Prior to fiscal 1993, CompCare principally engaged in the ownership, operation, and management of psychiatric and substance abuse programs in Company owned, leased, or unaffiliated hospitals. During fiscal 1999, we completed our plan to dispose of our hospital business segment. Fiscal 2004 results include a $387,000 charge related to such discontinued operations (see Note 9 - “Discontinued Operations” to the audited, consolidated financial statements).
Comprehensive Care Corporation is a Delaware corporation organized in 1969. The Company, primarily through its wholly owned subsidiary, Comprehensive Behavioral Care, Inc., provides managed care services in the behavioral health and psychiatric fields, which is its only operating segment. The Company manages the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf of employers, health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. The managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. The customer base for its services includes both private and governmental entities. The Company’s services are provided primarily by unrelated vendors on a subcontract or subcapitated basis.
We currently depend, and expect to continue to depend in the near future, upon a relatively small number of customers for a significant percentage of our operating revenues. A significant reduction in sales to any of our large customers or a customer exerting significant pricing and margin pressures on us would have a material adverse effect on our results of operations. In the past, some of our customers have terminated their arrangements with us or have significantly reduced the amount of services requested from us. There can be no assurance that present or future customers will not terminate their arrangements with us or significantly reduce the amount of services requested from us. Any such termination of a relationship or reduction in use of our services could have a material adverse effect on our results of operations or financial condition (see “Factors Affecting Future Results” and Note 4 - “Major Contracts/Customers” to the audited, consolidated financial statements).
For the fiscal year ended May 31, 2005, the Company reported a loss from continuing operations and net loss of $268,000, or $0.05 loss per share (basic and diluted). During the comparable period of the prior fiscal year, the Company reported a loss from continuing operations of $390,000, or $0.09 loss per share (basic and diluted), and a net loss of $777,000, or $0.18 loss per share (basic and diluted).
Effective June 14, 2005, the Company completed a sale of 14,400 shares of its Series A Shares to one investor for approximately $3.4 million in net cash proceeds to the Company (see Note 17(1) - “Subsequent Events” to the audited, consolidated financial statements). Additionally, on March 24, 2005, the Company completed the sale of 50,000 shares of its common stock, $.01 par value (the “Shares”), for $52,500 in net cash proceeds, to conclude the Company’s private placement, which generated approximately $776,000 in aggregate net proceeds during February and March 2005.
Healthcare operating expenses decreased by approximately $2.9 million, or 11.9%, for the fiscal year ended May 31, 2005 as compared to the fiscal year ended May 31, 2004. This decrease is primarily attributable to revenue reductions, along with clinical program improvements resulting in reduced costs of care, and secondarily to lower personnel costs resulting from restructuring our regional and corporate operations. Healthcare operating expense as a percentage of operating revenue decreased by 0.7%, from 87.7% for the fiscal year ended May 31, 2004 to 87.0% for the fiscal year ended May 31, 2005. This decrease is primarily due to the loss of one major contract in Florida that consistently returned a high medical loss ratio.
utilization during our fourth fiscal quarter, which comprises the months of March, April and May. Such variations in utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the first fiscal quarter and a negative impact on our gross margins and operating profits during the fourth quarter. For our fiscal quarter ended May 31, 2005, we experienced higher than expected utilization costs as compared to the fourth quarter in the previous two fiscal years. We have attempted to address these high fourth quarter utilization costs through rate increases with certain of our clients. We cannot assure you, however, that we will not continue to experience increased utilization costs in our fourth fiscal quarters compared to other quarters.
During the fiscal year ended May 31, 2005, net cash used in continuing and discontinued operations amounted to $105,000 and $151,000, respectively. In addition, $46,000 was used to acquire property and equipment and $788,000 was provided by financing activities, primarily from the issuance of common stock in a private placement transaction, which generated approximately $776,000 in aggregate net proceeds during February and March 2005.
During the fiscal year ended May 31, 2005, we had an operating profit of $5,000 and a net loss of $268,000. As of May 31, 2005, the Company had a working capital deficiency of $3.6 million and a stockholders’ deficit of $4.1 million. On June 14, 2005, the Company completed the sale of 14,400 shares of its Series A Shares, $50.00 par value, to one investor for approximately $3.4 million in net cash proceeds to the Company (see Note 17(1) - “Subsequent Events” to the audited, consolidated financial statements). Additionally, on March 24, 2005, the Company completed the sale of 50,000 shares of its common stock, $.01 par value (the “Shares”), for $52,500 in net cash proceeds, to conclude the Company’s private placement, which generated approximately $776,000 in aggregate net proceeds during February and March 2005. As a result, we believe we have sufficient working capital to sustain current operations and meet our current obligations during our 2006 fiscal year without the need to raise additional equity or debt financing. In addition, we believe we have sufficient working capital to meet our capital needs during fiscal 2006, which will include additional installments toward the $170,000 that remains to be paid in connection with our new information system. Working capital needs in our 2007 fiscal year and thereafter are expected to be met by cash generated from continuing operations.
Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and may impact our ability to achieve and sustain profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results could differ from the $3.7 million claims payable amount reported as of May 31, 2005.
In October 2004, we submitted a bid to the State of Connecticut in response to its request for proposal for administrative services only (“ASO”) in connection with a contract that was expected to begin by October 1, 2005. On January 7, 2005, the Company was informed that another bidder was selected to negotiate this ASO contract. If the State of Connecticut is successful in their negotiations with the selected bidder and the State of Connecticut continues with the implementation of its ASO plans, the Company’s existing contract may be terminated sometime during the Company’s third quarter of fiscal 2006, which begins December 1, 2005. This contract represented approximately 21.6%, or $5.3 million, of our operating revenue for the fiscal year ended May 31, 2005 (see Note 4(2) - “Major Customers/Contracts” - to the audited, consolidated financial statements).
Managed care operations are at risk for costs incurred to supply agreed upon levels of service. Failure to anticipate or control costs could have material, adverse effects on the Company. Providing services on a full-risk capitation basis exposes CompCare to the additional risk that contracts negotiated and entered into may ultimately be unprofitable if utilization levels require us to provide services at capitation rates which do not account for or factor in such utilization levels.
Our costs of care include estimated amounts for IBNR. The IBNR is estimated using an actuarial paid completion factor methodology and other statistical analyses that we continually review and adjust, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results may differ materially from the estimated amounts reported.
As a result of our dependence on a limited number of customers, the loss of any one of these customers, or a reduction in business from any one of them, could have a material, adverse effect on our working capital and future results of operations.
We currently have contracts with seven health plans to provide behavioral healthcare services under commercial, Medicaid, and CHIP plans. These combined contracts represent approximately 78.3% and 52.1% of our operating revenue for the fiscal years ended May 31, 2005 and May 31, 2004, respectively, two of which each represented more than 20% of our operating revenues during our fiscal year ended May 31, 2005. The terms of each contract are generally for one-year periods and are automatically renewable for additional one-year periods unless terminated by either party. The loss of one or more of these clients, without replacement by new business, would negatively affect the financial condition of the Company. In October 2004, the Company submitted a bid to the State of Connecticut in response to its request for proposal for administrative services only (“ASO”) in connection with a contract that is expected to begin by October 1, 2005. On January 7, 2005, the Company was informed that another bidder was selected to negotiate this ASO contract. If the State of Connecticut is successful in their negotiations with the selected bidder and the State of Connecticut continues with the implementation of its ASO plans, the Company’s existing contract will be terminated, which may occur sometime during the Company’s third quarter of fiscal 2006, which begins December 1, 2005 (see Note 4(2) - “Major Contracts/Customers” - to the audited, consolidated financial statements).
The industry is subject to extensive state and federal regulations, as well as diverse licensure requirements varying by state. Changes in regulations could affect the profitability of our contracts or our ability to retain clients or to gain new customers.
Historically and during fiscal 2005, we have experienced consistently low utilization during our first fiscal quarter, which comprises the months of June, July, and August, and increased utilization during our fourth fiscal quarter, which comprises the months of March, April and May. Such variations in utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the first fiscal quarter and a negative impact on our gross margins and operating profits during the fourth quarter.
to prevent the creation and issuance of capital stock with rights equal to or superior to those of the Series A Shares.
We may be unable to sell the eye care memberships in which case our financial results will suffer to the extent we have revenue from such memberships that is less than the cost we paid to acquire them.
Consolidated Statements of Operations, Years Ended May 31, 2005, 2004 and 2003
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comprehensive Care Corporation and subsidiaries as of May 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for the fiscal years then ended, in conformity with U.S. generally accepted accounting principles.
We have audited the accompanying consolidated statements of operations, stockholders’ deficit and cash flows of Comprehensive Care Corporation and subsidiaries for the year ended May 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Comprehensive Care Corporation and subsidiaries for the year ended May 31, 2003, in conformity with U.S. generally accepted accounting principles.
The Company’s managed care activities are performed under the terms of agreements with health maintenance organizations (“HMOs”), preferred provider organizations, and other health plans or payers to provide contracted behavioral healthcare services to subscribing participants. Revenue under a substantial portion of these agreements is earned monthly based on the number of qualified participants regardless of services actually provided (generally referred to as capitation arrangements). The information regarding qualified participants is supplied by the Company’s clients and the Company relies extensively on the accuracy of the client remittance and other reported information to determine the amount of revenue to be recognized. Such agreements accounted for 90.2%, or $22.1 million, of revenue for the fiscal year ended May 31, 2005, 85.5%, or $23.6 million, of revenue for the fiscal year ended May 31, 2004, and 87.4%, or $28.2 million, of revenue for the fiscal year ended May 31, 2003. The remaining balance of the Company’s revenues is earned on a fee-for-service basis and is recognized as services are rendered.
Cash and cash equivalents consist entirely of funds on deposit in savings and checking accounts at major financial institutions.
In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board No. 30, “Reporting Results of
Operations.” The Company adopted the provisions of SFAS 145 effective for its fiscal year ended May 31, 2003 and has reflected gains on settlement of debt as other income instead of as extraordinary items.
The accrued reinsurance claims payable liability represents amounts payable to providers under a state reinsurance program associated with the Company’s contract to provide behavioral healthcare services to members of a Connecticut HMO (see Note 4 (2) - Major Contracts/Customers).
The Company issues stock options to its employees and non-employee directors (“optionees”) allowing optionees to purchase the Company’s common stock pursuant to shareholder approved stock option plans. As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 148, “ Accounting for Stock-Based Compensation-Transitional Disclosure,” the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options (“APB 25”). Under APB 25, in the event that the exercise price of the Company’s employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recognized. No stock-based employee compensation cost is reflected in net (loss) income, as all options granted under the Company’s employee stock options plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net (loss) income and (loss) income per share if the Company had applied the fair value recognition provisions of SFAS No. 148 to stock-based employee compensation.
On December 16, 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which requires companies to record compensation expense for stock options issued to employees at an amount determined by the fair value of the options. SFAS No. 123R was initially effective for the Company in its second quarter of fiscal 2006. However, due to an SEC extension of the compliance date in April 2005, SFAS No. 123R will now be effective for the Company beginning June 1, 2006. As such, effective with the Company’s first fiscal quarter of fiscal 2007, SFAS No. 123R will eliminate the Company’s ability to account for stock options using the method permitted under APB 25 and instead require the Company to recognize compensation expense should the Company issue stock options to its employees or non-employee directors. The Company is in the process of evaluating the impact adoption of SFAS No. 123R will have on the consolidated financial statements.
For cash and cash equivalents, marketable securities, and restricted cash, the carrying amount approximates fair value. For long-term debt, the fair value is based on the estimated market price for the convertible debentures on the last day of the fiscal year.
During the fiscal year ended May 31, 2005, net cash used in continuing and discontinued operations amounted to $106,000 and $151,000, respectively. In addition, $45,000 was used to acquire property and equipment and $788,000 was provided by financing activities, primarily from the issuance of common stock in a private placement transaction, which generated approximately $776,000 in aggregate net proceeds during February and March 2005.
During the fiscal year ended May 31, 2005, the Company had an operating profit of $5,000 and a net loss of $268,000. As of May 31, 2005, the Company had a working capital deficiency of $3.6 million and a stockholders’ deficit of $4.1 million. Effective June 14, 2005, the Company completed a sale of 14,400 shares of its Series A Convertible Preferred Stock, $50.00 par value (“Series A Shares”), to one investor for approximately $3.4 million in net cash proceeds to the Company (see Note 17(1) - “Subsequent Events”). Additionally, on March 24, 2005, the Company completed the sale of 50,000 shares of its common stock, $.01 par value, for $52,500 in net cash proceeds, to conclude the Company’s private placement, which generated approximately $776,000 in aggregate net proceeds during February and March 2005. As a result, management believes the Company has sufficient working capital to sustain current operations and meet the Company’s current obligations during fiscal 2006 without the need to raise additional equity or debt financing. In addition, management believes the Company has sufficient working capital to meet the Company’s capital needs during fiscal 2006, which will include additional installments toward the $170,000 that remains to be paid in connection with a new information system. This system has expected costs of approximately $370,000. Once implemented, this system will enable the Company to continue to meet HIPAA requirements, streamline our entire clinical and claims functions, and offer service improvements to our participating providers.
(2) The Company has one contract to provide behavioral healthcare services to Connecticut members under contract with one HMO. This agreement represented approximately 21.6%, or $5.3 million, 13.7%, or $3.8 million, and 9.0%, or $2.9 million of the Company’s operating revenue for the fiscal years ended May 31, 2005, 2004, and 2003, respectively. Additionally, this contract provides that the Company, through its contract with this HMO, receives additional funds directly from a state reinsurance program for the purpose of paying providers. During the fiscal years ended May 31, 2005, 2004, and 2003, the Company filed reinsurance claims totaling approximately $2.7 million, $2.1 million, and $3.0 million, respectively. Such claims represent cost reimbursements and, as such, are not included in the reported operating revenues and are accounted for as reductions of healthcare operating expenses. As of May 31, 2005 and 2004, the Company has reported $3.2 million as accrued reinsurance claims payable, with $0.4 and $0.6 million reported as accounts receivable-managed care reinsurance contracts. In the event that the Company does not collect the amounts receivable related to reinsurance amounts, the Company could remain liable for the costs of the specific services provided to members that qualify for such reimbursements. The difference between the reinsurance receivable amount and the reinsurance payable amount is related to timing differences between the authorization date, the date the money is received by the Company, and the date the money is paid to the provider. In certain cases, providers have submitted claims for authorized services having incorrect service codes or otherwise incorrect information that has caused payment to be denied by the Company. In such cases, there are contractual and statutory provisions that allow the provider to appeal a denied claim. If no appeal is received by the Company within the prescribed amount of time, the Company may be required to remit the reinsurance funds back to the appropriate party. For non-reinsurance claims incurred but not reported under this contract, the Company estimates its claims payable using a similar method as that used for other existing contracts. This HMO has been a customer since March 2001. The original contract term ended December 31, 2002 and, in accordance with its terms, has automatically renewed for three consecutive one-year periods, with the current term ending December 31, 2005. In October 2004, the Company submitted a bid to the State of Connecticut in response to its request for proposal for administrative services only (“ASO”) in connection with a contract that is expected to begin by October 1, 2005. On
(4) During fiscal 2003, the Company had three contracts with one HMO to provide behavioral healthcare services to Florida members. The combined revenue from these contracts accounted for 11.7%, or $3.8 million, of the Company’s operating revenues during such fiscal year. These contracts covering Florida members terminated effective January 1, 2003.
Accounts Receivable of $118,000 at May 31, 2005 and $201,000 at May 31, 2004 consists of trade receivables resulting from services rendered under managed care capitation contracts. Accounts Receivable - Managed Care Reinsurance Contract of $372,000 at May 31, 2005 and $553,000 at May 31, 2004 consist of receivables resulting from services rendered under the Connecticut contract (see Note 4(2) - “Major Contracts/Customers”). The following table summarizes changes in the Company’s allowance for doubtful accounts for the fiscal years ended May 31, 2005, 2004 and 2003:
* Excludes $9,000 in 2005, $17,000 in 2004, and $24,000 in 2003 of recoveries from accounts previously written off.
Discontinued hospital operations for the year ended May 31, 2003 consist of a $470,000 gain on settlement of a liability and income of $163,000 relating to hospital cost report settlements.
At May 31, 2005, the debentures are convertible into 9,044 shares of common stock at a conversion price of $248.12 per share. Following the private transaction completed in June 2005 (see Note 17(1) - “Subsequent Events”), the debentures are convertible into 12,377 shares of common stock at a conversion price of $181.30.
In Fiscal 2003 the Company settled a tax dispute with the IRS regarding the disallowance of $12.4 million in previously received tax refunds specific to the Company’s Fiscal 1985 and 1986 income tax returns. In accordance with the settlement the Company paid the IRS $2.2 million and relinquished rights to Federal net operating loss carryforwards of approximately $42.0 million resulting from losses incurred in fiscal years ended May 31, 1995 through May 31, 2001, and a minimum tax credit carryover of approximately $0.7 million.
As of May 31, 2005, there are 18,740 remaining shares authorized and available to issue, and no outstanding shares of Preferred Stock (see Note 17(1) - “Subsequent Events”). The Company is authorized to issue shares of Preferred Stock, $50.00 par value, in one or more series, each series to have such designation and number of shares as the Board of Directors may fix prior to the issuance of any shares of such series. Each series may have such preferences and relative participation, optional or special rights with such qualifications, limitations or restrictions stated in the resolution or resolutions providing for the issuance of such series as may be adopted from time to time by the Board of Directors prior to the issuance of any such series.
(b) Includes 100,000 warrants to purchase common stock of the Company issued in prior fiscal years to three consultants for their services to the Company, which included public and investor relations and web site development services. in addition, 306,000 warrants to purchase common stock of the Company were issued to two consultants and two employees as compensation for introducing strategic business partners to the Company. All such warrants were issued in lieu of cash compensation and have five-year terms with exercise prices ranging from $1.09 to $5.00.
The Company currently has two active incentive plans, the 1995 Incentive Plan and the 2002 Incentive Plan (“Plans”), that provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, and restricted stock grants to eligible employees and consultants to the Company. Grants issued under the Plans may qualify as Incentive Stock Options (“ISOs”) under Section 422A of the Internal Revenue Code. Options for ISOs may be granted for terms of up to ten years and are generally exercisable in cumulative increments of 50% each six months. Options for Non-statutory Stock Options (“NSOs”) may be granted for terms of up to 13 years. The exercise price for ISOs must equal or exceed the fair market value of the shares on the date of grant, and 65% in the case of other options. The Plans also provide for the full vesting of all outstanding options under certain change of control events. The maximum number of shares authorized for issuance is 1,000,000 under the 2002 Incentive Plan and 1,000,000 under the 1995 Incentive Plan. As of May 31, 2005 under the 2002 Incentive Plan, there were 511,000 shares available for option grants and there were 475,000 options outstanding, of which 445,500 options were exercisable. Additionally, as of May 31, 2005 under the 1995 Incentive Plan, there were 500 shares available for option grants and there were 748,125 options outstanding, of which 744,875 options were exercisable.
The Company also has a non-qualified stock option plan for its outside directors (the “Directors’ Plan”). Each non-qualified stock option is exercisable at a price equal to the common stock’s fair market value as of the date of grant. Initial grants vest annually in 25% increments beginning on the first anniversary of the date of grant, provided the individual is still a director on those dates. Annual grants will become 100% vested as of the first annual meeting of our stockholders following the date of grant, provided the individual is still a director as of that date. Such annual grants include options granted to non-employee directors for service on the various committees of the Board of Directors. An optionee who ceases to be a director shall forfeit that portion of the option attributable to such vesting dates on or after the date he or she ceases to be a director. The maximum number of shares authorized for issuance under the Directors’ Plan is 250,000. As of May 31, 2005 under the Directors’ Plan, there were 65,003 shares available for option grants and there were 120,831 options outstanding, of which 79,165 options were exercisable.
A summary of options outstanding and exercisable as of May 31, 2005 follows:
Future minimum payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining terms of one year or more, consist of the following at May 31, 2005:
The Company is subject to the requirements of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). The purpose of the HIPAA provisions is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and, also, to protect the security and privacy of protected health information. Entities subject to HIPAA include some healthcare providers and all healthcare plans. To meet the specific requirements of HIPAA, the Company determined it needed to make a significant investment in its current information system or in a new information system that would better meet the Company’s future needs. As a result, the Company has entered into a Software License Maintenance and Services Agreement with Qualifacts Systems, Inc. (“Qualifacts”), a vendor that has provided the Company with an immediate, temporary solution to meet HIPAA compliance rules specific to the Electronic Health Care Transactions and Code Sets Standards Model Compliance Plan with the Centers for Medicare and Medicaid Services and, additionally, to design a new, customized management information system that will enable the Company to continue to meet HIPAA requirements in the future. The Company expects to incur approximately $370,000 of costs to customize the Qualifacts system and activate the licenses needed for Qualifacts and other, related third-party software.
Includes a loss on impairment of approximately $118,000 with respect to the Company’s marketable securities.
On August 3, 2005, the Company’s principle operating subsidiary, Comprehensive Behavioral Care, Inc. (“CBC”), entered into a marketing agreement (“Agreement”) with Health Alliance Network, Inc. (“HAN”) whereas CBC has agreed to appoint HAN as its primary representative and marketing agent for commercial business. Pursuant to the Agreement, HAN will receive a $15,000 monthly fee for its marketing services to CBC plus reimbursement of related travel expenses. HAN will receive three percent of the gross revenues received by CBC from commercial services agreements resulting from introductions made by HAN or its affiliates and approved by CBC. HAN will receive an additional payment with respect to those commercial services agreements exceeding certain pricing targets equal to fifty percent of the gross revenues exceeding such pricing target. Further, CBC will pay HAN a quarterly bonus of $9,000 or $21,000 if the Company achieves certain quarterly profit targets. The maximum payments to HAN, inclusive of all fees and bonuses, shall not exceed $1.0 million in any fiscal year. The Agreement is effective August 1, 2005 for an initial term of twenty-four (24) months and is automatically renewable for additional periods of twelve months each unless terminated by either party. Two of the shareholders of HAN are also part-time senior marketing employees of CBC and, additionally, they are each members of the investment group that recently acquired 14,400 shares of the Company’s Series A Shares (see Note 17(1) above).