U. S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D. C. 20549
FORM 10-Q
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(Mark One) |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2005 |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
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For the transition period from to |
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Commission File Number: 001-15667 |
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PRECIS,
INC.
(Name of business issuer in its Charter)
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OKLAHOMA |
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73-1494382 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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Identification No.) |
2040 North Highway 360
Grand Prairie, Texas 75050
(Address of principal executive offices)
(866) 578-1665
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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Yes o No ý |
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or
15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court. Yes o
No o
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of issuer’s classes of common equity, as of the latest practicable date: As of May 13, 2005, 12,332,316 shares of the issuer’s common stock, $0.01 par value, were outstanding.
PRECIS, INC.
FORM 10-Q
For the Quarter Ended March 31, 2005
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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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 18.
Item 2. Management’s 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 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, 2004 (collectively referred to as the “Disclosure Documents”). Certain forward-looking statements contained herein and in such 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 such statements. Our ability to achieve such results is subject to the risks and uncertainties discussed in our Form 10-K. Any forward-looking statements contained in this report represent our judgment as of the date hereof. 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.
Consumer Healthcare Savings Solution
We offer savings on healthcare services throughout the United States to persons who are uninsured, under-insured, or have elected to purchase only high deductible or limited benefit medical insurance policies. These savings are achieved by accessing the same preferred provider organizations (PPOs) that are utilized by many insurance companies. These programs are sold primarily through a network marketing strategy under the name Care Entrée™. We design these programs to benefit healthcare providers as well as the network members. Providers commonly give reduced or preferred rates to PPO networks in exchange for steerage of patients. However, the providers must still file claim forms and wait 30 to 60 days to be paid for their services. Our programs utilize these same networks to obtain the same savings for the Care Entrée™ program members. However, the healthcare providers are paid much more promptly without the oversight of the typical claims review processes of an insurance company. We provide transaction facilitation services to both the program member and the healthcare provider.
We also offer full third party administration services through our wholly-owned subsidiary, Access HealthSource, Inc., (“Access”). Access helps us offer a more complete suite of healthcare services. We are now able to 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. We acquired Access in the second quarter of 2004 and its results of operations have contributed favorably to our consolidated results. Access has successfully secured multi-year contracts on favorable terms with its two largest clients and has brought us a stable source of revenue. Moreover, we have realized certain intangible benefits from the acquisition. For instance, we have broadened the management responsibilities of several members of Access’ management team to company-wide roles. Our new Chief Operating Officer, Frank Apodaca, is the President and C.E.O. of Access and he will be implementing, on a company-wide basis, operational controls that have been successful at Access.
Affordable Healthcare Insurance and Financial Products
Commencing in September 2003, through our subsidiary, Care Financial of Texas, L.L.C. (“Care Financial”), we began offering our high deductible and scheduled benefit insurance policies. In addition, we have recently added a suite of products including life insurance and annuities, along with health savings accounts (HSAs), Healthcare Reimbursement Arrangements (HRAs) and medical and dependent care Flexible Spending Accounts (FSAs) offered through Care125, a division of our Foresight, Inc. subsidiary (“Foresight”). The high deductible and scheduled benefit insurance policies, HSAs, HRAs and medical and dependent care FSAs, when combined with the Care Entrée™ program, offer affordable, well-rounded solutions for individuals and employers who are no longer able to afford or obtain traditional health insurance policies. While these products are usually sold by licensed life and health insurance agents, the HRAs and medical and dependent care FSAs are also sold by our independent marketing representatives who, from a regulatory standpoint, are not required to be licensed to sell these products. The life insurance products serve to complement our healthcare product offerings by addressing our members’ overall financial condition. The insurance policies are sold through our independent marketing representatives who are licensed insurance agents and other licensed agents who are not Care Entree independent marketing representatives.
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Our Group and Wholesale Products
We offer three wholesale membership service solutions:
Private Label and Co-Brand Healthcare Programs
We design and offer healthcare membership programs for employer groups, retailers and association-based organizations. These programs are marketed under our “For Your Good Health” label or the privately labeled name of our client. Membership in these programs are offered and sold by direct sales or through marketing companies that ask prospective customers to call a customer service center for more information (in-bound direct marketing). We believe that our clients, their members, and the vendors of the products and services offered through the programs, all benefit from our membership service programs. The products and services are bundled, priced and marketed utilizing relationship marketing strategies or inbound direct marketing to target the profiled needs of the clients’ particular member base.
Repricing for Governments and Other Self-Funded Employers
For governments and other large, self-funded employers seeking to reduce the cost of offering healthcare benefits to their employees, we can also offer a more streamlined version of our product. In these cases, we offer access to healthcare through our network of providers and the efficient repricing of bills through our proprietary systems. We offer these services for a price based on either the number of participants per month or as a percentage of savings on healthcare costs actually realized.
On June 18, 2004, we acquired Access, a full-service third party administrator, for a purchase price of $3,666,000, consisting of $2,000,000 of cash and $1,400,000 of our common stock (488,486 shares) and $266,000 of acquisition cost including investment banking, valuation and legal and accounting fees. Additional obligations under that purchase agreement are based on future performance of Access and during the first quarter of 2005, Access’ performance to date resulted in an obligation to convey cash payments of $560,000 plus the issuance of 320,473 common shares valued at $560,000, which were conveyed in April. Through the acquisition of Access, we now provide 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. Access helps us offer a more complete suite of healthcare services. Also through Access, 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. From a sales distribution standpoint, we have the ability to grow Access’ regional business through our numerous independent marketing representatives who sell both to individuals and employer groups throughout the United States. Our acquisition of Access serves to complement our entry into the public sector market through our agreement with the State of Louisiana in 2003. Access’ primary area of expertise is in the public sector market.
Non-healthcare Related Club Membership Programs
Through Foresight, we also design non-healthcare related membership programs for rental-purchase companies, financial organizations, employer groups, retailers and association-based organizations. Memberships in these programs are also offered and sold as part of a point-of-sale transaction or by direct marketing through direct mail or as an insert. Program members are offered and provided with our and third-party vendors’ products and services. The products and services are bundled, priced and marketed to target the profiled needs of the clients’ particular customer base. Among the products and services offered are (i) consumer product extended warranties, (ii) tire and wheel guarantee, (iii) insurance products included as association benefits, (iv) emergency travel and living expense reimbursement, (v) access to air ambulance evacuation services, (vi) identity theft protection, (vii) savings on veterinary care, (viii) retail and entertainment discounts, (ix) grocery coupons, (x) a retail savings coupon book, (xi) emergency roadside assistance, and (xii) auto deductible expense reimbursement. Substantially all of our non-healthcare related membership service programs are offered and sold at retail by clients engaged in the rental-purchase industry.
Critical Accounting Policies
Revenue Recognition
Healthcare Membership Revenues
The Company recognizes membership revenues, other than initial enrollment fees, on each monthly anniversary date. Membership revenues are reduced by the amount of refunds estimated to be incurred. For members that are billed directly, collection of the billed amount is collected almost entirely by automated clearinghouse, electronic check or by electronic charge to the members’ credit card. The settlement of those charges occurs within a day or two. In a minority of
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cases, the membership fees may be billed to the member by our private label partners, and then our portion of such revenue is remitted to us on a periodic basis. During the time from the billing of such member fees and their remittance to us, we record a receivable from those private label partners, for which management must estimate an allowance for uncollectible accounts. We review the aging of outstanding balances, the credit worthiness of the private label partner and their history of paying amounts owed as agreed in estimating that allowance.
Member enrollment fees, net of direct costs, are deferred and amortized over the estimated membership period, which averages eight to ten months. Independent marketing representative fees, net of direct costs, are deferred and amortized over the term of the 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 analysis of such costs and collects statistics on such membership periods as a basis for adjusting these estimates from time to time.
Access Third Party Administration
Access recognizes revenue based upon the individual contract arrangements that it has with each of its’ clients, i.e., when the contractual obligations are satisfied.
Rental Purchase and Club Membership Revenues
Rental purchase and club membership revenues are recognized in the month that our products and services have been delivered to our clients. We sell rental purchase and club membership programs on a wholesale basis to our clients. The wholesale client remits a portion of the rental purchase and club membership revenues to us and retains the balance as compensation for having made the sale. We provide an allowance for those accounts that we consider to be uncollectible.
Commission Expense
Commissions are paid to our independent marketing representatives in the month following the month in which a member has enrolled in our Care Entrée™ program. Commissions are only paid in the following month when the related monthly membership fees have been received. We do not pay advanced commissions on membership sales. The amounts of commission are based upon established commission schedules and are determined and accrued based upon the recognition the related healthcare membership revenue, as described above.
Acquisitions
During 2004, we acquired Access for a total initial purchase price of $3,666,000. Under the purchase obligation, the purchase price of Access could be increased if Access were to achieve certain performance thresholds. Contingent consideration of $1,120,000 was accrued at March 31, 2005, based upon Access’ performance to date, increasing goodwill by that amount during the first quarter of 2005. The allocation of $3,424,000 to goodwill is considered appropriate, as Access strategically complements the Company’s healthcare service offering.
Fixed Assets
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets for financial reporting purposes. Leasehold improvements are depreciated using the straight-line method over their estimated useful lives or the lease term, whichever is shorter. The estimation of useful lives involves judgment and is based, in part, upon past experience with similar assets and upon management’s plans for the utilization of assets in the future.
We periodically review fixed assets, including software, whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. When any such impairment exists, the related assets will be written down to their fair value. If we determine that the remaining useful life, based upon current events and circumstances, should be adjusted, the depreciation or amortization of the related asset is adjusted on a prospective basis.
Intangible Asset Valuation
Our intangible assets, consisting primarily of goodwill of $22,501,000 as of March 31, 2005, represented the excess of acquisition costs over the fair value of net assets acquired. Goodwill is not amortized. During the year ended December 31, 2004, our intangible assets were reduced by $2,000,000 to reflect impairment of the goodwill arising from our acquisition of
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Foresight, Inc. in 2000 and were increased by $2,304,000 to reflect the goodwill arising from our acquisition of Access and by $1,400,000 allocated to a contract acquired in the acquisition of Access. An additional increase of $1,120,000 occurred during the first quarter of 2005 as the result of the Access contingent consideration discussed above.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The net deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. We evaluate the probability of recognizing the benefit of deferred tax assets through the reduction of taxes otherwise payable in the future and provide an allowance against the carrying amount of such deferred tax assets if it is more probable than not that some or all of those assets will not be realized.
Results of Operations
Current and Comparative Prior Period Historical Information. The following table sets forth selected results of operations for the three months ended March 31, 2005 and 2004.
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For the Three Months Ended |
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Unaudited |
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(Dollars in Thousands except earnings per share) |
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2005 |
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2004 |
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Product and service revenues |
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$ |
8,700 |
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9,946 |
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Operating expenses: |
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Cost of operations |
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3,109 |
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3,301 |
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Sales and marketing. |
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2,200 |
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3,198 |
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General and administrative |
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3,485 |
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2,329 |
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Total operating expenses. |
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8,794 |
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8,828 |
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Operating income (loss) |
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(94 |
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1,118 |
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Other income and expenses: |
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Interest (income) and expense, net |
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(13 |
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29 |
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Total other expenses |
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(13 |
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29 |
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(Loss) earnings before income taxes |
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(81 |
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1,089 |
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(Benefit) provision for income taxes |
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(30 |
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483 |
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Net (Loss) earnings |
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$ |
(51 |
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606 |
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(Loss) earnings per common share: |
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Basic |
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$ |
0.00 |
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$ |
0.05 |
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Diluted (1) |
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$ |
0.00 |
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$ |
0.05 |
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Weighted average number of common shares outstanding: |
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Basic. |
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11,824,255 |
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11,864,714 |
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Diluted (1) |
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11,824,255 |
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11,930,725 |
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(1) For the quarter ended March 31, 2005, 16,391 shares related to outstanding stock options were not included in the calculation of fully diluted earnings per share because the inclusion would have been anti-dilutive.
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Operational Review for the Three Months Ended March 31, 2005
Our healthcare membership base was approximately 52,000 members as of March 31, 2005 as compared to 79,000 members as of March 31, 2004, a decrease of approximately 27,000 members or 34.2%. The reduction in our healthcare membership base was primarily due to the implementation of the escrow account requirements for hospitalized care in the fourth quarter of 2002, and expansion to physicians and doctors commencing on October 1, 2003. As of March 31, 2005, the percentage of our individual members who have escrowed funds with us was approximately 36.3% of the total individual healthcare membership base. This excludes our private label programs, where the escrow requirements have not been mandated. In addition, our healthcare savings program has experienced issues with provider acceptance in some markets. As a result, revenues from our healthcare savings program continue to decline by $3,227,000, from $9,583,000 in the first quarter of 2004 to $6,356,000 in the first quarter of 2005.
Although these escrow requirements negatively impacted our membership base and consequently our revenues and net earnings in 2004 and the first quarter of 2005, these changes were required to help provide assurance of payment to the healthcare providers and accordingly, their continued willingness to provide healthcare services to our members. This strategic move was critical to our long-term operational and financial viability in the health card savings market as many healthcare providers throughout the United States will no longer accept a “health discount” card. The success of our new healthcare product offering has not been fully determined. Therefore, its long-term impact on both revenues and net earnings is currently unknown and may not be known for some time. The growth of our members’ escrow or cash-in-trust to $5,349,000 as of March 31, 2005 from $4,922,000 as of December 31, 2004 and from $4,019,000 as of March 31, 2004, provides an indication that, while overall membership numbers have continued to decline, those members who do participate in the escrow-based form of our healthcare savings program are continuing to grow their escrow deposits with us.
Our operating results did benefit from the acquisition of Access, which occurred in June of 2004. Access contributed $2,010,000 or 23.1% of first quarter 2005 revenue and $446,000 of net earnings (after taxes) to partially offset our other losses. Access has successfully secured multi-year contracts on favorable terms with its two largest clients and has brought us a stable source of revenue. Moreover, we have realized certain intangible benefits from the acquisition. For instance, we have broadened the management responsibilities of several members of Access’ management team to company-wide roles. Our new Chief Operating Officer, Frank Apodaca, is the President and C.E.O. of Access and he will be implementing, on a company-wide basis, operational controls that have been successful at Access.
In the first quarter of 2005, we have undertaken measures and initiatives to improve our operating performance. These measures and initiatives include (i) the integration of Access management members with our management team, as mentioned above, (ii) the termination of certain equipment capital leases, (iii) other cost reduction actions, and (iv) exploration of additional products to compliment our core healthcare savings product and offer additional compensatory incentives to our independent marketing representatives.
Comparison of the Three Months Ended March 31, 2005 and 2004
Product and Service Revenues. During the three months ended March 31, 2005, revenues were $8,700,000, a decrease of $1,246,000 or (12.5%), from $9,946,000 during the comparable 2004 period. The reduction in actual revenues for the three months ended March 31, 2005 from the corresponding period in 2004 was primarily due to continuing reductions in the members in our Care Entrée program of $3,227,000, from $9,583,000 in the first quarter of 2004 to $6,356,000 in the first quarter of 2005 as a result of our implementation of member escrow account requirements commencing in the fourth quarter of 2002, offset in part by revenues of $2,010,000 from Access that was acquired in June 2004. The requirement of member escrow deposits was in response to market changes in the healthcare savings industry. In addition, effective October 1, 2003, the escrow account requirements were expanded to include all doctors and physicians. Under the escrow arrangement, we pre-certify to the provider the members’ ability to pay based upon the available escrow account/balances and to process the members’ payments directly to the providers to help assure timely payment to the providers. As a result of these changes, we believe an enhanced healthcare product offering has been created for members and the healthcare providers. The overall success and impact on revenues and net earnings of this newly restructured product offering will not be known for sometime. The escrowed funds referred to as cash-in-trust on our balance sheet were $5,349,000 as of March 31, 2005. Through the acquisition of Access, we provide a wide range of healthcare claims administration services and other cost containment procedures that are frequently required by governments and other employers who have chosen to self fund their healthcare benefit requirements. For 2005, more than 65.8% of our revenues were attributable to our healthcare membership program.
Additionally, revenue in our Foresight wholesale club membership programs declined by $28,000, or 12.0%, from $234,000 in the first quarter of 2004 to $206,000 in the first quarter of 2005 due to the maturity and competitive nature of this business. Revenue from our Care Financial division increased $25,000, or 27.8%, from $90,000 in the first quarter of 2004 to $115,000 in the first quarter of 2005.
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Operating Metrics
Our healthcare membership base was approximately 52,000 members as of March 31, 2005 as compared to 79,000 members as of March 31, 2004, a decrease of approximately 27,000 members or 34.2%. During the first quarter of 2005, our membership declined by 5,000 members or 8.8% from 57,000 members at December 31, 2004. The reduction in our healthcare membership base was due to the implementation of the escrow account requirements in 2002 and 2003. During the first quarter of 2005, we commenced development of a new product line consisting of health-related nutraceuticals, which are expected to generate an increasing stream of revenue later in 2005 and synergistically support resumption of growth in healthcare savings program revenue.
Cost of Operations. Cost of operations for the three months ended March 31, 2005 decreased $192,000 or (5.8)%, to $3,109,000 from $3,301,000 during the 2004 comparable period. Cost of operations was approximately 35.7% of revenues during the three months ended March 31, 2005, while during the comparable 2004 period cost of operations was 33.2% of revenues. The decrease in cost of operations for the first quarter of 2005 was primarily due to decreases in costs of $736,000 related to decreased revenue in our Care Entree program discussed previously, offset by increased costs of $627,000 that is due to the acquisition of Access in June 2004. The increase in cost of operations expense as a percentage of revenue was primarily attributable to increased preferred provider costs as a result of several ancillary products introduced after the first quarter of 2004, additional processing costs attributed to the administration of the escrow accounts and claims processing and the cost of capital leases of printing equipment entered into when membership level and enrollment activity was at a significantly higher level.
Sales and Marketing Expenses. Sales and marketing expenses decreased $998,000 or 31.2%, to $2,200,000 during the three months ended March 31, 2005 from $3,198,000 during the comparable 2004 period. Sales and marketing expenses represented 25.3% and 32.2% of revenues for the three months ended March 31, 2005 and 2004, respectively. The decrease in sales and marketing expenses during the first quarter of 2005 is primarily due to decreases in commissions related to the decreased revenue in the Care Entree program discussed previously. The decrease in sales and marketing expenses as a percentage of revenues is due in part to a shift toward private label s