<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended November 30, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
--------------- --------------
Commission File Number 1-9927
------
COMPREHENSIVE CARE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2594724
- ---------------------------------- ---------------------------------
(State or other jurisdiction (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 January 7, 2000
- -------------------------------------- ------------------------------
Common Stock, par value $.01 per share 3,817,812
<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1-- CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets,
November 30, 1999 and May 31, 1999.......................................3
Consolidated Statements of Operations for
the Three and Six Months ended November 30, 1999 and 1998................4
Consolidated Statements of Cash Flows for
the Six Months ended November 30, 1999 and 1998..........................5
Notes to Consolidated Financial Statements.....................................6-11
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................12-19
PART II - OTHER INFORMATION
ITEM 1-- LEGAL PROCEEDINGS............................................................20-21
ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................22
ITEM 6-- EXHIBITS AND REPORTS ON FORM 8-K................................................22
SIGNATURES................................................................................23
</TABLE>
2
<PAGE> 3
PART I. - FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1999 1999
------------ ----------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 5,506 $ 8,026
Restricted cash ......................................................... 1,716 --
Accounts receivable, less allowance for doubtful accounts of $692 and
$923 .................................................................. 323 932
Accounts receivable - pharmacy and laboratory costs ..................... 10,469 10,469
Other receivable ........................................................ 2,415 2,415
Other current assets .................................................... 573 614
-------- --------
Total current assets ....................................................... 21,002 22,456
-------- --------
Property and equipment ..................................................... 4,366 4,296
Less accumulated depreciation .............................................. (2,697) (2,326)
-------- --------
Net property and equipment ................................................. 1,669 1,970
-------- --------
Non-current assets:
Notes receivable ........................................................ 1,159 1,172
Goodwill, net ........................................................... 1,044 1,080
Restricted cash ......................................................... 79 1,923
Other assets ............................................................ 429 465
-------- --------
Total non-current assets ................................................... 2,711 4,640
-------- --------
Total assets ............................................................... $ 25,382 $ 29,066
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities ................................ $ 4,199 $ 4,552
Accrued claims payable .................................................. 3,324 4,369
Accrued pharmacy and laboratory costs payable ........................... 10,469 10,469
Current maturities of long-term debt .................................... 3 3
Unbenefitted tax refunds received ....................................... 12,092 12,092
Income taxes payable .................................................... 60 76
-------- --------
Total current liabilities .................................................. 30,147 31,561
-------- --------
Long-term liabilities:
Long-term debt, excluding current maturities ............................ 2,252 2,253
Other liabilities ....................................................... 191 166
-------- --------
Total long-term liabilities ................................................ 2,443 2,419
-------- --------
Total liabilities .......................................................... 32,590 33,980
-------- --------
Commitments and Contingencies (see Note 3 and Note 7)
Stockholders' deficit:
Preferred stock, $50.00 par value; authorized 60,000 shares ............. -- --
Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,817,812 and 3,817,812 ................................. 38 38
Additional paid-in-capital .............................................. 51,794 51,794
Accumulated deficit ..................................................... (59,040) (56,746)
-------- --------
Total stockholders' deficit ................................................ (7,208) (4,914)
-------- --------
Total liabilities and stockholders' deficit ................................ $ 25,382 $ 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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES ................................................. $ 4,882 $ 10,215 $ 10,132 $ 20,331
COSTS AND EXPENSES:
Healthcare operating expenses ...................................... 4,539 7,532 8,620 15,004
General and administrative expenses ................................ 1,888 2,453 3,977 4,225
Provision for doubtful accounts .................................... (163) 243 (499) 302
Depreciation and amortization ...................................... 215 246 430 481
-------- -------- -------- --------
6,479 10,474 12,528 20,012
-------- -------- -------- --------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS ................. (1,597) (259) (2,396) 319
OTHER INCOME (EXPENSE)
Asset write-down ................................................... -- (146) -- (146)
Gain on sale of assets ............................................. 6 1 6 1
Loss on sale of assets ............................................. (1) (4) (1) (4)
Non-operating income/(expense) ..................................... 51 -- 51 --
Interest income .................................................... 116 63 236 134
Interest expense ................................................... (119) (42) (188) (88)
-------- -------- -------- --------
53 (128) 104 (103)
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ....... (1,544) (387) (2,292) 216
Income tax expense ................................................. (2) (15) (2) (30)
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ........................... (1,546) (402) (2,294) 186
DISCONTINUED OPERATIONS:
Loss from operations, less applicable income tax expense of $0 ... -- (454) -- (583)
Estimated loss on disposal, including provision for operating
losses through disposal date, less applicable income tax
expense of $0 .................................................. -- (70) -- (70)
-------- -------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM ..................................... (1,546) (926) (2,294) (467)
EXTRAORDINARY GAIN, NET OF TAXES OF $0 ............................. -- -- -- 120
-------- -------- -------- --------
NET LOSS ........................................................... (1,546) (926) (2,294) (347)
Dividends on convertible preferred stock ........................... -- (21) -- (42)
-------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ....................... $ (1,546) $ (947) $ (2,294) $ (389)
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ........................... $ (0.41) $ (0.12) $ (0.60) $ 0.04
Discontinued operations:
Loss from operations ............................................. -- (0.13) -- (0.17)
Estimated loss on disposal ....................................... -- (0.02) -- (0.02)
Extraordinary item ................................................. -- -- -- 0.03
-------- -------- -------- --------
NET LOSS ........................................................... $ (0.41) $ (0.27) $ (0.60) $ (0.12)
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ........................... $ (0.41) $ (0.12) $ (0.60) $ 0.04
Discontinued operations:
Loss from operations ............................................. -- (0.13) -- (0.17)
Estimated loss on disposal ....................................... -- (0.02) -- (0.02)
Extraordinary item ................................................. -- -- -- 0.03
-------- -------- -------- --------
NET LOSS ........................................................... $ (0.41) $ (0.27) $ (0.60) $ (0.12)
======== ======== ======== ========
</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,
1999 1998
---- ----
(Amounts in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations before extraordinary item .. $(2,294) $ 186
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization ........................................... 430 481
Asset write-down ........................................................ -- 146
Provision for doubtful accounts ......................................... -- 302
Gain on sale of assets .................................................. (6) (1)
Loss on sale of assets .................................................. 1 4
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable ..................................................... 609 (349)
Accounts receivable - pharmacy and laboratory costs ..................... -- (2,889)
Other current assets, restricted funds, and other non-current assets .... 205 (218)
Accounts payable and accrued liabilities ................................ (350) 374
Accrued claims payable .................................................. (1,045) (1,197)
Accrued pharmacy and laboratory costs payable ........................... -- 2,759
Income taxes payable .................................................... (16) (39)
Other liabilities ....................................................... 25 (122)
------- -------
NET CASH USED IN CONTINUING OPERATIONS .............................. (2,441) (563)
NET CASH USED IN DISCONTINUED OPERATIONS ............................ -- (1,306)
------- -------
NET CASH USED IN OPERATING ACTIVITIES ............................... (2,441) (1,869)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property and equipment ........................ 7 2
Payments received on note receivable .................................... 12 --
Additions to property and equipment ..................................... (97) (453)
------- -------
NET CASH USED IN INVESTING ACTIVITIES ............................... (78) (451)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock .............................. -- 158
Repayment of debt ....................................................... (1) (1)
------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ................. (1) 157
------- -------
Net decrease in cash and cash equivalents .................................. (2,520) (2,163)
Cash and cash equivalents at beginning of period ........................... 8,026 6,016
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 5,506 $ 3,853
======= =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
NOTE 1-- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet as of November 30, 1999, and the related
consolidated statements of operations and cash flows for the three and six
months ended November 30, 1999 and 1998 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such adjustments
consisted only of normal recurring items. The results of operations for the six
months ended November 30, 1999 are not necessarily indicative of the results to
be expected during the balance of the fiscal year.
The consolidated financial statements do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. The balance sheet at May 31, 1999 has been derived from
the audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statement presentation. Notes to consolidated financial
statements included in Form 10-K for the year ended May 31, 1999 on file with
the Securities and Exchange Commission provide additional disclosures and a
further description of accounting policies.
The Company's financial statements are presented on the basis that it
is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recovery and classification of assets or the amount and
classification of liabilities that may result from the outcome of the
uncertainties described in Note 2-- "Liquidity and Capital Resources".
The accrued claims payable liability represents the estimated ultimate
net amounts owed for all behavioral healthcare services provided through the
respective balance sheet dates. The unpaid claims liability is estimated using
an actuarial paid completion factor methodology and other statistical analyses.
These estimates are subject to the effects of trends in utilization and other
factors. Although considerable variability is inherent in such estimates,
management believes that the unpaid claims liability is adequate. The estimates
are continually reviewed and adjusted as experience develops or new information
becomes known with adjustments included in current operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates. 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 November 30, 1999, the Company had unrestricted cash and cash
equivalents of $5.5 million. During the six months ended November 30, 1999, the
Company used $2.4 million in operations. Additionally, $0.1 million was used by
its investing activities. The Company reported a loss of $2.4 million from
continuing operations for the six months ended November 30, 1999, compared to
income of $0.3 million from continuing operations for the six months ended
November 30, 1998. The Company has an accumulated deficit of $59.0 million and
total stockholders' deficit of $7.2 million as of November 30, 1999.
Additionally, the Company's current assets at November 30, 1999 amounted to
approximately $21.0 million and current liabilities were approximately $30.1
million, resulting in a working capital deficiency of approximately $9.1
million. The working capital deficiency referred to above results from a $12.1
million liability related to Federal income tax refunds received in prior years.
The ultimate outcome of the Internal Revenue Service audit whereby it is seeking
recovery of the refunds from the Company, including the amount to be repaid, if
any, and the timing thereof, is not determinable (see Note 4 -- "Income Taxes").
The Company cannot state with any degree of certainty whether any
required additional equity or debt financing to meet its obligations will be
available to it during Fiscal 2000 and, if available, that the source of
financing would be available on terms and conditions acceptable to the Company.
The above conditions raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustment that may result from the outcome of
this uncertainty.
6
<PAGE> 7
During Fiscal 1999 and continuing during the first six 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 November 30, 1999. During Fiscal 1999,
Humana sent written notice to the Company that the Company owed $3.0
million to Humana in connection with these pharmacy and laboratory
costs. The Company has expressed to Humana its total disagreement with
Humana's position. The Company believes that Humana owes the Company in
excess of $3.0 million in relation to this same issue. Efforts are
being made to work with Humana to resolve the uncertainty.
The Company also has contracts with Humana Health Plans ("Humana")
under which it provides services to members in Florida. For the six
months ended November 30, 1999, the Florida, Humana contracts accounted
for 31.9%, or $3.2 million, of the Company's operating revenues from
continuing operations compared to 17.1%, or $3.5 million, for the six
months ended November 30, 1998. As of November 30, 1999, the Company
provides services to approximately 200,000 members that are covered
under the Humana plans in Florida. The terms of the Florida contracts
are for two-year periods and each contract is automatically renewable
for additional terms equal to the original contract period unless
terminated by either party.
(2) The Company currently has two contracts with one HMO to provide
behavioral healthcare services to contracted members in Texas. These
combined contracts represented approximately 5.6% and 3.9% of the
Company's operating revenue from continuing operations for the six
months ended November 30, 1999 and 1998, 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 six months ended November 30, 1999 and 1998, the
six contracts with this HMO accounted for operating revenue from
continuing operations of approximately 8.5% and 6.9%, respectively.
(3) The Company currently has two contracts with one HMO to provide
behavioral healthcare services to contracted members in Texas. These
combined contracts represented approximately 10.7% and 6.0% of the
Company's operating revenue from continuing operations for the six
months ended November 30, 1999 and 1998, respectively. The Company
recently submitted a bid to this HMO in response to a Request for
Proposal that involves the membership covered under its existing
contracts, which are due to expire in February and March, 2000. The
Company cannot determine at this time if either of its contracts with
this HMO will be renewed.
(4) The Company currently has one contract with one HMO to provide
behavioral healthcare services to contracted members in Indiana. This
contract represents approximately 9.4% and 3.8% of operating
7
<PAGE> 8
revenue from continuing operations for the six months ended November
30, 1999 and 1998, respectively. The Company recently received written
notice from this HMO that its contract will not be renewed and, as a
result, the contract will terminate effective December 31, 1999.
(5) The Company currently has three contracts with one HMO to provide
behavioral healthcare services to contracted members in Texas. These
contracts represents approximately 7.5% and 1.2% of operating revenue
from continuing operations for the six months ended November 30, 1999
and 1998, respectively. The Company recently received written notice
from this HMO that its contract will not be renewed and, as a result,
the contracts will terminate effective December 31, 1999.
NOTE 4 -- 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 November 30, 1999 and 1998.
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, are recorded
as a deferred liability, "Unbenefitted tax refunds received" pending resolution
by the IRS of the appropriateness of the Section 172(f) carryback. The
additional refunds requested under Section 172(f) for prior years of $7.7
million have not been received, nor has the Company recognized any tax benefit
related to these potential refunds.
Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. No assurance can be provided that the
Company will be able to retain the refunds received to date or that the other
refunds requested will be received.
As a result of the Section 172(f) carryback claims filed by the Company
and the tentative refunds received, the Company came under audit with respect to
the tax years previously mentioned.
On August 21, 1998, the Company received an examination report,
dated August 6, 1998, from the IRS advising the Company that it was disallowing
$12.4 million of the $14.8 million of refunds previously received, and the
additional refunds requested of $7.7 million. If the position of the IRS were to
be upheld, the Company would be required to repay $12.4 million in refunds
previously received, plus accrued interest of approximately $4.5 million through
November 30, 1999. Accordingly, the Company would be entitled to a repayment of
the fees advanced to its tax advisor relating to these refund claims of
approximately $2.5 million of which $2.4 million is reported as "other
receivable" in the accompanying balance sheet. This report commenced the
administrative appeals process. The Company filed a protest letter with the IRS
on November 6, 1998 and believes that its position with respect to its right to
the tax refunds received will be upheld. The Company's tax advisor relating to
these refund claims has advised management that the administrative appeals
process could take twelve to eighteen months. In the event the Company wishes to
further protest the results of its administrative appeal, it may further appeal
to the United States Tax Court following the final determination of the
administrative appeal. The Company has been advised that a determination by the
United States Tax Court could take up to an additional twelve months from
commencement of the appeals process in the United States Tax Court. The IRS
reserves the right to assess and collect the tax previously refunded to the
Company at any time during the appeals process.
NOTE 5 -- DISCONTINUED OPERATIONS
During Fiscal 1999, the Company sold its Aurora, Colorado and Ft.
Worth, Texas facilities, which completed the disposal plan for its hospital
business segment.
8
<PAGE> 9
NOTE 6-- EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share in accordance with Statement No. 128,
Earnings Per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations ...................... $(1,546) $ (402) $(2,294) $ 186
Less preferred stock dividends ................................ -- (21) -- (42)
------- --------- ------- ---------
Numerator for diluted earnings (loss) per share
available to common stockholders from continuing
operations .................................................. (1,546) (423) (2,294) 144
Discontinued operations:
Loss from operations .......................................... -- (454) -- (583)
Estimated loss on disposal .................................... -- (70) -- (70)
Extraordinary item ................................................. -- -- -- 120
------- --------- ------- ---------
Net loss available to common stockholders
after assumed conversions ................................... $(1,546) $ (947) $(2,294) $ (389)
======= ========= ======= =========
Denominator:
Weighted average shares ............................................ 3,817 3,474 3,817 3,459
Effect of dilutive securities:
Employee stock options ........................................ -- -- -- --
Convertible preferred stock ................................... -- -- -- --
------- --------- ------- ---------
Dilutive potential common shares .............................. -- -- -- --
Denominator for diluted earnings (loss) per share - adjusted
weighted-average shares after assumed conversions ........... 3,817 3,474 3,817 3,459
======= ========= ======= =========
BASIC EARNINGS PER SHARE
Income (loss) from continuing operations ........................... $ (0.41) $ (0.12) $ (0.60) $ 0.04
Discontinued operations:
Loss from operations .......................................... -- (0.13) -- (0.17)
Estimated loss on disposal .................................... -- (0.02) -- (0.02)
Extraordinary item ................................................. -- -- -- 0.03
------- --------- ------- ---------
Net loss ........................................................... $ (0.41) $ (0.27) $ (0.60) $ (0.12)
======= ========= ======= =========
DILUTED EARNINGS PER SHARE
Income (loss) from continuing operations ........................... $ (0.41) $ (0.12) $ (0.60) $ 0.04
Discontinued operations:
Loss from operations .......................................... -- (0.13) -- (0.17)
Estimated loss on disposal .................................... -- (0.02) -- (0.02)
Extraordinary item ................................................. -- -- -- 0.03
------- --------- ------- ---------
Net loss ........................................................... $ (0.41) $ (0.27) $ (0.60) $ (0.12)
======= ========= ======= =========
</TABLE>
The following number of potentially convertible shares of common stock
related to convertible debentures and stock options are as follows at November
30, 1999:
<TABLE>
<S> <C>
For conversion of convertible debentures................................... 9,044
Outstanding stock options.................................................. 854,651
Possible future issuance under stock options plans......................... 305,558
---------
Total.................................................................. 1,169,253
=========
</TABLE>
9
<PAGE> 10
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
(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) 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 November 30, 1999, 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 recently filed a demand for arbitration of
this dispute before the American Arbitration Association. The Company
has filed a counter-claim in the arbitration for PMR's alleged breach
of the same hospital management agreement and intends to actively
defend this action. The Company does not believe that the impact of
this claim will have a material adverse effect on the Company's
financial position, results of operations and cash flows.
(4) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
Officer of the Company, commenced an action against the Company and its
Chairman, Chriss W. Street, in the Superior Court of the State of
California arising out of the termination of her employment on
September 29, 1997. The action alleges alternate causes of action based
upon her employment relationship with the Company and seeks unspecified
damages for unpaid wages, unspecified actual, compensatory and punitive
damages; damages for emotional distress; and costs, legal fees and
penalties under applicable California law. As of November 30, 1999, the
action is awaiting a trial date. 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 4, "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 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.
10
<PAGE> 11
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 17).
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 six months ended November 30, 1999, managed care operations
accounted for 96.6%, or $9.8 million, of the Company's operating revenues from
continuing operations. The following tables summarizes the Company's financial
data for the three and six months ended November 30, 1999 and 1998 (in
thousands):
RESULT OF OPERATIONS
THE THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1998:
<TABLE>
<CAPTION>
CONSOLIDATED
THREE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
NOVEMBER 30, 1999 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- --------------------------------- --------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 4,710 $ 172 $ 4,882 $ --
Healthcare operating expenses 4,392 147 4,539 --
General/administrative expenses 1,241 647 1,888 --
Other operating expenses 146 (94) 52 --
-------- ------- -------- ---
5,779 700 6,479 --
-------- ------ -------- -----
Operating loss $ (1,069) $ (528) $ (1,597) $ --
======== ====== ======== =====
</TABLE>
<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 7,421 111 7,532 1,194
General/administrative expenses 1,449 1,004 2,453 6
Other operating expenses 443 46 489 336
-------- ------ -------- -----
9,313 1,161 10,474 1,536
-------- ------ -------- -----
Operating income (loss) $ 652 $ (911) $ (259) $ (454)
======== ====== ======== =====
</TABLE>
The Company reported an operating loss of approximately $1.6 million
from continuing operations for the quarter ended November 30, 1999, which is
primarily attributable to the loss of two major, managed care contracts during
the fourth quarter of Fiscal 1999. Managed care revenue decreased by
approximately 52.7%, or $5.3 million, for the quarter ended November 30, 1999
compared to the quarter ended November 30, 1998. Additionally, this loss
included approximately $0.2 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
of $0.3 million from continuing operations reported 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.
Operating revenues from continuing operations decreased by
approximately 52.2%, or $5.3 million, for the quarter ended November 30, 1999
compared to the quarter ended November 30, 1998. This decrease is directly
attributable to the loss of two major, managed care contracts during the fourth
quarter of Fiscal 1999.
12
<PAGE> 13
Healthcare operating expenses from continuing operations decreased by
$3.0 million for the quarter ended November 30, 1999 as compared to the quarter
ended November 30, 1998. This decrease is attributable to the loss of revenues
specific to two major, managed care contracts that terminated during Fiscal
1999. Healthcare operating expense as a percentage of net revenue for managed
care operations increased from 74.5% for the quarter ended November 30, 1998 to
93.3% for the quarter ended November 30, 1999. This percentage increase is due
to continuing fixed costs that cannot be tied to the specific contracts that
were terminated during Fiscal 1999. Efforts are being made to reduce the overall
costs to manage the Company's existing contracts, including cost reductions
related to managing the Company's healthcare information systems and, also,
planned centralization of certain contract management and clinical functions.
General and administrative expenses from continuing operations
decreased by approximately $0.6 million for the quarter ended November 30, 1999
as compared to the quarter ended November 30, 1998. The decrease is primarily
attributable to savings in legal costs in comparison to legal costs incurred for
the same period during Fiscal 1999. General and administrative costs as a
percentage of revenue increased from 24.0% for the quarter ended November 30,
1998 to 38.7% for the quarter ended November 30, 1999. This increase is
attributable to the continuing fixed costs that cannot be tied to the specific
contracts that were terminated during Fiscal 1999. Efforts are being made to
reduce the general and administrative costs during the remaining months of
Fiscal 2000, including the elimination or reduction of certain costs associated
with corporate office operations.
Other operating expenses from continuing operations decreased by $0.4
million for the quarter ended November 30, 1999 compared to the quarter ended
November 30, 1998. This decrease is primarily attributable to the $0.2 million
of bad debt expense recognized during the quarter ended November 30, 1998
specific to the two major, managed care contracts that terminated during Fiscal
1999. Additionally, the Company recognized $0.1 million of bad debt recoveries
specific to the discontinued operations during the quarter ended November 30,
1999.
THE SIX MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE SIX MONTHS ENDED NOVEMBER
30, 1998:
<TABLE>
<CAPTION>
CONSOLIDATED
SIX MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED
NOVEMBER 30, 1999 CARE OTHER OPERATIONS OPERATIONS OPERATIONS
- --------------------------------- --------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues $ 9,786 $ 346 $ 10,132 $ --
Healthcare operating expenses 8,294 326 8,620 --
General/administrative expenses 2,621 1,356 3,977 --
Other operating expenses 83 (152) (69) --
--------- -------- -------- -----
10,998 1,530 12,528 --
--------- -------- -------- -----
Operating loss $ (1,212) $ (1,184) $ (2,396) $ --
========= ======== ======== =====
</TABLE>
<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 14,732 272 15,004 2,598
General/administrative expenses 2,248 1,977 4,225 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>
The Company reported an operating loss from continuing operations of
approximately $2.4 million for the six months ended November 30, 1999, which is
primarily attributable to the loss of two major, managed care contracts during
the fourth quarter of Fiscal 1999. Managed care revenue decreased by
approximately 50.5%, or $10.0 million, for the six months ended November 30,
1999 compared to the six months ended November 30, 1998. Additionally, this loss
included 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
13
<PAGE> 14
connection with the NCQA accreditation. This is compared to operating income
from continuing operations of $0.3 million reported 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 Argentina.
Operating revenues from continuing operations decreased by
approximately 50.2%, or $10.2 million, for the six months ended November 30,
1999 compared to the six months ended November 30, 1998. This decrease is
directly attributable to the loss of two major, managed care contracts during
the fourth quarter of Fiscal 1999.
Healthcare operating expenses from continuing operations decreased by
$6.4 million for the six months ended November 30, 1999 as compared to the six
months ended November 30, 1998. 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 for managed care
operations increased from 74.6% for the six months ended November 30, 1998 to
84.8% for the six months ended November 30, 1999. This percentage increase is
due to continuing fixed costs that cannot be tied to the specific contracts that
were terminated during Fiscal 1999. Efforts are being made to reduce the overall
costs to manage the Company's existing contracts, including cost reductions
related to managing the Company's healthcare information systems and, also,
planned centralization of certain contract management and clinical functions.
General and administrative expenses from continuing operations
decreased by approximately $0.2 million, for the six months ended November 30,
1999 as compared to the six months ended November 30, 1998. The decrease is
primarily attributable to savings in legal costs in comparison to legal costs
incurred for the same period during Fiscal 1999, specifically one legal
settlement that totaled $0.2 million. General and administrative costs as a
percentage of revenue increased from 20.8% for the six months ended November 30,
1998 to 39.3% for the six months ended November 30, 1999. This increase is
attributable to the continuing fixed costs that cannot be tied to the specific
contracts that were terminated during Fiscal 1999. Efforts are being made to
reduce the general and administrative costs during the remaining months of
Fiscal 2000, including the elimination or reduction of certain costs associated
with corporate office operations.
Other operating expenses from continuing operations decreased by $0.9
million for the six months ended November 30, 1999 compared to the six months
ended November 30, 1998. This decrease is primarily attributable to the $0.3
million of bad debt expense recognized during the six months ended November 30,
1998 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
six months ended November 30, 1999.
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 and plans to eliminate additional positions in connection with its
efforts to centralize certain management and clinical functions. The Company
expects annual savings of, approximately, $1.0 million from these centralization
efforts and further staff reductions.
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
As of September 15, 1999, the Company has completed the Remediation,
Testing, and Implementation phases of its project for Mission Critical systems.
The Company defines its mission-critical systems as its 1) clinical operating
system, 2) related database and EDI interchanges, 3) operations and facilities
systems (includes phone and communications network), and 4) accounting systems.
The following chart shows the completion date or expected completion
date for each phase of the Company's Plan for its mission-critical systems:
<TABLE>
<CAPTION>
EXPECTED COMPLETION - CALENDAR YEAR 1999
==============================================================================
Phase 0 YEAR 2000 PROJECT OFFICE
- ------------------------------------------------------------------------------
<S> <C> <C>
Initial Assessment of Critical Systems Completed
- ------------------------------------------------------------------------------
Create Year 2000 Project Documents Completed
- ------------------------------------------------------------------------------
Build Vender Compliance Database Completed
- ------------------------------------------------------------------------------
Maintain Vendor Compliance Process Ongoing
- ------------------------------------------------------------------------------
Year 2000 Project Management Ongoing
- ------------------------------------------------------------------------------
Phase 1 INVENTORY PHASE Completed
- ------------------------------------------------------------------------------
Phase 2 ASSESSMENT PHASE Completed
- ------------------------------------------------------------------------------
Phase 3 REMEDIATE/REPLACE PHASE Completed
- ------------------------------------------------------------------------------
Phase 4 TESTING PHASE Completed
- ------------------------------------------------------------------------------
Phase 5 IMPLEMENTATION PHASE Completed
- ------------------------------------------------------------------------------
</TABLE>
The Company has completed implementation for all regional offices to
its new clinical operating system (TXEN). The system was purchased from Nichols
Research Corporation and has been certified Year 2000 compliant. The
implementation occurred ahead of the scheduled implementation date of September
30, 1999. The Company has also completed full remediation and testing of its
main financial and accounting system. The system has processed Fiscal 2000
information with no reported incidents. Additionally the Company has also
completed assessment of its mission critical systems, equipment and
infrastructure.
As of January 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.
As of September 15, 1999, the Company has completed a Contingency and
Continuity Business Resumption Plan program for all of its core business
functions in all regions. The Company will use its contingency plan to reduce
the risk of disruption of service on January 1, 2000. The plan processes include
the following, core business areas:
- Call Processing (Interactive / Call Distribution)
- Financial Processing (AP / AR / Claims)
- Membership / Eligibility / Authorizations
- Correspondence Processing (Authorization Mailers / EOB / EOP)
- Certification / Credentialing / Eligibility
- Reporting
- Encounters
- Infrastructure Systems
During the six months ended November 30, 1999, the Company recognized
approximately $0.1 million in expense specific to its Year 2000 compliance
program which has been paid to consultants or vendors providing
15
<PAGE> 16
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 six months ended November 30, 1999. The following chart
provides a summary of the Company's expected costs and actual expenditures to
date related to its Year 2000 Plan.
<TABLE>
<CAPTION>
ACTUAL COSTS
TOTAL EXPECTED INCURRED AT REMAINING
COSTS NOVEMBER 30, 1999 EXPECTED COSTS
------------- ----------------- --------------
<S> <C> <C> <C>
Capital expenditures............. $ 850,000 $ 825,000 $25,000
Operating expense................ 246,000 221,000 25,000
------------ ----------- -------
Total............................ $ 1,096,000 $ 1,046,000 $50,000
============ =========== =======
</TABLE>
While the absolute costs cannot be determined at this time, the Company
does not expect such costs to exceed $1.1 million, including any costs incurred
for system implementations that may have been accelerated due to Year 2000
issues.
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Except for historical
information, the matters discussed that may be considered forward-looking
statements may be subject to certain risks and uncertainties that could cause
the actual results to differ materially from those projected, including
uncertainties in the market, pricing, competition, procurement efficiencies,
uncertainties inherent in the Year 2000 problem, other matters discussed in this
quarterly report on Form 10-Q, and other risks detailed from time to time in the
Company's SEC reports.
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 thirteen (13) contracts with six HMOs to
provide behavioral healthcare services under commercial, Medicaid, and Medicare
plans, to contracted members in Florida, Indiana, Michigan and Texas. These
combined contracts represent approximately 71.4% and 33.3% of the Company's
operating revenue from continuing operations for the six months ended November
30, 1999 and 1998, 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 November 30, 1999, 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 5.6% and 3.8% of the Company's operating revenues from continuing
operations for the six months ended November 30, 1999 and 1998, respectively.
The Company has also received notice from one Indiana HMO that its contract with
the Company will not be renewed. As a result, one contract will terminate on
December 31, 1999 that accounted for 9.4% and 3.8% of the Company's operating
revenues from continuing operations for the six months ended November 30, 1999
and 1998, respectively. The Company has also received notice from one Texas HMO
that its contract with the Company will not be renewed. As a result, three
contracts will terminate on December 31, 1999 that accounted for 7.5% and 1.2%
of the Company's operating revenues from continuing operations for the six
months ended November 30, 1999 and 1998, respectively. Additionally, the Company
recently submitted a bid to one HMO in Texas in response to a Request for
Proposal that involves the membership covered under its existing contracts,
which are due to expire in February and March, 2000. These combined contracts
represented approximately 10.7% and 6.0% of the Company's operating revenue from
continuing operations for the six months ended November 30, 1999 and 1998,
respectively. The Company cannot determine at this time if either of its
contracts with this HMO will be renewed.
16
<PAGE> 17
UNCERTAINTY OF FUTURE PROFITABILITY
As of November 30, 1999, the Company had stockholders' deficit of $7.2
million and a working capital deficiency of approximately $9.1 million. The
Company had a net loss for the six months ended November 30, 1999 of $2.3
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 November 30, 1999. The Company filed a protest with the IRS on
November 6, 1998 to contest the examination report with the appeals office of
the Internal Revenue Service in Laguna Niguel, California. In the event that the
Company is unsuccessful in the 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.
During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, are recorded
as a deferred liability, "Unbenefitted tax refunds received" pending resolution
by the IRS of the appropriateness of the Section 172(f) carryback. The
additional refunds requested under Section 172(f) for prior years of $7.7
million have not been received, nor has the Company recognized any tax benefit
related to these potential refunds.
Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. No assurance can be provided that the
Company will be able to retain the refunds received to date or that the other
refunds requested will be received.
As a result of the Section 172(f) carryback claims filed by the
Company, and the tentative refunds received, the Company came under audit with
respect to the tax years previously mentioned.
On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be upheld,
the Company would be required to repay $12.4 million in refunds previously
received, plus accrued interest of approximately $4.5 million through November
30, 1999. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refund claims of approximately
$2.5 million of which $2.4 million is reported as "other receivable" in the
accompanying balance sheet. This report commences the administrative appeals
process. The Company filed a protest letter with the IRS on November 6, 1998 and
believes that its position with respect to its right to the tax refunds received
will be upheld. The Company's tax advisor relating to these
17
<PAGE> 18
refund claims has advised management that the administrative appeals process
could take twelve to eighteen months. In the event the Company wishes to further
protest the results of its administrative appeal, it may further appeal to the
United States Tax Court following the final determination of the administrative
appeal. The Company has been advised that a determination by the United States
Tax Court could take up to an additional twelve months from commencement of the
appeals process in the United States Tax Court. The IRS reserves the right to
assess and collect the tax previously refunded to the Company at any time during
the appeals process.
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS
Managed care operations are at risk for costs incurred to supply
agreed upon levels of service. Failure to anticipate or control costs could have
material, adverse effects on the Company. Additionally, the business of
providing services on a full-risk capitation basis exposes the Company to the
additional risk that contracts negotiated and entered into may ultimately be
determined to be unprofitable if utilization levels require the Company to
deliver and provide services at capitation rates which do not account for or
factor in such utilization levels.
The levels of revenues and profitability of healthcare companies may
be affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement governmental controls on
the price of healthcare. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business and no assurance can be given that any such reforms will not
have a material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has issued or committed to issue 9,000 shares related to
the 7 1/2% convertible subordinated debentures due April 15, 2010, and options
or other rights to purchase approximately 1,160,000 shares. The Company may
contemplate issuing additional amounts of debt, equity or convertible securities
in public or private transactions for use in fulfilling its future capital needs
(see "Need for Additional Funds; Uncertainty of Future Funding"). Issuance of
additional equity could adversely affect the trading price of the Company's
Common Stock.
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 November 30, 1999, there are no outstanding
shares of Preferred Stock. The Company's Restated Certificate of Incorporation
also provides for a classified board of directors with directors divided into
three classes serving staggered terms. The Company's stock option plans
generally provide for the acceleration of vesting of options granted under such
plans in the event of certain transactions which result in a change of control
of the Company. Section 203 of the General Corporation Law of Delaware prohibits
the Company from engaging in certain business combinations with interested
stockholders. In addition, each share of the Company's Common Stock includes one
right on the terms and subject to the conditions of the Rights Agreement between
the Company and Continental Stock Transfer & Trust Company. These provisions may
have the effect of delaying or preventing a change in control of the Company
without action by the stockholders and therefore could adversely affect the
price of the Company's Common Stock or the possibility of sale of shares to an
acquiring person.
18
<PAGE> 19
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.
19
<PAGE> 20
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 November 30, 1999, 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. The Company has
filed a counter-claim in the arbitration for PMR's alleged breach of
the same hospital management agreement and intends to actively defend
this action. The Company does not believe that the impact of this claim
will have a material adverse effect on the Company's financial
position, results of operations and cash flows.
(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, 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
20
<PAGE> 21
applicability of Section 172(f) to the type of business in which the
Company operates is unclear. No assurance can be provided that the
Company will be able to retain the refunds received to date or that the
other refunds requested will be received.
As a result of the Section 172(f) carryback claims filed by the
Company, and the tentative refunds received, the Company came under
audit with respect to the tax years previously mentioned.
On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was
disallowing $12.4 million of the $14.8 million of refunds previously
received, and the additional refunds requested of $7.7 million. If the
position of the IRS were to be upheld, the Company would be required to
repay $12.4 million in refunds previously received, plus accrued
interest of approximately $4.5 million through November 30, 1999.
Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refund claims of
approximately $2.5 million of which $2.4 million is reported as "other
receivable" in the accompanying balance sheet. This report commences
the administrative appeals process. The Company filed a protest letter
with the IRS on November 6, 1998 and believes that its position with
respect to its right to the tax refunds received will be upheld. The
Company's tax advisor relating to these refund claims has advised
management that the administrative appeals process could take twelve to
eighteen months. In the event the Company wishes to further protest the
results of its administrative appeal, it may further appeal to the
United States Tax Court following the final determination of the
administrative appeal. The Company has been advised that a
determination by the United States Tax Court could take up to an
additional twelve months from commencement of the appeals process in
the United States Tax Court. The IRS reserves the right to assess and
collect the tax previously refunded to the Company at any time during
the appeals process.
(6) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
Officer of the Company, commenced an action against the Company and its
Chairman, Chriss W. Street, in the Superior Court of the State of
California arising out of the termination of her employment on
September 29, 1997. The action alleges alternate causes of action based
upon her employment relationship with the Company and seeks unspecified
damages for unpaid wages, unspecified actual, compensatory and punitive
damages; damages for emotional distress; and costs, legal fees and
penalties under applicable California law. As of November 30, 1999, the
action is awaiting a trial date. The Company has denied its liability
and has denied the principal allegations of the complaint. The Company
believes that it has good and meritorious defenses to this action.
From time to time, the Company and its subsidiaries are also parties to
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims exceed insurance policy limits and
the Company or a subsidiary may have exposure to liability that is not covered
by insurance. Management believes that the outcome of such lawsuits will not
have a material adverse impact on the Company's financial statements.
21
<PAGE> 22
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
10.14 - Addendum to Employment Agreement effective December
27, 1999 between the Company and Robert J. Landis
(filed herewith).
27 - Financial Data Schedules (filed herewith).
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K, dated
October 1, 1999, to report under Item 5 that the Company's
Annual Meeting of Shareholders would be held on December
10, 1999 and, additionally, that proxy materials would be
mailed on or about November 3, 1999 to shareholders of
record as of October 29, 1999.
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPREHENSIVE CARE CORPORATION
January 14, 2000 by /s/ ROBERT J. LANDIS
----------------------------------
Robert J. Landis
Executive Vice President and
Chief Financial Officer
23
<PAGE> 1
EXHIBIT 10.14
ADDENDUM / MODIFICATION TO EMPLOYMENT AGREEMENT
Pursuant to Article IX of the Employment Agreement made the 14th day of
September 1998, effective July 2nd, 1998 by and between Robert J. Landis,
("Executive") and Comprehensive Care Corporation, (the "Company"), the parties
agree to modify the Employment Agreement effective December 27th, 1999 as
follows:
ARTICLE IX, TERM AND TERMINATION is deleted and replaced by the following:
(A) This Agreement shall commence on the date hereof and end as of the
date of termination of employment.
(B) This Agreement may be terminated prior to the expiration of its
term as follows:
a. Upon the mutual agreement of the Company and Executive.
b. Upon the death or permanent disability of Executive, in which
case Executive shall be entitled to all Base Salary through
the date of termination. For the purposes of the foregoing,
permanent disability shall be the inability of Executive to
attend to his usual duties for a period of two (2) months in
any 12-month period of the term or sixty (60) consecutive
calendar days.
c. For cause by the Company, in which case Executive shall only be
entitled to his Base Salary through the date of termination. For
the purpose of the foregoing, cause shall be (a) a breach or
default in the performance by Executive of any of his material
obligations under this Agreement, which breach or default is
not cured within ten (10) business days following written notice
thereof to Executive, or (b) the commission by Executive of any
act resulting in or intending to result in his personal gain or
enrichment at the expense of the Company, or the commission by
Executive of any felony or misdemeanor or act involving moral
turpitude.
d. By the Company without cause, in which case Executive shall be
entitled to an amount equal to twelve (12) months of his Base
Salary in effect at the time of termination, payable in salary
continuation or lump sum in accordance with Company practice.
e. By the executive if, at any time during the term as a result of
a change in control of the Company shall have occurred, in which
case Executive shall be entitled to an amount equal to twelve
(12) months of his Base Salary in effect at the time of
termination plus a pro-rata portion of his Incentive Bonus at
target for the period of the beginning of the fiscal year
through date of termination, payable in salary continuation or
lump sum in accordance with Company practice. For the purpose of
the foregoing, a change in control shall occur in the
<PAGE> 2
event the Company enters into any agreement involving the sale
of a controlling interest in the Company or the sale by the
company of all or substantially all of its assets to any other
entity, or the merger of the Company into and with another
entity in which the Company is not the survivor, or in which
the Company is not the controlling shareholder. In the event
of termination by Executive under this subparagraph, Executive
shall be entitled to receive, as a special severance benefit,
all options granted to Executive and which shall not have
heretofore vested, shall immediately vest and become presently
exercisable.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum and affixed
their hands and seals this 27th day of December 1999.
COMPREHENSIVE CARE CORPORATION
By: /s/ Chriss W. Street
---------------------------------
Chriss W. Street
Chairman, President and Chief
Executive Officer
By: /s/ Robert J. Landis
---------------------------------
Robert J. Landis (Executive)
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