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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended February 28, 2006.
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period fromto.
 Commission
File
Number1-9927
 COMPREHENSIVE CARE CORPORATION
  Delaware
    
    95-2594724(State or other jurisdiction of incorporation
    
    (IRS Employer Identification No.)or organization)
 204 South Hoover Blvd, Suite 200, Tampa, FL 33609
 (813) 288-4808
  þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer þ
  o þ
  Classes
    
    Outstanding at April 10, 2006Common Stock, par value $.01 per share
    
    5,872,374




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##### 



COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Index
 PagePART I  FINANCIAL INFORMATIONItem 1Consolidated Financial StatementsConsolidated Balance Sheets,
February 28, 2006 and May 31, 2005
    
    
    3Consolidated Statements of Operations for
the Three and Nine months ended February 28, 2006 and February 28, 2005
    
    
    4Consolidated Statements of Cash Flows for
the Nine months ended February 28, 2006 and February 28, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-11Item 2Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12-19Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1Legal Proceedings
    
    
    19Item 1ARisk Factors
    
    
    19-20Item 2Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3Defaults Upon Senior Securities
    
    
    20Item 4Submission of Matters to a Vote of Security Holders
    
    
    20Item 5Other Information
    
    
    20Item 6Exhibits
    
    
    21Signatures
    
    
    22Certifications
    
    
    23-26Ex-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification
  2




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 PART I.  FINANCIAL INFORMATION
 
 Item 1  Consolidated Financial Statements
 
 Consolidated Balance Sheets
 February 28,
    
    
    May 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,121
    
    
    $
    3,695Restricted cash
    
    
    584
    
    
    
    Marketable securities
    
    
    3
    
    
    
    11Accounts receivable, less allowance for doubtful accounts of $1 and $5,
respectively
    
    
    23
    
    
    
    113Accounts receivable  managed care reinsurance contract
    
    
    
    
    
    
    372Other current assets
    
    
    491
    
    
    
    481Total current assets
    
    
    7,222
    
    
    
    4,672Property and equipment, net
    
    
    129
    
    
    
    384Goodwill, net
    
    
    991
    
    
    
    991Restricted cash
    
    
    
    
    
    
    72Other assets
    
    
    230
    
    
    
    329Total assets
    
    $
    8,572
    
    
    $
    6,448LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    1,061
    
    
    $
    1,310Accrued claims payable
    
    
    3,154
    
    
    
    3,730Accrued reinsurance claims payable
    
    
    2,749
    
    
    
    3,191Income taxes payable
    
    
    29
    
    
    
    30Total current liabilities
    
    
    6,993
    
    
    
    8,261Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    20
    
    
    
    60Total long-term liabilities
    
    
    2,264
    
    
    
    2,304Total liabilities
    
    
    9,257
    
    
    
    10,565Stockholders deficit:Preferred stock, $50.00 par value; authorized 18,740 shares; issued and
outstanding 14,400 and 0, respectively
    
    
    720
    
    
    
    Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 5,851,374 and 5,582,547, respectively
    
    
    59
    
    
    
    56Additional paid-in capital
    
    
    56,597
    
    
    
    53,813Accumulated deficit
    
    
    (58,046
    )
    
    
    (57,986
    )Other comprehensive loss
    
    
    (15
    )
    
    
    Total stockholders deficit
    
    
    (685
    )
    
    
    (4,117
    )Total liabilities and stockholders deficit
    
    $
    8,572
    
    
    $
    6,448
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating revenues
    
    $
    5,585
    
    
    $
    6,241
    
    
    $
    18,642
    
    
    $
    18,511Costs and expenses:Healthcare operating expenses
    
    
    4,579
    
    
    
    5,134
    
    
    
    16,074
    
    
    
    15,630General and administrative expenses
    
    
    768
    
    
    
    846
    
    
    
    2,473
    
    
    
    2,275Recovery of doubtful accounts
    
    
    (55
    )
    
    
    ( 2
    )
    
    
    (91
    )
    
    
    (6
    )Depreciation and amortization
    
    
    21
    
    
    
    24
    
    
    
    65
    
    
    
    715,313
    
    
    
    6,002
    
    
    
    18,521
    
    
    
    17,970Operating income before items shown below
    
    
    272
    
    
    
    239
    
    
    
    121
    
    
    
    541Other income (expense):Loss from software development
    
    
    (102
    )
    
    
    
    
    
    
    (102
    )
    
    
    Interest income
    
    
    19
    
    
    
    4
    
    
    
    47
    
    
    
    9Interest expense
    
    
    (45
    )
    
    
    (51
    )
    
    
    (139
    )
    
    
    (157
    )Other non-operating income
    
    
    1
    
    
    
    33
    
    
    
    57
    
    
    
    55Income (loss) before income taxes
    
    
    145
    
    
    
    225
    
    
    
    (16
    )
    
    
    448Income tax expense
    
    
    16
    
    
    
    13
    
    
    
    44
    
    
    
    42Net income (loss) attributable to common shareholders
    
    $
    129
    
    
    $
    212
    
    
    $
    (60
    )
    
    $
    406Income (loss) per common share  basic:
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.01
    )
    
    $
    0.09Income (loss) per common share  diluted:
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    (0.01
    )
    
    $
    0.08Weighted average common shares outstanding:Basic
    
    
    5,851
    
    
    
    4,794
    
    
    
    5,782
    
    
    
    4,722Diluted
    
    
    10,443
    
    
    
    5,316
    
    
    
    5,782
    
    
    
    5,285
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Nine Months EndedFebruary 28,2006
    
    
    2005Cash flows from operating activities:Net (loss) income from continuing operations
    
    $
    (60
    )
    
    $
    406Adjustments to reconcile net (loss) income from continuing operations
to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    65
    
    
    
    71Loss from software development
    
    
    102
    
    
    
    Compensation expense  stock, stock options and warrants issued
    
    
    26
    
    
    
    30Amortization of deferred revenue
    
    
    (56
    )
    
    
    (43
    )Changes in assets and liabilities:Accounts receivable, net
    
    
    90
    
    
    
    (73
    )Accounts receivable  managed care reinsurance contract
    
    
    372
    
    
    
    207Other current assets, restricted cash, and other assets
    
    
    (323
    )
    
    
    251Accounts payable and accrued liabilities
    
    
    (146
    )
    
    
    (145
    )Accrued claims payable
    
    
    (576
    )
    
    
    (138
    )Accrued reinsurance claims payable
    
    
    (442
    )
    
    
    72Income taxes payable
    
    
    (1
    )
    
    
    2Other liabilities
    
    
    
    
    
    
    (1
    )Net cash (used in) provided by continuing operations
    
    
    (949
    )
    
    
    639Net cash used in discontinued operations
    
    
    (55
    )
    
    
    (112
    )Net cash (used in) provided by continuing and discontinued
operations
    
    
    (1,004
    )
    
    
    527Cash flows from investing activities:Additions to property and equipment
    
    
    (13
    )
    
    
    (29
    )Net cash used in investing activities
    
    
    (13
    )
    
    
    (29
    )Cash flows from financing activities:Proceeds
from the issuance of common and preferred stock
    
    
    3,481
    
    
    
    769Repayment of long-term debt
    
    
    (38
    )
    
    
    (37
    )Net cash provided by financing activities
    
    
    3,443
    
    
    
    732Net increase in cash and cash equivalents
    
    
    2,426
    
    
    
    1,230Cash and cash equivalents at beginning of period
    
    
    3,695
    
    
    
    3,209Cash and cash equivalents at end of period
    
    $
    6,121
    
    
    $
    4,439Supplemental disclosures of cash flow information:Cash paid during the nine month period for:Interest
    
    $
    97
    
    
    
    114Income taxes
    
    $
    45
    
    
    
    48Non-cash financing and investing activities:Warrants issued in connection with issuance of common stock
    
    $
    
    
    
    
    234Securities received through consulting agreement, net of other
comprehensive loss
    
    $
    4
    
    
    
    Property and equipment acquired under capital leases
    
    $
    
    
    
    
    43
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Note 1  Summary of Significant Accounting Policies
   Marketable Securities
  Restricted Cash
  Revenue Recognition
  Healthcare Expense Recognition
  6




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Accrued Claims Payable
  Premium Deficiencies
    Income Taxes
  Stock Options
  7




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Three
    
    
    Three
    
    
    Nine
    
    
    NineMonths
    
    
    Months
    
    
    Months
    
    
    MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended2/28/06
    
    
    2/28/05
    
    
    2/28/06
    
    
    2/28/05Net income (loss), as reported
    
    $
    129
    
    
    $
    212
    
    
    $
    (60
    )
    
    $
    406Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
    
    
    (105
    )
    
    
    (77
    )
    
    
    (133
    )
    
    
    (160
    )Pro forma net income (loss)
    
    $
    24
    
    
    $
    135
    
    
    $
    (193
    )
    
    $
    246Income (loss) per common share:Basic  as reported
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.01
    )
    
    $
    0.09Diluted  as reported
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    (0.01
    )
    
    $
    0.08Basic  pro forma
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.05Diluted  pro forma
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    (0.03
    )
    
    $
    0.05
 Per Share Data
  Three Months Ended
    
    
    Nine Months EndedFebruary 28,
    
    
    February 28,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Numerator for diluted income (loss) attributable to common
stockholders
    
    $
    129
    
    
    $
    212
    
    
    $
    (60
    )
    
    $
    406Denominator:Weighted average shares
    
    
    5,851
    
    
    
    4,794
    
    
    
    5,782
    
    
    
    4,722Effect of dilutive securities:Warrants
    
    
    14
    
    
    
    2
    
    
    
    
    
    
    
    2Employee stock options
    
    
    342
    
    
    
    520
    
    
    
    
    
    
    
    561Convertible preferred stock
    
    
    4,236
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted income (loss) per share-adjusted
weighted average shares after assumed conversions
    
    
    10,443
    
    
    
    5,316
    
    
    
    5,782
    
    
    
    5,285Basic income (loss) per share:
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    (0.01
    )
    
    $
    0.09Diluted income (loss) per share:
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    (0.01
    )
    
    $
    0.08
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  Convertible debentures(a)
    
    
    12,377Convertible preferred stock(b)
    
    
    4,235,328Outstanding stock options(c)
    
    
    1,093,740Outstanding warrants(d)
    
    
    406,000Possible future issuance under stock option plans
    
    
    568,336Total
    
    
    6,315,781
 
 (a)
    
    The debentures are convertible into 12,377 shares of common stock at a conversion price of
$181.30 per share.(b)
    
    The Series A Convertible Preferred Stock (Series A Preferred Stock) is convertible into
4,235,328 shares of common stock at a conversion rate of 294.12 common shares for each preferred
share.(c)
    
    Options to purchase common stock of the Company have been issued to employees and non-employee
Board of Director members with exercise prices ranging from $0.25 to $4.00.(d)
    
    Warrants to purchase common stock of the Company have been issued to certain individuals or
vendors in exchange for consulting services. All such warrants were issued in lieu of cash
compensation and have five-year terms with exercise prices ranging from $1.09 to $5.00 Note 2  Liquidity
   Note 3  Total Comprehensive Income (Loss)
  Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended2/28/06
    
    
    2/28/05
    
    
    2/28/06
    
    
    2/28/05Net income (loss)
    
    $
    129
    
    
    $
    212
    
    
    $
    (60
    )
    
    $
    406Other comprehensive loss:Unrealized holding loss
    
    
    (7
    )
    
    
    (61
    )
    
    
    (15
    )
    
    
    (112
    )Total comprehensive income (loss)
    
    $
    122
    
    
    $
    151
    
    
    $
    (75
    )
    
    $
    294
 Note 4  Sources Of Revenue
  Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended2/28/06
    
    
    2/28/05
    
    
    2/28/06
    
    
    2/28/05Capitated contracts
    
    $
    5,412
    
    
    $
    5,573
    
    
    $
    17,889
    
    
    $
    16,376Non-capitated contracts
    
    
    173
    
    
    
    668
    
    
    
    753
    
    
    
    2,135Total
    
    $
    5,585
    
    
    $
    6,241
    
    
    $
    18,642
    
    
    $
    18,511
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  Note 5  Major Customers/Contracts
    Note 6  Preferred Stock
  Note 7  Commitments and Contingencies
  10




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
      Note 8  Related Party Transactions
  11




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations
  OVERVIEW
 General
    12




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  Recent Developments
   RESULTS OF OPERATIONS
   13




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 The Three Months Ended February 28, 2006 Compared to the Three Months Ended February 28,
2005:
 Three Months EndedFebruary 28,2006
    
    
    2005Operating revenues:Capitated contracts
    
    $
    5,412
    
    
    
    5,573Non-capitated sources
    
    
    173
    
    
    
    668Total operating revenues
    
    
    5,585
    
    
    
    6,241Operating expenses:Healthcare operating expenses:Claims expense(1)
    
    
    3,560
    
    
    
    3,850Other healthcare operating expenses(1)
    
    
    1,019
    
    
    
    1,284Total healthcare operating expense
    
    
    4,579
    
    
    
    5,134General and administrative expenses
    
    
    768
    
    
    
    846Other operating expenses, net
    
    
    (34
    )
    
    
    22Total operating expenses
    
    
    5,313
    
    
    
    6,002Operating income
    
    $
    272
    
    
    
    239
 
 (1)
    
    Claims expense reflects the cost of revenue of capitated contracts, and other healthcare
operating expense reflects the cost of revenue of capitated and non-capitated contracts.    14




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 The Nine Months Ended February 28, 2006 Compared to the Nine Months Ended February 28,
2005:
 Nine Months EndedFebruary 28,2006
    
    
    2005Operating revenues:Capitated contracts
    
    $
    17,889
    
    
    
    16,376Non-capitated sources
    
    
    753
    
    
    
    2,135Total operating revenues
    
    
    18,642
    
    
    
    18,511Operating expenses:Healthcare operating expenses:Claims expense(1)
    
    
    12,820
    
    
    
    11,779Other healthcare operating expenses(1)
    
    
    3,254
    
    
    
    3,851Total healthcare operating expense
    
    
    16,074
    
    
    
    15,630General and administrative expenses
    
    
    2,473
    
    
    
    2,275Other operating expenses, net
    
    
    (26
    )
    
    
    65Total operating expenses
    
    
    18,521
    
    
    
    17,970Operating income
    
    $
    121
    
    
    
    541
 
 (1)
    
    Claims expense reflects the cost of revenue of capitated contracts, and other healthcare
operating expense reflects the cost of revenue of capitated and non-capitated contracts.    SEASONALITY OF BUSINESS
  15




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 CONCENTRATION OF RISK
  LIQUIDITY AND CAPITAL RESOURCES
     Related-Party Transactions
  16




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 CRITICAL ACCOUNTING ESTIMATES
   Revenue Recognition
   Accrued Claims Payable and Claims Expense
    17




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
    
    
    Changes in utilization patterns
    
    Changes in healthcare costs
    
    Changes in claims submission timeframes by providers
    
    Success in renegotiating contracts with healthcare providers
    
    Occurrence of catastrophes
    
    Changes in benefit plan design
    
    The impact of present or future state and federal regulations
  Change in Healthcare Costs:
 (Decrease)(Decrease)
    
    IncreaseIncrease
    
    In Claims Expense(5%)
        
    
    ($74,000
    )5%
    
    
    $72,000
 Premium Deficiencies
    18




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Marketable Securities
  
    
    The financial condition of the issuer.
    
    The length of time the investment has been in a continuous unrealized position.
    
    The Companys ability to hold the security for a period of time sufficient to allow
for any anticipated recovery.
 Goodwill
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We depend on a limited number of customers, the loss of any one of these customers, or a reduction
in business from any one of them, could have a material, adverse effect on our working capital and
future results of operations.
  19




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
    Our inability to recover amounts paid to an information system vendor exposes the Company to
further impairment.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  20




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Item 6. Exhibits
 EXHIBITNUMBER
    
    DESCRIPTION
    
    PAGE NUMBER31.1
    
    Comprehensive Care Corporation CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    2331.2
    
    Comprehensive Care Corporation CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    2432.1
    
    Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    2532.2
    
    Comprehensive Care Corporation CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    26
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 SIGNATURES
  COMPREHENSIVE CARE CORPORATIONApril 14, 2006By
    
    /s/ Mary Jane JohnsonMary Jane JohnsonPresident and Chief Executive Officer(Principal Executive Officer)By
    
    /s/ Robert J. LandisRobert J. LandisChairman, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 22