We conduct our operations from our headquarters in Tampa, Florida and our data processing facility in Middletown, New York. We lease both of these facilities. We believe that our facilities are adequate for our present and foreseeable business requirements.
We have derived the following selected historical consolidated financial data from our audited consolidated financial statements at December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001, 2000, 1999, and 1998, which are included in this Form 10-K. The report of PricewaterhouseCoopers LLP, our independent accountants, on our consolidated financial statements at December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 appears elsewhere in this Form 10-K. Our selected consolidated financial data should be read in conjunction with the related consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K.
- ---------- (1) We have reclassified the business units sold in 2001 and 2000 as discontinued operations in the Consolidated Statements of Operations. During 2000, we sold our unemployment compensation, workers' compensation, workers' compensation managed care organization, and self-funded businesses. In 2001, we sold our third party administration and managing general underwriter business units.
The following discussion should be read together with our consolidated financial statements and related notes, which appear elsewhere in this Form 10-K. To the extent that this discussion is more limited than the information in the consolidated financial statements, you should rely on the consolidated financial statements. We caution you that, while forward-looking statements reflect our good faith beliefs, these statements are not guarantees of future performance. In addition, except as required by law, we disclaim any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. See Forward-Looking Statements.
Our expenses generally consist of fees incurred to provide access to participating PPO networks for our customers, compensation and benefits costs for our employees, occupancy and related costs, general and administrative expenses associated with operating our business, taxes, and debt service obligations.
The following table sets forth, for the periods indicated, the percentages that certain items of income and expense bear to our operating revenue for the periods indicated.
Personnel expense for the year ended December 31, 2002 decreased $0.6 million, or 6.6%, to $8.5 million from $9.1 million in 2001. Personnel expense as a percentage of revenues decreased to 25.6% in 2002 compared to 27.8% in 2001. During 2002, we reduced our total employee count from 152 at January 1, 2002 to 144 at December 21, 2002. We continued to benefit from efficiencies in our claim repricing operations through increased use of our technology, which allowed us to increase the number of claims processed per person in 2002 compared to the same period in 2001.
Network access fees and other cost of operating revenue for the year ended December 31, 2002 decreased $1.2 million, or 10.3%, to $10.4 million from $11.6 million in 2001. Network access fees and other cost of operating revenue as a percentage of operating revenue were 31.3% in 2002 compared to 35.1% in 2001. This decrease was attributable to decreases in network access fees of $0.2 million, due to contracts with certain of our newer networks that are on more favorable terms and the migration of certain networks to a flat fee contract basis. Additionally, our electronic imaging costs decreased by approximately $0.2 million as more of our repricing is done through either EDI or internet connections.
Depreciation for the year ended December 31, 2002 increased an immaterial amount compared to 2001. This small increase in depreciation was due to purchases of fixed assets in the latter part of 2001 and during 2002. Amortization of intangibles was $1.4 million for the year ended December 31, 2001. No amortization of goodwill was recorded in 2002 due to the adoption of Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Intangible Assets," under which goodwill is no longer amortized but instead is subject to impairment tests at least annually. No impairment of goodwill was determined to have occurred during 2002.
Bad debt expense for the year ended December 31, 2002 increased an immaterial amount from the same period in 2001. Bad debt expense is recorded based on our estimate of uncollectible accounts receivable.
During 2002, we pursued a secondary offering of our common stock (the "Offering"), and in connection therewith incurred legal, accounting, and printing fees. However, due to market conditions, the Offering was indefinitely postponed and, accordingly, in the fourth quarter, we expensed approximately $1.2 million associated with the Offering.
The benefit for income taxes for the year ended December 31, 2002 was $1.2 million compared to a provision for income taxes of $26.8 million during the same period in 2001. Effective January 1, 2002, a new federal law was enacted allowing corporations to increase the period for which they may obtain refunds on past income taxes paid due to net operating losses. The prior law allowed companies to use their net operating losses for the preceding three fiscal years while the new law allows companies to use their net operating losses for the preceding five fiscal years.
of claims received and commissions earned from the increase in operating revenue. Personnel expense as a percentage of operating revenue decreased to 27.8% in 2001 compared to 30.8% in 2000, primarily because we were able to increase efficiencies in our claims repricing operations through increased use of our technology, which allowed us to increase the number of claims processed per person in 2001.
Network access fees and other costs of operating revenue for the year ended December 31, 2001 increased $3.7 million, or 46.8%, to $11.6 million from $7.9 million in 2000. This increase was primarily attributable to increases in network access fees, electronic imaging, postage, computer software and maintenance cost, and printing cost supporting our increased operating revenue. Network access fees and other costs of operating revenue as a percentage of operating revenue were 35.1% in 2001 compared to 29.4% in 2000. Additionally, we incurred increased legal and other costs associated with our divestitures and credit facility restructuring activities during 2001 totaling $0.7 million. During 2000, we received proceeds from a key-man life insurance policy totaling $0.5 million, which reduced overall cost of operating revenue during such period.
Bad debt expense for the year ended December 31, 2001 increased $2.7 million, or 450.0%, to $3.3 million from $0.6 million in 2000 due to the related increase in operating revenue, an overall increase in the estimated allowance for doubtful accounts based on historical collection rates, and a $1.2 million additional reserve against certain accounts resulting from customer negotiations.
Interest expense for the year ended December 31, 2001 increased $1.6 million, or 15.2%, to $12.1 million from $10.5 million in 2000. This increase resulted from increased interest rates on our credit facility from prime plus 1.0%, or 10.5%, at January 1, 2001 to prime plus 6.0%, or 10.75%, at December 31, 2001. In addition, we incurred significant bank charges that were included in interest expense associated with amendments to our credit facility during 2001.
Provision for income taxes for the year ended December 31, 2001 was $26.8 million compared to a benefit for income taxes of $3.3 million in 2000. During 2001, we were required to establish a $36.5 million valuation allowance on our net deferred tax assets as a result of cumulative losses in recent years, as required by SFAS No. 109, "Income Taxes."
Loss from discontinued operations, net of taxes for the year ended December 31, 2001 decreased $58.2 million, or 99.0%, to $0.6 million from $58.8 million in 2000. Loss on sale of discontinued operations, net of taxes for the year ended December 31, 2001 decreased $29.2 million, or 74.3%, to $10.1 million from $39.3 million in 2000. During 2000, these operations were adversely affected by the write-off of $80.3 million of goodwill and contract rights related to the business units sold determined by the selling price of the unemployment compensation and workers' compensation, Ohio workers' compensation managed care organization and self-funded business units sold in 2000, and the definitive agreement signed in April 2001 to sell our third party administration and managing general underwriter business units. The additional losses in 2001 were incurred based on actual results of operations and the terms of the final sale, which occurred in June 2001.
On June 18, 2001, we completed the disposition of our third party administration and managing general underwriter business units with the sale of our subsidiary, HealthPlan Services, Inc. In connection with this non-cash transaction, the buyer, HealthPlan Holdings, Inc., assumed approximately $40.0 million in working capital deficit of the acquired businesses and acquired assets having a fair market value of approximately $30.0 million. At the closing of this transaction, we issued 709,757 shares of our common stock to offset $5.0 million of the assumed deficit. We offset the remaining $5.0 million of this deficit with a long-term convertible subordinated note, which automatically converted into 813,273 shares of common stock on April 12, 2002 in connection with the restructuring of our credit facilities. The note accrued interest prior to its conversion, which we elected to pay through the issuance of 41,552 shares of our common stock. Our agreement with HealthPlan Holdings states that if HealthPlan Holdings does not receive gross proceeds of at least $5.0 million upon the sale of the conversion shares, then we must issue and distribute to them additional shares of our common stock, based on a ten-day trading average price, to compensate HealthPlan Holdings for the difference, if any, between $5.0 million and the amount of proceeds they realize from the sale of the conversion shares. Our agreement with HealthPlan Holdings also requires that we register the conversion shares upon demand. To date, HealthPlan Holdings has made no demand for registration of these conversion shares.
statement covering the issued shares as soon as practicable after the closing of their purchase of such shares. The Agreement also contained provisions requiring redemption of such shares or the issuance of certain additional penalty shares (in the event that our lenders prohibited redemption), if such registration statement did not become effective by certain specified time periods. Because the registration statement we filed with the Securities and Exchange Commission covering such shares was not declared effective within the required time periods, we issued to HealthPlan Holdings the maximum number of penalty shares specified by the registration rights agreement, which was 200,000 shares of our common stock. As of this date, we still have not registered the 709,757 purchased shares.
On April 12, 2002, we closed a transaction to restructure and refinance our bank debt, which was $69.0 million prior to the closing. Under the terms of the restructured agreement, we entered into a $40.0 million term loan that accrues interest at a variable rate, generally prime plus 1.0%, with interest payments due monthly beginning on April 30, 2002. Quarterly principal payments of $50,000 became due beginning September 30, 2002, and the term loan is payable in full on May 31, 2004. The term loan is collateralized by all of our assets. The restructured credit facility does not include a line of credit or the ability to borrow any additional funds. In exchange for retirement of the remaining amounts due to the lenders, we issued 29,000 shares of our newly authorized Series C convertible preferred stock and an additional note in the amount of $184,872. The Series C convertible preferred stock accrues dividends at 10.0% per annum during the first twelve months from issuance and at 12.0% per annum thereafter. Dividends are payable quarterly in additional shares of Series C convertible preferred stock or, at our option, in cash. We have chosen to pay dividends in the form of additional shares, and to date we have issued to the Series C shareholders an aggregate of 2,092 additional shares of Series C convertible preferred stock. In connection with the restructuring, we issued an additional note to Wachovia Bank, National Association (referred to as Wachovia), the administrative agent for our lending group, in the amount of $64,000 for administrative agent fees. The restructured credit agreement contains certain financial covenants, including minimum monthly EBITDA levels (defined as earnings before interest, taxes, depreciation, and amortization and adjusted for non-cash items deducted in calculating net income and severance, if any, paid to certain of our officers), maximum quarterly and annual capital expenditures, a minimum quarterly fixed charge ratio that is based primarily on our operating cash flows, and maximum quarterly and annual extraordinary expenses (excluding certain pending and threatened litigation, indemnification agreements, and certain other matters as defined in the restructured agreement). The required monthly minimum EBITDA levels for the third quarter of 2002 averaged approximately $808,000. The required monthly minimum EBITDA level was $1.0 million from October 2002 through January 2003, and decreased to $700,000 in February 2003. For March 2003 through July 2003, the monthly minimum EBITDA will be $800,000, and it will increase to $1.0 million per month thereafter. From April 12, 2002 through November 30, 2002, we were in compliance with these financial covenants for each reporting period required under the terms of the restructured agreement. During December 2002, we were not in compliance with our EBITDA covenant and we subsequently obtained a waiver from our senior lenders for this non-compliance.
The accounting treatment for the restructured credit facility complies with the requirements of SFAS No.15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings," which requires that a comparison be made between the future cash outflows associated with the restructured facility (including principal, interest and related costs), and the carrying value related to the previous credit facility. The carrying value of the restructured credit facility would be the same as the carrying value of the previous obligations, less the fair value of the preferred stock issued. We obtained an appraisal to determine the fair value of the stock and warrants issued, which indicated the fair value was approximately $29.0 million. No gain or loss was recognized for accounting purposes in connection with the debt restructuring. We recorded a charge during the second quarter of 2002 of $0.4 million upon closing of our debt restructuring for various investment advisory and legal fees incurred in connection with the arrangement of the restructured credit facility.
In connection with the closing of the transactions contemplated by the restructured credit agreement, we entered into a letter agreement, as amended, with the lenders and Wachovia, as administrative agent for the lenders and for the holders of the Series C convertible preferred stock. Pursuant to the letter agreement, the lenders, in their capacity as such and as holders of the Series C convertible preferred stock, granted to us an option to consider the entire indebtedness under the credit facility paid in full and to redeem the Series C convertible preferred stock in exchange for payment of $40.0 million plus accrued and unpaid interest under the credit facility and other specified terms. The option expired on September 9, 2002.
As of March 27, 2002, we retired a subordinated note payable to New England Financial, including accrued interest, totaling approximately $2.5 million, by issuing 274,369 shares of our common stock, based on the closing price of our common stock one day immediately prior to the retirement date of the note, and by issuing a credit for $950,000 payable with in-kind claims repricing services. New England Financial subsequently assigned the 274,369 shares to New England Financial Distributors. We have agreed to register these shares.
In 1994, we obtained a letter of credit in connection with a third party administration contract entered into by HealthPlan Services, our former subsidiary. The letter of credit remained outstanding due to multi-party litigation related to the business administered. In July 2002, we entered into a settlement agreement with respect to the litigation. The letter of credit, which was then in the amount of $4.6 million, was subsequently returned to our senior lenders and canceled. In January 2003, in compliance with the indemnification obligations arising out of our sale of the HealthPlan Services business, we paid $250,000 in connection with the final settlement of the multi-party litigation.
We spent $0.3 million and $0.5 million on capital expenditures during the twelve months ended December 31, 2002 and 2001, respectively.
We do not believe that inflation had a material effect on our results of operations for the twelve months ended December 31, 2002 and 2001. There can be no assurance, however, that our business will not be affected by inflation in the future.
The preparation of our consolidated financial statements requires that we adopt and follow certain accounting policies. Certain amounts presented in our condensed consolidated financial statements have been determined in accordance with such policies, based upon estimates and assumptions. Although we believe that our estimates and assumptions are reasonable, actual results may differ.
We generate our operating revenue and related accounts receivable from services provided to healthcare payers, such as self-insured employers, medical insurance carriers, third party administrators, HMOs, and other entities that pay claims on behalf of health plans. We also generate operating revenue from services that we provide to participating health care services providers, such as individual providers and provider networks.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS"), SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the period in which the recorded value of goodwill and certain intangibles is more than its fair value. On January 1, 2002, we adopted the provisions of each statement applying to goodwill and intangible assets acquired prior to June 30, 2001. These new requirements will impact future period net income by an amount equal to the discontinued goodwill amortization offset by goodwill impairment charges, if any, and adjusted for any differences between the old and new rules for defining intangible assets on future business combinations. We completed our impairment tests for 2002 and determined that our goodwill was not impaired.
We recognize deferred assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized.
On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item,
In November 2002, the FASB issued Financial Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others (an interpretation of FAS No. 5, 57 and 107 and rescission of SFAS Interpretation No. 34)," which modifies the accounting and enhances the disclosure of certain types of guarantees. FIN 45 requires that upon issuance of certain guarantees, the guarantor must recognize a liability for the fair value of the obligation it assumes under the guarantee. FIN 45's provisions for the initial recognition and measurement are to be applied to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of annual periods that end after December 15, 2002. We do not believe FIN 45 will have an impact on us.
On January 17, 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51," which imposes a new approach in determining if a reporting entity should consolidate certain legal entities, including partnerships, limited liability companies, or trusts, among others, collectively defined as variable interest entities or VIEs. A legal entity is considered a VIE if it does not have sufficient equity at risk to finance its own activities without relying on financial support from other parties. Additional criteria must be applied to determine if this condition is met or if the equity holders, as a group, lack any one of three stipulated characteristics of a controlling financial interest. If the legal entity is a VIE, then the reporting entity determined to be the primary beneficiary must consolidate it. Even if a reporting entity is not obligated to consolidate a VIE, then certain disclosures must be made about the VIE if the reporting entity has a significant variable interest. Certain transition disclosures are required for all financial statements issued after January 31, 2003. The ongoing disclosure and consolidation requirements are effective for all interim financial periods beginning after June 15, 2003. We do not believe that FIN 46 will currently have an impact on us.
Any investor in our stock, and any party considering an investment in our stock, should carefully consider the following factors and cautionary statements, as well as the other information set forth in this Form 10-K. If any of the following risks were to actually occur, our business, financial condition, or results of operations could be materially harmed. As a result, the value of our stock could decline and you could lose all or part of your investment in our stock.
Failure to comply with financial covenants will cause default under our term loan and, in some cases, may allow Series C preferred stockholders to control our board.
Our obligations to issue additional shares of our common stock and to register outstanding and issuable shares may result in substantial dilution of stockholder value.
We also have reserved an aggregate of 2,369,050 shares of common stock for future issuance to our officers, non-employee directors, employees, and consultants pursuant to our existing stock incentive plans. We have outstanding options with respect to 1,810,137 of these shares. These shares are all registered pursuant to the Securities and Exchange Act of 1933. At our 2002 Annual Meeting of Stockholders, our stockholders approved the issuance of options to purchase 3.0 million shares of our common stock, subject to completion of a proposed public offering of our stock. During the fourth quarter of 2002, we decided to postpone the offering indefinitely. At our 2003 annual meeting, we expect to request stockholder approval for issuance of options to purchase an aggregate of 3.5 million shares of our common stock, without any condition related to the conclusion of an offering.
In connection with the HealthPlan Holdings transaction and the restructuring of our credit facility, we issued a total of 150,000 shares of our common stock to our senior lenders in 2001 and 2002. We have granted the senior lenders registration rights with respect to these shares.
On July 9, 2001, we completed a $3.8 million private placement of 553,500 shares of our common stock to certain investment accounts managed by DePrince, Race & Zollo. We have agreed to register these shares.
Future issuances of substantial amounts of common stock, or the perception that such sales could occur, and the registration of currently unregistered shares, could have a material adverse effect on the value of our common stock. See "Business-Our History" and "Management's Discussion and Analysis of Operations - Liquidity and Capital Resources" for more information regarding the transactions described above.
additional funds to operate our business, to develop new or enhanced services, or to respond to competitive pressures. Although we are not currently planning to engage in any acquisitions and expect that all our growth will be internally generated, we also may need to raise additional funds in the event that an attractive expansion opportunity were to arise. If we were to raise additional funds by issuing debt securities, we would be required to pay interest on those securities, reducing our earnings and decreasing our available cash. In addition, the interests of holders of our common stock would be subordinated to those of our debt holders if we were to be liquidated. If we were to raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our stockholders would be diluted. Any new securities could have rights, preferences, and privileges senior to those of our common stock. In addition, we cannot assure you that we would be able to issue and sell new securities to meet our additional funding needs.
We have contingent obligations from the sale of our third party administration and managing general underwriter businesses.
In connection with the sale of our third party administration and managing general underwriter businesses in 2001 and 2000, we incurred indemnification obligations for representations, warranties, and covenants, and for liabilities arising prior to the sale of these businesses. Consequently, we have assumed the defense of a number of claims for liabilities arising prior to the sale of these businesses. In November 2001, Paid Prescriptions LLC initiated a breach of contract action against HealthPlan Services, Inc., one of our former subsidiaries, seeking $1.6 million to $2.0 million in compensation. We are vigorously defending the action, as required by the terms of our sale of the HealthPlan Services business to HealthPlan Holdings, Inc. in June 2001. We also are currently negotiating certain disputes with HealthPlan Holdings, Inc. regarding the HealthPlan Services sale, including a dispute regarding the closing balance sheet of HealthPlan Services. We have accrued approximately $1.2 million in reserves for potential or contingent liabilities. There may be unknown liabilities arising from our contingent obligations for which we have not established reserves or there may be liabilities for which we have not accrued adequate reserves and, if these liabilities were to occur, we might have to reorganize or liquidate under the bankruptcy laws in order to discharge them. We cannot assure you of the outcome of any matter arising under our contingent obligations, and if the outcome is adverse, these obligations could have a material adverse effect on our operating results and financial condition.
The loss of one or more of our significant customers could cause our business to suffer. Our top three customers accounted for 19.6% of our operating revenue for the year ended December 31, 2002. These customers may account for a significant portion of our operating revenue throughout 2003, depending upon our ability to grow our business by and with similarly-sized customers in the foreseeable future. Since our customer contracts generally are terminable within 90 days, any of these customers could terminate their relationship with us at any time. In addition, companies in the healthcare industry generally have been consolidating, resulting in a limited number of payers and PPOs controlling an increasing portion of claims. Therefore, we believe that our operating revenue will be largely dependent upon product acceptance by a smaller number of payers and PPOs. If we lose any one of our major customers or any of our major customers negotiate less favorable terms with us, then we will lose operating revenue, which would adversely affect our financial condition and results of operations.
The terms of our customer contracts provide no guarantee of long-term relationships or payments.
All of our contracts with PPOs and providers can be terminated without cause, generally on 90 days' notice. The termination of any PPO contract would render us unable to provide our customers with network access to that PPO, and therefore would adversely affect our ability to reprice claims and derive revenues. Furthermore, as a "network of networks," we rely on our participating PPOs and provider groups to ensure participation by our participating providers. Our PPO contracts generally do not provide us with a direct recourse against a participating provider that chooses not to honor its obligation to provide a discount, or chooses to discontinue its participation in our NPPN network. In 2002, our contracts with three former networks terminated, representing a loss of 138 hospitals and 31,034 physicians. Although we replaced the terminated networks with new network arrangements that in each instance substantially offset these hospital and physician losses, termination of provider contracts or other changes in the manner in which these parties conduct their business are outside of our control and could negatively affect our ability to provide services to our customers.
Our percentage of savings business model sometimes allows a payer to utilize our network discounts in circumstances where our NPPN network is not the payer's primary network. In these circumstances, our NPPN network participating providers are not traditionally given the same assurances of patient flow that they receive when they are part of a primary network. Historically, some providers have been reluctant to participate in network arrangements that do not guarantee a high degree of patient steerage. Although we think that the steerage provided by our payers as a whole and the speed and efficiency with which we provide claims repricing services make NPPN network affiliation an attractive option for providers, there can be no assurance that our business model will not discourage providers from commencing or maintaining an affiliation with our NPPN network.
In addition, our growth rate is partially attributable to healthcare expenditures nationally and the related growth of claims we process. We may not continue to grow in the future, and if we do grow, our growth may not be at or near historical levels.
Although our NPPN network business unit began doing business in 1994, the increasing popularity and use of electronic claims and data processing tools and the Internet have occurred only recently and, as a result, the focus of our business has changed significantly. We did not begin our current focus on being a technology enabled service provider until 2001, when we completed our sale of our third party administration and managing general underwriter businesses to HealthPlan Holdings and began concentrating exclusively on medical cost management. At that time, we also began to build our network and data management business process outsourcing businesses, including our PayerServ and PlanServ products, which did not begin earning revenue until the first quarter of 2002. As new ventures in 2002, PayerServ and PlanServ currently have 24 and 8 customers, respectively. There can be no guarantee that these businesses will acquire new customers or will generate significant operating revenue in the future. Because our business has changed, it is difficult to evaluate due to the new risks and challenges we are
We may not be successful in addressing any or all of these risks. Any failure to address these risks could have a material adverse effect on our business, operating results, and financial condition.
We face competition from HMOs, PPOs, third party administrators, and other managed healthcare companies, such as Blue Cross Blue Shield, McKesson/HBOC, The TriZetto Group, Inc., HealthAxis, Avidyn/ppoOne, Inc., BCE Emergis/eHealth Solutions Group, Concentra, Inc., Beech Street Corporation, MultiPlan, Inc., Private Healthcare Systems (PHCS), and Coalition America, Inc. We believe that, as managed care continues to gain acceptance in the marketplace and more sophisticated technology is adopted, our competition will increase. In addition, legislative reform may intensify competition in the markets we serve. Many of our current and potential competitors have greater financial and marketing resources than we have. We cannot assure you that we will continue to maintain our existing customers or our past level of operating performance. We also cannot assure you that we will be successful with any new products or in any new markets that we may enter.
Our strategy is to expand through internal growth. Expenses arising from efforts to increase our market penetration may have a negative impact on operating results. As a result, we are subject to certain growth-related risks, including the risk that we will be unable to retain personnel or acquire the resources necessary to service our internal growth adequately. While we are pursuing an internal growth strategy, it is possible that we would consider an attractive opportunity for expansion by acquiring another company in our core business, assuming that our resources would permit us to make such an acquisition. If we seek to acquire another company, we may not be able to integrate the acquired business effectively.
We are highly dependent on our senior management, particularly our Chairman and Chief Executive Officer Phillip S. Dingle and our President and Chief Operating Officer Jeffrey L. Markle. The loss of these members of our senior management team could harm us and our prospects significantly. We have employment agreements with each of Mr. Dingle and Mr. Markle, but these employment agreements do not obligate the executive officers to remain in our employ.
The inability of our customers to pay for our services could decrease our revenue.
Our health insurance and HMO payer customers may be required to maintain restricted cash reserves and satisfy strict balance sheet ratios promulgated by state regulatory agencies. In addition, the financial stability of our payer customers may be adversely affected by physician groups or associations within their organizations that become subject to costly litigation or become insolvent. Our ability to collect fees for our services may become impaired if our payer customers are unable to pay for our services because they need to maintain cash reserves, if they fail to maintain required balance sheet ratios, or if they become insolvent. Although we have not experienced any material problems with collecting fees for our services to date, any financial instability of our customers in the future could adversely affect our revenues.
We are dependent on the growth of the internet and electronic healthcare information markets.
The difficulty of securely transmitting confidential information over the Internet has been a significant barrier to conducting e-commerce and engaging in sensitive communications over the Internet. Our strategy relies in part on the use of the Internet to transmit confidential information. We believe that any well-publicized compromise of Internet security may deter people from using the Internet to conduct transactions that involve transmitting confidential healthcare information. We rely largely on our security systems, confidentiality procedures, and employee non-disclosure agreements to maintain the confidentiality and security of confidential information. It is possible that third parties could penetrate our network security or otherwise misappropriate patient information and other data. If this happens, our operations could be interrupted, and we could be subject to liability. We may have to devote significant financial and other resources to protecting against security breaches or to alleviating problems caused by breaches. We could face financial loss, litigation, and other liabilities to the extent that our activities or the activities of third party contractors involving the storage and transmission of confidential information like patient records or credit information are compromised. In addition, we could incur additional expenses if new regulations regarding the use of personal information are introduced.
We rely largely on our own security systems, confidentiality procedures, and employee nondisclosure agreements to maintain the confidentiality and security of our proprietary information, including our trade secrets and internally developed computer applications. If third parties gain unauthorized access to our information systems, or if anyone misappropriates our proprietary information, this may have a material adverse effect on our business and results of operations. In addition, our technology has not been patented nor have we registered any copyrights with respect to such technology. Trade secrets laws offer limited protection against third party development of competitive products or services. Lacking the protection of patents or registered copyrights for our internally-developed software and software applications, we are more vulnerable to misappropriation of our proprietary technology by third parties or competitors. Because we believe that our software and software applications are valuable to us, the failure to adequately protect our technology could adversely affect our business.
We may be subject to trademark and service mark infringement claims in the future.
We must continue to expand and adapt our network and technology infrastructure to accommodate additional users, increased transaction volumes, and changing customer requirements. We may not be able to accurately project the rate or timing of increases, if any, in the volume of transactions we reprice or otherwise service or be able to expand and upgrade our systems and infrastructure to accommodate such increases. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers' changing needs on a timely basis, at a commercially reasonable cost or at all. Our current information systems, procedures, and controls may not continue to support our operations while maintaining acceptable overall performance and may hinder our ability to exploit the market for healthcare applications and services. Service lapses could cause our users to switch to the services of our competitors.
Government regulation of the healthcare industry may change and adversely affect our business.
During the past several years, the healthcare industry has been subject to increasing levels of government regulation of reimbursement rates and certain capital expenditures, among other things. In addition, federal and state governments have considered proposals to reform the healthcare system. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates, and otherwise adversely affect the healthcare industry, which could adversely affect our business. The impact of regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory requirements or interpretations. While we believe our operations are in material compliance with the applicable laws as currently interpreted, the regulatory environment in which we operate may change significantly in the future, which could restrict our existing operations, expansion, financial condition, or opportunities for success. See "Business - Government Regulation."
Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As provider networks and managed care organizations consolidate, competition to provide products and services such as those we provide will become more intense, and the importance of establishing and maintaining relationships with key industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our products and services. If we are forced to reduce our prices, our margins will decrease, unless we are able to achieve corresponding reductions in expenses.
Our stock price has been volatile and may continue to fluctuate.
Our common stock has experienced significant price and volume fluctuations. Our stock price ranged from a high of $6.40 per share to a low of $0.73 per share during the year ended December 31, 2002. On March 24, 2003, our closing common stock price was $0.99 per share. These fluctuations are not necessarily directly related to our operating performance. Our common stock may not continue to trade at the current price level. See "Market for Registrant's Common Equity and Related Stockholder Matters" for more information on the trading price of our common stock. The market price for our common stock may continue to fluctuate widely in response to factors such as the following:
in changes in the market price of the stock of many companies that may not have been directly related to the operating performance of those companies.
Some companies that have experienced volatility in the market price of their stock or have had their stock subject to substantial dilution have been sued in securities class action litigation. In light of the fluctuations in our stock price and dilution to our stockholders, it is possible that we may be the subject of securities class action litigation in the future. This type of litigation is generally costly and often results in a diversion of management's attention and resources and could harm our business, prospects, results of operations, and financial condition.
Provisions contained in Delaware law, our charter, and our bylaws may restrict the ability of a third party to take over our company, prevent investors from receiving a "control premium" for their shares, and prevent or frustrate any attempt to replace or remove the current management of our company by our stockholders.
Provisions contained in our amended and restated certificate of incorporation and bylaws, as well as Delaware corporate law, may delay, defer, or prevent an attempt by a third party to take over our company, which may prevent our stockholders from receiving a "control premium" for their shares. For example, these provisions may defer or prevent tender offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities of our stockholders to receive a premium over then-prevailing market prices for their common stock. In addition, such provisions may prevent or frustrate our stockholders from replacing or removing our current management.