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, 2002. All leases are triple net leases, under which the Company bears all costs of operations, including insurance, taxes, and utilities.
* Effective June 30, 2002, the Company’s Idaho operations were reduced as a result of the termination of one contract which accounted for less than 2% of operating revenues during Fiscal 2002. The Company’s continuing Idaho business is from prison-based programs requiring only minimal administrative support. As a result, effective August 31, 2002, the Company expects to eliminate its Idaho administrative office.
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 and 1998 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”.
RESULTS OF OPERATIONS - YEAR ENDED MAY 31, 2002 COMPARED TO THE YEAR ENDED MAY 31, 2001.
Healthcare operating expenses increased by approximately $9.3 million, or 60.7%, for the fiscal year ended May 31, 2002 as compared to the fiscal year ended May 31, 2001. This increase is directly attributable to revenue growth as described above. Healthcare operating expense as a percentage of operating revenue increased by 4.8%, from 84.3% for the fiscal year ended May 31, 2001 to 89.1% for the fiscal year ended May 31, 2002. This increase is primarily attributable to a change in revenue mix resulting in increased Medicaid and Medicare membership during Fiscal 2002 compared to Fiscal 2001.
General and administrative expenses decreased by approximately $0.3 million, or 7.8%, for the fiscal year ended May 31, 2002 as compared to the fiscal year ended May 31, 2001. This decrease is attributable to the Company’s continuing efforts to reduce general and administrative costs. General and administrative expense as a percentage of operating revenue decreased from 21.1% for the fiscal year ended May 31, 2001 to 12.8% for the fiscal year ended May 31, 2002.
Other operating expenses increased $43,000 for the fiscal year ended May 31, 2002 compared to the fiscal year ended May 31, 2001. This increase is primarily attributable to the $327,000 reduction in the amount of recovery of doubtful accounts year over year, offset by a $242,000 decrease in depreciation expense, which results from assets being fully depreciated and, also, from decreases in capital spending. Additionally, Fiscal 2002 results do not include any amortization expense compared to $72,000 of amortization expense recorded during the fiscal year ended May 31, 2001 (see Note 10 to the audited financial statements - “Goodwill”).
Healthcare operating expenses decreased by approximately $0.5 million, or 3.0%, for the fiscal year ended May 31, 2001 as compared to the fiscal year ended May 31, 2000. This decrease is attributable to the cost savings realized from the centralization of certain contract management and clinical functions that began in Fiscal 2000. Healthcare operating expense as a percentage of operating revenue decreased from 89.2% for the fiscal year ended May 31, 2000 to 84.3% for the fiscal year ended May 31, 2001.
Other operating expenses decreased by $0.8 million for the fiscal year ended May 31, 2001 compared to the fiscal year ended May 31, 2000. This decrease is primarily attributable to the $0.8 million of restructuring expense in Fiscal 2000.
The Company has a long-term debt obligation of approximately $2.2 million specific to its 7 1/2% convertible subordinated debentures, which are due in April 2010. By reason of the terms of the indenture, the Company is required to make semi-annual interest payments to its debenture holders in April and October of each year, but is not required to make any principal payments, sinking fund payments, or to redeem any securities prior to maturity in 2010. The debentures are convertible into approximately 9,000 shares of Common Stock at a conversion price of $248.12 per share.
on terms and conditions acceptable to the Company. The Company does not currently engage in transactions relating to market sensitive risk instruments.
During Fiscal 2001 and Fiscal 2000, management took steps to trim costs and save cash, including making significant staff reductions, centralizing certain contract management and clinical functions, and eliminating the Company’s California administrative office and related executive staff positions. The Company’s continuation as a going concern is dependent upon its ability to achieve profitability, to generate sufficient cash flow to meet its obligations on a timely basis, and to obtain additional financing as may be required.
This Annual Report on Form 10-K contains certain forward-looking statements that are based on current expectations and involve a number of risks and uncertainties. Factors that may materially affect revenues, expenses and operating results include, without limitation, the Company’s success in (i) expanding the managed behavioral healthcare operations, (ii) effective management in the delivery of services, (iii) risk and utilization in context of capitated payouts, and (iv) retaining certain refunds from the IRS (see Note 14 to the audited consolidated financial statements - “Income Taxes”).
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
the Company’s contracts. The Company cannot predict the effect healthcare reforms may have on its business and no assurance can be given that any such reforms will not have a material adverse effect on the Company.
The Company is subject to extensive and evolving state and federal regulations as well as changes in Medicaid and Medicare reimbursement that could have an effect on the profitability of the Company’s contracts. These regulations range from licensure and compliance with regulations related to insurance companies and other risk-assuming entities, to licensure and compliance with regulations related to healthcare providers. These laws and regulations may vary considerably among states. As a result, the Company may be subject to the specific regulatory approach adopted by each state for regulation of managed care companies and for providers of behavioral healthcare treatment services. The Company is currently licensed in one state to operate as a Limited Health Service Organization and is required to comply with certain laws and regulations that, among other things, may require the Company to maintain certain types of assets and minimum levels of deposits, capital, surplus, reserves, or net worth. The Company holds licenses or certificates to perform utilization review and third party administrator (“TPA”) services in certain states. Certain of the services provided by the Company’s managed behavioral healthcare subsidiaries may be subject to such licensing requirements in other states. There can be no assurance that additional utilization review or TPA licenses will not be required or, if required, that the Company 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, the Company has not sought licensure as either an insurer or HMO in certain states. If the regulatory positions of these states were to change, the Company’s business could be materially affected until such time as the Company meets the regulatory requirements. Currently, management cannot quantify the potential effects of additional regulation of the managed care industry, but such costs will have an adverse effect on further operations to the extent that they are not able to be recouped in future managed care contracts.
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
The Company is subject to the various provisions of the Sarbanes-Oxley Act of 2002, which include a requirement that the Company must have at least one qualified, financial expert on its independent audit committee or be subject to not having its stock included in the Over The Counter Bulletin Board listings. The Company has until April 2003 to comply with this requirement.
We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation and subsidiaries as of May 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the three years in the period ended May 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
In cases where the Company retains the financial responsibility for authorizations, hospital utilization, and the cost of other behavioral healthcare services, the Company establishes an accrual for estimated claims payable (see “Accrued Claims Payable” below).
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, 2002 or May 31, 2001.
Cash in excess of daily requirements is invested in short-term investments with original maturities of three months or less. These investments aggregated $2.6 million and $1.5 million at May 31, 2002 and 2001, respectively. These investments are included in cash equivalents in the accompanying consolidated balance sheets.
As of May 31, 2002 and 2001, non-current restricted accounts include $0.3 million of cash held in trust in connection with the Company’s Directors and Officers liability insurance policy.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets”, which establishes new standards for the treatment of goodwill and other intangible assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 31, 2001 and permitted early adoption for companies with a fiscal year beginning after March 15, 2001. SFAS 142 prescribes that amortization of goodwill will cease as of the adoption date. The Company elected to adopt SFAS 142 effective June 1, 2001 and, as a result, there has been no amortization expense recorded during Fiscal 2002 (see Note 10 - “Goodwill”). In accordance with SFAS 142, the Company has performed an impairment test within six months of the adoption date and has determined that no impairment of goodwill had occurred as of such date. The Company will perform an impairment test at least annually thereafter and whenever events and circumstances occur that might effect the carrying value of goodwill.
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. 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.
The Company calculates deferred taxes and related income tax expense using the liability method. This method determines deferred taxes by applying the current tax rate to net operating loss carryforwards and to the cumulative temporary differences between the recorded carrying amounts and the corresponding tax basis of assets and liabilities. A valuation allowance is established for deferred tax assets unless their realization is considered more likely than not. The Company’s provision for income taxes is the sum of the change in the balance of deferred taxes between the beginning and the end of the period and income taxes currently payable or receivable.
The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, in the event that the exercise price of the Company’s employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recognized.
For cash and cash equivalents, notes receivable, and restricted cash, the carrying amount approximates fair value. For long-term debt, the fair value is based on the estimated market price for the Debentures on the last day of the fiscal year.
The accompanying consolidated financial statements are prepared on a going concern basis. For the years ended May 31, 2002, 2001 and 2000, the Company has incurred net losses and, as of May 31, 2002, has a stockholders’ deficit of $12.5 million and a working capital deficiency of $12.3 million. The working capital deficiency results primarily from a $12.1 million liability related to Federal income tax refunds received in prior years. The ultimate outcome of the Internal Revenue Service audit whereby it is seeking recovery of the refunds from the Company, including the amount to be repaid, if any, and the timing thereof, is not determinable (see Note 14 - “Income Taxes”).
Management cannot state with any degree of certainty whether any required additional equity or debt financing will be available to it during Fiscal 2003 and, if available, that the source of financing would be available 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, which is dependent upon its ability to continue to generate sufficient cash flow to meet its obligations on a timely basis, successfully resolve the Internal Revenue Service audit, obtain additional financing as may be required and, ultimately, to attain profitability. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
The Company had contracts with Humana Health Plans (“Humana”) under which it provided services to members in Florida. Effective June 30, 2000, Humana completed the sale of its North Florida Medicaid business to another Florida HMO. Additionally, Humana’s contracts with the Company, which covered specific commercial, Medicaid
and Medicare populations of approximately 60,000 members in Florida terminated September 30, 2000. Humana contracts accounted for $0.7 million, or 3.9%, of operating revenue for the fiscal year ended May 31, 2001 compared to $6.0 million, or 33.8%, for the fiscal year ended May 31, 2001.
During the fourth quarter of the fiscal year ended May 31, 2001, the Company implemented a new contract to provide behavioral healthcare services to Connecticut members under contract with one HMO. For the fiscal year ended May 31, 2002, this contract represented approximately 12.7%, or $3.5 million, of the Company’s operating revenue compared to 3.2%, or $0.6 million for the fiscal year ended May 31, 2001. Additionally, this contract provides that the Company, through its contract with this HMO, receives additional funds directly from a state reinsurance program. During the fiscal year ended May 31, 2002, the Company filed reinsurance claims totaling approximately $3.8 million. Such claims represent cost reimbursements and, as such, are not included in the reported operating revenues and are accounted for as reductions of healthcare operating expenses. As of May 31, 2002, the Company has reported $0.6 million as a component of accounts receivable, with $2.0 million reported as accrued reinsurance claims payable, in the accompanying balance sheet. In the event that the Company does not collect these reinsurance amounts, the Company could remain liable for the costs of the specific services provided to members that qualify for such reimbursements. For non-reinsurance claims incurred but not reported under this contract, the Company estimates its claims payable using a similar method as that used for other existing contracts. As of May 31, 2002, there was a limited amount of historical data available to the Company for use in such estimates specific to this contract. Thus, actual results could differ from the claims payable amount reported as of May 31, 2002. While the Company believes its estimate to be adequate, management will review and make any necessary changes to its estimate as additional data becomes available. This HMO has been our customer since April 2001. The original contract term expires December 31, 2002 and provides for automatic one-year renewals unless terminated by either party.
The Company has three contracts with one HMO to provide behavioral healthcare services to contracted members in Texas. These combined contracts represented approximately 6.8%, or $1.9 million, 9.7%, or $1.8 million, and $2.1 million, or 11.8%, of the Company’s operating revenue for the fiscal years ended May 31, 2002, 2001 and 2000, respectively. This HMO has been our customer since February 1998. The primary contract with this customer has renewed through February 7, 2003 and the contract provides for additional, automatic one-year renewals unless terminated by either party.
The loss of any of the above customers could have a material, adverse effect on the Company’s financial condition and future results of operations.
Other receivable at May 31, 2002 and 2001 represents $2.5 million advanced to a vendor to prepare a federal income tax refund claim that is more fully described in Note 14. The costs incurred will be refunded to the Company should the Internal Revenue Service (“IRS”) disallow the refund and require its repayment. To the extent that the IRS allows all or some portion of the refund, the fees paid will be recognized as expense in proportion to the amount of refund allowed.
Changes in the carrying amount of goodwill for the fiscal years ended May 31, 2002 and 2001 are as follows:
Reconciliation between the provision for income tax and the amount computed by applying the statutory Federal income tax rate (34%) to loss before income tax is as follows:
After consideration of all the evidence, both positive and negative, especially the requirement that the net operating loss carryforwards may not be available under the terms of the Offer in Compromise discussed below, if accepted by the Internal Revenue Service, management has determined that a valuation allowance at May 31, 2002 and 2001, was necessary to offset the deferred tax assets based on the likelihood of future realization.
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 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 $8.2 million through May 31, 2002. In this event, 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. The Company filed a protest letter with the IRS on November 6, 1998. This filing commenced the administrative appeals process.
If the IRS were to accept the Amended Offer, the IRS would require that the net operating loss carryforwards are no longer available to the Company. If the IRS were to disallow the refunds claimed and an offer is not accepted, the Company will have additional loss carry forwards of approximately $50 million, which will expire if unused by the year 2010.
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 six consecutive months of employment are eligible to participate in the Plan. Effective June 1, 1995, eligibility was modified to six months of employment and a minimum of twenty (20) regularly scheduled hours per week. Each participant may contribute from 2% to 15% of his or her compensation to the Plan 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 Board of Directors or the Planning Committee. The Company’s employer matching contributions were $9,000, $10,000, and $17,000 to the Plan in Fiscal 2002, 2001, and 2000 respectively.
As of May 31, 2002, there are 18,740 remaining shares authorized and available to issue, and no outstanding shares of Preferred Stock. The Company is authorized to issue shares of Preferred Stock, $50.00 par value, in one or more series, each series to have such designation and number of shares as the Board of Directors may fix prior to the issuance of any shares of such series. Each series may have such preferences and relative participation, optional or special rights with such qualifications, limitations or restrictions stated in the resolution or resolutions providing for the issuance of such series as may be adopted from time to time by the Board of Directors prior to the issuance of any such series.
Authorized shares of common stock reserved for possible issuance for convertible debentures and stock options are as follows at May 31, 2002:
The Company has a 1995 Incentive Plan (the “1995 Plan”) which 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
Includes 120,000 options, exercisable at $6.6875 per share, held by the former Chief Executive Officer, which were cancelled in connection with his separation from the Company in January 2000.
Adjusted pro forma information regarding net income or loss and earnings or loss per share is required by SFAS 123, “Accounting for Stock-based Compensation”, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The weighted average fair values of options granted
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, $0.7 million, and $0.8 million for fiscal years 2002, 2001, and 2000, respectively. During Fiscal 2000, the Company received rental income of $84,000 in connection with the sublease of a portion of its California facilities (which were closed in Fiscal 2000) to entities operated by the Company’s former Chief Executive Officer (“CEO”). The Company has no future obligation under the California lease, having completed a transfer of this lease in Fiscal 2000 to an entity managed by the Company’s former CEO.
On February 2, 2001, the Company entered into a lease agreement for premises to serve as the principal business and executive offices for the Company and CBC, its principal operating subsidiary. CBC is the principal lessee under the lease, and the Company is the guarantor of the lease. The lease, which began on March 22, 2001, is for a term of 5 years and 2 months and provides for a base rent of approximately $22,000 per month for the first 12 months of the lease term, with intervening escalations during each successive 12-month period under the lease term, with a final monthly rental of approximately $25,000. In connection with this lease, the Company posted a lease security deposit in February 2001, in the amount of $65,000.
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 term of the contract. The original term of the bond was for one year and the bond, which is unsecured, is automatically renewable as long as the contract remains in force.
On February 19, 1999, the California Superior Court denied the Company’s Petition for Writ of Mandate of an adverse administrative appeal decision regarding application of the Maximum Inpatient Reimbursement Limitation to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. The Company owned this facility until its disposal in fiscal year 1991. The subject matter of the Superior Court action involved the refusal of the administrative law judge to order further reductions in the liability for costs associated with treating high cost, long stay Medi-Cal patients, which are commonly referred to as “outliers”.
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 its 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.
The Company would remain liable to perform the services covered under subcapitation agreements if the parties with which the Company subcapitates were unable to fulfill their responsibilities under such agreements.
Includes a $66,000 bad debt recovery specific to one contract that terminated in 1999.
(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.
(e) Certain prior year amounts have been reclassified to conform with the current year’s presentation, including approximately $0.8 million of reinsurance program reimbursements that were previously classified equally as operating revenue and healthcare operating expense in Fiscal 2001 (see Note 4 - “Major Contracts/Customers”, Item 2, for a description of the specific contract that includes state reinsurance funds).