-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ObdjvQmyT9L4m0b8J8zqsPyPiYnizeCjwyzdSFyPnbLhUb0n9tBNymEAfZPtgzDs 3gaOEAJ0go+oFiZet9Qyhg== 0000950144-98-004599.txt : 19980415 0000950144-98-004599.hdr.sgml : 19980415 ACCESSION NUMBER: 0000950144-98-004599 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980414 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPREHENSIVE CARE CORP CENTRAL INDEX KEY: 0000022872 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 952594724 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09927 FILM NUMBER: 98593478 BUSINESS ADDRESS: STREET 1: 1111 BAYSIDE DRIVE, 100 CITY: CORONA DEL MAR STATE: CA ZIP: 92625 BUSINESS PHONE: 7147199797 MAIL ADDRESS: STREET 1: 1111 BAYSIDE DRIVE 100 CITY: CORONA DEL MAR STATE: CA ZIP: 92625 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES DATE OF NAME CHANGE: 19730501 FORMER COMPANY: FORMER CONFORMED NAME: JADE OIL CO DATE OF NAME CHANGE: 19700402 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES INC DATE OF NAME CHANGE: 19700402 10-Q 1 COMPREHENSIVE CARE CORPORATION FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended February 28, 1998. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ______________ Commission File Number 0-5751 ------ COMPREHENSIVE CARE CORPORATION ------------------------------ (Exact name of registrant as specified in its charter) Delaware 95-2594724 -------- ---------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organ- ization) 4200 West Cypress Street, Suite 300, Tampa, FL 33607 ---------------------------------------------------- (Address of principal executive offices and zip code) (813) 876-5036 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: Classes Outstanding at April 10, 1998 ------- ----------------------------- Common Stock, par value $.01 per share 3,460,560 2 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Index
Page PART I - FINANCIAL INFORMATION Item 1. - Condensed Consolidated Financial Statements Condensed consolidated balance sheets, February 28, 1998 and May 31, 1997......................... 3 Condensed consolidated statements of operations for the three and nine months ended February 28, 1998 and 1997................................................... 4 Condensed consolidated statements of cash flows for the nine months ended February 28, 1998 and 1997........... 5 Notes to condensed consolidated financial statements.......... 6-11 Item 2. - Management's discussion and analysis of financial condition and results of operations.................... 11-19 PART II - OTHER INFORMATION Item 1. - Legal Proceedings........................................ 19 Item 2. - Exhibits and Reports on Form 8-K......................... 20 Signatures......................................................... 21
2 3 PART I. - FINANCIAL INFORMATION ITEM 1. - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts)
February 28, May 31, 1998 1997 ---- ---- ASSETS (Unaudited) (Note) Current assets: Cash and cash equivalents .................................................... $ 3,554 $ 3,991 Accounts receivable, less allowance for doubtful accounts of $1,046 and $882 ....................................... 2,291 1,988 Other receivables ............................................................ 2,451 2,486 Property and equipment held for sale ......................................... -- 2,797 Other current assets ......................................................... 277 259 -------- -------- Total current assets ........................................................... 8,573 11,521 -------- -------- Property and equipment ......................................................... 11,155 10,138 Less accumulated depreciation and amortization ................................. (4,256) (3,820) -------- -------- Net property and equipment ..................................................... 6,899 6,318 -------- -------- Noncurrent assets: Property and equipment held for sale ......................................... 1,910 1,910 Notes receivable ............................................................. 1,922 1,941 Goodwill, net ................................................................ 1,319 1,567 Cash and receivable withholdings ............................................. 3,578 842 Other assets ................................................................. 597 647 -------- -------- Total noncurrent assets ........................................................ 9,326 6,907 -------- -------- Total assets ................................................................... $ 24,798 $ 24,746 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities ..................................... $ 4,506 $ 5,152 Accrued claims payable ....................................................... 6,073 6,256 Current maturities of long-term debt ......................................... 2 46 Unbenefitted tax refunds received ............................................ 12,092 12,092 Income taxes payable ......................................................... 351 362 -------- -------- Total current liabilities ...................................................... $ 23,024 $ 23,908 -------- -------- Long-term liabilities: Long-term debt, excluding current maturities ................................. 2,705 2,712 Other liabilities ............................................................ 642 696 -------- -------- Total long-term liabilities .................................................... 3,347 3,408 -------- -------- Stockholders' deficit: Preferred stock, $50.00 par value; authorized 60,000 shares; issued and outstanding 41,260 shares of Series A Non-Voting 4% Cumulative Convertible Preferred Stock at redemption value ............................ 2,156 2,094 Common stock, $.01 par value; authorized 12,500,000 shares; issued and outstanding 3,391,529 shares ........................................... 34 34 Additional paid-in capital ................................................... 48,998 48,888 Accumulated deficit .......................................................... (52,761) (53,586) -------- -------- Total stockholders' deficit .............................................. (1,573) (2,570) -------- -------- Total liabilities and stockholders' deficit .................................... $ 24,798 $ 24,746 ======== ========
Note: The balance sheet at May 31, 1997 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 statements. See accompanying notes. 3 4 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended ------------------ ----------------- February 28, February 28, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues and gains: Operating revenues ....................................... $ 11,834 $ 9,438 $ 34,433 $ 28,141 Costs and expenses: Direct healthcare expenses ............................... 9,071 8,101 28,733 24,690 General and administrative expenses ...................... 1,723 2,269 4,406 6,079 Provision for doubtful accounts .......................... (106) (12) 51 189 Depreciation and amortization ............................ 210 182 628 520 Restructuring expenses ................................... -- -- -- 195 -------- -------- -------- -------- 10,898 10,540 33,818 31,673 -------- -------- -------- -------- Income (loss) from operations .............................. 936 (1,102) 615 (3,532) Gain on sale of assets ................................... 13 16 169 42 Loss on sale of assets ................................... -- -- (8) (12) Non-recurring gain (loss) ................................ -- -- -- (250) Interest income .......................................... 116 62 323 212 Interest expense ......................................... (39) (74) (160) (670) -------- -------- -------- -------- Income (loss) before income taxes .......................... 1,026 (1,098) 939 (4,210) Provision (benefit) for income taxes ....................... 19 4 53 (341) -------- -------- -------- -------- Income (loss) before extraordinary item .................... 1,007 (1,102) 886 (3,869) Extraordinary item - gain on debenture exchange ............ -- 2,191 -- 2,191 -------- -------- -------- -------- Net income (loss) .......................................... 1,007 1,089 886 (1,678) Dividends on convertible preferred stock ................... 21 10 62 10 -------- -------- -------- -------- Net income (loss) attributable to common stockholders ............................................. $ 986 $ 1,079 $ 824 $ (1,688) ======== ======== ======== ======== BASIC EARNINGS PER SHARE Income (loss) before extraordinary item .................... $ 0.29 $ (0.35) $ 0.24 $ (1.29) Extraordinary item ......................................... 0.00 0.70 0.00 0.73 -------- -------- -------- -------- Net Income (loss) .......................................... $ 0.29 $ 0.35 $ 0.24 $ (0.56) ======== ======== ======== ======== DILUTED EARNINGS PER SHARE Income (loss) before extraordinary item .................... $ 0.27 $ (0.35) $ 0.23 $ (1.29) Extraordinary item ......................................... $ 0.00 $ 0.70 $ 0.00 $ 0.73 -------- -------- -------- -------- Net Income (loss) .......................................... $ 0.27 $ 0.35 $ 0.23 $ (0.56) ======== ======== ======== ========
See accompanying notes. 4 5 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)
Nine Months Ended ----------------- February 28, 1998 1997 ---- ---- Cash flows from operating activities: Net income (loss) .................................................... $ 824 $(1,688) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................................ 627 520 Provision for doubtful accounts ...................................... 51 189 Gain on Debenture conversion ......................................... -- (2,191) Gain on sale of assets ............................................... (167) (42) Loss on sale of assets ............................................... 9 12 Changes in assets and liabilities: Accounts receivable ................................................ (354) 9 Notes and other receivables ........................................ 54 (733) Other current assets, restricted funds, and other non-current assets (2,738) (137) Accounts payable and accrued liabilities ........................... (375) 1,069 Other liabilities .................................................. (380) (208) Increase in unbenefitted tax refunds received .......................... -- 5,074 Increase (decrease) in income taxes payable ............................ (11) (50) ------- ------- Net cash (used in) provided by operating activities .................. (2,460) 1,824 ------- ------- Cash flows from investing activities: Net proceeds from sale of property and equipment (operating and held for sale) ....................................................... 2,966 409 Additions to property and equipment .................................. (1,110) (293) ------- ------- Net cash provided by investing activities .......................... 1,856 116 ------- ------- Cash flows from financing activities: Bank and other borrowings ............................................ 16 -- Dividends on preferred stock ......................................... 63 10 Proceeds from the issuance of Common Stock ........................... 155 2,756 Repayment of debt .................................................... (67) (5,373) ------- ------- Net cash provided by (used in) financing activities ................ 167 (2,607) ------- ------- Net decrease in cash and cash equivalents .............................. (437) (667) Cash and cash equivalents at beginning of period ....................... 3,991 4,433 ------- ------- Cash and cash equivalents at end of period ............................. $ 3,554 $ 3,766 ======= =======
See accompanying notes. 5 6 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) NOTE -1- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The condensed consolidated balance sheet as of February 28, 1998, and the related condensed consolidated statements of operations and cash flows for the three and nine month periods ended February 28, 1998 and 1997 are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The results of operations for the three and nine months ended February 28, 1998 are not necessarily indicative of the results to be expected during the balance of the fiscal year. The condensed 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. Notes to consolidated financial statements included in Form 10-K for the year ended May 31, 1997 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 Company incurred significant losses from operations in fiscal 1997. Income was recorded for the second and third quarters of 1998 and a profit is reflected on a year to date basis. The continuation of the Company's business is dependent upon the resolution of operating and short-term liquidity problems and the realization of the Company's plan of operations. These conditions may raise doubt about the Company's ability to continue as a going concern. 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 this uncertainty (see Note -2- "Operating Losses and Liquidity"). In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any diluted effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. (See Note -8-). 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- Operating Losses and Liquidity At February 28, 1998, the Company had cash and cash equivalents of $3.6 million. During the nine months ended February 28, 1998, the Company used $2.5 million in its operating activities which includes $1.7 million for cash restricted due to capitation contract requirements and provided $1.9 million from its investing activities. The Company reported net income before extraordinary items of $1.0 million for the quarter ended February 28, 1998, versus a net loss of $1.1 million for the quarter ended February 28, 1997. The Company recorded net income before extraordinary items and after dividends on convertible, preferred stock of $0.8 million for the nine months ended February 28, 1998 versus a loss of $3.9 million before extraordinary items for the same period of fiscal 1997. As a result, the Company has an accumulated deficit of $52.8 million and a total stockholders' deficiency of $1.6 million as of February 28, 1998. Additionally, the Company's current assets at February 28, 1998 amounted to approximately $8.6 million and current liabilities were approximately $23.0 million, resulting in a working capital deficiency of approximately $14.4 million and a negative current ratio of 1:2.7. The Company's primary use of available cash resources is to continue to expand its behavioral medicine managed care business and fund operations. 6 7 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) During the third quarter of fiscal 1997, the Company completed its Debenture Exchange Offer. In addition to recognizing a gain on the Exchange of $2.2 million, the Exchange resulted in a reduction of debt of $6.8 million with the remaining $2.7 million in Debentures due in 2010. The Debenture Exchange will also result in a reduction of interest expense for future periods. The bondholders also consented to the waiver and elimination of the Debenture sinking fund. Annual sinking fund installments of 5% would have been payable commencing in April 1996 and continuing annually through April 2009. During the third quarter of fiscal 1997, the Company exchanged its Secured Convertible Note into Series A Non-Voting 4% Cumulative Convertible Preferred Stock and also exchanged a minority interest in one of its subsidiaries into 100,000 shares of its Common Stock (see Note -3- "Acquisitions and Dispositions"). As a result of the above transactions, current liabilities were reduced by $11.5 million, non-current liabilities were increased by $1.6 million, and stockholders' deficit was improved by $5.3 million. These transactions also reduced the Company's future cash obligations with the significant reduction in debt, interest expense, and future sinking fund requirements. The Company also has the following potential sources of cash to fund additional operating needs: - A firm commitment from a mutual fund to purchase, in a private placement, at least $5.0 million of 15%, fully secured Company notes, due no earlier than November 1998 if offered by the Company. - Included in assets held for sale (non-current) is one hospital facility designated as property and equipment held for sale with a net realizable value of $1.9 million. The Company expects to sell this facility during fiscal 1998. Additionally, the Company believes that it would be able to raise additional working capital through either an equity offering or borrowings if it so desired. However, the Company cannot state with any degree of certainty at this time whether additional equity capital or working capital would be available to it, and if available, would be at terms and conditions acceptable to the Company. All of these potential sources of additional cash in fiscal 1998 are subject to variation due to business and economic influences outside the Company's control. Based upon current levels of operation and cash on hand of $3.6 million and cash anticipated to be internally generated from operations, the Company believes that it has sufficient working capital to meet obligations as they become due, however, the ultimate resolution of the Company's entitlement to certain IRS refund claims or the occurrence of business or economic conditions beyond the control of the Company or the loss of existing contracts from which cash from operations is internally generated may adversely affect the adequacy of such working capital. These conditions may raise substantial doubt about the Company's ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty. In fiscal 1993, the Company established a restructuring reserve to address the Company's operational issues. The purpose of such reserve was for the realignment of the Company's focus and business and the settlement and disposition of certain non-performing and under-utilized assets. Most of the Company's inpatient freestanding facilities have been sold. Management continues to implement plans for expanding the Company's managed care and behavioral medicine contract management operations. During fiscal 1997, the Company established an additional restructuring reserve of $0.2 million for severance and other cash outlays related to the planned closure and disposition of contract units which occurred during the first quarter of fiscal 1997. The following table sets forth the activity to the restructuring reserve during the third quarter of fiscal 1998:
CHARGES ------- NOVEMBER 30, FEBRUARY 28, 1997 INCOME EXPENSE PAYMENTS 1998 ---- ------ ------- -------- ---- (AMOUNTS IN THOUSANDS) Restructuring Reserve: --------------------- Severance.......................... $ 12 $ -- $ -- $ (12) $ 0 Operations/corporate relocation.... 168 (66) -- (13) 89 ---- ----- ----- ----- ---- Totals............................. $180 $ (66) $ -- $ (25) $ 89 ==== ===== ===== ===== ====
7 8 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) NOTE -3- ACQUISITIONS AND DISPOSITIONS On June 4, 1997, the Company sold its non-operating freestanding facility located in Cincinnati, Ohio for a gain of $0.2 million. Proceeds from the sale were utilized for working capital purposes. On August 12, 1996, the Company sold a non-operating facility in Costa Mesa, California. As part of this transaction, the Company took back a note equal to 83% of the selling price. The cash proceeds were utilized to retire long-term debt and for working capital purposes. On July 25, 1996, the Company consented to closing the acquisition of Healthcare Management Services, Inc., Healthcare Management Services of Ohio, Inc., Healthcare Management Services of Michigan Inc. and Behavioral Healthcare Management, Inc. (hereafter collectively referred to as "HMS"). The Company consented to the closing, reserving its rights to assert certain claims against the Sellers and others. (See Note -9- Commitments and Contingencies). HMS contracts with commercial and governmental agencies to provide managed behavioral health care programs to patients in Michigan and Ohio. Additionally, HMS provides the following on a contract basis: case management (pre-certification, concurrent review, quality assurance, retrospective chart reviews, peer review and clinical audits as requested by their clients), claims review, network development, credentialing and management of clinical services for hospitals and community providers. The Company recorded the acquisition using the purchase method of accounting. In conjunction with this acquisition, the Company issued a net of 10,000 shares of its Common Stock after giving effect to a settlement with one of the principals in the HMS transaction. NOTE -4- PROPERTY AND EQUIPMENT HELD FOR SALE The Company has decided to dispose of certain freestanding facilities and other assets (see Note -2- "Operating Losses and Liquidity"). Property and equipment held for sale consisting of land, building, equipment and other fixed assets with a historical net book value of approximately $2.7 million at February 28, 1998 is carried at estimated net realizable value of approximately $1.9 million. Operating expenses of the facilities designated for disposition were $52,000 for the three months ended February 28, 1998. Property and equipment held for sale which are under contract and expected to be sold within the next twelve month period are shown as current assets on the consolidated balance sheets. Gains and losses on facilities have been reflected in the statement of operations. Any impairments to the net realizable value of property and equipment held for sale have also been recorded in the statement of operations. There were no transactions affecting the carrying value of property and equipment held for sale for the three months ended February 28, 1998. NOTE -5- RESTRICTED CASH AND RECEIVABLE WITHHOLDINGS Restricted cash and receivable withholdings consist of the following:
February 28, May 31, 1998 1997 ---- ---- (Dollars in thousands) Cash restricted to meet capitation-contract requirements ........ $ 1,819 $ 133 Receivable (capitation) withholdings............................. 1,759 709 ------- ------ Total restricted funds:.......................................... $ 3,578 $ 842 ======= ======
NOTE -6- INCOME TAXES On July 20, 1995, the Company filed its Federal tax return for fiscal 1995 and subsequently filed Form 1139 "Corporate Application for Tentative Refund" to carryback losses described in Section 172(f) requesting a refund to the Company in the amount of $9.4 million. On September 20, 1996, the Company filed its Federal income tax return for fiscal 1996, and subsequently filed Form 1139 "Corporate Application for Tentative Refund" to carryback losses described under Section 172(f) requesting a refund to the Company in the amount of $5.5 million. Section 172(f) 8 9 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) provides for a 10-year net operating loss carryback for losses attributable to specified liability losses. A specified liability loss is defined, in general, as any amount otherwise allowable as a deduction which is attributable to (i) a product liability or (ii) 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. On August 30, 1995, the Company also filed amended Federal tax returns for several prior fiscal years to carryback losses under Section 172(f). The refunds requested on the amended returns are approximately $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982. There may be opposition by the Internal Revenue Service ("IRS") as to the Company's ability to obtain benefits from refunds claimed under Section 172(f). Therefore, no assurances can be made as to the Company's entitlement to all claimed refunds. In September 1996, the Company received a $5.4 million tentative refund for fiscal 1996. Of this refund, $0.3 million has been recognized as a tax benefit during the second quarter of fiscal 1997. In October 1995, the Company received a $9.4 million tentative refund for fiscal 1995. Of this refund, $2.4 million was recognized as a tax benefit during the second quarter of fiscal 1996. Receipt of the 1996 and 1995 Federal refunds does not imply IRS approval. Due to the lack of significant precedent regarding Section 172(f), the unbenefitted amounts from fiscal 1996 and 1995 of $5.1 million and $7.0 million, respectively, are reflected on the Company's consolidated balance sheet in unbenefitted tax refunds received. In connection with the refund claims, the Company paid contingency fees of $1.1 million and $1.9 million relating to the fiscal 1996 and 1995 refunds, respectively. The Company expensed a pro rata portion of the contingency fees as related tax benefits were recognized. The remaining amount of $2.4 million is reflected in the Company's consolidated balance sheet as other receivables. In the event the IRS Appeals Office determines that the Company is not entitled to all or a portion of the deductions under Section 172(f), this fee is reimbursable to the Company proportionately. The Company is currently under audit by the IRS related to its fiscal 1996 and fiscal 1995 Federal income tax returns and the amended returns for prior years. Neither the Company nor the IRS will be foreclosed from raising other tax issues in regard to any audits of such returns, which also could ultimately affect the Company's tax liability. The income tax reported by the Company differs from the customary statutory rate of 34% due primarily to the utilization of net operating loss carryforwards. NOTE -7- ACCRUED CLAIMS PAYABLE Accrued claims payable represents the estimated ultimate net cost of all reported and unreported benefits provided through February 28, 1998. The accrued claims payable liability is estimated using statistical analyses based on historical trends. Although considerable variability is inherent in such estimates, management believes that the reported liability is adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known, such adjustments are included in current operations. 9 10 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 (UNAUDITED) NOTE -8- EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share in accordance with Statement No. 128, Earnings Per Share:
Three Months Ended Nine Months Ended ------------------ ----------------- February 28, February 28, 1998 1997 1998 1997 ---- ---- ---- ---- Numerator: Income (loss) before Extraordinary item $ 1,007,000 $(1,102,000) $ 886,000 $(3,869,000) Less Preferred stock dividends (21,000) (10,000) (62,000) (10,000) ----------- ----------- ---------- ----------- Numerator for basic earnings per share- income (loss) available to common stockholders $ 986,000 $(1,112,000) $ 824,000 $(3,879,000) Extraordinary item 0 2,191,000 0 2,191,000 ----------- ----------- ---------- ----------- Net income (loss) available to common stockholders $ 986,000 $ 1,079,000 $ 824,000 $(1,688,000) Effect of dilutive securities: Preferred stock dividends $ 21,000 $ 0 $ 0 $ 0 ----------- ----------- ---------- ----------- Numerator for diluted earnings per share- income available to common stock- holders after assumed conversions 1,007,000 (1,112,000) 824,000 (3,879,000) Denominator: Denominator for basic earnings per share - weighted-average shares 3,386,129 3,145,561 3,377,243 3,000,520 Effect of dilutive securities: Employee stock options 53,586 0 171,619 0 Convertible preferred stock 343,833 0 0 0 ----------- ----------- ---------- ----------- Dilutive potential common shares 397,419 0 171,619 0 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 3,783,548 3,145,561 3,548,862 3,000,520 =========== =========== ========== =========== BASIC EARNINGS PER SHARE Income (loss) before extraordinary item $ 0.29 $ (0.35) $ 0.24 $ (1.29) Extraordinary item 0.00 0.70 0.00 0.73 ----------- ----------- ---------- ----------- Net Income (loss) $ 0.29 $ 0.35 $ 0.24 $ (0.56) =========== =========== ========== =========== DILUTED EARNINGS PER SHARE Income (loss) before extraordinary item $ 0.27 $ (0.35) $ 0.23 $ (1.29) Extraordinary item $ 0.00 $ 0.70 $ 0.00 $ 0.73 ----------- ----------- ---------- ----------- Net Income (loss) $ 0.27 $ 0.35 $ 0.23 $ (0.56) =========== =========== ========== ===========
The following number of potentially convertible shares of common stock related to convertible preferred stock, convertible debentures, and stock options are as follows at February 28, 1998:
For conversion of convertible preferred stock 343,833 For conversion of convertible debentures 77,736 Outstanding stock options 672,682 Possible future issuances under stock option plan 677,111 --------- Total shares potentially convertible 1,771,362 =========
10 11 NOTE -9- COMMITMENTS AND CONTINGENCIES On September 6, 1996, the Company instituted an arbitration against the HMS principals ("Sellers") with the American Arbitration Association in Orange County, California seeking, among other things, reimbursement from the Sellers for damages which the Company sustained by reason of the inaccuracies of the representations and warranties made by the Sellers and for the indemnification from each of the Sellers as provided for under the terms of the Stock Purchase Agreement. One seller has settled his case with the Company. The arbitration against the remaining Seller is presently pending. The Company does not believe that the impact of these claims will have a material adverse effect on the Company's financial position, results of operations and cash flows. In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criterion in regard to net tangible assets available to Common Stock and three year average net income. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards and has so indicated in approving the Company's most recent Listing Application on December 30, 1996. Management believes, although no assurance may be given, that the completion of the Company's Debenture Exchange Offer positions the Company to seek additional equity and thereby satisfies the Committee of the Company's progress. No assurance may be given that additional equity may be obtained on terms favorable to the Company. On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial Officer of the Company, commenced an action against the Company and its Chairman, Chriss W. Street, in the Superior Court of the State of California arising out of the termination of her employment on September 29, 1997. The action alleges alternate causes of action based upon her employment relationship with the Company and seeks unspecified damages for unpaid wages, unspecified actual, compensatory and punitive damages; damages for emotional distress; and costs, legal fees and penalties under applicable California law. The 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 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. NOTE -10- EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE On March 31, 1998, the Company collected cash, totaling $1,949,800, representing $1,936,800 in principal and $13,000 in interest in full settlement of the 8% secured promissory note. 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 Factor Related to Forward- Looking Statements and Associated Risks" (page 16). General Comprehensive Care Corporation ("CompCare") was founded 27 years ago to provide fee-for-service treatment of alcohol abuse at inpatient hospitals. In its early years, the Company grew rapidly and prospered due to the willingness of insurance companies to reimburse the Company for long lengths of stay and at very lucrative day rates. Over time, the Company diversified to provide a spectrum of behavioral healthcare services including drug treatments, smoking cessation and long-term rehabilitation. Beginning in the late 1980's and accelerating into the 1990's, insurance companies implemented "managed care" cost containment in behavioral healthcare. This led to the adoption of policies aimed at reducing inpatient lengths of stay and day rates paid and encouraging lower-cost, outpatient treatments, with consequent losses to the Company. The Company embarked on a strategic plan to divest itself of its freestanding facilities and to concentrate its efforts on its managed behavioral healthcare business. 11 12 In the first quarter of fiscal 1995, the CompCare Board appointed Mr. Chriss W. Street as President and Chief Executive Officer to restructure the Company's balance sheet and return operations to sustained profitability. Through the first fiscal quarter of 1998, the Company divested most of its unprofitable freestanding inpatient hospital facilities, reduced net debt by 93%, and resolved certain past IRS and legal issues. Operations were reorganized around strategic investments in expertise and infrastructure that facilitated the growth of the Company's managed behavioral healthcare business by 1,000%. Global Restructuring In early fiscal 1995, management developed a "global restructuring" plan intended to address the Company's immediate challenges and to return to a base of profitability for future success. Management has achieved all of the stated objectives in the global restructuring plan, including the restructuring of the Company's financial obligations represented by the Company's 7 1/2% Convertible Subordinated Debentures (the "Debentures") which occurred during the third quarter of fiscal 1997. During fiscal 1997, the Company recorded $0.2 million in restructuring charges related to the Company's closure of several contract units which occurred during the first and second quarters of fiscal 1997. The components of this charge were predominately severance to contract unit employees. Closure of these units was either consistent with the Company's global restructuring plans or resulted from contracts not renewed by host hospitals and will eliminate the funding of operating losses and cash flow deficits required by these units. On June 4, 1997, the Company sold its non-operating freestanding facility in Cincinnati, Ohio which had been closed in August, 1996 due to poor performance. The Company utilized the proceeds received from the sale for working capital and short-term investment purposes. Third Quarter During the third fiscal quarter ended February 28, 1998, CompCare's management continued to focus on achieving sustainable profitability. The Company implemented its previously announced consolidation of certain financial and operating functions from its corporate headquarters in Corona del Mar, California to its rapidly growing managed care subsidiary headquartered in Tampa, Florida. Management believes that increased communication and the intensive involvement of corporate management in the direct operational aspects of the business were key factors in the Company achieving its first back-to-back operating profit in recent years. CompCare's mix of business remained at more than 80% managed care for the quarter. The following table sets forth the distribution of operating revenues for the selected quarterly periods:
Three months ended ----------------------------------------- February 28, May 31, February 28, 1998 1997 1997 ---- ---- ---- Managed care operations.......................... 84% 78% 79% Provider operations.............................. 16 22 21 --- --- --- Totals........................................... 100% 100% 100% === === ===
Income from operations for the third quarter of fiscal 1998 was $936,000 compared to a $674,000 profit for the second quarter of fiscal 1998, and a $1,102,000 loss from operations for the comparable third quarter of fiscal 1997. Net Income before extraordinary items and after dividends on convertible, preferred stock for the third quarter of 1998 was $986,000 or $.29 per share compared to the $673,000 profit or $.20 per share for the second quarter of fiscal 1998 and the $1,112,000 loss or $.35 per share for the comparable third quarter of 1997. RESULTS OF OPERATIONS Statistical Information The following utilization statistics include data from all operations including closures during the periods, joint ventures and closed facilities: 12 13
Three Months Ended Nine Months Ended ------------------ ----------------- February 28, February 28, 1998 1997 1998 1997 ---- ---- ---- ---- Managed care operations (covered lives): Carve-out (capitated) ................... 1,045,996 1,232,068 1,045,996 1,232,068 ASO services ............................ 198,877 4,632 198,877 4,632 EAP ..................................... 62,399 66,998 62,399 66,998 Blended products ........................ 0 227,517 0 227,517 --------- --------- --------- --------- Total .............................. 1,307,272 1,531,215 1,307,272 1,531,215 ========= ========= ========= ========= Behavioral medicine contracts: Patient days ............................ 4,416 1,281 11,821 6,451 Average occupied beds per contract ...... 12 3 11 4 Admissions .............................. 183 334 889 1,156 Average length of stay (days) ........... 24.1 3.9 13.3 5.6 Beds available at end of period ......... 60 55 60 55 Freestanding facilities: Patient days ............................ 476 1470 3088 4,577 Occupancy rate .......................... 14% 43% 30% 38% Admissions .............................. 49 301 551 914 Average length of stay (days) ........... 9.7 4.9 5.6 5.0 Beds available at end of period ......... 38 38 38 45
Three Months Ended February 28, 1998 Compared To Three Months Ended February 28, 1997
Three months ended Increase (Decrease) ------------------ ------------------- February 28, 1998 1997 $ % ---- ---- ------- ---- (Amounts in thousands) Operating revenues Managed care .................... $ 9,993 $ 7,478 $ 2,515 34% Provider operations ............. 1,841 1,960 (119) (6)% ------- ------- ------- --- Net revenues ................. 11,834 9,438 2,396 25% Direct healthcare expenses ........ 9,104 8,101 1,003 12% General and administrative ........ 1,690 2,269 (579) (26)% Other operating expenses .......... 104 170 (66) (39)% ------- ------- ------- --- Operating income (loss) ......... $ 936 $(1,102) $ 2,038 185% ======= ======= ======= ===
Operating revenues increased by 25%, or $2.4 million, from the third quarter of fiscal 1997, reflecting increases in the overall monthly payment rate obtained from new contracts in the managed care division. The managed care division posted an increase in operating revenues of 34%, or $2.5 million, for the third quarter of fiscal 1998 as compared to the third quarter of fiscal 1997. Direct healthcare expenses increased by approximately 12%, or $1 million for the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 due primarily to an increase of 34% in managed care operations which reflects growth in the underlying business, offset by the elimination of selected unprofitable contracts. General and administrative expenses decreased by approximately $0.6 million from the third quarter of fiscal 1997. This reduction in expense reflects a decline in corporate overhead spending due primarily to the consolidation of corporate and managed care finance functions in Tampa, Florida. During the third quarter of fiscal 1998, patient days of service for behavioral medicine contracts increased 345% from 1,281 patient days to 4,416 patient days due to the implementation, during the first quarter of fiscal 1998, of a high-volume contract with the State of Idaho. However, average net revenue per patient day decreased 89% from the third quarter of fiscal 1997 due to a lower per-patient revenue. 13 14 During the third quarter of fiscal 1998, admissions for the freestanding facility operated by the Company decreased to 49 from 301 in the third quarter of the prior fiscal year. Average length of stay increased from 4.9 days to 9.7 days in the current quarter. The Company continues to focus its efforts toward providing effective lower cost outpatient, partial hospitalization and daycare programs. It also continues to strive to establish and maintain relationships and contracts with managed care and others that pay for or broker such services. Nine Months Ended February 28, 1998 Compared to Nine Months Ended February 28, 1997
Nine months ended Increase (Decrease) ----------------- ------------------- February 28, 1998 1997 $ % ---- ---- ------- ---- (Amounts in thousands) Operating revenues Managed care .................... $28,545 $19,466 $ 9,079 47% Provider operations ............. 5,888 8,675 (2,787) (32)% ------- ------- ------- --- Net revenues ................. 34,433 28,141 6,292 22% Direct healthcare expenses ........ 28,733 24,690 4,043 16% General and administrative ........ 4,406 6,079 (1,673) (28)% Other operating expenses .......... 679 904 (225) (25)% ------- ------- ------- --- Operating income (loss) ......... $ 615 $(3,532) $ 4,147 117% ======= ======= ======= ===
The Company reported a pretax profit of approximately $1.0 million for the nine months ended February 28, 1998 compared to the pretax loss of $4.2 million reported for the nine months ended February 28, 1997. Included in the results for fiscal 1997 is a restructuring charge of $0.2 million, a legal settlement of $0.3 million and $0.1 million in fees and expenses relating to the Company's Exchange Offer of its Debentures. Operating revenues increased by 22%, or $6.3 million for the nine months ended February 28, 1998 compared to the nine months ended February 28, 1997. The increase in operating revenues is attributable to an increase in managed care operations of $9.1 million which was offset by a decline of $2.8 million related to provider operations which is comprised of behavioral medicine contract units and one freestanding facility. Managed care revenues increased 47% due to increased rates for new contracts offset by a decrease in non-profitable, lower rate contracts. Direct healthcare expenses increased by 16%, or $4.0 million for the nine months ended February 28, 1998 as compared to the nine months ended February 28, 1997. The increase in direct healthcare expenses is primarily attributable to an increase in managed care operations which was partially offset by a decline in direct healthcare expenses for provider operations. The managed care increase reflects growth in the underlying business, offset by the elimination of selected, unprofitable contracts. Covered lives decreased 223,943 or 15% due to cancellation of existing non-profitable, lower rate contracts. General and administrative expenses decreased by 28%, or $1.7 million for the nine months ended February 28, 1998 as compared to the nine months ended February 28, 1997. This reduction in expense reflects a decline in corporate overhead spending due to corporate restructuring. Other operating expenses declined by $0.2 million as a result of a decrease in the provision for doubtful accounts arising from improved management of Company receivables. Interest expense decreased by 80%, or $0.5 million for the nine months ended February 28, 1998 compared to the nine months ended February 28, 1997 as a result of the Debenture Exchange in the third quarter of fiscal 1997. The Company's managed care operations contract with a variety of sources on a capitated basis. The Company attempts to control its risk by entering into contractual relationships with healthcare providers including hospitals and physician groups on a sub-capitated, discounted fee for service or per case basis. The Company believes that it distinguishes itself from its competition by being the "science-based" provider of care by managing all clinical programs based upon proven treatment technologies. 14 15 During the first nine months of fiscal 1998, patient days of service for behavioral medicine contracts increased by approximately 83% from 6,451 patient days to 11,821 patient days due to the implementation during the first quarter of fiscal 1998 of a high-volume contract with the State of Idaho. However, average net revenue per patient day decreased 87% from the first nine months of fiscal 1997 due to a lower, per-patient revenue. Admissions at the freestanding facility decreased to 551 from 914 in the first nine months of fiscal year 1998. Average length of stay increased to 5.6 from 5.0. Total patient days declined 1,489 days to 3,088 days in the first nine months of fiscal 1998. The Company is taking steps designed to increase revenues, primarily through the continued development of its behavioral medicine managed care business. The Company is also implementing cost reduction measures including the consolidation of selected corporate functions with the managed care operations and achievement of various operating efficiencies. In addition, the Company sold two poorly performing facilities in fiscal 1997 and one during the first quarter of fiscal 1998. The Company owns two freestanding facilities. One of the two owned facilities is currently operating and the other is held for sale. The Company will continue to evaluate the performance of the remaining operating facility in its respective market. LIQUIDITY AND CAPITAL RESOURCES At February 28, 1998, the Company had cash and cash equivalents of $3.6 million. During the nine months ended February 28, 1998, the Company used $2.5 million in its operating activities and provided $1.9 million from its investing activities. The Company reported net income before extraordinary items and after dividends on convertible, preferred stock of $1.0 million for the quarter ended February 28, 1998, versus a net loss of $1.1 million for the quarter ended February 28, 1997. The Company reported net income before extraordinary items and after dividends on convertible, preferred stock of $0.8 million for the nine months ended February 28, 1998, versus a loss of $3.9 million for the same period of fiscal 1997. As a result, the Company has an accumulated deficit of $52.8 million and a total stockholders' deficiency of $1.6 million as of February 28, 1998. Additionally, the Company's current assets at February 28, 1998 amounted to approximately $8.6 million and current liabilities were approximately $23.0 million, resulting in a working capital deficiency of approximately $14.4 million and a negative current ratio of 1:2.7. The Company's primary use of available cash resources is to continue to expand its behavioral medicine managed care business and fund operations while it seeks to dispose of its non-operating freestanding facility held for sale. During third quarter fiscal 1997, the Company completed its Debenture Exchange Offer. In addition to recognizing a gain on the Exchange of $2.2 million, the Exchange resulted in a reduction of debt of $6.8 million with the remaining $2.7 million in Debentures due in 2010. The Debenture Exchange will also result in a reduction of interest expense for future periods. The bondholders also consented to the waiver and elimination of the Debenture sinking fund. Annual sinking fund installments of 5% would have been payable commencing in April 1996 and continuing annually through April 2009. During the third quarter of fiscal 1997, the Company exchanged its Secured Convertible Note into Series A Non-Voting 4% Cumulative Convertible Preferred Stock and also exchanged a minority interest in one of its subsidiaries into 100,000 shares of its Common Stock (see Note -3- "Acquisitions and Dispositions"). As a result of the above transactions, current liabilities were reduced by $11.5 million, non-current liabilities were increased by $1.6 million, and stockholders' deficit was improved by $5.3 million. These transactions also reduced the Company's future cash obligations with the significant reduction in debt, interest expense and future sinking fund requirements. The Company also has the following potential sources of cash to fund additional operating needs: - A firm commitment from a mutual fund to purchase in a private placement at least $5.0 million of 15%, fully secured Company notes, due no earlier than November 1998 if offered by the Company. - Included in assets held for sale (non-current) is one hospital facility designated as property and equipment held for sale with a net realizable value of $1.9 million. The Company expects to sell this facility during fiscal 1998. 15 16 Additionally, the Company believes that it would be able to raise additional working capital through either an equity offering or borrowings if it so desired. However, the Company cannot state with any degree of certainty at this time whether additional equity capital or working capital would be available to it, and if available, would be at terms and conditions acceptable to the Company. All of these potential sources of additional cash in fiscal 1998 are subject to variation due to business and economic influences outside the Company's control. Based upon current levels of operation and cash on hand of $3.6 million and cash anticipated to be internally generated from operations, the Company believes that it has sufficient working capital to meet obligations as they become due; however, the ultimate resolution of the Company's entitlement to certain IRS refund claims or the occurrence of business or economic conditions beyond the control of the Company or the loss of existing contracts from which cash from operations is internally generated may adversely affect the adequacy of such working capital. These conditions may raise substantial doubt about the Company's ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty. RISK FACTORS IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This Quarterly Report on Form 10-Q contains certain forward-looking statements that are based on current expectations and involve a number of risks and uncertainties. Factors that may materially affect revenues, expenses and operating results include, without limitation, the Company's success in (i) disposing of its remaining freestanding facility on acceptable terms, (ii) expanding the behavioral medicine managed care operations, (iii) securing and retaining certain refunds from the IRS and certain judgments from adverse parties in the legal proceedings described above, and (iv) maintaining the listing of the Company's Common Stock on the NYSE. The forward-looking statements included herein are based on current assumptions that competitive conditions within the healthcare industry will not change materially or adversely, that the Company will retain key management personnel, that the Company's forecasts will accurately anticipate market demand for its services, that the IRS refunds are recoverable and that there will be no material adverse change in the Company's operations or business. 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. HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY As of February 28, 1998, the Company had a stockholders' deficiency of $1.6 million, a working capital deficiency of approximately $14.4 million and a negative current ratio of 1:2.7. Income from operations for the quarter ended February 28, 1998 was $0.9 million. Present results of operations are not necessarily indicative of anticipated future results of operations. There can be no assurance that the Company will be able to sustain profitability and maintain positive cash flows from operations or that profitability and positive cash flow from operations can be sustained on an ongoing basis. Moreover, the level of profitability or positive cash flow cannot accurately be predicted. The Company's lack of profitability has resulted in the Company failing to satisfy listing standards of the NYSE. No assurance can be made that the Common Stock will continue to trade on the NYSE or that the Company can satisfy the comparable requirements of any other stock exchange or the NASDAQ stock market. 16 17 GOING CONCERN The Company's independent auditors have included an explanatory paragraph in their report on the Company's consolidated financial statements as of May 31, 1997 that states that the Company's history of losses and consolidated financial position raise substantial doubt about its ability to continue as a going concern. NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING In the past, the Company's negative cash flow from operations has consumed substantial amounts of cash. The completion of the Debenture Exchange Offer required substantial amounts of cash for the payment of $4.6 million of default interest and/or payment in exchange for surrender of Debentures which resulted in a depletion of the Company's cash resources. During prior fiscal years, a principal source of liquidity has been the private sale of equity securities and debt securities convertible into equity. Under the shareholder policies of the NYSE, the Company may not be able to effect large placements of equity without shareholder approval, which, if not obtained, may adversely affect the Company with respect to future capital formation. In addition, issuance of additional equity securities by the Company could result in substantial dilution to stockholders. The Company has received tax refunds for fiscal 1996 and 1995 in the amounts of $9.4 million and $5.4 million, respectively. Such refunds are based on loss carrybacks under Section 172(f) of the Internal Revenue Code. Any IRS claim for return of all or any portion thereof could have an adverse effect on the Company's cash flows. See "Taxes," below. TAXES The Company has received tax refunds of approximately $14.8 million from the carryback of fiscal 1996 and 1995 specified losses defined in Section 172(f). Section 172(f) provides for a 10-year net operating loss carryback for losses attributable to specified liability losses. A specified liability loss is defined, in general, as any amount otherwise allowable as a deduction which is attributable to (i) a product liability, or (ii) 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. Receipt of the 1996 and 1995 tax refunds does not imply IRS approval. The proceeds to the Company of the 1995 refund were reduced by a $2.5 million offset for the Company's outstanding payroll tax obligation to the Internal Revenue Service ("IRS"), including interest, pursuant to a settlement agreement relating to tax years 1983 through 1991. Also, a $3.0 million contingency fee was paid to Deloitte & Touche, LLP from the 1995 and 1996 refund proceeds. Section 172(f) is an area of the tax law without guiding legal precedent. There may be substantial opposition by the IRS to all or a substantial portion of such claims, and no assurances can be made as to the ability to retain tax refunds based on such deductions. Although the Company is currently being audited by the IRS, neither the Company nor the IRS will be precluded in any resultant tax audit from raising these and additional issues. The Company may be unable to utilize some or all of its allowable tax deductions or losses, which depends upon factors including the availability of sufficient net income from which to deduct such losses during limited carryback and carryover periods. Further, the Company's ability to use any Net Operating Losses may be subject to limitation in the event that the Company issues or agrees to issue substantial amounts of additional equity. The Company monitors the potential for "change of ownership" and believes its financing plans as contemplated will not cause a "change of ownership;" however, no assurances can be made that future events will not act to limit the Company's tax benefits. DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS The Company's ability to succeed in increasing revenues may depend in part on the extent to which reimbursement of the cost of such treatment will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price of medical products and services. 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 materially adversely affect 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 17 18 into may ultimately be determined to be unprofitable, and result in significant losses by reason of unanticipated utilization levels requiring 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. DEPENDENCE ON KEY PERSONNEL The Company depends and will continue to depend upon the services of its senior management and skilled personnel. The Company is presently in the process of relocating certain significant management functions to Tampa, Florida, where Comprehensive Behavioral Care, the Company's principal subsidiary, is located. In connection with such relocation, the Company is in the process of an executive search for a Chief Financial Officer. There is no assurance that the Company will be able to successfully recruit an individual who has the necessary background and experience in the managed healthcare field. SHARES ELIGIBLE FOR FUTURE SALE The Company has issued or committed to issue approximately 344,000 shares related to the 4% convertible preferred stock, 78,000 shares related to the conversion of debt or private placements, and options or other rights to purchase approximately 1,350,000 shares. The Company may contemplate issuing additional amounts of debt, equity or convertible securities in private transactions in furtherance of fulfilling its future capital needs (see "Need for Additional Funds: Uncertainty of Future Funding"). Issuance of additional equity could adversely affect the trading prices of the Common Stock. PRICE VOLATILITY IN PUBLIC MARKET The securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. Trading prices of securities of companies in the healthcare and managed care sectors have experienced significant volatility. 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, which could have the effect of diluting the Common Stock or reducing working capital that would otherwise be available to the Company. There is currently issued and outstanding 41,260 shares of Preferred Stock designated as Series A Non-Voting 4% Cumulative Convertible Preferred Stock. The Company's Restated Certificate of Incorporation also provides for a classified board of directors, with directors divided into three classes serving staggered terms. In addition, 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. In addition, 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. CONTINUED LISTING ON NYSE The Company has been below certain continued listing criteria of the NYSE since prior to October 1994. The continued listing of the Company's Common Stock on the NYSE is subject to continual review and possible delisting upon notices from the Listing and Compliance Committee of the NYSE. 18 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 1998 would be non-deductible. PART II. - OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS On September 6, 1996, the Company instituted an arbitration against the HMS principals ("Sellers") with the American Arbitration Association in Orange County, California seeking, among other things, reimbursement from the Sellers for damages which the Company sustained by reason of the inaccuracies of the representations and warranties made by the Sellers and for the indemnification from each of the Sellers as provided for under the terms of the Stock Purchase Agreement. One seller has settled his case with the Company. The arbitration against the remaining Seller is presently pending. The Company does not believe that the impact of these claims will have a material adverse effect on the Company's financial position, results of operations and cash flows. In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criterion in regard to net tangible assets available to Common Stock and three year average net income. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards, and has so indicated in approving the Company's most recent Listing Application on December 30, 1996. Management believes, although no assurance may be given, that the completion of the Company's Debenture Exchange Offer will enable the Company to seek additional equity and thereby satisfy the Committee of the Company's progress. No assurance may be given that additional equity may be obtained on terms favorable to the Company. On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial Officer of the Company, commenced an action against the Company and its Chairman, Chriss W. Street, in the Superior Court of the State of California arising out of the termination of her employment on September 29, 1997. The action alleges alternate causes of action based upon her employment relationship with the Company and seeks unspecified damages for unpaid wages, unspecified actual, compensatory and punitive damages; damages for emotional distress; and costs, legal fees and penalties under applicable California law. The action is only in its formative stages. The Company has denied its liability, and has denied the principal allegations of the complaint. The Company believes that it has good and meritorious defenses to this action. 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 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. 19 20 ITEM 2. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedules (filed herewith). (b) Reports on Form 8-K 1) The Company announced on August 19, 1997, that Stuart J. Ghertner, Ph.D., had resigned as Chief Operating Officer of the Company and as President of its wholly-owned subsidiary, Comprehensive Behavioral Care, Inc., effective September 12, 1997. Dr. Ghertner will continue to be available to the Company on a consulting basis. 2) The Company filed a current report on Form 8-K dated September 12, 1997, to report under Item 5, that the number of members comprising the Board of Directors was increased to six; the number of directors comprising Class II directors was increased to two; and Mr. John A. McCarthy, Jr. was appointed as a Class II director until the 1999 Annual Meeting of Stockholders. 3) The Company filed a current report on Form 8-K dated October 3, 1997, to report under Item 5, that Ms. Kerri Ruppert, Senior Vice President and Chief Financial Officer of the Company, was separated from the Company, effective September 29, 1997, and that Ms. Carol Pollack was elected as the Company's interim Chief Financial Officer, effective September 30, 1997. The Company also reported that Mr. W. James Nicol resigned as a Class II director of the Company, and that the vacancy would not be filled at this time, reducing the number of Class II directors to one and the entire Board to five. 4) The Company filed a current report on Form 8-K dated December 8, 1997, to report under Item 5, the results of its Annual Meeting of Stockholders which included the election of two Class I Directors and the approval of an amendment to the Company's 1995 Incentive Plan to increase the number of shares authorized and available for issuance thereunder from 450,000 to 600,000. 5) The Company filed a current report on Form 8-K dated January 9, 1998, to report under Item 5, that Ms. Kerri Ruppert, the former Chief Financial Officer of the Company, commenced an action against the Company and its Chairman, Chriss W. Street, arising out of the termination of her employment on September 29, 1997. 20 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPREHENSIVE CARE CORPORATION April 14, 1998 By /s/ CHRISS W. STREET -------------------------------------- Chriss W. Street President and Chief Executive Officer (Principal Executive Officer) April 14, 1998 By /s/ KEVIN M. CARNANAN -------------------------------------- Kevin M.Carnahan Vice President of Finance and Chief Accounting Officer 21 22 COMPREHENSIVE CARE CORPORATION EXHIBIT INDEX FORM 10-Q THIRD QUARTER ENDED FEBRUARY 28, 1998 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedules (filed herewith). 22 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS MAY-31-1998 DEC-01-1997 FEB-28-1998 3,554 0 2,291 1,046 0 8,573 11,155 4,256 24,798 23,024 2,705 0 2,156 34 (3,763) 24,798 34,433 34,433 0 33,818 (484) 51 160 939 53 886 0 0 0 824 .24 .23
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