| PRECIS INC ITEM 1A RISK FACTORS The matters discussed below and elsewhere in this report should be considered when evaluating our business operations and strategies |
| Additionally, there may be risks and uncertainties that we are not aware of or that we currently deem immaterial, which may become material factors affecting our operations and business success |
| 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; or • adversely affect our results of operations; • require significant reduction or discontinuance of our operations; • require us to seek a merger partner; or • require us to sell additional stock on terms that are highly dilutive to our stockholders |
| 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 "e believes, "e "e expects, "e "e may, "e "e will, "e "e should "e or "e anticipates "e or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategies that involve risks and uncertainties |
| You should read statements that contain these words carefully because they: • discuss our future expectations; • contain projections of our future operating results or of our future financial condition; or • state other "e forward-looking "e 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 |
| OUR REVENUES ARE LARGELY DEPENDENT ON THE INDEPENDENT MARKETING REPRESENTATIVES, WHOSE REDUCED SALES EFFORTS OR TERMINATION MAY RESULT IN SIGNIFICANT LOSS OF REVENUES Our success and growth depend in large part upon our ability to attract, retain and motivate the network of independent marketing representatives who principally market our Care Entree™ medical savings program |
| Our independent marketing representatives typically offer and sell the Care Entree™ program on a part-time basis, and may engage in other business activities |
| These marketing representatives may give higher priority to other products or services, reducing their efforts devoted to 17 _________________________________________________________________ marketing our Care Entree™ program |
| Also, our ability to attract and retain marketing representatives could be negatively affected by adverse publicity relating to our Care Entree™ program and operations |
| Under our network marketing system, the marketing representatives &apos downline organizations are headed by a relatively small number of key representatives who are responsible for a substantial percentage of our total revenues |
| The loss of a significant number of marketing representatives, including any key representatives, for any reason, could adversely affect our revenues and operating results, and could impair our ability to attract new distributors |
| A LARGE PART OF OUR REVENUES ARE DEPENDENT ON KEY RELATIONSHIPS WITH A FEW PRIVATE LABEL RESELLERS AND WE MAY BECOME MORE DEPENDENT ON SALES BY A FEW PRIVATE LABEL RESELLERS Our revenues from sales or 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 number of resellers, our revenues and operating results may be adversely affected by the loss of our relationship with any of those private label resellers |
| DEVELOPMENT AND MAINTENANCE OF RELATIONSHIPS WITH PREFERRED PROVIDER ORGANIZATIONS ARE CRITICAL AND THE LOSS OF SUCH RELATIONSHIPS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS As part of our business operations, we must develop and maintain relationships with preferred provider organizations within each market area that our services are offered |
| Development and maintenance of these relationships with healthcare providers within a preferred provider organization is in part based on professional relationships and the reputation of our management and marketing personnel |
| Because many members that receive healthcare services are self-insured and responsible for payment for healthcare services received, failure to pay or late payments by members may negatively affect our relationship with the preferred provider organizations |
| Consequently, preferred provider organization relationships may be adversely affected by events beyond our control, including departures of key personnel and alterations in professional relationships and members &apos failures to pay for services received |
| The loss of a preferred provider organization within a geographic market area may not be replaced on a timely basis, if at all, and may have a material adverse effect on our business, financial condition and results of operations |
| is the principal preferred provider organization through which our members obtain savings on healthcare services through our Care Entree™ program |
| The loss of Private Healthcare Systems as a preferred provider organization or disruption of our members &apos access to this preferred provider organization could adversely affect our business |
| While we currently enjoy a good relationship with Private Healthcare Systems, there are no assurances that we will continue to have a good relationship with this network in the future, or that the network may choose to partner with one of our competitors or compete directly with our Care Entree™ program |
| WE FACE COMPETITION FOR MARKETING REPRESENTATIVES AS WELL AS COMPETITIVE OFFERINGS OF HEALTHCARE PRODUCTS AND SERVICES Within the medical savings membership industry, competition for members is becoming more intense |
| We offer membership programs that provide products and services similar to or directly in 18 _________________________________________________________________ competition with products and services offered by our network-marketing competitors as well as the providers of such products and services through other channels of distribution |
| Although not permitted under the current agreements with our marketing representatives and private label clients, in the future some of our clients may provide, either directly or through third parties, programs that directly compete with our programs |
| Furthermore, marketing representatives have a variety of products that they can choose to market, whether competing with us in the healthcare market or not |
| Our business operations compete in two channels of competition |
| First, we compete based upon the healthcare products and services offered |
| These competitors include companies that offer healthcare products and services through membership programs much like our programs, as well as insurance companies, preferred provider organization networks and other organizations that offer benefit programs to their customers |
| Second, we compete with all types of network marketing companies throughout the US for new marketing representatives |
| Many of our competitors have substantially larger customer bases and greater financial and other resources |
| We provide no assurance that our competitors will not provide healthcare benefit programs comparable or superior to our programs at lower membership prices or adapt more quickly to evolving healthcare industry trends or changing industry requirements |
| Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could adversely affect our business, financial condition and results of operations |
| There is no assurance that we will be able to compete effectively with current and future competitors |
| WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION MUCH LIKE AN INSURANCE COMPANY AND THIS REGULATORY OVERSIGHT MAY ADVERSELY AFFECT OR LIMIT OUR OPERATIONS The membership and healthcare benefits we offer are sold without the need for an insurance license by any federal, state or local regulatory licensing agency or commission |
| In comparison, companies that provide insurance benefits and operate healthcare management organizations and preferred provider organizations are regulated by state licensing agencies and commissions |
| These regulations extensively cover operations, including scope of benefits, rate formula, delivery systems, utilization review procedures, quality assurance, enrollment requirements, claim payments, marketing and advertising |
| Several state regulatory agencies and commissions have determined that our Care Entree™ programs are subject to governmental regulation |
| We do not know the full extent of these regulations and additional states may also impose regulation |
| Our need to comply with these regulations may adversely affect or limit our future operations |
| WE HAVE A FIDUCIARY RESPONSIBILTY TO OUR MEMBERS THROUGH OUR TOTAL CARE AND ESSENTIAL CARE PROGRAM OFFERINGS IN THIS CAPACITY, WE COULD BE LIABLE FOR THE LOSS OF MEMBERS &apos FUNDS DEPOSITED WITH US IN ESCROW In the fourth quarter of 2002, we initiated a medical savings program through our Total Care and Essential Care programs that was processed through our subsidiary Foresight, and is now processed through our subsidiary Access Administrators, Inc, as a third-party administrator |
| Under this medical savings program, funds collected from members are held in escrow for the benefit of the member as a source of payment for healthcare services obtained through our Total Care and Essential Care programs |
| Under the medical savings program we have a fiduciary responsibility to our members for the funds held for their benefit much like a trustee |
| In the unforeseen event of a loss of these funds while being held by us or our failure to implement and maintain adequate internal controls, we will be responsible and liable to the affected members for any such loss, including any consequential damages suffered by the members, which liability could be substantial |
| 19 _________________________________________________________________ AS A RESULT OF THE INTRODUCTION OF MEDICAL ESCROW ACCOUNTS, OUR FINANCIAL POSITION AND RESULTS OF OPERATIONS MAY CONTINUE TO BE ADVERSELY IMPACTED BY A DECREASE IN THE NUMBER OF HEALTHCARE SAVINGS PROGRAM MEMBERSHIPS THAT WE CAN SELL AND MAINTAIN While we believe that the introduction of our medical escrow accounts was an important product evolution, the initial impact of this introduction has negatively affected our business |
| This impact is the result of additional difficulties in selling and maintaining memberships in our program because of the added complexity |
| There is no assurance that we will be able to overcome these difficulties, and we may not be able to increase the number of memberships that are sold and maintained |
| As a result, our financial position and results of operations may be negatively affected |
| 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 "e pyramid "e or "e endless chain "e types of selling organizations |
| These regulations are generally directed at ensuring that product and service sales are ultimately made to consumers (as opposed to other marketing representatives) and that advancement within the network marketing organization is based on sales of products and services, rather than on investment in the company or other non-retail sales related criteria |
| The compensation structure of a network marketing organization is very complex |
| Compliance with all of the applicable regulations and laws is uncertain because of: • the evolving interpretations of existing laws and regulations; and • the enactment of new laws and regulations pertaining in general to network marketing organizations and product and service distribution |
| Accordingly, there is the risk that our network marketing system could be found to not comply with applicable laws and regulations that could: • result in enforcement action and imposition of penalty; • require modification of the marketing representative network system; • result in negative publicity; or • have a negative effect on distributor morale and loyalty |
| Any of these consequences could have a material adverse effect on our results of operations as well as our financial condition |
| 20 _________________________________________________________________ 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 "e pyramid scheme "e in violation of federal securities laws, state unfair practice and fraud laws and the Racketeer Influenced and Corrupt Organizations Act |
| Proceedings resulting from these claims could result in significant defense costs, settlement payments or judgments, and could have a material adverse effect on us |
| WE MAY HAVE EXPOSURE AND LIABILITY RELATING TO NON-COMPLIANCE WITH THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 AND THE COST OF COMPLIANCE COULD BE MATERIAL In April 2003, privacy regulations were promulgated by The Department of Health and Human Services pursuant to the Health Insurance Portability and Accountability Act of 1996 ( "e HIPAA "e ) |
| HIPAA imposes extensive restrictions on the use and disclosure of individually identifiable health information by certain entities |
| Also as part of HIPAA, the Department of Health and Human Services has issued final regulations standardizing electronic transactions between health plans, providers and clearinghouses |
| Healthcare plans, providers and claims administrators are required to conform their electronic and data processing systems with HIPAAapstas electronic transaction requirements |
| While we believe we are currently compliant with these regulations, we cannot be certain of the extent to which the enforcement or interpretation of these regulations will affect our business |
| Our continuing compliance with these regulations, therefore, may have a significant impact on our business operations and may be at material cost in the event we are subject to these regulations |
| Sanctions for failing to comply with standards issued pursuant to HIPAA include criminal and civil sanctions |
| DISRUPTION IN OUR OPERATIONS DUE TO IMPLEMENTATION OF OUR NEW MANAGEMENT INFORMATION SYSTEM MAY OCCUR AND COULD AFFECT OUR CLIENT RELATIONSHIPS We recently transitioned to our new management information system |
| There is no assurance that we will be able to continue operating without experiencing any disruptions in our operations or that our relationships with our members, marketing representatives or providers will not be adversely affected or that our internal controls will not be adversely affected |
| WE HAVE MANY COMPETITORS AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY WHICH MAY LEAD TO A LACK OF REVENUES AND DISCONTINUANCE OF OUR OPERATIONS We compete with numerous well-established companies that design and implement membership programs |
| Some of our competitors may be companies that have programs that are functionally similar or superior to our membership programs |
| Most of our competitors possess substantially greater financial, marketing, personnel and other resources than us |
| They may also have established reputations relating to membership programs |
| Due to competitive market forces, we may experience price reductions, reduced gross margins and loss of market share in the future, any of which would result in decreases in sales and revenues |
| These decreases in revenues would adversely affect our business and results of operations and could lead to discontinuance of operations |
| There can be no assurance that: • we will be able to compete successfully; 21 _________________________________________________________________ • our competitors will not develop membership programs that render our programs less marketable or even obsolete; or • we will be able to successfully enhance our programs when necessary |
| THE GOODWILL ACQUIRED PURSUANT TO OUR ACQUISITIONS OF THE CAPELLA GROUP AND ACCESS MAY BECOME IMPAIRED AND REQUIRE A WRITE-DOWN AND THE RECOGNITION OF AN IMPAIRMENT EXPENSE WHICH MAY BE SUBSTANTIAL In connection with our acquisitions of The Capella Group and Access, we recorded goodwill that, at December 31, 2005, had an aggregate asset value of dlra13cmam072cmam000 |
| In the event that the goodwill is determined to be further impaired for any reason, we will be required to write-down or reduce the value of the goodwill and recognize an impairment expense |
| The impairment expense may be substantial in amount and, in such case, adversely affect the results of our operations for the applicable period and may negatively affect the market value of our common stock |
| WE MAY FAIL TO REALIZE SOME OR ALL OF THE ANTICIPATED BENEFITS OF OUR ACQUISITION OF ACCESS AND THAT FAILURE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION Our combined company may fail to realize some or all of the anticipated benefits and synergies of our acquisition of Access as a result of, among other things, the failure of Access to renew or maintain its existing service agreements |
| In addition, the integration of Access &apos business and operations with those of Precis may take longer than anticipated, may be more costly than anticipated, and may have unanticipated adverse results relating to Access &apos or Precis &apos existing businesses or customer base |
| IF WE ISSUE SUBSTANTIAL SHARES OF OUR COMMON STOCK UPON ACCESS MEETING CERTAIN EARNINGS TARGETS, OUR STOCKHOLDERS COULD SUFFER DILUTION OF THEIR INVESTMENT AND OUR STOCK PRICE COULD DECLINE We will be required to issue up to 712cmam459 of additional common stock shares in the event Access attains certain levels of earnings before income tax, depreciation and amortization during 2006 |
| The issuance of these shares could have a substantial dilutive effect on our outstanding common stock as of the date of this report and their market value |
| The issuance of additional common stock may also adversely affect the terms under which we could obtain additional equity capital |
| OUR SUBSIDIARY, ACCESS, DERIVES A LARGE PERCENTAGE OF ITS INCOME FROM A FEW KEY CLIENTS AND THE LOSS OF ANY OF THOSE CLIENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION Access provides full service third party administration services to adjudicate and pay medical claims for employers who have self-funded all or any portion of their healthcare costs |
| Their primary market is governmental entities in the El Paso, Texas metropolitan area, including cities and school districts |
| There is a limited number of these types of entities in the El Paso Metropolitan area |
| A material portion of the revenues of Access is derived from its contractual relationships with a few key governmental entities |
| The loss of any of these relationships would adversely affect on our operating results and the loss of more than one of these relationships could have a material adverse effect on our financial condition |