##### 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 February 29, 2004.[  ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period fromto.Commission File Number 1-9927
 COMPREHENSIVE CARE CORPORATION 
  Delaware
    
    95-2594724(State or other jurisdiction of incorporation
or organization)
    
    (IRS Employer Identification No.)
 200 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 [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] 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 April 8, 2004Common Stock, par value $.01 per share
    
    4,673,049




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Index PagePART I  FINANCIAL INFORMATIONItem 1 Consolidated Financial StatementsConsolidated Balance Sheets, February 29, 2004 and May 31, 2003
    
    
    3Consolidated Statements of Operations for the Three and Nine months ended February 29, 2004 and February 28, 2003
    
    
    4Consolidated Statements of Cash Flows for the Nine months ended February 29, 2004 and February 28, 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-10Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11-17Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4  Controls and Procedures
    
    
    17-18PART II  OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    19Item 2cChanges in Securities and Use of Proceeds
    
    
    19Item 6 Exhibits and Reports on Form 8-K
    
    
    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 February 29,
    
    May 31,2004
    
    2003(unaudited)(Amounts in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,175
    
    
    $
    3,590Accounts receivable, less allowance for doubtful accounts of $0 and $27
    
    
    421
    
    
    
    75Accounts receivable  managed care reinsurance contract
    
    
    420
    
    
    
    354Other current assets
    
    
    274
    
    
    
    605Total current assets
    
    
    4,290
    
    
    
    4,624Property and equipment, net
    
    
    356
    
    
    
    230Note receivable
    
    
    
    
    
    
    155Goodwill, net
    
    
    991
    
    
    
    991Restricted cash
    
    
    327
    
    
    
    328Other assets
    
    
    46
    
    
    
    51Total assets
    
    $
    6,010
    
    
    $
    6,379LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    1,560
    
    
    $
    1,836Accrued claims payable
    
    
    3,608
    
    
    
    4,103Accrued reinsurance claims payable
    
    
    2,991
    
    
    
    3,117Income taxes payable
    
    
    22
    
    
    
    15Total current liabilities
    
    
    8,181
    
    
    
    9,071Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    175
    
    
    
    54Total long-term liabilities
    
    
    2,419
    
    
    
    2,298Total liabilities
    
    
    10,600
    
    
    
    11,369Commitments and Contingencies (Note 5)Stockholders 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 4,663,049 and 3,936,549
    
    
    47
    
    
    
    39Additional paid-in-capital
    
    
    52,945
    
    
    
    51,928Deferred compensation
    
    
    (5
    )
    
    
    (16
    )Accumulated deficit
    
    
    (57,577
    )
    
    
    (56,941
    )Total stockholders deficit
    
    
    (4,590
    )
    
    
    (4,990
    )Total liabilities and stockholders deficit
    
    $
    6,010
    
    
    $
    6,379
 See accompanying notes. 3




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share amounts) Three months Ended
    
    Nine months endedFebruary 29,
    
    February 28,
    
    February 29,
    
    February 28,2004
    
    2003
    
    2004
    
    2003Operating revenues
    
    $
    6,348
    
    
    $
    8,061
    
    
    $
    21,252
    
    
    $
    24,999Costs and expenses:Healthcare operating expenses
    
    
    5,520
    
    
    
    7,227
    
    
    
    18,571
    
    
    
    22,340General and administrative expenses
    
    
    799
    
    
    
    771
    
    
    
    2,677
    
    
    
    2,611Provision for (recovery of) doubtful accounts
    
    
    (2
    )
    
    
    19
    
    
    
    (14
    )
    
    
    5Depreciation and amortization
    
    
    27
    
    
    
    37
    
    
    
    82
    
    
    
    1686,344
    
    
    
    8,054
    
    
    
    21,316
    
    
    
    25,124Operating income (loss) from continuing operations before
items shown below
    
    
    4
    
    
    
    7
    
    
    
    (64
    )
    
    
    (125
    )Other income (expense):Net gain on IRS settlement
    
    
    
    
    
    
    7,717
    
    
    
    
    
    
    
    7,717Gain on settlement of other liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470Loss from prepayment of note receivable
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )
    
    
    Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Interest income
    
    
    4
    
    
    
    8
    
    
    
    22
    
    
    
    37Interest expense
    
    
    (57
    )
    
    
    (44
    )
    
    
    (159
    )
    
    
    (134
    )Other non-operating income
    
    
    
    
    
    
    25
    
    
    
    1
    
    
    
    33(Loss) income from continuing operations before income taxes
    
    
    (69
    )
    
    
    7,713
    
    
    
    (220
    )
    
    
    7,997Income tax expense
    
    
    9
    
    
    
    7
    
    
    
    29
    
    
    
    17(Loss) income from continuing operations
    
    $
    (78
    )
    
    $
    7,706
    
    
    $
    (249
    )
    
    $
    7,980Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    Net (loss) income attributable to common stockholders
    
    $
    (78
    )
    
    $
    7,706
    
    
    $
    (636
    )
    
    $
    7,980(Loss)
income per common share - basic:(Loss) income from continuing operations
    
    $
    (0.02
    )
    
    $
    1.97
    
    
    $
    (0.06
    )
    
    $
    2.05Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )
    
    
    Net (loss) income
    
    $
    (0.02
    )
    
    $
    1.97
    
    
    $
    (0.15
    )
    
    $
    2.05(Loss) income per common share  diluted:(Loss) income from continuing operations
    
    $
    (0.02
    )
    
    $
    1.71
    
    
    $
    (0.06
    )
    
    $
    1.87Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )
    
    
    Net (loss) income
    
    $
    (0.02
    )
    
    $
    1.71
    
    
    $
    (0.15
    )
    
    $
    1.87Weighted average common shares outstanding:Basic
    
    
    4,585
    
    
    
    3,908
    
    
    
    4,154
    
    
    
    3,897Diluted
    
    
    4,585
    
    
    
    4,509
    
    
    
    4,154
    
    
    
    4,277
 See accompanying notes. 4




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 Consolidated Statements of Cash Flows
(Unaudited) Nine months endedFebruary 29,
    
    February 28,2004
    
    2003(Amounts in thousands)Cash flows from operating activities:Net (loss) income from continuing operations
    
    $
    (249
    )
    
    $
    7,980Adjustments to reconcile net (loss) income from continuing operations
to net cash used in operating activities:Depreciation and amortization
    
    
    82
    
    
    
    168Loss in connection with prepayment of note receivable
    
    
    20
    
    
    
    Provision for doubtful accounts
    
    
    
    
    
    
    5Net gain on IRS settlement
    
    
    
    
    
    
    (7,717
    )Gain on sale of assets
    
    
    
    
    
    
    (4
    )Loss on disposal of assets
    
    
    
    
    
    
    5Non-cash expense  stock issued
    
    
    33
    
    
    
    20Compensation expense  stock options and warrants issued
    
    
    29
    
    
    
    9Other non-operating gain
    
    
    
    
    
    
    (470
    )Changes in assets and liabilities:Accounts receivable
    
    
    (346
    )
    
    
    (259
    )Accounts
receivable - managed care reinsurance contract
    
    
    (66
    )
    
    
    99Other receivable
    
    
    
    
    
    
    525Other current assets, restricted funds, and other non-current assets
    
    
    240
    
    
    
    409Unbenefitted tax refunds received
    
    
    
    
    
    
    (2,258
    )Accounts payable and accrued liabilities
    
    
    (420
    )
    
    
    (824
    )Accrued claims payable
    
    
    (495
    )
    
    
    (219
    )Accrued reinsurance claims payable
    
    
    (126
    )
    
    
    883Income taxes payable
    
    
    7
    
    
    
    (1
    )Net cash used in continuing operations
    
    
    (1,291
    )
    
    
    (1,649
    )Net cash used in discontinued operations
    
    
    (53
    )
    
    
    Net cash used in continuing and discontinued operations
    
    
    (1,344
    )
    
    
    (1,649
    )Cash flows from investing activities:Net proceeds from sale of property and equipment
    
    
    
    
    
    
    3Payments received on note receivable
    
    
    139
    
    
    
    3Additions to property and equipment
    
    
    (159
    )
    
    
    (37
    )Net cash used in investing activities
    
    
    (20
    )
    
    
    (31
    )Cash flows from financing activities:Proceeds from the issuance of Common Stock
    
    
    974
    
    
    
    14Repayment of debt
    
    
    (25
    )
    
    
    (9
    )Net cash provided by financing activities
    
    
    949
    
    
    
    5Net decrease in cash and cash equivalents
    
    
    (415
    )
    
    
    (1,675
    )Cash and cash equivalents at beginning of year
    
    
    3,590
    
    
    
    5,340Cash and cash equivalents at end of period
    
    $
    3,175
    
    
    $
    3,665
 See accompanying notes 5




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Note 1  Summary of Significant Accounting Policies The consolidated balance sheet as of February 29, 2004, and the related
consolidated statements of operations for the three and nine months ended
February 29, 2004 and February 28, 2003, and cash flows for the nine months
ended February 29, 2004 and February 28, 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 financial
statements have been included. Such adjustments consisted only of normal
recurring items. The results of operations for the nine months ended February
29, 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 balance sheet at May 31, 2003 has
been derived from the audited 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 year ended May 31, 2003 are on file with the Securities and
Exchange Commission and provide additional disclosures and a further
description of accounting policies. The Companys financial statements are presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The consolidated financial
statements do not include any adjustments to reflect the possible future
effects on the recovery and classification of assets or the amount and
classification of liabilities that may result from the outcome of the
uncertainties described in Note 2  Basis of Presentation. The Companys managed care activities are performed under the terms of
agreements with health maintenance organizations (HMOs), preferred provider
organizations (PPOs), 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). Such agreements accounted for 85.9%,
or $18.2 million, of revenue for the nine months ended February 29, 2004 and
87.5%, or $22.0 million, of revenue for the nine months ended February 28,
2003. The balance of the Companys revenues is earned on a fee-for-service
basis and is recognized as services are rendered. Restricted Cash As of February 29, 2004 and May 31, 2003, 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. 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
February 29, 2004. Although considerable variability is inherent in such
estimates, management believes that the unpaid claims liability is adequate. Income Taxes The Company calculates deferred taxes and related income tax expense using
the liability method. This method determines deferred taxes by applying the
current tax rate to net operating loss carryforwards and to the cumulative
temporary differences between the recorded carrying amounts and the
corresponding tax basis of assets and liabilities. A valuation allowance is
established for deferred tax assets unless their realization is considered more 6




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES likely than not. The Companys provision for income taxes is the sum of the
change in the balance of deferred taxes between the beginning and the end of
the period and income taxes currently payable or receivable. 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 (loss) income, 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 (loss) income
and (loss) income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation. Quarter
    
    Quarter
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    Ended2/29/04
    
    2/28/03
    
    2/29/04
    
    2/28/03Net (loss) income, as reported
    
    $
    (78
    )
    
    $
    7,706
    
    
    $
    (636
    )
    
    $
    7,980Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
    
    
    (96
    )
    
    
    (117
    )
    
    
    (206
    )
    
    
    (179
    )Pro forma net (loss) income
    
    $
    (174
    )
    
    $
    7,589
    
    
    $
    (842
    )
    
    $
    7,801(Loss) income per common share:Basic  as reported
    
    $
    (0.02
    )
    
    $
    1.97
    
    
    $
    (0.15
    )
    
    $
    2.05Diluted  as reported
    
    $
    (0.02
    )
    
    $
    1.71
    
    
    $
    (0.15
    )
    
    $
    1.87Basic  pro forma
    
    $
    (0.04
    )
    
    $
    1.94
    
    
    $
    (0.20
    )
    
    $
    2.00Diluted  pro forma
    
    $
    (0.04
    )
    
    $
    1.68
    
    
    $
    (0.20
    )
    
    $
    1.82
 Per Share data In calculating basic (loss) income per share, net (loss) income is divided
by the weighted average number of common shares outstanding for the period.
Diluted (loss) income 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 (loss) income per share in accordance with
SFAS No. 128, Earnings Per Share (amounts in thousands, except per share data): 7




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Three Months Ended
    
    Nine months endedFebruary 29,
    
    February 28,
    
    February 29,
    
    February 28,2004
    
    2003
    
    2004
    
    2003Numerator:(Loss) income per share from continuing
operations
    
    $
    (78
    )
    
    $
    7,706
    
    
    $
    (249
    )
    
    $
    7,980Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    Net (loss) income attributable to common stockholders
    
    $
    (78
    )
    
    $
    7,706
    
    
    $
    (636
    )
    
    $
    7,980Denominator:Weighted average shares
    
    
    4,585
    
    
    
    3,908
    
    
    
    4,154
    
    
    
    3,897Effect of dilutive securities:Employee stock options
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    380Warrants
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Denominator for diluted (loss) income per share-adjusted weighted
average shares after assumed conversions
    
    
    4,585
    
    
    
    4,509
    
    
    
    4,154
    
    
    
    4,277Basic (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.02
    )
    
    $
    1.97
    
    
    $
    (0.06
    )
    
    $
    2.05Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )
    
    
    Net (loss) income
    
    $
    (0.02
    )
    
    $
    1.97
    
    
    $
    (0.15
    )
    
    $
    2.05Diluted (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.02
    )
    
    $
    1.71
    
    
    $
    (0.06
    )
    
    $
    1.87Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )
    
    
    Net (loss) income
    
    $
    (0.02
    )
    
    $
    1.71
    
    
    $
    (0.15
    )
    
    $
    1.87
 Authorized shares of common stock reserved for possible issuance for
convertible debentures and stock options are as follows at February 29, 2004: Convertible debentures
    
    
    9,044Outstanding stock options
    
    
    1,240,390Possible future issuance under stock option plans
    
    
    306,569Total
    
    
    1,556,003
 Note 2  Basis of Presentation The accompanying consolidated financial statements are prepared on a going
concern basis. During the nine months ended February 29, 2004, net cash used
in continuing and discontinued operations amounted to $1,291,000 and $53,000,
respectively. The Company had $949,000 of net cash provided from financing
activities, primarily through the sale of an aggregate of 700,000 shares of
common stock in a private transaction completed in December 2003. This
transaction reduced the Companys working capital deficiency and stockholders
deficit each by approximately $972,000. Uses of cash during the nine months
ended February 29, 2004 include $140,000 for the Companys ongoing
implementation of its new, customized management information system. The
Companys capital needs during Fiscal 2004 will require additional installments
toward the $230,000 that remains to be paid in connection with this 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 February 29, 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 2004. Management cannot state with any degree of
certainty whether any required additional equity or debt financing will be
available to the Company during Fiscal 2004 and, if available, that the source
of financing would be available on terms and conditions acceptable to the
Company. 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 20.8%, or $4.4 million, of the Companys
operating revenues during the nine months ended February 29, 2004. During the
prior fiscal year, such Medicaid members were serviced by the Company through
its contract with another HMO whose agreements with the Company covered
Medicaid, Medicare, and commercial members and represented a combined 19.7%, or
$4.9 million, of the Companys operating revenue for the nine months ended
February 28, 2003. On December 31, 2002, the Company received a formal
termination notice, effective February 28, 2003, from the prior HMO client with
respect to the Medicare and commercial business. In addition, the acquiring
HMO, whose contract with the Company was scheduled to renew in January 2004,
formally advised the Company on October 30, 2003 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. In response to the loss of revenue
specific to this contract, the Company restructured its regional and corporate
operations, centralized certain clinical and administrative functions, reduced
staffing, and eliminated certain expenses that could not be supported with
existing and remaining revenues. (2) The Company has one contract to provide behavioral healthcare services to
Connecticut members under contract with one HMO. This agreement represented
approximately 12.7%, or $2.7 million, and 8.6%, or $2.2 million, of the
Companys operating revenue for the nine months ended February 29, 2004 and
February 28, 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 nine months ended February 29, 2004 and February 28, 2003, the Company
filed reinsurance claims totaling approximately $1.5 million and $2.3 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 February 29, 2004 and May 31, 2003,
respectively, the Company has reported $3.0 million and $3.1 million as accrued
reinsurance claims payable, with $0.4 million reported as accounts
receivable-managed care reinsurance contracts 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 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. (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
13.0%, or $2.8 million, and 11.4%, or $2.9 million, of the Companys operating
revenues during the nine months ended February 29, 2004 and February 28, 2003,
respectively. Benefits available to Texas CHIP recipients were significantly
reduced for the five month period September 1, 2003 to January 31, 2004 as a
result of legislative bills passed by the Texas State legislature.
Consequently, CHIP business under this contract accounted for approximately
$0.9 million, or 4.2%, of operating revenues as compared to $1.7 million, or
7.0% of operating revenues for the nine month periods ended February 29, 2004
and February 28, 2003, respectively. Subsequent legislation has restored the
majority of benefits available to CHIP recipients effective February 1, 2004.
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. (4) During the prior fiscal year, the Company had three contracts with one HMO
to provide behavioral healthcare services to Florida members. The combined
revenue from these contracts accounted for 15.1%, or $3.8 million, of the
Companys operating revenues during the nine months ended February 28, 2003.
These contracts covering Florida members terminated effective January 1, 2003.
Additionally, the Company has one major contract with an affiliate of this HMO
(see Item 2 above). 9




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Although there can be no assurance that the Company will be able to reduce its
costs in an amount sufficient to offset the loss of gross margins associated
with the customer listed under (1) above, the Company has undertaken efforts to
restructure its regional and corporate operations, including the centralization
of certain clinical and administrative functions, generalized staff downsizing,
and the elimination of certain expenses that cannot be supported with existing
and remaining revenues, to minimize any effect on future results of operations. 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 nine months ended February 29, 2004 include a change in
estimate resulting in a $387,000 charge recorded in August 2003 and included
under Discontinued Operations in the accompanying financial statements. Such
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 Company has determined not to appeal the Medicare
intermediarys determination and has accepted the settlement requiring the
Company to repay $400,000 specific to Fiscal 1999, less approximately $106,000
in Medicare refunds that were due the Company in connection with its Fiscal
1995 and 1996 Medicare cost report settlements for this same Aurora, Colorado
hospital. Further, the Medicare intermediary has accepted the Companys
proposed, 24-month, 12.125% installment payment plan to repay the net amount of
approximately $300,000, of which $241,000 remains to be paid as of February 29,
2004. Of the remaining amount, approximately $147,000 is included in accounts
payable and accrued expenses and $94,000 in long-term liabilities in the
accompanying balance sheet at February 29, 2004. Note 5  Commitments and Contingencies (1) A contract with one existing client requires the Company to maintain a
performance bond throughout the contract term. At February 29, 2004, the
Company maintained a $600,000 performance bond in compliance with this
requirement. (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 recently 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 $0.4 million
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 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 This quarterly report on Form 10-Q includes forward-looking statements,
the realization of which may be impacted by certain important factors discussed
below under Cautionary Statement and Risk Factors  Important Factors
Related to Forward-Looking Statements and Associated Risks (page 14). 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 nine months ended February 29, 2004, the Company reported a loss
from continuing operations of $249,000, or $0.06 loss per share (basic and
diluted), and a net loss of $636,000, or $0.15 loss per share (basic and
diluted). During the comparable period of the prior fiscal year, the Company
recorded a $7,717,000, non-operating gain resulting from an IRS settlement and
as a result reported income from continuing operations and net income of
$7,980,000, or $2.05 basic income per share ($1.87 diluted income per share). For the quarter ended February 29, 2004, the Company reported a net loss
of $78,000, or $0.02 basic and diluted loss per share, compared to net income
of $7,706,000, or $1.97 basic earnings per share ($1.71 diluted earnings per
share) for the quarter ended February 28, 2003, which included the
aforementioned $7,717,000 non-operating gain. Due to the recent loss of one major customer in Florida and the temporary
reduction in CHIP revenue that occurred during the months of September 2003
through January 2004, we reduced our staff by approximately 10% in December
2003. We have since recalled or hired certain staff as a result of the Texas
CHIP business reinstatement in February 2004, but do not expect staffing levels
to return to prior existing levels or to increase other operating costs
significantly as a result of this recent event. Additionally, as part of our
ongoing expense reduction program to align costs with expected revenues, we
will maintain in effect a temporary salary freeze applicable to all employees
and certain other reductions in operating costs associated with the specific
contracts that have terminated or otherwise cannot be supported by expected
revenues. The following tables summarize the Companys operating results from
continuing operations for the three and nine months ended February 29, 2004 and
February 28, 2003 (in thousands): The three months ended February 29, 2004 compared to the three months ended
February 28, 2003: Consolidated
    
    ConsolidatedContinuing
    
    ContinuingOperations
    
    OperationsFiscal 2004
    
    Fiscal 2003Operating revenues
    
    $
    6,348
    
    
    $
    8,061Healthcare operating expenses
    
    
    5,520
    
    
    
    7,227General/administrative expenses
    
    
    799
    
    
    
    771Other operating expenses
    
    
    25
    
    
    
    566,344
    
    
    
    8,054Operating income
    
    $
    4
    
    
    $
    7
 The Company reported a net loss of $78,000 and operating profit of $4,000 for
the quarter ended February 29, 2004 compared to net income of $7,706,000 and
operating income of $7,000 for the quarter ended February 28, 2003. 11




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Operating revenues decreased by 21.3%, or $1.7 million, to $6.3 million for the
quarter ended February 29, 2004 compared to $8.1 million for the quarter ended
February 28, 2003. Reduced revenues from Texas CHIP contracts and the effect
of terminated contracts in Florida resulted in lower revenues, but were offset
by increased business in Connecticut and Texas, and new business in Michigan. Healthcare operating expenses decreased by approximately $1.7 million, or
23.6%, for the quarter ended February 29, 2004 as compared to the quarter ended
February 28, 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 2.7%, from 89.7% for the quarter ended February
28, 2003 to 87.0% for the quarter ended February 29, 2004. This decrease is
primarily due to the termination in January 2003 of one major contract that
consistently returned a high medical loss ratio. General and administrative expenses increased by $28,000, or 3.6%, for the
quarter ended February 29, 2004 as compared to the quarter ended February 28,
2003. This increase is primarily attributable to increased usage of outside
professional services during the quarter ended February 29, 2004, including
approximately $21,000 of legal and consulting services in connection with one
unsuccessful bid in Tennessee. General and administrative expense as a
percentage of operating revenue increased from 9.6% for the quarter ended
February 28, 2003 to 12.6% for the quarter ended February 29, 2004 due to the
previously described decrease in operating revenue. Other operating expenses decreased by $31,000 for the quarter ended
February 29, 2004 compared to the quarter ended February 28, 2003. This
decrease is attributable to a reduction in depreciation expense as a result of
specific assets being fully depreciated, and a decrease in bad debt expense. The nine months ended February 29, 2004 compared to the nine months ended
February 28, 2003: Consolidated
    
    ConsolidatedContinuing
    
    ContinuingOperations
    
    OperationsFiscal 2004
    
    Fiscal 2003Operating revenues
    
    $
    21,252
    
    
    $
    24,999Healthcare operating expenses
    
    
    18,571
    
    
    
    22,340General/administrative expenses
    
    
    2,677
    
    
    
    2,611Other operating expenses
    
    
    68
    
    
    
    17321,316
    
    
    
    25,124Operating loss
    
    $
    (64
    )
    
    $
    (125
    )
 The Company reported an operating loss of $64,000, a loss from continuing
operations of $249,000 and a net loss of $636,000 for the nine months ended
February 29, 2004 compared to an operating loss of $125,000 and net income of
$7,980,000 for the nine months ended February 28, 2003, which included a
$7,717,000, non-operating gain related to the IRS Settlement. Operating
revenues decreased by 15.0%, or $3.7 million, to $21.3 million for the nine
months ended February 29, 2004 compared to $25.0 million for the nine months
ended February 28, 2003. This decrease is primarily attributable to terminated
contracts in Florida that accounted for $5.3 million of revenue during the nine
months ended February 28, 2003 and a decrease in Texas CHIP revenue of
approximately $1.5 million during the nine months ended February 29, 2004
compared to the same period in Fiscal 2003. These decreases were partially
offset by increased business in Connecticut, Indiana, and Texas, and new
business in Michigan. Healthcare operating expenses decreased by approximately $3.8 million, or
16.9%, for the nine months ended February 29, 2004 as compared to the nine
months ended February 28, 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 89.4% for the nine
months ended February 28, 2003 to 87.4% for the nine months ended February 29,
2004. This decrease is primarily due to the termination in January 2003 of
one major contract that consistently returned a high medical loss ratio. General and administrative expenses increased by $66,000, or 2.5%, for the
nine months ended February 29, 2004 as compared to the nine months ended
February 28, 2003. This increase is primarily attributable to $122,000 of legal
and consulting services incurred in connection with one unsuccessful bid in
Tennessee, offset by a general reduction in usage of other similar professional
services. General and administrative expense as a percentage of 12




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES operating revenue increased from 10.4% for the nine months ended February 28,
2003 to 12.6% for the nine months ended February 29, 2004. Other operating expenses decreased by $105,000 for the nine months ended
February 29, 2004 compared to the nine months ended February 28, 2003. This
decrease is directly attributable to a reduction in depreciation expense as a
result of specific assets being fully depreciated, and a decrease in bad debt
expense. 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. Liquidity and Capital Resources During the nine months ended February 29, 2004, net cash used in
continuing and discontinued operations amounted to $1,291,000 and $53,000,
respectively. The Company had $949,000 of net cash provided from financing
activities, primarily through the sale of an aggregate of 700,000 shares of
common stock in a private transaction completed in December 2003. The December
2003 private transaction reduced our working capital deficiency and
stockholders deficit each by approximately $972,000. Uses of cash during the
nine months ended February 29, 2004 include $140,000 related to the ongoing
implementation of our new, customized management information system. Our
capital needs during Fiscal 2004 will require additional installments toward
the $230,000 that remains to be paid in connection with this system, which has
expected total costs of 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 February 29, 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 during
Fiscal 2004. We cannot state with any degree of certainty whether any required
additional equity or debt financing will be available to us during Fiscal 2004
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 achieve profitability and 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 $3.6
million claims payable amount reported as of February 29, 2004. Summary of Significant Accounting Policies 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 financial statements
requires us to make significant estimates and judgments to develop the amounts
reflected and disclosed in the financial statements. 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 the following significant accounting policies involve our most
significant judgments and estimates that are material to our consolidated
financial statements: 13




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 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 February 29, 2004. Although considerable
variability is inherent in such estimates, we believe that the unpaid claims
liability is adequate. Revenue Recognition  Our managed care activities are performed under the
terms of agreements with health maintenance organizations, 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 our clients and we rely 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 85.9%, or $18.2
million, of revenue from continuing operations for the nine months ended
February 29, 2004. The balance of our revenues is earned on a fee-for-service
basis and is recognized as services are rendered. CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Certain information included
in this quarterly report on Form 10-Q and in other Company reports, SEC
filings, statements, and presentations is forward looking within the meaning of
the Private Securities Litigation Reform Act of 1995, including, but 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. Such forward-looking information involves important
risks and uncertainties that could significantly affect actual results and
cause them to differ materially from expectations expressed herein and in other
Company reports, SEC filings, statements, and presentations. These risks and
uncertainties include local, regional, and national economic and political
conditions, the effect of governmental regulation, the competitive environment
in which the Company operates, and other risks detailed from time to time in
the Companys SEC reports. Risk Factors Important Factors Related to Forward-Looking Statements and Associated Risks This quarterly report on Form 10-Q contains certain forward-looking
statements that are based on current expectations and involve a number of risks
and uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, our success in (i) expanding the
managed behavioral healthcare operations, (ii) effective management in the
delivery of services, and (iii) risk and utilization in context of capitated
payouts. Concentration of Risk We currently have contracts with five health plans to provide behavioral
healthcare services under commercial, Medicaid, and CHIP plans to contracted
members in Connecticut, Michigan and Texas. These combined contracts represent
approximately 44.9%, or $9.5 million, of our operating revenue for the nine
months ended February 29, 2004. In general, 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 any one of
these customers or changes in any of these States Medicaid reimbursement rules
could have a material, adverse effect on our working capital and future results
of operations (see Medicaid and Other State Funded Programs below). History of Operating Losses  Uncertainty of Future Profitability For each of the fiscal years ending May 31, 2003, 2002 and 2001, we
incurred operating losses of approximately $608,000, $774,000 and $1,163,000,
respectively. The report of the Companys independent auditors with respect to
their examination of the Companys financial statements for the years ended May
31, 2003, 2002 and
2001 contains an explanatory paragraph relating to the preparation of the
Companys financial statements on a going concern basis and states that the
Companys working capital deficiency and stockholders deficit raise
substantial doubt about its ability to continue as a going concern. For the
nine months ended February 29, 2004, the Company 14




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES reported a loss from continuing operations of $249,000 and a net loss of
$636,000. At February 29, 2004, the Companys total current liabilities
exceeded its total current assets by approximately $3.9 million and it had an
accumulated deficit of approximately $57.6 million, with a total stockholders
deficit of approximately $4.6 million.
Due to the recent loss of one major customer in Florida and the temporary
reduction in CHIP revenue that occurred during the months of September 2003
through January 2004, we had reduced our staff by approximately 10% in December
2003. We have since recalled or hired certain staff as a result of the Texas
CHIP business reinstatement in February 2004, but do not expect staffing levels
to return to prior existing levels or to increase other operating costs as a
result of this recent event. Additionally, as part of our ongoing expense
reduction program to align costs with expected revenues, we will maintain in
effect a temporary salary freeze applicable to all employees and certain other
reductions in operating costs associated with the specific contracts that have
terminated or otherwise cannot be supported by expected revenues. While our
management has addressed the conditions giving rise to the going concern
uncertainty, there is no assurance that we will be successful in implementing
any of the plans of management to restore us to profitability, to achieve and
maintain positive cash flow on an ongoing basis, or otherwise to ensure that we
will be able to continue as a going concern. Costs of Care - Estimated Claims Incurred But Not Reported Our costs of care include estimated amounts for claims incurred but not
yet reported (IBNR) to us. The IBNR is estimated using an actuarial paid
completion factor methodology and other statistical analyses that we
continually review and adjust, if necessary, to reflect any change in the
estimated liability. These estimates are subject to the effects of trends in
utilization and other factors. Although considerable variability is inherent
in such estimates, we believe that our unpaid claims liability is adequate.
However, actual results may differ materially from the estimated amounts
reported. Need for Additional Funds; Uncertainty of Future Funding We believe that our ability to increase business is dependent on our
ability to have available working capital and, therefore, we will require
additional funding. In December 2003, we raised approximately $1.0 million
through a private transaction of an aggregate of 700,000 shares of our common
stock thereby reducing our working capital deficiency and stockholders deficit
each by approximately $1.0 million as a result of this transaction. The shares
issued in connection with this private placement have not been registered and
may be resold pursuant to Rule 144 under the general rules and regulations of
the Securities Act of 1933 as amended assuming that all of the conditions and
provisions of the rule have been satisfied. The earliest date that these
shares would become eligible for resale without a registration statement would
be December 8, 2004. We are continuing to pursue additional sources of
financing on terms that would support our future capital needs and provide
available funds for working capital in Fiscal 2004. We cannot state with any
degree of certainty whether any required additional equity or debt financing
will be available to us during Fiscal 2004 and, if available, that the source
of financing would be available on terms and conditions acceptable to us. Uncertainties Related to Pricing, Healthcare Reform, and Related Matters Managed care operations are at risk for costs incurred to supply agreed
upon levels of service. Failure to anticipate or control costs could have
material, adverse effects on the Company. Additionally, the business of
providing services on a full-risk capitation basis exposes us to the additional
risk that contracts negotiated and entered into may ultimately be determined to
be unprofitable if utilization levels require us to deliver and provide
services at capitation rates which do not account for or factor in such
utilization levels. We typically contract with small to medium sized HMOs who may be
adversely affected by the continuing efforts of governmental and third party
payers to contain or reduce the costs of healthcare through various means. Our
clients may fall under state supervision or otherwise be subject to state
discipline placing them at risk of losing membership to their competitors in
which case we may be unable to contract with any succeeding HMOs. They may
also determine to manage the behavioral healthcare benefits in house and, as
a result, discontinue contracting with the Company. Additionally, our clients
may be acquired by larger HMOs, in which case there can be no assurance that
the acquiring company would renew our contract. Medicaid and Other State funded Programs As of February 29, 2004, we managed approximately 657,000 lives in
connection with behavioral and substance abuse services covered through
Medicaid in California, Connecticut, Florida, Michigan and Texas. Any 15




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES changes in Medicaid reimbursement could ultimately affect the Company through
contract bidding and cost structures with the health plans first impacted by
such changes. Benefits available to Texas CHIP recipients were significantly
reduced for the five month period September 1, 2003 to January 31, 2004 as a
result of legislative bills passed by the Texas State legislature. Although
subsequent legislation restored the majority of benefits available to CHIP
recipients effective February 1, 2004, the temporary reduction in revenues had
a negative impact on the Companys results of operations for the nine months
ended February 29, 2004. Further changes to Medicaid and other state funded
programs are possible given the current economic conditions negatively
affecting the budgets of many states. Seasonality of Business Historically and during Fiscal 2003, 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. Regulatory compliance We are subject to extensive and evolving state and federal regulations
relating to the nations mental health system as well as changes in Medicaid
and Medicare reimbursement that could have an effect on the profitability of
our contracts. These regulations range from licensure and compliance with
regulations related to insurance companies and other risk-assuming entities, to
licensure and compliance with regulations related to healthcare providers.
These laws and regulations may vary considerably among states. As a result,
CompCare may be subject to the specific regulatory approach adopted by each
state for regulation of managed care companies and for providers of behavioral
healthcare treatment services. We hold licenses or certificates to perform utilization review and third
party administrator (TPA) services in certain states. Certain of the
services provided by our managed behavioral healthcare subsidiaries may be
subject to such licensing requirements in other states. There can be no
assurance that additional utilization review or TPA licenses will not be
required or, if required, that CompCare will qualify to obtain such licenses.
In many states, entities that assume risk under contract with licensed
insurance companies or health plans have not been considered by state
regulators to be conducting an insurance or HMO business. As a result, we have
not sought licensure as either an insurer or HMO in any state. If the
regulatory positions of these states were to change, our business could be
materially affected until such time as we are able to meet the regulatory
requirements. Currently, we cannot quantify the potential effects of additional
regulation of the managed care industry, but such costs will have an adverse
effect on future operations to the extent that they are not able to be recouped
in future managed care contracts. We are 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, we recently determined we needed to make a significant
investment in our current information system or in a new information system
that would better meet our future needs. As a result, we entered into a
Software License Maintenance and Services Agreement with Qualifacts Systems,
Inc. (Qualifacts), a vendor that has provided us 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 us to continue to meet HIPAA
requirements in the future. While these efforts will be ongoing, we believe we
have met substantially all compliance rules and timetables with respect to the
HIPAA regulations. Failure to do so may result in penalties and have a
material adverse effect on the Companys ability to retain its customers or to
gain new business. Dependence on Key Personnel We currently rely heavily on several key executives and other management,
clinical and technical personnel for our business performance and development.
Recent new hires have included senior management personnel and other essential
employees that are assisting executive management with marketing efforts and
enhancements to our clinical system designs. Our future success will depend in
large part upon our continued ability to attract and retain highly skilled
employees. 16




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Shares Eligible for Future Sale As of April 8, 2004, the Company has issued 1,224,390 options, with
exercise prices ranging from $0.25 to $4.00. A total of 937,999 options are
exercisable and in the money as of April 8, 2004 and, accordingly, could be
exercised and resold by optionees. Additionally, in connection with the private
transaction that was completed on December 8, 2003, an aggregate of 700,000
shares of our common stock were issued to two private investors. The shares
issued in connection with this private placement have not been registered and
may be resold pursuant to Rule 144 under the general rules and regulations of
the Securities Act of 1933 as amended assuming that all of the conditions and
provisions of the rule are complied with. The earliest date that these shares
would become eligible for resale without a registration statement would be
December 8, 2004. Anti-takeover Provisions The Companys Restated Certificate of Incorporation provides for 60,000
authorized shares of Preferred Stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by our Board of Directors
without any vote or action by the stockholders that could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. As of February 29, 2004, there are 18,740 remaining
shares authorized and available to issue, and no outstanding shares of
Preferred Stock. The Companys Restated Certificate of Incorporation also
provides for a classified board of directors with directors divided into three
classes serving staggered terms. The Companys stock option plans generally
provide for the acceleration of vesting of options granted under such plans in
the event of certain transactions that result in a change of control of the
Company. Section 203 of the General Corporation Law of Delaware prohibits us
from engaging in certain business combinations with interested stockholders.
These provisions may have the effect of delaying or preventing a change in
control of the Company without action by the stockholders and therefore could
adversely affect the price of our Common Stock or the possibility of sale of
shares to an acquiring person. Assumptions relating to the foregoing involve judgments that are difficult
to predict accurately and are subject to many factors that can materially
affect results. Budgeting and other management decisions are subjective in
many respects and thus susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of which may
cause us to alter our budgets which may in turn affect the Companys results.
In light of the factors that can materially affect the forward-looking
information included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that our
objectives or plans will be achieved. 
 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 Evaluation of the Companys Disclosure Controls and Internal Controls.Within
the 90 days prior to filing this report on Form 10-Q, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures (Disclosure Controls), and its internal controls and procedures
for financial reporting (Internal Controls). This evaluation (the Controls
Evaluation) was done under the supervision and with the participation of our
Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Rules
adopted by the Securities and Exchange Commission (SEC) require that in this
section of the quarterly report on Form 10-Q we present the conclusions of the
CEO and the CFO about the effectiveness of our Disclosure Controls and Internal
Controls based on and as of the date of the Controls Evaluation. Disclosure Controls and Internal Controls.As provided in Rule 13a-14 of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended, Disclosure Controls are defined as meaning controls and procedures
that are designed with the objective of insuring that information required to
be disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, designed and reported
within the time periods specified by the SECs rules and forms. Disclosure
Controls include, within the definition under the Exchange Act, and without
limitation, controls and procedures designed to insure that information
required to be disclosed by us in our reports is accumulated and communicated
to our management including our CEO 17




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES and CFO, as appropriate, to allow timely decisions regarding disclosure.
Internal Controls are procedures which are designed with the objective of
providing reasonable assurance that (1) our transactions are properly
authorized; (2) our assets are safeguarded against unauthorized or improper
use; and (3) our transactions are properly recorded and reported, all to permit
the preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America. Scope of the Controls Evaluation.The evaluation made by our CEO and CFO of
our Disclosure Controls and our Internal Controls included a review of the
controls objectives and design, the controls implementation by the Company
and the effect of the controls on the information generated for use in this
Form 10-Q. In the course of the Controls Evaluation, we sought to identify
data errors, control problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in our quarterly reports on
Form 10-Q and Annual Report on Form 10-K. The overall goals of these various
evaluation activities are to monitor our Disclosure Controls and our Internal
Controls and to make modifications as necessary; our intent in this regard is
that the Disclosure Controls and the Internal Controls will be maintained as
dynamic systems that change (including with improvements and corrections) as
conditions warrant. Among other matters, we sought in our evaluation to determine whether there
were any significant deficiencies or material weaknesses in the Companys
Internal Controls, or whether the Company had identified any acts of fraud
involving personnel who have a significant role in the Companys Internal
Controls. In the professional auditing literature, significant deficiencies
are referred to as reportable conditions; these are control issues that could
have a significant adverse effect on the ability to record, process, summarize
and report financial data in the financial statements. A material weakness
is defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
Controls Evaluation, and in each case if a problem was identified, we
considered what revision, improvement and/or correction to make in accordance
with our on-going procedures. Following the completion of the audit of the
Companys financial statements, the Companys external auditors issued their
management letter to the Board of Directors, which did not identify any
significant deficiency or material weakness in the Companys internal controls
but did recommend certain improvements in the Companys existing internal
controls. The Companys management, including the CEO and CFO, does not expect that our
Disclosure Controls or our Internal Controls will prevent all errors and all
fraud. A control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control systems objectives
will be met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because
of changes in conditions or deterioration in the degree of compliance with its
policies or procedures. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected. In accordance with SEC requirements, our CEO and CFO each have confirmed that,
since the date of the Controls Evaluation to the date of this quarterly report
on Form 10-Q, there have been no significant changes in Internal Controls or in
other factors that could significantly affect Internal Controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses. Conclusion.Based upon the Controls Evaluation, our CEO and CFO have each
concluded that our Disclosure Controls are effective to ensure that material
information relating to the Company and its consolidated subsidiaries is made
known to management, including the CEO and CFO, particularly during the period
when our periodic reports are being prepared, and that our Internal Controls
are effective to provide reasonable assurance that our financial
statements are fairly presented in conformity with accounting principles
generally accepted in the United States of America. 18




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES 
 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 financial statements. 
 Item 2c  CHANGES IN SECURITIES AND USE OF PROCEEDS As previously reported in the Companys Current Report on Form 8-K dated
December 9, 2003, the Company, on December 8, 2003, completed the sale of
700,000 shares of its common stock, $.01 par value (the Shares), for an
aggregate of $1,015,000, of which the Company realized net proceeds of
approximately $971,500. The Company intends to utilize the net proceeds for
working capital purposes. The Shares were sold to two individuals in a private
transaction not involving a public offering. The shares issued in connection
with this private placement have not been registered and may be resold pursuant
to Rule 144 under the general rules and regulations of the Securities Act of
1933 as amended assuming that all of the conditions and provisions of the rule
are satisfied. The earliest date that these shares would become eligible for
resale without a registration statement would be December 8, 2004. 
 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
    
    
    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
 (b) Reports on Form 8-K   During the quarter ended February 29, 2004, the
following reports on Form 8-K were filed by the Registrant: Date of Report
    
    Item Reported
    
    DescriptionDecember 9, 2003
    
    Item 5. Other Events
    
    The Company announced completion of a private
transaction of an aggregate of 700,000 shares of its common stock.January 12, 2004
    
    Item 5. Other Events
    
    The Company announced that it had been selected by an existing
HMO client to manage benefits for a small membership in California.February 2, 2004
    
    Item 5. Other Events
    
    The Company announced it had retained the firm of
Porter, LeVay, & Rose, Inc. as its financial public
relations firm.February 3, 2004
    
    Item 5. Other Events
    
    The Company announced the reinstatement of three
client contracts and the addition of a fourth contract
new to the Company in its Southwest region..
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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 CORPORATIONApril 12, 2004By
    
    /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)
 20