e10vq
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Three Months Ended March 31, 2008
OR
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
Commission File Number: 001-15667
ACCESS PLANS USA, INC.
(Exact name of business issuer as specified in its Charter)
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OKLAHOMA
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73-1494382 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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4929 WEST ROYAL LANE, SUITE 200 |
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IRVING, TEXAS
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75063 |
(Address of principal executive offices)
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(Zip Code) |
(866) 578-1665
(Registrants telephone number)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company
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Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of May 9, 2008 the Registrant had outstanding 20,269,145 shares of Common Stock, $.01 par
value.
ACCESS PLANS USA, INC.
FORM 10-Q
For the Quarter Ended March 31, 2008
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Our financial statements which are prepared in accordance with Regulation S-X are set forth in this
report beginning on page 26.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by the more detailed information in our
2007 Annual Report on Form 10-K and the financial statements contained in this report, including
the notes thereto, and our other periodic reports filed with the Securities and Exchange Commission
since December 31, 2007 (collectively referred to as the Disclosure Documents). Certain
forward-looking statements contained in this report and in the Disclosure Documents regarding our
business and prospects are based upon numerous assumptions about future conditions that may
ultimately prove to be inaccurate and actual events and results may materially differ from
anticipated results described in the forward-looking statements. Our ability to achieve these
results is subject to the risks and uncertainties discussed in the Disclosure Documents. 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.
We
at Access Plans USA, Inc. develop and distribute quality affordable consumer driven
healthcare 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 healthcare. They
include health insurance plans and non-insurance healthcare discount programs to help provide
solutions for the millions of Americans who need access to affordable healthcare.
Our operations are organized under three business divisions:
Consumer Plan Division. Our Consumer Plan Division develops and markets non-insurance
healthcare discount programs and association memberships that include defined benefit insurance
features. These programs are distributed through multiple distribution channels. The division
operates through our wholly-owned subsidiaries, The Capella Group, Inc. (Capella) and Protective
Marketing Enterprises, Inc. (PME). PME also owns and manages a proprietary customer healthcare
advocacy department and proprietary networks of dental and vision providers that provide services
at negotiated rates to members of our discount medical plans (program members) and to members of
other plans that have contracted with us for access to our networks (network access members).
Before 2007, this division was referred to as our Consumer Healthcare Savings segment.
Insurance Marketing Division. Our Insurance Marketing Division markets individual health
insurance products and related benefit plans, including specialty insurance products, primarily
through a broad network of independent agents. We support our distribution channels with web-based
technology, incentive programs and back-office support. This division operates as Insuraco USA LLC
(Insuraco).
Regional Healthcare Division. Our Regional Healthcare Division 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. It
also owns and manages a proprietary network of medical providers. This division operates as
Foresight TPA (Foresight) and was previously referred to as the Employer and Group Healthcare
Services segment. Foresight TPA is the assumed name of Access HealthSource, Inc.
Summary Results of Operations
For the first quarter, we reported revenue of $10,585,000, an increase of $2,260,000 or 27%,
compared to $8,325,000 during the comparable quarter in 2007. First quarter 2008 revenue included
$5,809,000 attributable to the Insurance Marketing operations acquired in the merger with ICM on
January 30, 2007, and $3,416,000 for first quarter 2007, and $1,160,000 attributable to the Consumer Plan operations acquired in the
acquisition of PME on October 1, 2007. Our net loss for the first quarter of 2008 was $1,043,000
or $(.05) per fully diluted share, compared to a net loss of $325,000 or $(.02) per fully diluted
share for the comparable quarter in 2007. We used $793,000 of cash in our operating activities
during the first quarter of 2008.
Critical Accounting Policies
Basis of Presentation. The consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles (GAAP) and include the accounts of
our wholly-owned subsidiaries, Capella, Insuraco, and Foresight. 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.
3
Use of Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions that affect the
amounts reported in our financial statements and accompanying notes. Certain significant estimates
are required in the evaluation of goodwill and intangible assets for impairment as well as
allowances for doubtful recoveries of advanced agent commissions and accounts and notes receivable.
Actual results could differ from those estimates and the differences could be material.
Fair Value of Financial Instruments. The recorded amounts of short-term investments, accounts
receivable, income taxes receivable, notes receivable, accounts payable, accrued liabilities,
income taxes payable, capital lease obligations and debt approximate fair value because of the
short-term maturity of these items.
Recently Issued Accounting Standards. In September 2006, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, that 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. This standard
applies to the Company beginning in 2008. It has not had a material impact through March 31, 2008.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115, that is effective for
fiscal years beginning after November 15, 2007. This statement permits an entity to choose to
measure many financial instruments and certain other items at fair value on specified election
dates. This election, which may be applied on an instrument by instrument basis, is typically
irrevocable once elected. Subsequent unrealized gains and losses on items for which the fair value
option has been elected will be reported in earnings. Adoption of this standard has not had a
material impact on the Company.
In December 2007, the FASB issued SFAS No. 141R (FAS 141R), Business Combinations, which
revises FAS 141 and changes multiple aspects of the accounting for business combinations. Under the
guidance in FAS 141R, the acquisition method must be used, which requires the acquirer to recognize
most identifiable assets acquired, liabilities assumed, and non-controlling interests in the
acquiree at their full fair value on the acquisition date. Goodwill is to be recognized as the
excess of the consideration transferred plus the fair value of the non-controlling interest over
the fair values of the identifiable net assets acquired. Subsequent changes in the fair value of
contingent consideration classified as a liability are to be recognized in earnings, while
contingent consideration classified as equity is not to be re-measured. Costs such as transaction
costs are to be excluded from acquisition accounting, generally leading to recognizing expense,
and, additionally, restructuring costs that do not meet certain criteria at acquisition date are to
be subsequently recognized as post-acquisition costs. FAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company anticipates that adoption of
this pronouncement will not have a material impact on its financial position and results of
operation.
Revenue Recognition. Revenue recognition varies based upon source.
Consumer Plan Division Revenues. We recognize Consumer Plan program membership revenues,
other than initial enrollment fees, ratably over the membership month. 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, 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 of those
amounts, 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 creditworthiness 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.
Insurance Marketing Division Revenues. The revenue of our Insurance Marketing Division is
primarily from sales commissions due from the insurance companies we represent. These sales
commissions are generally a percentage of the commissionable insurance premium and other related
amounts charged and collected by the insurance companies. Commission income and policy fees, other
than enrollment fees, and corresponding commission expense payable to agents, are generally
recognized at their gross amount, as
4
earned on a monthly basis, until the underlying policyholder contract is terminated. Advanced
commissions received are recorded as unearned commission revenue and are recognized in income as
earned. Initial enrollment fees are deferred and amortized over the estimated lives of the
respective policies. The estimated weighted-average life for the policies sold ranges from 18 to
48 months, and is based upon our historical policyholder contract termination experience.
Our commission revenue generally represents a percentage of the insurance premium a
policyholder pays to his or her insurance carrier and, to a lesser extent, additional incentive
payments that insurance carriers pay us for achieving sales volume thresholds or other objectives.
Commission rates vary by carrier and by the type of plan purchased by a policyholder. Commission
rates also may vary based upon the amount of time that the policy has been active, with commission
rates for individual and family policies typically being higher in the first 12 months of the
policy. Individuals, families and small businesses purchasing health insurance through us typically
pay their premiums on a monthly basis. Insurance carriers typically pay us our commissions monthly,
after they receive the premium payment from the member. We continue to receive the commission
payment from the relevant insurance carrier until the health insurance policy is cancelled or we
otherwise do not remain the agent on the policy. As a result, the majority of our revenue is
recurring in nature and grows in correlation with the growth we experience in our policies in
force. Commission income and policy fees, other than initial enrollment fees, and corresponding
commission expense payable to agents who sell policies on our behalf, are generally recognized at
their gross amount, as earned on a monthly basis, until such time as the underlying policyholder
contract is terminated.
In some cases, we may receive an advance payment of commissions from the carrier, representing
our expected commission on future premiums not yet collected or earned. These advances are subject
to repayment back to the carrier in the event that the policy lapses before the advanced
commissions are collected and earned. These advanced commissions are reflected on our balance sheet
as unearned commissions. Similarly, we or the carrier may advance commissions to brokers and agents
who sell for us. These advances are subject to repayment back to us or to the carrier in the event
that the policy lapses before the advanced commissions are collected and earned. These commissions
advanced to agents are reflected on our balance sheet as advanced agent commissions. Collection of
the commissions advanced may be accomplished by withholding amounts due to the agents, plus
accumulated interest, from future commissions on the policy upon which the advance was made,
commissions on other policies sold by the agent or, in certain cases, commissions due to agents
managing the agent to whom advances were made. Advanced agent commissions are reviewed on a
quarterly basis to determine if any advanced agent commissions will likely be uncollectible. An
allowance is provided for any advanced agent commission balance where recovery is considered
doubtful. This allowance for uncollectible advances is based upon review of the aging of
outstanding balances and estimates of future commissions expected to be due to the agents to whom
advances are outstanding and the agents responsible for their management. Any bad debt is written
off when determined uncollectible.
We recognize commission revenue when the commission is earned, based upon premiums collected
and earned on the underlying policies in force. These revenues are based upon amounts reported to
us by a carrier, which occurs through our receipt of a cash payment and a commission statement.
Incentive payments from carriers are recognized when we receive notice from the carrier that they
have been earned and are generally reported to us in a more irregular pattern than premium
commissions. As a result, our revenue for a particular quarter could be higher or lower than
expectations due to the timing of the reporting of commission override payments.
Revenue attributable to individual and family major medical policies and supplemental products
for the three months ended March 31, 2008 represented approximately 81% of our total revenue in the
Insurance Marketing Division. Additionally, revenue attributable to Medicare supplemental policies
for the three months ended March 31, 2008 represented approximately 16% of our total revenues in
the Insurance Marketing Division. In addition to the revenue we derive from commissions on the sale
of health insurance products, we derive revenue from interest charged to agents on their
outstanding advanced commissions and for the sale of leads to those agents.
Regional Healthcare Division (Foresight) Revenues. The principal sources of revenues of our
Regional Healthcare Division, Foresight (formerly Access HealthSource, Inc.), 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 Commission expense varies based upon source.
Consumer Plan. Commissions on Consumer Plan Division revenues are accrued in the month in
which a member has enrolled in the program. These commissions are only paid to our independent
marketing representatives in the month following our receipt of the related membership fees by us.
In 2007, we began issuing advances of commissions on certain Consumer Plan programs to increase
sales representative recruitment. In 2008, we began paying accelerated commissions, comprising
amounts paid in excess of the initial revenue collected at the time of sale, on certain programs.
These commissions have been expensed as incurred, rather than being capitalized and amortized over
the expected lives of the respective programs.
5
Insurance Marketing. Commission expenses for the Insurance Marketing Division consist
primarily of commissions payable to agents and are generally recognized at their gross amount, as
earned on a monthly basis, until such time as the underlying policyholder contract is terminated.
Advances of commissions up to ten months are paid to agents in the Insurance Marketing Division
based on certain insurance policy premium commissions. Collection of the commissions advanced may
be accomplished by withholding amounts due to the agents for future commissions on the policy upon
which the advance was made, commissions on other policies sold by the agent or, in certain cases,
commissions due to agents managing the agent to whom advances were made. We periodically assess the
collectibility of the amounts outstanding for commission advances and record an estimated allowance
for uncollectible amounts. This allowance for uncollectible advances is based upon review of the
aging of outstanding balances and estimates of future commissions expected to be due to the agents
to whom advances are outstanding and the agents responsible for their management.
Acquisition Costs. Certain policy acquisition costs, generally lead expenses for sales of
major medical policies, are capitalized and amortized over the estimated lives of the respective
policies, provided that the amount capitalized does not exceed the amount of capitalized and
deferred enrollment fees for the Insurance Marketing Division. The estimated weighted-average life
for the policies sold ranges from 18 to 24 months, and is based upon our historical policyholder
contract termination experience.
Advanced Agent Commissions. Our Insurance Marketing Division advances agent commissions up to
one year for certain insurance programs. Collection of the commissions advanced (plus accrued
interest) is accomplished by withholding amounts due to the agents for future commissions on the
policy upon which the advance was made, commissions on other policies sold by the agent or, in
certain cases, commissions due to agents managing the agent to whom advances were made. Advanced
agent commissions are reviewed periodically to determine if any advanced agent commissions will
likely be uncollectible. An allowance is provided for the estimated advanced agent commission
balance where recovery is considered doubtful. This allowance for uncollectible advances required
judgment and is based upon review of the aging of outstanding balances and estimates of future
commissions expected to be due to the agents to whom advances are outstanding and the agents
responsible for their management. Advances are written off when determined to be non-collectible.
Accounts Receivable. Accounts receivable generally represent commissions and fees due from
insurance carriers and plan sponsors. Accounts receivable are reviewed on a monthly basis to
determine if any receivables will be potentially uncollectible. An allowance is provided for any
accounts receivable balance where recovery is considered to be doubtful. Accounts receivable are
written off when they are determined to be uncollectible. Our accounts receivable are unsecured.
Acquisitions. On January 30, 2007, we completed our merger with ICM. Under the terms of the
merger, the shareholders of ICM received 6,756,382 shares of our common stock. The assets and
liabilities acquired were initially valued, in the aggregate net amount of $10,540,000, based upon
the market value of the common stock issued as the merger consideration in the acquisition.
Judgment was required in the allocation of value to the acquired assets and liabilities, based upon
their fair values, especially with regard to the allocation of $10,087,000 to goodwill and
$3,700,000 to other intangible assets. These other intangible assets represent the estimated value,
at the date of their acquisition, of policies in force (Customer Contracts) of $1,800,000 and
certain agent relationships (Agent Relationships) of $1,900,000. The Customer Contracts and Agent
Relationships are being amortized on a straight-line basis over three years and eight years,
respectively. Goodwill is deemed to have an infinite life and is subject to an annual, or more
frequent, analysis for possible impairment (discussed below).
On October 1, 2007, we completed our acquisition of PME. PME offers, as a wholesaler, discount
medical service products, provides back office support through its use of various operating
systems, maintains a customer service facility, and develops products from both its proprietary
networks of dental and vision providers contracted and third-party provider networks. The
$1,218,000 purchase price of PME was cash consideration paid to PMEs parent, Protective Life
Corporation. Judgment was required in the allocation of value to the acquired assets and
liabilities, based upon their fair values, especially with regard to the allocation of $1,073,000
to other intangible assets. The other intangible assets included memberships in force (Customer
Contracts) having an estimated value of $482,000 and dental and vision provider network contracts
(Network Contracts) having an estimated value of $591,000. These Customer Contracts and Network
Contracts are being amortized on a straight-line basis over four years and eight years,
respectively.
Intangible Asset Valuation. Our intangible assets as of March 31, 2008, consisted of
$5,489,000 of goodwill and other intangible assets of $3,707,000, primarily attributable to our
January 2007 ICM acquisition and our October 2007 PME acquisition. Goodwill represents the excess
of acquisition costs over the fair value of net assets acquired. Goodwill is not amortized. The
other intangible assets represent the estimated value, at the date of their acquisition, of
policies and memberships in force (Customer Contracts), certain agent relationships and provider network
contracts (Agent Relationships/Network Contracts), net of amortization. The intangible asset
amount initially allocated to Customer Contracts was $2,282,000 and the amount allocated to Agent
Relationships/Network Contracts was $2,491,000.
Stock Option Expense and Option-Pricing Model. Recognized compensation expense for stock
options granted to employees includes: (a) compensation cost for all share-based payments
previously granted, but not yet vested, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and
6
(b) compensation cost for all share-based payments currently granted based on the grant date
fair value estimated in accordance with the provisions of SFAS No. 123(R), Share-Based Payment. The
binomial lattice option-pricing model is 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 period ended December 31, 2007 equal to the expected option term. Expected pre-vesting
forfeitures were estimated based on actual historical pre-vesting forfeitures over the most recent
period ended March 31, 2008 for the expected option term. The risk-free interest rate was based on
the interest rate of zero-coupon United States Treasury securities over the expected option term.
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.
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. As of March 31, 2008, we evaluated the probability of recognizing the benefit
of deferred tax assets through the reduction of taxes otherwise payable in the future. We
determined that a valuation allowance to fully offset net deferred tax assets was appropriate as of
March 31, 2008.
Reclassifications. Certain prior period amounts have been reclassified to conform to the
current periods presentation.
Results of Operations
Consumer Plan Division. The operating results for our Consumer Plan Division were as follows:
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For the Three Months Ended March 31, |
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Dollar |
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Percent |
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Dollars in Thousands |
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2008 |
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2007 |
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Change |
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Change |
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Commission and service revenue |
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$ |
3,915 |
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$ |
3,104 |
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$ |
811 |
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26.1 |
% |
Interest income |
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13 |
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17 |
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(4 |
) |
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-23.5 |
% |
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Total revenues |
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3,928 |
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3,121 |
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807 |
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25.9 |
% |
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Operating expenses: |
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Commissions |
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1,452 |
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702 |
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750 |
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106.8 |
% |
Cost of operations |
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1,805 |
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1,234 |
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571 |
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46.3 |
% |
Sales and marketing |
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143 |
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205 |
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(62 |
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-30.2 |
% |
General and administrative |
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701 |
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746 |
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(45 |
) |
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-6.0 |
% |
Depreciation and amortization |
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90 |
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75 |
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15 |
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20.0 |
% |
Interest expense |
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7 |
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5 |
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2 |
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40.0 |
% |
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Total expenses |
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4,198 |
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2,967 |
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481 |
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16.2 |
% |
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Earnings (loss) before taxes |
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$ |
(270 |
) |
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$ |
154 |
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$ |
(424 |
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-275.3 |
% |
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Percent of revenue: |
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Total revenues |
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100.0 |
% |
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100.0 |
% |
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Operating expenses: |
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Commissions |
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37.0 |
% |
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22.5 |
% |
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Cost of operations |
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46.0 |
% |
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39.5 |
% |
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Sales and marketing |
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3.6 |
% |
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6.6 |
% |
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General and administrative |
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17.8 |
% |
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|
23.9 |
% |
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Depreciation and amortization |
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|
2.3 |
% |
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|
2.4 |
% |
|
|
|
|
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Interest expense |
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|
0.2 |
% |
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|
0.2 |
% |
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Total expenses |
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106.9 |
% |
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95.1 |
% |
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Earnings (loss) before taxes |
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|
(6.9 |
%) |
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
Consumer Plan Selected Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Dollars in Thousands (except monthly average) |
|
1st Qtr |
|
4th Qtr |
|
3rd Qtr |
|
2nd Qtr |
|
1st Qtr |
|
Year |
Program Member: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members newly enrolled |
|
|
19,281 |
|
|
|
4,954 |
|
|
|
6,771 |
|
|
|
7,483 |
|
|
|
25,541 |
|
|
|
44,749 |
|
Members at end of period |
|
|
46,655 |
|
|
|
38,270 |
|
|
|
27,902 |
|
|
|
28,965 |
|
|
|
30,649 |
|
|
|
38,270 |
|
Network
Access Members:2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members at end of period |
|
|
38,895 |
|
|
|
46,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
3,915 |
|
|
$ |
4,255 |
|
|
$ |
3,119 |
|
|
$ |
3,220 |
|
|
$ |
3,104 |
|
|
$ |
13,698 |
|
Commissions |
|
|
1,452 |
|
|
|
1,272 |
|
|
|
810 |
|
|
|
822 |
|
|
|
702 |
|
|
|
3,606 |
|
Provider
network benefits costs |
|
|
694 |
|
|
|
729 |
|
|
|
734 |
|
|
|
660 |
|
|
|
549 |
|
|
|
2,672 |
|
Average monthly revenue per Program Member,
net of commission and provider network
benefit costs3 |
|
$ |
15.07 |
|
|
$ |
17.77 |
|
|
$ |
18.46 |
|
|
$ |
19.44 |
|
|
$ |
19.77 |
|
|
$ |
19.09 |
|
|
|
|
(1) |
|
PME results are included in 4th quarter 2007 and 1st quarter 2008. |
|
(2) |
|
Network access monthly member revenue (PMPM) is about $1.00. |
|
(3) |
|
Commissions are adjusted to normalize impact of accelerated commissions paid on a new program introduced during the quarter. |
Service Revenues. Revenues increased by $811,000 from the three months ended March 31, 2007
to the three months ended March 31, 2008 due to the inclusion in our first quarter 2008 results of
revenues of recently acquired PME of $1,160,000 offset by a decline in legacy Capella business
revenue of $349,000. The $349,000 decline reflected a long-term trend of membership decline down
to 24,213 members at March 31, 2008 compared to 30,649 at March 31, 2007.
Commissions. Commission expense increased by $750,000 from the three months ended March 31,
2008 to the three months ended March 31, 2007 due to commissions paid on PME revenue, including
$327,000 of accelerated commissions which were paid to certain marketing resellers upon the initial
sale of a membership and expensed as paid.
Cost of Operations. The increase in cost of operations of $571,000 from the three months
ended March 31, 2007 to the three months ended March 31, 2008 was due primarily to the operating
costs of PME now reflected in the results of our operations and which were not recorded in our 2007
results.
General and Administrative Expenses. The decrease in general and administrative expenses from
the three months ended March 31, 2007 to the three months ended March 31, 2008 was due to an
$83,000 reduction in personnel costs in Capella, a $40,000 decrease in third party administrative
charges, a $25,000 reduction in property taxes associated with equipment, and a $22,000 reduction
in management consulting fees and offset by higher legal and settlement costs. For the three months ended March 31, 2008 we accrued
$300,000 in connection with a re-assessment of our exposure arising from pending litigation and
claims. During the corresponding prior year period we incurred $216,000 of such costs. The net
increase in legal and settlement costs for the three months ended March 31, 2008 was more than
offset by savings arising from various operational efficiencies, including personnel reductions and
lower management consulting fees.
Insurance Marketing Division. The operating results for our Insurance Marketing Division were
as follows:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percent |
|
Dollars in Thousands |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
Commission revenue |
|
$ |
5,641 |
|
|
$ |
3,332 |
|
|
$ |
2,309 |
|
|
|
69.3 |
% |
Interest income on agent advances |
|
|
168 |
|
|
|
84 |
|
|
|
84 |
|
|
|
100.0 |
% |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
5,809 |
|
|
|
3,416 |
|
|
|
2,393 |
|
|
|
70.1 |
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission expense |
|
|
4,168 |
|
|
|
2,511 |
|
|
|
1,657 |
|
|
|
66.0 |
% |
Cost of operations |
|
|
148 |
|
|
|
94 |
|
|
|
54 |
|
|
|
57.4 |
% |
Sales and marketing |
|
|
701 |
|
|
|
488 |
|
|
|
213 |
|
|
|
43.6 |
% |
General and administrative |
|
|
292 |
|
|
|
178 |
|
|
|
114 |
|
|
|
64.0 |
% |
Depreciation and amortization |
|
|
218 |
|
|
|
142 |
|
|
|
76 |
|
|
|
53.5 |
% |
Interest expense |
|
|
24 |
|
|
|
43 |
|
|
|
(19 |
) |
|
|
-44.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
5,551 |
|
|
|
3,456 |
|
|
|
438 |
|
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before taxes |
|
$ |
258 |
|
|
$ |
(40 |
) |
|
$ |
298 |
|
|
|
-745.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
|
71.8 |
% |
|
|
73.5 |
% |
|
|
|
|
|
|
|
|
Cost of operations |
|
|
2.5 |
% |
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
12.1 |
% |
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
General and administrative |
|
|
5.0 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3.8 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
0.4 |
% |
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
95.6 |
% |
|
|
101.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before taxes |
|
|
4.4 |
% |
|
|
(1.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Marketing Summary of Selected Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Dollars in Thousands (except monthly average) |
|
1st Qtr |
|
4th Qtr |
|
3rd Qtr |
|
2nd Qtr |
|
1st Qtr (1) |
|
Year (2) |
Major Medical Submitted annualized premiums |
|
$ |
21,001 |
|
|
$ |
17,094 |
|
|
$ |
15,993 |
|
|
$ |
14,143 |
|
|
$ |
16,923 |
|
|
$ |
64,153 |
|
Major Medical Issued annualized premiums |
|
$ |
16,281 |
|
|
$ |
13,120 |
|
|
$ |
12,269 |
|
|
$ |
10,314 |
|
|
$ |
10,524 |
|
|
$ |
46,227 |
|
Medicare Issued Annualized premiums |
|
$ |
271 |
|
|
$ |
1,036 |
|
|
$ |
914 |
|
|
$ |
666 |
|
|
$ |
1,127 |
|
|
$ |
3,743 |
|
|
New issued policies Major Medical |
|
|
5,305 |
|
|
|
3,883 |
|
|
|
3,555 |
|
|
|
2,945 |
|
|
|
3,327 |
|
|
|
13,710 |
|
New issued policies Medicare |
|
|
126 |
|
|
|
475 |
|
|
|
572 |
|
|
|
352 |
|
|
|
652 |
|
|
|
2,051 |
|
Policies in-force at end of period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major Medical AHCP |
|
|
17,455 |
|
|
|
16,440 |
|
|
|
15,317 |
|
|
|
14,353 |
|
|
|
13,665 |
|
|
|
16,440 |
|
Major Medical percent change |
|
|
6.2 |
% |
|
|
7.3 |
% |
|
|
6.7 |
% |
|
|
5.0 |
% |
|
|
n/a |
|
|
|
n/a |
|
Medicare Supplement ACP |
|
|
10,844 |
|
|
|
12,873 |
|
|
|
13,305 |
|
|
|
13,549 |
|
|
|
14,107 |
|
|
|
12,873 |
|
Medicare Supplement percent change |
|
|
-15.8 |
% |
|
|
-3.2 |
% |
|
|
-1.8 |
% |
|
|
-4.0 |
% |
|
|
n/a |
|
|
|
n/a |
|
Commission revenues |
|
$ |
5,641 |
|
|
$ |
5,456 |
|
|
$ |
5,520 |
|
|
$ |
5,275 |
|
|
$ |
3,332 |
|
|
$ |
19,583 |
|
Commission expense |
|
$ |
4,168 |
|
|
$ |
4,113 |
|
|
$ |
4,091 |
|
|
$ |
3,697 |
|
|
$ |
2,511 |
|
|
$ |
14,412 |
|
Revenue, net of commission expense |
|
$ |
1,473 |
|
|
$ |
1,343 |
|
|
$ |
1,429 |
|
|
$ |
1,578 |
|
|
$ |
821 |
|
|
$ |
5,171 |
|
Average monthly revenue per policy, net of
commission expense |
|
$ |
17.05 |
|
|
$ |
15.45 |
|
|
$ |
16.85 |
|
|
$ |
18.90 |
|
|
$ |
9.59 |
|
|
|
|
|
|
|
|
(1) |
|
2 months activity, except for premiums and policies issued |
|
(2) |
|
11 months ended December 31, 2007, except for premiums and policies issued |
Operating
results of the Insurance Marketing Division are included only for February 2007 and
the following months because the ICM acquisition was completed on January 30, 2007. Accordingly, the first
quarter results for 2007 only include two months of operations versus three months for 2008.
Commissions. Commission revenue per month increased from $1,666,000 per month for the two
months ended March 31, 2007 to $1,880,000 per month for the three months ended March 31, 2008, an
increase of 12.8%.
9
Commission expense increased from $1,256,000 per month for the two months ended March 31, 2007
to $1,389,000 per month for the three months ended March 31, 2008. These increases arose from an
increasing number of policies in force for major medical, (from 13,665 at March 31, 2007 to 17,455
at March 31, 2008) offset by a decline in policies in force for Medicare supplement insurance, as
reflected in the table above.
Cost of Operations. Cost of operations remained consistent from $47,000 per month for the two
months ended March, 31, 2007 to $49,000 per month for the three months ended March 31, 2008.
Sales and Marketing. Sales and marketing expenses remained stable from $244,000 per month in
the two months ended March 31, 2007 to $234,000 per month for the three months ended March 31,
2008.
General and Administrative Expenses. General and administrative expenses were consistent from
$89,000 per month for the two months ended March 31, 2007 to $97,000 per month for the three months
ended March 31, 2008.
Regional Healthcare Division. The operating results for our Regional Healthcare Division were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percent |
|
Dollars in Thousands |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
Service revenue |
|
$ |
846 |
|
|
$ |
1,736 |
|
|
$ |
(890 |
) |
|
|
-51.3 |
% |
Interest income |
|
|
2 |
|
|
|
35 |
|
|
|
(33 |
) |
|
|
-94.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
848 |
|
|
|
1,771 |
|
|
|
(923 |
) |
|
|
-52.1 |
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
Cost of operations |
|
|
857 |
|
|
|
1,140 |
|
|
|
(283 |
) |
|
|
-24.8 |
% |
Sales and marketing |
|
|
81 |
|
|
|
128 |
|
|
|
(47 |
) |
|
|
-36.7 |
% |
General and administrative |
|
|
290 |
|
|
|
209 |
|
|
|
81 |
|
|
|
38.8 |
% |
Depreciation and amortization |
|
|
25 |
|
|
|
28 |
|
|
|
(3 |
) |
|
|
-10.7 |
% |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,253 |
|
|
|
1,505 |
|
|
|
(252 |
) |
|
|
-16.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes |
|
$ |
(405 |
) |
|
$ |
266 |
|
|
$ |
(671 |
) |
|
|
-252.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
Cost of operations |
|
|
101.1 |
% |
|
|
64.4 |
% |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
9.6 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
General and administrative |
|
|
34.2 |
% |
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2.9 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
147.8 |
% |
|
|
85.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before taxes |
|
|
(47.8 |
%) |
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional Healthcare Summary of Selected Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Dollars in Thousands (except monthly average) |
|
1st Qtr |
|
4th Qtr |
|
3rd Qtr |
|
2nd Qtr |
|
1st Qtr |
|
Year |
Covered employees |
|
|
11,067 |
|
|
|
25,612 |
|
|
|
28,215 |
|
|
|
29,666 |
|
|
|
31,005 |
|
|
|
25,612 |
|
Percent Change |
|
|
(56.8 |
%) |
|
|
(9.2 |
%) |
|
|
(4.9 |
%) |
|
|
(4.3 |
%) |
|
|
(1.1 |
%) |
|
|
(18.1 |
%) |
Service revenues |
|
$ |
846 |
|
|
$ |
1,593 |
|
|
$ |
1,594 |
|
|
$ |
1,680 |
|
|
$ |
1,736 |
|
|
$ |
6,603 |
|
Average monthly revenue per member |
|
$ |
15.38 |
|
|
$ |
19.73 |
|
|
$ |
18.36 |
|
|
$ |
18.46 |
|
|
$ |
18.66 |
|
|
$ |
21.48 |
|
The primary element of our Regional Healthcare Division is our wholly-owned subsidiary,
Foresight, through which we offer full third-party administration services. Through Foresight, 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 employees healthcare benefits. Foresight helps us
offer a more complete suite of healthcare service products. Also through Foresight, 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.
10
Service Revenues. Due to the previously disclosed losses of two significant customer
contracts, the Regional Healthcare Division has experienced a significant decline in revenue from
$1,771,000 for the three months ended March 31, 2007 to $848,000 for the three months ended March
31, 2008, a decline of 52.1%. While efforts have been made to reduce costs in anticipation of the
decline in revenue, these efforts have not been successful in completely offsetting declining
revenue.
Cost of Operations. Cost of operations were reduced by 24.8% from $1,140,000 for the three
months ended March 31, 2007 to $858,000 for the three months ended March 31, 2008.
Sales and Marketing Expenses. Sales and marketing expenses were reduced by 36.7% from
$128,000 for the three months ended March 31, 2007 to $81,000 for the three months ended March 31,
2008 due to the loss of significant contracts discussed previously.
General and Administrative Expenses. General and administrative expenses increased by 38.8%
to $290,000 for the three months ended March 31, 2008 due to $146,000 of legal expenses during that period incurred in connection with the federal investigation of
the activities of the divisions former CEO.
Corporate and Other. The operating costs for our corporate and other activities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
Dollar |
|
|
Percent |
|
Dollars in Thousands |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
Change |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
1 |
|
|
$ |
6 |
|
|
$ |
(5 |
) |
|
|
-83.3 |
% |
Cost of operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
General and administrative |
|
|
604 |
|
|
|
668 |
|
|
|
(64 |
) |
|
|
-9.6 |
% |
Depreciation and amortization |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
0.0 |
% |
Interest income, net |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
605 |
|
|
|
676 |
|
|
|
(66 |
) |
|
|
-9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes |
|
$ |
(605 |
) |
|
$ |
(676 |
) |
|
$ |
66 |
|
|
|
-9.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses. The 9.8% decline in general and administrative expenses
from the three months ended March 31, 2007 to the three months ended March 31, 2008 was primarily
due to lower officer salaries.
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 forward balances 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 March 31, 2008 we did not have any recorded deferred tax assets or
liabilities. At December 31, 2007 we had current deferred tax assets of $23,000 and non-current
deferred tax liabilities of $23,000. The current deferred tax asset was primarily due to the net
operating loss carry-forward that, if not
utilized, will expire at various dates through 2027. The deferred tax liability is primarily
related to the acquisition related amortizable intangible assets. At March 31, 2008 and December 31, 2007 we had valuation allowances of $291,000 to fully
offset net deferred tax assets on these dates.
Liquidity and Capital Resources
Operating Activities. Net cash used in operating activities for the three months ended March
31, 2008 was $793,000 and net cash provided for the three months ended March 31, 2007 was $659,000.
The decrease in net cash provided by operating activities of $1,452,000 was due primarily to
greater net losses in the Regional Healthcare and Consumer Plan Divisions, as previously discussed,
as well as prior year operations benefiting from the utilization of greater amounts of expenses
that were prepaid at December 31, 2006 in conjunction with tax planning strategies.
Investing Activities. Net cash used by investing activities for the three months ended March
31, 2008 and 2007 was $1,339,000 and $108,000, respectively. The increase in net cash used in
investing activities of $1,231,000 was due primarily to $730,000 of additional advancing of
commissions to agents as well as pledging $504,000 to secure bonds for regulatory licenses.
11
Financing Activities. Net cash provided by financing activities for the three months ended
March 31, 2008 was $793,000 and net cash used in financing activities for the three months ended
March 31, 2007 was $34,000. The increase in cash provided by financing activities was due primarily
to borrowings under a new credit facility with a specialty lender and increases in advances from
carriers.
On March 31, 2008 and December 31, 2007 we had working capital of $1,283,000 and $1,076,000,
respectively. The increase in working capital during the first quarter of 2008 of $207,000 was due
primarily to long-term borrowings under a new credit facility with a specialty lender, as discussed
below.
We do not have any capital commitments as of March 31, 2008. We anticipate that our capital
expenditures for 2008 may exceed the amount incurred during 2007 due to the need to relocate PMEs
operating facility and complete other steps to integrate PME into our operations. We require
working capital to advance commissions to our agents prior to our receipt of the underlying
commission from the insurance carrier. On March 24, 2008, our subsidiary AHCP entered into a Loan
and Security Agreement (the Loan Agreement) with CFG, LLC (CFG). We are co-borrowers under the
Loan Agreement. Through the Loan Agreement, CFG loaned AHCP $1,604,972. We used some of the proceeds
from this loan to pay off existing debt that we had incurred to finance our agent commission
advance program for our Insurance Marketing Division. Additional proceeds from the loan are
available for our working capital needs, including the agent advance program. Outstanding balances
under the loan are charged interest at a rate that is the greater of (x) five (5) percentage points
above the prime rate as reported in the Wall Street Journal as of the first publication day of the
month, and (y) 10%. As of March 31, 2008, the interest rate was 11.0% per annum. We are obligated
to repay the loan in 36 monthly payments of $52,000, although the monthly amount may change as the
applicable interest rate changes. We may prepay the loan at any time without penalty. The debt is
secured by the assets, including rights to commissions from insurance carriers, of AHCP. CFG may
accelerate the amounts owed under the loan should we default in our obligations under the Loan
Agreement.
Growth in our Insurance Marketing Division will necessitate additional financing to fund
future advances. Additionally, if we incur losses from the operation of our Regional Healthcare
Division, our cash and working capital may be reduced or consumed. We are attempting to modify our
arrangements for clearing credit card charges so that less cash will be required to be pledged to
our clearing service providers. However, there is no assurance that those efforts will be
successful.
Because our capital requirements cannot be predicted with certainty, there is no assurance
that we will not require any additional financing during the next twelve months, and if required,
that any additional financing will be available on terms satisfactory to us or advantageous to our
stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any investments in market risk sensitive investments.
ITEM 4. CONTROLS AND PROCEDURES (and ITEM 4T. CONTROLS AND PROCEDURES)
Our Interim 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 Interim 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 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 quarter end close process and the preparation of this report, an
evaluation was performed under the supervision and with the participation of management, including
our Interim Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures over financial reporting. Based on
that
12
evaluation, the Interim Chief Executive Officer and Chief Financial Officer have concluded
that the Companys disclosure controls and procedures were not effective at March 31, 2008. The
Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were not effective due to the material weaknesses in internal control over financial
reporting noted below. Our management reported to our auditors and the audit committee of our board
of directors that, other than the changes being implemented to remediate the material weakness
noted below, no other change in our disclosure controls and procedures and internal control over
financial reporting occurred during the first quarter of 2008 that would materially affect or was
reasonably likely to materially affect our disclosure controls and procedures or internal control
over financial reporting.
The following material weaknesses form the basis for our conclusion at March 31, 2008:
Insurance Marketing Division Commission Processing. Our processing and recording of commission
revenues earned and commission expenses earned by and payable to agents are key determinants of
material revenues and expenses reported in our financial statements. The processing and recording
of commission revenue and expense, together with the accurate and timely disbursement of commission
payments to agents, are dependent upon our timely receipt of complete and accurate commission information from
the insurance carriers whose policies we sell. Our failure to receive such commission information
in a timely, complete and accurate fashion could adversely impact our ability to pay commissions in
a timely and accurate manner or to state revenues or expenses in our financial statements in a
materially correct manner. While we have established multiple compensating manual processes
designed to partially mitigate these weaknesses, we nevertheless have insufficient control
procedures in place to fully assure that commission information received from those insurance
carriers is complete, accurate or received in a timely manner. Additionally, some information is
processed for us by outside third party service bureaus or administrators. Some of those third
party service bureaus or administrators have not had their controls evaluated by independent
registered accountants and they have not received SAS 70 reports on their controls. We have
performed limited reviews of their controls and have determined that they have insufficient
information technology general controls, as further discussed below. Our remediation of the
material weakness in controls over the processing of commissions for our Insurance Marketing
Division necessitates the development and implementation of a new information technology system
that provides us with assurance as to the receipt, from insurance carriers, of commission
information in a timely, complete and accurate fashion and replaces or replicates the processes
currently performed by certain of the third-party service bureaus or administrators discussed
above. We anticipate that these remediation efforts may not be completed until late in 2008.
Information Technology General Controls. During our assessment of internal controls over financial
reporting, as they apply to or are affected by our information technology functions, we determined
that we had numerous weaknesses in both our internal information technology controls and those at
third-party service bureaus or administrators, including:
|
|
Lack of controls over the transfer of data to and from third party service bureaus or
administrators, carriers and us, |
|
|
|
Lack of a rigorous software development methodology, |
|
|
|
Lack of documented change control, |
|
|
|
Weak service level management, |
|
|
|
Informal security processes, |
|
|
|
Inconsistent help desk functions, |
|
|
|
Inadequately documented data backups, |
|
|
|
Inadequate infrastructure acquisition and maintenance, and |
|
|
|
Poor operating controls. |
As discussed above, our remediation of the material weakness in controls over information
technology controls as they relate to the processing of commissions for our Insurance Marketing
Division will necessitate the development and implementation of a new information technology system
that provides us with assurance as to the receipt, from insurance carriers, of commission
information in a timely, complete and accurate fashion and replaces or replicates the processes
currently performed by certain of the third-party service bureaus or administrators discussed
above. We anticipate that these remediation efforts may not be completed until late in 2008.
Further, the remediation of the material weakness in controls over information technology controls
as they relate to our Consumer Plan Division will require the migration of our processing for that
business to the automated processing platforms acquired by us through our acquisition of PME in the
fourth quarter of 2007. We believe that this migration may be completed by mid-2008.
13
We anticipate the actions described above and resulting improvements in controls will
strengthen our internal control over financial reporting and will, over time, address the related
material weaknesses that we identified as of March 31, 2008. However, because many of the controls
in our system of internal controls rely extensively on manual review and approval, the successful
operation of these controls for, at least, the next several quarters may be required prior to
management being able to conclude that the material weaknesses have been remediated.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as provided below, there have been no material developments in legal proceedings
reported by us in our Annual Report on Form 10-K. There were no new material legal proceedings that
arose during the quarter ended March 31, 2008.
With respect to the States General Life Insurance Matter described more fully in our Annual
Report on Form 10-K, our Motion for Summary Judgment on various matters was granted on May 6,
2008. The order granting our motion dismissed the Special Deputy Receivers causes of action
related to recovery from affiliates, fraudulent transfers, avoidable preferences and under the
Uniform Fraudulent Transfer Act. While the granting of our motion does not summarily dismiss the
case, it does narrow the issues significantly and makes it less likely that the Special Deputy
Receiver will be able to recover any amount from us.
ITEM 1A. RISK FACTORS
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 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. |
14
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 THE FIRST QUARTERS OF 2008 AND 2007 WE INCURRED LOSSES FROM OPERATIONS AND THESE LOSSES
MAY CONTINUE.
During the three months ended March 31, 2008 and 2007 we incurred losses before taxes of $1,022,000 and $296,000, respectively, and net losses of $1,043,000 and $325,000,
respectively. As part of the net losses in prior years, we incurred goodwill
impairment charges of $12,069,000, $6,440,000 including tax considerations of $426,000, and
$12,900,000 in 2007, 2006 and 2005, respectively. In 2007, we recorded goodwill impairment charges
of $4,092,000 for Foresight due to the loss of significant contracts by the Regional Healthcare
Division, $3,377,000 for Capella due to the failure of certain new product and marketing
initiatives by the Consumer Plan Division to achieve expected results, and $4,600,000 for the
Insurance Marketing Division due to significant declines in sales of Medicare supplemental
policies. In 2006, we recorded goodwill impairment charges of $4,066,000 including tax
considerations of $426,000 for Foresight (the Regional Healthcare Division and $2,800,000 for
Capella (the Consumer Plan Division). In 2005, we recorded a goodwill impairment charge of
$12,900,000 related to Capella (the Consumer Plan Division). The operating losses before goodwill
impairment charges in 2007 and 2005 were primarily attributable to the continuing costs associated
with our medical savings program. There is no assurance that operating losses will not continue or
that our operations will become or continue to be profitable in 2008 or thereafter.
WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL ON A TIMELY BASIS OR ON ACCEPTABLE TERMS TO
FUND OUR WORKING CAPITAL REQUIREMENTS.
As a result of our decline in revenues, our merger with ICM, our acquisition of PME, and
certain marketing and sales initiatives, we have used significant amounts of cash in our operations
and in financing and investing activities. As of March 31, 2008, we had a balance of $1.4 million
of unrestricted cash. In the first quarter of 2008, cash used in investing and financing activities
was $.8 million and our operating activities used $.6 million in cash. This resulted in a decrease
of $1.3 million in our unrestricted cash and cash equivalents during the quarter.
We expect that we will need significant additional cash resources to operate and execute our
business plan in the future, particularly with respect to our agent advance commission programs
that are critical to the success of our Insurance Marketing Division. Our future capital
requirements will depend on many factors, including our ability to maintain our existing cost
structure and return on sales, fund obligations for additional capital and execute our business and
strategic plans as currently conceived. If these resources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain a credit facility.
The sale of additional equity securities may result in additional dilution to our stockholders.
Additional indebtedness could result in debt service obligations and lender imposed operating and
financing covenants that restrict our operations. In addition, financing might be unavailable in
amounts or on terms acceptable to us, if at all.
THE PENDING FEDERAL INVESTIGATION RELATED TO OUR REGIONAL HEALTHCARE DIVISION MAY RESULT IN
THE IMPOSITION OF SUBSTANTIAL PENALTIES AND REQUIRE SUBSTANTIAL RESTITUTION PAYMENTS TO LOCAL
GOVERNMENT AGENCIES.
The former CEO of our Regional Healthcare Division subsidiary, Foresight (formerly Access
HealthSource, Inc.), is currently under federal investigation related to the obtaining of certain
contracts with local government agencies or entities in the El Paso area. Although no indictments
have occurred, we believe that the investigation involves, among other things, allegations of
corruption relating to contract procurement for Foresight by its former Chief Executive Officer,
Frank Apodaca. In addition to the negative financial effect from the loss of business by the
Regional Healthcare Division, we have suffered and may continue to suffer the adverse publicity
associated with the investigation. This adverse publicity may adversely affect the reputation of
our other divisions and their ability to attract business, and secure financing. We provide no
assurance as to the outcome of the investigation. Our financial condition and the results of
operations will be adversely affected in the event that we become obligated to pay fines, make
restitution payments to the applicable local governmental agencies or entities, and result in the
imposition of license restrictions or terminations. We have accrued $125,000 for resolution of
this matter.
OUR REGIONAL HEALTHCARE DIVISION SUBSIDIARY, FORESIGHT, 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.
The Regional Healthcare Division (Foresight) 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. This Divisions primary market is
15
governmental entities in the
metropolitan area of El Paso, Texas, including cities and school districts. There are a limited
number of these types of entities within that metropolitan area. During the second and third
quarters of 2007, we announced several adverse events related to the loss of two major customers
and possible loss or non-renewal of another major customer beyond contract expirations in 2007. As
of June 30, 2007, we re-evaluated the carrying value of goodwill related to Foresight (and this
Division) and determined that an impairment charge of $4,092,000 that reduced the carrying value of
the goodwill to zero for the loss of these contracts was appropriate. There is no assurance that
the Regional Healthcare Division will obtain renewal or extension on its remaining contracts. One
remaining client accounts for 45% of the divisions revenue. The loss of any of these remaining
contractual relationships will adversely affect 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 HAVE IDENTIFIED MATERIAL WEAKNESSES IN OUR INTERNAL CONTROLS THAT COULD AFFECT OUR ABILITY TO
ENSURE TIMELY AND RELIABLE FINANCIAL REPORTS.
Our processing and recording of commission revenues earned and commission expenses payable to
agents are key determinants of material revenues and expenses reported in our financial statements.
This processing and recording of commission revenue and expense, together with the accurate and
timely disbursement of commission payments to certain agents, is dependent upon our timely receipt
of complete and accurate information about such commissions from the insurance carriers whose
policies we sell. While we have established multiple compensating manual processes designed to
partially mitigate these weaknesses, we nevertheless have insufficient control procedures in place
to fully assure that commission information received from those insurance carriers is complete,
accurate or received in a timely manner. Additionally, some information is processed for us by
outside third-party service bureaus or administrators. Some of those third-party service bureaus or
administrators have not had their controls evaluated by independent registered accountants and they
have not received SAS 70 reports on their controls. We have performed limited reviews of their
controls and have preliminarily determined that they have insufficient information technology
controls. Additionally, we determined that we had numerous weaknesses in our own internal
information technology controls in these areas. Our failure to receive and process such commission
information in a timely, complete and accurate fashion or to process it accurately could adversely
impact our ability to pay commissions to our agents in a timely and accurate manner or to state
revenues or expenses in our financial statements in a materially correct manner.
WE RELY ON OUR INSURANCE CARRIER PARTNERS TO ACCURATELY AND REGULARLY PREPARE COMMISSION REPORTS,
AND IF THESE REPORTS ARE INACCURATE OR NOT SENT TO US IN A TIMELY MANNER, OUR RESULTS OF
OPERATIONS COULD SUFFER.
Our Insurance Marketing Division generates revenues primarily from the receipt of commissions
paid to us by insurance companies based upon the insurance policies sold to consumers through
agents with which we have contracted. These revenues are in the form of first year and renewal
commissions that vary by company and product. In calculating the amount of commission earned by us
and in accounting for commission paid to us by insurance companies, we rely on data not under our
control, including data provided to us by the insurance company and premium collection and payment
service providers engaged by the insurance company to calculate and pay commissions. The data that
we receive may fluctuate as the insurance company or its collection and payment service providers
make adjustments to their reports of policies sold. We have implemented our own processes to
evaluate the data that we receive to help confirm that it is consistent with the number and types
of policies that we believe have been sold. However, it is difficult for us to independently
determine whether carriers are reporting all commissions due to us, primarily because the majority
of our members terminate their policies by discontinuing their premium payments to the carrier
instead of informing us of the cancellation. Because we cannot always rely on the accuracy or
timeliness of the data that we receive from the insurance company or its payment service
providers, our financial reports are subject to adjustment and we may not collect and
recognize revenue that we are entitled to, both of which would harm our business, operating results
and financial condition.
The same data from insurance carriers or their payment service providers is used to calculate
the balances of advanced commissions owed by us to the insurance carrier or owed to us by agents.
Because we cannot always rely on the accuracy or timeliness of the data that we receive from the
insurance company or its payment service, our calculation of these balances may fluctuate and
resulting adjustments may adversely affect our business, operating results and financial condition.
Our processing and recording of commission revenues earned and commission expenses payable to
agents are key determinants of material revenues and expenses reported in our financial statements.
This processing and recording of commission revenue and expense, together with the accurate and
timely disbursement of commission payments to agents, is dependent upon our timely receipt of
complete and accurate information about such commissions from the insurance carriers whose policies
we sell. Our failure to receive such commission information in a timely, complete and accurate
fashion could adversely impact our ability to pay commissions in a timely and accurate manner or to
state revenues or expenses in our financial statements in a materially correct manner.
16
OUR REVENUES IN THE CONSUMER PLAN DIVISION ARE LARGELY DEPENDENT ON THE INDEPENDENT MARKETING
REPRESENTATIVES, WHOSE REDUCED SALES EFFORTS OR TERMINATION HAVE RESULTED, AND MAY CONTINUE TO
RESULT, IN SIGNIFICANT LOSSES 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 USA Healthcare
Savings and Care Entréetm medical savings programs. Our independent marketing
representatives typically offer and sell these programs 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 programs. Also, our ability
to attract and retain marketing representatives could be negatively affected by adverse publicity
relating to our programs 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 CONSUMER PLAN DIVISION 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 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 Consumer Plan Division products 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 TWO KEY PREFERRED PROVIDER ORGANIZATIONS AND THE LOSS OF OR A CHANGE
IN OUR RELATIONSHIPS WITH THESE PROVIDERS 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 have obtained savings on medical services through
our Care Entréetm program. PME has utilized the Galaxy Health Network
(Galaxy) preferred provider organization. The loss of PHCS or Galaxy as a preferred provider
organization or a disruption of our members access to PHCS or Galaxy could affect our ability to
retain our members and could, therefore, adversely affect our business. While we currently enjoy a
good relationship with Galaxy, 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
17
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, 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 AND RELATED PRIVATE PARTY LITIGATION MAY ADVERSELY AFFECT OUR FINANCIAL
POSITION AND LIMIT OUR OPERATIONS.
In recent years, several states have enacted laws and regulations that govern discount medical
program organizations (DMPOs). The laws vary in scope, ranging from registration to a comprehensive
licensing process with oversight over all aspects of the program, including the manner by which
discount medical programs are sold, the price at which they are sold, the relationship of the DMPO
licenses or registrations for our Consumer Plan Division subsidiaries. We hold these licenses in
every jurisdiction where a license or registration is required to be held and where the respective
subsidiary conducts business. Because these laws and regulations are relatively new, we do not know
the full extent of their effect on our business or our ability to maintain all required licenses.
Our need to comply with these laws and regulations may adversely affect or limit our future
operations and the compliance cost has and will likely continue to have a material adverse 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 market memberships in associations that have been formed to provide various consumer
benefits to their members. These associations may include in their benefit packages insurance
products that are issued under group or blanket policies covering the associations members. Most
states allow these memberships to be sold under certain circumstances without a licensed insurance
agent making each sale. If a state were to determine that our sales of these memberships do not
comply with their regulations, our ability to continue selling these memberships would be adversely
affected and we may subject us to fines and penalties and may require our payment of refunds or
restitutions to the associations and their members.
The business practices and compensation arrangements of the insurance intermediary industry,
including our practices and arrangements, are subject to uncertainty due to investigations by
various government authorities and related private litigation. The
legislatures of various states may adopt new laws addressing contingent commission
arrangements, including laws prohibiting these arrangements, and addressing disclosures of these
arrangements to insureds. Various state departments of insurance may also adopt new regulations
addressing these matters. While it is not possible to predict the outcome of the government
inquiries and investigations into the insurance industrys commission payment practices or the
response by the market and government regulators, any material decrease in our profit-sharing
contingent commissions is likely to have an adverse effect on our results from operations.
OUR FAILURE TO PROTECT OUR MEMBERS AND CUSTOMERS DATA COULD ADVERSLY AFFECT OUR FINANCIAL
POSITION AND OPERATIONS BY DAMAGING OUR REPUTATION, HARMING OUR BUSINESS AND CAUSING US TO EXPEND
CAPITAL AND OTHER RESOURCES TO PROTECT AGAINST FUTURE SECURITY BREACHES.
Certain of our services are based upon the collection, distribution, and protection of
sensitive private data. Unauthorized users might access that data, and human error or technological
failures might cause the wrongful dissemination of that data. If we experience a security breach,
the integrity of certain of our services may be affected and such a breach could violate certain of
our marketing partner agreements, which could give our marketing partners the right to terminate
their agreements with us. We have incurred, and may incur in the future, significant costs to
protect against the threat of a security breach. We may also incur significant
18
costs to solve
problems that may be caused by future breaches or to prevent such breaches. Any breach or perceived
breach could subject us to legal claims from our marketing partners or customers and/or regulatory
or law enforcement entities under laws that govern the protection of non-public personal
information. Moreover, any public perception that we have engaged in the unauthorized release of,
or have failed to adequately protect, private information could adversely affect our ability to
attract and retain members and customers. In addition, unauthorized third parties might alter
information in our databases that could adversely affect both our ability to market our services
and the credibility of our information.
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:
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the evolving interpretations of existing laws and regulations, and |
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|
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:
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result in enforcement action and imposition of penalty, |
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|
require modification of the marketing representative network system, |
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result in negative publicity, or |
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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.
THE ADVERTISING AND PROMOTIONAL ACTIVITIES OF OUR INDEPENDENT MARKETING REPRESENTATIVES AND
PRIVATE-LABEL CUSTOMERS ARE SUBJECT TO AND MAY VIOLATE FEDERAL AND STATE REGULATION CAUSING US TO
BE SUBJECT TO THE IMPOSITION OF CIVIL PENALTIES, FINES, INJUNCTIONS AND LOSS OF STATE LICENSES.
The Federal Trade Commission (FTC) and most states regulate advertising, product claims, and
other consumer matters, including advertising of our healthcare savings products. All advertising,
promotional and solicitation materials used by our independent marketing representatives and
private label customers must be approved by us prior to use. We are currently under investigation
by the Texas Attorney General as a result of the activities of one of our private label customers,
with whom we have terminated our relationship. While we have not been the target of FTC enforcement
action for the advertising of, or product claims
19
related to, our healthcare savings products, there
can be no assurance that the FTC will not question our advertising or other operations in the
future. In addition, there can be no assurance that a state, in addition to Texas, will not
interpret our product claims presumptively valid under federal law as illegal under that states
regulations, or that future FTC regulations or decisions will not restrict the permissible scope of
the claimed savings. We are subject to the risk of claims by our independent marketing
representatives and private label customers and members of our Care Entreetm
programs of the Consumer Plan Division and those under private label arrangements may file actions
on their own behalf, as a class or otherwise, and may file complaints with the FTC or state or
local consumer affairs offices. These agencies may take action on their own initiative against us
for alleged advertising or product claim violations. These actions may include consent decrees and
the refund of amounts paid by the complaining members, refunds to an entire class of independent
marketing representatives, private label customers or members, or other damages, as well as changes
in our method of doing business. A complaint because of a practice of one independent marketing
representative or private label customer, whether or not that practice was authorized by us, could
result in an order affecting some or all of our independent marketing representatives and private
label customers in the particular state, and an order in one state could influence courts or
government agencies in other states considering similar matters. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or judgments and could have
a material adverse effect on our operations.
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 were 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 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 OUR RELIANCE ON OUR MANAGEMENT INFORMATION SYSTEM MAY OCCUR
AND COULD ADVERSELY AFFECT OUR CLIENT RELATIONSHIPS.
We manage certain information related to our Consumer Plan Division membership on an
administrative proprietary information system. Because it is a proprietary system, 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:
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|
|
we will be able to compete successfully; |
|
|
|
|
our competitors will not develop programs that render our programs less marketable or
even obsolete; or |
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|
we will be able to successfully enhance our programs when necessary. |
THE RECORDED GOODWILL ASSOCIATED WITH OUR ACQUISITIONS OF ICM AND PME MAY BECOME IMPAIRED AND
REQUIRE A SUBSTANTIAL WRITE-DOWN AND THE RECOGNITION OF AN IMPAIRMENT EXPENSE.
In connection with our acquisitions of Capella, ICM and PME, we recorded goodwill that had a
net aggregate asset value of $5,489,000 at December 31, 2007 and at March 31, 2008. This carrying
value has been reduced through impairment charges of
20
$12,069,000 in 2007, $6,440,000 in 2006, and $12,900,000 in 2005. 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.
WE MAY FIND IT DIFFICULT TO INTEGRATE PMES BUSINESSES AND OPERATIONS WITH OUR BUSINESS AND
OPERATIONS.
We believe that PMEs marketing and distribution of dental and vision network access and
non-insurance medical discount programs will complement and fit well with our Consumer Plan
Division. However, we will not achieve the anticipated benefits of that acquisition unless we
successfully integrate the PME operations. There can be no assurance that this will occur.
WE ARE DEPENDENT ON THIRD-PARTY SERVICE PROVIDERS AND THE FAILURE OF THESE SERVICE PROVIDERS TO
ADEQUATELY PROVIDE SERVICES TO US COULD AFFECT OUR FINANCIAL RESULTS BECAUSE THIS FAILURE COULD
ADVERSELY 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. We are also dependent upon third-party data
processing and administrative service providers for the processing of commission revenue and
expense for our Insurance Marketing Division. As a result of these outsourcing arrangements, we may
lose direct control over 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. Although we are transitioning the services provided to us by Lifeguard to systems that
we now own or manage as a result of our acquisition of PME, we will remain dependent on Lifeguard
for certain services until that transition is complete and for the accurate completion of the
transition.
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 our Insurance Marketing Division has strategic
relationships, more than 85% of this Divisions 2007 revenue and 95% of its 2006 and 2005 revenue
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.
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.
21
Furthermore, of the approximately 5,000 independent agents with whom our Insurance Marketing
Division has active distribution and marketing relationships, more than 80% of this Divisions
revenues are 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 MARKETPLACE 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 our
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 offer 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.
ON AUGUST 19, 2007, PETER W. NAUERT, OUR CHIEF EXECUTIVE OFFICER, ON WHOM WE WERE HIGHLY
DEPENDENT, PASSED AWAY AND THE CONSEQUENCES OF THE LOSS OF HIS SERVICES ARE CURRENTLY
INDETERMINABLE.
We were highly dependent upon Peter W. Nauert, the Companys Chief Executive Officer and
Chairman. Mr. Nauerts management skills, reputation and contacts within the insurance industry
were key elements of our business plans. Mr. Nauert passed away August 19, 2007 after a brief
illness. The ultimate effect and consequences of the loss of Mr. Nauerts services are not
currently determinable. The loss of Mr. Nauerts management skills, reputation and insurance
industry contacts may adversely affect the growth and success we expect to obtain from our merger
with ICM.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a) None.
b) None.
c) None.
d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits will be provided upon request by the U.S. Securities and Exchange Commission
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Exhibit |
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No. |
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Description |
3.1
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Registrants Amended and Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 of Registrants Form 10-K filed with the Commission on April
2, 2007. |
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3.2
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Registrants Amended and Restated Bylaws incorporated by reference to Exhibit 3.2 of
Registrants Form 10-K filed with the Commission on April 2, 2007. |
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4.1
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Form of certificate of the common stock of Registrant is incorporated by reference to
Exhibit 4.1 of Registrants Form 10-K filed with the Commission on April 2, 2007. |
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4.2
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Precis, Inc. 1999 Stock Option Plan (amended and restated), incorporated by reference
to the Schedule 14A filed with the Commission on June 23, 2003. |
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4.3
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Precis, Inc. 2002 IMR Stock Option Plan, incorporated by reference to the Schedule 14A
filed with the Commission on June 26, 2002. |
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4.4
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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 |
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31.1
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Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of Ian R. Stuart as Interim
President and Chief Executive Officer. |
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31.2
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Certification Pursuant to Rule 13a-14(a) and 15d-14(a) of Robert L. Bintliff as Chief
Financial Officer and Principal Accounting Officer. |
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32.1
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
Sarbanes-Oxley Act of Ian R. Stuart as Interim President and Chief Executive Officer. |
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32.2
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Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
Sarbanes-Oxley Act of Robert L. Bintliff as Chief Financial Officer and Principal
Accounting Officer. |
23
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.
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ACCESS PLANS USA, INC.
(Registrant)
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Date: May 9, 2008 |
By: |
/s/ IAN R. STUART
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Ian R. Stuart |
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Interim President and Chief Executive Officer |
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Date: May 9, 2008 |
By: |
/s/ ROBERT L. BINTLIFF
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Robert L. Bintliff |
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Chief Financial Officer and Principal Accounting Officer |
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24
INDEX TO FINANCIAL STATEMENTS
25
ACCESS
PLANS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2008 AND DECEMBER 31, 2007
|
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As of |
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As of |
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Dollars in Thousands |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
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(unaudited) |
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|
ASSETS |
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,372 |
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|
$ |
2,711 |
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Restricted short-term investments |
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|
1,735 |
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|
|
1,231 |
|
|
|
|
|
|
|
|
Total cash and short-term investments |
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3,107 |
|
|
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3,942 |
|
Accounts and notes receivable, net |
|
|
1,083 |
|
|
|
1,054 |
|
Advanced agent commissions, net |
|
|
6,062 |
|
|
|
5,332 |
|
Income taxes receivable, net |
|
|
70 |
|
|
|
70 |
|
Prepaid expenses |
|
|
298 |
|
|
|
193 |
|
Deferred tax asset |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
10,620 |
|
|
|
10,614 |
|
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
|
706 |
|
|
|
682 |
|
Goodwill, net |
|
|
5,489 |
|
|
|
5,489 |
|
Other intangible assets, net |
|
|
3,707 |
|
|
|
3,960 |
|
Other assets |
|
|
189 |
|
|
|
73 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
20,711 |
|
|
$ |
20,818 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
628 |
|
|
$ |
563 |
|
Short-term debt |
|
|
736 |
|
|
|
1,255 |
|
Income taxes payable |
|
|
261 |
|
|
|
267 |
|
Unearned
commissions |
|
|
4,362 |
|
|
|
4,126 |
|
Deferred service fees and deferred enrollment fees, net of acquisition costs |
|
|
295 |
|
|
|
378 |
|
Current portion of capital leases |
|
|
|
|
|
|
48 |
|
Other accrued liabilities |
|
|
3,055 |
|
|
|
2,901 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
9,337 |
|
|
|
9,538 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,124 |
|
|
|
|
|
Deferred tax liability |
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
10,461 |
|
|
|
9,561 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 20,749,145
issued and 20,269,145 outstanding |
|
|
207 |
|
|
|
207 |
|
Additional paid-in capital |
|
|
40,655 |
|
|
|
40,619 |
|
Accumulated deficit |
|
|
(29,603 |
) |
|
|
(28,560 |
) |
Less: treasury stock (480,000 shares) |
|
|
(1,009 |
) |
|
|
(1,009 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
10,250 |
|
|
|
11,257 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
20,711 |
|
|
$ |
20,818 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
26
ACCESS
PLANS USA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
Dollars in Thousands, except Earnings per Share |
|
2008 |
|
|
2007 |
|
Commission and service revenues |
|
$ |
10,402 |
|
|
$ |
8,189 |
|
Interest income on agent advances |
|
|
168 |
|
|
|
84 |
|
Interest income |
|
|
15 |
|
|
|
52 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
10,585 |
|
|
|
8,325 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Commissions |
|
|
5,621 |
|
|
|
3,219 |
|
Cost of operations |
|
|
2,810 |
|
|
|
2,408 |
|
Sales and marketing |
|
|
925 |
|
|
|
956 |
|
General and administrative |
|
|
1,887 |
|
|
|
1,743 |
|
Depreciation and amortization |
|
|
335 |
|
|
|
247 |
|
Interest expense |
|
|
29 |
|
|
|
48 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
11,607 |
|
|
|
8,621 |
|
|
|
|
|
|
|
|
Loss before taxes |
|
|
(1,022 |
) |
|
|
(296 |
) |
Provision for income taxes expense |
|
|
21 |
|
|
|
29 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,043 |
) |
|
$ |
(325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
Basic and diluted: |
|
$ |
(0.05 |
) |
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding, basic and diluted: |
|
|
20,269,145 |
|
|
|
16,561,766 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
27
ACCESS
PLANS USA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK |
|
|
ADDITIONAL |
|
|
ACCUMULATED |
|
|
TREASURY STOCK |
|
|
|
|
Dollars in Thousands |
|
SHARES |
|
|
AMOUNT |
|
|
PAID-IN CAPITAL |
|
|
DEFICIT |
|
|
SHARES |
|
|
AMOUNT |
|
|
TOTAL |
|
Balance, December 31,
2007 |
|
|
20,749,145 |
|
|
$ |
207 |
|
|
$ |
40,619 |
|
|
$ |
(28,560 |
) |
|
|
(480,000 |
) |
|
$ |
(1,009 |
) |
|
$ |
11,257 |
|
Stock option awards |
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,043 |
) |
|
|
|
|
|
|
|
|
|
|
(1,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008
(unaudited) |
|
|
20,749,145 |
|
|
$ |
207 |
|
|
$ |
40,655 |
|
|
$ |
(29,603 |
) |
|
|
(480,000 |
) |
|
$ |
(1,009 |
) |
|
$ |
10,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
28
ACCESS
PLANS USA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
Dollars in Thousands |
|
2008 |
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,043 |
) |
|
$ |
(325 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
335 |
|
|
|
250 |
|
Provision for losses on accounts and notes receivable |
|
|
48 |
|
|
|
(19 |
) |
Loss on disposal and impairment of fixed assets |
|
|
|
|
|
|
32 |
|
Stock options expense |
|
|
36 |
|
|
|
259 |
|
Changes in operating assets and liabilities (net of business acquired): |
|
|
|
|
|
|
|
|
Accounts and notes receivable, net |
|
|
(77 |
) |
|
|
120 |
|
Income taxes receivable, net of payable |
|
|
(6 |
) |
|
|
28 |
|
Inventory |
|
|
|
|
|
|
6 |
|
Prepaid expenses |
|
|
(105 |
) |
|
|
475 |
|
Other assets |
|
|
(117 |
) |
|
|
(12 |
) |
Accounts payable |
|
|
65 |
|
|
|
111 |
|
Accrued liabilities |
|
|
154 |
|
|
|
(196 |
) |
Deferred service fees and deferred enrollment fees, net of acquisition costs |
|
|
(83 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
Net cash (used) provided by operating activities |
|
|
(793 |
) |
|
|
659 |
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
(Increase) decrease in restricted short-term investments |
|
|
(504 |
) |
|
|
320 |
|
Increase in advanced agent commissions |
|
|
(730 |
) |
|
|
(361 |
) |
Purchase of fixed assets |
|
|
(105 |
) |
|
|
(144 |
) |
Cash acquired in business combination, net |
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,339 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Payments of capital leases |
|
|
(48 |
) |
|
|
(50 |
) |
Increase (decrease) in debt, net |
|
|
605 |
|
|
|
(44 |
) |
Unearned
commissions |
|
|
236 |
|
|
|
60 |
|
|
|
|
|
|
|
|
Net cash provided by (used) in financing activities |
|
|
793 |
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(1,339 |
) |
|
|
517 |
|
Cash and cash equivalents at beginning of period |
|
|
2,711 |
|
|
|
3,232 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,372 |
|
|
$ |
3,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure: |
|
|
|
|
|
|
|
|
Income taxes recovered (paid), net |
|
$ |
(35 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
29 |
|
|
$ |
48 |
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Accrued cash and stock issuance for consideration on business combination |
|
$ |
|
|
|
$ |
7,018 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
29
ACCESS PLANS USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Interim Financial Information
The accompanying condensed consolidated financial statements are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position at such dates and of the
operations and cash flows for the periods then ended. The financial information is presented in a
condensed format, and it does not include all of the footnote disclosure normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America. Operating results for the three months ended March 31, 2008 and 2007 are
not necessarily indicative of results that may be expected for the entire year. The preparation of
financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities and reported
amounts of revenues and expenses during the reporting periods under consideration. Actual results
could differ materially from such assumptions and estimates. The accompanying condensed
consolidated financial statements and related footnotes should be read in conjunction with the
Companys audited financial statements, included in its December 31, 2007 Form 10-K filed with the
Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform
to the current periods presentation.
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. (Capella), Insuraco USA LLC (Insuraco),
Access Healthsource, Inc., doing business as Foresight TPA (Foresight), and Protective Marketing
Enterprises, Inc. (PME). 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 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 as well
as allowances for doubtful recoveries of advanced agent commissions and accounts and notes
receivable. Actual results could differ from those estimates and such differences could be
material.
Revenue Recognition. Revenue recognition varies based on source.
Consumer Plan Division Revenues. The Company recognizes its Consumer Plan program membership
revenues, other than initial enrollment fees, ratably over the membership month. 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 for 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.
Insurance Marketing Division Revenues. The revenue of the Companys Insurance Marketing
Division is primarily from sales commissions due from the insurance companies it represents. These
sales commissions are generally a percentage of premiums collected. Commission income and policy
fees, other than initial enrollment fees, and corresponding commission expense payable to agents,
are generally recognized at their gross amount, as earned on a monthly basis, until such time as
the underlying policyholder contract is terminated. Advanced commissions received are recorded as
unearned insurance commissions and are recognized in income as earned. Initial enrollment fees are
deferred and amortized over the estimated lives of the respective policies. The estimated weighted
average life for the policies sold ranges from eighteen months to two years and is based upon the
Companys historical policyholder contract termination experience.
30
Regional Healthcare Division Revenues. The principal sources of revenues of the Companys
Regional Healthcare Division 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. Commission expense varies based upon source.
Consumer Plan. Commissions on Consumer Plan Division revenues are accrued in the month in
which a member has enrolled in the program. These commissions are only paid to the Companys
independent marketing representatives in the month following the receipt of the related membership
fees. In 2007, the Company began issuing advances of commissions on certain Consumer Plan programs
to increase sales representative recruitment. In 2008, the Company began paying accelerated
commissions, comprising amounts paid in excess of the initial revenue collected at the time of
sale, on certain programs. These commissions have been expensed as incurred, rather than being
capitalized and amortized over the expected lives of the respective programs.
Insurance Marketing. Commission expenses for the Insurance Marketing Division consist
primarily of commissions payable to agents and are generally recognized at their gross amount, as
earned on a monthly basis, until such time as the underlying policyholder contract is terminated.
Advances of commissions up to one year are paid to agents in the Insurance Marketing Division based
on certain insurance policy premium commissions. Collection of the commissions advanced may be
accomplished by withholding amounts due to the agents for future commissions on the policy upon
which the advance was made, commissions on other policies sold by the agent or, in certain cases,
commissions due to agents managing the agent to whom advances were made. We periodically assess the
collectibility of the amounts outstanding for commission advances and record an estimated allowance
for uncollectible amounts. This allowance for uncollectible advances is based upon review of the
aging of outstanding balances and estimates of future commissions expected to be due to the agents
to whom advances are outstanding and the agents responsible for their management.
Acquisition Costs. Certain policy acquisition costs, generally lead expenses for sales of
major medical policies, are capitalized and amortized over the estimated lives of the respective
policies, provided that the amount capitalized does not exceed the amount of capitalized and
deferred enrollment fees for the Insurance Marketing Division. The estimated weighted-average life
for the policies sold ranges from 18 to 24 months, and is based upon our historical policyholder
contract termination experience.
Advanced Agent Commissions. The Companys Insurance Marketing Division advances agent
commissions up to one year for certain insurance programs. Collection of the commissions advanced
(plus accrued interest) is accomplished by withholding amounts due to the agents for future
commissions on the policy upon which the advance was made, commissions on other policies sold by
the agent or, in certain cases, commissions due to agents managing the agent to whom advances were
made. Advanced agent commissions are reviewed periodically to determine if any advanced agent
commissions will likely be uncollectible. An allowance is provided for the estimated advanced agent
commission balance where recovery is considered doubtful. This allowance for uncollectible advances
required judgment and is based upon review of the aging of outstanding balances and estimates of
future commissions expected to be due to the agents to whom advances are outstanding and the agents
responsible for their management. Advances are written off when determined to be non-collectible.
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. Unrestricted short-term investments represent investments
with original maturities of more than three months and less than one year.
Restricted Short-Term Investments. Restricted short-term investments represent investments
with original maturities of one year or less pledged to obtain processing and collection
arrangements for credit card and automated clearing house payments.
Accounts Receivable. Accounts receivable generally represent commissions and fees due from
insurance carriers and plan sponsors. Accounts receivable are reviewed on a monthly basis to
determine if any receivables will be potentially uncollectible. An allowance is provided for any
accounts receivable balance where recovery is considered to be doubtful. Accounts receivable are
written off when they are determined to be uncollectible. The Company does not require collateral
as security for payment of 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 the shorter of their estimated useful lives or the lease term. Ordinary
maintenance and repairs are charged to expense as
31
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 |
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 capitalized, while data conversion, training and maintenance costs associated
with internal-use software are expensed as incurred. As of March 31, 2008 and 2007, the net book
value of capitalized software costs was $130,000 and $339,000, respectively. Amortization expense
related to capitalized software was $13,000 and $26,000 for the three months ended March 31, 2008
and 2007, respectively.
Intangible Asset Valuation. Intangible assets consist of goodwill and finite life intangible
assets. Goodwill represents the excess of acquisition costs over the fair value of net assets
acquired. Goodwill is not amortized. The other intangible assets represent the estimated value, at
the date of their acquisition, of policies in force (Customer Contracts), certain agent
relationships (Agent Relationships), and proprietary networks of contracted dental and vision
providers.
Recorded goodwill must be reviewed and analyzed to determine its fair value and possible
impairment. This review and analysis is conducted at least annually, and may be conducted more
frequently if an event occurs or circumstances change that would, more likely than not, reduce the
fair value of a reporting unit below its carrying amount. The aggregate fair market value of the
reporting units assets, including recorded goodwill, in excess of the fair value of the reporting
units liabilities, may not exceed the fair value of the reporting units equity. The fair value of
the reporting units equity is based upon valuation techniques that estimate the amount at which
the reporting unit as a whole could be bought or sold in a current transaction between willing
parties. The downward trending of our common stock price may have a material effect on the fair
value of our goodwill in future accounting periods.
As of the end of our 2007 third quarter, the Company performed an annual assessment of the
carrying value of goodwill as mentioned above. 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. The Company estimated fair values of Foresight and Capella using discounted
cash flow projections and other valuation methodologies in evaluating and measuring a potential
goodwill impairment charges. To the extent that, in the future, the estimates change or the
Companys stock price decreases, further goodwill write-downs may occur. Those assessments of the
carrying value of goodwill were reviewed and approved by the Audit Committee of the 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. As of March 31, 2008, we evaluated the probability of recognizing the benefit
of deferred tax assets through the reduction of taxes otherwise payable in the future. We
determined that a valuation allowance to fully offset net deferred tax assets was appropriate as of
March 31, 2008.
On July 14, 2006, the Financial Accounting Standards Board (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. We
adopted the provisions of FIN 48 on January 1, 2007. We have analyzed all filing positions in
federal and state tax jurisdictions where we are required to file income tax returns. Our major tax
jurisdictions include the federal jurisdiction and the state of Texas. Tax years open to
examination include 2003 through 2006 for the federal return. A federal audit for 2004 has been
completed with no change to our tax liability. The Texas audit for Capella for the years 2002-2005
have been concluded with no material change to our tax provision. We have elected to recognize
penalties and interest related to tax liabilities as a component of income tax expense and income
taxes payable. As of March 31, 2008 and 2007, income taxes payable included $55,000 and $90,000 of
accrued interest expense, respectively, and $3,750 and $26,000 of
accrued penalties, respectively, related to state tax
liabilities.
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. 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 three months ended
March 31, 2008 and 2007 was 1,292,500 and 893,354, respectively.
32
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.
During 2008, insurance commissions on sales of policies for two carriers amounted to 15.6% and
16.3% of our total revenue. Additionally, a material portion of our Regional Healthcare Divisions
revenues have historically been derived from its contractual relationships with a few key
governmental entities in the El Paso, Texas region. 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 Option Expense and Option-Pricing Model. Recognized compensation expense for stock
options granted to employees includes: (a) compensation cost for all share-based payments
previously granted, but not yet vested, based on the grant date fair value estimated in accordance
with the original provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock Based-Compensation, and (b) compensation cost for all share-based payments
currently granted based on the grant date fair value estimated in accordance with the provisions of
SFAS No. 123(R), Share- Based Payment. The binomial lattice option-pricing model is 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 period ended March 31, 2008 equal to the
expected option term. Expected pre-vesting forfeitures were estimated based on actual historical
pre-vesting forfeitures over the most recent period ended March 31, 2008 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.
Recently Issued Accounting Standards In September 2006, the FASB issued Statement of 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 U.S. Generally Accepted Accounting Principles
(GAAP) and expands disclosures about fair value measurements. Application of this standard is
required beginning in 2008. It has not had a material impact through March 31, 2008.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115, which is effective
for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to
measure many financial instruments and certain other items at fair value on specified election
dates. Such election, which may be applied on an instrument by instrument basis, is typically
irrevocable once elected. Subsequent unrealized gains and losses on items for which the fair value
option has been elected will be reported in earnings. Management does not presently anticipate
election to measure any of the Companys assets or liabilities on a fair value basis.
In December 2007, the FASB issued SFAS No. 141R (FAS 141R), Business Combinations, that
revises FAS 141 and changes multiple aspects of the accounting for business combinations. Under the
guidance in FAS 141R, the acquisition method must be used, which requires the acquirer to recognize
most identifiable assets acquired, liabilities assumed, and non-controlling interests in the
acquiree at their full fair value on the acquisition date. Goodwill is to be recognized as the
excess of the consideration transferred plus the fair value of the non-controlling interest over
the fair values of the identifiable net assets acquired. Subsequent changes in the fair value of
contingent consideration classified as a liability are to be recognized in earnings, while
contingent consideration classified as equity is not to be re-measured. Costs such as transaction
costs are to be excluded from acquisition accounting, generally leading to recognizing expense,
and, additionally, restructuring costs that do not meet certain criteria at acquisition date are to
be subsequently recognized as post-acquisition costs. FAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The company anticipates that adoption of
this pronouncement will not have a material impact on its financial position or results of
operations.
Reclassifications. Certain prior period amounts have been reclassified to conform to the
current periods presentation.
Note 3 Business Acquisitions
On January 30, 2007, the Company completed its merger with Insurance Capital Management USA,
Inc. (ICM). On October 1, 2007 the Company completed its acquisition of Protective Marketing
Enterprises, Inc. (PME).
33
The following proforma condensed results of operations have been prepared as if the Companys
acquisitions of ICM and PME occurred on January 1, 2007:
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
(unaudited) |
|
Dollars in Thousands |
|
2007 |
|
Service revenues |
|
$ |
13,437 |
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(734 |
) |
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, basic and diluted
Continuing operations |
|
$ |
(0.04 |
) |
|
|
|
|
Weighted average number of common shares
outstanding, basic and diluted: |
|
|
20,269,145 |
|
|
|
|
|
The proforma revenues for the three months ended March 31, 2007 reflected above include
$3,446,000 of revenue from PMEs operations. Because PME had discontinued much of its marketing
activities during 2007, its revenues declined to $1,320,000 for the three months ended December 31,
2007.
Note 4 Intangible Assets
The changes in the carrying amount of the Companys intangible assets for the three months
ended March 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer |
|
|
Agent |
|
|
Total |
|
Dollars in Thousands |
|
Goodwill |
|
|
Contracts |
|
|
Relationships |
|
|
(Unaudited) |
|
Intangible assets, balance as of December 31, 2007 |
|
$ |
5,489 |
|
|
$ |
1,704 |
|
|
$ |
2,256 |
|
|
$ |
9,449 |
|
Amortization of intangibles |
|
|
|
|
|
|
(177 |
) |
|
|
(76 |
) |
|
|
(253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, balance as of March 31, 2008 |
|
$ |
5,489 |
|
|
$ |
1,527 |
|
|
$ |
2,180 |
|
|
$ |
9,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill is subject to impairment of valuations as described above but is not subject to
amortization. During 2007, the Company recorded additions to intangible assets subject to
amortization of $4,773,000, with a weighted average amortization life of 4.6 years. The components
of finite-lived intangible assets acquired during 2007 are: $2,282,000 Customer contracts (3.2
years); $1,900,000 Agent relationships (8 years); and $591,000 Network contracts (8 years).
Note 5 Advanced Agent Commissions
Advanced agent commissions consist of:
|
|
|
|
|
|
|
As of March 31, 2008 |
|
Dollars in Thousands |
|
(Unaudited) |
|
Advances funded by: |
|
|
|
|
Specialty lending corporation |
|
$ |
1,605 |
|
Insurance carriers |
|
|
4,362 |
|
Self-funded |
|
|
495 |
|
|
|
|
|
Sub-total |
|
|
6,462 |
|
Allowance for doubtful recoveries |
|
|
(400 |
) |
|
|
|
|
Total advanced agent commissions |
|
$ |
6,062 |
|
|
|
|
|
Note 6 Short-term and Long-term Debt
The Companys short-term and long-term debt consists of:
34
|
|
|
|
|
|
|
As of March 31, 2008 |
|
Dollars in Thousands |
|
(Unaudited) |
|
Short-term debt: |
|
|
|
|
Loan from specialty lending corporation |
|
$ |
481 |
|
Promissory note from related party (Peter Nauert Estate) |
|
|
255 |
|
|
|
|
|
Total short-term debt |
|
$ |
736 |
|
|
|
|
|
Long-term debt: |
|
|
|
|
Loan from specialty lending corporation |
|
$ |
1,124 |
|
|
|
|
|
Total long-term debt |
|
$ |
1,124 |
|
|
|
|
|
On September 28, 2007, the Company entered into a loan arrangement with the Peter W. Nauert
Revocable Trust U/A/D 8-71978 (the Nauert Trust). The Nauert Trust holds approximately 27% of the
Companys issued and outstanding common stock. Under this arrangement, the Nauert Trust lent the
Company $500,000 as evidenced by the Revolving Promissory Note (the Note) of which $255,000
remains outstanding at March 31, 2008. The Note matures September 28, 2008 and all principal and
interest will be due and payable. The outstanding principal balance of the Note accrues interest at
a rate of 0.5% below the Prime Rate charged by a designated local bank (4.75% at March 31, 2008).
Based upon the current interest rate, the Note requires monthly principal and interest payments of
$43,321. The proceeds from this loan were used to pay down existing financing arrangements with an
unrelated third-party lender.
On March 24, 2008, our subsidiary AHCP entered into a Loan and Security Agreement (the Loan
Agreement) with CFG, LLC (CFG). The Company is a co-borrower under the Loan Agreement. Through
that Loan Agreement, CFG loaned to AHCP $1,604,972. The Company used part of the loan proceeds to
pay off existing indebtedness incurred to finance its agent commission advance program for the
Insurance Marketing Division. Additional loan proceeds are available for the Companys working
capital needs, including the agent advance program. Outstanding balances under this loan are bear
interest at a rate that is the greater of (x) five percentage points above the Prime Rate (as
defined in the Wall Street Journal as of the first publication day of the month), or (y) 10%. As of
March 31, 2008, the interest rate was 11.0% per annum. The principal amount of this loan is payable
in 36 monthly
installments of $52,000, plus interest. The loan may be prepaid without penalty. The loan is
secured by the assets, including rights to commissions from insurance carriers, of AHCP. CFG may
accelerate the principal installments in the event of our default under the Loan Agreement terms.
Note 7 Common Stock Options
Total estimated unrecognized compensation cost from unvested stock options as of March 31,
2008 was approximately $87,000, which is expected to be recognized over a weighted average period
of approximately 1.4 years.
The following table summarizes stock options outstanding and changes during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
Contractual |
|
|
|
|
|
|
|
|
Exercise |
|
Average |
|
Term |
|
Aggregate |
|
|
Number of Shares |
|
Price |
|
Fair Value |
|
(in years) |
|
Intrinsic Value |
Outstanding at January 1, 2008 |
|
|
1,317,500 |
|
|
$ |
1.95 |
|
|
$ |
1.16 |
|
|
|
2.9 |
|
|
$ |
250,000 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
Forfeited |
|
|
(25,000 |
) |
|
|
2.00 |
|
|
|
1.71 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
1,292,500 |
|
|
|
1.95 |
|
|
|
1.15 |
|
|
|
2.5 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested (exercisable) |
|
|
1,013,750 |
|
|
|
1.98 |
|
|
|
1.18 |
|
|
|
2.5 |
|
|
$ |
|
|
Non-Vested |
|
|
278,750 |
|
|
|
1.83 |
|
|
|
1.04 |
|
|
|
3.3 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
1,292,500 |
|
|
$ |
1.95 |
|
|
$ |
1.15 |
|
|
|
2.7 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No stock options were exercised during the three months ended March 31, 2008. The Company did
not realize any tax deductions related to the exercise of stock options during this period. The
Company will record such deductions to deferred tax assets and/or additional paid in capital when
realized. As of March 31, 2008 shares available for grant under the 1999 Option Plan and 2002
Non-Employee Stock Option Plan were 603,294 and 929,500, respectively.
35
Stock options outstanding and currently exercisable at March 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Life |
|
Average |
|
|
|
|
|
Average |
Range of exercise prices |
|
Outstanding |
|
(in years) |
|
Exercise Price |
|
Outstanding |
|
Exercise Price |
$1.05 to $1.75 |
|
|
287,000 |
|
|
|
3.8 |
|
|
$ |
1.37 |
|
|
|
287,000 |
|
|
$ |
1.37 |
|
$1.76 to $3.55 |
|
|
988,500 |
|
|
|
2.4 |
|
|
|
2.08 |
|
|
|
709,750 |
|
|
|
2.17 |
|
$3.56 to $5.25 |
|
|
17,000 |
|
|
|
0.8 |
|
|
|
4.36 |
|
|
|
17,000 |
|
|
|
4.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,292,500 |
|
|
|
2.6 |
|
|
|
1.95 |
|
|
|
1,013,750 |
|
|
|
1.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Related Party Transactions
Mr. Frank Apodaca, Foresights former Chief Operating Officer, had an agreement with Ready One
Industries, formerly National Center for Employment of the Disabled (NCED). NCED was the party
from whom the Company acquired Foresight in June 2004. This agreement between Mr. Apodaca and NCED
predates the Companys acquisition of Foresight and entitles him to 10% of the proceeds (stock or
cash) from the sale of Foresight. Pursuant to this agreement, as of December 31, 2006, Mr. Apodaca
has received 214,548 of the Companys shares and may be entitled to receive $223,000 from NCED.
The office space we lease for our Foresight operation in El Paso was owned by NCED through
January 2007. Total payments of $24,000 were paid to NCED under this agreement through January
2007. In the first quarter of 2007, the property was sold to a non-related party and the lease was
assigned to that new landlord. Foresight also earned revenue from NCED of $684,000 and $146,000 in
2006 and 2007, respectively.
The Company has an arrangement with Insurance Producers Group of America, Inc. (IPG). IPG
was a subsidiary of ICM before it merged with ICM in January of this year, but was distributed to
certain ICM shareholders prior to its merger. IPG markets insurance products through career agents
that it has appointed. The Companys arrangement with IPG allows IPG to use a portion of its office
space and also allows certain of the Companys officers and employees to provide services to IPG.
IPG pays the Company, on an arms length basis, for the use of the space and the use of its
employees. The monthly amount paid to the Company varies but is less than $5,000 per month. IPG is
managed by individuals not related to the Company, but Ian Stuart, the Companys Interim President
and CEO, owns approximately 11% of the issued and outstanding shares of IPG and, occasionally
provides management services to IPG. In addition, during April 2008, the Peter Nauert Revocable
Trust, which owns 27% of the Companys issued and outstanding common stock, sold its interest in
IPG.
See Note 6 for a discussion of a note payable to the Nauert Trust.
Note 9 Risk Concentration
Currently, 86% of the Companys Insurance Marketing Division revenue is derived from insurance
products underwritten by five insurance carriers. During the three months ended March 31, 2008,
60%, of the Companys revenues arose from commissions on policies written by two health insurance
carriers. The Company believes all of these insurance carriers to be financially sound, based in
part upon A.M. Best ratings of B+ or better, and that all accounts due from these carriers will be
collected in full. If the Companys relationship with one or more of these carriers was severed,
the revenue impact would be nominal in the short term, but could be significant over the long term.
However, management believes the Company has the ability to replace carriers with little or no
difficulty.
Note 10 Commitments and Contingencies
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.
Zermeno v Precis, Inc. 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., 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 under case number BC 300788.
36
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. Under California Health and Safety Code § 445
(Section 445). That provision governs medical referral services. The plaintiffs also sought
relief under Business and Professions Code § 17200, Californias Unfair Competition Law
(Section 17200).
On December 21, 2007, the Company received a favorable verdict. The plaintiffs have indicated
that they plan to appeal. 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.
The Company believes it has complied with all applicable statues and regulations in the state
of California. Although the Company 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
Capella and Equal Access Health, Inc. (including various names under which Equal Access Health,
Inc. does business) on April 28, 2005. Equal Access Health was a third-
party marketer of the Companys discount medical card programs, but is otherwise not
affiliated with the Companys subsidiaries or the Company. The lawsuit alleges that Care
Entréetm, directly and through at least one other party that formerly resold
the services of Care Entréetms 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. The Company believes 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. Unfavorable
findings in this lawsuit could have a material adverse effect on the Companys 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. (Foresight) In June 2004, the Company acquired Foresight (formerly Access Healthsource,
Inc.) 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 served as the
President and C.E.O. of Foresight from the Companys acquisition until September 3, 2007, on which
his date his employment was terminated by the Company. Mr. Apodaca, who had been placed on leave
prior to the termination of his employment, also served as Chief Administrative Officer and a
member of the Board of Directors of NCED. Mr. Apodaca also served as the Companys President from
June 10, 2004 to January 30, 2007. 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 acquisition
of Foresight.
There is an ongoing federal investigation of Mr. Apodaca and Foresight, and there has been
publicity in the El Paso, Texas area about the investigation. The investigation involves several
elected public officials and over 20 companies that do business with local government entities in
the El Paso area. Although no indictments have occurred, the Company believes that the
investigation involves, among other things, allegations of corruption relating to contract
procurement by Mr. Apodaca and Foresight and other companies from these local governmental
entities. The Company can offer no assurance as to the outcome of the investigation. In addition to
the negative financial effect from the loss of business, the Company has suffered and may continue
to suffer as a result of the investigation and the adverse publicity surrounding the investigation.
The Companys financial condition and the results of its operations will be materially affected
should the investigation result in formal allegations of wrongdoing by Foresight. The Company may
become obligated to pay fines or restitution and its ability to operate Foresight under licenses
may be restricted or terminated. In addition, the publicity and financial effect resulting from the
investigation may affect the other divisions reputation and ability to attract business, and
secure financing.
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.
The
Company has accrued $575,000 for resolution of the above matters.
37
In connection with the Companys acquisition of ICM and its subsidiaries, Mr. Nauert and the
Peter W. Nauert Revocable Trust have agreed to fully indemnify ICM and the Company against any
losses resulting from this matter. Although the Company can provide no assurance, we believe that
the ultimate outcome of these claims and lawsuits will not have a material adverse effect on the
Companys consolidated financial condition, results of operation, or liquidity, and no amounts for
any potential losses have been accrued at March 31, 2008.
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 $1,735,000 and $1,231,000 as of
March 31, 2008 and December 31, 2007, respectively.
Note 11 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 resources and marketing strategies. The Companys Consumer Plan Division 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 private label resellers and a
network marketing strategy. The Companys Insurance Marketing Division provides web-based
technology, specialty products and marketing of individual health insurance products and related
benefits plans, primarily through a broad network of independent agency channels. The Companys
Regional Healthcare Division 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.
The accounting policies of the segments are consistent with those described in the summary of
significant accounting policies in Note 2. Intersegment sales are not material and all intersegment
transfers are eliminated.
The Company evaluates segment performance based on revenues and income before provision for
income taxes. The following table summarizes segment information for continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2008 (unaudited) |
|
|
|
Consumer |
|
|
Insurance |
|
|
Regional |
|
|
Corporate |
|
|
|
|
|
|
Plan |
|
|
Marketing |
|
|
Healthcare |
|
|
and Other |
|
|
|
|
Dollars in Thousands |
|
Division |
|
|
Division |
|
|
Division |
|
|
Division |
|
|
Total |
|
Commission and service revenue(1) |
|
$ |
3,915 |
|
|
$ |
5,641 |
|
|
$ |
846 |
|
|
$ |
|
|
|
$ |
10,402 |
|
Interest income |
|
|
13 |
|
|
|
168 |
|
|
|
2 |
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
3,928 |
|
|
|
5,809 |
|
|
|
848 |
|
|
|
|
|
|
|
10,585 |
|
Income (loss) before income taxes |
|
|
(270 |
) |
|
|
258 |
|
|
|
(405 |
) |
|
|
(605 |
) |
|
|
(1,022 |
) |
Interest expense |
|
|
7 |
|
|
|
24 |
|
|
|
|
|
|
|
(2 |
) |
|
|
29 |
|
Depreciation and amortization |
|
|
90 |
|
|
|
218 |
|
|
|
25 |
|
|
|
2 |
|
|
|
335 |
|
Tax provision (benefit) (2) |
|
|
18 |
|
|
|
11 |
|
|
|
5 |
|
|
|
(13 |
) |
|
|
21 |
|
Assets acquired, net of disposals |
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105 |
|
Intangible assets and goodwill(2) |
|
|
979 |
|
|
|
8,212 |
|
|
|
|
|
|
|
5 |
|
|
|
9,196 |
|
Assets held |
|
|
2,447 |
|
|
|
15,552 |
|
|
|
3,920 |
|
|
|
(1,208 |
) |
|
|
20,711 |
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2007 (unaudited) |
|
|
|
Consumer |
|
|
Insurance |
|
|
Regional |
|
|
Corporate |
|
|
|
|
|
|
Plan |
|
|
Marketing |
|
|
Healthcare |
|
|
and Other |
|
|
|
|
Dollars in Thousands |
|
Division |
|
|
Division |
|
|
Division |
|
|
Division |
|
|
Total |
|
Commission and service revenue(1) |
|
$ |
3,104 |
|
|
$ |
3,332 |
|
|
$ |
1,736 |
|
|
$ |
17 |
|
|
$ |
8,189 |
|
Interest income |
|
|
17 |
|
|
|
84 |
|
|
|
35 |
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
3,121 |
|
|
|
3,416 |
|
|
|
1,771 |
|
|
|
17 |
|
|
|
8,325 |
|
Income (loss) before income taxes |
|
|
154 |
|
|
|
(40 |
) |
|
|
266 |
|
|
|
(676 |
) |
|
|
(296 |
) |
Interest expense |
|
|
5 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
48 |
|
Depreciation and amortization |
|
|
75 |
|
|
|
142 |
|
|
|
28 |
|
|
|
2 |
|
|
|
247 |
|
Tax provision (benefit) (2) |
|
|
4 |
|
|
|
7 |
|
|
|
12 |
|
|
|
6 |
|
|
|
29 |
|
Assets acquired, net of disposals |
|
|
109 |
|
|
|
|
|
|
|
(36 |
) |
|
|
|
|
|
|
73 |
|
Intangible assets and goodwill(2) |
|
|
3,377 |
|
|
|
13,580 |
|
|
|
4,091 |
|
|
|
5 |
|
|
|
21,053 |
|
Assets held |
|
|
5,004 |
|
|
|
19,751 |
|
|
|
8,276 |
|
|
|
1,564 |
|
|
|
34,595 |
|
|
|
|
(1) |
|
Certain prior period amounts have been reclassified to conform to the current periods
presentation. |
|
(2) |
|
Income tax expense (benefit) is not allocated to the operations of the related segment. |
39