Commitments and Contingencies

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 7 — COMMITMENTS AND CONTINGENCIES

a. Leases:

We lease certain office space and equipment under operating leases expiring in 2013 and 2014. The Tampa office lease contains an annual escalation clause and a provision for payment of real estate taxes, insurance, and maintenance and repair expenses. Total rental expense for all operating leases was approximately $622,000 and $642,000, respectively, for 2012 and 2011.

Future minimum payments under non-cancelable operating leases with initial or remaining terms of one year or more, consist of the following at December 31, 2012 (amounts in thousands):

2013	$	204
2014		28
	$	232

b. Economic conditions and related risks, concentrations and uncertainties:

At December 31, 2012, we had a working capital deficiency of approximately $21.7 million and a stockholders’ equity deficiency of approximately $22.9 million resulting from a history of operating losses. We expect that with our existing customer contracts, the addition of new contracts that we are close to obtaining through our marketing efforts, the collection of receivables, the extension of vendor payments, and the launch of our new pharmacy management programs, that we will be able to sustain current operations over the near term. However, we do not currently maintain a line of credit or other committed 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 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 or sustain profitable operations and positive operating cash flows in the near term. Although subject to the general economic conditions, risks and uncertainties discussed in the following paragraph, management believes that our current cash position will likely be sufficient to meet our current levels of operations in the short term, our ability to achieve our business objectives and continue as a going concern for a reasonable period of time may be dependent upon the success of our plans to obtain sufficient debt or equity financing, and, ultimately, to achieve profitable operations and positive cash flows from operations during 2013.

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, and political uncertainty in the U.S. about the effects on healthcare of recent and prospective government action, all of which are likely to continue to have far-reaching effects on economic activity for an indeterminate period. The probable duration and effects of these conditions on our future operations and cash flows, including our ability to obtain continued support from our major stockholders and creditors cannot be estimated at this time.

We occasionally carry cash on deposit with financial institutions in excess of federally-insured limits, and the risk of losses related to such concentrations may be significant as a result of economic conditions 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.

In addition, based on recent experience, our business has been concentrated among a few major customer contracts, as was the case during 2012 and 2011 when our major Puerto Rico contract generated 81.5% or $56.1 million, and 67.9% or $48.4 million, respectively, of our revenues. Customer concentrations such as this present the risk of large fluctuations in business volume should the contract terminate, which occurred with the expiration of the aforementioned Puerto Rico contract in 2012.

c. Legal matters:

We are involved in several litigation matters described as follows.

(1) We initiated an action against Jerry Katzman, a former director, in July 2009 alleging that Mr. Katzman fraudulently induced us to enter into an employment agreement and, alternatively, that Mr. Katzman breached that alleged employment agreement and was rightfully terminated. In September 2010, the matter proceeded to a trial by jury. The jury found that Mr. Katzman did not fraudulently induce CompCare to enter into the contract but also found that Mr. Katzman was not entitled to damages. On defendant’s motion to amend the verdict due to inconsistency, the trial court set aside the jury verdict and awarded Mr. Katzman damages of approximately $1.3 million. The Company appealed the lower court’s decision and posted a collateralized appeal bond for approximately $1.3 million. On February 14, 2013, the 11 ^th Circuit Court of Appeals of the State of Florida reversed the lower court’s judgment in favor of Katzman and remanded the case for a new trial on both liability and damages. The appellate court also taxed appellate costs in favor of CompCare against Katzman. The decision of the appellate court also reverses the lower court’s award of attorney’s fees previously awarded to Katzman against CompCare.

(2) 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 believed resolved many of the claims that are the subject of the complaint, which we therefore, now believe is without merit and are vigorously opposing.

(3) We are in arbitration with a former health plan client in Missouri relating to its allegation that we breached our obligation to pay claims submitted to us for payment. The arbitration is underway but has not yet progressed significantly.

(4) A group of health care providers in the state of Louisiana has filed suit against us claiming breach of contract in that we failed to pay claims submitted to us for payment. The litigation is currently in the discovery stage.

Management believes that the provision is adequate for the estimated probable minimum losses, including legal defense costs, to be incurred from these matters.

d. Employee retirement benefit plan:

We have a single-employer defined contribution employee retirement plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of our eligible employees. Matching contributions are made only at management’s discretion and were none in 2012 and 2011.

e. Employment agreement with Chief Executive Officer:

In accordance with the employment agreement between the Company and our Board Chairman and CEO, Clark Marcus, we are obligated to pay to Mr. Marcus a total of approximately $5.7 million in base salary over the next five years. In addition, we will pay on his behalf approximately a total of $68,000 in health insurance premiums and $603,000 in life insurance premiums, also over the next five years. This compensation may, at our election, be only accrued but not paid, in whole or in part, until such time as we receive financing and/or generate sufficient cash flows, after the payment of our operating expenses, with which to pay Mr. Marcus his agreed compensation.

In the event Mr. Marcus’ employment is terminated without cause, or Mr. Marcus voluntarily terminates his employment within one year following a change in control, if any, we will be obligated to pay to Mr. Marcus any accrued but unpaid bonuses and the total compensation that would have been paid to him for five full years following the date of termination. In connection with this employment agreement, we have deferred compensation payable of $740,000 and $350,000 included in accrued expenses as of December 31, 2012 and 2011, respectively.

f. Letters of Credit:

In connection with our former major contract to provide mental health, substance abuse and pharmacy prescription drugs management services in Puerto Rico, we obtained a letter of credit from a bank for $4,000,000 to assure the customer of our compliance with our obligations under the agreement. The letter of credit extends past the expiration date of the contract, decreasing at the rate of $666,667 monthly until the letter’s termination on June 30, 2013. 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 the major stockholder for the amount of collateral accessed by the bank to fulfill its obligations thereunder.