We do not own any real property. The following table sets forth certain information regarding our leased properties as of May 31, 2005. All leases are full service leases under which CompCare bears only those costs of operations and property taxes exceeding the base-year expenses.
The Company reported operating income of $5,000 and a net loss of $268,000, or $0.05 loss per share (basic and diluted) for the fiscal year ended May 31, 2005, compared to an operating loss of $80,000 and a net loss
of $777,000, or $0.18 loss per share (basic and diluted), for the fiscal year ended May 31, 2004. Operating revenues decreased by 11.3%, or approximately $3.1 million, to $24.5 million for the fiscal year ended May 31, 2005 compared to $27.6 million for the fiscal year ended May 31, 2004. This decrease is primarily attributable to the loss of one major customer in Florida that accounted for $4.4 million of revenue during the fiscal year ended May 31, 2004, offset partially by increased revenues primarily in Connecticut and Texas.
Results of Operations - Year Ended May 31, 2004 As Compared to the Year Ended May 31, 2003.
General and administrative expenses, which included $122,000 of legal and consulting services incurred in connection with one unsuccessful bid in Tennessee, decreased by $74,000, or 2.1%, for the fiscal year ended May 31, 2004 as compared to the fiscal year ended May 31, 2003. General and administrative expense as a percentage of operating revenue increased from 10.8% for the fiscal year ended May 31, 2003 to 12.3% for the fiscal year ended May 31, 2004 due to the previously described decrease in operating revenue.
Historically and during our fiscal year ended May 31, 2005, we have experienced consistently low utilization during our first fiscal quarter, which comprises the months of June, July, and August, and increased
Our discussion and analysis of our financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the consolidated financial statements, most notably our estimate for claims incurred but not yet reported (“IBNR”). On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe our accounting policies specific to our accrued claims payable (IBNR), revenue recognition, marketable securities, and goodwill involve our most significant judgments and estimates that are material to our consolidated financial statements (see Note 2 - “Summary of Significant Accounting Policies” to the audited, consolidated financial statements).
On December 16, 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which requires companies to record compensation expense for stock options issued to employees at an amount determined by the fair value of the options. SFAS No. 123R was initially effective for the Company in its second quarter of fiscal 2006. However, due to an SEC extension of the compliance date in April 2005, SFAS No. 123R will now be effective for the Company beginning June 1, 2006. As such, effective with the Company’s first fiscal quarter of fiscal 2007, SFAS No. 123R will eliminate our ability to account for stock options using the method permitted under APB 25 and instead require us to recognize compensation expense should the Company issue stock options to its employees or non-employee directors. The Company is in the process of evaluating the impact adoption of SFAS No. 123R will have on the 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 other Company reports, 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 the Company’s 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 other Company reports, SEC filings, statements, and presentations. These risks and uncertainties include local, regional, and national economic and political conditions, the effect of governmental regulation, the competitive environment in which the Company operates, and other risks detailed from time to time in the Company’s SEC reports.
We typically contract with small to medium sized HMO’s which 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. Our clients may also determine to manage the behavioral healthcare benefits “in house” and, as a result, discontinue contracting with the Company. Additionally, our clients may be acquired by larger HMO’s, in which case there can be no assurance that the acquiring company would renew our contract.
Many managed care companies, including nine of our existing clients, provide services to groups covered by Medicaid and/or CHIP programs. Recent state budgetary cutbacks to such programs have reduced reimbursement rates and could ultimately affect companies such as CompCare.
As of May 31, 2005, we managed approximately 683,000 lives in connection with behavioral and substance abuse services covered through CHIP and Medicaid programs in Texas and Medicaid in Connecticut, Florida, and Michigan. Any changes in CHIP or Medicaid reimbursement could ultimately affect the Company through contract bidding and cost structures with the health plans first impacted by such changes. Benefits available to Texas CHIP recipients were significantly reduced for the five-month period September 1, 2003 to January 31, 2004 as a result of legislative bills passed by the Texas State legislature. Although subsequent legislation restored the majority of benefits available to CHIP recipients effective February 1, 2004, the temporary reduction in revenues had a negative impact on the Company’s results of operations for the fiscal year ended May 31, 2004. Such changes, if implemented in the future, could have a material, adverse impact on our operations. Additionally, we cannot predict which states in which we operate may pass legislation that would reduce our revenue through changes in the reimbursement rates or in the number of eligible participants. In either case, we may be unable to reduce our costs to a level that would allow us to maintain current gross margins specific to our Medicaid and CHIP programs.
An effective and secure information system, available at all times, is vital to our health plans and their members. We depend on our computer systems for significant service and management functions, such as providing membership verification, monitoring utilization, processing provider claims, and providing regulatory data and other client and managerial reports. Any loss of availability of our current information system, or implementation failure related to our new information system currently being developed, would cause a disruption in operations and impact our performance. There can be no assurance that implementation will be successful or that it will be completed within the expected timeframe.
The Company is continually and aggressively pursuing new business. However, the smaller size and financial condition of our company has proved a deterrent to some prospective customers. Additionally, we will likely have difficulty in matching the financial resources expended on marketing characteristic of our competitors. As a result, we may not be able to realize our forecasted short and long-term growth plans.
CompCare holds licenses or certificates to perform utilization review and TPA services in certain states. There can be no assurance that additional utilization review or TPA licenses will not be required or, if required, that CompCare will qualify to obtain such licenses. In many states, entities that assume risk under contract with licensed insurance companies or health plans have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure as either an insurer or HMO in any state. If the regulatory positions of these states were to change, our business could be materially affected until such time as we are able to meet the regulatory requirements, if at all. Additionally, some states may determine to contract directly with companies such as ours for managed behavioral healthcare services in which case they may also require us to maintain financial reserves or net worth requirements that we may not be able to meet. Currently, we cannot quantify the potential effects of additional regulation of the managed care industry, but such costs will have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.
CompCare is subject to the requirements of HIPAA. The purpose of the HIPAA is to improve the efficiency and effectiveness of the healthcare system through standardization of the electronic data interchange of certain administrative and financial transactions and to protect the security and privacy of protected health information. While we expect to meet all compliance rules and timetables with respect to the HIPAA regulations, failure to do so may result in penalties and have a material adverse effect on the Company’s ability to retain its customers or to gain new business.
Currently, our Series A Preferred Shareholder is able to exercise decisive influence over our major corporate decisions.
As of June 14, 2005, Woodcliff Healthcare Investment Partners LLC (“Woodcliff”), as a result of its purchase of 14,400 shares of our Series A Shares, $50.00 par value, beneficially owned capital stock representing approximately 43% of the Company’s voting power and has the right to designate a majority of the members of our Board of Directors (see “Recent Developments” on page 1). As a result, holders of our common stock are subject to the following risks, among others:
Woodcliff can exercise decisive influence over major decisions involving the Company and its assets; and
Woodcliff may have interests that differ from those of the Company’s other stockholders.
The holders of our Series A Shares have significant rights and preferences over the holders of the common stock.
The holders of our Series A Shares have other rights and preferences, including the following:
to convert their preferred stock into an increased number of shares of common stock as a result of antidilution adjustments;
to vote together with the holders of the common stock on an "as-converted" basis on all matters;
to designate representatives to be appointed to our board of directors and, voting together as a single class, to elect up to five directors; and
The Company is actively marketing the eye care memberships we acquired in November 2004, but our efforts have not yet been successful. If our marketing plan fails with respect to these memberships, we may have to write off some or all of the $125,000 we paid to acquire them. While we believe our marketing efforts will be successful, there can be no assurance the Company will sell a quantity of memberships at prices that will allow us to recover the $125,000 cost.
Consolidated Statements of Stockholders’ Deficit, Years Ended May 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows, Years Ended May 31, 2005, 2004 and 2003
We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation and subsidiaries as of May 31, 2005 and 2004 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the fiscal years then ended. 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.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Comprehensive Care Corporation (the “Company” or “CompCare”) is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the “Company” include Comprehensive Behavioral Care, Inc. (“CBC”) and subsidiary corporations. The Company, primarily through its wholly owned subsidiary, CBC, 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 Company also provides prior and concurrent authorization for physician-prescribed psychotropic medications for a major Medicaid HMO in Indiana and Michigan. The managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. The customer base for its services includes both private and governmental entities. The Company’s services are provided primarily by unrelated vendors on a subcontract or subcapitated basis. The Company’s fiscal year ended May 31, 2005 (“fiscal 2005”).
Estimated future healthcare costs and expenses in excess of estimated future premiums are recorded as a loss when determinable. No such deficiencies existed at May 31, 2005 or May 31, 2004.
During the quarter ended February 28, 2005, the trust agreement specific to the Company’s Directors and Officers liability insurance policy was terminated and all funds, which amounted to approximately $253,000, were released to the Company. As such, at May 31, 2005, restricted cash consists only of a $72,000 deposit required under the terms of the Company’s Tampa office lease.
The Company’s marketable securities, which is comprised of one “available for sale” security, received in lieu of cash compensation for consulting services provided by the Company to one party, are reflected in the consolidated balance sheet at fair market value, with unrealized gains or losses, if any, included in other comprehensive income within stockholders’ deficit. Realized gains or losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are reported in other income (expense). At May 31, 2005, management determined that the loss on investment in marketable securities is other than temporary in nature and, as such, the Company recognized an impairment loss of approximately $118,000 during May 2005. Factors considered in determining whether the loss was other than temporary included the financial condition of the issuer, the fact that this investment has been in a continuous unrealized loss position since November 2004 when the Company acquired this security, and the Company’s intent to hold this investment for a period of time sufficient to allow for any anticipated recovery. At May 31, 2005, after recognizing the impairment loss on this investment, the carrying value of approximately $11,000 is equal to the fair value of this security. As such, the Company has no unrealized gains or losses at May 31, 2005.
Property and equipment are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives ranging from 3 to 12 years. Leasehold improvements are amortized over the shorter of the lease term or the asset’s useful life. Depreciation and amortization expense was $96,000, $107,000, and $195,000 for the fiscal years ended May 31, 2005, 2004 and 2003, respectively.
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets,” which establishes new guidance for the treatment of goodwill and other intangible assets. Pursuant to SFAS 142, which was adopted by the Company effective June 1, 2001, goodwill is not amortized but is periodically evaluated for impairment to carrying amount, with decreases in carrying amount recognized immediately. The Company reviews goodwill for impairment annually, or more frequently if changes in circumstances or the occurrence of events suggest an impairment exists. The test for impairment of goodwill requires the Company to make estimates about fair value, which are based on projected future cash flows. In accordance with SFAS 142, the Company had performed an impairment test within six months of the adoption date and determined that no impairment of goodwill had occurred as of such date. In addition, the Company performed an annual impairment test as of May 31, 2005, 2004 and 2003 and determined that no impairment of goodwill had occurred as of such dates. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001.
The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims incurred but not yet reported (“IBNR”) to the Company. The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. However, actual claims incurred could differ from the estimated claims payable amount reported as of May 31, 2005 and 2004. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate.
The carrying amounts and fair values of the Company’s financial instruments at May 31, 2005 and 2004 are as follows:
January 7, 2005, the Company was informed that another bidder was selected to negotiate this ASO contract. If the State of Connecticut is successful in their negotiations with the selected bidder and the State of Connecticut continues with the implementation of its ASO plans, the Company’s existing contract may be terminated sometime during the Company’s third quarter of fiscal 2006, which begins December 1, 2005.
(3) The Company has contracts with one HMO to provide behavioral healthcare services to contracted commercial, Medicaid, and Children’s Health Insurance Program (“CHIP”) members in Texas. This business accounted for approximately 21.5%, or $5.2 million, 14.5%, or $4.0 million, and 11.9%, or $3.9 million of the Company’s operating revenues during the fiscal years ended May 31, 2005, 2004, and 2003, respectively. This HMO has been a customer of the Company since November 1998. The original contract term was for one year and the contract provides for automatic one-year renewal terms.
Results for the fiscal year ended May 31, 2004 include a change in estimate resulting in a $387,000 charge recorded in August 2003 related to hospital operations disposed of in prior years, which is included under discontinued operations in the accompanying consolidated financial statements. The charge primarily relates to settlement of the Company’s Fiscal 1999 Medicare cost report for its Aurora, Colorado facility that was sold by the Company during Fiscal 1999. The settlement requires the Company to repay $400,000 specific to Fiscal 1999, less approximately $106,000 in Medicare refunds that were due the Company in connection with its Fiscal 1995 and 1996 Medicare cost report settlements for this same Aurora, Colorado hospital. Further, the Medicare intermediary accepted the Company’s proposed, 24-month, 12.125% installment payment plan to repay the net amount of approximately $300,000, of which approximately $55,000 remains to be paid as of May 31, 2005, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet at May 31, 2005.
7 1/2% convertible subordinated debentures due April, 2010, interest payable semi-annually in April and October*
At May 31, 2005, the Company’s Federal net operating loss carryforwards total approximately $3.5 million resulting from losses incurred in the fiscal years ended May 31, 2002 through 2005, which expire in 2022 through 2025. 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. The private placement transaction completed subsequent to May 31, 2005 constitutes a “change of ownership” under IRS rules and, as a result, will limit the Company’s tax benefits beginning in fiscal 2006 (see Note 17(1) - “Subsequent Events”). Further, the Company’s ability to use any net operating losses may be subject to further limitation in the event that the Company issues or agrees to issue substantial amounts of additional equity.
After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at May 31, 2005 and 2004, was necessary to fully offset the deferred tax assets based on the likelihood of future realization.
The Company offers a 401(k) Plan (the “Plan”), which is a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of its eligible employees. All full-time and part-time employees who have attained the age of 21 and have completed one thousand hours of service are eligible to participate in the Plan. Each participant may contribute from 2% to 50% of his or her compensation to the Plan up to the annual maximum allowed amount, which was $14,000 during Calendar 2005, subject to limitations on the highly compensated employees to ensure the Plan is non-discriminatory. Company contributions are discretionary and are determined by the Company’s management. The Company did not make a matching contribution in fiscal 2005. The Company’s employer matching contributions were approximately $2,300, and $9,000 to the Plan in fiscal 2004 and 2003, respectively.
Note 14 - Preferred Stock, Common Stock, and Stock Option Plans
Authorized shares of common stock reserved for possible issuance for convertible debentures and stock options are as follows at May 31, 2005 (see Note 17(1) - “Subsequent Events” - with respect to shares of common stock reserved for possible issuance for Series A Shares):
(a) At May 31, 2005, the debentures are convertible into 9,044 shares of common stock at a conversion price of $248.12 per share. Following the private transaction completed in June 2005 (see Note 17(1) - “Subsequent Events”), the debentures are convertible into 12,377 shares of common stock at a conversion price of $181.30.
The Company leases certain facilities and equipment. The facility leases contain escalation clauses based on the Consumer Price Index and provisions for payment of real estate taxes, insurance, and maintenance and repair expenses. Total rental expense for all operating leases was $0.6 million in each of the fiscal years ended May 31, 2005, 2004, and 2003.
In connection with the Company’s Preferred Provider Network license in Connecticut, the Company is required to maintain a performance bond during all applicable terms of the license. As such, the Company maintains a performance bond of $2,400,000 in compliance with this requirement. In addition, a contract with one existing client requires the Company to maintain two performance bonds totaling $330,000 throughout the contract term.
The Company is actively marketing eye care memberships it acquired in November 2004. If the Company’s marketing plan fails with respect to these memberships, it may have to write off some or all of the $125,000 the Company paid to acquire them (see Note 7 - “Other Assets”). While management believes the Company’s marketing efforts will be successful, there can be no assurance the Company will sell a quantity of memberships at prices that will allow the Company to recover the $125,000 cost.
On June 14, 2005, pursuant to a Securities Purchase Agreement (the “Securities Purchase Agreement”), the Company completed a private transaction for the sale of 14,400 shares of its Series A Convertible Preferred Stock, $50.00 par value (“Series A Shares”), to one investor for an aggregate of $3,600,000 in gross proceeds to the Company. The Company realized net cash proceeds of approximately $3.4 million thereby reducing its working capital deficiency and stockholders’ deficit each by approximately $3.4 million as a result of this transaction. The shares issued in connection with this private placement have not been registered and may be resold pursuant to Rule 144 under the general rules and regulations of the Securities Act of 1933 as amended assuming that all of the conditions and provisions of the rule are complied with. The earliest date that these shares would become eligible for resale without a registration statement would be June 14, 2006. Further, each share of the Series A Shares is convertible into 294.12 shares, or 4,235,328 shares, of the Company’s common stock, subject to anti-dilution and other customary adjustments. If the shares were converted into the Company’s common stock immediately after the closing of the transactions contemplated by the Securities Purchase Agreement, the common stock issuable upon such conversion would represent approximately 43% of the Company’s outstanding common stock, excluding exercises of any options or warrants outstanding at such time. Certain members of the Investor are non-management employees of the Company. The Securities Purchase Agreement also provides that the Company may require the Investor to purchase up to approximately 2.95 million shares of the Company’s common stock, subject to the Company attaining certain financial targets and satisfying other conditions.