CompCare manages the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf of health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. Our managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. The customer base for our services includes both employers and health plans that contract with governmental entities. Our clinical services are provided primarily by unrelated contracted providers on a fee for service or subcapitated basis.
The reorganization plan also included a shift in the sales and marketing approach of the Company to improve margins. In concert with the addition of a Senior Vice President of Business Development, we began pursuing Administrative Services Only contracts and broadened our product offerings. The Company began utilizing consultants, association memberships, and endorsements to increase its market presence. ASO contracts are non-risk and provide management with more certainty in generating profits. We further expanded our product offering to include specialty case management services in areas such as Attention Deficit Disorder and Autism and an analytic service that provides our clients with actionable information so patients can be coordinated cost effectively. We expect these efforts to broaden our sales pipeline.
In the summer of 2008, we formed a majority owned subsidiary in Puerto Rico with an island based provider system. CompCare de Puerto Rico was awarded its first HMO contract in the fall and began providing mental health services in December. On January 1, 2009, CompCare de Puerto Rico added psychotropic drug management to that contract. With the new governmental administration in Puerto Rico, we believe that new opportunities will begin to appear and with our local partner, we are well positioned to grow our business.
Core is a company specializing in the healthcare sector and is a national leader in product sourcing and the direct response market. Core markets a variety of health-related products under its Medquip™ brand name and insurance and discounted health products branded as Core Advantage™ through a multiple of distribution channels. In addition to traditional distribution channels, the Company directs its distribution into highly targeted ethnic markets. In particular, CompCare services Medicare/Medicaid and affordable healthcare solution market segments - segments that are all “booming” in this economic climate.
As a direct result of CompCare’s acquisition of Core, the Company can expect strong revenue growth and sustainable increased margins. All CompCare’s overheads are covered by its existing contracted revenues, thus all new sales generated by the Company will have a visible impact to the bottom line. In addition, CompCare’s existing back office and fulfillment capabilities will be able to easily support the additional sales.
The decrease in capitated contract revenue from $36.3 million to $34.1 million is primarily attributable to the loss of one client in Texas and two customers in Indiana, which accounted for approximately $5.7 million in revenue for the year ended December 31, 2007 compared to $37,000 for the year ended December 31, 2008. This was partially offset by additional business from existing clients in Indiana, Maryland, and Michigan, which contributed an additional $3.7 million. The decrease in non-capitated revenue is primarily attributable to the loss of business from customers in Indiana and Texas.
General and administrative expenses decreased by $290,000, or 7.2%, for the year ended December 31, 2008 as compared to the year ended December 31, 2007. This decrease is primarily attributable to the $416,000 severance benefit of two years salary paid in 2007 to our former Chief Executive Officer upon her resignation pursuant to her employment agreement following the January 12, 2007 change in ownership of Woodcliff. General and administrative expense as a percentage of operating revenue decreased from 10.8% for the year ended December 31, 2007 to 10.6% for the year ended December 31, 2008.
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.
To minimize the effect of inflation, some of our multi-year revenue contracts contain provisions for annual rate increases that average approximately three percent per year. Our largest expense, the cost of care provided by our contracted providers, is frequently tied to standard Medicaid, CHIP, and Medicare reimbursement rates set by governmental entities. To the extent these standard rates are periodically increased to reflect the effects of inflation, we may be adversely affected by rising prices, absent a sufficient compensating increase in our revenues.
During the year ended December 31, 2008, net cash and cash equivalents decreased by $5.2 million. Net cash used in operations totaled $5.5 million, attributable primarily to payment of claims on our Indiana, Pennsylvania, and Maryland contracts which have experienced high utilization of services by members. Approximately $1.5 million of the total cash usage was due to a timing difference in the monthly capitation remittance from our large Indiana client, which the Company received in January 2009. In addition, approximately $0.7 million in cash was used to pay accrued claims payable relating to three contracts that terminated during the quarter ended December 31, 2007, and $416,000 was used to make a contractually required severance payment to our former Chief Executive Officer. Cash used in investing activities is comprised of $48,000 in additions to property and equipment offset by $27,000 in proceeds from payments received on notes receivable. Cash provided by financing activities consists primarily of $158,000 in net proceeds from the issuance of common stock and $200,000 from the issuance of a convertible promissory note, providing additional funds for working capital purposes. Other cash flows from financing activities consist of repayment of debt of $55,000.
The following is a schedule at December 31, 2008 of our long-term contractual commitments, future minimum lease payments under non-cancelable operating lease arrangements, and other long-term obligations:
Excludes 7 1/2% in interest payable semi-annually in April and October (see Note 12 - “Long-term Debt” to the audited, consolidated financial statements).
Healthcare operating expenses are composed of claims expense and other healthcare operating expenses. Claims expense includes amounts paid to hospitals, physician groups, and other licensed behavioral healthcare professionals. Other healthcare operating expenses include items such as information systems, provider contracting, case management and quality assurance, attributable to both capitated and non-capitated contracts.
The cost of behavioral health services is recognized in the period in which an eligible member actually receives services and includes an estimate of IBNR. We contract with various healthcare providers including hospitals, physician groups and other managed care organizations either on a discounted fee-for-service or a per-case basis. We determine that a member has received services when we receive a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. We then determine whether (1) the member is eligible to receive such services, (2) the service provided is medically necessary and is covered by the benefit plan’s certificate of coverage, and (3) the service has been authorized by one of our employees. If all of these requirements are met, the claim is entered into our claims system for payment and the associated cost of behavioral health services is recognized. If the claim is denied, the service provider is notified and has appeal rights under their contract with us.
Accrued claims payable consists primarily of reserves established for reported claims and claims IBNR 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 $6.4 and $6.9 million at December 31, 2008 and between $4.9 and $5.5 million at December 31, 2007. 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 at December 31, 2008 and 2007 were $6.8 million and $5.5 million, respectively. Approximately $3.4 million of the $6.8 million accrued claims payable balance at December 31, 2008 is attributable to our major Indiana Medicaid client. We have used the same methodology and assumptions for estimating the IBNR portion of the accrued claims liability for the last three periods.
A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at December 31, 2008 could increase our claims expense by approximately $127,000 as illustrated in the table below:
We accrue losses under our capitated contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We perform this loss accrual analysis on a specific contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance costs, and each contract’s specific terms related to future revenue increases as compared to expected increases in healthcare costs. The projected future healthcare and maintenance costs are estimated based on historical trends and our estimate of future cost increases.
We issue stock-based awards to our employees and members of our Board of Directors. Effective June 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment” and elected to apply the modified-prospective method to measure compensation cost for stock options at fair value on the grant date and recognize compensation cost on a straight-line basis over the service period for those options expected to vest. We use the Black-Scholes option pricing model, which requires certain variables for input to calculate the fair value of a stock award on the grant date. These variables include the expected volatility of our stock price, award exercise behaviors, the risk free interest rate, and expected dividends. We use significant judgment in estimating expected volatility of the stock, exercise behavior and forfeiture rates.
A variety of factors are considered in determining the expected term of options granted. Options granted are grouped by their homogeneity based on the optionees’ position, whether managerial or clerical, and length of service and turnover rate. Where possible, we analyze exercise and post-vesting termination behavior. For any group without sufficient information, we estimate the expected term of the options granted by averaging the vesting term and the contractual term of the options.
In June 2006, the Financial Accounting Standards Board (“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 fiscal years beginning after December 15, 2006. We adopted FIN 48 effective January 1, 2007 with no impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations,” but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS 141(R) expands on the disclosures previously required by SFAS 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to an acquired business. SFAS 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. We will adopt this statement as of January 1, 2009. We are currently evaluating the impact SFAS 141(R) will have on our consolidated financial statements.
We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation and Subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years ended December 31, 2008 and 2007, the seven months ended December 31, 2006, and the fiscal year ended May 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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, 2008 and 2007 and the consolidated results of their operations and their cash flows for the years ended December 31, 2008 and 2007, the seven months ended December 31, 2006, and the fiscal year ended May 31, 2006, in conformity with U.S. generally accepted accounting principles.
Our managed care activities are performed under the terms of agreements with health maintenance organizations, 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 our clients and we review membership eligibility records and other reported information to verify its accuracy to determine the amount of revenue to be recognized. For the years ended December 31, 2008 and 2007 such agreements accounted for 97.0%, or $34.1 million, and 97.0%, or $36.3 million, respectively, of revenue. For the seven months ended December 31, 2006 such agreements accounted for 95.3%, or $9.8 million of revenue. For the fiscal year ended May 31, 2006 such agreements accounted for 96.2%, or $23.0 million of revenue. The remaining balance of our revenues is earned on a fee-for-service basis and is recognized as services are rendered.
At any time prior to the end of a contract or contract renewal, if a capitated contract is not meeting its financial goals, we generally have 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 our clients have historically been generally receptive to such requests, no assurance can be given that such requests will be fulfilled in the future in our favor. If a rate increase is not granted, we have the ability, in most cases, to terminate the contract and limit our risk to a short-term period.
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. At December 31, 2008 and 2007, no contract loss reserve for future periods was necessary.
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 $153,000 and $154,000 for the years ended December 31, 2008 and 2007, respectively. Depreciation and amortization expense for the seven months ended December 31, 2006 was $62,000. For the fiscal year ended May 31, 2006, depreciation and amortization expense was $87,000.
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 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. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate.
Non-controlling interest on our balance sheet as of December 31, 2008 represents the minority owner’s interest in our newly formed, majority owned subsidiary, CompCare de Puerto Rico, Inc. and incorporates adjustments to reflect the minority owner’s share of operating results for 2008. CompCare de Puerto Rico, Inc. is 51% owned by Comprehensive Behavioral Care, Inc. and 49% owned by a major behavioral health services company based in San Juan, Puerto Rico.
We grant stock options to our employees and non-employee directors (“grantees”) allowing grantees 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.
For cash and cash equivalents, restricted cash, and the note receivable, the carrying amount approximates fair value. Our financial assets and liabilities other than cash are not traded in an open market and therefore require us to estimate their fair value. Pursuant to the disclosure requirements prescribed by FAS 107, we use a present value technique, which is a type of income approach, to measure the fair value of these financial instruments. The rate used for discounting expected cash flows is a risk-free rate adjusted for systematic and unsystematic risk.
(1) Effective December 31, 2008, we ceased providing behavioral health services to approximately 11,000 members of a Medicare Advantage HMO in the state of Maryland. We had previously served 39,000 of this HMO’s members in Pennsylvania until the contract for the membership in this state ended on July 31, 2008, due to the HMO’s selection of another behavioral health vendor. Services provided to members in both states accounted for $6.1 million, or 17.3%, and $5.5 million, or 14.7%, of our operating revenues for the years ended December 31, 2008 and 2007, respectively.
(3) We currently furnish behavioral healthcare services to approximately 243,000 members of a health plan providing Medicaid, Medicare, and CHIP benefits across three states. Services are provided on a fee-for-service and administrative services only (“ASO”) basis. The contracts accounted for $3.7 million, or 10.6%, of revenue for the year ended December 31, 2008, $4.3 million, or 11.6%, for the year ended December 31, 2007, $1.5 million, or 14.1%, for the seven months ended December 31, 2006, and $2.3 million, or 9.5%, for the fiscal year ended May 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.
(1) The promissory note is convertible at the option of the note holder into 800,000 shares of restricted common stock at a conversion price of $0.25 per share.
(2) At December 31, 2008, the debentures are convertible into 15,873 shares of common stock at a conversion price of $141.37 per share.
At December 31, 2008, the Company’s federal net operating loss carryforwards total approximately $12.8 million, of which $8.8 million is not subject to Section 382 limitations from the first two change in control transactions. These losses were incurred in the years ended May 31, 2002 through December 31, 2008, and expire in years 2022 through 2028. The Company may be unable to utilize some or all of its allowable tax deductions or losses, depending upon factors including the availability of sufficient taxable income from which to deduct such losses during limited carryover periods.
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 2007, 2006, and 2005.
As of December 31, 2008, there were 4,340 remaining shares of preferred stock authorized and available to issue, and 14,400 outstanding shares of Series A Preferred Stock. All of the outstanding Series A Preferred shares were issued in June 2005 as a result of the sale of Series A Preferred Stock to Woodcliff for approximately $3.4 million in net cash proceeds. The Series A Preferred Stock, acquired by Hythiam in January 2007, was recently acquired by Core in January 2009. On January 20, 2009, Core converted the Series A Preferred Stock into 4,553,136 shares of common stock. See Note 19 “Subsequent Events.”
On January 20, 2009, as part of the Merger Agreement between Core and CompCare, we issued 1,675 shares of newly designated Series B-1 Convertible Preferred Stock and 2,665 shares of Series B-2 Convertible Preferred Stock in exchange for all of Core’s Class B Common Stock. The Series B-1 Convertible Preferred Stock is senior to the Series B-2 Convertible Preferred Stock, which in turn is senior to our common stock. The Series B-1 and Series B-2 Convertible Preferred Stock have other rights and preferences more fully described in Exhibit 99.2 to our Form 8-K dated January 16, 2009 and filed January 23, 2009, available at www.sec.gov. Also see Note 19 “Subsequent Events.”
(d) Options to purchase our common stock have been issued to employees and non-employee Board of Director members with exercise prices ranging from $0.25 to $2.16.
We grant stock options to our employees and non-employee directors (“grantees”) allowing grantees to purchase our common stock pursuant to shareholder-approved stock option plans. We currently have two active incentive plans, the 1995 Incentive Plan and the 2002 Incentive Plan (collectively, the “Plans”), that provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, restricted preferred stock, and common stock grants to eligible employees and consultants. 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. Vesting generally occurs after six months for one-half of the options and after 12 months for the remaining options. The exercise price for ISOs must equal or exceed the fair market value of the shares on the date of grant. 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 December 31, 2008, under the 2002 Incentive Plan, there were 422,000 options available for grant and 538,000 options outstanding, of which 305,500 were exercisable. Additionally, as of December 31, 2008, under the 1995 Incentive Plan, there were 184,500 options outstanding and exercisable. There are no further options available for grant under the 1995 Incentive Plan.
The following table summarizes information about options granted, exercised, and vested for the years ended December 31, 2008 and 2007, the seven months ended December 31, 2006 and for the fiscal year ended May 31, 2006.
A summary of our stock option activity and related information for the years ended December 31, 2008 and 2007, the seven months ended December 31, 2006, and the fiscal year ended May 31, 2006, and is as follows:
A summary of options outstanding and exercisable as of December 31, 2008 is as follows:
We periodically issue warrants to purchase common stock as compensation for the services of consultants and marketing employees. At December 31, 2008, 306,000 warrants to purchase common stock for $1.25 per share were outstanding, having been issued in prior years to two consultants and two employees as compensation for introducing strategic business partners to the Company. All such warrants have five-year terms and expire in February 2010. No warrants were issued during the years ended December 31, 2008 and 2007, the seven months ended December 31, 2006, or the fiscal year ended May 31, 2006.
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 December 31, 2008:
In January 2009 we entered into an agreement with Hythiam to provide administrative services for Hythiam’s newly launched specialty products and programs for autism and ADD. Hythiam will pay us a fee per member per month for claims processing and other related services. The agreement is for an initial term of one year with options for renewal.
During 2007, CBC contracted with Integra Health Management, Inc. (“IHM”), a company that provides behavioral and medical health management and consultative services to healthcare payers. IHM was founded by one of our former directors, Michael Yuhas, who also serves as its current Chief Executive Officer. During the years ended December 31, 2008 and 2007, CBC paid IHM $94,620 and $28,212, respectively, for monitoring and care coordination of intensive case management patients. In addition, IHM provided $115,967 and $15,000 of information technology consulting services to CBC for the years ended December 31, 2008 and 2007, respectively.
In March 2009, we executed new employment agreements with our Chief Executive Officer, our new Chief Financial Officer, and our Chief Accounting Officer. The agreements are for terms of three years and contain provisions that include salary deferral, signing bonuses, and incentive compensation, among other items. Each contract also stipulates payments due each employee upon termination due to a change in control. See Note 19, “Subsequent Events.”
In connection with the January 2009 purchase by Core of the Hythiam owned CompCare securities, our then Chief Financial Officer, Robert J. Landis, entered into a temporary waiver of the change in control provisions of his employment agreement with the Company. Such provisions relate to payments that would be made to him upon certain events following a change in control of the Company, as defined in his employment agreement. The waiver terminated on March 5, 2009, the date on which Mr. Landis and the Company entered into a new employment agreement.
(b) Includes $ 416,000 of severance benefits due the Company’s former Chief Executive Officer.
On January 20, 2009, we entered into an Agreement and Plan of Merger (the “Merger”) with Core Corporate Consulting Group, Inc. (“Core”), a privately held Delaware corporation. The merger was accomplished by merging Core into our wholly-owned subsidiary, CompCare Acquisition, Inc., with Core continuing as the surviving corporation and becoming a wholly-owned direct subsidiary of CompCare.
In a related transaction on January 20, 2009, Core purchased 14,400 shares of our Series A Convertible Preferred Stock and 1,739,130 shares of common stock of the Company owned by Woodcliff. The Series A Preferred Stock purchased by Core represented 100% of the outstanding shares of such stock. Prior to the Merger, Core converted all of its Series A Preferred Stock into 4,553,136 shares of common stock of the Company, and by virtue of this transaction owned approximately 49% of the outstanding shares of our common stock. In February 2009, we cancelled the stock certificates representing the 1,739,130 common shares acquired from Hythiam and the 4,553,136 common shares resulting from the Series A Preferred Stock conversion.
In accordance with the Certificate of Designation of the Series B-1 and B-2 Convertible Preferred Stock, the preferred shares will become convertible into other securities of the Company upon the availability of authorized securities into which they could be converted. Such authorized securities will become available upon the effectiveness of an action by written consent of a majority of shareholders of CompCare to increase the number of authorized common and preferred shares, which is expected to become effective in March or April of 2009. A third series of preferred stock, Series C Convertible Preferred Stock, par value $50.00 per share, was also designated. The Series B-1 Convertible Preferred Stock will be convertible into an aggregate of 14,400 shares of Series C Convertible Preferred Stock at the rate of one share of Series B-1 Convertible Preferred Stock for 8.597015 shares of Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock is in turn convertible into common stock of the Company at the rate of approximately 316.2767396 shares of CompCare common stock for each share of Series C Convertible Preferred Stock, or approximately 4,554,379 shares of CompCare common stock. The Series B-2 Convertible Preferred Stock will be convertible into an aggregate of 7,246,871 shares of CompCare common stock at a rate of one Series B-2 share for approximately 2,719.273546 shares of CompCare common stock. Such conversion features are immediately available to the holders of the Series B-1 and B-2 shares after the effective date.
Pursuant to SFAS 141R, the acquisition will be accounted for as a “Reverse Acquisition” under 141R paragraph A12. As such, the legal form of the transaction is ignored, and the “target” company, being Core, is treated as the “acquiring” company for financial reporting purposes and CompCare is treated as the “target” company. As such, the fair value of CompCare’s common shares is recognized, together with adjustments necessary to reflect CompCare’s net tangible and identifiable intangible assets at their fair value with any remainder assigned to goodwill. A pro-forma balance sheet of the consolidated entity as if the Merger occurred on December 31, 2008 and pro forma income statement as if the Merger occurred on January 1, 2008 are as follows:
(g) Core’s consolidated balance sheet as if it was prepared on December 31, 2008. Except for identifiable intangible assets, CompCare’s assets and liabilities approximate fair value.
(j) Represents the adjustment to reflect the equity structure of CompCare (Accounting Acquiree) in a reverse acquisition, as if the acquisition had been completed on December 31, 2008.
(a) Represents an issuance of 4,000,000 shares of Core Corporate Consulting Group, Inc. (Core) at $0.001 par value for $1,000,000 through a private transaction, as if it had been completed on December 31, 2008. There was no significant cost related to the transaction.
(b) Represents the estimated amortization of intangible assets acquired, as if the transaction had been completed on January 1, 2008. The estimated useful life is assumed at 3 years. The amortization is being recognized using the straight-line method.
In connection with Core’s purchase of the CompCare securities from Woodcliff and not as the result of any disagreement with the Company, Steven R. Peskin, M.D., Michel A. Sucher, M.D., and Michael Yuhas resigned as directors of the Company, effective January 16, 2009. Dr. Sucher was the Chair of the Compensation and Stock Option Committee and Dr. Peskin was the Chair of the Nominating and Corporate Governance Committee.
On January 21, 2009, we appointed the following persons as directors of the Company: Arnold B. Finestone, Sharon Kay Ray. Joshua I. Smith, and Arthur K. Yeap. On the same day, Mr. Finestone was appointed Chairman of the Board, Mr. Smith was named Vice Chairman of the Board, and the Audit and Compensation & Stock Option Committees were reconstituted. The Audit Committee is now comprised of Mr. Finestone (Chairman), Mr. Smith and Mr. Yeap, and the Compensation and Stock Option Committee is comprised of Ms. Ray, Mr. Finestone, and Mr. Yeap (Chairman).
On February 26, 2009, Giuseppe (Joe) Crisafi was appointed as the Company’s Chief Financial Officer and as a Director. Mr. Crisafi will report jointly to the Company’s Chief Executive Officer and the Board of Directors. The material terms of his employment agreement include a term of three years and a base salary of $390,000 per annum increased by an amount no less than an amount equal to the percentage increase in the consumer price index for the metropolitan area of Mr. Crisafi’s place of residence. This compensation may, at the election of the Company, be accrued, in whole or in part, until such time as the Company receives financing and/or generates sufficient revenues with which to pay Mr. Crisafi his stated compensation, after the payment by the Company of its operating expenses, but no longer than the end of each tax year. In addition, Mr. Crisafi will be entitled to a special bonus in the amount equal to one percent of the Company’s pre-tax profits from the preceding year (as determined by the application of generally accepted accounting principles), up to the first $1,000,000 of such profits; plus an additional sum equal to two percent of the Company’s pre-tax profits for all sums over $1,000,000. In the event Mr. Crisafi’s employment is terminated without cause twelve months from a change in control, the Company shall pay to Mr. Crisafi a lump sum amount equal to the aggregate of (i) accrued unpaid salary, if any; (ii) accrued but unpaid expenses, if any; (iii) accrued but unpaid bonuses, if any; (iv) unissued warrants, if any; and (v) the total compensation which would have been paid to Mr. Crisafi through five full years of compensation from the date of termination.
On February 26, 2009, Robert J. Landis was appointed as the Company’s Chief Accounting Officer (CAO). Mr. Landis will report directly to the Company’s Chief Financial Officer. The material terms of his employment agreement will include a term of three years and a base salary of $191,500 per annum increased by an amount no less than an amount equal to the percentage increase in the consumer price index for the Tampa, Florida metropolitan area. In addition, Mr. Landis will receive a signing bonus of $20,000 plus 500,000 CompCare Shares. In the event Mr. Landis’ employment is terminated without cause twelve months from a change in control, the Company shall pay to Mr. Landis a lump sum amount equal to the aggregate of (i) accrued unpaid salary, if any; (ii) accrued but unpaid expenses, if any; (iii) accrued but unpaid bonuses, if any; (iv) unissued warrants, if any; and (v) the total compensation which would have been paid to Mr. Landis through three full years of compensation from the date of termination.
In February 2009 we obtained additional equity financing in the amount of $1.6 million through the sale of 6.4 million shares of our unregistered common stock to two investors. We intend to use the net proceeds from the sale of the securities for working capital and in sales and marketing to help accelerate new business. For further information, see our Form 8-K dated February 25, 2009 and filed March 3, 2009, available at www.sec.gov.