Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2010
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-30099
Access Plans, Inc.
(Exact name of registrant as specified in its charter)
| |
|
|
|
| OKLAHOMA
|
|
27-1846323 |
| (State or other jurisdiction of
|
|
(I.R.S. Employer |
| incorporation or organization)
|
|
Identification No.) |
900 36th Avenue NW, Suite 105, Norman, OK 73072
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (405) 579-8525
Securities registered pursuant to Section 12 (b) of the Act: None Securities
to be registered pursuant to Section 12 (g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 505 of the
Securities Act. Yes o No þ
Indicate by check mark whether the issuer is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act 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 þ No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Parts III of this Form 10-K or any amendment to this Form 10-K. Yes o No þ
Indicate by check mark whether registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a small reporting company.
| |
|
|
|
|
|
|
|
| Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
of registrant, computed using the last sale price, or the average bid and asked price of such
common equity as reported for the registrant’s common stock on March 31, 2010 was $8,209,600.
As of December 16, 2010, 19,877,204 shares of the registrant’s common stock, $0.001 par value were
outstanding.
ACCESS PLANS, INC.
FORM 10-K
TABLE OF CONTENTS
2
We are a leading provider of consumer membership plans, healthcare savings membership plans and a
marketer for individual major medical health insurance products. For our membership plan
products, through working with our wholesale and retail clients, we design and build membership
plans that contain benefits aggregated from our vendors that appeal to our clients’ customers. For
our major medical health insurance products, we offer and sell these products through a national
network of independent agents. Our vision statement is “Valued Benefits for Every Family”.
Our current operations are organized under four operating segments.
Wholesale Plans
Our Wholesale Plans Division provides our clients, primarily rent-to-own and retail stores,
customized membership marketing plans that leverage their brand name and customer relationships
and typically their payment mechanism, plus offer benefits that appeal to their customers.
These plans provide the consumer savings on medical services, discount savings on dining and
entertainment, automotive, legal and financial, as well as insurance programs including leased
property, involuntary unemployment, accidental death and dismemberment, and extended service
plans.
The value provided by our plans to our clients, includes increased customer attraction and
retention, plus incremental fee income with limited risk or capital cost. By implementing these
plans repetitively, our management team is uniquely qualified to efficiently assist our clients in
achieving their goals, while avoiding operational and marketing pitfalls.
Retail Plans
Our Retail Plans’ offerings primarily include healthcare savings plans and association memberships
that provide insurance features. These healthcare savings plans are not insurance, but allow
members access to a variety of healthcare networks to obtain discounts from usual and customary
fees. We offer wellness programs, prescription drug, vision and dental discount programs, medical
discount cards, and limited benefit insured plans. Our members pay providers the discounted rate
at the time services are provided to them. These plans are designed to serve the markets in which
individuals either have no health insurance or limited healthcare benefits.
Insurance Marketing
Our Insurance Marketing Division offers and sells individual major medical health insurance
products and related benefit plans, including specialty insurance products, primarily through a
national network of independent agents. We support our agents with access to proprietary and
private label products, leads for new sales, commission advance programs, incentive programs,
including an annual convention, web-based technology, and back-office support.
Corporate
Our Corporate segment includes salary and other expenses for individuals performing services for
administration of overall operations of the Company. These expenses are not allocated to our other
segments.
INDUSTRY OVERVIEW
Wholesale Plans
Our Wholesale Plans Division’s products are primarily offered and distributed at rent-to-own
retail stores pursuant to contractual arrangements. All of these rent-to-own retail stores are
owned by rent-to-own industry participants who are unrelated and independent of us. Nationwide
there are approximately 8,600 locations serving approximately 4.1 million households according to
the Association of Progressive Rental Organizations (“APRO”). It is estimated that the two
largest rent-to-own industry participants’ account for approximately 4,800 of the total number of
stores, and the majority of the remainder of the industry consists of operations with fewer than
50 stores. The industry has been consolidating and that trend is expected to continue, resulting
in an increased concentration of stores in the two largest rent-to-own industry participants.
The rent-to-own industry serves a highly diverse customer base. According to APRO, approximately
96% of rent-to-own customers have household incomes between $15,000 and $50,000 per year. The
rent-to-own industry serves a wide variety of customers by allowing them to obtain merchandise
that they might otherwise be unable to obtain due to insufficient cash resources or a lack of
access to credit. APRO also estimates that 95% of customers have high school diplomas.
3
Healthcare Industry
Our Retail Plans and Insurance Marketing Divisions offer healthcare solutions for individuals and
families who are insured, underinsured (limited benefit insurance plans), and uninsured.
The uninsured. It is estimated that 16.7% of all people in America, or 50.7 million individuals,
were without health insurance coverage in 2009, an increase of 4.4 million people compared to 2008.
[Source: U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage 2009 Report” issued
September 2010]. Furthermore, 9.1% of the uninsured have annual income over $75,000. [Source: U.S.
Census Bureau, “Income, Poverty, and Health Insurance Coverage 2009 Report” issued September 2010].
The percentage of people working full-time without health insurance in 2009 was 15.2%, an increase
from 14.6% in 2008. [Source: U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage
2009 Report” issued September 2010]. Nationally, healthcare expenditures are projected to have
reached $2.5 trillion in 2009, up from $1.35 trillion in 2000. [Source: U.S. Centers for Medicare
and Medicaid Services]. Costs of healthcare (in doctors’ offices and hospitals) for self-paying
uninsured patients are often far higher than the amount an insured or his or her insurance company
would pay for the same healthcare services. The number of people with health insurance in the U.S.
decreased in 2009 for the first time since 1987, the first year that comparable health insurance
data were collected.
The insured and underinsured. In 2009, 55.8% of the U.S. population participated in
employer-sponsored medical insurance plans, showing a gradual year-by-year decrease from 58.5% in
2008. [Source: U.S. Census Bureau, “Income, Poverty, and Health Insurance Coverage 2009 Report”
issued September 2010]. In addition, data from the Kaiser Family Foundation show that employers are
requiring employees to contribute more in cost-sharing (premiums, deductibles and/or co-payments)
for their health insurance. [Source: Kaiser Family Foundation and Health Research and Educational
Trust, “Employer Health Benefits, 2009 Annual Survey”]. Between 2008 and 2009, premiums for
employer-sponsored health insurance rose 5.0%, a rate that exceeds the 2009 inflation rate of -.4%
and the 2009 decrease in national average wage index of 1.5%, and the overall average premiums for
family coverage have increased 130% over the last 10 years. [Source: Kaiser Family Foundation and
Health Research and Educational Trust, “Employer Health Benefits, 2009 Annual Survey”]. These
increases are, in turn, hitting employees of small employers particularly hard because to keep
premiums affordable, the benefit packages generally include higher cost-sharing levels through
higher deductibles and copayments than packages offered by large employers. [America’s Health
Insurance Plans Center for Policy and Research Report, March 2009]. Therefore, higher costs are
not only being felt by the employers, but also by their employees. The average monthly contribution
by workers for single and family healthcare coverage rose from $8 and $52, respectively, in 1988 to
$75 and $333, respectively, in 2010. The average cost of family coverage is now $13,770 per year,
including worker contributions of $3,997. Not surprisingly, employers are looking for alternatives.
In 2010, 69% of employers offered health benefits compared to 60% reported for 2009. The cost of
health insurance remains the main reason cited by firms for not offering health benefits. [Source:
Kaiser Family Foundation and Health Research and Educational Trust, “Employer Health Benefits, 2009
Annual Survey”].
Over-utilization, increasing regulation and legislation. Over-utilization of the healthcare system
is one of the factors contributing to the increasing cost trends. American citizens are utilizing
healthcare services at an ever-increasing rate. Behind this phenomenon is the fact that insurance
plans and healthcare management organizations are structured to encourage usage. Small co-payments,
that average $20 to $30 per office visit, encourage insured consumers to use the healthcare system
more frequently because they do not perceive themselves ultimately as having to pay the full costs
of the medical services received.
A number of insurers have discontinued offering their insurance products in certain states, due to
state regulations that no longer provide for a viable operating environment. As a result of these
health coverage cancellations, those formerly insured individuals and families are required to pay
more for their insurance coverage, cannot obtain any coverage because of pre-existing conditions or
simply remain uninsured for healthcare.
In addition, federal legislation provides for tax favorable Health Savings Accounts (“HSAs”).
Individuals with high deductible health insurance coverage can deduct contributions to their HSA
from their reported income for tax purposes. In 2010, the qualifying health insurance must have a
deductible of at least $1,200 for individuals and $2,400 for families and the maximum amount that
can be contributed is $3,050 for individuals and $6,150 for families. Amounts contributed to the
HSAs can be used for certain uninsured medical expenses, but generally cannot be used to pay for
the health insurance premium. Individuals can establish HSAs without regard to their income and
amounts contributed to the HSAs do not have to be used within a certain time period. Because the
higher deductible health insurance policies generally provide lower premium amounts, there is an
increasing market for specialty plans that supplement or fill deductible or other gaps in coverage
for millions of Americans.
4
Self-employed and small businesses. In 2010, 68% of employers with between 3 and 199 workers
provided health insurance, up from 59% in 2009. [Source: Kaiser Family Foundation and Health
Research and Educational Trust, “Employer Health Benefits, 2010 Annual Survey”]. Small firms with
fewer than 500 employees represent 99.9% of the 29.6 million U.S. businesses in 2008. [Source:
U.S. Census Bureau, Statistics of U.S. Businesses]. In addition, small businesses have accounted
for 64% of net new jobs annually over the last 15 years. [Source: Small Business Administration
Office of Advocacy, September 2009]. Individuals working for such small businesses generally do not
have access to group health insurance at affordable rates. As the number of uninsured individuals
increases, we anticipate that the market for our non-insurance healthcare savings programs and
economically priced small group insurance products will increase.
Senior population. The age 65 and over segment of the U.S. population is expected to grow from 40
million in 2010 comprising 13% of the population to 89 million by 2050, comprising 20% of the total
population. [Source: U.S. Census Bureau, 2009]. While the federal Medicare program covers a portion
of healthcare expenses for senior Americans, the gaps in coverage provide a significant market for
supplemental plans.
HISTORY OF THE COMPANY
Access Plans, Inc. became a holding company of Alliance HealthCard and its subsidiaries and the
registrant under the Securities Exchange Act of 1934 following approval by the shareholders of
Alliance HealthCard, Inc. (“Alliance HealthCard”), effective December 7, 2009, Alliance
HealthCard Acquisition Corp., a subsidiary of Access Plans, Inc., an Oklahoma corporation, also
one of Alliance HealthCard’s wholly-owned subsidiaries, merged into Alliance HealthCard. The
shareholders of Alliance HealthCard exchanged their Alliance HealthCard common stock shares on
a one-for-one basis for common stock shares of Access Plans, Inc.
Our subsidiary, Alliance HealthCard, was founded in 1998 as a provider of discount medical
plans with a focus on creating, marketing, and distributing membership savings programs
primarily to the underserved markets in the United States. Our original programs offered
attractive savings in approximately 16 areas of health care, including physician visits,
hospital stays, chiropractics, vision, dental, pharmacy, hearing, and patient advocacy, among
others.
On February 28, 2007, we completed the merger-acquisition of BMS Holding Company, Inc. and its
subsidiary, Benefit Marketing Solutions, LLC (“BMS”). BMS is one of the largest membership plan
providers to dealers in the rental purchase industry market space. While we continue to market
our health oriented programs, this merger-acquisition has greatly expanded our business scope
to include programs that offer discount savings on dining and entertainment, automotive, legal
and financial, as well as insurance programs including leased property, involuntary
unemployment, accidental death and dismemberment, and extended service plans.
BMS was formed in February 2002 and is a national membership program benefit organization that
designs, markets, and distributes membership programs for rental-purchase companies, financial
organizations, employer groups, retailers and association-based organizations. These membership
programs are sold as part of a point-of-sale transaction or through direct marketing efforts.
The point-of-sale membership plans are sold through about 4,910 rent-to-own retail store
locations in the U.S., Puerto Rico and Canada.
As part of the merger-acquisition of BMS Holding Company, Inc., we also acquired BMS Insurance
Agency, LLC (“BMS Agency”) that was formed in January 2005. BMS Agency is licensed to offer life,
accident and health, and property and casualty insurance.
On April 1, 2009, we completed our acquisition of Access Plans USA, Inc., (“Access Plans USA”).
Access Plans USA markets health insurance and develops and distributes consumer driven discount
plans on a variety of health related services including medical, dental, pharmacy and vision care
and manages its own proprietary dental and vision networks.
BUSINESS OVERVIEW
We are a leading provider of consumer membership plans, healthcare savings membership plans and a
marketer for individual major medical health insurance products. In partnership with our
wholesale and retail clients, we design and build membership plans that contain benefits
aggregated from our vendors that appeal to our clients’ customers. Our major medical health
insurance products are offered and sold through a national network of independent agents.
5
Our current operations are organized under three business Divisions.
Wholesale Plans
Our Wholesale Plans Division provides our clients customized membership marketing plans that
leverage their brand name, customer relationships and typically their payment mechanism, plus
offer benefits that appeal to their customers. The value provided by our plans to our clients,
includes increased customer attraction and retention, plus incremental fee income with limited
risk or capital cost. By implementing these plans repetitively, our management team is uniquely
qualified to efficiently assist our clients in achieving their goals, while avoiding operational
and marketing pitfalls.
This Division currently manages about 220 membership plans for our clients that include
rental-purchase dealers, insurance companies, financial institutions, retail merchants, and
consumer finance companies. At September 30, 2010, our wholesale plans were offered at
approximately 4,910 locations. Of the locations at September 30, 2010, 2,880 locations were
Rent-A-Center company owned locations operated under their brand. Rent-A-Center, Inc., a Nasdaq
(symbol RCII) traded company, is the largest rent-to-own company in the United States, Puerto Rico
and Canada. Our revenue attributable to the contractual arrangements with Rent-A-Center was
approximately $11.9 million, (21% of total revenue) during the fiscal year ended September 30,
2010, compared to $11.6 million, (30% of total revenue) during the fiscal year ended September 30,
2009. Total revenue for our Wholesale Plans’ Division accounted for $22.4 million, (40% of total
revenue) and $19.5 million, (50% of total revenue) during the fiscal years ended September 30,
2010 and September 30, 2009, respectively. Our growth in wholesale plans revenue is dependent in
significant part on an increase in the number of rent-to-own locations at which these plans are
offered and the selling efforts at those locations. Although we have long-term contracts with
Rent-A-Center and other rent-to-own companies, the loss of these contractual arrangements,
especially with Rent-A-Center would have a significant adverse impact on our revenues,
profitability and our ability to negotiate discounts with our vendors.
Retail Plans
Our Retail Plans’ offerings include healthcare savings plans and association memberships that
provide insurance features. These healthcare savings plans are not insurance, but allow members
access to a variety of healthcare networks to obtain discounts from usual and customary fees. We
offer wellness programs, prescription drug and dental discount programs, medical discount cards,
and limited benefit insured plans. Our members pay providers the discounted rate at the time
services are provided to them. These plans are designed to serve the markets in which individuals
either have no health insurance or limited healthcare benefits. Our revenue attributable to
retail plans was approximately $17.5 million, (32% of total revenue) and $12.8 million, (33% of
total revenue) during the fiscal years ended September 30, 2010 and 2009, respectively.
This Division is comprised of the membership business of Alliance Healthcard, The Capella Group,
Inc. (“Capella”) and Protective Marketing Enterprises, Inc. (“PME”). Capella and PME are
subsidiaries of Access Plans USA, which we acquired on April 1, 2009 (See Note 4. Mergers and
Acquisitions). PME also owns and manages proprietary networks of dental and vision providers that
provide services at negotiated rates to certain members of our plans and other plans that have
contracted with us for access to our networks.
Through our healthcare savings plans, we believe customers save an average of 35% on their medical
costs and between 10% and 50% on services through other discount medical providers. These
discounts for services that do not require the use of a medical PPO are more difficult to track
because our members pay a discounted rate at point of service.
Operationally, this Division utilizes two platforms: the “Affinity” system that is operated under
a license to PME and the “Alliance” system that is a proprietary system we developed. These
systems are utilized primarily for the following functions:
| |
• |
|
Maintaining member eligibility; |
| |
• |
|
Generate periodic reporting to contracted third party networks and other
vendors; |
| |
• |
|
Maintaining a database of providers and provider locator services; and |
| |
• |
|
Drafting or charging member accounts and tracking cash receipts. |
6
In addition to our wholesale and retail offerings, certain clients may choose to include our
benefits with their own membership plan offering. In these instances, the client bears the cost of
marketing and fulfillment, and we provide customer service. These offerings
are designed to enhance our clients’ existing product and service offerings and improve their
product value relative to their competition and in some instances to improve their customer
retention. While these plans provide lower periodic member fees, we incur limited implementation
costs and receive higher revenue participation rates. Our additional distribution channels also
include network marketing representatives, independent agents and consumer direct sales call
centers. We also market to internet portals and financial institutions.
In order to deliver our membership offerings, we contract with a number of different vendors to
provide various products and services to our members. The majority of these vendor relationships
involve the vendor providing our members access to their network or providers or their locations
and our members obtain a discount at the time of service. We have vendor relationships with
medical networks, automotive service companies, insurance companies, travel related entities and
food and entertainment consumer discount providers. Our vendors value the relationship with us
because we deliver many customers to them without incremental capital cost or risk on their part
and these relationships are governed by multi-year agreements and aggregated volume scaling.
Insurance Marketing
Our Insurance Marketing Division offers and sells individual major medical health insurance
products and related benefit plans, including specialty insurance products, primarily through a
national network of independent agents. America’s Healthcare/Rx Plan Agency (AHCP), also a
subsidiary of Access Plans USA, is the centerpiece of the Insurance Marketing Division. AHCP
distributes major medical, short term medical, critical illness and related health insurance
products to small businesses, self-employed and other individuals and families through a network
of approximately 7,420 independent agents which have carrier appointments through AHCP. The
primary insurance carriers that we represent include: Golden Rule Insurance Company, World
Insurance Company, Aetna and Colorado Bankers.
Access Plans USA was acquired on April 1, 2009. Operating results for 2009 are only for the six
months ended September 30, 2009 (See Note 4. Mergers and Acquisitions).
We support our agents and recruit new agents via access to proprietary and private label products,
leads for new sales, commission advance programs, incentive programs, including an annual
convention, web-based technology, and back-office support. More specifically, our agent support
and recruiting tools include:
| |
• |
|
e-Agent Center — provides agents with access to real-time rate quoting, on-line
licensing and contracting, insurance application submission, access to brochures
and other marketing materials. |
| |
• |
|
Lead Distribution — we utilize an electronic system to connect agents with an
on-line lead ordering and delivery system. Leads are also provided in certain
situations as incentives to sell certain policies. |
| |
• |
|
Incentive programs — to assist with agent motivation and recruitment, we
provide paid annual convention trips and periodic sales contests. |
| |
• |
|
Agent advances — with most of the major medical products we represent, agents
are entitled to from three to nine months of advance commissions either funded by
AHCP or our insurance carrier partner. Our ability to grow this segment will
depend, in part, on our continued access to working capital to fund these advances. |
| |
• |
|
Home office support — this includes agent and product training, marketing
materials and agent communication. The training programs include both on-site and
in-house schools, DVDs and webcasts covering product knowledge and sales techniques
as well as market conduct and regulatory compliance issues. In addition, our
support includes development and distribution of a wide variety of marketing
materials including flyers, brochures, email blasts and letters. We also promote
and inform our agents on important news and updates via a weekly newsletter. |
Our strategy for the Insurance Marketing Division is to:
| |
• |
|
continue working with insurance carriers in the development of proprietary products
for our agents to represent; |
| |
• |
|
expand the number of carriers that we represent for more product choice for customers
and expanded geographic representation; and |
| |
• |
|
enhance our e-agent platforms in order to better serve our existing agents and improve
attraction of new agents to sell insurance products we represent. |
We generate most of our revenue in this Division from commissions paid to us by health insurance
carriers whose health insurance policies and products we sell. Our revenue attributable to
commission and fee revenue was approximately $20.6 million (37% of
total revenue) and $11.4 million (29% of total revenue), respectively for the fiscal years ended
September 30, 2010 and 2009.
7
BUSINESS STRATEGY
Our focus is providing national membership program benefits to organizations that include
rental-purchase companies, financial institutions, retail merchants, and consumer finance
companies nationwide. For our major medical health insurance products, we offer and sell these
products through a national network of independent agents. The strategy is to succeed in the
marketplace by:
| • |
|
expanding and improving relationships with our membership plans provider vendors and
insurance carrier partners; |
| • |
|
maintaining and enhancing customer and agent satisfaction by providing high quality telephone
and web support; |
| • |
|
continually enhancing existing programs and developing innovative solutions and products for
our clients and agents; and |
| • |
|
assisting the market to understand how our offerings are different and superior. |
Increase Market Penetration
We believe we have opportunities to expand our offerings to markets with similar operational and
customer demographic characteristics to those we now serve. In addition, many of these markets may
be substantially larger than our existing markets. We recently began exploring these new markets
and plan to continue such efforts. Our tested and proven infrastructure allows us to serve
substantially more customers without a significant increase in fixed costs.
Maintain and Enhance Customer Satisfaction
Our belief is that providing high-quality customer service to our customers, clients, agents and
members is extremely important in order to encourage memberships and to strengthen the affinity of
those members for the client that offered the service program. In order to achieve our anticipated
growth and to ensure client, member and marketing representative loyalty, we continue to develop
and invest significantly in our member service systems. All new member service representatives are
required to complete a training course before beginning to take calls and attend on-the-job
training thereafter. Through our training programs, systems and software, we seek to provide
members with friendly, rapid and effective answers to questions. In addition, we continue to work
closely with our clients’ customer service staffs to ensure that their representatives are
knowledgeable in matters relating to membership service programs offered by us.
Continually Enhance Programs
We believe that we are well-positioned to increase market share by taking advantage of providing
consumers distinctive and innovative membership programs. We will continue to enhance our programs
and add, remove or restructure benefits to sustain this advantage. As we consider new markets, we
seek opportunities to deliver competitive plans with innovative services or operational
structures.
Manage Growth Effectively
We intend to grow by focusing our sales team on potential new accounts, while continuing to expand
our existing customer base by tailoring new programs that will continue to complement and increase
the customer’s existing revenue sources. In addition, we continue to selectively consider
acquisitions of membership program companies to improve our market share. We believe that we have
the management team in place to manage this growth.
8
SERVICES
We provide consumer membership plans, healthcare savings membership plans and are a marketer for
individual major medical health insurance products. Our benefit categories include: Discount
Medical, Food and Entertainment, Insurance, Automotive Discounts, Dealer Add-In Benefits and
Miscellaneous Benefits.
| |
|
|
| Discount Medical |
|
Insurance |
Physician Network Access
|
|
Major Medical/Individual Health Insurance |
Dental Network Access
|
|
Life Insurance |
Vision Care & Eyewear Network Access
|
|
Accidental Death & Dismemberment |
Pharmacy Network Discounts
|
|
Involuntary Unemployment |
Mail Order Pharmacy Discounts
|
|
Leased Property Insurance |
Chiropractor Network Access
|
|
Dental Insurance |
Hearing Aid Discounts
|
|
Limited Medical Insurance |
Vitamins & Nutritional Supplements
|
|
Critical Illness Insurance |
| |
|
|
| Automotive Discounts |
|
Dealer Add-In Benefits |
Discounted Roadside Assistance
|
|
Lease Cancellation Benefits |
Automotive Service Provider Savings
|
|
Account Reinstatement |
Customer Trip Routing
|
|
Points Program for On Time Payments |
Car Theft Reward |
|
|
Rental Car Savings |
|
|
| |
|
|
| Food and Entertainment |
|
Miscellaneous Benefits |
Grocery Coupon Savings
|
|
Kid Secure |
Restaurant Savings
|
|
Discounted Legal Services |
Theme Park Discounts
|
|
Savings at Choice Hotels |
Movie Theater Discounts
|
|
Savings at 1-800Flowers.com |
|
|
Product Service Plans |
CUSTOMERS
Our Wholesale Plans Division currently manages about 220 membership plans for our clients
that include rental purchase dealers, insurance companies, financial institutions, retail
merchants, and consumer finance companies. Our Retail Plans are offered at over 7,000 retail
locations. Our Insurance Marketing Division currently sells the products of approximately 12
insurance carriers.
Revenue attributable to two contracts in our Wholesale Plans and Insurance Marketing Divisions
totaled $22,234,963 or 40% of total revenue for the fiscal year ended September 30, 2010.
Revenue attributable to one contract in our Wholesale Plans’ Division totaled $11,858,278 or 21%
of total revenue for the fiscal year ended September 30, 2010.
9
EMPLOYEES
As of September 30, 2010, we had 78 full-time employees in the following departments:
| |
|
|
|
|
| |
|
Number of |
|
| Department |
|
Employees |
|
Customer Services and Client Support |
|
|
40 |
|
Sales and Marketing |
|
|
11 |
|
Executive and Administration |
|
|
10 |
|
Finance and Accounting |
|
|
10 |
|
Information Services |
|
|
7 |
|
COMPETITION
Wholesale and Retail Plans Divisions
While there are numerous companies providing membership offerings, they compete for members by
soliciting customers throughout various industries. We strive to maintain strong client
relationships in order to mitigate the effects of such competition. There are a number of
companies that compete with us. Our principal competitors include: New Benefits, Coverdell,
MembersTrust, Affinion, Aegon and CAREINGTON International Corporation. Our other competitors
include large retailers, financial institutions, insurance companies, preferred provider
organization networks, and other organizations, which offer benefit programs to their customers.
Insurance Marketing Division
We compete in the highly competitive individual health insurance industry. The major medical
products and services of the insurance companies that we offer compete with large national,
regional and specialty health insurers, including Assurant, and various Blue Cross/Blue Shield
companies. In addition, we and our insurance products compete with other companies and their
insurance products among insurance agencies and their agents for the offering and sale of
insurance products and financial services.
Many of our competitors in the insurance marketing industry have substantially greater financial
resources, broader product lines, or greater experience than we do. We compete on the basis of
price, reputation, diversity of product offerings and flexibility of coverage, ability to
attract and retain agents, and the quality and level of services provided to the independent
insurance agencies and their agents.
We face additional competition due to a trend among healthcare providers and insurance companies
to combine and form networks in order to contract directly with small businesses and other
prospective customers to provide healthcare services. In addition, because our products and
services are marketed through independent agents, most of which represent and offer insurance
products of multiple insurance companies, we compete for the marketing focus of each independent
agent.
The environment within which we operate is intensely competitive and subject to rapid change. To
maintain or increase our market share position, we must continually enhance our product offerings,
introduce new product features and enhancements, and expand our client service capabilities. We
currently compete principally on the basis of the specialized nature of our products and services.
GOVERNMENT REGULATION
We offer benefits including insurance products, extended service, discount medical and other
discount programs through association-based membership programs that are sold by our clients as
add-ons to the client’s core business. We also sell our discount medical program as a stand-alone
program directly to the public and through marketers. Through our subsidiary AHCP and its agents
we offer insurance directly to the public and through association based programs. We also offer
extended service contracts that we obtain from a licensed extended service company on a stand-
alone basis through retail outlets.
Our association-based programs are offered through several different associations. For some of
our Wholesale and Retail Division plans we administer claims for of our association-based
insurance and service programs through our subsidiary, BMS Agency, an Oklahoma licensed insurance
agency. Those association-based programs are offered through an Oklahoma association in
accordance with the laws of Oklahoma. For other programs, including association-based programs
offered through AHCP, our
subsidiaries are not involved in the administration of the claims.
10
The laws and regulations and their interpretation relating to our insurance, service and discount
medical business are subject to uncertainty and change. There is no assurance that a review of
our current and proposed operations will not result in a determination that could materially and
adversely affect our business, results of operations and financial condition. See Item 3. Legal
Proceedings below. Moreover, regulatory requirements are subject to change from time to time and
may in the future become more restrictive, thereby making compliance more difficult or expensive
or otherwise affecting or restricting our ability to conduct our business as now conducted or
proposed to be conducted. We are subject to the risk of challenges to the legality of selling
insurance or other regulated products through our association based marketing program, including
claims that our programs do not comply with a particular state’s laws regarding the offering and
licensing for a regulated product or administration of claims. We are subject to the risk that
our discount programs will be determined to be regulated by the discount buying club laws or
physician referral laws. In addition, the use of the internet in the marketing and distribution
of our services is relatively new and presents issues. These issues include the limitations on an
insurance regulator’s jurisdiction and whether Internet service providers, gateways or cybermalls
are engaged in the solicitation or sale of insurance policies or otherwise transacting business
requiring licensure under the laws of one or more states.
Discount Medical Regulations
There are approximately 34 states that now have licensing laws and regulations for discount
medical provider organizations (hereinafter referred to as “DMPO”). The regulations differ
materially among states and are subject to amendment and reinterpretation by the agencies charged
with their enforcement. Some states require a license to operate as a DMPO. We have three
subsidiaries that operate as DMPOs. Alliance HealthCard of Florida, Inc. is registered or
licensed, or has applications for licensing pending or in process in all states where required.
Our other DMPOs are registered or licensed in all states where they are conducting business and
licensing is required. There is also the risk that a state will adopt regulations or enact
legislation restricting or prohibiting the sale of our medical discount programs in that state. In
addition, California views our discount medical plans as managed healthcare and its Department of
Managed Health Care has taken the position that we must seek and eventually obtain a license under
the Knox-Keene Act. Capella, Inc., consistent with a previous settlement with the California
Department of Managed Health Care, is in the process of obtaining a license under the Knox-Keene
Act. Compliance with these regulations on a state-by-state basis has been expensive and
cumbersome. See Item 3.Legal Proceedings below.
Compliance with federal and state regulations is generally our responsibility. The medical
discount plan industry is especially susceptible to charges by the media of regulatory
noncompliance and unfair dealing. As is often the case, the media may publicize perceived
non-compliance with consumer protection regulations and violations of notions of fair dealing
with consumers. Our failure to comply with current, as well as newly enacted or adopted, federal
and state regulations could have a material adverse effect upon our business, financial
condition and results of operations in addition to the following:
| |
• |
|
non-compliance may cause us to lose licensing status or to become the subject of a
variety of enforcement or private actions; |
| |
• |
|
compliance with changes in applicable regulations could materially increase the
associated operating costs; |
| |
• |
|
non-compliance with any rules and regulations enforced by a federal or state
consumer protection authority may subject us or our management personnel to fines or
various forms of civil or criminal prosecution; and |
| |
• |
|
non-compliance, or alleged non-compliance may result in loss of contracts, negative
publicity potentially damaging our reputation, network relationships, client relationships
and the relationship with program members, representatives and consumers in general. |
Insurance Regulations
Government regulation of insurance is a changing area of law and varies from state to state.
Our insurance agency, our agents and the insurance companies from which we obtain our insurance
products and financial services are subject to various federal and state regulations applicable
to their operations. These insurance companies and we must comply with constantly evolving
regulations and make changes occasionally to services, products, structure or operations in
accordance with the requirements of those regulations.
| |
• |
|
Similar to the insurance companies providing products and services offered by us, we
are unable to accurately predict additional government regulations, including health care
reform currently pending at the federal level, that may be enacted affecting the
insurance industry and the offered products and service or how existing or future
regulations might be interpreted. |
11
| |
• |
|
Additional governmental regulation or future interpretation of existing regulations may
decrease the amount of commissions we can earn, eliminate some of the products we offer,
increase the cost of compliance or materially affect the insurance products and services
offered by us and our profitability. |
| |
• |
|
We must rely on the insurance companies that provide the insurance products and
financial services offered by us to carefully monitor state and federal legislative and
regulatory activity as it affects their insurance products and services. We believe that
the insurance products and financial services that we offer comply in all material
respects with all applicable federal and state regulations. |
| |
• |
|
Among the benefits afforded to the members of our association are varying forms of
insurance. Our ability to offer insurance products that we are authorized to distribute
to this association for inclusion in its benefit packages may be affected by governmental
regulation or future interpretation of existing regulations that may increase the cost of
regulatory compliance or affect the nature and scope of products that we may make
available to such associations. |
| |
• |
|
We are currently offering extended service contracts that we obtain from a service
contract provider in three states through a retailer of electronics and appliances.
Those three states regulate extended service contracts under the state insurance code.
These laws generally regulate the disclosures, service contract provisions and require
us to obtain insurance coverage for the cost of service. We contract with a third party
vendor that provides the insurance and the customer contracts. |
Healthcare Regulation and Reform
Government regulation and reform of the healthcare industry may also affect the manner in which we
conduct our business. There continues to be diverse legislative and regulatory initiatives at the
federal and state levels that may affect aspects of the nation’s health care system some of which
may decrease the amount of commissions we can earn, may eliminate some of the products we offer,
increase the cost of compliance or adversely affect the insurance products and services offered by
us and our profitability. The Health Care and Education Affordability Reconciliation Act of 2010
(“Health Care Reform Law”) which was signed into law on March 30, 2010 will reduce the amount of
commission paid by health insurance carriers and may have other adverse consequences including
those listed above in this paragraph.
The Gramm-Leach-Bliley Act mandated restrictions on the disclosure and safeguarding of our
insured’s financial information. The USA Patriot Act placed new federal compliance requirements
relating to anti-money laundering, customer identification and information sharing.
In addition, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) requires
certain guaranteed issuance and renew-ability of health insurance coverage for individuals and
small employer groups and limits exclusions on pre-existing conditions. HIPAA mandated the adoption
of extensive standards for the use and disclosure of health information. HIPAA also mandated the
adoption of standards for the exchange of electronic health information in an effort to encourage
overall administrative simplification and enhance the effectiveness and the efficiency of the
healthcare industry.
HIPAA’s security standards became effective April 20, 2005 and further mandated that specific
requirements be met relating to maintaining the confidentiality and integrity of electronic
health information and protecting it from anticipated hazards or uses and disclosures that are
not permitted.
We believe that we are in compliance with these regulations. We plan to continually audit our
compliance, and accordingly cannot give assurance that our costs of continuing to comply with
HIPAA will not be material to us. Sanctions for failing to comply with standards issued
pursuant to HIPAA include criminal penalties and civil sanctions.
In addition to federal regulation and reform, many states have enacted, or are considering,
various healthcare reform statutes. These reforms relate to, among other things, managed care
practices, prompt payment practices, health insurer liability and mandated benefits. Most states
have also enacted patient confidentiality laws that prohibit the disclosure of confidential
information. As with all areas of legislation, the federal regulations establish minimum
standards and preempt conflicting state laws that are less restrictive but will allow state laws
that are more restrictive. We expect that this trend of increased legislation and regulation will
continue. We are unable to predict what state reforms will be enacted or how they would affect
our business.
E-Commerce Regulation
We may be subject to additional federal and state statutes and regulations in connection with our
product strategy that includes Internet services and products. On an increasingly frequent basis,
federal and state legislators are proposing laws and regulations that apply to internet based
commerce and communications. Areas being affected by this regulation include user privacy,
pricing, content,
taxation, copyright protection, distribution and quality of products, and services. To the extent
that our products and services would be subject to these laws and regulations, the sale of our
products and our business could be adversely affected.
12
Network Marketing Regulation
Our network marketing system is subject to a number of federal and state regulations administered
by the Federal Trade Commission and various state agencies. Our network marketing organization and
activities are subject to scrutiny by various state and federal governmental regulatory 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.
The compensation structure of these selling organizations is very complex, and compliance with all
of the applicable laws is uncertain in light of evolving interpretation of existing laws and the
enactment of new legislation and adoption of regulations pertaining to this type of product
distribution.
We seek legal advice, regarding the structure and operation of our network marketing to ensure
that it complies with all of the applicable laws and regulations pertaining to network sales
organizations. Based on these efforts and the experience of our management, we believe that we
are in compliance with all applicable federal and state regulatory requirements.
Legislative Development
In addition to the Health Care Reform Law, numerous proposals to reform the current healthcare
system have been introduced in the U.S. Congress and in various state legislatures. Proposals have
included, among other things, modifications to the existing employer-based insurance system, a
quasi-regulated system of “managed competition” among health insurers, and a single-payer, public
program. Changes in healthcare policy could significantly affect our business. Legislation has
been introduced from time to time in the U.S. Congress that could result in the federal government
assuming a more direct role in regulating insurance companies.
We are unable to evaluate new legislation that may be proposed and when or whether any
legislation will be enacted and implemented. However, many of the proposals, if adopted,
could have a material adverse effect on our business, financial condition or results of
operations; while others, if adopted, could potentially benefit our business.
Privacy Laws
Certain of our services are based upon the collection, distribution and protection of sensitive
private data. Our contracts with certain clients require our protection of certain confidential
information and to compliance with certain provisions of privacy laws including the
Gramm-Leach-Bliley Act. 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 the breach could
violate certain of our client agreements. We have incurred, and may continue to incur, significant
costs to protect against the threat of a security breach. We may also incur significant costs to
alleviate problems that may be caused by future breaches. Any breach or perceived breach could
subject us to government fines or sanctions, legal claims from clients or customers under that
govern the security non-public personal information. There is no assurance that we would prevail
in the event of such litigation. 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 end-customers. In addition, unauthorized
third parties might alter information in our databases that may adversely affect both our ability
to market our services and the credibility of our information.
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, |
13
| |
• |
|
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 |
| |
• |
|
states other “forward-looking” information. |
We believe it is important to discuss our expectations. However, it must be recognized that events
may occur in the future over which we have no control and which we are not accurately able to
predict. Any forward-looking statements contained in this report represent our judgment as of the
date of this report. We disclaim, however, any intent or obligation to update these
forward-looking statements. As a result, the reader is cautioned not to place undue reliance on
these forward-looking statements.
A SIGNIFICANT PORTION OF OUR REVENUE IS DEPENDENT ON TWO CLIENTS.
Revenue attributable to two clients in our Wholesale Plans and Insurance Marketing Divisions
totaled $22,234,963 or 40% of total revenue for the fiscal year ended September 30, 2010.
For the fiscal year ended September 30, 2010, revenue attributable to a client in our Wholesale
Plans Division totaled $11,858,278 or 21% of total revenue. Although we have long-term contracts
with these clients, loss of either or both of these clients would have a significant adverse
affect on our revenues, profitability and our ability to negotiate discounts with vendors.
A PORTION OF OUR EXPENSES ARE DEPENDENT ON FACTORS THAT WE DO NOT CONTROL.
Some of our expenses, especially those related to unemployment waiver and extended service, are
dependent on factors that we do not control such as the national unemployment rate or changes in
product design or reliability. As a consequence, those factors may adversely change causing us to
incur additional expenses that we may not be able to manage or reduce. Any negative change in our
expenses could reduce our profitability and we may not be able to pass those costs on to our
clients or customers without losing business.
WE DEPEND ON VARIOUS THIRD-PARTY VENDORS TO SUPPLY CERTAIN PRODUCTS AND SERVICES THAT WE
MARKET.
We depend on various third-party vendors to supply the products and services that we market. As a
result, the quality of service they provide is not entirely within our control. If any third-party
vendor were to cease operations, or terminate, breach or not renew its contract with us, or suffer
interruptions, delays or quality problems, we may not be able to substitute a comparable
third-party vendor on a timely basis or on favorable terms. With respect to the insurance programs
and products that we offer, we are dependent on the insurance carriers that underwrite the
insurance to obtain appropriate regulatory approvals. If we were required to use an alternative
insurance carrier, it may materially increase the time required to bring alternative or substitute
insurance related product to market. We are generally obligated to continue providing our products
and services to our customers even if we lose the vendor providing the products or services. A
disruption in our product offerings could harm our reputation and result in customer or agent
dissatisfaction. Replacing existing third-party vendors may not be accomplished in a timely manner
and may be with more expensive third-party vendors resulting in increased costs and reduced
profitability.
14
WE FACE COMPETITION FOR CLIENTS TO MARKET OUR PROGRAMS AS WELL AS COMPETITIVE OFFERINGS
OF BENEFIT PROGRAMS.
There is significant competition for agents, clients and members in our industries. We offer
programs that provide products and services similar to or directly in competition with products
and services offered by our competitors as well as the providers of such products and services
through other channels of distribution.
We provide no assurance that our competitors will not provide products or benefit programs
comparable or superior to our products and programs at lower membership prices or adapt more
quickly to evolving 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.
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.
Due to competitive market forces, we may experience price reductions, reduced gross margins and
loss of market share in the future, any of which would result in decreases in sales and revenues.
These decreases in revenues would adversely affect our business and results of operations and
could lead to discontinuance of operations. There can be no assurance that:
| |
• |
|
we will be able to compete successfully; |
| |
• |
|
our competitors will not develop programs that render our programs less
marketable or even obsolete; or |
| |
• |
|
we will be able to successfully enhance our programs when necessary. |
THE COST OF COMPLIANCE WITH DISCOUNT MEDICAL PROGRAM ORGANIZATION LAWS AND REGULATIONS MAY
ADVERSELY AFFECT OUR PROFITABILITY.
In recent years, several states have enacted laws and adopted regulations that govern discount
medical program organizations (“DMPO”) similar to those we offer and organize. The laws and
regulations 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, and the DMPO licenses or registrations.
Because a significant number of states have not enacted laws governing discount medical programs
we cannot predict whether those states will similarly enact these laws and if they do, we do not
know the full consequence of their enactment upon our business. We do not know whether we will be
able to maintain all necessary licenses and registrations. Our need to comply with these laws and
regulations may adversely affect or limit our future operations. The cost of complying with these
laws and regulations has and will likely continue to have a material adverse effect on our results
of operations and financial position.
THE EFFECT OF THE HEALTH CARE REFORM ON THE INSURANCE INDUSTRY AND OUR INSURANCE MARKETING
DIVISION IS UNCERTAIN.
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. At the federal level, The Health
Care and Education Affordability Reconciliation Act of 2010 (Health Care Reform Law) was signed
into law on March 30, 2010. Although much of the regulatory interpretation of the new law has yet
to be proposed and adopted, beginning in 2010 insurers are required to implement a number of
changes related to major medical insurance policies. These changes include: changes to required
coverage, elimination of most preexisting condition exclusions and a minimum loss ratio of 80-85%.
The minimum loss ratio requires health insurance companies to expend 80% of the premium on medical
service reimbursements (85% for group health). The law will require certain people to purchase
health insurance and will set up subsidies to assist certain people in purchasing health insurance
and allows certain people to obtain insurance from the federal government. The Health Care Reform
Law could impact the number of health insurance customers purchasing health insurance and the
amount and nature of the health insurance they purchase. We are unable to predict whether this law
will increase or decrease the number of people purchasing health insurance or the amount of
insurance purchased. As a result of the Health Care Reform Law, commissions on the sale of
individual major medical insurance policies will be reduced beginning in 2011 and that will result
in a significant reduction in our revenue. Because most of our commission revenue is ultimately
paid to our agents, we anticipate that the potential reduction in
revenue will not necessarily cause a reduction in our profitability in the same proportion.
However, the reduction in commission could cause our agents to stop selling health insurance or
cause them to sell other products with high commission levels to make up for the loss of their
revenues.
15
IN ADDITION TO THE RECENTLY ENACTED HEALTH CARE REFORM ACT, ADDITIONAL HEALTH CARE REFORM
LEGISLATION CONTINUES TO BE CONSIDERED, THE NATURE AND CONSEQUENCE OF WHICH ARE CURRENTLY
INDETERMINABLE.
Other proposals to reform the current healthcare system have been introduced in the U.S. Congress
and in various state legislatures. Proposals have included, among other things, modifications to
the existing employer-based insurance system, a quasi-regulated system of “managed competition”
among health insurers, and a single-payer, public program. Changes in healthcare policy could
significantly affect our business. Government regulation and reform of the healthcare industry may
also affect the manner in which we conduct our business in the future. The legislative and
regulatory initiatives at both the federal and state levels to effect changes and cost containment
in the nation’s health care system may decrease the amount of commissions we can earn, eliminate
some of the products we currently and may offer, increase the cost of compliance or materially
affect the insurance products and services offered by us and our profitability.
INSURANCE PRODUCTS AND THE SALE OF THOSE PRODUCTS ARE HIGHLY REGULATED AND THE COST OF
COMPLIANCE MAY INCRASE AND LIMIT THE INSURANCE PRODUCTS WE OFFER.
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 laws and 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 laws and regulations. We may also be limited in manner
in which we market and distribute our products and financial services as a result of these laws
and regulations.
OUR MEMBERSHIP ASSOCIATIONS MAY BECOME SUBJECT TO INCREASED REGULATION,
THROUGH REGULATORY LICENSING REQUIREMENTS, OR REGULATORY ENFORCEMENT,
RESULTING IN RESTRICTION OF THE MANNER OF DISTRIBUTION AND RESULTING IN
INCREASED REGULATORY COMPLIANCE COSTS AND PENALTIES.
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 unemployment waivers,
extended service and insurance products that are issued under group or blanket policies covering
the association’s members. Most states’ insurance laws and regulations allow these membership
programs that contain insurance products 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 program
memberships do not comply with their laws or regulations, it would result in a material adverse
effect on our results of operations and financial position. Our ability to continue selling these
memberships would be adversely affected, and we may be subject to fines and penalties and may have
to issue refunds or provide restitution to the associations and their members.
OUR BUSINESS PRACTICES AND COMPENSATION ARRANGEMENTS WITH INSURANCE COMPANIES AND AGENTS MAY
BE SCRUTINIZED BY GOVERNMENTAL REGULATORS AND SUBJECT TO CONSUMER LITIGATION.
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 the insured. 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
industry’s 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.
WE MAY HAVE EXPOSURE AND LIABILITY RELATING TO NON-COMPLIANCE WITH THE HEALTH INSURANCE
PORTABILITY AND ACCOUNTABILITY ACT OF 1996 AND THE COST OF COMPLIANCE
COULD BE MATERIAL.
In April 2003 privacy regulations promulgated by The Department of Health and Human Services
pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). HIPAA
imposes extensive restrictions on the use and disclosure of individually identifiable health
information by certain entities. Also as part of HIPAA, the Department of Health and Human
Services has 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
adverse effect 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.
16
OUR FAILURE TO COMPLY WITH FEDERAL AND STATE REGULATION COULD RESULT IN ENFORCEMENT ACTION AND
IMPOSITION OF PENALTIES, MODIFICATION OF OUR OPERATIONS, AND NEGATIVE PUBLICITY.
Our operations are regulated by federal and state laws and regulations administered by various
state agencies. These laws and regulations cover the areas of insurance, discount medical plans,
associations, and extended service.
Compliance with all of the applicable regulations and laws is uncertain because of the evolving
interpretations of existing laws and regulations, and the enactment of new laws and regulations.
Accordingly, there is the risk that our operations could be found to not comply with applicable
laws and regulations that could
| |
• |
|
result in enforcement action and imposition of penalty, |
| |
• |
|
require modification of our operations or programs, |
| |
• |
|
result in negative publicity. |
Any of these consequences could have a material adverse effect on our results of operations as well
as our financial condition.
THE RECORDED GOODWILL ASSOCIATED WITH OUR ACQUISITION OF ACCESS PLANS USA AND OUR
MERGER-ACQUISITION OF BMS HOLDING COMPANY MAY BECOME IMPAIRED AND REQUIRE A SUBSTANTIAL
WRITEDOWN AND THE RECOGNITION OF AN IMPAIRMENT EXPENSE.
In connection with our acquisition of Access Plans USA in 2009 and our merger-acquisition of BMS
Holding Company in 2007, we recorded goodwill that had a net aggregate asset value of $1,842,186
and $2,534,152, respectively at September 30, 2010. In the event that the goodwill is determined to
be impaired for any reason, we will be required to write-down or reduce the value of the goodwill
and recognize an impairment expense. The impairment expense may be substantial in amount and, in
such case, adversely affect the results of our operations for the applicable period and may
negatively affect the market value of our common stock.
OUR FAILURE TO PROTECT PRIVATE DATA COULD SUBJECT US TO PENALTIES, DAMAGE OUR REPUTATION,
CAUSE US TO BE IN BREACH OF CONTRACTS AND CAUSE 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. Our contracts with certain clients place a duty on us to protect certain confidential
information and to comply with certain provisions of privacy laws including the Gramm-Leach-Bliley
Act. 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 client
agreements. We have incurred, and will continue to incur, significant costs to protect against a
security breach. We may also incur significant costs to alleviate problems that may be caused by a
security breach. Any breach or perceived breach could subject us to government fines or sanctions,
legal claims from clients or customers under that govern the security non-public personal
information. There is no assurance that we would prevail in litigation. 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
end-customers. In addition, unauthorized third parties might alter information in our databases
that would adversely affect both our ability to market our services and the credibility of our
information.
WE RELY ON OUR INSURANCE CARRIER PARTNERS AND THIRD PARTIES 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 whom we have contracted. 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. 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. These revenues are in the form of first year and renewal commissions
that vary by
17
company and product. 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 timely and accurately calculate and pay commissions including advance payment of agent
commissions. Some of the commission 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 general controls.
Accordingly, the commission information 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 financially reported commissions are subject to adjustment and
we may not collect and realize the full amount of the reported revenue which may adversely affect
our business, operating results and financial condition.
OUR REVENUES IN THE RETAIL PLANS DIVISION ARE LARGELY DEPENDENT ON THE INDEPENDENT MARKETING
REPRESENTATIVES, WHOSE REDUCED SALES EFFORTS OR TERMINATION MAY RESULT IN SIGNIFICANT LOSS OF
REVENUES.
Part of our success and growth depends in part upon our ability to attract, retain and motivate the
network of independent marketing representatives who principally market our USA Healthcare Savings
and Care Entrée 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’ down line 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 RETAIL PLANS 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.
THE FAILURE OF OUR NETWORK MARKETING ORGANIZATION TO COMPLY WITH FEDERAL AND STATE REGULATION
COULD RESULT IN ENFORCEMENT ACTION AND IMPOSITION OF PENALTIES, MODIFICATION OF OUR NETWORK
MARKETING SYSTEM, AND NEGATIVE PUBLICITY.
Our network marketing organization is subject to federal and state laws and regulations
administered by the Federal Trade Commission and various state agencies. These laws and regulations
include securities, franchise investment, business opportunity and criminal laws prohibiting the
use of “pyramid” or “endless chain” types of selling organizations. These regulations are generally
directed at ensuring that product and service sales are ultimately made to consumers (as opposed to
other marketing representatives) and that advancement within the network marketing organization is
based on sales of products and services, rather than on investment in the company or other
non-retail sales related criteria. The compensation structure of a network marketing organization
is very complex. Compliance with all of the applicable regulations and laws is uncertain because of
| |
• |
|
the evolving interpretations of existing laws and regulations, and |
| |
• |
|
the enactment of new laws and regulations pertaining in general to
network marketing organizations and product and service distribution. |
18
Accordingly, there is the risk that our network marketing system could be found to not comply with
applicable laws and regulations that could
| |
• |
|
result in enforcement action and imposition of penalty, |
| |
• |
|
require modification of the marketing representative network system, |
| |
• |
|
result in negative publicity, or |
| |
• |
|
have a negative effect on distributor morale and loyalty. |
Any of these consequences could have a material adverse effect on our results of operations as
well as our financial condition.
THE LEGALITY OF OUR NETWORK MARKETING ORGANIZATION IS SUBJECT TO CHALLENGE BY OUR MARKETING
REPRESENTATIVES, WHICH COULD RESULT IN SIGNIFICANT DEFENSE COSTS, SETTLEMENT PAYMENTS OR
JUDGMENTS, AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
Our network marketing organization is subject to legality challenge by our marketing
representatives, both individually and as a class. Generally, these challenges would be based on
claims that our marketing network program was operated as an illegal “pyramid scheme” in violation
of federal securities laws, state unfair practice and fraud laws and the Racketeer Influenced and
Corrupt Organizations Act. Proceedings resulting from these claims could result in significant
defense costs, settlement payments, or judgments, and could have a material adverse effect on us.
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. While we have not been the target of
FTC enforcement action, 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 will not
interpret our product claims presumptively valid under federal law as illegal under that state’s
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 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. 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.
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 Retail Plans 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.
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. We are dependent
on a relatively small number of insurance companies to provide product and financial services for
sale through our channels.
19
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.
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.
|
|
|
| ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS. |
We do not have any unresolved and outstanding comments of the Staff of the U.S. Securities and
Exchange Commission.
20
We lease the space for our corporate offices and Wholesale Plans Division in Norman, Oklahoma
under a lease that expires September 30, 2011. The total space consists of approximately 6,523
square feet. The lease agreement is with Southwest Brokers, Inc., a company owned by Brett
Wimberley, one of our Directors, President and Chief Financial Officer. This lease was executed on
May 1, 2005, amended on August 1, 2006, August 1, 2008, September 30, 2009 and September 30, 2010.
The lease expires on September 30, 2011. In the event we are required to move from our current
Norman, Oklahoma office facilities, the terms and cost of occupancy may be substantially different
than those under which our office space is currently occupied and the rental rate may be
substantially greater.
Our Retail Plans and Insurance Marketing Divisions lease office space in Irving, Texas under a
lease agreement with an unaffiliated third party that expires November 15, 2011. The total space
consists of approximately 17,612 square feet. We lease an additional 7,412 square feet from the
same unaffiliated third party under a separate lease that expires November 30, 2011.
We believe that our current office space facilities are adequate for our current operations.
|
|
|
| ITEM 3. |
|
LEGAL PROCEEDINGS |
The following legal proceedings involve the subsidiaries of Access Plans USA which we acquired on
April 1, 2009.
William Andrew Rivell, M.D. and Alan B. Whitehouse, M.D., individually and on behalf of all persons
similarly situated, v. Private Health Care Systems and The Capella Group, Inc.; Civil Action File
No: CV106-176 was filed and remains pending in the United States District Court for the Southern
District of Georgia, Augusta Division. The plaintiffs in this case allege that the contracts
entered into by medical providers with our subsidiary, The Capella Group, Inc. (“Capella”) through
Capella’s relationship with the Private Health Care Systems network of providers (“PHCS”) did not
allow for the use of the providers’ names to market a discount medical plan whereby payment for
services is made at the point of service by the consumer, and not by a third-party payor such as an
insurance company. We vigorously contest this assertion and intend to defend this case. The
Plaintiffs are, however, seeking certification of this case as a class action on behalf of all
similarly-situated physicians nationwide. If the plaintiffs succeed with such certification and
ultimately prevail in the case, it could have a material adverse affect on our financial condition
and our results of operation. The case was originally instituted on November 17, 2006, but was
thereafter dismissed by the District Court. The United States Court of Appeals for the Eleventh
Circuit vacated such dismissal and remanded the case to the District Court on March 24, 2008. In
August of 2009 the District Court denied Plaintiffs’ Amended Motion for Class Certification. In
September of 2009 Plaintiffs filed their Motion for Reconsideration of Order Denying Amended Motion
for Class Certification, asking the District Court to certify a smaller class. On September 30,
2010 the Court issued a ruling denying Plaintiff’s Motion for Reconsideration of Order Denying
Amended Motion for Class Certification.
On October 30, 2008 The Hartford Accident and Indemnity Co. assumed payment of defense costs
pursuant to a reservation of rights letter issued on that date. The Hartford’s duty to defend was
litigated in Hartford Accident and Indemnity Insurance Company v. The Capella Group, Inc. D/b/a
Care Entrée; Civil Action File No: 4:09-cv-295 which was filed on May 27, 2009. The Court on
December 21, 2009 issued a memorandum opinion granting our motion for summary judgment denying the
summary judgment motion of Hartford on the duty to defend issue, ruling that the Hartford was
obligated to provide a defense in the Rivell action. The Court denied our motion for attorney’s
fees related to the summary judgment motions and ruled that a decision on the issue of whether
Hartford had a duty to indemnify in the Rivell action was premature. The court dismissed all
remaining claims for declaratory relief by either party.
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. The Zermeno plaintiffs are
former members of the Care Entrée discount healthcare program who allege that they (for themselves
and for the general public) are entitled to injunctive, declaratory, and equitable relief under
Section 445 of the California Health and Safety Code. That Section governs medical referral
services. The plaintiffs’ also sought relief under Section 17200 of the Business and Professions
Code, California’s Unfair Competition Law. On December 21, 2007, we received a favorable verdict
based on the court’s finding that the Plaintiffs did not have standing to sue since they were no
longer customers of Precis. The plaintiffs appealed and on December 23, 2009 the Court of Appeals
reversed the trial court’s ruling on standing and remanded the case to the trial court for a ruling
on the merits. On November 1, 2010 the Court issued a Statement of Decision in which it ruled that
Section 445 applied to the Care Entrée program and that Section 445 had been violated. Following
the ruling, the parties have briefed the issue of scope of injunctive relief. Precis, Inc. has the
right to appeal the Statement of Decision or any injunctive relief that is issued once the Court
issues a ruling on
injunctive relief. An adverse outcome in this case would have a material affect our financial
condition and would limit our ability (and that of other healthcare discount programs) to do
business in California. We believe that we have complied with all California statues and
regulations. Although we believe the Plaintiffs’ claims are without merit, we cannot provide any
assurance regarding the outcome or results of this litigation.
21
At September 30, 2010, we accrued $36,000 for defense costs of the above matters and other
pending litigation matters. While it is possible that we may incur costs in excess of this
amount, we are unable to provide a reasonable estimate of the range of additional costs that may
be incurred.
ITEM 4. (Removed and Reserved)
PART II.
|
|
|
| ITEM 5. |
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
Our common stock is quoted on the OTC Bulletin Board under the symbol “APNC”. As of December 6,
2010, there were 352 holders of record of our common stock. The table below sets forth for the
periods indicated the high and low price per share (using the closing average of best bid and best
ask price) of our common stock as reported on the OTC Bulletin Board. These quotations also
reflect inter-dealer prices without retail mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions.
| |
|
|
|
|
|
|
|
|
| |
|
Price Per Common Share |
|
| |
|
High |
|
|
Low |
|
Year Ended September 30, 2010: |
|
|
|
|
|
|
|
|
First Quarter ended December 31, 2009 |
|
$ |
1.18 |
|
|
$ |
0.75 |
|
Second Quarter ended March 31, 2010 |
|
$ |
1.22 |
|
|
$ |
1.00 |
|
Third Quarter ended June 30, 2010 |
|
$ |
1.25 |
|
|
$ |
0.83 |
|
Fourth Quarter ended September 30, 2010 |
|
$ |
0.97 |
|
|
$ |
0.85 |
|
Year Ended September 30, 2009: |
|
|
|
|
|
|
|
|
First Quarter ended December 31, 2008 |
|
$ |
1.05 |
|
|
$ |
0.30 |
|
Second Quarter ended March 31, 2009 |
|
$ |
0.95 |
|
|
$ |
0.55 |
|
Third Quarter ended June 30, 2009 |
|
$ |
0.89 |
|
|
$ |
0.36 |
|
Fourth Quarter ended September 30, 2009 |
|
$ |
1.00 |
|
|
$ |
0.40 |
|
DIVIDEND POLICY
We have never paid cash dividends or made other cash distributions to common stock shareholders,
and do not expect to declare or pay any cash dividends in the foreseeable future.
We intend to retain future earnings, if any, for working capital and to finance current operations
and expansion of its business. Payments of dividends in the future will depend upon growth,
profitability, financial condition and other factors that our Board of Directors may deem relevant.
ISSUANCE OF UNREGISTERED SECURITIES
On September 30, 2010, one of our former executive officers and directors exercised stock option
for the purchase of 100,000 common stock shares for $.83 per share. The common stock shares were
not registered under the Securities Act of 1933, as amended (the “Securities Act”). The shares
were issued without payment of commissions or any other form of remuneration and pursuant to Rule
506 of Regulation D promulgated under the Securities Act.
22
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth as of September 30, 2010, information related to each category of
equity compensation plan approved or not approved by our shareholders, including individual
compensation arrangements with our non-employee directors. The equity compensation plans approved
by our shareholders is our 2009 Equity Option Plan. All stock options and rights to acquire our
equity securities are exercisable for or represent the right to purchase our common stock.
On October 13, 2009, our board of directors approved and adopted the Alliance HealthCard, Inc.
2009 Equity Compensation Plan. The 2009 Plan became effective on December 7, 2009.
Our 2000 Stock Option Plan was terminated on December 7, 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of |
|
|
|
|
|
|
|
|
| |
|
Securities to be |
|
|
|
|
|
|
|
|
| |
|
issued upon |
|
|
|
|
|
|
Number of securities |
|
| |
|
exercise |
|
|
Weighted-average |
|
|
remaining available |
|
| |
|
of outstanding |
|
|
exercise price of |
|
|
for future issuance |
|
| |
|
options, warrants |
|
|
outstanding options, |
|
|
under equity |
|
| Plan category |
|
and rights |
|
|
warrants and rights |
|
|
compensation plans |
|
Equity compensation plans approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
2009 Stock Option Plan |
|
|
2,270,111 |
|
|
$ |
1.11 |
|
|
|
279,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders: |
|
|
|
|
|
|
|
|
|
|
|
|
2000 Stock Option Plan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,270,111 |
|
|
|
|
|
|
|
279,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ITEM 6. |
|
SELECTED FINANCIAL DATA. |
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and as such, are
not required to provide the information required by Item 301 of Regulation S-K with respect to
Selected Financial Data.
|
|
|
| ITEM 7. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Overview
Access Plans, Inc. became a holding company of Alliance HealthCard and its subsidiaries and the
registrant under the Securities Exchange Act of 1934 following approval by the shareholders of
Alliance HealthCard, Inc. (“Alliance HealthCard”), effective December 7, 2009, Alliance HealthCard
Acquisition Corp., a subsidiary of Access Plans, Inc., an Oklahoma corporation, also one of
Alliance HealthCard’s wholly-owned subsidiaries, merged into Alliance HealthCard. The
shareholders of Alliance HealthCard exchanged their Alliance HealthCard common stock shares on a
one-for-one basis for common stock shares of Access Plans, Inc.
Our subsidiary, Alliance HealthCard formed in 1998 is a provider of discount medical plans with a
focus on creating, marketing, and distributing membership savings programs primarily to the
underserved markets in the United States. Our original programs offered attractive savings in
approximately 16 areas of healthcare, including physician visits, hospital stays, chiropractics,
vision, dental, pharmacy, hearing, and patient advocacy, among others. In February 2007, we
completed the reverse merger-acquisition of BMS Holding Company, Inc., and its subsidiaries,
Benefit Marketing Solutions, L.L.C. (BMS) and BMS Insurance Agency, L.L.C., (“BMS Agency”),
Alliance HealthCard being deemed as the legal acquirer and BMS Holding Company as the accounting
acquirer. As a result of this accounting treatment, intangible assets and goodwill totaling
$4,791,945 were recorded reflecting the fair market value of Alliance HealthCard in excess of its
identifiable net tangible assets as of the date of the merger. While we continue to market our
health oriented programs, this merger-acquisition has greatly expanded our business scope to
include programs that offer discount
savings on dining and entertainment, automotive, legal and financial, as well as insurance
programs including leased property, involuntary unemployment, accidental death and dismemberment,
and product service plans. We sell our membership savings programs to retailers, insurance
companies, finance companies, banks, employer groups and association-based organizations through
direct sales or independent marketing consultants.
23
BMS designs, markets, and distributes membership programs for rental-purchase companies,
financial organizations, employer groups, retailers and association-based organizations on a
nation-wide basis. These membership programs are sold as part of a point-of-sale transaction or
through direct marketing efforts. The point-of-sale membership plans are sold through more than
4,800 locations in the U.S. and Canada.
On April 1, 2009, we completed our acquisition of Access Plans USA. Access Plans USA markets
health insurance and develops and distributes consumer driven discount plans on a variety of
health related services such as medical, dental, pharmacy and vision care and manages its own
proprietary dental and vision networks. We issued 6,800,578 shares of our common stock in
exchange for the outstanding common stock of Access Plans USA. The aggregate purchase price of
Access Plans USA was determined to be $4,768,500 based on the fair market value of the 6,800,578
shares determined on November 13, 2008, the date of the acquisition agreement. In connection
with our acquisition of Access Plans USA, we recorded goodwill that had a net aggregate asset
value of $1,842,186 at September 30, 2010.
The Company’s operations are currently organized under four segments:
| |
• |
|
Wholesale Plans Division — plan offerings are customized membership marketing plans
primarily offered at rent-to-own retail stores. |
| |
• |
|
Retail Plans Division — plan offerings are primarily healthcare savings plans. These
plans are not insurance, but allow members access to a variety of healthcare networks to
obtain discounts from usual and customary fees. |
| |
• |
|
Insurance Marketing Division — markets individual major medical health insurance and
other insurance products through a national network of independent agents. |
| |
• |
|
Corporate — includes salary and other expenses for individuals performing services for
administration of overall management and operations of the Company. These expenses are not
allocated to our other segments. |
Wholesale Plans
Our Wholesale Plans Division provides our clients with customized membership marketing plans that
leverage their brand names, customer relationships and typically their payment mechanism, plus
offer benefits that appeal to their customers. The value provided by our plans to our clients,
includes increased customer attraction and retention, plus incremental fee income with limited
risk or capital cost.
Our plans are primarily offered at rent-to-own retail stores. Nationwide there are approximately
8,600 locations serving approximately 4.1 million households according to the Association of
Progressive Rental Organizations (“APRO”). It is estimated that the two largest rent-to-own
industry participants, account for approximately 4,800 of the total number of stores, and the
majority of the remainder of the industry consists of operations with fewer than 50 stores. The
industry has been consolidating and is expected to continue, resulting in an increased
concentration of stores in the two largest rent-to-own industry participants.
The rent-to-own industry serves a highly diverse customer base. According to the APRO,
approximately 96% of rent-to-own customers have household incomes between $15,000 and $50,000 per
year. The rent-to-own industry serves a wide variety of customers by allowing them to obtain
merchandise that they might otherwise be unable to obtain due to insufficient cash resources or a
lack of access to credit. APRO also estimates that 95% of customers have high school diplomas.
We currently manage about 220 membership plans for our clients that include rental purchase
dealers, insurance companies, financial institutions, retail merchants, and consumer finance
companies. At September 30, 2010, our wholesale plans were offered at approximately 4,910
locations. Of the locations at September 30, 2010, 2,880 locations were Rent-A-Center owned
locations operated under their brand. Rent-A-Center, Inc., a Nasdaq (symbol RCII) traded
company, is the largest rent-to-own company in the United States, Puerto Rico and Canada. Our
revenue attributable to the contractual arrangements with Rent-A-Center was approximately $11.9
million, (21% of total revenue) during the fiscal year ended September 30, 2010, compared to $11.6
million, (30% of total revenue) during the fiscal year ended September 30, 2009. Revenue
attributable to our Wholesale Plans Division accounted for $22.4 million, (40% of total revenue)
during the fiscal year ended September 30, 2010 and $19.5 million, (50% of total revenue) during
the fiscal year ended September 30, 2009. Our growth in wholesale plans revenue is dependent in
significant part on
an increase in the number of rent-to-own locations at which these plans are offered and the sales
efforts of those locations. Although we have long-term contracts with Rent-A-Center and other
rent-to-own companies, loss of either, especially Rent-A-Center would have a significant impact on
our revenues, profitability and our ability to negotiate discounts with our vendors.
24
Retail Plans
Our Retail Plans Division offerings include healthcare savings plans and association memberships
that provide insurance features. These healthcare savings plans are not insurance, but allow
members access to a variety of healthcare networks to obtain discounts from usual and customary
fees. We offer wellness programs, prescription drug and dental discount programs, medical discount
cards, and limited benefit insured plans. Our members pay providers the discounted rate at the
time services are provided to them. These plans are designed to serve the markets in which
individuals either have no health insurance or limited healthcare benefits. Our revenue
attributable to retail plans was approximately $17.5 million (32% of total revenue) and $12.8
million (33% of total revenue) during the fiscal year ended September 30, 2010 and 2009,
respectively.
This Division is comprised of the membership business of Alliance Healthcard, The Capella Group,
Inc. (“Capella”) and Protective Marketing Enterprises, Inc. (“PME”). Capella and PME are
subsidiaries of Access Plans USA which was acquired on April 1, 2009. PME also owns and manages
proprietary networks of dental and vision providers that provide services at negotiated rates to
certain members of our plans and other plans that have contracted with us for access to our
networks.
Through our healthcare savings plans, we believe customers save an average of 35% on their medical
costs and between 10% and 50% on services through other discount medical providers. These
discounts for services that do not require the use of a medical PPO are more difficult to track
because our members pay a discounted rate at point of service.
In addition to our wholesale and retail offerings, certain clients may choose to include our
benefits with their own membership plan offering. In these instances, the client bears the cost of
marketing and fulfillment, and we provide customer service. These offerings are designed to
enhance our clients’ existing offering and improve their product value relative to their
competition and in some instances to improve their customer retention. While these plans provide
lower periodic member fees, we incur limited implementation costs and receive higher revenue
participation rates. Our additional distribution channels also include network marketing
representatives, independent agents and consumer direct sales call centers. We also market to
internet portals and financial institutions.
In order to deliver our membership offerings, we contract with a number of different vendors to
provide various products and services to our members. The majority of these vendor relationships
involve the vendor providing our members access to their network or providers or their locations
and our members obtain a discount at the time of service. We have vendor relationships with
medical networks, automotive service companies, insurance companies, travel related entities and
food and entertainment consumer discount providers. Our vendors value the relationship with us
because we deliver many customers to them without incremental capital cost or risk on their part
and these relationships are governed by multi-year agreements and aggregated volume scaling.
Insurance Marketing
Our Insurance Marketing Division offers and sells individual major medical health insurance
products and related benefit plans, including specialty insurance products, primarily through a
national network of independent agents.
America’s Healthcare/Rx Plan Agency (“AHCP”) is the centerpiece of the Insurance Marketing
Division. AHCP is a subsidiary of Access Plans USA which was acquired on April 1, 2009. AHCP
distributes major medical, short term medical, critical illness and related health insurance
products to small businesses, self-employed and other individuals and families through a network
of approximately 7,420 independent agents which have carrier appointments through AHCP. The
primary insurance carriers that we represent include: Golden Rule Insurance Company, World
Insurance Company, Aetna and Colorado Bankers.
We support our agents and recruit new agents via access to proprietary and private label products,
leads for new sales, commission advance programs, incentive programs, including an annual
convention, web-based technology, and back-office support. More specifically, our agent support
and recruiting tools include:
| |
• |
|
e-Agent Center — provides agents with access to real-time rate quoting, on-line
licensing and contracting, insurance application submission, access to brochures
and other marketing materials. |
| |
• |
|
Lead Distribution — we utilize an electronic system to connect agents with an
on-line lead ordering and delivery system. Leads are also provided in certain
situations as incentives to sell certain policies. |
| |
• |
|
Incentive programs — to assist with agent motivation and recruitment, we
provide paid annual convention trips and periodic sales contests. |
25
| |
• |
|
Agent advances — with most of the major medical products we represent, agents
are entitled to from 3 to 9 months of advance commissions either funded by AHCP or
our insurance carrier partner. Our ability to grow this segment will depend, in
part, on our continued access to working capital to fund these advances. |
| |
• |
|
Home office support — this includes agent and product training, marketing
materials and agent communication. The training programs include both on-site and
in-house schools, DVDs and webcasts covering product knowledge and sales techniques
as well as market conduct and regulatory compliance issues. In addition, our
support includes development and distribution of a wide variety of marketing
materials including flyers, brochures, email blasts and letters. We also promote
and inform our agents on important news and updates via a weekly newsletter. |
Our strategy for the Insurance Marketing Division is to:
| |
• |
|
Continue working with insurance carriers in the development of proprietary
products for our agents to represent; |
| |
• |
|
Expand the number of carriers that we represent for more product choice for
customers and expanded geographic representation; and |
| |
• |
|
Enhance our e-agent platforms in order to better serve our existing agents and
improve attraction to new agents to sell plans we represent. |
The revenue of our Insurance Marketing Division is from earned sales commissions paid by the
insurance companies this Division represents. These sales commissions are generally a percentage
of premium revenue. Our revenue attributable to the Insurance Marketing Division was approximately
$20.6 million (37% of total revenue) and $11.4 million (29% of total revenue) during the fiscal
year ended September 30, 2010 and 2009 respectively. Growth for our commission revenue is based
on continued recruitment efforts of agents and the resulting penetration of the individual, family
and small business health insurance markets, driving a corresponding growth in the number of
policies in force. We estimate that as of September 30, 2010 we had approximately 25,200 policies
in force compared to an estimated 24,000 policies in force at September 30, 2009.
The Health Care and Education Affordability Reconciliation Act of 2010 (Health Care Reform Law)
was enacted on March 30, 2010. Although much of the regulatory interpretation of the new law has
yet to be proposed and adopted, beginning in 2010 insurers are required to implement a number of
changes related to major medical insurance policies. These changes include, but are not limited
to: changes to required coverage, elimination of most preexisting condition exclusions and a
minimum loss ratio of 80%. The minimum loss ratio requires health insurance companies to maintain
premium levels such that 80% of the premium is utilized for claims on medical services and related
expenses (85% for group health). The Health Care Reform Law will require certain people to
purchase health insurance and will set up subsidies to assist certain people in purchasing health
insurance and allows certain people to obtain insurance from the federal government. It is
possible that this law will impact the products we currently offer or change the number of
customers or potential customers for our products. As a result of the minimum loss ratio
requirement in the Health Care Reform Law, it is likely that commissions on the sale of individual
major medical insurance policies will be reduced in January 2011 and, if that happens, it could
result in a significant reduction in our revenue. Because most of our commission revenue is
ultimately paid to our agents we anticipate that the potential reduction in revenue will not
necessarily cause a reduction in our profitability in the same proportion. However, the
anticipated reduction in commissions could cause our agents to stop selling health insurance
because of the reduced commissions or cause them to sell other products to make up for the loss of
their revenues.
In response to the anticipated effect of the Health Care Reform Law, we are endeavoring to expand
the portfolio of health related insurance products that we provide to our agents. These new and
expanded products will furnish our agents a means to mitigate the possible financial impact that
may result from the new law.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and the accompanying notes. Actual results may differ from those
estimates and the differences may be material. Certain significant estimates are required in the
evaluation of goodwill and intangible assets for impairment, valuation of stock based
compensation, allowances for doubtful recoveries of advanced agent commissions, deferred income
taxes, accounts and notes receivable and the waiver reimbursements liability. Actual results could
differ from those estimates and the differences could be material.
26
Goodwill and Intangible Assets
Goodwill from acquisitions represents the excess of the cost of a business acquired over the net of
the amounts assigned to assets acquired, including identifiable intangible assets and liabilities
assumed. GAAP specifies criteria to be used in determining whether intangible assets acquired in a
business combination must be recognized and reported separately from goodwill. Amounts assigned to
goodwill and other identifiable intangible assets are based on independent appraisals or internal
estimates.
Intangible assets deemed acquired in connection with Access Plans USA, were valued at $3,000,000
and are being amortized over the estimated useful life of those assets (See Note 4 —Mergers and
Acquisitions) of the financial statements appearing elsewhere in this report. Amortization expense
totaled $465,000 during the fiscal year ended September 30, 2010 and $232,500 for the six months
ended September 30, 2009. Access Plans USA was acquired on April 1, 2009 and financial results are
only for the six months ended September 30, 2009.
Customer lists acquired in an acquisition are capitalized and amortized over the estimated useful
lives of the customer lists. Customer lists acquired in 2007 were valued at $2,500,000 and are
being amortized over 60 months, the estimated useful life of the list. Amortization expense totaled
$500,000 during each of the fiscal years ended September 30, 2010 and 2009.
The Company evaluates the impairment of goodwill as of the end of each fiscal year and the
recoverability of other intangible assets whenever events or changes in circumstances indicate that
an intangible asset’s carrying amount may not be recoverable. These circumstances include:
| |
• |
|
a significant decrease in the market value of an asset; |
| |
• |
|
a significant adverse change in the extent or manner in which an asset is used; or |
| |
• |
|
an accumulation of costs significantly in excess of the amount originally expected for
the acquisition of an asset |
We measure the carrying amount of the asset against the estimated undiscounted future cash flows
associated with it. Should the sum of the expected future net cash flows be less than the carrying
value of the asset being evaluated, an impairment loss would be recognized. The impairment loss
would be calculated as the amount by which the carrying value of the asset exceeds its fair value.
The fair value is measured based on quoted market prices, if available. If quoted market prices are
not available, the estimate of fair value is based on various valuation techniques, including the
discounted value of estimated future cash flows. The evaluation of asset impairment requires us to
make assumptions about future cash flows over the life of the asset being evaluated. These
assumptions require significant judgment and actual results may differ from assumed and estimated
amounts. As of September 30, 2010 and 2009, we determined that the recorded value of our goodwill
and other intangibles were not impaired.
Stock Based Compensation
We measure stock based compensation expense using the modified prospective method. Under the
modified prospective method, stock-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as expense over the requisite service or vesting
period.
Income Taxes
We use a liability approach to calculating deferred income taxes. The objective is to measure a
deferred income tax liability or asset using the tax rates expected to apply to taxable income in
the periods in which the deferred income tax liability or asset is expected to be settled or
realized. Any resulting net deferred income tax assets should be reduced by a valuation allowance
sufficient to reduce such assets to the amount that is more likely than not to be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely
than not of being sustained. Recognized income tax positions are measured at the largest amount
that is greater than 50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs. The Company records interest and
penalties related to unrecognized tax benefits as a component of income tax expense.
27
Revenue Recognition
We recognize revenue when four basic criteria are met:
| |
• |
|
persuasive evidence of an arrangement exists; |
| |
• |
|
delivery has occurred or services have been rendered; |
| |
• |
|
the seller’s price to the buyer is fixed or determinable; and |
| |
• |
|
collectability is reasonably assured. |
Our revenue recognition varies based on source. Membership fees of the Wholesale and Retail Plans
Divisions are paid on a weekly, monthly or annual basis and fees paid in advance are recorded as
deferred revenue and recognized monthly over the applicable membership term. Our wholesale and
private label partners bill their customers for the membership fees and periodically remit our
portion of the fees to us. For our retail members that are typically billed directly, the billed
amount is almost entirely collected by electronic charge to the member’s credit card, automated
clearinghouse or electronic check.
Revenue of the Insurance Marketing Division reflects commissions and fees reported to us by
insurance companies for policies sold by the Division’s agents. Commissions and fees collected are
recognized as earned on a monthly basis until the underlying contract is reported to the Division
as terminated. Our commission rates vary by insurance carrier, the type of policy purchased by the
policyholder and the amount of time the policy has been active, with commission rates typically
being higher during the first 12 months of the policy period. Revenue also includes interest
income earned on commissions advanced to the Division’s agents.
Unearned commissions comprise commission advances received from insurance carriers but not yet
earned or collected. These advances are subject to repayment back to the carrier in the event that
the policy lapses before the advanced commissions are earned and collected. Additionally, fees
received are recorded as deferred revenue and amortized over the expected weighted average life of
the policies sold which currently approximates 18 months. Deferred revenue is reported net of
related policy acquisition costs, principally lead and marketing credits, which are capitalized and
amortized over the same weighted average life, to the extent such deferred costs do not exceed the
related gross deferred revenue. Any excess costs are expensed as incurred.
Commission Expense
Commission expense is based on the applicable rates applied to membership revenues billed or
insurance commissions collected, and are recognized as incurred on a monthly basis until such time
as the underlying program member or insurance policy is terminated.
The Insurance Marketing Division advances agent commissions, up to nine months, for certain
insurance programs. The advance commissions to our agents are funded partly by the insurance
carriers we represent and partly by us. These commissions advanced to agents are reflected on our
balance sheet as advanced agent commissions. Collection of the commissions advanced (plus accrued
interest) is accomplished by withholding amounts earned by the agent on the policy upon which the
advance was made. In the event of early termination of the underlying policy, the Division seeks
to recover the unpaid advance balance by withholding advanced and earned commissions on other
policies sold by the agent. This Division also has the contractual right to pursue other sources
of recovery, including recovery from the agents managing the agent to whom advances were made.
The Retail Plans Division advances agent commissions for certain retail plan programs. The advance
commissions to the Company’s agents are funded by the Company and are reflected on the balance
sheet as advanced agent commissions. Collection of the commissions advanced is accomplished by
withholding amounts earned by the agent on the memberships upon which the advance was made. In
addition, certain membership persistency levels must be maintained.
Advanced agent commissions are reviewed and an allowance is provided for those balances where
recovery is considered doubtful. This allowance requires judgment and is based primarily upon
estimates of the recovery of future commissions expected to be earned by the agents with
outstanding balances and, where applicable, the agents responsible for their management. Advances
are written off when determined to be non-collectible.
28
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51, which was
subsequently incorporated into ASC Topic 810, Consolidation. ASC Topic 810 establishes new
accounting and reporting standards for non-controlling interests in a subsidiary and for the
deconsolidation of a subsidiary. ASC Topic 810 requires entities to classify non-controlling
interests as a component of stockholders’ equity and requires subsequent changes in ownership
interests in a subsidiary to be accounted for as an equity transaction. Additionally, ASC Topic 810
requires entities to recognize a gain or loss upon the loss of control of a subsidiary and to
re-measure any ownership interest retained at fair value on that date. ASC Topic 810 also requires
expanded disclosures that clearly identify and distinguish between the interests of the parent and
the interests of the non-controlling owners. ASC Topic 810 is effective on a prospective basis for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2008, except for the presentation and disclosure requirements, which are required to be applied
retrospectively. The adoption of ASC Topic 810 was effective for us beginning October 1, 2009.
Because all of our subsidiaries are wholly-owned, ASC Topic 810 did not have a material impact on
our financial condition or results of operations.
In April 2008, the FASB issued an update to Codification Topic 350, Intangible- Goodwill and Other,
which amends the factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset. This amendment became effective
on a prospective basis to all intangible assets acquired and for disclosures on all intangible
assets recognized on or after the beginning of the first annual period subsequent to December 15,
2008. Early adoption was prohibited. The amendment to Codification Topic 350 was effective for us
beginning October 1, 2009 and did not have a material impact on our determination of the useful
life of our intangible assets, financial condition or results of operations.
In May 2009, the FASB issued authoritative guidance on subsequent events, which was codified in ASC
855, Subsequent Events. ASC 855 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. We adopted these provisions of ASC 855 on June 30, 2009. On February 24,
2010, the FASB updated the guidance to address certain implementation issues related to an entity’s
requirement to perform and disclose subsequent event procedures. Effective upon its issuance, the
update exempts registrants reporting under the Securities Exchange Act of 1934 from disclosing the
date through which subsequent events have been evaluated. As the update affected disclosure only,
the adoption of the update did not have an impact on our consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value
Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.
ASU 2010-06 requires expanded fair value disclosures of transfers into and out of Levels 1 and 2
fair value measurements and clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06
is effective for us beginning January 1, 2010. The adoption of this accounting standard update did
not have a material impact on our financial position, results of operations, cash flows and
disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In July 2010, the FASB issued Accounting Standards Update No. 2010-20 (ASU 2010-20), Receivables
(Topic 310) — Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses. ASU 2010-20 requires disclosures about the nature of the credit risk in an entity’s
financing receivables, how that risk is incorporated into the allowance for credit losses, and the
reasons for any changes in the allowance. Disclosure is required to be disaggregated at the level
at which an entity calculates its allowance for credit losses. ASU 2010-20 is effective for us
beginning December 31, 2010. The adoption of this accounting standard is not expected to have a
material impact on our financial position, results of operations, cash flows and disclosures.
Results of Operations
Introduction
We are a leading provider of consumer membership plans, healthcare savings membership plans and a
marketer for individual major medical health insurance products. Through working with our
wholesale and retail clients, we design and build membership plans that contain benefits
aggregated from our vendors that appeal to our client’s customers. For our major medical health
insurance products, we offer and sell these products through a national network of independent
agents.
29
The following table sets forth selected results of our operations for the fiscal years ended
September 30, 2010 and 2009. We operate in four reportable business segments: Wholesale Plans,
Retail Plans, Insurance Marketing and Corporate. The Wholesale Plans Division includes the
operations of our customized membership marketing plans primarily offered at rent-to-own retail
stores. The Retail Plans Division includes the operations from our healthcare savings plans
designed to serve the markets in which individuals either have no health insurance or limited
healthcare benefits. The Insurance Marketing Division offers and sells individual major medical
health insurance products and related benefit plans. The following information was derived and
taken from our audited financial statements appearing elsewhere in this report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended |
|
| |
|
September 30, |
|
| ($ in thousands) |
|
2010 |
|
|
2009 |
|
|
% Change |
|
Net revenues |
|
$ |
55,349 |
|
|
$ |
39,081 |
|
|
|
42 |
% |
Direct costs |
|
|
39,044 |
|
|
|
26,469 |
|
|
|
48 |
% |
Operating expenses |
|
|
11,474 |
|
|
|
8,324 |
|
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,831 |
|
|
|
4,288 |
|
|
|
13 |
% |
Net other income (expense) |
|
|
(21 |
) |
|
|
200 |
|
|
|
(111 |
%) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,810 |
|
|
|
4,488 |
|
|
|
7 |
% |
Income taxes, net |
|
|
1,762 |
|
|
|
1,049 |
|
|
|
68 |
% |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,048 |
|
|
$ |
3,439 |
|
|
|
(11 |
%) |
|
|
|
|
|
|
|
|
|
|
The following tables set forth revenue, gross margin and operating income by segment.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended |
|
| |
|
September 30, |
|
| ($ in thousands) |
|
2010 |
|
|
2009 |
|
|
% Change |
|
Net revenues — by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Plans |
|
$ |
22,372 |
|
|
$ |
19,522 |
|
|
|
15 |
% |
Retail Plans (a) |
|
|
17,458 |
|
|
|
12,838 |
|
|
|
36 |
% |
Insurance Marketing |
|
|
20,641 |
|
|
|
11,432 |
|
|
|
81 |
% |
Corporate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Intercompany Eliminations |
|
|
(5,122 |
) |
|
|
(4,711 |
) |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,349 |
|
|
$ |
39,081 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin — by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Plans (a) |
|
$ |
5,997 |
|
|
$ |
3,884 |
|
|
|
54 |
% |
Retail Plans (a) |
|
|
7,035 |
|
|
|
6,710 |
|
|
|
5 |
% |
Insurance Marketing |
|
|
3,273 |
|
|
|
2,018 |
|
|
|
62 |
% |
Corporate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,305 |
|
|
$ |
12,612 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income — by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Plans (a) |
|
$ |
4,034 |
|
|
$ |
2,030 |
|
|
|
99 |
% |
Retail Plans (a) |
|
|
1,844 |
|
|
|
2,734 |
|
|
|
(33 |
%) |
Insurance Marketing |
|
|
161 |
|
|
|
482 |
|
|
|
(67 |
%) |
Corporate |
|
|
(1,208 |
) |
|
|
(958 |
) |
|
|
(26 |
%) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,831 |
|
|
$ |
4,288 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
| |
|
|
| (a) |
|
Gross of intercompany eliminations |
30
| |
|
|
Discussion of Years Ended September 30, 2010 and 2009 |
Net revenues increased $16.2 million (a 41% increase) during the 2010 fiscal year to $55.3 million
from $39.1 million in 2009. The increase in net revenues was primarily due to:
| |
• |
|
The acquisition of Access Plans USA on April 1, 2009 which resulted in an increase of
revenue of approximately $12.9 million; |
| |
• |
|
Growth in our Wholesale Plans Division of approximately $2.9 million attributable to
additional rent to own locations offering our plans and an increase in member acceptance
rates among our clients; and |
| |
• |
|
Growth in our existing Retail Plans Division of approximately $.9 million
attributable to new business beginning in the second quarter 2010 and an existing client
whose membership acceptance rates continue to increase; and |
| |
• |
|
Other changes of $(.4) million. See the “Segment Analysis” below for additional
information. |
Direct costs increased $12.5 million (a 47% increase) during the 2010 fiscal year to $39.0 million
from $26.5 million in 2009. The increase in direct costs was attributable to the following:
| |
• |
|
The acquisition of Access Plans USA on April 1, 2009 which resulted in an increase in
cost of sales of $12.4 million; |
| |
• |
|
Our Wholesale Plans Division experienced an increase of $.8 million primarily
attributable to revenue growth due to additional rent to own locations offering our
plans and an increase in member acceptance rates among our clients; and an increase in
product service expenses attributable to increased program membership, increases in the
average number of product that members have eligible for service and a slight increase
in the average cost per incident; and |
| |
• |
|
Our existing Retail Plans Division experienced a decrease of $.2 million primarily
attributable to a decrease of compensation expense resulting from the centralization of
operations for our Retail Plans Division during the fiscal 2010 1st quarter
ended December 31, 2009; and |
| |
• |
|
Other changes of $(.4) million. See “Segment Analysis” below for additional
information. |
Operating expenses increased $3.2 million (a 39% increase) during the 2010 fiscal year to $11.5
million from $8.3 million in 2009. The increase in operating expenses was primarily attributable
to the acquisition of Access Plans USA on April 1, 2009 which resulted in an increase in operating
expenses of $3.2 million. See the “Segment Analysis” below for additional information.
Net other income decreased $.2 million during the 2010 fiscal year. The decrease was primarily
attributable to income earned from a non-recurring transaction during 2009.
Provision for income taxes, net increased by $.8 million during the 2010 fiscal year to $1.8
million from $1.0 million in 2009. For the 2010 fiscal year we recorded an income tax provision of
$1.8 million consisting of income tax expense of $1.3 million and deferred income expense of $.5
million. The net increase consisted of tax refunds of $.5 million for federal and state income
taxes for prior fiscal years.
Net income was approximately $3.0 million (6% of net revenue) during the 2010 fiscal year compared
to $3.4 million (9% of net revenue) during 2009.
31
Wholesale Plans Division
Selected Operating Metrics
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended September 30, |
|
| ($ in thousands except member data) |
|
2010 |
|
|
2009 |
|
|
% Change |
|
Results of operations |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
22,372 |
|
|
$ |
19,522 |
|
|
|
15 |
% |
Direct costs |
|
|
16,375 |
|
|
|
15,638 |
|
|
|
5 |
% |
Operating expenses |
|
|
1,963 |
|
|
|
1,854 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
4,034 |
|
|
$ |
2,030 |
|
|
|
99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
— |
|
Direct costs |
|
|
73 |
% |
|
|
80 |
% |
|
|
(7 |
%) |
Operating expenses |
|
|
9 |
% |
|
|
9 |
% |
|
|
— |
|
Operating income |
|
|
18 |
% |
|
|
10 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Member count at September 30, |
|
|
639,034 |
|
|
|
547,532 |
|
|
|
17 |
% |
Net revenues increased $2.9 million (a 15% increase) during the 2010 fiscal year to $22.4 million
from $19.5 million in 2009. The increase in net revenues was attributable to additional
rent-to-own locations offering our plans and an increase in member acceptance rates among existing
clients.
Direct costs increased $.8 million (a 5% increase) during the 2010 fiscal year to $16.4 million
from $15.6 million in 2009. The increase was primarily attributable to: a) an increase of
approximately $.7 million associated with revenue growth; b) an increase of $1.2 million for
product service expenses and c) a decrease of $1.1 million for clients’ waiver of rental payments
primarily due to a decrease in unemployment waiver expense primarily related to a decrease in the
level of national unemployment. We entered into contractual arrangements to administer certain
membership programs for clients, primarily in the rental purchase industry. For approximately
3,100 (78%) of our point-of-sale locations the administration duties include reimbursing the client
for certain expenses it incurs in the operation of the program. Those expenses are primarily
related to product service expenses and the client’s waiver of rental payments under defined
circumstances such as when their customer becomes unemployed for a stated period of time. It is
our policy to reserve the necessary funds in order to reimburse our clients as those obligations
become due in the future. The increase in product service expense is attributable to increased
program membership, increases in the average number of product that members have eligible for
service and a slight increase in the average cost per incident.
Operating expenses increased $.1 million (a 5% increase) during the 2010 fiscal year to $2.0
million from $1.9 million in 2009.
Operating income increased $2.0 million (a 100% increase) during the 2010 fiscal year to $4.0
million from $2.0 million in 2009. The increase was primarily attributable to additional rent to
own locations offering our plans, an increase in member acceptance rates among our clients and a
decrease in unemployment waiver expense primarily due to a decrease in the level of national
unemployment.
32
Retail Plans Division
Selected Operating Metrics
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended September 30, |
|
| ($ in thousands except member data) |
|
2010 |
|
|
2009 |
|
|
% Change |
|
Results of operations |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
17,458 |
|
|
$ |
12,838 |
|
|
|
36 |
% |
Direct costs |
|
|
10,423 |
|
|
|
6,128 |
|
|
|
70 |
% |
Operating expenses |
|
|
5,191 |
|
|
|
3,975 |
|
|
|
31 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
1,844 |
|
|
$ |
2,735 |
|
|
|
(33 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
— |
|
Direct costs |
|
|
60 |
% |
|
|
48 |
% |
|
|
12 |
% |
Operating expenses |
|
|
30 |
% |
|
|
31 |
% |
|
|
(1 |
%) |
Operating income |
|
|
11 |
% |
|
|
21 |
% |
|
|
(10 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Member count at September 30, |
|
|
1,572,880 |
|
|
|
1,104,669 |
|
|
|
42 |
% |
Net revenues increased $4.7 million (a 37% increase) during the 2010 fiscal year to $17.5 million
from $12.8 million in 2009. The increase in net revenues was primarily due to:
| |
• |
|
The acquisition Access Plans USA Retail Plans operating segment on April 1, 2009
which resulted in an increase of $1.5 million; |
| |
• |
|
New contracts beginning during 2010 attributed $2.5 million; and |
| |
• |
|
Membership growth for existing contracts of $.7 million. |
Direct costs increased $4.3 million (a 70% increase) during the 2010 fiscal year to $10.4 million
from $6.1 million in 2009. The increase in direct costs was attributable to:
| |
• |
|
The acquisition Access Plans USA Retail Plans operating segment on April 1, 2009
which resulted in an increase of $.3 million; |
| |
• |
|
New contracts beginning during 2010 attributed $4.2 million; and |
| |
• |
|
Our existing Retail Plans Division experienced a decrease of $.2 million
attributable to a decrease of compensation expense resulting from the centralization of
operations during the fiscal 2010 1st quarter ended December 31, 2009. |
Operating expenses increased $1.2 million (a 30% increase) to $5.2 million during the 2010 fiscal
year from $4.0 million in 2009. The increase in operating expenses was attributable to:
| |
• |
|
The acquisition Access Plans USA Retail Plans operating segment on April 1, 2009
resulting in an increase of $1.1 million; |
| |
• |
|
Operating expenses of $.6 million for a new contract beginning during 2010; |
| |
• |
|
Operating expenses for our existing Retail Plans operating segment decreased $.5
million due to the centralization of operations during the fiscal 2010 1st
quarter. |
Operating income decreased $.9 million (a 33% decrease) to $1.8 million during the 2010 fiscal year
from $2.7 million in 2009.
33
Insurance Marketing Division
Selected Operating Metrics
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended September 30, |
|
| ($ in thousands except member data) |
|
2010 |
|
|
2009 |
|
|
% Change |
|
Results of operations |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
20,641 |
|
|
$ |
11,432 |
|
|
|
81 |
% |
Direct costs |
|
|
17,368 |
|
|
|
9,413 |
|
|
|
85 |
% |
Operating expenses |
|
|
3,112 |
|
|
|
1,537 |
|
|
|
102 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
161 |
|
|
$ |
482 |
|
|
|
(67 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
100 |
% |
|
|
100 |
% |
|
|
— |
|
Direct costs |
|
|
84 |
% |
|
|
82 |
% |
|
|
2 |
% |
Operating expenses |
|
|
15 |
% |
|
|
13 |
% |
|
|
2 |
% |
Operating income |
|
|
1 |
% |
|
|
4 |
% |
|
|
(3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of in-force policies |
|
|
25,219 |
|
|
|
24,016 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of agents at September 30, |
|
|
7,420 |
|
|
|
5,872 |
|
|
|
26 |
% |
Our Insurance Marketing Division was part of the Access Plans USA acquisition on April 1, 2009.
Operating results are only for the six months ended for the fiscal year ended September 30, 2009.
Corporate
Selected Operating Metrics
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended September 30, |
|
| ($ in thousands) |
|
2010 |
|
|
2009 |
|
|
% Change |
|
Results of operations |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
Direct costs |
|
|
— |
|
|
|
— |
|
|
|
|
|
Operating expenses |
|
|
1,208 |
|
|
|
958 |
|
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
(1,208 |
) |
|
$ |
(958 |
) |
|
|
(26 |
%) |
|
|
|
|
|
|
|
|
|
|
Operating expenses increased $0.2 million to $1.2 million during the 2010 fiscal year from $1.0
million for 2009. The increase was attributable to an increase in compensation expense for
existing employees and the addition of two employees.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
34
LIQUIDITY AND CAPITAL RESOURCES
We had unrestricted cash and cash equivalents of $5.4 and $4.1 million at September 30, 2010 and
2009, respectively. Our working capital was $5.7 million at September 30, 2010 compared to $1.1
million at September 30, 2009. The improvement of $4.6 million was due to the following:
| |
• |
|
Cash increased $1.6 million which was partially a result of growth in net income; |
| |
• |
|
Accounts receivable increased $.6 million due to increased revenue for our
Wholesale and Retail Plans Divisions; |
| |
• |
|
Notes payable decreased $1.6 million resulting from the retirement of notes payable to
related parties; |
| |
• |
|
Other accrued liabilities decreased $.7 million attributable to payments for
legal settlements of $.3 million and other accrued liabilities of $.4 million; and |
| |
• |
|
Other increases of $.1 million. |
Pursuant to discussions between the note holders and our directors, on November 18, 2009 the
disinterested directors approved a proposal by the note holders that the notes be paid off early
at a 10% discount. As a result of the discount, the Company recorded a gain of $94,444 in other
income during the quarter ended December 31, 2009. Principal payments of $1,030,348 were made to
the note holders on January 6, 2010 resulting in retirement of the notes.
Cash provided by operating activities was $3.2 million and $3.8 million for the fiscal years ended
September 30, 2010 and 2009, respectively. The decrease of $.6 million was primarily attributable
to:
| |
• |
|
A decrease in net income of $.4 million; |
| |
• |
|
Receivables increased by $.7 million attributable to revenue growth; |
| |
• |
|
An increase in our deferred tax expense, net of $1.3 primarily attributable to a
decrease of the valuation allowance reserve of $.8 million for 2009; |
| |
• |
|
An increase in amortization expense of $.4 million due to the amortization of
intangible assets related to the acquisition of Access Plans; |
| |
• |
|
A decrease in advanced agent commissions of $.3 million related to the Insurance
Marketing Division; |
| |
• |
|
A decrease in unearned commissions of $.8 million also related to the Insurance
Marketing Division; |
| |
• |
|
A decrease in waiver reimbursements liabilities and other liabilities of $1.0
million consisting of $.3 million for waiver reimbursements and other accrued
liabilities of $.7 million primarily related to payments for legal settlements of $.3
million; |
| |
• |
|
Other increases of $.1 million |
Cash used by investing activities was $.05 million and $.2 million for the fiscal years ended
September 30, 2010 and 2009, respectively. The increase of $.2 million was attributable to:
| |
• |
|
Restricted cash decreased $.7 million primarily due to the settlement of the States
General legal proceedings on October 27, 2009; |
| |
• |
|
Cash received from acquisition decreased $.4 million; and |
| |
• |
|
Other decreases of $.1 million. |
35
Cash used by financing activities was $2.0 million for the year ended September 30, 2010 compared
to $2.5 million for the same prior fiscal year period. The decrease of $.5 million was primarily
attributable to the purchase of treasury stock of $.5 million on October 27, 2009.
We anticipate that our cash on hand, together with cash flow from operations, will be sufficient
for the next 12 and following months to finance operations, make capital investments in the
ordinary course of business, and pay indebtedness when due.
The following table summarizes our known contractual obligations as of September 30, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Payments Due By Period |
|
| |
|
|
|
|
|
Less than 1 |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
| Contractual obligations |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
5 years |
|
Long-Term Debt Obligations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Capital Lease Obligations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Operating Lease Obligations |
|
|
497,926 |
|
|
|
447,863 |
|
|
|
50,063 |
|
|
|
|
|
|
|
|
|
Purchase Obligations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other Long-Term
Liabilities Reflected on
the Balance Sheet |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
497,926 |
|
|
$ |
447,863 |
|
|
$ |
50,063 |
|
|
$ |
— |
|
|
$ |
— |
|
IMPACT OF INFLATION
Inflation has not had a material effect on us to date. However, the effects of inflation on
future operating results will depend in part, on our ability to increase prices or lower
expenses, or both, in amounts that offset inflationary cost increases.
|
|
|
| ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. |
We do not have any material exposure to market risk from derivatives or other financial
instruments.
|
|
|
| ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following financial statements are filed with this report:
36
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders of
Access Plans, Inc.
We have audited the accompanying consolidated balance sheets of Access Plans, Inc. and
subsidiaries, as of September 30, 2010 and 2009 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Access Plans, Inc. and subsidiaries as of September
30, 2010 and 2009 and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Eide Bailly LLP
Greenwood Village, Colorado
December 22, 2010
37
Access Plans, Inc. & Subsidiaries
Consolidated Balance Sheets
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,380,571 |
|
|
$ |
4,108,183 |
|
Restricted cash, current |
|
|
786,871 |
|
|
|
470,378 |
|
Accounts receivable, net |
|
|
4,429,885 |
|
|
|
3,789,790 |
|
Advanced agent commissions, net |
|
|
4,619,814 |
|
|
|
5,827,406 |
|
Deferred income taxes, current |
|
|
1,010,000 |
|
|
|
981,000 |
|
Prepaid expenses |
|
|
69,987 |
|
|
|
92,499 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
16,297,128 |
|
|
|
15,269,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures and equipment, net |
|
|
327,560 |
|
|
|
385,967 |
|
Goodwill |
|
|
4,376,339 |
|
|
|
4,376,339 |
|
Intangibles, net |
|
|
3,010,823 |
|
|
|
3,975,823 |
|
Restricted cash, other |
|
|
— |
|
|
|
500,000 |
|
Deferred income taxes, long term |
|
|
736,000 |
|
|
|
1,222,000 |
|
Other assets |
|
|
103,722 |
|
|
|
243,677 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
24,851,572 |
|
|
$ |
25,973,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
907,586 |
|
|
$ |
766,920 |
|
Accrued salaries and benefits |
|
|
167,055 |
|
|
|
247,075 |
|
Accrued commissions |
|
|
582,729 |
|
|
|
641,550 |
|
Unearned commissions |
|
|
4,571,883 |
|
|
|
5,700,347 |
|
Waiver reimbursements liability |
|
|
846,600 |
|
|
|
1,102,900 |
|
Deferred revenue |
|
|
857,942 |
|
|
|
1,023,002 |
|
Current portion of notes payable to related parties and other notes |
|
|
352,298 |
|
|
|
1,647,201 |
|
Liability for unrecognized tax benefit |
|
|
166,000 |
|
|
|
166,000 |
|
Other accrued liabilities |
|
|
2,185,431 |
|
|
|
2,881,866 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
10,637,524 |
|
|
|
14,176,861 |
|
|
|
|
|
|
|
|
|
|
Long term liabilities: |
|
|
|
|
|
|
|
|
Notes payable to related parties and other notes, net of current portion shown above |
|
|
— |
|
|
|
302,744 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
10,637,524 |
|
|
|
14,479,605 |
|
|
|
|
|
|
|
|
Commitments |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 100,000,000 shares authorized; 19,877,204 and
21,633,705 shares issued and outstanding at September 30, 2010 and 2009,
respectively |
|
|
19,877 |
|
|
|
21,633 |
|
Additional paid-in-capital |
|
|
11,259,020 |
|
|
|
11,584,359 |
|
Accumulated earnings (deficit) |
|
|
2,935,151 |
|
|
|
(112,112 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
14,214,048 |
|
|
|
11,493,880 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
24,851,572 |
|
|
$ |
25,973,485 |
|
|
|
|
|
|
|
|
See the accompanying notes to the financial statements.
38
Access Plans, Inc. & Subsidiaries
Consolidated Statements of Operations
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
| |
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
Net revenues |
|
$ |
55,349,075 |
|
|
$ |
39,081,383 |
|
Direct costs |
|
|
39,044,305 |
|
|
|
26,469,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
16,304,770 |
|
|
|
12,612,369 |
|
|
|
|
|
|
|
|
|
|
Marketing and sales expenses |
|
|
2,249,081 |
|
|
|
1,658,887 |
|
General and administrative expenses |
|
|
8,064,528 |
|
|
|
5,820,860 |
|
Depreciation and amortization expense |
|
|
1,159,691 |
|
|
|
844,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,831,470 |
|
|
|
4,287,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Other income |
|
|
25,912 |
|
|
|
346,775 |
|
Other expense, net |
|
|
(47,119 |
) |
|
|
(146,692 |
) |
|
|
|
|
|
|
|
|
|
|
(21,207 |
) |
|
|
200,083 |
|
|
|
|
|
|
|
|
Net income before income taxes |
|
|
4,810,263 |
|
|
|
4,487,745 |
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
|
|
|
Current |
|
|
1,306,000 |
|
|
|
1,879,000 |
|
Deferred tax (benefit) |
|
|
457,000 |
|
|
|
(830,000 |
) |
|
|
|
|
|
|
|
Total provision for income taxes |
|
|
1,763,000 |
|
|
|
1,049,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,047,263 |
|
|
$ |
3,438,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
Basic income |
|
$ |
0.15 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income |
|
$ |
0.15 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
19,909,722 |
|
|
|
18,242,732 |
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
20,110,572 |
|
|
|
18,247,606 |
|
See the accompanying notes to the financial statements.
39
Access Plans, Inc. & Subsidiaries
Consolidated Statements of Stockholders’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
Accumulated |
|
|
Total |
|
| |
|
Common Stock |
|
|
Paid in |
|
|
Earnings |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
(Deficit) |
|
|
Equity |
|
Balance at October 1, 2008 |
|
|
14,796,763 |
|
|
$ |
14,796 |
|
|
$ |
6,808,758 |
|
|
$ |
(3,550,857 |
) |
|
$ |
3,272,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction of outstanding shares |
|
|
36,364 |
|
|
|
36 |
|
|
|
(36 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued in business acquisition |
|
|
6,800,578 |
|
|
|
6,801 |
|
|
|
4,761,700 |
|
|
|
— |
|
|
|
4,768,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to directors |
|
|
— |
|
|
|
— |
|
|
|
13,937 |
|
|
|
— |
|
|
|
13,937 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,438,745 |
|
|
|
3,438,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
|
21,633,705 |
|
|
|
21,633 |
|
|
|
11,584,359 |
|
|
|
(112,112 |
) |
|
|
11,493,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares purchased and retired |
|
|
(1,856,501 |
) |
|
|
(1,856 |
) |
|
|
(498,144 |
) |
|
|
— |
|
|
|
(500,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
100,000 |
|
|
|
100 |
|
|
|
82,900 |
|
|
|
— |
|
|
|
83,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued to employees
and directors |
|
|
— |
|
|
|
— |
|
|
|
89,904 |
|
|
|
— |
|
|
|
89,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,047,263 |
|
|
|
3,047,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rounding |
|
|
|
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010 |
|
|
19,877,204 |
|
|
$ |
19,877 |
|
|
$ |
11,259,020 |
|
|
$ |
2,935,151 |
|
|
$ |
14,214,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the financial statements.
40
Access Plans, Inc. & Subsidiaries
Consolidated Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
| |
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,047,263 |
|
|
$ |
3,438,745 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,159,691 |
|
|
|
844,960 |
|
Deferred tax expense (benefit) |
|
|
457,000 |
|
|
|
(829,986 |
) |
Stock option expense |
|
|
89,904 |
|
|
|
13,937 |
|
Reduction in related party debt |
|
|
(94,444 |
) |
|
|
— |
|
Amortization of loan discount to interest expense |
|
|
38,643 |
|
|
|
154,569 |
|
Provision for losses on receivables and advanced agent commissions |
|
|
35,310 |
|
|
|
118,894 |
|
Change in operating assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
Receivables |
|
|
(675,412 |
) |
|
|
68,896 |
|
Advanced agent commissions |
|
|
1,207,593 |
|
|
|
916,232 |
|
Prepaid expenses |
|
|
163,119 |
|
|
|
77,816 |
|
Accounts payable |
|
|
140,666 |
|
|
|
(592,657 |
) |
Accrued salaries and benefits |
|
|
(80,020 |
) |
|
|
85,343 |
|
Unearned commissions |
|
|
(1,187,284 |
) |
|
|
(439,034 |
) |
Deferred revenue |
|
|
(165,059 |
) |
|
|
(86,419 |
) |
Claims and other accrued liabilities |
|
|
(952,968 |
) |
|
|
39,744 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,184,002 |
|
|
|
3,811,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash |
|
|
183,507 |
|
|
|
(472,186 |
) |
Cash received from acquisition |
|
|
— |
|
|
|
450,213 |
|
Investment in LLC |
|
|
— |
|
|
|
(100,000 |
) |
Purchase of equipment |
|
|
(136,275 |
) |
|
|
(44,407 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
47,232 |
|
|
|
(166,380 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Increase in short term debt |
|
|
196,421 |
|
|
|
— |
|
Payments on promissory notes — related parties |
|
|
(1,030,348 |
) |
|
|
(2,289,663 |
) |
Payment on promissory notes — other |
|
|
(707,919 |
) |
|
|
(259,769 |
) |
Purchase of treasury stock |
|
|
(500,000 |
) |
|
|
— |
|
Stock options exercised |
|
|
83,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
Net cash (used by) financing activities |
|
|
(1,958,846 |
) |
|
|
(2,549,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
1,272,388 |
|
|
|
1,095,500 |
|
Beginning of period |
|
|
4,108,183 |
|
|
|
3,012,683 |
|
|
|
|
|
|
|
|
End of period |
|
$ |
5,380,571 |
|
|
$ |
4,108,183 |
|
|
|
|
|
|
|
|
See the accompanying notes to the financial statements.
41
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010 AND 2009
NOTE 1. DESCRIPTION OF THE BUSINESS
Access Plans, Inc. became a holding company of Alliance HealthCard and its subsidiaries and the
registrant under the Securities Exchange Act of 1934 following approval by the shareholders of
Alliance HealthCard, Inc. (“Alliance HealthCard”), effective December 7, 2009, Alliance HealthCard
Acquisition Corp., a subsidiary of Access Plans, Inc., an Oklahoma corporation, also one of
Alliance HealthCard’s wholly-owned subsidiaries, merged into Alliance HealthCard. The shareholders
of Alliance HealthCard exchanged their Alliance HealthCard common stock shares on a one-for-one
basis for common stock shares of Access Plans, Inc.
Alliance HealthCard, our subsidiary, was founded in 1998 and is a provider of discount medical
plans with a focus on creating, marketing, and distributing membership savings programs primarily
to the underserved markets in the United States. The Company’s original programs offered attractive
savings in approximately 16 areas of health care, including physician visits, hospital stays,
chiropractics, vision, dental, pharmacy, hearing, and patient advocacy, among others. On February
28, 2007, we completed a merger with Benefit Marketing Solutions, L.L.C., (“BMS”). For financial
reporting purpose, BMS was considered the acquiring entity and historical financial statements
prior to March 2007 reflect the activities of BMS as adjusted for the effect of the
recapitalization which occurred at the merger date. Activities of Alliance HealthCard prior to the
merger date are no longer reflected in the historical financial statements as it was considered to
be the acquired entity. While the Company continues to market its successful health oriented
programs, the merger has greatly expanded the Company’s business scope to include programs that
offer discount savings on dining and entertainment, automotive, legal and financial, as well as
insurance programs including leased property, involuntary unemployment, accidental death and
dismemberment, and extended service plans. The Company sells its membership savings programs to
retailers, insurance companies, finance companies, banks, employer groups and association-based
organizations through direct sales or independent marketing consultants, and is now a leading
provider of value added membership plans sold in conjunction with point-of-sale transactions. See
Note 4 — Mergers and Acquisitions below.
BMS, subsidiary, Benefit Marketing Solutions, L.L.C., was formed in February 2002 and is a
national membership program benefits organization that designs, markets, and distributes
membership programs for rental-purchase companies, financial organizations, employer groups,
retailers and association-based organizations. These membership programs are sold as part of a
point-of-sale transaction or through direct marketing efforts. The point-of-sale membership
plans are sold through more than 4,910 locations in the U.S. and Canada.
On April 1, 2009, the Company completed its acquisition of Access Plans USA, Inc. (“Access Plans
USA”). Access Plans USA markets health insurance and develops and distributes consumer driven
discount plans on a variety of health related services including medical, dental, pharmacy and
vision care and manages its own proprietary dental and vision networks.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include those of our wholly owned subsidiary Alliance
HealthCard The subsidiaries of Alliance HealthCard include BMS Holding Company, Inc., Access
Plans USA, Inc. and Alliance HealthCard of Florida, Inc. BMS Insurance Agency, L.L.C. (the
“Agency”), is a wholly owned subsidiary of BMS Holding Company. The Agency was formed to comply
with the State of Oklahoma regulations for insurance agencies. All intercompany accounts and
transactions have been eliminated in the consolidation.
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 the accompanying notes. Actual results may differ from those
estimates and the differences may be material to the financial statements. Certain significant
estimates are required in the evaluation of goodwill and intangible assets for impairment,
valuation of stock based compensation, allowances for doubtful recoveries of advanced agent
commissions, deferred income taxes, accounts and notes receivable and the waiver reimbursements
liability. Actual results could differ from those estimates and the differences could be material.
42
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill and Intangible Assets
Goodwill in business acquisitions represents the excess of the cost of a business acquired
over the net of the amounts assigned to assets acquired, including identifiable intangible assets
and liabilities assumed. United States generally accepted accounting practices (“GAAP”) specifies
criteria to be used in determining whether intangible assets acquired in a business combination
must be recognized and reported separately from goodwill. Amounts assigned to goodwill and other
identifiable intangible assets are based on independent appraisals or internal estimates.
Intangible assets deemed acquired in connection with Access Plans USA, were valued at $3,000,000
and are being amortized over the estimated useful life of those assets (See Note 4 —Mergers and
Acquisitions, below). Amortization expense totaled $465,000 during the fiscal year ended September
30, 2010 and $232,500 during the fiscal year ended September 30, 2009.
Customer lists acquired in an acquisition are capitalized and amortized over the estimated useful
lives of the customer lists. Customer lists deemed acquired in 2007 were valued at $2,500,000 and
are being amortized over 60 months, the estimated useful life of the list. Amortization expense
totaled $500,000 during each of the fiscal years ended September 30, 2010 and 2009.
The Company evaluates the impairment of goodwill as of the end of each fiscal year and the
recoverability of identifiable intangible assets whenever events or changes in circumstances
indicate that an intangible asset’s carrying amount may not be recoverable. These circumstances
include: (1) a significant decrease in the market value of an asset, (2) a significant adverse
change in the extent or manner in which an asset is used, or (3) an accumulation of costs
significantly in excess of the amount originally expected for the acquisition of an asset. The
Company measures the carrying amount of the asset against the estimated undiscounted future cash
flows associated with the asset. In the event the sum of the expected future net cash flows will
be less than the carrying value of the asset being evaluated, an impairment loss would be
recognized. The impairment loss would be calculated as the amount by which the carrying value of
the asset exceeds its fair value. The fair value is measured based on quoted market prices, if
available. If quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including the discounted value of estimated future cash flows. The
evaluation of asset impairment requires the Company to make assumptions about future cash flows
over the life of the asset being evaluated. These assumptions require significant judgment and
actual results may differ from assumed and estimated amounts. As of September 30, 2010 and 2009 the
Company recognized no impairment losses related to goodwill and other intangible assets.
Stock Based Compensation
The Company measures stock-based compensation expense using the modified prospective method. Under
the modified prospective method, stock-based compensation cost is measured at the grant date based
on the fair value of the award and is recognized as expense over the requisite service or vesting
period.
Income Taxes
The Company uses a liability approach to calculate deferred income taxes. The objective is to
measure a deferred income tax liability or asset using the tax rates expected to apply to taxable
income in the periods in which the deferred income tax liability or asset is expected to be settled
or realized. Any resulting net deferred income tax assets should be reduced by a valuation
allowance sufficient to reduce such assets to the amount that is more likely than not to be
realized.
43
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In accordance with FASB ASC Topic740, Income Taxes, as of October 1, 2007, the Company recognizes
the effect of income tax positions only if those positions are more likely than not of being
sustained. Recognized income tax positions are measured at the largest amount that is greater than
50% likely of being realized. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs. The Company records interest and penalties related to
unrecognized tax benefits as a component of income tax expense.
Revenue Recognition
In accordance with Securities and Exchange Commission Staff Accounting Bulletin (No. 104) Revenue
Recognition, (Corrected Copy), the Company recognizes revenue when four basic criteria are met:
| |
• |
|
persuasive evidence of an arrangement exists; |
| |
• |
|
delivery has occurred or services have been rendered; |
| |
• |
|
the seller’s price to the buyer is fixed or determinable; and |
| |
• |
|
collectability is reasonably assured. |
The Company’s revenue recognition varies based on the revenue source.
Wholesale and Retail Plans Divisions — membership fees are paid to the Company on a weekly,
monthly or annual basis and fees paid in advance are recorded as deferred revenue and recognized
monthly over the applicable membership term.
Insurance Marketing Division — revenue reflects commissions and fees reported to the Company by
insurance companies for policies sold by the Division’s agents. Commissions and fees collected are
recognized as earned on a monthly basis until such time as the underlying contract is reported to
the Division as terminated. Revenue also includes interest income earned on commissions advanced
to the Division’s agents.
Unearned commissions comprise commission advances received from insurance carriers but not yet
earned. Additionally, administration fees received are recorded as deferred revenue and amortized
over the expected weighted average life of the policies sold which currently approximates 18
months. Deferred revenue is reported net of related policy acquisition costs, principally lead and
marketing credits, which are capitalized and amortized over the same weighted average life, to the
extent such deferred costs do not exceed the related gross deferred revenue. Any excess costs are
expensed as incurred.
Accounts Receivable
Accounts receivable generally represent membership fees due from the Company’s Wholesale Plans and
Retail Plans Divisions’ customers and commissions and fees due from insurance carriers and plan
sponsors for the Company’s Insurance Marketing Division. 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 allowance for doubtful
accounts was $98,929 and $125,783, respectively at September 30, 2010 and September 30, 2009. Bad
debt expense totaled $43,119 and $118,894, respectively for the years ended September 30, 2010 and
September 30, 2009.
Our customers are located in 48 states and are not confined to a single geographic area.
44
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commission Expense
Commission expense is based on the applicable rates applied to membership revenues billed or
insurance commissions collected, and are recognized as incurred on a monthly basis until such time
as the underlying program member or insurance policy is terminated.
The Insurance Marketing Division advances agent commissions, from 3 to 9 months, for certain
insurance programs. Collection of the commissions advanced (plus accrued interest) is accomplished
by withholding amounts earned by the agent on the policy upon which the advance was made. In the
event of early termination of the underlying policy, this Division seeks to recover the unpaid
advance balance by withholding advanced and earned commissions on other policies sold by the agent.
This Division also has the contractual right to pursue other sources of recovery, including
recovery from the agents managing the agent to whom advances were made.
The Retail Plans Division advances agents’ commissions for certain retail plan programs. The
advance commissions to the Company’s agents are funded by the Company and are reflected on the
balance sheet as advanced agent commissions. Collection of the commissions advanced is
accomplished by withholding amounts earned by the agent on the memberships upon which the advance
was made. In addition, certain membership persistency levels must be maintained.
Advanced agent commissions are reviewed and an allowance is provided for those balances where
recovery is considered doubtful. This allowance requires judgment and is based primarily upon
estimates of the recovery of future commissions expected to be earned by the agents with
outstanding balances and, where applicable, the agents responsible for their management. Advances
are written off when determined to be non-collectible.
Advertising Expense
The Company’s advertising is non-direct and the costs are expensed as incurred. During the years
ended September 30, 2010 and 2009, we incurred $19,392 and $11,306, respectively of advertising
expense.
Cash and Cash Equivalents
For the purpose of the Statement of Cash Flows, we consider cash and cash equivalents to be cash on
hand, demand deposits and all highly liquid investments with original maturities at the time of
purchase of three months or less that may be used for operations.
Restricted Cash
Restricted cash consists of short term investments with original maturities of one year or less.
The investments are pledged to secure letters of credit required as collateral for surety bonds.
Certain Reclassifications
Certain 2009 items have been reclassified to conform to the current year presentation. Such
reclassifications had no effect on 2009 net income.
Furniture, Fixtures and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization expenses are recognized 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.
45
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
|
|
7-10 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 |
Earnings per Share
Basic net earnings (loss) per common share is computed by dividing net earnings (loss) applicable
to common shareholders by the weighted-average number of common shares outstanding during the
period. Diluted net earnings (loss) per common share is determined using the weighted-average
number of common share shares outstanding during the period, adjusted for the dilutive effect of
common stock equivalents, consisting of shares that might be issued upon exercise of common stock
options. In periods where losses are reported, the weighted-average number of common shares
outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51, which was
subsequently incorporated into ASC Topic 810, Consolidation. ASC Topic 810 establishes new
accounting and reporting standards for non-controlling interests in a subsidiary and for the
deconsolidation of a subsidiary. ASC Topic 810 requires entities to classify non-controlling
interests as a component of stockholders’ equity and requires subsequent changes in ownership
interests in a subsidiary to be accounted for as an equity transaction. Additionally, ASC Topic 810
requires entities to recognize a gain or loss upon the loss of control of a subsidiary and to
re-measure any ownership interest retained at fair value on that date. ASC Topic 810 also requires
expanded disclosures that clearly identify and distinguish between the interests of the parent and
the interests of the non-controlling owners. ASC Topic 810 is effective on a prospective basis for
fiscal years, and interim periods within those fiscal years, beginning on or after December 15,
2008, except for the presentation and disclosure requirements, which are required to be applied
retrospectively. The adoption of ASC Topic 810 was effective for the Company beginning October 1,
2009 and did not have a material impact on the Company’s financial condition or results of
operations because the Company’s subsidiaries are wholly-owned.
In April 2008, the FASB issued an update to Codification Topic 350, Intangible- Goodwill and Other,
which amends the factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset. This amendment is effective on
a prospective basis to all intangible assets acquired and for disclosures on all intangible assets
recognized on or after the beginning of the first annual period subsequent to December 15, 2008.
Early adoption was prohibited. The amendment to Codification Topic 350 was effective for the
Company beginning October 1, 2009 and did not have a material impact on the Company’s determination
of the useful life of its intangible assets, financial condition or results of operations.
In May 2009, the FASB issued authoritative guidance on subsequent events, which was codified in ASC
855, Subsequent Events. ASC 855 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued. The Company adopted these provisions of ASC 855 on June 30, 2009. On
February 24, 2010, the FASB updated the guidance to address certain implementation issues related
to an entity’s requirement to perform and disclose subsequent event procedures. Effective upon its
issuance, the update exempts registrants reporting under the Securities Exchange Act of 1934 from
disclosing the date through which subsequent events have been evaluated. As the update affected
disclosure only, the adoption of the update did not have an impact on the Company’s
Consolidated Financial Statements.
46
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value
Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.
ASU 2010-06 requires expanded fair value disclosures of transfers into and out of Levels 1 and 2
fair value measurements and clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06
became effective for the Company beginning January 1, 2010. The adoption of this accounting
standard update did not have a material impact on the Company’s financial position, results of
operations, cash flows and disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In July 2010, the FASB issued Accounting Standards Update No. 2010-20 (ASU 2010-20),
Receivables (Topic 310) — Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses. ASU 2010-20 requires disclosures about the nature of the credit risk
in an entity’s financing receivables, how that risk is incorporated into the allowance for credit
losses, and the reasons for any changes in the allowance. Disclosure is required to be
disaggregated at the level at which an entity calculates its allowance for credit losses. ASU
2010-20 is effective for us beginning December 31, 2010. The adoption of this accounting standard
is not expected to have a material impact on our financial position, results of operations, cash
flows and disclosures.
NOTE 3. SUPPLEMENTAL CASH FLOWS INFORMATION
Cash payments for interest and income taxes and certain non-cash transactions for the years ended
at September 30, were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
| |
Interest |
|
$ |
64,571 |
|
|
$ |
77,025 |
|
Income taxes paid |
|
$ |
1,624,000 |
|
|
$ |
2,193,086 |
|
Stock issued in relation to acquisition |
|
$ |
— |
|
|
$ |
4,768,501 |
|
NOTE 4. MERGERS AND ACQUISITIONS
Access Plans USA Acquisition
On April 1, 2009, the Company completed its acquisition of Access Plans USA. Access Plans USA
markets health insurance and develops and distributes consumer driven discount plans on a variety
of health related services such as medical, dental, pharmacy and vision care and manages its own
proprietary dental and vision networks. The Company issued 6,800,578 shares of its common stock in
exchange for the outstanding common stock of Access Plans USA. The aggregate purchase price of
Access Plans USA was determined to be $4,768,500 based on the fair market value of the 6,800,578
shares determined on November 13, 2008, the date of the acquisition agreement.
The acquisition of Access Plans USA Insurance Marketing Division provides the Company with future
commission revenue from a book of health insurance policies in force, a broader range of insured
health care products and services and an established distribution channel of health insurance
agents. The acquisition of the Retail Plans Division provides the Company products from both its’
proprietary and third party provider networks plus an existing base of plan members.
47
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4. MERGERS AND ACQUISITIONS (continued)
The following table presents the allocation of the acquisition costs, to the fair market values of
the assets acquired and the liabilities assumed:
| |
|
|
|
|
|
Current assets |
|
$ |
9,086,216 |
|
Property and equipment |
|
|
289,000 |
|
Other assets |
|
|
1,167,699 |
|
Intangible assets |
|
|
3,000,000 |
|
Goodwill |
|
|
1,842,186 |
|
|
|
|
|
Total assets acquired |
|
|
15,385,101 |
|
|
|
|
|
Current liabilities assumed |
|
|
9,887,746 |
|
Long-term liabilities assumed |
|
|
728,855 |
|
|
|
|
|
Total liabilities assumed |
|
|
10,616,601 |
|
|
|
|
|
Net assets acquired |
|
$ |
4,768,500 |
|
|
|
|
|
The following un-audited pro forma consolidated results of operations have been prepared as if the
acquisition of Access Plans USA had occurred on October 1, 2008.
| |
|
|
|
|
| |
|
Year Ended |
|
| |
|
September 30, |
|
| |
|
2009 |
|
| Statement of Operations Data: |
|
(Unaudited) |
|
Total revenue |
|
$ |
32,277,000 |
|
Operating income (loss) |
|
$ |
(547,000 |
) |
Diluted earnings per share |
|
$ |
(0.03 |
) |
Weighted-average number of diluted common shares outstanding |
|
|
18,248,000 |
|
The pro forma information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved had the acquisition
been consummated as of that time, nor is it intended to be a projection of future results.
The Company evaluates the impairment of goodwill as of the end of each fiscal year and the
recoverability of identifiable intangible assets whenever events or changes in circumstances
indicate that an intangible asset’s carrying amount may not be recoverable. If considered
impaired goodwill will be written down to fair value and a corresponding impairment loss
recognized. 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 $1,842,186
to goodwill and $3,000,000 to other intangible assets. The other intangible assets represent the
estimated value, at the date of their acquisition, of policies in force (“Customer Contracts”) of
$1,200,000, certain agent relationships (“Agency Relationships”) of $1,500,000 and certain dental
and vision provider network contracts (“Proprietary Programs”) of $300,000. These assets are being
amortized on a straight-line basis over five years and eight years.
48
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4. MERGERS AND ACQUISITIONS (continued)
Intangible assets resulting from mergers and acquisitions, as of September 30, 2010 and 2009, are
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Useful |
|
|
2010 |
|
|
2009 |
|
| |
|
Life |
|
|
Gross |
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
(Years) |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amortization |
|
|
Net |
|
Alliance HealthCard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists |
|
|
5 |
|
|
$ |
2,500,000 |
|
|
$ |
(1,791,677 |
) |
|
$ |
708,323 |
|
|
$ |
(1,291,677 |
) |
|
$ |
1,208,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Access Plans USA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-force books of
business |
|
|
5 |
|
|
|
1,200,000 |
|
|
|
(360,000 |
) |
|
|
840,000 |
|
|
|
(120,000 |
) |
|
|
1,080,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency relationships |
|
|
8 |
|
|
|
1,500,000 |
|
|
|
(281,250 |
) |
|
|
1,218,750 |
|
|
|
(93,750 |
) |
|
|
1,406,250 |
|
| |
Proprietary
programs |
|
|
8 |
|
|
|
300,000 |
|
|
|
(56,250 |
) |
|
|
243,750 |
|
|
|
(18,750 |
) |
|
|
281,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
5,500,000 |
|
|
$ |
(2,489,177 |
) |
|
$ |
3,010,823 |
|
|
$ |
(1,524,177 |
) |
|
$ |
3,975,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended September 30, 2010 and 2009 was $965,000 and $732,500,
respectively.
Amortization expense for the next five years related to these intangible assets is expected to be
as follows:
| |
|
|
|
|
|
2011 |
|
$ |
965,000 |
|
2012 |
|
$ |
673,000 |
|
2013 |
|
$ |
465,000 |
|
2014 |
|
$ |
120,000 |
|
2015 |
|
$ |
345,000 |
|
Foresight Acquisition
The software and the non-compete agreement have been amortized over three years. Amortization
expense was $0 and $1,667, respectively for the years ended September 30, 2010 and 2009.
NOTE 5. NOTES PAYABLE TO RELATED PARTIES
On February 28, 2007, we consummated a merger (the “Merger”) with BMS Holding Company, Inc.,
(“BMS”) an Oklahoma corporation. As a result of the Merger, three promissory notes (the “Notes”)
were made and issued by the Company to three former BMS shareholders in the aggregate amount of
$5,113,177. Commencing on March 1, 2007, the Notes bear interest on the unpaid principal balance at
one percent (1%) per annum with such interest payable quarterly. The principal and interest on the
Notes was required to be paid in twelve equal quarterly installments, commencing on May 15, 2007,
and payable on each August 14, November 14, February 14, and May 15 thereafter through February 14,
2010.
49
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE
5. NOTES PAYABLE TO RELATED PARTY (continued)
Pursuant to discussions between the note holders and our independent directors, on November 18,
2009 the disinterested directors accepted a proposal by the note holders for the notes to be paid
off early at a 10% discount. The Company recorded a gain of $94,444 as other income for the three
months ended December 31, 2009 as a result of the discount. Principal payments of $1,030,348 were
made to the note holders on January 6, 2010 and the notes were deemed fully paid. Principal
payments made on these notes for the year ended September 30, 2009 were $2,289,663. Interest
payments made on these notes for the years ended September 30, 2010 and 2009 were $3,980 and
$25,798, respectively.
NOTE 6. OTHER LONG TERM DEBT
During March 2008, Access Plans USA obtained a loan of $1,605,000 from Commission Funding Group
(CFG), a specialty corporation. The current CFG loan matures March 2011, and the principal is
repayable in equal monthly installments. The interest rate, which is variable, together with the
origination fee amortization charge, was 10% at September 30, 2010, the minimum rate provided by
the loan agreement. The loan may be prepaid without penalty. Collateral provided to CFG includes
rights, only in the event of a default, to cash, accounts receivable, and certain Insurance
Marketing commission rights from insurance carriers.
In January 2010, America’s Healthcare/Rx Plan Agency (AHCP) obtained a loan of $195,800 from Loyal
American Life Insurance Company (Loyal). The loan represents AHCP’s unsecured obligations or
advances from Loyal. The amount may be adjusted for any secured advances transferred to unsecured
obligations during the loan period. At September 30, 2010 these transfers are not material. The
loan matures in December 2010 and the loan principal is repayable in equal monthly installments.
The loan bears default interest at 1% of the outstanding balance per month. Interest is waived as
long as payments are made when due and no interest has been accrued. Collateral provided to Loyal
includes rights to accounts receivable and commissions from Loyal.
Principal payments made on these loans for the years ended September 30, 2010 and 2009 were
$707,919 and $259,769, respectively. Principal payments due for the Company’s 2011 fiscal year are
$352,298. Interest payments made on these loans for the years ended September 30, 2010 and 2009
were $60,591 and $52,090, respectively.
NOTE 7. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following at September 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Furniture, fixtures and equipment |
|
$ |
425,162 |
|
|
$ |
390,950 |
|
Websites |
|
|
33,595 |
|
|
|
33,595 |
|
Software |
|
|
249,696 |
|
|
|
158,051 |
|
Leasehold improvements |
|
|
118,109 |
|
|
|
107,686 |
|
|
|
|
|
|
|
|
|
|
|
826,562 |
|
|
|
690,282 |
|
Less: accumulated depreciation and amortization |
|
|
(499,002 |
) |
|
|
(304,315 |
) |
|
|
|
|
|
|
|
|
|
$ |
327,560 |
|
|
$ |
385,967 |
|
|
|
|
|
|
|
|
Depreciation expense for the years ended September 30, 2010 and 2009 was $194,687 and $102,187,
respectively.
50
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 — ADVANCED AGENT COMMISSIONS
Advanced agent commissions consist of the following at September 30, 2010 and 2009:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Advances funded by: |
|
|
|
|
|
|
|
|
Insurance carriers |
|
$ |
4,571,883 |
|
|
$ |
5,700,347 |
|
Specialty lending corporation |
|
|
352,298 |
|
|
|
863,795 |
|
Self-funded |
|
|
1,168,572 |
|
|
|
835,156 |
|
|
|
|
|
|
|
|
Sub-total |
|
|
5,679,524 |
|
|
|
7,399,298 |
|
Allowance for doubtful recoveries |
|
|
(1,472,939 |
) |
|
|
(1,571,892 |
) |
|
|
|
|
|
|
|
Advanced agent commissions, net |
|
$ |
4,619,814 |
|
|
$ |
5,827,406 |
|
|
|
|
|
|
|
|
The Company recognized bad debt expense on advanced agent commissions of $0 and $97,892,
respectively for the years ended September 30, 2010 and 2009.
NOTE 9 — INVESTMENT IN LLC
On December 30, 2008, the Company acquired an entity ownership interest whose purpose is to invest
in Oklahoma-based small business ventures or in Oklahoma-based rural small business ventures. The
acquisition cost of the ownership interest was $100,000 paid upon acquisition and execution and
delivery of a non-recourse promissory note in the principal amount of $768,704. The ownership
interest generated tax credits allocated to the Company that were used to offset Oklahoma state
income tax.
The promissory note is non-recourse and the Company does not have any liability and has been
guaranteed by other parties, the promissory note has not been reflected in these financial
statements.
Due to utilization of the majority of the tax credits, the value of the investment was reduced to
$0 at September 30, 2010.
NOTE 10 — STOCK BASED COMPENSATION
In conjunction with certain employment and consulting agreements, the Company granted stock
options exercisable for the purchase of common stock shares of 940,000 during the year ended
September 30, 2010. The Company granted 309,536 stock options during the year ended September 30,
2009. In conjunction with the acquisition of Access Plans USA on April 1, 2009, the Company
awarded stock options exercisable for the purchase of 264,536 common stock shares in replacement
of outstanding stock options of Access Plans USA at April 1, 2009 that were exercisable for the
purchase of 788,500 common stock shares of Access Plans USA.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model using the assumptions noted in the following table. Expected volatilities are
based on historical prices of our stock. We use historical data to estimate expected term and
option forfeitures within the valuation model. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of
grant. The Company does not provide for any expected dividends or discount for post-vesting
restrictions in the model.
51
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. STOCK BASED COMPENSATION (Continued)
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Estimated volatility |
|
|
81 |
% |
|
|
21 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Risk free interest rate |
|
|
1.0 |
% |
|
|
1.0 |
% |
Expected lives |
|
4 Years |
|
|
4 Years |
|
Information regarding the options is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Weighted |
|
|
|
|
|
|
|
| |
|
Average |
|
|
|
|
|
|
|
| |
|
Exercise |
|
|
Options |
|
|
Options |
|
| |
|
Price |
|
|
Outstanding |
|
|
Exercisable |
|
Balance at October 1, 2008 |
|
|
|
|
|
|
1,518,897 |
|
|
|
1,489,730 |
|
Granted |
|
$ |
4.88 |
|
|
|
309,536 |
|
|
|
274,727 |
|
Forfeited |
|
$ |
1.42 |
|
|
|
(226,646 |
) |
|
|
(220,355 |
) |
Exercised |
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
Became exercisable |
|
$ |
1.50 |
|
|
|
— |
|
|
|
18,333 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
|
|
|
|
|
1,601,787 |
|
|
|
1,562,435 |
|
Granted |
|
$ |
1.07 |
|
|
|
940,000 |
|
|
|
— |
|
Forfeited |
|
$ |
4.93 |
|
|
|
(171,676 |
) |
|
|
(146,514 |
) |
Exercised |
|
$ |
0.83 |
|
|
|
(100,000 |
) |
|
|
(100,000 |
) |
Became exercisable |
|
$ |
0.62 |
|
|
|
— |
|
|
|
212,512 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
|
|
|
|
|
2,270,111 |
|
|
|
1,528,433 |
|
|
|
|
|
|
|
|
|
|
|
|
There were outstanding stock options exercisable for the purchase of 2,270,111 common stock shares
on September 30, 2010. The exercise price on these options ranged from $0.55 to $6.86 with an
average-weighted remaining contractual life of 5.4 years with an average exercise price of $1.11.
The Company recognized stock option expense of $89,904 and $13,937, respectively during the years
ended September 30, 2010 and 2009.
The following table summarizes information about stock options outstanding at September 30, 2010.
| |
|
|
|
|
|
Range of exercise price |
|
$ |
0.55 – $6.86 |
|
Number outstanding |
|
|
2,270,111 |
|
Weighted average remaining contractual life |
|
5.4 Years |
|
Weighted average exercise price |
|
$ |
1.11 |
|
During the year ending September 30, 2010, options were exercised for the purchase of 100,000
common stock shares for $83,000. During the year ending September 30, 2009, no options were
exercised.
52
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. INCOME TAXES
Components of income tax expense for the fiscal years ended September 30, 2010 and 2009 are as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
| |
Current income tax expense |
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,419,000 |
|
|
$ |
1,689,000 |
|
State |
|
|
(113,000 |
) |
|
|
190,000 |
|
|
|
|
|
|
|
|
Total current income tax expense |
|
|
1,306,000 |
|
|
|
1,879,000 |
|
|
|
|
|
|
|
|
Deferred income tax (benefit) |
|
|
|
|
|
|
|
|
Federal |
|
|
447,000 |
|
|
|
(557,000 |
) |
State |
|
|
10,000 |
|
|
|
(275,000 |
) |
|
|
|
|
|
|
|
Total deferred income tax (benefit) |
|
|
457,000 |
|
|
|
(830,000 |
) |
|
|
|
|
|
|
|
Net income tax expense |
|
$ |
1,763,000 |
|
|
$ |
1,049,000 |
|
|
|
|
|
|
|
|
A reconciliation of the provision for income taxes with amounts determined by applying the
statutory US federal income tax rate to income before taxes is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended September 30, |
|
| |
|
2010 |
|
|
2009 |
|
| |
Computed tax at federal statutory rate of 34% |
|
$ |
1,635,000 |
|
|
$ |
1,526,000 |
|
State income taxes |
|
|
61,000 |
|
|
|
190,000 |
|
Tax effect of non deductible amortization of intangible assets |
|
|
178,000 |
|
|
|
193,000 |
|
Tax effect of utilization of NOL |
|
|
(147,000 |
) |
|
|
(109,000 |
) |
Change in valuation allowance |
|
|
— |
|
|
|
(700,000 |
) |
Non-deductible expenses |
|
|
16,000 |
|
|
|
24,000 |
|
Other |
|
|
20,000 |
|
|
|
(75,000 |
) |
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
1,763,000 |
|
|
$ |
1,049,000 |
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
37 |
% |
|
|
23 |
% |
53
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax reporting purposes. Significant components of our deferred tax assets and liabilities as of
September 30, 2010 and 2009 are as follows:
Deferred Income Tax Assets
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
| |
Current |
|
|
|
|
|
|
|
|
Revenue deferred for financial reporting purposes |
|
$ |
257,000 |
|
|
$ |
309,000 |
|
Agent advance reserves for financial reporting purposes |
|
|
544,000 |
|
|
|
548,000 |
|
State tax credit |
|
|
100,000 |
|
|
|
— |
|
Other deferred tax assets, current for financial reporting purposes |
|
|
109,000 |
|
|
|
124,000 |
|
|
|
|
|
|
|
|
Total |
|
|
1,010,000 |
|
|
|
981,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term |
|
|
|
|
|
|
|
|
Book depreciation in excess of tax depreciation |
|
|
57,000 |
|
|
|
101,000 |
|
Intangible assets for financial reporting purposes |
|
|
(493,000 |
) |
|
|
(644,000 |
) |
Covenant not to compete for financial reporting purposes |
|
|
85,000 |
|
|
|
94,000 |
|
State tax credit |
|
|
— |
|
|
|
200,000 |
|
Other deferred tax assets for financial reporting purposes |
|
|
90,000 |
|
|
|
33,000 |
|
NOL carryover |
|
|
997,000 |
|
|
|
1,438,000 |
|
|
|
|
|
|
|
|
Total |
|
|
736,000 |
|
|
|
1,222,000 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
1,746,000 |
|
|
|
2,203,000 |
|
Less Valuation allowance |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Net Deferred income tax asset at September 30, |
|
$ |
1,746,000 |
|
|
$ |
2,203,000 |
|
|
|
|
|
|
|
|
As of September 30, 2010, we had a net operating loss carry-forward of approximately $2,933,000
which will expire as follows:
| |
|
|
|
|
| Fiscal year ended September 30, |
|
|
|
|
| |
2011 |
|
$ |
76,000 |
|
2017 |
|
|
767,000 |
|
2018 |
|
|
226,000 |
|
2021 |
|
|
167,000 |
|
2023 |
|
|
903,000 |
|
2025 |
|
|
468,000 |
|
2029 |
|
|
326,000 |
|
|
|
|
|
|
|
$ |
2,933,000 |
|
|
|
|
|
54
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 11. INCOME TAXES (Continued)
The balance of unrecognized tax benefits, the amount of related interest and penalties we have
provided and what we believe to be the range of reasonably possible changes in the next 12 months
were:
| |
|
|
|
|
|
Unrecognized tax benefits |
|
$ |
141,000 |
|
Portion that, if recognized, would reduce tax expense and effective tax rate |
|
|
141,000 |
|
Accrued interest and penalties on unrecognized tax benefits |
|
|
25,000 |
|
Portion that, if recognized, would reduce tax expense and effective tax rate |
|
|
25,000 |
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2010 |
|
|
2009 |
|
Beginning balance |
|
$ |
166,000 |
|
|
$ |
166,000 |
|
Additions for tax positions of the current year |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
166,000 |
|
|
$ |
166,000 |
|
|
|
|
|
|
|
|
During the years ended September 30, 2010 and 2009, the Company did not recognize additional
penalties and interest beyond the adequacy of the 2008 interest and penalties of approximately
$25,000 as additional accrual is not significant. These amounts have been accounted for as income
tax expense in 2008. As stated below, due to the Company no longer being subject to US federal,
state or local income tax examinations by tax authorities for years prior to 2007 the unrecognized
tax benefit and accrued interest has been classified as a current liability.
The 2008 tax return of our subsidiary Access Plans USA, Inc. is currently under examination by the
Internal Revenue Service. The examination agent has completed field work and has concluded there
are no material changes to the return.
The 2007 tax return for Alliance HealthCard, Inc. for the period beginning March 1, 2007 and ending
September 30, 2007 was audited by the Internal Revenue Service. The examination concluded there
were no material changes to the return.
With few exceptions, the Company is no longer subject to US federal, state or local income tax
examinations by tax authorities for years prior to 2007.
NOTE 12. EARNINGS PER SHARE
Basic earnings per common share for the fiscal years ended September 30, 2010 and 2009 were
calculated by dividing the net income available to common shareholders by the weighted-average
common shares outstanding during the period. Diluted earnings per share for the years ended
September 30, 2010 and 2009 were calculated by dividing net income available to common
shareholders by the weighted average common shares outstanding during the period plus the dilutive
potential common shares, which were determined as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended September 30, |
|
| |
|
2010 |
|
|
2009 |
|
| |
Weighted-average common shares |
|
|
19,909,722 |
|
|
|
18,242,732 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
200,850 |
|
|
|
4,874 |
|
|
|
|
|
|
|
|
Diluted potential common shares |
|
|
20,110,572 |
|
|
|
18,247,606 |
|
|
|
|
|
|
|
|
Dilutive potential common shares are calculated in accordance with the treasury stock method,
which assumes that proceeds from the exercise of all options are used to repurchase common stock
at market value. The amount of shares remaining after the proceeds are exhausted, represent the
potential dilutive effect of the securities.
55
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13. RELATED PARTY TRANSACTIONS
Operating Lease
The Company occupies its corporate offices and Wholesale Plans Division in Norman, Oklahoma under
a lease that expires September 30, 2011. The total leased space is approximately 6,523 square
feet. The lease agreement is with Southwest Brokers, Inc., a company owned by Brett Wimberley, one
of the Company’s Directors, President and Chief Financial Officer. This lease was executed on May
1, 2005, amended on August 1, 2006 and August 1, 2008, September 30, 2009, and September 30, 2010.
In the event the Company is required to move from the current Norman, Oklahoma office facilities,
the terms and cost of occupancy may be substantially different than those under which the office
space is currently occupied and the rental rate may be substantially greater.
The Company’s rent expense associated with related party transactions was approximately $103,162
and $199,444 for the years ending September 30, 2010 and 2009, respectively.
The Company’s share of the minimum future rental payments due under the related party
non-cancelable operating lease arrangements is as follows:
| |
|
|
|
|
| Year Ending September 30, |
|
Amount |
|
2011 |
|
$ |
97,848 |
|
NOTE 14. OPERATING LEASES
The Company’s Retail Plans Division and Insurance Marketing Division occupy 25,024 square feet of
office space under two lease agreements with an unaffiliated third party that expires November 15
and November 30, 2011. These are located at 4929 West Royal Lane, Suite 200, Irving, Texas 75063.
The Company’s rent expense associated with operating leases of the Irving office was $233,035 and
$133,312 for the years ended September 30, 2010 and 2009, respectively.
Future minimum rental payments due under the non-cancelable operating lease arrangements are as
follows:
| |
|
|
|
|
| Year Ending September 30, |
|
Amount |
|
2011 |
|
$ |
350,015 |
|
2012 |
|
|
50,063 |
|
|
|
|
|
|
|
$ |
400,078 |
|
|
|
|
|
NOTE 15. WAIVER REIMBURSEMENTS LIABILITY
The Company has entered into contractual arrangements to administer certain membership programs
for its clients, primarily in the rental purchase industry whereby the administration duties may
include reimbursing the client for certain expenses they incur in the operation of a particular
membership program. Under these arrangements, the Company is responsible for reimbursing the
client when (under the terms of the agreement with its customer) it waives rental payments
required of the client’s customer under specifically defined and limited circumstances, including
when their customer becomes unemployed for a stated period of time or when the Company’s client
provides product service to its customer. It is the Company’s policy to reserve the necessary
funds in order to meet the anticipated reimbursement obligation owed to the Company’s clients in
the event the Company’s reimbursement obligations require payment in the future. The Company’s
obligations for these reimbursements do not have any kind of a tail that extends beyond the
Company’s clients’ payment obligations following
termination of the contractual arrangement or agreement with the Company’s clients or the clients’
customer. As of September 30, 2010 and 2009, the Company recorded an estimated incurred but not
reported reimbursement obligation of $846,600 and $1,102,900, respectively.
56
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 16. CONCENTRATION OF CREDIT RISK
The Company uses financial institutions in which the Company maintains cash balances that at times
may exceed federally insured limits. The Company has not experienced any losses in those accounts
and management believes the Company is not exposed to any significant credit risk respecting its
cash and cash equivalents. The Company’s uninsured cash balance totaled $5,102,500 and $3,026,292
at September 30, 2010 and 2009, respectively.
Concentration of credit risk with respect to accounts receivable and revenue is due to a high
volume of business conducted with two customers in the Company’s Wholesale Plans and Insurance
Marketing Divisions. Approximately 47% and 40% of total accounts receivable were due from two
customers as of September 30, 2010 and 2009, respectively. Approximately 34% of total accounts
receivable were due from one customer in the Company’s Wholesale Plans Division as of September
30, 2010. Approximately 40% and 43% of total sales were generated from two customers for the
fiscal year ended September 30, 2010 and 2009, respectively. Total sales generated from one
customer in the Company’s Wholesale Plans Division was $11.9 million, (21% of total revenue) and
$11.6 million, (30% of total revenue), during the fiscal years ended September 30, 2010 and 2009,
respectively.
Approximately 50% and 47% of the total accounts payable and trade-related accrued liabilities
relate to three parties for the years ended September 30, 2010 and 2009, respectively.
NOTE 17. DEFINED CONTRIBUTION PLAN
The Company implemented a 401(k) plan on August 1, 2004. Eligible employees contribute to the
401(k) Plan. Employees become eligible after attaining age 18. The employee may become a
participant of the 401(k) plan on the first day of the month following the completion of the
eligibility requirements. Effective August 1, 2007, the Company implemented a non-elective
contribution to the Plan of 50% up to 6% of the employee’s contribution. The non-elective
contributions are allocated to all employees eligible to participate in the Plan. The non-elective
contributions are subject to a vesting schedule that takes five years of service to become 100%
vested. All accounts are participant-directed accounts. The Company made non-elective contributions
of $69,524 and $35,405 for the fiscal years ended September 30, 2010 and 2009, respectively.
NOTE 18 — FINANCIAL INSTRUMENTS
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value
Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.
ASU 2010-06 requires expanded fair value disclosures of transfers into and out of Levels 1 and 2
fair value measurements and clarifies existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair value.
The carrying value of financial instruments including cash, receivables, accounts payable, accrued
expenses and debt, approximates their fair value at September 30, 2010 and 2009 due to the
relatively short-term nature of these instruments.
ASU (2010-06) defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
(also referred to as an exit price). ASC 820 also establishes a three-level fair value hierarchy
for classifying financial instruments that is based on whether the inputs to the valuation
techniques used to measure fair value are observable or unobservable. The three levels of the ASC
820 fair value hierarchy are described below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs other than quoted prices in active markets for identical
assets or liabilities
Level 3: Unobservable inputs
57
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 19 — FINANCIAL INSTRUMENTS (Continued)
As of September 30, 2010, the Company did not have any financial assets or liabilities that were
measured at fair value on a recurring basis subsequent to initial recognition.
NOTE 20 — TREASURY STOCK
On October 27, 2009, the Company finalized an agreement with the Peter W. Nauert Revocable Trust in
which the Company
paid $500,000 as part of a stock repurchase-settlement transaction that settled the litigation with
States General Life Insurance
Company (The State of Texas v. States General Life Insurance Company, Cause No. GV-500484, 126th
District Court, Travis
County, Texas) and by which, as part of and a condition of the settlement, the Company repurchased
1,856,401 shares of its
common stock from the Peter W. Nauert Revocable Trust for the $500,000 settlement payment.
NOTE 21. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
| |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
13,302,648 |
|
|
$ |
13,460,566 |
|
|
$ |
14,370,700 |
|
|
$ |
14,215,161 |
|
Gross profit |
|
$ |
4,502,940 |
|
|
$ |
3,999,605 |
|
|
$ |
4,421,408 |
|
|
$ |
3,380,817 |
|
Net income |
|
$ |
896,495 |
|
|
$ |
735,309 |
|
|
$ |
948,350 |
|
|
$ |
467,109 |
|
Diluted net income per share |
|
$ |
0.04 |
|
|
$ |
0.04 |
|
|
$ |
0.05 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
5,668,541 |
|
|
$ |
5,885,623 |
|
|
$ |
13,959,723 |
|
|
$ |
13,567,496 |
|
Gross profit |
|
$ |
2,581,128 |
|
|
$ |
1,998,264 |
|
|
$ |
4,149,046 |
|
|
$ |
3,883,931 |
|
Net income |
|
$ |
955,450 |
|
|
$ |
329,888 |
|
|
$ |
862,465 |
|
|
$ |
1,291,578 |
|
Diluted net income per share |
|
$ |
0.06 |
|
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
$ |
0.07 |
|
NOTE 22. SEGMENT REPORTING
Historically, the Company pursued similar marketing strategies for its Wholesale and Retail Plans
Divisions and thus the Divisions were managed at a corporate level rather than on a segment basis.
Effective with the acquisition of Access Plans USA on April 1, 2009, the Company began pursuing
distinct marketing strategies and developed separate management teams for each of its Divisions.
The Company’s operations now consist of the following segments: a) Wholesale Plans; b) Retail
Plans; c) Insurance Marketing; and d) Corporate.
58
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 21. SEGMENT REPORTING (Continued)
Reportable business segment information follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended |
|
| |
|
September 30, |
|
| ($ in thousands) |
|
2010 |
|
|
2009 |
|
|
% Change |
|
Net revenues — by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Plans |
|
$ |
22,372 |
|
|
$ |
19,522 |
|
|
|
15 |
% |
Retail Plans (a) |
|
|
17,458 |
|
|
|
12,838 |
|
|
|
36 |
% |
Insurance Marketing |
|
|
20,641 |
|
|
|
11,432 |
|
|
|
81 |
% |
Corporate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Eliminations |
|
|
(5,122 |
) |
|
|
(4,711 |
) |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,349 |
|
|
$ |
39,081 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin — by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Plans (a) |
|
$ |
5,997 |
|
|
$ |
3,884 |
|
|
|
54 |
% |
Retail Plans (a) |
|
|
7,035 |
|
|
|
6,710 |
|
|
|
5 |
% |
Insurance Marketing |
|
|
3,273 |
|
|
|
2,018 |
|
|
|
62 |
% |
Corporate |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,305 |
|
|
$ |
12,612 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income — by segment |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Plans (a) |
|
$ |
4,034 |
|
|
$ |
2,030 |
|
|
|
99 |
% |
Retail Plans (a) |
|
|
1,844 |
|
|
|
2,734 |
|
|
|
(33 |
%) |
Insurance Marketing |
|
|
161 |
|
|
|
482 |
|
|
|
(67 |
%) |
Corporate |
|
|
(1,208 |
) |
|
|
(958 |
) |
|
|
(26 |
%) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,831 |
|
|
$ |
4,288 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
For the Years Ended |
|
| |
|
September 30, |
|
| |
|
2010 |
|
|
2009 |
|
Segment assets |
|
|
|
|
|
|
|
|
Wholesale Plans (a) |
|
$ |
18,998 |
|
|
$ |
10,525 |
|
Retail Plans (a) |
|
|
26,369 |
|
|
|
18,889 |
|
Insurance Marketing |
|
|
8,499 |
|
|
|
11,324 |
|
Corporate |
|
|
(29,014 |
) |
|
|
(14,765 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
24,852 |
|
|
$ |
25,973 |
|
|
|
|
|
|
|
|
| |
|
|
| a) |
|
Gross of intercompany eliminations |
59
ACCESS PLANS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 23. OTHER INCOME
The Company recognized other income of $346,775 during the year ended September 30, 2009 from a
release of a liability related to a contract termination in April 2009.
NOTE 24. LEGAL PROCEEDINGS
The following legal proceedings involve the subsidiaries of Access Plans USA, Inc. which was
acquired by the Company in a merger on April 1, 2009.
William Andrew Rivell, M.D. and Alan B. Whitehouse, M.D., individually and on behalf of all persons
similarly situated, v. Private Health Care Systems and The Capella Group, Inc.; Civil Action File
No: CV106-176 was filed and remains pending in the United States District Court for the Southern
District of Georgia, Augusta Division. The plaintiffs in this case allege that the contracts
entered into by medical providers with our subsidiary, The Capella Group, Inc. (“Capella”) through
Capella’s relationship with the Private Health Care Systems network of providers (“PHCS”) did not
allow for the use of the providers’ names to market a discount medical plan whereby payment for
services is made at the point of service by the consumer, and not by a third party payor such as an
insurance company. We are vigorously contesting this assertion and intend to defend this case. The
Plaintiffs are, however, seeking certification of this case as a class action on behalf of all
similarly-situated physicians nationwide. If the plaintiffs succeed with such certification and
ultimately prevail in the case, it could have a material adverse affect on our financial condition
and our results of operation. The case was originally instituted on November 17, 2006, but was
thereafter dismissed by the District Court. The United States Court of Appeals for the Eleventh
Circuit vacated such dismissal and remanded the case to the District Court on March 24, 2008. In
August of 2009 the District Court denied Plaintiffs’ Amended Motion for Class Certification. In
September of 2009 Plaintiffs filed their Motion for Reconsideration of Order Denying Amended Motion
for Class Certification, asking the District Court to certify a smaller class. On September 30,
2010 the Court issued a ruling denying Plaintiff’s Motion for Reconsideration of Order Denying
Amended Motion for Class Certification.
On October 30, 2008 The Hartford Accident and Indemnity Co. assumed payment of defense costs
pursuant to a reservation of rights letter issued on that date. The Hartford’s duty to defend was
litigated in Hartford Accident and Indemnity Insurance Company v. The Capella Group, Inc. D/b/a
Care Entrée; Civil Action File No: 4:09-cv-295 which was filed on May 27, 2009 The Court on
December 21, 2009 issued a memorandum opinion granting our motion for summary judgment denying the
summary judgment motion of Hartford on the duty to defend issue, ruling that the Hartford was
obligated to provide a defense in the Rivell action. The Court denied our motion for attorney’s
fees related to the summary judgment motions and ruled that a decision on the issue of whether
Hartford had a duty to indemnify in the Rivell action was premature. The court dismissed all
remaining claims for declaratory relief by either party.
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. The Zermeno plaintiffs are
former members of the Care Entrée discount healthcare program who allege that they (for themselves
and for the general public) are entitled to injunctive, declaratory, and equitable relief under
Section 445 of the California Health and Safety Code. That Section governs medical referral
services. The plaintiffs’ also sought relief under Section 17200 of the Business and Professions
Code, California’s Unfair Competition Law. On December 21, 2007, we received a favorable verdict
based on the court’s finding that the Plaintiffs did not have standing to sue since they were no
longer customers of Precis. The plaintiffs appealed and on December 23, 2009 the Court of Appeals
reversed the trial court’s ruling on standing and remanded the case to the trial court for a ruling
on the merits. On November 1, 2010 the Court issued a Statement of Decision in which it ruled that
Section 445 applied to the Care Entrée program and that Section 445 had been violated. Following
the ruling, the parties have briefed the issue of scope of injunctive relief. Precis, Inc. has the
right to appeal the Statement of Decision or any injunctive relief that is issued once the Court
issues a ruling on injunctive relief. An adverse outcome in this case would have a material affect
our financial condition and would limit our ability (and that of other healthcare discount
programs) to do business in California. We believe that we have complied with all California
statues and regulations. Although we believe the Plaintiffs’ claims are without merit, we cannot
provide any assurance regarding the outcome or results of this litigation.
At September 30, 2010, the Company accrued $36,000 for defense costs of the above matters and
other pending litigation matters. While it is possible that the Company may incur additional costs
in excess of $36,000, the Company is unable to provide a reasonable estimate of the range of
additional costs that may be incurred.
60
|
|
|
| ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
There has been no occurrence requiring response to this item.
|
|
|
| ITEM 9A |
|
and Item 9A(T). CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer and other members of our management are
responsible primarily 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 and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the U.S
Securities and Exchange Commission. These controls and procedures are designed to ensure that
information required to be disclosed in our reports filed or submitted under the Exchange Act is
accumulated and communicated to our management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Furthermore, our Chief Executive Officer and 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.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2010. Management completed
its assessment and documentation of the design and operation of our internal controls and
procedures for financial reporting based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Additionally, our Chief Executive Officer and Chief Financial Officer issued their assessment
report and concluded that the design and operation of our internal control over financial reporting
(as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) were effective as of September 30,
2010 and were documented and fairly stated, in all material respects, based on the criteria
established in Internal Control—Integrated Framework issued by the COSO.
Our Chief Executive Officer and Chief Financial Officer have concluded that the consolidated
financial statements included in this Annual Report on Form 10-K, fairly present, in all material
respects, our financial condition, results of operations and cash flows for the periods presented
in accordance with United States generally accepted accounting principles.
This annual report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in this annual report.
61
|
|
|
| ITEM 9B. |
|
OTHER INFORMATION |
All information required to be disclosed in a report on Form 8-K during the three months ended
September 30, 2010 was reported on Form 8-K.
PART III
|
|
|
| ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Our Directors and Executive Officers
Set forth below is certain information with respect to our executive officers and directors. Our
directors are generally elected at the annual shareholders’ meeting and hold office until the next
annual shareholders’ meeting and until their successors are elected and qualify. Executive
officers are elected by our Board of Directors and serve at its discretion. Our bylaws provide
that the Board of Directors shall consist of that number of members as the Board of Directors may
from time to time determine by resolution or election, but not less than five and not more than
seven. Our Board of Directors currently consists of seven members.
| |
|
|
|
|
|
|
| Name |
|
|
Age |
|
|
Position |
Danny C. Wright
|
|
|
59 |
|
|
Chairman of the Board of Directors and Chief Executive Officer |
|
|
|
|
|
|
|
Brett Wimberley
|
|
|
48 |
|
|
Director, President and Chief Financial Officer |
|
|
|
|
|
|
|
Rita W. McKeown
|
|
|
57 |
|
|
Chief Accounting Officer and Treasurer |
|
|
|
|
|
|
|
Susan Matthews
|
|
|
52 |
|
|
President, Wholesale Plans Division (a subsidiary) |
|
|
|
|
|
|
|
Bradley W. Denison
|
|
|
50 |
|
|
Executive Vice President, General Counsel, and Secretary |
|
|
|
|
|
|
|
David Huguelet
|
|
|
51 |
|
|
President, Retail Plans Division |
|
|
|
|
|
|
|
Charles Harris
|
|
|
56 |
|
|
President, Insurance Marketing Division |
|
|
|
|
|
|
|
Larry G. Gerdes(1) (2)
|
|
|
61 |
|
|
Director |
|
|
|
|
|
|
|
Mark Kidd (1) (2)
|
|
|
44 |
|
|
Director |
|
|
|
|
|
|
|
John Simonelli (1)
(2) (3)
|
|
|
64 |
|
|
Director |
|
|
|
|
|
|
|
Russell Cleveland (2)
(3)
|
|
|
72 |
|
|
Director |
|
|
|
|
|
|
|
J. French Hill (2) (3)
|
|
|
54 |
|
|
Director |
| |
|
|
| (1) |
|
Member of the Audit Committee |
| |
| (2) |
|
Member of the Stock Option and Compensation Committee |
| |
| (3) |
|
Member of the Nominating and Governance Committee |
62
Danny C. Wright has served as our Chairman of the Board of Directors and Chief Executive Officer
since March 2007 and has served as Chief Executive Officer of our subsidiary, Benefit Marketing
Solutions, since January 2003. From 2000 to 2003, Mr. Wright was a principal of Club Source Group
(CSG). CSG was the largest independent representative of Foresight, Inc. products after he sold
his interest in Foresight in 1999. In 1989, Mr. Wright co-founded and served as President of
Foresight, Inc. until the company sold in December 1999. Mr. Wright led Foresight’s growth from
start-up to one of the leading membership plan providers in the rental purchase industry and
serving two-thirds of the industry’s locations. Prior to Foresight, Mr. Wright managed warranty
terms administration and add-on programs for a regional home and auto retail chain and served in
various positions for two insurance carriers.
Brett Wimberley has served as one of our Directors and as President since May 2007, and Chief
Financial Officer since February 11, 2010 and Chief Operating Officer of our subsidiary Benefit
Marketing Solutions (BMS) since February 2002. Mr. Wimberley has been President of Southwest
Brokers, Inc, a real estate investment company, since February 1987. Mr. Wimberley served as
President of Universal Marketing Services from October 1996 to December 2000 and Foresight, Inc.
from December 1999 to December 2000. From January 1990 to September 1996, Mr. Wimberley served in
various sales positions for United Bank Services, last as Senior Vice President. Mr. Wimberley
holds a BBA and MBA from the University of Oklahoma.
Rita W. McKeown began serving as our Chief Accounting Officer in 2010 and served as Chief
Financial Officer from September 2000 until February 11, 2010. From 1994 to 1999, Ms. McKeown
served as director of finance of Transcend Services, Inc., an Atlanta Georgia healthcare company
specializing in patient information management solutions for hospitals and other associated
healthcare providers. From 1991 to 1994, Ms. McKeown served as director of accounting of Premier
Anesthesia, Inc. From 1981 to 1991, Ms. McKeown held multiple senior accounting positions with HBO
& Co in Atlanta. Ms. McKeown is a Certified Public Accountant and received her BBA from Kennesaw
State University in Kennesaw, Georgia.
Susan Matthews has served as our President of our Wholesale Plans Division since September 15,
2009. Prior to September 15, 2009, Ms. Matthews formerly served as Executive Vice President of
Alliance HealthCard since May 2007 and Executive Vice President of Sales & Marketing for our
subsidiary Benefit Marketing Solutions since January 2003. From 2000 to 2003, she co-founded Club
Source Group, a company formed to market club programs to various industries. Ms. Matthews served
as Marketing Director for Foresight, Inc. from 1989 until it was sold in 1999. From 1984 to 1999
she served in various capacities with United Bank Services and Steve Owens & Associates marketing
club programs to financial institutions. Ms. Matthews received her BBA from the University of
Oklahoma.
Bradley W. Denison has served as Executive Vice President, General Counsel, and Secretary since
November 2009. Mr. Denison joined our subsidiary, Benefit Marketing Solutions, as General Counsel
in February of 2006 and formerly served as our Senior Vice President, General Counsel and Secretary
since 2007. Mr. Denison was previously employed by Rent-A-Center, Inc. from 1991-2001 and served
as its Senior Vice President and General Counsel from 1998 through 2001. Prior to his employment
at Rent-A-Center, Mr. Denison worked extensively in insurance and litigation in private law
practice from 1985 through 1991. Prior to his employment with BMS, Mr. Denison was involved in
consulting and operating retail businesses. Mr. Denison has a B.S. Business Administration and a
Juris Doctorate from the University of Kansas.
David Huguelet has served as President of our Retail Plans Division since September 15, 2009.
Prior to September 15, Mr. Huguelet served as the Senior Vice President of New Business
Development of Benefit Marketing Solutions since January 2005. From 2003 to 2004 he was a Director
of New Business Development for Aon Innovative Solutions, a major provider of extended service
contracts to retailers. Mr. Huguelet served as Vice President of Lyndon Insurance Group, a
subsidiary of Protective Life, from 2001 to 2003. From 1989 to 2001, Mr. Huguelet served in
various capacities, including Business Board Chairman, with American Bankers Insurance Group, now
Assurant. From 1984 to 1989, Mr. Huguelet served in various capacities with Household Finance, now
HSBC. Mr. Huguelet holds a Bachelor of Science in Business Administration from the University of
North Carolina at Greensboro, an MBA from Barry University, a CLU designation and a CPCU
designation.
Charles Harris, Jr., President of our Insurance Marketing Division (AHCP) has over 23 years in the
insurance industry in both administration and marketing. He joined AHCP in October 2010. From
January 2003 to October 2010, Mr. Harris served as President of National Health Insurance Company,
a national health insurance carrier specializing in the individual and self-employed health
insurance market. From April 1998 to January 2003, he was the Chief Marketing Officer for National
Health Insurance Company. Mr. Harris served as Senior Vice President of Administration for Pioneer
Financial Services, an insurance holding company from 1993 to 1998. From 1988 to 1993, Mr. Harris
served in various capacities, including staff accountant, Operations Manager of the telemarketing
operations, and President for Aegis Specialty Marketing, Inc. (a.k.a. Keith Wood Agency). Prior to
1988, Mr. Harris performed various duties in the accounting field in the oil and gas industry. Mr.
Harris
received his formal education by completing a Bachelor of Science in Pre-Med at Oklahoma Christian
University, Edmond, OK and later completing a Bachelor of Science in Accounting at Central State
University, Edmond, OK. He became a Certified Public Accountant in 1981 and is a member of the
American Institute of Certified Public Accounts and the Oklahoma Society of Certified Public
Accountants.
63
Larry G. Gerdes has served as one of our Directors since February 1, 2001. Mr. Gerdes has served
as the Chief Executive Officer of Transcend Services, Inc. since May 1993 and as Chairman of the
Board since May 2000. In addition, he served as President of Transcend Services, Inc. from 1985 to
December 2003 and April 2005 through August 2009. From 1991 to 1993, Mr. Gerdes was a private
investor. Mr. Gerdes serves on the board of Transcend Services, Inc. (TRCR) and CME Group (CME).
Prior to 1991, Mr. Gerdes held various executive positions with HBO & Company, including Chief
Financial Officer and Executive Vice President.
John Simonelli has served as one of our Directors since May 12, 2008. Mr. Simonelli served as
Chairman of the Board and Chief Executive Officer of Graymark Healthcare, Inc. (GRMH) from
February 3, 2005 until July 23, 2008 and served as its President and Chief Operating Officer from
August 18, 2003 to February 3, 2005. Mr. Simonelli is an independent business consultant who has
extensive experience in the planning, development, and funding of emerging growth companies. He
served as a director of Access Plans USA, Inc. (formerly Precis, Inc.) from December 2000 until
July 2001. Access Plans USA, Inc. is a publicly-held company primarily engaged in the providing
of healthcare savings to the self-insured. From March 1994 until July 1999, Mr. Simonelli was
employed by Laboratory Specialists of America, Inc. and served as Chairman of the Board, Chief
Executive Officer and Secretary, and a Director until December 7, 1998. Laboratory Specialists of
America, Inc. was engaged in forensic drug testing and was formerly publicly-held until acquired
by The Kroll-O’Gara Company by merger. Mr. Simonelli served as a Director, Chief Executive
Officer and Secretary of Vantage Capital Resources, Inc. from March 1996 until its merger with The
Vialink Company (formerly Applied Intelligence Group, Inc.) and thereafter served as a Director
and Vice President of The Vialink Company until October 14, 1996. He served as Chairman of the
Board and Chief Executive Officer of MBF USA, Inc. (formerly American Drug Screens, Inc.), a
publicly-held company engaged in the medical products and services industry, from February 1988
through June 1992. He served as Chief Executive Officer of Unico, Inc. (formerly CMS Advertising,
Inc.), a publicly-held company engaged in the franchising of cooperative direct mail advertising
businesses, from June 1986 to June 1988. From July 1981 through June 1985, he served in various
capacities, including President and Director, with Moto Photo, Inc., a publicly-held company
engaged in the business of franchising one-hour, photo development laboratories. Mr. Simonelli
served as President and Chief Executive Officer from May 1985 until November 1985, and a Director,
from May 1985 through 1988, of TM Communications, Inc. (formerly Video Image, Inc. and TM Century,
Inc.), a publicly-held company engaged in radio broadcasting and corporate communications.
Mark Kidd has served as one of our Directors since May 12, 2008. Mr. Kidd has over 20 years
experience in finance and accounting. Mr. Kidd is Chief Executive Officer of C&L Supply, Inc., a
privately-held wholesale distribution company which serves customers in seven states. Mr. Kidd
also serves, on a part-time basis, as the SEC Reporting Manager for Graymark Healthcare, Inc.
(GRMH). Mr. Kidd served as Chief Financial Officer of Graymark Healthcare, Inc. from August 18,
2003 until July 23, 2008. Mr. Kidd served as Chief Financial Officer of Access Plans USA, Inc.
(formerly Precis, Inc.), a publicly-held company, from August 1999 until January 2002 and as a
director from January 2000 until February 2002. He also served as President, Chief Operating
Officer, Secretary and a Director of Foresight, Inc. a wholly-owned subsidiary of Access Plans
USA, Inc. from February 1999 until January 2002. Mr. Kidd served as President of Paceco Financial
Services, Inc., a privately-held regulated savings company, from March 1998 until December 2000.
Mr. Kidd also spent approximately 9 years in public accounting. Mr. Kidd is a Certified Public
Accountant and holds a B.B.A. in accounting from Southern Methodist University.
J. French Hill has served as one of our Directors since April 1, 2009. Mr. Hill served on the
Board of Directors of Access Plans USA, Inc. from January 2003 until April 2009 and was named as
its Chairman of the Board of Directors on August 20, 2007. In 1999, Mr. Hill founded Delta Trust &
Banking Corp., a privately held banking, trust and investment brokerage company headquartered in
Little Rock, Arkansas, following a six year career with Arkansas’ largest publicly traded holding
company, First Commercial Corp. First Commercial was sold in 1998 to Regions Financial Corp. (RF).
As an executive officer of First Commercial, Mr. Hill was chairman of the bank holding company’s
trust Division and its investment brokerage dealer subsidiary from 1995 until 1998. He also
oversaw a number of other staff functions in the company from 1993 through 1998 including human
resources, executive compensation, bank compliance, credit review and strategic planning. During
the last five years he has served as a member of the Board of Directors of Delta Trust & Banking
Corp. and its affiliates (1999 to present), Research Solutions LLC, a privately held company in
the clinical trials business (1999 to 2008), and Syair Designs LLC, a privately held company in
the aircraft lighting systems business (2000-2003). From May 1989 through January 1993, Mr. Hill
was a senior economic policy official in the George H. W. Bush Administration on the staff of the
White House and as deputy assistant secretary of the U.S. Treasury. Mr. Hill graduated magna cum
laude in economics from Vanderbilt University.
64
Russell Cleveland has served as one of our Directors since April 1, 2009. Mr. Cleveland was a
director of Access Plans USA, Inc. from September 2005 until April 2009. He is the Founder,
President, and Chief Executive Officer of Renn Capital Group, Inc., a privately held investment
management company. He has held these positions since 1972. Mr. Cleveland has 40 years experience
in the investment business, of which 31 years has been spent as a portfolio manager specializing
in the investment of common stocks and convertibles of small private and publicly traded
companies. A graduate of Wharton School of Business, Mr. Cleveland has served as President of the
Dallas Association of Investment Analysts and, during the course of his career, has served on
numerous boards of directors of public and private companies. Mr. Cleveland currently serves on
the Boards of Directors of Renaissance III, RUSGIT, Cover-All Technologies, Inc., CaminoSoft
Corp., Digital Recorders, Inc., Integrated Security Systems, Inc. and BPO, Inc., all of which are
publicly traded companies.
Committees of the Board of Directors
Our Board of Directors has three standing committees: the Audit Committee, the Stock Option and
Compensation Committee, and Nominating and Governance Committee.
Audit Committee
The Audit Committee of the Board of Directors currently comprised of Messrs. Gerdes, Simonelli, and
Kidd, oversees our accounting and reporting processes and the audits of our financial statements.
Each of Messrs. Gerdes, Simonelli, and Kidd is “independent” as defined in Rule 6320A of the
Financial Industry Regulatory Authority. Furthermore, our Board of Directors has determined that
each of Messrs. Gerdes and Kidd qualify as an audit committee financial expert as defined in Item
401(h)(2) of Regulation S-K. The Report of the Audit Committee appears below. The Audit Committee
Charter is posted in the Investors Relations section of our website, www.accessplans.com. The Audit
Committee reviews and reassesses the adequacy of its charter on an annual basis. The Audit
Committee held four meetings during the fiscal year ended September 30, 2010.
| |
|
|
|
Members of the Audit Committee:
|
|
Larry G. Gerdes |
|
|
John Simonelli |
|
|
Mark R. Kidd |
Stock Option and Compensation Committee
The Stock Option and Compensation Committee (the “Compensation Committee”) that is comprised of
Messrs. Gerdes, Simonelli, Kidd, Hill and Cleveland acts as administrator of our 2009 Equity
Compensation Plan and makes recommendations concerning the establishment of additional employee
benefit plans and compensation of our executive officers and directors. Each member of the
Compensation Committee is “independent” as defined in Rule 6320A of the Financial Industry
Regulatory Authority. The Report of the Compensation Committee appears below. The Stock Option and
Compensation Committee Charter is posted in the Investors section of our website,
www.accessplans.com. The Compensation Committee held three meetings during the fiscal year ended
September 30, 2010.
| |
|
|
|
Members of the Compensation Committee:
|
|
Larry G. Gerdes |
|
|
John Simonelli |
|
|
Mark R. Kidd |
|
|
J. French Hill |
|
|
Russell Cleveland |
Nominating and Governance Committee
The Nominating and Corporate Governance Committee (a) monitors and oversees matters of corporate
governance, including the evaluation of the performance and processes and the “independence” of
directors of our Board of Directors, and (b) selects, evaluates and recommends to the Board
qualified candidates for election or appointment to our Board. This Committee consists is of
Messrs. Simonelli, Hill and Cleveland, each being “independent” as defined in Rule 6320A of the
Financial Industry Regulatory Authority. The Nominating and Governance Committee Charter is posted
in the Investors section of our website, www.accessplans.com. The nominee directors were
nominated by our Board of Directors prior to formation of the Nominating and Governance Committee.
65
| |
|
|
|
Members of the Nominating and Corporate Governance Committee:
|
|
John Simonelli |
|
|
J. French Hill |
|
|
Russell Cleveland |
Code of Ethics
We have a code of ethics (the “Code”) that applies to members of our Board of Directors, our
officers including our president (being our principal executive officer), and our chief financial
officer (being our principal financial and accounting officer). The Code sets forth written
standards that are designed to deter wrongdoing and to promote
| • |
|
honest and ethical conduct, |
| • |
|
full, fair, accurate, timely, and understandable disclosure in reports and documents
that we file with, or submit to, the Securities and Exchange Commission and in other
public communications made by us; |
| • |
|
compliance with applicable governmental laws, rules and regulations; |
| • |
|
prompt internal reporting of violations of the Code to an appropriate person or persons
identified in the Code; and |
| • |
|
accountability for adherence to the Code. |
The Code may be found on our website at www.accessplans.com. We will describe the nature of
amendments to the Code on our website, except that we may not describe amendments that are purely
a technical, administrative, or otherwise non- substantive. We will also disclose on our website
any waivers from any provision of the Code that we may grant. Information about amendments and
waivers to the Code will be available on our website for at least 12 months, and thereafter, the
information will be available upon request for five years. A copy of the Code may be obtained by
written request addressed to Bradley W. Denison, General Counsel and Corporate Secretary, Access
Plans, Inc., 900 36th Avenue, NW, Norman, Oklahoma 73072.
Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of
1934, as amended, requires our directors, officers, and persons who own more than 10% of our
common stock or other registered class of our equity securities to file reports of ownership and
changes in ownership with the U.S. Securities and Exchange Commission. Officers, directors and 10%
or greater shareholders are required to furnish us with copies of all Section 16(a) forms they
file.
Based solely on our review of the copies of the Section 16(a) forms we received covering
acquisition and disposition transactions in our common stock during the year ended September 30,
2010, we believe that each person who, at any time during that fiscal year, was a director,
executive officer, or beneficial owner of 10% or more of our common stock complied with all Section
16(a) filing requirements.
66
|
|
|
| ITEM 11. |
|
EXECUTIVE COMPENSATION |
The following table sets forth the cash and non-cash compensation of the individuals that served
as our Chief Executive Officer, Chief Financial Officer paid or accrued during the fiscal years
ended September 30, 2010, 2009 and 2008 and its three other most highly compensated executive
officers that were serving at September 30, 2010.
SUMMARY COMPENSATION TABLE
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Option |
|
|
All Other |
|
|
|
|
| Name and Principle Position |
|
Year |
|
|
Salary |
|
|
Bonus |
|
|
Awards(1) |
|
|
Compensation |
|
|
Total |
|
Danny C. Wright |
|
|
2010 |
|
|
$ |
252,084 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
252,084 |
|
Director and Chief Executive |
|
|
2009 |
|
|
$ |
200,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
200,000 |
|
Officer |
|
|
2008 |
|
|
$ |
200,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brett Wimberley |
|
|
2010 |
|
|
$ |
227,083 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
227,083 |
|
Director, President |
|
|
2009 |
|
|
$ |
175,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
175,000 |
|
And Chief Financial Officer |
|
|
2008 |
|
|
$ |
175,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
175,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradley W. Denison |
|
|
2010 |
|
|
$ |
250,000 |
|
|
$ |
10,400 |
|
|
$ |
22,135 |
|
|
$ |
— |
|
|
$ |
282,535 |
|
Senior Vice President, General |
|
|
2009 |
|
|
$ |
250,000 |
|
|
$ |
10,400 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
260,400 |
|
Counsel and Secretary |
|
|
2008 |
|
|
$ |
250,000 |
|
|
$ |
10,400 |
|
|
$ |
6,096 |
|
|
$ |
— |
|
|
$ |
266,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rita W. McKeown |
|
|
2010 |
|
|
$ |
130,000 |
|
|
$ |
4,425 |
|
|
$ |
11,067 |
|
|
$ |
— |
|
|
$ |
145,492 |
|
Chief Accounting Officer |
|
|
2009 |
|
|
$ |
100,671 |
|
|
$ |
9,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
109,671 |
|
and Treasurer |
|
|
2008 |
|
|
$ |
94,000 |
|
|
$ |
5,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
99,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan Matthews |
|
|
2010 |
|
|
$ |
175,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
175,000 |
|
President, Wholesale Plans |
|
|
2009 |
|
|
$ |
175,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
175,000 |
|
|
|
|
2008 |
|
|
$ |
175,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
175,000 |
|
| |
|
|
| (1) |
|
We used the Black Scholes option-pricing model to estimate the option fair values as
described in Note 2 — Summary of Significant Accounting Policies (Stock Based Compensation)
of the financial statements appearing above in this report, to determine the value of the
amounts for Option Awards. |
Outstanding Equity Awards at Fiscal Year-End
During the year ended September 30, 2010, no options to purchase our common stock were exercised
by the named executive officers. The following table sets forth information related to the
number and value of options held by the named officers at September 30, 2010.
Outstanding Equity Awards at September 30, 2010
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock Option Awards |
|
|
|
| |
|
Number of Common Stock |
|
|
Option |
|
|
Option |
| |
|
Underlying Options |
|
|
Exercise |
|
|
Expiration |
| Name |
|
Exercisable |
|
|
Un-exercisable |
|
|
Price(1) |
|
|
Date |
Danny C. Wright |
|
|
-0- |
|
|
|
-0- |
|
|
$ |
-0- |
|
|
N/A |
Brett Wimberley |
|
|
-0- |
|
|
|
-0- |
|
|
$ |
-0- |
|
|
N/A |
Bradley Denison |
|
|
7,500 |
|
|
|
-0- |
|
|
$ |
1.00 |
|
|
May 13, 2018 |
|
|
|
50,000 |
|
|
|
450,000 |
|
|
$ |
0.93 |
|
|
August 2, 2020 |
Rita McKeown |
|
|
6,000 |
|
|
|
-0- |
|
|
$ |
1.00 |
|
|
October 1, 2010 |
|
|
|
4,999 |
|
|
|
-0- |
|
|
$ |
1.01 |
|
|
May 26, 2014 |
|
|
|
10,000 |
|
|
|
-0- |
|
|
$ |
1.15 |
|
|
February 15, 2017 |
|
|
|
25,000 |
|
|
|
25,000 |
|
|
$ |
0.93 |
|
|
August 2, 2020 |
Susan Matthews |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
N/A |
| |
|
|
| (1) |
|
The closing sale price of our common stock as reported on the OTC Bulletin Board on
September 30, 2010 was $0.90. |
67
Equity Compensation Plans
Alliance HealthCard, Inc. 2009 Equity Compensation Plan
On October 13, 2009, our board of directors approved and adopted the Alliance HealthCard, Inc. 2009
Equity Compensation Plan (the “2009 Plan”). The 2009 Plan became effective on December 7, 2009.
The 2009 Plan is established to create equity compensation incentives designed to motivate our
directors and employees to put forth maximum effort toward our success and growth and enable our
ability to attract and retain experienced individuals who by their position, ability and diligence
are able to make important contributions to our success. The 2009 Plan provides for the grant of
stock options, including incentive stock options (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the “Code”)), restricted stock awards, performance units,
performance bonuses and stock appreciation rights to our employees and the grant of nonqualified
stock options, stock appreciation rights and restricted stock awards to non-employee directors,
subject to the conditions of the 2009 Plan (“Incentive Awards”).
The 2009 Plan consists of three separate plans, a Non-Executive Officer Participant Plan, an
Executive Officer Participant Plan and a Non-Employee Director Participant Plan. Except for
administration and the category of employees eligible to receive incentive awards, the terms of the
Non-Executive Officer Participant Plan and the Executive Officer Participant Plan are identical.
The Non-Employee Director Plan has other variations in terms and only permits the grant of
nonqualified stock options and restricted stock awards. Each incentive award will be pursuant to a
written award agreement. The 2009 Plan is designed to provide flexibility to meet our needs in a
changing and competitive environment while minimizing dilution to our shareholders. We do not
intend to use all incentive elements of the 2009 Plan at all times for each participant but will
selectively grant the incentive awards and rights to achieve long-term goals.
The Plan has a term ending October 30, 2019 during which incentive awards may be granted; the 2009
Plan will continue in effect until all matters relating to the payment of incentive awards and
administration are settled.
Shares Subject to the 2009 Plan. Incentive awards may be made for a total of 2,550,000 shares of
our common stock of which 2,550,000 are to be used for the grant of incentive stock options.
During the term of the 2009 Plan, we are required to reserve and keep available sufficient shares
to satisfy the requirements of the 2009 Plan.
Administration of the Plan by the Committee. The Non-Executive Officer Participant Plan is
administered by our Stock Option and Compensation Committee (the “Compensation Committee”). The
Compensation Committee may, at its discretion, delegate authority to the Regular Award Committee, a
committee appointed by our Compensation Committee, to administer the Non-Executive Officer
Participant Plan to the extent permitted by applicable law, rule or regulation. The Regular Award
Committee may only act within guidelines established by the Compensation Committee. The Executive
Officer Participant Plan is administered by the Compensation Committee. Subject to the provisions
of the 2009 Plan, our Compensation Committee or Award Committee (the “Committee”) shall have
exclusive power to:
| |
• |
|
Select the employees to participate in the 2009 Plan; |
| |
• |
|
Determine the time or times when incentive awards will be made; |
| |
• |
|
Determine the form of an incentive award (stock option, restricted stock award,
performance unit, performance bonus or stock appreciation right), the number of common
stock shares or performance units subject to the incentive award, the amount and all the
terms, conditions (including performance requirements), restrictions and limitations of an
incentive award, including the time and conditions of exercise or vesting, and the terms of
any incentive award agreement; |
| |
• |
|
Determine whether incentive awards will be granted singly or in combination; |
| |
• |
|
Accelerate the vesting, exercise or payment of an inventive award or the performance
period of an incentive award; |
| |
• |
|
Determine extent an incentive award may be deferred, either automatically or at the
election of the participant or the Committee; and |
| |
| |
• |
|
Take any and all other action it deems necessary or advisable for the proper operation
or administration of the Plan. |
68
Our board of directors has the exclusive power to select non-employee directors to participate in
the 2009 Plan and to determine the number of non-qualified stock options, stock appreciation rights
or shares of restricted stock awarded to the participating directors. Our Compensation Committee
administers all other aspects of the Incentive Awards made to participating directors.
The Committee in its sole discretion shall have the authority, subject to the provisions of the
2009 Plan, to establish, adopt, or revise such rules and regulations and to make all determinations
relating to the 2009 Plan, as it may deem necessary or advisable for the administration. The
Committee’s interpretation of the 2009 Plan or any incentive awards and all decisions and
determinations by the Committee shall be final, binding, and conclusive.
The 2009 Plan and the incentive awards are intended to qualify as “qualified performance based
compensation” under Section 162(m) of the Code. Accordingly, the Committee will make determinations
as to performance targets and all other applicable provisions of the 2009 Plan as necessary in
order for it and incentive awards to satisfy the requirements of Section 162(m) of the Code.
Grant of Restricted Stock Awards. The Committee may grant a restricted stock award to an employee
in its discretion; similarly our board of directors may grant a restricted stock award to our
non-employee directors. Each restricted stock award may be evidenced in the manner as the
Committee deems appropriate, including, without limitation, a book-entry registration or issuance
of a stock certificate or certificates, and by an incentive award agreement setting forth the terms
of the restricted stock award.
Grant of Awards. The Committee may grant monetary units (“performance units”) to our employees.
Each incentive award of performance units will be evidenced by an incentive award agreement setting
the terms and conditions and in a form as the Committee may approve.
The Committee will establish performance targets for each incentive award for a period of no less
than a year based upon some or all of the performance criteria. The Committee shall also establish
such other terms and conditions as it deems appropriate to incentive award. The incentive award
may be paid out in cash or our common stock shares as determined in the sole discretion of the
Committee.
Grant of Performance Bonus. The Committee may grant a cash bonus (“performance bonus”) to our
selected employees. The Committee will determine the amount that may be earned as a performance
bonus in any period of one year or more upon the achievement of a performance target established by
the Committee. The Committee will select the applicable performance target for each period in
which a performance bonus is awarded. The performance target shall be based upon operational,
financial or performance criteria. Payment of a performance bonus will be made within 60 days of
its certification of achievement of applicable the performance target unless the
participant-employee has previously elected to defer payment pursuant to a non-qualified deferred
compensation plan adopted by us. Payment of a performance bonus may be made in either cash or our
common stock shares as determined in the sole discretion of the Committee.
Grant of Stock Appreciation Rights. The Committee may grant a stock appreciation right (“SAR”) to
our employees or non-employee directors. Any SAR granted will be deemed to be an incentive award.
SARs may be granted as an independent incentive award separate from an option or granted in tandem
with an option. Each grant of a SAR shall be evidenced by an incentive award agreement setting
forth the terms and conditions and be in a form as the Committee may from time to time approve,
subject to the requirements of the 2009 Plan. The exercise price of the SAR shall not be less than
the “fair market value” of a common stock share on the date of the grant of the SAR.
69
Withholding Taxes. We are entitled to deduct from any payment or delivery of shares under the 2009
Plan the amount of all applicable income and employment taxes required by law to be withheld with
respect to the payment or share delivery, or may require the participant to pay to us the tax prior
to and as a condition of the making of the payment or share delivery. In accordance with any
applicable administrative guidelines it establishes, the Committee may allow a participant to pay
the amount of the taxes required to be withheld from an Incentive Award by (i) directing us to
withhold from any payment or share delivery the number of common stock shares having a “fair market
value” on the date of payment or share delivery equal to the amount of the required withholding
taxes or (ii) delivering to us common stock shares owned for not less than six months (“mature
shares”) having a “fair market value” on the date of payment or share delivery equal to the amount
of the required withholding taxes.
Change of Control. Incentive Awards granted may, in the discretion of the Committee, provide in
the incentive award agreement that the Incentive Awards will immediately vest, become fully earned
and exercisable upon the occurrence of an event that constitutes a “change of control.” In general
a “change of control” will occur upon a person or a group (as defined in Treasury Regulation
Section 1.409A-3(i)(5)(v)(B) acquiring 40% or more of our shareholder total voting rights or
substantially all of our assets within a 12-month period, or a majority of our directors are
replaced within a 12-month period.
Employment Arrangements and Keyman Insurance
We have employment agreements with Danny C. Wright, Brett Wimberley and Susan Matthews executed
on March 1, 2007.
Pursuant to the employment agreement with Danny C. Wright, he agreed to serve as the President and
Chief Executive Officer of our subsidiary, AHC — Benefit Marketing Acquisition, Inc. The term of
the agreement commenced on March 1, 2007 and continues through February 28, 2010. The term of the
agreement will automatically be extended for additional one-year terms, unless either notice of
termination is given not less than to the other on or before December 1st in the year of
termination, commencing March 1, 2010. In addition to the base salary, Mr. Wright is eligible to
be considered for annual bonuses to be determined by our Board of Directors. On May 28, 2010 Mr.
Wright’s employment agreement was amended effective May 1, 2010 increasing his base salary to
$325,000 annually.
Pursuant to the employment agreement with Brett Wimberley, he agreed to serve as the Chief
Operating Officer of our subsidiary, AHC — Benefit Marketing Acquisition, Inc. The term of the
agreement commenced on March 1, 2007 and continues through February 28, 2010. The term of the
agreement will automatically be extended for additional one-year terms, unless either notice of
termination is given not less than to the other on or before December 1st in the year of
termination, commencing March 1, 2010. In addition to the base salary, Mr. Wimberley is eligible to
be considered for annual bonuses to be determined by our Board of Directors. On May 28, 2010 Mr.
Wimberley’s employment agreement was amended effective May 1, 2010 increasing his base salary to
$300,000 annually.
Pursuant to the employment agreement with Susan Matthews, she agreed to serve as the Executive Vice
President of our subsidiary, AHC — Benefit Marketing Acquisition, Inc. The term of the agreement
commenced on March 1, 2007 and continues through February 28, 2010. The term of the agreement will
automatically be extended for additional one-year terms, unless either notice of termination is
given not less than to the other on or before December 1st in the year of termination, commencing
March 1, 2010. Effective October 1, 2010 Ms. Matthews’ employment agreement was amended increasing
her salary to $200,000 annually. In addition to the base salary, Ms. Matthews is eligible to be
considered for annual bonuses to be determined by our Board of Directors.
We do not maintain any key-man insurance covering the death or disability of any of our executive
officers.
Compensation of Directors
In May 2010, we adopted a compensation policy for our non-employee directors. This policy provides
that our non-employee directors are entitled to receive stock grants of 10,000 common stock shares,
annually, and $2,500 per calendar quarter. Prior to adoption of this compensation policy, beginning
in May 2008, we adopted a compensation policy for our non-employee directors that consisted of
stock options exercisable for the purchase of 10,000 common stock shares upon initially becoming a
member of the board of directors, thereafter annual options exercisable for the purchase of 5,000
common stock shares, and $1,000 per calendar quarter. Directors who are also our employees receive
no additional compensation for serving as directors or on a board committee, unless special
circumstances or assigned responsibilities support additional compensation, including negotiation
of the terms of an asset or entity acquisition transaction. We reimburse our directors for travel
and out-of-pocket expenses in connection with their attendance at meetings of our board and its
committees.
70
During the fiscal year ended September 30, 2010, the members of our board of directors
received the following compensation:
| • |
|
payment of $1,000 for the quarters ended December 31, 2009 and March 31, 2010; |
| • |
|
payment of $1,750 for the quarter ended June 30, 2010; |
| • |
|
payment of $2,500 for the quarter ended September 30, 2010; |
| • |
|
reimbursement for travel and out of pocket expenses in connection with their attendance at
board and committee meetings; and |
| • |
|
stock options to the non-employee board members, all of which remain outstanding at
September 30, 2010 |
| |
|
|
|
|
| Director Name |
|
Options Granted |
|
Russell Cleveland |
|
|
5,000 |
|
Larry Gerdes |
|
|
10,000 |
|
J. French Hill |
|
|
5,000 |
|
Mark Kidd |
|
|
10,000 |
|
John Simonelli |
|
|
10,000 |
|
In 2010, the following directors received compensation in the following aggregate amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fees Earned or |
|
|
Option |
|
|
|
|
| Name |
|
Paid in Cash |
|
|
Awards |
|
|
Total |
|
Russell Cleveland |
|
$ |
6,250 |
|
|
$ |
2,213 |
|
|
$ |
8,463 |
|
Larry Gerdes |
|
$ |
6,250 |
|
|
$ |
4,807 |
|
|
$ |
11,057 |
|
J. French Hill |
|
$ |
6,250 |
|
|
$ |
2,213 |
|
|
$ |
8,463 |
|
Mark Kidd |
|
$ |
6,250 |
|
|
$ |
4,807 |
|
|
$ |
11,057 |
|
John Simonelli |
|
$ |
6,250 |
|
|
$ |
4,807 |
|
|
$ |
11,057 |
|
| |
|
|
| (2) |
|
Access Plans, Inc. used the Black Scholes option-pricing model to estimate the option fair
values as described in Note 2 — Summary of Significant Accounting Policies (Stock Based
Compensation) of the financial statements appearing above in this report, to determine the
value of the amounts for Option Awards. |
Officer and Director Liability and Indemnification
As provided by the Oklahoma General Corporation Act, each of our directors and officers is not
liable to us or our shareholders for any action taken as a director or officer, or any failure to
take any action, if the director or officer performed his or her duties in compliance with the
Oklahoma General Corporation Act. A director is required to discharge his or her duties as a
director, including those duties as a member of a committee, or an officer in a manner he or she
believes in good faith to be in our best interests and with the care an ordinarily prudent person
in a like position would exercise under similar circumstances. In discharging his or her duties a
director or officer is entitled to rely on information, opinions, reports, or statements,
including financial statements and other financial data, if prepared or presented by:
| • |
|
One or more of our officers or employees whom the director reasonably believes to be
reliable and competent in the matters presented; |
| • |
|
Legal counsel, public accountants, investment bankers, or other persons as to matters the
director reasonably believes are within the person’s professional or expert competence; or |
| • |
|
A committee of our Board of Directors of which he is not a member if the director reasonably
believes the committee merits confidence. |
However, a director or an officer is not entitled to rely on the forgoing if the director or
officer has knowledge concerning the matter in question that makes reliance unwarranted.
71
The provisions of the Oklahoma General Corporation Act do not eliminate liability of a director or
an executive officer for violations of federal securities laws, nor do they limit our rights or
our stockholders’ rights, in appropriate circumstances, to seek equitable remedies including
injunctive or other forms of non-monetary relief. These remedies may not be effective in all
cases.
The Oklahoma General Corporation Act requires us to indemnify all of our directors, officers,
employees and agents. Under these provisions, when an individual in his or her capacity as an
officer or a director is made or threatened to be made a party to any suit or proceeding, the
individual may be indemnified if he or she acted in good faith. These indemnification provisions
are not exclusive of any other rights to which the individual may be entitled. Insofar as
indemnification for liabilities arising under the Oklahoma General Corporation Act or otherwise may
be permitted to our directors and officers, we have been advised that in the opinion of the U.S.
Securities and Exchange Commission the indemnification is against public policy and is, therefore,
unenforceable.
|
|
|
| ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The following table presents certain information as to the beneficial ownership of our common
stock as of December 16, 2010 and the beneficial ownership of the common stock of (i) each person
who is known to us to be the beneficial owner of more than 5% thereof, (ii) each of our directors
and executive officers, and (iii) all of our executive officers and directors as a group, together
with their percentage holdings of the outstanding shares. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated, and there are no family
relationships among our executive officers, directors and 5% and greater shareholders, except as
otherwise indicated by footnote. For purposes of the following table, the number of shares and
percent of ownership of our outstanding common stock that the named person beneficially owns
includes shares of our common stock that the named person has the right to acquire within 60 days
of the above-referenced date pursuant to exercise of stock options and other types of purchase
rights and are deemed to be outstanding, but are not deemed to be outstanding for the purposes of
computing the number of shares beneficially owned and percent of outstanding common stock of any
other named person.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Owned |
|
|
Rights |
|
|
|
|
|
|
Percent of |
|
| Name (and Address) |
|
Of |
|
|
To |
|
|
Total |
|
|
Ownership |
|
| of Beneficial Owner |
|
Record |
|
|
Acquire (1) |
|
|
Shares (1) |
|
|
(1) (2) |
|
| |
Danny Wright (3) (9)
900 36th Avenue, NW
Norman, Oklahoma 73072 |
|
|
3,946,900 |
|
|
|
-0- |
|
|
|
3,946,900 |
|
|
|
19.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brett Wimberley (4) (9)
900 36th Avenue, NW
Norman, Oklahoma 73072 |
|
|
3,918,327 |
|
|
|
-0- |
|
|
|
3,918,327 |
|
|
|
19.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Susan Matthews (5)
900 36th Avenue, NW
Norman, Oklahoma 73072 |
|
|
1,966,000 |
|
|
|
-0- |
|
|
|
1,966,000 |
|
|
|
9.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RENN Capital (6)
4929 W. Royal Lane, Suite 200
Irving, TX 75063 |
|
|
2,254,645 |
|
|
|
23,387 |
|
|
|
2,278,032 |
|
|
|
11.5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Cleveland (6) (9) |
|
|
2,254,645 |
|
|
|
23,387 |
|
|
|
2,278,032 |
|
|
|
11.5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry G. Gerdes (8) |
|
|
181,165 |
|
|
|
155,000 |
|
|
|
336,165 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Simonelli (9) |
|
|
5,000 |
|
|
|
95,000 |
|
|
|
100,000 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. French Hill (9) |
|
|
15,000 |
|
|
|
31,774 |
|
|
|
46,774 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rita W. McKeown (7) |
|
|
-0- |
|
|
|
76,999 |
|
|
|
76,999 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Huguelet (10) |
|
|
60,920 |
|
|
|
104,500 |
|
|
|
165,420 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradley W. Denison (11) |
|
|
61,500 |
|
|
|
507,500 |
|
|
|
569,000 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark Kidd (9) |
|
|
5,000 |
|
|
|
20,000 |
|
|
|
25,000 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and officers
as a group of 12 individuals |
|
|
12,414,457 |
|
|
|
1,014,160 |
|
|
|
13,428,617 |
|
|
|
67.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
72
| |
|
|
| (1) |
|
Shares not outstanding but deemed beneficially owned by virtue of the right of a person or
members of a group to acquire them within 60 days are treated as outstanding for determining
the amount and percentage of common stock owned by such person. To our knowledge, each named
person has sole voting and sole investment power with respect to the shares shown except as
noted, subject to community property laws, where applicable. |
| |
| (2) |
|
Rounded to the nearest one-tenth of one percent, based upon 19,877,304 shares of
common stock outstanding at December 1, 2010. |
| |
| (3) |
|
Mr. Wright is our Chairman of Board of Directors and Chief Executive Officer. |
| |
| (4) |
|
Mr. Wimberley is one of our directors and our President and Chief Financial Officer. |
| |
| (5) |
|
Ms. Matthews is President of our subsidiary, Benefit Marketing Solutions, LLC. |
| |
| (6) |
|
The beneficial shares owned are held of record by RENN Global Entrepreneurs Fund, Inc.
(formerly Renaissance Capital Growth & Income Fund III, Inc.) (662,502 shares), Premier RENN
Entrepreneurial Fund Limited (formerly Premier RENN US Emerging Growth Fund Limited) (417,306
shares), Renaissance US Growth Investment Trust PLC (1,174,837 shares), each of which is an
investment fund managed by RENN Capital Group, Inc. Mr. Cleveland controls RENN Capital Group,
Inc. and is also deemed to be the beneficial owner of those common stock shares. Mr.
Cleveland serves as one of our directors. |
| |
| (7) |
|
Ms. McKeown is our Chief Accounting Officer. |
| |
| (8) |
|
The number of shares and the percent includes 166,666 shares held by Gerdes Huff Investments
of which Mr. Gerdes is a general partner and 9,999 shares held by Gerdes Family Partnership of
which Mr. Gerdes is a general partner. Mr. Gerdes serves as one of our directors. |
| |
| (9) |
|
The named individual is one of our directors. |
| |
| (10) |
|
Mr. Huguelet is President, Retail Division. |
| |
| (11) |
|
Mr. Denison is Executive Vice President, General Counsel and Secretary. |
See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities” regarding the equity compensation plan and the common stock shares
available for issuance under our 2009 Equity Compensation Plan.
|
|
|
| ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Contained below is a description of transactions we entered into with our officers, directors and
shareholders that beneficially own more than 5% of our common stock during the years ended
September 30, 2010 and 2009. These transactions will continue in effect and may result in
conflicts of interest between us and these individuals. Although our officers and directors have
fiduciary duties to us and our shareholders, there can be no assurance that conflicts of interest
will always be resolved in favor of us and our shareholders.
73
We lease the space for our corporate offices and Wholesale Plans Division in Norman, Oklahoma
under a lease that expires September 30, 2011. The total space consists of approximately 6,523
square feet. The lease agreement is with Southwest Brokers, Inc., a company owned by Brett
Wimberley, one of our Directors, President and Chief Financial Officer. This lease was executed on
May 1, 2005, amended on August 1, 2006, August 1, 2008, September 30, 2009 and September 30, 2010.
The lease expires on September 30, 2011.
Our rent expense associated with related party transactions was approximately $103,162 and
$199,444 for the years ending September 30, 2010 and 2009, respectively.
Merger-Acquisition of BMS Holding Company
On February 28, 2007, we completed the merger-acquisition of BMS Holding Company. The
shareholders of BMS Holding Company were Danny C. Wright, Brett Wimberley and Susan Matthews. In
completion of this merger-acquisition, we issued 4,000,000 common stock shares to each of Messrs.
Wright and Wimberley and 2,000,000 common stock shares to Ms. Matthews. Furthermore, we issued
promissory notes to each of Messrs. Wright and Wimberley and Ms. Matthews in the principal
amounts of $2,858,800, $2,858,800, and $1,429,400, respectively (the “Original Notes”). Because
BMS Holding Company was deemed to have acquired us for financial reporting purposes (not for
legal purposes), the principal and interest payments on the promissory notes are deemed dividend
distributions to Messrs. Wright and Wimberley and Ms. Matthews. During the year ended September
30, 2007, Messrs. Wright and Wimberley and Ms. Matthews were paid interest and principal under
the Original Notes of $488,953, $488,953, and $244,476, respectively. Messrs. Wright and
Wimberley are directors and executive officers of our Company, and Ms. Matthews is an executive
officer of our Company.
On January 10, 2008, pursuant to an agreement among Messrs. Wright and Wimberley, Ms. Matthews and
us, the Original Notes were cancelled, and we issued new replacement promissory notes to Messrs.
Wright and Wimberley and Ms. Matthews in the original principal amount of $2,045,271, $2,045,271,
and $1,022,635, respectively (the “New Notes”). The principal amounts of the New Notes are equal to
the outstanding balances, reduced by $247,073 for the CAPIC requirement, respectively owed to the
holders of the Original Notes at the time the Original Notes were cancelled. The cancellation of
the Original Notes and the issuance of the New Notes were approved by the disinterested members of
our board of directors. During the year ended September 30, 2009, Messrs. Wright and Wimberley and
Ms. Matthews were paid interest and principal under the New Notes of $710,344, $710,344, and
$355,172, respectively.
The New Notes differ from the Original Notes in a few material respects. First, the Original Notes
contained provisions contemplating a reduction in the outstanding principal balance if we do not
achieve certain adjusted EBITDA (as defined in the notes) levels in our fiscal years ending
September 30, 2007, 2008 and 2009. These adjusted EBITDA levels have been retained, but the 12
month measurement periods have been deferred by one year each to the fiscal year ending September
30, 2009, and converted to quarterly reviews thereafter. We believe these deferrals more
appropriately tie the payment obligations under the New Notes to our performance, which was one of
the primary purposes of the principal reduction provisions of the Original Notes. Second, the
Original Notes did not contain any provision for the repayment of amounts by the holders of the
Original Notes resulting from our failure to achieve sufficient adjusted EBITDA levels during the
12 months ending September 30, 2010 and reduction of principal below the remaining outstanding
principal balance of the Original Notes. Under the New Notes the holders will receive reduced
payments after the 2010 fiscal year end adjustment in the event the adjusted EBITDA thresholds are
not met in the fiscal quarters relating to those payments. Finally, the New Notes modify the
definition used to calculate the adjusted EBITDA to give our board of directors the ability to
exclude, in its discretion, certain infrequent expenses incurred other than in the ordinary course
of our business. This change was made to more closely align our interests with that of those note
holders by removing, subject to approval by our disinterested directors, the potential negative
financial impact of expenses or losses that may be incurred at the initiation of a long-term
project.
Pursuant to discussions between the note holders and our independent directors, on November 18,
2009 the disinterested directors accepted a proposal by the note holders for the notes to be paid
off early at a 10% discount. The Company recorded a gain of $94,444 as other income for the three
months ended December 31, 2009 as a result of the discount. Principal payments of $1,030,348 were
made to the note holders on January 6, 2010 and the notes were deemed fully paid.
Director Independence
For purposes of determining whether a member of our Board of Directors qualifies as “independent
director,” we have selected and utilize the definition of “independent director” within the
meaning of Rule 4200 of the Financial Industry Regulatory Association. Currently, five members of
our Board of Directors, Larry G. Gerdes, John Simonelli, Mark Kidd, J. French Hill and Russell
Cleveland qualify as an “independent director.” Because our other directors are employees, they do
not qualify as “independent directors.”
74
|
|
|
| ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Audit Fees
Effective August 30, 2010, the Audit Committee approved the engagement of Eide Bailly LLP as our
independent registered public accounting firm. To date, we have paid Eide Bailly LLP a total of
$138,500 and $107,775 for professional services rendered during the years ended September 30, 2010
and 2009, respectively. Fees include audits of financial statements as well as reviews of
quarterly and other filings.
Tax Fees
The aggregate fees billed by Weaver LLP for professional services rendered in conjunction with
federal, state and local income tax return preparation and other tax related services in 2010 was
$61,200. Aggregate fees billed by Dunn, Stone & Cunningham for professional services rendered in
conjunction with federal, state and local income tax return preparation in 2009 was $10,747 and
both were approved by the Audit Committee.
PART IV
|
|
|
| ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
(a) Exhibits:
| |
|
|
|
|
|
| |
3.1 |
|
|
Certificate of Incorporation, incorporated by reference in the Quarterly Report on Form 10-Q filed with the commission on
February 15, 2010. |
| |
|
|
|
|
| |
3.2 |
|
|
Bylaws,
incorporated by reference in the Quarterly Report on Form 10-Q
filed with the commission on February 15, 2010. |
| |
|
|
|
|
| |
4.1 |
|
|
Common stock certificate, incorporated by reference in the Quarterly Report on Form 10-Q filed with the commission on February 15, 2010. |
| |
|
|
|
|
| |
10.1 |
|
|
Agreement and Plan of Merger amongst Alliance HealthCard, Inc., AHC-Benefit Marketing
Acquisition, Inc. and BMS Holding Company, Inc, Benefit Marketing Solutions, LLC, Susan
Matthews, Brett Wimberley, Danny C. Wright, dated December 26, 2006, incorporated by reference
to Form 8K filed with the Commission on January 3, 2007. |
| |
|
|
|
|
| |
10.2 |
|
|
Employment Agreement Danny C. Wright, incorporation by reference to the Form 8K filed with
the Commission on March 6, 2007. |
| |
|
|
|
|
| |
10.3 |
|
|
Employment Agreement Brett Wimberley, incorporation by reference to the Form 8K filed with
the Commission on March 6, 2007. |
| |
|
|
|
|
| |
10.4 |
|
|
Employment Agreement Susan Matthews, incorporation by reference to the Form 8K filed with the
Commission on March 6, 2007. |
| |
|
|
|
|
| |
10.5 |
|
|
Employment Agreement Robert Garces, incorporation by reference to the Form 8K filed with the
Commission on March 6, 2007. |
| |
|
|
|
|
| |
10.6 |
|
|
Employment Agreement Thomas Kiser, incorporation by reference to the Form 8K filed with the
Commission on March 6, 2007. |
| |
|
|
|
|
| |
10.7 |
|
|
$2,045,271 Promissory Note of Alliance HealthCard, Inc. dated January 10, 2008, and
issued to Danny C. Wright, incorporation by reference to the Form 8K
filed with the Commission on March 6, 2007. |
| |
|
|
|
|
| |
10.8 |
|
|
$2,045,271 Promissory Note of Alliance HealthCard, Inc. dated January 10, 2008, and
issued to Brett Wimberley, incorporation by reference to the Form 8K
filed with the Commission on March 6, 2007. |
| |
|
|
|
|
| |
10.9 |
|
|
$1,022,635 Promissory Note of Alliance HealthCard, Inc. dated January 10, 2008, and
issued to Susan Matthews, incorporation by reference to the Form 8K
filed with the Commission on March 6, 2007. |
75
| |
|
|
|
|
|
| |
10.10 |
|
|
Certificate of Merger Agreement with Access Plans USA, Inc., incorporated by reference to
the Form 8K filed with the Commission on November 18, 2008. |
| |
|
|
|
|
| |
10.11 |
|
|
Rent A Center Agreement between Benefit Marketing Solutions, LLC. Effective March 1, 2007,
incorporated by reference to the Form 10K/A filed with the Commission on October 14, 2009. |
| |
|
|
|
|
| |
10.12 |
|
|
Amendment to the Employment Agreement Danny C. Wright, dated May 28, 2010. |
| |
|
|
|
|
| |
10.13 |
|
|
Amendment to the Employment Agreement Brett Wimberley, dated May 28, 2010. |
| |
|
|
|
|
| |
10.14 |
|
|
Lease Agreement for Summit Building between Onward, L.L.C. and Benefit Marketing Solutions
dated February 1, 2004 and 2010 Addendum to Lease Agreement for Summit Building dated
September 30, 2010. |
| |
|
|
|
|
| |
10.15 |
|
|
Amendment to the Employment Agreement Susan Matthews, dated October 1, 2010. |
| |
|
|
|
|
| |
10.16 |
|
|
Independent Broker’s Contract, by and between Golden Rule Insurance Company and America’s
Health Care/Rx Plan Agency, Inc. dated January 10, 2006. |
| |
|
|
|
|
| |
10.17 |
|
|
Certificate
of Merger Agreement with Access Plans USA, Inc., final version. |
| |
|
|
|
|
| |
31.1 |
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
|
|
| |
31.2 |
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
|
|
| |
32.1 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
| |
|
|
|
|
| |
32.2 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
76
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
| |
|
|
|
|
| |
Access Plans, Inc.
|
|
| December 22, 2010 |
By: |
/s/ Danny Wright
|
|
| |
|
Danny Wright |
|
| |
|
Chairman and Chief Executive Officer
(Principal Executive Officer) |
|
| |
| December 22, 2010 |
By: |
/s/ Brett Wimberley
|
|
| |
|
Chief Financial Officer |
|
| |
|
(Principal Financial and Accounting Officer) |
|
77