<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 November 30, 1998.
[ ] 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 January 5, 1999
- - -------------------------------------- ------------------------------
Common Stock, par value $.01 per share 3,473,987
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,
November 30, 1998 and May 31, 1998.....................................................3
Consolidated Statements of Operations for
the Three and Six Months ended November 30, 1998 and 1997..............................4
Consolidated Statements of Cash Flows for
the Six Months ended November 30, 1998 and 1997........................................5
Notes to Consolidated Financial Statements...................................................6-13
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................................14-19
PART II - OTHER INFORMATION
ITEM 1-- LEGAL PROCEEDINGS..............................................................................20
ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................21
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>
NOVEMBER 30, MAY 31,
1998 1998
------------ --------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 3,853 $ 6,016
Accounts receivable, less provision for doubtful accounts
of $1,540 and $1,488 ............................................... 3,767 3,600
Accounts receivable - pharmacy and laboratory costs ................... 8,544 5,655
Property and equipment held for sale .................................. 1,764 1,910
Net assets of discontinued operations ................................. 4,638 --
Other receivable ...................................................... 2,415 2,415
Other current assets .................................................. 287 235
-------- --------
TOTAL CURRENT ASSETS ....................................................... 25,268 19,831
-------- --------
Property and equipment ..................................................... 4,234 11,416
Less accumulated depreciation of $2,030 and $4,262 ......................... (2,030) (4,373)
-------- --------
Net property and equipment ................................................. 2,204 7,043
-------- --------
Notes receivable ........................................................... 94 94
Goodwill, net .............................................................. 1,152 1,187
Restricted cash ............................................................ 1,875 1,848
Other assets ............................................................... 679 402
-------- --------
TOTAL ASSETS ............................................................... $ 31,272 $ 30,405
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .............................. $ 5,588 $ 5,789
Accrued claims payable ................................................ 3,649 4,846
Accrued pharmacy and laboratory costs payable ......................... 8,414 5,655
Current maturities of long-term debt .................................. 2 2
Unbenefitted tax refunds received ..................................... 12,092 12,092
Income taxes payable .................................................. 267 306
-------- --------
TOTAL CURRENT LIABILITIES .................................................. 30,012 28,690
-------- --------
LONG-TERM LIABILITIES:
Long-term debt, excluding current maturities .......................... 2,255 2,704
Other liabilities ..................................................... 175 297
-------- --------
TOTAL LONG-TERM LIABILITIES ................................................ 2,430 3,001
-------- --------
TOTAL LIABILITIES .......................................................... 32,442 31,691
-------- --------
STOCKHOLDERS' DEFICIT:
Preferred stock, $50.00 par value; authorized 60,000 shares; issued and
outstanding 41,260 shares of Series A Non-Voting
4% Cumulative Convertible Preferred Stock at redemption value ......... 2,218 2,176
Common stock $.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,473,979 and 3,415,402 shares ........................ 35 34
Additional paid-in-capital ............................................ 49,663 49,201
Accumulated deficit ................................................... (53,086) (52,697)
-------- --------
TOTAL STOCKHOLDERS' DEFICIT ................................................ (1,170) (1,286)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ................................ $ 31,272 $ 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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES ............................................... $ 10,215 $ 9,757 $ 20,331 $ 19,300
Costs and expenses:
Healthcare operating expenses .................................... 8,366 8,145 15,993 16,926
General and administrative expenses .............................. 1,619 1,221 3,236 2,272
Provision for doubtful accounts .................................. 243 11 302 90
Depreciation and amortization .................................... 246 216 481 392
-------- -------- -------- --------
10,474 9,593 20,012 19,680
-------- -------- -------- --------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS ............... (259) 164 319 (380)
OTHER INCOME (EXPENSE)
Asset write-down ................................................. (146) -- (146) --
Gain on sale of assets ........................................... 1 -- 1 156
Loss on sale of assets ........................................... (4) (1) (4) (8)
Interest income .................................................. 63 94 134 207
Interest expense ................................................. (42) (58) (88) (121)
-------- -------- -------- --------
(128) 35 (103) 234
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ..... (387) 199 216 (146)
Income tax expense ............................................... (15) (16) (30) (34)
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ......................... (402) 183 186 (180)
DISCONTINUED OPERATIONS:
Income (loss) from operations, less applicable income
tax expense of $0 ..................................... (454) 510 (583) 59
Estimated loss on disposal, including provision for operating
losses through disposal date, less applicable
income tax expense of $0 .............................. (70) -- (70) --
-------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ........................... (926) 693 (467) (121)
EXTRAORDINARY GAIN, NET OF TAXES OF $0 ........................... -- -- 120 --
-------- -------- -------- --------
NET INCOME (LOSS) ................................................ (926) 693 (347) (121)
Dividends on convertible preferred stock ......................... (21) (20) (42) (41)
-------- -------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ............ $ (947) $ 673 $ (389) $ (162)
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ......................... $ (0.12) $ 0.05 $ 0.04 $ (0.07)
Discontinued operations:
Income (loss) from operations ......................... (0.13) 0.15 (0.17) 0.02
Estimated loss on disposal .................................. (0.02) -- (0.02) --
Extraordinary item ............................................... -- -- 0.03 --
-------- -------- -------- --------
NET INCOME (LOSS) ................................................ $ (0.27) $ 0.20 $ (0.12) $ (0.05)
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ......................... $ (0.12) $ 0.05 $ 0.04 $ (0.07)
Discontinued operations:
Income (loss) from operations ............................... (0.13) 0.13 (0.17) 0.02
Estimated loss on disposal .................................. (0.02) -- (0.02) --
Extraordinary item .......................................... -- -- 0.03 --
-------- -------- -------- --------
NET INCOME (LOSS) ................................................ $ (0.27) $ 0.18 $ (0.12) $ ( 0.05)
======== ======== ======== ========
</TABLE>
See accompanying notes
4
<PAGE> 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations before extraordinary item..... $ 186 $ (180)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization.............................................. 481 392
Asset write-down........................................................... 146 --
Provision for doubtful accounts............................................ 302 90
Gain on sale of assets..................................................... (1) (156)
Loss on sale of assets..................................................... 4 8
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable........................................................ (349) 130
Accounts receivable - pharmacy and laboratory costs........................ (2,889) --
Notes and other receivables................................................ -- 36
Other current assets, restricted funds, and other non-current assets....... (218) (1,439)
Accounts payable and accrued liabilities................................... 374 (211)
Accrued claims payable..................................................... (1,197) 399
Accrued pharmacy and laboratory costs payable.............................. 2,759 --
Income taxes payable....................................................... (39) 9
Other liabilities.......................................................... (122) (28)
------ -----
NET CASH USED IN CONTINUING OPERATIONS................................. (563) (950)
DISCONTINUED OPERATIONS:
Cash used in operations.................................................... (1,306) (475)
------- -------
NET CASH (USED IN) DISCONTINUED OPERATIONS............................. (1,306) (475)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property and equipment........................... 2 2,955
Additions to property and equipment........................................ (453) (828)
---- ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................... (451) 2,127
---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock............................. 158 61
Repayment of debt...................................................... (1) (66)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............................. 157 (5)
------ ---------
Net increase (decrease) in cash and cash equivalents............................ (2,163) 697
Cash and cash equivalents at beginning of period................................ 6,016 4,068
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 3,853 $ 4,765
====== ======
</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 November 30, 1998, and the
related consolidated statements of operations and cash flows for the six months
ended November 30, 1998 and 1997 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 six months ended November 30, 1998 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 cost for all behavioral healthcare services provided through November 30,
1998. 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 November 30, 1998, the Company had unrestricted cash and cash
equivalents of $3.9 million. During the six months ended November 30, 1998, the
Company used $0.6 million in its continuing operations, used $1.3 million in
discontinued operations, used $0.5 million in its investing activities, and
$0.2 million was provided by the Company's financing activities. The Company
reported a loss of $0.4 million from continuing operations for the quarter
ended November 30, 1998, compared to income of $0.2 million from continuing
operations for the quarter ended November 30, 1997. The Company has an
accumulated deficit of $53.1 million and total stockholders' deficit of $1.2
million as of November 30, 1998. Additionally, the Company's current assets at
November 30, 1998 amounted to approximately $25.3 million and current
liabilities were approximately $30.0 million, resulting in a working capital
deficiency of approximately $4.7 million and a current ratio of 1:1.2. The
Company's primary use of available cash resources is to expand its managed care
business and fund operations.
Management intends to continue the expansion of its managed care
business. Expansion will require competing with other managed care companies
that have more available resources. In order to compete effectively, demands on
the Company's cash resources may increase significantly. There can be no
assurance that the Company will retain all of its existing contracts, which
generate cash flow from operations. Other cash requirements during fiscal year
1999 may include the following:
1. The Company intends to rapidly accelerate its efforts to become
Year 2000 compliant and estimates that it will spend
approximately $0.6 million during 1999 toward this effort.
6
<PAGE> 7
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
2. The Company received an examination report from the Internal
Revenue Service. While the Company intends to vigorously contest
the results of that audit, no assurance can be provided as to
the amount and timing of the ultimate outcome (see Note 7--
"Commitments and Contingencies").
3. As described in Note 7 -- "Commitments and Contingencies" -- the
Company expects to repay up to $1.0 million to the California
Medicaid program during 1999.
The Company's available sources of cash during fiscal year 1999 will be
derived from operations and the potential sale of the operating hospital for
which the Company recently signed a definitive agreement to sell for $5.1
million and the sale of the Company's property and equipment held for sale for
which the Company recently signed a definitive agreement to sell for
approximately $2.0 million (see Note 8 -- "Subsequent Events"). There can be no
assurance that the sale will close or that sufficient funds will be derived from
the sale in an amount or at a point in time that will allow the Company to meet
its obligations.
The Company cannot state with any degree of certainty, at this time,
whether additional equity or debt financing will be available to it, and if
available, would be available on terms and conditions acceptable to the
Company. Any potential sources of additional financing are subject to business
and economic conditions outside the Company's control. There can be no
assurance during fiscal year 1999 that, if required to do so, the Company will
be able to complete the transactions necessary to eliminate the working capital
deficit.
These conditions 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-- INCOME TAXES
The Company's provision for income taxes for the quarters ended
November 30, 1998 and 1997 differs from the statutory rate of 34% due,
primarily, to the Company's utilization of tax return net operating loss
carryforwards.
NOTE 4-- DISCONTINUED OPERATIONS
During the quarter ended November 30, 1998, the Company entered into
two separate agreements with separate purchasers for the sale of its two
remaining hospital facilities. The sale of the Company's two remaining
hospitals 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 8-- "Subsequent Events").
For the quarter ended November 30, 1998, the hospital segment has been
accounted for as a discontinued operation and the results of operations have
been excluded from continuing operations in the Consolidated Statement of
Operations for all periods presented.
7
<PAGE> 8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The estimated loss on disposal at November 30, 1998 included the
expected costs related to the sales transaction, certain closedown expenses for
the Aurora facility, and the anticipated operating losses of the Aurora
facility through February 28, 1999 which is the expected disposal date.
Information relating to the discontinued operations for the six months
ended November 30, 1998 is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
1998
----
(Amounts in thousands)
<S> <C>
Operating revenues.............................................................. $ 2,364
Costs and expenses:
Healthcare operating expenses.............................................. 2,598
General and administrative expenses........................................ 16
Other operating expenses ................................................ 333
--------
2,947
--------
Loss from operations............................................................ $ (583)
=======
</TABLE>
The net assets of the discontinued operations included in the
accompanying consolidated balance sheets as of November 30, 1998 are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
1998
----
(Amounts in thousands)
<S> <C>
Property and equipment used in discontinued operations, net of
accumulated depreciation of $2,798............................................ $ 4,708
Less loss on disposition including estimated gain on sale of $180
and estimated loss of $250 during the phase-out period........................ (70)
---------
Net assets of discontinued operations........................................... $ 4,638
=======
</TABLE>
8
<PAGE> 9
NOTE 5 -- 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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997 1998 1997
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations ................. $ (402) $ 183 $ 186 $ (180)
Less preferred stock dividends ........................... (21) (20) (42) (41)
------- ------- --------- -------
Numerator for basic earnings per share income (loss)
from continuing operations ............................. (423) 163 144 (221)
Effect of dilutive securities:
Preferred stock dividends .............................. -- 20 -- --
------- ------- --------- -------
Numerator for diluted earnings (loss) per share-income
available to common stockholders from continuing
operations after assumed conversions ................... (423) 183 144 (221)
Discontinued operations:
Operating income (loss) .................................. (454) 510 (583) 59
Estimated loss on disposal ............................... (70) -- (70) --
Extraordinary item ............................................ -- -- 120 --
------- ------- --------- -------
Net income (loss) available to common stockholders
after assumed conversions .............................. $ (947) $ 693 $ (389) $ (162)
======= ======= ========= =======
Denominator:
Basic earnings (loss) per share - weighted average shares ..... 3,474 3,374 3,459 3,373
Effect of dilutive securities:
Employee stock options ................................... -- 92 -- --
Convertible preferred stock .............................. -- 344 -- --
------- ------- --------- -------
Dilutive potential common shares ......................... -- 436 -- --
Denominator for diluted earnings (loss) per share-adjusted
weighted-average shares and assumed conversions ........ 3,474 3,810 3,459 3,373
======= ======= ========= =======
BASIC EARNINGS PER SHARE
Income (loss) from continuing operations ...................... $ (0.12) $ 0.05 $ 0.04 $ (0.07)
Discontinued operations:
Income (loss) from operations ............................ (0.13) 0.15 (0.17) 0.02
Estimated loss on disposal ............................... (0.02) -- (0.02) --
Extraordinary item ............................................ -- -- 0.03 --
------- ------- --------- -------
Net income (loss) ............................................. $ (0.27) $ 0.20 $ (0.12) $ (0.05)
======= ======= ========= =======
DILUTED EARNINGS PER SHARE
Income (loss) from continuing operations ...................... $ (0.12) $ 0.05 $ 0.04 $ (0.07)
Discontinued operations:
Income (loss) from operations ............................ (0.13) 0.13 (0.17) 0.02
Estimated loss on disposal ............................... (0.02) -- (0.02) --
Extraordinary item ............................................ -- -- 0.03 --
------- ------- --------- -------
Net income (loss) ............................................. $ (0.27) $ 0.18 $ (0.12) $ (0.05)
======= ======= ========= =======
</TABLE>
The following number of potentially convertible shares of common stock
related to convertible preferred stock, convertible debentures, and stock
options are as follows at November 30, 1998:
<TABLE>
<S> <C>
For conversion of convertible preferred stock.............................. 343,833
For conversion of convertible debentures................................... 9,044
Outstanding stock options.................................................. 790,215
Possible future issuance under stock options plans......................... 491,244
---------
Total.................................................................. 1,634,336
=========
</TABLE>
9
<PAGE> 10
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 6-- STOCK OPTION PLANS
On November 17, 1998, the Company's Board of Directors approved the
re-pricing of stock option grants to employees below the level of Executive
Officers, subject to each employee returning his or her old options for
cancellation. The canceled options will be replaced by an equivalent number of
new options at an exercise price equal to the closing price of the Company's
Common Stock on November 30, 1998. The new grants will be subject to the
Company's usual stock option grants, including the vesting in accordance with
the Company's vesting policy.
NOTE 7-- 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 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.
The Notice discusses the initial plan of Rehabilitation that will be
submitted to the Court in December 1998. In accordance with this
initial plan, the Company agreed to continue providing
post-rehabilitation 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 is shorter. The payment mechanism that will
be submitted to the Court as the initial plan of Rehabilitation
provides for an advance payment for the rehabilitation-period
services. If approved by the Court, this advance payment will be
calculated as 30% of the amount owed to the Company for
pre-rehabilitation services.
The Rehabilitator has not specified an amount that the Company can
expect to receive for pre-rehabilitation services nor has it precluded
the Company from asserting its claim for the entire amount of money
owed for these pre-rehabilitation services. At November 30, 1998, the
Company has recognized income of approximately $1.0 million and has
recorded an expense of approximately $0.1 million as a provision for
doubtful accounts for HIP accounts receivable.
The rehabilitation process is in its formative stages and there is no
assurance that the Company will recover its claim against HIP and it
is not known whether the State of New Jersey will honor claims arising
prior to the rehabilitation proceeding. The Company believes that it
has a good and meritorious claim against HIP.
(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.
10
<PAGE> 11
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 November 30, 1998.
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 intends to protest the
examination report 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.
(3) The Company is currently involved in an action in California Superior
Court contesting certain aspects 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 involves
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". It is anticipated that a final determination on the
Superior Court action will be obtained in 1999. The Company currently
has $1.0 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 September 6, 1996, the Company instituted an arbitration against
the Sellers of HMS with the American Arbitration Association in Orange
County, California seeking, among other things, reimbursement from the
Sellers for damages which the Company sustained by reason of the
inaccuracies of the representations and warranties made by the Sellers
and for the indemnification from each of the Sellers as provided for
under the terms of the Stock Purchase Agreement. One seller has
settled his case with the Company. The remaining seller has not
interposed an answer to the arbitration, and the arbitration is
therefore in its formative stages. The Company does not believe that
the impact of these claims will have a material adverse effect on the
Company's financial position, results of operations and cash flows.
(6) The Company entered into a Stock Purchase Agreement on April 30, 1996
to purchase the outstanding stock of HMS. The Stock Purchase Agreement
was subject to certain escrow provisions and other contingencies that
were not completed until July 25, 1996. In conjunction with this
transaction, HMS initiated an arbitration against The Emerald Health
Network, Inc. ("Emerald") claiming breach of contract and seeking
damages and other relief. In August 1996, Emerald, in turn, initiated
action in the U.S. District Court for the Northern District of Ohio,
Eastern Division, (Case No. 1:96 CV 1759), against the Company
claiming, among other things, interference with the contract between
Emerald and HMS and seeking unspecified damages and other relief. The
Company filed counterclaims against Emerald for deceptive trade
practices, defamation, tortuous interference with business
relationships, and unfair competition. A confidential settlement has
been reached between Emerald and the Company. The Company believes
that it has claims arising from this transaction against the
accountants and legal counsel of HMS as well as HMS's lending bank. On
October 1, 1996, the Company filed a claim of malpractice against the
legal
11
<PAGE> 12
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
counsel of HMS. These claims are presently being investigated
and have not as yet been quantified. The Company does not believe that
the impact of these claims will have a material adverse effect on the
Company's financial position, results of operations and cash flows.
(7) In October 1994, the NYSE notified the Company that it was below
certain quantitative and qualitative listing criteria in regard to net
tangible assets available to Common Stock and three-year average net
income. The Listing and Compliance Committee of the NYSE has
determined to monitor, on a quarterly basis, the Company's progress
toward returning to original listing standards and has so indicated in
approving the Company's most recent Listing Application on December
31, 1998. No assurance may be given that additional equity may be
obtained on terms favorable to the Company.
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.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Company is currently in the early phases of assessing its ability
to make its information systems Year 2000 compliant. The Year 2000 problem
exists because many computer programs are unable to distinguish between the
Year 1900 and the Year 2000. Any failure to have corrected a Year 2000 problem
could result in an interruption in certain normal business activities or
operations.
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. While management intends to do so, no
assessment has been made of the Company's third party vendors and customers. As
a result, the Company is unable to state with any certainty the costs of
becoming compliant. However, such costs are not expected to exceed $1.1
million, of which the Company has expended approximately $0.5 million as of
November 30, 1998. The absolute costs cannot be estimated at this time.
The preliminary assessment indicates that, while the Company has
initially converted one of its five regions to a new Year 2000 compliant
clinical operating system, the remaining four regions will also require that
they be converted to the new clinical operating system. The Company has a
planned implementation schedule that calls for completion of the conversion
process by mid-1999.
The Company has not addressed the potential impact of Year 2000 on its
non-essential information systems, its other equipment that may be affected by
Year 2000, or the impact of transacting business with their parties who do not
have Year 2000 compliant systems.
Should the Company be unable to become Year 2000 compliant, the Year
2000 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.
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.
12
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTE 8-- SUBSEQUENT EVENTS
On December 16, 1998, the Company completed the sale of its
non-operating hospital facility located in Ft. Worth, Texas for approximately
$1.8 million.
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
usual stock option grants, including the vesting in accordance with the
Company's vesting policy at the closing price on December 14, 1998.
13
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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 many hospital facilities. During the quarter ended November
30, 1998, the Company adopted a plan to discontinue its hospital operations. As
of November 30, 1998, the Company owns one non-operating, psychiatric hospital,
designated as held for sale and one operating hospital for which the Company
recently received a Letter of Intent to Purchase for $5.1 million. The Company
expects to complete both sales transactions during fiscal 1999 (See Note 8 to
the consolidated financial statements - "Subsequent Events").
The Company can now focus on its managed care operations. During
fiscal 1998 and 1997, managed care operations experienced significant growth
through internal development and the expansion into new managed behavioral
healthcare markets, primarily in Puerto Rico, Texas, and New Jersey. The
Company is currently exploring new business opportunities in Argentina and has
submitted a bid on a government contract to provide medical services to
Argentina senior citizens.
During the three months ended November 30, 1998, the Company's
operating revenues from continuing operations increased by 4.7%, or $0.5
million, compared to the three months ended November 30, 1997. Managed care
operations accounted for 97.6%, or $10.0 million, of the Company's operating
revenues from continuing operations for the three months ended November 30,
1998.
RESULT OF OPERATIONS
THE THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1997:
<TABLE>
<CAPTION>
CONSOLIDATED
THREE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
NOVEMBER 30, 1998 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- - --------------------------------- --------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 9,965 $ 250 $10,215 $1,082
Healthcare operating expenses 8,243 123 8,366 1,194
General/administrative expenses 627 992 1,619 6
Other operating expenses 443 46 489 336
------- ------ ------- ------
9,313 1,161 10,474 1,536
----- ------ ------- -----
Operating income (loss) $ 652 $ (911) $ (259) $ (454)
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED
THREE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
NOVEMBER 30, 1997 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- - --------------------------------- --------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 9,464 $ 293 $ 9,757 $ 1,954
Healthcare operating expenses 7,854 291 8,145 1,447
General/administrative expenses 444 777 1,221 13
Other operating expenses 144 83 227 (16)
------- ------ -------- -------
8,442 1,151 9,593 1,444
------- ------ -------- -------
Operating income (loss) $ 1,022 $ (858) $ 164 $ 510
======= ====== ======== =======
</TABLE>
The Company reported an operating loss of approximately $0.3 million
from continuing operations for the quarter ended November 30, 1998 which
included $0.1 million of expense for uncollectable accounts receivable specific
to one managed care contract and $0.4 million for costs incurred related to one
proposal for Argentina. This
14
<PAGE> 15
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
is compared to operating income of $0.2 million from continuing operations
reported for the quarter ended November 30, 1997.
Operating revenues from continuing operations increased by
approximately 4.7%, or $0.5 million, for the quarter ended November 30, 1998
compared to the quarter ended November 30, 1997. The increase is primarily
attributable to increased operating revenues of $0.5 million for new managed
care contracts that were acquired in the Company's Texas Region.
Healthcare operating expenses from continuing operations increased by
$0.2 million for the quarter ended November 30, 1998 as compared to the quarter
ended November 30, 1997. The increase in healthcare operating expenses is
attributable to approximately $0.4 million of costs incurred for one proposal
for Argentina which is offset primarily by the savings realized by the Company
since implementing the staff model provider network in Puerto Rico in November
1997. Healthcare operating expenses as a percentage of net revenues for managed
care operations decreased from 83.5% for the quarter ended November 30, 1997 to
81.9% for the quarter ended November 30, 1998.
General and administrative expenses from continuing operations
increased by approximately $0.4 million, for the quarter ended November 30,
1998 as compared to the quarter ended November 30, 1997. This increase is
attributable to approximately $0.2 million in increased costs over the prior
year to manage the Company's information systems and approximately $0.2
million for professional and consulting fees.
Other operating expenses from continuing operations increased by $0.3
million for the quarter ended November 30, 1998 compared to the quarter ended
November 30, 1997. This increase is directly attributable to the $0.2 million
increase in the managed care division's provision for doubtful accounts and a
$0.1 million increase in depreciation expense.
THE SIX MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THE SIX MONTHS ENDED
NOVEMBER 30, 1997:
<TABLE>
<CAPTION>
CONSOLIDATED
SIX MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
NOVEMBER 30, 1998 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- - --------------------------------- --------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenues $19,749 $ 582 $ 20,331 $2,364
Healthcare Operating Expenses 15,177 293 15,993 2,598
General/Administrative Expenses 1,803 1,956 3,236 16
Other Operating Expenses 660 123 783 333
-------- -------- -------- ------
17,640 2,372 20,012 2,947
-------- -------- -------- ------
Operating Income (loss) $ 2,109 $ (1,790) $ 319 $ (583)
======= ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED
SIX MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
NOVEMBER 30, 1997 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- - --------------------------------- --------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenues $18,552 $ 748 $ 19,300 $3,299
Healthcare Operating Expenses 16,350 565 16,926 3,121
General/Administrative Expenses 566 1,717 2,272 25
Other Operating Expenses 255 227 482 94
-------- -------- -------- ------
17,171 2,509 19,680 3,240
------- -------- -------- ------
Operating Income (loss) $ 1,381 $ (1,761) $ (380) $ 59
======= ======== ======== ======
</TABLE>
The Company reported operating income from continuing operations of
approximately $0.3 million for the six months ended November 30, 1998, which
included $0.1 million of expense for uncollectable accounts receivable specific
to one managed care contract and approximately $0.4 million for costs incurred
related to one proposal for
<PAGE> 16
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Argentina. This is compared to the operating loss from continuing operations of
$0.4 million reported for the six months ended November 30, 1997 which included
a restructuring charge of $0.2 million, a legal settlement of $0.3 million, and
$0.1 million in fees and expenses relating to the Company's Debenture Exchange
Offer.
Operating revenues from continuing operations increased by 5.3%, or
$1.0 million, for the six months ended November 30, 1998 compared to the six
months ended November 30, 1997. This increase is attributable to an increase in
managed care operating revenues of $1.2 million which is primarily due to new
business in the Texas Region and is offset by a $0.2 million decrease from
corporate and other operations.
Healthcare operating expenses from continuing operations decreased by
$0.9 million for the six months ended November 30, 1998 compared to the six
months ended November 30, 1997. This variance results from a $1.8 million
reduction in claims expense that was realized from the Company's implementation
in November 1997 of a staff model provider network in Puerto Rico and a $0.8
million benefit from two contracts that were renegotiated with more favorable
terms to the Company. These gains were offset by an increase of $1.3 million in
claims expense over the prior year that was a direct result of new contracts in
the Company's Texas region and approximately $0.4 million of costs incurred for
one proposal for Argentina. Healthcare operating expenses as a percentage of
net revenues for managed care operations decreased from 87.7% for the six
months ended November 30, 1997 to 78.7% for the six months ended November 30,
1998.
General and administrative expenses from continuing operations
increased approximately $1.0 million, for the six months ended November 30,
1998 compared to the six months ended November 30, 1997. This increase is
primarily due to approximately $0.4 million in legal expenses of which $0.2
million is attributable to one settlement, $0.4 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.
Other operating expenses from continuing operations for the six months
ended November 30, 1998 increased by $0.3 million compared to the six months
ended November 30, 1997. This increase is directly attributable to the $0.3
million increase in the managed care division's provision for doubtful
accounts.
The Company is taking steps designed to increase revenues primarily
through its managed care operations and the continued development of its
behavioral managed care business.
MAJOR CONTRACTS
PCA
The Company currently provides services to members of PCA Health Plans
of Puerto Rico, Inc., a subsidiary of Humana, Inc. ("PCA"). The contract with
PCA establishes an amount that is withheld from PCA's monthly remittances to
the Company to cover pharmacy and laboratory costs that are the financial
responsibility of the Company, but currently administered by PCA.
Because of the uncertainty surrounding the determination of the actual
pharmacy and laboratory costs incurred, the Company has reported the contract at
a 98.6% loss ratio for the contract to date pending clarification of the actual
costs incurred. Efforts are being made to work with PCA to resolve the
uncertainty and the Company expects to know the outcome during the current
fiscal year.
HIP
The Company currently provides services to members of the HIP of New
Jersey ("HIP") Plan, a managed care company that has recently been placed in
rehabilitation 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
for the duration of the period of rehabilitation, or for 90 days, whichever
period is shorter. For the six months ended November 30, 1998, this contract
accounts for approximately $0.7 million of net revenues and an estimated $0.1
million of operating income from continuing operations. The Company has
approximately $0.9 million in accounts receivable, net of a
16
<PAGE> 17
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
bad debt reserve of approximately $0.1 million, that pertains to
pre-rehabilitation services that the Company provided to HIP members in
accordance with this contract. However, the Rehabilitator has not specified an
amount that the Company can expect to receive for pre-rehabilitation services
nor has it precluded the Company from asserting its claim for the entire amount
of money owed for these pre-rehabilitation services.
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. The
rehabilitation process is in its formative stages and there is no assurance
that the Company will recover its claim against HIP and it is not known whether
the State of New Jersey will honor claims arising prior to the rehabilitation
proceeding. The Company believes that it has a good and meritorious claim
against HIP.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Company is currently in the early phases of assessing its ability
to make its information systems Year 2000 compliant. The Year 2000 problem
exists because many computer programs are unable to distinguish between the
Year 1900 and the Year 2000. Any failure to have corrected a Year 2000 problem
could result in an interruption in certain normal business activities or
operations.
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. While management intends to do so, no
assessment has been made of the Company's third party vendors and customers. As
a result, the Company is unable to state with any certainty the costs of
becoming compliant. However, such costs are not expected to exceed $1.1
million, of which the Company has expended approximately $0.5 million as of
November 30, 1998. The absolute costs cannot be estimated at this time.
The preliminary assessment indicates that, while the Company has
initially converted one of its five regions to a new Year 2000 compliant
clinical operating system, the remaining four regions will also require that
they be converted to the new clinical operating system. The Company has a
planned implementation schedule that calls for completion of the conversion
process by mid-1999.
The Company has not addressed the potential impact of Year 2000 on its
non-essential information systems, its other equipment that may be affected by
Year 2000, or the impact of transacting business with their parties who do not
have Year 2000 compliant systems.
Should the Company be unable to become Year 2000 compliant, the Year
2000 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 two remaining psychiatric hospitals on acceptable terms (see
Note 8 to the consolidated 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) maintaining the listing of the Company's Common Stock on the NYSE,
(vi) securing and retaining certain refunds from the IRS (see Note 7, item (2)
to the consolidated financial statements -- "Commitment and Contingencies").
UNCERTAINTY OF FUTURE PROFITABILITY
As of November 30, 1998, the Company had stockholders' deficit of $1.2
million, a working capital deficiency of approximately $4.7 million and a
current ratio of 1:1.2. The Company had a net loss from continuing operations
for the quarter ended November 30, 1998 of $0.4 million. Present results of
operations are not necessarily indicative of anticipated future results of
operations.
There can be no assurance that the Company will be able to achieve and
sustain profitability and maintain positive cash flows or that profitability
and positive cash flow can be sustained on an ongoing basis. Moreover, the
level of profitability or positive cash flow cannot be accurately predicted.
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. Under the shareholder policies of the NYSE the Company may not be able
to effect large private placements of equity without shareholder approval
which, if not obtained, may adversely affect the Company with respect to future
capital formation. In addition, 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 November 30, 1998. The Company intends to file protest with
the IRS and 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.
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 approximately 344,000
shares related to the 4% convertible preferred stock, 9,000 shares related to
the 7 1/2% convertible subordinated debentures due April 15, 2010, and options
or other rights to purchase approximately 1,392,000 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.
18
<PAGE> 19
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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.
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. There is currently issued and
outstanding 41,260 shares of Preferred Stock designated as Series A Non-Voting
4% Cumulative convertible 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.
NYSE LISTING
The Company has been below certain original listing criteria of the
NYSE since prior to October 1994. The original listing of the Company's Common
Stock on the NYSE is subject to continual review and possible delisting upon
notices from the Listing and Compliance Committee of the NYSE.
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 $1.1 million of
compensatory damages is sought 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.
The Notice discusses the initial plan of Rehabilitation that will be
submitted to the Court in December 1998. In accordance with this
initial plan, the Company agreed to continue providing
post-rehabilitation 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 is shorter. The payment mechanism that will
be submitted to the Court as the initial plan of Rehabilitation
provides for an advance payment for the rehabilitation-period services
that the Company will provide. If approved by the Court, this advance
payment will be calculated as 30% of the amount owed to the Company
for pre-rehabilitation services.
The Rehabilitator has not specified an amount that the Company can
expect to receive for pre-rehabilitation services nor has it precluded
the Company from asserting its claim for the entire amount of money
owed for these pre-rehabilitation services. At November 30, 1998, the
Company has recognized income of approximately $1.0 million and has
recorded an expense of approximately $0.1 million as a provision for
doubtful accounts for HIP accounts receivable.
The rehabilitation process is in its formative stages and there is no
assurance that the Company will recover its claim against HIP and it
is not known whether the State of New Jersey will honor claims arising
prior to the rehabilitation proceeding. The Company believes that it
has a good and meritorious claim against HIP.
(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. The IRS may determine that the Company's position and use
of Section 172(f) is inappropriate and request a return of some or all
of the refunds received to date. 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 refunds previously
20
<PAGE> 21
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 November 30, 1998.
Accordingly, the Company would be entitled to a repayment of the fees
advanced to the Company's tax advisor relating to these refund claims
of approximately $2.5 million that is reported as "other receivable"
in the accompanying balance sheet. This report commences the
administrative appeals process. The Company intends to protest the
examination report 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.
(3) The Company is currently involved in an action in California Superior
Court contesting certain aspects 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 involves
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". It is anticipated that a final determination on the
Superior Court action will be obtained in 1999. The Company currently
has $1.0 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 September 6, 1996, the Company instituted an arbitration against
the Sellers of HMS with the American Arbitration Association in Orange
County, California seeking, among other things reimbursement from the
Sellers for damages which the Company sustained by reason of the
inaccuracies of the representations and warranties made by the Sellers
and for the indemnification from each of the Sellers as provided for
under the terms of the Stock Purchase Agreement. One Seller has
settled his case with the Company. The remaining Seller has not
interposed an answer to the arbitration, and the arbitration is
therefore in its formative stages. The Company does not believe that
the impact of these claims 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.
ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY TITLE HOLDERS
The results of the Company's Annual Shareholders' Meeting were
reported in the Company's Report on Form 8-K dated November 17, 1998.
21
<PAGE> 22
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
September 15, 1998, to report under Item 5 that the Company
accepted the resignation of John A. McCarthy, Jr., a Class II
Director.
2. The Company filed a current report on Form 8-K, dated
September 24, 1998, to report under Item 5 that the Company
entered into new employment agreements with Mr. Chriss W.
Street, the President and Chief Executive Officer of the
Company, for a term expiring on November 30, 2001, and with
Mr. Robert J. Landis, the Executive Vice President and Chief
Financial Officer and Treasurer of the Company for a term
expiring on January 2, 2000.
3. The Company filed a current report on Form 8-K, dated November
17, 1998, to report under Item 5 the results of its Annual
Meeting of Stockholders which included the election of one Class
III Director and the approval of an amendment to the Company's
1995 Incentive Stock Option Plan to increase the number of
shares authorized and available for issuance thereunder from
600,000 to 1,000,000.
22
<PAGE> 23
SIGNATURES
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
January 12, 1999 by /s/ ROBERT J. LANDIS
-----------------------------------
Robert J. Landis
Executive Vice President and
Chief Financial Officer
January 12, 1999 by /s/ KEVIN M. CARNAHAN
------------------------------------
Kevin M. Carnahan
Vice President and
Chief Accounting Officer
23
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 3,853
<SECURITIES> 0
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<ALLOWANCES> 1,916
<INVENTORY> 0
<CURRENT-ASSETS> 25,268
<PP&E> 4,234
<DEPRECIATION> 2,030
<TOTAL-ASSETS> 31,272
<CURRENT-LIABILITIES> 30,012
<BONDS> 2,255
0
2,218
<COMMON> 35
<OTHER-SE> (3,423)
<TOTAL-LIABILITY-AND-EQUITY> 31,272
<SALES> 20,331
<TOTAL-REVENUES> 20,331
<CGS> 0
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<INCOME-PRETAX> 216
<INCOME-TAX> 30
<INCOME-CONTINUING> 186
<DISCONTINUED> (653)
<EXTRAORDINARY> 120
<CHANGES> 0
<NET-INCOME> (389)
<EPS-PRIMARY> (0.12)
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