<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, 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 January 8, 2001
-------------------------------------- ------------------------------
Common Stock, par value $.01 per share 3,817,804
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets,
November 30, 2000 and May 31, 2000..................................................... 3
Consolidated Statements of Operations for
the Three and Six Months ended November 30, 2000 and 1999.............................. 4
Consolidated Statements of Cash Flows for
the Six Months ended November 30, 2000 and 1999........................................ 5
Notes to Consolidated Financial Statements...................................................... 6-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................................... 11-15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS............................................................................... 16-17
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K................................................................ 18
SIGNATURES................................................................................................ 19
</TABLE>
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PART I. -- FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
2000 2000
------------ --------
(unaudited)
(Amounts in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 1,927 $ 2,518
Restricted cash ........................................................ 1,004 1,444
Accounts receivable, less allowance for doubtful accounts of $28 and
$13 .................................................................. 316 276
Accounts receivable - pharmacy and laboratory costs .................... 10,469 10,469
Other receivable ....................................................... 2,548 2,548
Other current assets ................................................... 323 147
-------- --------
Total current assets ...................................................... 16,587 17,402
Property and equipment, net ............................................... 793 1,086
Notes receivable .......................................................... 165 1,145
Goodwill, net ............................................................. 972 1,008
Restricted cash ........................................................... 492 486
Other assets .............................................................. 151 148
-------- --------
Total assets .............................................................. $ 19,160 $ 21,275
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities ............................... $ 3,194 $ 4,028
Accrued claims payable ................................................. 2,822 3,014
Accrued pharmacy and laboratory costs payable .......................... 10,469 10,469
Unbenefitted tax refunds received ...................................... 12,092 12,092
Income taxes payable ................................................... 48 44
-------- --------
Total current liabilities ................................................. 28,625 29,647
-------- --------
Long-term liabilities:
Long-term debt ......................................................... 2,244 2,244
Other liabilities ...................................................... 35 56
-------- --------
Total long-term liabilities ............................................... 2,279 2,300
-------- --------
Total liabilities ......................................................... 30,904 31,947
-------- --------
Commitments and Contingencies (Notes 5 and 7)
Stockholders' deficit:
Preferred stock, $50.00 par value; authorized 60,000 shares; none issued
and outstanding ....................................................... -- --
Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,817,805 and 3,817,822 ............................... 38 38
Additional paid-in-capital ............................................. 51,813 51,812
Deferred compensation .................................................. (2) (10)
Accumulated deficit .................................................... (63,593) (62,512)
-------- --------
Total stockholders' deficit .............................................. (11,744) (10,672)
-------- --------
Total liabilities and stockholders' deficit .............................. $ 19,160 $ 21,275
======== ========
</TABLE>
See accompanying notes.
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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,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES ................................................ $ 4,441 $ 4,882 $ 8,180 $ 10,132
COSTS AND EXPENSES:
Healthcare operating expenses ................................... 3,608 4,539 6,825 8,620
General and administrative expenses ............................. 929 1,888 1,881 3,977
Recovery of doubtful accounts ................................... (26) (163) (41) (499)
Depreciation and amortization ................................... 169 215 341 430
------- ------- -------- --------
4,680 6,479 9,006 12,528
------- ------- -------- --------
OPERATING LOSS BEFORE ITEMS SHOWN BELOW ........................... (239) (1,597) (826) (2,396)
OTHER INCOME (EXPENSE):
Loss in connection with prepayment of note receivable ........... -- -- (496) --
Reduction in accrued interest expense ........................... 290 -- 290 --
Interest income ................................................. 43 116 93 236
Interest expense ................................................ (45) (119) (121) (188)
Gain on sale of assets .......................................... -- 6 -- 6
Loss on sale of assets .......................................... -- (1) -- (1)
Other non-operating income ...................................... -- 51 -- 51
------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ................................. 49 (1,544) (1,060) (2,292)
Income tax expense ................................................ 20 2 21 2
------- ------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ............. $ 29 $(1,546) $ (1,081) $ (2,294)
======= ======= ======== ========
BASIC AND DILUTED EARNINGS PER SHARE:
Net income (loss) ................................................. $ 0.01 $ (0.41) $ (0.28) $ (0.60)
======= ======= ======== ========
</TABLE>
See accompanying notes.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
NOVEMBER 30,
2000 1999
------- -------
(Amounts in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $(1,081) $(2,294)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization ............................................. 341 430
Compensation expense - stock options issued ............................... 8 --
Loss in connection with prepayment of note receivable ..................... 496 --
Gain on sale of assets .................................................... -- (6)
Loss on sale of assets .................................................... -- 1
Reduction in accrued interest expense ..................................... (290) --
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable ....................................................... (40) 609
Other current assets, restricted funds, and other non-current assets ...... 231 205
Accounts payable and accrued liabilities .................................. (543) (350)
Accrued claims payable .................................................... (192) (1,045)
Income taxes payable ...................................................... 4 (16)
Other liabilities ......................................................... (21) 25
------- -------
NET CASH USED IN OPERATIONS ............................................... (1,087) (2,441)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property and equipment .......................... -- 7
Payments received on note receivable ...................................... 508 12
Additions to property and equipment ....................................... (12) (97)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ....................... 496 (78)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt ......................................................... -- (1)
------- -------
NET CASH USED IN FINANCING ACTIVITIES ..................................... -- (1)
------- -------
Net decrease in cash and cash equivalents ...................................... (591) (2,520)
Cash and cash equivalents at beginning of year ................................. 2,518 7,776
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 1,927 $ 5,256
======= =======
</TABLE>
See accompanying notes.
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NOTE 1 -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet as of November 30, 2000, and the related
consolidated statements of operations and cash flows for the three and six
months ended November 30, 2000 and 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 six
months ended November 30, 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, 2000 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, 2000 on file with
the Securities and Exchange Commission provide additional disclosures and a
further description of accounting policies.
The Company's financial statements are presented on the basis that it
is a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recovery and classification of assets or the amount and
classification of liabilities that may result from the outcome of the
uncertainties described in Note 2 -- "Liquidity and Capital Resources".
The accrued claims payable liability represents the estimated ultimate
net amounts owed for all behavioral healthcare services provided through the
respective balance sheet dates. The unpaid claims liability is estimated using
an actuarial paid completion factor methodology and other statistical analyses.
These estimates are subject to the effects of trends in utilization and other
factors. Although considerable variability is inherent in such estimates,
management believes that the unpaid claims liability is adequate. The estimates
are continually reviewed and adjusted as experience develops or new information
becomes known with adjustments included in current operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES
At November 30, 2000, the Company had unrestricted cash and cash
equivalents of $1.9 million. During the six months ended November 30, 2000, the
Company used $1.1 million in operations. Additionally, $0.5 million was provided
by its investing activities. The Company reported a net loss of $1.1 million for
the six months ended November 30, 2000, which included the $0.5 million
non-operating loss related to the note receivable prepayment arrangement (see
Note 4 -- "Notes Receivable"), a $0.3 million reduction in interest expense in
connection with a change in estimate specific to one third party liability (see
Note 7, Item 3 -- "Commitments and Contingencies"), and $0.2 million of income
in connection with one legal settlement. This compares to a net loss of $2.3
million for the six months ended November 30, 1999. The Company has an
accumulated deficit of $63.6 million and total stockholders' deficit of $11.7
million as of November 30, 2000. Additionally, the Company's current assets at
November 30, 2000 amounted to approximately $16.6 million and current
liabilities were approximately $28.6 million, resulting in a working capital
deficiency of approximately $12.0 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 2001 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.
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Commencing in Fiscal 2000 and continuing in Fiscal 2001, management
took steps to trim costs and save cash, including making significant staff
reductions, centralizing certain contract management and clinical functions, and
eliminating the Company's California administrative office and related executive
staff positions. The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing as may be required and, ultimately, to
attain profitability.
NOTE 3 -- MAJOR CUSTOMERS/CONTRACTS
The Company manages the delivery of a continuum of psychiatric and substance
abuse services to commercial, Medicare, and Medicaid members on behalf of
employers, health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), government organizations, third-party claims
administrators, and commercial and other group purchasers of behavioral
healthcare services. The Company is subject to changes in Medicaid and Medicare
regulations. As of November 30, 2000, the Company services approximately 700,000
members consisting of approximately 500,000 lives covered through Medicaid and
Medicare programs.
(1) During the six months ended November 30, 2000, the Company had
contracts with Humana Health Plans ("Humana") under which it provided
services to members in Florida. For the six months ended November 30,
2000, such contracts accounted for 8.8%, or $0.7 million, of the
Company's operating revenues compared to 31.9%, or $3.2 million, for
the six months ended November 30, 1999.
Effective June 30, 2000, Humana, Inc. ("Humana") completed the sale of
its North Florida Medicaid business to HealthEase of Florida, Inc.
Effective July 1, 2000, the Company entered into a one-year contract
with HealthEase of Florida, Inc. to continue to provide behavioral
healthcare services to approximately 100,000 of 160,000 Florida members
that were managed by the Company under contracts with Humana as of June
2000. Additionally, Humana's contracts with the Company, which cover
specific commercial, Medicaid and Medicare populations of approximately
60,000 members terminated September 30, 2000.
The combined revenue from the contracts that were transitioned to
HealthEase of Florida, Inc., plus one existing contract that the
Company had with this HMO, accounted for 17.4%, or $1.4 million, of the
Company's operating revenues during the six months ended November 30,
2000 compared to 2.3%, or $0.2 million, for the six months ended
November 30, 1999.
(2) The Company has two contracts with one HMO to provide behavioral
healthcare services to contracted members in Texas. These combined
contracts represented approximately 11.4%, or $0.9 million, and 10.4%,
or $1.1 million, of the Company's operating revenue for the six months
ended November 30, 2000 and 1999, respectively. The Company renewed
these contracts for two years, with effective dates of February 8,
2000.
(3) During the six months ended November 30, 2000, the Company implemented
five new contracts to provide behavioral healthcare services to Florida
members under contracts with one HMO. For the six months ended November
30, 2000, these five contracts represented approximately 16.8%, or $1.4
million, of the Company's operating revenue.
NOTE 4 -- NOTES RECEIVABLE
On August 31, 2000, the Company entered into a prepayment agreement and
note modification with Jefferson Hills Corporation ("JHC") in connection with
the secured promissory note, which originated out of the sale in Fiscal 1999 of
the Company's Aurora, Colorado facility to JHC. The terms of the prepayment
agreement required JHC to immediately remit $500,000 to the Company as a
prepayment on the note. Additionally, the note was modified to reflect a
remaining balance due totaling $170,000 and to require JHC to make monthly
principal and interest payments until April 2006. One final principal payment in
the amount of approximately $146,000 will be due from JHC in April 2006. As an
inducement to JHC to make such prepayment, the Company credited JHC with an
aggregate of approximately $996,000. As a result, the Company recorded a
non-operating loss during the quarter ended August 31, 2000 of approximately
$496,000 in connection with this transaction.
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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 six months ended November 30, 2000 and 1999.
In connection with the filing of its Federal income tax returns for
fiscal year 1995 and 1996, the Company filed a tentative refund claim to carry
back losses described in Section 172(f) of the Internal Revenue Code ("IRC"),
requesting a refund 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 for 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.
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.
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 Internal Revenue Service ("IRS") of the appropriateness of the 172(f)
carryback. The other 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.
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 $5.9 million through November
30, 2000. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refunds of approximately $2.5
million, which is reported as "other receivable" in the accompanying balance
sheets. This report commenced the administrative appeals process. The Company
filed a protest letter with the IRS on November 6, 1998. The IRS reserves the
right to assess and collect the tax previously refunded to the Company at any
time during the appeals process.
On July 11, 2000, the Company submitted an Offer in Compromise (the
"Offer") to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. The IRS is currently
evaluating the Offer. A preliminary meeting with the IRS with respect to the
Offer took place in October 2000. The Company expects that further discussions
will take place during the third quarter of Fiscal 2001. There can be no
assurance that the IRS will accept the Offer.
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,
2000 1999 2000 1999
-------- --------- --------- ---------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) from operations available to common $ 29 $ (1,546) $ (1,081) $ (2,294)
stockholders ............................................ ======== ======== ======== ========
DENOMINATOR:
Denominator for basic and diluted loss per share-adjusted
weighted average shares ................................. 3,818 3,818 3,818 3,818
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER SHARE:
Net income (loss) ....................................... $ 0.01 $ (0.41) $ (0.28) $ (0.60)
======== ======== ======== ========
</TABLE>
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The following number of potentially convertible shares of common stock related
to convertible debentures and stock options, all of which are anti-dilutive for
the purposes of computing diluted earnings per share, are as follows at November
30, 2000:
<TABLE>
<S> <C>
For conversion of convertible debentures ...................... 9,044
Outstanding stock options ..................................... 843,900
Possible future issuance under stock options plans ............ 258,809
---------
Total ..................................................... 1,111,753
=========
</TABLE>
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
(1) During the fiscal year ended May 31, 2000, the Company renewed one
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 November 30,
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) In July 2000, Steiner Corporation, a Colorado linen service company,
commenced an action against the Company seeking damages in the amount
of, approximately, $145,000 by reason of an alleged early termination
of a laundry service contract. While this claim has only recently been
asserted, the Company intends to deny liability. Additionally, the
Company does not believe that this 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.
During the quarter ended November 30, 2000, the Company lowered its
estimate by approximately $0.3 million specific to interest charges
that were previously accrued in connection with this liability. This
change in estimate was based on recent information provided to the
Company by the California Department of Health Services. As of November
30, 2000, the Company has approximately $1.0 million accrued relating
to this matter.
(4) With respect to the contingency related to prior years' income taxes,
see Note 5, "Income Taxes".
(5) During the quarter ended November 30, 2000, the Company reached a
verbal agreement with Humana to resolve all outstanding legal matters
with Humana. While there can be no assurance that a written agreement
will be executed during Fiscal 2001, Management believes that an
agreement will be finalized prior to February 28, 2001 and that there
will be no adverse impact on the Company's financial statements
resulting from such agreement.
In connection with the Company's contract with Humana Health Plans of
Puerto Rico, Inc., which expired on March 31, 1999, and until such time
as a written settlement has been executed, the Company continues to
report $10.5 million as accounts receivable and accrued claims payable
in the accompanying balance sheet at November 30, 2000 and May 31,
2000. These amounts are specific to the pharmacy and laboratory costs
that were 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 a 100% loss ratio for the contract to date pending
clarification of the actual costs incurred.
Additionally, in connection with the legal matter described in Item 6
below, the Company filed a Third Party Complaint against Humana
claiming that the final amount determined to be paid to Hato Rey
Psychiatric Hospital, d/b/a Mepsi Center ("MEPSI"), should be paid from
the equity reserve account maintained by the Company's Puerto Rico
subsidiary, jointly with Humana, to guarantee payment to
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providers. The Third Party Complaint also requests that the Court order
Humana to release the remaining balance to the Company after payment to
MEPSI was satisfied. Humana filed an answer to the Third Party
Complaint alleging that the equity reserve account also guarantees
payment of monies owed by the Company to Humana. While the legal matter
with MEPSI has been fully settled, Humana continues to withhold the
balance of the restricted funds due the Company. The Company plans to
actively pursue the release of these funds.
(6) The legal matter involving Puerto Rico provider Hato Rey Psychiatric
Hospital, d/b/a Mepsi Center, was settled September 27, 2000 for an
amount that did not exceed the Company's reserve for such claims. The
settlement amount was paid from the restricted cash account (see Item 5
above).
(7) Effective November 2000, all claims against the Company's subsidiary,
Careunit Hospital of Ohio, Inc., in connection with the action titled
"Vencor, Inc. v. Empe, Inc." were dismissed by order of the United
States District Court, Western District of Kentucky at Louisville. This
dismissal followed the Company's Motion for Summary Judgment, which was
sustained by the Court in its November 22, 2000 ruling.
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 any one of its subsidiaries 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.
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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 13).
GENERAL
RESULTS OF OPERATIONS
The Company reported a net loss of $1.1 million for the six months
ended November 30, 2000, which included the $0.5 million non-operating loss
related to the note receivable prepayment arrangement (see Note 4 to the
consolidated financial statements -- "Notes Receivable"), a $0.3 million
reduction in interest expense in connection with a change in estimate specific
to one third party liability (see Note 7, Item 3 to the consolidated financial
statements -- "Commitments and Contingencies"), and $0.2 million of income in
connection with one legal settlement.
The following table summarizes the Company's financial data for the
three months ended November 30, 2000 and 1999 (in thousands):
THE THREE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
NOVEMBER 30, 1999:
<TABLE>
<CAPTION>
CORPORATE
THREE MONTHS ENDED MANAGED AND OTHER CONSOLIDATED
NOVEMBER 30, 2000 CARE OPERATIONS OPERATIONS
------------------------------------ ------- ---------- ------------
<S> <C> <C> <C>
Operating revenues ................. $4,330 $ 111 $ 4,441
Healthcare operating expenses ...... 3,511 97 3,608
General/administrative expenses .... 563 366 929
Other operating expenses ........... 157 (14) 143
------ ------- -------
4,231 449 4,680
------ ------- -------
Operating income (loss) ............ $ 99 $ (338) $ (239)
====== ======= =======
<CAPTION>
CORPORATE
THREE MONTHS ENDED MANAGED AND OTHER CONSOLIDATED
NOVEMBER 30, 1999 CARE OPERATIONS OPERATIONS
------------------------------------ ------- ---------- ------------
<S> <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>
The Company reported an operating loss of approximately $0.2 million
for the quarter ended November 30, 2000. Additionally, operating revenues
decreased by $0.4 million, or 9.0%, for the quarter ended November 30, 2000
compared to the quarter ended November 30, 1999. This decrease is primarily
attributable to the loss of two major, managed care contracts during the third
quarter of Fiscal 2000.
Healthcare operating expenses decreased by approximately $0.9 million,
or 20.5%, for the quarter ended November 30, 2000 as compared to the quarter
ended November 30, 1999. This decrease is attributable to the loss of revenues
specific to two major contracts that terminated during Fiscal 2000. Healthcare
operating expense as a percentage of net revenue for managed care operations
decreased from 93.2% for the quarter ended November 30, 1999 to 81.1% for the
quarter ended November 30, 2000. Efforts are being made to increase revenues
during Fiscal 2001 without adding significantly to our healthcare operating
costs.
General and administrative expenses decreased by approximately $1.0
million, or 50.8%, for the quarter ended November 30, 2000 as compared to the
quarter ended November 30, 1999. General and administrative
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<PAGE> 12
expense as a percentage of revenue decreased from 38.7% for the quarter ended
November 30, 1999 to 20.9% for the quarter ended November 30, 2000. This
decrease is attributable to the significant cost reductions that were initiated
following the loss of two major, managed care contracts in Fiscal 2000. The
Company is continuing efforts to reduce its general and administrative costs.
Other operating expenses increased by $0.1 million for the current
quarter compared to the prior year results, which included $0.1 million of bad
debt recoveries.
The following table summarizes the Company's financial data for the six
months ended November 30, 2000 and 1999 (in thousands):
THE SIX MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THE SIX MONTHS ENDED NOVEMBER
30, 1999:
<TABLE>
<CAPTION>
CORPORATE
SIX MONTHS ENDED MANAGED AND OTHER CONSOLIDATED
NOVEMBER 30, 2000 CARE OPERATIONS OPERATIONS
------------------------------------ ------- ---------- ------------
<S> <C> <C> <C>
Operating revenues ................. $ 7,955 $ 225 $ 8,180
Healthcare operating expenses ...... 6,600 225 6,825
General/administrative expenses .... 1,179 702 1,881
Other operating expenses ........... 330 (30) 300
------- ------- -------
8,109 897 9,006
------- ------- -------
Operating loss ..................... $ (154) $ (672) $ (826)
======= ======= =======
<CAPTION>
CORPORATE
SIX MONTHS ENDED MANAGED AND OTHER CONSOLIDATED
NOVEMBER 30, 1999 CARE OPERATIONS OPERATIONS
------------------------------------ ------- ---------- ------------
<S> <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>
The Company reported an operating loss of approximately $0.8 million
for the six months ended November 30, 2000. Additionally, operating revenues
decreased by $2.0 million, or 19.3%, for the six months ended November 30, 2000
compared to the six months ended November 30, 1999. This decrease is primarily
attributable to the loss of two major, managed care contracts during the third
quarter of Fiscal 2000.
Healthcare operating expenses decreased by approximately $1.8 million,
or 20.8%, for the six months ended November 30, 2000 as compared to the six
months ended November 30, 1999. This decrease is attributable to the loss of
revenues specific to two major contracts that terminated during Fiscal 2000.
Healthcare operating expense as a percentage of net revenue for managed care
operations decreased slightly from 84.8% for the six months ended November 30,
1999 to 83.0% for the six months ended November 30, 2000. Efforts are being made
to increase revenues during Fiscal 2001 without adding significantly to our
healthcare operating costs.
General and administrative expenses decreased by approximately $2.1
million, or 52.7%, for the six months ended November 30, 2000 as compared to the
six months ended November 30, 1999. General and administrative expense as a
percentage of revenue decreased from 39.3% for the six months ended November 30,
1999 to 23.0% for the six months ended November 30, 2000. This decrease is
attributable to the significant cost reductions that were initiated following
the loss of two major, managed care contracts in Fiscal 2000. The Company is
continuing efforts to reduce its general and administrative costs.
Other operating expenses increased by $0.4 million for the six months
ended November 30, 2000 compared to the six months ended November 30, 1999. This
increase is attributable to $0.2 million of bad debt recoveries in
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<PAGE> 13
the six months ended November 30, 1999 specific to the Puerto Rico contract
performance guarantees. Additionally, results for the six months ended November
30, 1999 included $0.1 million of bad debt recoveries specific to the
discontinued operations and $0.1 million of bad debt recoveries specific to one
existing managed care contract.
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,
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 nine contracts with three HMOs to provide
behavioral healthcare services under commercial, Medicaid, and Medicare plans,
to contracted members in Florida and Texas. These combined contracts represent
approximately 45.6% and 12.7% of the Company's operating revenue for the six
months ended November 30, 2000 and 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.
UNCERTAINTY OF FUTURE PROFITABILITY
As of November 30, 2000, the Company had stockholders' deficit of $11.7
million and a working capital deficiency of approximately $12.0 million. The
Company had a net loss for the six months ended November 30, 2000 of $1.1
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
private sale of equity securities and debt securities convertible into equity.
Issuance of additional equity securities by the Company could result in
substantial dilution to stockholders.
The Company may be required to repay a portion of the tax refunds
received from the Internal Revenue Service for Fiscal 1996 and 1995, which
amounted to $9.4 million and $5.4 million, respectively (see "Taxes" below and
Note 5 to the consolidated financial statements -- "Income Taxes"). Further, the
Company may be required to repay some amount to Medi-Cal in connection with the
judgment entered on February 26, 1999, which is more fully described under Part
II -- Item 4, Legal Proceedings, below.
TAXES
In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed a tentative refund claim 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.
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<PAGE> 14
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 $5.9 million through November
30, 2000. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refunds of approximately $2.5
million, which is reported as "other receivable" in the accompanying balance
sheets. This report commenced the administrative appeals process. The Company
filed a protest letter with the IRS on November 6, 1998. The IRS reserves the
right to assess and collect the tax previously refunded to the Company at any
time during the appeals process.
On July 11, 2000, the Company submitted an Offer in Compromise (the
"Offer") to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. The IRS is currently
evaluating the Offer. A preliminary meeting with the IRS with respect to the
Offer took place in October 2000. The Company expects that further discussions
will take place during the third quarter of Fiscal 2001. There can be no
assurance that the IRS will accept the Offer.
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 1,103,000 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.
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<PAGE> 15
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, 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 2001 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.
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<PAGE> 16
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
(1) In July 2000, Steiner Corporation, a Colorado linen service company,
commenced an action against the Company seeking damages in the amount
of, approximately, $145,000 by reason of an alleged early termination
of a laundry service contract. While this claim has only recently been
asserted, the Company intends to deny liability. Additionally, the
Company does not believe that this claim will have a material adverse
effect on the Company's financial position, results of operations and
cash flows.
(2) 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.
(3) 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.
Additionally, in connection with the legal matter described in Item 6
below, the Company filed a Third Party Complaint against Humana
claiming that the final amount determined to be paid to Hato Rey
Psychiatric Hospital, d/b/a Mepsi Center ("MEPSI"), should be paid from
the equity reserve account maintained by the Company's Puerto Rico
subsidiary, jointly with Humana, to guarantee payment to providers. The
Third Party Complaint also requests that the Court order Humana to
release the remaining balance to the Company after payment to MEPSI was
satisfied. Humana filed an answer to the Third Party Complaint alleging
that the equity reserve account also guarantees payment of monies owed
by the Company to Humana.
During the quarter ended November 30, 2000, the Company reached a
verbal agreement with Humana to resolve all outstanding legal matters
with Humana. While there can be no assurance that a written agreement
will be executed during Fiscal 2001, Management believes that an
agreement will be finalized prior to February 28, 2001 and that there
will be no adverse impact on the Company's financial statements
resulting from such agreement.
(4) 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. The Company owned this facility 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.
During the quarter ended November 30, 2000, the Company lowered its
estimate by approximately $0.3 million specific to interest charges
that were previously accrued in connection with this liability. This
change in estimate was based on recent information provided to the
Company by the California Department of Health Services. As of November
30, 2000, the Company has approximately $1.0 million accrued relating
to this matter.
(5) In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed a tentative refund claim
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
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1995, requesting similar refunds of losses carried back under Section
172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million
for 1983; and $0.4 million for 1982, a total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is
recorded as a deferred liability, "Unbenefitted tax refunds received"
pending resolution by the IRS of the appropriateness of the Section
172(f) carryback. The additional refunds requested under Section 172(f)
for prior years of $7.7 million have not been received, nor has the
Company recognized any tax benefit related to these potential refunds.
Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability
or (2) a liability arising under a federal or state law or out of any
tort if the act giving rise to such liability occurs at least three
years before the beginning of the taxable year. The applicability of
Section 172(f) to the type of business in which the Company operates is
unclear. No assurance can be provided that the Company will be able to
retain the refunds received to date or that the additional 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 $5.9 million through November 30, 2000.
Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refunds of approximately
$2.5 million, which is reported as "other receivable" in the
accompanying balance sheets. This report commenced the administrative
appeals process. The Company filed a protest letter with the IRS on
November 6, 1998. The IRS reserves the right to assess and collect the
tax previously refunded to the Company at any time during the appeals
process.
On July 11, 2000, the Company submitted an Offer in Compromise (the
"Offer") to the Appeals Office of the IRS to resolve the controversy
with respect to the refunds at a substantially reduced amount. The IRS
is currently evaluating the Offer. A preliminary meeting with the IRS
with respect to the Offer took place in October 2000. The Company
expects that further discussions will take place during the third
quarter of Fiscal 2001. There can be no assurance that the IRS will
accept the Offer.
(6) The legal matter involving Puerto Rico provider Hato Rey Psychiatric
Hospital, d/b/a Mepsi Center, was settled September 27, 2000 for an
amount that did not exceed the Company's reserve for such claims. The
settlement amount was paid from the restricted cash account (see Item 3
above).
(7) Effective November 2000, all claims against the Company's subsidiary,
Careunit Hospital of Ohio, Inc., in connection with the action titled
"Vencor, Inc. v. Empe, Inc." were dismissed by order of the United
States District Court, Western District of Kentucky at Louisville. This
dismissal followed the Company's Motion for Summary Judgment, which was
sustained by the Court in its November 22, 2000 ruling.
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 any one of its subsidiaries 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.
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<PAGE> 18
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 15, 2000, were reported in the Company's current report on Form
8-K, dated December 15, 2000.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K -
The Company filed a current report on Form 8-K, dated December
15, 2000, to report under Item 5 the results of the Company's
Annual Shareholders' Meeting, which was held on December 15,
2000.
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<PAGE> 19
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 12, 2001 by /s/ ROBERT J. LANDIS
-----------------------------------------
Robert J. Landis
Chairman of the Board of Directors,
Chief Financial Officer, and Treasurer
Page 19
