We do not own any real property. The following table sets forth certain information regarding our leased properties as of May 31, 2006. All leases are full service leases under which CompCare bears only those costs of operations and property taxes exceeding the base-year expenses.
In June 2006, we renewed our Grand Prairie office lease for an additional two years beginning August 1, 2006 at a monthly base rate of $3,086.
Prior to fiscal 1993, CompCare principally engaged in the ownership, operation, and management of psychiatric and substance abuse programs in Company owned, leased, or unaffiliated hospitals. During fiscal 1999, we completed our plan to dispose of our hospital business segment. Fiscal 2004 results include a $387,000 charge related to such discontinued operations (see Note 10 - “Discontinued Operations” to the audited, consolidated financial statements).
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 owned by the Company until its disposal in fiscal year 1991.
This Annual Report on Form 10-K 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.”
We currently depend, and expect to continue to depend in the near future, upon a relatively small number of customers for a significant percentage of our operating revenues. A significant reduction in sales to any of our large customers or a customer exerting significant pricing and margin pressures on us would have a material adverse effect on our results of operations. In the past, some of our customers have terminated their arrangements with us or have significantly reduced the amount of services requested from us. There can be no assurance that present or future customers will not terminate their arrangements with us or significantly reduce the amount of services requested from us. Any such termination of a relationship or reduction in use of our services could have a material adverse effect on our results of operations or financial condition (see Item 1A “Risk Factors” and Note 5 - “Major Contracts/Customers” to the audited, consolidated financial statements).
Claims expense reflects the costs of revenue of capitated contracts, and other healthcare operating expenses reflects the cost of revenue of capitated and non-capitated contracts.
Results of Operations -Year Ended May 31, 2006 as Compared to the Year Ended May 31, 2005.
Claims expense on capitated contracts decreased approximately $129,000 or 0.8% for the fiscal year ended May 31, 2006 as compared to the fiscal year ended May 31, 2005. The reduction is due to decreased utilization of covered services. Claims expense as a percentage of capitated revenues decreased from 74.2% for the fiscal year ended May 31, 2005 to 70.5% for the fiscal year ended May 31, 2006. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, decreased approximately $607,000, or 12.3%, due to staff reductions in response to the loss of revenues in Michigan, Connecticut and Texas. As a percentage of total revenue, other healthcare operating expenses decreased from 20.1% for fiscal 2005 to 18.0% for fiscal 2006.
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. Capitated contract revenues decreased by 6.4%, or approximately $1.5 million, to $22.1 million for the fiscal year ended May 31, 2005 compared to $23.6 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. Non-capitated revenue declined 39.8% or approximately $1.6 million to $2.4 million for the fiscal year ended May 31, 2005, compared to $4.0 million for the same period of fiscal 2004. This decrease is attributable to the loss of ASO clients in Michigan and Texas.
Claims expense on capitated contracts decreased approximately $1.8 million or 9.9% for the fiscal year ended May 31, 2005 as compared to the fiscal year ended May 31, 2004, due to a reduction in capitated revenues and the loss of one major contract in Florida that consistently returned a high medical loss ratio. Claims expense as a percentage of capitated revenues decreased from 77.1% for the fiscal year ended May 31, 2004 to 74.2% for the fiscal year ended May 31, 2005. Other healthcare operating expenses, which are incurred to service both capitated and non-capitated contracts, decreased approximately $1.1 million, or 18.1%. This decrease is attributable to lower personnel costs resulting from restructuring our regional and corporate operations. As a percentage of total revenue, other healthcare operating expenses decreased from 21.8% for fiscal 2004 to 20.1% for fiscal 2005.
General and administrative expenses decreased by $307,000, or 9.1%, for the fiscal year ended May 31, 2005 as compared to the fiscal year ended May 31, 2004. This decrease is primarily attributable to a decrease in salaries and benefits resulting from the Company’s restructuring of regional and corporate operations and less usage of outside professional services. General and administrative expense as a percentage of operating revenue increased slightly from 12.3% for the fiscal year ended May 31, 2004 to 12.6% for the fiscal year ended May 31, 2005.
Historically, we have experienced increased utilization during our fourth fiscal quarter, which comprises the months of March, April and May. Such a variation in utilization impacts our costs of care during these months, generally having a negative impact on our gross margins and operating profits during the fourth quarter. During the first fiscal quarter of our 2006 fiscal year, we experienced higher than expected utilization costs as compared to the first quarter in the previous two fiscal years. We have attempted to address these high first quarter utilization costs through rate increases with certain of our clients. We cannot assure you, however, that we will not continue to experience increased utilization costs in our first and fourth fiscal quarters compared to other quarters.
Our 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. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and may impact our ability to achieve and sustain profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results could differ from the $2.8 million accrued claims payable amount reported as of May 31, 2006.
The following is a schedule at May 31, 2006 of our long-term contractual commitments, future minimum lease payments under non-cancelable operating lease arrangements, and other long-term obligations:
Healthcare operating expenses are composed of claims expense and other healthcare 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, case management and quality assurance, attributable to both capitated and non-capitated contracts.
The cost of behavioral health services is recognized in the period in which an eligible member actually receives services and includes an estimate of IBNR. The Company contracts with various healthcare providers including hospitals, physician groups and other licensed behavioral healthcare professionals either on a discounted fee-for-service or a per-case basis. The Company determines that a member has received services when the Company receives a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. The Company then determines whether (1) the member is eligible to receive such services, (2) the service provided is medically necessary and is covered by the benefit plan’s certificate of coverage, and (3) the service has been authorized by one of our employees. If all of these requirements are met, the claim is entered into the Company’s claims system for payment and the associated cost of behavioral health services is recognized.
The following table provides a reconciliation of the beginning and ending balance of accrued claims payable for the fiscal years ended May 31, 2006, 2005, and 2004:
Many aspects of our business are not predictable with consistency, and therefore, estimating IBNR claims involves a significant amount of management judgment. Actual claims incurred could differ from the estimated accrued claims payable amount presented. The following are factors that would have an impact on future operations and financial condition of the Company:
A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at May 31, 2006 could increase our claims expense by approximately $66,000 as illustrated in the table below:
In assessing the carrying value of a marketable security classified as “available for sale” where the security’s market value is less than its carrying value, we will make a determination if the decline is “other than temporary” by considering:
The length of time the investment has been in a continuous unrealized position.
The Company’s ability to hold the security for a period of time sufficient to allow for any anticipated recovery.
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, 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 the Company’s anticipated operating results, financial resources, increases in revenues, increased profitability, interest expense, growth and expansion, and the ability to obtain new
Consolidated Statements of Operations, Years Ended May 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows, Years Ended May 31, 2006, 2005 and 2004
We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation and Subsidiaries as of May 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the fiscal years ended May 31, 2006, 2005 and 2004. 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.
Note 1 - Description of the Company’s Business and Basis of Presentation
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, Medicaid and CHIP 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 basis. The Company’s fiscal year ended May 31, 2006 (“fiscal 2006”).
Healthcare operating expense is recognized in the period in which an eligible member actually receives services and includes an estimate of the cost of behavioral health services that have been incurred but not yet reported. See “Accrued Claims Payable and Claims Expense” for a discussion of claims incurred but not yet reported. The Company contracts with various healthcare providers including hospitals, physician groups and other licensed behavioral healthcare professionals either on a discounted fee-for-service or a per-case basis. The Company determines that a member has received services when the Company receives a claim within the contracted timeframe with all required billing elements correctly completed by the service provider. The Company then determines that the member is eligible to receive such services, the service provided is medically necessary and is covered by the benefit plan’s certificate of coverage, and the service is authorized by one of our employees. If all of these requirements are met, the claim is entered into the Company’s claims system for payment.
The Company accrues losses under its capitated contracts when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company performs this loss accrual analysis on a specific contract basis taking into consideration such factors as future contractual revenue, projected future healthcare and maintenance costs, and each contract’s specific terms related to future revenue increases as compared to expected increases in healthcare
At May 31, 2006, cash in excess of daily requirements was invested in short-term, overnight investments. Such investments totaled $1.0 million and are included in cash equivalents in the accompanying consolidated balance sheet. At May 31, 2005, cash and cash equivalents consist entirely of funds on deposit in savings and checking accounts at major financial institutions.
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 $87,000, $96,000, and $107,000 for the fiscal years ended May 31, 2006, 2005 and 2004, respectively.
Goodwill represents the cost in excess of the fair value of net assets acquired in purchase transactions. Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but is periodically evaluated for impairment to carrying amount, with decreases in carrying amount
The accrued reinsurance claims payable liability represents amounts payable to providers under a state reinsurance program associated with the Company’s contract to provide behavioral healthcare services to members of a Connecticut HMO. The Company’s contract with the HMO ended December 31, 2005 (see Note 5 (1) - Major Contracts/Customers).
The Company issues stock options to its employees and non-employee directors (“optionees”) allowing optionees to purchase the Company’s common stock pursuant to shareholder approved stock option plans. As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 148, “ Accounting for Stock-Based Compensation-Transitional Disclosure,” the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options (“APB 25”). 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. No stock-based employee compensation cost is reflected in net loss, as all options granted under the Company’s employee stock options plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123R to stock-based employee compensation.
The weighted average fair values of options granted were $1.42, $0.93, and $1.31 in fiscal 2006, 2005, and 2004, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.
In calculating basic loss per share, net loss is divided by the weighted average number of common shares outstanding for the period. For the periods presented, diluted loss per share is equivalent to basic loss per share. The following table sets forth the computation of basic and diluted loss per share in accordance with Statement No. 128, Earnings Per Share:
The carrying amounts and fair values of the Company’s financial instruments at May 31, 2006 and 2005 are as follows:
(1) Effective December 31, 2005, the Company experienced the loss of a major contract to provide behavioral healthcare services to the members of a Connecticut HMO. This agreement represented approximately 14.0%, or $3.4 million, 21.6%, or $5.3 million, and 13.7% or $3.8 million of the Company’s operating revenue for the fiscal years ended May 31, 2006, 2005, and 2004, respectively. Additionally, this contract provided that the Company, through its contract with this HMO, received additional funds directly from a state reinsurance program for the purpose of paying providers. During the fiscal years ended 2006, 2005, and 2004 the Company filed reinsurance claims totaling approximately $1.2 million, $2.7 million, and $2.1 million, respectively. 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, 2006 and 2005, the Company has reported $0 and $372,000 as accounts receivable-managed care reinsurance contracts, with $2.5 million and $3.2 million, respectively, reported as accrued reinsurance claims payable in the accompanying balance sheets. The difference between the reinsurance receivable amount and the reinsurance payable amount is related to timing differences between the authorization date, the date the money is received by the Company, and the date the money is paid to the provider. In certain cases, providers have submitted claims for authorized services having incorrect service codes or otherwise incorrect information that has caused payment to be denied by the Company. In such cases, there are contractual and statutory provisions that allow the provider to appeal a denied claim. If there is no appeal received by the Company within the prescribed amount of time, the Company may be required to remit the reinsurance funds back to the appropriate party. Accrued amounts for non-reinsurance claims incurred but not yet reported are estimated using methods similar to that used for other existing contracts, and totaled approximately $77,000 as of May 31, 2006. This HMO had been a customer since March 2001.
The Company had contracted in March 2004 with a software vendor to design a new managed care information system. In March 2006, after the Company had invested $200,000 of the $370,000 total cost of the new system, the vendor informed the Company that it would not be able to complete the design of the information system within the timeframe required by the Company to meet future information system needs. The Company sought a full refund of amounts paid but to avoid a protracted dispute, negotiated a settlement agreement whereby the vendor is to pay CompCare $2,500 per month for 36 months beginning August 1, 2006 for a total of $90,000. The receivable from this vendor is non-interest bearing and unsecured. The difference between the present value of the 36 monthly payments and the Company’s $200,000 investment has been recorded in the accompanying consolidated statement of operations described 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 $55,000 appears as a note receivable in the accompanying consolidated balance sheet at May 31, 2006.
At May 31, 2006, the Company’s federal net operating loss carryforwards total approximately $3.7 million resulting from losses incurred in the fiscal years ended May 31, 2002 through 2006, which expire in 2022 through 2026. 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. In June 2005, the Company completed a private placement transaction, which constituted a “change of ownership” under IRS Section 382 rules. As a result, the Company’s ability to use its net operating losses incurred prior to June 14, 2005 is limited to approximately $400,000 per year, with any unused portion to be carried forward to the following year. The Company 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, 2006 and 2005 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 $15,000 during Calendar 2006, 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 2006 and 2005. The Company’s employer matching contributions were approximately $2,300 to the Plan in fiscal 2004.
As of May 31, 2006, there are 4,340 remaining shares authorized and available to issue. 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.
restricted stock grants to eligible employees and consultants to the Company. 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. 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 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 May 31, 2006 under the 2002 Incentive Plan, there were 528,500 shares available for option grants and there were 441,500 options outstanding and exercisable. Additionally, as of May 31, 2006 under the 1995 Incentive Plan, there were no shares available for option grant and there were 514,075 options outstanding and exercisable.
A summary of options outstanding and exercisable as of May 31, 2006 follows:
The Company leases certain office space and equipment. The office 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 $0.5 million for the fiscal year ended May 31, 2006 and $0.6 million in each of the fiscal years ended May 31, 2005 and 2004.
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, 2006:
Amounts above include future office lease payments due under the Company’s renewal of its Grand Prairie office lease, which is effective August 1, 2006.
Related to the Company’s discontinued hospital operations, Medicare guidelines allow the Medicare fiscal intermediary to re-open previously filed cost reports. Management believes that the Company’s fiscal 1998 cost reports are being reviewed, in which case the intermediary may determine that additional amounts are due to or from Medicare.
The Company is actively marketing eye care memberships it acquired in November 2004. As of May 31, 2006 none of the memberships had been sold. As such, the Company believes it is probable that it will not recover its full investment of $125,000 and accordingly has recorded a valuation reserve of 50%, or $62,500, to reduce the carrying value of the memberships to management’s best estimate of recoverable value. If the Company’s marketing plan is not successful with respect to selling these memberships, it may have to write off the remaining amount the Company paid to acquire them (see Note 8 - “Other Assets”). 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.
The Company has insurance for a broad range of risks as it relates to its business operations. The Company maintains managed care errors and omissions, professional and general liability coverage. These policies are written on a claims-made basis and are subject to a $100,000 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. The Company is 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 the Company’s consolidated financial statements.
In February 2006 CBC entered into an agreement with Hythiam, Inc. whereby CBC would have the exclusive right to market Hythiam’s substance abuse disease management program to its 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, the Company will pay Hythiam license and service fees for each enrollee who is treated. A Director of the Company is the Vice President of Corporate Development for Hythiam. As of May 31, 2006 there had been no material transactions resulting from this agreement.