Advanzeon Solutions, Inc. - Quarter Report: 2005 November (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the period ended November 30, 2005.
| o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File Number 1-9927
COMPREHENSIVE CARE CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 95-2594724 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
204 South Hoover Blvd, Suite 200, Tampa, FL 33609
(Address of principal executive offices and zip code)
(813) 288-4808
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as
of the latest practicable date:
| Classes | Outstanding at January 6, 2006 | |
| Common Stock, par value $.01 per share | 5,851,374 |
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Index
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| 4 | ||||||||
| 5 | ||||||||
Notes to Consolidated Financial Statements |
6-11 | |||||||
| 12-18 | ||||||||
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| 19 | ||||||||
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| 19-20 | ||||||||
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| 21 | ||||||||
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Certifications |
23-26 | |||||||
| Ex-31.1: Section 302 Certification | ||||||||
| Ex-31.2: Section 302 Certification | ||||||||
| Ex-32.1: Section 906 Certification | ||||||||
| Ex-32.2: Section 906 Certification | ||||||||
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART
I. — FINANCIAL INFORMATION
Item 1 — Consolidated Financial Statements
Consolidated Balance Sheets
(Amounts in thousands)
| November 30, | May 31, | |||||||
| 2005 | 2005 | |||||||
| (unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 6,165 | $ | 3,695 | ||||
Restricted cash |
506 | — | ||||||
Marketable securities |
10 | 11 | ||||||
Accounts receivable, less allowance for doubtful accounts of $4 and $5,
respectively |
92 | 113 | ||||||
Accounts
receivable — managed care reinsurance contract |
436 | 372 | ||||||
Other current assets |
448 | 481 | ||||||
Total current assets |
7,657 | 4,672 | ||||||
Property and equipment, net |
350 | 384 | ||||||
Goodwill, net |
991 | 991 | ||||||
Restricted cash |
73 | 72 | ||||||
Other assets |
222 | 329 | ||||||
Total assets |
$ | 9,293 | $ | 6,448 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 945 | $ | 1,310 | ||||
Accrued claims payable |
3,775 | 3,730 | ||||||
Accrued reinsurance claims payable |
3,072 | 3,191 | ||||||
Income taxes payable |
33 | 30 | ||||||
Total current liabilities |
7,825 | 8,261 | ||||||
Long-term liabilities: |
||||||||
Long-term debt |
2,244 | 2,244 | ||||||
Other liabilities |
33 | 60 | ||||||
Total long-term liabilities |
2,277 | 2,304 | ||||||
Total liabilities |
10,102 | 10,565 | ||||||
Stockholders’ deficit: |
||||||||
Preferred stock, $50.00 par value; authorized 18,740 shares; issued and
outstanding 14,400 and 0, respectively |
720 | — | ||||||
Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 5,850,375 and 5,582,547, respectively |
59 | 56 | ||||||
Additional paid-in capital |
56,596 | 53,813 | ||||||
Accumulated deficit |
(58,175 | ) | (57,986 | ) | ||||
Other comprehensive loss |
(9 | ) | — | |||||
Total stockholders’ deficit |
(809 | ) | (4,117 | ) | ||||
Total liabilities and stockholders’ deficit |
$ | 9,293 | $ | 6,448 | ||||
See accompanying notes to consolidated financial statements.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share amounts)
| Three Months Ended | Six Months Ended | |||||||||||||||
| November 30, | November 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Operating revenues |
$ | 6,756 | $ | 6,231 | $ | 13,057 | $ | 12,270 | ||||||||
Costs and expenses: |
||||||||||||||||
Healthcare operating expenses |
5,777 | 5,328 | 11,495 | 10,496 | ||||||||||||
General and administrative expenses |
829 | 727 | 1,705 | 1,429 | ||||||||||||
(Recovery of) provision for doubtful accounts |
(2 | ) | 1 | (36 | ) | (4 | ) | |||||||||
Depreciation and amortization |
22 | 23 | 44 | 47 | ||||||||||||
| 6,626 | 6,079 | 13,208 | 11,968 | |||||||||||||
Operating income (loss) before items shown below |
130 | 152 | (151 | ) | 302 | |||||||||||
Other income (expense): |
||||||||||||||||
Interest income |
16 | 3 | 28 | 5 | ||||||||||||
Interest expense |
(45 | ) | (52 | ) | (94 | ) | (106 | ) | ||||||||
Other non-operating income |
24 | 11 | 56 | 22 | ||||||||||||
Income (loss) before income taxes |
125 | 114 | (161 | ) | 223 | |||||||||||
Income tax expense |
17 | 11 | 28 | 29 | ||||||||||||
Net income (loss) attributable to common stockholders |
$ | 108 | $ | 103 | $ | (189 | ) | $ | 194 | |||||||
Income (loss) per common share — basic |
$ | 0.02 | $ | 0.02 | $ | (0.03 | ) | $ | 0.04 | |||||||
Income (loss) per common share – diluted |
$ | 0.01 | $ | 0.02 | $ | (0.03 | ) | $ | 0.04 | |||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
5,815 | 4,691 | 5,748 | 4,687 | ||||||||||||
Diluted |
10,591 | 5,262 | 5,748 | 5,268 | ||||||||||||
See accompanying notes to consolidated financial statements.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
| Six Months Ended | ||||||||
| November 30, | ||||||||
| 2005 | 2004 | |||||||
Cash flows from operating activities: |
||||||||
Net (loss) income from continuing operations |
$ | (189 | ) | $ | 194 | |||
Adjustments to reconcile net loss (income) from continuing operations
to net cash used in operating activities: |
||||||||
Depreciation and amortization |
44 | 47 | ||||||
Compensation expense – stock, stock options and warrants issued |
24 | 23 | ||||||
Amortization of deferred revenue |
(54 | ) | (11 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, net |
21 | 2 | ||||||
Accounts receivable — managed care reinsurance contract |
(64 | ) | (172 | ) | ||||
Other current assets, restricted funds, and other non-current assets |
(368 | ) | (79 | ) | ||||
Accounts payable and accrued liabilities |
(263 | ) | (288 | ) | ||||
Accrued claims payable |
45 | (315 | ) | |||||
Accrued reinsurance claims payable |
(119 | ) | 207 | |||||
Income taxes payable |
3 | 18 | ||||||
Other liabilities |
— | (1 | ) | |||||
Net cash used in continuing operations |
(920 | ) | (375 | ) | ||||
Net cash used in discontinued operations |
(55 | ) | (73 | ) | ||||
Net cash used in continuing and discontinued operations |
(975 | ) | (448 | ) | ||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment, net |
(10 | ) | (14 | ) | ||||
Net cash used in investing activities |
(10 | ) | (14 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from the issuance of common and preferred stock |
3,481 | 6 | ||||||
Repayment of long-term debt |
(26 | ) | (24 | ) | ||||
Net cash provided by (used in) financing activities |
3,455 | (18 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
2,470 | (480 | ) | |||||
Cash and cash equivalents at beginning of period |
3,695 | 3,209 | ||||||
Cash and cash equivalents at end of period |
$ | 6,165 | $ | 2,729 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the six-month period for: |
||||||||
Interest |
$ | 95 | $ | 107 | ||||
Income taxes |
$ | 25 | $ | 19 | ||||
Non-cash operating, financing and investing activities: |
||||||||
Securities received through consulting agreement, net of other
comprehensive loss |
$ | 4 | $ | 78 | ||||
Property acquired under capital leases |
$ | — | $ | 27 | ||||
See accompanying notes to consolidated financial statements.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Note 1 – Summary of Significant Accounting Policies
The consolidated balance sheet as of November 30, 2005, and the related consolidated
statements of operations and cash flows for the six months ended November 30, 2005 and 2004 are
unaudited and have been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a
fair presentation of such consolidated financial statements have been included. Such adjustments
consisted only of normal recurring items. The results of operations for the six months ended
November 30, 2005 are not necessarily indicative of the results to be expected during the balance
of the fiscal year.
The consolidated financial statements do not include all information and footnotes necessary
for a complete presentation of financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of America. The
consolidated balance sheet at May 31, 2005 has been derived from the audited, consolidated
financial statements at that date, but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for complete
financial statement presentation. Notes to consolidated financial statements included in Form 10-K
for the fiscal year ended May 31, 2005 are on file with the Securities and Exchange Commission and
provide additional disclosures and a further description of accounting policies.
Marketable Securities
The Company’s marketable securities are classified as “available for sale,” and accordingly
are reflected in the consolidated balance sheet at fair market value, with the unrealized loss
included as other comprehensive loss within stockholders’ deficit.
Restricted Cash
At November 30, 2005, restricted cash consists of a $506,000 deposit required under the terms
of a contract with one existing client, and a $73,000 deposit required in accordance with the
Company’s Tampa office lease.
Revenue Recognition
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 95.6%, or $12.5 million, of revenue for the six months ended November 30, 2005 and 88.1%, or
$10.8 million, of revenue for the six months ended November 30, 2004. The remaining balance of the
Company’s revenues is earned on a fee-for-service basis and is recognized as services are rendered.
Healthcare Expense Recognition
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” for a discussion of claims incurred
but not yet reported. The Company contracts with various 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 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.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Accrued Claims Payable
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 November 30, 2005 and May 31, 2005. Although considerable variability is
inherent in such estimates, management believes that the unpaid claims liability is adequate.
Premium Deficiencies
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
costs. The projected future healthcare and maintenance costs are estimated based on historical
trends and the Company’s estimate of future cost increases.
At any time prior to the end of a contract or contract renewal, if a capitated contract is not
meeting its financial goals, the Company generally has the ability to cancel the contract with 60
to 90 days’ written notice. Prior to cancellation, the Company will usually submit a request for a
rate increase accompanied by supporting utilization data. Although historically the Company’s
clients have been generally receptive to such requests, no assurance can be given that such
requests will be fulfilled in the future in the Company’s favor. If a rate increase is not
granted, the Company has the ability to terminate the contract as described above and limit its
risk to a short-term period.
On a quarterly basis, the Company performs a review of its portfolio of contracts for the
purpose of identifying loss contracts (as defined in the American Institute of Certified Public
Accountants Audit and Accounting Guide – Health Care Organizations) and developing a contract loss
reserve, if applicable, for succeeding periods. During the six months ended November 30, 2005, the
Company did not have any contracts where it was probable that a loss had been incurred and for
which a loss could reasonably be estimated.
Income Taxes
The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 109,
“Accounting for Income Taxes.” Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to net operating
loss carryforwards and to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect of a
change in tax rates on deferred tax assets or liabilities is recognized in the consolidated
statements of operations in the period that included the enactment. A valuation allowance is
established for deferred tax assets unless their realization is considered more likely than not.
Stock Options
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, (“APB 25”) “Accounting for Stock Issued to
Employees” 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. No
stock-based employee compensation cost is reflected in net income (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
income (loss) and income (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 148 to stock-based employee compensation.
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| Three | Three | Six | Six | |||||||||||||
| Months | Months | Months | Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| 11/30/05 | 11/30/04 | 11/30/05 | 11/30/04 | |||||||||||||
| (in thousands except for per share information) | ||||||||||||||||
Net income (loss), as reported |
$ | 108 | $ | 103 | $ | (189 | ) | $ | 194 | |||||||
Deduct: |
||||||||||||||||
Total stock-based employee
compensation expense
determined
under fair value based method
for all awards, net of related
tax
effects |
(189 | ) | (54 | ) | (248 | ) | (54 | ) | ||||||||
Pro forma net (loss) income |
$ | (81 | ) | $ | 49 | $ | (437 | ) | $ | 140 | ||||||
Income (loss) per common share: |
||||||||||||||||
Basic – as reported |
$ | 0.02 | $ | 0.02 | $ | (0.03 | ) | $ | 0.04 | |||||||
Diluted – as reported |
$ | 0.01 | $ | 0.02 | $ | (0.03 | ) | $ | 0.04 | |||||||
Basic – pro forma |
$ | (0.01 | ) | $ | 0.01 | $ | (0.08 | ) | $ | 0.03 | ||||||
Diluted – pro forma |
$ | (0.01 | ) | $ | 0.01 | $ | (0.08 | ) | $ | 0.03 | ||||||
Per Share Data
In calculating basic income (loss) per share, net income (loss) is divided by the weighted
average number of common shares outstanding for the period. Diluted income (loss) per share
reflects the assumed exercise or conversion of all dilutive securities, such as options, warrants,
and convertible debentures. No such exercise or conversion is assumed where the effect is
antidilutive, such as when there is a net loss. The following table sets forth the computation of
basic and diluted income (loss) per share in accordance with Statement No. 128, Earnings Per Share:
(amounts in thousands, except per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||
| November 30, | November 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Numerator: |
||||||||||||||||
Numerator for diluted income
(loss) attributable to common
stockholders |
$ | 108 | $ | 103 | $ | (189 | ) | $ | 194 | |||||||
Denominator: |
||||||||||||||||
Weighted average shares |
5,815 | 4,691 | 5,748 | 4,687 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Warrants |
89 | 2 | — | 2 | ||||||||||||
Employee stock options |
452 | 569 | — | 579 | ||||||||||||
Convertible preferred stock |
4,235 | — | — | — | ||||||||||||
Denominator for diluted
income (loss) per
share-adjusted weighted
average shares after assumed
conversions |
10,591 | 5,262 | 5,748 | 5,268 | ||||||||||||
Income (loss) per share- basic |
$ | 0.02 | $ | 0.02 | $ | (0.03 | ) | $ | 0.04 | |||||||
Income (loss) per share- diluted |
$ | 0.01 | $ | 0.02 | $ | (0.03 | ) | $ | 0.04 | |||||||
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Authorized shares of common stock reserved for possible issuance for convertible debentures,
convertible preferred stock, stock options, and warrants are as follows at November 30, 2005:
Convertible debentures(a) |
12,377 | |||
Convertible preferred stock(b) |
4,235,328 | |||
Outstanding stock options(c) |
1,132,406 | |||
Outstanding warrants(d) |
406,000 | |||
Possible future issuance under stock option plans |
529,670 | |||
Total |
6,315,781 | |||
| (a) | The debentures are convertible into 12,377 shares of common stock at a conversion price of $181.30 per share. | |
| (b) | The Series A Convertible Preferred Stock (“Series A Preferred Stock”) is convertible into 4,235,328 shares of common stock at a conversion rate of 294.12 common shares for each preferred share. | |
| (c) | Options to purchase common stock of the Company have been issued to employees and non-employee Board of Director members with exercise prices ranging from $0.25 to $4.00. | |
| (d) | Warrants to purchase common stock of the Company have been issued to certain individuals or vendors in exchange for consulting services. All such warrants were issued in lieu of cash compensation and have five-year terms with exercise prices ranging from $1.09 to $5.00. |
Note 2 — Liquidity
During the six months ended November 30, 2005, net cash used in continuing and discontinued
operations amounted to $920,000 and $55,000, respectively. In addition, $3.5 million was provided
by financing activities, primarily from the sale of 14,400 shares of Series A Preferred Stock in
June 2005.
During the six months ended November 30, 2005 the Company incurred an operating loss of
$151,000 and a net loss of $189,000. As of November 30, 2005, the Company had a working capital
deficiency of $168,000 and a stockholders’ deficit of $809,000. Effective June 14, 2005, the
Company completed a sale of 14,400 shares of its Series A Preferred Stock to Woodcliff Healthcare
Investment Partners, LLC (“Woodcliff”) for approximately $3.4 million in net cash proceeds to the
Company. As a result, management believes the Company has sufficient working capital to sustain
current operations and to meet the Company’s current obligations during fiscal 2006 (including the
additional installments toward the $170,000 that remains to be paid in connection with our new
information system) without the need to raise additional equity or debt financing. Our new
information system has total expected costs of approximately $370,000. Once implemented, this
system will enable the Company to continue to meet HIPAA requirements, streamline the Company’s
entire clinical and claims functions, and offer service improvements to our participating providers
(see Note 7 (3) Commitments and Contingencies).
Note
3 — Total Comprehensive Income (Loss)
Total comprehensive income (loss), defined as net income (loss) adjusted for the unrealized
holding losses on available-for-sale securities, is as follows: (amounts in thousands)
| Three Months | Three Months | Six Months | Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| 11/30/05 | 11/30/04 | 11/30/05 | 11/30/04 | |||||||||||||
Net income (loss) |
$ | 108 | $ | 103 | $ | (189 | ) | $ | 194 | |||||||
Other comprehensive loss: |
||||||||||||||||
Unrealized holding loss |
(7 | ) | (51 | ) | (9 | ) | (51 | ) | ||||||||
Total comprehensive income (loss) |
$ | 101 | $ | 52 | $ | (198 | ) | $ | 143 | |||||||
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Note
4 — Sources Of Revenue
The Company’s revenue can be segregated into the following significant categories: (amounts in
thousands)
| Three Months | Three Months | Six Months | Six Months | |||||||||||||
| Ended | Ended | Ended | Ended | |||||||||||||
| 11/30/05 | 11/30/04 | 11/30/05 | 11/30/04 | |||||||||||||
Capitated contracts |
$ | 6,458 | $ | 5,492 | $ | 12,477 | $ | 10,803 | ||||||||
Non-capitated contracts |
298 | 739 | 580 | 1,467 | ||||||||||||
Total |
$ | 6,756 | $ | 6,231 | $ | 13,057 | $ | 12,270 | ||||||||
Capitated revenues include contracts under which the Company assumes the financial risk for
the costs of member behavioral healthcare services in exchange for a fixed, per member per month
fee. For non-capitated contracts, the Company may manage behavioral healthcare programs or perform
various managed care functions, such as clinical care management, provider network development, and
claims processing without assuming financial risk for member behavioral healthcare costs.
Note 5 — Major Customers/Contracts
(1) The Company has one contract to provide capitated behavioral healthcare services to
Connecticut members under contract with one HMO. This agreement represented approximately 21.9%, or
$2.9 million, and 20.9%, or $2.6 million, of the Company’s operating revenue for the six months
ended November 30, 2005 and 2004, respectively. Additionally, this contract provides that the
Company, through its contract with this HMO, receives additional funds directly from a state
reinsurance program for the purpose of paying providers. During the six months ended November 30,
2005 and 2004, the Company filed reinsurance claims totaling approximately $1.0 million and $1.8
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 November 30, 2005 and May 31, 2005, the Company has reported $0.4 million as
accounts receivable–managed care reinsurance contracts, with $3.1 million and $3.2 million,
respectively, reported as accrued reinsurance claims payable in the accompanying balance sheet. In
the event that the Company does not collect the amounts receivable related to reinsurance amounts,
the Company could remain liable for the costs of the specific services provided to members that
qualify for such reimbursements. 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 $1.2 million as of
November 30, 2005. This HMO has been a customer since March 2001. The original contract term
ended December 31, 2002 and, in accordance with its terms, automatically renews for consecutive
one-year periods, with the most recent term having ended December 31, 2005. For the 2006 contract
year, the State of Connecticut requested bids for an administrative services only (“ASO”) contract,
for which the Company submitted a bid but was not selected. Although we have not received any
written notice from our Connecticut HMO client terminating our contract with it, we have ceased
providing services and consider the contract to have ended December 31, 2005.
(2) The Company has contracts with one HMO to provide capitated behavioral healthcare
services to contracted commercial, Medicaid, and Children’s Health Insurance Program (“CHIP”)
members in Texas. This business accounted for approximately 21.2%, or $2.8 million, and 21.0%, or
$2.6 million, of the Company’s operating revenues during the six months ended November 30, 2005 and
2004, 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.
In general, 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.
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Note
6 — Preferred Stock
As of November 30, 2005, there are 4,340 remaining shares authorized and available to issue,
and 14,400 outstanding shares of Series A Preferred Stock. All outstanding shares were issued in
June 2005 as a result of the sale of Series A Preferred Stock to Woodcliff for approximately $3.4
million in net cash proceeds (see Management’s Discussion and Analysis of Financial Condition and
Results of Operations). 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.
Note 7 — Commitments and Contingencies
(1) 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.
(2) 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 and 1999 cost reports remain eligible for re-opening at some future
date, in which case the intermediary may determine that additional amounts are due to or from
Medicare.
(3) The Company is subject to the requirements of the Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”). The purpose of the HIPAA provisions 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, also, to protect the
security and privacy of protected health information. Entities subject to HIPAA include some
healthcare providers and all healthcare plans. To meet the specific requirements of HIPAA, the
Company determined it needed to make a significant investment in its current information system or
in a new information system that would better meet the Company’s future needs. As a result, the
Company has entered into a Software License Maintenance and Services Agreement with Qualifacts
Systems, Inc. (“Qualifacts”), a vendor that has provided the Company with an immediate, temporary
solution to meet HIPAA compliance rules specific to the Electronic Health Care Transactions and
Code Sets Standards Model Compliance Plan with the Centers for Medicare and Medicaid Services and,
additionally, to design a new, customized management information system that will enable the
Company to continue to meet HIPAA requirements in the future. The Company expects to incur
approximately $370,000 of costs to customize the Qualifacts system and activate the licenses needed
for Qualifacts and other, related third-party software, of which $170,000 remains to be paid.
(4) The Company is actively marketing eye care memberships it acquired in November 2004.
If the Company’s marketing plan is unsuccessful with respect to these memberships, it may have to
write off some or all of the $125,000 the Company paid to acquire them. 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.
(5) Effective August 1, 2005, the Company’s principal operating subsidiary, Comprehensive
Behavioral Care (“CBC”), entered into a marketing agreement with Health Alliance Network, Inc.
(“HAN”) whereas CBC has agreed to appoint HAN as its primary representative and marketing agent for
commercial business (see Management’s Discussion and Analysis of Financial Condition and Results of
Operations). Two shareholders of HAN are members of Woodcliff, the investor in our Series A
Preferred Stock in June 2005.
From time to time, the Company and its subsidiaries are also parties to and their property is
subject to ordinary, routine litigation incidental to their business, in which case 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 is not aware of any such lawsuits that
could have a material adverse impact on the Company’s consolidated financial statements.
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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations
In addition to historical information, the following information contains forward-looking
statements as defined under federal securities laws. Such statements include, but are 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. These statements are based on current
expectations, estimates and projections about the industry and markets in which Comprehensive Care
Corporation (“CompCare” or the “Company”) operates, and management’s beliefs and assumptions.
Forward-looking statements are not guarantees of future performance and involve certain known and
unknown risks and uncertainties that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks and uncertainties include, but are not limited
to, changes in local, regional, and national economic and political conditions, the effect of
governmental regulation, competitive market conditions, varying trends in member utilization, our
ability to manage healthcare operating expenses, the profitability of our capitated contracts, cost
of care, seasonality, and other risks detailed herein and from time to time in the Company’s SEC
reports. The following discussion should be read in conjunction with the accompanying consolidated
financial statements and notes thereto of CompCare appearing elsewhere herein.
OVERVIEW
GENERAL
Comprehensive Care Corporation is a Delaware corporation organized in 1969. The Company,
primarily through its wholly owned subsidiary, Comprehensive Behavioral Care, Inc., provides
managed care services in the behavioral health and psychiatric fields, which is its only operating
segment. We manage 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 customer base for our services includes both private and
governmental entities. Our services are provided primarily by unrelated vendors on a subcontract
basis.
We typically enter into contracts on an annual basis to provide managed behavioral healthcare
and substance abuse to our clients’ members. Our arrangements with our clients fall into two broad
categories: capitation arrangements, where our clients pay us a fixed fee per member, and
fee-for-service and administrative service arrangements where we may manage behavioral healthcare
programs or perform various managed care services. We derived 95.6% or $12.5 million of our
revenues from capitation arrangements for the six months ended November 30, 2005. Under capitation
arrangements, we receive premiums from our clients based on the number of covered members as
reported to us by our clients. The amount of premiums we receive for each member is fixed at the
beginning of the contract term. These premiums may be subsequently adjusted, up or down, generally
at the commencement of each renewal period.
Our largest expense is the cost of behavioral health services that we provide, which is based
primarily on our arrangements with healthcare providers. Since we are subject to increases in
healthcare operating expenses based on an increase in the number and frequency of our members
seeking behavioral care services, our profitability depends on our ability to predict and
effectively manage healthcare operating expenses in relation to the fixed premiums we receive under
capitation arrangements. Providing services on a capitation basis exposes us to the risk that our
contracts may ultimately be unprofitable if we are unable to anticipate or control healthcare
costs. Estimation of healthcare operating expense is our most significant critical accounting
estimate. See “Management Discussion and Analyses of Financial Condition and Results of Operations
— Critical Accounting Policies.”
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 and
financial condition. 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 would have a material adverse effect on our results of operations
or financial condition (see Note 5 — “Major Customers/Contracts” to the unaudited, consolidated
financial statements).
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RECENT DEVELOPMENTS
As previously disclosed in our filings with the Securities and Exchange Commission, in October
2004, we submitted a bid to the State of Connecticut in response to its request for proposal for
administrative services only (“ASO”) for a member population then managed by the Company under a
capitated arrangement with a Connecticut HMO. We were informed by the State of Connecticut on
January 7, 2005, that the State chose to negotiate with a bidder other than CompCare to provide ASO
to the State of Connecticut. Although we have not received any written notice from our Connecticut
HMO client terminating our contract with it, we have ceased providing services and consider the
contract to have ended December 31, 2005. The contract with our Connecticut HMO client
represented approximately $2.9 million, or 21.9%, of our operating revenue for the six months ended
November 30, 2005 and approximately $5.3 million, or 21.6%, of our operating revenue for the fiscal
year ended May 31, 2005. The Company has undertaken efforts to prepare for the loss of this
contract, including taking steps to reduce the internal costs and infrastructure associated with
this contract as well as enhancing efforts to obtain new business.
Results of Operations
For the six months ended November 30, 2005, the Company reported an operating loss of
$151,000, or $0.03 per share (basic and diluted) and a net loss of $189,000, or $0.03 loss per
share (basic and diluted). In comparison, the Company reported income from continuing operations
of $302,000, or $0.06 per share (basic and diluted), and net income of $194,000, or $0.04 per share
(basic and diluted), for the six months ended November 30, 2004.
The following tables summarize the Company’s operating results from continuing operations for
the three and six-month periods ended November 30, 2005 and 2004 (in thousands):
The Three Months Ended November 30, 2005 Compared to the Three Months Ended November 30,
2004:
| Three Months Ended | ||||||||
| November 30, | ||||||||
| 2005 | 2004 | |||||||
Operating revenues: |
||||||||
Capitated contracts |
$ | 6,458 | 5,492 | |||||
Non-capitated sources |
298 | 739 | ||||||
Total operating revenues |
6,756 | 6,231 | ||||||
Operating expenses: |
||||||||
Healthcare operating expenses: |
||||||||
Claims expense (1) |
4,660 | 4,025 | ||||||
Other healthcare operating expenses (1) |
1,117 | 1,303 | ||||||
Total healthcare operating expense |
5,777 | 5,328 | ||||||
General and administrative expenses |
829 | 727 | ||||||
Other operating expenses, net |
20 | 24 | ||||||
Total operating expenses |
6,626 | 6,079 | ||||||
Operating income |
$ | 130 | 152 | |||||
| (1) | Claims expense reflects the cost of revenue of capitated contracts, and other healthcare operating expense reflects the cost of revenue of capitated and non-capitated contracts. |
The Company reported operating income of $130,000 and net income of $108,000, or $0.02
earnings per basic share and $0.01 per diluted share, for the quarter ended November 30, 2005
compared to an operating income of $152,000 and net income of $103,000, or $0.02 earnings per share
(basic and diluted), for the quarter ended November 30, 2004. Operating revenues from capitated
contracts increased 17.6%, or approximately $966,000, to $6.5 million for the quarter ended
November 30, 2005 compared to $5.5 million for the quarter ended November 30, 2004. This increase
is primarily attributable to one new major customer in Pennsylvania and additional business from
existing clients in Connecticut and Indiana. Revenue from non-capitated sources declined 59.7% or
approximately $441,000 to $298,000 for the three months ended November 30, 2005, compared to
$739,000 for the three months ended November 30, 2004. The decrease is due to the loss of a
management services only customer in Michigan and an ASO client in Texas.
Claims expense on capitated contracts increased approximately $635,000 or 15.8% for the
quarter ended November 30, 2005 as compared to the quarter ended November 30, 2004 due to higher
capitated revenues. Claims
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expense as a percentage of capitated revenues decreased from 73.3% for the three months ended
November 30, 2004 to 72.2% for the three months ended November 30, 2004 due to a lower utilization
rate during the period. Other healthcare operating expenses, attributable to servicing both
capitated and non-capitated contracts, decreased 14.3% or approximately $186,000 due to workforce
reductions in response to the aforementioned decrease in non-capitated revenues in Michigan and
Texas.
General and administrative expenses increased by $102,000, or 14.0%, for the quarter ended
November 30, 2005 as compared to the quarter ended November 30, 2004. This increase is primarily
attributable to legal expenses in connection with the Company’s October 2005 Annual Meeting and
proxy statements, which was required to be held at such time pursuant to the Company’s agreement
relating to the sale of its Series A Preferred Stock, as well as costs associated with increased
efforts to obtain additional commercial business (see Note 7 (5) Commitments and Contingencies).
General and administrative expense as a percentage of operating revenue increased from 11.7% for
the three months ended November 30, 2004 to 12.3% for the three months ended November 30, 2005.
The Six Months Ended November 30, 2005 Compared to the Six Months Ended November 30, 2004:
| Six Months Ended | ||||||||
| November 30, | ||||||||
| 2005 | 2004 | |||||||
Operating revenues: |
||||||||
Capitated contracts |
$ | 12,477 | 10,803 | |||||
Non-capitated sources |
580 | 1,467 | ||||||
Total operating revenues |
13,057 | 12,270 | ||||||
Operating expenses: |
||||||||
Healthcare operating expenses: |
||||||||
Claims expense (1) |
9,260 | 7,929 | ||||||
Other healthcare operating expenses (1) |
2,235 | 2,567 | ||||||
Total healthcare operating expense |
11,495 | 10,496 | ||||||
General and administrative expenses |
1,705 | 1,429 | ||||||
Other operating expenses, net |
8 | 43 | ||||||
Total operating expenses |
13,208 | 11,968 | ||||||
Operating (loss) income |
$ | (151 | ) | 302 | ||||
| (1) | Claims expense reflects the cost of revenue of capitated contracts, and other healthcare operating expense reflects the cost of revenue of capitated and non-capitated contracts. |
The Company reported an operating loss of $151,000 and a net loss of $189,000, or $0.03
loss per share (basic and diluted), for the six months ended November 30, 2005 compared to an
operating income of $302,000 and a net income of $194,000, or $0.04 earnings per share (basic and
diluted), for the six months ended November 30, 2004. Capitated contract revenues increased 15.5%,
or approximately $1.7 million, to approximately $12.5 million for the six months ended November 30,
2005 compared to $10.8 million for the six months ended November 30, 2004. This increase is
primarily attributable to one new major customer in Pennsylvania and increased revenue from
existing clients in Connecticut and Indiana. Non-capitated revenue declined 60.5%, or
approximately $0.9 million, to approximately $0.6 million for the six months ended November 30,
2005, compared to approximately $1.5 million for the same period of fiscal 2004. The decrease is
attributable to the loss of a management services only customer in Michigan and an ASO client in
Texas.
Claims expense on capitated contracts increased approximately $1.3 million or 16.8% for the
six months ended November 30, 2005 as compared to the six months ended November 30, 2004 due to
higher capitated revenues and increased utilization of covered services. Claims expense as a
percentage of capitated revenues increased 0.8% from 73.4% for the six months ended November 30,
2004 to 74.2% for the six months ended November 30, 2005 due to a higher rate of utilization of
covered services. Other healthcare expenses, which are incurred to service both capitated and
non-capitated contracts, decreased approximately $332,000, or 12.9%, due to staff reductions in
response to the loss of non-capitated revenues in Michigan and Texas.
General and administrative expenses increased by $276,000, or 19.3%, for the six months ended
November 30, 2005 as compared to the six months ended November 30, 2004. This increase is primarily
attributable to indirect costs of the June 2005 sale of Series A Preferred Stock not qualifying for
offset against the proceeds of the issuance,
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increased costs for marketing consultants engaged to obtain additional commercial business,
and legal expenses in conjunction with the Company’s October 2005 Annual Meeting and proxy
statements. General and administrative expense as a percentage of operating revenue increased from
11.6% for the six months ended November 30, 2004 to 13.1% for the six months ended November 30,
2005.
Seasonality of Business
During the six months ended November 30, 2005, we experienced higher than expected utilization
costs as compared to the first six months of the previous two fiscal years. Historically, we have
experienced low utilization during our first fiscal quarter, which comprises the months of June,
July, and August, and increased utilization during our fourth fiscal quarter, which comprises the
months of March, April and May. Such variations in utilization impact our costs of care during
these months, generally having a positive impact on our gross margins and operating profits during
the first fiscal quarter and a negative impact on our gross margins and operating profits during
the fourth quarter. During the first 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 the high utilization costs incurred during our first quarter of this
fiscal year through rate increases with certain of our clients. We cannot assure you, however,
that we will not continue to experience increased utilization costs in subsequent quarters.
Concentration of Risk
For the six months ended November 30, 2005, 86.9% of our operating revenue was concentrated in
contracts with eight health plans to provide behavioral healthcare services under commercial,
Medicare, Medicaid, and CHIP plans. For the same period of the prior fiscal year, 73.8% of our
operating revenue was concentrated in contracts with seven health plans. The terms of each
contract are generally for one-year periods and are automatically renewable for additional one-year
periods unless terminated by either party. The loss of one or more of these clients, without
replacement by new business, could negatively affect the financial condition of the Company.
Liquidity and Capital Resources
During the six months ended November 30, 2005, net cash used in continuing and discontinued
operations amounted to $920,000 and $55,000, respectively, as compared to $375,000 and $73,000,
respectively, for the six months ended November 30, 2004. The increase in net cash used in
continuing and discontinued operations is primarily the result of the Company establishing a
restricted cash account in the initial amount of $500,000 in accordance with the terms of a client
contract. During the six months ended November 30, 2005, net cash provided by financing
activities amounted to $3.5 million, as compared to $18,000 used in financing activities for the
same period of fiscal 2005. The change in cash provided by financing activities is primarily
attributable to proceeds from the sale of 14,400 shares of Series A Preferred Stock in June 2005.
At November 30, 2005, cash and cash equivalents were approximately $6.2 million. We also
maintained restricted cash of $506,000 as of November 30, 2005, composed of a deposit required
pursuant to one of our client contracts. During the six months ended November 30, 2005, we
incurred an operating loss of $151,000 and a net loss of $189,000. As of November 30, 2005, the
Company had a working capital deficiency of $168,000 and a stockholders’ deficit of $809,000. On
June 14, 2005, the Company completed the sale of 14,400 shares of its Series A Preferred Stock for
approximately $3.4 million in net cash proceeds to the Company. As a result, we believe we have
sufficient working capital to sustain current operations and to meet our current obligations during
our 2006 fiscal year (including the additional installments toward the $170,000 that remains to be
paid in connection with our new information system) without the need to raise additional equity or
debt financing. We expect to meet our working capital needs in our 2007 fiscal year and thereafter
by cash generated from continuing operations.
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
sustain profitability and achieve 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 $3.8 million claims payable amount reported as of November 30, 2005.
Although we have not received any written notice from our Connecticut HMO client terminating
our contract with it, we have ceased providing services and consider the contract to have ended
December 31, 2005 (See “Recent Developments” above). This contract represented approximately $2.9
million, or 21.9%, of our operating revenue for
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the six months ended November 30, 2005 and approximately $5.3 million, or 21.6%, of our
operating revenue for the fiscal year ended May 31, 2005. While a loss of revenue, such as from our
Connecticut HMO client, may have a material adverse effect on our results of operations and
financial condition, our Connecticut contract typically generated high healthcare operating
expenses in relation to the fixed premiums that we received throughout the entire contract term.
Accordingly, we do not expect to experience an equally significant decline in operating income as a
result of losing the Connecticut business. Furthermore, we have replaced a portion of the revenues
from our Connecticut contract with new business in Pennsylvania.
Critical Accounting Estimates
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 revenue recognition, accrued claims payable
and claims expense, marketable securities, and goodwill involve our most significant judgments and
estimates that are material to our consolidated financial statements.
Revenue Recognition
We provide managed behavioral healthcare and substance abuse services to recipients, primarily
through subcontracts with HMOs. Revenue under the vast majority of these agreements is earned and
recognized monthly based on the number of covered members as reported to us by our clients
regardless of whether services actually provided are lesser or greater than anticipated when we
entered into such contracts (generally referred to as capitation arrangements). The information
regarding the number of covered members is supplied by the Company’s clients and the Company relies
extensively on the accuracy of this information when calculating the amount of revenue to be
recognized. Consequently, the vast majority of the Company’s revenue is determined by the
monthly receipt of covered member information and the associated payment from the client, thereby
removing uncertainty and precluding the Company from needing to make assumptions to estimate
monthly revenue amounts.
We may experience adjustments to our revenues to reflect changes in the number and eligibility
status of members subsequent to when revenue is recognized. Subsequent adjustments to the
Company’s revenue have not been material.
Accrued Claims Payable and Claims Expense
Healthcare operating expenses are composed of claims expense and other healthcare expenses.
Claims expense includes amounts paid to hospitals, physician groups and other managed care
organizations under capitated contracts. Other healthcare 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 (as defined below). The Company
contracts with various 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 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.
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Accrued claims payable consists primarily of reserves established for reported claims and
claims incurred but not yet reported (“IBNR”), which are unpaid through the respective balance
sheet dates. Our policy is to record management’s best estimate of IBNR. The IBNR liability is
estimated monthly using an actuarial paid completion factor methodology and is continually reviewed
and adjusted, if necessary, to reflect any change in the estimated liability as more information
becomes available. The actuarial model primarily uses past claims payment experience, enrollment
data and key assumptions such as trends in healthcare costs and seasonality in deriving a range of
estimates. The accrued claims payable ranges were between $3.8 and $4.0 million at November 30,
2005 and between $3.5 and $3.8 million at May 31, 2005. To determine the best estimates,
management reviews utilization statistics, authorized healthcare service data, calculated
completion factors and other data available at and subsequent to the balance sheet dates. The best
estimate at November 30, 2005 was $3.8 million and at May 31, 2005, $3.7 million. The Company has
used the same methodology and assumptions for estimating the IBNR portion of the accrued claims
liability for each fiscal quarter-end.
Accrued claims payable at November 30, 2005 and May 31, 2005 comprises approximately $1.6
million and, $1.8 million, respectively, of submitted and approved claims which had not yet been
paid, and $2.2 million and, $1.9 million for IBNR claims, respectively.
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 claims payable amount presented. The following are factors that would
have an impact on future operations and financial condition of the Company:
| • | Changes in utilization patterns | ||
| • | Changes in healthcare costs | ||
| • | Changes in claims submission timeframes by providers | ||
| • | Success in renegotiating contracts with healthcare providers | ||
| • | Occurrence of catastrophes | ||
| • | Changes in benefit plan design | ||
| • | The impact of present or future state and federal regulations |
A 5% increase in assumed healthcare cost trends from those used in our calculations of IBNR at
November 30, 2005 could increase our claims expense by approximately $102,000 and reduce our
net results per share by $0.02 as illustrated in the table below:
Change in Healthcare Costs:
| (Decrease) | ||
| (Decrease) | Increase | |
| Increase | In Claims Expense | |
| (5%) | ($103,000) | |
| 5% | $102,000 |
Premium Deficiencies
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
costs. The projected future healthcare and maintenance costs are estimated based on historical
trends and the Company’s estimate of future cost increases.
At any time prior to the end of a contract or contract renewal, if a capitated contract is not
meeting its financial goals, the Company generally has the ability to cancel the contract with 60
to 90 days’ written notice. Prior to cancellation, the Company will usually submit a request for a
rate increase accompanied by supporting utilization data. Although the Company’s clients have
historically been generally receptive to such requests, no assurance can be given
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that such requests will be fulfilled in the future in the Company’s favor. If a rate increase
is not granted, the Company has the ability to terminate the contract and limit its risk to a
short-term period.
On a quarterly basis, the Company performs a review of its portfolio of contracts for the
purpose of identifying loss contracts (as defined in the American Institute of Certified Public
Accountants Audit and Accounting Guide – Health Care Organizations) and developing a contract loss
reserve, if applicable, for succeeding periods. During the six months ended November 30, 2005, the
Company did not have any contracts where it was probable that a loss had been incurred and for
which a loss could reasonably be estimated.
Marketable Securities
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 financial condition of the issuer. | ||
| • | 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. |
Goodwill
The Company evaluates at least annually the amount of its recorded goodwill by performing an
impairment test that compares the carrying amount to an estimated fair value. In estimating the
fair value, management makes its best assumptions regarding future cash flows and a discount rate
to be applied to the cash flows to yield a present, fair value of equity. As a result of such
tests, management believes there is no material risk of loss from impairment of goodwill. However,
actual results may differ significantly from management’s assumptions, resulting in potentially
adverse impact to the Company’s financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
While we currently have market risk sensitive instruments, we have no significant exposure to
changing interest rates as the interest rate on our long-term debt is fixed. Additionally, we do
not use derivative financial instruments for investment or trading purposes and our investments are
generally limited to cash deposits.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer and
Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures as of the end of the period covered by this report, and,
based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded
that these disclosure controls and procedures are effective. There have been no changes in the
Company’s internal controls over financial reporting identified in connection with this evaluation
that occurred during the period covered by this report and that have affected, or are reasonably
likely to materially affect, the Company’s internal controls over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and its subsidiaries may be parties to and their property
subject to ordinary, routine litigation incidental to their business, in which case 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 is not aware of any such lawsuits that
could have a material adverse impact on the Company’s consolidated financial statements.
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Item 1A. Risk Factors
The Risk Factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended May
31, 2005 have not materially changed other than as set forth below.
We depend on a limited number of customers, the loss of any one of these customers, or a reduction
in business from any one of them, could have a material, adverse effect on our working capital and
future results of operations.
We currently have contracts with eight health plans to provide behavioral healthcare services
under commercial, Medicaid, and CHIP plans. These combined contracts represent approximately 86.9%
and 73.8% of our operating revenue for the six months ended November 30, 2005 and November 30,
2004, respectively, two of which each represented more than 20% of our operating revenues for the
same periods. The terms of each contract are generally for one-year periods and are automatically
renewable for additional one-year periods unless terminated by either party. The loss of one or
more of these clients, without replacement by new business, would negatively affect the financial
condition of the Company.
We believe the State of Connecticut has chosen to implement administrative services only for a
member population that has been managed by the Company under a capitated arrangement with a
Connecticut HMO. Our contract with the Connecticut HMO represented approximately $2.9 million, or
21.9%, of our operating revenue for the six months ended November 30, 2005 and approximately $5.3
million, or 21.6%, of our operating revenue for the fiscal year ended May 31, 2005. As a result of
the State of Connecticut’s change to an ASO plan, and although we have not received any written
notice from our Connecticut HMO client terminating our contract with it, we have ceased providing
services and consider the contract to have ended December 31, 2005. While a loss of revenue, such
as from our Connecticut HMO client, may have a material adverse effect on our results of operations
and financial condition, our Connecticut contract typically generated high healthcare operating
expenses in relation to the fixed premiums that we received throughout the entire contract term.
Accordingly, we do not expect to experience an equally significant decline in operating income as a
result of losing the Connecticut business. Furthermore, we have replaced a portion of the revenues
from our Connecticut contract with new business in Pennsylvania.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On October 28, 2005, the Company held its 2005 Annual Meeting of Stockholders. The meeting was
held to 1) elect two (2) Directors to the Company’s Board of Directors, 2) to obtain stockholder
approval to amend the Company’s Restated Certificate of Incorporation to eliminate classification
of the Board of Directors and replace it with the annual election of all directors, and 3) to amend
the Company’s Restated Certificate of Incorporation, and Amended and Restated Bylaws, to eliminate
cumulative voting.
Stockholders of the Company’s Common Stock, $0.01 par value, of record as of September 8, 2005
(the “Record Date”) were entitled to notice of the Annual Meeting and to vote at such meeting. As
of the Record Date, there were 5,785,377 shares of Common Stock and 14,400 shares of Convertible
Preferred Stock entitled to vote at the meeting. The 14,400 shares of Convertible Preferred Stock
represent 4,235,328 Common Shares of the Company on an as converted basis. Stockholders holding
4,842,540 shares of Common Stock and 14,400 shares of Convertible Preferred Stock, representing a
majority of the Common Stock and Preferred Stock and representing a quorum (approximately 83.7% and
100%, respectively, of the total shares entitled to vote), were represented at the meeting either
in person or by proxy.
RESULTS OF ELECTION OF DIRECTORS
Common and Preferred Stockholders were asked to elect one Director to the Company’s Board of
Directors. Set forth below is the name of the person nominated for and elected to serve on the
Company’s Board of Directors
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until the next Annual Meeting of Stockholders and until his successor is duly elected and
qualified as well as the results of the voting for the nominee. The results given below include
Common Shares and Preferred Shares on an as converted basis.
| Name | Votes For | Votes Withheld | ||||||
Eugene L. Froelich |
9,062,519 | 15,349 | ||||||
The Preferred Stockholder was asked to elect one Director to the Company’s Board of Directors.
Set forth below is the name of the person nominated for and elected to serve on the Company’s
Board of Directors until the next Annual Meeting of Stockholders and until his successor is duly
elected and qualified as well as the results of the voting for the nominee.
| Name | Preferred Votes For | Preferred Votes Withheld | ||||||
Robert Parker |
14,400 | 0 | ||||||
The Board of Directors of the Company is now comprised of the following seven (7) directors:
Ms. Mary Jane Johnson, Mr. Robert J. Landis, Mr. Eugene L. Froelich, Mr. David P. Schuster, Dr.
Barry A. Stein, Mr. Peter Jesse Walcott, and Mr. Robert Parker.
RESULTS OF AMENDMENT OF THE COMPREHENSIVE CARE CORPORATION RESTATED CERTIFICATE OF INCORPORATION TO
ELIMINATE CLASSIFICATION OF THE BOARD OF DIRECTORS
Stockholders were asked to amend the Comprehensive Care Corporation Restated Certificate of
Incorporation to eliminate classification of the Board of Directors and replace it with the annual
election of all directors. The holders of record of the following number of Common Shares and
Preferred Shares on an as converted basis entitled to vote, voted for or against the Company’s
proposal:
NUMBER OF SHARES
| For | Against | Abstain | ||||||
9,071,893 |
5,742 | 233 | ||||||
RESULTS OF AMENDMENT OF THE COMPREHENSIVE CARE CORPORATION RESTATED CERTIFICATE OF INCORPORATION
AND AMENDED AND RESTATED BYLAWS TO ELIMINATE CUMULATIVE VOTING
Stockholders were asked to amend the Comprehensive Care Corporation Restated Certificate of
Incorporation and Amended and Restated Bylaws to eliminate cumulative voting. The holders of
record of the following number of Common Shares and Preferred Shares on an as converted basis
entitled to vote, voted for or against the Company’s proposal:
NUMBER OF SHARES
| For | Against | Abstain | Broker Non-Votes | |||||||||
6,408,717 |
180,912 | 51,050 | 2,437,189 | |||||||||
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
| EXHIBIT | ||||||
| NUMBER | DESCRIPTION | PAGE NUMBER | ||||
31.1
|
Comprehensive Care Corporation CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 23 | ||||
31.2
|
Comprehensive Care Corporation CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 24 | ||||
32.1
|
Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 25 | ||||
32.2
|
Comprehensive Care Corporation CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 26 | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COMPREHENSIVE CARE CORPORATION | ||||||
January 12, 2006 |
||||||
| By | /s/ MARY JANE JOHNSON
|
|||||
| Mary Jane Johnson | ||||||
| President and Chief Executive Officer | ||||||
| (Principal Executive Officer) | ||||||
| By | /s/ ROBERT J. LANDIS | |||||
| Robert J. Landis | ||||||
| Chairman, Chief Financial Officer and Treasurer | ||||||
| (Principal Financial and Accounting Officer) | ||||||
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