(1) Beginning in November 2006, and in connection with a contract that started January 1, 2007 to service approximately 250,000 members of an Indiana health plan, we have rented office space within the Indianapolis offices of the client at the rate of $2,200 per month. We expect to rent such space, which is not subject to a written lease agreement, for a time period at least equivalent to the initial two-year term of the contract.
Fiscal 2003 results include a $7.7 million, non-operating gain related to a settlement with the Internal Revenue Service (“IRS”). Additionally, fiscal 2003 results include a $470,000 gain included in discontinued operations related to the settlement of one matter covering our fiscal years 1983 through 1986 involving Medi-Cal reimbursements paid to Brea Neuropsychiatric Hospital, a facility we owned until its disposal in fiscal year 1991.
The selected consolidated financial data that follows should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report.
This report includes forward-looking statements, the realization of which may be impacted by certain important factors discussed previously under Item 1A “Risk Factors - Important Factors Related to Forward-Looking Statements and Associated Risks.”
The following table sets forth our operating income (loss) for the years ended December 31, 2007 and 2006, the seven months ended December 31, 2006 and the fiscal years ended May 31, 2006 and 2005 (amounts in thousands):
General and administrative expenses increased by $908,000, or 29.1%, for the year ended December 31, 2007 as compared to the year ended December 31, 2006. This increase is primarily attributable to the $416,000 severance benefit of two years salary paid to our former CEO upon her resignation pursuant to her employment agreement following the January 12, 2007 change in ownership of Woodcliff, the expensing of $167,000 of prepaid director fees following the resignation of certain directors, and legal and professional fees of $301,000 incurred related to the proposed merger with Hythiam. General and administrative expense as a percentage of operating revenue decreased from 16.4% for the period ended December 31, 2006 to 10.8% for the period ended December 31, 2007.
Claims expense on capitated contracts decreased approximately $3.2 million or 30.0% for the seven months ended December 31, 2006 as compared to the seven months ended December 31, 2005. The reduction is due to the loss of capitated revenue as mentioned above. Claims expense as a percentage of capitated revenues increased from 74.0% for the period ended December 31, 2005 to 77.1% for the period ended December 31, 2006. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, decreased approximately $456,000, or 17.6%, 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 increased from 17.0% for the period ended December 31, 2005 to 20.7% for the period ended December 31, 2006.
RESULTS OF OPERATIONS -FISCAL YEAR ENDED MAY 31, 2006 AS COMPARED TO THE FISCAL YEAR ENDED MAY 31, 2005.
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 our 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.
During the year ended December 31, 2007, our cash and cash equivalents increased by $770,000. Net cash provided by continuing operations amounted to $826,000. Cash used in investing activities is comprised primarily of $58,000 in additions to property and equipment offset by $58,000 in proceeds from sales of available-for-sale securities, sales of equipment and payments received on notes receivable. Cash provided by financing activities consists of $19,000 in net proceeds from the issuance of common stock less $55,000 of repayment of liabilities. At December 31, 2007, cash and cash equivalents amounted to $6.3 million. We believe we have sufficient working capital to sustain current operations and meet our current obligations during the next twelve months.
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 our revenue have not been material in the past.
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.
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 $4.9 and $5.5 million at December 31, 2007, between $2.6 and $2.9 million at December 31, 2006, and between $2.6 and $2.8 million at May 31, 2006. To determine the best estimates, management reviews utilization statistics,
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides that companies may elect to measure many financial instruments and certain other items at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the “fair value option,” will enable some companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. We do not believe SFAS 159 will have a significant 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 acquired businesses. 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.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain information included in this annual report on Form 10-K and in our other reports, Securities and Exchange Commission (SEC) filings, statements, and presentations is forward looking within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning our anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, growth and expansion, and the ability to obtain new 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 our other 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 us, and other risks detailed from time to time in our SEC reports.
We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation and Subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ deficit and 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. 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.
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, 2007 and 2006 (unaudited) such agreements accounted for 97.0%, or $36.3 million, and 96.1% (unaudited), or $18.3 million (unaudited), respectively. For the seven months ended December 31, 2006 such agreements accounted for 95.3%, or $9.8 million of revenue. For the fiscal years ended May 31, 2006 and 2005 such agreements accounted for 96.2%, or $23.0 million, and 90.2%, or $22.1 million, respectively. The remaining balance of our revenues is earned on a fee-for-service basis and is recognized as services are rendered.
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.
Our revenue can be segregated into the following significant categories (amounts in thousands):
months ended December 31, 2006, respectively. We ceased providing services to the client’s Texas membership as of December 31, 2006. The contracts are for an initial one-year term with automatic annual renewals unless either party provides notice of cancellation at least 90 days prior to the expiration of the then current terms.
In general, our contracts with our 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.
Accounts Receivable of $35,000 at December 31, 2007 and $169,000 at December 31, 2006 consists of trade receivables resulting from services rendered under managed care capitation contracts. The following table summarizes changes in the Company’s allowance for doubtful accounts for the year ended December 31, 2007 and the seven months ended December 31, 2006:
(b) Excludes $4,000 at December 31, 2007, $153,000 at December 31, 2006, and $89,000 at May 31, 2006 of recoveries from accounts previously written off.
(1) Amount represents proceeds that were due the Company under a life insurance policy. We were entitled to the insurance benefits as the result of a settlement of our claims against the seller of four corporations purchased in 1996. The proceeds were received in April 2007.
(2) Represents the current portion of a promissory note received in July 2006 as settlement of a dispute between the Company and a software vendor that had been engaged to design, but was unable to complete, a new managed care information system. The difference between the present value of the note and our investment of approximately $200,000 was recorded in the accompanying consolidated statement of operations as a “loss from software development.” The current portion of the receivable is a component of other current assets while the non-current portion of approximately $17,000 appears as a note receivable in the accompanying consolidated balance sheet at December 31, 2007.
We use capital leases to finance the acquisition of certain computer and telephone equipment. Terms of the leases range from three to five years.
* At December 31, 2007, the debentures are convertible into 15,051 shares of common stock at a conversion price of $149.09 per share.
Provision for income taxes consists of the following (amounts in thousands):
At December 31, 2007, the Company’s federal net operating loss carryforwards total approximately $7.7 million, of which $3.2 million is not subject to Section 382 limitation. These losses were incurred in the years ended May 31, 2002 through December 31, 2007, and expire in years 2022 through 2027. 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.
NOTE 15 - PREFERRED STOCK, COMMON STOCK, AND STOCK OPTION PLANS
Authorized shares of common stock reserved for possible issuance for convertible debentures, convertible preferred stock, stock options, and warrants are as follows at December 31, 2007:
The debentures are convertible into 15,051 shares of common stock at a conversion price of $149.09 per share.
Warrants to purchase our common stock 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.
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. 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, and restricted 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 and are generally exercisable in cumulative increments of 50% each six months. 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, 2007, under the 2002 Incentive Plan, there were 500,000 options available for grant and 460,000 options outstanding, of which 440,000 were exercisable. Additionally, as of December 31, 2007, under the 1995 Incentive Plan, there were 485,375 options outstanding and exercisable. There are no further options available for grant under the 1995 Incentive Plan.
Stock options were granted to Board of Director members and certain employees during the years ended December 31, 2007 and 2006 (unaudited), the seven months ended December 31, 2006 and fiscal years ended May 31, 2006 and 2005. Options exercised during the years ended December 31, 2007 and 2006 (unaudited), the seven months ended December 31, 2006 and fiscal years ended May 31, 2006 and 2005 were 37,500, 26,333(unaudited), 0, 282,166 and 116,500 respectively. Total intrinsic value of exercised options during the years ended December 31, 2007 and 2006, the seven months ended December 31, 2006 and fiscal years ended May 31, 2006 and 2005 was $13,160, $35,922 (unaudited), $0, $411,009 and $91,166 respectively. During the year ended December 31, 2007, 123,332 stock options expired unexercised. These options had been granted to directors and one officer.
At December 31, 2007, there was approximately $59,274 of total unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of approximately 6 months. Total recognized compensation costs during the year ended December 31, 2007 were $89,763. No compensation cost related to employees was recognized prior to June 1, 2006. We recognized approximately $8,607 of tax benefits attributable to stock-based compensation expense recorded during the year ended December 31, 2007. This benefit was fully offset by a valuation allowance of the same amount due to the likelihood of future realization.
The following table lists the assumptions utilized in applying the Black-Scholes valuation model. We use historical data and management judgment to estimate the expected term of the option. Expected volatility is based on the historical volatility of our traded stock. We have not declared dividends in the past nor do we expect to do so in the near future, and as such we assume no expected dividend. The risk-free rate is based on the U.S. Treasury yield curve with the same expected term as that of the option at the time of grant.
A summary of our stock option activity and related information for the fiscal years ended May 31, 2005 and 2006, the seven months ended December 31, 2006, and the year ended December 31, 2007 is as follows:
A summary of options outstanding and exercisable as of December 31, 2007 is as follows:
Future minimum payments, by year and in the aggregate, under non-cancelable operating leases with initial or remaining terms of one year or more, consist of the following at December 31, 2007:
The above does not include rent payments related to our use of space within the offices of our major Indiana client, which is not subject to a written lease agreement.
(2) In connection with our Indiana contract that started January 1, 2007, we are required to maintain a performance bond in the amount of $1,000,000. In addition, a $25,000 performance bond is maintained in relation to a Third Party Administrator license in Maryland.
(3) Related to our discontinued hospital operations, Medicare guidelines allow the Medicare fiscal intermediary to re-open previously filed cost reports. Our fiscal 1999 cost report, the final year we were required to file a cost report, is being reviewed, in which case the intermediary may determine that additional amounts are due to or from Medicare. Management believes cost reports for fiscal years prior to fiscal 1999 are closed and considered final.
(4) We have insurance for a broad range of risks as it relates to our business operations. We maintain managed care errors and omissions, professional and general liability coverage. These policies are written on a claims-made basis and are subject to a $10,000 per claim self-insured retention. The managed care errors and omissions and professional liability policies include limits of liability of $1 million per claim and $3 million in the aggregate. The general liability has a limit of liability of $5 million per claim and $5 million in the aggregate. We are responsible for claims within the self-insured retentions or if the policy limits are exceeded. Management is not aware of any claims that could have a material adverse impact on our consolidated financial statements.
In February 2006, CBC entered into an agreement with Hythiam whereby we would have the exclusive right to market Hythiam’s substance abuse disease management program to CBC’s current and certain mutually agreed upon prospective clients. The program is an integrated disease management approach designed to offer less restrictive levels of care in order to minimize repeat detoxifications. Under the agreement, CBC will pay Hythiam license and service fees for each enrollee who is treated. As of December 31, 2007, there had been no material transactions resulting from this agreement.
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 directors, Michael Yuhas, who also serves as its current Chief Executive Officer. During the year ended December 31, 2007, CBC paid IHM $28,212 for monitoring and care coordination of intensive case management patients. In addition, IHM provided $15,000 of information technology consulting services to CBC.
We have accelerated our Sarbanes-Oxley Act compliance efforts in order to meet management attestation requirements for financial reporting internal controls as of December 31, 2007. Hythiam has paid for consulting services to accomplish our management review of such internal controls. Because this effort has benefited us, we will reimburse Hythiam a portion of the cost. In addition, we have benefited by being included under certain of Hythiam’s insurance policies. At December 31, 2007, $80,000 is included in accounts payable and accrued liabilities to cover expected reimbursements to Hythiam for these costs.
(b) Includes $ 416,000 of severance benefits due the Company’s CEO.