The following table sets forth our operating income (loss) for the fiscal years ended May 31, 2006, 2005 and 2004:
General and administrative expenses increased by $238,000, or 7.7%, for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005. This increase 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 the Company’s 2005 Annual Meeting and changes to the corporate charter. General and administrative expense as a percentage of operating revenue increased from 12.6% for the fiscal year ended May 31, 2005 to 13.8% for the fiscal year ended May 31, 2006.
Excludes 7 1/2% in interest payable semi-annually in April and October (see Note 13 - “Long-term Debt” to the audited, consolidated financial statements).
We provide managed behavioral healthcare and substance abuse services to recipients, primarily through subcontracts with HMOs. Revenue under the vast majority of these agreements is earned and recognized monthly based on the number of covered members as reported to us by our clients regardless of whether services actually provided are lesser or greater than anticipated when we entered into such contracts (generally referred to as capitation arrangements). The information regarding the number of covered members is supplied by the Company’s clients and the Company relies extensively on the accuracy of this information when calculating the amount of revenue to be recognized. Consequently, the vast majority of the Company’s revenue is determined by the monthly receipt of covered member information and the associated payment from the client, thereby removing uncertainty and precluding the Company from needing to make assumptions to estimate monthly revenue amounts.
We may experience adjustments to our revenues to reflect changes in the number and eligibility status of members subsequent to when revenue is recognized. Subsequent adjustments to the Company’s revenue have not been material.
Accrued claims payable consists primarily of reserves established for reported claims and IBNR claims, which are unpaid through the respective balance sheet dates. Our policy is to record management’s best estimate of IBNR. The IBNR liability is estimated monthly using an actuarial paid completion factor methodology and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability as more information becomes available. In deriving a range of estimates, management considers qualitative factors, authorization information, and an actuarial model that incorporates past claims payment experience, enrollment data and key assumptions such as trends in healthcare costs and seasonality. The accrued claims payable ranges were between $2.6 and $2.8 million at May 31, 2006, between $3.5 and $3.8 million at May 31, 2005, and between $3.6 and $3.8 million at May 31, 2004. To determine the best estimates, management reviews utilization statistics, authorized healthcare service data, calculated completion factors and other data available at and subsequent to the balance sheet dates. The best estimates for the fiscal years ended May 31, 2006, 2005 and 2004 were $2.8 million, $3.7 million and $3.6 million. The Company has used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three fiscal years.
At any time prior to the end of a contract or contract renewal, if a capitated contract is not meeting its financial goals, the Company generally has the ability to cancel the contract with 60 to 90 days’ written notice. Prior to cancellation, the Company will usually submit a request for a rate increase accompanied by supporting utilization data. Although the Company’s clients have historically been generally receptive to such requests, no assurance can be given that such requests will be fulfilled in the future in the Company’s favor. If a rate increase is not granted, the Company has the ability to terminate the contract and limit its risk to a short-term period.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, “Share-Based Payment,” which requires companies to record compensation expense for stock options issued to employees or non-employee directors at an amount determined by the fair value of the options. Beginning with its 2007 fiscal year, the Company will recognize compensation expense ratably over the remaining vesting period for any outstanding and unvested options existing at June 1, 2006, and over the full vesting period for options issued thereafter. The Company is in the process of evaluating the impact adoption of SFAS No. 123R will have on the consolidated financial statements.
behavioral healthcare contracts. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in other Company reports, SEC filings, statements, and presentations. These risks and uncertainties include, but are not limited to, changes in local, regional, and national economic and political conditions, the effect of governmental regulation, competitive market conditions, varying trends in member utilization, our ability to manage healthcare operating expenses, the profitability of our capitated contracts, cost of care, seasonality, the risk that any definitive agreements or additional business will result from letters of intent entered into by the Company, and other risks detailed from time to time in the Company’s SEC reports.
Consolidated Statements of Stockholders’ Deficit, Years Ended May 31, 2006, 2005 and 2004
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, 2006 and 2005, and the consolidated results of their operations and their cash flows for the fiscal years ended May 31, 2006, 2005 and 2004, in conformity with U.S. generally accepted accounting principles.
costs. The projected future healthcare and maintenance costs are estimated based on historical trends and the Company’s estimate of future cost increases.
On a quarterly basis, the Company performs a review of its 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 twelve months ended May 31, 2006, the Company did not have any contracts where it was probable that a loss had been incurred and for which a loss could reasonably be estimated.
At May 31, 2006, restricted cash consists of a $514,000 deposit required under the terms of a contract with one existing client for the purpose of paying claims within the next twelve months and a $75,000 deposit required in accordance with the Company’s Tampa office lease, which expired May 31, 2006. Approximately $463,000 of the claims payment deposit was released to the Company and disbursed subsequent to May 31, 2006, and the lease deposit was returned to the Company in its entirety in June 2006. At May 31, 2005, non-current restricted cash consisted solely of the Tampa office lease deposit.
The Company’s marketable securities, which is comprised of one “available for sale” security received in lieu of cash compensation for consulting services provided by the Company to one party, are reflected in the consolidated balance sheets at fair market value, with unrealized gains or losses, if any, included in other comprehensive income within stockholders’ deficit. Realized gains or losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are reported in other income (expense). At May 31, 2006 and 2005, management determined that the loss on investment in marketable securities is other than temporary in nature and as such, the Company recognized impairment losses of approximately $17,000 and $118,000, respectively. Factors considered in determining whether the loss was other than temporary included the financial condition of the issuer, the fact that this investment has been in a continuous unrealized loss position since November 2004 when the Company acquired this security, and the Company’s intent to hold this investment for a period of time sufficient to allow for any anticipated recovery. At May 31, 2006 and 2005, the carrying values of approximately $1,000 and $11,000, respectively, are equal to the fair values of this security. As such, the Company has no unrealized gains or losses at May 31, 2006.
recognized immediately. The Company reviews goodwill for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest an impairment exists. The test for impairment of goodwill requires the Company to make estimates about fair value, which are based on projected future cash flows. The Company performed an annual impairment test as of May 31, 2006 and 2005 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 the Company. The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. However, actual claims incurred could differ from the estimated accrued claims payable amount reported as of May 31, 2006 and 2005. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate.
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, “Share-Based Payment,” which requires companies to record compensation expense for stock options issued to employees or non-employee directors at an amount determined by the fair value of the options. Beginning with its 2007 fiscal year, the Company will recognize compensation expense ratably over the remaining vesting period for any outstanding and unvested options existing at June 1, 2006, and over the full vesting period for options issued thereafter.
For cash and cash equivalents, marketable securities, restricted cash, and note receivable, 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, 2006, $1.6 million in cash was used in continuing operations, primarily in the payment of accrued claims related to the Company’s contract with a Connecticut HMO that ended December 31, 2005. Approximately $55,000 was utilized in discontinued operations. Cash used in investing activities is comprised of $25,000 in additions to property and equipment. Cash provided by financing activities consists primarily of $3.4 million in net proceeds from the June 2005 sale by the Company of 14,400 shares of its Series A Convertible Preferred Stock, $50.00 par value, to one investor. As a result management believes the Company has sufficient working capital to sustain current operations and meet the Company’s current obligations during fiscal 2007.
The Company’s revenue can be segregated into the following significant categories: (amounts in thousands)
Capitated revenues include contracts under which the Company assumes 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, the Company 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.
(2) In January 2006 the Company received written notice from a Texas HMO client that the HMO had determined to establish its own behavioral health unit and therefore was canceling services effective May 31, 2006. The Company had served commercial, Medicaid, and Children’s Health Insurance Program (“CHIP”) members under this contract, which accounted for approximately 22.7%, or $5.4 million, 21.5%, or $5.2 million, and 14.5% or $4.0 million of the Company’s operating revenues during the fiscal years ended May 31, 2006, 2005, and 2004, respectively. The HMO had been a client of the Company since November 1998.
Accounts Receivable of $153,000 at May 31, 2006 and $118,000 at May 31, 2005 consists of trade receivables resulting from services rendered under managed care capitation contracts. Accounts Receivable - Managed Care Reinsurance Contract of $0 at May 31, 2006 and $372,000 at May 31, 2005 consists of receivables resulting from services rendered under the Connecticut contract (see Note 5(1) - “Major Contracts/Customers”). The following table summarizes changes in the Company’s allowance for doubtful accounts for the fiscal years ended May 31, 2006, 2005 and 2004:
Excludes $89,000 in 2006, $9,000 in 2005, and $17,000 in 2004 of recoveries from accounts previously written off.
The Company uses capital leases to finance the acquisition of certain computer and telephone equipment. Terms of the leases range from three to five years.
At May 31, 2006, the debentures are convertible into 12,377 shares of common stock at a conversion price of $181.30 per share.
Note 16 - Preferred Stock, Common Stock, and Stock Option Plans
In June 2005, pursuant to a Securities Purchase Agreement, the Company completed a private transaction for the sale of 14,400 shares of its Series A Convertible Preferred Stock, $50.00 par value, to Woodcliff for an aggregate of $3,600,000 in gross proceeds to the Company. The Company realized net cash proceeds of approximately $3.4 million thereby reducing its working capital deficiency and stockholders’ deficit each by approximately $3.4 million as a result of this transaction. The shares issued in connection with this private placement have not been registered and may be resold pursuant to Rule 144 under the general rules and regulations of the Securities Act of 1933 as amended assuming that all of the conditions and provisions of the rule are complied with. The earliest date that these shares would become eligible for resale without a registration statement would be June 14, 2006. Further, each share of the Series A Shares is convertible into 294.12 shares, or 4,235,328 shares, of the Company’s common stock, subject to anti-dilution and other customary adjustments. If the shares were converted into the Company’s common stock at May 31, 2006, the common stock issuable upon such conversion would represent approximately 41.8% of the Company’s outstanding common stock, excluding exercises of any options or warrants outstanding at such time. Certain members of Woodcliff are non-management employees of the Company. The Securities Purchase Agreement provided that the Company may require Woodcliff to purchase up to approximately 2.95 million shares of the Company’s common stock, subject to the Company attaining certain annual financial targets and satisfying other conditions. For its 2006 fiscal year, the Company did not attain the financial targets necessary to require Woodcliff to purchase 500,000 shares of its common stock. Based on the Company’s financial performance in fiscal 2007, the Company may require Woodcliff to purchase 500,000 shares of its common stock. In addition, during the second quarter of fiscal 2007, the Company will have the right to sell 1.74 million shares of common stock to Woodcliff as long as the Company continues to satisfy certain financial and other conditions.
Authorized shares of common stock reserved for possible issuance for convertible debentures, convertible preferred stock, stock options, and warrants are as follows at May 31, 2006:
The debentures are convertible into 12,377 shares of common stock at a conversion price of $181.30 per share.
Options to purchase common stock of the Company have been issued to employees and non-employee Board of Director members with exercise prices ranging from $.25 to $4.00.
Warrants to purchase common stock of the Company have been issued to certain individuals or vendors in exchange for consulting services. 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
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. Prior to amendment in February 2006, the Plan awarded initial grants vesting in 25% increments beginning on the first anniversary of the date of grant, and annual grants vesting 100% as of the first annual meeting of stockholders following the date of grant, provided the individual remained a director as of those dates. Subsequent to amendment, outside directors will receive an initial grant upon joining the Board and annual grants at each annual meeting of stockholders beginning with the 2006 annual meeting, each vesting in 20% increments beginning on the first anniversary of the date of grant, provided the director continues to serve on the Board on those dates. As further amended with the Board’s and shareholder approval, the maximum number of shares authorized for issuance under the Directors’ Plan was increased from 250,000 to 1,000,000, and non-employee directors serving as of the amendment date were granted a one-time award of 25,000 options. As of May 31, 2006 under the Directors’ Plan, there were 670,836 shares available for option grants and there were 230,832 options outstanding, of which 31,666 options were exercisable.
The Company periodically issues warrants to purchase common stock as compensation for the services of consultants and marketing employees. During the fiscal year ended May 31, 2005, the Company issued 306,000 warrants 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 the Company’s common stock. All such warrants have five-year terms. Valuation using the Black-Scholes pricing model was based on the following information:
No warrants were issued during the fiscal year ended May 31, 2006.
In connection with the Company’s Preferred Provider Network license in Connecticut and Third Party Administrator license in Maryland, the Company is required to maintain performance bonds during the terms of the licenses. As such, the Company maintains performance bonds in amounts totaling $2,425,000 in compliance with these requirements. In addition, a contract with one existing client requires the Company to maintain two performance bonds totaling $330,000 throughout the contract term.
In August 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 unless terminated by either party. Two of the shareholders of HAN are each members of the investment group that acquired 14,400 shares of the Company’s Series A Shares in June 2005.