<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended February 28, 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 0-5751
COMPREHENSIVE CARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2594724
- --------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organ-
ization)
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 April 8, 1999
- -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 3,817,820
1
<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1-- CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets,
February 28, 1999 and May 31, 1998.....................................................3
Consolidated Statements of Operations for
the Three and Nine Months ended February 28, 1999 and 1998.............................4
Consolidated Statements of Cash Flows for
the Nine Months ended February 28, 1999 and 1998.......................................5
Notes to Consolidated Financial Statements...................................................6-12
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................................13-19
PART II - OTHER INFORMATION
ITEM 1-- LEGAL PROCEEDINGS..........................................................................20-21
ITEM 2-- CHANGES IN SECURITIES.........................................................................22
ITEM 6-- EXHIBITS AND REPORTS ON FORM 8-K..............................................................22
SIGNATURES..............................................................................................23
</TABLE>
2
<PAGE> 3
PART I. - FINANCIAL INFORMATION
ITEM 1-- CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1999 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 3,788 $ 6,016
Accounts receivable, less allowance for doubtful accounts of $2,085 and $1,488 ... 1,858 3,280
Accounts receivable - pharmacy and laboratory costs ............................... 9,984 5,655
Property and equipment held for sale .............................................. -- 1,910
Net assets of discontinued operations ............................................. 4,368 --
Other receivable .................................................................. 2,415 2,415
Other current assets .............................................................. 1,243 555
-------- --------
TOTAL CURRENT ASSETS ................................................................... 23,656 19,831
-------- --------
Property and equipment ................................................................. 4,370 11,416
Less accumulated depreciation of $2,252 and $4,262 ..................................... (2,252) (4,373)
-------- --------
Net property and equipment ............................................................. 2,118 7,043
-------- --------
Notes receivable ....................................................................... 94 94
Goodwill, net .......................................................................... 1,134 1,187
Restricted cash ........................................................................ 1,900 1,848
Other assets ........................................................................... 656 402
-------- --------
TOTAL ASSETS ........................................................................... $ 29,558 $ 30,405
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .......................................... $ 4,200 $ 5,789
Accrued claims payable ............................................................ 3,456 4,846
Accrued pharmacy and laboratory costs payable ..................................... 9,854 5,655
Current maturities of long-term debt .............................................. 3 2
Unbenefitted tax refunds received ................................................. 12,092 12,092
Income taxes payable .............................................................. 232 306
-------- --------
TOTAL CURRENT LIABILITIES .............................................................. 29,837 28,690
-------- --------
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities ...................................... 2,254 2,704
Other liabilities ................................................................. 160 297
-------- --------
TOTAL LONG-TERM LIABILITIES ............................................................ 2,414 3,001
-------- --------
TOTAL LIABILITIES ...................................................................... 32,251 31,691
-------- --------
STOCKHOLDERS' DEFICIT:
Preferred stock, $50.00 par value; authorized 60,000 shares; issued and
outstanding 0 and 41,260 shares of Series A Non-Voting
4% Cumulative Convertible Preferred Stock at redemption value.................. -- 2,176
Common stock $.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,817,820 and 3,415,402 shares................................ 38 34
Additional paid-in-capital..................................................... 51,719 49,201
Accumulated deficit............................................................ (54,450) (52,697)
------ ------
TOTAL STOCKHOLDERS' DEFICIT......................................................... (2,693) (1,286)
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT......................................... $29,558 $30,405
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES ............................................... $ 10,263 $ 10,299 $ 30,594 $ 29,599
COSTS AND EXPENSES:
Healthcare operating expenses .................................... 8,267 7,999 24,260 24,925
General and administrative expenses .............................. 1,624 1,332 4,860 3,604
Provision for doubtful accounts .................................. 811 4 1,113 93
Depreciation and amortization .................................... 315 195 796 587
-------- -------- -------- --------
11,017 9,530 31,029 29,209
-------- -------- -------- --------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS ............... (754) 769 (435) 390
OTHER INCOME (EXPENSE)
Asset write-down ................................................. -- -- (146) --
Gain on sale of assets ........................................... 1 13 2 169
Loss on sale of assets ........................................... -- -- (4) (8)
Interest income .................................................. 55 116 189 323
Interest expense ................................................. (48) (39) (136) (160)
-------- -------- -------- --------
8 90 (95) 324
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ..... (746) 859 (530) 714
Income tax expense ............................................... 10 (19) (20) (53)
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ......................... (736) 840 (550) 661
DISCONTINUED OPERATIONS:
Income (loss) from operations, less applicable income
tax expense of $0 .......................................... -- 165 (583) 223
Estimated loss on disposal, including provision for operating
losses through disposal date, less applicable income tax
expense of $0 .............................................. (783) -- (853) --
-------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .......................... (1,519) 1,005 (1,986) 884
EXTRAORDINARY GAIN NET OF TAXES OF $0 ............................ -- -- 120 --
-------- -------- -------- --------
NET INCOME (LOSS) ................................................ (1,519) 1,005 (1,866) 884
Dividends on convertible preferred stock ......................... -- (21) -- (62)
-------- -------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ............ $ (1,519) $ 984 $ (1,866) $ 822
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ......................... $ (0.21) $ 0.24 $ (0.16) $ 0.18
Discontinued operations:
Income (loss) from operations ............................... -- 0.04 (0.17) 0.06
Estimated loss on disposal .................................. (0.22) -- (0.25) --
Extraordinary item ............................................... -- -- 0.03 --
-------- -------- -------- --------
NET INCOME (LOSS) ................................................ $ (0.43) $ 0.28 $ (0.55) $ 0.24
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ......................... $ (0.21) $ 0.22 $ (0.16) $ 0.17
Discontinued operations:
Income (loss) from operations ............................... -- 0.04 (0.17) 0.06
Estimated loss on disposal ....................................... (0.22) -- (0.25) --
Extraordinary item .......................................... -- -- 0.03 --
-------- -------- -------- --------
NET INCOME (LOSS) ........................................... $ (0.43) $ 0.26 $ (0.55) $ 0.23
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 28,
1999 1998
---- ----
(Amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations before extraordinary item ............ $ (550) $ 661
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization ..................................................... 796 587
Asset write-down .................................................................. 146 --
Provision for doubtful accounts ................................................... 1,113 93
Gain on sale of assets ............................................................ (1) (11)
Loss on sale of assets ............................................................ 4 9
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable ............................................................... (262) (631)
Accounts receivable - pharmacy and laboratory costs ............................... (4,329) --
Notes and other receivables ....................................................... -- 54
Other current assets, restricted funds, and other non-current assets .............. (670) (1,774)
Accounts payable and accrued liabilities .......................................... (634) (746)
Accrued claims payable ............................................................ (1,390) (57)
Accrued pharmacy and laboratory costs payable ..................................... 4,199 --
Income taxes payable .............................................................. (74) (11)
Other liabilities ................................................................. (137) (54)
-------- --------
NET CASH USED IN CONTINUING OPERATIONS ........................................ (1,789) (1,880)
DISCONTINUED OPERATIONS:
Proceeds from sale ................................................................ -- 2,951
Cash used in operations ........................................................... (1,744) (536)
-------- --------
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS ........................ (1,744) 2,415
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property and equipment .................................. 1,766 15
Additions to property and equipment ............................................... (615) (1,075)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........................... 1,151 (1,060)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock ........................................ 155 155
Repayment of debt ................................................................. (1) (67)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 154 88
-------- --------
Net decrease in cash and cash equivalents .............................................. (2,228) (437)
Cash and cash equivalents at beginning of period ....................................... 6,016 4,068
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................. $ 3,788 $ 3,631
======== ========
</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 February 28, 1999, and the
related consolidated statements of operations and cash flows for the nine
months ended February 28, 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 and nine months ended February 28, 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, 1998 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, 1998 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 as of February 28,
1999. 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 February 28, 1999, the Company had unrestricted cash and cash
equivalents of $3.8 million. During the nine months ended February 28, 1999,
the Company used $1.8 million in its continuing operations and used $1.7
million in discontinued operations. Additionally, $1.2 million was provided by
its investing activities, and $0.2 million was provided by the Company's
financing activities. The Company reported a loss of $0.7 million from
continuing operations for the quarter ended February 28, 1999, compared to
income of $0.8 million from continuing operations for the quarter ended
February 28, 1998. The Company has an accumulated deficit of $54.5 million and
total stockholders' deficit of $2.7 million as of February 28, 1999.
Additionally, the Company's current assets at February 28, 1999 amounted to
approximately $23.7 million and current liabilities were approximately $29.8
million, resulting in a working capital deficiency of approximately $6.2
million and a current ratio of 1:1.3. The Company's primary use of available
cash resources is to expand its managed care business and fund operations.
The Company's available sources of cash during the fourth quarter of
fiscal year 1999 will be derived from operations and the sale of the operating
hospital (see Note 11-- "Subsequent Events").
6
<PAGE> 7
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
At this time, the Company cannot state with any degree of certainty
whether additional equity or debt financing will be available to it and, if
available, that the source of financing would be available on terms and
conditions acceptable to the Company. Any potential sources of additional
financing may be subject to business and economic conditions outside the
Company's control. There can be no assurance that, if required to do so, the
Company will be able to complete the transactions necessary to eliminate the
working capital and stockholder deficits.
The working capital and stockholders deficits may raise doubt about
the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome
of this uncertainty.
NOTE 3-- PROPERTY AND EQUIPMENT HELD FOR SALE
On December 16, 1998, the Company completed the sale of its
non-operating hospital facility located in Fort Worth, Texas for approximately
$1.8 million in cash. Proceeds from the sale were utilized for working capital
purposes.
NOTE 4-- OTHER CURRENT ASSETS
During the quarter ended February 28, 1999, in order to meet the
specific requirements for the Argentina bid, the Company was required to secure
a $0.5 million Bid Bond. The Company placed $0.5 million in an interest bearing
deposit account to secure the Bid Bond. In accordance with the terms of the Bid
Bond, the deposit will be released to the Company after the Bid Bond expiration
date of June 12, 1999. Additionally, the Company paid a refundable, performance
bond insurance premium of approximately $0.1 million that it expects to recover
before the end of Fiscal 1999.
NOTE 5-- STOCKHOLDERS' DEFICIT
During February, 1999, the Lindner Growth Funds converted its holding
of Preferred Stock into Common Stock at a conversion price of $6.00 per share
of Common Stock in accordance with its rights under the terms of its $50.00 par
value Series A, non-voting 4% cumulative Convertible Preferred Stock Exchange
Agreement with the Company.
The Company issued 343,833 shares of its Common Stock related to this
conversion. Additionally, since the Company had presented its Preferred Stock
at redemption value, which requires a charge to retained earnings equal to the
amount of dividends that are not currently paid or declared, the entry to
record the Preferred Stock conversion resulted in a reduction in the Company's
accumulated deficit of approximately $0.2 million.
NOTE 6-- INCOME TAXES
The Company's provision for income taxes for the quarters ended
February 28, 1999 and 1998 differs from the statutory rate of 34% due,
primarily, to the Company's utilization of tax return net operating loss
carryforwards. At May 31, 1998, the Company had Federal accumulated net
operating loss carryforwards of approximately $28.9 million, which would expire
in 2009 through 2013. The Company will be allowed a minimum tax credit
carryover in the future of approximately $0.7 million against regular tax in
the event that regular tax expense exceeds the alternative minimum tax expense.
7
<PAGE> 8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 7-- DISCONTINUED OPERATIONS
The sale of the Company's remaining operating hospital will complete
the Company's plan to dispose of its hospital business segment. It is
anticipated that the disposal will be completed during fiscal 1999 (see Note
11-- "Subsequent Events").
Information relating to the discontinued operations for the nine
months ended February 28, 1999 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 28,
1999
----
(Amounts in thousands)
<S> <C>
Operating revenues ........................................ $ 3,236
Costs and expenses:
Healthcare operating expenses ........................ 2,900
General and administrative expenses .................. 16
Other operating expenses ............................. 1,321
-------
4,237
-------
Loss from operations (excludes $435 estimated loss on sale) $(1,001)
=======
</TABLE>
The net assets of the discontinued operations included in the
accompanying consolidated balance sheets as of February 28, 1999 are as
follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
1999
----
(Amounts in thousands)
<S> <C>
Property and equipment used in discontinued operations, net of
accumulated depreciation of $2,842 ...................... $ 4,671
Less remaining liability for loss on sale ................ (303)
-------
Net assets of discontinued operations ..................... $ 4,368
=======
</TABLE>
8
<PAGE> 9
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 8-- 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 NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1999 1998 1999 1998
---- ---- ---- ----
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations .................... $ (736) $ 840 $ (550) $ 661
Less preferred stock dividends .............................. -- (21) -- (62)
-------- -------- -------- --------
Numerator for basic earnings per share-income (loss)
from continuing operations ................................ (736) 819 (550) 599
Effect of dilutive securities:
Preferred stock dividends ................................. -- 21 -- 62
-------- -------- -------- --------
Numerator for diluted earnings (loss) per share-income
available to common stockholders from continuing
operations after assumed conversions ...................... (736) 840 (550) 661
Discontinued operations:
Operating income (loss) ..................................... -- 165 (583) 223
Estimated loss on disposal .................................. (783) -- (853) --
Extraordinary item ............................................... -- -- 120 --
-------- -------- -------- --------
Net income (loss) available to common stockholders
after assumed conversions ................................. $ (1,519) $ 1,005 $ (1,866) $ 884
======== ======== ======== ========
Denominator:
Weighted average shares .......................................... 3,508 3,386 3,475 3,377
Effect of dilutive securities:
Employee stock options ...................................... -- 24 -- 69
Convertible preferred stock ................................. -- 344 -- 344
-------- -------- -------- --------
Dilutive potential common shares ............................ -- 368 -- 413
Denominator for diluted earnings (loss) per share-adjusted
weighted-average shares after assumed conversions ......... 3,508 3,754 3,475 3,790
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Income (loss) from continuing operations ......................... $ (0.21) $ 0.24 $ (0.16) $ 0.18
Discontinued operations:
Income (loss) from operations ............................... -- 0.04 (0.17) 0.06
Estimated loss on disposal .................................. (0.22) -- (0.25) --
Extraordinary item ............................................... -- -- 0.03 --
-------- -------- -------- --------
Net income (loss) ................................................ $ (0.43) $ 0.28 $ (0.55) $ 0.24
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income (loss) from continuing operations ......................... $ (0.21) $ 0.22 $ (0.16) $ 0.17
Discontinued operations:
Income (loss) from operations ............................... -- 0.04 (0.17) 0.06
Estimated loss on disposal .................................. (0.22) -- (0.25) --
Extraordinary item ............................................... -- -- 0.03 --
-------- -------- -------- --------
Net income (loss) ................................................ $ (0.43) $ 0.26 $ (0.55) $ 0.23
======== ======== ======== ========
</TABLE>
The following number of potentially convertible shares of common stock
related to convertible debentures and stock options are as follows at February
28, 1999:
<TABLE>
<S> <C>
For conversion of convertible debentures .................. 9,044
Outstanding stock options ................................. 545,076
Possible future issuance under stock options plans ........ 635,133
---------
Total ................................................. 1,189,253
=========
</TABLE>
9
<PAGE> 10
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 9-- STOCK OPTION PLANS
On December 14, 1998, the Company's Board of Directors approved the
re-pricing of stock option grants for Executive Officers, subject to each
Executive Officer returning his or her old options for cancellation. For every
two options canceled under the 1988 Incentive Stock Option and Non-statutory
Stock Option Plans, one option will be reissued under the 1995 Incentive Stock
Option Plan. For every four options canceled under the 1995 Incentive Stock
Option Plan, three new options will be reissued. Any fractional shares will be
rounded up to the nearest whole share. All reissued options are subject to the
provisions of the 1995 Plan, including the vesting in accordance with the
Company's vesting policy. The exercise price of the reissued options equals the
December 14, 1998 closing price of $4.00.
NOTE 10--COMMITMENTS AND CONTINGENCIES
(1) On September 22, 1998, the Company commenced an action against HIP of
New Jersey ("HIP") in the United States District Court for the
District of New Jersey. Several causes of action were asserted; the
principal one is for breach of contract and the Company is seeking
$1.1 million of compensatory damages for the failure of HIP to pay
certain cost savings and other monies due to Comprehensive Behavioral
Care, Inc. pursuant to a written agreement.
In December, 1998, the Company received the "Notice to Network
Providers of HIP, in Rehabilitation" ("Notice") that discloses that
HIP has been placed in rehabilitation by the State of New Jersey, with
the Commissioner of the Department of Banking and Insurance as named
Rehabilitator. In accordance with the initial plan of rehabilitation,
the Company had agreed to provide services to members of HIP at 75% of
the Company's contract rate for the duration of the period of
rehabilitation, or for 90 days, whichever period was shorter. The
Company's contract with HIP will terminate on March 31, 1999.
In February 1999, there was a court-ordered dissolution of HIP. As of
February 28, 1999, the Company has recognized approximately $1.3
million of income and has recorded an expense of approximately $0.8
million as a provision for doubtful accounts for HIP accounts
receivable. Of the total outstanding accounts receivable at February
28, 1999, approximately $0.2 million relates to revenue recognized
during the rehabilitation period and approximately $1.1 million is the
gross amount outstanding from pre-rehabilitation accounts receivable.
The Company believes it will collect the $0.4 million net receivable
that remains at February 28, 1999 (see Note 11-- "Subsequent Events").
(2) 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 Internal
Revenue Code ("IRC"), requesting a refund to the Company of $9.4
million and $5.5 million, respectively, of which refunds of $9.4
million and $5.4 million were received. In addition, the Company also
filed amended Federal income tax returns for fiscal years prior to
1995, requesting similar refunds of losses carried back under Section
172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million
for 1983; and $0.4 million for 1982, a total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4
million, respectively. The balance of the refunds received, $12.1
million, is recorded as a deferred liability, "Unbenefitted tax
refunds received," pending resolution by the 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.
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.
10
<PAGE> 11
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 $4.0 million through February 28, 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.
(3) 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 February 28, 1999 the Company has
$1.1 million accrued relating to this matter.
(4) 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. The action is only
in its formative stages. 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.
(5) As previously reported by the Company on Form 8-K dated January 26,
1999, the Company was verbally advised by the staff of the New York
Stock Exchange that the Exchange ("Exchange") would initiate action to
remove the Company's Common Stock from listing on the Exchange. On
February 17, 1999, the Exchange suspended trading of the Company's
Common Stock. Effective February 24, 1999, the Company's Common Stock
began trading on the Over The Counter Bulletin Board. No assurance may
be given that the Company will meet the minimum listing requirements
of another stock exchange.
(6) 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 intends to file a
counter-claim in the arbitration for PMR's alleged breach of the same
hospital management agreement and 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.
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.
11
<PAGE> 12
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
REGULATORY MONITORING AND COMPLIANCE
The Company is subject to extensive and evolving state and federal
regulations, ranging 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 and, as a result, the Company
may be subject to the specific regulatory approach adopted by each state for
the regulation of managed care companies and for providers of behavioral
healthcare treatment services.
Currently, management cannot quantify the potential effects of
additional regulation of the managed care industry, but such costs could have
an adverse effect on future operations to the extent that they are not able to
be recouped in future managed care contracts. Management believes that the
Company is currently in material compliance with the laws and regulations of
the jurisdictions in which it operates.
NOTE 11-- SUBSEQUENT EVENTS
On March 11, 1999, the Company completed the sale of its Aurora,
Colorado hospital for approximately $3.3 million in cash plus $1.2 million in a
secured promissory note.
On March 17, 1999, the Company received notification from Humana
Health Plans of Puerto Rico, Inc. that the Company would not be selected as the
provider of behavioral care services for Humana in the event that Humana's
contract with the Commonwealth of Puerto Rico is renewed. The Company's
contract with Humana will terminate on April 30, 1999. For the nine months
ended February 28, 1999 this contract accounts for 46.9%, or $14.4 million, of
the Company's operating revenues.
On March 31, 1999, the Company entered into a settlement agreement
with HIP of New Jersey, Inc. ("HIP") that required HIP to pay approximately
$0.4 million to the Company in settlement of the Company's claim that was
initiated in September, 1998. The settlement does not limit or preclude the
right of the Company to receive its pro rata share of future distributions from
HIP.
12
<PAGE> 13
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 18).
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. During the quarter ended November
30, 1998, the Company adopted a plan to discontinue its hospital operations. As
of February 28, 1999, the Company owned one operating hospital located in
Aurora, Colorado. The Company expects to complete the sale of its Aurora
hospital during fiscal 1999 (see Note 11 to the quarterly unaudited financial
statements-- "Subsequent Events").
For the three months ended February 28, 1999, managed care operations
accounted for 97.6%, or $10.0 million, of the Company's operating revenues from
continuing operations.
RESULT OF OPERATIONS
THE THREE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 28, 1998:
<TABLE>
<CAPTION>
CONSOLIDATED
THREE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
FEBRUARY 28, 1999 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- -------------------------------------------- ------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues ......................... $ 10,015 $ 248 $ 10,263 $ 872
Healthcare operating expenses .............. 8,204 63 8,267 258
General/administrative expenses ............ 692 932 1,624 --
Other operating expenses ................... 1,076 50 1,126 782
-------- -------- -------- --------
9,972 1,045 11,017 1,040
-------- -------- -------- --------
Operating income (loss) ............... $ 43 $ (797) $ (754) $ (168)
======== ======== ======== ========
<CAPTION>
CONSOLIDATED
THREE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
FEBRUARY 28, 1998 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- -------------------------------------------- ------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues ......................... $ 9,991 $ 308 $ 10,299 $ 1,533
Healthcare operating expenses .............. 7,837 162 7,999 1,456
General/administrative expenses ............ 591 741 1,332 7
Other operating expenses .............. 134 65 199 (95)
-------- -------- -------- --------
................................. 8,562 968 9,530 1,368
-------- -------- -------- --------
Operating income (loss) .................... $ 1,429 $ (660) $ 769 $ 165
======== ======== ======== ========
</TABLE>
The Company reported an operating loss of approximately $0.8 million
from continuing operations for the quarter ended February 28, 1999 which
included $0.7 million of expense for uncollectable accounts receivable specific
to one managed care contract and approximately $0.3 million for costs incurred
related to one proposal for Argentina. This is compared to operating income of
$0.8 million from continuing operations reported for the quarter ended February
28, 1998.
Healthcare operating expenses from continuing operations increased by
approximately $0.3 million for the quarter ended February 28, 1999 as compared
to the quarter ended February 28, 1998. The increase is primarily attributable
to costs incurred for one proposal for Argentina. Healthcare operating expense
as a percentage of net revenues for managed care operations increased from
78.4% for the quarter ended February 28, 1998 to 81.9% for the quarter ended
February 28, 1999.
13
<PAGE> 14
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
General and administrative expenses from continuing operations
increased by approximately $0.3 million for the quarter ended February 28, 1999
as compared to the quarter ended February 28, 1998. This increase is
attributable to approximately $0.3 million of increased costs over the prior
year to manage the Company's information systems, and approximately $0.2
million of increased costs for professional and consulting fees. These
increases were offset by savings over the prior year of approximately $0.2
million resulting from the restructuring that was completed during the quarter
ended February 28, 1998.
Other operating expenses from continuing operations increased by $0.9
million for the quarter ended February 28, 1999 compared to the quarter ended
February 28, 1998. This increase is directly attributable to the $0.8 million
increase in the Company's provision for doubtful accounts and a $0.1 million
increase in depreciation expense.
THE NINE MONTHS ENDED FEBRUARY 28, 1999 COMPARED TO THE NINE MONTHS ENDED
FEBRUARY 28, 1998:
<TABLE>
<CAPTION>
CONSOLIDATED
NINE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
FEBRUARY 28, 1999 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- -------------------------------------------- ------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenues ......................... $ 29,765 $ 829 $ 30,594 $ 3,236
Healthcare Operating Expenses .............. 23,905 355 24,260 2,900
General/Administrative Expenses ............ 1,972 2,888 4,860 16
Other Operating Expenses ................... 1,736 173 1,909 1,321
-------- -------- -------- --------
27,613 3,416 31,029 4,237
-------- -------- -------- --------
Operating Income (loss) .................... $ 2,152 $ (2,587) $ (435) $ (1,001)
======== ======== ======== ========
<CAPTION>
CONSOLIDATED
NINE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
FEBRUARY 28, 1998 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- -------------------------------------------- ------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenues ......................... $ 28,543 $ 1,056 $ 29,599 $ 4,832
Healthcare Operating Expenses .............. 24,187 738 24,925 4,577
General/Administrative Expenses ............ 1,457 2,147 3,604 33
Other Operating Expenses ................... 389 291 680 (1)
-------- -------- -------- --------
26,033 3,176 29,209 4,609
-------- -------- -------- --------
Operating Income (loss) .................... $ 2,510 $ (2,120) $ 390 $ 223
======== ======== ======== ========
</TABLE>
The Company reported an operating loss from continuing operations of
approximately $0.4 million for the nine months ended February 28, 1999, which
included $0.8 million of expense for uncollectable accounts receivable specific
to one managed care contract and approximately $0.6 million for costs incurred
related to one proposal for Argentina. This is compared to the operating income
from continuing operations of $0.4 million reported for the nine months ended
February 28, 1998.
Operating revenues from continuing operations increased by 3.3%, or
$1.0 million, for the nine months ended February 28, 1999 compared to the nine
months ended February 28, 1998. This increase is attributable to an increase in
managed care operating revenues of $1.2 million that is primarily due to new
business in Texas, Idaho, and Michigan and is offset by a decrease of
approximately $0.3 million from corporate and other operations, primarily from
the loss of certain behavioral contract management programs that have been
canceled or terminated during fiscal 1999.
14
<PAGE> 15
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Healthcare operating expenses from continuing operations decreased by
$0.7 million for the nine months ended February 28, 1999 as compared to the
nine months ended February 28, 1998. The decrease is primarily attributable to
a $2.2 million decrease over prior year in claims expense that is offset by
approximately $0.9 million of expense for the Staff Model clinics that were
instituted in Puerto Rico beginning in the second quarter of Fiscal 1998.
Additionally, the decrease in claims expense was offset by approximately $0.6
million of costs incurred related to one proposal for Argentina. Healthcare
operating expense as a percentage of net revenues for managed care operations
decreased from 84.7% for the nine months ended February 28, 1998 to 80.3% for
the nine months ended February 28, 1999.
General and administrative expenses from continuing operations
increased approximately $1.3 million for the nine months ended February 28,
1999 compared to the nine months ended February 28, 1998. This increase is
primarily due to approximately $0.7 million of increased costs for professional
and consulting fees of which $0.2 million is attributable to one legal
settlement and approximately $0.7 million of increased costs over the prior
year to manage the Company's information systems. These increases were offset
by savings over the prior year of approximately $0.2 million resulting from the
restructuring that was completed during the quarter ended February 28, 1998.
Other operating expenses from continuing operations for the nine
months ended February 28, 1999 increased by $1.2 million compared to the nine
months ended February 28, 1998. This increase is directly attributable to the
$1.0 million increase in the managed care division's provision for doubtful
accounts and the $0.2 million increase in depreciation expense.
MAJOR CONTRACTS/CUSTOMERS
HUMANA/PCA
The Company currently provides 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 are
due to expire on March 31, 1999 and Humana of Puerto Rico has notified the
Company that the Company's contracts with it will terminate on March 31, 1999,
which has been extended to April 30, 1999 (see Note 11 to the quarterly
unaudited financial statements-- "Subsequent Events"). For the nine months
ended February 28, 1999, these agreements account for 46.9%, or $14.4 million,
of the Company's operating revenues.
Additionally, the contract with Humana establishes an amount that is
withheld from Humana's monthly remittances to the Company to cover pharmacy and
laboratory costs that are the financial responsibility of the Company, but
currently 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 98.7% loss ratio for the contract to date
pending clarification of the actual costs incurred. Efforts are being made to
work with Humana to resolve the uncertainty and the Company expects to know the
outcome during the current fiscal year.
The Company also has contracts with Humana Health Plans ("Humana")
under which it provides services to members in Florida and Texas. Inclusive of
the Humana of Puerto Rico contracts, Humana contracts account for approximately
65.1%, or $19.9 million, of the Company's operating revenues for the nine
months ended February 28, 1999.
HIP
The Company currently provides services to members of the HIP of New
Jersey ("HIP") Plan, a managed care company that was placed in court-ordered
rehabilitation and subsequently, has been placed in liquidation by the State of
New Jersey. The Company has agreed to continue to provide services to HIP Plan
members at 75% of the Company's contract rate until March 31, 1999 after which
the Company's contract with HIP will terminate. For the nine months ended
February 28, 1999, this contract accounts for approximately $1.1 million of net
revenues and an estimated $0.4 million of the operating loss from continuing
operations. The Company has approximately $0.4 million in accounts receivable,
net of a bad debt reserve of approximately $0.8 million, that pertains to
services that the Company provided to HIP members in accordance with this
contract.
15
<PAGE> 16
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
On September 22, 1998, the Company commenced an action against HIP of
New Jersey ("HIP") in the United States District Court for the District of New
Jersey. Several causes of action were asserted; the principal one is for breach
of contract and the Company is seeking $1.1 million of compensatory damages for
the failure of HIP to pay certain cost savings and other monies due to
Comprehensive Behavioral Care, Inc. pursuant to a written agreement (see Note
11 to the quarterly unaudited financial statements-- "Subsequent Events").
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 phone switches and
fax machines to copy machines. Any failure to have corrected 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:
<TABLE>
<CAPTION>
EXPECTED COMPLETION
CALENDAR 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Phase 0 YEAR 2000 PROJECT OFFICE
Initial Assessment of Critical Systems Completed
Create Year 2000 Project Documents Completed
Build Vendor Compliance Database Completed
Maintain Vendor Compliance Process Fourth Quarter
Year 2000 Project Management Fourth Quarter
Phase 1 INVENTORY PHASE Completed
Phase 2 ASSESSMENT PHASE Second Quarter
Phase 3 REMEDIATE/REPLACE PHASE Third Quarter
Phase 4 TESTING PHASE Third Quarter
Phase 5 IMPLEMENTATION PHASE Third Quarter
- -------------------------------------------------------------------------------------------------
</TABLE>
In addition to the Plan described above, the Company is in the process
of assessing the Year 2000 readiness of all third parties having a material
relationship with the Company. The preliminary assessment indicates that, while
the Company has initially converted two of its four regional offices to a new
clinical operating system, the remaining two regions will also require that
they be converted to the new clinical operating system. The Company has a
planned implementation schedule that was accelerated due to the Year 2000
issues. The estimated completion date for this implementation schedule is
September 30, 1999.
16
<PAGE> 17
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The Company is currently addressing the potential impact of Year 2000
on its non-essential information systems, its other equipment that may be
affected by Year 2000, and the impact of transacting business with its parties
who do not have Year 2000 compliant systems. As of February 28, 1999, the
Company has drafted a letter to send with its survey to all business partners,
manufacturers of the Company's non-essential business equipment, and other
trade vendors. This letter requests that a written response to the survey be
provided to the Company. The second phase to addressing these non-essential
information systems will include follow-up, written or telephone requests for
survey responses. At February 28, 1999, the Company has not established an
expected completion date for these non-essential systems.
During the nine months ended February 28, 1999, the Company recognized
approximately $0.1 million in expense specific to its Year 2000 compliance
program of which approximately 34% has already been paid to consultants or
vendors providing services or equipment for the Company's compliance program.
Additionally, the Company paid approximately $0.3 million that was recorded as
capital expenditures during the nine months ended February 28, 1999 which
includes the costs for two of the clinical operating system conversions that
were planned for Fiscal 1999. 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>
TOTAL ACTUAL COSTS REMAINING
EXPECTED INCURRED AT EXPECTED
COSTS FEBRUARY 28, 1999 COSTS
---------- ----------------- ---------
<S> <C> <C> <C>
Capital expenditures...................................... $ 875,000 $725,000 $150,000
Operating expense......................................... 325,000 75,000 250,000
---------- -------- --------
Total..................................................... $1,200,000 $800,000 $400,000
========== ======== ========
</TABLE>
As of February 28, 1999, the Company has not developed any contingency
plan should it be unable to become compliant in a timely manner and there can
be no assurance that the Company will become Year 2000 compliant. As a result,
the Company is unable to state with any certainty the costs of becoming
compliant. 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.
Should the Company be unable to become Year 2000 compliant, the
problem could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially and adversely
affect the Company's results of operations, liquidity, and financial condition.
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.
17
<PAGE> 18
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)
disposing of its remaining psychiatric hospital on acceptable terms (see Note
11 to the quarterly unaudited financial statements-- "Subsequent Events"), (ii)
expanding the behavioral managed care operations, (iii) effective management in
the delivery of services, (iv) risk and utilization in context of capitated
payouts, (v) retaining certain refunds from the IRS (see Note 10, item (2) to
the quarterly unaudited financial statements -- "Commitment and
Contingencies").
UNCERTAINTY OF FUTURE PROFITABILITY
As of February 28, 1999, the Company had stockholders' deficit of $2.7
million, a working capital deficiency of approximately $6.2 million and a
current ratio of 1:1.3. The Company had a net loss from continuing operations
for the quarter ended February 28, 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 private sale of equity securities and debt securities convertible into
equity. Issuance of additional equity securities by the Company could result in
substantial dilution to stockholders.
The Company has received tax refunds for fiscal 1996 and 1995 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 February 28, 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.
DEPENDENCE ON KEY PERSONNEL
The Company depends and will continue to depend upon the services of
its senior management and skilled personnel. In fiscal 1998, the Company
relocated certain significant management functions to Tampa, Florida where
Comprehensive Behavioral Care, Inc., the Company's principal subsidiary, is
located.
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 1,180,000 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.
PRICE VOLATILITY IN PUBLIC MARKET
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating
performance of particular companies. Trading prices of securities of companies
in the healthcare and managed care sectors have experienced significant
volatility.
18
<PAGE> 19
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 February 28, 1999, there are no
outstanding shares of Preferred Stock (see Note 5 to the quarterly unaudited
financial statements-- "Stockholders' Deficit"). 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 1999
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.
19
<PAGE> 20
PART II- OTHER INFORMATION
ITEM 1-- LEGAL PROCEEDINGS
1) On September 22, 1998, the Company commenced an action against HIP of
New Jersey ("HIP") in the United States District Court for the
District of New Jersey. Several causes of action were asserted; the
principal one is for breach of contract and the Company is seeking
$1.1 million of compensatory damages for the failure of HIP to pay
certain cost savings and other monies due to Comprehensive Behavioral
Care, Inc. pursuant to a written agreement.
In December, 1998, the Company received the "Notice to Network
Providers of HIP, in Rehabilitation" ("Notice") that discloses HIP has
been placed in rehabilitation by the State of New Jersey, with the
Commissioner of the Department of Banking and Insurance as named
Rehabilitator. In accordance with the initial plan of rehabilitation,
the Company had agreed to provide services to members of HIP at 75% of
the Company's contract rate for the duration of the period of
rehabilitation, or for 90 days, whichever period was shorter. The
Company's contract with HIP will terminate on March 31, 1999 and,
accordingly, the Company will not provide services to members of HIP
after March 31, 1999.
In February 1999, there was a court-ordered dissolution of HIP and the
State of New Jersey has begun the liquidation process. As of February
28, 1999, the Company has recognized approximately $1.3 million of
income and has recorded an expense of approximately $0.8 million as a
provision for doubtful accounts for HIP accounts receivable. Of the
total outstanding at February 28, 1999, approximately $0.2 million
relates to revenue recognized during the rehabilitation period and
approximately $1.1 million is the gross amount outstanding from
pre-rehabilitation accounts receivable. The Company believes it will
collect the net receivable of $0.4 million that remains outstanding at
February 28, 1999 (see Note 11 to the quarterly unaudited financial
statements-- "Subsequent Events").
(2) 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 $4.0 million through February 28, 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
20
<PAGE> 21
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.
(3) 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 February 28, 1999 the Company has
$1.1 million accrued relating to this matter.
(4) 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. The action is only
in its formative stages. 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.
(5) 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 intends to file a
counter-claim in the arbitration for PMR's alleged breach of the same
hospital management agreement and 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.
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.
21
<PAGE> 22
ITEM 2-- CHANGES IN SECURITIES
On February 19, 1999 the Lindner Growth Funds converted its holdings
of 41,260 shares of Preferred Stock into 343,833 shares of Common Stock in
accordance with its rights under the terms of the Company's $50.00 par Series
A, non-voting 4% cumulative Convertible Preferred Stock Exchange Agreement (see
Note 5 to the quarterly unaudited financial statements-- "Stockholders
Deficit").
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 December 7, 1998, to report under Item 5 that
the Company had completed its entry into separate
agreements with separate purchasers for the sale of
its Trinity Oaks Hospital facility located in Fort
Worth, Texas and the sale of the Aurora Behavioral
Health Hospital facility located in Aurora,
Colorado.
2. The Company filed a current report on Form 8-K,
dated February 5, 1999, to report under Item 5 that
the Company was verbally advised by the staff of the
New York Stock Exchange that the Exchange intends to
initiate action to remove the Company's Common Stock
from listing on the Exchange.
The Company also reported that it had received a
Termination of Agreement letter, dated January 26,
1999, from the purchaser of the Aurora, Colorado
facility.
Additionally, the Company reported that it had been
advised by Humana that the Company's contracts with
Humana Health Plans of Puerto Rico, Inc. will
terminate on March 31, 1999 and that Humana has
invited the Company to bid for the Management of
Behavioral Care Services in the event new health
insurance contracts are awarded to Humana by the
Commonwealth of Puerto Rico.
22
<PAGE> 23
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
April 13, 1999 by /s/ ROBERT J. LANDIS
----------------------------------
Robert J. Landis
Executive Vice President and
Chief Financial Officer
23
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