<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended August 31, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ________________.
Commission File Number 1-9927
COMPREHENSIVE CARE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2594724
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4200 WEST CYPRESS STREET, SUITE 300, TAMPA, FL 33607
-----------------------------------------------------
(Address of principal executive offices and zip code)
(813) 876-5036
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date:
Classes Outstanding at October 8, 1999
- -------------------------------------- ------------------------------
Common Stock, par value $.01 per share 3,817,812
<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1--CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets,
August 31, 1999 and May 31, 1999.......................................................3
Consolidated Statements of Operations for
the Three Months ended August 31, 1999 and 1998........................................4
Consolidated Statements of Cash Flows for
the Three Months ended August 31, 1999 and 1998........................................5
Notes to Consolidated Financial Statements...................................................6-10
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................................11-17
PART II - OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS............................................................................18-19
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K................................................................20
SIGNATURES..............................................................................................21
</TABLE>
2
<PAGE> 3
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART I. - FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1999 1999
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 6,456 $ 8,026
Restricted cash ......................................................... 1,863 --
Accounts receivable, less allowance for doubtful accounts of $767 and
$923 .................................................................. 399 932
Accounts receivable - pharmacy and laboratory costs ..................... 10,469 10,469
Other receivable ........................................................ 2,415 2,415
Other current assets .................................................... 594 614
-------- --------
Total current assets ....................................................... 22,196 22,456
-------- --------
Property and equipment ..................................................... 4,380 4,296
Less accumulated depreciation .............................................. (2,524) (2,326)
-------- --------
Net property and equipment ................................................. 1,856 1,970
-------- --------
Non-current assets:
Notes receivable ........................................................ 1,166 1,172
Goodwill, net ........................................................... 1,062 1,080
Restricted cash ......................................................... 78 1,923
Other assets ............................................................ 476 465
-------- --------
Total non-current assets ................................................... 2,782 4,640
-------- --------
Total assets ............................................................... $ 26,834 $ 29,066
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities ................................ $ 4,252 $ 4,552
Accrued claims payable .................................................. 3,213 4,369
Accrued pharmacy and laboratory costs payable ........................... 10,469 10,469
Current maturities of long-term debt .................................... 3 3
Unbenefitted tax refunds received ....................................... 12,092 12,092
Income taxes payable .................................................... 63 76
-------- --------
Total current liabilities .................................................. 30,092 31,561
-------- --------
Long-term liabilities:
Long-term debt, excluding current maturities ............................ 2,253 2,253
Other liabilities ....................................................... 153 166
-------- --------
Total long-term liabilities ................................................ 2,406 2,419
-------- --------
Total liabilities .......................................................... 32,498 33,980
-------- --------
Commitments and Contingencies (see Note 3 and Note 7)
Stockholders' deficit:
Preferred stock, $50.00 par value; authorized 60,000 shares ............. -- --
Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,817,812 and 3,817,812 ................................. 38 38
Additional paid-in-capital .............................................. 51,794 51,794
Accumulated deficit ..................................................... (57,496) (56,746)
-------- --------
Total stockholders' deficit ................................................ (5,664) (4,914)
-------- --------
Total liabilities and stockholders' deficit ................................ $ 26,834 $ 29,066
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 4
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
1999 1998
------------- -------------
(Amounts in thousands, except
per share data)
<S> <C> <C>
OPERATING REVENUES ................................................ $ 5,250 $ 10,116
COSTS AND EXPENSES:
Healthcare operating expenses ................................... 4,680 7,627
General and administrative expenses ............................. 1,490 1,617
Provision for (recovery of) doubtful accounts ................... (336) 59
Depreciation and amortization ................................... 215 235
-------- --------
6,049 9,538
-------- --------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE ITEMS SHOWN BELOW ..................................... (799) 578
OTHER INCOME (EXPENSE):
Interest income ................................................. 120 71
Interest expense ................................................ (69) (46)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ...... (748) 603
Income tax expense (benefit) ...................................... -- 15
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS .......................... (748) 588
DISCONTINUED OPERATIONS:
Loss from operations, less applicable tax expense (benefit) of $0 -- (129)
-------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN ........................... (748) 459
EXTRAORDINARY GAIN NET OF TAXES OF $0 ............................. -- 120
-------- --------
NET INCOME (LOSS) ................................................. (748) 579
Dividends on convertible Preferred Stock .......................... -- (21)
-------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ............. $ (748) $ 558
======== ========
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations .......................... $ (0.20) $ 0.17
Discontinued operations:
Loss from operations ............................................ -- (0.04)
Extraordinary item ................................................ -- 0.03
-------- --------
Net income (loss) ................................................. $ (0.20) $ 0.16
======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations .......................... $ (0.20) $ 0.16
Discontinued operations:
Loss from operations ............................................ -- (0.04)
Extraordinary item ................................................ -- 0.03
-------- --------
Net income (loss) ................................................. $ (0.20) $ 0.15
======== ========
</TABLE>
See accompanying notes
4
<PAGE> 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
1999 1998
------------- -------------
(Amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations before extraordinary item .... $ (748) $ 588
ADJUSTMENTS TO RECONCILE INCOME (LOSS) TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization ...................................... 215 235
Provision for doubtful accounts .................................... -- 59
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable ................................................ 533 80
Accounts receivable - pharmacy and laboratory costs ................ -- (1,428)
Other current assets, restricted funds, and other non-current assets (7) (159)
Accounts payable and accrued liabilities ........................... (300) 8
Accrued claims payable ............................................. (1,156) (920)
Accrued pharmacy and laboratory costs payable ...................... -- 1,298
Income taxes payable ............................................... (13) (32)
Other liabilities .................................................. (13) (11)
------- -------
NET CASH USED IN CONTINUING OPERATIONS ............................. (1,489) (282)
------- -------
NET CASH USED IN DISCONTINUED OPERATIONS ........................... -- (359)
------- -------
NET CASH USED IN OPERATING ACTIVITIES .............................. (1,489) (641)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received on note receivable ............................... 6 --
Additions to property and equipment ................................ (87) (297)
------- -------
NET CASH USED IN INVESTING ACTIVITIES .............................. (81) (297)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock ......................... -- 158
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... -- 158
------- -------
Net decrease in cash and cash equivalents ............................. (1,570) (780)
Cash and cash equivalents at beginning of year ........................ 8,026 6,016
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 6,456 $ 5,236
======= =======
</TABLE>
See accompanying notes
5
<PAGE> 6
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 1 -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet as of August 31, 1999, and the related
consolidated statements of operations and cash flows for the three months ended
August 31, 1999 and 1998 are unaudited and have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the
opinion of management, all adjustments necessary for a fair presentation of
such financial statements have been included. Such adjustments consisted only
of normal recurring items. The results of operations for the three months ended
August 31, 1999 are not necessarily indicative of the results to be expected
during the balance of the fiscal year.
The consolidated financial statements do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. The balance sheet at May 31, 1999 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statement presentation. Notes to consolidated financial
statements included in Form 10-K for the year ended May 31, 1999 on file with
the Securities and Exchange Commission provide additional disclosures and a
further description of accounting policies.
The Company's financial statements are presented on the basis that it
is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recovery and classification of assets or the amount and
classification of liabilities that may result from the outcome of the
uncertainties described in Note 2-- "Liquidity and Capital Resources".
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.
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.
NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES
At August 31, 1999, the Company had unrestricted cash and cash
equivalents of $6.5 million. During the three months ended August 31, 1999, the
Company used $1.5 million in operations. Additionally, $0.1 million was used by
its investing activities. The Company reported a loss of $0.7 million from
continuing operations for the quarter ended August 31, 1999, compared to income
of $0.7 million from continuing operations for the quarter ended August 31,
1998, which included an extraordinary gain of $0.1 million. The Company has an
accumulated deficit of $57.5 million and total stockholders' deficit of $5.7
million as of August 31, 1999. Additionally, the Company's current assets at
August 31, 1999 amounted to approximately $22.2 million and current liabilities
were approximately $30.1 million, resulting in a working capital deficiency of
approximately $7.9 million. The working capital deficiency referred to above
results 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 4 -- "Income Taxes").
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 2000 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.
6
<PAGE> 7
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
During Fiscal 1999 and continuing during the first quarter of Fiscal
2000, management has taken steps to reduce costs and conserve cash, including
making significant staff reductions. Additionally, the Company disposed of its
hospital business segment during Fiscal 1999. This has allowed the Company to
direct its available resources toward the managed care business that is its
chief focus. The Company's continuation as a going concern is dependent upon
its ability to obtain additional financing as may be required and, ultimately,
to attain profitability.
NOTE 3 -- MAJOR CUSTOMERS/CONTRACTS
(1) During Fiscal 1999, the Company provided services to members of Humana
Health Plans of Puerto Rico, Inc. ("Humana of Puerto Rico") (successor
in interest to PCA Health Plans of Puerto Rico, Inc.) under the terms
of management service agreements entered into pursuant to health care
contracts awarded to Humana of Puerto Rico by the Puerto Rico
Insurance Administration. These contracts expired on March 31, 1999,
with an extension period that ended 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.
Additionally, the contract with Humana established an amount that was
withheld from Humana's monthly remittances to the Company to cover
pharmacy and laboratory costs that are 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 has reported the contract at a
100% loss ratio for the contract to date pending clarification of the
actual costs incurred. As a result, the Company has reported $10.5
million as accounts receivable and accrued claims payable in the
accompanying balance sheet at August 31, 1999. During Fiscal 1999,
Humana sent written notice to the Company that the Company owed $3.0
million to Humana in connection with these pharmacy and laboratory
costs. The Company has expressed to Humana its total disagreement with
Humana's position. The Company believes that Humana owes the Company
in excess of $3.0 million in relation to this same issue. Efforts are
being made to work with Humana to resolve the uncertainty.
The Company also has contracts with Humana Health Plans ("Humana")
under which it provides services to members in Florida and Texas. For
the quarter ended August 31, 1999, Humana contracts accounted for
32.5%, or $1.7 million, of the Company's operating revenues from
continuing operations compared to 50.3%, or $5.1 million, for the
quarter ended August 31, 1998. As of August 31, 1999, the Company
provides services to approximately 216,000 members that are covered
under the Humana plans in Florida and Texas. The terms of the Florida
and Texas contracts are for two-year periods and one-year periods,
respectively, and each contract is automatically renewable for
additional terms equal to the original contract period unless
terminated by either party.
(2) The Company currently has six contracts with one HMO to provide
behavioral healthcare services to contracted members in Texas. These
combined contracts represented approximately 11.0% and 7.6% of the
Company's operating revenue from continuing operations for the
quarters ended August 31, 1999 and 1998, respectively. The Company
recently received written notice from the Texas HMO that, effective
September 1, 1999, this HMO has selected another behavioral healthcare
company to manage care for the members covered under four of the six
contracts. The HMO cited their obligation to another behavioral
healthcare company, under terms and conditions that are tied to an
acquisition, as the reason for cancellation of these contracts.
Additionally, the letter stated that the Company's two remaining
contracts with this HMO will remain in effect through August 31, 2000.
These two contracts accounted for approximately 5.4% and 4.6% of
operating revenue from continuing operations for the quarters ended
August 31, 1999 and 1998, respectively.
(3) The Company currently has two contracts with one HMO to provide
behavioral healthcare services to contracted members in Texas. These
combined contracts represented approximately 10.2% and 6.2% of the
Company's operating revenue from continuing operations for the
quarters ended August 31, 1999 and 1998, respectively. The terms of
each contract are for two-year periods and each contract is
automatically renewable for additional one-year periods unless
terminated by either party.
7
<PAGE> 8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
(4) The Company currently has a contract with one HMO to provide
behavioral healthcare services to contracted members in Indiana. This
contract represents approximately 9.1% and 3.8% of operating revenue
from continuing operations for the quarter ended August 31, 1999 and
1998 respectively. The Company recently received written notice from
this HMO that its contract will not be renewed and, as a result, the
contract will terminate effective December 31, 1999.
NOTE 4 -- INCOME TAXES
The Company's provision for income taxes for the quarters ended August
31, 1999 and 1998 differs from the statutory rate of 34% due, primarily, to the
Company's utilization of tax return net operating loss carryforwards.
In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund to carry
back losses described in Section 172(f) of the 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, are recorded
as a deferred liability, "Unbenefitted tax refunds received" pending resolution
by the 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.
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 $4.5 million
through August 31, 1999. Accordingly, the Company would be entitled to a
repayment of the fees advanced to its tax advisor relating to these refund
claims of approximately $2.5 million of which $2.4 million is reported as
"other receivable" in the accompanying balance sheet. This report commenced the
administrative appeals process. The Company filed a protest letter with the IRS
on November 6, 1998 and believes that its position with respect to its right to
the tax refunds received will be upheld. The Company's tax advisor relating to
these refund claims has advised management that the administrative appeals
process could take twelve to eighteen months. In the event the Company wishes
to further protest the results of its administrative appeal, it may further
appeal to the United States Tax Court following the final determination of the
administrative appeal. The Company has been advised that a determination by the
United States Tax Court could take up to an additional twelve months from
commencement of the appeals process in the United States Tax Court. The IRS
reserves the right to assess and collect the tax previously refunded to the
Company at any time during the appeals process.
NOTE 5 -- DISCONTINUED OPERATIONS
During Fiscal 1999, the Company sold its Aurora, Colorado and Ft.
Worth, Texas facilities, which completed the disposal plan for its hospital
business segment.
8
<PAGE> 9
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 6 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with Statement No. 128, Earnings Per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
1999 1998
---------- ----------
(Amounts in thousands,
except per share data)
(Unaudited)
<S> <C> <C>
NUMERATOR:
Income (loss) from continuing operations .................................. $ (748) $ 588
Less preferred stock dividends ............................................ -- (21)
------- -------
Income (loss) from continuing operations available to common stockholders
before extraordinary item ............................................... (748) 567
Effect of dilutive securities:
Preferred Stock dividends ................................................. -- 21
------- -------
Numerator for diluted earnings (loss) per share available to common
stockholders from continuing operations after assumed conversions ....... (748) 588
Discontinued Operations:
Operating loss ............................................................ -- (129)
Extraordinary item ........................................................... -- 120
------- -------
Net income (loss) available to common stockholders after assumed conversions . $ (748) $ 579
======= =======
DENOMINATOR:
Weighted average shares ................................................... 3,818 3,444
Effect of dilutive securities:
Convertible preferred stock ............................................... -- 344
------- -------
Denominator for diluted earnings (loss) per share-adjusted weighted average
shares after assumed conversions ........................................ 3,818 3,788
======= =======
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ..................................... $ (0.20) $ 0.17
Discontinued operations:
Loss from operations ...................................................... -- (0.04)
Extraordinary item ........................................................... -- 0.03
------- -------
Net income (loss) ............................................................ $ (0.20) $ 0.16
======= =======
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ..................................... $ (0.20) $ 0.16
Discontinued operations:
Loss from operations ...................................................... -- (0.04)
Extraordinary item ........................................................... -- 0.03
------- -------
Net income (loss) ............................................................ $ (0.20) $ 0.15
======= =======
The following number of potentially convertible shares of common stock
related to convertible debentures and stock options are as follows at August
31, 1999:
For conversion of convertible debentures............................. 9,044
Outstanding stock options............................................ 963,683
Possible future issuance under stock options plans................... 196,526
---------
Total.......................................................... 1,169,253
=========
</TABLE>
9
<PAGE> 10
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
(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 ("MIRL") 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. As of August 31, 1999, the Company has
$1.1 million accrued relating to this matter.
(2) On January 22, 1999, PMR Corporation ("PMR") commenced an action
against the Company in San Diego Superior Court. This action seeks
damages for alleged breach of a hospital management agreement in
connection with the Aurora, Colorado facility. The Complaint seeks
compensatory damages of approximately $455,000, plus interest and
attorneys' fees. The Superior Court ordered this case into arbitration
on March 26, 1999. PMR has recently filed a demand for arbitration of
this dispute before the American Arbitration Association, to which the
Company has not yet responded. The Company has filed a counter-claim
in the arbitration for PMR's alleged breach of the same hospital
management agreement and intends to actively defend this action. The
Company does not believe that the impact of this claim will have a
material adverse effect on the Company's financial position, results
of operations and cash flows.
(3) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
Officer of the Company, commenced an action against the Company and
its Chairman, Chriss W. Street, in the Superior Court of the State of
California arising out of the termination of her employment on
September 29, 1997. The action alleges alternate causes of action
based upon her employment relationship with the Company and seeks
unspecified damages for unpaid wages, unspecified actual, compensatory
and punitive damages; damages for emotional distress; and costs, legal
fees and penalties under applicable California law. As of August 31,
1999, the action is in the discovery phase. The Company has denied its
liability and has denied the principal allegations of the complaint.
The Company believes that it has good and meritorious defenses to this
action.
(4) With respect to the contingency related to prior years' income taxes,
see Note 4, "Income Taxes".
(5) With respect to the contingency related to the Humana claim, see Note
3, "Major Customers/Contracts".
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 exceed insurance policy limits
and the Company or a subsidiary 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. These regulations range from licensure and compliance with
regulations related to insurance companies and other risk-assuming entities, to
licensure and compliance with regulations related to healthcare providers.
These laws and regulations may vary considerably among states. 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. Management believes that the
Company is currently in material compliance with the laws and regulations of
the jurisdictions in which it operates.
10
<PAGE> 11
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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" (page 14).
GENERAL
In response to continuing changes in the behavioral healthcare
industry, the Company has made significant changes in its operations, including
the divestiture of its hospital facilities that took place during Fiscal 1999.
For the three months ended August 31, 1999, managed care operations
accounted for 96.7%, or $5.1 million, of the Company's operating revenues from
continuing operations. The following table summarizes the Company's financial
data for the three months ended August 31, 1999 and 1998 (in thousands):
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED AUGUST 31, 1999 COMPARED TO THE THREE MONTHS ENDED
AUGUST 31, 1998:
<TABLE>
<CAPTION>
CORPORATE AND CONSOLIDATED
THREE MONTHS ENDED OTHER CONTINUING DISCONTINUED
AUGUST 31, 1999 MANAGED CARE OPERATIONS OPERATIONS OPERATIONS
- ------------------------------------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues..................... $ 5,076 $ 174 $ 5,250 $ --
Healthcare operating expenses.......... 4,431 249 4,680 --
General/administrative expenses........ 851 639 1,490 --
Other operating expenses............... (63) (58) (121) --
-------- ------- --------- -------
5,219 830 6,049 --
-------- ------- --------- -------
$ (143) $ (656) $ (799) $ --
======== ==-==== ========= =======
</TABLE>
<TABLE>
<CAPTION>
CORPORATE AND CONSOLIDATED
THREE MONTHS ENDED OTHER CONTINUING DISCONTINUED
AUGUST 31, 1998 MANAGED CARE OPERATIONS OPERATIONS OPERATIONS
- ------------------------------------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Operating revenues..................... $ 9,784 $ 332 $ 10,116 $ 1,282
Healthcare operating expenses.......... 7,457 170 7,627 1,198
General/administrative expenses........ 653 964 1,617 10
Other operating expenses............... 217 77 294 203
-------- ------- --------- --------
8,327 1,211 9,538 1,411
-------- ------- --------- --------
$ 1,457 $ (879) $ 578 $ (129)
======== ======= ========= ========
</TABLE>
The Company reported an operating loss of approximately $0.8 million
from continuing operations for the quarter ended August 31, 1999 which included
approximately $0.2 million of costs specific to the Company's efforts to regain
business in Puerto Rico, consulting fees for marketing in other regions that
exceeded the first quarter, Fiscal 1999 costs by $0.3 million and approximately
$0.1 million of operating costs incurred to manage the Company's Year 2000
readiness program. Additionally, managed care revenue decreased by
approximately 48.1%, or $4.7 million, for the quarter ended August 31, 1999
compared to the quarter ended August 31, 1998.
Operating revenues from continuing operations decreased by $4.8
million, or 48.1%, for the quarter ended August 31, 1999 compared to the
quarter ended August 31, 1998. This decrease is directly attributable to the
loss of two major, managed care contracts during the fourth quarter of Fiscal
1999.
Healthcare operating expenses from continuing operations decreased by
approximately $2.9 million for the quarter ended August 31, 1999 as compared to
the quarter ended August 31, 1998. The decrease is attributable to the loss of
revenues specific to two major contracts that terminated during Fiscal 1999.
Healthcare operating expense as a percentage of net revenue for managed care
operations increased from 76.2% for the quarter ended August 31, 1998 to 87.3%
for the quarter ended August 31, 1999. This percentage increase is due to
continuing fixed costs that
11
<PAGE> 12
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
cannot be tied to the specific contracts that were terminated during Fiscal
1999. Efforts are being made to reduce the overall costs to manage the
Company's existing contracts, including cost reductions related to managing the
Company's healthcare information systems and, also, planned centralization of
certain contract management functions.
General and administrative expenses from continuing operations
decreased by approximately $0.1 million for the quarter ended August 31, 1999
as compared to the quarter ended August 31, 1998. The decrease is primarily
attributable to one legal settlement in the first quarter of Fiscal 1999.
General and administrative expense as a percentage of revenue increased from
16.0% for the quarter ended August 31, 1998 to 28.4% for the quarter ended
August 31, 1999. This increase is attributable to the loss of revenue from two
major contracts that terminated during the fourth quarter of Fiscal 1999. This
percentage increase is due to continuing fixed costs that cannot be tied to the
specific contracts that were terminated during Fiscal 1999. Efforts are being
made to reduce the general and administrative costs during the remaining months
of Fiscal 2000, including the elimination or reduction of certain costs
associated with corporate office operations.
Other operating expenses from continuing operations decreased by $0.4
million for the quarter ended August 31, 1999 compared to the quarter ended
August 31, 1998. This decrease is directly attributable to $0.2 million of bad
debt recoveries specific to the Puerto Rico contract performance guarantees
that were recovered during the first quarter, $0.1 million of bad debt
recoveries specific to the discontinued operations, and $0.1 million of bad
debt recoveries specific to one existing managed care contract.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Year 2000 problem exists because many computer programs were
designed and developed without considering the upcoming change in century.
Historically, certain computerized systems have been designed to have two-digit
rather than four-digit fields to define the applicable year and this could mean
that many computer programs are unable to distinguish between the year 1900 and
the year 2000 when a date of "00" is used for the applicable year. Potential
problems could exist for both information technology systems ("IT") and non-IT
systems. Non-IT systems typically include embedded technology, such as
micro-controllers, and may include equipment ranging from telephone switches
and fax machines to copy machines. Any failure to correct a Year 2000 problem
could result in an interruption in certain normal business activities or
operations due to errors or system failures.
The Company has developed a compliance program ("Plan") using an
enterprise wide, phased approach for assessing, remediating or replacing,
testing, and implementing each of its mission-critical systems. The Plan covers
many diverse systems and components of systems and, as such, each system will
be treated separately in the Plan. Therefore, it will be possible for different
systems to be in different phases of the Plan at any point in time.
Additionally, since the Company's Plan addresses the Year 2000 problem from an
enterprise wide approach, the Plan covers both information technology ("IT")
systems and non-IT systems. The Plan also includes reviews of external vendors,
EDI exchange partners, and environmental infrastructure, including utilities
and security systems.
The Company's compliance program includes an estimated completion date
of September 30, 1999, for all phases of its Plan for mission-critical systems.
The Company defines its mission-critical systems as its 1) clinical operating
system, 2) related database and EDI interchanges, 3) operations and facilities
systems (includes phone and communications network), and 4) accounting systems.
The following chart shows the expected completion date for each phase
of the Company's Plan for its mission-critical systems:
12
<PAGE> 13
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
EXPECTED COMPLETION - CALENDAR YEAR 1999
<TABLE>
<CAPTION>
Phase 0 YEAR 2000 PROJECT OFFICE
<S> <C> <C>
Initial Assessment of Critical Systems Completed
Create Year 2000 Project Documents Completed
Build Vender Compliance Database Completed
Maintain Vendor Compliance Process Fourth Quarter
Year 2000 Project Management Fourth Quarter
Phase 1 INVENTORY PHASE Completed
Phase 2 ASSESSMENT PHASE Completed
Phase 3 REMEDIATE/REPLACE PHASE Completed
Phase 4 TESTING PHASE Completed
Phase 5 IMPLEMENTATION PHASE Completed
</TABLE>
As of September 15, 1999, the Company has completed the Remediation,
Testing, and Implementation phases of its project for Mission Critical systems.
The Company has completed implementation for all regional offices to its new
clinical operating system (TXEN). The system was purchased from Nichols
Research Corporation and has been certified Year 2000 compliant. The
implementation occurred ahead of the scheduled implementation date of September
30, 1999. The Company has also completed full remediation and testing of its
main financial and accounting system. The system has processed Fiscal 2000
information with no reported incidents. Additionally the Company has also
completed assessment of its mission critical systems, equipment and
infrastructure.
The Company is continuing to address the potential impact of Year 2000
on its non-essential information systems, its other equipment that may be
affected by the Year 2000, and the impact of transacting business with parties
who do not have Year 2000 compliant systems. The Company has completed mailing
of its Year 2000 survey to all business partners, manufacturers of the
Company's non-essential business equipment, and other trade vendors. The
Company has continued its vendor compliance program by mailing surveys to all
health providers that are utilized by the Company. The Company cannot state
with any certainty whether their suppliers, vendors and data exchange partners
will remain compliant even if they have stated compliance in previous
communications. Even though the Company will observe `On-going Vigilance' for
Year 2000 problems, they cannot ensure that their vendors, providers, and
manufacturers will be as vigilant.
As of September 15, 1999, the Company has completed a Contingency and
Continuity Business Resumption Plan program for all of its core business
functions in all regions. The Company will use newly created contingency plans
to reduce the risk of disruption of service on January 1, 2000. These processes
include the following, core business areas:
- Call Processing (Interactive / Call Distribution)
- Financial Processing (AP / AR / Claims)
- Membership / Eligibility / Authorizations
- Correspondence Processing (Authorization Mailers / EOB / EOP)
- Certification / Credentialing / Eligibility
- Reporting
- Encounters
- Infrastructure Systems
During the three months ended August 31, 1999, the Company recognized
approximately $0.1 million in expense specific to its Year 2000 compliance
program which has been paid to consultants or vendors providing services or
equipment for the Company's compliance program. Additionally, the Company paid
approximately $0.1 million that was recorded as capital expenditures during the
three months ended August 31, 1999, which includes the costs for three of the
clinical operating system conversions that were planned for Fiscal 1999.
13
<PAGE> 14
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The following chart provides a summary of the Company's expected costs and
actual expenditures to date related to its Year 2000 Plan.
<TABLE>
<CAPTION>
ACTUAL COSTS
TOTAL EXPECTED INCURRED AT REMAINING
COSTS AUGUST 31, 1999 EXPECTED COSTS
-------------- --------------- --------------
<S> <C> <C> <C>
Capital expenditures................................. $ 875,000 $825,000 $ 50,000
Operating expense.................................... 325,000 166,000 159,000
---------- -------- --------
Total................................................ $1,200,000 $991,000 $209,000
========== ======== ========
</TABLE>
While the absolute costs cannot be determined at this time, the
Company does not expect such costs to exceed $1.2 million, including any costs
incurred for system implementations that may have been accelerated due to Year
2000 issues.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Except for historical
information, the matters discussed that may be considered forward-looking
statements may be subject to certain risks and uncertainties that could cause
the actual results to differ materially from those projected, including
uncertainties in the market, pricing, competition, procurement efficiencies,
uncertainties inherent in the Year 2000 problem, other matters discussed in
this quarterly report on Form 10-Q, and other risks detailed from time to time
in the Company's SEC reports.
14
<PAGE> 15
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
RISK FACTORS
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Quarterly Report on Form 10-Q 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.
CONCENTRATION OF RISK
The Company currently has fifteen contracts with five HMOs to provide
behavioral healthcare services under commercial, Medicaid, and Medicare plans,
to contracted members in Florida, Indiana, and Texas. These combined contracts
represent approximately 70.4% and 68.3% of the Company's operating revenue from
continuing operations for the quarters ended August 31, 1999 and 1998,
respectively. The terms of each contract are for one-year periods and are
automatically renewable for additional one-year periods unless terminated by
either party. As of August 31, 1999, the Company had received notice from one
Texas HMO that four of six contracts with the Company will not be renewed and
that, effective September 1, 1999, this HMO has selected another behavioral
healthcare company to manage care for members covered under four of the six
contracts. These four contracts accounted for approximately 5.6% and 3.0% of
the Company's operating revenues from continuing operations for the quarters
ended August 31, 1999 and 1998, respectively. The two remaining contracts, will
remain in effect through August 31, 2000. These two contracts accounted for
5.4% and 4.6% of the Company's operating revenues from continuing operations
for the quarters ended August 31, 1999 and 1998, respectively. Additionally,
the Company has received notice from one Indiana HMO that its contract with the
Company will not be renewed. As a result, one contract will terminate on
December 31, 1999 that accounted for 9.1% and 3.8% of the Company's operating
revenues from continuing operations for the quarters ended August 31, 1999 and
1998, respectively.
UNCERTAINTY OF FUTURE PROFITABILITY
As of August 31, 1999, the Company had stockholders' deficit of $5.7
million and a working capital deficiency of approximately $7.9 million. The
Company had a net loss for the quarter ended August 31, 1999 of $0.7 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.
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING
During prior fiscal years, a principal source of liquidity has been
the sale of hospital properties and equipment that, as of March 11, 1999, have
been entirely disposed of.
The Company has received tax refunds for fiscal 1995 and 1996 in the
amounts of $9.4 million and $5.4 million, respectively. Such refunds are based
on loss carrybacks under Section 172(f) of the Internal Revenue Code. Any IRS
claim for return of all or any portion thereof could have an adverse effect on
the Company's cash flows. On August 21, 1998, the Company received an
examination report from the IRS, dated August 6, 1998, related to its Section
172(f) carryback claims and amended tax returns for prior years, claiming taxes
due totaling approximately $12.4 million for which the Company has accrued
$12.1 million as of August 31, 1999. The Company filed a protest with the IRS
on November 6, 1998 to contest the examination report with the appeals office
of the Internal Revenue Service in Laguna Niguel, California. In the event that
the Company is unsuccessful in the appeal process, the Company is entitled to a
repayment of fees advanced to the Company's tax advisor relating to these
refund claims, totaling approximately $2.5 million. The IRS reserves the right
to assess and collect the tax previously refunded to the Company at any time
during the appeals process.
TAXES
In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund to carry
back losses described in Section 172(f) of the 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
15
<PAGE> 16
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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, are recorded
as a deferred liability, "Unbenefitted tax refunds received" pending resolution
by the 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.
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 $4.5 million
through August 31, 1999. Accordingly, the Company would be entitled to a
repayment of the fees advanced to its tax advisor relating to these refund
claims of approximately $2.5 million of which $2.4 million is reported as
"other receivable" in the accompanying balance sheet. This report commences the
administrative appeals process. The Company filed a protest letter with the IRS
on November 6, 1998 and believes that its position with respect to its right to
the tax refunds received will be upheld. The Company's tax advisor relating to
these refund claims has advised management that the administrative appeals
process could take twelve to eighteen months. In the event the Company wishes
to further protest the results of its administrative appeal, it may further
appeal to the United States Tax Court following the final determination of the
administrative appeal. The Company has been advised that a determination by the
United States Tax Court could take up to an additional twelve months from
commencement of the appeals process in the United States Tax Court. The IRS
reserves the right to assess and collect the tax previously refunded to the
Company at any time during the appeals process.
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.
The levels of revenues and profitability of healthcare companies may
be affected by the continuing efforts of governmental and third party payors 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 payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect 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.
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 1,160,000 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.
16
<PAGE> 17
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 August 31, 1999, there are no
outstanding shares of Preferred Stock. 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.
LIMITATIONS ON THE DEDUCTIBILITY OF COMPENSATION UNDER CERTAIN CIRCUMSTANCES
Pursuant to the 1993 Omnibus Budget Reconciliation Act, a portion of
annual compensation payable after 1993 to any of the Company's five highest
paid executive officers would not be deductible by the Company for federal
income tax purposes to the extent such officers' overall compensation exceeds
$1.0 million per executive officer. Qualifying performance-based incentive
compensation, however, would be both deductible and excluded for purposes of
calculating the $1.0 million base. The Board of Directors has determined that
no portion of anticipated compensation payable to any executive officer in
Fiscal 2000 would be non-deductible.
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.
17
<PAGE> 18
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
(1) Although no formal claim has been made or asserted, Humana Health
Plans of Puerto Rico, Inc. ("Humana") has claimed that the Company
owes $3.0 million to Humana in connection with the contract that was
terminated by Humana on March 31, 1999. Humana's claim relates to the
pharmacy and laboratory costs incurred by Humana throughout the
contract period. The Company has expressed to Humana its total
disagreement with Humana's position. The Company believes that Humana
owes the Company in excess of $3.0 million in relation to this same
issue; however, the Company has not formally asserted such claim. The
Company does not believe that Humana's claim will have a material
adverse effect on the Company's financial position, results of
operations and cash flows.
(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 ("MIRL") 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. As of August 31, 1999, the Company has
$1.1 million accrued relating to this matter.
(3) On January 22, 1999, PMR Corporation ("PMR") commenced an action
against the Company in San Diego Superior Court. This action seeks
damages for alleged breach of a hospital management agreement in
connection with the Aurora, Colorado facility. The Complaint seeks
compensatory damages of approximately $455,000, plus interest and
attorneys' fees. The Superior Court ordered this case into arbitration
on March 26, 1999. PMR has filed a demand for arbitration of this
dispute before the American Arbitration Association, to which the
Company has not yet responded. The Company has filed a counter-claim
in the arbitration for PMR's alleged breach of the same hospital
management agreement and intends to actively defend this action. The
Company does not believe that the impact of this claim will have a
material adverse effect on the Company's financial position, results
of operations and cash flows.
(4) In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund
to carry back losses described in Section 172(f) of the 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, are recorded as a deferred liability, "Unbenefitted tax
refunds received" pending resolution by the 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.
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
18
<PAGE> 19
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 $4.5 million through August 31, 1999.
Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refund claims of
approximately $2.5 million of which $2.4 million is reported as "other
receivable" in the accompanying balance sheet. This report commences
the administrative appeals process. The Company filed a protest letter
with the IRS on November 6, 1998 and believes that its position with
respect to its right to the tax refunds received will be upheld. The
Company's tax advisor relating to these refund claims has advised
management that the administrative appeals process could take twelve
to eighteen months. In the event the Company wishes to further protest
the results of its administrative appeal, it may further appeal to the
United States Tax Court following the final determination of the
administrative appeal. The Company has been advised that a
determination by the United States Tax Court could take up to an
additional twelve months from commencement of the appeals process in
the United States Tax Court. The IRS reserves the right to assess and
collect the tax previously refunded to the Company at any time during
the appeals process.
(5) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
Officer of the Company, commenced an action against the Company and
its Chairman, Chriss W. Street, in the Superior Court of the State of
California arising out of the termination of her employment on
September 29, 1997. The action alleges alternate causes of action
based upon her employment relationship with the Company and seeks
unspecified damages for unpaid wages, unspecified actual, compensatory
and punitive damages; damages for emotional distress; and costs, legal
fees and penalties under applicable California law. As of August 31,
1999, the action is in the discovery phase. The Company has denied its
liability and has denied the principal allegations of the complaint.
The Company believes that it has good and meritorious defenses to this
action.
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 exceed insurance policy limits
and the Company or a subsidiary 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.
19
<PAGE> 20
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedules (filed herewith).
(b) Reports on Form 8-K
1. The Company filed a current report on Form 8-K, dated July 2, 1999,
to report under Item 5 that the Company entered into an employment
agreement with Mary Jane Johnson and that pursuant to the
agreement, Ms. Johnson would be the Company's Chief Operating
Officer and would continue to serve as Director of the Company and
Chief Executive Officer of the Company's principal subsidiary,
Comprehensive Behavioral Care, Inc.
Additionally, the Company reported that effective July 2, 1999, the
Company entered into addendums to the employment agreements between
the Company and each of Chriss W. Street, Chairman, President and
Chief Executive Officer of the Company and Robert J. Landis,
Executive Vice President, Chief Financial Officer, Treasurer, and
Director of the Company, amending the calculation of their bonus
compensation in certain respects.
20
<PAGE> 21
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPREHENSIVE CARE CORPORATION
October 15, 1999 by /s/ ROBERT J. LANDIS
---------------------------
Robert J. Landis
Executive Vice President and
Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1000
<CASH> 6,456
<SECURITIES> 0
<RECEIVABLES> 13,283
<ALLOWANCES> 767
<INVENTORY> 0
<CURRENT-ASSETS> 22,196
<PP&E> 4,380
<DEPRECIATION> 2,524
<TOTAL-ASSETS> 26,834
<CURRENT-LIABILITIES> 30,092
<BONDS> 2,253
0
0
<COMMON> 38
<OTHER-SE> (5,702)
<TOTAL-LIABILITY-AND-EQUITY> 26,834
<SALES> 5,250
<TOTAL-REVENUES> 5,250
<CGS> 0
<TOTAL-COSTS> 4,680
<OTHER-EXPENSES> 1,585
<LOSS-PROVISION> (336)
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> (748)
<INCOME-TAX> 0
<INCOME-CONTINUING> (748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (748)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
