-----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, LC1cUF17dme/7x8i/Xv0mzQSioQq6AHOGJ0iNDcDRJx3P0TiA6rQ8EfYB8v/WS4D l5D2NZFDq+daokwxTBCCvg== 0000950144-00-000302.txt : 20000202 0000950144-00-000302.hdr.sgml : 20000202 ACCESSION NUMBER: 0000950144-00-000302 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000114 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: 507263 BUSINESS ADDRESS: STREET 1: 4200 W CYPRESS STREET 2: STE 300 CITY: TAMPA STATE: FL ZIP: 33607 BUSINESS PHONE: 8138765036 MAIL ADDRESS: STREET 1: 4200 WEST CYPRESS STREET 2: SUITE 300 CITY: TAMPA STATE: FL ZIP: 33607 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 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly report pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934 For the period ended November 30, 1999. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . --------------- -------------- Commission File Number 1-9927 ------ COMPREHENSIVE CARE CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 95-2594724 - ---------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 4200 WEST CYPRESS STREET, SUITE 300, TAMPA, FL 33607 ----------------------------------------------------- (Address of principal executive offices and zip code) (813) 876-5036 -------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: Classes Outstanding at January 7, 2000 - -------------------------------------- ------------------------------ Common Stock, par value $.01 per share 3,817,812 2 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES INDEX
PAGE PART 1 - FINANCIAL INFORMATION ITEM 1-- CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets, November 30, 1999 and May 31, 1999.......................................3 Consolidated Statements of Operations for the Three and Six Months ended November 30, 1999 and 1998................4 Consolidated Statements of Cash Flows for the Six Months ended November 30, 1999 and 1998..........................5 Notes to Consolidated Financial Statements.....................................6-11 ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................12-19 PART II - OTHER INFORMATION ITEM 1-- LEGAL PROCEEDINGS............................................................20-21 ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................22 ITEM 6-- EXHIBITS AND REPORTS ON FORM 8-K................................................22 SIGNATURES................................................................................23
2 3 PART I. - FINANCIAL INFORMATION ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
NOVEMBER 30, MAY 31, 1999 1999 ------------ ---------- ASSETS (Unaudited) Current assets: Cash and cash equivalents ............................................... $ 5,506 $ 8,026 Restricted cash ......................................................... 1,716 -- Accounts receivable, less allowance for doubtful accounts of $692 and $923 .................................................................. 323 932 Accounts receivable - pharmacy and laboratory costs ..................... 10,469 10,469 Other receivable ........................................................ 2,415 2,415 Other current assets .................................................... 573 614 -------- -------- Total current assets ....................................................... 21,002 22,456 -------- -------- Property and equipment ..................................................... 4,366 4,296 Less accumulated depreciation .............................................. (2,697) (2,326) -------- -------- Net property and equipment ................................................. 1,669 1,970 -------- -------- Non-current assets: Notes receivable ........................................................ 1,159 1,172 Goodwill, net ........................................................... 1,044 1,080 Restricted cash ......................................................... 79 1,923 Other assets ............................................................ 429 465 -------- -------- Total non-current assets ................................................... 2,711 4,640 -------- -------- Total assets ............................................................... $ 25,382 $ 29,066 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities ................................ $ 4,199 $ 4,552 Accrued claims payable .................................................. 3,324 4,369 Accrued pharmacy and laboratory costs payable ........................... 10,469 10,469 Current maturities of long-term debt .................................... 3 3 Unbenefitted tax refunds received ....................................... 12,092 12,092 Income taxes payable .................................................... 60 76 -------- -------- Total current liabilities .................................................. 30,147 31,561 -------- -------- Long-term liabilities: Long-term debt, excluding current maturities ............................ 2,252 2,253 Other liabilities ....................................................... 191 166 -------- -------- Total long-term liabilities ................................................ 2,443 2,419 -------- -------- Total liabilities .......................................................... 32,590 33,980 -------- -------- Commitments and Contingencies (see Note 3 and Note 7) Stockholders' deficit: Preferred stock, $50.00 par value; authorized 60,000 shares ............. -- -- Common stock, $0.01 par value; authorized 12,500,000 shares; issued and outstanding 3,817,812 and 3,817,812 ................................. 38 38 Additional paid-in-capital .............................................. 51,794 51,794 Accumulated deficit ..................................................... (59,040) (56,746) -------- -------- Total stockholders' deficit ................................................ (7,208) (4,914) -------- -------- Total liabilities and stockholders' deficit ................................ $ 25,382 $ 29,066 ======== ========
See accompanying notes 3 4 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, 1999 1998 1999 1998 -------- -------- -------- -------- OPERATING REVENUES ................................................. $ 4,882 $ 10,215 $ 10,132 $ 20,331 COSTS AND EXPENSES: Healthcare operating expenses ...................................... 4,539 7,532 8,620 15,004 General and administrative expenses ................................ 1,888 2,453 3,977 4,225 Provision for doubtful accounts .................................... (163) 243 (499) 302 Depreciation and amortization ...................................... 215 246 430 481 -------- -------- -------- -------- 6,479 10,474 12,528 20,012 -------- -------- -------- -------- OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS ................. (1,597) (259) (2,396) 319 OTHER INCOME (EXPENSE) Asset write-down ................................................... -- (146) -- (146) Gain on sale of assets ............................................. 6 1 6 1 Loss on sale of assets ............................................. (1) (4) (1) (4) Non-operating income/(expense) ..................................... 51 -- 51 -- Interest income .................................................... 116 63 236 134 Interest expense ................................................... (119) (42) (188) (88) -------- -------- -------- -------- 53 (128) 104 (103) -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ....... (1,544) (387) (2,292) 216 Income tax expense ................................................. (2) (15) (2) (30) -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS ........................... (1,546) (402) (2,294) 186 DISCONTINUED OPERATIONS: Loss from operations, less applicable income tax expense of $0 ... -- (454) -- (583) Estimated loss on disposal, including provision for operating losses through disposal date, less applicable income tax expense of $0 .................................................. -- (70) -- (70) -------- -------- -------- -------- LOSS BEFORE EXTRAORDINARY ITEM ..................................... (1,546) (926) (2,294) (467) EXTRAORDINARY GAIN, NET OF TAXES OF $0 ............................. -- -- -- 120 -------- -------- -------- -------- NET LOSS ........................................................... (1,546) (926) (2,294) (347) Dividends on convertible preferred stock ........................... -- (21) -- (42) -------- -------- -------- -------- NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ....................... $ (1,546) $ (947) $ (2,294) $ (389) ======== ======== ======== ======== BASIC EARNINGS PER SHARE: Income (loss) from continuing operations ........................... $ (0.41) $ (0.12) $ (0.60) $ 0.04 Discontinued operations: Loss from operations ............................................. -- (0.13) -- (0.17) Estimated loss on disposal ....................................... -- (0.02) -- (0.02) Extraordinary item ................................................. -- -- -- 0.03 -------- -------- -------- -------- NET LOSS ........................................................... $ (0.41) $ (0.27) $ (0.60) $ (0.12) ======== ======== ======== ======== DILUTED EARNINGS PER SHARE: Income (loss) from continuing operations ........................... $ (0.41) $ (0.12) $ (0.60) $ 0.04 Discontinued operations: Loss from operations ............................................. -- (0.13) -- (0.17) Estimated loss on disposal ....................................... -- (0.02) -- (0.02) Extraordinary item ................................................. -- -- -- 0.03 -------- -------- -------- -------- NET LOSS ........................................................... $ (0.41) $ (0.27) $ (0.60) $ (0.12) ======== ======== ======== ========
See accompanying notes. 4 5 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED NOVEMBER 30, 1999 1998 ---- ---- (Amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) from continuing operations before extraordinary item .. $(2,294) $ 186 ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES: Depreciation and amortization ........................................... 430 481 Asset write-down ........................................................ -- 146 Provision for doubtful accounts ......................................... -- 302 Gain on sale of assets .................................................. (6) (1) Loss on sale of assets .................................................. 1 4 CHANGES IN ASSETS AND LIABILITIES: Accounts receivable ..................................................... 609 (349) Accounts receivable - pharmacy and laboratory costs ..................... -- (2,889) Other current assets, restricted funds, and other non-current assets .... 205 (218) Accounts payable and accrued liabilities ................................ (350) 374 Accrued claims payable .................................................. (1,045) (1,197) Accrued pharmacy and laboratory costs payable ........................... -- 2,759 Income taxes payable .................................................... (16) (39) Other liabilities ....................................................... 25 (122) ------- ------- NET CASH USED IN CONTINUING OPERATIONS .............................. (2,441) (563) NET CASH USED IN DISCONTINUED OPERATIONS ............................ -- (1,306) ------- ------- NET CASH USED IN OPERATING ACTIVITIES ............................... (2,441) (1,869) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of property and equipment ........................ 7 2 Payments received on note receivable .................................... 12 -- Additions to property and equipment ..................................... (97) (453) ------- ------- NET CASH USED IN INVESTING ACTIVITIES ............................... (78) (451) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of Common Stock .............................. -- 158 Repayment of debt ....................................................... (1) (1) ------- ------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ................. (1) 157 ------- ------- Net decrease in cash and cash equivalents .................................. (2,520) (2,163) Cash and cash equivalents at beginning of period ........................... 8,026 6,016 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 5,506 $ 3,853 ======= =======
See accompanying notes. 5 6 NOTE 1-- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated balance sheet as of November 30, 1999, and the related consolidated statements of operations and cash flows for the three and six months ended November 30, 1999 and 1998 are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The results of operations for the six months ended November 30, 1999 are not necessarily indicative of the results to be expected during the balance of the fiscal year. The consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The balance sheet at May 31, 1999 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. Notes to consolidated financial statements included in Form 10-K for the year ended May 31, 1999 on file with the Securities and Exchange Commission provide additional disclosures and a further description of accounting policies. The Company's financial statements are presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recovery and classification of assets or the amount and classification of liabilities that may result from the outcome of the uncertainties described in Note 2-- "Liquidity and Capital Resources". The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates. The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate. The estimates are continually reviewed and adjusted as experience develops or new information becomes known with adjustments included in current operations. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Certain amounts for Fiscal 2000 and Fiscal 1999 have been reclassified to conform to the Fiscal 2000 presentation. These reclassifications had no effect on the previously reported results of operations or stockholders' deficit. NOTE 2 -- LIQUIDITY AND CAPITAL RESOURCES At November 30, 1999, the Company had unrestricted cash and cash equivalents of $5.5 million. During the six months ended November 30, 1999, the Company used $2.4 million in operations. Additionally, $0.1 million was used by its investing activities. The Company reported a loss of $2.4 million from continuing operations for the six months ended November 30, 1999, compared to income of $0.3 million from continuing operations for the six months ended November 30, 1998. The Company has an accumulated deficit of $59.0 million and total stockholders' deficit of $7.2 million as of November 30, 1999. Additionally, the Company's current assets at November 30, 1999 amounted to approximately $21.0 million and current liabilities were approximately $30.1 million, resulting in a working capital deficiency of approximately $9.1 million. The working capital deficiency referred to above results from a $12.1 million liability related to Federal income tax refunds received in prior years. The ultimate outcome of the Internal Revenue Service audit whereby it is seeking recovery of the refunds from the Company, including the amount to be repaid, if any, and the timing thereof, is not determinable (see Note 4 -- "Income Taxes"). The Company cannot state with any degree of certainty whether any required additional equity or debt financing to meet its obligations will be available to it during Fiscal 2000 and, if available, that the source of financing would be available on terms and conditions acceptable to the Company. The above conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustment that may result from the outcome of this uncertainty. 6 7 During Fiscal 1999 and continuing during the first six months of Fiscal 2000, management has taken steps to reduce costs and conserve cash, including making significant staff reductions. Additionally, the Company disposed of its hospital business segment during Fiscal 1999. This has allowed the Company to direct its available resources toward the managed behavioral care business, which is its chief focus. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing as may be required and, ultimately, to attain profitability. NOTE 3 -- MAJOR CUSTOMERS/CONTRACTS (1) During Fiscal 1999, the Company provided services to members of Humana Health Plans of Puerto Rico, Inc. ["Humana of Puerto Rico" (successor in interest to PCA Health Plans of Puerto Rico, Inc.)] under the terms of management service agreements entered into pursuant to healthcare contracts awarded to Humana of Puerto Rico by the Puerto Rico Insurance Administration. These contracts expired on March 31, 1999, with an extension period that ended April 30, 1999. For the fiscal year ended May 31, 1999, these agreements accounted for approximately 44%, or $17.1 million, of the Company's operating revenues from continuing operations. Additionally, the contract with Humana established an amount that was withheld from Humana's monthly remittances to the Company to cover pharmacy and laboratory costs that are the financial responsibility of the Company, but were administered by Humana. Because of the uncertainty surrounding the determination of the actual pharmacy and laboratory costs incurred, the Company has reported the contract at a 100% loss ratio for the contract to date pending clarification of the actual costs incurred. As a result, the Company has reported $10.5 million as accounts receivable and accrued claims payable in the accompanying balance sheet at November 30, 1999. During Fiscal 1999, Humana sent written notice to the Company that the Company owed $3.0 million to Humana in connection with these pharmacy and laboratory costs. The Company has expressed to Humana its total disagreement with Humana's position. The Company believes that Humana owes the Company in excess of $3.0 million in relation to this same issue. Efforts are being made to work with Humana to resolve the uncertainty. The Company also has contracts with Humana Health Plans ("Humana") under which it provides services to members in Florida. For the six months ended November 30, 1999, the Florida, Humana contracts accounted for 31.9%, or $3.2 million, of the Company's operating revenues from continuing operations compared to 17.1%, or $3.5 million, for the six months ended November 30, 1998. As of November 30, 1999, the Company provides services to approximately 200,000 members that are covered under the Humana plans in Florida. The terms of the Florida contracts are for two-year periods and each contract is automatically renewable for additional terms equal to the original contract period unless terminated by either party. (2) The Company currently has two contracts with one HMO to provide behavioral healthcare services to contracted members in Texas. These combined contracts represented approximately 5.6% and 3.9% of the Company's operating revenue from continuing operations for the six months ended November 30, 1999 and 1998, respectively. The Company received written notice from this HMO that these two contracts will remain in effect through August 31, 2000 and that, as of September 1, 1999, this HMO had selected another behavioral healthcare company to manage care for the members covered under four contracts that were previously managed by the Company. The HMO cited their obligation to another behavioral healthcare company, under terms and conditions that are tied to an acquisition, as the reason for cancellation of these contracts. During the six months ended November 30, 1999 and 1998, the six contracts with this HMO accounted for operating revenue from continuing operations of approximately 8.5% and 6.9%, respectively. (3) The Company currently has two contracts with one HMO to provide behavioral healthcare services to contracted members in Texas. These combined contracts represented approximately 10.7% and 6.0% of the Company's operating revenue from continuing operations for the six months ended November 30, 1999 and 1998, respectively. The Company recently submitted a bid to this HMO in response to a Request for Proposal that involves the membership covered under its existing contracts, which are due to expire in February and March, 2000. The Company cannot determine at this time if either of its contracts with this HMO will be renewed. (4) The Company currently has one contract with one HMO to provide behavioral healthcare services to contracted members in Indiana. This contract represents approximately 9.4% and 3.8% of operating 7 8 revenue from continuing operations for the six months ended November 30, 1999 and 1998, respectively. The Company recently received written notice from this HMO that its contract will not be renewed and, as a result, the contract will terminate effective December 31, 1999. (5) The Company currently has three contracts with one HMO to provide behavioral healthcare services to contracted members in Texas. These contracts represents approximately 7.5% and 1.2% of operating revenue from continuing operations for the six months ended November 30, 1999 and 1998, respectively. The Company recently received written notice from this HMO that its contract will not be renewed and, as a result, the contracts will terminate effective December 31, 1999. NOTE 4 -- INCOME TAXES The Company's provision for income taxes differs from the statutory rate of 34% due, primarily, to the Company's increased valuation allowance for losses generated during the three months ended November 30, 1999 and 1998. In connection with the filing of its Federal income tax returns for fiscal years 1995 and 1996, the Company filed for a tentative refund to carry back losses described in Section 172(f) of the Internal Revenue Code ("IRC"), requesting a refund to the Company of $9.4 million and $5.5 million, respectively, of which refunds of $9.4 million and $5.4 million were received. In addition, the Company also filed amended Federal income tax returns for fiscal years prior to 1995, requesting similar refunds of losses carried back under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a total of $7.7 million. During fiscal years 1997 and 1996, the Company recognized a portion of the refunds received as a tax benefit of $0.3 million and $2.4 million, respectively. The balance of the refunds received, $12.1 million, are recorded as a deferred liability, "Unbenefitted tax refunds received" pending resolution by the IRS of the appropriateness of the Section 172(f) carryback. The additional refunds requested under Section 172(f) for prior years of $7.7 million have not been received, nor has the Company recognized any tax benefit related to these potential refunds. Section 172(f) of the IRC provides for a ten-year net operating loss carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. The applicability of Section 172(f) to the type of business in which the Company operates is unclear. No assurance can be provided that the Company will be able to retain the refunds received to date or that the other refunds requested will be received. As a result of the Section 172(f) carryback claims filed by the Company and the tentative refunds received, the Company came under audit with respect to the tax years previously mentioned. On August 21, 1998, the Company received an examination report, dated August 6, 1998, from the IRS advising the Company that it was disallowing $12.4 million of the $14.8 million of refunds previously received, and the additional refunds requested of $7.7 million. If the position of the IRS were to be upheld, the Company would be required to repay $12.4 million in refunds previously received, plus accrued interest of approximately $4.5 million through November 30, 1999. Accordingly, the Company would be entitled to a repayment of the fees advanced to its tax advisor relating to these refund claims of approximately $2.5 million of which $2.4 million is reported as "other receivable" in the accompanying balance sheet. This report commenced the administrative appeals process. The Company filed a protest letter with the IRS on November 6, 1998 and believes that its position with respect to its right to the tax refunds received will be upheld. The Company's tax advisor relating to these refund claims has advised management that the administrative appeals process could take twelve to eighteen months. In the event the Company wishes to further protest the results of its administrative appeal, it may further appeal to the United States Tax Court following the final determination of the administrative appeal. The Company has been advised that a determination by the United States Tax Court could take up to an additional twelve months from commencement of the appeals process in the United States Tax Court. The IRS reserves the right to assess and collect the tax previously refunded to the Company at any time during the appeals process. NOTE 5 -- DISCONTINUED OPERATIONS During Fiscal 1999, the Company sold its Aurora, Colorado and Ft. Worth, Texas facilities, which completed the disposal plan for its hospital business segment. 8 9 NOTE 6-- EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share in accordance with Statement No. 128, Earnings Per Share:
THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- (Amounts in thousands except per share data) Numerator: Income (loss) from continuing operations ...................... $(1,546) $ (402) $(2,294) $ 186 Less preferred stock dividends ................................ -- (21) -- (42) ------- --------- ------- --------- Numerator for diluted earnings (loss) per share available to common stockholders from continuing operations .................................................. (1,546) (423) (2,294) 144 Discontinued operations: Loss from operations .......................................... -- (454) -- (583) Estimated loss on disposal .................................... -- (70) -- (70) Extraordinary item ................................................. -- -- -- 120 ------- --------- ------- --------- Net loss available to common stockholders after assumed conversions ................................... $(1,546) $ (947) $(2,294) $ (389) ======= ========= ======= ========= Denominator: Weighted average shares ............................................ 3,817 3,474 3,817 3,459 Effect of dilutive securities: Employee stock options ........................................ -- -- -- -- Convertible preferred stock ................................... -- -- -- -- ------- --------- ------- --------- Dilutive potential common shares .............................. -- -- -- -- Denominator for diluted earnings (loss) per share - adjusted weighted-average shares after assumed conversions ........... 3,817 3,474 3,817 3,459 ======= ========= ======= ========= BASIC EARNINGS PER SHARE Income (loss) from continuing operations ........................... $ (0.41) $ (0.12) $ (0.60) $ 0.04 Discontinued operations: Loss from operations .......................................... -- (0.13) -- (0.17) Estimated loss on disposal .................................... -- (0.02) -- (0.02) Extraordinary item ................................................. -- -- -- 0.03 ------- --------- ------- --------- Net loss ........................................................... $ (0.41) $ (0.27) $ (0.60) $ (0.12) ======= ========= ======= ========= DILUTED EARNINGS PER SHARE Income (loss) from continuing operations ........................... $ (0.41) $ (0.12) $ (0.60) $ 0.04 Discontinued operations: Loss from operations .......................................... -- (0.13) -- (0.17) Estimated loss on disposal .................................... -- (0.02) -- (0.02) Extraordinary item ................................................. -- -- -- 0.03 ------- --------- ------- --------- Net loss ........................................................... $ (0.41) $ (0.27) $ (0.60) $ (0.12) ======= ========= ======= =========
The following number of potentially convertible shares of common stock related to convertible debentures and stock options are as follows at November 30, 1999: For conversion of convertible debentures................................... 9,044 Outstanding stock options.................................................. 854,651 Possible future issuance under stock options plans......................... 305,558 --------- Total.................................................................. 1,169,253 =========
9 10 NOTE 7 -- COMMITMENTS AND CONTINGENCIES (1) In May, 1999, the Company commenced an action against Richard Powers, a former Executive Vice President of the Company, and his current employer, American Psych Systems ("APS"), in the Circuit Court in and for Hillsborough County, Florida. The Company claims that Mr. Powers breached his agreements with the Company by attempting to divert customers to APS. The Company further claims that APS tortuously interfered with the Company's business relationships by directing Powers to solicit these customers in violation of his agreements. The suit is still in its early stages. The Court has denied a motion to dismiss filed by Powers and APS, and the parties have begun the discovery process. The complaint seeks unspecified damages. (2) On February 19, 1999, the California Superior Court denied the Company's Petition for Writ of Mandate of an adverse administrative appeal decision regarding application of the Maximum Inpatient Reimbursement Limitation ("MIRL") to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. This facility was owned by the Company until its disposal in fiscal year 1991. The subject matter of the Superior Court action involved the refusal of the administrative law judge to order further reductions in the liability for costs associated with treating high cost, long stay Medi-Cal patients, which are commonly referred to as "outliers". The Company does not plan to appeal the California Superior Court decision for which the Notice of Entry of Judgment was entered on February 26, 1999. As of November 30, 1999, the Company has $1.2 million accrued relating to this matter. (3) On January 22, 1999, PMR Corporation ("PMR") commenced an action against the Company in San Diego Superior Court. This action seeks damages for alleged breach of a hospital management agreement in connection with the Aurora, Colorado facility. The Complaint seeks compensatory damages of approximately $455,000, plus interest and attorneys' fees. The Superior Court ordered this case into arbitration on March 26, 1999. PMR has recently filed a demand for arbitration of this dispute before the American Arbitration Association. The Company has filed a counter-claim in the arbitration for PMR's alleged breach of the same hospital management agreement and intends to actively defend this action. The Company does not believe that the impact of this claim will have a material adverse effect on the Company's financial position, results of operations and cash flows. (4) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial Officer of the Company, commenced an action against the Company and its Chairman, Chriss W. Street, in the Superior Court of the State of California arising out of the termination of her employment on September 29, 1997. The action alleges alternate causes of action based upon her employment relationship with the Company and seeks unspecified damages for unpaid wages, unspecified actual, compensatory and punitive damages; damages for emotional distress; and costs, legal fees and penalties under applicable California law. As of November 30, 1999, the action is awaiting a trial date. The Company has denied its liability and has denied the principal allegations of the complaint. The Company believes that it has good and meritorious defenses to this action. (5) With respect to the contingency related to prior years' income taxes, see Note 4, "Income Taxes". (6) With respect to the contingency related to the Humana claim, see Note 3, "Major Customers/Contracts". From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary, routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the Company or a subsidiary may have exposure to a liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements. 10 11 REGULATORY MONITORING AND COMPLIANCE The Company is subject to extensive and evolving state and federal regulations. These regulations range from licensure and compliance with regulations related to insurance companies and other risk-assuming entities, to licensure and compliance with regulations related to healthcare providers. These laws and regulations may vary considerably among states. As a result, the Company may be subject to the specific regulatory approach adopted by each state for the regulation of managed care companies and for providers of behavioral healthcare treatment services. Currently, management cannot quantify the potential effects of additional regulation of the managed care industry, but such costs could have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts. Management believes that the Company is currently in material compliance with the laws and regulations of the jurisdictions in which it operates. 11 12 ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q includes forward-looking statements, the realization of which may be impacted by certain important factors discussed below under "Risk Factors - Important Factors Related to Forward-Looking Statements and Associated Risks" (page 17). GENERAL In response to continuing changes in the behavioral healthcare industry, the Company has made significant changes in its operations, including the divestiture of its hospital facilities that took place during Fiscal 1999. For the six months ended November 30, 1999, managed care operations accounted for 96.6%, or $9.8 million, of the Company's operating revenues from continuing operations. The following tables summarizes the Company's financial data for the three and six months ended November 30, 1999 and 1998 (in thousands): RESULT OF OPERATIONS THE THREE MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 1998:
CONSOLIDATED THREE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED NOVEMBER 30, 1999 CARE OTHER OPERATIONS OPERATIONS OPERATIONS - --------------------------------- --------- ---------------- ----------- ---------- 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) $ -- ======== ====== ======== =====
CONSOLIDATED THREE MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED NOVEMBER 30, 1998 CARE OTHER OPERATIONS OPERATIONS OPERATIONS - --------------------------------- --------- ---------------- ----------- ---------- Operating revenues $ 9,965 $ 250 $ 10,215 $ 1,082 Healthcare operating expenses 7,421 111 7,532 1,194 General/administrative expenses 1,449 1,004 2,453 6 Other operating expenses 443 46 489 336 -------- ------ -------- ----- 9,313 1,161 10,474 1,536 -------- ------ -------- ----- Operating income (loss) $ 652 $ (911) $ (259) $ (454) ======== ====== ======== =====
The Company reported an operating loss of approximately $1.6 million from continuing operations for the quarter ended November 30, 1999, which is primarily attributable to the loss of two major, managed care contracts during the fourth quarter of Fiscal 1999. Managed care revenue decreased by approximately 52.7%, or $5.3 million, for the quarter ended November 30, 1999 compared to the quarter ended November 30, 1998. Additionally, this loss included approximately $0.2 million of increased marketing and other costs specific to the Company's efforts to regain business in Puerto Rico and in other regions, approximately $0.1 million of operating costs incurred to manage the Company's Year 2000 readiness program, and approximately $0.1 million of costs in connection with the NCQA accreditation. This is compared to an operating loss of $0.3 million from continuing operations reported for the quarter ended November 30, 1998, which included $0.1 million of expense for uncollectable accounts receivable specific to one managed care contract and $0.4 million for costs incurred related to one proposal for Argentina. Operating revenues from continuing operations decreased by approximately 52.2%, or $5.3 million, for the quarter ended November 30, 1999 compared to the quarter ended November 30, 1998. This decrease is directly attributable to the loss of two major, managed care contracts during the fourth quarter of Fiscal 1999. 12 13 Healthcare operating expenses from continuing operations decreased by $3.0 million for the quarter ended November 30, 1999 as compared to the quarter ended November 30, 1998. This decrease is attributable to the loss of revenues specific to two major, managed care contracts that terminated during Fiscal 1999. Healthcare operating expense as a percentage of net revenue for managed care operations increased from 74.5% for the quarter ended November 30, 1998 to 93.3% for the quarter ended November 30, 1999. This percentage increase is due to continuing fixed costs that cannot be tied to the specific contracts that were terminated during Fiscal 1999. Efforts are being made to reduce the overall costs to manage the Company's existing contracts, including cost reductions related to managing the Company's healthcare information systems and, also, planned centralization of certain contract management and clinical functions. General and administrative expenses from continuing operations decreased by approximately $0.6 million for the quarter ended November 30, 1999 as compared to the quarter ended November 30, 1998. The decrease is primarily attributable to savings in legal costs in comparison to legal costs incurred for the same period during Fiscal 1999. General and administrative costs as a percentage of revenue increased from 24.0% for the quarter ended November 30, 1998 to 38.7% for the quarter ended November 30, 1999. This increase is attributable to the continuing fixed costs that cannot be tied to the specific contracts that were terminated during Fiscal 1999. Efforts are being made to reduce the general and administrative costs during the remaining months of Fiscal 2000, including the elimination or reduction of certain costs associated with corporate office operations. Other operating expenses from continuing operations decreased by $0.4 million for the quarter ended November 30, 1999 compared to the quarter ended November 30, 1998. This decrease is primarily attributable to the $0.2 million of bad debt expense recognized during the quarter ended November 30, 1998 specific to the two major, managed care contracts that terminated during Fiscal 1999. Additionally, the Company recognized $0.1 million of bad debt recoveries specific to the discontinued operations during the quarter ended November 30, 1999. THE SIX MONTHS ENDED NOVEMBER 30, 1999 COMPARED TO THE SIX MONTHS ENDED NOVEMBER 30, 1998:
CONSOLIDATED SIX MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED NOVEMBER 30, 1999 CARE OTHER OPERATIONS OPERATIONS OPERATIONS - --------------------------------- --------- ---------------- ----------- ---------- 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) $ -- ========= ======== ======== =====
CONSOLIDATED SIX MONTHS ENDED MANAGED CORPORATE AND CONTINUING DISCONTINUED NOVEMBER 30, 1998 CARE OTHER OPERATIONS OPERATIONS OPERATIONS - --------------------------------- --------- ---------------- ----------- ---------- Operating revenues $19,749 $ 582 $ 20,331 $2,364 Healthcare operating expenses 14,732 272 15,004 2,598 General/administrative expenses 2,248 1,977 4,225 16 Other operating expenses 660 123 783 333 ------- -------- -------- ------ 17,640 2,372 20,012 2,947 ------- -------- -------- ------ Operating income (loss) $ 2,109 $ (1,790) $ 319 $ (583) ======= ======== ======== ======
The Company reported an operating loss from continuing operations of approximately $2.4 million for the six months ended November 30, 1999, which is primarily attributable to the loss of two major, managed care contracts during the fourth quarter of Fiscal 1999. Managed care revenue decreased by approximately 50.5%, or $10.0 million, for the six months ended November 30, 1999 compared to the six months ended November 30, 1998. Additionally, this loss included approximately $0.6 million of increased marketing and other costs specific to the Company's efforts to regain business in Puerto Rico and in other regions, approximately $0.1 million of operating costs incurred to manage the Company's Year 2000 readiness program, and approximately $0.1 million of costs in 13 14 connection with the NCQA accreditation. This is compared to operating income from continuing operations of $0.3 million reported for the six months ended November 30, 1998, which included $0.1 million of expense for uncollectable accounts receivable specific to one managed care contract and approximately $0.4 million for costs incurred related to one proposal for Argentina. Operating revenues from continuing operations decreased by approximately 50.2%, or $10.2 million, for the six months ended November 30, 1999 compared to the six months ended November 30, 1998. This decrease is directly attributable to the loss of two major, managed care contracts during the fourth quarter of Fiscal 1999. Healthcare operating expenses from continuing operations decreased by $6.4 million for the six months ended November 30, 1999 as compared to the six months ended November 30, 1998. This decrease is attributable to the loss of revenues specific to two major contracts that terminated during Fiscal 1999. Healthcare operating expense as a percentage of net revenue for managed care operations increased from 74.6% for the six months ended November 30, 1998 to 84.8% for the six months ended November 30, 1999. This percentage increase is due to continuing fixed costs that cannot be tied to the specific contracts that were terminated during Fiscal 1999. Efforts are being made to reduce the overall costs to manage the Company's existing contracts, including cost reductions related to managing the Company's healthcare information systems and, also, planned centralization of certain contract management and clinical functions. General and administrative expenses from continuing operations decreased by approximately $0.2 million, for the six months ended November 30, 1999 as compared to the six months ended November 30, 1998. The decrease is primarily attributable to savings in legal costs in comparison to legal costs incurred for the same period during Fiscal 1999, specifically one legal settlement that totaled $0.2 million. General and administrative costs as a percentage of revenue increased from 20.8% for the six months ended November 30, 1998 to 39.3% for the six months ended November 30, 1999. This increase is attributable to the continuing fixed costs that cannot be tied to the specific contracts that were terminated during Fiscal 1999. Efforts are being made to reduce the general and administrative costs during the remaining months of Fiscal 2000, including the elimination or reduction of certain costs associated with corporate office operations. Other operating expenses from continuing operations decreased by $0.9 million for the six months ended November 30, 1999 compared to the six months ended November 30, 1998. This decrease is primarily attributable to the $0.3 million of bad debt expense recognized during the six months ended November 30, 1998 specific to the two major, managed care contracts that terminated during Fiscal 1999. Additionally, the Company recognized $0.2 million of bad debt recoveries specific to the discontinued operations, $0.2 million of bad debt recoveries specific to the Puerto Rico contract performance guarantees, and $0.1 million of bad debt recoveries specific to one managed care contract during the six months ended November 30, 1999. The Company is taking steps designed to increase revenues primarily through its managed care operations and the continued development of its behavioral managed care business. The Company has also made significant staff reductions and plans to eliminate additional positions in connection with its efforts to centralize certain management and clinical functions. The Company expects annual savings of, approximately, $1.0 million from these centralization efforts and further staff reductions. IMPACT OF YEAR 2000 COMPUTER ISSUES The Year 2000 problem exists because many computer programs were designed and developed without considering the upcoming change in century. Historically, certain computerized systems have been designed to have two-digit rather than four-digit fields to define the applicable year and this could mean that many computer programs are unable to distinguish between the year 1900 and the year 2000 when a date of "00" is used for the applicable year. Potential problems could exist for both information technology systems ("IT") and non-IT systems. Non-IT systems typically include embedded technology, such as micro-controllers, and may include equipment ranging from telephone switches and fax machines to copy machines. Any failure to correct a Year 2000 problem could result in an interruption in certain normal business activities or operations due to errors or system failures. The Company developed a compliance program ("Plan") which used an enterprise wide, phased approach for assessing, remediating or replacing, testing, and implementing each of its mission-critical systems. The Plan covers many diverse systems and components of systems and, as such, each system was treated separately in the Plan. Additionally, since the Company's Plan addresses the Year 2000 problem from an enterprise wide approach, the Plan covers both information technology ("IT") systems and non-IT systems. The Plan also includes reviews of external vendors, EDI exchange partners, and environmental infrastructure, including utilities and security systems. 14 15 As of September 15, 1999, the Company has completed the Remediation, Testing, and Implementation phases of its project for Mission Critical systems. The Company defines its mission-critical systems as its 1) clinical operating system, 2) related database and EDI interchanges, 3) operations and facilities systems (includes phone and communications network), and 4) accounting systems. The following chart shows the completion date or expected completion date for each phase of the Company's Plan for its mission-critical systems:
EXPECTED COMPLETION - CALENDAR YEAR 1999 ============================================================================== Phase 0 YEAR 2000 PROJECT OFFICE - ------------------------------------------------------------------------------ Initial Assessment of Critical Systems Completed - ------------------------------------------------------------------------------ Create Year 2000 Project Documents Completed - ------------------------------------------------------------------------------ Build Vender Compliance Database Completed - ------------------------------------------------------------------------------ Maintain Vendor Compliance Process Ongoing - ------------------------------------------------------------------------------ Year 2000 Project Management Ongoing - ------------------------------------------------------------------------------ Phase 1 INVENTORY PHASE Completed - ------------------------------------------------------------------------------ Phase 2 ASSESSMENT PHASE Completed - ------------------------------------------------------------------------------ Phase 3 REMEDIATE/REPLACE PHASE Completed - ------------------------------------------------------------------------------ Phase 4 TESTING PHASE Completed - ------------------------------------------------------------------------------ Phase 5 IMPLEMENTATION PHASE Completed - ------------------------------------------------------------------------------
The Company has completed implementation for all regional offices to its new clinical operating system (TXEN). The system was purchased from Nichols Research Corporation and has been certified Year 2000 compliant. The implementation occurred ahead of the scheduled implementation date of September 30, 1999. The Company has also completed full remediation and testing of its main financial and accounting system. The system has processed Fiscal 2000 information with no reported incidents. Additionally the Company has also completed assessment of its mission critical systems, equipment and infrastructure. As of January 12, 2000, there has been no disruption of normal business activities or system failures experienced by the Company. The Company is continuing to address the potential impact of Year 2000 on its non-essential information systems, its other equipment that may be affected by the Year 2000, and the impact of transacting business with parties who do not have Year 2000 compliant systems. The Company has completed mailing of its Year 2000 survey to all business partners, manufacturers of the Company's non-essential business equipment, and other trade vendors. The Company has continued its vendor compliance program by mailing surveys to all health providers that are utilized by the Company. The Company cannot state with any certainty whether their suppliers, vendors and data exchange partners will remain compliant even if they have stated compliance in previous communications. Even though the Company will observe `On-going Vigilance' for Year 2000 problems, they cannot ensure that their vendors, providers, and manufacturers will be as vigilant. As of September 15, 1999, the Company has completed a Contingency and Continuity Business Resumption Plan program for all of its core business functions in all regions. The Company will use its contingency plan to reduce the risk of disruption of service on January 1, 2000. The plan processes include the following, core business areas: - Call Processing (Interactive / Call Distribution) - Financial Processing (AP / AR / Claims) - Membership / Eligibility / Authorizations - Correspondence Processing (Authorization Mailers / EOB / EOP) - Certification / Credentialing / Eligibility - Reporting - Encounters - Infrastructure Systems During the six months ended November 30, 1999, the Company recognized approximately $0.1 million in expense specific to its Year 2000 compliance program which has been paid to consultants or vendors providing 15 16 services or equipment for the Company's compliance program. Additionally, the Company paid approximately $0.1 million that was recorded as capital expenditures during the six months ended November 30, 1999. The following chart provides a summary of the Company's expected costs and actual expenditures to date related to its Year 2000 Plan.
ACTUAL COSTS TOTAL EXPECTED INCURRED AT REMAINING COSTS NOVEMBER 30, 1999 EXPECTED COSTS ------------- ----------------- -------------- Capital expenditures............. $ 850,000 $ 825,000 $25,000 Operating expense................ 246,000 221,000 25,000 ------------ ----------- ------- Total............................ $ 1,096,000 $ 1,046,000 $50,000 ============ =========== =======
While the absolute costs cannot be determined at this time, the Company does not expect such costs to exceed $1.1 million, including any costs incurred for system implementations that may have been accelerated due to Year 2000 issues. CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Except for historical information, the matters discussed that may be considered forward-looking statements may be subject to certain risks and uncertainties that could cause the actual results to differ materially from those projected, including uncertainties in the market, pricing, competition, procurement efficiencies, uncertainties inherent in the Year 2000 problem, other matters discussed in this quarterly report on Form 10-Q, and other risks detailed from time to time in the Company's SEC reports. RISK FACTORS IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This Quarterly Report on Form 10-Q contains certain forward-looking statements that are based on current expectations and involve a number of risks and uncertainties. Factors that may materially affect revenues, expenses and operating results include, without limitation, the Company's success in (i) expanding the managed behavioral healthcare operations, (ii) effective management in the delivery of services, (iii) risk and utilization in context of capitated payouts, and (iv) retaining certain refunds from the IRS. CONCENTRATION OF RISK The Company currently has thirteen (13) contracts with six HMOs to provide behavioral healthcare services under commercial, Medicaid, and Medicare plans, to contracted members in Florida, Indiana, Michigan and Texas. These combined contracts represent approximately 71.4% and 33.3% of the Company's operating revenue from continuing operations for the six months ended November 30, 1999 and 1998, respectively. The terms of each contract are generally for one-year periods and are automatically renewable for additional one-year periods unless terminated by either party. As of November 30, 1999, the Company had received notice from one Texas HMO that two contracts with the Company will not be renewed effective August 31, 2000. These contracts accounted for approximately 5.6% and 3.8% of the Company's operating revenues from continuing operations for the six months ended November 30, 1999 and 1998, respectively. The Company has also received notice from one Indiana HMO that its contract with the Company will not be renewed. As a result, one contract will terminate on December 31, 1999 that accounted for 9.4% and 3.8% of the Company's operating revenues from continuing operations for the six months ended November 30, 1999 and 1998, respectively. The Company has also received notice from one Texas HMO that its contract with the Company will not be renewed. As a result, three contracts will terminate on December 31, 1999 that accounted for 7.5% and 1.2% of the Company's operating revenues from continuing operations for the six months ended November 30, 1999 and 1998, respectively. Additionally, the Company recently submitted a bid to one HMO in Texas in response to a Request for Proposal that involves the membership covered under its existing contracts, which are due to expire in February and March, 2000. These combined contracts represented approximately 10.7% and 6.0% of the Company's operating revenue from continuing operations for the six months ended November 30, 1999 and 1998, respectively. The Company cannot determine at this time if either of its contracts with this HMO will be renewed. 16 17 UNCERTAINTY OF FUTURE PROFITABILITY As of November 30, 1999, the Company had stockholders' deficit of $7.2 million and a working capital deficiency of approximately $9.1 million. The Company had a net loss for the six months ended November 30, 1999 of $2.3 million. There can be no assurance that the Company will be able to achieve and sustain profitability or that the Company can achieve and maintain positive cash flow on an ongoing basis. Present results of operations are not necessarily indicative of anticipated future results of operations. NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING During prior fiscal years, a principal source of liquidity has been the sale of hospital properties and equipment that, as of March 11, 1999, have been entirely disposed of. The Company has received tax refunds for fiscal 1995 and 1996 in the amounts of $9.4 million and $5.4 million, respectively. Such refunds are based on loss carrybacks under Section 172(f) of the Internal Revenue Code. Any IRS claim for return of all or any portion thereof could have an adverse effect on the Company's cash flows. On August 21, 1998, the Company received an examination report from the IRS, dated August 6, 1998, related to its Section 172(f) carryback claims and amended tax returns for prior years, claiming taxes due totaling approximately $12.4 million for which the Company has accrued $12.1 million as of November 30, 1999. The Company filed a protest with the IRS on November 6, 1998 to contest the examination report with the appeals office of the Internal Revenue Service in Laguna Niguel, California. In the event that the Company is unsuccessful in the appeals process, the Company is entitled to a repayment of fees advanced to the Company's tax advisor relating to these refund claims, totaling approximately $2.5 million. The IRS reserves the right to assess and collect the tax previously refunded to the Company at any time during the appeals process. TAXES In connection with the filing of its Federal income tax returns for fiscal years 1995 and 1996, the Company filed for a tentative refund to carry back losses described in Section 172(f) of the Internal Revenue Code ("IRC"), requesting a refund to the Company of $9.4 million and $5.5 million, respectively, of which refunds of $9.4 million and $5.4 million were received. In addition, the Company also filed amended Federal income tax returns for fiscal years prior to 1995, requesting similar refunds of losses carried back under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a total of $7.7 million. During fiscal years 1997 and 1996, the Company recognized a portion of the refunds received as a tax benefit of $0.3 million and $2.4 million, respectively. The balance of the refunds received, $12.1 million, are recorded as a deferred liability, "Unbenefitted tax refunds received" pending resolution by the IRS of the appropriateness of the Section 172(f) carryback. The additional refunds requested under Section 172(f) for prior years of $7.7 million have not been received, nor has the Company recognized any tax benefit related to these potential refunds. Section 172(f) of the IRC provides for a ten-year net operating loss carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. The applicability of Section 172(f) to the type of business in which the Company operates is unclear. No assurance can be provided that the Company will be able to retain the refunds received to date or that the other refunds requested will be received. As a result of the Section 172(f) carryback claims filed by the Company, and the tentative refunds received, the Company came under audit with respect to the tax years previously mentioned. On August 21, 1998, the Company received an examination report, dated August 6, 1998, from the IRS advising the Company that it was disallowing $12.4 million of the $14.8 million of refunds previously received, and the additional refunds requested of $7.7 million. If the position of the IRS were to be upheld, the Company would be required to repay $12.4 million in refunds previously received, plus accrued interest of approximately $4.5 million through November 30, 1999. Accordingly, the Company would be entitled to a repayment of the fees advanced to its tax advisor relating to these refund claims of approximately $2.5 million of which $2.4 million is reported as "other receivable" in the accompanying balance sheet. This report commences the administrative appeals process. The Company filed a protest letter with the IRS on November 6, 1998 and believes that its position with respect to its right to the tax refunds received will be upheld. The Company's tax advisor relating to these 17 18 refund claims has advised management that the administrative appeals process could take twelve to eighteen months. In the event the Company wishes to further protest the results of its administrative appeal, it may further appeal to the United States Tax Court following the final determination of the administrative appeal. The Company has been advised that a determination by the United States Tax Court could take up to an additional twelve months from commencement of the appeals process in the United States Tax Court. The IRS reserves the right to assess and collect the tax previously refunded to the Company at any time during the appeals process. UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS Managed care operations are at risk for costs incurred to supply agreed upon levels of service. Failure to anticipate or control costs could have material, adverse effects on the Company. Additionally, the business of providing services on a full-risk capitation basis exposes the Company to the additional risk that contracts negotiated and entered into may ultimately be determined to be unprofitable if utilization levels require the Company to deliver and provide services at capitation rates which do not account for or factor in such utilization levels. The levels of revenues and profitability of healthcare companies may be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of healthcare through various means. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement governmental controls on the price of healthcare. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payors for healthcare goods and services may take in response to any healthcare reform proposals or legislation. The Company cannot predict the effect healthcare reforms may have on its business and no assurance can be given that any such reforms will not have a material adverse effect on the Company. SHARES ELIGIBLE FOR FUTURE SALE The Company has issued or committed to issue 9,000 shares related to the 7 1/2% convertible subordinated debentures due April 15, 2010, and options or other rights to purchase approximately 1,160,000 shares. The Company may contemplate issuing additional amounts of debt, equity or convertible securities in public or private transactions for use in fulfilling its future capital needs (see "Need for Additional Funds; Uncertainty of Future Funding"). Issuance of additional equity could adversely affect the trading price of the Company's Common Stock. ANTI-TAKEOVER PROVISIONS The Company's Restated Certificate of Incorporation provides for 60,000 authorized shares of Preferred Stock, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by the Board of Directors without any vote or action by the stockholders that could have the effect of diluting the Common Stock or reducing working capital that would otherwise be available to the Company. As of November 30, 1999, there are no outstanding shares of Preferred Stock. The Company's Restated Certificate of Incorporation also provides for a classified board of directors with directors divided into three classes serving staggered terms. The Company's stock option plans generally provide for the acceleration of vesting of options granted under such plans in the event of certain transactions which result in a change of control of the Company. Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders. In addition, each share of the Company's Common Stock includes one right on the terms and subject to the conditions of the Rights Agreement between the Company and Continental Stock Transfer & Trust Company. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders and therefore could adversely affect the price of the Company's Common Stock or the possibility of sale of shares to an acquiring person. 18 19 LIMITATIONS ON THE DEDUCTIBILITY OF COMPENSATION UNDER CERTAIN CIRCUMSTANCES Pursuant to the 1993 Omnibus Budget Reconciliation Act, a portion of annual compensation payable after 1993 to any of the Company's five highest paid executive officers would not be deductible by the Company for federal income tax purposes to the extent such officers' overall compensation exceeds $1.0 million per executive officer. Qualifying performance-based incentive compensation, however, would be both deductible and excluded for purposes of calculating the $1.0 million base. The Board of Directors has determined that no portion of anticipated compensation payable to any executive officer in Fiscal 2000 would be non-deductible. Assumptions relating to the foregoing involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its budgets which may in turn affect the Company's results. In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. 19 20 PART II - OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS (1) In May, 1999, the Company commenced an action against Richard Powers, a former Executive Vice President of the Company, and his current employer, American Psych Systems ("APS"), in the Circuit Court in and for Hillsborough County, Florida. The Company claims that Mr. Powers breached his agreements with the Company by attempting to divert customers to APS. The Company further claims that APS tortuously interfered with the Company's business relationships by directing Powers to solicit these customers in violation of his agreements. The suit is still in its early stages. The Court has denied a motion to dismiss filed by Powers and APS, and the parties have begun the discovery process. The complaint seeks unspecified damages. (2) Although no formal claim has been made or asserted, Humana Health Plans of Puerto Rico, Inc. ("Humana") has claimed that the Company owes $3.0 million to Humana in connection with the contract that was terminated by Humana on March 31, 1999. Humana's claim relates to the pharmacy and laboratory costs incurred by Humana throughout the contract period. The Company has expressed to Humana its total disagreement with Humana's position. The Company believes that Humana owes the Company in excess of $3.0 million in relation to this same issue; however, the Company has not formally asserted such claim. The Company does not believe that Humana's claim will have a material adverse effect on the Company's financial position, results of operations and cash flows. (3) On February 19, 1999, the California Superior Court denied the Company's Petition for Writ of Mandate of an adverse administrative appeal decision regarding application of the Maximum Inpatient Reimbursement Limitation ("MIRL") to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. This facility was owned by the Company until its disposal in fiscal year 1991. The subject matter of the Superior Court action involved the refusal of the administrative law judge to order further reductions in the liability for costs associated with treating high cost, long stay Medi-Cal patients, which are commonly referred to as "outliers". The Company does not plan to appeal the California Superior Court decision for which the Notice of Entry of Judgment was entered on February 26, 1999. As of November 30, 1999, the Company has $1.2 million accrued relating to this matter. (4) On January 22, 1999, PMR Corporation ("PMR") commenced an action against the Company in San Diego Superior Court. This action seeks damages for alleged breach of a hospital management agreement in connection with the Aurora, Colorado facility. The Complaint seeks compensatory damages of approximately $455,000, plus interest and attorneys' fees. The Superior Court ordered this case into arbitration on March 26, 1999. PMR has filed a demand for arbitration of this dispute before the American Arbitration Association. The Company has filed a counter-claim in the arbitration for PMR's alleged breach of the same hospital management agreement and intends to actively defend this action. The Company does not believe that the impact of this claim will have a material adverse effect on the Company's financial position, results of operations and cash flows. (5) In connection with the filing of its Federal income tax returns for fiscal years 1995 and 1996, the Company filed for a tentative refund to carry back losses described in Section 172(f) of the IRC, requesting a refund to the Company of $9.4 million and $5.5 million, respectively, of which refunds of $9.4 million and $5.4 million were received. In addition, the Company also filed amended Federal income tax returns for fiscal years prior to 1995, requesting similar refunds of losses carried back under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a total of $7.7 million. During fiscal years 1997 and 1996, the Company recognized a portion of the refunds received as a tax benefit of $0.3 million and $2.4 million, respectively. The balance of the refunds received, $12.1 million, are recorded as a deferred liability, "Unbenefitted tax refunds received" pending resolution by the IRS of the appropriateness of the Section 172(f) carryback. The additional refunds requested under Section 172(f) for prior years of $7.7 million have not been received, nor has the Company recognized any tax benefit related to these potential refunds. Section 172(f) of the IRC provides for a ten-year net operating loss carryback for specific losses attributable to (1) a product liability or (2) a liability arising under a federal or state law or out of any tort if the act giving rise to such liability occurs at least three years before the beginning of the taxable year. The 20 21 applicability of Section 172(f) to the type of business in which the Company operates is unclear. No assurance can be provided that the Company will be able to retain the refunds received to date or that the other refunds requested will be received. As a result of the Section 172(f) carryback claims filed by the Company, and the tentative refunds received, the Company came under audit with respect to the tax years previously mentioned. On August 21, 1998, the Company received an examination report, dated August 6, 1998, from the IRS advising the Company that it was disallowing $12.4 million of the $14.8 million of refunds previously received, and the additional refunds requested of $7.7 million. If the position of the IRS were to be upheld, the Company would be required to repay $12.4 million in refunds previously received, plus accrued interest of approximately $4.5 million through November 30, 1999. Accordingly, the Company would be entitled to a repayment of the fees advanced to its tax advisor relating to these refund claims of approximately $2.5 million of which $2.4 million is reported as "other receivable" in the accompanying balance sheet. This report commences the administrative appeals process. The Company filed a protest letter with the IRS on November 6, 1998 and believes that its position with respect to its right to the tax refunds received will be upheld. The Company's tax advisor relating to these refund claims has advised management that the administrative appeals process could take twelve to eighteen months. In the event the Company wishes to further protest the results of its administrative appeal, it may further appeal to the United States Tax Court following the final determination of the administrative appeal. The Company has been advised that a determination by the United States Tax Court could take up to an additional twelve months from commencement of the appeals process in the United States Tax Court. The IRS reserves the right to assess and collect the tax previously refunded to the Company at any time during the appeals process. (6) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial Officer of the Company, commenced an action against the Company and its Chairman, Chriss W. Street, in the Superior Court of the State of California arising out of the termination of her employment on September 29, 1997. The action alleges alternate causes of action based upon her employment relationship with the Company and seeks unspecified damages for unpaid wages, unspecified actual, compensatory and punitive damages; damages for emotional distress; and costs, legal fees and penalties under applicable California law. As of November 30, 1999, the action is awaiting a trial date. The Company has denied its liability and has denied the principal allegations of the complaint. The Company believes that it has good and meritorious defenses to this action. From time to time, the Company and its subsidiaries are also parties to and their property is subject to ordinary, routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the Company or a subsidiary may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements. 21 22 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The results of the Company's Annual Shareholders' Meeting, which was held on December 10, 1999, were reported in the Company's current report on Form 8-K, dated December 20, 1999. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.14 - Addendum to Employment Agreement effective December 27, 1999 between the Company and Robert J. Landis (filed herewith). 27 - Financial Data Schedules (filed herewith). (b) Reports on Form 8-K The Company filed a current report on Form 8-K, dated October 1, 1999, to report under Item 5 that the Company's Annual Meeting of Shareholders would be held on December 10, 1999 and, additionally, that proxy materials would be mailed on or about November 3, 1999 to shareholders of record as of October 29, 1999. 22 23 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPREHENSIVE CARE CORPORATION January 14, 2000 by /s/ ROBERT J. LANDIS ---------------------------------- Robert J. Landis Executive Vice President and Chief Financial Officer 23 EX-10.14 2 ADDENDUM TO EMPLOYMENT AGREEMENT 1 EXHIBIT 10.14 ADDENDUM / MODIFICATION TO EMPLOYMENT AGREEMENT Pursuant to Article IX of the Employment Agreement made the 14th day of September 1998, effective July 2nd, 1998 by and between Robert J. Landis, ("Executive") and Comprehensive Care Corporation, (the "Company"), the parties agree to modify the Employment Agreement effective December 27th, 1999 as follows: ARTICLE IX, TERM AND TERMINATION is deleted and replaced by the following: (A) This Agreement shall commence on the date hereof and end as of the date of termination of employment. (B) This Agreement may be terminated prior to the expiration of its term as follows: a. Upon the mutual agreement of the Company and Executive. b. Upon the death or permanent disability of Executive, in which case Executive shall be entitled to all Base Salary through the date of termination. For the purposes of the foregoing, permanent disability shall be the inability of Executive to attend to his usual duties for a period of two (2) months in any 12-month period of the term or sixty (60) consecutive calendar days. c. For cause by the Company, in which case Executive shall only be entitled to his Base Salary through the date of termination. For the purpose of the foregoing, cause shall be (a) a breach or default in the performance by Executive of any of his material obligations under this Agreement, which breach or default is not cured within ten (10) business days following written notice thereof to Executive, or (b) the commission by Executive of any act resulting in or intending to result in his personal gain or enrichment at the expense of the Company, or the commission by Executive of any felony or misdemeanor or act involving moral turpitude. d. By the Company without cause, in which case Executive shall be entitled to an amount equal to twelve (12) months of his Base Salary in effect at the time of termination, payable in salary continuation or lump sum in accordance with Company practice. e. By the executive if, at any time during the term as a result of a change in control of the Company shall have occurred, in which case Executive shall be entitled to an amount equal to twelve (12) months of his Base Salary in effect at the time of termination plus a pro-rata portion of his Incentive Bonus at target for the period of the beginning of the fiscal year through date of termination, payable in salary continuation or lump sum in accordance with Company practice. For the purpose of the foregoing, a change in control shall occur in the 2 event the Company enters into any agreement involving the sale of a controlling interest in the Company or the sale by the company of all or substantially all of its assets to any other entity, or the merger of the Company into and with another entity in which the Company is not the survivor, or in which the Company is not the controlling shareholder. In the event of termination by Executive under this subparagraph, Executive shall be entitled to receive, as a special severance benefit, all options granted to Executive and which shall not have heretofore vested, shall immediately vest and become presently exercisable. IN WITNESS WHEREOF, the parties hereto have executed this Addendum and affixed their hands and seals this 27th day of December 1999. COMPREHENSIVE CARE CORPORATION By: /s/ Chriss W. Street --------------------------------- Chriss W. Street Chairman, President and Chief Executive Officer By: /s/ Robert J. Landis --------------------------------- Robert J. Landis (Executive) EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 1 6-MOS MAY-31-2000 JUN-01-1999 NOV-30-1999 1,000 5,506 0 13,207 692 0 21,002 4,366 2,697 25,382 30,147 2,244 0 0 38 (7,246) 25,382 10,132 10,132 0 8,620 4,115 (499) 188 (2,292) 2 (2,294) 0 0 0 (2,294) (0.60) (0.60)
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