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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended August 31, 2006.
 o
    
    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
  Delaware
    
    95-2594724(State or other jurisdiction of incorporation 
or organization)
    
    (IRS Employer Identification No.)
 3405 W. Dr. Martin Luther King Jr. Blvd, Suite 101, Tampa, FL 33607
  (813) 288-4808
 (Registrants telephone number, including area code)
 
  þ o
  o o þ
 o þ
  Class
    
    Outstanding at October 11, 2006Common Stock, par value $.01 per share
    
    5,916,207




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##### 



COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Index
 PAGEPART I  FINANCIAL INFORMATIONItem 1 Consolidated Financial StatementsConsolidated Balance Sheets as of August 31, 2006 and May 31, 2006
    
    
    3Consolidated Statements of Operations for the three months ended August 31, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows for the three months ended August 31, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-13Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13-18Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4Controls and Procedures
    
    
    18-19PART II  OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    19Item 1A  Risk Factors
    
    
    19Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3 Defaults Upon Senior Securities
    
    
    19Item 4 Submission of Matters to a Vote of Security Holders
    
    
    19Item 5 Other Information
    
    
    19Item 6 Exhibits
    
    
    19Signatures
    
    
    20Certifications
    
    
    21-24Ex-31.1: Section 302 Certification CEOEx-31.2: Section 302 Certification CFOEx-32.1: Section 906 Certification CEOEx-32.2: Section 906 Certification CFO
  2




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
 
 Consolidated Balance Sheets
  August 31,
    
    
    May 31,2006
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,935
    
    
    
    5,463Restricted cash
    
    
    2
    
    
    
    589Accounts receivable, less allowance for doubtful accounts of $13 and
$0, respectively
    
    
    378
    
    
    
    153Other current assets
    
    
    650
    
    
    
    477Total current assets
    
    
    5,965
    
    
    
    6,682Property and equipment, net
    
    
    309
    
    
    
    251Note receivable
    
    
    53
    
    
    
    55Goodwill, net
    
    
    991
    
    
    
    991Other assets
    
    
    200
    
    
    
    203Total assets
    
    
    7,518
    
    
    
    8,182LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    
    1,259
    
    
    
    1,198Accrued claims payable
    
    
    2,263
    
    
    
    2,790Accrued reinsurance claims payable
    
    
    2,516
    
    
    
    2,526Income taxes payable
    
    
    60
    
    
    
    48Total current liabilities
    
    
    6,098
    
    
    
    6,562Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    158
    
    
    
    119Total long-term liabilities
    
    
    2,402
    
    
    
    2,363Total liabilities
    
    
    8,500
    
    
    
    8,925Stockholders deficit:Preferred stock, $50.00 par value; authorized 18,740 shares; 14,400
issued
    
    
    720
    
    
    
    720Common stock, $0.01 par value; authorized 30,000,000 shares; issued
and outstanding 5,904,207 and 5,898,707, respectively
    
    
    59
    
    
    
    59Additional paid-in capital
    
    
    56,681
    
    
    
    56,645Accumulated deficit
    
    
    (58,442
    )
    
    
    (58,167
    )Total stockholders deficit
    
    
    (982
    )
    
    
    (743
    )Total liabilities and stockholders deficit
    
    $
    7,518
    
    
    
    8,182
  3




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Operations
   Three months EndedAugust 31,2006
    
    
    2005Operating revenues
    
    $
    4,036
    
    
    
    6,301Costs and expenses:Healthcare operating expenses
    
    
    3,618
    
    
    
    5,718General and administrative expenses
    
    
    762
    
    
    
    876Recovery of doubtful accounts
    
    
    (138
    )
    
    
    (34
    )Depreciation and amortization
    
    
    23
    
    
    
    224,265
    
    
    
    6,582Operating loss before items shown below
    
    
    (229
    )
    
    
    (281
    )Other income (expense):Interest income
    
    
    23
    
    
    
    12Interest expense
    
    
    (49
    )
    
    
    (49
    )Other non-operating income
    
    
    3
    
    
    
    32Loss before income taxes
    
    
    (252
    )
    
    
    (286
    )Income tax expense
    
    
    23
    
    
    
    11Net loss attributable to common stockholders
    
    $
    (275
    )
    
    
    (297
    )Net loss per common share  basic and diluted
    
    $
    (0.05
    )
    
    
    (0.05
    )Weighted average common shares outstanding:Basic
    
    
    5,902
    
    
    
    5,682Diluted
    
    
    5,902
    
    
    
    5,682
  4




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
   Three months endedAugust 31,2006
    
    
    2005Cash flows from operating activities:Net loss from continuing operations
    
    $
    (275
    )
    
    
    (297
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    23
    
    
    
    22Compensation expense  stock options issued
    
    
    23
    
    
    
    Compensation expense  stock issued
    
    
    4
    
    
    
    12Amortization of deferred revenue
    
    
    (2
    )
    
    
    (32
    )Changes in assets and liabilities:Accounts receivable, net
    
    
    (225
    )
    
    
    (187
    )Accounts receivable  managed care reinsurance contract
    
    
    
    
    
    
    (119
    )Other current assets, restricted cash, and other assets
    
    
    436
    
    
    
    (514
    )Accounts payable and accrued liabilities
    
    
    62
    
    
    
    199Accrued claims payable
    
    
    (527
    )
    
    
    (171
    )Accrued reinsurance claims payable
    
    
    (10
    )
    
    
    (122
    )Income taxes payable
    
    
    12
    
    
    
    (13
    )Other liabilities
    
    
    51
    
    
    
    Net cash used in continuing operations
    
    
    (428
    )
    
    
    (1,222
    )Net cash used in discontinued operations
    
    
    
    
    
    
    (41
    )Net cash used in continuing and discontinued operations
    
    
    (428
    )
    
    
    (1,263
    )Cash flows from investing activities:Payment received on note receivable
    
    
    2
    
    
    
    Additions to property and equipment, net
    
    
    (83
    )
    
    
    (9
    )Net cash used in investing activities
    
    
    (81
    )
    
    
    (9
    )Cash flows from financing activities:Proceeds from issuance of common stock and preferred stock
    
    
    
    
    
    
    3,454Repayment of long-term debt
    
    
    (19
    )
    
    
    (12
    )Net cash (used in) provided by financing activities
    
    
    (19
    )
    
    
    3,442Net (decrease) increase in cash and cash equivalents
    
    
    (528
    )
    
    
    2,170Cash and cash equivalents at beginning of period
    
    
    5,463
    
    
    
    3,695Cash and cash equivalents at end of period
    
    $
    4,935
    
    
    
    5,865Supplemental disclosures of cash flow information:Cash paid during the quarter forInterest
    
    $
    7
    
    
    
    7Income Taxes
    
    $
    11
    
    
    
    24
 S
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##### Table of Contents



COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Note 1  Summary of Significant Accounting Policies
   Restricted Cash
  Revenue Recognition
  Healthcare Expense Recognition
  Accrued Claims Payable
  6




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




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
    Three Months Ended August 31,2006
    
    
    2005(in thousands except forper share information)Net loss, as reported
    
    $
    (275
    )
    
    
    (297
    )Add:Total stock-based employee compensation expense included in
related net loss, net of related tax effects
    
    
    23
    
    
    
    Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
    
    
    (23
    )
    
    
    (18
    )Pro forma net loss
    
    $
    (275
    )
    
    
    (315
    )Loss per common share:Basic  as reported
    
    $
    (0.05
    )
    
    
    (0.05
    )Diluted  as reported
    
    $
    (0.05
    )
    
    
    (0.05
    )Basic  pro forma
    
    $
    (0.05
    )
    
    
    (0.06
    )Diluted  pro forma
    
    $
    (0.05
    )
    
    
    (0.06
    )
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  Weighted-Average
    
    
    Weighted-AverageExercise
    
    
    Remaining
    
    
    Aggregate IntrinsicOptions
    
    Shares
    
    
    Price
    
    
    Contractual Term
    
    
    ValueOutstanding at June 1, 2006
    
    
    1,186,407
    
    

    $1.36Granted
    
    
    
    
    
Exercised
    
    
    
    
    
Forfeited or expired
    
    
    (2,700
    )
    
$1.15Outstanding at August 31, 2006
    
    
    1,183,707
    
    
$1.36
    
    
6.07
    
    
$990,171Exercisable at August 31, 2006
    
    
    994,541
    
    
$1.28
    
    

    5.55
    
    
$917,862
    Three Months Ended August 31,2006*
    
    2005Volatility factor of the expected market price of the
Companys common stock
    
    
    
    
    
    
    95.0
    %Expected life (in years) of the options
    
    
    
    
    
    
    5Risk-free interest rate
    
    
    
    
    
    
    4.09  4.10
    %Dividend yield
    
    
    
    
    
    
    0
    %
 
 *
    
    No stock options were granted during this period. Per Share Data
  9




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Three Months EndedAugust 31,2006
    
    
    2005Numerator:Numerator for diluted loss attributable to common stockholders
    
    $
    (275
    )
    
    
    (297
    )Denominator:Weighted average shares
    
    
    5,902
    
    
    
    5,682Effect of dilutive securities:Convertible preferred stock
    
    
    
    
    
    
    Employee stock options
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    Denominator for diluted loss per share-adjusted weighted
average shares after assumed exercises
    
    
    5,902
    
    
    
    5,682Loss per common share  basic and diluted
    
    $
    (0.05
    )
    
    
    (0.05
    )
  Convertible debentures(a)
    
    
    12,377Convertible preferred stock(b)
    
    
    4,235,328Outstanding stock options(c)
    
    
    1,183,707Outstanding warrants(d)
    
    
    406,000Possible future issuance under stock option plans
    
    
    1,200,836Total
    
    
    7,038,248
 
 (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 $.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
  10




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Note 3  Sources Of Revenue
  Three Months Ended August 31,2006
    
    
    2005(amounts in thousands)Capitated contracts
    
    $
    3,869
    
    
    
    6,019Non-capitated contracts
    
    
    167
    
    
    
    282Total
    
    $
    4,036
    
    
    
    6,301
  Note 4  Major Customers/Contracts
     Note 5  Preferred Stock
  11




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  Note 6 Commitments and Contingencies
      Note 7  Related Party Transactions
  12




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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
    13




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
    Results of Operations
   Three Months EndedAugust 31,2006
    
    
    2005Operating revenues:Capitated contracts
    
    $
    3,869
    
    
    
    6,019Non-capitated sources
    
    
    167
    
    
    
    282Total operating revenues
    
    
    4,036
    
    
    
    6,301Operating expenses:Healthcare operating expenses:Claims expense (1)
    
    
    2,775
    
    
    
    4,600Other healthcare operating expenses (1)
    
    
    843
    
    
    
    1,118Total healthcare operating expenses
    
    
    3,618
    
    
    
    5,718General and administrative expenses
    
    
    762
    
    
    
    876Recovery of doubtful accounts
    
    
    (138
    )
    
    
    (34
    )Depreciation and amortization
    
    
    23
    
    
    
    22Total operating expenses
    
    
    4,265
    
    
    
    6,582Operating loss
    
    $
    (229
    )
    
    
    (281
    )
 
 (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
     Seasonality of Business
  Concentration of Risk
  Liquidity and Capital Resources
   15




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
   Related-Party Transactions
   Critical Accounting Estimates
   Revenue Recognition
   16




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Accrued Claims Payable and Claims Expense
      
    
    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
 17




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  Change in Healthcare Costs:
 (Decrease)(Decrease)
    
    IncreaseIncrease
    
    In Claims Expense(5%)
    
    
    ($68,000
    )5%
    
    
    $67,000
 Premium Deficiencies
    Goodwill
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  18




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 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
  
 Item 6. Exhibits
 EXHIBITNUMBER
    
    DESCRIPTION
    
    PAGE NUMBER31.1
    
    Comprehensive Care Corporation CEO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    2131.2
    
    Comprehensive Care Corporation CFO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    2232.1
    
    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
    
    
    2332.2
    
    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
    
    
    24
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
   COMPREHENSIVE CARE CORPORATIONOctober 13, 2006By
    
    /s/ MARY JANE JOHNSON

Mary Jane JohnsonPresident and Chief Executive Officer(Principal Executive Officer)By
    
    /s/ ROBERT J. LANDIS

Robert J. LandisChairman, Chief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 20