensation Committee has strived to set
executive compensation at amounts competitive to the companies
reviewed in the 2004 study.
We have no pre-established policy or target for the allocation
between either cash and non-cash or short-term and long-term
incentive compensation. Our Compensation Committee has reviewed
the information from the 2004 study to determine the appropriate
level and mix of incentive compensation. Historically, we made
annual cash incentive awards and non-cash awards on a less
frequent basis. In 2006, we made cash awards and amended
previously granted incentive stock options to provide for a
lower exercise price. Because of the management changes
resulting from our merger with ICM, we are developing new
incentive compensation plans that will provide us with a policy
to make cash and non-cash awards as a result of either our
performance or that of our executive officers and other
employees or a combination of both, depending on the type of
award, compared to established goals.
We believe in engaging the best available talent in critical
managerial functions and this may result in our having to
negotiate individually with executives who have retention
packages in place with other employers or who have specific
compensation requirements. Accordingly, our Compensation
Committee may determine that it is in our best interests and our
shareholders that we negotiate a compensation package with an
individual that deviates from our standard compensation
practices. Similarly, our Compensation Committee may determine
to adjust a compensation package outside of the normal annual
review cycle in order to address a retention issue.
Since the departure of our then Chief Executive Officer in June
2005, our executives have not participated in the executive
compensation discussions of our Compensation Committee. In 2007,
we expect that our new Chief Executive Officer will participate
in these discussions and other members of the executive
management team will participate in the drafting of our new
compensation plans, including our incentive compensation plan
and provide information relating to the execution of such plans,
such as earning targets and results.
We currently do not have any ownership guidelines requiring our
executives to hold a minimum ownership interest in the Company.
We believe that our 1999 Stock Option Plan provides compensation
in a manner that aligns the executive with interests of our
shareholders in growing a profitable company and enhancing
shareholder value. This plan is discussed below.
Elements
of Executive Compensation
Compensation of our executive officers in 2006 was comprised
primarily of
|
|
|
|
|
base salary,
|
|
|
|
performance based incentive compensation (bonuses),
|
|
|
|
awards under our equity compensation plans,
|
|
|
|
perquisites and other personal benefits.
|
In an effort to ensure the continued competitiveness of our
executive compensation policies, the Committee, in setting base
salaries and bonuses and making annual and long-term incentive
awards, considered the prior levels of executive compensation,
the compensation paid to executives of our competitors, the
terms of employment agreements and the information provided in
the 2004 compensation study.
The incentive portions of an executives compensation are
intended to achieve the Committees goal of aligning any
executives interests with those of our shareholders and
with our performance. These portions of an executives
compensation are placed at risk and are linked to the effect our
operating results have on the market price of our common stock
and effectively are designed (in the near- and long-term) to
benefit our shareholders through increased value in the event
favorable operating results are achieved. As a result, during
years of favorable operating results our executives are provided
the opportunity to participate in the increase in the market
value of our
57
common stock, much like our shareholders. Conversely, in years
of less favorable operating results, the compensation of our
executives may be below competitive levels. Generally,
higher-level executive officers have a greater level of their
compensation placed at risk.
Executive Base Salaries. We provide a
base salary for our executives to compensate them for their
services during the fiscal year. Because we have a limited
number of employees, we do not have a policy setting forth base
salary ranges by position or responsibility. In determining the
base salary for each employee, the Compensation Committee
considers:
|
|
|
|
|
the performance of the executive;
|
|
|
|
the performance of the Company;
|
|
|
|
information provided in the 2004 study; and
|
|
|
|
internal factors including previously agreed upon commitments
bound by contract, the executives compensation relative to
other officers, and changes in job responsibility.
|
We have entered into employment agreements with only two of our
executive officers, both in 2004: Frank Apodaca, the
President and CEO of our AAI subsidiary, and Robert L. Bintliff,
our Chief Financial Officer. The employment agreements that we
entered into with Mr. Apodaca and Mr. Bintliff at the
commencement of each of their terms of employment provide for
their base salaries. Their base salaries were negotiated by the
Compensation Committee prior to entering into of the employment
agreements based on the information available to the committee
from the 2004 compensation study and other market information.
The base salary of our General Counsel, Eliseo Ruiz was also
primarily based on the 2004 compensation study. We had no other
executive officers in 2006. For the executive officers that
joined us a result of our merger with ICM, we will provide a
base salary consistent with their base salary at ICM after our
Compensation Committee has reviewed those factors described
above.
Incentive Compensation (Bonuses). We do
not have a formal incentive compensation plan. We are developing
an incentive compensation plan with our new management team and
our Compensation Committee. We expect that the plan will promote
high performance and the achievement of company goals in order
to encourage the growth of stockholder value and to allow key
employees to participate in the growth and profitability of the
Company. Because we do not have a formal incentive compensation
plan, we do not have current policies regarding the use of
discretion in making awards, the interplay between the
achievement of corporate goals and individual goals, how
compensation or amounts realizable from prior compensation are
considered in setting other elements of compensation, the
adjustment or recovery of awards or payments if the relevant
company performance measures upon which they were based are
restated or otherwise adjusted in a manner that would reduce the
size of an award or payment, or similar matters related to
incentive compensation. Instead our Compensation Committee looks
to the overall goals of our compensation program in making
decisions on all compensation matters.
In 2006, the Compensation Committee granted bonuses to three
executives based on the standards that we expect to implement in
our 2007 incentive compensation plan. Mr. Apodaca received
a cash bonus as a result of a profitable year in AAIs
operation in 2005. Mr. Bintliff received a cash bonus as a
result of the Companys success in restructuring certain
lease commitments to save costs and in achieving certain tax
benefits as a result of a reorganization of our operations.
Mr. Bintliff and Mr. Ruiz also received cash bonuses
and awards of stock options relating to their efforts in
preparing the Company for its merger with ICM.
Long-Term Equity Compensation Plan
Grants. Stock option grants with respect to
2006 performance were made under our 1999 Stock Option Plan to
three employees, including our executive officers. This Plan
provides for the grant of stock options, with or without stock
appreciation rights. The stock options granted in 2006 were
without stock appreciation rights and have exercise prices equal
to or higher than the fair market value of our common stock on
the date of grant. Because the options were granted with an
exercise price equal to the market value of our common stock at
the time of grant, they provided no value unless our stock price
exceeds the option exercise price. These stock options are
accordingly tied to the stock price appreciation of our common
stock value, rewarding the executives and other employees as if
they share in the ownership of our common stock similar to that
of our shareholders. The number of shares subject to options
granted to each executive officer was determined based upon
58
the expected value of our common stock and our historical
practice of granting stock options to our executive officers and
directors. Much like our cash incentive compensation, grants
under our 1999 Stock Option Plan are intended to:
|
|
|
|
|
enhance the link between the creation of stockholder value and
long-term executive incentive compensation;
|
|
|
|
provide an opportunity for increased equity ownership by
executives; and
|
|
|
|
maintain competitive levels of executive compensation.
|
The grants made in 2006 rewarded key officers for their
performance in 2005 and in 2006. Moreover, by amending the
exercise price of previously granted stock options, the
Compensation Committee chose to reward the executives for their
efforts in the turnaround of the Company in a manner that
closely aligned them with the interests of our shareholders in
achieving growth and profitability after the completion of our
merger with ICM.
Other Benefits. Our executive officers
receive other perquisites and benefits consistent with our goals
of providing an overall compensation plan that is competitive in
order to attract and retain key executives. The Compensation
Committee believes that these perquisites and benefits are
reasonable and periodically reviews the Companys policy
toward such compensation. Such perquisites and benefits include
health insurance, life insurance, and other benefits available
to all employees of the Company and, in the case of
Mr. Apodaca and Mr. Bintliff, the use of a company car
or a car allowance.
We currently do not have a stock award program, a retirement
plan, a savings plan, a deferred compensation plan, or any other
benefit plan available to our executives.
Chief
Executive Officer Compensation
We had no chief executive officer in 2006.
In June 2005, Nicholas J. Zaffiris, one of our Directors, began
serving as Non-Executive Chairman of the Board of Directors. In
such capacity he acted as our interim Chief Executive Officer,
but did not become one of our employees. Mr. Zaffiris
received $100,000 in cash compensation for his services as
Non-Executive Chairman of the Board of Directors and had certain
of his previously issued stock options amended to reflect a
lower exercise price. The value in 2006 of such amendment was
$29,677. In making these compensation decisions, the
Compensation Committee considered several factors, including
Mr. Zaffiris performance as a member of our Board of
Directors and the potential cost to the Company in seeking and
engaging a full-time Chief Executive Officer on an interim basis.
Post-Employment
Compensation and Contractual Commitments
We currently do not have severance policy or any commitment for
post-employment compensation except as provided in our
employment agreements with Mr. Apodaca and
Mr. Bintliff.
In the case of Mr. Apodaca, his agreement was amended as of
March 1, 2007 to provide for a term ending on
December 31, 2007. It provides for a base salary of
$250,000 per year. Should we terminate his agreement
without cause prior to the expiration of the term,
Mr. Apodaca would be entitled to receive any remaining
compensation in a one-time, lump sum payment equal to fifty
percent (50%) of his base salary and a pro-rata share of any
bonus earned through the date of termination along with any
remaining non-competition compensation provided for in the
agreement (up to $75,000 in 2006). He would not be entitled to
any other benefits or compensation after the termination.
Mr. Bintliff has an employment agreement with us that
provides for an initial term ending on October 31, 2007.
The agreement provides that Mr. Bintliffs employment
shall continue after the initial term for successive periods of
one year duration until terminated in accordance with the terms
of the agreement. It currently provides for a base salary of
$208,012 per year and an auto allowance of $650 per
month. Should we terminate his agreement without cause prior to
the expiration of the term, he would be entitled to compensation
equal to 18 months of his base salary then in effect and
all benefits that he would otherwise be entitled to for
18 months.
59
In the case of Messrs. Apodaca and Bintliff, any
outstanding stock options held by the executive would be
cancelled in the event that the executive is terminated for
cause. If the employment relationship is terminated for any
other reason, the executive would have ninety days from the date
of termination to exercise any outstanding options that he is
entitled to exercise (options that are vested).
Summary
Compensation
The following table sets forth the compensation during 2006,
paid or accrued, of the individuals that served as our Chief
Executive Officer or our Chief Financial Officer, and our two
other most highly compensated executive officers that were
serving at December 31, 2006 and another one of our
officers that was not serving as an executive at the end of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
Name and Principle Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards(1)
|
|
|
Compensation
|
|
|
Total
|
|
|
Nicholas J. Zaffiris(2)
|
|
|
2006
|
|
|
$
|
100,000
|
|
|
$
|
|
|
|
$
|
29,677
|
|
|
$
|
22,000
|
|
|
$
|
151,677
|
|
Acting Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank Apodaca(3)
|
|
|
2006
|
|
|
|
266,303
|
|
|
|
59,077
|
|
|
|
14,220
|
|
|
|
81,250
|
|
|
|
420,850
|
|
Chief Executive Officer and
President of Access HealthSource, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert L. Bintliff(4)
|
|
|
2006
|
|
|
|
187,032
|
|
|
|
75,000
|
|
|
|
116,646
|
|
|
|
7,800
|
|
|
|
386,478
|
|
Chief Financial Officer and
Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliseo Ruiz III(5)
|
|
|
2006
|
|
|
|
177,019
|
|
|
|
35,000
|
|
|
|
123,746
|
|
|
|
|
|
|
|
335,765
|
|
Executive Vice President
and General Counsel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Wysong(6)
|
|
|
2006
|
|
|
|
59,077
|
|
|
|
147,667
|
|
|
|
|
|
|
|
36,000
|
|
|
|
242,744
|
|
Vice President of Business
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We use the Binomial Lattice option-pricing model to estimate the
option fair values of option awards as described in
Note 2 Summary of Significant Accounting
Policies (Stock Based Compensation) of the financial statements
to arrive at the amounts for Option Awards. |
|
(2) |
|
Mr. Zaffiris was the Non-Executive Chairman of the Board of
Directors and, in such capacity, served as our Acting Chief
Executive Officer in 2006. He was not employed by the Company.
The amount attributed to him in 2006 includes $22,000 in regular
board compensation and $100,000 as compensation for his services
as Non-Executive Chairman of the Board of Directors. The option
awards relate to the net increase in value of 45,000 stock
options repriced to $2.00 from prices ranging from $2.59 to
$7.65 in December 2006. |
|
(3) |
|
Mr. Apodacas other compensation is related to
non-competition provisions in his employment agreement. The
option awards relate to the net increase in value of 100,000
stock options repriced to $2.00 from $2.76 in December 2006. As
the president of AAI, Mr. Apodaca is given the use of a
company car with an original value of $36,000. |
|
(4) |
|
Mr. Bintliffs option awards relate to 150,000 stock
options granted in November plus the net increase in value of
100,000 stock options repriced to $2.00 from $2.99 in December
2006. Mr. Bintliff received a $50,000 cash bonus as a
result our success in restructuring certain lease commitments to
save costs and in achieving certain tax benefits as a result of
a reorganization of our operations in 2005. He also received a
$25,000 cash bonus relating to his efforts in our preparation
for the merger with ICM. His other compensation was a car
allowance of $650 per month. |
|
(5) |
|
Mr. Ruizs option awards relate to 150,000 stock
options granted in November plus the net increase in value of
100,000 stock options repriced to $2.00 from $3.88 in December
2006. |
|
(6) |
|
Mr. Wysongs employment terminated on October 18,
2006. The amount under the designation bonus is the
amount of commission paid to Mr. Wysong as a percentage of
actual revenues received by AAI. The amount under the
designation all other compensation is the amount of
post-employment compensation we paid Mr. Wysong for certain
services and commitments by him. |
60
Grants of
Plan-Based Awards
The following table sets forth certain information relating to
options granted in 2006 to named officers to purchase shares of
our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock
|
|
|
|
|
Name
|
|
Grant Date
|
|
|
Option Shares
|
|
|
Exercise Price
|
|
|
Nicholas J. Zaffiris(1)
|
|
|
12/29/06
|
|
|
|
45,000
|
|
|
$
|
2.00
|
|
Frank Apodaca(1)
|
|
|
12/29/06
|
|
|
|
100,000
|
|
|
$
|
2.00
|
|
Robert L. Bintliff
|
|
|
11/01/06
|
|
|
|
150,000
|
|
|
$
|
1.76
|
|
Robert L. Bintliff(1)
|
|
|
12/29/06
|
|
|
|
100,000
|
|
|
$
|
2.00
|
|
Eliseo Ruiz III
|
|
|
11/01/06
|
|
|
|
150,000
|
|
|
$
|
1.76
|
|
Eliseo Ruiz III(1)
|
|
|
12/29/06
|
|
|
|
100,000
|
|
|
$
|
2.00
|
|
|
|
|
(1) |
|
These stock options were repriced to $2.00 from prices ranging
from $2.59 to $7.65 in December 2006. |
Option
Exercises in Last Fiscal Year
No executive officer exercised options in 2006.
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth information related to the number
and value of options held by the named officer at
December 31, 2006. During 2006, no options to purchase our
common stock were exercised by the named executive
officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities Underlying Unexercised Options as of
|
|
|
Option
|
|
|
Option
|
|
|
|
December 31, 2006
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
Frank B. Apodaca
|
|
|
12,500
|
|
|
|
37,500
|
|
|
$
|
1.05
|
|
|
|
6/18/2009
|
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
2.00
|
|
|
|
5/25/2010
|
|
Robert L. Bintliff
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
2.00
|
|
|
|
2/28/2009
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
1.76
|
|
|
|
11/1/2011
|
|
Eliseo Ruiz III
|
|
|
75,000
|
|
|
|
25,000
|
|
|
|
2.00
|
|
|
|
3/23/2009
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
1.76
|
|
|
|
11/1/2011
|
|
David M. Wysong
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
2.40
|
|
|
|
8/18/2009
|
|
|
|
|
10,000
|
|
|
|
30,000
|
|
|
|
1.75
|
|
|
|
10/5/2009
|
|
Compensation
of Directors
We compensate our directors as follows:
|
|
|
|
|
Each non-employee member of the board receives a quarterly
payment of $4,000.
|
|
|
|
In addition, each non-employee member of the board received $500
per quarter for each committee on which he or she serves and an
additional $500 per quarter for each committee for which he
or she serves as chairperson.
|
|
|
|
We reimburse our directors for travel and out of pocket expenses
in connection with their attendance at meetings of the board.
|
|
|
|
We may occasionally grant stock options to our board members.
|
61
In 2006, the following directors received compensation in the
following aggregate amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
Option
|
|
|
|
|
Name
|
|
Paid in Cash
|
|
|
Awards
|
|
|
Total
|
|
|
Eugene Becker
|
|
$
|
24,000
|
|
|
$
|
|
|
|
$
|
24,000
|
|
Russell Cleveland(1)
|
|
|
20,000
|
|
|
|
17,529
|
|
|
|
37,529
|
|
Kenneth S. George(1)
|
|
|
20,000
|
|
|
|
15,614
|
|
|
|
35,614
|
|
J. French Hill(1)
|
|
|
20,000
|
|
|
|
17,628
|
|
|
|
37,628
|
|
Kent H. Webb, M.D.(1)
|
|
|
25,000
|
|
|
|
19,638
|
|
|
|
44,638
|
|
|
|
|
(1) |
|
These stock options were repriced to $2.00 from prices ranging
from $2.59 to $7.65 in December, 2006. We used the Binomial
Lattice option-pricing model to estimate the option fair values
as described in Note 2 Summary of Significant
Accounting Policies (Stock Based Compensation) of the financial
statements, to arrive at the amounts for Option Awards set forth
above. |
Equity
Compensation Plans
1999 Stock Option Plan. For the benefit
of our employees, directors and consultants, we have adopted the
Precis Smart Card Systems, Inc. 1999 Stock Option Plan (the
stock option plan or the plan). The plan
provides for the issuance of options intended to qualify as
incentive stock options for federal income tax purposes to our
employees and non-employees, including employees who also serve
as our directors. Qualification of the grant of options under
the plan as incentive stock options for federal income tax
purposes is not a condition of the grant and failure to so
qualify does not affect the ability to exercise the stock
options. The number of shares of common stock authorized and
reserved for issuance under the plan is 1,400,000.
Our board of directors administers and interprets the plan
(unless delegated to a committee) and has authority to grant
options to all eligible participants and determine the types of
options granted, the terms, restrictions and conditions of the
options at the time of grant.
The exercise price of options may not be less than 85% of the
fair market value of our common stock on the date of grant of
the option and to qualify as an incentive stock option may not
be less than the fair market value of common stock on the date
of the grant of the incentive stock option. Upon the exercise of
an option, the exercise price must be paid in full, in cash, in
our common stock (at the fair market value thereof) or a
combination thereof.
Options qualifying as incentive stock options are exercisable
only by an optionee during the period ending three months after
the optionee ceases to be our employee, a director or
non-employee service provider. However, in the event of death or
disability of the optionee, the incentive stock options are
exercisable for one year following death or disability and in
the event of the retirement of the optionee, the Board of
Directors may designate an additional period for exercise. In
any event options may not be exercised beyond the expiration
date of the options. Options may be granted to our key
management employees, directors, key professional employees or
key professional non-employee service providers, although
options granted non-employee directors do not qualify as
incentive stock options. No option may be granted after
December 31, 2008. Options are not transferable except by
will or by the laws of descent and distribution.
All outstanding options granted under the plan will become fully
vested and immediately exercisable if (i) within any
12-month
period, we sell an amount of common stock that exceeds 50% of
the number of shares of common stock outstanding immediately
before the
12-month
period or (ii) a change of control occurs. For
purposes of the plan, a change of control is defined
as the acquisition in a transaction or series of transactions by
any person, entity or group (two or more persons acting as a
partnership, limited partnership, syndicate or other group for
the purpose of acquiring our securities) of beneficial ownership
of 50% or more (or less than 50% as determined by a majority of
our directors) of either the then outstanding shares of our
common stock or the combined voting power of our then
outstanding voting securities.
2002 Non-Employee Stock Option
Plan. Effective May 31, 2002 our board
of directors approved the Access Plans 2002 Non-Employee Stock
Option Plan (the 2002 Stock Option Plan) which was
approved by our stockholders on July 29, 2002 and amended
by our stockholders on January 30, 2007. Our employees who
also serve
62
as our directors are not eligible to receive stock option under
this plan. The purpose of the 2002 Stock Option Plan is to
strengthen our ability to attract and retain the services of
individuals that serve as our non-employee directors,
consultants and other advisors that are essential to our
long-term growth and financial success and thereby to enhance
stockholder value through the grant of stock options. The total
number of shares of common stock authorized and reserved for
issuance upon exercise of options granted under the 2002 Stock
Option Plan is 1,500,000.
Our Board of Directors administers and interprets the 2002 Stock
Option Plan and has authority to grant options to eligible
recipients and determine the basis upon which the options are to
be granted and the terms, restrictions and conditions of the
options at the time of grant. Options granted are exercisable in
such amounts, at such intervals and upon such terms as the
option grant provides. The per share purchase price of the
common stock under the options is determined by our board of
directors; however, the purchase price may not be less than the
closing sale price of our common stock on the date of grant of
the option. Upon the exercise of an option, the stock purchase
price must be paid in full, in cash by check or in our common
stock held by the option holder for more than six months or a
combination of cash and common stock.
Options granted under the 2002 Stock Option Plan may not under
any circumstance be exercised after 10 years from the date
of grant and no option may be granted after March 31, 2010.
Options are not transferable except by will, by the laws of
descent and distribution, by gift or a domestic relations order
to a family member. Family member transfers include
transfers to parents (and in-laws), to nieces and nephews
(adopted or otherwise) as well as trusts, foundations and other
entities principally for their benefit.
Director
Liability and Indemnification
As permitted by the provisions of the Oklahoma General
Corporation Act, our Certificate of Incorporation eliminates the
monetary liability of our directors for a breach of their
fiduciary duty as directors. However, these provisions do not
eliminate our directors liability
|
|
|
|
|
for a breach of the directors duty of loyalty to us or our
stockholders,
|
|
|
|
for acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law,
|
|
|
|
arising under Section 1053 of the Oklahoma General
Corporation Act relating to the declaration of dividends and
purchase or redemption of shares in violation of the Oklahoma
General Corporation Act, or
|
|
|
|
for any transaction from which the director derived an improper
personal benefit.
|
In addition, these provisions do not eliminate liability of a
director for violations of federal securities laws, nor do they
limit our rights or our stockholders rights, in
appropriate circumstances, to seek equitable remedies including
injunctive or other forms of non-monetary relief. These remedies
may not be effective in all cases.
Our bylaws require us to indemnify all of our directors and
officers. Under these provisions, when an individual in his or
her capacity as an officer or a director is made or threatened
to be made a party to any suit or proceeding, the individual may
be indemnified if he or she acted in good faith and in a manner
reasonably believed to be in or not opposed to our best
interest. Our bylaws further provide that this indemnification
is not exclusive of any other rights to which the individual may
be entitled. Insofar as indemnification for liabilities arising
under our bylaws or otherwise may be permitted to our directors
and officers, we have been advised that in the opinion of the
Securities and Exchange Commission the indemnification is
against public policy and is, therefore, unenforceable.
We enter into indemnity and contribution agreements with each of
our directors and executive officers. Under these
indemnification agreements we have agreed to pay on behalf of
the indemnitee, and his or her executors, administrators and
heirs, any amount that he or she is or becomes legally obligated
to pay because the
|
|
|
|
|
indemnitee served as one of our directors or officers, or served
as a director, officer, employee or agent of a corporation,
partnership, joint venture, trust or other enterprise at our
request or
|
|
|
|
indemnitee was involved in any threatened, pending or completed
action, suit or proceeding by us or in our right to procure a
judgment in our favor by reason that the indemnitee served as
one of our directors or
|
63
|
|
|
|
|
officers, or served as a director, officer, employee or agent of
a corporation, partnership, joint venture, trust or other
enterprise at our request.
|
To be entitled to indemnification, indemnitee must have acted in
good faith and in a manner that he or she reasonably believed to
be in or not opposed to our best interests. In addition, no
indemnification is required if the indemnitee is determined to
be liable to us unless the court in which the legal proceeding
was brought determines that the indemnitee was entitled to
indemnification. The costs and expenses covered by these
agreements include expenses of investigations, judicial or
administrative proceedings or appeals, amounts paid in
settlement, attorneys fees and disbursements, judgments,
fines, penalties and expenses of enforcement of the
indemnification rights.
We maintain insurance to protect our directors and officers
against liability asserted against them in their official
capacities for events occurring after June 7, 2001. This
insurance protection covers claims and any related defense costs
of up to $5,000,000 with an additional excess on losses up to
$5,000,000 on excess of $5,000,000, an additional excess on
losses up to $5,000,000 on excess of $10,000,000, and an
additional excess on losses up to $5,000,0000 in excess of
$15,000,000 each based on alleged or actual securities law
violations, other than intentional dishonest or fraudulent acts
or omissions, or any willful violation of any statute, rule or
law, or claims arising out of any improper profit, remuneration
or advantage derived by an insured director or officer.
Employment
Arrangements and Lack of Keyman Insurance
As of December 31, 2006, we had employment agreements with
each of Frank Apodaca and Robert L. Bintliff.
Mr. Apodacas employment agreement was entered into on
June 18, 2004 for a three-year term beginning on that date.
By amendment, the term has been extended to December 31,
2007. His agreement provides for a current base annual salary of
$250,000.
Mr. Bintliffs employment agreement was entered into
on November 1, 2004, for a three-year term beginning on
that date and provides for a current base annual salary of
$208,012
These agreements provide, among other things,
|
|
|
|
|
entitlement to fringe benefits including medical and insurance
benefits and participation in our 401(k) plan and MSA plan and
any other benefit plan we establish, and a car allowance of up
to $650 per month or use of company owned vehicle; and
|
|
|
|
limited salary continuation during any period of temporary or
permanent disability, illness or incapacity to substantially
perform the services required under the agreement or in the
event of employees death.
|
These agreements require the employee to devote the required
time and attention to our business and affairs necessary to
carry out his responsibilities and duties. The employee may not
hold executive positions with other entities or own interests
in, manage or otherwise operate other businesses.
The employment of Messrs. Apodaca and Bintliff may be
terminated by us for good cause. Under both of their
employment agreements, good cause includes, among
other things, commitment of a felony, willful failure to take
actions permitted by law and necessary to implement our written
policies or to otherwise perform his or her duties, willful
misconduct materially injurious to us or our subsidiaries, and
violations of the Foreign Corrupt Practices Act.
As of the date of this report, we do not maintain any keyman
insurance on the life or disability of our executive officers.
However, the Company is considering the purchase of keyman
insurance or similar protection that would be in the best
interest of the shareholders.
As of the date of this report, we have at will
employment relationship with our other executive officers, with
base salaries as set forth on the table below. Each such officer
is entitled to participate in employee benefit programs,
including our 401K plan, that we offer to all of our employees
and is also eligible for incentive
64
compensation awards (bonuses) as may be determined by the Board
the Board of Directors. As of December 31, 2006, we did not
have a formal incentive compensation plan. The base salaries of
the other executive officers are:
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Base Salary
|
|
|
Peter W. Nauert
|
|
Chief Executive Officer and
Chairman of the Board of Directors
|
|
$
|
300,000
|
|
Ian Stuart
|
|
Chief Operating Officer
|
|
$
|
200,000
|
|
Michael Owens
|
|
President of Americas Health
Care/Rx Plan Agency, Inc.
|
|
$
|
175,000
|
|
Carl Fischer
|
|
Chief Executive Officer of
American Benefit Resource/Rx, Inc. and President and Chief
Marketing Officer of Adult Care Plans/Rx America
|
|
$
|
150,000
|
|
Nancy Zalud
|
|
Vice President of Communications
|
|
$
|
130,000
|
|
Compensation
Committee Interlocks And Insider Participation
Other than Nicholas J. Zaffiris, the members of our Compensation
Committee have not served as one of our officers or been in our
employ. No member of the Compensation Committee has any
interlocking relationship with any other company that requires
disclosure under this heading. None of our executive officers
have served as a director or member of the compensation
committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or Compensation
Committee.
Conclusion
and Report on Executive Compensation
Our Compensation Committee believes that our executive
compensation arrangements and plans serve our best interests and
those of our shareholders. The Committee takes very seriously
its responsibilities respecting setting and determining the
compensation arrangements with our executive officers.
Accordingly, the Committee continues to monitor and revise the
compensation arrangements and may formulate other plans and
arrangements as necessary to ensure that our compensation system
continues to meet our needs and those of our shareholders.
The Compensation Committee of the Company, comprised of Russell
Cleveland, Kent H Webb, M.D. and Nicholas J. Zaffiris, has
reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of
Regulation S-K
with management and, based on such review and discussion, the
Compensation Committee recommended to the Board that the
Compensation Discussion and Analysis be included in this Annual
Report on
Form 10-K
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The following table presents, as of March 21, 2007,
information related to the beneficial ownership of our common
stock of (i) each person who is known to us to be the
beneficial owner of more than 5% of our common stock,
(ii) each of our directors and the executive officers named
in the Summary Compensation Table (see Item 11.
Executive Compensation), and (iii) all of our
executive officers and directors as a group, together with their
percentage holdings of the outstanding shares. All persons
listed have sole voting and investment power with respect to
their shares unless otherwise indicated, and there are no family
relationships amongst our executive officers and directors. For
purposes of the following table, the number of shares and
percent of ownership of our outstanding common stock that the
named person beneficially owns includes shares of our common
stock that the person has the right to acquire within
60 days of the above-mentioned date pursuant to the
exercise of stock options and warrants, and are deemed to be
outstanding, but are not deemed to be outstanding for the
purposes of computing the number of shares beneficially owned
and percent of outstanding common stock of any other named
person.
65
Beneficial
Ownership Of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 30, 2007
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Beneficial Ownership
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Beneficially
|
|
|
Total
|
|
|
|
|
|
|
Owned of
|
|
|
Option
|
|
|
Owned
|
|
|
Shares
|
|
|
|
|
|
|
Record
|
|
|
Shares
|
|
|
Shares
|
|
|
Owned
|
|
|
Percent
|
|
|
Our Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kent H. Webb
|
|
|
94,019
|
|
|
|
113,000
|
|
|
|
|
|
|
|
207,019
|
|
|
|
1.15
|
%
|
Kenneth S. George
|
|
|
|
|
|
|
55,000
|
|
|
|
|
|
|
|
55,000
|
|
|
|
0.31
|
%
|
J. French Hill
|
|
|
2,000
|
|
|
|
65,000
|
|
|
|
|
|
|
|
67,000
|
|
|
|
0.37
|
%
|
Nicholas J. Zaffiris
|
|
|
|
|
|
|
65,000
|
|
|
|
|
|
|
|
65,000
|
|
|
|
0.36
|
%
|
Russell Cleveland(3)
|
|
|
|
|
|
|
|
|
|
|
3,242,313
|
|
|
|
3,242,313
|
|
|
|
18.00
|
%
|
Andrew A. Boemi(4)
|
|
|
50,054
|
|
|
|
|
|
|
|
|
|
|
|
50,054
|
|
|
|
0.28
|
%
|
Our Executive
Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter W. Nauert Director,
President & CEO(5)
|
|
|
3,684,299
|
|
|
|
|
|
|
|
|
|
|
|
3,684,299
|
|
|
|
20.46
|
%
|
Frank B. Apodaca(6)
|
|
|
188,699
|
|
|
|
100,000
|
|
|
|
30,849
|
|
|
|
319,548
|
|
|
|
1.77
|
%
|
Robert L. Bintliff(7)
|
|
|
3,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
53,000
|
|
|
|
0.29
|
%
|
David Wysong
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 30, 2007
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Beneficial Ownership
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Beneficially
|
|
|
Total
|
|
|
|
|
|
|
Owned of
|
|
|
Option
|
|
|
Owned
|
|
|
Shares
|
|
|
|
|
Name of Beneficial Owner
|
|
Record
|
|
|
Shares
|
|
|
Shares
|
|
|
Owned
|
|
|
Percent
|
|
|
Eliseo Ruiz III(8)
|
|
|
2,200
|
|
|
|
75,000
|
|
|
|
|
|
|
|
77,200
|
|
|
|
0.43
|
%
|
Ian R. Stuart(9)
|
|
|
583,961
|
|
|
|
|
|
|
|
|
|
|
|
583,961
|
|
|
|
3.24
|
%
|
Carl H. Fisher(10)
|
|
|
46,054
|
|
|
|
|
|
|
|
|
|
|
|
46,054
|
|
|
|
0.26
|
%
|
Michael K. Owens(11)
|
|
|
92,107
|
|
|
|
|
|
|
|
|
|
|
|
92,107
|
|
|
|
0.51
|
%
|
Nancy L. Zalud(12)
|
|
|
46,054
|
|
|
|
|
|
|
|
|
|
|
|
46,054
|
|
|
|
0.26
|
%
|
Our Executive Officer and
Directors as a group of fourteen persons
|
|
|
4,792,447
|
|
|
|
523,000
|
|
|
|
3,273,162
|
|
|
|
8,588,609
|
|
|
|
47.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
Other Beneficial
Owners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
Ready One Industries
|
|
|
1,961,784
|
|
|
|
|
|
|
|
|
|
|
|
1,961,784
|
|
|
|
10.89
|
%
|
US Special Opportunities
Trust PLC(3)
|
|
|
801,813
|
|
|
|
|
|
|
|
|
|
|
|
801,813
|
|
|
|
4.45
|
%
|
Renaissance Capital
Growth & Income
Fund III, Inc.(3)
|
|
|
890,500
|
|
|
|
|
|
|
|
|
|
|
|
890,500
|
|
|
|
4.94
|
%
|
Premier RENN US Emerging Growth
Fund Limited(3)
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
4.16
|
%
|
Renaissance US Growth Investment
Trust PLC(3)
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
800,000
|
|
|
|
4.44
|
%
|
RENN Capital Group, Inc.(3)
|
|
|
|
|
|
|
|
|
|
|
3,242,313
|
|
|
|
3,242,313
|
|
|
|
18.00
|
%
|
Rodney D. Baber
|
|
|
1,043,354
|
|
|
|
|
|
|
|
|
|
|
|
1,043,354
|
|
|
|
5.79
|
%
|
Lewis Opportunity Fund, LP
|
|
|
1,173,700
|
|
|
|
|
|
|
|
|
|
|
|
1,173,700
|
|
|
|
6.52
|
%
|
R & R Opportunity Fund, LP
|
|
|
865,965
|
|
|
|
|
|
|
|
|
|
|
|
865,965
|
|
|
|
4.81
|
%
|
66
|
|
|
(1) |
|
Shares not outstanding but deemed beneficially owned by virtue
of the right of the named person to acquire the shares within
60 days of the above-mentioned date are treated as
outstanding for determining the amount and percentage of common
stock owned by the person. Shares for which beneficial ownership
is disclaimed by an individual also are included for purposes of
determining the amount and percentage of Common Stock owned by
such individual. Based upon our knowledge, each named person has
sole voting and sole investment power with respect to the shares
shown except as noted, subject to community property laws, where
applicable. |
|
(2) |
|
The percentage shown was rounded to the nearest one-tenth of one
percent, based upon 18,011,292 shares of common stock being
outstanding on March 30, 2007. |
|
(3) |
|
The 3,242,313 Other Beneficially Owned Shares are
owned by US Special Opportunities Trust PLC
(801,813 shares), Renaissance Capital Growth &
Income Fund III, Inc. (890,500 shares), Premier RENN
US Emerging Growth Fund Limited (750,000 shares),
Renaissance US Growth Investment Trust PLC
(800,000 shares), each of which is an investment fund
managed by RENN Capital Group, Inc. Mr. Cleveland controls
RENN Capital Group, Inc. and is deemed, therefore, deemed to be
the beneficial owner of the common stock shares. |
|
(4) |
|
Pursuant to the terms of our merger acquisition of ICM,
Messrs. Nauert and Boemi became members of our Board of
Directors on January 29, 2007. |
|
(5) |
|
Under the terms of our merger acquisition of ICM, we are
obligated to issue and deliver additional common stock shares to
the shareholders of ICM including the Peter W. Nauert Revocable
Trust that is controlled by Mr. Nauert. The issuance of the
additional shares is based upon the adjusted earnings before
interest, taxes, depreciation and amortization of Insuraco USA
and its subsidiaries. The number of additional shares that may
be issued to Mr. Nauert is not determinable as of the date
of this report, but the maximum number of shares that we may
deliver is 5,533,482. |
|
(6) |
|
Mr. Apodaca had an agreement with National Center for
Employment of the Disabled (NCED), the former parent
of AAI and for whom he previously provided service. This
agreement entitles Mr. Apodaca to 10% of the common stock
shares and cash we paid or will pay NCED for Access.
Mr. Apodaca has received 183,699 common stock shares and
(ii) is entitled to and is the beneficial owner of an
additional 30,849 shares. He has also purchased 5,000 of
our shares directly and currently has options exercisable within
60 days of the record date for 62,500 shares.
Mr. Apodaca holds additional options to purchase 87,500
common stock shares that are not exercisable and will not be
exercisable within 60 days of the date of this report. |
|
(7) |
|
Mr. Bintliff is our Chief Financial Officer. The
beneficially owned shares and percentage of outstanding shares
include 50,000 shares of our common stock issuable upon
exercise of stock options. Mr. Bintliff holds additional
options to purchase 200,000 common stock shares that are not
exercisable and will not be exercisable within 60 days of
the date of this report. |
|
(8) |
|
Mr. Ruiz is our General Counsel. The beneficially owned
shares and percentage of outstanding shares include 75,000
common stock shares that are exercisable or will be exercisable
within 60 days of the date of this report. Mr. Ruiz
holds additional options to purchase 175,000 common stock shares
that are not exercisable and will not be exercisable within
60 days of the date of this report. |
|
(9) |
|
In January 2007, Mr. Stuart became our Chief Operating
Officer. |
|
(10) |
|
In January 2007, Mr. Fisher became our President and Chief
Marketing Officer of our Adult Care Plans/Rx America subsidiary
that was acquired as part of our merger acquisition of ICM. |
|
(11) |
|
In January 2007, Mr. Owens became our President of our
Americas Health Care/Rx Plan Agency, Inc. subsidiary that
was acquired as part of our merger acquisition of ICM. |
|
(12) |
|
In January 2007, Ms. Zalud became our Vice President of
Marketing and Communications. |
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
Our policies with respect to related party transaction are
included in more general conflict of interest policies and
practices set forth in our Code of Conduct.
67
Our Code of Conduct prohibits conflicts involving family
members, ownership in outside businesses, and outside
employment. Our directors, officers and employees and their
family members are not permitted to own, directly or indirectly,
a significant financial interest in any business enterprise that
does or seeks to do business with, or is in competition with, us
unless prior specific written approval has been granted by our
Board of Directors. As a guide, a significant financial
interest refers to an ownership interest of more than 1%
of the outstanding securities or capital value of the business
enterprise or that represents more than 5% of the total assets
of the director, officer, employee or family member.
Our Corporate Governance and Nominating Committee is charged
with reviewing conflicts of interests. If the matter cannot be
resolved by the committee, our Board of Directors may take
action, or in the case of a conflict among all or nearly all of
the members of our Board of Directors, the matter may be brought
to our shareholders.
Contained below is a description of transactions and proposed
transactions we entered into with our officers, directors and
stockholders that beneficially own more than 5% of our common
stock during 2006 and 2005. These transactions will continue in
effect and may result in conflicts of interest between us and
these individuals. Although our officers and directors have
fiduciary duties to us and our stockholders, there can be no
assurance that conflicts of interest will always be resolved in
favor of us and our stockholders.
Certain Relationships with NCED. On
June 18, 2004, we acquired Access HealthSource, Inc.
(AAI) for a purchase price of up to $9,350,000 plus
payment of acquisition costs from Ready One Industries, formerly
National Center for Employment of the Disabled, Inc.
(NCED) of which Frank Apodaca served as Chief
Administration Officer. Mr. Apodaca, previously served as
our President and Chief Operating Officer, also serves as the
President and Chief Executive Officer of AAI and has retained
that position after the acquisition. The purchase price was in
part based upon a multiple of 3.22 of the earnings before
interest, taxes, depreciation and amortization of AAI
(EBITDA) for the years ending December 31,
2004, 2005 and 2006. The total purchase consideration was
$7,863,000 that includes cash payments totaling $4,232,000 and
issuance of 2,145,483 shares with a value of $3,632,000.
Total acquisition costs through December 31, 2006 were
$381,000. Including the merger consideration paid and delivered,
and the acquisition costs, the total purchase price is
$8,244,000. Mr. Apodaca has an agreement with Ready One
Industries entitling Mr. Apodaca to 10% of the proceeds
(stock or cash) from the sale of AAI. This agreement pre-dated
our purchase of AAI. The 16,780 square feet of office space
we lease for our AAI operation in El Paso as described in
Item 2 was owned by NCED through January 2007. Market rates
were compared prior to the execution of this lease to ensure
that the lease terms were consistent with an impartial,
arms-length transaction. Total payments of $169,000 were paid to
NCED under this agreement in 2006. AAI also earned revenue from
NCED of $729,000 and $684,000 in 2005 and 2006, respectively.
Mr. Nauerts Relationship with The States
General Life Insurance Company. On
October 3, 2003, Strategic Acquisition Partners, a
privately held company (SAP), purchased Aegis
Financial Corporation (Aegis), the sole owner of SGLIC.
Mr. Nauert owned a 75% interest in SAP. SGLIC was facing
financial challenges at the time Aegis was purchased by SAP. The
previous owner of Aegis had refused to provide the capital and
other financial resources necessary for SGLIC to continue its
operations. Mr. Nauert believed that he could effect a
turnaround of SGLIC by refocusing its sales and marketing
initiatives and reducing expenses. However, by the second half
of 2004, it became apparent that emerging health insurance
claims were significantly greater than predicted at the time SAP
acquired SGLIC and that SGLICs capital was being
significantly depleted. During the fourth quarter of 2004,
Mr. Nauert led various initiatives to recapitalize SGLIC.
Despite various expressions of preliminary interest, the
potential investors in SGLIC, failed to provide the capital
resources necessary to allow SGLIC to continue its operations.
Accordingly, in February 2005, Mr. Nauert and SAP agreed to
place SGLIC in permanent receivership with the Texas Insurance
Commission (The State of Texas v. States General Life
Insurance Company, Cause
No. GV-500484
in the 126th District Court of Travis County, Texas). At
the time SGLIC was placed into receivership, Mr. Nauert was
the Chairman of the Board of SGLIC and the principal shareholder
of its ultimate parent, SAP. Additionally, Michael K. Owens,
President of Americas Health Care/Rx Plan Agency, Inc.,
was an officer of SGLIC. Pursuant to letters dated
October 19, 2006, the Special Deputy Receiver (the
SDR) of SGLIC asserted certain claims against ICM,
its subsidiaries, Peter W. Nauert, ICMs Chairman and Chief
Executive Officer, and G. Scott Smith, a former Executive
Officer of ICM, totaling $2,839,000. The SDR is seeking recovery
of certain SGLIC funds that it alleges were inappropriately
transferred and paid to or for the benefit of ICM, its
subsidiaries and Messrs. Nauert and Smith. These claims are
based upon assertions of Texas law violations,
68
including prohibitions against self-dealing, participation in
breach of fiduciary duty and preferential and fraudulent
transfers. Mr. Nauert was in control and Chairman of the
Board of SGLIC when it was placed in receivership by the Texas
Insurance Commission. ICM, its subsidiaries and
Messrs. Nauert and Smith intend to exercise their full
rights in defense of the SDRs asserted claims. The SDR
filed its own action against SGLIC, pending in the
126th District Court of Travis County, Texas under cause
No. GV-500484
and against Messrs. Nauert and Smith, ICM, certain
subsidiaries of Insurance Capital Management, Inc. and other
parties, in the 126th District Court of Travis County,
Texas under cause
No. D-1-GN-06-4697.
Access Plans has been named as a defendant in this action as a
successor-in-interest
to ICM. In connection with our merger-acquisition of ICM and its
subsidiaries, Mr. Nauert and the Peter W. Nauert Revocable
Trust have agreed to fully indemnify ICM and us against any
losses resulting from this matter.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The aggregate fees for professional services rendered to us for
the years ended December 31, 2006 and 2005 were as follows:
Audit Fees. For audit services provided
to us by Hein & Associates LLP for the year ended
December 31, 2006, fees are expected to be $160,000. During
the year ended December 31, 2005, we were billed $142,000.
Audit Related Fees. During the years
ended December 31, 2006 and 2005, we incurred audit related
fees of $37,000 and $34,000 related primarily to reviews of SEC
filings, respectively.
All Other Fees. During the year ended
December 31, 2006, we incurred other fees of $215,000 in
connection with the acquisition of ICM.
In accordance with our Audit Committee Charter, the Audit
Committee approves in advance any and all audit services,
including audit engagement fees and terms, and non-audit
services provided to us by our independent auditors (subject to
the de minimus exception for non-audit services contained
in Section 10A(i)(1)(B) of the Securities Exchange Act of
1934, as amended), all as required by applicable law or listing
standards. The independent auditors and our management are
required to periodically report to the Audit Committee the
extent of services provided by the independent auditors and the
fees associated with these services. In accordance with our
Audit Committee Charter the provision of services by
Hein & Associates, LLP and BDO Seidman, LLP (other than
audit, review or attest services) were approved prior to the
provision of the services and 100% of those services that were
not pre-approved were promptly brought to the attention of our
Audit Committee and approved prior to completion of the audit of
our financial statements for each of 2006 and 2005.
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as a part of this
Form 10-K
(1) Index and Consolidated Financial Statements
(2) Financial Statement Schedules required to be filed
by Item 8 of this form
None
All schedules are omitted because they are not applicable.
(b) Exhibits
69
EXHIBIT INDEX
Exhibits will be provided upon request by the
U.S. Securities and Exchange Commission
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1
|
|
Registrants Amended and
Restated Certificate of Incorporation
|
|
3
|
.2
|
|
Registrants Amended and
Restated Bylaws
|
|
4
|
.1
|
|
Form of certificate of the common
stock of Registrant
|
|
4
|
.2
|
|
Form of Underwriters Warrant
and Warrant Certificate, incorporated by reference to
Exhibit 4.2 of Registrants
Form SB-2
Registration Statement
(No. 333-86643).
|
|
10
|
.1
|
|
Precis, Inc. 1999 Stock Option
Plan (amended and restated), incorporated by reference to the
Schedule 14A filed with the Commission on June 23,
2003.
|
|
10
|
.2
|
|
Precis, Inc. 2002 Non-Employee
Stock Option Plan (amended and restated), incorporated by
reference to the Schedule 14A filed with the Commission on
December 29, 2006.
|
|
10
|
.3
|
|
Employment Agreement dated
November 1, 2004, between registrant and Robert Bintliff,
incorporated by reference to Exhibit 10.7 on
registrants
Form 10-K
filed with the Commission on April 18, 2005.
|
|
10
|
.4
|
|
Employment Agreement dated
June 18, 2004, between registrant and Frank Apodaca,
incorporated by reference to Exhibit 2.2 at registrants
Form 8-K
filed with the Commission on July 2, 2004.
|
|
10
|
.5
|
|
Services Agreement with Lifeguard
Emergency Travel, Inc.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm-BDO Seidman, LLP.
|
|
23
|
.2
|
|
Consent of Independent Registered
Public Accounting Firm-Hein & Associates LLP
|
|
31
|
.1
|
|
Rule 13a-14(a)
Certification of Peter W. Nauert as Chairman of the Board,
President and Chief Executive Officer.
|
|
31
|
.2
|
|
Rule 13a-14(a)
Certification of Robert L. Bintliff as Chief Financial Officer.
|
|
32
|
.1
|
|
Section 1350 Certification of
Peter W. Nauert as Chairman of the Board, President and Chief
Executive Officer
|
|
32
|
.2
|
|
Section 1350 Certification of
Robert L. Bintliff as Chief Financial Officer.
|
70
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the Registrant caused this amended report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACCESS PLANS USA, INC.
(Registrant)
Peter W. Nauert
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: April 2, 2007
|
|
|
|
By:
|
/s/ ROBERT
L. BINTLIFF
|
Robert L. Bintliff
Chief Financial Officer
Date: April 2, 2007
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ PETER
W. NAUERT
Peter
W. Nauert
|
|
Chairman of the Board of
Directors, President and Chief Executive Officer
|
|
April 2, 2007
|
|
|
|
|
|
/s/ ROBERT
L. BINTLIFF
Robert
L. Bintliff
|
|
Chief Financial Officer
|
|
April 2, 2007
|
|
|
|
|
|
/s/ ANDREW
A. BOEMI
Andrew
A. Boemi
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ RUSSELL
CLEVELAND
Russell
Cleveland
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ KENNETH
S. GEORGE
Kenneth
S. George
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ J.
FRENCH HILL
J.
French Hill
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ KENT
H.
WEBB, M.D.
Kent
H. Webb, M.D.
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ NICHOLAS
J. ZAFFIRIS
Nicholas
J. Zaffiris
|
|
Director
|
|
April 2, 2007
|
71
INDEX TO
FINANCIAL STATEMENTS
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Access Plans USA,
Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheets of
Access Plans USA, Inc. (formerly Precis, Inc.) as of
December 31, 2006 and 2005 and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the two years in the period ended
December 31, 2006. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Access Plans USA, Inc. at
December 31, 2006 and 2005, and the results of its
operations and its cash flows for each of the two years in the
period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
As disclosed in Note 11 to the accompanying consolidated
financial statements, effective January 1, 2006, the
Company adopted Statement of Financial Accounting Standards
No. 123(R), Share Based Payment.
(Signed Hein & Associates LLP)
Dallas, Texas
March 30, 2007
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Access Plans USA,
Inc.
Irving, Texas
We have audited the accompanying consolidated statements of
operations, stockholders equity, and cash flows of Access
Plans USA, Inc. (formerly Preis, Inc.), for the year ended
December 31, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of operations and cash flows for Access Plans USA, Inc. for the
year ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
(Signed BDO Seidman, LLP)
Dallas, Texas
April 11, 2005, except for Note 18 which is as of
March 30, 2007.
F-3
ACCESS
PLANS USA, INC.
AS OF
DECEMBER 31, 2006 AND 2005
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,232
|
|
|
$
|
6,011
|
|
Unrestricted short-term investments
|
|
|
200
|
|
|
|
|
|
Restricted short-term investments
|
|
|
1,420
|
|
|
|
250
|
|
Cash-in-trust
|
|
|
|
|
|
|
5,585
|
|
Accounts and notes receivable, net
|
|
|
190
|
|
|
|
263
|
|
Income taxes receivable
|
|
|
322
|
|
|
|
1,046
|
|
Inventory
|
|
|
20
|
|
|
|
332
|
|
Prepaid expenses
|
|
|
1,492
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,876
|
|
|
|
14,954
|
|
Fixed assets, net
|
|
|
924
|
|
|
|
1,124
|
|
Goodwill and other intangible
assets, net
|
|
|
7,471
|
|
|
|
14,332
|
|
Deferred tax asset
|
|
|
387
|
|
|
|
275
|
|
Other assets
|
|
|
662
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,320
|
|
|
$
|
30,864
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
178
|
|
|
$
|
467
|
|
Accrued commissions
|
|
|
156
|
|
|
|
380
|
|
Accrued cost of business
combinations
|
|
|
|
|
|
|
1,170
|
|
Other accrued liabilities
|
|
|
1,458
|
|
|
|
1,590
|
|
Franchise taxes payable
|
|
|
429
|
|
|
|
507
|
|
Members liabilities
|
|
|
|
|
|
|
5,585
|
|
Deferred fees
|
|
|
82
|
|
|
|
47
|
|
Current portion of capital leases
|
|
|
190
|
|
|
|
241
|
|
Deferred tax liability
|
|
|
387
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,880
|
|
|
|
10,262
|
|
Capital lease obligations, net of
current portion
|
|
|
48
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,928
|
|
|
|
10,500
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value,
2,000,000 shares authorized, none issued
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value,
100,000,000 shares authorized; 14,012,763 and 13,704,269
issued, respectively, and 13,512,763 and 13,204,269 outstanding,
respectively
|
|
|
140
|
|
|
|
137
|
|
Additional paid-in capital
|
|
|
29,691
|
|
|
|
28,942
|
|
Accumulated deficit
|
|
|
(15,388
|
)
|
|
|
(7,664
|
)
|
Less: treasury stock
(500,000 shares)
|
|
|
(1,051
|
)
|
|
|
(1,051
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
13,392
|
|
|
|
20,364
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
16,320
|
|
|
$
|
30,864
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ACCESS
PLANS USA, INC.
FOR THE
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands, Except Earnings per Share
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Service revenues
|
|
$
|
21,974
|
|
|
$
|
30,028
|
|
|
$
|
37,413
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
10,514
|
|
|
|
13,138
|
|
|
|
15,826
|
|
Sales and marketing
|
|
|
5,463
|
|
|
|
7,486
|
|
|
|
11,358
|
|
General and administrative
|
|
|
6,776
|
|
|
|
9,769
|
|
|
|
10,385
|
|
Impairment charge for goodwill
|
|
|
6,440
|
|
|
|
12,900
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
29,193
|
|
|
|
43,293
|
|
|
|
39,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(7,219
|
)
|
|
|
(13,265
|
)
|
|
|
(2,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
355
|
|
|
|
159
|
|
|
|
(57
|
)
|
Loss before taxes
|
|
|
(6,864
|
)
|
|
|
(13,106
|
)
|
|
|
(2,213
|
)
|
Provision for income taxes
(benefit) expense
|
|
|
(50
|
)
|
|
|
123
|
|
|
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(6,814
|
)
|
|
|
(13,229
|
)
|
|
|
(1,657
|
)
|
Discontinued:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued
operations, net of taxes of $180
|
|
|
|
|
|
|
300
|
|
|
|
|
|
Loss from discontinued operations,
net of tax benefit of $0, $73 and $179, respectively
|
|
|
(910
|
)
|
|
|
(442
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,724
|
)
|
|
$
|
(13,371
|
)
|
|
$
|
(1,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.51
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.51
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,486,562
|
|
|
|
12,432,591
|
|
|
|
11,921,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
13,486,562
|
|
|
|
12,432,591
|
|
|
|
11,921,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ACCESS
PLANS USA, INC.
FOR THE
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Treasury
|
|
|
(Accumulated
|
|
|
|
|
Dollars in Thousands
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit)
|
|
|
Total
|
|
|
Balance, December 31, 2003
|
|
|
11,872,147
|
|
|
$
|
119
|
|
|
$
|
25,821
|
|
|
$
|
|
|
|
$
|
7,663
|
|
|
$
|
33,603
|
|
Stock option exercised, net of tax
|
|
|
1,250
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Issuance of stock in business
combinations
|
|
|
488,486
|
|
|
|
5
|
|
|
|
1,395
|
|
|
|
|
|
|
|
|
|
|
|
1,400
|
|
Other
|
|
|
(26,117
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock at cost
|
|
|
(255,946
|
)
|
|
|
|
|
|
|
|
|
|
|
(682
|
)
|
|
|
|
|
|
|
(682
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,956
|
)
|
|
|
(1,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
12,079,820
|
|
|
|
123
|
|
|
|
27,221
|
|
|
|
(682
|
)
|
|
|
5,707
|
|
|
|
32,369
|
|
Stock option exercised, net of tax
|
|
|
20,000
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Issuance of stock in business
combinations
|
|
|
1,348,503
|
|
|
|
14
|
|
|
|
1,696
|
|
|
|
|
|
|
|
|
|
|
|
1,710
|
|
Purchase of treasury stock at cost
|
|
|
(244,054
|
)
|
|
|
|
|
|
|
|
|
|
|
(369
|
)
|
|
|
|
|
|
|
(369
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,371
|
)
|
|
|
(13,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
13,204,269
|
|
|
|
137
|
|
|
|
28,942
|
|
|
|
(1,051
|
)
|
|
|
(7,664
|
)
|
|
|
20,364
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
231
|
|
Issuance of stock in business
combinations
|
|
|
308,494
|
|
|
|
3
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
521
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,724
|
)
|
|
|
(7,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
13,512,763
|
|
|
$
|
140
|
|
|
$
|
29,691
|
|
|
$
|
(1,051
|
)
|
|
$
|
(15,388
|
)
|
|
$
|
13,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ACCESS
PLANS USA, INC.
FOR THE
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,724
|
)
|
|
$
|
(13,371
|
)
|
|
$
|
(1,956
|
)
|
Adjustments to reconcile net loss
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
774
|
|
|
|
1,754
|
|
|
|
2,323
|
|
Gain on sale of discontinued
operations
|
|
|
|
|
|
|
(480
|
)
|
|
|
|
|
Other non-cash items and loss on
disposal of fixed assets
|
|
|
453
|
|
|
|
94
|
|
|
|
176
|
|
Provision for losses on accounts
and notes receivable
|
|
|
39
|
|
|
|
198
|
|
|
|
1,012
|
|
Stock option expense
|
|
|
231
|
|
|
|
|
|
|
|
|
|
Goodwill impairment including tax
considerations
|
|
|
6,866
|
|
|
|
12,900
|
|
|
|
2,000
|
|
Deferred income taxes
|
|
|
|
|
|
|
1,146
|
|
|
|
(1,041
|
)
|
Changes in operating assets and
liabilities (net of business acquired):
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable, net
|
|
|
34
|
|
|
|
(149
|
)
|
|
|
(208
|
)
|
Income taxes receivable
|
|
|
724
|
|
|
|
(66
|
)
|
|
|
(859
|
)
|
Inventory
|
|
|
128
|
|
|
|
(188
|
)
|
|
|
1
|
|
Prepaid expenses
|
|
|
(25
|
)
|
|
|
(920
|
)
|
|
|
(97
|
)
|
Other assets
|
|
|
75
|
|
|
|
7
|
|
|
|
(139
|
)
|
Accounts payable
|
|
|
(289
|
)
|
|
|
(3
|
)
|
|
|
48
|
|
Accrued liabilities
|
|
|
(518
|
)
|
|
|
(299
|
)
|
|
|
243
|
|
Deferred fees
|
|
|
35
|
|
|
|
(107
|
)
|
|
|
(17
|
)
|
Income taxes payable
|
|
|
(78
|
)
|
|
|
(2
|
)
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
725
|
|
|
|
514
|
|
|
|
1,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in unrestricted
short-term investments
|
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
Increase in restricted short-term
investments
|
|
|
(1,170
|
)
|
|
|
(250
|
)
|
|
|
|
|
Purchase of fixed assets
|
|
|
(848
|
)
|
|
|
(336
|
)
|
|
|
(736
|
)
|
Cash used in business combination,
net of cash acquired
|
|
|
(1,045
|
)
|
|
|
(1,711
|
)
|
|
|
(1,859
|
)
|
Proceeds from sale of discontinued
operations
|
|
|
|
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(3,263
|
)
|
|
|
(1,822
|
)
|
|
|
(2,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
25
|
|
|
|
4
|
|
Payments of capital leases
|
|
|
(241
|
)
|
|
|
(620
|
)
|
|
|
(1,291
|
)
|
Purchase of treasury stock
|
|
|
|
|
|
|
(369
|
)
|
|
|
(682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(241
|
)
|
|
|
(964
|
)
|
|
|
(1,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(2,779
|
)
|
|
|
(2,272
|
)
|
|
|
(2,805
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
6,011
|
|
|
|
8,283
|
|
|
|
11,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
3,232
|
|
|
$
|
6,011
|
|
|
$
|
8,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes recovered (paid), net
|
|
$
|
998
|
|
|
$
|
(155
|
)
|
|
$
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
50
|
|
|
$
|
72
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets
through capital leases, net of retirements
|
|
$
|
|
|
|
$
|
507
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock in business
combination
|
|
$
|
521
|
|
|
$
|
1,710
|
|
|
$
|
1,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-in-trust
collected, net of refunds and claims paid
|
|
$
|
(5,585
|
)
|
|
$
|
663
|
|
|
$
|
2,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Nature of Business
Access Plans USA, Inc., formerly Precis, Inc. (the
Company) is a provider of innovative healthcare and
other membership service programs. The Company offers savings on
healthcare services throughout the United States to persons who
are under-insured. These savings are offered by accessing the
same preferred provider organizations (PPOs) that are utilized
by many insurance companies. These programs are sold primarily
through a network marketing strategy under the name Care
Entréetm
and through private label resellers. The Company also addresses
the needs of self-funded employers and groups by providing third
party administration services and access to a proprietary PPO
network.
Note 2
Summary of Significant Accounting Policies
Basis of Presentation. The consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles and include the
accounts of the Companys wholly-owned subsidiaries, The
Capella Group, Inc., Foresight, Inc. (discontinued and dissolved
in 2005), Care Financial, LLC (formerly Smart Care Insurance
Agency LLC) and Access HealthSource, Inc.
(AAI). All significant inter-company accounts and
transactions have been eliminated. Certain reclassifications
have been made to prior period financial statements to conform
to the current presentation of the financial statements.
Use of Estimates. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management of the Company to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Certain
significant estimates are required in the evaluation of goodwill
and intangible assets for impairment. Actual results could
differ from those estimates and such differences could be
material.
Revenue Recognition. Revenue
recognition varies based on source.
Healthcare Membership Revenues. The Company
recognizes its Care
Entréetm
program membership revenues, other than initial enrollment fees,
on each monthly anniversary date. Membership revenues are
reduced by the amount of estimated refunds. For members that are
billed directly, the billed amount is collected almost entirely
by electronic charge to the members credit cards,
automated clearinghouse or electronic check. The settlement of
those charges occurs within a day or two. Under certain private
label arrangements, the Companys private label partners
bill their members for the membership fees and the
Companys portion of the membership fees is periodically
remitted to the Company. During the time from the billing of
these private-label membership fees and the remittance to it,
the Company records a receivable from the private label partners
and records an estimated allowance for uncollectible amounts.
The allowance of uncollectible receivables is based upon review
of the aging of outstanding balances, the credit worthiness of
the private label partner and its history of paying the agreed
amounts owed.
Membership enrollment fees, net of direct costs, are deferred
and amortized over the estimated membership period that averages
eight to ten months. Independent marketing representative fees,
net of direct costs, are deferred and amortized over the term of
the applicable contract. Judgment is involved in the allocation
of costs to determine the direct costs netted against those
deferred revenues, as well as in estimating the membership
period over which to amortize such net revenue. The Company
maintains a statistical analysis of the costs and membership
periods as a basis for adjusting these estimates from time to
time.
AAI Third Party Administration. AAIs
principal sources of revenues include administrative fees for
third party claims administration, network provider fees for the
preferred provider network and utilization and management fees.
These fees are based on monthly or per member per month fee
schedules under specified contractual agreements. Revenues from
these services are recognized in the periods in which the
services are performed and when collection is reasonably assured.
F-8
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Rental Purchase and Club Membership
Revenues. Rental purchase and club membership
revenues are recognized in the month that the Companys
products and services have been delivered to its clients. Up
until December 2005, the Company sold rental purchase and club
membership programs on a wholesale basis to its clients.
Commission Expense. Commissions are
accrued in the month in which a member has enrolled in the Care
Entréetm
program. Commissions are only paid to the Companys
independent marketing representatives in the following month
after the related membership fees have been received by the
Company. The Company does not pay advanced commissions on
membership sales.
Cash-in-Trust. Cash-in-trust
consists of cash and cash equivalents held on behalf of members
who have escrowed funds with the Company. These funds are owned
by the members and are presented in the Companys
December 31, 2005 balance sheet as an asset under the
description
cash-in-trust
and as a liability under the description members
liabilities. These funds were returned to the members in
2006.
Cash and Cash Equivalents. Cash and
cash equivalents consist primarily of cash on deposit or cash
investments purchased with original maturities of three months
or less.
Unrestricted Short-Term
Investments. Short term investments with
original maturities of more than three months and less than one
year.
Restricted Short-Term
Investments. Short term investments, with
original maturities of one year or less, pledged to obtain
processing and collection arrangements for credit card and
automated clearing house payments.
Trade Accounts Receivable and
Notes Receivable. Accounts receivable
and notes receivable represent amounts due from private label
partners who market the Companys Care Entrée product
and bill the members directly. The Company does not charge
interest on any of its outstanding trade accounts receivable.
The Company does charge an immaterial amount of interest, at a
negotiated rate, on its notes receivable. If there is any doubt
about the collectability of a note, the Company ceases to accrue
interest on that note. The Company reviews accounts receivable
and notes receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. An allowance is
provided for any receivable balance where recovery is considered
to be doubtful. Any bad debt arising is written off as incurred.
The Company does not require collateral on its receivables.
Fixed Assets. Property and equipment
are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives of the
related assets for financial reporting purposes and principally
on accelerated methods for tax purposes. Leasehold improvements
are depreciated using the straight-line method over their
estimated useful lives or the lease term, whichever is shorter.
Ordinary maintenance and repairs are charged to expense as
incurred. Expenditures that extend the physical or economic life
of property and equipment are capitalized. The estimated useful
lives of property and equipment are as follows:
|
|
|
Furniture and Fixtures
|
|
7 years
|
Leasehold Improvements
|
|
Over the term of the lease, or
useful life,
whichever is shorter
|
Computers and Office Equipment
|
|
3-5 years
|
Software
|
|
3 years
|
Automobiles
|
|
5 years
|
The Company periodically reviews property and equipment whenever
events or changes in circumstances indicate that their carrying
amounts may not be recoverable or their depreciation or
amortization periods should be accelerated. When any such
impairment exists, the related assets will be written down to
their fair value.
The Company capitalizes both internal and external costs of
developing or obtaining computer software for internal use.
Costs incurred to develop internal-use software during the
application development stage are
F-9
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
capitalized, while data conversion, training and maintenance
costs associated with internal-use software are expensed as
incurred. As of December 31, 2006 and 2005, the net book
value of capitalized software costs was $324,000 and $210,000
respectively. Amortization expense related to capitalized
software was $118,000, $598,000 and $190,000 in fiscal years
2006, 2005 and 2004, respectively. At October 1, 2004, the
Company adjusted the estimated useful life for certain of its
internal-use software to a period ending June 30, 2005.
Depreciation expense was adjusted from that date in October 2004
forward, increasing depreciation expense in 2005 and 2004 by
$75,000 and $150,000 respectively.
Other Intangible Assets. Other
intangible assets consist of trademarks which have a have a
useful life of 50 years and can be renewed indefinitely.
Goodwill. Goodwill represents the
excess of acquisition costs over the fair value of net
identifiable assets acquired. Goodwill is not amortized, but it
is reviewed on an annual basis in order to determine if
impairment exists. Where necessary, an impairment charge
($6,866,000 in 2006 including tax considerations of $426,000,
$12,900,000 in 2005 and $2,000,000 in 2004) is recorded to
reflect managements assessment that, based upon current
and projected revenues, earnings and other factors, the
estimated fair value of the operating units goodwill did
not exceed its carrying value.
Income Taxes. Income taxes are provided
for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of
assets and liabilities for financial and income tax reporting.
The net deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will either
be taxable or deductible when the assets and liabilities are
recovered or settled.
Net Earnings per Share. Basic net
earnings per share is calculated by dividing the net earnings by
the weighted average number of shares outstanding for the year
without consideration for common stock equivalents. Diluted net
earnings per share gives effect to all dilutive potential common
shares outstanding for the year. Diluted earnings per share are
not considered when there is a net loss. For the years ended
December 31, 2006, 2005, and 2004 outstanding stock option
of 43,575, 25,375, and 54,864 shares, respectively, were
not included in the calculation of fully diluted earnings per
share because the inclusion would have been anti-dilutive. The
number of stock options and warrants that were considered
out-of-the-money
and thus excluded for purposes of the diluted earnings per share
calculation for the year ended December 31, 2006, 2005 and
2004 was 1,255,354 and 1,089,354 and 991,198 respectively.
Concentration of Credit Risk. The
Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant risk. The Company attempts to
mitigate this risk by transferring balances not immediately
needed into accounts secured with pledged U.S. government
securities of short maturity.
The Companys customers are not concentrated in any
specific geographic region or industry. No single customer
accounted for a significant amount of the Companys sales
and there were no significant accounts receivable from a single
customer. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
Fair Value of Financial
Instruments. The recorded amounts of cash,
short-term investments, accounts receivable, income taxes
receivable, notes receivable, accounts payable, accrued
liabilities, income taxes payable and capital lease obligations
approximate fair value because of the short-term maturity of
these items.
Stock-Based Compensation. Effective
January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123(R) using the modified
prospective transition method. In addition, the Securities and
Exchange Commission issued Staff Accounting
Bulletin No. 107 Share-Based
Payment (SAB 107) in March, 2005,
which provides supplemental SFAS 123(R) application
guidance based on the views of the SEC. Under the modified
prospective transition method, compensation cost recognized in
year ended December 31,2006 includes:
F-10
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based
on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, and
(b) compensation cost for all share-based payments granted
beginning January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of
SFAS 123(R). In accordance with the modified prospective
transition method, results for prior periods have not been
restated.
Recently Issued Accounting
Standards. In December 2004,
SFAS No. 123 Accounting for Stock-Based
Compensation was revised
(SFAS No. 123R). SFAS No. 123R
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions and requires that companies record compensation
expense for employee stock options awards.
SFAS No. 123R is effective for annual reports
beginning after June 15, 2005. The Company adopted
SFAS No. 123R on January 1, 2006 using the
modified prospective method. See Note 10.
On July 14, 2006, the FASB issued Interpretation
No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes, an Interpretation of
SFAS No. 109, Accounting for Income
Taxes. FIN 48 prescribes guidance to address
inconsistencies among entities with the measurement and
recognition in accounting for income tax positions for financial
statement purposes. Specifically, FIN 48 addresses the
timing of the recognition of income tax benefits. FIN 48
requires the financial statement recognition of an income tax
benefit when the company determines that it is
more-likely-than-not that the tax position will be ultimately
sustained. FIN 48 is effective for fiscal years beginning
after December 15, 2006. Upon adoption of FIN 48, the
cumulative effect will be reported as an adjustment to the
opening balance of retained earnings at January 1, 2007.
The Company does not believe that adoption of FIN 48 will
have a material impact on the Companys financial
statements.
On September 15, 2006, the FASB issued
SFAS No. 157, Fair Value Measurements,
which provides enhanced guidance for using fair value
measurements in financial reporting. While the standard does not
expand the use of fair value in any new circumstance, it has
applicability to several current accounting standards that
require or permit entities to measure assets and liabilities at
fair value. This standard defines fair value, establishes a
framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. Application of this
standard is required beginning in 2008. Management is currently
assessing what impact, if any, the application of this standard
could have on the Companys financial statements.
Note 3
Business Combination
On June 18, 2004, the Company acquired AAI for a purchase
price of $8,244,000. The total includes cash payments of
$4,232,000 and distribution of 2,145,483 shares with a
value of $3,632,000 paid to the seller and acquisition costs of
$380,000 through December 31, 2006. AAI completes the
Companys healthcare offering which is to provide
individuals and employee group markets access to preferred
provider networks, medical escrow accounts and third party
administration capabilities to adjudicate and pay for the
medical claims.
F-11
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following condensed results of operations presents the
Companys operating results prepared on a pro-forma basis,
as if the acquisition of AAI had occurred at the beginning of
2004.
|
|
|
|
|
|
|
For the Year
|
|
|
|
Ended December 31,
|
|
Dollars in Thousands
|
|
2004 (Unaudited)
|
|
|
Revenues
|
|
$
|
40,292
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,710
|
)
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
Basic
|
|
|
|
|
From continuing operations
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
From discontinued operations
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
Diluted
|
|
|
|
|
From continuing operations
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
From discontinued operations
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,329,018
|
|
|
|
|
|
|
Diluted
|
|
|
12,329,018
|
|
|
|
|
|
|
Mr. Apodaca, AAIs Chief Operating Officer, has an
agreement with Ready One Industries, formerly National Center
for Employment of the Disabled (NCED). NCED is the
party from whom the Company acquired AAI in June 2004. This
agreement between Mr. Apodaca and NCED predates the
Companys acquisition of AAI and entitles him to 10% of the
proceeds (stock or cash) from the sale of AAI. Pursuant to this
agreement, as of December 31, 2006, Mr. Apodaca has
received 214,548 of the Companys shares and is entitled to
receive $223,000 from NCED.
Note 4
Accounts and Notes Receivable
During 2006 and 2005, the Company held notes receivable with
certain private label clients. Accounts and notes receivable are
comprised of the following at December 31,
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
Accounts receivable
|
|
$
|
276
|
|
|
$
|
320
|
|
Allowance for doubtful accounts
receivable
|
|
|
(86
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
190
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
|
154
|
|
|
|
206
|
|
Allowance for doubtful notes
receivable
|
|
|
(154
|
)
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
Notes receivable, net
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable, net
|
|
$
|
190
|
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
Based on the information available to the Company, the Company
believes its allowances for both doubtful accounts and notes
receivable are adequate. However, actual write-offs might exceed
the recorded allowance. The Company has recognized bad debt
expense of $39,000, $198,000 and $1,012,000 for 2006, 2005, and
2004, respectively.
F-12
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 5
Prepaid Expenses
Prepaid expenses are comprised of the following at
December 31,
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
Provider network premiums
|
|
$
|
435
|
|
|
$
|
643
|
|
Member services
|
|
|
400
|
|
|
|
|
|
Insurance
|
|
|
511
|
|
|
|
484
|
|
Postage
|
|
|
50
|
|
|
|
134
|
|
Service contracts
|
|
|
10
|
|
|
|
57
|
|
Rent
|
|
|
|
|
|
|
31
|
|
Other
|
|
|
86
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,492
|
|
|
$
|
1,467
|
|
|
|
|
|
|
|
|
|
|
Note 6
Fixed Assets
Fixed assets are comprised of the following at December 31,
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
Furniture and fixtures
|
|
$
|
23
|
|
|
$
|
311
|
|
Leasehold improvements
|
|
|
210
|
|
|
|
169
|
|
Computers and office equipment
|
|
|
1,559
|
|
|
|
1,770
|
|
Software
|
|
|
1,144
|
|
|
|
996
|
|
Automobiles
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,972
|
|
|
|
3,246
|
|
Accumulated depreciation and
amortization
|
|
|
(2,048
|
)
|
|
|
(2,122
|
)
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
924
|
|
|
$
|
1,124
|
|
|
|
|
|
|
|
|
|
|
Note 7
Goodwill and Other Intangible Assets
The change in the carrying amount of the Companys
intangible assets for the years ended December 31, 2006 and
2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
Goodwill
|
|
|
Trademark
|
|
|
Total
|
|
|
Intangible assets, balance as of
January 1, 2005
|
|
$
|
22,781
|
|
|
$
|
|
|
|
$
|
22,781
|
|
Contingent consideration paid
|
|
|
4,591
|
|
|
|
|
|
|
|
4,591
|
|
Goodwill impairment charge
|
|
|
(13,040
|
)
|
|
|
|
|
|
|
(13,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, balance as of
December 31, 2005
|
|
|
14,332
|
|
|
|
|
|
|
|
14,332
|
|
Goodwill impairment charge
|
|
|
(6,440
|
)
|
|
|
|
|
|
|
(6,440
|
)
|
Tax impact on goodwill impairment
charge
|
|
|
(426
|
)
|
|
|
|
|
|
|
(426
|
)
|
Acquisition of trademark
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, balance as of
December 31, 2006
|
|
$
|
7,466
|
|
|
$
|
5
|
|
|
$
|
7,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006, goodwill decreased
by $4,066,000 including tax considerations of $426,000 as the
result of an impairment charge primarily due to the decline in
the number of lives covered under plans that are administered by
AAI. In addition, goodwill for Capella decreased by $2,800,000
as the result of an impairment charge due to the continuing
decline in members and revenue.
F-13
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended December 31, 2005, goodwill increased
by $4,591,000 due to the final payments made to acquire AAI.
Further, the $13,040,000 was primarily for a impairment of
$12,900,000 related to Capella.
To the extent that, in the future, the Companys revenue
and earnings estimates change or the Companys stock price
decreases, further goodwill write-downs may occur.
Note 8
Capital Leases
The Company has several capital leases for office equipment with
a net book value of $63,000 and $451,000 as of December 31,
2006 and 2005, respectively. These lease purchases have been
capitalized at the present value of future cash payments
discounted using an interest rate of 8.5% for both years and the
assets are being depreciated over their estimated useful lives.
The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of
the net lease payments as of December 31, 2006:
|
|
|
|
|
Dollars in Thousands
|
|
Amount
|
|
|
2007
|
|
$
|
273
|
|
2008
|
|
|
51
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
324
|
|
Less: Executory costs
|
|
|
(25
|
)
|
Less: Interest
|
|
|
(61
|
)
|
|
|
|
|
|
Present value minimum lease
payments
|
|
|
238
|
|
Current portion of capital lease
obligations
|
|
|
190
|
|
|
|
|
|
|
Capital lease obligations, net of
current portion
|
|
$
|
48
|
|
|
|
|
|
|
The following is a schedule of capital leases in effect as of
December 31:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
Capitalized lease assets
|
|
$
|
593
|
|
|
$
|
759
|
|
Accumulated amortization
|
|
|
(530
|
)
|
|
|
(308
|
)
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
63
|
|
|
$
|
451
|
|
|
|
|
|
|
|
|
|
|
Capitalized lease obligation
|
|
$
|
238
|
|
|
$
|
479
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005 and 2004,
amortization of capitalized lease assets in the amounts of
$386,000, $649,000 and $1,344,000 respectively, were included in
depreciation and amortization expense. The fourth quarter of
2006 amortization expense included an impairment charge of
$151,000 related to the discontinued use of certain leased
equipment due to the Companys outsourcing initiative.
F-14
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 9
Accrued Liabilities
Accrued Liabilities are comprised of the following at
December 31,
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
Accrued acquisition costs
|
|
|
162
|
|
|
|
127
|
|
Accrued payroll and benefits
|
|
|
326
|
|
|
|
442
|
|
Accrued professional fees
|
|
|
197
|
|
|
|
254
|
|
Unrecoverable claims accrual
|
|
|
116
|
|
|
|
167
|
|
Accrued foresight club premiums
|
|
|
|
|
|
|
123
|
|
Other
|
|
|
657
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,458
|
|
|
$
|
1,590
|
|
|
|
|
|
|
|
|
|
|
Note 10
Stockholders Equity
Pursuant to its Certificate of Incorporation, the Company is
authorized to issue up to 102,000,000 shares of capital
stock, consisting of 100,000,000 shares of common stock,
$0.01 par value per share (the Common Stock),
and 2,000,000 shares of preferred stock, $1.00 par
value per share (the Preferred Stock). Preferred
stock may be issued in series with rights and preferences as
determined by the board of directors.
On July 8, 2004, the Companys Board of Directors
authorized the repurchase of up to 500,000 shares of the
Companys common stock through open market or private
purchase transactions over the next year depending on prevailing
market conditions. Through December 31, 2004, the Company
had purchased 255,946 shares under this authorization for a
total consideration of $682,000 at a weighted average price of
$2.66 per share. In 2005, the Company purchased an
additional 244,054 shares for a total consideration of
$369,000 at a weighted average price of $1.51 per share.
Note 11
Common Stock Options
Stock-Based Compensation. Effective
January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123(R) using the modified
prospective transition method. In addition, the Securities and
Exchange Commission issued Staff Accounting
Bulletin No. 107 Share-Based
Payment (SAB 107) in March, 2005,
which provides supplemental SFAS 123(R) application
guidance based on the views of the SEC. Under the modified
prospective transition method, compensation cost recognized in
2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123, and (b) compensation cost for all
share-based payments granted beginning January 1, 2006,
based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R). In accordance with the
modified prospective transition method, results for prior
periods have not been restated.
The Binomial Lattice option-pricing model was used to estimate
the option fair values. The option-pricing model requires a
number of assumptions, of which the most significant are,
expected stock price volatility, the expected pre-vesting
forfeiture rate and the risk-free interest rate. Expected
volatility was calculated based upon actual historical stock
price movements over the most recent periods ending
December 31, 2006 equal to the expected option term.
Expected pre-vesting forfeitures were estimated based on actual
historical pre-vesting forfeitures over the most recent periods
ending December 31, 2006 for the expected option term. The
risk-free interest rate is based on the interest rate of
zero-coupon United States Treasury securities over the expected
option term. The Companys prior pro-forma presentations
used the Black-Scholes option pricing model. If the Company had
continued to use the Black-Scholes model the effect on the
recorded expense would have been immaterial.
F-15
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to the adoption of SFAS 123(R), the Company presented
any tax benefits of deductions resulting from the exercise of
stock options within operating cash flows in the consolidated
statements of cash flow. SFAS 123(R) requires tax benefits
resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits)
to be classified and reported as both an operating cash outflow
and a financing cash inflow upon adoption of SFAS 123(R).
For the years ended December 31, 2005 and 2004, the Company
applied the intrinsic value method of accounting for stock
options as prescribed by APB 25. Since all options granted
during this period had an exercise price equal to the closing
market price of the underlying common stock on the grant date,
no compensation expense was recognized. If compensation expense
had been recognized based on the estimated fair value of each
option granted in accordance with the provisions of
SFAS 123R, the Companys net loss would have been
reduced to the following pro-forma amounts:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2005
|
|
|
2004
|
|
|
Loss from continuing operations
|
|
$
|
(13,229
|
)
|
|
$
|
(1,657
|
)
|
Gain on sale of operations, net of
taxes
|
|
|
300
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(442
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(13,371
|
)
|
|
|
(1,956
|
)
|
Deduct: Total stock-based
compensation expense determined under fair value based method
for all awards, net of related tax effects
|
|
|
(361
|
)
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(13,732
|
)
|
|
$
|
(2,272
|
)
|
|
|
|
|
|
|
|
|
|
If compensation expense had been recognized based on the
estimated fair value of each option granted in accordance with
the provisions of SFAS 123R, net loss per share would have
been reduced to the following pro-forma amounts:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.06
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
From sale of and discontinued
operations
|
|
$
|
(.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Basic pro-forma
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.09
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
From sale of and discontinued
operations
|
|
$
|
(.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Diluted as
reported
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.06
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
From sale of and discontinued
operations
|
|
$
|
(.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Diluted pro-forma
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(1.09
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
From sale of and discontinued
operations
|
|
$
|
(.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model. The intent
of the Black-Scholes option valuation model is to provide
estimates of fair values of traded
F-16
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options that have no vesting restrictions and are fully
transferable. The following assumptions used for grants in 2005
and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Risk free interest rate
|
|
|
4.23
|
%
|
|
|
3.94
|
%
|
Volatility rate
|
|
|
72
|
%
|
|
|
48
|
%
|
Dividend yield
|
|
|
None
|
|
|
|
None
|
|
Option expected lives
|
|
|
5 yrs
|
|
|
|
5 yrs
|
|
Stock-Based Compensation Plans. As of
December 31, 2006, the Company has two stock-based
compensation plans as described below.
In November 1999, the Companys Board of Directors restated
and adopted the 1999 Stock Option Plan with an effective date of
November 30, 1999. The Company has reserved
700,000 shares of the Companys common stock for
issuance upon the exercise of options granted under this plan.
Under the 1999 Stock Option Plan, the Board can determine the
date on which options can vest and become exercisable as well as
the term of the options granted.
In July 2002, the Companys stockholders adopted the 2002
IMR Stock Option Plan with an effective date of July 29,
2002. The Company has reserved 500,000 shares of its common
stock for issuance upon the exercise of options granted under
this plan. Under the 2002 IMR Stock Option Plan, the Board can
determine the date on which options can vest and become
exercisable as well as the term of the options granted. On
January 29, 2003, the Board approved a motion effective
June 1, 2003 for the discontinuance of any further stock
option grants under the 2002 IMR Stock Option Plan.
In July 2002, the Companys stockholders adopted the 2002
Non Employee Stock Option Plan with an effective date of
July 29, 2002. The Company has reserved 500,000 shares
of its common stock for issuance upon the exercise of options
granted under this plan. Under the 2002 Non Employee Stock
Option Plan, the Board can determine the date on which options
can vest and become exercisable as well as the term of the
options granted.
In connection with the Companys initial public offering,
the Company agreed to sell to the underwriter warrants
exercisable for the purchase of 100,000 shares of common
stock for $9.00 per share during a five-year period. The
holders of these warrants had the right through the expiration
date, to include such warrants and the shares of common stock
issuable upon their exercise in any registration statement or
amendment to a registration statement of the Company at no
expense to such holders. As of December 31, 2006, 16,500 of
these warrants had been exercised at a per share price of $9.00.
All warrants expired February 10, 2005.
Amendments to the Stock-Based Compensation
Plans. The Company has made amendments to the
stock-based compensation plans as described below.
On June 29, 2003, the Companys stockholders approved
an amendment to increase the number of shares reserved under the
Companys 1999 Stock Option Plan from 700,000 to
1,400,000 shares of common stock for issuance upon the
exercise of options under this plan. Under the 1999 Stock Option
Plan, the Board can determine the date on which options can vest
and become exercisable as well as the term of the option
granted. As of December 31, 2006, the number of options
remaining available for future issuance under the 1999 Stock
Option Plan is 579,000.
On November 8, 2006 the Board of Directors adopted and
approved an amendment of the 2002 Non Employee Stock Option
Plan. They increased the number of common stock shares reserved
for issuance upon the exercise of options granted under the Plan
from 500,000 to 1,500,000 shares and the expiration date of
the Plan was extended from March 31, 2007 to March 31,
2010. The companys stockholders approved this amendment on
January 30, 2007.
F-17
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2006 Stock Option Information. In
November 2006, the Board of Directors granted 310,000 options to
Company officers. These stock options have an exercise price of
$1.76, a five year life and vest in equal portions over four
years. The Company recognized about $16,000 of expense in 2006
related to these grants and expects to recognize a total
additional compensation expense of approximately $200,000 over
the four year vesting period of these options.
In November 2006, the Board of Directors voted to reprice all
outstanding stock options effective December 27, 2006 with
an exercise price greater than $2.00 per share held by the
Companys current directors and officers. As a result, the
exercise price of outstanding options on 649,000 shares,
subject to repricing, was reduced from a range of $2.24 to
$9.50 per share to $2.00 per share. There was no
change in the number of shares subject to each repriced stock
option, vesting, expiration date, or other terms. The Company
expects to recognize a total additional compensation expense of
$158,000 over the remaining average vesting life of these
options of 1.3 years. Approximately $127,000 was recognized
in the fourth quarter of 2006, as a result of repricing
currently vested options, and the remaining $31,000 will be
recognized in 2007 and 2008.
The total outstanding stock options held by Directors as of
December 31, 2006 were for 475,000 shares with a
weighted average exercise price of $1.99. During 2006, the
Companys executives and directors exercised no stock
options and forfeited 184,000 stock options. Compensation costs
of $231,000 was included in general and administrative expenses.
The tax benefit related to compensation costs is $85,000. The
changes in outstanding stock options for the year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Fair
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
Outstanding at beginning of year
|
|
|
1,301,354
|
|
|
$
|
3.48
|
|
|
$
|
1.58
|
|
Granted
|
|
|
310,000
|
|
|
|
1.76
|
|
|
|
0.95
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(184,000
|
)
|
|
|
4.13
|
|
|
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,427,354
|
|
|
|
2.21
|
|
|
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested (exercisable)
|
|
|
832,854
|
|
|
|
2.45
|
|
|
|
1.58
|
|
Non-Vested
|
|
|
594,500
|
|
|
|
1.87
|
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,427,354
|
|
|
|
2.21
|
|
|
|
1.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and exercisable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercise
|
|
Price Range
|
|
At
12/31/06
|
|
|
Life (Years)
|
|
|
Price
|
|
|
12/31/06
|
|
|
Price
|
|
|
$1.05 to $1.75
|
|
|
212,000
|
|
|
|
3.7
|
|
|
$
|
1.32
|
|
|
|
137,000
|
|
|
$
|
1.29
|
|
$1.76 to $3.55
|
|
|
1,113,066
|
|
|
|
2.9
|
|
|
|
2.07
|
|
|
|
605,566
|
|
|
|
2.22
|
|
$3.56 to $5.25
|
|
|
74,550
|
|
|
|
1.2
|
|
|
|
4.39
|
|
|
|
62,550
|
|
|
|
4.45
|
|
$5.26 to $9.50
|
|
|
27,738
|
|
|
|
0.2
|
|
|
|
8.65
|
|
|
|
27,738
|
|
|
|
8.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,427,354
|
|
|
|
2.9
|
|
|
|
2.21
|
|
|
|
832,854
|
|
|
|
2.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005 Stock Option Information. During
the year ended December 31, 2005, 224,000 stock options
were granted to the Companys officers and directors. These
stock options had a weighted average exercise price of $1.37 and
were immediately exercisable. The total outstanding stock
options held by Directors as of December 31, 2005 were for
622,000 shares with a weighted average exercise price of
$3.71. The Companys directors exercised 10,000 stock
options in December 2005. The Companys officers and
directors forfeited stock options on 295,000 during the year
ended December 31, 2005. The Company adopted the fair value
recognition provisions of SFAS 123(R) effective
January 1, 2006, using the modified prospective transition
method and, therefore, no compensation costs were recorded in
2005. The changes in outstanding stock options for the year are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Options
|
|
|
Price
|
|
|
Fair Value
|
|
|
Outstanding at beginning of year
|
|
|
1,489,764
|
|
|
$
|
4.01
|
|
|
$
|
1.78
|
|
Granted at market value
|
|
|
224,000
|
|
|
|
1.37
|
|
|
|
1.02
|
|
Exercised
|
|
|
(20,000
|
)
|
|
|
1.25
|
|
|
|
0.55
|
|
Forfeited
|
|
|
(392,410
|
)
|
|
|
4.39
|
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,301,354
|
|
|
|
3.48
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
842,229
|
|
|
|
3.88
|
|
|
|
1.79
|
|
Non-Vested
|
|
|
459,125
|
|
|
|
4.18
|
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,301,354
|
|
|
|
3.48
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and exercisable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercise
|
|
Price Range
|
|
At
12/31/05
|
|
|
Life (Years)
|
|
|
Price
|
|
|
12/31/05
|
|
|
Price
|
|
|
$1.05 to $1.75
|
|
|
212,000
|
|
|
|
4.8
|
|
|
$
|
1.32
|
|
|
|
112,000
|
|
|
$
|
1.27
|
|
$1.76 to $3.55
|
|
|
610,566
|
|
|
|
3.5
|
|
|
|
2.80
|
|
|
|
366,816
|
|
|
|
2.85
|
|
$3.56 to $5.25
|
|
|
348,550
|
|
|
|
3.4
|
|
|
|
4.34
|
|
|
|
234,800
|
|
|
|
4.54
|
|
$5.26 to $9.50
|
|
|
130,238
|
|
|
|
2.4
|
|
|
|
7.90
|
|
|
|
128,613
|
|
|
|
7.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,301,354
|
|
|
|
3.6
|
|
|
|
3.48
|
|
|
|
842,229
|
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004 Stock Option Information. The
total outstanding stock options held by Directors as of
December 31, 2004 was 498,000 with a weighted average
exercise price of $4.29. The Companys directors did not
exercise
and/or
forfeit any stock options for the year ended December 31,
2004. The Company adopted the fair value recognition provisions
of SFAS 123(R) effective January 1, 2006, using the
modified prospective transition method and, therefore, no
compensation costs were recorded in 2004. The changes in
outstanding stock options for the year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Exercise
|
|
|
Average
|
|
|
|
Options
|
|
|
Price
|
|
|
Fair Value
|
|
|
Outstanding at beginning of year
|
|
|
991,014
|
|
|
$
|
5.73
|
|
|
$
|
1.88
|
|
Granted at market value
|
|
|
845,500
|
|
|
|
3.20
|
|
|
|
1.47
|
|
Exercised
|
|
|
(8,750
|
)
|
|
|
3.55
|
|
|
|
1.55
|
|
Forfeited
|
|
|
(338,000
|
)
|
|
|
7.02
|
|
|
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,489,764
|
|
|
|
4.01
|
|
|
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
702,514
|
|
|
|
4.45
|
|
|
|
2.01
|
|
Non-Vested
|
|
|
787,250
|
|
|
|
3.62
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,489,764
|
|
|
|
4.01
|
|
|
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding and exercisable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercise
|
|
Price Range
|
|
At
12/31/04
|
|
|
Life (Years)
|
|
|
Price
|
|
|
12/31/04
|
|
|
Price
|
|
|
$1.25 to $1.87
|
|
|
40,000
|
|
|
|
1.0
|
|
|
$
|
1.25
|
|
|
|
40,000
|
|
|
$
|
1.25
|
|
$2.24 to $3.55
|
|
|
652,566
|
|
|
|
4.4
|
|
|
|
2.84
|
|
|
|
300,441
|
|
|
|
2.95
|
|
$3.82 to $5.25
|
|
|
630,460
|
|
|
|
4.1
|
|
|
|
4.35
|
|
|
|
216,710
|
|
|
|
4.81
|
|
$5.78 to $8.51
|
|
|
137,738
|
|
|
|
3.4
|
|
|
|
7.61
|
|
|
|
130,238
|
|
|
|
7.72
|
|
$9.37 to $9.50
|
|
|
29,000
|
|
|
|
2.2
|
|
|
|
9.50
|
|
|
|
15,125
|
|
|
|
9.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,489,764
|
|
|
|
4.0
|
|
|
|
4.01
|
|
|
|
702,514
|
|
|
|
4.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12
Income Taxes
The income tax provision for the years ended December 31,
2006, 2005 and 2004 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current provision
|
|
$
|
(465
|
)
|
|
$
|
(916
|
)
|
|
$
|
306
|
|
Deferred provision
|
|
|
415
|
|
|
|
1,146
|
|
|
|
(1,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(50
|
)
|
|
$
|
230
|
|
|
$
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit) from
continuing operations
|
|
$
|
(50
|
)
|
|
$
|
41
|
|
|
$
|
(650
|
)
|
Tax provision (benefit) from sale
and discontinued operations
|
|
$
|
|
|
|
$
|
189
|
|
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income
taxes
|
|
$
|
(50
|
)
|
|
$
|
230
|
|
|
$
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income tax assets and liabilities as of
December 31, 2006 and 2005 are comprised of:
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
2005
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,047
|
|
|
$
|
739
|
|
Allowance for doubtful accounts
and notes
|
|
|
89
|
|
|
|
85
|
|
Depreciation and impairment of
fixed assets
|
|
|
41
|
|
|
|
61
|
|
Accrued expenses
|
|
|
201
|
|
|
|
254
|
|
Valuation allowance
|
|
|
(862
|
)
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
516
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
516
|
|
|
|
544
|
|
Depreciation
|
|
|
|
|
|
|
|
|
Intangible asset basis differences
|
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
516
|
|
|
|
1,023
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, current
|
|
$
|
|
|
|
$
|
|
|
Deferred tax asset, non-current
|
|
|
387
|
|
|
|
275
|
|
Deferred tax liability, current
|
|
|
(387
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, the Company had federal and
state net operating loss (NOL) carryforwards of
approximately $3,081,000 and $2,174,000, respectively, expiring
at various dates through 2020. The NOL carryforwards after tax
effects of 34% result in a deferred tax asset of $1,047,000 and
$739,000 as of December 31, 2006 and 2005, respectively.
Internal Revenue Code Section 382 places a limitation on
the amount of taxable income which can be offset by net
operating loss (NOL) carryforwards after a change in
control (generally greater than 50% change in ownership) of a
loss corporation. Generally, after a change in control, a loss
corporation cannot deduct NOL carryforwards in excess of the
Section 382 limitation. Due to these change in
ownership provisions, utilization of NOL and tax credit
carryforwards may be subject to an annual limitation regarding
their utilization against taxable income in future periods. The
Companys ability to use these losses prior to year-end
2006 to offset future taxable income is subject to an annual
limitation of approximately $192,000 under the Internal Revenue
Code.
The Companys effective income tax rate for continuing
operations differs from the U.S. federal statutory rate as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
|
|
(34.0
|
)%
|
Permanent differences
|
|
|
31.3
|
%
|
|
|
(32.4
|
)%
|
|
|
0.0
|
%
|
State rate
|
|
|
6.4
|
%
|
|
|
(0.9
|
)%
|
|
|
8.1
|
%
|
Increase in valuation allowance
|
|
|
(5.3
|
)%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Other
|
|
|
0.8
|
%
|
|
|
(0.8
|
)%
|
|
|
(1.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8
|
)%
|
|
|
(0.1
|
)%
|
|
|
(27.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 13
Related Party Transactions
Mr. Apodaca, AAIs Chief Operating Officer, has an
agreement with Ready One Industries, formerly National Center
for Employment of the Disabled (NCED). NCED is the
party from whom the Company acquired AAI in June 2004. This
agreement between Mr. Apodaca and NCED predates the
Companys acquisition of AAI and entitles him to 10% of the
proceeds (stock or cash) from the sale of AAI. Pursuant to this
agreement, as of December 31, 2006, Mr. Apodaca has
received 214,548 of the Companys shares and is entitled to
receive $223,000 from NCED.
The office space we lease for our AAI operation in El Paso
was owned by NCED through January 2007. Total payments of
$169,000 were paid to NCED under this agreement in 2006. AAI
also earned revenue from NCED of $729,000 and $684,000 in 2005
and 2006, respectively.
Note 14
Commitments and Contingencies
Legal Proceedings. In the normal course
of business, the Company may become involved in litigation or in
settlement proceedings relating to claims arising out of the
Companys operations. Except as described below, the
Company is not a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, could have a
material adverse effect on the Companys business,
financial condition and results of operations.
Kirk, et al v Precis, Inc. and David
May. On September 8, 2003, the case styled
Robert Kirk, Individually and D/B/A US Asian Advisors,
LLC, Eugene M. Kennedy, P.A., Stewart & Associates,
CPAs, P.A. and Kimberly Decamp, Plaintiffs vs. Precis,
Inc. and David May, Defendants was initiated in the
District Court of Tarrant County, Texas, Case No. 236 201
468 03. The plaintiffs Robert Kirk (doing business as US Asian
Advisors, LLC or U.S. Asian Capital Investors, LLC),
Kimberly Decamp and Stewart & Associates, CPAs,
P.A. held warrants exercisable for the purchase of 9,000, 48,000
and 4,000 shares, respectively, of the Companys
common stock for $9.00 per share on or before
February 8, 2005. The plaintiffs Eugene M. Kennedy, P.A.
and Kimberly Decamp held stock options that expired on
June 30, 2003, and that were exercisable for 15,000 and
170,000 shares, respectively, of the Companys common
stock for $9.37 per share. David May served as the
Companys Secretary and Vice President and General Counsel
through January 5, 2004.
The plaintiffs alleged that they were not allowed to exercise
their stock options and warrants in May 2003 due to actions and
inactions of Mr. May and that these actions and inactions
constituted fraud, misrepresentation, negligence and legal
malpractice. All communications with Mr. May were through
the plaintiffs broker, Burt Martin Arnold Securities,
Inc. Plaintiffs sought damages equal to the difference between
the exercise price of the stock options or warrants and the
market value of the Companys common stock on May 7,
2002 (presumably the closing sale price of $15.75) or an
aggregate sum of $1,592,050, plus exemplary damages and costs.
On July 13, 2005, the court entered a judgment in the
Companys favor, ordering that the plaintiffs take nothing
by way of their lawsuit. The order set aside a previous jury
verdict in favor of the plaintiffs. The trial courts
judgment was affirmed by the Court of Appeals for the Second
Judicial District of Texas. The plaintiffs may appeal the
appellate courts decision to the Texas Supreme Court.
While the Company cannot offer any assurance as to the outcome
of the appeal, the Company believes that there exists no basis
on which the judgment in the Companys favor will be
overturned.
Zermeno v Precis The case styled Manuela
Zermeno, individually and on behalf of the general public; and
Juan A. Zermeno, individually and on behalf of the general
public v Precis, Inc., an Oklahoma corporation and Does 1
through 100, inclusive was filed on August 14,
2003 in the Superior Court of the State of California for the
County of Los Angeles.
F-22
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A second case styled California Foundation for Business
Ethics, Inc., a California non-profit corporation,
v Precis, Inc., and Does 1 through 100, inclusive
was filed on September 9, 2003, in the Superior Court
of the State of California for the County of Los Angeles.
The two above cases were removed to the United States District
Court for the Central District of California and consolidated by
order of the court, on December 4, 2003.
The Zermeno plaintiffs are former members of the Care
Entréetm
discount health care program who allege that they (for
themselves and for the general public) are entitled to
injunctive, declaratory, and equitable relief. Plaintiffs
First Amended Complaint set forth three distinct claims under
California law. Plaintiffs first cause of action alleged
that the operation of the Companys Care
Entréetm
program violates Health and Safety Code §445
(Section 445) that governs medical referral
services. Next, Plaintiffs alleged that they are entitled to
damages under Civil Code §§1812.119 and 1812.123,
which are part of the broader statutory scheme governing the
operation of discount buying organizations, Civil Code 1812. 100
et. Seq. (Section 1812.100).
Plaintiffs third cause of action sought relief under
Business and Professions Code § 17200,
Californias Unfair Competition Law
(Section 17200).
The Company fully settled all the claims brought by the
California Foundation for Business Ethics, Inc. With the Zermeno
plaintiffs, the Company settled the causes of action related to
Civil Code §§ 1812.100. The claim under
Section 445 and the related claim under Section 17200
remain pending and have been assigned to the Superior Court of
California, Los Angeles County under case number BC 300788. A
negative result in this case would have a material affect on the
Companys financial condition and would limit the
Companys ability (and that of other healthcare discount
programs) to do business in California.
Management believes that the Company has complied with all
applicable statues and regulations in the state of California.
Although management believes the Plaintiffs claims are
without merit, the Company cannot provide any assurance
regarding the outcome or results of this litigation.
State of Texas v The Capella Group, Inc.
et al. The State of Texas filed a lawsuit
against our subsidiary, The Capella Group, Inc. d/b/a Care
Entrée, and Equal Access Health, Inc. (including various
names under which Equal Access Health, Inc. does business) on
April 28, 2005. Equal Access Health is a third party
marketer of our discount medical card programs, but is otherwise
not affiliated with our subsidiaries or us. The lawsuit alleges
that Care Entrée, directly and through at least one other
party that resells Care Entrées services to the
public, violated certain provisions of the Texas Deceptive Trade
Practices -Consumer Protection Act. The lawsuit seeks, among
other things, injunctive relief, unspecified monetary penalties
and restitution. We believe that the allegations are without
merit and are vigorously defending this lawsuit. The lawsuit was
filed in the
98th District
Court of Travis County, Texas as case number GV501264. We have
always insisted that our programs be sold in an honest and
forthright manner and have worked to protect the interests of
consumers in Texas and all other states. Unfavorable findings in
this lawsuit could have a material adverse effect on our
financial condition and results of operations. No assurance can
be provided regarding the outcome or results of this litigation.
Investigation of National Center for Employment of the
Disabled, Inc. and Access HealthSource, Inc.
(AAI). In June 2004 the Company
acquired AAI and its subsidiaries from National Center for
Employment of the Disabled, Inc. (now known as Ready One
Industries, NCED). Robert E. Jones, the C.E.O. of
NCED, was elected to and served on the Companys Board of
Directors until his March 2006 resignation. Frank Apodaca, the
President and C.E.O. of AAI served as Chief Administrative
Officer for NCED. He also served on the Board of Directors of
NCED until his resignation in March 2006. Until July 2006, his
employment agreement with the Company allowed him to spend up to
20% of his time on matters related to NCEDs operations.
NCED is one of the Companys greater than 10% shareholders
as a result of shares it received from the Companys
acquisition of AAI.
F-23
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NCED provides services to the United States government under
various contracts that were awarded to NCED under a federal
program that encouraged the use of facilities whose work force
is composed of 75% or more disabled workers. In 2006,
investigations into NCED revealed that it may not have employed
a sufficient number of disabled workers to meet the
programs requirements. Although the Company believes that
AAI was not involved in the contracting for NCEDs federal
contracts and was not involved in NCEDs operations either
before or after the Companys acquisition of AAI, the
investigation of NCED may lead to allegations that either AAI or
Mr. Apodaca was involved in inappropriate or illegal
activities. The investigation of NCED may also lead to other
investigations of AAIs contracting processes and
operations. There are currently no legal actions related to this
matter pending against AAI or Mr. Apodaca. Because of these
investigations and any related allegations or charges and the
associated unfavorable publicity, AAI may lose its local
government clients. The loss of these clients and the resulting
loss of revenue could have a material adverse effect on the
Companys financial condition and result of operations.
Restricted Short-Term Investments. In
order to arrange for the processing and collection of credit
card and automated clearing house payments to it from its
customers, the company has pledged cash and short-term
investments in the aggregate amounts of $1,420,000 and $250,00
as of December 31, 2006 and 2005, respectively.
Employment Agreements. We have entered
into employment agreements with only two of our executive
officers. If both of them terminate without cause or through a
change of ownership, the Company may be obligated to pay them
approximately $495,000 in the aggregate.
Note 15
Operating Leases
The Company has leased various office spaces through
December 15, 2011. Future lease commitments on this space
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than 5
|
|
|
|
|
Dollars in Thousands
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
|
|
Total operating leases on real
property, net of sublease income
|
|
$
|
2,104
|
|
|
$
|
402
|
|
|
$
|
924
|
|
|
$
|
778
|
|
|
$
|
|
|
|
|
|
|
The office space we lease for our AAI operation in El Paso
was owned by an affiliated company through January 2007. Total
payments of $169,000 were paid to NCED under this agreement in
2006.
Management expects that leases currently in effect will be
renewed or replaced with other leases of a similar nature and
term. For the years ended December 31, 2006, 2005 and 2004,
the Company recognized rent expense related to office space and
equipment in the amounts of $733,000, $629,000 and $515,000
respectively.
Note 16
Employee Benefit Plan
The Company has adopted a retirement plan that includes a 401(k)
deferred compensation feature. All employees who have completed
at least six months of service and are 21 years of age or
older may participate in the plan. The Company makes matching
contributions of up to 50% of a participants contributions
limited to 3% of the participants annual compensation. The
Company matching contributions vest 20% per year and become
fully vested after the participant has 6 or more years of
service. During 2006, 2005 and 2004, the Company made $112,000,
$29,000 and $32,000, respectively, in matching contributions to
the Plan. All contributions by participants are fully vested.
Note 17
Segmented Information
The Company discloses segment information in accordance with
SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information, that requires companies
to report selected segment information on a quarterly basis and
to report certain entity-wide disclosures about products and
services, major customers, and the material countries in which
the entity holds assets and reports revenues. The Companys
reportable segments are strategic divisions that offer different
services and are managed separately as each division requires
different
F-24
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
resources and marketing strategies. The Companys Consumer
Healthcare Savings segment, the Companys largest segment,
offers savings on healthcare services to persons who are
un-insured, under-insured, or who have elected to purchase only
high deductible or limited benefit medical insurance policies,
by providing access to the same preferred provider organizations
(PPOs) that are utilized by many insurance companies and
employers who self-fund at least a portion of their
employees healthcare risk. These programs are sold
primarily through a network marketing strategy. The
Companys Employer and Group Healthcare Services segment
provides a wide range of healthcare claims administration
services and other cost containment procedures that are
frequently required by governments and other large employers who
have chosen to self fund their healthcare benefits requirements.
In prior years, the Company reported the financial results of
the Companys wholly-owned subsidiary Care Financial of
Texas, L.L.C. (Care Financial) in a separate segment, Financial
Services. Financial Services included two divisions
Care Financial which offered high deductible and scheduled
benefit insurance policies and Care 125 which offered life
insurance and annuities, along with Healthcare Savings Accounts
(HSAs), Healthcare Reimbursement Arrangements (HRAs) and medical
and dependent care Flexible Spending Accounts (FSAs). Care 125
was discontinued in December 2006 and Care Financial is included
with Corporate and Other.
No one customer represents more than 10% of the Companys
overall revenue. However, a material portion of the revenues of
AAI is derived from its contractual relationships with a few key
governmental entities. The Company operates in substantially all
of the fifty states in the U.S. but not in any foreign
countries.
The Company evaluates segment performance based on revenues and
income before provision for income taxes. The Company does not
allocate income taxes or unusual items to the segments. The
table on this page and the following page summarizes segment
information for continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2006
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Employer and
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
Group Healthcare
|
|
|
Corporate
|
|
|
Continuing
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
Services
|
|
|
and Other
|
|
|
Operations
|
|
|
|
|
|
|
|
|
Service revenue(1)
|
|
$
|
14,483
|
|
|
$
|
7,409
|
|
|
$
|
82
|
|
|
$
|
21,974
|
|
|
|
|
|
|
|
|
|
Operating income (loss)(1)
|
|
|
(254
|
)
|
|
|
1,304
|
|
|
|
(8,269
|
)
|
|
|
(7,219
|
)
|
|
|
|
|
|
|
|
|
Interest expense (income)
|
|
|
(240
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
(355
|
)
|
|
|
|
|
|
|
|
|
Goodwill impairment including tax
considerations
|
|
|
|
|
|
|
|
|
|
|
6,866
|
|
|
|
6,866
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
651
|
|
|
|
105
|
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
Tax Benefit(2)
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
Assets acquired, net of disposals
|
|
|
(460
|
)
|
|
|
291
|
|
|
|
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
Intangible assets(2)
|
|
|
|
|
|
|
|
|
|
|
7,471
|
|
|
|
7,471
|
|
|
|
|
|
|
|
|
|
Assets held
|
|
|
2,908
|
|
|
|
12,429
|
|
|
|
983
|
|
|
|
16,320
|
|
|
|
|
|
|
|
|
|
F-25
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2005
|
|
|
|
|
|
|
Consumer
|
|
|
Employer and
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Healthcare
|
|
|
Group Healthcare
|
|
|
Corporate
|
|
|
Continuing
|
|
|
|
|
|
|
Savings
|
|
|
Services
|
|
|
and Other
|
|
|
Operations
|
|
|
|
|
|
Service revenue(1)
|
|
$
|
21,160
|
|
|
$
|
8,537
|
|
|
$
|
331
|
|
|
$
|
30,028
|
|
|
|
|
|
Operating income (loss)(1)
|
|
|
532
|
|
|
|
1,745
|
|
|
|
(15,542
|
)
|
|
|
(13,265
|
)
|
|
|
|
|
Interest expense (income)
|
|
|
|
|
|
|
|
|
|
|
(159
|
)
|
|
|
(159
|
)
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
12,900
|
|
|
|
12,900
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,440
|
|
|
|
146
|
|
|
|
|
|
|
|
1,586
|
|
|
|
|
|
Taxes(2)
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
50
|
|
|
|
|
|
Assets acquired, net of disposals
|
|
|
|
|
|
|
20
|
|
|
|
(2,930
|
)
|
|
|
(2,910
|
)
|
|
|
|
|
Intangible assets(2)
|
|
|
|
|
|
|
|
|
|
|
14,332
|
|
|
|
14,332
|
|
|
|
|
|
Assets held
|
|
|
8,335
|
|
|
|
11,157
|
|
|
|
11,346
|
|
|
|
30,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in Thousands
|
|
2004
|
|
|
|
|
|
|
Consumer
|
|
|
Employer and
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Healthcare
|
|
|
Group Healthcare
|
|
|
Corporate
|
|
|
Continuing
|
|
|
|
|
|
|
Savings
|
|
|
Services
|
|
|
and Other
|
|
|
Operations
|
|
|
|
|
|
Service revenue(1)
|
|
$
|
32,625
|
|
|
$
|
4,079
|
|
|
$
|
709
|
|
|
$
|
37,413
|
|
|
|
|
|
Operating income (loss)(1)
|
|
|
1,195
|
|
|
|
630
|
|
|
|
(3,981
|
)
|
|
|
(2,156
|
)
|
|
|
|
|
Interest expense (income)
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
57
|
|
|
|
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,247
|
|
|
|
58
|
|
|
|
4
|
|
|
|
2,309
|
|
|
|
|
|
Tax benefit(2)
|
|
|
|
|
|
|
|
|
|
|
(735
|
)
|
|
|
(735
|
)
|
|
|
|
|
Assets acquired, net of disposals
|
|
|
658
|
|
|
|
585
|
|
|
|
1,278
|
|
|
|
2,521
|
|
|
|
|
|
Intangible assets(2)
|
|
|
|
|
|
|
|
|
|
|
22,781
|
|
|
|
22,781
|
|
|
|
|
|
Assets held
|
|
|
10,743
|
|
|
|
8,636
|
|
|
|
20,268
|
|
|
|
39,647
|
|
|
|
|
|
|
|
|
(1) |
|
Unusual charges are included in the loss at the corporate level
and not allocated to the related segment. The loss before
provision for income taxes for 2006 for the Employer and Group
Healthcare Services segment excludes charges for impairment of
goodwill of $4,066,000 including tax considerations of $426,000
which is due primarily to the current and projected reductions
in earnings due to a decline in number of lives covered under
plans that are administered by AAI. The loss before provision
for income taxes for 2006 for the Consumer Healthcare Savings
segment excludes charges of $2,800,000 for impairment of
goodwill recorded in connection with the acquisition of Capella.
The loss before provision for income taxes for 2005 for the
Consumer Healthcare Savings segment excludes charges of
$12,900,000 for impairment of goodwill recorded in connection
with the acquisition of Capella. The loss before provision for
income taxes for 2004 for the non-healthcare membership program
segment excludes a $2,000,000 charge for impairment of goodwill
recorded in connection with the acquisition of Foresight Inc. |
|
(2) |
|
Intangible assets and income tax expense (benefit) are not
allocated to the assets and operations of the related segment. |
F-26
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 18
Discontinued Operations
An analysis of the discontinued operations is as follows:
DISCONTINUED
OPERATIONS SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months
|
|
Dollars in Thousands
|
|
Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Service Revenues
|
|
$
|
125
|
|
|
$
|
1,180
|
|
|
|
906
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations
|
|
|
94
|
|
|
|
1,000
|
|
|
|
724
|
|
Sales and marketing
|
|
|
343
|
|
|
|
468
|
|
|
|
131
|
|
General and administrative
|
|
|
598
|
|
|
|
228
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,035
|
|
|
|
1,696
|
|
|
|
1,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(910
|
)
|
|
|
(516
|
)
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(910
|
)
|
|
|
(515
|
)
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
(benefit) expense
|
|
|
|
|
|
|
(73
|
)
|
|
|
(179
|
)
|
Earnings (loss) from operations
|
|
|
(910
|
)
|
|
|
(442
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of operations, net of
taxes
|
|
|
|
|
|
|
300
|
|
|
|
|
|
Net loss
|
|
$
|
(910
|
)
|
|
$
|
(142
|
)
|
|
$
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations are as follows:
Financial Services Care
125. In the first quarter of 2004, the
Company initiated Care 125, a division of AAI, to provide health
savings accounts (HSAs), Healthcare Reimbursement Arrangements
(HRAs) and medical and dependent care Flexible Spending Accounts
(FSAs). Care125 services would allow employers to offer
additional benefits to their employees and give employees
additional tools to manage their healthcare and dependent care
expenses. Additionally, Care125 programs and the Companys
medical savings programs could be sold together by agents and
brokers with whom the Company has contracted to offer a more
complete benefit package to employers. The Company discontinued
this division in December 2006. This operation had net losses in
2006, 2005 and 2004 of $121,000, $137,000, and $157,000,
respectively.
Vergance. In the third quarter of 2005,
the Company began offering neutraceuticals through the Vergance
marketing group of the Companys Consumer Healthcare
Services division. Neutraceutical sales consisting of vitamins,
minerals and other nutritional supplements, under the Natrience
brand commenced in late September 2005, but were immaterial
through June 30, 2006. Effective June 30, 2006, the
Company discontinued its operations and wrote off the assets of
this division. This operation had net losses in 2006, 2005 and
2004 of $789,000, $321,000, and $0, respectively.
Member Services. The Foresight Club
designed and offered membership programs for rental-purchase
companies, financial organizations, employer groups, retailers,
and association-based organizations. The Company sold
substantially all of the operating assets of the Foresight Club
division to Benefit Marketing Solutions (BMS), an
unaffiliated privately held Norman, Oklahoma company effective
December 1, 2005. Effective December 19, 2005, the
Company dissolved Foresight, Inc. and transferred its remaining
net assets, of approximately $173,000, to the Consumer
Healthcare Services division. This dissolution provided a tax
benefit of approximately $545,000 related to the deduction for
federal income tax purposes of the write-off of goodwill for
which an impairment of $2,000,000 was recognized in 2004. This
operation had net income, including gain on sale of operations,
in 2005 of $316,000 and a net loss of $142,000 in 2004.
F-27
ACCESS
PLANS USA, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 19
Subsequent Events
Insurance Capital Management USA
Inc. On January 30, 2007, the Company
completed its merger with Insurance Capital Management USA, Inc.
(ICM). Under the terms of the merger, the
shareholders of ICM received shares of Company common stock
based on the adjusted earning before income taxes, depreciation
and amortization (adjusted EBITDA) of the ICM and
its acquired companies. On January 29, 2007, the ICM
shareholders were issued 4,498,529 of common stock shares of the
Company. The ICM shareholders may receive up to an additional
2,257,853 common stock shares of the Company if the acquired ICM
companies achieve adjusted EBITDA of $1,250,000 over four
consecutive calendar quarters ending on or before
December 31, 2007. Based on a preliminary review of
adjusted EBITDA for the acquired ICM companies for the year
ended in December 2006, approximately 2,111,400 of the
2,257,853 shares, discussed above, will be issued to ICM
shareholders during the second quarter of 2007.
States General Life Insurance
Company. In February 2005, States General
Life Insurance Company (SGLIC) was placed in
permanent receivership by the Texas Insurance Commission (The
State of Texas v States General Life Insurance Company, Cause
No. GV-500484,
in the
126th District
Court of Travis County, Texas.) Pursuant to letters dated
October 19, 2006, the Special Deputy Receiver (the
SDR) of SGLIC asserted certain claims against ICM,
its subsidiaries, Peter W. Nauert, ICMs Chairman and Chief
Executive Officer, and G. Scott Smith, a former Executive
Officer of ICM, totaling $2,839,000. The SDR is seeking recovery
of certain SGLIC funds that it alleges were inappropriately
transferred and paid to or for the benefit of ICM, its
subsidiaries and Messrs. Nauert and Smith. These claims are
based upon assertions of Texas law violations, including
prohibitions against self-dealing, participation in breach of
fiduciary duty and preferential and fraudulent transfers.
Mr. Nauert was in control and Chairman of the Board of
SGLIC when it was placed in receivership by the Texas Insurance
Commission. The Company, its subsidiaries and
Messrs. Nauert and Smith intend to exercise their full
rights in defense of the SDRs asserted claims. The SDR
filed its own action against SGLIC, pending in the
126th District
Court of Travis County, Texas under cause
No. GV-500484
and against Messrs. Nauert and Smith, ICM, certain
subsidiaries of ICM and other parties, in the
126th District
Court of Travis County, Texas under cause
No. D-1-GN-06-4697.
Access Plans has been named as a defendant in this action as a
successor-in-interest
to ICM.
In connection with our merger-acquisition of ICM and its
subsidiaries, Mr. Nauert and the Peter W. Nauert Revocable
Trust have agreed to fully indemnify ICM and us against any
losses resulting from this matter.
F-28