Contingencies

9 Months Ended

Sep. 30, 2011

Contingencies [Abstract]

Contingencies

NOTE 4– CONTINGENCIES

Economic conditions and related risks concentrations and uncertainties:

The United States and other parts of the world have been experiencing a severe and widespread recession accompanied by, among other things, instability in the financial markets and reduced credit availability, which are likely to continue to have far reaching effects on economic activity for an indeterminate period. The effects and probable duration of these conditions on our ability to obtain continued support from our major stockholders and lenders, success in our marketing efforts, and ultimately, profitable operations and positive cash flows, cannot be estimated at this time.

We occasionally carry cash and equivalents on deposit with financial institutions in excess of federally-insured limits, and the risk of losses related to such concentrations may be increasing as a result of recent economic developments discussed in the foregoing paragraph. The extent of a loss to be sustained as a result of uninsured deposits in the event of a future failure of a financial institution, if any, however, is not subject to estimation at this time.

Going concern uncertainty:

At September 30, 2011, we had a working capital deficiency of approximately $22.7 million and a stockholders' equity deficiency of approximately $11.7 million resulting from a history of operating losses. Approximately $2.5 million of debt was past due and, therefore, in default. As a result of these conditions, and the aforementioned economic conditions and risks, our ability to continue as a going concern will be dependent upon the success of management's plans, as set forth in the following paragraph, and is subject to significant uncertainty. Except for the consideration afforded this matter in determining the valuation allowance for deferred tax assets from net operating loss carryforwards (Note 7), the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

We are negotiating with lenders and expect to establish payment plans during the fourth quarter to cure certain debt defaults. We also expect that with our existing customer contracts, plus the addition of new contracts we are now seeking to obtain through our marketing efforts, and the expected continuing financial support from our major stockholders, that we will be able to improve our cash flows and operating results and sustain current operations over the next year. However, we do not currently maintain a line of credit or term loan with any commercial bank or other financial institution and have not made any arrangements to obtain such additional financing but are looking at various alternative sources of financing if operations cannot support our ongoing plan. Nevertheless, there can be no assurance that we will be able to find such financing in amounts or on terms acceptable to us, if at all, or that we will be able to achieve profitable operations and positive operating cash flows. Although management believes that our current cash position plus the expected continued support of our major stockholders will be sufficient to meet our current levels of operations, failure to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during the remainder of 2011 and 2012 would adversely affect our ability to achieve our business objectives and continue as a going concern.

Concentration, major customer contract:

We currently provide mental health, substance abuse, and pharmacy prescription drugs management services to approximately 202,000 members of a health plan in Puerto Rico on an at-risk basis pursuant to a contract that began in September 2010. The contract accounted for 66.1%, or $35.7 million, of our revenues for the nine months ended September 30, 2011. The contract has an initial two-year term with automatic renewals for additional one year terms unless either party provides 90 days prior written notice of its intention not to renew the agreement.

During the second year of the initial term, the health plan has the ability to cancel the contract without cause by providing at least 90 days prior written notice. Should this occur, the health plan would be required to pay to us a termination payment equivalent to $125,000 multiplied by the number of quarters remaining in the second year, including the quarter in which the termination is effective. No termination payment is required by the health plan after the initial two-year term. Each party has the right to terminate after 60 days prior written notice in the event of a material breach of the contract, except that a breach involving either party's financial obligations requires a 30-day notice. The breaching party will have 30 days to cure the breach to prevent termination of the contact. The loss of this customer, without replacement by new business, would adversely affect our future financial results and jeopardize our ability to continue as a going concern.

Legal matters:

(1) We are subject to a pending judgment of damages to a former director of approximately $1.3 million, plus a court award to the director of $582,000 as reimbursement of legal fees and payment of interest on the pending judgment. The judgment and award are under appeal, and motions for reconsideration by the Company are pending.

(2) A subsidiary is subject to a suit for trademark infringement, among other things, in connection with its proposal to obtain a managed behavioral healthcare services contract in Puerto Rico. The complaint is seeking monetary damages in the amount of $600,000 and certain injunctive relief. We believe the suit is without merit and intend to vigorously defend ourselves against the allegations asserted.

(3) In addition, the Company and a former customer are being sued for damages of approximately $1.7 million for allegedly unpaid claims for behavioral health professional services rendered between January 1, 2007 and December 31, 2008. We filed a counterclaim for breach of a settlement agreement that we believe previously resolved many of the claims that are the subject of the complaint, which we believe is without merit and are vigorously opposing.

During the nine months ended September 30, 2011, we re-evaluated the adequacy of our provision for possible litigation settlements and legal defense costs and made adjustments to reduce the provision by the net amount of $0.5 million, which resulted in an equal reduction of general and administrative expense. Management believes that the remaining provision is adequate for the estimated probable minimum losses, including legal defense costs, to be incurred from the litigation described above.

Other:

In connection with an agreement with a new customer to provide mental health, substance abuse and pharmacy prescription drugs management services in Puerto Rico, we obtained a letter of credit from a bank in the amount of $4,000,000 for the benefit of the customer to secure our compliance with our obligations under the agreement. Under the agreement, the customer may draw on all or part of the letter of credit under certain circumstances, including our lack of compliance, if any, with certain of our obligations thereunder. Collateral for the letter of credit was provided by a major stockholder of the Company. If the client draws upon the letter of credit, we may become liable to our major stockholder for the amount of collateral accessed by the bank to fulfill its obligations under the letter of credit.