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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the period ended August 31, 2005.
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to  .
 Commission File Number 1-9927
 COMPREHENSIVE CARE CORPORATION
  Delaware
    
    95-2594724(State or other jurisdiction of incorporation
or organization)
    
    (IRS Employer Identification No.)
 204 South Hoover Blvd, Suite 200, Tampa, FL 33609
 (813) 288-4808
 þ o
 o þ
 o þ
  Class
    
    Outstanding at October 10, 2005Common Stock, par value $.01 per share
    
    5,785,375




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Index
 PART I  FINANCIAL INFORMATIONItem 1 Consolidated Financial Statements
    
    PAGEConsolidated Balance Sheets as of
August 31, 2005 and May 31, 2005
    
    
    3Consolidated Statements of Operations for
the three months ended August 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows for
the three months ended August 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-11Item 2Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12-17Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4Controls and Procedures
    
    
    17PART II  OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    17Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3 Defaults Upon Senior Securities
    
    
    18Item 4 Submission of Matters to a Vote of Security Holders
    
    
    18Item 5 Other Information
    
    
    18Item 6 Exhibits
    
    
    18Signatures
    
    
    19Certifications
    
    
    20-23Ex-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification
  2




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
 
 Consolidated Balance Sheets
 August 31,
    
    
    May 31,2005
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,865
    
    
    
    3,695Restricted cash
    
    
    502
    
    
    
    Marketable securities
    
    
    10
    
    
    
    11Accounts receivable, less allowance for doubtful accounts of $6 and
$5, respectively
    
    
    300
    
    
    
    113Accounts receivable  managed care reinsurance contract
    
    
    491
    
    
    
    372Other current assets
    
    
    529
    
    
    
    481Total current assets
    
    
    7,697
    
    
    
    4,672Property and equipment, net
    
    
    370
    
    
    
    384Goodwill, net
    
    
    991
    
    
    
    991Restricted cash
    
    
    73
    
    
    
    72Other assets
    
    
    304
    
    
    
    329Total assets
    
    
    9,435
    
    
    
    6,448LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    
    1,436
    
    
    
    1,310Accrued claims payable
    
    
    3,559
    
    
    
    3,730Accrued reinsurance claims payable
    
    
    3,069
    
    
    
    3,191Income taxes payable
    
    
    17
    
    
    
    30Total current liabilities
    
    
    8,081
    
    
    
    8,261Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    46
    
    
    
    60Total long-term liabilities
    
    
    2,290
    
    
    
    2,304Total liabilities
    
    
    10,371
    
    
    
    10,565Stockholders deficit:Preferred stock, $50.00 par value; authorized 18,740 shares; issued and
outstanding 14,400 and 0, respectively
    
    
    720
    
    
    
    Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 5,785,377 and 5,582,547, respectively
    
    
    58
    
    
    
    56Additional paid-in-capital
    
    
    56,570
    
    
    
    53,813Accumulated deficit
    
    
    (58,283
    )
    
    
    (57,986
    )Other comprehensive loss
    
    
    (1
    )
    
    
    Total stockholders deficit
    
    
    (936
    )
    
    
    (4,117
    )Total liabilities and stockholders deficit
    
    $
    9,435
    
    
    
    6,448
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 Three months EndedAugust 31,2005
    
    
    2004Operating revenues
    
    $
    6,301
    
    
    
    6,039Costs and expenses:Healthcare operating expenses
    
    
    5,718
    
    
    
    5,168General and administrative expenses
    
    
    876
    
    
    
    702Recovery of doubtful accounts
    
    
    (34
    )
    
    
    (5
    )Depreciation and amortization
    
    
    22
    
    
    
    246,582
    
    
    
    5,889Operating (loss) income before items shown below
    
    
    (281
    )
    
    
    150Other income (expense):Interest income
    
    
    12
    
    
    
    2Interest expense
    
    
    (49
    )
    
    
    (54
    )Other non-operating income
    
    
    32
    
    
    
    11(Loss) income from before income taxes
    
    
    (286
    )
    
    
    109Income tax expense
    
    
    11
    
    
    
    18Net (loss) income attributable to common stockholders
    
    $
    (297
    )
    
    
    91Net (loss) income per common share  basic
    
    $
    (0.05
    )
    
    
    0.02Net (loss) income per common share  diluted
    
    $
    (0.05
    )
    
    
    0.02Weighted average common shares outstanding:Basic
    
    
    5,682
    
    
    
    4,682Diluted
    
    
    5,682
    
    
    
    5,272
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Three months EndedAugust 31,2005
    
    
    2004Cash flows from operating activities:Net (loss) income from continuing operations
    
    $
    (297
    )
    
    
    91Adjustments to reconcile net (loss) income to net cash used in operating
activities:Depreciation and amortization
    
    
    22
    
    
    
    24Compensation expense  stock and stock options issued
    
    
    12
    
    
    
    2Amortization of deferred revenue
    
    
    (32
    )
    
    
    Changes in assets and liabilities:Accounts receivable, net
    
    
    (187
    )
    
    
    74Accounts receivable  managed care reinsurance contract
    
    
    (119
    )
    
    
    105Other current assets, restricted cash, and other assets
    
    
    (514
    )
    
    
    (52
    )Accounts payable and accrued liabilities
    
    
    199
    
    
    
    (56
    )Accrued claims payable
    
    
    (171
    )
    
    
    (410
    )Accrued reinsurance claims payable
    
    
    (122
    )
    
    
    55Income taxes payable
    
    
    (13
    )
    
    
    16Other liabilities
    
    
    
    
    
    
    (2
    )Net cash used in continuing operations
    
    
    (1,222
    )
    
    
    (153
    )Net cash used in discontinued operations
    
    
    (41
    )
    
    
    (36
    )Net cash used in continuing and discontinued operations
    
    
    (1,263
    )
    
    
    (189
    )Cash flows from investing activities:Additions to property and equipment, net
    
    
    (9
    )
    
    
    (1
    )Net cash used in investing activities
    
    
    (9
    )
    
    
    (1
    )Cash flows from financing activities:Proceeds from issuance of common stock and preferred stock
    
    
    3,454
    
    
    
    5Repayment of long-term debt
    
    
    (12
    )
    
    
    (10
    )Net cash provided by (used in) financing activities
    
    
    3,442
    
    
    
    (5
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,170
    
    
    
    (195
    )Cash and cash equivalents at beginning of year
    
    
    3,695
    
    
    
    3,209Cash and cash equivalents at end of period
    
    $
    5,865
    
    
    
    3,014Supplemental disclosures of cash flow information:Cash paid during the quarter forInterest
    
    $
    7
    
    
    
    11Income Taxes
    
    $
    24
    
    
    
    8Noncash financing and investing activitiesProperty acquired under capital leases
    
    $
    
    
    
    
    27
 S
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Note 1  Summary of Significant Accounting Policies
   Restricted Cash
  Revenue Recognition
  Healthcare Expense Recognition
  6




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




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Three Months Ended August 31,2005
    
    
    2004(in thousands except forper share information)Net (loss) income, as reported
    
    $
    (297
    )
    
    $
    91Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects*
    
    
    (59
    )
    
    
    Pro forma net (loss) income
    
    $
    (356
    )
    
    $
    91(Loss) income per common share:Basic  as reported
    
    $
    (0.05
    )
    
    $
    0.02Diluted  as reported
    
    $
    (0.05
    )
    
    $
    0.02Basic  pro forma
    
    $
    (0.06
    )
    
    $
    0.02Diluted  pro forma
    
    $
    (0.06
    )
    
    $
    0.02
 
 *
    
    No grants were issued during the quarter ended August 31, 2004. Per Share Data
  Three Months EndedAugust 31,2005
    
    
    2004Numerator:Numerator for diluted (loss) income attributable to common
stockholders
    
    $
    (297
    )
    
    
    91Denominator:Weighted average shares
    
    
    5,682
    
    
    
    4,682Effect of dilutive securities:Employee stock options
    
    
    
    
    
    
    588Warrants
    
    
    
    
    
    
    2Denominator for diluted (loss) income per share-adjusted weighted
average shares after assumed exercises
    
    
    5,682
    
    
    
    5,272(Loss) income per common share  basic
    
    $
    (0.05
    )
    
    
    0.02(Loss) income per common share  diluted
    
    $
    (0.05
    )
    
    
    0.02
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  Convertible debentures(a)
    
    
    12,377Convertible preferred stock(b)
    
    
    4,235,328Outstanding stock options(c)
    
    
    1,169,740Outstanding warrants(d)
    
    
    406,000Possible future issuance under stock option plans
    
    
    559,336Total
    
    
    6,382,781
 (a)    The debentures are convertible into 12,377 shares of common stock at a conversion price of
$181.30 per share.(b)    The Series A Convertible Preferred Stock (Series A Preferred Stock) is convertible into
4,235,328 shares of
common stock at a conversion rate of 294.12 common shares for each preferred
share.(c)    Options to purchase common stock of the Company have been issued to employees and non-employee
Board of Director
members with exercise prices ranging from $.25 to $4.00.(d)    Warrants to purchase common stock of the Company have been issued to certain individuals or
vendors in exchange
for consulting services. All such warrants were issued in lieu of cash
compensation and have five-year terms with exercise prices ranging
from $1.09 to $5.00. Warrants
  Number of warrants
    
    
    306,000Exercise price
    
    $
    1.25Volatility factor of the expected market price of the
Companys common stock
    
    
    95.0
    %Expected life of the warrants
    
    3 yearsRisk-free interest rate
    
    
    3.9
    %Dividend yield
    
    
    0.0
    %Warrant valuation (in thousands)
    
    $
    234
  Note 2  Liquidity
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Note 3  Sources Of Revenue
  Three Months Ended August 31,2005
    
    
    2004(amounts in thousands)Capitated contracts
    
    $
    6,019
    
    
    $
    5,311Non-capitated contracts
    
    
    282
    
    
    
    728Total
    
    $
    6,301
    
    
    $
    6,039
  Note 4  Major Customers/Contracts
    10




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 Note 5  Preferred Stock
  Note
6  Commitments and Contingencies
       11




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




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
    Results of Operations
   Three Months EndedAugust 31,2005
    
    
    2004Operating revenues:Capitated contracts
    
    $
    6,019
    
    
    
    5,311Non-capitated sources
    
    
    282
    
    
    
    728Total operating revenues
    
    
    6,301
    
    
    
    6,039Operating expenses:Healthcare operating expenses:Claims expense (1)
    
    
    4,600
    
    
    
    3,904Other healthcare operating expenses (1)
    
    
    1,118
    
    
    
    1,264Total healthcare operating expense
    
    
    5,818
    
    
    
    5,168General and administrative expenses
    
    
    876
    
    
    
    702Other operating (revenues) expenses
    
    
    (12
    )
    
    
    19Total operating expenses
    
    
    6,582
    
    
    
    5,889Operating (loss) income
    
    $
    (281
    )
    
    
    150
 (1)    Claims
expense reflects the cost of revenue of capitated contracts, and other
healthcare operating expense reflects
the cost of revenue of capitated and non-capitated
contracts.  13




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
    Seasonality of Business
  Concentration of Risk
  Liquidity and Capital Resources
    14




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
   Critical Accounting Estimates
   Revenue Recognition
   Accrued Claims Payable and Claims Expense
   15




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
     
    
    Changes in utilization patterns
    
    Changes in healthcare costs
    
    Changes in claims submission timeframes by providers
    
    Success in renegotiating contracts with healthcare providers
    
    Occurrence of catastrophes
    
    Changes in benefit plan design
  Change in Healthcare Costs:
 (Decrease)(Decrease)
    
    IncreaseIncrease
    
    In Claims Expense(5%)
    
    ($95,000)5%
    
    $93,000
 Premium Deficiencies
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
  Marketable Securities
  
    
    The financial condition of the issuer.
    
    The length of time the investment has been in a continuous unrealized position.
    
    The Companys ability to hold the security for a period of time sufficient to allow
for any anticipated recovery.
 Goodwill
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  17




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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 EXHIBITNUMBER
    
    DESCRIPTION
    
    PAGE NUMBER31.1
    
    Comprehensive Care Corporation CEO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    2031.2
    
    Comprehensive Care Corporation CFO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    2132.1
    
    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
    
    
    2232.2
    
    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
    
    
    23
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
 
   COMPREHENSIVE CARE CORPORATIONOctober 14, 2005By
    
    /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)
 19