##### Table of Contents



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 1934For the period ended November 30, 2004.o
    
    Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from _______________ to _______________.Commission File Number 1-9927
 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 
  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
þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes
o No þ 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, 2005Common Stock, par value $.01 per share
    
    4,798,547




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Index  
 PagePART I  FINANCIAL INFORMATIONItem 1 Consolidated Financial StatementsConsolidated Balance Sheets, November 30, 2004 and May 31, 2004
    
    
    3Consolidated Statements of Operations for the Three and Six months ended November 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the Six months ended November 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-10Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-14Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4Controls and Procedures
    
    
    14PART II  OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    14Item 2Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    14Item 5Other Information
    
    
    15Item 6 Exhibits and Reports on Form 8-K
    
    
    15Signatures
    
    
    16Certifications
    
    
    17-20Ex-31.1: Section 302 Certification of CEOEx-31.2: Section 302 Certification of CFOEx-32.1: Section 906 Certification of CEOEx-32.2: Section 906 Certification of CFO
  2




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##### Table of Contents



COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 PART I.  FINANCIAL INFORMATION 
 Item 1  Consolidated Financial Statements 
 Consolidated Balance Sheets
(Amounts in thousands) November 30,
    
    
    May 31,2004
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,729
    
    
    $
    3,209Marketable securities
    
    
    78
    
    
    
    Restricted cash
    
    
    253
    
    
    
    Accounts receivable, less allowance for doubtful accounts of $2 and $10,
respectively
    
    
    189
    
    
    
    191Accounts receivable  managed care reinsurance contract
    
    
    725
    
    
    
    553Other current assets
    
    
    403
    
    
    
    524Total current assets
    
    
    4,377
    
    
    
    4,477Property and equipment, net
    
    
    397
    
    
    
    390Goodwill, net
    
    
    991
    
    
    
    991Restricted cash
    
    
    72
    
    
    
    325Other assets
    
    
    242
    
    
    
    42Total assets
    
    $
    6,079
    
    
    $
    6,225LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    1,549
    
    
    $
    1,720Accrued claims payable
    
    
    3,332
    
    
    
    3,647Accrued reinsurance claims payable
    
    
    3,390
    
    
    
    3,183Income taxes payable
    
    
    43
    
    
    
    25Total current liabilities
    
    
    8,314
    
    
    
    8,575Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    73
    
    
    
    131Total long-term liabilities
    
    
    2,317
    
    
    
    2,375Total liabilities
    
    
    10,631
    
    
    
    10,950Stockholders deficit:Preferred stock, $50.00 par value; authorized 18,740 shares; none issued
    
    
    
    
    
    
    Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 4,697,547 and 4,673,048, respectively
    
    
    47
    
    
    
    47Additional paid-in-capital
    
    
    52,976
    
    
    
    52,950Deferred compensation
    
    
    
    
    
    
    (4
    )Accumulated deficit
    
    
    (57,524
    )
    
    
    (57,718
    )Other comprehensive loss
    
    
    (51
    )
    
    
    Total stockholders deficit
    
    
    (4,552
    )
    
    
    (4,725
    )Total liabilities and stockholders deficit
    
    $
    6,079
    
    
    $
    6,225
 See accompanying notes to consolidated financial statements. 3




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
  Consolidated Statements of Operations
 Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Operating revenues
    
    $
    6,231
    
    
    $
    7,011
    
    
    $
    12,270
    
    
    $
    14,904Costs and expenses:Healthcare operating expenses
    
    
    5,328
    
    
    
    6,199
    
    
    
    10,496
    
    
    
    13,051General and administrative expenses
    
    
    727
    
    
    
    970
    
    
    
    1,429
    
    
    
    1,878Provision for (recovery of) doubtful accounts
    
    
    1
    
    
    
    ( 4
    )
    
    
    ( 4
    )
    
    
    ( 12
    )Depreciation and amortization
    
    
    23
    
    
    
    28
    
    
    
    47
    
    
    
    556,079
    
    
    
    7,193
    
    
    
    11,968
    
    
    
    14,972Operating income (loss) from continuing operations before
items shown below
    
    
    152
    
    
    
    (182
    )
    
    
    302
    
    
    
    (68
    )Other income (expense):Interest income
    
    
    3
    
    
    
    6
    
    
    
    5
    
    
    
    18Interest expense
    
    
    (52
    )
    
    
    (54
    )
    
    
    (106
    )
    
    
    (102
    )Other non-operating income
    
    
    11
    
    
    
    
    
    
    
    22
    
    
    
    1Income (loss) from continuing operations before income taxes
    
    
    114
    
    
    
    (230
    )
    
    
    223
    
    
    
    (151
    )Income tax expense
    
    
    11
    
    
    
    3
    
    
    
    29
    
    
    
    20Income (loss) from continuing operations
    
    $
    103
    
    
    $
    (233
    )
    
    $
    194
    
    
    $
    (171
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (387
    )Net income (loss) attributable to common stockholders
    
    $
    103
    
    
    $
    (233
    )
    
    $
    194
    
    
    $
    (558
    )Income
(loss) per common share - basic:Income (loss) from continuing operations
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.04
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.10
    )Net income (loss)
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )Income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.04
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.10
    )Net income (loss)
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )Weighted average common shares outstanding:Basic
    
    
    4,691
    
    
    
    3,942
    
    
    
    4,687
    
    
    
    3,939Diluted
    
    
    5,262
    
    
    
    3,942
    
    
    
    5,268
    
    
    
    3,939
 See accompanying notes to consolidated financial statements. 4




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
  Consolidated Statements of Cash Flows
 Six Months EndedNovember 30,2004
    
    
    2003Cash flows from operating activities:Net income (loss) from continuing operations
    
    $
    194
    
    
    $
    (171
    )Adjustments to reconcile net income (loss) from continuing operations
to net cash used in operating activities:Depreciation and amortization
    
    
    47
    
    
    
    55Compensation expense  stock, stock options and warrants issued
    
    
    23
    
    
    
    23Amortization of deferred revenue
    
    
    (11
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    2
    
    
    
    (180
    )Accounts
receivable - managed care reinsurance contract
    
    
    (172
    )
    
    
    (128
    )Other current assets, restricted funds, and other non-current assets
    
    
    (79
    )
    
    
    145Accounts payable and accrued liabilities
    
    
    (288
    )
    
    
    (345
    )Accrued claims payable
    
    
    (315
    )
    
    
    (230
    )Accrued reinsurance claims payable
    
    
    207
    
    
    
    198Income taxes payable
    
    
    18
    
    
    
    4Other liabilities
    
    
    (1
    )
    
    
    (1
    )Net cash used in continuing operations
    
    
    (375
    )
    
    
    (630
    )Net cash used in discontinued operations
    
    
    (73
    )
    
    
    (22
    )Net cash used in continuing and discontinued operations
    
    
    (448
    )
    
    
    (652
    )Cash flows from investing activities:Payments received on note receivable
    
    
    
    
    
    
    2Additions to property and equipment
    
    
    (14
    )
    
    
    (132
    )Net cash used in investing activities
    
    
    (14
    )
    
    
    (130
    )Cash flows from financing activities:Proceeds from the issuance of common stock
    
    
    6
    
    
    
    2Repayment of debt
    
    
    (24
    )
    
    
    (14
    )Net cash used in financing activities
    
    
    (18
    )
    
    
    (12
    )Net decrease in cash and cash equivalents
    
    
    (480
    )
    
    
    (794
    )Cash and cash equivalents at beginning of period
    
    
    3,209
    
    
    
    3,590Cash and cash equivalents at end of period
    
    $
    2,729
    
    
    $
    2,796Supplemental disclosures of cash flow information:Cash paid during the six month period for:Interest
    
    $
    107
    
    
    
    101Income taxes
    
    $
    19
    
    
    
    16Noncash operating, financing and investing activities:Securities received through consulting agreement, net of other
comprehensive loss
    
    $
    78
    
    
    
    Property acquired under capital leases
    
    $
    27
    
    
    
    61
 See accompanying notes to consolidated financial statements. 5




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Note 1  Summary of Significant Accounting Policies The consolidated balance sheet as of November 30, 2004, and the related consolidated
statements of operations and cash flows for the six months ended November 30, 2004 and 2003 are
unaudited and have been prepared in accordance with accounting principles generally accepted in the
United States of America 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 consolidated financial statements have been included. Such adjustments
consisted only of normal recurring items. The results of operations for the six months ended
November 30, 2004 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 accounting principles generally accepted in the United States of America. The
consolidated balance sheet at May 31, 2004 has been derived from the audited, consolidated
financial statements at that date, but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for complete
financial statement presentation. Notes to consolidated financial statements included in Form 10-K
for the fiscal year ended May 31, 2004 are on file with the Securities and Exchange Commission and
provide additional disclosures and a further description of accounting policies. The Companys consolidated 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  Basis of Presentation. Marketable Securities The Companys marketable securities are classified as available for sale, and accordingly
are reflected in the consolidated balance sheet at fair market value, with the unrealized loss
included as an other comprehensive loss within stockholders deficit. Restricted Cash During the quarter ended November 30, 2004, the Company reclassified $253,000 from non-current
to current restricted cash due to the expiration of the trust agreement and pending release of
escrow specific to the Companys Directors and Officers liability insurance policy. As of
November 30, 2004, the non-current restricted cash amount of $72,000 represents a required deposit
under the terms of the Companys Tampa office lease. Revenue Recognition The Companys managed care activities are performed under the terms of agreements with health
maintenance organizations (HMOs), preferred provider organizations, and other health plans or
payers to provide contracted behavioral healthcare services to subscribing participants. Revenue
under a substantial portion of these agreements is earned monthly based on the number of qualified
participants regardless of services actually provided (generally referred to as capitation
arrangements). The information regarding qualified participants is supplied by the Companys
clients and the Company relies extensively on the accuracy of the client remittance and other
reported information to determine the amount of revenue to be recognized. Such agreements
accounted for 88.1%, or $10.8 million, of revenue for the six months ended November 30, 2004 and
87.2%, or $13.0 million, of revenue for the six months ended November 30, 2003. The remaining
balance of the Companys revenues is earned on a fee-for-service basis and is recognized as
services are rendered. Accrued Claims Payable The accrued claims payable liability represents the estimated ultimate net amounts owed for
all behavioral healthcare services provided through the respective balance sheet dates, including
estimated amounts for claims incurred but not yet reported (IBNR) to the Company. The unpaid
claims liability is estimated using an actuarial paid completion factor methodology and other
statistical analyses and is continually reviewed and adjusted, if necessary, to reflect any change
in the estimated liability. These estimates are subject to the effects of trends in 6




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES utilization and other factors. However, actual claims incurred could differ from the estimated
claims payable amount reported as of November 30, 2004. Although considerable variability is
inherent in such estimates, management believes that the unpaid claims liability is adequate. Income Taxes The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to net operating
loss carryforwards and to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect of a
change in tax rates on deferred tax assets or liabilities is recognized in the consolidated
statements of operations in the period that included the enactment. A valuation allowance is
established for deferred tax assets unless their realization is considered more likely than not. Stock Options The Company periodically grants stock options to employees and non-employee directors
(optionees) allowing optionees to purchase the Companys common stock pursuant to shareholder
approved stock option plans. As permitted by Statement of Financial Accounting Standards (SFAS)
No. 148, Accounting for Stock-Based Compensation-Transitional Disclosure, the Company has elected
to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations in accounting for its employee stock options (APB 25). Under APB 25,
in the event that the exercise price of the Companys employee stock options is less than the
market price of the underlying stock on the date of grant, compensation expense is recognized. No
stock-based employee compensation cost is reflected in net income (loss), as all options granted
under the Companys employee stock options plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table illustrates the effect on net
income (loss) and net income (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock Based
Compensation, to stock-based employee compensation (amounts in thousands, except per
share data). Three
    
    
    Three
    
    
    Six
    
    
    SixMonths
    
    
    Months
    
    
    Months
    
    
    MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended11/30/04
    
    
    11/30/03
    
    
    11/30/04
    
    
    11/30/03Net income (loss), as reported
    
    $
    103
    
    
    $
    (233
    )
    
    $
    194
    
    
    $
    (558
    )Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
    
    
    (54
    )
    
    
    (110
    )
    
    
    (54
    )
    
    
    (110
    )Pro forma net income (loss)
    
    $
    49
    
    
    $
    (343
    )
    
    $
    140
    
    
    $
    (668
    )Income (loss) per common share:Basic  as reported
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )Diluted  as reported
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )Basic  pro forma
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.03
    
    
    $
    (0.17
    )Diluted  pro forma
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    0.03
    
    
    $
    (0.17
    )
 On
December 16, 2004, the FASB issued Statement No. 123R,
Share-Based Payment, which requires companies to record
compensation expense for stock options issued to employees at an
amount determined by the fair value of the options. SFAS
No. 123R is effective for the Company for interim or annual
periods beginning after June 15, 2005. As such, effective with
the Companys second fiscal quarter of fiscal 2006, SFAS
No. 123R will eliminate our ability to account for stock options
using the method permitted under APB 25 and instead require us
to recognize compensation expense should the Company issue stock
options to its employees or non-employee directors. The Company is in
the process of evaluating the impact adoption of SFAS No. 123R
will have on the consolidated financial statements. Per Share Data In calculating basic income (loss) per share, net income (loss) is divided by the weighted
average number of common shares outstanding for the period. Diluted income (loss) per share
reflects the assumed exercise or conversion of all dilutive securities, such as options, warrants,
and convertible debentures. No such exercise or conversion is assumed where the effect is
antidilutive, such as when there is a net loss. The following table sets forth 7




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES the computation of basic and diluted income (loss) per share in accordance with Statement No. 128,
Earnings Per Share (amounts in thousands, except per share data): Three Months Ended
    
    
    Six Months EndedNovember 30,
    
    
    November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Numerator:Numerator for diluted income (loss) per share from continuing
operations
    
    $
    103
    
    
    $
    (233
    )
    
    $
    194
    
    
    $
    (171
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (387
    )Net income (loss) attributable to common stockholders
    
    $
    103
    
    
    $
    (233
    )
    
    $
    194
    
    
    $
    (558
    )Denominator:Weighted average shares
    
    
    4,691
    
    
    
    3,942
    
    
    
    4,687
    
    
    
    3,939Effect of dilutive securities:Warrants
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Employee stock options
    
    
    569
    
    
    
    
    
    
    
    579
    
    
    
    Denominator for diluted income (loss) per share-adjusted
weighted
average shares after assumed conversions
    
    
    5,262
    
    
    
    3,942
    
    
    
    5,268
    
    
    
    3,939Basic income (loss) per share:Income (loss) from continuing operations
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.04
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.10
    )Net income (loss)
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )Diluted income (loss) per share:Income (loss) from continuing operations
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.04
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.10
    )Net income (loss)
    
    $
    0.02
    
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.14
    )
 Authorized shares of common stock reserved for possible issuance for convertible debentures, stock
options, and warrants are as follows at November 30, 2004: Convertible debentures
    
    
    9,044Outstanding stock options
    
    
    1,275,090Possible future issuance under stock option plans and warrants
    
    
    349,369Total
    
    
    1,633,503
 Note 2  Basis of Presentation The accompanying consolidated financial statements are prepared on a going concern basis.
During the six months ended November 30, 2004, net cash used in continuing and discontinued
operations amounted to $375,000 and $73,000, respectively. The Companys capital needs during
fiscal 2005 will require additional installments toward the $180,000 that remains to be paid in
connection with its new information system, which has expected total costs of approximately
$370,000. Once implemented, this system will enable the Company to meet HIPAA requirements,
streamline the Companys entire clinical and claims functions, and offer service improvements to
the Companys participating providers. As of November 30, 2004, the Company had a working capital deficiency of $3.9 million and a
stockholders deficit of $4.6 million. The Company is continuing to pursue sources of financing on
terms that would support the Companys capital needs and provide available funds for working
capital during fiscal 2005. Management cannot state with any degree of certainty whether any
required additional equity or debt financing will be available to the Company during fiscal 2005
and, if available, that the source of financing would be available on terms and conditions
acceptable to the Company. Further, the Company has incurred operating losses in recent years,
including the fiscal year ended May 31, 2004. These conditions raise substantial doubt about the
Companys ability to continue as a going concern, which is dependent upon its ability to continue
to generate sufficient cash flow to meet its obligations on a timely basis, obtaining additional
financing as may be required and, ultimately, sustaining an operating profit. The accompanying
consolidated financial statements do not include any adjustments that may result from the outcome
of this uncertainty. 8




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Note 3  Total Comprehensive Income (Loss) Total comprehensive income (loss) is net income (loss) adjusted for the unrealized holding losses
on available-for-sale securities, which amounted to $51,000 and $0 as of November 30, 2004 and
2003, respectively: Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended11/30/04
    
    
    11/30/03
    
    
    11/30/04
    
    
    11/30/03Net income (loss)
    
    $
    103
    
    
    $
    (233
    )
    
    $
    194
    
    
    $
    (558
    )Other comprehensive loss:Unrealized holding loss
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )
    
    
    Total comprehensive income (loss)
    
    $
    52
    
    
    $
    (233
    )
    
    $
    143
    
    
    $
    (558
    )
 Note 4  Major Customers/Contracts (1) Beginning January 1, 2003, the Company contracted with a new HMO client to provide
behavioral healthcare services to contracted Medicaid members in Florida. This business accounted
for 25.3%, or $3.8 million, of the Companys operating revenues during the six months ended
November 30, 2003. On October 30, 2003, the HMO, whose contract was scheduled to renew in January
2004, advised the Company that it had determined to insource behavioral health and, therefore,
would not renew its contract with the Company. Accordingly, the Companys contract with this HMO
customer terminated effective December 31, 2003. (2) The Company has one contract to provide behavioral healthcare services to Connecticut
members under contract with one HMO. This agreement represented approximately 20.9%, or $2.6
million, and 11.3%, or $1.7 million, of the Companys operating revenue for the six months ended
November 30, 2004 and 2003, respectively. Additionally, this contract provides that the Company,
through its contract with this HMO, receives additional funds directly from a state reinsurance
program for the purpose of paying providers. During the six months ended November 30, 2004 and
2003, the Company filed reinsurance claims totaling approximately $1.8 million and $1.1 million,
respectively. Such claims represent cost reimbursements and, as such, are not included in the
reported operating revenues and are accounted for as reductions of healthcare operating expenses.
As of November 30, 2004 and May 31, 2004, respectively, the Company has reported $0.8 million and
$0.6 million as accounts receivablemanaged care reinsurance contracts, with $3.4 million and $3.2
million reported as accrued reinsurance claims payable in the accompanying balance sheet. In the
event that the Company does not collect the amounts receivable related to reinsurance amounts, the
Company could remain liable for the costs of the specific services provided to members that qualify
for such reimbursements. The difference between the reinsurance receivable amount and the
reinsurance payable amount is related to timing differences between the authorization date, the
date the money is received by the Company, and the date the money is paid to the provider. In
certain cases, providers have submitted claims for authorized services having incorrect service
codes or otherwise incorrect information that has caused payment to be denied by the Company. In
such cases, there are contractual and statutory provisions that allow the provider to appeal a
denied claim. If no appeal is received by the Company within the prescribed amount of time, the
Company may be required to remit the reinsurance funds back to the appropriate party. For
non-reinsurance claims incurred but not yet reported under this contract, the Company estimates its
claims payable using a similar method as that used for other existing contracts. This HMO has been
a customer since March 2001. The original contract term ended December 31, 2002 and, in
accordance with its terms, has automatically renewed for three consecutive one-year periods, with
the current term ending December 31, 2005. In October 2004, the Company submitted a bid to the
State of Connecticut in response to its request for proposal for administrative services only
(ASO) in connection with a contract that is expected to begin by July 1, 2005. On January 7, 2005
the Company was informed that another bidder was selected to negotiate this ASO contract. If the
State of Connecticut is successful in their negotiations with the selected bidder and the State of
Connecticut continues with the implementation of its ASO plans, the Companys existing contract may
be terminated sometime during the Companys first quarter of fiscal 2006, which begins June 1,
2005. (3) The Company has contracts with one HMO to provide behavioral healthcare services to
contracted commercial, Medicaid, and Childrens Health Insurance Program (CHIP) members in Texas.
This business accounted for approximately 21.0%, or $2.6 million, and 12.6%, or $1.9 million, of
the Companys operating revenues during the six months ended November 30, 2004 and 2003,
respectively. This HMO has been a customer of the Company since November 1998. The original
contract term was for one year and the contract provides for automatic one-year renewal terms. 9




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES In general, the Companys contracts with its customers are typically for initial one-year terms,
with automatic annual extensions. Such contracts generally provide for cancellation by either
party with 60 to 90 days written notice. Note 5  Discontinued Operations Results for the six months ended November 30, 2003 include a change in estimate resulting in a
net charge of approximately $387,000 related to hospital operations disposed of in prior years,
which is included under discontinued operations in the accompanying consolidated financial
statements. The charge primarily relates to settlement of the Companys fiscal 1999 Medicare cost
report for its Aurora, Colorado facility that was sold by the Company during fiscal 1999. The
settlement requires the Company to repay a net amount of $294,000 by means of a two-year
installment plan. At November 30, 2004, approximately $132,000 remains outstanding and is included
in accounts payable and accrued expenses in the accompanying consolidated balance sheet. Note 6  Commitments and Contingencies (1) The Companys contract with one existing client includes a requirement to maintain a
performance bond throughout the contract term. Additionally, in connection with the Companys
recently issued Preferred Provider Network license in Connecticut, the Company is required to
maintain a performance bond during all applicable terms of the license. As such, the Company
maintains performance bonds of $600,000 and $2,400,000, respectively, in compliance with these
requirements. (2) Related to the Companys discontinued hospital operations, Medicare guidelines allow
the Medicare fiscal intermediary to re-open previously filed cost reports. Management believes
that the Companys fiscal 1998 and 1999 cost reports remain eligible for re-opening at some future
date, in which case the intermediary may determine that additional amounts are due to or from
Medicare. (3) The Company is subject to the requirements of the Health Insurance Portability and
Accountability Act of 1996 (HIPAA). The purpose of the HIPAA provisions is to improve the
efficiency and effectiveness of the healthcare system through standardization of the electronic
data interchange of certain administrative and financial transactions and, also, to protect the
security and privacy of protected health information. Entities subject to HIPAA include some
healthcare providers and all healthcare plans. To meet the specific requirements of HIPAA, the
Company determined it needed to make a significant investment in its current information system or
in a new information system that would better meet the Companys future needs. As a result, the
Company has entered into a Software License Maintenance and Services Agreement with Qualifacts
Systems, Inc. (Qualifacts), a vendor that has provided the Company with an immediate, temporary
solution to meet HIPAA compliance rules specific to the Electronic Health Care Transactions and
Code Sets Standards Model Compliance Plan with the Centers for Medicare and Medicaid Services and,
additionally, to design a new, customized management information system that will enable the
Company to continue to meet HIPAA requirements in the future. The Company expects to incur a total
of approximately $370,000 of costs to customize the Qualifacts system and activate the licenses
needed for Qualifacts and other, related third-party software. 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 which case claims may
exceed insurance policy limits and the Company or any one of its subsidiaries may have exposure to
a liability that is not covered by insurance. Management is not aware of any such lawsuits that
could have a material adverse impact on the Companys consolidated financial statements. 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations In addition to historical information, the following information contains forward-looking
statements as defined under federal securities laws. Such statements include, but are not limited
to, statements concerning the Companys anticipated operating results, financial resources,
increases in revenues, increased profitability, interest expense, growth and expansion, and the

ability to obtain new behavioral healthcare contracts. These statements are based on current
expectations, estimates and projections about the industry and markets in which Comprehensive Care
Corporation (CompCare or the Company) operates, and managements beliefs and assumptions.
Forward-looking statements are not guarantees of future performance and involve certain known and
unknown risks and uncertainties that could cause actual results to differ materially from those
expressed or implied by such statements. Such risks and uncertainties include, but are not limited
to, changes in local, regional, and national economic and political conditions, the effect of
governmental regulation, competitive market conditions, varying trends in member utilization, cost
of care, and seasonality, the Companys ability to obtain additional financing, and other risks
detailed herein and from 10




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES time to time in the Companys SEC reports. The following discussion should be read in conjunction
with the accompanying consolidated financial statements and notes thereto of CompCare appearing
elsewhere herein. General Introduction The Company has provided managed behavioral healthcare services and products since 1992.
Services are marketed primarily through business development staff who are responsible for
developing new sales leads and for preparing responses to formal commercial and public sector
Requests for Proposals (RFPs). The Company typically has several RFPs in process, with
submissions being made to a diverse selection of existing and prospective clients. Current
services include a broad spectrum of inpatient and outpatient mental health and substance abuse
therapy, counseling, and supportive interventions. Declines in operating revenues over the past six fiscal quarters are primarily attributable to
two changes in our client base. In September 2003, revenues from Texas CHIP contracts were
temporarily eliminated due to State legislative changes. Although revenues resumed after a
five-month hiatus, reinstated revenue levels are approximately 60% of the former amounts primarily
due to a reduction in the benefits made available to Texas CHIP members. On December 31, 2003, we
experienced the loss of one major Florida customer who determined to internally manage behavioral
health services to its members. This contract accounted for 25.3%, or $3.8 million, of our revenue
during the first six months of fiscal 2004. In the past year, we have experienced membership
expansion primarily from existing contracts and, additionally from several new clients. As a
result, the year-to-year variance in revenue was limited to a decline of $2.6 million from fiscal
2004 to 2005. In preparation for the loss of revenue specific to the major Florida customer, we
restructured our regional and corporate operations, centralized certain clinical and administrative
functions, reassigned or downsized staff, and eliminated certain expenses that could not be
supported with remaining revenues. Consequently, our fiscal 2005 healthcare operating expenses and
general and administrative expenses are lower than in the prior fiscal year both in amount and as a
percentage of revenue. Results of Operations For the six months ended November 30, 2004, the Company reported net income of $194,000, or
$0.04 earnings per share (basic and diluted). In comparison, the Company reported a loss from
continuing operations of $171,000, or $0.04 per share (basic and diluted), and a net loss of
$558,000, or $0.14 per share (basic and diluted), for the six months ended November 30, 2003. Results for the six months ended November 30, 2003 include a change in estimate resulting in a
net charge of approximately $387,000 that has been included under discontinued operations in the
unaudited, consolidated financial statements for the six months ended November 30, 2003 (see Note 5
 Discontinued Operations to the unaudited, consolidated financial statements). The following tables summarize the Companys operating results from continuing operations for
the three and six months ended November 30, 2004 and 2003 (in thousands): The Three Months Ended November 30, 2004 Compared to the Three Months Ended November 30,
2003: Three
    
    
    ThreeMonths
    
    
    MonthsEnded
    
    
    EndedNovember 30, 2004
    
    
    November 30, 2003Operating revenues
    
    $
    6,231
    
    
    $
    7,011Healthcare operating expenses
    
    
    5,328
    
    
    
    6,199General/administrative expenses
    
    
    727
    
    
    
    970Other operating expenses
    
    
    24
    
    
    
    246,079
    
    
    
    7,193Operating income (loss)
    
    $
    152
    
    
    $
    (182
    )
 The Company reported operating income of $152,000 and net income of $103,000, or $0.02
earnings per share (basic and diluted), for the quarter ended November 30, 2004 compared to an
operating loss of $182,000 and a 11




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES net loss of $233,000, or $0.06 loss per share (basic and diluted), for the quarter ended
November 30, 2003. Operating revenues decreased by 11.1%, or approximately $780,000, to $6.2
million for the quarter ended November 30, 2004 compared to $7.0 million for the quarter ended
November 30, 2003. This decrease is primarily attributable to the loss of one major customer in
Florida that accounted for $1.9 million of revenue during the fiscal quarter ended November 30,
2003. Healthcare operating expenses decreased by approximately $871,000, or 14.1%, for the quarter
ended November 30, 2004 as compared to the quarter ended November 30, 2003. This decrease is
directly attributable to the loss of revenue as described above. Healthcare operating expense as a
percentage of operating revenue decreased by 2.9%, from 88.4% for the quarter ended November 30,
2003 to 85.5% for the quarter ended November 30, 2004. This decrease is primarily due to the loss
of one major contract in Florida that consistently returned a high medical loss ratio. General and administrative expenses decreased by $243,000, or 25.1%, for the quarter ended
November 30, 2004 as compared to the quarter ended November 30, 2003. This decrease is primarily
attributable to a decrease in salaries and benefits resulting from the Companys expense reduction
program and less usage of outside professional services. General and administrative expense as a
percentage of operating revenue decreased from 13.8% for the quarter ended November 30, 2003 to
11.7% for the quarter ended November 30, 2004. The Six Months Ended November 30, 2004 Compared to the Six Months Ended November 30,
2003: Six
    
    
    SixMonths
    
    
    MonthsEnded
    
    
    EndedNovember 30, 2004
    
    
    November 30, 2003Operating revenues
    
    $
    12,270
    
    
    $
    14,904Healthcare operating expenses
    
    
    10,496
    
    
    
    13,051General/administrative expenses
    
    
    1,429
    
    
    
    1,878Other operating expenses
    
    
    43
    
    
    
    4311,968
    
    
    
    14,972Operating income (loss)
    
    $
    302
    
    
    $
    (68
    )
 The Company reported operating income of $302,000 and net income of $194,000, or $0.04
earnings per share (basic and diluted), for the six months ended November 30, 2004 compared to an
operating loss of $68,000 and a net loss of $558,000, or $0.14 loss per share (basic and diluted),
for the six months ended November 30, 2003. Operating revenues decreased by 17.7%, or approximately
$2.6 million, to $12.3 million for the six months ended November 30, 2004 compared to $14.9 million
for the six months ended November 30, 2003. This decrease is primarily attributable to the loss of
one major customer in Florida that accounted for $3.8 million of revenue during the six months
ended November 30, 2003. Healthcare operating expenses decreased by approximately $2.6 million, or 19.6%, for the six
months ended November 30, 2004 as compared to the six months ended November 30, 2003. This decrease
is directly attributable to the loss of revenue as described above. Healthcare operating expense
as a percentage of operating revenue decreased by 2.0%, from 87.6% for the six months ended
November 30, 2003 to 85.6% for the six months ended November 30, 2004. This decrease is primarily
due to the loss of one major contract in Florida that consistently returned a high medical loss
ratio. General and administrative expenses decreased by $449,000, or 23.9%, for the six months ended
November 30, 2004 as compared to the six months ended November 30, 2003. This decrease is primarily
attributable to a decrease in salaries and benefits resulting from the Companys expense reduction
program and less usage of outside professional services. General and administrative expense as a
percentage of operating revenue decreased from 12.6% for the six months ended November 30, 2003 to
11.7% for the six months ended November 30, 2004. 12




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Seasonality of Business Historically, we have experienced consistently low utilization during our first fiscal
quarter, which comprises the months of June, July, and August, and increased utilization during our
fourth fiscal quarter, which comprises the months of March, April and May. Such variations in
utilization impact our costs of care during these months, generally having a positive impact on our
gross margins and operating profits during the first fiscal quarter and a negative impact on our
gross margins and operating profits during the fourth quarter. Concentration of Risk We currently have contracts with six health plans to provide behavioral healthcare services
under commercial, Medicaid, and CHIP plans. These combined contracts represent approximately 70.9%
and 42.9% of our operating revenue for the six months ended November 30, 2004 and November 30,
2003, 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. The
loss of one or more of these clients, without replacement by new business, could negatively affect
the financial condition of the Company. Liquidity and Capital Resources During the six months ended November 30, 2004, net cash used in continuing and discontinued
operations amounted to $375,000 and $73,000, respectively. During the remaining months of fiscal
2005, we expect to pay $60,000 towards the $180,000 that remains to be paid in connection with our
new information system, which will enable us to continue to meet the requirements of the Health
Insurance Portability and Accountability Act of 1990 (HIPAA). We expect the balance of $120,000
to be paid in equal monthly installments of $5,000 beginning in fiscal 2006. The timing of all
remaining installments is dependent on the success of meeting specific implementation goals at set
times. Our expected total costs of this system are approximately $370,000 of which $190,000 was
paid prior to November 30, 2004. Once implemented, this system will enable us to continue to meet
HIPAA requirements, streamline our entire clinical and claims functions, and offer service
improvements to our participating providers. As of November 30, 2004, the Company had a working
capital deficiency of $3.9 million and a stockholders
deficit of $4.6 million. We are continuing
to pursue sources of financing on terms that would support our future capital needs and provide
available funds for working capital. We cannot state with any degree of certainty whether any
required additional equity or debt financing will be available to us during fiscal 2005 and, if
available, that the source of financing will be available on terms and conditions acceptable to us.
These conditions raise substantial doubt about the Companys ability to continue as a going
concern, which is dependent upon our ability to continue to generate sufficient cash flow to meet
our obligations on a timely basis, obtaining additional financing as may be required and,
ultimately, sustaining an operating profit. Our 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. Any significant increase in member utilization that falls outside
of our estimations would increase healthcare operating expenses and may impact our ability to
sustain profitability and achieve positive cash flow. Although considerable variability is inherent
in such estimates, we believe that our unpaid claims liability is adequate. However, actual results
could differ from the $3.3 million claims payable amount reported as of November 30, 2004. In October 2004, we submitted a bid to the State of Connecticut in response to its request for
proposal for administrative services only (ASO) in connection with a contract that is expected to
begin by July 1, 2005. On January 7, 2005 the Company was informed that another bidder was selected
to negotiate this ASO contract. If the State of Connecticut is successful in their negotiations
with the selected bidder and the State of Connecticut continues with the implementation of its ASO
plans, the Companys existing contract may be terminated sometime during the Companys first
quarter of fiscal 2006, which begins June 1, 2005. This contract represented approximately 20.9%,
or $2.6 million, of our operating revenue for the six months ended November 30, 2004(see Note 4(2)
 Major Customers/Contracts  to the unaudited, consolidated financial statements). 13




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations is based upon
the Companys consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
consolidated financial statements requires us to make significant estimates and judgments to
develop the amounts reflected and disclosed in the consolidated financial statements, most notably
our estimate for claims incurred but not yet reported (IBNR). On an on-going basis, we evaluate
the appropriateness of our estimates and we maintain a thorough process to review the application
of our accounting policies. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. We believe our accounting policies specific to our accrued claims payable and revenue
recognition involve our most significant judgments and estimates that are material to our
consolidated financial statements (see Note 1  Summary of Significant Accounting Policies to the
unaudited, consolidated financial statements). 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk While we currently have market risk sensitive instruments, we have no significant exposure to
changing interest rates as the interest rate on our long-term debt is fixed. Since November 10,
2004, the Company has held one marketable security classified as available-for-sale, which is
subject to price risk. The fair market value of such investment as of November 30, 2004 was
$78,000. We do not use derivative financial instruments for investment or trading purposes and the
remainder of our investments is generally limited to cash deposits. 
 Item 4. Controls and Procedures Under the supervision and with the participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial Officer, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and procedures as of the end
of the period covered by this report, and, based on their evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and procedures are
effective. There have been no changes in the Companys internal controls over financial reporting
identified in connection with this evaluation that occurred during the period covered by this
report and that have affected, or are reasonably likely to materially affect, the Companys
internal controls over financial reporting. 
 PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings From time to time, the Company and its subsidiaries may be parties to and their property
subject to ordinary, routine litigation incidental to their business, in which case claims may
exceed insurance policy limits and the Company or any one of its subsidiaries may have exposure to
a liability that is not covered by insurance. Management is not aware of any such lawsuits that
could have a material adverse impact on the Companys consolidated financial statements. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended November 30, 2004, the Company issued an aggregate of 11,000 shares
of its common stock in exchange for marketing and other consulting services provided to the Company
by two separate vendors, each of whom received shares of the Companys common stock in lieu of an
aggregate of $17,500 of cash compensation. Of the total 11,000 shares issued during the quarter,
we issued 3,000 shares on September 1, 2004; 4,000 shares on September 22, 2004; and 4,000 shares
on October 20, 2004. The foregoing sales of securities were made in reliance upon the exemptions
from the registration provisions of the Securities Act of 1933, as amended, provided for by Section
4(2) thereof for transactions not involving a public offering. 14




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 Item 5. Other Information (b) Procedures for Submitting Stockholder Proposals
The Companys 2004 Annual Meeting of Stockholders is scheduled to be held on Friday, March 11,
2005, at 9:00 a.m. Eastern Standard Time at the Companys principal executive offices, located at
204 South Hoover Boulevard, Suite 200, Tampa, Florida 33609. The date of the Companys 2004 Annual
Meeting of Stockholders differs by more than 30 days from that of the Companys 2003 Annual Meeting
of Stockholders. Proposals for Inclusion in the Proxy Statement.Pursuant to Rule 14a-8 under the Exchange Act,
stockholders may present proper proposals for inclusion in the Companys proxy statement and for
consideration at its 2004 annual meeting of its stockholders by submitting their proposals to the
Company in a timely manner. In order to be included in the Companys proxy statement for the 2004
annual meeting, stockholder proposals must be received by the Company no later than January 19,
2005, and must otherwise comply with the requirements of Rule 14a-8. Proposals Not Included in the Proxy Statement.In addition, the Companys bylaws establish an
advance notice procedure with regard to certain matters, including stockholder proposals not
included in the Companys proxy statement, to be brought before an annual meeting of stockholders.
In general, notice must be received by the Secretary of the Company not less than 60 days nor more
than 90 days prior to the annual meeting, provided, however, that in the event that less than 70
days notice or prior public disclosure of the date of the annual meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not later than the close
of business on the tenth (10th) day following the day on which such notice of the date of the
Annual Meeting was mailed or such public disclosure was made. Therefore, to be presented at the
Companys 2004 Annual Meeting, such a proposal must be received by the Company no later than
January 24, 2005. 
 Item 6. Exhibits and Reports on Form 8-K EXHIBITNUMBER
    
    DESCRIPTION
    
    PAGE NUMBER31.1
    
    Comprehensive Care Corporation CEO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    1731.2
    
    Comprehensive Care Corporation CFO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    1832.1
    
    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
    
    
    1932.2
    
    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
    
    
    20
 (b) Reports on Form 8-K  The Company filed a current report on Form 8-K, dated November 30, 2004, to report under Item 8.01
that the Company had issued a press release announcing the execution of a service agreement with
Eye Care International, Inc. The Company filed a current report on Form 8-K, dated October 7, 2004, to report under Item 2.02
that the Company had issued a press release to report the Companys financial results for the
quarter ended August 31, 2004. 15




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 SIGNATURES 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 CORPORATIONJanuary 12, 2005By
    
    /s/ Mary Jane JohnsonMary Jane Johnson
President and Chief Executive Officer
(Principal Executive Officer)By
    
    /s/ Robert J. LandisRobert J. Landis
Chairman, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
 16