We do not own any real property. We lease our corporate office and regional offices. The following table sets forth certain information regarding our leased properties as of December 31, 2007. The Texas lease is a full service lease under which we bear only those costs of operations and property taxes exceeding the base-year expenses. The Florida lease is a sublease for which the monthly base rent covers all services and property taxes. We believe our current office space is suitable and adequate to meet our existing needs and that additional facilities will be available for lease to meet our future needs.
Prior to fiscal 1993, we 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.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2007 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2006.
Claims expense on capitated contracts increased approximately $17.3 million or 133.1% for the year ended December 31, 2007 as compared to the year ended December 31, 2006. The increase is due to the addition of the capitated revenues mentioned above. Claims expense as a percentage of capitated revenues increased from 71.2% for the year ended December 31, 2006 to 83.5% for the year ended December 31, 2007 due to a high medical loss ratio experienced with our major Indiana client. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, increased approximately $2.6 million, or 67.9%, due to staff increases in
response to the addition of revenues in Indiana, Pennsylvania and Michigan. As a percentage of total revenue, other healthcare operating expenses decreased from 20.3% for the period ended December 31, 2006 to 17.3% for the period ended December 31, 2007.
General and administrative expenses decreased by $192,000, or 9.8%, for the seven months ended December 31, 2006 as compared to the seven months ended December 31, 2005. This decrease is primarily attributable to indirect costs of the June 2005 sale of Series A Preferred Stock, increased costs for marketing consultants engaged to obtain additional commercial business, and legal expenses associated with our 2005 Annual Meeting and changes to the corporate charter in the period ended December 31, 2005. General and administrative expense as a percentage of operating revenue increased from 12.8% for the period ended December 31, 2005 to 17.1% for the period ended December 31, 2006.
Claims expense on capitated contracts decreased approximately $129,000 or 0.8% for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005. The reduction is due to decreased utilization of covered services. Claims expense as a percentage of capitated revenues decreased from 74.2% for the fiscal year ended May 31, 2005 to 70.5% for the fiscal year ended May 31, 2006. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, decreased approximately $607,000, or 12.3% for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005, due to staff reductions in response to the loss of revenues in Michigan, Connecticut and Texas. As a percentage of total revenue, other healthcare operating expenses decreased from 20.1% for fiscal 2005 to 18.0% for fiscal 2006.
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 $5.5 million accrued claims payable amount reported as of December 31, 2007.
The following is a schedule at December 31, 2007 of our long-term contractual commitments, future minimum lease payments under non-cancelable operating lease arrangements, and other long-term obligations:
We believe our accounting policies specific to our revenue recognition, accrued claims payable and claims expense, premium deficiencies, goodwill, and stock compensation expense involve our most significant judgments and estimates that are material to our consolidated financial statements (see Note 2 - “Summary of Significant Accounting Policies” to the audited, consolidated financial statements).
authorized healthcare service data, calculated completion factors and other data available at and subsequent to the balance sheet dates. The best estimates at December 31, 2007, December 31, 2006 and May 31, 2006 were $5.5 million, $2.7 million and $2.8 million respectively. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three years.
The following table provides a reconciliation of the beginning and ending balance of accrued claims payable for the year ended December 31, 2007, the seven months ended December 31, 2006 and the fiscal year ended May 31, 2006:
A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at December 31, 2007 could increase our claims expense by approximately $193,000 as illustrated in the table below:
On a quarterly basis, we perform a review of our portfolio of contracts for the purpose of identifying loss contracts (as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide - Health Care Organizations) and developing a contract loss reserve, if applicable, for succeeding periods. During the year ended December 31, 2007, we identified two contracts that were not meeting their financial goals. We successfully obtained a rate increase from one client effective January 1, 2008. We are negotiating and believe we will receive a rate increase from the other client effective January 1, 2008, provided we comply with monthly performance measures we believe we will meet. The rate increase would amount to approximately $2 million per annum. At December 31, 2007, we believe no contract loss reserve for future periods is necessary for these contracts.
We evaluate at least annually the amount of our recorded goodwill by performing an impairment test that compares the carrying amount to an estimated fair value. In estimating the fair value, management makes its best assumptions regarding future cash flows and a discount rate to be applied to the cash flows to yield a present, fair value of equity. As a result of such tests, management believes there is no material risk of loss from impairment of goodwill. However, actual results may differ significantly from management’s assumptions, resulting in potentially adverse impact to our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 requires that non-controlling (or minority)
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business, financial condition or operating results.
Consolidated Statements of Operations, Year Ended December 31, 2007, Seven Months Ended December 31, 2006, and Fiscal Years Ended May 31, 2006 and 2005
Consolidated Statements of Stockholders’ Deficit, Year Ended December 31, 2007, Seven Months Ended December 31, 2006, and Fiscal Years Ended May 31, 2006 and 2005
Consolidated Statements of Cash Flows, Year Ended December 31, 2007, Seven Months Ended December 31, 2006, and Fiscal Years Ended May 31, 2006 and 2005
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comprehensive Care Corporation and Subsidiaries as of December 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for the year ended December 31, 2007, the seven months ended December 31, 2006, and the years ended May 31, 2006 and 2005, in conformity with U.S. generally accepted accounting principles.
Comprehensive Care Corporation (the “Company” or “CompCare”) is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the “Company” include Comprehensive Behavioral Care, Inc. (“CBC”) and subsidiary corporations. The Company, primarily through its wholly owned subsidiary, CBC, provides managed care services in the behavioral health and psychiatric fields, which is its only operating segment. We manage the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, Medicaid and CHIP members on behalf of employers, health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. We also provide prior and concurrent authorization for physician-prescribed psychotropic medications for a major Medicaid HMO in Indiana and Michigan. 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. Our services are provided primarily by unrelated vendors on a subcontract basis.
Our Board of Directors approved on May 21, 2007 a change in the Company’s fiscal year end from May 31 to December 31, effective December 31, 2006. The purpose of the change is to align the Company’s fiscal year end with that of Hythiam, which purchased a majority controlling interest in the Company through its purchase of Woodcliff in January 2007. In addition, a calendar year end coincides with that of our major Indiana client that provided approximately 40.2% of our revenues during 2007. The seven months ended December 31, 2006 was our transition period for financial reporting purposes.
The consolidated financial statements include the accounts of Comprehensive Care Corporation and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current year presentation.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
At December 31, 2007, cash and cash equivalents consisted entirely of funds on deposit in savings and checking accounts at major financial institutions. At December 31, 2006, cash in excess of daily requirements was invested in short-term, overnight investments. Such investments totaled $1.7 million and are included in cash and cash equivalents in the accompanying consolidated balance sheets.
Property and equipment are stated at cost. Expenditures for renewals and improvements are capitalized to the property accounts. Replacements and maintenance and repairs that do not improve or extend the life of the respective assets are expensed as incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives ranging from 2 to 12 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Amortization of assets acquired under capital leases is included in depreciation expense. Depreciation and amortization expense was $154,000 for the year ended December 31, 2007 and $62,000 for the seven months ended December 31, 2006. For the fiscal years ended May 31, 2006 and 2005, depreciation and amortization expense was $87,000 and $96,000, respectively.
Goodwill represents the cost in excess of the fair value of net assets acquired in purchase transactions. Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but is periodically evaluated for impairment to carrying amount, with decreases in carrying amount recognized immediately. We review goodwill for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The test for impairment of goodwill requires us to make estimates about fair value, which are based on projected future cash flows. We performed an impairment test as of December 31, 2007 and 2006, and determined that no impairment of goodwill had occurred as of such dates.
The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims incurred but not yet reported (“IBNR”) to us. The unpaid claims liability is estimated using an actuarial paid completion factor
The accrued reinsurance claims payable liability represents amounts payable to providers under a state reinsurance program associated with our contract to provide behavioral healthcare services to members of a Connecticut HMO. Our contract with the HMO ended December 31, 2005.
In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes. FIN 48 requires that companies recognize in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007, the beginning of our 2007 fiscal year, with no impact on our consolidated financial statements.
We issue stock options to our employees and non-employee directors (“optionees”) allowing optionees to purchase our common stock pursuant to shareholder approved stock option plans. Prior to June 1, 2006, as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation-Transitional Disclosure,” we elected to follow Accounting Principles Board Opinion No. 25, (“APB 25”) “Accounting for Stock Issued to Employees” and related interpretations in accounting for our employee stock options. Under APB 25, in the event that the exercise price of our employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recognized. Because all options granted under our employee stock option plans had an exercise price equal to the market value of the underlying common stock on the date of grant, no stock-based employee compensation cost was reflected in net loss.
The weighted average fair value of options granted in fiscal year 2006 and 2005 was $1.42 and $0.93, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.
In calculating basic loss per share, net loss is divided by the weighted average number of common shares outstanding for the period. For the periods presented, diluted loss per share is equivalent to basic loss per share. The following table sets forth the computation of basic and diluted loss per share in accordance with Statement No. 128, “Earnings Per Share”:
Capitated revenues include contracts under which we assume the financial risk for the costs of member behavioral healthcare services in exchange for a fixed, per member per month fee. For non-capitated contracts, we may manage behavioral healthcare programs or perform various managed care functions, such as clinical care management, provider network development, and claims processing without assuming financial risk for member behavioral healthcare costs.
(1) During our fiscal year ended May 31, 2006, we began providing behavioral health services to the members of a Medicare Advantage HMO in the states of Maryland, Pennsylvania, and Texas. Revenues under the contracts accounted for $5.5 million, or 14.7%, and $2.0 million, or 19.6% of our revenues for the year ended December 31, 2007 and the seven
In January 2008, this client issued a RFP for management of behavioral healthcare services for its Pennsylvania, Maryland, and Texas regions. We submitted a bid to retain our current business with this client as well as attempt to regain the Texas membership. Our client intends to select a finalist in March 2008 with an effective date of July 1, 2008 for a new agreement to serve members in these states. We do not expect to be selected as a finalist and accordingly the majority of the revenues under this contract are expected to end during the third quarter of 2008.
(2) On January 1, 2007, we began providing behavioral healthcare services to approximately 250,000 Medicaid recipients in Indiana. The contract generated $15.0 million, or 40.2% of our revenues for the year ended December 31, 2007, and is for an initial term of two years with subsequent extensions by mutual written agreement. Termination of the contract by either party may only be effected by reason of failure to perform that has not been corrected within agreed upon timeframes.
(3) We currently furnish behavioral healthcare services to approximately 244,000 members of a health plan providing Medicaid, Medicare, and CHIP benefits in Michigan, Texas and California. Services are provided on a fee-for-service and ASO basis. The contracts accounted for $4.3 million, or 11.6%, and $1.5 million, or 14.1%, of our revenues for the year ended December 31, 2007 and the seven months ended December 31, 2006, respectively. The health plan has been a customer since June of 2002. The initial contract was for a one-year period and has been automatically renewed on an annual basis. Termination by either party may occur with 90 days written notice to the other party.
Recoveries are reflected on our consolidated statements of operations as a reduction to the provision for doubtful accounts.
On January 12, 2007, the sale of Woodcliff’s majority interest in the Company to Hythiam constituted another “change of ownership” under IRS Section 382 rules. In the event that the Company has two or more ownership changes, Section 1.382-5(d) also describes a potential impact on the limitation for any losses attributable to the period preceding the earlier ownership change. We have determined that the latest change of ownership does not change the limitation of approximately $400,000 per year for net operating losses incurred prior to June 14, 2005, the date of the first change in control. Furthermore, our ability to use net operating losses incurred between June 15, 2005 and January 12, 2007 is limited to approximately $490,000 per year. Net operating losses for periods prior to June 15, 2005 and for the subsequent period of June 15, 2005 to January 12, 2007 may be deducted simultaneously subject to the applicable limitations. Any unused portion of such limitations can be carried forward to the following year. We may be subject to further limitation in the event that we issue or agree to issue substantial amounts of additional equity.
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) which clarifies the accounting for uncertainty in income taxes. FIN 48 requires that companies recognize in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007 with no impact on our consolidated financial statements. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Tax years that remain subject to examinations by tax authorities are 2005, 2004, and 2003.
After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2007 and 2006 was necessary to fully offset the deferred tax assets based on the likelihood of future realization.
We offer a 401(k) Plan (the “Plan”), which is a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of our eligible employees. All full-time and part-time employees who have attained the age of 21 and have completed one thousand hours of service are eligible to participate in the Plan. Each participant may contribute from 2% to 50% of his or her compensation to the Plan up to the annual maximum allowed amount, which was $15,500 during Calendar 2007, subject to limitations on the highly compensated employees to ensure the Plan is non-discriminatory. Company contributions are discretionary and are determined by the Company’s management. Our employer matching contributions were $8,906 to the Plan in 2007. We did not make a matching contribution during the seven months ended December 31, 2006 or during the 2006 and 2005 fiscal years.
We are 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.
We also have a non-qualified stock option plan for our non-employee directors. Each non-qualified stock option is exercisable at a price equal to the average of the closing bid and asked prices of the common stock in the over-the-counter market for the most recent preceding day there was a sale of the stock prior to the grant date. Grants of options vest in accordance with vesting schedules established by our Board of Director’s Compensation and Stock Option Committee. Upon joining the Board, directors receive an initial grant of 25,000 options. Annually, directors are granted 15,000 options on the date of the Company’s annual meeting. As of December 31, 2007, under the directors’ plan, there were 776,668 shares available for option grants and 125,000 options outstanding, of which none were exercisable.
A summary of activity for the year ended December 31, 2007 is as follows:
The following table summarizes information about options granted, exercised, and vested for the years ended December 31, 2007 and 2006 (unaudited), the seven months ended December 31, 2006 and for the fiscal years ended May 31, 2006 and 2005.
We periodically issue warrants to purchase common stock as compensation for the services of consultants and marketing employees. Of the 406,000 warrants outstanding at December 31, 2007, 306,000 were issued to two consultants and two employees as compensation for introducing strategic business partners to the Company. Such partners were responsible for the infusion of approximately $776,000 in cash to the Company in February and March 2005 in a private placement of our common stock. All such warrants have five-year terms. Valuation using the Black-Scholes pricing model for the warrants issued in February and March 2005 was based on the following information:
No warrants were issued during the year ended December 31, 2007, the seven months ended December 31, 2006, or the fiscal year ended May 31, 2006.
(1) We provided behavioral healthcare services to the members of a Connecticut HMO from 2001 to 2005 under a contract that provided that we would also receive funds directly from a state reinsurance program for the purpose of paying providers. At December 31, 2007, $2.5 million of reinsurance claims payable remains and is attributable to providers having submitted claims for authorized services having incorrect service codes or otherwise incorrect information that has caused payment to be denied by us. In such cases, there are 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, it is probable that we will be required to remit the reinsurance funds back to the appropriate party.
(6) Relating to our major Indiana contract, we have become aware that the state of Indiana is considering requiring payment of a claims billing code that we had previously been instructed to deny. If the state of Indiana implements the payment requirement, the claims represented by these billing codes would be paid retroactively to January 1, 2007. Although we do not believe we have a contractual obligation to pay for this code, it is possible that we may be responsible for these payments, which in our estimation could approximate $350,000. We believe that the state of Indiana will make a final determination by mid April 2008.
In August 2005, our principal operating subsidiary, CBC, entered into a marketing agreement with Health Alliance Network, Inc. (“HAN”) whereby CBC appointed HAN as its primary representative and marketing agent for commercial business. Two shareholders of HAN held membership interests in Woodcliff, the owner of a controlling interest us. On January 12, 2007, the members of Woodcliff sold 100% of their outstanding membership interests in Woodcliff to Hythiam. For the years ended December 31, 2007 and 2006 (unaudited), CBC paid HAN $60,000 and $85,500 (unaudited), respectively, under this agreement.
(c) Includes a $150,000 recovery of an account written off in 1999.
(d) Includes recognition of $250,000 of insurance policy proceeds due the Company.
(e) Includes $69,000 of expenses attributable to the sale of the Series A Preferred Stock.
(g) Includes a $62,500 asset write down of eye care memberships.