In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comprehensive Care Corporation and subsidiaries as of May 31, 2003, and the consolidated results of their operations and their cash flows for the years ended May 31, 2003 and 2002, in conformity with U.S. generally accepted accounting principles.
The Company’s managed care activities are performed under the terms of agreements with health maintenance organizations (“HMOs”), preferred provider organizations, and other health plans or payers to provide contracted behavioral healthcare services to subscribing participants. Revenue under a substantial portion of these agreements is earned monthly based on the number of qualified participants regardless of services actually provided (generally referred to as capitation arrangements). The information regarding qualified participants is supplied by the Company’s clients and the Company relies extensively on the accuracy of the client remittance and other reported information to determine the amount of revenue to be recognized. Such agreements accounted for 85.5%, or $23.6 million, of revenue for the fiscal year ended May 31, 2004, 87.4%, or $28.2 million, of revenue for the fiscal year ended May 31, 2003, and 84.7%, or $23.4 million, of revenue for the fiscal year ended May 31, 2002. The remaining balance of the Company’s revenues is earned on a fee-for-service basis and is recognized as services are rendered.
(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 14.5%, or $4.0 million, 11.9%, or $3.9 million, and 12.2%, or $3.4 million of the Company’s operating revenues during the fiscal years ended May 31, 2004, 2003, and 2002, respectively. The Fiscal 2003 and 2002 amounts include revenue received from another customer placed under conservatorship by the State of Texas whose Medicaid members were added to those of the HMO during Fiscal 2003. 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. Consequently, CHIP business under this contract accounted for approximately 4.8%, or $1.3 million, of operating revenues for the fiscal year ended May 31, 2004 as compared to 7.3%, or $2.4 million, and 7.2%, or $2.0 million of operating revenues for the twelve month periods ended May 31, 2003 and 2002, respectively. Subsequent legislation has restored the majority of benefits available to CHIP recipients effective February 1, 2004. 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.
As a result of the resolution of this matter, the Company extinguished the $12.1 million liability, which had been recorded for the refunds pending resolution of the dispute, and recorded a non-operating gain in the quarter ended February 28, 2003 of approximately $7.7 million net of related expenses, including $2.0 million representing the unrecovered portion of the $2.5 million of fees previously paid to its tax advisor. The gain represented income per share of $1.97 (diluted income per share of $1.77). No taxable income resulted from the settlement of the liability.
A summary of options outstanding and exercisable as of May 31, 2004 follows:
Includes $88,000 related to a favorable cost report settlement that was completed during the fiscal year ended May 31, 2003 pertaining to the Company’s hospital business segment that was discontinued in Fiscal 1999.