The Company reported a net loss of $770,000, or $0.20 per share, for the fiscal year ended May 31, 2002 compared to the net loss of $1.1 million, or $0.29 per share, for the fiscal year ended May 31, 2001. The Fiscal 2002 net loss included $55,000 specific to the cumulative effect of a change in accounting principle (see Note 10 to the audited financial statements - “Goodwill”) and a $66,000 bad debt recovery specific to one contract that terminated in Fiscal 1999. The following tables summarize the Company’s financial data for the fiscal years ended May 31, 2002 and 2001 (in thousands):
The Company reported a net loss of $770,000 and an operating loss of $774,000 for the fiscal year ended May 31, 2002 compared to the operating loss of $1.2 million for the fiscal year ended May 31, 2001. Operating revenues increased by 51.9%, or $9.4 million, to $27.6 million for the fiscal year ended May 31, 2002 compared to $18.2 million for the fiscal year ended May 31, 2001. This increase is attributable to two major contracts implemented during Fiscal 2001 and membership growth from state sponsored children’s health insurance programs.
Management believes that the Company’s current infrastructure is sufficient to support continued revenue growth during Fiscal 2003 without the need for any significant increase to staff or other operating costs.
General and administrative expenses decreased by approximately $3.1 million, or 44.9%, for the fiscal year ended May 31, 2001 as compared to the fiscal year ended May 31, 2000. General and administrative expense as a percentage of revenue decreased from 39.4% for the fiscal year ended May 31, 2000 to 21.1% for the fiscal year ended May 31, 2001. This decrease is attributable to the significant cost reductions that were initiated following the loss of two major, managed care contracts in Fiscal 2000.
At May 31, 2002, the Company had unrestricted cash and cash equivalents of $5.3 million. The Company has committed approximately $0.5 million for use in connection with the Repayment Agreement described under Item 3(1) - “Legal Proceedings” above. During the fiscal year ended May 31, 2002, $2.5 million was provided by the Company’s operating activities, of which $1.2 million was provided as a result of timing differences between the collection of state reinsurance program amounts and the payment dates for reinsurance claims specific to one major contract (see Note 4, Item 2, to the audited financial statements - “Major Contracts/Customers”). The Company reported a net loss of approximately $770,000 for the fiscal year ended May 31, 2002, which includes a $55,000 gain specific to the cumulative effect of a change in accounting principle (see Note 10 to the audited financial statements - “Goodwill”) and a $66,000 bad debt recovery related to one contract that terminated in Fiscal 1999. This compares to a net loss of $1.1 million for the fiscal year ended May 31, 2001. The Company has an accumulated deficit of $64.4 million and total stockholders’ deficit of $12.5 million as of May 31, 2002. Additionally, the Company’s current assets at May 31, 2002 amounted to approximately $9.4 million and current liabilities were approximately $21.7 million, resulting in a working capital deficiency of approximately $12.3 million. The working capital deficiency referred to above results primarily from a $12.1 million liability related to Federal income tax refunds received in prior years. The ultimate outcome of the Internal Revenue Service audit whereby it is seeking recovery of the refunds from the Company, including the amount to be repaid, if any, and the timing thereof, is not determinable (see Note 14 to the audited financial statements - “Income Taxes”). Additionally, the Company cannot predict utilization trends, which could change significantly in future periods. Any such negative trends would increase healthcare operating expenses and may impact the Company’s ability to achieve profitability and maintain positive cash flow.
Management cannot state with any degree of certainty whether any required additional equity or debt financing will be available to it during Fiscal 2003 and, if available, that the source of financing would be available
The above conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustment that may result from the outcome of this uncertainty.
The Company currently has twelve contracts with four health plans to provide behavioral healthcare services under commercial, Medicaid, and Medicare plans, to contracted members in Connecticut, Florida and Texas. These combined contracts represent approximately 57.9% and 49.9% of the Company’s operating revenue for the fiscal years ended May 31, 2002 and 2001, respectively. 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 any one of these customers could have a material, adverse effect on the Company’s working capital and future results of operations (see Note 4 to the audited consolidated financial statements - “Major Customers/Contracts”).
The Company may be required to repay a portion of the tax refunds received from the Internal Revenue Service for Fiscal 1996 and 1995, which amounted to $9.4 million and $5.4 million, respectively (see Item 3 - (2) - “Legal Proceedings”, above).
and $5.4 million were received. In addition, the Company also filed amended Federal income tax returns for fiscal years prior to 1995, requesting similar refunds of losses carried back under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a total of $7.7 million. Further, the Company entered into a fee arrangement with its tax advisor that required the Company to advance its tax advisor an amount equal to 20% of any state or federal refunds received. Such fees were due and payable to the Company’s tax advisor within 30 days upon receipt of such tax refunds. However, if it is ultimately determined upon examination and through appellate conference that such tax strategies are unallowable, the Company is entitled to receive a pro rata refund from its tax advisor of any fee that resulted from the disallowed item or items.
During fiscal years 1997 and 1996, the Company recognized a portion of the refunds received as a tax benefit of $0.3 million and $2.4 million, respectively. The balance of the refunds received, $12.1 million, is recorded as a deferred liability, “Unbenefitted tax refunds received” pending resolution by the Internal Revenue Service (“IRS”) of the appropriateness of the Section 172(f) carryback. The additional refunds requested under Section 172(f) for prior years of $7.7 million have not been received, nor has the Company recognized any tax benefit related to these potential refunds.
Section 172(f) of the IRC provides for a ten-year net operating loss carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. The applicability of Section 172(f) to the type of business in which the Company operates is unclear. No assurance can be provided that the Company will be able to retain the refunds received to date or that the additional refunds requested will be received.
As a result of the Section 172(f) carryback claims filed by the Company, and the tentative refunds received, the Company came under audit with respect to the tax years previously mentioned.
The Company typically contracts with small to medium sized HMO’s who may be adversely affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means. The Company's clients may also be acquired by larger HMO's, in which case there can be no assurance that the acquiring company would renew the Company's contract. Additionally, changes specific to Medicaid and Medicare reimbursement could have an effect on the profitability of
The Company has issued or committed to issue options or other rights to purchase approximately 1,101,000 shares, with option prices range from $0.25 to $4.00. The Company may contemplate issuing additional amounts of debt, equity or convertible securities in public or private transactions for use in fulfilling its future capital needs (see “Need for Additional Funds; Uncertainty of Future Funding”). Issuance of additional equity could adversely affect the trading price of the Company’s Common Stock.
The Company’s Restated Certificate of Incorporation provides for 60,000 authorized shares of Preferred Stock, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by the Board of Directors without any vote or action by the stockholders that could have the effect of diluting the Common Stock or reducing working capital that would otherwise be available to the Company. As of May 31, 2002, there are 18,740 remaining shares authorized and available to issue, and no outstanding shares of Preferred Stock. The Company’s Restated Certificate of Incorporation also provides for a classified board of directors with directors divided into three classes serving staggered terms. The Company’s stock option plans generally provide for the acceleration of vesting of options granted under such plans in the event of certain transactions that result in a change of control of the Company. Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders and therefore could adversely affect the price of the Company’s Common Stock or the possibility of sale of shares to an acquiring person.
herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.
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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3, the Company’s working capital deficiency and stockholders’ deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans as to these matters are described in Note 14. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Comprehensive Care Corporation (the “Company”) is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the “Company” include Comprehensive Behavioral Care, Inc. (“CompCare” or “CBC”) and subsidiary corporations. The Company, through its wholly owned subsidiary, CompCare, primarily 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 corporate and governmental entities. The Company’s services are provided primarily by unrelated vendors on a subcontract or subcapitated basis.
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.
The preparation of 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 financial statements and accompanying notes. Actual results could differ from these estimates.
Property and equipment are recorded at cost. Depreciation of furniture and equipment is computed using the straight-line method over the estimated useful lives of 3 to 12 years. Leasehold improvements are amortized over the term of the related lease.
The carrying amounts and fair values of the Company’s financial instruments at May 31, 2002 and 2001, are as follows:
Certain prior year amounts have been reclassified to conform with the current year’s presentation, including approximately $0.8 million of reinsurance program reimbursements that were previously classified as both operating revenue and healthcare operating expense in the Fiscal 2001 consolidated statement of operations (see Note 4(2)).
Effective July 1, 2000, the Company entered into a contract with one HMO to continue to provide behavioral healthcare services to approximately 100,000 of 160,000 Florida members that were managed by the Company under prior contracts with Humana. The combined revenue from the contracts that were transitioned from Humana, plus two additional contracts that the Company has with this HMO, accounted for 17.0%, or $4.7 million, of the Company’s operating revenues during the fiscal year ended May 31, 2002 compared to 17.6%, or $3.2 million, for the fiscal year ended May 31, 2001. Additionally, the Company has one major contract with an affiliate of this HMO (see Item 2 below). This HMO has been our customer since November 1998. The primary contract with this customer has renewed through June 30, 2003 and the contract provides for automatic, additional one-year renewals unless terminated by either party. Additionally, the Company has one major contract with an affiliate of this HMO (see Item 2 below).
During the fiscal year ended May 31, 2001, the Company implemented five new contracts to provide behavioral healthcare services to Florida members under contracts with one HMO. These combined contracts, plus one additional contract that was implemented during Fiscal 2002, represented approximately 21.4%, or $5.9 million, and 19.5%, or $3.5 million, of the Company’s operating revenue for the fiscal years ended May 31, 2002 and 2001, respectively. This HMO has been our customer since July 2000. The primary contract with this customer has renewed through July 22, 2003 and the contract provides for additional, automatic one-year renewals unless terminated by either party.
In general, the Company’s contracts with its customers are typically for initial one-year terms, with automatic annual extensions. Such contracts generally provide for cancellation by either party with 60 to 90 days’ written notice.
*Excludes $109,000 in 2002, $448,000 in 2001, and $349,000 in 2000 of recoveries from accounts previously written off.
As a result of the adoption of SFAS 142, effective June 1, 2001, no amortization expense was recorded during the fiscal year ended May 31, 2002 compared to approximately $72,000 of amortization expense recorded during each of the fiscal years ended May 31, 2001 and 2000. SFAS 141 requires the elimination of any unamortized deferred credits related to an excess of fair value of acquired assets over cost from a business combination for which the acquisition date was before July 1, 2001 immediately upon adoption of SFAS 142. As of June 1, 2001, the Company had an unamortized deferred credit of $55,000 that related to an acquisition in 1996. As a result, the Company recognized $55,000 as the cumulative effect of a change in accounting principle during the quarter ended August 31, 2001.
During Fiscal 2000, following the termination of two major contracts on December 31, 1999, the Company underwent a restructuring that included the closing of the Company’s California administrative office, terminating related executive and staff positions, and centralizing certain contract management and clinical functions. The Company incurred restructuring charges of $881,000 in connection therewith, including a separation payment of $760,000 to the Company’s former Chairman and CEO. Rentals under the lease for the California office were assumed by an entity affiliated with the Company’s former Chairman and CEO. In addition, during Fiscal 1999, the Company incurred restructuring charges of $600,000 related to the loss of a major contract in Puerto Rico. Following is an analysis of the restructuring charges together with related payments reflected in a reserve for restructuring charges:
Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows:
At May 31, 2002, the Company had Federal net operating loss carryforwards of approximately $42.0 million resulting from losses incurred in the fiscal years ended May 31, 1995 through May 31, 2002, which expire in 2010 through 2022. In addition, the Company has a minimum tax credit carryover of approximately $0.7 million against regular tax in the event that regular tax expense exceeds the alternative minimum tax expense.
In connection with the filing of its Federal income tax returns for fiscal year 1995 and 1996, the Company filed a tentative refund claim to carry back losses described in Section 172(f) of the Internal Revenue Code (“IRC”), requesting a refund of $9.4 million and $5.5 million, respectively, of which refunds of $9.4 million and $5.4 million were received. In addition, the Company also filed amended Federal income tax returns for fiscal years prior to 1995, requesting similar refunds for losses carried back under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a total of $7.7 million.
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 either 33% each year or 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 1995 Plan also provides for the full vesting of all outstanding options under certain change of control events. The maximum number of shares authorized for issuance under the 1995 Plan is 1,000,000. As of May 31, 2002, there were 3,450 options available for grant and there were 902,175 options outstanding, of which 779,925 options were exercisable, under the 1995 Plan.
The Company 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 the Company’s stockholders following the date of grant, provided the individual is still a director as of that date. 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, 2002, there were 185,834 options available for grant under the Directors’ Plan. The Company had no outside directors and there were no options outstanding to former directors as of May 31, 2002.
were $0.52, $0.14, and $0.41 in Fiscal 2002, 2001, and 2000, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.
The fair value of these options was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
The Company’s pro forma information is as follows (in thousands except for loss per share information):
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, 2002:
During the fiscal year ended May 31, 2001, the Company implemented a major contract for one new client requiring that the Company maintains a $600,000 performance bond throughout the term of the contract. This bond, which was issued in September 2001 with an effective date of April 1, 2001, is unsecured and is automatically renewable as long as the contract remains in force.
During the fiscal year ended May 31, 2001, the Company lowered its estimate by approximately $0.3 million specific to interest charges that were previously accrued in connection with this liability. This change in estimate was based on information provided to the Company by the California Department of Health Services (the “Department”). As of May 31, 2002, the Company has approximately $1.0 million accrued relating to this matter.
Effective July 2002, the Company has entered into a Repayment Agreement with the Department to resolve this liability at a substantially reduced amount. The terms of the Repayment Agreement will require the Company to either 1) pay one lump sum of $450,000 to the Department on or before September 1, 2002 or 2) beginning September 1, 2002, the Company will be required to make three monthly installment payments of $160,000 each, with the last payment being due on or before November 1, 2002, for a total of $480,000 as full and complete satisfaction of the outstanding liability. If neither of the arrangements discussed under 1) or 2) above is satisfied, the Company will be considered to be in default and the Department has the right to collect the full amount of the claim plus interest, attorney’s fees, and collections costs.
With respect to the contingency related to prior years’ income taxes, see Note 14, “Income Taxes”.
From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary, routine litigation incidental to their business. In some pending cases, claims may exceed insurance policy limits and the
Company or any one of its subsidiaries may have exposure to a liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company’s financial statements.
Includes a $55,000 cumulative effect of change in accounting principle (see Note 10 - “Goodwill”).
(a) Includes a $0.5 million non-operating loss related to the note receivable prepayment arrangement.