Contingencies

6 Months Ended

Jun. 30, 2012

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 other 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 June 30, 2012, we had a working capital deficiency of approximately $26.9 million and a stockholders’ equity deficiency of approximately $14.5 million resulting from a history of operating losses. Approximately $2.8 million of debt was past due and in default. As a result of these conditions, and the aforementioned economic conditions and related 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. Management has determined that these conditions have not contributed to any impairment of the Company’s goodwill at this time, and the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty, except for the consideration afforded this matter in determining the valuation allowance for deferred tax assets from net operating loss carryforwards (Note 7).

Although we cannot provide any assurance in this respect, we believe that subject to the general economic conditions, risks and uncertainties discussed in the preceding paragraphs, (a) with our existing customer contracts, plus the addition of new contracts we believe we are close to obtaining through our marketing efforts, and the launch of new pharmacy management programs, and (b) the expected continuing financial support from our major stockholders and bondholders, that we will be able to improve our cash flows and operating results in the near term and sustain current operations over the next year. However, we do not currently maintain a line of credit or other financing arrangement with any financial institution and have not made any arrangements to obtain any additional financing but are looking at various alternative sources of financing if operations cannot support our ongoing plan. Nevertheless, there also 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 the expected profitable operations and positive operating cash flows in the near term. Accordingly, our ability to achieve our business objectives and continue as a going concern is dependent upon the success of the foregoing plans to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during the next year.

Concentration, major customer contract:

We currently provide mental health, substance abuse, and pharmacy prescription drugs management services to approximately 212,000 members of a health plan in Puerto Rico on an at-risk basis pursuant to a contract that expires in September 2012. The contract accounted for 76.5%, or $27.6 million, of our revenues for the six months ended June 30, 2012. The contract provided for automatic renewals for additional one year terms unless either party provides 90 days prior written notice of its intention not to renew the agreement. However, on March 5, 2012, the contract with the aforementioned health plan in Puerto Rico was amended to extend the contract term to December 31, 2012, and to increase the rate to be paid to the Company for pharmacy management services by approximately 11% retroactively effective January 1, 2012.

In addition, we resolved a contract interpretation dispute for $2.2 million with the health plan against the cost of pharmacy drugs for which it was agreed that we are not responsible under the contract. The contract dispute resolution removes the cost of pharmacy drugs prescribed for non-mental health conditions charged to us by the health plan’s pharmacy benefit manager from the contract’s inception to April 2012. The contract resolution reduced our pharmacy cost by $2.2 million during the three months ended June 30, 2012. Additionally, the dispute resolution required us to establish a designated bank account in the name of our client for the payment of claims associated with this client.

The aforementioned health plan in Puerto Rico has the ability to cancel the contract without cause by providing at least 90 days prior written notice, and in the event of a material breach of the contract, each party has the right to terminate after 60 days prior written notice, except that a breach involving either party’s financial obligations requires only 30-day notice. The foregoing notwithstanding, the breaching party would 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:

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Aside from the litigation described below, as of the date of this report, we are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business, financial condition or operating results.

(1) We are subject to a pending judgment of damages to a former director of approximately $1.9 million including an award for reimbursement of legal fees and payment of interest. 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, we and a former customer are being sued for damages of approximately $1.7 million for allegedly unpaid claims for behavioral health professional services rendered in 2007 and 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 six months ended June 30, 2012, 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 amount of approximately $1.6 million, which resulted in an equal reduction of our first quarter general and administrative expense. The reduction is due to the Company obtaining an offsetting judgment against an individual that also has pending judgments against us described in item (1) above. With regard to this matter, we obtained a letter of credit in 2011 for approximately $1.9 million to collateralize two surety bonds that permit our appeal of these judgments against us. 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 a new customer agreement for us 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 $4.0 million to assure the customer of our compliance with our obligations under the agreement. Under such agreement, the customer may draw on all or part of the letter of credit under certain defined circumstances. 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.