The Company does not currently own any real property. The following table sets forth certain information regarding the properties leased by the Company at May 31, 2001. All leases are triple net leases, under which the Company bears all costs of operations, including insurance, taxes, and utilities.
Prior to Fiscal 1993, the Company principally engaged in the ownership, operation, and management of psychiatric and substance abuse programs in Company owned, leased, or unaffiliated hospitals. During Fiscal 1999, the Company completed its plan to dispose of its hospital business segment. The selected consolidated financial data that follows includes the results of discontinued hospital operations for the fiscal years ended May 31, 1999, 1998, and 1997 and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. Reclassifications of prior year amounts have been made to conform to the current year's presentation (see
This Annual Report on Form 10-K includes forward-looking statements, the realization of which may be impacted by certain important factors discussed below under "Risk Factors -- Important Factors Related to Forward-Looking Statements and Associated Risks".
The Company reported a net loss of $1.1 million, or $0.29 per share, for the fiscal year ended May 31, 2001 compared to the net loss of $5.8 million, or $1.51 per share, for the fiscal year ended May 31, 2000. The following table summarizes the Company's financial data for the fiscal years ended May 31, 2001 and 2000 (in thousands):
RESULTS OF OPERATIONS - YEAR ENDED MAY 31, 2000 COMPARED TO THE YEAR ENDED MAY 31, 1999.
Operating revenues from continuing operations decreased by approximately 54.6%, or $21.3 million, for the fiscal year ended May 31, 2000 compared to the fiscal year ended May 31, 1999. This decrease is primarily attributable to the loss of two major contracts during the fourth quarter of Fiscal 1999 and two major contracts during the third quarter of Fiscal 2000.
Healthcare operating expenses from continuing operations decreased by 46.9%, or $14.0 million, for the fiscal year ended May 31, 2000 as compared to the fiscal year ended May 31, 1999. This decrease is attributable to the loss of revenue specific to two major contracts that terminated in Fiscal 1999 and two major contracts that terminated in Fiscal 2000. Healthcare operating expense as a percentage of net revenue from continuing operations increased from 76.3% for the fiscal year ended May 31, 1999 to 89.2% for the fiscal year ended May 31, 2000. This percentage increase is attributable to $0.3 million of claims expense recorded during the fiscal year ended May 31, 2000 specific to the Puerto Rico contract, which terminated in Fiscal 1999. Additionally, this percentage increase is attributable to continuing fixed costs that cannot be tied to the specific contracts that were terminated during Fiscal 1999.
General and administrative expenses from continuing operations decreased by approximately 23.8%, or $2.2 million, for the fiscal year ended May 31, 2000 as compared to the fiscal year ended May 31, 1999. This decrease is primarily attributable to $1.5 million of savings in legal and accounting fees, a $0.5 million reduction in building lease costs, a $0.2 million savings in directors fees, $0.2 million of savings in corporate salaries, and a $0.1 million reduction in shareholder reporting costs in comparison to costs incurred for the same period during Fiscal 2000. These savings were offset by $0.3 million of fees paid to marketing consultants during Fiscal 2000. General and administrative costs as a percentage of revenue increased from 23.4% for the fiscal year ended May 31, 1999 to 39.4% for the fiscal year ended May 31, 2000. This percentage increase is attributable to the continuing fixed costs that could not be tied to the specific contracts that were terminated during Fiscal 1999.
The Company's available sources of cash during the next fiscal year will be derived from operations. At this time, the Company cannot state with any degree of certainty whether additional equity or debt financing will be available to it and, if available, that the source of financing would be available on terms and conditions acceptable to the Company. Any potential sources of additional financing may be subject to business and economic conditions outside the Company's control.
The working capital and stockholders' deficits raise doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.
Assumptions relating to the foregoing involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its budgets which may in turn affect the Company's results. In light of the factors that can materially affect the forward-looking information included 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.
During recent fiscal years, a principal source of liquidity has been the sale of hospital facilities. During Fiscal 1999, the Company completed its plan to dispose of its hospital business segment and, as such, does not currently own any hospital facilities. Subject to various market conditions, an additional source of liquidity could be the issuance of additional equity securities, which could result in substantial dilution to stockholders.
In connection with the filing of its Federal income tax returns for fiscal years 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 to the Company 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 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.
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 other refunds requested will be received.
On August 21, 1998, the Company received an examination report, dated August 6, 1998, from the IRS advising the Company that it was disallowing $12.4 million of the $14.8 million of refunds previously received, and the additional refunds requested of $7.7 million. If the position of the IRS were to be upheld the Company would be required to repay $12.4 million in refunds previously received, plus accrued interest of approximately $6.7 million through May 31, 2001. Accordingly, the Company would be entitled to a repayment of the fees advanced to its tax advisor relating to these refunds of approximately $2.5 million, which is reported as "other receivable" in the accompanying balance sheets. This report commenced the administrative appeals process. The Company filed a protest letter with the IRS on November 6, 1998. The IRS reserves the right to assess and collect the tax previously refunded to the Company at any time during the appeals process.
The Company depends and will continue to depend upon the services of its senior management and skilled personnel.
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, 2001, there are no outstanding shares of Preferred Stock (see Note 16 to the audited consolidated financial statements -- "Preferred Stock, Common Stock, and Stock Option Plans"). 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 which 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. In addition, each share of the Company's Common Stock includes one right on the terms and subject to the conditions of the Rights Agreement between the Company and Continental Stock Transfer & Trust Company. 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.
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 results of operations of the hospital business segment, which was disposed of during Fiscal 1999, are shown in discontinued operations in the accompanying statements of operations.
The Company's managed care activities are performed under the terms of agreements with health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), and other payers to provide contracted medical services to subscribing participants. Under these agreements, revenue arises from agreements to provide contracted services to qualified beneficiaries and is earned monthly based on the number of qualified participants regardless of services actually provided (generally referred to as capitation arrangements). The Company's revenues from providing other behavioral healthcare services are earned on a fee-for-service basis and are recognized as services are rendered.
The Company attempts to control its costs and risk by entering into contractual relationships with healthcare providers including hospitals, physician groups and other managed care organizations either on a sub-capitated, a discounted fee-for-services, or a per-case basis. The Company's capitation contracts typically exclude risk for chronic care patients. The cost of healthcare services is recognized in the period that the Company is obligated to provide such services. Certain contracted healthcare providers assume the financial risk for participant care rendered by them and they are compensated on a sub-capitated basis.
The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate. The estimates are continually reviewed and adjusted as experience develops or new information becomes known with adjustments included in current operations.
fair value of the options granted in accordance with SFAS Statement 123, "Accounting for Stock-based Compensation", and are being amortized to expense over the vesting period of the options. Amortization for Fiscal 2001 and 2000 amounted to $11,000 and $8,000, respectively.
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments whether or not recognized in the balance sheet for which it is practical to estimate that value.
The Company cannot state with any degree of certainty whether any required additional equity or debt financing to meet its obligations will be available to it during Fiscal 2002 and, if available, that the source of financing would be available on terms and conditions acceptable to the Company.
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.
(2) The Company has two contracts with one HMO to provide behavioral healthcare services to contracted members in Texas. These combined contracts represented approximately 9.0%, or $1.7 million, 11.8%, or $2.1 million, and 6%, or $2.4 million, of the Company's operating revenue for the fiscal years ended May 31, 2001, 2000, and 1999, respectively. The Company renewed these contracts for two years, with effective dates of February 8, 2000.
(3) 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. For the fiscal year
(4) During Fiscal 1999, the Company provided services to members of Humana Health Plans of Puerto Rico, Inc. under the terms of management service agreements, which expired on April 30, 1999. For the fiscal year ended May 31, 1999, these agreements accounted for approximately 44%, or $17.1 million, of the Company's operating revenues from continuing operations.
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.
The following table summarizes changes in the Company's allowance for doubtful accounts for the years ended May 31, 2001, 2000 and 1999:
*Includes $1,673 charged to discontinued operations. **Excludes $448 in 2001 and $349 in 2000 of recoveries from accounts previously written off.
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:
(1) Includes $90,000 for write-off of leasehold improvements. (2) Included in Accounts payable and accrued liabilities at May 31, 2000 (see Note 10 - "Accounts Payable and Accrued Liabilities").
Reconciliation between the provision for income tax applicable to continuing operations and the amount computed by applying the statutory Federal income tax rate (34%) to loss from continuing operations before income tax is as follows:
Significant components of the Company's deferred tax assets and deferred tax liabilities are as follows:
At May 31, 2001, the Company had Federal accumulated net operating loss carryforwards of approximately $40.3 million, which expire in 2010 through 2021. 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.
The Company may be unable to utilize some or all of its allowable tax deductions or losses, which depends upon factors including the availability of sufficient taxable income from which to deduct such losses during limited carryover periods. Further, the Company's ability to use any net operating losses may be subject to limitation in the event that the Company issues or agrees to issue substantial amounts of additional equity. The Company monitors the potential for "change of ownership" and believes that its financing plans as contemplated will not cause a "change of ownership"; however, no assurances can be made that future events will not act to limit the Company's tax benefits.
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 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 other refunds requested will be received.
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 172(f) carryback. The other 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.
On July 11, 2000, the Company submitted an Offer in Compromise (the "Offer") to the Appeals Office of the IRS to resolve the controversy with respect to the refunds at a substantially reduced amount. The IRS is currently evaluating the Offer. A preliminary meeting with the IRS with respect to the Offer took place in October 2000 and, subsequent to this meeting, the Company has provided additional documents to the IRS. The Company has continued its discussions with the IRS during the first quarter of Fiscal 2002 and expects to continue such discussions during the second quarter of Fiscal 2002. There can be no assurance that the IRS will accept the Offer.
During the fiscal year ended May 31, 1999, the Company sold its non-operating facility located in Fort Worth, Texas for $1.8 million in cash, which approximated its net book value.
NOTE 16 -- PREFERRED STOCK, COMMON STOCK, AND STOCK OPTION PLANS
The Board of Directors had designated 41,260 shares of Preferred Stock as Series A Non-Voting 4% Cumulative Convertible Preferred Stock, $50 par value (the "Preferred Stock). On January 17, 1997, the Preferred Stock was issued in exchange for the secured convertible note due January 9, 1997, in the principal amount of $2.0 million and bearing interest at the rate of 12% per annum and $63,000 of interest accrued thereon. The Preferred Stock had a cumulative quarterly dividend of 4% per annum which was payable when and as declared by the Board of Directors. However, no dividends were to be paid on the Preferred Stock until the Company had positive stockholder's equity. The Preferred Stock was preferred to the extent of $50 per share plus accrued dividends; was convertible into shares of Common Stock at $6 per share, which was the same price at which the principal of the note was exchangeable; and had no voting privileges.
During February 1999, the 41,260 outstanding shares of Preferred Stock were converted into 343,833 shares of Common Stock.
On April 19, 1988, the Company declared a dividend of one common share purchase right ("Right") for each share of Common Stock outstanding at May 6, 1988. Each Right entitles the holder to purchase one share of Common Stock at a price of $300 per share, subject to certain anti-dilution adjustments. The Rights are not exercisable and are transferable only with the Common Stock until the earlier of ten days following a public announcement that a person has acquired ownership of 25% or more of the Company's Common Stock or the commencement or announcement of a tender or exchange offer, the consummation of which would result in the ownership by a person of 30% or more of the Company's Common Stock. In the event that a person acquires 25% or more of the Company's Common Stock or if the Company is the surviving corporation in a merger and its Common Stock is not changed or exchanged, each holder of a Right, other than the 25% stockholder (whose Rights will be void), will thereafter have the right to receive on exercise that number of shares of Common Stock having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or more than 50% of its assets are sold, proper provision shall be made so that each Right holder shall have the right to receive or exercise, at the then current exercise price of the Right, that number of shares of Common Stock of the acquiring company that, at the time of the transaction, would have a market value of two times the exercise price of the Right. The Rights are redeemable at a price of $.20 per Right at any time prior to ten days after a person has acquired 25% or more of the Company's Common Stock.
Authorized shares of common stock reserved for possible issuance for convertible debentures and stock options are as follows at May 31, 2001:
The Company has a 1995 Incentive Plan (the "1995 Plan"). The 1995 Plan provides for the granting of stock options, stock appreciation rights, limited stock appreciation rights, and restricted stock grants to eligible employees and consultants to the Company. Grants issued under the 1995 Plan 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 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, 2001, there were 28,350 options available for grant and there were 888,525 options outstanding, of which 653,275 options were exercisable, under the 1995 Plan.
On December 14, 1998, the Company's Board of Directors approved the re-pricing of stock option grants for Executive Officers, subject to each Executive Officer returning his or her old options for cancellation. For every two options cancelled under the 1988 Incentive Stock Option and Non-statutory Stock Option Plans, one option was reissued under the 1995 Incentive Stock Option Plan. For every four options cancelled under the 1995 Incentive Stock Option Plan, three new options were reissued. All reissued options are subject to the provisions of the 1995 Plan, including vesting in accordance with the Company's vesting policy. The exercise price of the reissued options equals the December 14, 1998 closing price of $4.00.
A summary of the Company's stock option activity and related information for the years ended May 31 is as follows:
The fair value of these options was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
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, 2001:
(1) During the fiscal year ended May 31, 2000, the Company renewed one contract, which included a requirement that the Company maintains a $550,000 performance bond throughout the two-year renewal term of the contract. This bond was secured by a $150,000 cash deposit, which is included in the non-current, restricted cash balance at May 31, 2001 and 2000. The original term of the bond was for one year and the bond is automatically renewable as long as the contract remains in force.
(3) With respect to the contingency related to prior years' income taxes, see Note 13, "Income Taxes".
(4) During the year ended May 31, 2001, the Company reached an agreement with Humana to resolve all outstanding disputed matters with Humana Health Plans of Puerto Rico, Inc. related to the Company's contract with Humana, which expired on March 31, 1999. Such settlement did not require any payment by either party. As a result of the resolution, the Company has removed the $10.5 million receivable and related accrued claims payable from the accompanying balance sheet. These amounts were specific to the pharmacy and laboratory costs that were the financial responsibility of the Company, but were administered by Humana. Because of the uncertainty surrounding the determination of the actual pharmacy and laboratory costs incurred, the Company had previously reported a 100% loss ratio for the contract. Additionally, as a result of the resolution, Humana released approximately $1.0 million to the Company, which was previously restricted in accordance with the terms of the contract. Accordingly, the May 31, 2001 balance sheet reflects the reclassification of $1.0 million from restricted cash to cash and cash equivalents.
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.
(a) Includes a $0.5 million non-operating loss related to the note receivable prepayment arrangement. (b) Includes a $0.3 million reduction in interest expense in connection with a change in estimate specific to one third party liability and $0.2 million of income in connection with one legal settlement. (c) Includes $0.2 million of income in connection with one legal settlement. (d) Includes a $0.3 million bad debt recovery specific to one contract that terminated in 1999 and $0.1 million of non-operating income specific to proceeds received from one insurance settlement in which the Company was a claimant.
Fiscal 2000 results also included approximately $0.1 million of operating costs incurred to manage the Company's Year 2000 readiness program.