U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Commission File Number: 001-15667

ACCESS PLANS USA, INC.

(Exact name of business issuer as specified in its Charter)

OKLAHOMA		73-1494382
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
4929 WEST ROYAL LANE, SUITE 200 IRVING, TEXAS (Address of principal executive offices)		75063 (Zip Code)

(866) 578-1665
(Registrant’s telephone number)

     Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer: o	Accelerated filer: o	Non-accelerated filer: o	Smaller reporting company: þ

     Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     Yes o No þ

     As of August 14, 2008 the Registrant had outstanding 20,269,145 shares of Common Stock, $.01 par value.

 

 

ACCESS PLANS USA, INC.

FORM 10-Q

For the Quarter Ended June 30, 2008

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			3
Item 2. Management’s Discussion and Analysis			3
Item 3. Quantitative and Qualitative Disclosures about Market Risk			13
Item 4. Controls and Procedures (and Item 4T. Controls and Procedures)			13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			14
Item 1A. Risk Factors			15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			15
Item 3. Defaults upon Senior Securities			15
Item 4. Submission of Matters to a Vote of Security Holders			15
Item 5. Other Information			15
Item 6. Exhibits			16
SIGNATURES			17
Certification of Interim President and Chief Executive Officer and Chief Financial Officer Pursuant to Rule  13a-14(a) and 15d-14(a)
Certification of Interim President and Chief Executive Officer Pursuant to Section 302
Certification of Chief Financial Officer Pursuant to Section 302
Certification of Interim President and Chief Executive Officer Pursuant to Section 906
Certification of Chief Financial Officer Pursuant to Section 906

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Our financial statements which are prepared in accordance with Regulation S-X are set forth in this report beginning on page 18.

The following discussion is qualified in its entirety by the more detailed information in our 2007 Annual Report on Form 10-K and the financial statements contained in this report, including the notes thereto, and our other periodic reports filed with the Securities and Exchange Commission since December 31, 2007 (collectively referred to as the “Disclosure Documents”). Certain forward-looking statements contained in this report and in the Disclosure Documents regarding our business and prospects are based upon numerous assumptions about future conditions that may ultimately prove to be inaccurate and actual events and results may materially differ from anticipated results described in the forward-looking statements. Our ability to achieve these results is subject to the risks and uncertainties discussed in the Disclosure Documents. Any forward-looking statements contained in this report represent our judgment as of the date of this report. We disclaim, however, any intent or obligation to update these forward-looking statements. As a result, the reader is cautioned not to place undue reliance on these forward-looking statements.

General
We at Access Plans USA, Inc., develop and distribute quality affordable consumer driven healthcare programs for individuals, and to a lesser extent, employer groups. Our products and programs are designed to deal with the rising costs of healthcare. These programs include health insurance plans and non-insurance healthcare discount programs to help provide solutions for the millions of Americans who need access to affordable healthcare.

Since December 31, 2007, we did not actively engage in the sale and marketing of Medicare insurance programs. In June of 2008, we sold all of our rights to future override commissions on substantially all of the Medicare supplement business previously sold by agents contracted with ACP Agency, a wholly-owned subsidiary. Other business written by ACP Agency has been relatively minor and accordingly, the results of ACP Agency, which were previously included in the Insurance Marketing Division, have been reclassified as a discontinued operation.

Our current operations are organized under three business divisions:

•

Consumer Plan Division: Consumer Plan develops and markets non-insurance healthcare discount programs and association memberships that include defined benefit insurance features through multiple distribution channels. We offer wellness programs, prescription drug and dental discount programs, medical discount cards, limited benefit insured plans and supplemental programs. Our distribution channels currently include network marketing representatives, independent agents and consumer direct tele-sales call centers. We also market to internet portals and financial institutions and wholesale lease some of our programs. This Division operates through our wholly-owned subsidiaries, The Capella Group, Inc. (“Capella”) and Protective Marketing Enterprises, Inc. (“PME”). PME was acquired in October 2007, and operates a proprietary customer healthcare advocacy department and proprietary dental and vision networks that provide services at negotiated rates to members of our discount medical plans (“program members”) and to members of other plans that have contracted with us for access to our networks (“network access members”). PME also has a back-office support platform that includes billing, administration and commission disbursement systems. Prior to 2007, this Division was referred to as our Consumer Healthcare Savings segment.

•

Insurance Marketing Division: Insurance Marketing 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 (AHCP Agency). We support AHCP 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. Prior to the second quarter of 2008, this Division also included the results of ACP Agency (a broad network of independent agents that distributed Medicare supplement insurance programs to individuals) that is now reported as a discontinued operation, as further discussed below. This Division, which operates as Insuraco USA LLC (“Insuraco”), was acquired in January 2007 in connection with our merger with Insurance Capital Management USA, Inc.

•

Regional Healthcare Division: Regional Healthcare provides third-party claims administration, healthcare provider network management, and utilization management services primarily for El Paso-based employer groups that utilize partially self-funded strategies to finance their employee benefit programs. Regional Healthcare also owns and manages a proprietary network of medical providers. Prior to 2007, this Division, which currently operates as Foresight TPA, was referred to as or Employer and Group Healthcare Services segment.

Results of Operations
A summary of our results of operations for the three and six months ended June 30, 2008 and 2007 is set forth below. The financial statements appearing elsewhere in this report provide additional related information. Certain reclassifications have been made to prior period financial statements to conform to the current presentation of the financial statements.

{$ in thousands}		Three Months Ended June 30,													Six Months Ended June 30,
		2008				2007(a)				Change					2008				2007(a)				Change
Total revenue		$	10,058			$	9,065				11	%			$	19,739			$	16,363				21	%
Direct expenses			6,612				4,843				37	%				12,895				8,252				56	%
Gross margin			3,446				4,222				-18	%				6,844				8,111				-16	%
Total operating expenses			4,212				9,694				-57	%				8,708				13,920				-37	%
Loss from continuing operations before income taxes		$	(766	)		$	(5,472	)							$	(1,864	)		$	(5,809	)
Net loss		$	(325	)		$	(5,452	)							$	(1,369	)		$	(5,777	)
a) Reclassified to conform to the current period’s presentation.

Total revenue: The 11% increase in second quarter revenue to $10,058,000 reflects a 29% growth in Insurance Marketing revenue and increased revenue attributable to Consumer Plan’s October 1, 2007 acquisition of Protective Marketing Enterprises, Inc. (PME) being partially offset by a 60% decrease in Regional Healthcare revenues driven by this Division’s previously disclosed loss of two major contracts. The 21% year-to-date revenue growth to $19,739,000 reflects a comparable trend - compounded by the inclusion of only five months of Insurance Marketing revenues in 2007 (Insurance Marketing was acquired January 30, 2007).

Gross margin: Gross margin comprises commission and services revenues, plus interest income, less commission costs, healthcare provider network benefit costs, other costs that are directly related to the generation of revenue, and interest expense. The 18% second quarter and 16% year-to-date decline in gross margin to $3,446,000, and $6,844,000, respectively, was driven by the previously disclosed 2007 termination of two major Regional Healthcare contracts. The significant decline in Regional Healthcare gross margin was partially offset by some growth in Consumer Plan and Insurance Marketing gross margins, as more fully discussed below.

Total operating expenses: The substantial quarter and year-to-date reductions in operating expenses were driven by the absence of the $4,092,000 prior year goodwill impairment charge attributable to the termination of two major Regional Healthcare contracts and lower restructuring charges compared to the prior year. Additionally, we benefited from lower quarterly and year-to-date Regional Healthcare costs, reflecting actions taken to reduce expenses in this division. In the second quarter of 2008, we also realized a net reduction in operating costs compared to the prior quarter reflecting the transfer of the call center billing and administration functions onto the PME platform and a curtailment of Insurance Marketing administrative costs.

Loss from continuing operations before income taxes: The loss from continuing operations before income taxes aggregated $766,000 for the second quarter and $1,864,000 year-to-date. The earnings resulting from the maturity of Insurance Marketing’s AHCP Agency into a profitable operation, combined with the modest turnaround in Consumer Plan’s second quarter operating results, were more than offset by Regional Healthcare’s 2008 losses and the substantial, albeit lower second quarter, costs attributable to operating as a publicly-held company, that are included in Corporate and Other.

Net loss: The inclusion of results from discontinued operations, principally the $385,000 second quarter 2008 net gain on sale of the Medicare supplement override commissions, reduced the net loss to $325,000 for the second quarter and $1,369,000 year-to-date. The modest income tax expense is attributable to state franchise taxes. We have not recognized any tax benefits attributable to net operating loss carry-forwards, as currently it is “more likely than not” that all, or a portion of this benefit, which approximates $500,000 at June 30, 2008, will not be realized.

The following table sets forth revenue, gross margin and the income (loss), by segment, from continuing operations.

{$ in thousands}		Three Months Ended June 30,													Six Months Ended June 30,
Total Revenue - by segment		2008				2007(a)				Change					2008				2007(a)				Change
Consumer Plan		$	4,092			$	3,269				25	%			$	7,998			$	6,410				25	%
Insurance Marketing			5,267				4,077				29	%				10,190				6,447				58	%
Regional Healthcare			685				1,709				-60	%				1,532				3,479				-56	%
Corporate			14				10									19				27
Total		$	10,058			$	9,065				11	%			$	19,739			$	16,363				21	%
Gross margin - by segment
Consumer Plan		$	1,553			$	1,420				9	%			$	2,928			$	2,948				-1	%
Insurance Marketing			1,230				1,159				6	%				2,446				1,830				34	%
Regional Healthcare			655				1,639				-60	%				1,458				3,318				-56	%
Corporate			8				4				*					12				15				*
Total		$	3,446			$	4,222				-18	%			$	6,844			$	8,111				-16	%
Income (loss) from continuing operations before taxes - by Segment
Consumer Plan		$	116			$	(640	)			*				$	(152	)		$	(484	)			*
Insurance Marketing			189				(150	)			*					371				(231	)			*
Regional Healthcare			(478	)			(4,085	)			*					(885	)			(3,819	)			*
Corporate			(593	)			(597	)			*					(1,198	)			(1,275	)			*
Total		$	(766	)		$	(5,472	)			*				$	(1,864	)		$	(5,809	)			*
a) Reclassified to conform to the current period’s presentation.
*  Percent change not meaningful.

Consumer Plan Division. The operating results for our Consumer Plan Division are set forth below.

{$ in thousands}		Three Months Ended June 30,													Six Months Ended June 30,
Results of Operations		2008				2007(a)				Change					2008				2007(a)				Change
Total revenue		$	4,092			$	3,269				25	%			$	7,998			$	6,410				25	%
Direct expenses			2,539				1,849				37	%				5,070				3,462				46	%
Gross margin			1,553				1,420				9	%				2,928				2,948				-1	%
Personnel costs			855				527				62	%				1,740				1,037				68	%
Other sales, general and administrative expenses			492				985				-50	%				1,159				1,772				-35	%
Depreciation and amortization			90				26				246	%				181				101				79	%
Restructuring and severance			-				522				*					-				522				*
Total operating expenses			1,437				2,060				-30	%				3,080				3,432				-10	%
Operating income (loss) before income taxes		$	116			$	(640	)			*				$	(152	)		$	(484	)			*
Percent of revenue:
Total revenue			100	%			100	%								100	%			100	%
Direct expenses			62	%			57	%								63	%			54	%
Gross margin			38	%			43	%								37	%			46	%
Personnel costs			21	%			16	%								22	%			16	%
Other sales, general and administrative expenses			12	%			30	%								15	%			28	%
Depreciation and amortization			2	%			1	%								2	%			2	%
Restructuring and severance			0	%			16	%								0	%			8	%
Total operating expenses			35	%			63	%								39	%			54	%
Operating income (loss) before income taxes			3	%			-20	%								-2	%			-8	%

		2008								2007
Selected Metrics		2nd Qtr				1st Qtr				4th Qtr				3rd Qtr				2nd Qtr				1st Qtr
Program members:
New members enrolled			17,621				25,912				12,789				6,771				7,483				6,461
Members at end of period			49,709				55,535				39,737				27,902				28,965				30,649
Change from prior quarter			-10	%			40	%			42	%			-4	%			-5	%
Network access members:
Members at end of period			38,278				37,950				46,718
Change from prior quarter			1	%			-19	%
Total revenue		$	4,092			$	3,906			$	4,238			$	3,146			$	3,269			$	3,141
Change from prior quarter			5	%			-8	%			35	%			-4	%			4	%			-2	%
Direct expenses (a)			2,539				2,531				2,503				1,904				1,849				1,613
Gross margin (a)			1,553				1,375				1,735				1,242				1,420				1,528
Gross margin ratio			38	%			35	%			41	%			39	%			43	%			49	%
Change from prior quarter			13	%			-21	%			40	%			-13	%			-7	%			-13	%
Operating expenses (b)			1,437				1,643				1,467				4,421				2,060				1,372
Operating income (loss) before income taxes (b)		$	116			$	(268	)		$	268			$	(3,179	)		$	(640	)		$	156
a) Reclassified to conform to the current period’s presentation.
b) Third quarter 2007 operating expenses include a $3,377,000 goodwill impairment charge.
*  Percent change not meaningful.

Total revenue: The 25% increase in second quarter and year-to-date revenue to $4,092,000, and $7,998,000, respectively, was primarily driven by the revenue from customers obtained in the October 2007 acquisition of PME. Revenue from new sales subsequent to this acquisition was substantially offset by the member terminations attributable to sales made by both Capella and PME prior to this date.

Gross margin: The year-to-date gross margin of $2,928,000 approximates the prior 2007 level. Additional gross margin from program and network members acquired with the PME acquisition, was offset by the continued decline in the more profitable legacy Capella multi-level-marketing book of business, and by high first durational month (“accelerated”) commissions paid to acquire new customers, particularly during the first quarter of 2008. During the second quarter of 2008, we experienced very high policy termination rates on the new “accelerated commission” call center program introduced in the prior quarter. We have subsequently curtailed new sales from this distribution channel and modified our criteria for evaluating other new sales opportunities. This was reflected in the 40% growth in program members to 55,535 at March 31, 2008, followed by the 10% decline in program members to 49,709 at June 30, 2008.

Total operating expenses: The 30% second quarter and 10% year-to-date reduction in operating expenses was primarily driven by the $522,000 restructuring charge recorded in the second quarter of 2007 in connection with an unsuccessful joint marketing initiative with Insurance Marketing and the anticipated termination of the legacy Capella administration outsourcing agreement. The second quarter and year-to-date reduction in sales, marketing and administrative costs was substantially offset by the increase in personnel costs primarily due to the addition of the PME call center personnel and the shift in expenditures resulting from the September 2007 termination of the outsourcing agreement. The 2008 increase in depreciation and amortization charges was primarily attributable to the amortization of the intangible asset established in connection with the October 2007 PME acquisition.

Operating income (loss) before income taxes: While the Consumer Plan Division returned to profitability in the second quarter of 2008 with operating income before taxes of $116,000, the 3% margin remains substantially below our blended pricing target of approximately 10%.

During the second quarter of 2008, Consumer Plan added sales and marketing resources and developed a relatively broad pipeline of new sales opportunities for the second half of 2008, principally with new call centers. We are seeking to diversify the distribution channels by adding web-portals, financial institutional relationships and new network access customers. We consider the latter opportunity to be considerably enhanced with our June 2008 partnership with Dentemax, the nation’s pre-eminent dental discount card network. We have also introduced new products to the legacy Capella multi-level-marketing channel. Execution of these new sales opportunities, combined with further reductions in the cost structure, should translate into improved profitability for the balance of 2008.

Insurance Marketing Division. The operating results for our Insurance Marketing Division are set forth below.

{$ in thousands}		Three Months Ended June 30,													Six Months Ended June 30,
Results of Operations		2008				2007(a)				Change					2008				2007(a)				Change(b)
Total revenue		$	5,267			$	4,077				29	%			$	10,190			$	6,447				32	%
Direct expenses			4,037				2,918				38	%				7,744				4,617				40	%
Gross margin			1,230				1,159				6	%				2,446				1,830				11	%
Personnel costs			499				492				1	%				966				797				1	%
Other sales, general and administrative expenses			384				488				-21	%				793				833				-21	%
Depreciation and amortization			158				155				2	%				316				257				2	%
Restructuring and severance			-				174				*					-				174				*
Total operating expenses			1,041				1,309				-20	%				2,075				2,061				-16	%
Operating income (loss) before income taxes		$	189			$	(150	)			*				$	371			$	(231	)			*
Percent of revenue:
Total revenue			100	%			100	%								100	%			100	%
Direct expenses			77	%			72	%								76	%			72	%
Gross margin			23	%			28	%								24	%			28	%
Personnel costs			9	%			12	%								9	%			12	%
Other sales, general and administrative expenses			7	%			12	%								8	%			13	%
Depreciation and amortization			3	%			4	%								3	%			4	%
Restructuring and severance			0	%			4	%								0	%			3	%
Total operating expenses			19	%			32	%								20	%			32	%
Operating income (loss) before income taxes			4	%			-4	%								4	%			-4	%

		2008								2007
Selected Metrics		2nd Qtr				1st Qtr				4th Qtr				3rd Qtr				2nd Qtr(b)				1st Qtr(c)
Major medical insurance:
Submitted annualized premium		$	20,182			$	21,001			$	17,094			$	15,993			$	14,143			$	16,923
Issued annualized premium		$	15,488			$	16,272			$	13,545			$	12,269			$	10,314			$	10,524
New policies issued/sold			4,859				5,300				3,817				3,555				2,945				3,327
Policies in-force at end of period			19,161				17,820				16,449				15,317				14,353				13,665
Change from prior quarter			8	%			8	%			7	%			7	%			5	%
Total revenue (a)		$	5,267			$	4,923			$	4,468			$	4,331			$	4,077			$	2,370
Change from prior quarter			7	%			10	%			3	%			6	%			15	%
Direct expenses (a)			4,037				3,707				3,335				3,248				2,918				1,699
Gross margin (a)			1,230				1,216				1,133				1,083				1,159				671
Gross margin ratio			23	%			25	%			25	%			25	%			28	%			28	%
Change from prior quarter			1	%			7	%			5	%			-7	%			15	%
Operating expenses (d)			1,041				1,034				992				1,626				1,309				752
Operating income (loss) before income taxes (d)		$	189			$	182			$	141			$	(543	)		$	(150	)		$	(81	)
a) Reclassified to conform to the current period’s presentation.
b) Year-to-date percent change adjusts for absence of activity for January 2007 (division acquired January 30, 2007).
c) Two months activity through March 31, 2007, except for annualized premium and new policies issued/sold.
d) Third quarter 2007 operating expenses include a $600,000 goodwill impairment charge.
*  Percent change not meaningful.

Total revenue: The 29% increase in second quarter revenue to $5,267,000, and the 32%* year-to-date increase to $10,190,000 primarily reflects sustained growth in AHCP Agency’s major medical book of business. The June 30, 2008 policies in-force count of 19,161 is up 33% from a year ago.

Gross margin: The year-to-date gross margin of $2,446,000 reflects an 11%* growth over the prior year. This lower growth rate, relative to the revenue growth rate, reflects the shift in sales to lower-margin major-medical insurance carrier relationships. During the second quarter of 2008, the growth in gross margin was further constrained by additional lead cost amortization charges. In prior quarters, these expenditures were capitalized and, because the unamortized balance did not exceed unamortized deferred enrollment fee revenue, these costs were being amortized at an approximate 5% monthly rate. However, during the second quarter of 2008 the continuation of the trend toward sales of lower-margin major-medical insurance products, which typically have no enrollment fee income at time of sale, resulted in accelerated lead expenditure amortization charges.

Second quarter results include a net favorable $50,000 reduction in previously accrued commission expense on our Golden Rule program, currently our primary major medical carrier. The Golden Rule program accounts for 72% of the total June 30, 2008 outstanding agent advances (prior to the provision for doubtful recoveries, which aggregates $550,000 at June 30, 2008).

Total operating expenses: While quarter and year-to-date* personnel costs are comparable with those in 2007; substantive reductions in other sales, marketing and administrative expenditures have been executed. Additionally, the higher 2007 operating costs include the $174,000 restructuring charge recorded in the 2007 second quarter in connection with an unsuccessful joint marketing initiative with Consumer Plan Division. Depreciation and amortization charges predominantly relate to the amortization of the intangible asset established in connection with the January 2007 acquisition of this Division.

Operating income (loss) before income taxes: Revenue growth and expense reductions during 2008 resulted in Insurance Marketing transitioning from a 4% pre-tax operating loss margin through the first half of 2007 to a 4% pre-tax operating income margin for the first half of 2008. Operating income before taxes aggregated $189,000 for the quarter and $371,000 year-to-date.

During the 2008 second quarter, Insurance Marketing secured preliminary commitments from two major carriers to provide us with new differentiated proprietary, or private label, product offerings. Execution of these new program opportunities, combined with further efficiencies in the cost structure, should translate into improved profitability for the balance of 2008 and further improvement in the 4% year-to-date profit margin.

Regional Healthcare Division. The operating results for our Regional Healthcare Division are set forth below.

{$ in thousands}		Three Months Ended June 30,													Six Months Ended June 30,
Results of Operations		2008				2007(a)				Change					2008				2007(a)				Change
Total revenue		$	685			$	1,709				-60	%			$	1,532			$	3,479				-56	%
Direct expenses			30				70				-57	%				74				161				-54	%
Gross margin			655				1,639				-60	%				1,458				3,318				-56	%
Personnel costs			664				838				-21	%				1,373				1,714				-20	%
Other sales, general and administrative expenses			452				768				-41	%				928				1,278				-27	%
Depreciation and amortization			17				26				*					42				53				*
Goodwill impairment charge			-				4,092				*					-				4,092				*
Total operating expenses			1,133				5,724				*					2,343				7,137				*
Operating (loss) before income taxes		$	(478	)		$	(4,085	)			*				$	(885	)		$	(3,819	)			*
Percent of revenue:
Total revenue			100	%			100	%								100	%			100	%
Direct expenses			4	%			4	%								5	%			5	%
Gross margin			96	%			96	%								95	%			95	%
Personnel costs			97	%			49	%								90	%			49	%
Other sales, general and administrative expenses			66	%			45	%								60	%			37	%
Depreciation and amortization			3	%			2	%								3	%			1	%
Goodwill impairment charge			0	%			239	%								0	%			118	%
Total operating expense			166	%			335	%								153	%			205	%
Operating loss before income taxes			-70	%			-239	%								-58	%			-110	%

		2008								2007
Selected Metrics		2nd Qtr				1st Qtr				4th Qtr				3rd Qtr				2nd Qtr				1st Qtr
Covered employees			11,253				11,067				25,612				28,215				29,666				31,005
Change from prior quarter			2	%			-57	%			-9	%			-5	%			-4	%			-1	%
Total revenue		$	685			$	847			$	1,580			$	1,620			$	1,709			$	1,770
Change from prior quarter			-19	%			-46	%			-2	%			-5	%			-3	%			0	%
Operating income (loss) before income taxes (b)		$	(478	)		$	(407	)		$	299			$	(44	)		$	(4,085	)		$	266
a) Reclassified to conform to the current period’s presentation.
b) Second quarter 2007 operating expenses include a $4,092,000 goodwill impairment charge.
*  Percent change not meaningful.

Total revenue: The significant decline in second quarter and year-to-date revenue is attributable to the termination of two major contracts in 2007. During the first quarter of 2008, the division successfully retained a major school district contract through the end of 2009. Absent this, revenues would probably have declined considerably further later this year. While this Division also added 172 new members in the second quarter of 2008, recording its first new sales since 2005, the revenue impact was negligible.

Gross margin: Regional Healthcare direct costs were minimal; accordingly, gross margin closely corresponded directly to the revenue results and trending.

Total operating expenses: While there was some reduction in personnel and other sales, marketing and administrative expenses during 2008, the percentage decrease was lower than the revenue decline, and currently these costs aggregate

more than 150% of the revenue. The prior year goodwill impairment charge of $4,092,000 was attributable to the termination of the previously referenced two major contracts.

Operating income (loss) before income taxes: This division, which has significant excess capacity relative to the current client level, is generating significant operating losses – $478,000 for the second quarter of 2008 and $885,000 year-to-date.

We have received preliminary expressions of interest from several parties regarding leveraging Regional Healthcare’s claims administration capabilities and accessing our local proprietary hospital and physician networks. We have also made progress toward reaching a satisfactory resolution with the Department of Justice regarding their investigation of certain activities of former management, although this issue has not been fully resolved. However, our ability to rapidly change the structure of our El Paso operations is currently being constrained by a significant dispute with Tenet Hospitals Limited d/b/a Sierra Medical Center and Providence Memorial Hospital and R.H.S.C. El Paso, Inc. d/b/a Rio Vista Physical Rehabilitation Hospital (collectively, “Tenet”), one of our hospital network providers (see Part II – Other Information, Item 1, Legal Proceedings). We are seeking to expeditiously resolve this dispute.

Corporate and Other. The operating costs for our corporate and other activities were as follows:

{$ in thousands}		Three Months Ended June 30,													Six Months Ended June 30,
		2008				2007(a)				Change					2008				2007(a)				Change
Total revenue		$	14			$	10				*				$	19			$	27				*
Direct expenses			6				6				*					7				12				*
Gross margin			8				4				*					12				15				*
Personnel costs			231				343				-33	%				543				814				-33	%
Other sales, general and administrative expenses			205				256				-20	%				500				471				6	%
Depreciation and amortization			1				2				*					3				5				*
Restructuring and severance			164				-				*					164				-				*
Total operating expenses			601				601				0	%				1,210				1,290				-6	%
Operating (loss) before income taxes		$	(593	)		$	(597	)			*				$	(1,198	)		$	(1,275	)			*

		2008								2007
		2nd Qtr				1st Qtr				4th Qtr				3rd Qtr				2nd Qtr				1st Qtr
Operating (loss) before income taxes		$	(593	)		$	(605	)		$	(595	)		$	(546	)		$	(597	)		$	(678	)
a) Reclassified to conform to the current period’s presentation.

Total operating expenses: Operating expenses included in this segment comprise those expenses not readily allocable to our three divisions – the majority of these relate to public company operating costs. The reduction in personnel and administrative expenses during the second quarter 2008 was offset by the establishment of a $164,000 severance charge in connection with the realignment of certain support functions. Year-to-date expenses, inclusive of the severance charge, decreased 6% from the 2007 level.

Liquidity and Capital Resources
A summary of our net cash flow quarterly trend and liquidity and working capital metrics is set forth below.

{$ in thousands}		2008								2007
		2nd Qtr				1st Qtr				4th Qtr				3rd Qtr				2nd Qtr				1st Qtr
Net cash flow provided by (used in):
Operating activities (a):
Continuing operations		$	(766	)		$	(1,309	)		$	692			$	330			$	106			$	333
Discontinued operations			874				54				(70	)			73				(178	)			17
Total operating activity			108				(1,255	)			622				403				(72	)			350
Investing activities (a)			453				(608	)			(940	)			(31	)			96				256
Financing activities (a)			(185	)			557				(557	)			(651	)			8				(92	)
Net change in unrestricted cash		$	376			$	(1,306	)		$	(875	)		$	(279	)		$	32			$	514
Selected balance sheet metrics:
Unrestricted cash		$	1,694			$	1,318			$	2,624			$	3,499			$	3,778			$	3,746
Unrestricted short-term investments			-				-				-				11				11				200
Restricted short-term investments			1,154				1,735				1,231				1,100				1,100				1,100
Total cash and investments		$	2,848			$	3,053			$	3,855			$	4,610			$	4,889			$	5,046
Short-term debt		$	680			$	736			$	1,255			$	1,812			$	2,069			$	1,960
Long-term debt			995				1,124				-				-				348				400
Total debt		$	1,675			$	1,860			$	1,255			$	1,812			$	2,417			$	2,360
Working capital		$	1,469			$	1,292			$	1,165			$	1,552			$	1,919			$	2,841

a)

Cash flows have been reclassified to conform to the current period’s presentation; in prior quarters, net cash used to fund agent commission advances was presented as an investing activity and advance commissions received from insurance carriers was presented as a financing activity. Both are currently included in operating activities.

Operating activities: Net cash used in continuing operations activity aggregated $766,000 for the second quarter and $2,075,000 year-to-date, in contrast to positive operating cash flow generated throughout 2007. The principal drivers of this adverse trend were

■		the funding of Regional Healthcare Division’s operating losses (in 2007, this Division generated positive operating cash flow);
■		an increase in the amount of self-funding of agent advance commissions;
■		funding certain Consumer Plan Division accelerated commission payments; and
■		reversal of favorable fourth quarter 2007 expense payment timing variances.

Additionally, in the first half of 2007, we benefited from lower expense payments resulting from the prepayment of certain costs in 2006 in conjunction with tax planning strategies for that year.

The significant positive cash flow provided by the discontinued operation in the second quarter of 2008 reflects the $764,000 received in connection with the sale of our rights to future override commissions on substantially all of the Medicare supplement insurance business written by ACP Agency.

Investing activities: The $155,000 of net cash used by investing activities during the six months ended June 30, 2008 primarily represented leasehold improvement and equipment expenditures in connection with the PME integration and call center relocation. Cash provided by investing activities during the second quarter of 2008 primarily represents the release of $515,000 of restricted deposits in connection with the conversion of legacy Capella credit card clearing and automated clearing-house processing onto the PME platform. During the first quarter of 2008, we were required to establish $504,000 of restricted deposits to secure bonds for regulatory licenses in our Consumer Plan and Regional Healthcare divisions.

Financing activities: Substantially all of our financing activity related to debt repayments and the March 2008 receipt of $874,000 in connection with securing a new three-year loan from Commission Funding Group (CFG), a specialty lending corporation (the proceeds received were net of loan repayments and an origination fee charge aggregating $731,000). $1,546,000 of the total outstanding debt at June 30, 2008 was attributable to the CFG facility, and the balance of $129,000 comprises the remaining outstanding principal on the one-year loan obtained from the Peter W. Nauert estate in September 2007.

Working capital: Working capital at June 30, 2008 aggregated $1,469,000, a $304,000 increase from December 31, 2007. This reflects a $575,000 reduction in short-term debt, plus the $764,000 proceeds from the sale of the future override commissions on the Medicare supplement insurance business, more than offsetting the adverse impact of cash-based operating losses for the 2008 first half.

Capital commitments: We did not have any capital commitments as of June 30, 2008. We do not anticipate the need for any significant capital expenditures during the second half of 2008.

Liquidity: Unrestricted cash at June 30, 2008 aggregated $1,694,000. During the third quarter of 2008, we anticipate, but cannot provide assurance, that we will improve the unrestricted cash generated by our Irving, Texas based operations (which comprise our Consumer Plan and Insurance Marketing Divisions and Corporate and Other) by:

•		securing the release of additional restricted deposits;
•		lessening the amount of self-funding of agent advance commissions;
•		reducing operating cost expenditures; and
•		generating positive cash-flow sales growth, particularly in our Consumer Plan Division.