##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q x
    
    Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934For the period ended August 31, 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 x    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 x 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 October 1, 2004Common Stock, par value $.01 per share
    
    
    4,689,548




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Index PAGEPART I  FINANCIAL INFORMATIONItem 1 Consolidated Financial StatementsConsolidated Balance Sheets,
August 31, 2004 and May 31, 2004
    
    
    3Consolidated Statements of Operations for
the three months ended August 31, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for
the three months ended August 31, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-10Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    11-13Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4  Controls and Procedures
    
    
    14PART II  OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    14Item 6 Exhibits and Reports on Form 8-K
    
    
    14Signatures
    
    
    15Certifications
    
    
    16-19Ex-31.1: Certification of President and CEOEx-31.2: Certification of Chairman, Cheif Financial Officer and TreasurerEx-32.1: Certification of President and Cheif Executive OfficerEx-32.2: Certification of Chairman, Cheif Financial Officer and Treasurer
 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 31,2004
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,014
    
    
    
    3,209Accounts receivable, less allowance for doubtful accounts of $10 and $10, respectively
    
    
    117
    
    
    
    191Accounts receivable  managed care reinsurance contract
    
    
    448
    
    
    
    553Other current assets
    
    
    491
    
    
    
    524Total current assets
    
    
    4,070
    
    
    
    4,477Property and equipment, net
    
    
    408
    
    
    
    390Goodwill, net
    
    
    991
    
    
    
    991Restricted cash
    
    
    325
    
    
    
    325Other assets
    
    
    127
    
    
    
    42Total assets
    
    $
    5,921
    
    
    
    6,225LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    1,688
    
    
    
    1,720Accrued claims payable
    
    
    3,237
    
    
    
    3,647Accrued reinsurance claims payable
    
    
    3,238
    
    
    
    3,183Income taxes payable
    
    
    41
    
    
    
    25Total current liabilities
    
    
    8,204
    
    
    
    8,575Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    100
    
    
    
    131Total long-term liabilities
    
    
    2,344
    
    
    
    2,375Total liabilities
    
    
    10,548
    
    
    
    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
4,682,548 and 4,673,048, respectively
    
    
    47
    
    
    
    47Additional paid-in-capital
    
    
    52,955
    
    
    
    52,950Deferred compensation
    
    
    (2
    )
    
    
    (4
    )Accumulated deficit
    
    
    (57,627
    )
    
    
    (57,718
    )Total stockholders deficit
    
    
    (4,627
    )
    
    
    (4,725
    )Total liabilities and stockholders deficit
    
    $
    5,921
    
    
    
    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 EndedAugust 31,2004
    
    2003Operating revenues
    
    $
    6,039
    
    
    
    7,893Costs and expenses:Healthcare operating expenses
    
    
    5,168
    
    
    
    6,852General and administrative expenses
    
    
    702
    
    
    
    908Recovery of doubtful accounts
    
    
    (5
    )
    
    
    (8
    )Depreciation and amortization
    
    
    24
    
    
    
    275,889
    
    
    
    7,779Operating income from continuing operations before
items shown below
    
    
    150
    
    
    
    114Other income (expense):Interest income
    
    
    2
    
    
    
    12Interest expense
    
    
    (54
    )
    
    
    (48
    )Other non-operating income
    
    
    11
    
    
    
    1Income from continuing operations before income taxes
    
    
    109
    
    
    
    79Income tax expense
    
    
    18
    
    
    
    17Income from continuing operations
    
    $
    91
    
    
    
    62Loss from discontinued operations
    
    
    
    
    
    
    (387
    )Net income (loss) attributable to common stockholders
    
    $
    91
    
    
    
    (325
    )Income per common share  basic:Income from continuing operations
    
    $
    0.02
    
    
    
    0.02Loss from discontinued operations
    
    
    
    
    
    
    (0.10
    )Net income (loss)
    
    $
    0.02
    
    
    
    (0.08
    )Income per common share  diluted:Income from continuing operations
    
    $
    0.02
    
    
    
    0.01Loss from discontinued operations
    
    
    
    
    
    
    (0.08
    )Net income (loss)
    
    $
    0.02
    
    
    
    (0.07
    )Weighted average common shares outstanding:Basic
    
    
    4,682
    
    
    
    3,937Diluted
    
    
    5,272
    
    
    
    4,725
 See accompanying notes to consolidated financial statements. 4




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows 
 Three months endedAugust 31,2004
    
    2003Cash flows from operating activities:Net income from continuing operations
    
    $
    91
    
    
    
    62Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    24
    
    
    
    27Compensation expense  stock options and warrants issued
    
    
    2
    
    
    
    17Changes in assets and liabilities:Accounts receivable, net
    
    
    74
    
    
    
    (182
    )Accounts receivable  managed care reinsurance contract
    
    
    105
    
    
    
    (131
    )Other current assets, restricted funds, and other non-current assets
    
    
    (52
    )
    
    
    74Accounts payable and accrued liabilities
    
    
    (56
    )
    
    
    (121
    )Accrued claims payable
    
    
    (410
    )
    
    
    (64
    )Accrued reinsurance claims payable
    
    
    55
    
    
    
    226Income taxes payable
    
    
    16
    
    
    
    2Other liabilities
    
    
    (2
    )
    
    
    Net cash used in continuing operations
    
    
    (153
    )
    
    
    (90
    )Net cash used in discontinued operations
    
    
    (36
    )
    
    
    Net cash used in continuing and discontinued operations
    
    
    (189
    )
    
    
    (90
    )Cash flows from investing activities:Payments received on note receivable
    
    
    
    
    
    
    1Additions to property and equipment
    
    
    (1
    )
    
    
    (80
    )Net cash used in investing activities
    
    
    (1
    )
    
    
    (79
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    5
    
    
    
    1Repayment of debt
    
    
    (10
    )
    
    
    (6
    )Net cash used in financing activities
    
    
    (5
    )
    
    
    (5
    )Net decrease in cash and cash equivalents
    
    
    (195
    )
    
    
    (174
    )Cash and cash equivalents at beginning of year
    
    
    3,209
    
    
    
    3,590Cash and cash equivalents at end of period
    
    $
    3,014
    
    
    
    3,416Supplemental disclosures of cash flow information:Cash paid during the quarter forInterest
    
    $
    11
    
    
    
    6Income Taxes
    
    $
    8
    
    
    
    15Noncash financing and investing activitiesProperty acquired under capital leases
    
    $
    27
    
    
    
    14
 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 August 31, 2004, and the related
consolidated statements of operations and cash flows for the three months ended
August 31, 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 three months ended August 31, 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. Restricted Cash As of August 31, 2004 and May 31, 2004, non-current restricted accounts
include $0.3 million of cash held in trust in connection with the Companys
Directors and Officers liability insurance policy. 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 87.9%, or $5.3 million, of revenue for the quarter
ended August 31, 2004 and 87.7%, or $6.9 million, of revenue for the quarter
ended August 31, 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 utilization and other factors. However, actual claims
incurred could differ from the estimated claims payable amount reported as of
August 31, 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 6




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 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 issues stock options to its 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 to stock-based employee compensation. Quarter Ended August 31,2004
    
    2003(in thousands except forper share information)Net income (loss), as reported
    
    $
    91
    
    
    $
    (325
    )Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects*
    
    
    
    
    
    
    (40
    )Pro forma net income (loss)
    
    $
    91
    
    
    $
    (365
    )Income (loss) per common share:Basic  as reported
    
    $
    0.02
    
    
    $
    (0.08
    )Diluted  as reported
    
    $
    0.02
    
    
    $
    (0.07
    )Basic  pro forma
    
    $
    0.02
    
    
    $
    (0.09
    )Diluted  pro forma
    
    $
    0.02
    
    
    $
    (0.08
    )
 * No grants were issued during the quarter ended August 31, 2004. 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 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): 7




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Three Months EndedAugust 31,2004
    
    2003Numerator:Numerator for diluted income per share from continuing operations
    
    $
    91
    
    
    $
    62Loss from discontinued operations
    
    
    
    
    
    
    (387
    )Numerator for diluted income (loss) attributable to common
stockholders
    
    $
    91
    
    
    $
    (325
    )Denominator:Weighted average shares
    
    
    4,682
    
    
    
    3,937Effect of dilutive securities:Employee stock options
    
    
    588
    
    
    
    782Warrants
    
    
    2
    
    

    
    6Denominator for diluted income (loss) per share-adjusted
weighted average shares after assumed exercises
    
    
    5,272
    
    
    
    4,725Income (loss) per common share - basic:Income (loss) from continuing operations
    
    $
    0.02
    
    
    $
    0.02Loss from discontinued operations
    
    
    
    
    
    
    (0.10
    )Net income (loss)
    
    $
    0.02
    
    
    $
    (0.08
    )Income (loss) per common share - diluted:Income (loss) from continuing operations
    
    $
    0.02
    
    
    $
    0.01Loss from discontinued operations
    
    
    
    
    
    
    (0.08
    )Net income (loss)
    
    $
    0.02
    
    
    $
    (0.07
    )
 Authorized shares of common stock reserved for possible issuance for
convertible debentures and stock options are as follows at August 31, 2004: Convertible debentures
    
    
    9,044Outstanding stock options
    
    
    1,216,890Possible future issuance under stock option plans
    
    
    310,569Total
    
    
    1,536,503
 Note 2  Basis of Presentation The accompanying consolidated financial statements are prepared on a going
concern basis. During the three months ended August 31, 2004, net cash used
in continuing and discontinued operations amounted to $153,000 and $36,000,
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 August 31, 2004, the Company had a working capital deficiency of
$4.1 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  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 23.3%, or $1.8 million, of the Companys
operating revenues during the fiscal quarter ended August 31, 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 19.9%, or $1.2 million, and 9.9%, or $0.8 million, of the
Companys operating revenue for the quarters ended August 31, 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 each of the
quarters ended August 31, 2004 and 2003, the Company filed reinsurance claims
totaling approximately $0.6 million. 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 August 31,
2004 and May 31, 2004, respectively, the Company has reported $0.4 million and
$0.6 million as accounts receivablemanaged care reinsurance contracts, with
$3.2 million reported as accrued reinsurance claims payable as of each date.
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 two
consecutive one-year periods, with the current term ending December 31, 2004.
In October 2004, the Company began preparing a bid that will be submitted 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 in February 2005, with full implementation to be completed by July 1, 2005.
If selected, the Companys existing contract would terminate and a new contract would be negotiated between the
Company and the State of Connecticut covering significantly more members than
are covered under the current fee-for-service arrangement. If the State of
Connecticut were to select another behavioral healthcare company to service
this membership, the Companys existing contract may terminate effective
June 30, 2005. There can be no assurance that the Companys existing

contract will be renewed, or that the Company will be successful in its bid to
provide ASO services to Connecticut members, or that the State of Connecticut
will select a bidder. (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
20.9%, or $1.3 million, and 14.2%, or $1.1 million, of the Companys operating
revenues during the fiscal quarters ended August 31, 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. 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 4  Discontinued Operations Results for the quarter ended August 31, 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 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 August 31, 2004, approximately $169,000 remains
to be paid, of which $155,000 is included in accounts payable and accrued
expenses and $14,000 in long-term liabilities in the accompanying consolidated
balance sheet. 9




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Note 5  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. 10




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 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 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. Results of Operations For the quarter ended August 31, 2004, the Company reported net income of
$91,000, or $0.02 earnings per share (basic and diluted). In comparison, the
Company reported income from continuing operations of $62,000, or $0.02 basic
earnings per share ($0.01 diluted earnings per share), and a net loss of
$325,000, or $0.08 basic loss per share ($0.07 diluted loss per share), for the
quarter ended August 31, 2003. Results for the quarter ended August 31, 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 quarter ended August 31, 2003 (see Note 4  Discontinued
Operations to the unaudited, consolidated financial statements). The following tables summarize the Companys operating results from
continuing operations for the three months ended August 31, 2004 and 2003 (in
thousands): The Three Months Ended August 31, 2004 Compared to the Three Months Ended
August 31, 2003: Consolidated
    
    ConsolidatedContinuing
    
    ContinuingOperations
    
    OperationsFiscal 2005
    
    Fiscal 2004Operating revenues
    
    $
    6,039
    
    
    $
    7,893Healthcare operating expenses
    
    
    5,168
    
    
    
    6,852General and administrative expenses
    
    
    702
    
    
    
    908Other operating expenses
    
    
    19
    
    
    
    195,889
    
    
    
    7,779Operating income
    
    $
    150
    
    
    $
    114
 The Company reported operating income of $150,000 and net income of
$91,000, or $0.02 earnings per share (basic and diluted), for the quarter ended
August 31, 2004 compared to operating income of $114,000 and a net loss of 11




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES $325,000, or $0.08 basic loss per share ($0.07 diluted loss per share),
for the quarter ended August 31, 2003. Operating revenues decreased by 23.5%,
or approximately $1.9 million, to $6.0 million for the quarter ended August 31,
2004 compared to $7.9 million for the quarter ended August 31, 2003. This
decrease is primarily attributable to the loss of one major customer in Florida
that accounted for $1.8 million of revenue during the fiscal quarter ended
August 31, 2003. Healthcare operating expenses decreased by approximately $1.7 million, or
24.6%, for the quarter ended August 31, 2004 as compared to the quarter ended
August 31, 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 1.2%, from 86.8% for the quarter ended August 31, 2003 to
85.6% for the quarter ended August 31, 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 $206,000, or 22.7%, for
the quarter ended August 31, 2004 as compared to the quarter ended August 31,
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 increased slightly from 11.5% for the quarter
ended August 31, 2003 to 11.6% for the quarter ended August 31, 2004. 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 68.6% and 43.4% of our operating revenue for
the fiscal quarters ended August 31, 2004 and August 31, 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 fiscal quarter ended August 31, 2004, net cash used in
continuing and discontinued operations amounted to $153,000 and $36,000,
respectively. During Fiscal 2005 we expect to pay a minimum of $60,000 toward
the $180,000 that remains to be paid in connection with the ongoing
implementation of our new, customized management information system. The
timing of all remaining installments is dependent on the success of meeting
specific implementation goals at set times. Therefore, it is possible that the
entire $180,000 will be paid during our 2005 fiscal year. Our expected total
costs of this system are approximately $370,000. Once implemented, this system
will enable us to meet HIPAA requirements, streamline our entire clinical and
claims functions, and offer service improvements to our participating
providers. As of August 31, 2004, the Company had a working capital deficiency
of $4.1 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 would 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 the
unpaid claims liability is adequate. However, actual results could differ from
the $3.2 million claims payable amount reported as of August 31, 2004. 12




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES The State of Connecticut recently enacted legislation requiring
risk-bearing entities, such as CompCare, to be licensed as a Preferred Provider
Network (PPN). During the fiscal quarter ended August 31, 2004 we were
successful in meeting the requirements to obtain the PPN license, which is due
for renewal in May 2005 and requires us to maintain a performance bond during
all applicable terms of the PPN license (see Note 5(1)  Commitments and
Contingencies  to the unaudited, consolidated financial statements).
In October 2004, we began preparing a bid that will be submitted 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

in February 2005, with full implementation to be completed by July 1, 2005.
If selected, our existing contract would terminate and a new
contract would be negotiated between the Company and the State of Connecticut
covering significantly more members than are covered under the current
fee-for-service arrangement. If the State of Connecticut were to select
another behavioral healthcare company to service this membership, our existing
contract may terminate effective June 30, 2005. There can be no assurance
that our existing contract will be renewed, or that we will be successful in
our bid to provide ASO services to Connecticut members, or that the State of
Connecticut will select a bidder (see Note 3(2)  Major Customers/Contracts
 to the unaudited, consolidated financial statements). Summary of Significant Accounting Policies 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). 13




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 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. Additionally, we do not use derivative financial
instruments for investment or trading purposes and our investments are
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 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 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
    
    
    1631.2
    
    Comprehensive Care Corporation CFO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    1732.1
    
    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
    
    
    1832.2
    
    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
    
    
    19
 (b) Reports on Form 8-K  The Company filed a current report on Form 8-K, dated June 4, 2004, to
report under Item 4 that the Company had dismissed Eisner LLP as its
independent public accountants on June 1, 2004 and, additionally, that
the Audit Committee of the Board of Directors of the Company appointed
Kirkland, Russ, Murphy & Tapp P.A. to serve as its independent registered
public accounting firm for the fiscal year ended May 31, 2004. 14




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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 CORPORATIONOctober 7, 2004By
    
    /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)
 15