ITEM 1. BUSINESS
ORGANIZATIONAL HISTORY
Comprehensive Care Corporation(R) (the "Company") is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the Company include the Company's principal operating subsidiary, Comprehensive Behavioral Care, Inc.(SM) (1) ("CompCare"(SM) (2) or "CBC") and subsidiary corporations.
The Company has provided managed behavioral healthcare services and products since its acquisition of AccessCare, Inc. in December 1992. On August 1, 1995, the Company renamed this subsidiary to Comprehensive Behavioral Care, Inc.(SM). In addition to its managed care products, CompCare provides contract behavioral healthcare services through its subsidiary, Comprehensive Care Integration, Inc. The Company's chief focus is its managed care business.
As of May 31, 2001, the Company had the following active subsidiaries:
RECENT DEVELOPMENTS
- - During March 2001, the Company implemented a major contract to provide behavioral healthcare benefits to members in Connecticut. During Fiscal 2001, the Company successfully implemented two major contracts, including the Connecticut contract, with only minimal increases in staff and other operating expenses.
- - In January 2001, the Company announced that its behavioral healthcare subsidiary, Comprehensive Behavioral Care, Inc. - Southeast Region ("CompCare") was awarded a Full Accreditation from the National Committee for Quality Assurance ("NCQA") for its HMO Commercial, HMO Medicaid, HMO Medicare and ASO Commercial product lines under NCQA's standards for managed behavioral healthcare organizations ("MBHOs"). Full Accreditation is granted for a period of three years to those plans that have excellent programs for continuous quality improvement and that meet NCQA's rigorous standards. This Full Accreditation award extends the NCQA accreditation to July 2002.
- - During Fiscal 2001, the Company resolved various legal matters that were pending at May 31, 2000, including all legal matters with Humana that were resolved effective February 8, 2001, with no material, adverse impact on the Company's financial position.
- --------------- (1) Comprehensive Behavioral Care, Inc. is a registered service mark of the Company.
(2) CompCare is a registered service mark of Comprehensive Behavioral Care, Inc.
OPERATIONAL OVERVIEW
For the fiscal year ended May 31, 2001, the Company reported a net loss of approximately $1.1 million, which included the $0.5 million non-operating loss related to the note receivable prepayment arrangement (see Note 9 - "Notes Receivable"), $0.4 million of income in connection with two legal settlements, a $0.3 million reduction in interest expense in connection with a change in estimate specific to one third party liability (see Note 17, Item 2
ITEM 2. PROPERTIES
The Company does not currently own any real property. The following table sets forth certain information regarding the properties leased by the Company at May 31, 2001. All leases are triple net leases, under which the Company bears all costs of operations, including insurance, taxes, and utilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
(1) On February 19, 1999, the California Superior Court denied the Company's Petition for Writ of Mandate of an adverse administrative appeal decision regarding application of the Maximum Inpatient Reimbursement Limitation to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. The Company owned this facility until its disposal in fiscal year 1991. The subject matter of the Superior Court action involved the refusal of the administrative law judge to order further reductions in the liability for costs associated with treating high cost, long stay Medi-Cal patients, which are commonly referred to as "outliers". The Company does not plan to appeal the California Superior Court decision for which the Notice of Entry of Judgment was entered on February 26, 1999.
During the quarter ended November 30, 2000, the Company lowered its estimate by approximately $0.3 million specific to interest charges that were previously accrued in connection with this liability. This change in estimate was based on recent information provided to the Company by the California Department of Health Services. As of May 31, 2001, the Company has approximately $1.0 million accrued relating to this matter.
In March 2001, the Company submitted an offer to the State of California to resolve this liability at a substantially reduced amount. On April 23, 2001, the Company received a letter, dated April 11, 2001, from the State of California advising the company that its proposed settlement offer was not accepted and, additionally, requesting payment of approximately $0.8 million. The Company is contemplating a second settlement offer. There can be no assurance that the Sate of California will give consideration to such offer or agree to alternate terms.
(2) In connection with the filing of its Federal income tax returns for fiscal years 1995 and 1996, the Company filed a tentative refund claim to carry back losses described in Section 172(f) of the Internal Revenue Code ("IRC"), requesting a refund to the Company of $9.4 million and $5.5 million, respectively, of which refunds of $9.4 million and $5.4 million were received. In addition, the Company also filed amended Federal income tax returns for fiscal years prior to 1995, requesting similar refunds of losses carried back under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of the refunds received as a tax benefit of $0.3 million and $2.4 million, respectively. The balance of the refunds received, $12.1 million, is recorded as a deferred liability, "Unbenefitted tax refunds received" pending resolution by the Internal Revenue Service ("IRS") of the appropriateness of the Section 172(f) carryback. The additional refunds requested under Section 172(f) for prior years of $7.7 million have not been received, nor has the Company recognized any tax benefit related to these potential refunds.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Section 172(f) of the IRC provides for a ten-year net operating loss carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. The applicability of Section 172(f) to the type of business in which the Company operates is unclear. No assurance can be provided that the Company will be able to retain the refunds received to date or that the additional refunds requested will be received.
As a result of the Section 172(f) carryback claims filed by the Company, and the tentative refunds received, the Company came under audit with respect to the tax years previously mentioned.
On August 21, 1998, the Company received an examination report, dated August 6, 1998, from the IRS advising the Company that it was disallowing $12.4 million of the $14.8 million of refunds previously received, and the additional refunds requested of $7.7 million. If the position of the IRS were to be upheld, the Company would be required to repay $12.4 million in refunds previously received, plus accrued interest of approximately $6.7 million through May 31, 2001. Accordingly, the Company would be entitled to a repayment of the fees advanced to its tax advisor relating to these refunds of approximately $2.5 million, which is reported as "other receivable" in the accompanying balance sheets. This report commenced the administrative appeals process. The Company filed a protest letter with the IRS on November 6, 1998. The IRS reserves the right to assess and collect the tax previously refunded to the Company at any time during the appeals process.
On July 11, 2000, the Company submitted an Offer in Compromise (the "Offer") to the Appeals Office of the IRS to resolve the controversy with respect to the refunds at a substantially reduced amount. The IRS is currently evaluating the Offer. A preliminary meeting with the IRS with respect to the Offer took place in October 2000 and, subsequent to this meeting, the Company has provided additional documents to the IRS. The Company has continued its discussions with the IRS during the first quarter of Fiscal 2002 and expects to continue such discussions during the second quarter of Fiscal 2002. There can be no assurance that the IRS will accept the Offer.
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 some pending cases, claims may exceed insurance policy limits and the Company or any one of its subsidiaries may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART II.
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Over The Counter Bulletin Board ("OTC-BB") under the symbol CHCR. The following table sets forth the range of high and low closing prices for the Common Stock, as reported by the OTC-BB, for the fiscal quarters indicated:
(a) As of July 31, 2001, the Company had 1,432 common stockholders of record.
(b) The Company did not pay any cash dividends on its Common Stock during any quarter of Fiscal 2001, 2000, or 1999 and does not contemplate the initiation of payment of any cash dividends in the foreseeable future (see ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS").
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Prior to Fiscal 1993, the Company principally engaged in the ownership, operation, and management of psychiatric and substance abuse programs in Company owned, leased, or unaffiliated hospitals. During Fiscal 1999, the Company completed its plan to dispose of its hospital business segment. The selected consolidated financial data that follows includes the results of discontinued hospital operations for the fiscal years ended May 31, 1999, 1998, and 1997 and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. Reclassifications of prior year amounts have been made to conform to the current year's presentation (see ITEM 7
ITEM 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations").
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Annual Report on Form 10-K includes forward-looking statements, the realization of which may be impacted by certain important factors discussed below under "Risk Factors -- Important Factors Related to Forward-Looking Statements and Associated Risks".
GENERAL
The Company reported a net loss of $1.1 million, or $0.29 per share, for the fiscal year ended May 31, 2001 compared to the net loss of $5.8 million, or $1.51 per share, for the fiscal year ended May 31, 2000. The following table summarizes the Company's financial data for the fiscal years ended May 31, 2001 and 2000 (in thousands):
RESULTS OF OPERATIONS - THE YEAR ENDED MAY 31, 2001 COMPARED TO THE YEAR ENDED MAY 31, 2000.
The Company reported an operating loss of $1.2 million for the fiscal year ended May 31, 2001. Operating revenues increased by $1.3 million, or 7.1%, for the fiscal year ended May 31, 2001 compared to the fiscal year ended May 31, 2000. This increase is attributable to the implementation in Fiscal 2001 of two major, managed care contracts which accounted for $4.9 million of operating revenues during the fiscal year ended May 31, 2001, offset by the loss of revenues during Fiscal 2001 specific to the Humana contracts and the loss of two major contracts that terminated during the third quarter of Fiscal 2000.
Healthcare operating expenses increased by approximately $0.3 million, or 1.9%, for the fiscal year ended May 31, 2001 as compared to the fiscal year ended May 31, 2000. This increase is directly attributable to the new business added during Fiscal 2001. Healthcare operating expense as a percentage of operating revenue decreased from 89.2% for the fiscal year ended May 31, 2000 to 84.9% for the fiscal year ended May 31, 2001. Efforts are being made to further increase revenues during Fiscal 2002 without adding significantly to our healthcare operating costs.
General and administrative expenses decreased by approximately $3.1 million, or 44.9%, for the fiscal year ended May 31, 2001 as compared to the fiscal year ended May 31, 2000. General and administrative expense as a percentage of revenue decreased from 39.4% for the fiscal year ended May 31, 2000 to 20.3% for the fiscal year ended May 31, 2001. This decrease is attributable to the significant cost reductions that were initiated following the loss of two major, managed care contracts in Fiscal 2000.
Other operating expenses decreased by $0.8 million for the fiscal year ended May 31, 2001 compared to the fiscal year ended May 31, 2000. This decrease is primarily attributable to the $0.8 million of restructuring expense in Fiscal 2000.
Management believes that the Company's current infrastructure is sufficient to support continued revenue growth during Fiscal 2002 without the need for any significant increase to staff or other operating costs.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS - YEAR ENDED MAY 31, 2000 COMPARED TO THE YEAR ENDED MAY 31, 1999.
The Company reported an operating loss of approximately $6.1 million from continuing operations for the fiscal year ended May 31, 2000, primarily attributable to the loss of two major, managed care contracts during the fourth quarter of Fiscal 1999. Additionally, this loss included approximately $0.9 million of restructuring expenses in connection with the elimination of the Company's California office and affiliated employees, approximately $0.6 million of increased marketing and other costs specific to the Company's efforts to regain business, approximately $0.1 million of operating costs incurred to manage the Company's Year 2000 readiness program, and approximately $0.1 million of costs in connection with the NCQA accreditation. These expenses were offset in part by $0.3 million of revenue related to favorable cost report settlements that took place during the year. This is compared to an operating loss of $3.2 million from continuing operations reported for the fiscal year ended May 31, 1999, which included approximately $0.9 million of bad debt expense specific to two major contracts that terminated during Fiscal 1999, $0.3 million of bad debt expense specific to hospital accounts receivable that were written off after the March 11, 1999 disposal date, and $0.2 million of bad debt expense specific to CCI contracts that terminated prior to May 31, 1999. Additionally, the Company incurred $0.8 million of expense in its unsuccessful bid for a managed care contract in Argentina and approximately $0.6 million of restructuring costs related to the loss of the PCA contract in Puerto Rico during Fiscal 1999.
Operating revenues from continuing operations decreased by approximately 54.6%, or $21.3 million, for the fiscal year ended May 31, 2000 compared to the fiscal year ended May 31, 1999. This decrease is primarily attributable to the loss of two major contracts during the fourth quarter of Fiscal 1999 and two major contracts during the third quarter of Fiscal 2000.
Healthcare operating expenses from continuing operations decreased by 46.9%, or $14.0 million, for the fiscal year ended May 31, 2000 as compared to the fiscal year ended May 31, 1999. This decrease is attributable to the loss of revenue specific to two major contracts that terminated in Fiscal 1999 and two major contracts that terminated in Fiscal 2000. Healthcare operating expense as a percentage of net revenue from continuing operations increased from 76.3% for the fiscal year ended May 31, 1999 to 89.2% for the fiscal year ended May 31, 2000. This percentage increase is attributable to $0.3 million of claims expense recorded during the fiscal year ended May 31, 2000 specific to the Puerto Rico contract, which terminated in Fiscal 1999. Additionally, this percentage increase is attributable to continuing fixed costs that cannot be tied to the specific contracts that were terminated during Fiscal 1999.
General and administrative expenses from continuing operations decreased by approximately 23.8%, or $2.2 million, for the fiscal year ended May 31, 2000 as compared to the fiscal year ended May 31, 1999. This decrease is primarily attributable to $1.5 million of savings in legal and accounting fees, a $0.5 million reduction in building lease costs, a $0.2 million savings in directors fees, $0.2 million of savings in corporate salaries, and a $0.1 million reduction in shareholder reporting costs in comparison to costs incurred for the same period during Fiscal 2000. These savings were offset by $0.3 million of fees paid to marketing consultants during Fiscal 2000. General and administrative costs as a percentage of revenue increased from 23.4% for the fiscal year ended May 31, 1999 to 39.4% for the fiscal year ended May 31, 2000. This percentage increase is attributable to the continuing fixed costs that could not be tied to the specific contracts that were terminated during Fiscal 1999.
Other operating expenses from continuing operations decreased by $2.3 million for the fiscal year ended May 31, 2000 compared to the fiscal year ended May 31, 1999. This decrease is primarily attributable to the $0.9 million of bad debt expense recognized during the fiscal year ended May 31, 1999 specific to the two major, managed care contracts that terminated during Fiscal 1999, $0.3 million of bad debt expense specific to hospital accounts receivable that were written off after the March 11, 1999 disposal date, and $0.2 million of bad debt expense specific to CCI contracts that were terminated prior to May 31, 1999. In contrast to the $1.6 million of bad debt expense recognized in Fiscal 1999, the Company recognized recoveries totaling $0.6 million during the fiscal year ended May 31, 2000. Additionally, expense for depreciation and amortization decreased by $0.2 million during Fiscal 2000 in comparison to the prior year. These gains were offset by a restructuring charge related to the elimination of the Company's California administrative office and related executive staff during Fiscal 2000. Such costs exceeded the prior year restructuring charge, which pertained to the loss of the Puerto Rico contract, by approximately $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2001, the Company had unrestricted cash and cash equivalents of $2.9 million. During the fiscal year ended May 31, 2001, the Company used $0.1 million in its continuing operations. Additionally, $0.5 million was provided by its investing activities. The Company reported a net loss of approximately $1.1 million for the fiscal year ended May 31, 2001, compared to a net loss of $5.8 million for the fiscal year ended May 31, 2000. The Company has an accumulated deficit of $63.6 million and total stockholders' deficit of $11.8 million as of May 31, 2001. Additionally, the Company's current assets at May 31, 2001 amounted to approximately $7.5 million and current liabilities were approximately $19.3 million, resulting in a working capital deficiency of approximately $11.8 million. The Company's primary use of available cash resources is to expand its managed care business and fund operations.
The Company's available sources of cash during the next fiscal year will be derived from operations. At this time, the Company cannot state with any degree of certainty whether additional equity or debt financing will be available to it and, if available, that the source of financing would be available on terms and conditions acceptable to the Company. Any potential sources of additional financing may be subject to business and economic conditions outside the Company's control.
The working capital and stockholders' deficits raise doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.
RISK FACTORS
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Annual Report on Form 10-K contains certain forward-looking statements that are based on current expectations and involve a number of risks and uncertainties. Factors that may materially affect revenues, expenses and operating results include, without limitation, the Company's success in (i) expanding the managed behavioral healthcare operations, (ii) effective management in the delivery of services, (iii) risk and utilization in context of capitated payouts, and (iv) retaining certain refunds from the IRS (see Note 13 to the audited consolidated financial statements -- "Income Taxes").
Assumptions relating to the foregoing involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its budgets which may in turn affect the Company's results. In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.
CONCENTRATION OF RISK
The Company currently has ten contracts with three HMOs to provide behavioral healthcare services under commercial, Medicaid, and Medicare plans, to contracted members in Connecticut, Florida, and Texas. These combined contracts represent approximately 51.7% and 14.1% of the Company's operating revenue for the fiscal year ended May 31, 2001 and 2000, respectively. 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.
UNCERTAINTY OF FUTURE PROFITABILITY
As of May 31, 2001, the Company had stockholders' deficit of $11.8 million and a working capital deficiency of approximately $11.8 million. The Company had a net loss for the fiscal year ended May 31, 2001 of approximately $1.1 million. There can be no assurance that the Company will be able to achieve and sustain profitability or that the Company can achieve and maintain positive cash flow on an ongoing basis. Present results of operations are not necessarily indicative of anticipated future results of operations.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING
During recent fiscal years, a principal source of liquidity has been the sale of hospital facilities. During Fiscal 1999, the Company completed its plan to dispose of its hospital business segment and, as such, does not currently own any hospital facilities. Subject to various market conditions, an additional source of liquidity could be the issuance of additional equity securities, which could result in substantial dilution to stockholders.
The Company may be required to repay a portion of the tax refunds received from the Internal Revenue Service for Fiscal 1996 and 1995, which amounted to $9.4 million and $5.4 million, respectively (see "Taxes" below and Note 13 to the audited, consolidated financial statements - "Income Taxes"). Further, the Company may be required to repay some amount to Medi-Cal in connection with the judgment entered on February 26, 1999, which is more fully described under Item 1, Legal Proceedings, above.
TAXES
In connection with the filing of its Federal income tax returns for fiscal years 1995 and 1996, the Company filed a tentative refund claim to carry back losses described in Section 172(f) of the Internal Revenue Code ("IRC"), requesting a refund to the Company of $9.4 million and $5.5 million, respectively, of which refunds of $9.4 million and $5.4 million were received. In addition, the Company also filed amended Federal income tax returns for fiscal years prior to 1995, requesting similar refunds of losses carried back under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of the refunds received as a tax benefit of $0.3 million and $2.4 million, respectively. The balance of the refunds received, $12.1 million, is recorded as a deferred liability, "Unbenefitted tax refunds received" pending resolution by the Internal Revenue Service ("IRS") of the appropriateness of the Section 172(f) carryback. The additional refunds requested under Section 172(f) for prior years of $7.7 million have not been received, nor has the Company recognized any tax benefit related to these potential refunds.
Section 172(f) of the IRC provides for a ten-year net operating loss carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. The applicability of Section 172(f) to the type of business in which the Company operates is unclear. No assurance can be provided that the Company will be able to retain the refunds received to date or that the other refunds requested will be received.
On August 21, 1998, the Company received an examination report, dated August 6, 1998, from the IRS advising the Company that it was disallowing $12.4 million of the $14.8 million of refunds previously received, and the additional refunds requested of $7.7 million. If the position of the IRS were to be upheld the Company would be required to repay $12.4 million in refunds previously received, plus accrued interest of approximately $6.7 million through May 31, 2001. Accordingly, the Company would be entitled to a repayment of the fees advanced to its tax advisor relating to these refunds of approximately $2.5 million, which is reported as "other receivable" in the accompanying balance sheets. This report commenced the administrative appeals process. The Company filed a protest letter with the IRS on November 6, 1998. The IRS reserves the right to assess and collect the tax previously refunded to the Company at any time during the appeals process.
On July 11, 2000, the Company submitted an Offer in Compromise (the "Offer") to the Appeals Office of the IRS to resolve the controversy with respect to the refunds at a substantially reduced amount. The IRS is currently evaluating the Offer. A preliminary meeting with the IRS with respect to the Offer took place in October 2000 and, subsequent to this meeting, the Company has provided additional documents to the IRS. The Company has continued its discussions with the IRS during the first quarter of Fiscal 2002 and expects to continue such discussions during the second quarter of Fiscal 2002. There can be no assurance that the IRS will accept the Offer.
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS
Managed care operations are at risk for costs incurred to supply agreed upon levels of service. Failure to anticipate or control costs could have material, adverse effects on the Company. Additionally, the business of providing services on a full-risk capitation basis exposes the Company to the additional risk that contracts negotiated and entered into may ultimately be determined to be unprofitable if utilization levels require the Company to deliver and provide services at capitation rates which do not account for or factor in such utilization levels.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The levels of revenues and profitability of healthcare companies may be affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement governmental controls on the price of healthcare. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payers for healthcare goods and services may take in response to any healthcare reform proposals or legislation. The Company cannot predict the effect that healthcare reforms may have on its business and no assurance can be given that any such reforms will not have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company depends and will continue to depend upon the services of its senior management and skilled personnel.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has issued or committed to issue 9,000 shares related to the 7 1/2% convertible subordinated debentures due April 15, 2010, and options or other rights to purchase approximately 1,103,000 shares. The Company may contemplate issuing additional amounts of debt, equity or convertible securities in public or private transactions for use in fulfilling its future capital needs (see "Need for Additional Funds; Uncertainty of Future Funding"). Issuance of additional equity could adversely affect the trading price of the Company's Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation provides for 60,000 authorized shares of Preferred Stock, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by the Board of Directors without any vote or action by the stockholders that could have the effect of diluting the Common Stock or reducing working capital that would otherwise be available to the Company. As of May 31, 2001, there are no outstanding shares of Preferred Stock (see Note 16 to the audited consolidated financial statements -- "Preferred Stock, Common Stock, and Stock Option Plans"). The Company's Restated Certificate of Incorporation also provides for a classified board of directors with directors divided into three classes serving staggered terms. The Company's stock option plans generally provide for the acceleration of vesting of options granted under such plans in the event of certain transactions which result in a change of control of the Company. Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders. In addition, each share of the Company's Common Stock includes one right on the terms and subject to the conditions of the Rights Agreement between the Company and Continental Stock Transfer & Trust Company. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders and therefore could adversely affect the price of the Company's Common Stock or the possibility of sale of shares to an acquiring person.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statement Schedules
Years Ended May 31, 2001, 2000 and 1999
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Comprehensive Care Corporation
We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation and subsidiaries as of May 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended May 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3, the Company's working capital deficiency and stockholders' deficit raise substantial doubt about its ability to continue as a going concern. Management's plans as to these matters are also described in Notes 3 and 13. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Richard A. Eisner & Company, LLP
New York, New York August 3, 2001
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS)
See accompanying notes.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 1 -- DESCRIPTION OF THE COMPANY'S BUSINESS
Comprehensive Care Corporation (the "Company") is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the "Company" include Comprehensive Behavioral Care, Inc. ("CompCare" or "CBC") and subsidiary corporations. The Company, through its wholly owned subsidiary, CompCare, primarily provides managed care services in the behavioral health and psychiatric fields, which is its only operating segment. The Company manages the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf of employers, HMOs, PPOs, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. The managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. The customer base for its services includes both corporate and governmental entities. The Company's services are provided by employees or by unrelated vendors on a subcontract or subcapitated basis.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Comprehensive Care Corporation and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation. The results of operations of the hospital business segment, which was disposed of during Fiscal 1999, are shown in discontinued operations in the accompanying statements of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
REVENUE RECOGNITION
The Company's managed care activities are performed under the terms of agreements with health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), and other payers to provide contracted medical services to subscribing participants. Under these agreements, revenue arises from agreements to provide contracted services to qualified beneficiaries and is earned monthly based on the number of qualified participants regardless of services actually provided (generally referred to as capitation arrangements). The Company's revenues from providing other behavioral healthcare services are earned on a fee-for-service basis and are recognized as services are rendered.
HEALTHCARE EXPENSE RECOGNITION
The Company attempts to control its costs and risk by entering into contractual relationships with 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's capitation contracts typically exclude risk for chronic care patients. The cost of healthcare services is recognized in the period that the Company is obligated to provide such services. Certain contracted healthcare providers assume the financial risk for participant care rendered by them and they are compensated on a sub-capitated basis.
In cases where the Company retains the financial responsibility for authorizations, hospital utilization, and the cost of other behavioral healthcare services, the Company establishes an accrual for estimated claims payable.
PREMIUM DEFICIENCIES
Estimated future healthcare costs and expenses in excess of estimated future premiums are recorded as a loss when determinable. No such deficiencies existed at May 31, 2001 or May 31, 2000.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CASH AND CASH EQUIVALENTS
Cash in excess of daily requirements is invested in short-term investments with original maturities of three months or less. These investments aggregated $1.5 million and $1.8 million at May 31, 2001 and 2000, respectively. These investments are included in cash equivalents in the accompanying consolidated balance sheets.
RESTRICTED CASH
Restricted accounts classified as current assets are required under capitated contracts, primarily the Puerto Rico contract that expired March 31, 1999 (see Note 17 -- "Commitments and Contingencies", Item 4). Non-current restricted accounts include $0.3 million of cash held in trust in connection with the Company's Directors and Officers liability insurance policy.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of furniture and equipment is computed using the straight-line method over the estimated useful lives of 3 to 12 years. Leasehold improvements are amortized over the term of the related lease.
GOODWILL
Goodwill includes costs in excess of the fair value of net assets of businesses purchased. Costs in excess of net assets purchased are amortized on a straight-line basis up to 20 years. The Company evaluates the recoverability and the amortization period of goodwill by determining whether the amount of goodwill recorded can be recovered through undiscounted cash flows of the business acquired excluding interest expense and amortization over the remaining amortization period. The Company believes that the remaining $0.9 million of net recorded goodwill at May 31, 2001 is recoverable from future estimated undiscounted cash flows. The amounts of goodwill reported in the consolidated balance sheets are net of accumulated amortization of $494,000 and $422,000 at May 31, 2001 and 2000, respectively.
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.
The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate. The estimates are continually reviewed and adjusted as experience develops or new information becomes known with adjustments included in current operations.
INCOME TAXES
The Company calculates deferred taxes and related income tax expense using the liability method. This method determines deferred taxes by applying the current tax rate to net operating loss carryforwards and to the cumulative temporary differences between the recorded carrying amounts and the corresponding tax basis of assets and liabilities. A valuation allowance is established for deferred tax assets unless their realization is considered more likely than not. The Company's provision for income taxes is the sum of the change in the balance of deferred taxes between the beginning and the end of the period and income taxes currently payable or receivable.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, in the event that the exercise price of the Company's employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recognized.
In Fiscal 2001 and 2000, the Company recognized deferred compensation totaling $1,000 and $18,000, respectively, in relation to options that were issued to non-employee consultants. Such amounts were based on the
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
fair value of the options granted in accordance with SFAS Statement 123, "Accounting for Stock-based Compensation", and are being amortized to expense over the vesting period of the options. Amortization for Fiscal 2001 and 2000 amounted to $11,000 and $8,000, respectively.
PER SHARE DATA
In calculating basic earnings (loss) per share, net income (loss) is adjusted for dividends on preferred stock and is divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the assumed conversion of all dilutive securities, such as options and convertible preferred stock. No such exercise or conversion is assumed where the effect is antidilutive, such as when there is a loss from continuing operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments whether or not recognized in the balance sheet for which it is practical to estimate that value.
For cash and cash equivalents, notes receivable, and restricted cash, the carrying amount approximates fair value. For long-term debt, the fair value is based on the estimated market price for the Debentures on the last day of the fiscal year.
The carrying amounts and fair values of the Company's financial instruments at May 31, 2001 and 2000, are as follows:
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets", which establishes new standards for the treatment of goodwill and other intangible assets. SFAS 142 is effective for fiscal years beginning after December 31, 2001 and permits early adoption for companies with a fiscal year beginning after March 15, 2001. SFAS 142 prescribes that amortization of goodwill will cease as of the adoption date. Additionally, the Company will be required to perform an impairment test as of the adoption date, annually thereafter, and whenever events and circumstances occur that might effect the carrying value of these assets. The Company has not yet determined whether it will elect early adoption or what effect, if any, the impairment test of goodwill will have on the Company's results of operations and financial position.
NOTE 3 -- LIQUIDITY AND CAPITAL RESOURCES
For the years ended May 31, 2001, 2000, and 1999, the Company incurred losses from continuing operations of approximately $1.1 million, $5.8 million, and $3.0 million, respectively. As of May 31, 2001, the Company had a working capital deficiency of approximately $11.8 million and a stockholders' deficit of approximately $11.8 million. In addition, for the years ended May 31, 2001, 2000, and 1999, continuing operations used cash of approximately $0.1 million, $5.3 million, and $1.4 million, respectively. The working capital deficiency referred to above results primarily from a $12.1 million liability related to Federal income tax refunds received in prior years. The ultimate outcome of the Internal Revenue Service audit whereby it is seeking recovery of the refunds from the Company, including the amount to be repaid, if any, and the timing thereof, is not determinable (see Note 13 -- "Income Taxes").
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The Company cannot state with any degree of certainty whether any required additional equity or debt financing to meet its obligations will be available to it during Fiscal 2002 and, if available, that the source of financing would be available on terms and conditions acceptable to the Company.
The above conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustment that may result from the outcome of this uncertainty.
During Fiscal 2001 and 2000, management has taken steps to trim costs and save cash, including making significant staff reductions, centralizing certain contract management and clinical functions, and eliminating the Company's California administrative office and related executive staff positions. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required and, ultimately, to attain profitability.
NOTE 4 -- MAJOR CONTRACTS/CUSTOMERS
(1) The Company had contracts with Humana Health Plans ("Humana") under which it provided services to members in Florida. Effective June 30, 2000, Humana completed the sale of its North Florida Medicaid business to HealthEase of Florida, Inc. Additionally, Humana's contracts with the Company, which cover specific commercial, Medicaid and Medicare populations of approximately 60,000 members in Florida terminated September 30, 2000. Fiscal 2001 operations include $0.7 million, or 3.7%, of operating revenue specific to the Humana contracts compared to $6.0 million, or 33.8%, and $6.8 million, or 17.4%, for the fiscal years ended May 31, 2000, and 1999, respectively.
Effective July 1, 2000, the Company entered into a contract with one HMO to continue to provide behavioral healthcare services to approximately 100,000 of 160,000 Florida members that were managed by the Company under contracts with Humana as of June 2000. The initial term of this contract is for one year and the contract provides for automatic annual extensions. The combined revenue from the contracts that were transitioned from Humana, plus one existing contract that the Company had with this HMO and one new contract that the Company has with an affiliate of this HMO, accounted for 24.1%, or $4.6 million, of the Company's operating revenues during the fiscal year ended May 31, 2001 compared to 2.3%, or $0.4 million, for the fiscal year ended May 31, 2000.
Additionally, one contract includes a provision that the Company, through its contract with this HMO, receives additional funds directly from a state reinsurance program. During the quarter ended May 31, 2001, the Company filed reinsurance claims totaling approximately $0.8 million. This amount was included in revenue with a corresponding amount as claims expense in the accompanying financial statements. Additionally, as these reinsurance claim amounts remain outstanding as of May 31, 2001, the Company has reported the $0.8 million as a component of accounts receivable, with a corresponding amount that has been included in accrued claims payable, in the accompanying balance sheet. In the event that these reinsurance amounts are not collected by the Company, the Company could remain liable to perform services for the specific members that qualify for such reimbursements. Subsequent to May 31, 2001, the Company has collected 100% of the $0.8 million that was included in accounts receivable at May 31, 2001. For non-reinsurance claims incurred but not reported under this contract, the Company estimates its claims payable using a similar method as that used for other existing contracts. As of May 31, 2001, there was a limited amount of historical data available to the Company for use in such estimates specific to this contract. Thus, actual results could differ from the claims payable amount reported as of May 31, 2001. While the Company believes its estimate to be adequate, management will review and make any necessary changes to its estimate as additional data becomes available.
(2) The Company has two contracts with one HMO to provide behavioral healthcare services to contracted members in Texas. These combined contracts represented approximately 9.0%, or $1.7 million, 11.8%, or $2.1 million, and 6%, or $2.4 million, of the Company's operating revenue for the fiscal years ended May 31, 2001, 2000, and 1999, respectively. The Company renewed these contracts for two years, with effective dates of February 8, 2000.
(3) During the fiscal year ended May 31, 2001, the Company implemented five new contracts to provide behavioral healthcare services to Florida members under contracts with one HMO. For the fiscal year
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
ended May 31, 2001, these five contracts represented approximately 18.7%, or $3.5 million, of the Company's operating revenue.
(4) During Fiscal 1999, the Company provided services to members of Humana Health Plans of Puerto Rico, Inc. under the terms of management service agreements, which expired on April 30, 1999. For the fiscal year ended May 31, 1999, these agreements accounted for approximately 44%, or $17.1 million, of the Company's operating revenues from continuing operations.
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.
NOTE 5 -- ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
The following table summarizes changes in the Company's allowance for doubtful accounts for the years ended May 31, 2001, 2000 and 1999:
*Includes $1,673 charged to discontinued operations. **Excludes $448 in 2001 and $349 in 2000 of recoveries from accounts previously written off.
Recoveries are reflected on the Company's statement of operations as a reduction to the provision for doubtful accounts.
NOTE 6 -- OTHER RECEIVABLE
Other receivable at May 31, 2001 and 2000 represents $2.5 million paid to a vendor to prepare a federal income tax refund that is more fully described in Note 13. The costs incurred will be refunded to the Company should the Internal Revenue Service ("IRS") disallow the refund and require its repayment. To the extent that all or some portion of the refund is allowed by the IRS, the fees paid will be recognized as expense in proportion to the amount of refund allowed.
NOTE 7 -- OTHER CURRENT ASSETS
Other current assets consist of the following:
(a) May 31, 2001 amount includes a $0.3 million bad debt recovery and $0.1 million for an insurance settlement received in June 2001, which are more fully described in Note 18.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 8 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
NOTE 9 -- NOTES RECEIVABLE
On August 31, 2000, the Company entered into a prepayment agreement and note modification with Jefferson Hills Corporation ("JHC") in connection with the secured promissory note, which originated out of the sale in Fiscal 1999 of the Company's Aurora, Colorado facility to JHC (see Note 14). The terms of the prepayment agreement required JHC to immediately remit $500,000 to the Company as a prepayment on the note. Additionally, the note was modified to reflect a remaining balance due totaling $170,000 and to require JHC to make monthly principal and interest payments until April 2006. One final principal payment in the amount of approximately $146,000 will be due from JHC in April 2006. As an inducement to JHC to make such prepayment, the Company credited JHC with an aggregate of approximately $996,000. As a result, the Company recorded a non-operating loss during the quarter ended August 31, 2000 of approximately $496,000 in connection with this transaction.
Notes receivable consist of the following:
NOTE 10 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 11 - RESTRUCTURING
During Fiscal 2000, following the termination of two major contracts on December 31, 1999, the Company underwent a restructuring that included the closing of the Company's California administrative office, terminating related executive and staff positions, and centralizing certain contract management and clinical functions. The Company incurred restructuring charges of $881,000 in connection therewith, including a separation payment of $760,000 to the Company's former Chairman and CEO. Rentals under the lease for the California office were assumed by an entity affiliated with the Company's former Chairman and CEO. In addition, during Fiscal 1999, the Company incurred restructuring charges of $600,000 related to the loss of a major contract in Puerto Rico. Following is an analysis of the restructuring charges together with related payments reflected in a reserve for restructuring charges:
(1) Includes $90,000 for write-off of leasehold improvements. (2) Included in Accounts payable and accrued liabilities at May 31, 2000 (see Note 10 - "Accounts Payable and Accrued Liabilities").
(1) Includes $177,000 for write-off of leasehold improvements.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 12 -- LONG-TERM DEBT
Long-term debt consists of the following:
On July 24, 1998, the Company completed a debenture exchange offer with its debentureholders. An aggregate of $0.4 million of principal amount of Debentures, representing approximately 17% of the issued and outstanding Debentures, were tendered for exchange to the Company pursuant to the terms of the Exchange Offer and a total of 33,185 shares of Common Stock were issued by the Company. The resulting gain on the Debenture Exchange of $0.1 million after related costs and expenses was recorded as an extraordinary gain in the accompanying consolidated statement of operations for the year ended May 31, 1999. The debentures are convertible into approximately 9,000 shares of Common Stock at a conversion price of $248.12 per share.
NOTE 13 -- INCOME TAXES
Provision for income taxes consists of the following:
Reconciliation between the provision for income tax applicable to continuing operations and the amount computed by applying the statutory Federal income tax rate (34%) to loss from continuing operations before income tax is as follows:
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Significant components of the Company's deferred tax assets and deferred tax liabilities are as follows:
At May 31, 2001, the Company had Federal accumulated net operating loss carryforwards of approximately $40.3 million, which expire in 2010 through 2021. In addition, the Company has a minimum tax credit carryover of approximately $0.7 million against regular tax in the event that regular tax expense exceeds the alternative minimum tax expense.
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. Further, the Company's ability to use any net operating losses may be subject to limitation in the event that the Company issues or agrees to issue substantial amounts of additional equity. The Company monitors the potential for "change of ownership" and believes that its financing plans as contemplated will not cause a "change of ownership"; however, no assurances can be made that future events will not act to limit the Company's tax benefits.
After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at May 31, 2001 and 2000, was necessary to offset the deferred tax assets based on the likelihood of future realization.
UNBENEFITTED TAX REFUNDS RECEIVED
In connection with the filing of its Federal income tax returns for fiscal year 1995 and 1996, the Company filed a tentative refund claim to carry back losses described in Section 172(f) of the Internal Revenue Code ("IRC"), requesting a refund of $9.4 million and $5.5 million, respectively, of which refunds of $9.4 million and $5.4 million were received. In addition, the Company also filed amended Federal income tax returns for fiscal years prior to 1995, requesting similar refunds for losses carried back under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a total of $7.7 million.
Section 172(f) of the IRC provides for a ten year net operating loss carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. The applicability of Section 172(f) to the type of business in which the Company operates is unclear. No assurance can be provided that the Company will be able to retain the refunds received to date or that the other refunds requested will be received.
During fiscal years 1997 and 1996, the Company recognized a portion of the refunds received as a tax benefit of $0.3 million and $2.4 million, respectively. The balance of the refunds received, $12.1 million, is recorded as a deferred liability, "Unbenefitted tax refunds received", pending resolution by the Internal Revenue
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Service ("IRS") of the appropriateness of the 172(f) carryback. The other refunds requested under Section 172(f) for prior years of $7.7 million have not been received, nor has the Company recognized any tax benefit related to these potential refunds.
On August 21, 1998, the Company received an examination report, dated August 6, 1998, from the IRS advising the Company that it was disallowing $12.4 million of the $14.8 million of refunds previously received, and the additional refunds requested of $7.7 million. If the position of the IRS were to be upheld the Company would be required to repay $12.4 million in refunds previously received, plus accrued interest of approximately $6.7 million through May 31, 2001. Accordingly, the Company would be entitled to a repayment of the fees advanced to its tax advisor relating to these refunds of approximately $2.5 million, which is reported as "other receivable" in the accompanying balance sheets. This report commenced the administrative appeals process. The Company filed a protest letter with the IRS on November 6, 1998. The IRS reserves the right to assess and collect the tax previously refunded to the Company at any time during the appeals process.
On July 11, 2000, the Company submitted an Offer in Compromise (the "Offer") to the Appeals Office of the IRS to resolve the controversy with respect to the refunds at a substantially reduced amount. The IRS is currently evaluating the Offer. A preliminary meeting with the IRS with respect to the Offer took place in October 2000 and, subsequent to this meeting, the Company has provided additional documents to the IRS. The Company has continued its discussions with the IRS during the first quarter of Fiscal 2002 and expects to continue such discussions during the second quarter of Fiscal 2002. There can be no assurance that the IRS will accept the Offer.
If the IRS were to disallow the refunds claimed, or the terms of the Offer in Compromise as presented or modified are not adhered to, the Company will have additional loss carry forwards of approximately $50 million, which will expire if unused by the year 2010.
NOTE 14 -- DISCONTINUED OPERATIONS
On March 11, 1999, the Company sold its Aurora, Colorado hospital for $3.3 million of cash plus a $1.2 million note receivable (see Note 9), and recognized a loss on sale of $416,000. This sale completed the Company's plan to dispose of its hospital business segment. Financial information relating to the operation of the discontinued hospital business follows:
*Year-to-date through the November 30, 1998 measurement date.
During the fiscal year ended May 31, 1999, the Company sold its non-operating facility located in Fort Worth, Texas for $1.8 million in cash, which approximated its net book value.
NOTE 15 -- EMPLOYEE BENEFIT PLAN
The Company offers a 401(k) Plan (the "Plan"), which is a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of its eligible employees. All full-time and part-time employees who have attained the age of 21 and have completed six consecutive months of employment are eligible to participate in the Plan. Effective June 1, 1995, eligibility was modified to six months of employment and a minimum of twenty (20) regularly scheduled hours per week. Each participant may contribute from 2% to 15% of his or her compensation to the Plan subject to limitations on the highly compensated employees to ensure the Plan is non-discriminatory. Company contributions are discretionary and are determined by the Company's Board of Directors or the Planning Committee. The Company's employer matching contributions were $10,000, $17,000, and $22,000 to the Plan in Fiscal 2001, 2000, and 1999 respectively.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 16 -- PREFERRED STOCK, COMMON STOCK, AND STOCK OPTION PLANS
Preferred Stock
The Company is authorized to issue up to 60,000 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.
The Board of Directors had designated 41,260 shares of Preferred Stock as Series A Non-Voting 4% Cumulative Convertible Preferred Stock, $50 par value (the "Preferred Stock). On January 17, 1997, the Preferred Stock was issued in exchange for the secured convertible note due January 9, 1997, in the principal amount of $2.0 million and bearing interest at the rate of 12% per annum and $63,000 of interest accrued thereon. The Preferred Stock had a cumulative quarterly dividend of 4% per annum which was payable when and as declared by the Board of Directors. However, no dividends were to be paid on the Preferred Stock until the Company had positive stockholder's equity. The Preferred Stock was preferred to the extent of $50 per share plus accrued dividends; was convertible into shares of Common Stock at $6 per share, which was the same price at which the principal of the note was exchangeable; and had no voting privileges.
During February 1999, the 41,260 outstanding shares of Preferred Stock were converted into 343,833 shares of Common Stock.
Common Stock
On April 19, 1988, the Company declared a dividend of one common share purchase right ("Right") for each share of Common Stock outstanding at May 6, 1988. Each Right entitles the holder to purchase one share of Common Stock at a price of $300 per share, subject to certain anti-dilution adjustments. The Rights are not exercisable and are transferable only with the Common Stock until the earlier of ten days following a public announcement that a person has acquired ownership of 25% or more of the Company's Common Stock or the commencement or announcement of a tender or exchange offer, the consummation of which would result in the ownership by a person of 30% or more of the Company's Common Stock. In the event that a person acquires 25% or more of the Company's Common Stock or if the Company is the surviving corporation in a merger and its Common Stock is not changed or exchanged, each holder of a Right, other than the 25% stockholder (whose Rights will be void), will thereafter have the right to receive on exercise that number of shares of Common Stock having a market value of two times the exercise price of the Right. If the Company is acquired in a merger or more than 50% of its assets are sold, proper provision shall be made so that each Right holder shall have the right to receive or exercise, at the then current exercise price of the Right, that number of shares of Common Stock of the acquiring company that, at the time of the transaction, would have a market value of two times the exercise price of the Right. The Rights are redeemable at a price of $.20 per Right at any time prior to ten days after a person has acquired 25% or more of the Company's Common Stock.
Authorized shares of common stock reserved for possible issuance for convertible debentures and stock options are as follows at May 31, 2001:
Stock Option Plans
The Company has a 1995 Incentive Plan (the "1995 Plan"). The 1995 Plan provides for the granting of stock options, stock appreciation rights, limited stock appreciation rights, and restricted stock grants to eligible employees and consultants to the Company. Grants issued under the 1995 Plan may qualify as Incentive Stock Options ("ISOs") under 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 either 33% each year or 50% each six
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 1995 Plan also provides for the full vesting of all outstanding options under certain change of control events. The maximum number of shares authorized for issuance under the 1995 Plan is 1,000,000. As of May 31, 2001, there were 28,350 options available for grant and there were 888,525 options outstanding, of which 653,275 options were exercisable, under the 1995 Plan.
On November 17, 1998, the Company's Board of Directors approved the re-pricing of stock option grants to employees below the level of Executive Officers, subject to each employee returning his or her old options for cancellation. The cancelled options were replaced by an equivalent number of new options at an exercise price equal to the November 30, 1998 closing price of $3.5625.
On December 14, 1998, the Company's Board of Directors approved the re-pricing of stock option grants for Executive Officers, subject to each Executive Officer returning his or her old options for cancellation. For every two options cancelled under the 1988 Incentive Stock Option and Non-statutory Stock Option Plans, one option was reissued under the 1995 Incentive Stock Option Plan. For every four options cancelled under the 1995 Incentive Stock Option Plan, three new options were reissued. All reissued options are subject to the provisions of the 1995 Plan, including vesting in accordance with the Company's vesting policy. The exercise price of the reissued options equals the December 14, 1998 closing price of $4.00.
The Company has a non-qualified stock option plan for its outside directors (the "Directors' Plan"). Each non-qualified stock option is exercisable at a price equal to the Common Stock's fair market value as of the date of grant. Initial grants vest annually in 25% increments beginning on the first anniversary of the date of grant, provided the individual is still a director on those dates. Annual grants will become 100% vested as of the first annual meeting of the Company's stockholders following the date of grant, provided the individual is still a director as of that date. An optionee who ceases to be a director shall forfeit that portion of the option attributable to such vesting dates on or after the date he or she ceases to be a director. The maximum number of shares authorized for issuance under the Directors' Plan is 250,000. As of May 31, 2001, there were 185,834 options available for grant under the Directors' Plan. The Company had no outside directors and there were no options outstanding to former directors as of May 31, 2001.
A summary of the Company's stock option activity and related information for the years ended May 31 is as follows:
(a) Includes 120,000 options exercisable at $6.6875 per share held by former Chief Executive Officer that were cancelled in connection with his separation from the Company in January 2000.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
A summary of options outstanding and exercisable as of May 31, 2001 follows:
Adjusted pro forma information regarding net income or loss and earnings or loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The weighted average fair values of options granted were $0.14, $0.41, and $4.91 in Fiscal 2001, 2000, and 1999, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
The fair value of these options was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
The Company's pro forma information is as follows (in thousands except for loss per share information):
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain facilities and equipment. The facility leases contain escalation clauses based on the Consumer Price Index and provisions for payment of real estate taxes, insurance, and maintenance and repair expenses. Total rental expense for all operating leases applicable to continuing operations was $0.7 million, $0.8 million, and $1.3 million for fiscal years 2001, 2000, and 1999, respectively. During Fiscal 2000 and Fiscal 1999, the Company received rental income of $84,000 and $106,000, respectively, in connection with the sublease of a portion of its California facilities (which were closed in Fiscal 2000) to entities operated by the Company's former Chief Executive Officer ("CEO"). The Company has no future obligation under the California lease, having completed a transfer of this lease in Fiscal 2000 to an entity managed by the Company's former CEO.
On February 2, 2001, the Company entered into a lease agreement for premises to serve as the principal business and executive offices for the Company and CBC, its principal operating subsidiary. CBC is the principal lessee under the lease, and the Company is the guarantor of the lease. The lease, which began on March 22, 2001, is for a term of 5 years and 2 months and provides for a base rent of approximately $22,000 per month for the first 12 months of the lease term, with intervening escalations during each successive 12 month period under the lease term, with a final monthly rental of approximately $25,000. In connection with this lease, the Company posted a lease security deposit in February 2001, in the amount of $65,000.
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, 2001:
Other Commitments and Contingencies
(1) During the fiscal year ended May 31, 2000, the Company renewed one contract, which included a requirement that the Company maintains a $550,000 performance bond throughout the two-year renewal term of the contract. This bond was secured by a $150,000 cash deposit, which is included in the non-current, restricted cash balance at May 31, 2001 and 2000. The original term of the bond was for one year and the bond is automatically renewable as long as the contract remains in force.
(2) On February 19, 1999, the California Superior Court denied the Company's Petition for Writ of Mandate of an adverse administrative appeal decision regarding application of the Maximum Inpatient Reimbursement Limitation to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. This facility was owned by the Company until its disposal in fiscal year 1991. The subject matter of the Superior Court action involved the refusal of the administrative law judge to order further reductions in the liability for costs associated with treating high cost, long stay Medi-Cal patients, which are commonly referred to as "outliers". The Company does not plan to appeal the California Superior Court decision for which the Notice of Entry of Judgment was entered on February 26, 1999.
During the year ended May 31, 2001, the Company lowered its estimate by approximately $0.3 million specific to interest charges that were previously accrued in connection with this liability. This change in estimate was based on information provided to the Company by the California Department of Health Services. As of May 31, 2001, the Company has approximately $1.0 million accrued relating to this matter.
On March 29, 2001, the Company submitted an offer to the State of California to resolve this liability at a substantially reduced amount. On April 23, 2001, the Company received a letter, dated April 11, 2001,
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
from the State of California advising the company that its proposed settlement offer was not accepted and, additionally, requesting payment of approximately $0.8 million. The Company is contemplating a second settlement offer. There can be no assurance that the State of California will give consideration to such offer or agree to alternate terms.
(3) With respect to the contingency related to prior years' income taxes, see Note 13, "Income Taxes".
(4) During the year ended May 31, 2001, the Company reached an agreement with Humana to resolve all outstanding disputed matters with Humana Health Plans of Puerto Rico, Inc. related to the Company's contract with Humana, which expired on March 31, 1999. Such settlement did not require any payment by either party. As a result of the resolution, the Company has removed the $10.5 million receivable and related accrued claims payable from the accompanying balance sheet. These amounts were specific to the pharmacy and laboratory costs that were the financial responsibility of the Company, but were administered by Humana. Because of the uncertainty surrounding the determination of the actual pharmacy and laboratory costs incurred, the Company had previously reported a 100% loss ratio for the contract. Additionally, as a result of the resolution, Humana released approximately $1.0 million to the Company, which was previously restricted in accordance with the terms of the contract. Accordingly, the May 31, 2001 balance sheet reflects the reclassification of $1.0 million from restricted cash to cash and cash equivalents.
(5) The Company would remain liable to perform the services covered under subcapitation agreements if the parties with which the Company subcapitates were unable to fulfill their responsibilities under such agreements.
From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary, routine litigation incidental to their business. In some pending cases, 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 believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements.
REGULATORY MONITORING AND COMPLIANCE
The Company is subject to extensive and evolving state and federal regulations, including licensure and compliance with regulations related to healthcare providers, insurance companies, and other risk assuming entities. These laws and regulations may vary considerably among states and, as a result, the Company may be subject to the specific regulatory approach adopted by each state for the regulation of managed care companies and for providers of behavioral healthcare treatment services. Currently, management cannot quantify the potential effects of additional regulation of the managed care industry, but such costs could have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.
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 transmitted information. Entities subject to HIPAA include all healthcare providers and all healthcare plans. To meet the specific requirements of HIPAA, the Company will incur costs to insure the adequacy and security of its healthcare information system and communication networks. Additionally, the Company may incur costs to implement the specific transaction codes required by HIPAA for claims, payment, enrollment, eligibility, or to become compliant with security and privacy rules, which may be more stringent for providers of certain behavioral healthcare services. The expected timetable to be compliant is currently October 2002 for transaction code changes and April 2003 for compliance with the privacy rules. The Company is currently evaluating its systems and policies that are impacted by HIPAA. While these efforts will be ongoing, the Company expects to meet all compliance rules and timetables with respect to the HIPAA regulations. Failure to do so may result in penalties and have a material adverse effect on the Company's ability to retain its customers or to gain new business.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 18 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(a) Includes a $0.5 million non-operating loss related to the note receivable prepayment arrangement. (b) Includes a $0.3 million reduction in interest expense in connection with a change in estimate specific to one third party liability and $0.2 million of income in connection with one legal settlement. (c) Includes $0.2 million of income in connection with one legal settlement. (d) Includes a $0.3 million bad debt recovery specific to one contract that terminated in 1999 and $0.1 million of non-operating income specific to proceeds received from one insurance settlement in which the Company was a claimant.
(a) Reflects a $0.6 million reclassification between Healthcare Operating and General and Administrative Expenses to conform to the 2001 presentation. This reclassification had no effect on the previously reported results of operations or stockholders' deficit. (b) Includes $0.1 million of costs in connection with the NCQA accreditation. (c) Includes $0.9 million of restructuring expenses in connection with the elimination of the Company's California office and affiliated employees and approximately $0.1 million of non-operating gains. (d) Includes $0.3 million of revenue related to favorable cost report settlements completed during the year and $0.1 million of non-operating gains, primarily related to property tax refunds received specific to assets disposed of during Fiscal 1999 or earlier.
Fiscal 2000 results also included approximately $0.1 million of operating costs incurred to manage the Company's Year 2000 readiness program.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART III
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE COMPENSATION
The Company expects to file its definitive proxy statement with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year. The information set forth therein under "Election of Directors" and "Executive Compensation" is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required is set forth under the caption "Principal Stockholders" in the proxy statement for the 2001 annual meeting of stockholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth under the caption "Election of Directors" in the proxy statement for the 2001 annual meeting of stockholders and is incorporated herein by reference.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - Included in Part II of this report: Report of Independent Certified Public Accountants Consolidated Balance Sheets, May 31, 2001 and 2000 Consolidated Statements of Operations, Years Ended May 31, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Deficit, Years Ended May 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows, Years Ended May 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
None.
Other schedules are omitted, as required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
3. Exhibits:
- ------------------- * Management contract or compensatory plan or arrangement with one or more directors or executive officers.
(1) Filed as an exhibit to the Company's Form S-3 Registration Statement No. 2-97160. (2) Filed as an exhibit to the Company's Form 8-K dated May 4, 1988. (3) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1988. (4) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1991. (5) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1994. (6) Filed as an exhibit to the Company's Form 10-Q for the quarter ended November 30, 1994.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
(7) Filed as an exhibit to the Company's Form 10-Q for the quarter ended February 28, 1995. (8) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1995. (9) Filed as an exhibit to the Company's Form 8-K dated January 30, 1997. (10) Filed as an exhibit to the Company's Form 8-K dated July 2, 1999. (11) Filed with original of Registration Statement on Form S-1, dated January 29, 1997. (12) Filed as an exhibit to the Company's Form 8-K dated September 24, 1998. (13) Filed as an exhibit to the Company's Form 8-K dated November 25, 1998. (14) Filed as an exhibit to the Company's Form 10-K for the Fiscal Year ended May 31, 2000. (15) Filed as an exhibit to the Company's Form 8-K dated November 25, 1998.
(b) Reports on Form 8-K.
1) The Company filed a current report on Form 8-K, dated March 2, 2001, to report under Item 5 that the Company's principal operating subsidiary, Comprehensive Behavioral Care, Inc. ("CBC") had been selected by one HMO to manage behavioral healthcare benefits for its Connecticut members.
Additionally, the Company reported that on February 2, 2001, CBC entered into a new, five-year lease agreement for premises located at 200 South Hoover Blvd., Suite 200, Tampa, Florida 33609 and that these new premises would be occupied by both CBC and the Company and will serve as the principal business and executive offices of both CBC and the Company.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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, August 24, 2001.
COMPREHENSIVE CARE CORPORATION
By /s/ MARY JANE JOHNSON ---------------------------------------------- Mary Jane Johnson President and Chief Executive Officer (Principal Executive Officer)
By /s/ ROBERT J. LANDIS ---------------------------------------------- Robert J. Landis Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates so indicated.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Exhibit Index
Fiscal Year Ended May 31, 2001