<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 February 29, 2000.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ___________.
Commission File Number 1-9927
------
COMPREHENSIVE CARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2594724
- ---------------------------------- -------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
4200 WEST CYPRESS STREET, SUITE 300, TAMPA, FL 33607
------------------------------------------------------
(Address of principal executive offices and zip code)
(813) 876-5036
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date:
Classes Outstanding at April 10, 2000
- -------------------------------------- -----------------------------
Common Stock, par value $.01 per share 3,817,808
<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets,
February 29, 2000 and May 31, 1999.....................................................3
Consolidated Statements of Operations for
the three and nine months ended February 29, 2000 and February 28, 1999................4
Consolidated Statements of Cash Flows for
the nine months ended February 29, 2000 and February 28, 1999..........................5
Notes to Consolidated Financial Statements...................................................6-11
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................................12-18
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS.........................................................................19-20
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................21
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.............................................................21
SIGNATURES..............................................................................................22
</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 29, MAY 31,
2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 3,479 $ 8,026
Restricted cash............................................................... 1,721 --
Accounts receivable, less allowance for doubtful accounts of $661 and
$923........................................................................ 328 932
Accounts receivable -- pharmacy and laboratory costs.......................... 10,469 10,469
Other receivable.............................................................. 2,415 2,415
Other current assets.......................................................... 503 614
-------- --------
Total current assets............................................................. 18,915 22,456
-------- --------
Property and equipment........................................................... 3,632 4,296
Less accumulated depreciation.................................................... (2,339) (2,326)
-------- --------
Net property and equipment....................................................... 1,293 1,970
-------- --------
Non-current assets:
Notes receivable.............................................................. 1,152 1,172
Goodwill, net................................................................. 1,026 1,080
Restricted cash............................................................... 230 1,923
Other assets.................................................................. 229 465
-------- --------
Total non-current assets......................................................... 2,637 4,640
-------- --------
Total assets..................................................................... $ 22,845 $ 29,066
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities...................................... $ 4,566 $ 4,552
Accrued claims payable........................................................ 3,249 4,369
Accrued pharmacy and laboratory costs payable................................. 10,469 10,469
Current maturities of long-term debt.......................................... -- 3
Unbenefitted tax refunds received............................................. 12,092 12,092
Income taxes payable.......................................................... 41 76
-------- --------
Total current liabilities........................................................ 30,417 31,561
-------- --------
Long-term liabilities:
Long-term debt, excluding current maturities.................................. 2,244 2,253
Other liabilities............................................................. 179 166
-------- --------
Total long-term liabilities...................................................... 2,423 2,419
-------- --------
Total liabilities................................................................ 32,840 33,980
-------- --------
Commitments and Contingencies (see Note 5 and Note 8)
Stockholders' deficit:
Preferred stock, $50.00 par value; authorized 60,000 shares................... -- --
Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,817,808 and 3,817,812....................................... 38 38
Additional paid-in-capital.................................................... 51,794 51,794
Accumulated deficit........................................................... (61,827) (56,746)
-------- --------
Total stockholders' deficit...................................................... (9,995) (4,914)
-------- --------
Total liabilities and stockholders' deficit...................................... $ 22,845 $ 29,066
======== ========
</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 29 FEBRUARY 28 FEBRUARY 29 FEBRUARY 28
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES...................................... $ 3,790 $ 10,263 $ 13,922 $ 30,594
COSTS AND EXPENSES:
Healthcare operating expenses......................... 3,824 7,641 12,444 22,645
General and administrative expenses................... 1,767 2,250 5,744 6,475
Provision for (recovery of) doubtful accounts......... (76) 811 (575) 1,113
Restructuring expenses................................ 884 -- 884 --
Depreciation and amortization......................... 181 315 611 796
--------- --------- --------- ---------
6,580 11,017 19,108 31,029
--------- --------- --------- ---------
OPERATING LOSS FROM CONTINUING OPERATIONS BEFORE ITEMS
SHOWN BELOW............................................. (2,790) (754) (5,186) (435)
OTHER INCOME (EXPENSE):
Asset write-down/write-off............................ (10) -- -- (146)
Gain on sale of assets................................ 2 1 8 2
Loss on sale of assets................................ -- -- (1) (4)
Non-operating income/(expense)........................ -- -- 41 --
Interest income....................................... 90 55 326 189
Interest expense...................................... (79) (48) (267) (136)
--------- --------- --------- ---------
3 8 107 (95)
--------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (2,787) (746) (5,079) (530)
Income tax benefit (expense)............................ -- 10 (2) (20)
--------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS......................... (2,787) (736) (5,081) (550)
DISCONTINUED OPERATIONS:
Loss from operations, less applicable income tax
expense of $0....................................... -- -- -- (583)
Estimated loss on disposal, including provision for
operating losses through disposal date, less
applicable income tax expense of $0................. -- (783) -- (853)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM.......................... (2,787) (1,519) (5,081) (1,986)
EXTRAORDINARY GAIN, NET OF TAXES OF $0.................. -- -- -- 120
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS............ $ (2,787) $ (1,519) $ (5,081) $ (1,866)
========= ========= ========= =========
BASIC AND DILUTED EARNINGS PER SHARE:
Loss from continuing operations......................... $ (0.73) $ (0.21) $ (1.33) $ (0.16)
Discontinued operations:
Loss from operations.................................. -- -- -- (0.17)
Estimated loss on disposal............................ -- (0.22) -- (0.25)
Extraordinary item...................................... -- -- -- 0.03
--------- --------- --------- ---------
NET LOSS................................................ $ (0.73) $ (0.43) $ (1.33) $ (0.55)
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FEBRUARY 29 FEBRUARY 28
2000 1999
----------- -----------
(Amounts in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations before extraordinary item.................... $ (5,081) $ (550)
ADJUSTMENTS TO RECONCILE LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization................................................ 611 796
Asset write-down/write-off................................................... 10 146
Provision for doubtful accounts.............................................. -- 1,113
Gain on sale of assets....................................................... (8) (1)
Loss on sale of assets....................................................... 1 4
Restructuring expense........................................................ 144 --
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable.......................................................... 604 (262)
Accounts receivable - pharmacy and laboratory costs.......................... -- (4,329)
Other current assets, restricted funds, and other non-current assets......... 320 (670)
Accounts payable and accrued liabilities..................................... (56) (634)
Accrued claims payable....................................................... (1,120) (1,390)
Accrued pharmacy and laboratory costs payable................................ -- 4,199
Income taxes payable......................................................... (35) (74)
Other liabilities............................................................ 13 (137)
-------- --------
NET CASH USED IN CONTINUING OPERATIONS..................................... (4,597) (1,789)
NET CASH USED IN DISCONTINUED OPERATIONS................................... -- (1,744)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES...................................... (4,597) (3,533)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property and equipment............................. 137 1,766
Payment received on note receivable.......................................... 19 --
Additions to property and equipment.......................................... (104) (615)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES.................................. 52 1,151
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock................................... -- 155
Repayment of debt............................................................ (2) (1)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........................ (2) 154
-------- --------
Net decrease in cash and cash equivalents...................................... (4,547) (2,228)
Cash and cash equivalents at beginning of period............................... 8,026 6,016
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 3,479 $ 3,788
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
NOTE 1 -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet as of February 29, 2000, and the
related consolidated statements of operations and cash flows for the three and
nine months ended February 29, 2000 and February 28, 1999 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 nine months ended February 29, 2000 are not
necessarily indicative of the results to be expected during the balance of the
fiscal year.
The consolidated financial statements do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. The balance sheet at May 31, 1999 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statement presentation. Notes to consolidated financial
statements included in Form 10-K for the year ended May 31, 1999 on file with
the Securities and Exchange Commission provide additional disclosures and a
further description of accounting policies.
The Company's financial statements are presented on the basis that it
is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recovery and classification of assets or the amount and
classification of liabilities that may result from the outcome of the
uncertainties described in Note 2 -- "Liquidity and Capital Resources".
The accrued claims payable liability represents the estimated ultimate
net amounts owed for all behavioral healthcare services provided through the
respective balance sheet dates. The unpaid claims liability is estimated using
an actuarial paid completion factor methodology and other statistical analyses.
These estimates are subject to the effects of trends in utilization and other
factors. Although considerable variability is inherent in such estimates,
management believes that the unpaid claims liability is adequate. The estimates
are continually reviewed and adjusted as experience develops or new information
becomes known, with adjustments included in current operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates. Certain
amounts for Fiscal 2000 and Fiscal 1999 have been reclassified to conform to
the Fiscal 2000 presentation. These reclassifications had no effect on the
previously reported results of operations or stockholders' deficit.
NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES
At February 29, 2000, the Company had unrestricted cash and cash
equivalents of $3.5 million. During the nine months ended February 29, 2000,
the Company used $4.6 million in operations. Net Cash provided by investing
activities totaled $0.1 million for the nine months ended February 29, 2000.
The Company reported a loss of $5.1 million from continuing operations for the
nine months ended February 29, 2000, compared to the loss of $0.6 million from
continuing operations for the nine months ended February 28, 1999. The Company
has an accumulated deficit of $61.8 million and total stockholders' deficit of
$10.0 million as of February 29, 2000. Additionally, the Company's current
assets at February 29, 2000 amounted to approximately $18.9 million and current
liabilities were approximately $30.4 million, resulting in a working capital
deficiency of approximately $11.5 million. The working capital deficiency
referred to above results primarily from a $12.1 million liability related to
Federal income tax refunds received in prior years. The ultimate outcome of the
Internal Revenue Service audit whereby it is seeking recovery of the refunds
from the Company, including the amount to be repaid, if any, and the timing
thereof, is not determinable (see Note 5 --"Income Taxes").
The Company cannot state with any degree of certainty whether any
required additional equity or debt financing to meet its obligations will be
available to it during Fiscal 2000 and, if available, that the source of
financing would be available on terms and conditions acceptable to the Company.
6
<PAGE> 7
The above conditions raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustment that may result from the outcome of
this uncertainty.
During Fiscal 1999 and continuing during the first nine months of
Fiscal 2000, management has taken steps to reduce costs and conserve cash,
including making significant staff reductions. Additionally, the Company
disposed of its hospital business segment during Fiscal 1999. This has allowed
the Company to direct its available resources toward the managed behavioral
care business, which is its chief focus. The Company's continuation as a going
concern is dependent upon its ability to obtain additional financing as may be
required and, ultimately, to attain profitability.
NOTE 3 -- MAJOR CUSTOMERS/CONTRACTS
(1) During Fiscal 1999, the Company provided services to members of Humana
Health Plans of Puerto Rico, Inc. ["Humana of Puerto Rico" (successor
in interest to PCA Health Plans of Puerto Rico, Inc.)] under the terms
of management service agreements entered into pursuant to healthcare
contracts awarded to Humana of Puerto Rico by the Puerto Rico
Insurance Administration. These contracts expired on March 31, 1999,
with an extension period that ended April 30, 1999. For the fiscal
year ended May 31, 1999, these agreements accounted for approximately
44%, or $17.1 million, of the Company's operating revenues from
continuing operations.
Additionally, the contract with Humana established an amount that was
withheld from Humana's monthly remittances to the Company to cover
pharmacy and laboratory costs that are the financial responsibility of
the Company, but were administered by Humana. Because of the
uncertainty surrounding the determination of the actual pharmacy and
laboratory costs incurred, the Company has reported the contract at a
100% loss ratio for the contract to date pending clarification of the
actual costs incurred. As a result, the Company has reported $10.5
million as accounts receivable and accrued claims payable in the
accompanying balance sheet at February 29, 2000. During Fiscal 1999,
Humana sent written notice to the Company that the Company owed $3.0
million to Humana in connection with these pharmacy and laboratory
costs. The Company has expressed to Humana its total disagreement with
Humana's position. The Company believes that Humana owes the Company
in excess of $3.0 million in relation to this same issue. Efforts are
being made to work with Humana to resolve the uncertainty.
The Company also has contracts with Humana Health Plans ("Humana")
under which it provides services to members in Florida. For the nine
months ended February 29, 2000, the Florida, Humana contracts
accounted for 32.8%, or $4.6 million, of the Company's operating
revenues from continuing operations compared to 15.3%, or $5.2
million, for the nine months ended February 28, 1999. As of February
29, 2000, the Company provides services to approximately 150,000
members that are covered under the Humana plans in Florida. The
Company renewed these contracts for two years, with effective dates of
April 1, 1999.
(2) The Company currently has two contracts with one HMO to provide
behavioral healthcare services to contracted members in Texas. These
combined contracts represented approximately 11.3% and 5.3% of the
Company's operating revenue from continuing operations for the nine
months ended February 29, 2000 and February 28, 1999, respectively.
The Company recently renewed these contracts for two years, with
effective dates of February 8, 2000.
(3) The Company currently has two contracts with one HMO to provide
behavioral healthcare services to contracted members in Texas. These
combined contracts represented approximately 5.9% and 3.3% of the
Company's operating revenue from continuing operations for the nine
months ended February 29, 2000 and February 28, 1999, respectively.
The Company received written notice from this HMO that these two
contracts will remain in effect through August 31, 2000 and that, as
of September 1, 1999, this HMO had selected another behavioral
healthcare company to manage care for the members covered under four
contracts that were previously managed by the Company. The HMO cited
their obligation to another behavioral healthcare company, under terms
and conditions that are tied to an acquisition, as the reason for
cancellation of these contracts. During the nine months ended February
29, 2000 and February 28, 1999, the six contracts with this HMO
accounted for operating revenue from continuing operations of
approximately 8.0% and 6.1%, respectively.
7
<PAGE> 8
(4) During the quarter ended February 29, 2000, the Company had one
contract with one HMO to provide behavioral healthcare services to
contracted members in Indiana. This contract, which represented
approximately 8.0% and 3.5% of operating revenue from continuing
operations for the nine months ended February 29, 2000 and February
28, 1999, respectively, was terminated effective December 31, 1999.
(5) During the quarter ended February 29, 2000, the Company had three
contracts with one HMO to provide behavioral healthcare services to
contracted members in Texas. These contracts represented approximately
6.7% and 1.3% of operating revenue from continuing operations for the
nine months ended February 29, 2000 and February 28, 1999,
respectively. These contracts were not renewed by the HMO and, as a
result, terminated December 31, 1999.
NOTE 4 - RESTRUCTURING RESERVE
During the quarter ended February 29, 2000, a restructuring reserve
was established in the amount of $900,000 for the purpose of completing
management's plan to restructure corporate operations, which included the
elimination of the Company's California office and the three affiliated
employees. The following table sets forth the activity during the quarter ended
February 29, 2000:
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 1, PAYMENTS/ FEBRUARY 29,
1999 EXPENSE CHARGES 2000
(Amounts in thousands)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RESTRUCTURING:
Severance and separation benefits ................... $ -- $ 725 $(720) $ 5
Write-off of California assets(1) ................... -- 110 (111) (1)
Other closing costs ............................... -- 65 (13) 52
---- ----- ----- -----
Totals ................................................ $ -- $ 900 $(844) $ 56
Puerto Rico and other prior reserves ................. 284 (16) (91) 177
---- ----- ----- -----
Totals ................................................ $284 $ 884 $(935) $ 233(2)
==== ===== ===== =====
</TABLE>
(1) Includes $90,000 reserved for write-off of leasehold improvements.
(2) Included in Accounts payable and accrued liabilities at February 29, 2000.
NOTE 5 -- INCOME TAXES
The Company's provision for income taxes differs from the statutory
rate of 34% due, primarily, to the Company's increased valuation allowance for
losses generated during the three months ended February 29, 2000 and February
28, 1999.
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.
8
<PAGE> 9
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 $4.9 million
through February 29, 2000. Accordingly, the Company would be entitled to a
repayment of the fees advanced to its tax advisor relating to these refund
claims of approximately $2.5 million of which $2.4 million is reported as
"other receivable" in the accompanying balance sheet. This report commenced the
administrative appeals process. The Company filed a protest letter with the IRS
on November 6, 1998 and believes that its position with respect to its right to
the tax refunds received will be upheld. The Company's tax advisor relating to
these refund claims has advised management that the administrative appeals
process could take twelve to eighteen months. In the event the Company wishes
to further protest the results of its administrative appeal, it may further
appeal to the United States Tax Court following the final determination of the
administrative appeal. The Company has been advised that a determination by the
United States Tax Court could take up to an additional twelve months from
commencement of the appeals process in the United States Tax Court. The IRS
reserves the right to assess and collect the tax previously refunded to the
Company at any time during the appeals process.
NOTE 6 -- DISCONTINUED OPERATIONS
During Fiscal 1999, the Company sold its Aurora, Colorado and Ft.
Worth, Texas facilities, which completed the disposal plan for its hospital
business segment.
9
<PAGE> 10
NOTE 7 -- 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 29 FEBRUARY 28 FEBRUARY 29 FEBRUARY 28
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator:
Loss from continuing operations .......................... $(2,787) $ (736) $(5,081) $ (550)
Discontinued Operations:
Loss from operations ..................................... -- -- -- (583)
Estimated loss on disposal ............................... -- (783) -- (853)
Extraordinary item ......................................... -- -- -- 120
------- ------- ------- -------
Net loss available to common stockholders after assumed
conversions .............................................. $(2,787) $(1,519) $(5,081) $(1,866)
======= ======= ======= =======
Denominator:
Weighted average shares .................................. 3,818 3,508 3,818 3,475
Effect of dilutive securities:
Employee stock options ................................... -- -- -- --
Convertible preferred stock .............................. -- -- -- --
------- ------- ------- -------
Dilutive potential common shares ......................... -- -- -- --
Denominator for diluted loss per share-adjusted
weighted-average shares after assumed conversions ...... 3,818 3,508 3,818 3,475
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER SHARE:
Loss from continuing operations ............................ $ (0.73) $ (0.21) $ (1.33) $ (0.16)
Discontinued operations:
Loss from operations ..................................... -- -- -- (0.17)
Estimated loss on disposal ............................... -- (0.22) -- (0.25)
Extraordinary item ......................................... -- -- -- 0.03
------- ------- ------- -------
Net loss ................................................... $ (0.73) $ (0.43) $ (1.33) $ (0.55)
======= ======= ======= =======
</TABLE>
The following number of potentially convertible shares of common stock
related to convertible debentures and stock options is as follows at February
29, 2000:
<TABLE>
<CAPTION>
<S> <C>
For conversion of convertible debentures................................... 9,044
Outstanding stock options.................................................. 1,009,701
Possible future issuance under stock options plans......................... 110,508
----------
Total.................................................................. 1,129,253
==========
</TABLE>
10
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NOTE 8 -- COMMITMENTS AND CONTINGENCIES
(1) During the quarter ended February 29, 2000, the Company renewed one
contract (the "Contract"), which included a requirement that the
Company maintains a $550,000 performance bond throughout the two-year
renewal term of the Contract. This bond was secured by a $150,000 cash
deposit, which is included in the non-current, restricted cash balance
at February 29, 2000. The term of the bond is for one year and the
bond is automatically renewable as long as the Contract remains in
force.
(2) On February 19, 1999, the California Superior Court denied the
Company's Petition for Writ of Mandate of an adverse administrative
appeal decision regarding application of the Maximum Inpatient
Reimbursement Limitation ("MIRL") to Medi-Cal reimbursement paid to
Brea Neuropsychiatric Hospital for its fiscal periods 1983 through
1986. This facility was owned by the Company until its disposal in
fiscal year 1991. The subject matter of the Superior Court action
involved the refusal of the administrative law judge to order further
reductions in the liability for costs associated with treating high
cost, long stay Medi-Cal patients, which are commonly referred to as
"outliers". The Company does not plan to appeal the California
Superior Court decision for which the Notice of Entry of Judgment was
entered on February 26, 1999. As of February 29, 2000, the Company has
$1.2 million accrued relating to this matter.
(3) On January 22, 1999, PMR Corporation ("PMR") commenced an action
against the Company in San Diego Superior Court. This action seeks
damages for alleged breach of a hospital management agreement in
connection with the Aurora, Colorado facility. The Complaint seeks
compensatory damages of approximately $455,000, plus interest and
attorneys' fees. The Superior Court ordered this case into arbitration
on March 26, 1999. PMR has filed a demand for arbitration of this
dispute before the American Arbitration Association, and the Company
has filed a counter-claim in the arbitration for PMR's alleged breach
of the same hospital management agreement and intends to actively
defend this action. The arbitration is scheduled to commence on May
22, 2000. The Company believes that it has good and meritorious
defenses to this action.
(4) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
Officer of the Company, commenced an action against the Company and
its former 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 case is
scheduled for trial on August 28, 2000. 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) With respect to the contingency related to prior years' income taxes,
see Note 5, "Income Taxes".
(6) With respect to the contingency related to the Humana claim, see Note
3, "Major Customers/Contracts".
From time to time, the Company and its subsidiaries are also parties
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims may exceed insurance policy
limits and the Company or a subsidiary may have exposure to a liability that is
not covered by insurance. Management believes that the outcome of such lawsuits
will not have a material adverse impact on the Company's financial statements.
REGULATORY MONITORING AND COMPLIANCE
The Company is subject to extensive and evolving state and federal
regulations. These regulations range from licensure and compliance with
regulations related to insurance companies and other risk-assuming entities, to
licensure and compliance with regulations related to healthcare providers.
These laws and regulations may vary considerably among states. As a result, the
Company may be subject to the specific regulatory approach adopted by each
state for the regulation of managed care companies and for providers of
behavioral healthcare treatment services.
Currently, management cannot quantify the potential effects of
additional regulation of the managed care industry, but such costs could have
an adverse effect on future operations to the extent that they are not able to
be recouped in future managed care contracts. Management believes that the
Company is currently in material compliance with the laws and regulations of
the jurisdictions in which it operates.
11
<PAGE> 12
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 16).
GENERAL
In response to continuing changes in the behavioral healthcare
industry, the Company has made significant changes in its operations, including
the divestiture of its hospital facilities that took place during Fiscal 1999.
For the nine months ended February 29, 2000, managed care operations
accounted for 96.5%, or $13.4 million, of the Company's operating revenues from
continuing operations. The following tables summarize the Company's financial
data for the three and nine months ended February 29, 2000 and February 28,
1999 (in thousands):
RESULT OF OPERATIONS
THE THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 28, 1999:
<TABLE>
<CAPTION>
CORPORATE AND CONSOLIDATED
THREE MONTHS ENDED OTHER CONTINUING DISCONTINUED
FEBRUARY 29, 2000 MANAGED CARE OPERATIONS OPERATIONS OPERATIONS
- ----------------------------------------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C>
Operating revenues $ 3,645 $ 145 $ 3,790 $ --
Healthcare operating expenses 3,677 147 3,824 --
General/administrative expenses 1,061 706 1,767 --
Restructuring expenses (9) 893 884 --
Other operating expenses 123 (18) 105 --
-------- -------- -------- -------
4,852 1,728 6,580 --
-------- -------- -------- -------
Operating loss $ (1,207) $ (1,583) $ (2,790) $ --
======== ======== ======== =======
<CAPTION>
CORPORATE AND CONSOLIDATED
THREE MONTHS ENDED OTHER CONTINUING DISCONTINUED
FEBRUARY 28, 1999 MANAGED CARE OPERATIONS OPERATIONS OPERATIONS
- ----------------------------------------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C>
Operating revenues $ 10,015 $ 248 $ 10,263 $ 872
Healthcare operating expenses 7,590 51 7,641 258
General/administrative expenses 1,306 944 2,250 --
Other operating expenses 1,076 50 1,126 782
-------- -------- -------- -------
9,972 1,045 11,017 1,040
-------- -------- -------- -------
Operating income (loss) $ 43 $ (797) $ (754) $ (168)
======== ======== ======== =======
</TABLE>
The Company reported an operating loss of approximately $2.8 million
from continuing operations for the quarter ended February 29, 2000, which is
primarily attributable to the loss of two major, managed care contracts during
the fourth quarter of Fiscal 1999. Additionally, this loss included
approximately $0.9 million of restructuring expenses in connection with the
elimination of the Company's California office and affiliated employees, and
$0.1 million of increased marketing and other costs specific to the Company's
efforts to regain business in Puerto Rico and in other regions. This is
compared to an operating loss of $0.8 million from continuing operations
reported 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 $0.3 million for costs incurred related to one proposal for
Argentina.
Operating revenues from continuing operations decreased by
approximately 63.1%, or $6.5 million, for the quarter ended February 29, 2000
compared to the quarter ended February 28, 1999. This decrease is primarily
attributable to the loss of two major, managed care contracts during the fourth
quarter of Fiscal 1999.
Healthcare operating expenses from continuing operations decreased by
50.0%, or $3.8 million, for the quarter ended February 29, 2000 as compared to
the quarter ended February 28, 1999. This decrease is attributable to the loss
of revenue specific to two major, managed care contracts that terminated during
the fourth quarter of Fiscal 1999. Healthcare operating expense as a percentage
of net revenue from continuing operations increased
12
<PAGE> 13
from 74.5% for the quarter ended February 28, 1999 to 100.9% for the quarter
ended February 29, 2000. This percentage increase is attributable to $0.2
million of claims expense recorded during the quarter ended February 29, 2000
specific to the Puerto Rico contract, which terminated in Fiscal 1999.
Additionally, this percentage increase is attributable to continuing fixed
costs that cannot be tied to the specific contracts that were terminated during
Fiscal 1999. Efforts are being made to reduce the overall costs to manage the
Company's existing contracts, including cost reductions related to managing the
Company's healthcare information systems and, also, the centralization of
certain contract management and clinical functions, which was completed during
February, 2000.
General and administrative expenses from continuing operations
decreased by approximately 21.5%, or $0.5 million, for the quarter ended
February 29, 2000 as compared to the quarter ended February 28, 1999. This
decrease is primarily attributable to $0.2 million of savings in legal costs,
$0.2 million of savings in corporate salaries, and a $0.1 million reduction in
building lease costs in comparison to costs incurred for the same period during
Fiscal 1999. General and administrative costs as a percentage of revenue
increased from 21.9% for the quarter ended February 28, 1999 to 46.6% for the
quarter ended February 29, 2000. This percentage increase is attributable to
the continuing fixed costs that cannot be tied to the specific contracts that
were terminated during Fiscal 1999. The Company has taken steps to reduce its
general and administrative costs by making significant staff reductions,
including certain executive and staff positions that were eliminated as a
result of the decision to close the Company's California office effective
January 31, 2000.
Other operating expenses from continuing operations decreased by $1.0
million for the quarter ended February 29, 2000 compared to the quarter ended
February 28, 1999. This decrease is primarily attributable to the $0.8 million
of bad debt expense recognized during the quarter ended February 28, 1999
specific to the two major, managed care contracts that terminated during Fiscal
1999.
THE NINE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THE NINE MONTHS ENDED
FEBRUARY 28, 1999:
<TABLE>
<CAPTION>
CORPORATE AND CONSOLIDATED
NINE MONTHS ENDED OTHER CONTINUING DISCONTINUED
FEBRUARY 29, 2000 MANAGED CARE OPERATIONS OPERATIONS OPERATIONS
- ----------------------------------------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C>
Operating revenues $ 13,431 $ 491 $ 13,922 $ --
Healthcare operating expenses 11,971 473 12,444 --
General/administrative expenses 3,682 2,062 5,744 --
Restructuring expenses (9) 893 884 --
Other operating expenses 206 (170) 36 --
---------- --------- ---------- --------
15,850 3,258 19,108 --
---------- --------- ---------- --------
Operating loss $ (2,419) $ (2,767) $ (5,186) $ --
========== ========= ========== ========
<CAPTION>
CORPORATE AND CONSOLIDATED
NINE MONTHS ENDED OTHER CONTINUING DISCONTINUED
FEBRUARY 28, 1999 MANAGED CARE OPERATIONS OPERATIONS OPERATIONS
- ----------------------------------------- ------------ -------------- ---------- ------------
<S> <C> <C> <C> <C>
Operating revenues $ 29,764 $ 830 $ 30,594 $ 3,236
Healthcare operating expenses 22,322 323 22,645 2,900
General/administrative expenses 3,554 2,921 6,475 16
Other operating expenses 1,736 173 1,909 1,321
---------- --------- ---------- ----------
27,612 3,417 31,029 4,237
---------- --------- ---------- ----------
Operating income (loss) $ 2,152 $ (2,587) $ (435) $ (1,001)
========== ========= ========== ==========
</TABLE>
The Company reported an operating loss from continuing operations of
approximately $5.2 million for the nine months ended February 29, 2000, which
is primarily attributable to the loss of two major, managed care contracts
during the fourth quarter of Fiscal 1999. Additionally, this loss included
approximately $0.9 million of restructuring expenses in connection with the
elimination of the Company's California office and affiliated employees,
approximately $0.6 million of increased marketing and other costs specific to
the Company's efforts to regain business in Puerto Rico and in other regions,
approximately $0.1 million of operating costs incurred to manage the Company's
Year 2000 readiness program, and approximately $0.1 million of costs in
connection with the NCQA accreditation. This is compared to an operating loss
from continuing operations of $0.4 million reported 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.
13
<PAGE> 14
Operating revenues from continuing operations decreased by
approximately 54.5%, or $16.7 million, for the nine months ended February 29,
2000 compared to the nine months ended February 28, 1999. This decrease is
primarily attributable to the loss of two major, managed care contracts during
the fourth quarter of Fiscal 1999.
Healthcare operating expenses from continuing operations decreased by
45.0%, or $10.2 million, for the nine months ended February 29, 2000 as
compared to the nine months ended February 28, 1999. This decrease is
attributable to the loss of revenues specific to two major contracts that
terminated during Fiscal 1999. Healthcare operating expense as a percentage of
net revenue from continuing operations increased from 74.0% for the nine months
ended February 28, 1999 to 89.4% for the nine months ended February 29, 2000.
This percentage increase is attributable to $0.3 million of claims expense
recorded during the nine months ended February 29, 2000 specific to the Puerto
Rico contract, which terminated in Fiscal 1999. Additionally, this percentage
increase is attributable to continuing fixed costs that cannot be tied to the
specific contracts that were terminated during Fiscal 1999. Efforts are being
made to reduce the overall costs to manage the Company's existing contracts,
including cost reductions related to managing the Company's healthcare
information systems and, also, the centralization of certain contract
management and clinical functions, which was completed during February 2000.
General and administrative expenses from continuing operations
decreased by approximately 11.3%, or $0.7 million, for the nine months ended
February 29, 2000 as compared to the nine months ended February 28, 1999. This
decrease is primarily attributable to $0.7 million of savings in legal and
audit fees in comparison to the legal and audit fees recorded for the same
period during Fiscal 1999. General and administrative costs as a percentage of
revenue increased from 21.2% for the nine months ended February 28, 1999 to
41.3% for the nine months ended February 29, 2000. This percentage increase is
attributable to the continuing fixed costs that cannot be tied to the specific
contracts that were terminated during Fiscal 1999. Efforts have been made to
reduce the general and administrative costs during the remaining months of
Fiscal 2000, including the elimination in February 2000 of all costs associated
with operating the California office.
Other operating expenses from continuing operations decreased by $1.9
million for the nine months ended February 29, 2000 compared to the nine months
ended February 28, 1999. This decrease is primarily attributable to the $1.1
million of bad debt expense recognized during the nine months ended February
28, 1999 specific to the two major, managed care contracts that terminated
during Fiscal 1999. Additionally, the Company recognized $0.2 million of bad
debt recoveries specific to the discontinued operations, $0.2 million of bad
debt recoveries specific to the Puerto Rico contract performance guarantees,
and $0.1 million of bad debt recoveries specific to one managed care contract
during the nine months ended February 29, 2000.
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. The Company has also made significant staff
reductions, including certain executive and staff positions that were
eliminated as a result of the decision to close the Company's California
office. Additionally, the company recently completed its centralization effort,
which involved the consolidation of specific management and clinical functions.
The Company expects annual savings of, approximately, $1.6 million from these
centralization efforts and from cost savings associated with the elimination of
the Company's California office.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Year 2000 problem exists because many computer programs were
designed and developed without considering the upcoming change in century.
Historically, certain computerized systems have been designed to have two-digit
rather than four-digit fields to define the applicable year and this could mean
that many computer programs are unable to distinguish between the year 1900 and
the year 2000 when a date of "00" is used for the applicable year. Potential
problems could exist for both information technology systems ("IT") and non-IT
systems. Non-IT systems typically include embedded technology, such as
micro-controllers, and may include equipment ranging from telephone switches
and fax machines to copy machines. Any failure to correct a Year 2000 problem
could result in an interruption in certain normal business activities or
operations due to errors or system failures.
The Company developed a compliance program ("Plan") which used 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 was
treated separately in the Plan. 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.
14
<PAGE> 15
The Company completed the Remediation, Testing, and Implementation
phases of its project for Mission Critical systems in September 1999, with
ongoing project management and, also, maintenance of the vendor compliance
process.
The Company also completed implementation for all regional offices to
its new clinical operating system (TXEN). The system was purchased from Nichols
Research Corporation and has been certified Year 2000 compliant. The
implementation occurred ahead of the scheduled implementation date of September
30, 1999. The Company has also completed full remediation and testing of its
main financial and accounting system. Additionally, the Company has also
completed assessment of its mission critical systems, equipment and
infrastructure.
As of April 12, 2000, there has been no disruption of normal business
activities or system failures experienced by the Company. The Company is
continuing to address the potential impact of Year 2000 on its non-essential
information systems, its other equipment that may be affected by the Year 2000,
and the impact of transacting business with parties who do not have Year 2000
compliant systems. The Company has completed mailing of its Year 2000 survey to
all business partners, manufacturers of the Company's non-essential business
equipment, and other trade vendors. The Company has continued its vendor
compliance program by mailing surveys to all health providers that are utilized
by the Company. The Company cannot state with any certainty whether their
suppliers, vendors and data exchange partners will remain compliant even if
they have stated compliance in previous communications. Even though the Company
will observe `On-going Vigilance' for Year 2000 problems, they cannot ensure
that their vendors, providers, and manufacturers will be as vigilant.
During the nine months ended February 29, 2000, the Company recognized
approximately $0.1 million in expense specific to its Year 2000 compliance
program which has been paid to consultants or vendors providing services or
equipment for the Company's compliance program. Additionally, the Company paid
approximately $0.1 million that was recorded as capital expenditures during the
nine months ended February 29, 2000.
The following chart provides a summary of the Company's actual
expenditures to date related to its Year 2000 Plan. As of February 29, 2000,
there are no future expected costs related to the Company's Year 2000 Plan.
<TABLE>
<CAPTION>
ACTUAL COSTS
INCURRED AT
FEBRUARY 29, 2000
------------------
<S> <C>
Capital expenditures................................. $ 825,000
Operating expense.................................... 238,000
----------
Total................................................ $ 1,063,000
==========
</TABLE>
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.
15
<PAGE> 16
RISK FACTORS
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements that are based on current expectations and involve a number of risks
and uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the Company's success in (i)
expanding the managed behavioral healthcare operations, (ii) effective
management in the delivery of services, (iii) risk and utilization in context
of capitated payouts, and (iv) retaining certain refunds from the IRS.
CONCENTRATION OF RISK
The Company currently has nine (9) contracts with five HMOs to provide
behavioral healthcare services under commercial, Medicaid, and Medicare plans,
to contracted members in Florida, Michigan and Texas. These combined contracts
represent approximately 60.0% and 27.0% of the Company's operating revenue from
continuing operations for the nine months ended February 29, 2000 and February
28, 1999, respectively. The terms of each contract are generally for one-year
periods and are automatically renewable for additional one-year periods unless
terminated by either party. As of February 29, 2000, the Company had received
notice from one Texas HMO that two contracts with the Company will not be
renewed effective August 31, 2000. These contracts accounted for approximately
8.0% and 3.0% of the Company's operating revenues from continuing operations
for the nine months ended February 29, 2000 and February 28, 1999,
respectively.
UNCERTAINTY OF FUTURE PROFITABILITY
As of February 29, 2000, the Company had stockholders' deficit of
$10.0 million and a working capital deficiency of approximately $11.5 million.
The Company had a net loss for the nine months ended February 29, 2000 of $5.1
million. There can be no assurance that the Company will be able to achieve and
sustain profitability or that the Company can achieve and maintain positive
cash flow on an ongoing basis. Present results of operations are not
necessarily indicative of anticipated future results of operations.
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING
During prior fiscal years, a principal source of liquidity has been
the sale of hospital properties and equipment that, as of March 11, 1999, have
been entirely disposed of.
The Company has received tax refunds for fiscal 1995 and 1996 in the
amounts of $9.4 million and $5.4 million, respectively. Such refunds are based
on loss carrybacks under Section 172(f) of the Internal Revenue Code. Any IRS
claim for return of all or any portion thereof could have an adverse effect on
the Company's cash flows. On August 21, 1998, the Company received an
examination report from the IRS, dated August 6, 1998, related to its Section
172(f) carryback claims and amended tax returns for prior years, claiming taxes
due totaling approximately $12.4 million for which the Company has accrued
$12.1 million as of February 29, 2000. 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 appeals process, the Company is entitled to
a repayment of fees advanced to the Company's tax advisor relating to these
refund claims, totaling approximately $2.5 million. The IRS reserves the right
to assess and collect the tax previously refunded to the Company at any time
during the appeals process.
TAXES
In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund to carry
back losses described in Section 172(f) of the 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.
16
<PAGE> 17
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. 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 $4.9 million
through February 29, 2000. Accordingly, the Company would be entitled to a
repayment of the fees advanced to its tax advisor relating to these refund
claims of approximately $2.5 million of which $2.4 million is reported as
"other receivable" in the accompanying balance sheet. This report commences the
administrative appeals process. The Company filed a protest letter with the IRS
on November 6, 1998 and believes that its position with respect to its right to
the tax refunds received will be upheld. The Company's tax advisor relating to
these refund claims has advised management that the administrative appeals
process could take twelve to eighteen months. In the event the Company wishes
to further protest the results of its administrative appeal, it may further
appeal to the United States Tax Court following the final determination of the
administrative appeal. The Company has been advised that a determination by the
United States Tax Court could take up to an additional twelve months from
commencement of the appeals process in the United States Tax Court. The IRS
reserves the right to assess and collect the tax previously refunded to the
Company at any time during the appeals process.
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS
Managed care operations are at risk for costs incurred to supply
agreed upon levels of service. Failure to anticipate or control costs could
have material, adverse effects on the Company. Additionally, the business of
providing services on a full-risk capitation basis exposes the Company to the
additional risk that contracts negotiated and entered into may ultimately be
determined to be unprofitable if utilization levels require the Company to
deliver and provide services at capitation rates which do not account for or
factor in such utilization levels.
The levels of revenues and profitability of healthcare companies may
be affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to
be, a number of federal and state proposals to implement governmental controls
on the price of healthcare. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business and no assurance can be given that any such reforms will not
have a material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has issued or committed to issue 9,000 shares related to
the 7 1/2% convertible subordinated debentures due April 15, 2010, and options
or other rights to purchase approximately 1,120,000 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.
17
<PAGE> 18
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 29, 2000, there are no
outstanding shares of Preferred Stock. The Company's Restated Certificate of
Incorporation also provides for a classified board of directors with directors
divided into three classes serving staggered terms. The Company's stock option
plans generally provide for the acceleration of vesting of options granted
under such plans in the event of certain transactions which result in a change
of control of the Company. Section 203 of the General Corporation Law of
Delaware prohibits the Company from engaging in certain business combinations
with interested stockholders. In addition, each share of the Company's Common
Stock includes one right on the terms and subject to the conditions of the
Rights Agreement between the Company and Continental Stock Transfer & Trust
Company. These provisions may have the effect of delaying or preventing a
change in control of the Company without action by the stockholders and
therefore could adversely affect the price of the Company's Common Stock or the
possibility of sale of shares to an acquiring person.
LIMITATIONS ON THE DEDUCTIBILITY OF COMPENSATION UNDER CERTAIN CIRCUMSTANCES
Pursuant to the 1993 Omnibus Budget Reconciliation Act, a portion of
annual compensation payable after 1993 to any of the Company's five highest
paid executive officers would not be deductible by the Company for federal
income tax purposes to the extent such officers' overall compensation exceeds
$1.0 million per executive officer. Qualifying performance-based incentive
compensation, however, would be both deductible and excluded for purposes of
calculating the $1.0 million base. The Board of Directors has determined that
no portion of anticipated compensation payable to any executive officer in
Fiscal 2000 would be non-deductible.
Assumptions relating to the foregoing involve judgments that are
difficult to predict accurately and are subject to many factors that can
materially affect results. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and
periodic revisions based on actual experience and business developments, the
impact of which may cause the Company to alter its budgets which may in turn
affect the Company's results. In light of the factors that can materially
affect the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.
18
<PAGE> 19
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
(1) In May, 1999, the Company commenced an action against Richard Powers,
a former Executive Vice President of the Company, and his current
employer, American Psych Systems ("APS"), in the Circuit Court in and
for Hillsborough County, Florida. The Company claims that Mr. Powers
breached his agreements with the Company by attempting to divert
customers to APS. The Company further claims that APS tortuously
interfered with the Company's business relationships by directing
Powers to solicit these customers in violation of his agreements. The
suit is still in its early stages. The Court has denied a motion to
dismiss filed by Powers and APS, and the parties have begun the
discovery process. The complaint seeks unspecified damages.
(2) Although no formal claim has been made or asserted, Humana Health
Plans of Puerto Rico, Inc. ("Humana") has claimed that the Company
owes $3.0 million to Humana in connection with the contract that was
terminated by Humana on March 31, 1999. Humana's claim relates to the
pharmacy and laboratory costs incurred by Humana throughout the
contract period. The Company has expressed to Humana its total
disagreement with Humana's position. The Company believes that Humana
owes the Company in excess of $3.0 million in relation to this same
issue; however, the Company has not formally asserted such claim. The
Company does not believe that Humana's claim will have a material
adverse effect on the Company's financial position, results of
operations and cash flows.
(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 29, 2000, the Company has
$1.2 million accrued relating to this matter.
(4) On January 22, 1999, PMR Corporation ("PMR") commenced an action
against the Company in San Diego Superior Court. This action seeks
damages for alleged breach of a hospital management agreement in
connection with the Aurora, Colorado facility. The Complaint seeks
compensatory damages of approximately $455,000, plus interest and
attorneys' fees. The Superior Court ordered this case into arbitration
on March 26, 1999. PMR has filed a demand for arbitration of this
dispute before the American Arbitration Association, and the Company
has filed a counter-claim in the arbitration for PMR's alleged breach
of the same hospital management agreement. The Company intends to
actively defend this action. The arbitration is scheduled to commence
on May 22, 2000. The Company believes that it has good and meritorious
defenses to this action.
(5) 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, 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.
19
<PAGE> 20
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 $4.9 million through February 29, 2000.
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.
(6) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
Officer of the Company, commenced an action against the Company and
its former 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 case is
scheduled for trial on August 28, 2000. The Company has denied its
liability and has denied the principal allegations of the complaint.
The Company believes that it has good and meritorious defenses to this
action.
From time to time, the Company and its subsidiaries are also parties
to and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims may 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.
20
<PAGE> 21
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of the Company's Annual Shareholders' Meeting, which was
held on December 10, 1999, were reported in the Company's current report on
Form 8-K, dated December 20, 1999.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedules (filed herewith) (for SEC use
only).
(b) Reports on Form 8-K
1) The Company filed a current report on Form 8-K, dated
December 20, 1999, to report under Item 5 the results of
its Annual Meeting of Stockholders which included the
election of one Class II Director to the Company's Board
of Directors.
2) The Company filed a current report on Form 8-K, dated
January 18, 2000, to report under Item 5 that the
Company had determined to eliminate its California
office and affiliated employees and that, in connection
with this change, the Company elected to terminate the
employment of its President and Chairman, Chriss W.
Street. Additionally, the Company reported the election
of Robert J. Landis as Chairman of the Board of
Directors, the election of Mary Jane Johnson as
President and Chief Executive Officer of the Company,
and the election of Cathy J. Welch as Secretary of the
Company.
21
<PAGE> 22
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 14, 2000 By:
/s/ ROBERT J. LANDIS
--------------------------------
Robert J. Landis
Chairman of the Board and
Chief Financial Officer
22
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