<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K 405/A
Amendment No. 1
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended May 31, 1995 or
/ / 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 0-5751
COMPREHENSIVE CARE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-2594724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4350 Von Karman Avenue
Suite 280
Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 798-0460
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, Par Value $.01 per share New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7 1/2% Convertible Subordinated Debentures due 2010 Over-the-Counter
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant at August 31, 1995, was $20,635,655 based on the closing sale price
of the Common Stock on August 31, 1995 as reported on the New York Stock
Exchange composite tape.
At August 31, 1995, the Registrant had 2,637,003 shares of Common Stock
outstanding.
The aggregate market value of Registrant's Common Stock held by
non-affiliates as of August 31, 1995 and the number of shares outstanding,
includes an aggregate of 422,500 shares previously sold by the Registrant and
which the Registrant is obligated to issue. Issuance of which is pending the
completion of administerial acts.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive proxy statement for the Registrant's 1995 annual meeting of
stockholders presently scheduled to be held on November 9, 1995, which Proxy
Statement will be filed no later than 120 days after the close of the
Registrant's fiscal year ended May 31, 1995.
1
<PAGE> 2
PART I
ITEM 1. BUSINESS.
Comprehensive Care Corporation(R) (the "Company") is a Delaware
corporation organized in January 1969. The Company is transitioning from
predominantly a provider of inpatient treatment programs for psychiatric
disorders and chemical dependency (including alcohol and drug) to a managed care
behavioral health care company providing a continuum of services. Such services
include risk based contract capitation of behavioral health expenses for
specific populations and a broad spectrum of inpatient and outpatient mental
health and substance abuse therapy and counseling. Programs are provided at
freestanding facilities operated by the Company and at independent general
hospitals under contracts with the Company. A wholly-owned subsidiary,
CareUnit(R), Inc., develops, markets and manages the Company's contract
programs. During fiscal 1995, psychiatric and chemical dependency treatment
programs (freestanding operations and CareUnit, Inc. contracts) accounted for
approximately 80% of the Company's operating revenues. Comprehensive Behavioral
Care, Inc., ("Comprehensive Behavioral"), formerly known as AccessCare, Inc., an
86.5% subsidiary primarily engaged in the development and delivery of managed
care services for behavioral medicine, accounted for approximately 19% of the
Company's operating revenues in fiscal 1995. The remaining 1% of fiscal 1995
revenues were derived from other activities.
The Company has experienced significant net losses in 1995 and prior
years, has a working capital deficiency of $15.3 million and a deficit in
stockholders' equity of $4.9 million as of May 31, 1995, and is attempting to
accomplish a Debenture exchange offer to cure a default in the payment of
interest on these Debentures. Additionally, during the past five years, and in
particular since fiscal 1994, the Company has begun to refocus its activities
through closure and/or sale of its freestanding facilities and expansion of
managed care activities. See Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of these matters
as well as other risk factors that the Company faces.
The following table sets forth for each of the years in the five-year
period ended May 31, 1995, the operating revenues of the Company's freestanding
operations, CareUnit, Inc. contracts, Comprehensive Behavioral operations,
RehabCare programs, and other activities.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freestanding operations .................. 62% 70% 81% 75% 34%
CareUnit, Inc. contracts ................. 18 16 12 14 14
Comprehensive Behavioral operations (1) .. 19 10 2 -- --
RehabCare programs (2) ................... -- -- -- 6 47
Other activities ......................... 1 4 5 5 5
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
--------------------------------
(1) The Company has provided managed care products since the acquisition of
Comprehensive Behavioral Care, Inc.'s predecessor in December 1992. On
August 1, 1995, the Company changed the name of its subsidiary from
AccessCare, Inc. to Comprehensive Behavioral Care, Inc.
(2) The Company formerly owned a company known as RehabCare Corporation
("RehabCare"), which developed, marketed and managed the delivery of
comprehensive medical rehabilitation services for functionally disabled
persons. The Company offered RehabCare common stock to the public in
fiscal 1992, maintaining a minority interest, and during fiscal 1993,
sold its remaining 48% stake in RehabCare. Accordingly, revenues from
RehabCare were not material to the Company during fiscal 1993.
2
<PAGE> 3
MANAGED CARE OPERATIONS
Comprehensive Behavioral Care, Inc. provides managed behavioral health care
and substance abuse services for employers, HMO's, PPO's, government
organizations, third party claim administrators and other group purchasers of
health care. Comprehensive Behavioral currently provides services to contracted
members in 35 states. The programs and services currently offered by
Comprehensive Behavioral include fully integrated capitated behavioral health
care services, employee assistance programs ("EAP"), case management/utilization
review services, provider sponsored health plan development, preferred provider
network development and management and physician advisor reviews. Comprehensive
Behavioral distinguishes itself from the competition by being the
"science-based" provider of care. Comprehensive Behavioral manages its clinical
service programs on proven treatment technologies and is a leader in training
its providers to use science-based efficacious treatment.
Comprehensive Behavioral accounted for approximately 19% of the Company's
operating revenues in fiscal 1995. Comprehensive Behavioral, in concert with a
network of providers (e.g., CareUnit, Inc.), is expected to assist the Company
in developing an integrated service model to provide high quality, cost
effective care.
In May 1995, the Company entered into an agreement with Physicians
Corporation of America ("PCA") providing for PCA to invest $1.0 million into
Comprehensive Behavioral for a voting equity position equal to 13 1/2% of
Comprehensive Behavioral voting power on a fully diluted basis, represented by
shares of Series A Preferred Stock which is also option of PCA for 100,000
shares of the Company's Common Stock (see Note 3-- "Acquisitions and
Dispositions"). In addition, PCA was granted a first right of refusal regarding
any sale of Comprehensive Behavioral.
SOURCES OF REVENUE
Comprehensive Behavioral provides managed behavioral health and substance
abuse services to the members under contract. Generally, Comprehensive
Behavioral receives a negotiated per member per month amount, or capitation, to
provide these services. Comprehensive Behavioral is responsible for the
development of service networks, including physicians, therapists and
hospitalization services.
Contracts are generally entered into for a period of one to three years and
automatically renew for successive one-year periods unless either party gives
notice of termination.
DEVELOPMENT, COMPETITION, AND PROMOTION
Approximately fifteen managed behavioral health care companies provide
service for 80 million people in the United States and the Commonwealth of
Puerto Rico. Additionally, there are numerous local and regional group
practices, community mental health centers and behavioral health care hospitals
that manage behavioral health care on behalf of HMOs, PPOs and local
governments. Approximately one-third of the potential private marketplace still
operates through indemnity coverage (approximately 60 million lives) and another
third are covered through PPO products. The last two years have seen an
increased migration to fully capitated HMO products in most markets. This is
Comprehensive Behavioral's primary niche. Approximately 19% of all mental health
care expenditures nationally are funded through Medicaid. Currently 11 states
have received Health Care Finance Administration ("HCFA") approval for statewide
privatization of mental health Medicaid expenditures, 9 states have submitted
HCFA applications for waivers and 8 states have applications for waivers in the
preparation stage. Additionally, 8.8 million people covered through Champus are
being moved to managed care products in the next two years. As a consequence of
these changes in the marketplace, the potential dollars expended for managed
behavioral services in the market are expected to grow dramatically.
Comprehensive Behavioral currently manages approximately 187,000 people covered
through Medicaid in Florida and has partnered with PCA (see Note 3--
"Acquisitions and Dispositions") to attract such additional business in other
states.
Managed behavioral care is an extremely competitive business and seven
companies currently dominate the market and include: Medco Behavioral Care
(approximately 15 million lives), Value Behavioral Care (approximately 11
million lives), Greenspring (approximately 11 million lives), MCC (approximately
5 million lives), CMG (approximately 4 million lives), USBH (approximately 4
million lives) and Options Mental Health (approximately 3 million lives).
Contracts are competitively bid and are awarded based upon price, customer
service, capacity to satisfy the standards of the National Committee of Quality
Assurance ("NCQA") and capacity to deliver the product including financial
viability of the bidder. Comprehensive Behavioral has developed a
3
<PAGE> 4
reputation as a price efficient company with high ratings by customers and
members. As a subcontractor to four NCQA accredited HMOs, Comprehensive
Behavioral has been through the NCQA evaluation on repeated occasions and has
met its stringent criteria.
Comprehensive Behavioral is subject to multiple state and federal
regulations, as well as changes in Medicaid and Medicare reimbursement. At this
point in time Comprehensive Behavioral is unable to predict what effect, if any,
the changes in legislation for Medicaid and Medicare will have on Comprehensive
Behavioral.
Comprehensive Behavioral has certificates of authority in sixteen states and
is awaiting such certificates in an additional six. Comprehensive Behavioral
intends to become able to provide managed behavioral health care in all fifty
states and the Commonwealth of Puerto Rico.
CONTRACT OPERATIONS
CareUnit, Inc. operates contract programs for behavioral medicine services
in dedicated units of independent hospitals. The programs offered are similar to
the behavioral medicine services offered in the Company's freestanding
facilities.
Under a contract, the hospital furnishes patients with all hospital
facilities and services necessary for their generalized medical care, including
nursing, dietary and housekeeping. CareUnit, Inc. is obligated to provide a
multi-disciplinary team consisting of a physician (who serves as medical
director for the program), a program manager, a social worker, a therapist and
other appropriate supporting personnel. CareUnit, Inc. also typically provides
support in the areas of program implementation and management, staff recruiting,
continuing education, treatment team training, community education, advertising,
public relations, insurance and ongoing program quality assurance. As a result
of reimbursement changes and competitive pressures, the contractual obligations
of CareUnit, Inc. have been subject to intense evaluation. In general, some
prospective client hospitals have expressed a desire for more control over the
services provided by CareUnit, Inc. and, in response, CareUnit, Inc. is
providing a more flexible approach to contract management. During fiscal years
1995, 1994 and 1993, CareUnit, Inc. through CareInstitute(R), a related
non-profit entity, managed two contracts for the State of Idaho. These programs
provide behavioral medicine services in a residential and outpatient setting.
During fiscal 1995, CareUnit, Inc. experienced an increase in the number of
contracts and available beds. Although seven new contracts were opened, CareUnit
experienced a decline in inpatient census during fiscal 1995. The Company
believes that the decline in the number of inpatient beds is a result of the
continued influence of managed care and reduction in available reimbursement
from third parties, which have had the effect of making CareUnit, Inc.'s
contracts less profitable to hospitals. During fiscal 1995, CareUnit purchased
certain assets of Alternative Psychiatric Centers, Inc. ("APC"), a behavioral
medicine contract company based in Southern California (see Note 3--
"Acquisitions and Dispositions"). The purchase of APC added three contracts to
CareUnit. In addition, during fiscal 1995, CareUnit, Inc. terminated one
unprofitable contract and four were terminated by the contracting hospital.
Responding to market demands, CareUnit, Inc. has implemented, in the
majority of its contracts, a variety of levels of care, offering a wide range of
treatment options including detoxification, inpatient, residential, day-
treatment or partial hospitalization and outpatient services. As a result,
inpatient occupancy rates have declined as patients are moved to a less acute
level of care.
4
<PAGE> 5
The following table sets forth selected operating data regarding behavioral
medicine programs managed under contract:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Number of contracts at end of period (1):
Adult CareUnits(2)(3) ................ 11 10 12 15 21
Adolescent CareUnits(2) .............. -- 1 1 1 2
Adult CarePsychCenters(R)(2) ......... 2 3 3 3 4
Partial Hospitalization .............. 3 -- -- -- --
Eating disorders units ............... 1 1 1 2 2
------ ------ ------ ------ -------
Total ................................ 17(5) 15 17 21 29
====== ====== ====== ====== =======
Available beds at end of period ......... 157 236 306 479 685
Patient days served during period ....... 39,082 34,464 51,524 92,574 151,219
Admissions .............................. 3,634 3,992 5,139 7,867 11,902
Average occupied beds per contract ...... 5.8 7.3 8.3 9.9 10.6
Average occupancy rate for period(4) .... 42% 37% 39% 42% 45%
</TABLE>
-------------------------
(1) Excludes contracts which have been executed but are not operational as
of the end of the period.
(2) CareUnit is the service mark under which the Company markets chemical
dependency treatment programs. CarePsychCenter is the service mark
under which the Company markets psychiatric treatment programs.
(3) Includes two state chemical dependency full-service contracts.
(4) Average occupancy rate is calculated by dividing total patient days by
the number of available bed-days during the relevant period.
(5) During fiscal 1995, CareUnit, Inc. opened 7 contracts and closed 5
contracts, one of which was terminated by CareUnit, Inc. and 4 by the
contracting hospitals.
In March 1995, the Company entered into a letter agreement with a
representative of certain holders of the Company's Debentures. The agreement,
among other things, provides for a pledge of all of the shares of CareUnit, Inc.
to secure the Company's obligation to purchase the Debentures on the agreed upon
terms and conditions of the exchange offer or otherwise (see Note 10--
"Long-Term Debt and Short-Term Borrowings").
SOURCES OF REVENUES
Patients are admitted to a behavioral medicine program under the
contracting hospital's standard admission policies and procedures. The hospital
submits to the patient, the patient's insurance company, or other responsible
party a bill that covers the services of the hospital. Generally, CareUnit, Inc.
receives a negotiated fee for each patient day of service provided and in many
cases also receives a fixed monthly management fee or a percentage of net
revenue. Fees paid by the hospital are subject to annual adjustments to reflect
changes in the Consumer Price Index. CareUnit, Inc. and the hospital share the
risk of nonpayment by patients based on a predetermined percentage participation
by CareUnit, Inc. in bad debts. CareUnit, Inc. may also participate with a
contracting hospital in charity care and certain contractual allowances and
discounts. Hospitals contracting for programs experience the same reimbursement
pressures as the Company's freestanding facilities.
Management contracts are generally entered into for a period of two to
five years and thereafter are automatically renewed for successive one-year
periods unless either party gives notice of termination at least 90 days prior
to the end of such periods. Contracts are also terminable for material defaults.
A significant number of contracts are terminable by either party on their
anniversary dates.
DEVELOPMENT, COMPETITION AND PROMOTION
CareUnit, Inc. directs its development activities toward increasing the
number of management contracts with hospitals. The primary competitors of
CareUnit, Inc. are hospitals and hospital management companies that offer
programs similar to those offered by CareUnit, Inc. A major development effort
will be made in conjunction with the Company's managed care subsidiary,
Comprehensive Behavioral Care, Inc., to expand the contract operations in
general hospitals and develop a continuum of care.
5
<PAGE> 6
FREESTANDING OPERATIONS
The Company currently operates four owned or leased facilities representing 237
available beds. During the second quarter of fiscal 1995, the Company sold the
100-bed CareUnit of Orlando and in the fourth quarter sold the 136-bed Starting
Point(R), Oak Avenue. The sale of these facilities was part of the Company's
plan of operations and restructuring. The following table sets forth selected
operating data regarding the Company's freestanding facilities. Facilities are
designated either psychiatric or chemical dependency based on the license of the
facility and the predominant treatment provided. For information concerning the
nature of the Company's interest in the facilities, see Item 2, "PROPERTIES".
<TABLE>
<CAPTION>
YEAR LICENSED INPATIENT DAYS FOR YEAR ENDED MAY 31,
-------------------------------------
ACQUIRED(1) BEDS 1995 1994 1993 1992 1991
---------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
PSYCHIATRIC/CHEMICAL DEPENDENCY FACILITIES
CareUnit Hospital of Kirkland . . . . . . . 1981 83 5,062 5,699 6,506 9,478 9,682
CareUnit Hospital of Cincinnati . . . . . . 1982 128 9,348 12,133 12,243 12,744 12,131
Starting Point, Orange County . . . . . . . 1983 70 2,362 2,422 3,487 7,046 10,349
Aurora Behavioral Health Hospital (2) . . . . 1988 100 2,593 2,859 7,237 22,070 8,730
CLOSED/FACILITIES HELD FOR SALE
CareUnit Hospital of Fort Worth(3) . . . . . 2,985 9,027 10,910 13,534 10,591
CareUnit of Jacksonville Beach (4) . . . . . --- --- --- 5,026 6,119
CLOSED/SOLD FACILITIES
CareUnit Hospital of Albuquerque (5)(11) . . --- --- 4,150 4,098 4,522
CareUnit of Coral Springs (5)(12) . . . . . --- --- 3,539 7,617 9,611
CareUnit of Grand Rapids (6) . . . . . . . . 5,424 6,545 6,348 6,221 7,662
CareUnit Hospital of Nevada (7) . . . . . . --- --- 6,920 7,881 8,632
CareUnit of South Florida/Tampa (5)(12) . . . --- --- 6,891 6,761 6,957
Crossroads Hospital (8) . . . . . . . . . . --- --- --- 1,705 5,078
Newport Point, Inc. (9) . . . . . . . . . . --- --- 4,669 --- ---
Starting Point, Oak Avenue (5)(10) . . . . --- --- 8,868 11,988 14,639
Woodview-Calabasas Hospital (8) . . . . . . --- --- --- 7,913 13,809
Other (13)(14) . . . . . . . . . . . . . . . --- --- --- --- 7,581
------ ------ ------ ------- -------
Patient days served during period
27,774 38,685 81,768 124,082 136,093
====== ====== ====== ======= =======
Admissions . . . . . . . . . . . . . . . . . . 3,329 3,916 7,047 8,859 9,312
Available beds at end of period (15) . . . . . 237 347 385 748 1,059
Average occupancy rate for period (16) . . . . 25% 30% 28% 38% 29%
</TABLE>
-------------------------------
(1) Calendar year acquired, built or leased.
(2) Formerly known as CareUnit of Colorado.
(3) On January 13, 1995, CareUnit Hospital of Ft. Worth, an 83-bed
psychiatric facility was closed. The facility is currently for lease or
sale.
(4) In February 1992, CareUnit of Jacksonville Beach, an 84-bed chemical
dependency facility, was closed. This facility is currently for sale.
(5) In March 1993, CareUnit Hospital of Albuquerque, a seventy-bed chemical
dependency facility, CareUnit of Coral Springs, a 100-bed chemical
dependency facility, CareUnit of South Florida/Tampa, a 100-bed
chemical dependency facility and Starting Point, Oak Avenue, a 136-bed
chemical dependency facility were closed.
(6) On April 30, 1995, CareUnit of Grand Rapids, a 76-bed chemical
dependency facility lease terminated. The operations of this facility
were transferred to Longford/CareUnit of Grand Rapids and currently
operates under a joint management contract.
(7) On April 5, 1993, CareUnit Hospital of Nevada, a 50-bed psychiatric
facility, was sold.
(8) The Company is currently in negotiations to dissolve, retroactive to
December 31, 1991, the joint venture which leased Crossroads Hospital
and Woodview-Calabasas Hospital. Crossroads Hospital continued to be
managed by the Company although in August 1992 it was closed and was
subleased through the term of the lease which expired in September
1993. Woodview-Calabasas continues to be managed by the Company's joint
venture partner although it was closed in April 1993.
(9) Joint operating agreement between Century Healthcare of California and
Starting Point, Inc. to manage Newport Harbor Psychiatric Hospital, a
68-bed adolescent psychiatric hospital and Starting Point, Orange
County, a 70-bed psychiatric facility. This agreement was mutually
dissolved on February 28, 1993.
(10) Includes Starting Point, Grand Avenue which was sold in July 1991.
(11) On July 1, 1993, CareUnit Hospital of Albuquerque was sold.
(12) On October 1, 1993, CareUnit of So. Florida/Tampa was sold and on
December 10, 1993, CareUnit of Coral Springs was sold.
6
<PAGE> 7
(13) Includes Brea Hospital Neuropsychiatric Center, CareUnit Hospital of
Orange, CareUnit Hospital of St. Louis, CareUnit of Orlando, CareUnit
of DuPage, Sutter Center for Psychiatry and Golden Valley Health
Center. These facilities were closed or sold in fiscal 1989 through
1991.
(14) Includes CareUnit of San Diego, a 92-bed chemical dependency facility,
which was closed in December 1989 and is currently for sale.
(15) A facility may have appropriate licensure for more beds than are in use
for a number of reasons, including lack of demand, anticipation of
future need, renovation and practical limitations in assigning patients
to multiple-bed rooms. Available beds is defined as the number of beds
which are available for use at any given time.
(16) Average occupancy rate is calculated by dividing total patient days by
the average number of available bed-days during the relevant period.
FREESTANDING FACILITY PROGRAMS
The services offered at a freestanding facility are determined by the
licensure of the facility, the needs of the patient community and reimbursement
considerations including working relationships with managed care companies. A
program within the facility represents a separately staffed unit dedicated to
the treatment of patients whose primary diagnosis suggests that their treatment
needs will best be met within the unit. Patients whose diagnosis suggests the
need for supplemental services are accommodated throughout their stay as
dictated by the individual treatment plan developed for each patient.
Psychiatric. Psychiatric programs are offered in most of the Company's
freestanding facilities. Admission to the programs offered by the Company is
typically voluntary although certain facilities provide emergency psychiatric
services and accept involuntary patients who are suffering an acute episodic
psychiatric incident.
Each patient admitted to a psychiatric program undergoes a complete
assessment including an initial evaluation by a psychiatrist, a medical history,
physical examination, a laboratory work-up, a nursing assessment, a
psychological evaluation, and social and family assessments. The assessments are
utilized to develop an individualized treatment plan for each patient.
The treatment programs are undertaken by an interdisciplinary team of
professionals experienced in the treatment of psychiatric problems. Length of
stay varies in accordance with the severity of the patient's condition. A
comprehensive discharge plan which may include outpatient psychiatric or
psychological treatment, or referral to an alternate treatment facility is
prepared for each patient. Psychiatric programs are also available on an
inpatient, day treatment and outpatient basis and form a continuum of care.
Chemical Dependency. Chemical dependency programs, offered in all
freestanding facilities, are delivered under the names CareUnit, Starting Point
and Aurora Behavioral Health Hospital and include programs for adults and
adolescents. Facilities offer a comprehensive treatment program based on therapy
and education. The medically based programs utilize a team approach to
treatment, with a supervising physician, psychologists, counselors, therapists
and specially trained nurses. This multi-disciplinary team approach means that
the medical, emotional, psychological, social and physical needs of the patient
are all addressed in treatment.
Facilities offer levels of care that can form a continuum, including
detoxification, inpatient, residential, day treatment and outpatient programs
which meet the evolving needs of patients and their families. Based on an
initial assessment, each patient is placed into the level of care that is most
appropriate for his or her needs. Following assessment, each patient admitted
into treatment receives a full medical and social history as well as a physical
examination that includes those diagnostic studies ordered by the patient's
attending physician. Throughout the course of treatment, each plan is reviewed
frequently to ensure that it continues to meet the changing needs of the
patient. The length of time spent in treatment is dependent on an individual's
needs and can range from several weeks to several months.
SOURCES OF REVENUES
During fiscal 1995, approximately 37% of the Company's operating
revenues from freestanding operations were received from private sources
(private health insurers, managed care companies and directly from patients) and
the balance from Medicare, Medicaid and other governmental programs.
Private health insurers offer plans that typically include coverage for
psychiatric and chemical dependency treatment. In many instances, the level of
coverage for psychiatric and chemical dependency benefits is less than that
provided for medical/surgical services. Lower coverage levels result in higher
co-payments by the patient, who
7
<PAGE> 8
is often unable to meet his or her commitment in its entirety or is unable to
pay as rapidly as the insurance company. This pattern tends to increase bad
debts and days outstanding in receivables.
Private insurance plans vary significantly in their methods of payment,
including cost, cost plus, prospective rate, negotiated rate, percentage of
charges, and billed charges. Health insurers have adopted a number of payment
mechanisms for the primary purpose of decreasing the amounts paid to hospitals
(including the Company's operations) for services rendered. These mechanisms
include various forms of utilization review, preferred provider arrangements
where use of participating hospitals is encouraged in exchange for a discount,
and payment limitations or negotiated rates based on community standards. The
Company believes these changing payment mechanisms will continue to have a
negative effect on its revenues and require the Company to offer a continuum of
care ranging from outpatient to intensive inpatient services.
Employers, union trusts and other major purchasers of health care
services have become increasingly aggressive in pursuing cost containment. To
the extent that major purchasers are self-insured, they actively negotiate with
hospitals, Health Maintenance Organizations ("HMOs") and Preferred Provider
Organizations ("PPOs") for lower rates. Those major purchasers that are insured
or use a third-party administrator expect the insurer or administrator to
control claims costs. In addition, many major purchasers of health care services
are reconsidering the benefits that they provide and in many cases reducing the
level of coverage, thereby shifting more of the burden to their employees or
members. Such reductions in benefits have had a negative impact on the Company's
business.
Under the Social Security Amendments Act of 1983, a prospective payment
system ("PPS") was adopted to cover routine and ancillary operating costs of
most Medicare inpatient hospital services. Under this system, the Secretary of
the United States Department of Health and Human Services ("HHS") established
fixed payment amounts per discharge based on diagnostic-related groups
("DRG's"). In general, a hospital's payment for Medicare inpatients is limited
to the DRG rate and capital costs, regardless of the amount of services provided
to the patient or the length of the patient's hospital stay. Under PPS, a
hospital may keep any excess of its prospective payment rate over its operating
costs incurred in furnishing inpatient services, but is at risk for any
operating costs that exceed its payment rate. Qualified providers of alcohol and
drug treatment services are paid under PPS. Psychiatric hospitals are exempt
from PPS. Inpatient psychiatric units within acute care hospitals are eligible
to obtain an exemption from PPS upon satisfaction of specified federal criteria.
Exempt hospitals and exempt units within acute care hospitals are subject to
limitations on the level of cost or the permissible increase in cost subject to
reimbursement under the Medicare program, including those limitations imposed
under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). No
assurance can be given that psychiatric services will continue to be eligible
for exemption from PPS or that other regulatory or legislative changes will not
adversely affect the Company's business.
The Company's four facilities currently participate in the Medicare
program. Of these, two are currently excluded from PPS (TEFRA limits are
applicable to these facilities). Medicare utilization at those facilities
participating in the Medicare program averaged approximately 50% in fiscal 1995.
The Company does not believe that the imposition of TEFRA limits or PPS has had
a material adverse impact on its business at its freestanding facilities or that
loss of exclusion from PPS at freestanding facilities would materially impact
the Company's business. During fiscal 1995, all of the Company's facilities
reflected an increase in Medicare utilization primarily due to their partial
hospitalization programs.
Hospitals participating in the Medicare program are required to retain
the services of a peer review organization ("PRO"). The PRO is responsible for
determining the medical necessity, appropriateness and quality of care given
Medicare program patients. In instances where the medical necessity of an
admission or procedure is challenged by the PRO, payment may be delayed, reduced
or denied in its entirety. Amounts denied because of medical review may not be
charged to the service recipient, and are absorbed by the hospital. In
non-emergency admissions (which encompass most of the Company's admissions)
review is performed prior to the patient's arrival at the hospital. In the event
that the patient does not meet the PRO criteria for admission, the patient may
be admitted for outpatient treatment, referred to an alternative treatment
provider or sent home. The Company believes that the existence of PROs has
reduced inpatient admissions in its facilities serving Medicare patients.
The Medicaid program is a combined federal and state program providing
coverage for low income persons. The specific services offered and reimbursement
methods vary from state to state. Less than 7% of the Company's
8
<PAGE> 9
freestanding facility revenues are derived from the Medicaid program.
Accordingly, changes in Medicaid program reimbursement are not expected to have
a material adverse impact on the Company's business.
COMPETITION AND PROMOTION
The Company's primary competitors are hospitals and hospital management
companies (both not-for-profit and investor-owned) that offer programs similar
to those of the Company. The Company has faced generally increasing competition
in the last few years. Some of the hospitals that compete with the Company are
either owned or supported by governmental agencies or are owned by
not-for-profit corporations supported by endowments and charitable contributions
enabling some of these hospitals to provide a wide range of services regardless
of cost-effectiveness.
Most patients are directed to a specific facility by their employer (or
their agent), the employer's insurance company (i.e. managed care companies), a
physician, a social services agency or another health care provider. The Company
markets its services by contracting with these referral sources. The primary
competitive factors in attracting referral sources and patients are reputation,
success record, cost and quality of care, location and scope of services offered
at a facility. The Company believes it is competitive in factors necessary for
patient attraction. The Company and its competitors also compete to attract
qualified physicians and psychiatrists and other licensed mental health
providers.
The Company maintains a public relations program designed to increase
public awareness of its treatment programs. The Company spent approximately
$400,000 for media advertising (television, radio and print) in support of its
freestanding operations during fiscal 1995 and 1994. The forms of media used are
specifically tailored to the geographic area in which the public relations
efforts are directed.
PUBLISHING ACTIVITIES
Through March 1994, the Company (under the name CompCare Publishers) was
engaged in the publication, distribution and sale of books, pamphlets and
brochures generally relating to the Company's health care activities. Literature
distributed by the Company was sold to the general public and educational
institutions. Such literature was also sold to patients participating in
programs managed by the Company. The Company did not own or operate the printing
facilities used in the publication of its literature.
In April 1994, certain assets and rights representing a material portion
of the publishing business were sold. CompCare Publishers was operating and
distributing the books and material remaining after the sale via a distribution
agreement with the buyer that expired on April 30, 1995. The Company liquidated
the remaining assets and rights. Publishing activities accounted for less than
1% of the Company's operating revenues in fiscal 1995.
GOVERNMENTAL REGULATION
The development and operations of health care facilities are subject to
compliance with various federal, state and local laws and regulations. Health
care facilities operated by the Company as well as by hospitals under contract
with CareUnit, Inc. must comply with the requirements of federal, state and
local health agencies, with state-mandated rate control initiatives, with state
certificate of need and similar laws regulating various aspects of the operation
of health facilities (including construction of facilities and initiation of new
services), and with the requirements of municipal building codes, health codes
and local fire departments. State licensing of facilities is a prerequisite to
participation in the Medicare and Medicaid programs. Legislative, regulatory and
policy changes by governmental agencies (including reduction of budgets for
payments under the Medicare, Medicaid and other state and federal governmental
health care reimbursement programs) may impact the Company's ability to generate
revenue and the utilization of its health care facilities.
Certain facilities operated by the Company are certified as providers
for Medicare and Medicaid services. Both the Medicare and Medicaid programs
contain specific physical plant, safety, patient care and other requirements
that must be satisfied by health care facilities in order to qualify under those
programs. The Company believes that the facilities it owns or leases are in
substantial compliance with the various Medicare and Medicaid
9
<PAGE> 10
regulatory requirements applicable to them. The requirements for certification
under these governmental reimbursement programs are subject to change, and in
order to remain qualified for the program, it may be necessary for the Company
to effect changes from time to time in its facilities, equipment, personnel and
services.
Under the Social Security Act, the Department of Health and Human
Services ("HHS") has the authority to impose civil monetary penalties against
any participant in the Medicare program that makes claims for payment for
services that were not rendered as claimed or were rendered by a person or
entity not properly licensed under state law or other false billing practices.
The Social Security Act also contains provisions making it a felony for health
care providers to make false statements relating to claims for payments under
the Medicare program or to make false statements relating to compliance with the
Medicare conditions of participation. In addition, the making of false claims
for payment by providers participating in the Medicare program is subject to
criminal penalty under federal laws relating generally to claims for payment
made to the federal government or any agency.
Various federal and state laws regulate the relationship between
providers of health care services and physicians. These laws include the "fraud
and abuse" provisions of the Social Security Act, under which civil and criminal
penalties can be imposed upon persons who pay or receive remuneration in return
for inducement of referrals of patients who are eligible for reimbursement under
the Medicare or Medicaid programs. Civil penalties range from monetary fines
that may be levied on a per-violation basis to temporary or permanent exclusion
from the Medicare program.
The prohibitions on inducements for referrals are so broadly drafted
that they may create liability in connection with a wide variety of business
transactions and other hospital-physician relations that have been traditional
or commonplace in the health care industry. Courts, HHS and officials of the
Office of Inspector General have construed broadly the fraud and abuse
provisions of the Social Security Act concerning illegal remuneration
arrangements and, in so doing, have created uncertainty as to the legality of
numerous types of common business and financial relationships between health
care providers and practitioners. Such relationships often are created to
respond to competitive pressures.
Limiting "safe harbor" regulations define a narrow scope of practices
that will be exempted from prosecution or other enforcement action under the
illegal remuneration provisions of the fraud and abuse law. These clarifying
regulations may be followed by more aggressive enforcement of these provisions
with respect to relationships that do not fit within the specified safe harbor
rules. Activities that fall outside of the safe harbor rules include a wide
range of activities frequently engaged in between hospitals, physicians and
other third parties. These regulations identifying business practices that do
not constitute illegal remuneration do not eliminate this uncertainty, and may
cause providers and practitioners alike to abandon certain mutually beneficial
relationships. The Company does not believe that any such claims or
relationships exist with respect to the Company.
In April 1989, the Inspector General of the Department of HHS issued a
report on financial arrangements between physicians and health care businesses.
The report contained a number of recommendations, including a prohibition of
physician referrals to any facilities in which the physician has a financial
interest. The original Stark Law (Stark I) passed in 1989 as Sec 6204 of Public
Law 101-508 in the Omnibus Budget Reconciliation Act of 1989 ("OBRA 1989") and
became effective January 1, 1992. Unless an exception is otherwise available,
Stark I forbids a physician from making a referral for which Medicare
reimbursement may be made to a clinical laboratory with which such physician has
a financial relationship, and prohibits such clinical laboratory from billing
for or receiving reimbursement from the Medicare or Medicaid programs on account
of such referral. On March 11, 1992, proposed regulations implementing the Stark
Amendment were issued, but have not been adopted by the Inspector General. The
Company believes that it is in compliance with the proposed regulations in all
material respects.
Additional legislation expanding the Stark Amendment to other physician
and health care business relationships has been passed as part of the Omnibus
Budget Reconciliation Act of 1993 ("OBRA 1993"). OBRA 1993 broadens the services
included within the referral prohibition of Stark I: a physician having a
financial relationship with an entity may not make referrals to that entity for
"designated health services", which include, in addition to clinical laboratory
services, physical therapy services; occupational therapy services; radiology or
other diagnostic services; radiation therapy services; durable medical
equipment; parenteral and enteral nutrients, equipment and supplies;
prosthetics, orthotics and prosthetic devices; home health services; outpatient
prescription drugs; and inpatient and outpatient hospital services. This law,
Stark II, expanded its application to include Medicaid, as well as Medicare
patients, and took effect January 1, 1995, with respect to referrals for the
expanded list of designated health services.
10
<PAGE> 11
Numerous exceptions are allowed under the OBRA 1993 of Stark II for
financial arrangements that would otherwise trigger the referral prohibition.
These provide, under certain conditions, exceptions for relationships involving
rental of office space and equipment, employment relationships, personal service
arrangements, payments unrelated to designated services, physician recruitment
and certain isolated transactions. A key element of the exceptions relating to
transactions between providers and physicians is that the transaction be at fair
market value (not taking into account, of course, the value to the providers of
any referrals from the physician). Other technical requirements must also be
met, such as the agreement being in writing and having a minimum term of one
year. HHS may adopt regulations in the future which expand upon the conditions
attached to qualification for these exceptions. Currently Stark II is being
actively reconsidered by the House Ways and Means Subcommittee on Health for
major amendments to the statute. A "Physician Self-Referral Improvement Act" has
been proposed by Congressman Stark. The Company's relationships with physicians
in its contract operations, as well as the Company's development of
relationships with physicians will continue to be evaluated for access to an
applicable exception and modified if necessary, to be in compliance with the law
and its exceptions, including any future regulations. The Company is unable to
predict at this time what effect, if any, Stark II and any future regulations
implementing its provisions, will have upon its business.
National health care reform capable of accelerating massive changes in
the health care marketplace is again under active consideration by the Congress.
The focus is on reforming the Medicare and Medicaid programs only, with a move
toward managed care and reduced spending. Both the House of Representatives and
the Senate have introduced proposals that would transform the Medicaid program
into a block-grant program to the states. At this time, it is not possible to
determine the exact nature of the proposals, or their legislative outcome, or
their likely impact upon institutional providers.
In addition, several states are undertaking analysis and legislation
designed to modify the financing and delivery of health care at the state level.
A wide variety of bills and regulations are pending in several states proposing
to regulate, control or alter the financing of health care costs; however, it is
not possible at this time to predict with assurance the effect on the business
of the Company, if any, of such bills or regulatory actions.
ACCREDITATION
The Joint Commission on Accreditation of Healthcare Organizations
("JCAHO") is an independent commission that conducts voluntary accreditation
programs with the goal of improving the quality of care provided in health care
facilities. Generally, hospitals including dedicated units, long-term care
facilities and certain other health care facilities may apply for JCAHO
accreditation. If a hospital under contract with CareUnit, Inc. requests a JCAHO
survey of its entire facility, the contract program, if a psychiatric or
chemical dependency program, will be separately surveyed. After conducting
on-site surveys, JCAHO awards accreditation for up to three years to facilities
found to be in substantial compliance with JCAHO standards. Accredited
facilities are periodically resurveyed. Loss of JCAHO accreditation could
adversely affect the hospital's reputation and its ability to obtain third-party
reimbursement. All of the Company's freestanding facilities are accredited and
the hospitals under contract with CareUnit, Inc. have received or have applied
for such accreditation.
To develop standards that effectively evaluate the structure and
function of medical and quality management systems in managed care
organizations, the National Committee for Quality Assurance ("NCQA") has
developed in conjunction with the managed care industry, health care purchasers,
state regulators and consumers, an extensive review and development process. The
Standards for Accreditation of Managed Care Organizations used by NCQA reviewers
to evaluate a managed care organization address the following areas: quality
improvement, utilization management, credentialing, members' rights and
responsibilities, preventative care services guidelines and medical records.
These standards validate that a managed care organization is founded on
principals of quality and is continuously improving the clinical care and
services provided. NCQA also utilizes Health Plan Data and Information Set
("HEDIS") which is a core set of performance measurements developed to respond
to complex but simply defined employer needs as standards for patient and
customer satisfaction. Comprehensive Behavioral meets the standards for NCQA
accreditation and has adopted HEDIS.
11
<PAGE> 12
ADMINISTRATION AND EMPLOYEES
In January 1995, the Company's executive and administrative offices were
relocated to Newport Beach, California, where management controls operations,
business development, legal and accounting functions, governmental and
statistical reporting, research and treatment program evaluation.
At August 9, 1995, the Company employed approximately 24 persons in its
corporate and administrative offices, 74 persons assigned to Comprehensive
Behavioral, 105 persons assigned to CareUnit, Inc., 243 persons in its
freestanding facilities and 2 persons in other operations. Many of the
physicians and psychiatrists who are the medical directors of the Company's
contract units, the psychologists serving on treatment teams and the physicians
utilizing the facilities operated by the Company were not previously employed by
the Company and were treated as independent contractors. As part of the
Company's settlement with the Internal Revenue Service (see Note 15--
"Commitments and Contingencies") each of these individuals must comply with
certain criteria in order to remain classified as an independent contractor. The
Company has not encountered any work stoppages due to labor disputes with its
employees.
ITEM 2. PROPERTIES.
The following table sets forth certain information regarding the
properties owned or leased by the Company at May 31, 1995:
<TABLE>
<CAPTION>
OWNED OR LEASE MONTHLY
NAME AND LOCATION LEASED(1) EXPIRES(2) RENTAL(3)
----------------- --------- ---------- ---------
<S> <C> <C> <C>
PSYCHIATRIC/CHEMICAL DEPENDENCY FREESTANDING TREATMENT FACILITIES
CareUnit Hospital (4) . . . . . . . . Owned --- ---
Fort Worth, Texas
CareUnit Hospital . . . . . . . . . . Leased 2035 $16,106(5)
Kirkland, Washington
CareUnit Facility (6) . . . . . . . . Owned --- ---
Jacksonville Beach, Florida
CareUnit Hospital (10) . . . . . . . . Owned --- ---
Cincinnati, Ohio
Starting Point, Orange County . . . . Owned --- ---
Costa Mesa, California
Aurora Behavioral Health Hospital (10) Owned --- ---
Aurora, Colorado
CareUnit Facility (7) . . . . . . . . Owned --- ---
San Diego, California
OTHER OPERATING FACILITIES
CareUnit, Inc. . . . . . . . . . . . . Leased 1996 2,278
Chesterfield, Missouri
CompCare Publishers (8) . . . . . . . Leased 1997 3,009
Minneapolis, Minnesota
Comprehensive Behavioral Care, Inc.
Tampa, Florida . . . . . . . . . . Leased 1995 7,435
Las Vegas, Nevada . . . . . . . . . Leased 1995 1,997
Ft. Lauderdale, Florida . . . . . . Leased 1995 586
South Bend, Indiana . . . . . . . . Leased 1997 1,027
ADMINISTRATIVE FACILITIES
Corporate Headquarters (9) . . . . . . Leased 1995 5,037
Newport Beach, California
Data Processing Center (9) . . . . . . Leased 1997 3,882
Riverside, California
</TABLE>
-------------------------
(1) Subject to encumbrances. For information concerning the Company's
long-term debt, see Note 10 to the Company's consolidated financial
statements contained in this report.
12
<PAGE> 13
(2) Assumes all options to renew will be exercised.
(3) All leases, other than those relating to the Company's administrative
facilities, are triple net leases under which the Company bears all
costs of operations, including insurance, taxes and utilities. The
Company is responsible for specified increases in taxes, assessments and
operating costs relating to its administrative facilities.
(4) Closed January 1995. The Company intends to sell this property.
(5) Subject to increase every three years based upon increases in the
Consumer Price Index, not to exceed 10%.
(6) Closed February 1992. The Company intends to sell this property.
(7) Closed December 1989. The Company intends to sell this property.
(8) Office/operation sold in April 1994; Company has sublet this property.
(9) This lease was converted to month-to-month.
(10) Encumbered by a lien securing payment of a $2.0 million note due January
9, 1997.
ITEM 3. LEGAL PROCEEDINGS.
On October 30, 1992, the Company filed a complaint in the United States
District Court for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare") seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost
benefit of certain stockholder appreciation rights in an amount in excess of
$3.6 million and punitive damages. RehabCare filed a counterclaim in the case
seeking a declaratory judgement with respect to the rights of both parties under
the Stock Redemption Agreement, an injunction enjoining the Company from taking
certain action under the Stock Redemption or Restated Shareholders Agreements
and damages in the form of attorneys' fees and costs allegedly incurred by
RehabCare with respect to its issuance of certain preferred stock and with
respect to prior litigation between the parties. The case was tried before a
jury commencing on February 21, 1995. Prior to the presentation of evidence to
the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8,
1995, the jury returned its verdict awarding the Company $2,681,250 in damages,
plus interest and the costs of the action against RehabCare for securities fraud
and for breach of contract. RehabCare has posted a bond in the amount of $3.0
million, and filed a motion for new trial or in the alternative, for
judgement as a matter of law, which the court denied its entirety on August 4,
1995. On September 1, 1995, RehabCare filed a notice of appeal with the District
Court indicating its intent to appeal the matter to the United States Court of
Appeals. Although the Company feels that RehabCare will not prevail in its
appeal, the Company has not recognized any gain with relation to the judgement.
In connection with the proposed sale and lease-back of hospitals to CMP
Properties, Inc., a real estate investment trust, the Company advanced $1.1
million to its financial advisor in fiscal 1992. The financial advisor was
affiliated with several members of the Company's Board of Directors at that
time. The advances, which were to be repaid if the transaction was not
completed, were to be secured by a pledge of common stock in an unrelated
company. The pledged shares of common stock were in the possession of the
Company's primary legal counsel at that time, as collateral for the advances.
After the transaction was terminated, the financial advisor refused to repay the
advances and the Company's legal counsel refused to turn over the collateral to
the Company. The Company has filed an action in the United States District Court
for the District of Oregon (Civil Case No. 94-384 FR) against its former
financial advisor and former legal counsel to recover the advances. The former
financial advisor has counterclaimed against the Company for $1,688,000 for
breach of contract and unjust enrichment. The Company's former law firm has
filed a counterclaim for $193,000 for unpaid legal fees. Management believes
that the counterclaims are without merit and intends to vigorously defend
against them and to pursue the Company's claims.
On June 8, 1994, RehabCare filed a lawsuit against the Company in the
Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement
entered into between the Company and RehabCare in May 1991 (Case No. 663957). An
amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges
that it has incurred attorneys fees in connection with the settlement of certain
tax issues with the IRS and has paid the IRS a settlement amount with respect to
the years 1987 and 1988. RehabCare seeks the recovery from the Company of
$588,000, plus interest, which RehabCare alleges is the amount it incurred for
payments to the IRS in settlement and attorneys fees it incurred in dealing with
the IRS. The Company has filed its answer and affirmative defenses contesting
the right of RehabCare to obtain the relief it seeks. Discovery is ongoing.
Until such discovery is complete, it is not possible to predict the likely
outcome of the lawsuit. The Company intends to continue to vigorously defend
this matter.
13
<PAGE> 14
Other Litigation
In December 1994, the Company reached a settlement with the Appeals
Office of the Internal Revenue Service ("IRS") on the payroll tax audit for the
calendar years 1983 through 1991 pursuant to which the Company agreed to pay the
IRS $5.0 million with the Company having no obligation to pay any penalties or
accrued interest. The IRS agent conducting the audit asserted that certain
physicians and psychologists and other staff engaged as independent contractors
by the Company should have been treated as employees for payroll tax purposes.
The settlement was reviewed and accepted on behalf of the IRS by its district
counsel. Payment terms have been accepted at 50% within 90 days of finalization
with the remainder financed over the next five years. In March 1995, the Company
paid $350,000 to the IRS against the initial payment due. In return, the IRS
granted the Company an additional 120 days to pay the remaining balance of
$2,150,000. In July 1995, the Company paid the remaining balance of the initial
payment, and continues to make the monthly installment payment pursuant to the
terms of the settlement. The unpaid balance bears interest at 9% per annum due
and payable after the $5.0 million is paid.
The Federal income tax returns of the Company for its fiscal years ended
1984 and 1987 through 1991 were examined by the IRS resulting in a disallowance
of approximately $229,000 in deductions which were offset against the Company's
net operating losses available for carryover. The examination also included the
review of the Company's claim for refund of approximately $205,000 relating to
an amended return for the fiscal year ended May 31, 1992. During completion of
the audit, the IRS noted that the Company had received excess refunds
representing its alternative minimum tax ("AMT") liability of approximately
$666,000 in 1990 and 1991 from the carry back of net operating losses to the
fiscal years ended May 31, 1988 and 1989, respectively. On March 29, 1994, the
Company agreed to the assessment of $666,000 plus interest and received the
final bill of $821,000 during the fourth quarter of fiscal 1994. The Company
paid the assessment including interest during the third quarter of fiscal year
1995. The Company will no longer report on this issue.
An involuntary bankruptcy petition was dismissed on March 6, 1995
pursuant to an agreement dated March 3, 1995 between the Company and a
representative of the petitioners. Under such agreement the Company has agreed,
subject to the conditions therein, to offer to exchange for its outstanding 7
1/2% Convertible Subordinated Debentures with a combination of cash and shares.
See Note 10-- "Long-Term Debt and Short-Term Borrowings" for a discussion of the
Company's default in the payment of interest on its 7 1/2 % Convertible
Subordinated Debentures and the consequent acceleration of the full principal
amount thereof. The foregoing is intended to disclose an event, and does not
constitute an offer to the holders of the Company's Debentures. Any such offer
may only be made pursuant to an exchange offer, and in conformity with the
relevant securities laws, rules and regulations.
In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criterion
in regard to net tangible assets available to common stock and three year
average net income among others. The Listing and Compliance Committee of the
NYSE has determined to monitor the Company's progress toward returning to
continuing listing standards. Management anticipates success in "global
restructuring" (see Note 2-- "Operating Losses and Liquidity") will be necessary
in order to satisfy the Committee of the Company's progress. The Company met
with representatives of the NYSE during the third quarter of fiscal 1995 and
during the first quarter of fiscal 1996, to discuss the Company's financial
condition and intention to issue shares without seeking approval of shareholders
pursuant to the exception to the NYSE policy for financially distressed
companies.
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 some pending cases, claims exceed insurance policy limits and the
Company or a subsidiary may have exposure to liability that is not covered by
insurance. Management believes that the outcome of such lawsuits will not have a
material adverse impact on the Company's financial statements.
EXECUTIVE OFFICERS OF THE COMPANY
CHRISS W. STREET, age 45. Mr. Street has been employed by the Company
since May 1994. Mr. Street was named interim Chief Executive Officer on May 4,
1994 and in June 1994, he was appointed Chief Executive Officer of the Company.
Mr. Street was elected as Chairman of the Board of Directors in November
14
<PAGE> 15
1993. In February 1995, Mr. Street was elected as a director for Micropolis
Corporation, where he also serves as Chairman of the compensation committee. In
addition, in August 1995, Mr. Street was elected as a director of Nu-Tech Bio
Med, Inc. where he also serves on the stock option committee. Mr. Street is
founder and sole stockholder of Chriss Street & Company, a firm specializing in
investment banking, financial advisory services, securities trading and
factoring. Mr. Street commenced operations of Chriss Street & Company in
February 1992 and was Managing Director for Seidler-Amdec Securities, Inc. from
1988 to 1992.
DREW Q. MILLER, age 42. Mr. Miller has been employed by the Company
since November 1994. In November 1994, Mr. Miller was appointed Vice President -
Acquisitions and Development. In December 1994, Mr. Miller was appointed Chief
Financial Officer and in January 1995 was appointed interim Chief Operating
Officer. In July 1995, Mr. Miller was appointed Chief Operating Officer. Prior
to his employment with the Company, Mr. Miller was President of Alternative
Psychiatric Centers, Inc., which was purchased by the Company in February 1995.
Prior to his employment in April 1993 with APC, Mr. Miller was Chief Financial
Officer for Concept Psychiatric Health Group, Inc. commencing in July 1989.
KERRI RUPPERT, age 36. Ms. Ruppert has been employed by the Company
since 1988. In October 1992, she was appointed Vice President and Chief
Accounting Officer, and in January 1993, she was elected Secretary of the
Company and Treasurer in November 1994. She was Vice President and Controller
from April 1990 to 1992 and Assistant Corporate Controller from 1988 to 1990.
Prior to her employment with the Company, she served in a variety of financial
management positions with Maxicare Health Plans, Inc. from 1983 to 1988.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock is traded on the New York Stock Exchange
under the symbol CMP. The following table sets forth the range of high
and low sale prices for the Common Stock for the fiscal quarters
indicated:
<TABLE>
<CAPTION>
PRICE
-----
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C>
1994:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $11 1/4 $6 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 8 3/4 6 1/4
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 12 1/2 5
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 8 3/4 5
</TABLE>
<TABLE>
<CAPTION>
PRICE
-----
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C>
1995:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $8 3/4 $2 1/2
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 7 3/4 5
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 9 3/8 5 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 8 3/4 5
</TABLE>
(b) As of July 31, 1995, the Company had 1,929 stockholders of record of
Common Stock.
(c) No cash dividend was declared during any quarter of fiscal 1995, 1994 or
1993, a result of the Company's operating losses and restrictions
contained in the Company's primary loan agreement and 7 1/2% Convertible
Subordinated Debentures due 2010. The Company does not expect to resume
payment of cash dividends in the foreseeable future. See Item 7,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS".
(d) On May 16, 1994, the stockholders of the Company approved an amendment
to the Company's Certificate of Incorporation to effect a reverse stock
split of one share for each ten or fewer shares of the Company's Common
Stock, with the specific ratio to be selected by the Board of Directors.
The stockholders also approved amendments to the Certificate of
Incorporation reducing the par value of the Company's Common Stock to
$.01 per share and reducing the number of authorized shares of Common
Stock to five times the number of shares outstanding, reserved or
otherwise committed for future issuance but not less than 12.5 million.
The reverse stock split and amendments to the Certificate of
Incorporation were to become effective on any date selected by the Board
of Directors prior to February 16, 1995.
The Board of Directors effected a one-for-ten reverse stock split
effective October 17, 1994. On the effective date of the reverse stock
split, the Company's Certificate of Incorporation was amended to reduce
the par value of the Common Stock to $.01 per share and to reduce the
number of authorized shares of Common Stock to 12.5 million. All share
and per share information contained in this Form 10-K reflect the effect
of the reverse stock split, which is to reduce the number of shares set
forth by a factor of ten, with each stockholder's proportionate
ownership interest remaining constant, except for payment in cash in
lieu of fractional shares.
(e) In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing
criterion in regard to net tangible assets available to common stock and
three year average net income. The Listing and Compliance Committee of
the NYSE has determined to
16
<PAGE> 17
monitor the Company's progress toward returning to continuing listing
standards. Management anticipates success in "global restructuring" (see
Note 2-- "Operating Losses and Liquidity") will be necessary in order to
satisfy the Committee of the Company's progress. The Company met with
representatives of the NYSE during the third quarter fiscal 1995 and
first quarter of fiscal 1996 to discuss the Company's financial
condition and intention to issue shares without seeking approval of
shareholders. No assurance can be given as to the actions that the NYSE
may take or that the steps of the restructuring will be successfully
completed.
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA.
The following tables summarize selected consolidated financial data and
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this report. Reclassification of prior year
amounts have been made to conform with the current year's presentation. See Item
7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" for a discussion of recent results of operations and liquidity.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues and gains:
Operating revenues, net . . . . . . . . . . . $29,282 $34,277 $51,847 $59,969 $84,689
Gain on sale of RehabCare stock, net . . . . --- --- 13,114 17,683 ---
Gain on Sovran settlement net . . . . . . . --- --- 584 --- ---
Interest income . . . . . . . . . . . . . . . 38 50 69 336 531
Equity in earnings(loss) of unconsolidated
affiliates . . . . . . . . . . . . . . . . --- --- 384 168 (1,289)
-------- -------- -------- -------- --------
29,320 34,327 65,998 78,156 83,931
======== ======== ======== ======== ========
Costs and expenses:
Operating expenses . . . . . . . . . . . . . 31,497 31,875 50,924 38,810 65,362
General and administrative expenses . . . . . 4,331 5,455 5,754 12,946 21,267
Provision for doubtful accounts . . . . . . . 1,423 1,558 6,187 6,065 4,759
Depreciation and amortization . . . . . . . . 1,797 1,762 2,946 2,602 3,580
Loss on sale/write-down of assets . . . . . . 259 --- 4,382 15,986 5,863
Interest expense . . . . . . . . . . . . . . 1,366 1,228 1,759 3,908 7,380
Other restructuring/non-recurring expenses . --- --- 5,452 2,152 2,819
-------- -------- -------- -------- --------
40,673 41,878 77,404 82,469 111,030
======== ======== ======== ======== ========
Loss before income taxes . . . . . . . . . . . . (11,353) (7,551) (11,406) (4,313) (27,099)
Provision(benefit) for income taxes . . . . . . . 180 301 194 249 401
-------- -------- -------- -------- --------
Loss before extraordinary item . . . . . . . . . (11,533) (7,852) (11,600) (4,562) (27,500)
======== ======== ======== ======== ========
Extraordinary item - gain on debenture
conversion . . . . . . . . . . . . . . . . . --- --- --- --- 11,465
Net loss . . . . . . . . . . . . . . . . . . . . $(11,533) $(7,852) $(11,600) $(4,562) $(16,035)
======== ======== ======== ======== ========
Loss per common and common
equivalent share:
Loss before extraordinary item . . . . . . . $(5.11) $(3.57) $(5.28) $(2.08) $(22.69)
Extraordinary item - gain on debenture
conversion . . . . . . . . . . . . . . . . --- --- --- --- 9.46
-------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . $(5.11) $(3.57) $(5.28) $(2.08) $(13.23)
======== ======== ======== ======== ========
Cash dividends per share . . . . . . . . . . . . $ --- $ --- $ --- $ --- $ ----
Weighted average common and common ======== ======== ======== ======== ========
equivalent shares outstanding . . . . . . . . 2,257 2,199 2,196 2,190 1,212
</TABLE>
------------------------------
<TABLE>
<CAPTION>
AS OF MAY 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital(deficit) . . . . . . . . . . . . $(15,342) $ 412 $ 438 $11,901 $11,221
Total assets . . . . . . . . . . . . . . . . . . 26,001 33,226 46,968 70,422 99,084
Long-term debt . . . . . . . . . . . . . . . . . 5,077 10,477 10,652 10,375 28,078
Stockholders' equity(deficit) . . . . . . . . . . (4,933) 5,099 12,951 24,441 28,976
</TABLE>
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Company entered fiscal 1995 with a new business strategy that
specifically addressed the threat of being liened by the Internal Revenue
Service ("IRS") for tax liabilities primarily related to independent contractor
issues. Although the Company has name recognition as a quality provider of
traditional inpatient chemical dependency treatment, insurance reimbursement per
length of stay for inpatient treatment had decreased over the last five years as
a result of "managed care's" focus on outpatient services as the "most
appropriate treatment."
The Company's poor financial performance over the prior five years had been
also exacerbated due to a series of tumultuous events including:
- A failed merger in 1989.
- Movement of the Company's headquarters from California to
Missouri in 1989.
- A proxy fight in 1990 which eliminated most of the health care
expertise from the board of directors.
- Prior management's reliance on the sale of productive CareUnit,
Inc. assets to offset hospital operating losses.
- Five different presidents over the past five years.
In early fiscal 1995, Management developed a "global restructuring" plan
intended to address the Company's immediate challenges and to build a base for
future success. Management intended that this "global restructuring" include as
many of the following steps as possible: (i) effect a reverse stock split to
improve the Company's image; (ii) negotiate settlement of the Company's payroll
tax audit with the IRS; (iii) restructure the Company's financial obligations
represented by the Company's Debentures; and (iv) raise capital to finance the
restructuring costs.
The Company suffered significant operating losses and non-recurring charges
during fiscal 1995, including almost $1.0 million in legal fees as the Company
aggressively moved to restructure its balance sheet and operations. However,
management was successful in completing many of the global restructuring steps.
In October 1994, the Company implemented a one-for-ten reverse stock split. In
December 1994, the Company finalized the settlement of the Company's outstanding
payroll and income tax audits with the IRS. In January 1995, the Company issued
a Secured Convertible Note in the amount of $2.0 million and in February and
April 1995, the Company made private offerings of common stock which provide for
some of the necessary and immediate equity capital infusion to the Company. In
March 1995, the Company entered into a letter of agreement intended to
restructure the Company's outstanding Debentures. In addition, in March 1995,
the Company received a legal judgement in its favor for $2.7 million. In May
1995, the Company received a $1.0 million investment in its subsidiary that also
includes an ongoing contractual relationship. A more detailed description of
these transactions is set forth below.
In December 1994, the Company reached a final settlement with the IRS on the
payroll tax audit (see Note 15-- "Commitment and Contingencies") pursuant to
which the Company will pay the IRS an aggregate of $5.0 million, with the
Company having no obligation to pay any penalties or accrued interest. Payment
terms have been accepted at 50% within 90 days (extended an additional 120 days)
of finalization with the remaining balance financed over the next five years. In
March 1995, the Company paid $350,000 to the IRS against the initial payment
due. The Company paid the remaining balance of the initial payment of $2,150,000
on July 10, 1995. This obligation was paid with the balloon payment received
pursuant to the Company's note receivable related to the sale of its facility in
Sacramento, California. Among other terms, the note provided for a lump sum
payment to the Company of $2,750,000 on or before July 11, 1995. The Company
commenced monthly installment payments to the IRS in April 1995. The Company had
received excess refunds representing its alternative minimum tax (AMT) liability
of approximately $666,000 for 1990 and 1991 from the carry back of net operating
losses to the fiscal years ended May 31, 1988 and 1989. In January 1995, the
Company paid the IRS $821,000 related to the Federal income tax audit. The
Company has filed its fiscal 1995 Federal tax return which included a refund
claim to the Company for $9.4 million (see Note 12-- "Income Taxes"). In
addition, the Company has filed amended Federal tax returns for fiscal 1986,
1985, 1983 and 1982. The aggregate amount of refund claimed on such amended
returns is approximately $13.2 million for a total of approximately $22.6
million. No assurance can be given that the IRS will approve or process any
refunds claimed by the Company.
On January 5, 1995, the Company issued a $2.0 million Secured Convertible
Note due January 9, 1997 to a business trust. The Note is secured by first
priority liens on two of the Company's operating hospital properties
19
<PAGE> 20
(see Note 10-- Long-Term Debt and Short-Term Borrowings). On February 1, 1995,
the Company sold an aggregate of 100,000 shares of common stock to one
accredited investor in a private offering for an aggregate purchase price of
$600,000 paid in cash on February 7, 1995. Such agreement was amended in June
1995 for an additional 15,000 shares as an adjustment for delay in registration
of shares without additional payment. On April 15, 1995, the Company sold an
aggregate of 150,000 shares of common stock to an accredited investor in a
private offering for an aggregate purchase price of $975,000 paid in cash on
April 18, 1995. Commissions and fees related to the private placements were
approximately $72,000 for net proceeds of $1,503,000. It is the Company's intent
to amend this agreement for an additional 22,500 shares as an adjustment for
delay in registration of shares without additional payment. In addition, during
the first quarter of fiscal 1996, the Company entered into three private
placements for 155,000 shares of common stock for an aggregate purchase of
$930,000. The proceeds were used to pay costs of closing unprofitable or under
performing operations, working capital and other general corporate purposes.
The Company did not make its payment of interest on its Debentures when such
payment was scheduled on October 17, 1994. In early February 1995, a group of
holders and purported holders of the Debentures gave notice of acceleration of
the entire amount of principal and interest due under the Debentures, and on
February 24, 1995, a subset of such persons filed an involuntary petition in the
United States Bankruptcy Court for the Northern District of Texas under Chapter
7 of the U.S. Bankruptcy Code. On March 3, 1995, the Company entered into a
letter agreement with a representative of the holders of the Debentures who had
taken such actions. The agreement provides for a consensual, out-of-court
resolution that the Company's Board of Directors has approved as in the best
interests of the Company, its stockholders and other stakeholders. The holders'
representative agreed to use best efforts to provide notices of waiver of the
interest non-payment default, notices of rescission of the Debenture
acceleration and the effects thereof, and consent to the immediate dismissal of
the involuntary Chapter 7 petition. In return, the Company has agreed to provide
an opportunity to holders of Debentures to tender their Debentures to the
Company pursuant to an exchange offer to be made by the Company to the holders
of the Debentures. The offer consideration will consist of $500 in cash and $120
worth in shares of Common Stock at a defined value per each $1,000 in face
amount of Debentures. Tendering holders will not receive interest calculated
from and after April 15, 1994 (which includes the October 17, 1994 and April 17,
1995 payments) and in lieu of calculated interest will receive an interest
payment of $80 per $1,000 face amount of Debentures. The maximum amount in cash
necessary to exchange for 100% of the outstanding Debentures would be
approximately $5,500,000. Among the factors affecting the anticipated exchange
offering are the various conditions to the consummation of the offer and the
ability of the Company to finance the cash payment necessary. Therefore, no
assurance can be made that the exchange offer will be successfully completed.
Failure to consummate the Debenture exchange offer may result in the Company
considering alternative actions including filing for voluntary protection from
creditors. The Company believes that the recovery to its security holders would
be less in a bankruptcy case than the recovery that may be achieved under the
consensual, out-of-court arrangement the Company has reached. In addition, the
agreement provides for a pledge of all of the shares of CareUnit, Inc. to secure
the Company's obligation to purchase Debentures, pursuant to the exchange or
otherwise; and failure to complete an exchange could result in a foreclosure
sale of such shares. The foregoing is intended to disclose an event, and does
not constitute an offer to the holders of the Company's Debentures. Any such
offer may only be made pursuant to an exchange offer, in conformity with the
relevant securities laws, rules and regulations.
In March 1995, the Company was awarded a legal judgement in the amount of
$2.7 million against its former subsidiary, RehabCare Corporation (see Note 15--
"Commitments and Contingencies"). RehabCare has posted a bond in the amount of
$3.0 million and filed a notice of appeal on September 1, 1995. Although the
Company feels that RehabCare will not prevail with the appeal, the Company has
not recognized any gain with relation to this judgement. The Company is unable
to predict whether any proceeds from this judgement would be forthcoming
during fiscal year 1996.
In February 1995, the Company purchased certain assets from Alternative
Psychiatric Centers, Inc. ("APC") a contract management company based in
Southern California (see Note 3-- "Acquisitions and Dispositions"). APC
contracts contributed 11% of CareUnit's total operating revenues during fiscal
1995 although these contracts were only in effect for four months during fiscal
1995.
In April 1995, the Company agreed to issue to American Mental Health Care,
Inc. ("AMH") 44,054 shares of the Company's Common Stock in return for a
one-year management contract between Comprehensive Behavioral and AMH (see Note
3-- "Acquisitions and Dispositions"), and one-third of the shares of AMH on a
fully-diluted basis. This transaction will allow the Company to provide services
on a capitated basis to approximately 82,000
20
<PAGE> 21
lives in the Tampa, Florida area. The Company has an option to acquire the
remaining two-thirds of AMH for 132,162 shares of Common Stock.
In May 1995, the Company's subsidiary, Comprehensive Behavioral, received a
cash infusion from Physicians Corporation of America ("PCA"), of $1.0 million in
return for 13 1/2% of the voting power of Comprehensive Behavioral represented
by all of the Series A Preferred Stock of Comprehensive Behavioral exchangeable
at the option of PCA for 100,000 shares of the Company's Common Stock (see Notes
3 and 14-- "Acquisitions and Dispositions" and "Stockholders' Equity"). In
addition, PCA was granted a first right of refusal regarding any sale of
Comprehensive Behavioral. As a key to the agreement, so long as PCA remains an
equity holder of Comprehensive Behavioral, PCA and its subsidiaries are required
to negotiate in good faith to contract with Comprehensive Behavioral for the
delivery of mental health services in all PCA service areas where Comprehensive
Behavioral has an adequate network. In addition, Comprehensive Behavioral will
provide services on a capitated basis to 220,000 of PCA's approximately 700,000
members effective June 1, 1995.
In the past several years, the Company has been funding the operating losses
and cash flow needs of its subsidiary, Comprehensive Behavioral. Given the above
transactions, including the investment of PCA, this subsidiary has attained a
positive cash flow during the early part of fiscal 1996 and, as a result,
management anticipates that this subsidiary will be in position to fund its
operations.
RESULTS OF OPERATIONS - FISCAL 1995 (COMPARED WITH FISCAL 1994)
The Company incurred a loss of approximately $11.5 million or $5.11 per share
for the fiscal year ended May 31, 1995, which was a deterioration of $3.6
million or $1.54 per share more than the $7.9 million or $3.57 loss per share in
the prior year.
During fiscal 1995, operating revenues declined $5.0 million or 15% from
fiscal 1994, primarily as a result of the closure of two freestanding facilities
during fiscal 1995 and the continued decline in census experienced by the
remaining freestanding operations. The decline in the freestanding operations
revenue during fiscal 1995 of $6.0 million or 25% was partially offset by an
increase in managed care revenues. Managed care revenues increased by $2.1
million or 65% during fiscal 1995 as compared to the prior year.
Operating expenses decreased slightly during fiscal 1995. The decrease in
operating expenses experienced by freestanding facilities of $1.5 million or 7%
was offset by a 47% or $2.2 million increase in managed care operating expenses.
General and administrative expenses declined by $1.1 million or 20% primarily as
a result of management's continued efforts to reduce corporate overhead
expenses. Included in general and administrative expenses is approximately $1.0
million in legal fees. During fiscal 1995, the Company relocated its corporate
headquarters from Missouri to Southern California. The Company estimates this
relocation, and the consolidation of administrative offices, eliminated a
portion of ongoing corporate burden, which is estimated to be $1.2 million
during fiscal 1995 and 1996. During fiscal 1995, the Company recorded $0.3
million for the loss on the sale/write-down of assets. This loss is primarily
attributable to the write-off of leasehold improvements on locations no longer
owned or operated by the Company.
Interest expense increased by $0.1 million or 11% primarily as a result of
the addition of interest related to the secured convertible note of $2.0 million
and the IRS Offer in Compromise originally for $5.0 million, (see Note 10--
"Long-Term Debt and Short-Term Borrowings"), both of which were added during
fiscal 1995.
The Company's provision for income taxes declined by $0.1 million or 40%.
This decline is primarily a result of the decrease in state income and franchise
taxes payable as the Company withdraws from states in which it is no longer
doing business and the dissolution of corporate entities no longer operating or
whose operations have been sold or dissolved in prior years.
The Company's current assets decreased by $7.1 million or 47% during fiscal
1995 to $8.0 million from $15.1 million in fiscal 1994. This decrease is
primarily due to the sale during fiscal 1995 of two freestanding facilities and
another property, and the write-off of an additional property, which was
classified as current assets held for sale as of May 31, 1994 for approximately
$5.4 million and the use of cash proceeds to fund operating losses. During
fiscal 1995, the Company's freestanding facility in Fort Worth, Texas was closed
due to poor performance. This facility has been classified with non-current
assets held for sale at May 31, 1995. Other non-current assets held for sale
includes two additional properties which are expected to be sold in the next
fiscal year, however,
21
<PAGE> 22
contracts for sale have not been fully negotiated. In addition, the Company's
lease ended at its Grand Rapids, Michigan facility. These operations were moved
to another location in April 1995 (see Note 3-- "Acquisitions and
Dispositions").
The Company's current liabilities increased during fiscal 1995 by $8.7
million or 59% to $23.4 million from $14.7 million in fiscal 1994. Included in
current liabilities is long-term debt in default which represents the $9.5
million of Debentures. The Debentures were previously classified as long-term
debt, however, the Company did not make its payment of interest on the
Debentures when such payment was scheduled (see Note 10-- "Long-Term Debt and
Short-Term Borrowings"), and, as a result, the Debentures are in default and the
holders have accelerated the entire principal amount. The Company has agreed to
use best efforts to provide an opportunity to holders of the Debentures to
tender their Debentures pursuant to an exchange offer to be made by the Company
to the holders of the Debentures. Failure to consummate the Debenture exchange
offer or rescind acceleration of the Debentures when contemplated may result in
the Company considering alternative actions including filing for voluntary
protection from creditors. Included in current maturities of long-term debt is
approximately $2.7 million related to the Company's obligation pursuant to its
settlement agreement with the IRS. Income taxes payable declined by $0.4 million
during fiscal 1995 as a result the Company's payment of $0.8 million for the IRS
assessment related to AMT (see Note 15-- "Commitments and Contingencies").
Long-term debt declined by $5.4 million or 51% from the prior fiscal year.
This decline is attributable to the $9.5 million in Debentures which has been
classified as current as of May 31, 1995, offset by the addition of the secured
convertible note and IRS settlement (see Note 10-- "Long-Term Debt and
Short-Term Borrowings"). Other non-current liabilities decreased in fiscal 1995
by $1.5 million or 50% to $1.5 million from $3.0 million in fiscal 1994. This
decline is attributable to the IRS settlement which was reclassified as
long-term debt during fiscal 1995. Minority interests at May 31, 1995,
represents the investment by PCA in Comprehensive Behavioral (see Note 14--
"Stockholders' Equity").
Managed Care Operations
During fiscal 1995, the number of covered lives increased by 113% from fiscal
1994. This increase is primarily attributable to new contracts added during
fiscal 1995 and the additional lives related to the American Mental Health Care,
Inc. ("AMH") one-year management contract with an option to acquire AMH for
Common Stock (see Note 3-- "Acquisitions and Dispositions"). Comprehensive
Behavioral attempts to distinguish itself from its competition by endeavoring to
be a "science-based" provider of care and manages all clinical programs based
upon what management believes are proven treatment technologies.
The following table reflects covered lives by major product provided:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Carve-out (capitated) . . . . . . . . . . . . . . . . . . . . . . 357,275 175,707
Blended products . . . . . . . . . . . . . . . . . . . . . . . . 4,491 3,334
EAP services . . . . . . . . . . . . . . . . . . . . . . . . . . 81,180 28,524
------- -------
Total covered lives . . . . . . . . . . . . . . . . . . . . 442,946 207,565
======= =======
</TABLE>
Comprehensive Behavioral contracts with a variety of sources on a capitated
basis. The Company attempts to control its risk by entering into contractual
relationships with health care providers, including hospitals and physician
groups on a sub-capitated, discounted fee-for-service or per case basis. The
Company's contracts typically exclude capitation risk for chronic care patients.
In fiscal 1995, operating revenue increased $2.2 million or 65% from fiscal
1994 which is attributable to new contracts added during fiscal 1995. In
addition, during fiscal 1994, Comprehensive Behavioral was in its growth stage
and still considered a start-up venture. Operating expenses increased by $2.4
million to $7.2 million or 51% in fiscal 1995 which is primarily a result of
restructuring which occurred during fiscal 1995, and an increase in the costs
associated with the expansion and development of new contracts. Also, fiscal
1995 results include a one time legal settlement of $0.2 million. Although
Comprehensive Behavioral experienced an increase in operating revenue
22
<PAGE> 23
during fiscal 1995, it was more than offset by the increase in total operating
expenses resulting in a net operating loss of $2.1 million, an increase in
Comprehensive Behavioral's net operating loss of 10% or $0.2 million from fiscal
1994.
Contract Operations
During fiscal 1995, patient days of service under CareUnit, Inc. contracts
declined by approximately 26% from 39,103 patient days to 29,082 patient days.
This decline is attributable to the five units which were closed during fiscal
1995, a decline in length of stay and increased influence of managed care. Of
the units closed, one contract was terminated by CareUnit, Inc. for poor
operating performance. The remaining four closures were terminated by the
contracting hospitals upon expiration of their term. The Company believes that
these non-renewals were influenced primarily by increased competition and
changes in reimbursement patterns by third-party payers. During fiscal 1995,
CareUnit, Inc. opened seven new contracts, of which three were partial
hospitalization programs. During fiscal 1995, CareUnit's operating revenue
declined by $0.1 million or 2% while operating expenses increased by 10% from
the prior year resulting in a decrease in net operating income of $0.7 million
from the prior year. The increase in operating expenses is primarily
attributable to the increased costs associated with the seven units added during
fiscal 1995. Traditionally, marketing and start-up costs for new programs
average approximately $25,000 per unit.
The following table sets forth quarterly utilization data on a "same store"
basis:
<TABLE>
<CAPTION>
Same Store Utilization
-----------------------------------------------------------------------------
Fiscal 1995 Fiscal 1994
------------------------------------ -----------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Admissions . . . . . . . . 715 647 706 721 708 629 618 625
Average length of stay . . 7.3 8.0 8.3 8.0 8.6 8.4 8.9 10.1
Patient days . . . . . . . 5,232 5,181 5,872 5,738 6,054 5,256 5,476 6,284
Average occupancy rate . . 45% 46% 51% 49% 55% 51% 54% 61%
</TABLE>
Units which were operational for both fiscal years experienced an 8%
increase in admissions which, when offset by the decrease in length of stay,
resulted in a 5% decline in utilization to 22,023 patient days. Since average
net revenue per patient day at these units increased by $6, net inpatient
operating revenues increased slightly to $2.4 million. An additional $0.7
million was generated by units closed during the fiscal year. During fiscal
1995, outpatient revenues increased 21% in fiscal 1995. This increase is
primarily attributable to one unit's increase in utilization which was twice the
prior year. In addition, partial hospitalization programs contributed 10% of
total revenue during fiscal 1995.
The following table illustrates the revenues in outpatient and daycare
programs offered by nine contract units on a "same store" basis:
<TABLE>
<CAPTION>
Net Outpatient/Daycare Revenues
----------------------------------------------------------------------------
(Dollars in thousands)
Fiscal 1995 Fiscal 1994
----------------------------------- ----------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Facilities offering . . . . 9 9 9 9 9 9 9 9
Net outpatient/daycare
revenues . . . . . . . . $344 $327 $323 $285 $287 $274 $232 $245
% of total "same store"
net operating revenues . 22% 27% 26% 22% 21% 22% 18% 17%
</TABLE>
23
<PAGE> 24
For units operational in both fiscal years, operating expenses increased
2%, which, combined with the increase in inpatient and outpatient operating
revenues, caused operating income at the unit level to increase 24% from fiscal
1994. Consequently, overall unit operating income increased to $0.9 million in
fiscal 1995 from $0.7 million in fiscal 1994.
Freestanding Operations
Admissions in fiscal 1995 declined overall by 587 to 3,329 from 3,916 in
fiscal 1994, an overall decline of 15%. Of this decline, 616 fewer admissions
were attributable to facilities which were closed or under contract to be sold
as of May 31, 1995. The Company closed one facility during fiscal 1995 due to
poor performance. In addition, the Company's lease for its facility in Grand
Rapids, Michigan ended in April 1995. The remaining facilities ("same store",
i.e., those operational during both fiscal years) experienced a slight increase
in admissions and a 16% decline in length of stay to 8.4 days, resulting in 16%
fewer patient days than the prior fiscal year. The following table sets forth
selected quarterly utilization data on a "same store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
----------------------------------------------------------------------------
Fiscal 1995 Fiscal 1994
---------------------------------- ----------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Admissions . . . . . . . . 584 578 561 586 567 568 571 574
Average length of stay . . 6 8 10 9 10 10 10 11
Patient days . . . . . . . 3,708 4,705 5,395 5,557 5,524 5,711 5,743 6,135
Average occupancy rate . . 17% 22% 25% 26% 25% 27% 27% 28%
</TABLE>
Overall operating revenue per patient day increased by 3% to $639 in
fiscal 1995 from fiscal 1994 and overall patient days declined 28% to 27,774,
resulting in a decrease of approximately $6.1 million, or 25%, in operating
revenues. During fiscal 1995, the Company closed two freestanding facilities,
one of which was due to poor performance. The other closed due to the
termination of lease. In addition to the decrease caused by the sale and/or
closure of hospitals, the Company believes that the increasing role of HMOs,
reduced benefits from employers and indemnity companies, a greater number of
competitive beds and a shifting to outpatient programs are responsible for this
decline in patient days. In response to these factors the Company accelerated
the development of effective, lower cost outpatient, daycare, and partial
hospitalization programs in conjunction with its freestanding facilities, and
shifted its marketing activities toward developing relationships and contracts
with managed care and other organizations which pay for or broker such services.
Overall operating expenses declined by $1.7 million or 8% to $19.5
million in fiscal 1995 from $21.2 million in fiscal 1994. This decline is
primarily attributable to the facility closures during fiscal 1995. Fiscal 1995
includes a one-time legal expense related to the Company's freestanding facility
in Aurora, Colorado of $0.2 million. In addition, the provision for bad debts
declined by $0.2 million or 16%. General and administrative expenses declined by
$0.2 or 62% as the Company continues to reduce its overhead expenses.
The following table illustrates the revenues in outpatient, daycare and
partial hospitalization programs offered by the freestanding facilities on a
"same store" basis:
<TABLE>
<CAPTION>
Net Outpatient/Daycare Revenues
----------------------------------------------------------------------------
(Dollars in thousands)
Fiscal 1995 Fiscal 1994
----------------------------------- ----------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Facilities offering . . . . 5 5 5 5 5 5 5 5
Net outpatient/daycare
revenues . . . . . . . . $2,133 $1,652 $1,804 $2,352 $2,401 $2,135 $1,744 $1,723
% of total "same store"
net operating revenues . 61% 52% 51% 60% 56% 55% 47% 46%
</TABLE>
24
<PAGE> 25
The Company recorded no asset write-downs during fiscal 1995 and
recorded $1.0 million during fiscal 1994. Prior year asset write-downs included
the estimated future operating losses, selling costs and carrying costs of such
facilities until disposition at an assumed future point in time. To the extent
that actual costs and time required to dispose of the facilities differ from
these estimates, adjustments to the amount written-down may be required. Losses
and carrying costs of such facilities are charged back directly to the carrying
values of the respective assets held for sale. Because chemical dependency
treatment facilities are special purpose structures, their resale value is
negatively affected by the oversupply of beds resulting from the diminished
demand for inpatient treatment currently being experienced throughout the
industry. Three facilities closed in the fourth quarter of fiscal 1993 were sold
during fiscal 1994. The Company sold two facilities during fiscal 1995, of which
one was closed in fiscal 1993, and the other in a prior fiscal year. The Company
currently has three facilities listed for sale, of which one was closed in
fiscal 1995, and the other two in prior fiscal years. These facilities have been
designated for disposition because of their weak market positions relative to
competitors and limited prospects for generating an acceptable return on
investment as an operating property. The Company will continue to evaluate the
performance of all of these facilities in their respective markets, and, if
circumstances warrant, may increase or reduce the number of facilities
designated for disposition.
RESULTS OF OPERATIONS - FISCAL 1994 (COMPARED WITH FISCAL 1993)
The Company incurred a loss of approximately $7.9 million or $3.57 per
share for the fiscal year ended May 31, 1994, which was an improvement of $3.7
million or $1.71 per share from the $11.6 million or $5.28 per share loss
incurred in the prior fiscal year. The fiscal 1994 fourth quarter loss of $4.0
million or $1.84 per share reflected an improvement from the fourth quarter of
the prior fiscal year by $0.3 million or $0.14 per share.
Results for fiscal 1993 were impacted by a gain of approximately $13.1
million recorded during the second quarter of the fiscal year as a result of the
sale by the Company of 2,300,000 shares of its formerly wholly-owned subsidiary
RehabCare. Prior to the sale the Company owned a 48% interest in RehabCare which
was accounted for on the equity method. Subsequent to the sale, the Company no
longer has an interest in RehabCare and no longer reports a portion of
RehabCare's earnings in its statement of operations. Included in the loss for
fiscal 1993 is a charge of approximately $6.7 million, attributable to
restructuring the organization, of which $1.2 million was reclassified as asset
write-downs during the fourth quarter. In fiscal 1993, the Company recorded
pretax charges of approximately $4.4 million primarily associated with the
write-down of property and equipment held for sale. Of this amount, $3.4 million
was a result of revaluing certain underperforming assets that the Company had
designated for disposition and the remaining $1.0 million was attributable to
the write-down of other property and equipment to net realizable value.
Operating revenues declined $17.6 million or 34% from fiscal 1993,
primarily as the result of the closure of four facilities during fiscal 1993,
the sale of a fifth facility and the decline in both admissions and length of
stay.
Operating expenses decreased by approximately $19.0 million or 37%,
primarily as a result of the closure of four facilities during fiscal 1993 and
the sale of a fifth. General and administrative expenses declined by
approximately $0.3 million or 5% in fiscal 1994 primarily as a result of
management's continued effort to reduce corporate overhead expenses. Interest
expense was reduced by $0.5 million or 30%, primarily as the result of the
paydown of senior secured debt by approximately $1.9 million with the proceeds
of asset sales. In addition, general and administrative expenses reflect a
credit of $0.8 million for fiscal 1993. This credit is the result of the
reduction of provisions for general and administrative expenses.
Equity in the earnings of unconsolidated affiliates was approximately
$0.4 million during fiscal 1993. No equity in the earnings of unconsolidated
affiliates was included in the Company's financial statements for fiscal 1994
(see Note 7-- "Investments in Unconsolidated Affiliates").
The Financial Accounting Standards Board ("FASB") has issued Statement
No. 109, "Accounting for Income Taxes". Effective June 1, 1993, the Company
adopted Statement No. 109 which changed the Company's method of accounting for
income taxes from the deferred method to the asset and liability method. The
change to Statement No. 109 had no cumulative effect on the financial statements
of the Company.
25
<PAGE> 26
RISK FACTORS
History of Losses and Anticipated Future Losses; Uncertainty of Future
Profitability
There can be no assurance that the Company will be able to achieve
profitability and positive cash flows from operations or that profitability and
positive cash flow from operations, if achieved, can be sustained on an ongoing
basis. Moreover, if achieved, the level of that profitability or that positive
cash flow cannot accurately be predicted.
Need for Additional Funds; Uncertainty of Future Funding
The Company's negative cash flow from operations has consumed
substantial amounts of cash. The conversion of the Debentures, which the Company
has agreed to use its best efforts to complete, will require substantial amounts
of cash. There can be no assurance that additional financing will be available
on acceptable terms, if at all. Issuance of additional equity securities by the
Company could result in dilution to then-existing stockholders. In the event of
a failure to meet these obligations on a timely basis, the Company will continue
to be liable for the entire $9.5 million principal amount of Debentures
outstanding in lieu of the negotiated amounts presently contemplated pursuant to
the Debenture letter agreement. (See Note 10-- "Long-Term Debt and Short-Term
Borrowings").
Disposition of Assets
The Company has been required to dispose of various properties in order
to raise working capital, and no assurance can be made that such dispositions
will not have adverse effects on the Company's financial condition or that the
Company has additional assets that could be disposed of in order to fund its
capital requirements.
In connection with a March 3, 1995 letter agreement with a
representative of the debenture holders, the Company has agreed to pledge all of
the shares of its CareUnit, Inc. subsidiary. The agreement provides that "At 150
days after the date of this Agreement, provided that the Participating
Securityholders have in each material respect performed (with opportunity to
cure if a cure is possible) their obligations required to be performed hereunder
on or prior to such date, and if the Offer has not then been consummated, the
Company shall pledge (with the Trustee, or an alternate acceptable to the
Company, to act as pledgeholder on terms of a written agreement containing
standard terms reasonably acceptable to the Participating Securityholders) all
of the Shares as collateral for its obligation to purchase the Securities
pursuant to the Offer or otherwise. Such pledge may only be foreclosed upon
following 180 days after the date hereof at the request of any Securityholder or
the Trustee if the Offer is not consummated on or prior to such date, provided
that the Participating Securityholders have in each material respect performed
(with opportunity to cure if a cure is possible) their obligations required to
be performed hereunder on or prior to such date. ...Upon consummation of the
Offer, the said pledges shall be released." No assurances can be made that any
such pledged shares will be returned to the Company or that the Company will not
be required to perform such agreement, or otherwise satisfy its obligations to
Debenture holders.
Two of the Company's freestanding facilities (Aurora, Colorado and
Cincinnati, Ohio) secure the Company's $2.0 million note due January 9, 1997.
See "Risk Factors -- Involuntary Bankruptcy Petition; Acceleration of
Indebtedness".
Involuntary Bankruptcy Petition; Acceleration of Indebtedness
Despite the dismissal in March 1995 of the involuntary bankruptcy
petition filed against the Company by three purported creditors, no assurance
may be made that such person or other persons whom the Company owes any debt
could not file another involuntary petition in bankruptcy court. The Company's
Debentures continue to be in default, including the default in payment of
interest accruing from April 1994 on approximately $9.5 million of outstanding
principal amount, and interest on default interest; and such Debentures continue
to be accelerated, and immediately payable in full (see Note 10-- "Long-Term
Debt and Short-Term Borrowings"). To rescind the acceleration of the Debentures
would require written consent of a majority of the Debentures and the cure of
all existing defaults. No assurances can be made that the holders of Debentures
will consent to rescission of the acceleration or that the defaults can be
cured. In the event that the Company does not retire the Debentures as and when
contemplated in the March 3, 1995 letter agreement, Debenture holders who filed
the earlier involuntary petition, or other Debenture holders, may file another
such petition. Other creditors may also file such a petition,
26
<PAGE> 27
or institute other actions against the Company, in order to prevent the
Debenture holders from collecting on their debts in advance of payment to
themselves. The acceleration of the Debentures constitutes a default under
certain senior debt of the Company. Previously, in January 1995, the Company's
freestanding hospital facility in Aurora, Colorado and the CareUnit Hospital of
Ohio, Inc., a freestanding hospital facility in Cincinnati, Ohio were given as
collateral for the Company's $2.0 million Secured Convertible Note due January
9, 1997 payable to Lindner Funds.
Taxes
The Company has filed its consolidated Federal tax return and amended
returns claiming net operating loss carry backs for tax deductions in accordance
with Internal Revenue Code Section ("Section") 172(f) and intends to attempt to
reduce its obligations to the IRS (see Note 12-- "Income Taxes"). Section 172(f)
is an area of the tax law without substantial legal precedent. There may be
substantial opposition by the IRS as to the Company's carry back claim;
therefore no assurances can be made to the Company's entitlement to such claim.
The IRS will not be precluded by the payroll tax settlement agreement from
raising additional issues in connection with the Company's tax returns.
Should the Company not utilize its net operating losses through carry
backs, the Company may be unable to utilize some or all of its allowable tax
deductions or losses, which depend upon factors including the availability of
sufficient net income from which to deduct such losses during limited carryover
periods. Further, the Company's ability to use any net operating losses in the
future may be subject to limitation in the event that the Company issues or
agrees to issue amounts of additional equity, which could constitute a change in
ownership in accordance with Section 382.
Dependence on Reimbursement by Third-Party Payors
The Company's ability to succeed in increasing its revenues may depend
in part on the extent to which reimbursement of the cost of treatment will be
available from government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price of medical products and services. As a result of
reimbursement changes and competitive pressures, the contractual obligations of
the Company have been subject to intense evaluation.
Uncertainty of Pricing; Health Care Reform and Related Matters
The levels of revenues and profitability of health care companies may be
affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of health care through various means. In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement governmental controls on
the price of health care. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for health care goods
and services may take in response to any health care reform proposals or
legislation. The Company cannot predict the effect health care reforms may have
on its business, and no assurance can be given that any such reforms will not
have a material adverse effect on the Company.
Management of Expansion
The Company's anticipated growth and expansion into areas and activities
requiring additional expertise, such as managed care, are expected to place
increased demands on the Company's resources. These demands are expected to
require the addition of new management personnel and the development of
additional expertise by existing management personnel. The failure to acquire
such services or to develop such expertise could have a material adverse effect
on the prospects for the Company's success.
27
<PAGE> 28
Management of Transition
The Company's prospects for success depend, to a degree, on its ability
to successfully implement its current restructuring plans. The failure of the
Company to successfully transition, or any unanticipated or significant delays
in such transition, could have a material adverse effect on the Company's
business. There can be no assurance that the Company will be able to achieve its
planned transition without disruption to its business or that facilities or
management information systems will be adequate to sustain future growth.
Shares Eligible for Future Sale
The Company contemplates issuing additional equity through private
placements and other private transactions, pending listing on NYSE, shareholder
approval or the exercise or conversion by holders of securities, and the Company
anticipates issuance of additional equity, including without limitation to
holders of approximately $9.5 million of outstanding convertible Debentures (see
Note 10-- "Long-Term Debt and Short-Term Borrowings"). Issuance of these shares,
registration thereof pursuant to registration rights or otherwise, and
additional sales of the sales could adversely affect the trading prices of the
Common Stock.
Price Volatility in Public Market
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. Trading prices of securities of companies in the
managed care sector have experienced significant volatility.
Anti-takeover Provisions
Each share of the Company's Common Stock includes one right on the
terms, and subject to the conditions, of the Rights Agreement between the
Company and Continental Stock Transfer & Trust Company. 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 the Board of Directors without any further vote or action
by the stockholders, which could have the effect of diluting the Common 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. In addition, 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 which result in a change of control of the Company. In
addition, Section 203 of the General Corporation Law of Delaware prohibits the
Company 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 the Company's Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported a net loss of $11.5 million for the year ended May
31, 1995 and has reported net losses in each of the four preceding fiscal years
aggregating an additional $39.8 million. As a result, the Company has an
accumulated deficit of $46.5 million and a total stockholders' deficiency of
$4.9 million as of May 31, 1995. Additionally, the Company's current assets at
May 31, 1995 amounted to approximately $8.0 million and current liabilities were
approximately $23.4 million, resulting in a working capital deficiency of
approximately $15.4 million and a current ratio of 1:2.9.
Included in current liabilities are $9.5 million of Debentures in
default as a result of the Company's failure to make scheduled payments of
interest on the Debentures commencing in October 1994. As further discussed in
Note 10-- "Long-Term Debt and Short-Term Borrowings", the Company has agreed to
use its best efforts to provide an opportunity for Debenture holders to tender
their Debentures pursuant to an exchange offer to be made by the Company. This
proposed transaction requires the holders of a majority of the Debentures to
give their approval to rescind the acceleration and the Company to obtain and
expend up to $5.5 million of cash during fiscal 1996, over and above cash
required to fund other financing, operating and investing needs. Additionally,
the Debenture exchange provides for the Company to issue $120 worth of its
common stock at a defined value for each $1,000 of Debentures, which may be
contingent upon the Company's ability to effect certain filings with the
Securities and Exchange Commission. The ability to timely proceed with any such
proposed filings will, in part, depend upon the ability of the Company to obtain
a consent from its prior auditors for the use of their report on the Company's
28
<PAGE> 29
consolidated financial statements in such registration statements. Failure to
obtain Debenture holder approval or to accomplish the Debenture exchange, or, in
the alternative, a failure of the Company and the Debenture holders to otherwise
reach a settlement, may cause the Debenture holders to pursue the involuntary
bankruptcy of the Company and/or the Company to take alternative actions that
may include filing for voluntary protection from creditors. Alternatively, if
the Debenture exchange is accomplished, the elimination of the Debenture's debt
service requirement would decrease the Company's future cash flow requirements.
(The foregoing summary does not constitute an offer to the holders of the
Company's Debentures. Any such offer may only be made pursuant to an exchange
offer, and in conformity with the relevant securities laws, rules and
regulations.)
Included in current maturities of long-term debt is approximately $2.7
million which represents the Company's obligation pursuant to its settlement
agreement with the IRS (see Note 15-- "Commitment and Contingencies"). The
Company has paid $2.3 million of this liability to the IRS during fiscal 1996
and intends to pay the remaining balance in monthly installments of $42,000
pursuant to the settlement agreement.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The 1995 consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.
To address the Company's operational issues, in fiscal 1993 the Company
established a restructuring reserve (see Note 9-- "Accounts Payables and Accrued
Liabilities"). One purpose of such reserve was for the realignment of the
Company's focus and business and the settlement and disposition of certain
non-performing and under-utilized assets. Through May 31, 1995 many of the
Company's inpatient freestanding facilities have been sold or are in the process
of being closed or sold. Additionally, in fiscal 1995, management has begun to
implement plans for expanding the Company's contract management and managed care
operations (see Note 3-- "Acquisitions and Dispositions").
In previous years, the Company was obligated to support and fund certain
freestanding facilities that now have been closed, including two such facilities
closed in fiscal 1995 (see Note 5-- "Property and Equipment Held for Sale"). As
a result, the Company will no longer be burdened with the negative cash flow
requirements associated with such facilities. Based upon a projection of actual
performance during fiscal 1995 with adjustments for reduced cash flow
requirements associated with facilities closed and/or sold in fiscal 1995, known
contract and cyclical changes, and also giving consideration to cash on hand at
May 31, 1995 of $1.5 million, management expects the Company to be able to meet
its cash obligations required by operations during fiscal 1996, excluding the
Company's obligations under the Debentures. However, the cash needs of the
Company may vary from month to month depending upon the actual level of business
activity, and through the first quarter of fiscal 1996 the Company continues to
incur losses. Therefore, no assurance can be given that the Company will
generate adequate cash flows to meet cash obligations required by operations,
excluding the Company's obligations under the Debentures, in fiscal 1996.
To provide funds for the Debenture exchange and/or additional operating
needs, the Company anticipates utilizing one or more of the following potential
sources of cash:
- The Company has received a firm commitment from a mutual fund to
purchase in a private placement at least $5.0 million of 15%
fully secured Company notes due no earlier than December 1996 if
offered by the Company.
- The Company has filed its fiscal 1995 Federal tax return, and a
Form 1139 "Corporate Application for Tentative Refund" in the
amount of $9.4 million. In the event the Company receives the
full refund claim for fiscal 1995, the net amount of cash
available for working capital purposes would be $7.5 million.
The Company has also filed amended Federal tax returns for prior
years to claim refunds of an additional $13.2 million. These
refund claims have been made under Section 172(f) of the
Internal Revenue Code, an area of the tax law without
significant precedent, and there may be substantial opposition
by the IRS to the Company's refund claims. Accordingly, no
assurances can be made to the Company's entitlement to such
refunds or the timing of the receipt thereof (see Note 12--
"Income Taxes").
29
<PAGE> 30
- Included in non-current assets are three hospital facilities
designated as property and equipment held for sale with a total
carrying value of $3.7 million. The Company expects to sell two
of these facilities in the next fiscal year and may lease a
third facility to an unrelated entity. However, the contracts
have not been fully negotiated, and proceeds from the sales or
lease of such assets are not expected to be available by the
time the Debenture exchange is expected to occur. Accordingly,
management expects to use such cash proceeds, if received during
fiscal 1996, to fund and expand the Company's operations and
implement the Company's restructuring plans.
- In March 1995, a jury awarded the Company approximately $2.7
million, plus interest, in damages in its lawsuit against
RehabCare Corporation. The defendant has posted a bond for the
amount of the award and has filed an appeal of the judgment.
Management is unable to predict whether any proceeds from this
judgment will be received in fiscal 1996 (see Note 15--
"Commitments and Contingencies").
All of these potential sources of additional cash in fiscal 1996 are
subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1996 the Company
will complete the transactions required to fund its working capital deficit.
The Company continues to incur losses from operations. During fiscal
1995, the Company commenced various steps to seek to reduce the funding of
operating losses and cash flow deficits of its subsidiaries. The Company
estimates expenses or obligations reflecting non-recurring expenses and inflows
which will assist the Company to meet certain obligations and provide for
working capital and are essential to the achievement of the Company's plan of
operations. During fiscal 1995, management implemented its plans for downsizing
and conversion of existing operations while expanding its contract management
and managed care operations. In addition, given the acquisitions (see Note 3--
"Acquisitions and Dispositions") during fiscal 1995, including the cash
investment in Comprehensive Behavioral, Comprehensive Behavioral has achieved a
cash flow positive state in fiscal 1996 (exclusive of corporate overhead
allocations). As a result, and assuming reasonable expansion of its business,
management anticipates that this subsidiary will be in a position to fund its
operations during fiscal 1996. The elimination of such funding will decrease the
Company's future cash flow requirements.
30
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
YEARS ENDED MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Balance Sheets, May 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Operations, Years Ended May 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . 35
Consolidated Statements of Stockholders' Equity, Years Ended May 31, 1995, 1994 and 1993 . . . . . . . . . . . 36
Consolidated Statements of Cash Flows, Years Ended May 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . 37
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
31
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Comprehensive Care Corporation
We have audited the accompanying consolidated balance sheet of Comprehensive
Care Corporation and subsidiaries as of May 31, 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Comprehensive Care Corporation and subsidiaries as of May 31, 1995, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements for the year ended
May 31, 1995 have been prepared assuming the Company will continue as a going
concern. As more fully described in Note 2, the Company has reported annual net
losses for each of the last five fiscal years and has a working capital
deficiency of $15.3 million and a deficit in total stockholders' equity of $4.9
million as of May 31, 1995. Approximately $9.5 million of the working capital
deficiency arises from presentation of the Company's convertible subordinated
debentures as currently payable due to default in the payment of interest on
this obligation commencing October 1994. The Company is seeking to remedy this
default through the debenture exchange offer described in Note 10. Among other
terms this proposed transaction requires the holders of a majority of the
debentures to give their approval to rescind the acceleration, and the Company
to obtain and expend up to $5.5 million in cash during fiscal 1996 over and
above cash required to fund other financing, operating and investing needs. No
assurance can be given that the debenture exchange will be successfully
accomplished, and the failure to reach a settlement with the holders of the
Company's debentures through the debenture exchange or otherwise may cause the
debenture holders to pursue the involuntary bankruptcy of the Company and/or the
Company to take alternative actions including filing for voluntary protection
from creditors. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 2. The 1995 consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Orange County, California
September 7, 1995
32
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comprehensive Care Corporation:
We have audited the accompanying consolidated balance sheets of
Comprehensive Care Corporation (a Delaware corporation) and subsidiaries as of
May 31, 1994 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Comprehensive Care
Corporation and subsidiaries as of May 31, 1994 and the results of their
operations and their cash flows for each of the two fiscal years in the period
ended May 31, 1994, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred significant
recurring losses and negative cash flows from operations which raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri
August 22, 1994
33
<PAGE> 34
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
------------------------
1995 1994
---- ----
A S S E T S (DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 1,542 $ 1,781
Accounts and notes receivable, less allowance for
doubtful accounts of $1,096 and $1,574 . . . . . . . . . . . . 3,329 5,848
Note receivable . . . . . . . . . . . . . . . . . . . . . . . . . 2,750 ---
Property and equipment held for sale . . . . . . . . . . . . . . --- 6,939
Other current assets . . . . . . . . . . . . . . . . . . . . . . 391 508
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 8,012 15,076
------- -------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . 25,181 29,326
Less accumulated depreciation and amortization . . . . . . . . . . . (13,074) (13,338)
------- -------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . 12,107 15,988
------- -------
Property and equipment held for sale . . . . . . . . . . . . . . . . 3,746 ---
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,136 2,162
======= =======
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,001 $33,226
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . . $10,235 $ 13,776
Long-term debt in default (see Note 10) . . . . . . . . . . . . . 9,538 ---
Current maturities of long-term debt . . . . . . . . . . . . . . 3,285 154
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 296 734
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 23,354 14,664
------- -------
Long-term debt, excluding current maturities . . . . . . . . . . . . 5,077 10,477
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,503 2,986
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 ---
Commitments and contingencies (see Note 2, 10 and 15)
Stockholders' equity:
Preferred stock, $50.00 par value; authorized 60,000 shares . . . --- ---
Common stock, $.01 par value; authorized 12,500,000 shares;
issued and outstanding 2,464,516 and 2,198,692 shares . . . . 25 22
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 41,558 40,060
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (46,516) (34,983)
------- -------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . ( 4,933) 5,099
------- -------
Total liabilities and stockholders' equity . . . . . . . . . . . . . $26,001 $33,226
======= =======
</TABLE>
See accompanying notes.
34
<PAGE> 35
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues and gains:
Operating revenues . . . . . . . . . . . . . . . . . $29,282 $34,277 $51,847
Gain on sale of RehabCare stock, net . . . . . . . . --- --- 13,114
Gain on Sovran settlement, net . . . . . . . . . . . --- --- 584
Interest income . . . . . . . . . . . . . . . . . . . 38 50 69
Equity in earnings of unconsolidated affiliates . . . --- --- 384
-------- ------- --------
29,320 34,327 65,998
-------- ------- --------
Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . . 31,497 31,875 50,924
General and administrative expenses . . . . . . . . . 4,331 5,455 5,754
Provision for doubtful accounts . . . . . . . . . . . 1,423 1,558 6,187
Depreciation and amortization . . . . . . . . . . . . 1,797 1,762 2,946
Loss on sale/write-down of assets . . . . . . . . . . 259 --- 4,382
Interest expense . . . . . . . . . . . . . . . . . . 1,366 1,228 1,759
Other restructuring/nonrecurring expenses . . . . . . --- --- 5,452
-------- ------- --------
40,673 41,878 77,404
-------- ------- --------
Loss before income taxes . . . . . . . . . . . . . . . . (11,353) (7,551) (11,406)
Provision for income taxes . . . . . . . . . . . . . . . 180 301 194
-------- ------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(11,533) $(7,852) $(11,600)
======== ======= ========
Net loss per share . . . . . . . . . . . . . . . . . . . $(5.11) $(3.57) $(5.28)
======== ======= ========
</TABLE>
See accompanying notes.
35
<PAGE> 36
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCK STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT EQUITY
------ ------ ------- ------- ------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1992 . . . . . 2,191 $ 22 $39,950 $(15,531) --- $ --- $24,441
Net loss . . . . . . . . . --- --- --- (11,600) --- --- (11,600)
Exercise of stock options . 4 --- 50 --- --- --- 50
Issuance of shares for the
purchase of Mental
Health Programs, Inc . . 4 --- 60 --- --- --- 60
----- ------- ------- -------- --- ------- -------
Balance, May 31, 1993 . . . . . 2,199 $ 22 $40,060 $(27,131) --- $ --- $12,951
Net loss . . . . . . . . . --- --- --- (7,852) --- --- (7,852)
----- ------- ------- -------- --- ------- -------
Balance, May 31, 1994 . . . . . 2,199 $ 22 $40,060 $(34,983) --- $ --- $ 5,099
Net loss . . . . . . . . . --- --- --- (11,533) --- --- (11,533)
Issuance of shares for the
purchase of Mental
Health Programs, Inc . . 16 --- --- --- --- --- ---
Odd lot shares purchase . . (2) (2)
Shares issued for
private placements . . . 250 3 1,500 --- --- --- 1,503
----- ------- ------- -------- --- ------- -------
Balance, May 31, 1995 . . . . . 2,465 $ 25 $41,558 $(46,516) --- $ --- $(4,933)
===== ======= ======= ======== === ======= =======
</TABLE>
See accompanying notes.
36
<PAGE> 37
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(11,533) $(7,852) $(11,600)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 1,797 1,762 2,946
Provision for doubtful accounts, net of recoveries . . . . . . 1,423 1,558 6,187
Gain on sale of RehabCare stock, net . . . . . . . . . . . . . --- --- (13,114)
Gain on Sovran settlement, net . . . . . . . . . . . . . . . . --- --- (584)
Loss on sale/write-down of assets . . . . . . . . . . . . . . 259 36 4,382
Carrying costs incurred on property and equipment
held for sale . . . . . . . . . . . . . . . . . . . . . . . (420) (1,241) (1,330)
Other restructuring/non-recurring expenses . . . . . . . . . . --- --- 5,452
Equity in earnings of unconsolidated affiliates . . . . . . . --- --- (384)
Decrease in accounts and notes receivable . . . . . . . . . . 1,108 452 2,542
Decrease in accounts payable and accrued liabilities . . . . . (116) (2,762) (4,927)
Increase(decrease) in income taxes payable . . . . . . . . . . (438) 68 ---
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 56 818 278
-------- ------- --------
Net cash used in operating activities . . . . . . . . . . . (7,864) (7,161) (10,152)
-------- ------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment
(operating and held for sale) . . . . . . . . . . . . . . 3,204 10,357 3,489
Proceeds from the sale of RehabCare stock . . . . . . . . . . --- --- 18,825
Proceeds from Sovran settlement, net . . . . . . . . . . . . . --- --- 584
Additions to property and equipment, net . . . . . . . . . . . (362) (383) (474)
Purchase of operating entity . . . . . . . . . . . . . . . . . (50) --- (75)
-------- ------- --------
Net cash provided by investing activities . . . . . . . . . 2,792 9,974 22,349
-------- ------- --------
Cash flows from financing activities:
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . (725) (2,158) (11,835)
Bank and other (repayments)borrowings . . . . . . . . . . . . 3,055 --- (1,266)
Exercise of stock options . . . . . . . . . . . . . . . . . . --- --- 50
Proceeds from the issuance of stock . . . . . . . . . . . . . 2,503 --- ---
-------- ------- --------
Net cash provided by(used in) financing activities . . . . 4,833 (2,158) (13,051)
-------- ------- --------
Net increase(decrease) in cash and cash equivalents . . . . . . . (239) 655 (854)
Cash and cash equivalents at beginning of year . . . . . . . . . 1,781 1,126 1,980
-------- ------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . $1,542 $ 1,781 $ 1,126
======== ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527 $1,302 $ 2,050
======== ======= ========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 507 $ 233 $ 338
======== ======= ========
</TABLE>
See accompanying notes.
37
<PAGE> 38
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of
Comprehensive Care Corporation (the "Company") and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company's consolidated financial statements are presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
continuation of the Company's business is dependent upon the resolution of
operating and short-term liquidity problems (see Note 2-- "Operating Losses and
Liquidity").
Revenue Recognition
Approximately 52%, 66% and 88% of the Company's operating revenues were
received from private sources in fiscal 1995, 1994 and 1993, respectively. The
remainder is received from Medicare, Medicaid and other governmental programs.
The latter are programs which provide for payments at rates generally less than
established billing rates. Payments are subject to audit by intermediaries
administering these programs. Revenues from these programs are recorded under
reimbursement principles applicable to each of the programs. Although management
believes estimated provisions currently recorded properly reflect these
revenues, any differences between final settlement and these estimated
provisions are reflected in operating revenues in the year finalized. Such
differences between estimated and final settlements approximated $(8,000) during
fiscal 1995.
Depreciation
Depreciation and amortization of property and equipment are computed on
the straight-line method over the estimated useful lives of the related assets,
principally: buildings and improvements -- 5 to 40 years; furniture and
equipment -- 3 to 12 years; leasehold improvements -- life of lease or life of
asset, whichever is less.
Property and Equipment Held for Sale
Property and equipment held for sale represents net assets of certain
freestanding facilities and other properties that the Company intends to sell,
within the next fiscal year, and is carried at estimated net realizable value
less holding costs anticipated to be incurred.
Property and equipment held for sale are expected to be sold in the next
fiscal year. Such property and equipment is shown as non-current assets on the
consolidated balance sheet as of May 31, 1995 due to the fact that contracts for
sale have not been fully negotiated. Gains and losses on facilities sold have
been reflected as adjustments to the estimated remaining property values. When
all assets that are classified as property and equipment held for sale are sold,
a net gain is anticipated that will be recognized and separately identified in
the statement of operations.
Intangible Assets
Intangible assets include costs in excess of fair value of net assets of
businesses purchased (goodwill), licenses, and similar rights. Costs in excess
of net assets purchased are amortized over 20 to 25 years. The costs of other
intangible assets are amortized over the period of benefit. The Company assesses
the recoverability and the amortization period of goodwill by determining
whether the amount can be recovered through undiscounted cash flows of the
businesses acquired, excluding interest expense and amortization, over the
remaining amortization
38
<PAGE> 39
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
period. The Company considers external factors relating to each acquired
business, including local market developments, regional and national trends,
regulatory developments and other pertinent factors including the business'
current and expected financial performance in making its assessment. The Company
believes that the $1.6 million of net recorded intangible assets at May 31,
1995, are recoverable from future estimated undiscounted cash flows. The amounts
in the consolidated balance sheets are net of accumulated amortization of
goodwill of $731,000 and $652,000 at May 31, 1995 and 1994, respectively.
Deferred Contract Costs
The Company has entered into contracts with independent general
hospitals whereby it will provide services in excess of the standard agreement.
In recognition of the hospitals' long-term commitment, the Company has paid
certain amounts to them. These amounts may be used by the hospitals for capital
improvements or as otherwise determined by the hospital. The Company is entitled
to a prorata refund in the event that the hospital terminates the contract
before its scheduled termination date; accordingly, these amounts are charged to
expense over the life of the contract.
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less. Such investments
are deemed to be cash equivalents for purposes of the consolidated statements of
cash flows and aggregate $318,000 and $1,294,000 at May 31, 1995 and 1994,
respectively.
Excluded from cash and cash equivalents is a certificate of deposit in
the amount of $55,000 at May 31, 1995. Such certificate of deposit secures a
letter of credit which is required under a capitated contract and is subject to
adjustment annually. As a result, this short-term investment has been classified
as other current assets in the financial statements at May 31, 1995.
Income Taxes
Effective June 1, 1993, the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes" on a
prospective basis. Prior to this date, the Company accounted for income taxes
under APB 11. Statement No. 109 changed the Company's method of accounting for
income taxes from the deferred method required under APB 11 to the asset and
liability method. Under the deferred method, annual income tax expense is
matched with pretax accounting income by providing deferred taxes at current tax
rates for timing differences between the determination of net earnings for
financial reporting and tax purposes. The objective of the asset and liability
method is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. The change to Statement No. 109 had
no cumulative effect on the financial statements of the Company as a result of
recording a valuation allowance.
Charity Care
The Company provides charity care to patients who meet certain criteria
under its charity care policy without charge or at amounts less than its
established rates. Corporate policy allows for charity when appropriate, which
must be prearranged, and the patient must meet applicable federal and/or state
poverty guidelines. The Company will not pursue collection of charity accounts.
Charity charges foregone, based upon established rates, were less than 1% of the
Company's operating revenues for fiscal 1995, 1994 and 1993.
39
<PAGE> 40
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
Loss Per Share
Primary and fully diluted loss per common and common equivalent share
have been computed by dividing net loss by the weighted average number of common
shares outstanding during the period. During fiscal 1995, 1994 and 1993, the
effect of outstanding stock options and the assumed conversion of the
convertible subordinated debentures had an antidilutive impact on loss per share
and, accordingly, were excluded from per share computations.
On May 16, 1994, the stockholders of the Company approved an amendment
to the Company's Certificate of Incorporation to effect a reverse stock split of
one share for each ten or fewer shares of the Company's Common Stock, with the
specific ratio to be selected by the Board of Directors. The stockholders also
approved amendments to the Certificate of Incorporation reducing the par value
of the Company's Common Stock to $.01 per share and reducing the number of
authorized shares of Common Stock to five times the number of shares
outstanding, reserved or otherwise committed for future issuance but not less
than 12.5 million. The reverse stock split and amendments to the Certificate of
Incorporation were to become effective on any date selected by the Board of
Directors prior to February 16, 1995.
The Board of Directors effected a one-for-ten reverse stock split
effective October 17, 1994. On the effective date of the reverse stock split,
the Certificate of Incorporation was amended to reduce the par value of the
Common Stock to $.01 per share and to reduce the number of authorized shares of
Common Stock to 12.5 million. All share and per share amounts contained in these
financial statements retroactively reflect the effect of the reverse stock split
for all periods presented, which effect is to reduce the number of shares set
forth by a factor of ten, with each stockholder's proportionate ownership
interest remaining constant, except for payment in lieu of fractional shares.
The weighted average number of common and common equivalent shares used
to calculate loss per share was 2,257,000, 2,199,000 and 2,196,000 for the years
ended May 31, 1995, 1994 and 1993, respectively.
Recently Issued Accounting Standards
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the Impairment
of Long-Lived Assets to Be Disposed Of". The Company is required to adopt the
provisions of this statement in 1997. SFAS No. 121 requires that the Company
review long-lived assets and certain identifiable intangibles to be held and
used for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. This review requires
the estimation of the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is to be recognized. Measurement of an impairment
loss for long-lived assets and identified intangibles that an entity expects to
hold and use should be based on the fair value of the assets. The statement
further requires that long-lived assets and certain identifiable intangibles to
be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. When adopted by the Company, this statement will govern the
accounting for the Company's Property and Equipment, Intangible Assets and
Property and Equipment Held for Sale.
As further described in Note 5, in 1992 the Company had transferred most
of its recorded hospital plant and equipment, which were proposed for inclusion
in a sale/leaseback transaction, into property and equipment held for sale and
reported them at their net realizable value. Such sale/leaseback plans were
terminated in October 1992, and the property and equipment was returned to
operating assets at their then net realizable value. Given the
40
<PAGE> 41
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
Company's ongoing losses and the presence of other industry related impairment
indicators, the Company has continued to depreciate those assets from that
basis. As a result, the Company's Property and Equipment is carried at a value
that approximates its current fair value. Property and Equipment Held for Sale
is reported at the assets net realizable value, which management believes
approximates the fair values of those assets less holding costs anticipated to
be incurred. Further, as indicated above (Intangible Assets), the Company
continues to evaluate the recoverability of recorded intangible assets of $1.6
million (see Note 8-- "Other Assets"). Accordingly, implementation of SFAS No.
121 is not expected to have a significant impact upon the Company's financial
statements.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
NOTE 2-- OPERATING LOSSES AND LIQUIDITY
The Company reported a net loss of $11.5 million for the year ended May
31, 1995 and has reported net losses in each of the four preceding fiscal years
aggregating an additional $39.8 million. As a result, the Company has an
accumulated deficit of $46.5 million and a total stockholders' deficiency of
$4.9 million as of May 31, 1995. Additionally, the Company's current assets at
May 31, 1995 amounted to approximately $8.0 million and current liabilities were
approximately $23.4 million, resulting in a working capital deficiency of
approximately $15.4 million and a current ratio of 1:2.9.
Included in current liabilities are $9.5 million of Debentures in
default as a result of the Company's failure to make scheduled payments of
interest on the Debentures commencing in October 1994. As further discussed in
Note 10-- "Long-Term Debt and Short-Term Borrowings", the Company has agreed to
use its best efforts to provide an opportunity for Debenture holders to tender
their Debentures pursuant to an exchange offer to be made by the Company. This
proposed transaction requires the holders of a majority of the Debentures to
give their approval to rescind the acceleration and the Company to obtain and
expend up to $5.5 million of cash during fiscal 1996, over and above cash
required to fund other financing, operating and investing needs. Additionally,
the Debenture exchange provides for the Company to issue $120 worth of its
common stock at a defined value for each $1,000 of Debentures, which may be
contingent upon the Company's ability to effect certain filings with the
Securities and Exchange Commission. The ability to timely proceed with any such
proposed filings will, in part, depend upon the ability of the Company to obtain
a consent from its prior auditors for the use of their report on the Company's
consolidated financial statements in such registration statements. Failure to
obtain Debenture holder approval or to accomplish the Debenture exchange, or, in
the alternative, a failure of the Company and the Debenture holders to otherwise
reach a settlement, may cause the Debenture holders to pursue the involuntary
bankruptcy of the Company and/or the Company to take alternative actions that
may include filing for voluntary protection from creditors. Alternatively, if
the Debenture exchange is accomplished, the elimination of the Debenture's debt
service requirement would decrease the Company's future cash flow requirements.
(The foregoing summary does not constitute an offer to the holders of the
Company's Debentures. Any such offer may only be made pursuant to an exchange
offer, and in conformity with the relevant securities laws, rules and
regulations.)
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The 1995 consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.
41
<PAGE> 42
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
To address the Company's operational issues, in fiscal 1993 the Company
established a restructuring reserve (see Note 9-- "Accounts Payables and Accrued
Liabilities"). One purpose of such reserve was for the realignment of the
Company's focus and business and the settlement and disposition of certain
non-performing and under-utilized assets. Through May 31, 1995 many of the
Company's inpatient freestanding facilities have been sold or are in the process
of being closed or sold. Additionally, in fiscal 1995, management has begun to
implement plans for expanding the Company's contract management and managed care
operations (see Note 3-- "Acquisitions and Dispositions").
In previous years, the Company was obligated to support and fund certain
freestanding facilities that now have been closed, including two such facilities
closed in fiscal 1995 (see Note 5-- "Property and Equipment Held for Sale"). As
a result, the Company will no longer be burdened with the negative cash flow
requirements associated with such facilities. Based upon a projection of actual
performance during fiscal 1995 with adjustments for reduced cash flow
requirements associated with facilities closed and/or sold in fiscal 1995, known
contract and cyclical changes, and also giving consideration to cash on hand at
May 31, 1995 of $1.5 million, management expects the Company to be able to meet
its cash obligations required by operations during fiscal 1996, excluding the
Company's obligations under the Debentures. However, the cash needs of the
Company may vary from month to month depending upon the actual level of business
activity, and through the first quarter of fiscal 1996 the Company continues to
incur losses. Therefore, no assurance can be given that the Company will
generate adequate cash flows to meet cash obligations required by operations,
excluding the Company's obligations under the Debentures, in fiscal 1996.
To provide funds for the Debenture exchange and/or additional operating
needs, the Company anticipates utilizing one or more of the following potential
sources of cash:
- The Company has received a firm commitment from a mutual fund to
purchase in a private placement at least $5.0 million of 15%
fully secured Company notes due no earlier than December 1996 if
offered by the Company.
- The Company has filed its fiscal 1995 Federal tax return, and a
Form 1139 "Corporate Application for Tentative Refund" in the
amount of $9.4 million. In the event the Company receives the
full refund claim for fiscal 1995, the net amount of cash
available for working capital purposes would be $7.5 million.
The Company has also filed amended Federal tax returns for prior
years to claim refunds of an additional $13.2 million. These
refund claims have been made under Section 172(f) of the
Internal Revenue Code, an area of the tax law without
significant precedent, and there may be substantial opposition
by the IRS to the Company's refund claims. Accordingly, no
assurances can be made to the Company's entitlement to such
refunds or the timing of the receipt thereof (see Note 12--
"Income Taxes").
- Included in non-current assets are three hospital facilities
designated as property and equipment held for sale with a total
carrying value of $3.7 million. The Company expects to sell two
of these facilities in the next fiscal year and may lease a
third facility to an unrelated entity. However, the contracts
have not been fully negotiated, and proceeds from the sales or
lease of such assets are not expected to be available by the
time the Debenture exchange is expected to occur. Accordingly,
management expects to use such cash proceeds, if received during
fiscal 1996, to fund and expand the Company's operations and
implement the Company's restructuring plans.
42
<PAGE> 43
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
- In March 1995, a jury awarded the Company approximately $2.7
million, plus interest, in damages in its lawsuit against
RehabCare Corporation. The defendant has posted a bond for the
amount of the award and has filed an appeal of the judgment.
Management is unable to predict whether any proceeds from this
judgment will be received in fiscal 1996 (see Note 15--
"Commitments and Contingencies").
All of these potential sources of additional cash in fiscal 1996 are
subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1996 the Company
will complete the transactions required to fund its working capital deficit.
NOTE 3-- ACQUISITIONS AND DISPOSITIONS
On May 22, 1995, the Company and its subsidiary, Comprehensive
Behavioral entered into an agreement with Physicians Corporation of America
("PCA"), providing for PCA to invest $1.0 million in Comprehensive Behavioral
for 13 1/2% of the voting power of Comprehensive Behavioral represented by all
of the Series A Preferred Stock of Comprehensive Behavioral which is also
exchangeable at the option of PCA for 100,000 shares of the Company's Common
Stock. As a key to the agreement, so long as PCA remains an equity holder of
Comprehensive Behavioral, PCA and its subsidiaries will negotiate in good faith
to contract with Comprehensive Behavioral for the delivery of mental health
services in all PCA service areas where Comprehensive Behavioral has an adequate
network. In addition, PCA was granted a first right of refusal regarding any
sale of Comprehensive Behavioral. The Company is required to maintain a $3.75
million investment in its subsidiary, Comprehensive Behavioral, which limits the
extent to which cash dividends may be paid to the parent. Effective June 1,
1995, Comprehensive Behavioral will provide services on a capitated basis to
220,000 of PCA's 700,000 members in the Tampa area. In conjunction with this
contract, in May 1995, PCA advanced $360,000 to Comprehensive Behavioral. Such
advance is reimbursable to PCA in 12 equal monthly installments.
On April 30, 1995, the Company's lease ended in Grand Rapids, Michigan.
As a result, the Company ceased operations in that facility; however the Company
entered into an agreement with Longford Health Sources, Inc., to operate a
chemical dependency unit in Kent Community Hospital in Grand Rapids, Michigan.
On April 1, 1995, the Company agreed to issue American Mental Health
Care, Inc. ("AMH") 44,054 shares of the Company's common stock in return for a
one-year management contract between Comprehensive Behavioral and AMH, one-third
of the shares of AMH and a one year option to acquire all of the shares of AMH
for up to 132,162 additional shares of the Company's Common Stock to be issued
based on three-year net revenue requirements. AMH currently provides behavioral
managed care services in Florida. The terms of the management agreement include
an employment contract with Comprehensive Behavioral for the former president of
AMH. The management contract has not been fully executed; however, AMH has
assigned its revenues and associated expenses to Comprehensive Behavioral
effective April 1, 1995. The Company's consolidated financial statements as of
May 31, 1995 reflect such revenue assignment and expense assumption.
On February 1, 1995, the Company purchased certain assets of Alternative
Psychiatric Centers, Inc., ("APC"), a behavioral medicine contract management
company based in Southern California for $50,000, from Drew Q. Miller, who
joined the Company and is currently Chief Financial Officer and Chief Operating
Officer. APC had two operating locations with three contract units offering
inpatient, outpatient and partial hospitalization services.
On November 22, 1994, the Company sold its CareUnit Hospital of Orlando.
Proceeds from the sale were utilized for working capital purposes. On March 3,
1995, the Company sold its Starting Point, Oak facility in
43
<PAGE> 44
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
Sacramento, California. Proceeds from this sale were utilized for working
capital purposes and for payment to the IRS in accordance with the Company's
offer in compromise with the IRS. (see Note 15-- "Commitments and
Contingencies").
On April 5, 1993, the Company sold its CareUnit Hospital of Nevada.
Proceeds from the sale were utilized to reduce the Company's senior secured debt
and the remainder was used for working capital purposes. On July 1, 1993, the
Company sold its CareUnit Hospital of Albuquerque and on October 1, 1993, sold
its CareUnit Hospital of South Florida/Tampa. Proceeds from both of these sales
were utilized to reduce the Company's senior secured debt and the remainder was
utilized for working capital purposes. On December 10, 1993, the Company sold
its CareUnit Hospital of Coral Springs. Proceeds from the sale were utilized for
working capital purposes. In April 1994, the Company sold a material portion of
its publishing business. Proceeds from the sale were used for working capital
purposes.
In October 1992, the Company's wholly-owned subsidiary, Starting Point,
Inc., entered into a joint operating agreement with Century HealthCare of
California to manage Newport Harbor Psychiatric Hospital, a 68-bed adolescent
psychiatric facility and Starting Point, Orange County, a 70-bed adult
psychiatric facility. The Company has an 80% interest in this venture. This
agreement was mutually dissolved on February 28, 1993. Pretax losses of
approximately $0.0 million and $0.1 million, net of minority interest, were
included in the consolidated financial statements for the years ended May 31,
1995 and 1994, respectively.
In December 1992, the Company purchased Mental Health Programs, Inc.
based in Tampa, Florida, from the former owner. The Company was operating as
AccessCare, Inc., however, effective August 1, 1995, the Company changed its
name to Comprehensive Behavioral Care, Inc. The terms of the purchase included a
payment of $75,000, issuance of 4,000 shares of the Company's common stock, an
employment agreement, a stock option agreement and the assumption of bank debt
from the former owner. Both the stock option and employment agreements and the
release of the former owner as guarantor of the bank debt are contingent upon
the continued employment of the former owner with the Company. In connection
with this acquisition, the Company recorded goodwill of approximately $829,000.
In July 1993, the Company terminated the employment agreement and subsequently
entered into litigation with the former owner. On November 21, 1994, the Company
reached a settlement agreement with the former owner and will pay $250,000 in
installments through September 1996; forgive the obligations owing under the
indemnification agreement between the Company and the former owner; and satisfy
the terms under the stock purchase agreement dated December 30, 1992 between the
former owner and the Company to issue 16,000 shares of the Company's common
stock. The Company has established a reserve with respect to this settlement.
During the third quarter of 1995, the Company satisfied the terms of the stock
purchase agreement and commenced installment payments to the former owner.
Should the Company be unable to register the 20,000 shares issued to the former
owner prior to December 31, 1995, the Company will be obligated to pay a penalty
in the amount of $50,000.
On July 3, 1991, RehabCare, a wholly-owned subsidiary of the Company as
of May 31, 1991, and the Company completed an initial public offering of
2,500,000 shares of RehabCare common stock. Of the total shares sold to the
public, 1,700,000 shares were sold by the Company and 800,000 shares were new
shares issued by RehabCare. Net proceeds to the Company totaled approximately
$20.6 million, of which approximately $11.3 million was used to pay a portion of
the Company's senior secured debt. A gain of approximately $18 million on the
sale of the RehabCare shares was recorded in the Company's consolidated
statement of operations for the first quarter of fiscal 1992. The Company's
remaining 48% interest (2,300,000 shares) in RehabCare was accounted for on the
equity method (see Note 7-- "Investments in Unconsolidated Affiliates"). The
Company sold its remaining 48% interest in RehabCare to RehabCare during fiscal
1993 and a gain of approximately $13.1 million was recorded in the Company's
consolidated statement of operations for the second quarter of 1993. Net
proceeds
44
<PAGE> 45
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
to the Company totaled $18.8 million which were used for the paydown of a
portion of senior secured debt, short-term borrowings, and to fund working
capital.
NOTE 4-- ACCOUNTS AND NOTES RECEIVABLE
Current notes receivable was $2,750,000 at May 31, 1995 which
represented financing on the sale of Starting Point Oak. The note was collected
in July 1995. There were no current notes receivable as of May 31, 1994. The
following table summarizes changes in the Company's allowance for doubtful
accounts for the years ended May 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
BALANCE AT WRITE-OFF BALANCE AT
BEGINNING ADDITIONS CHARGED TO OF END OF
------------------------
OF YEAR EXPENSE RECOVERIES ACCOUNTS YEAR
---------- ------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1995 . . . . . $1,574 $ 2,808 $(1,385) $(1,901) $1,096
Year ended May 31, 1994 . . . . . 2,489 3,841 (2,283) (2,473) 1,574
Year ended May 31, 1993 . . . . . 4,137 9,379 (3,192) (7,835) 2,489
</TABLE>
During fiscal 1993, the freestanding facilities fully implemented the
current write-off and reserve policy whereby all accounts past a certain aging
category or otherwise deemed by management to be uncollectible are written-off
and recorded as bad debt expense. Any recoveries are reflected on the Company's
statement of operations as a reduction to the provision for doubtful accounts
in the period in which it is received. The Company's reserve for bad debt
represented 25%, 21% and 24% of total receivables, for fiscal years ended May
31, 1995, 1994 and 1993, respectively.
NOTE 5-- PROPERTY AND EQUIPMENT HELD FOR SALE
The Company has decided to dispose of certain freestanding facilities
and other assets (see Note 2-- "Operating Losses and Liquidity"). Property and
equipment held for sale, consisting of land, building, equipment and other fixed
assets with an historical net book value of approximately $11.8 million and
$23.3 million at May 31, 1995 and 1994, respectively, is carried at estimated
net realizable value of approximately $3.7 million and $6.9 million at May 31,
1995 and 1994, respectively. Operating revenues and operating expenses of the
facilities designated for disposition were approximately $0.1 million and $0.5
million, respectively, for the year ended May 31, 1995, $0.1 million and $1.3
million, respectively, for the year ended May 31, 1994, $0.8 million and $2.1
million, respectively, for the year ended May 31, 1993. In addition, $1.0
million was reclassified to property and equipment during fiscal 1994 to adjust
property to its estimated fair market value.
45
<PAGE> 46
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
A summary of the transactions affecting the carrying value of property
and equipment held for sale is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1995 1994 1993
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . $ 6,939 $ 15,352 $ 35,568
Designation of facilities as property and equipment held for sale 2,347 --- 10,977
Carrying costs incurred during phase-out period . . . . . . . . . 420 1,241 1,330
Carrying value of assets sold . . . . . . . . . . . . . . . . . . (5,619) (7,981) ---
Contingencies on properties sold . . . . . . . . . . . . . . . . --- (848) ---
Loss on sale/write-down of facilities . . . . . . . . . . . . . . (341) (825) (3,670)
Redesignation of facilities as continuing operations . . . . . . --- --- (28,853)
------- -------- --------
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,746 $ 6,939 $ 15,352
======= ======== ========
</TABLE>
Contingencies for properties sold represent unresolved liabilities at the time
of sale. Proceeds from the sale of property and equipment held for sale were
$3.1 million (net of the $2.7 million note receivable) and $9.8 million for
fiscal 1995 and 1994, respectively. There were no sales proceeds in fiscal 1993.
The loss on sale/write-down of property and equipment held for sale is reflected
on the Company's statement of operations and consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gain on properties sold . . . . . . . . . . . . . . . . . . . $ 836 $ 1,825 $ ---
Loss/write-down of property and equipment . . . . . . . . . . (495) (1,000) ---
Adjustment to estimated property values . . . . . . . . . . . (341) (825) (3,670)
------ ------- --------
$ --- $ --- $ (3,670)
====== ======= ========
</TABLE>
Property and equipment held for sale at May 31, 1992 included certain
hospitals which were proposed for inclusion in sale/leaseback transactions and
were carried at estimated net realizable value totaling $27.8 million. In early
fiscal 1993, the Company had expected to sell certain freestanding facilities to
CMP Properties, Inc. and lease them back. The facilities expected to be sold and
leased back were carried at estimated net realizable value which had been
reduced for estimated selling costs for these facilities. On October 28, 1992,
the board of directors of the Company terminated its plans for the public
offering of shares of common stock of its wholly owned subsidiary CMP
Properties, Inc. As a result, the proposed sale of hospitals to CMP Properties
subject to leaseback to the Company was not completed, and the properties which
were to be part of the transaction and were designated as assets held for sale
were reclassified during the second quarter as property and equipment.
46
<PAGE> 47
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
NOTE 6-- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
-------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and improvements . . . . . . . . . . . . . . . . . . . . . . $ 2,122 $ 4,063
Buildings and improvements . . . . . . . . . . . . . . . . . . . 16,260 18,192
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . 4,710 4,817
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . 1,280 1,365
Capitalized leases . . . . . . . . . . . . . . . . . . . . . . . 809 889
------- -------
25,181 29,326
Less accumulated depreciation . . . . . . . . . . . . . . . . . . 13,074 13,338
------- -------
Net property and equipment . . . . . . . . . . . . . . . . . . . $12,107 $15,988
======= =======
</TABLE>
Included in property and equipment are write-downs to net realizable
value of $4.2 million and $4.6 million as of May 31, 1995 and 1994,
respectively. The loss on sale/write-down of property and equipment for the
years ended May 31, 1995, 1994 and 1993 were $259,000, $0, and $712,000,
respectively, and are reflected on the Company's statement of operations.
NOTE 7-- INVESTMENTS IN UNCONSOLIDATED AFFILIATES
NeuroAffiliates
The Company has a 50% interest in a joint venture partnership with
another corporation for the purpose of operating two hospitals. Under the terms
of the joint venture agreement, the Company managed Crossroads Hospital and its
partner managed Woodview-Calabasas Hospital. Each of the partners in the joint
venture received a management fee for the hospital it managed. The Company is
currently in negotiation to dissolve this joint venture retroactive to December
1991. The Company retained the hospital it managed and its partner retained the
other. The results of operations of the hospital retained have been included in
the consolidated financial statements beginning January 1, 1992. Crossroads
Hospital continued to be managed by the Company although it was closed in August
1992, and was subleased through the remaining term of the lease which expired in
September 1993. Woodview- Calabasas Hospital continues to be managed by its
joint-venture partner although it was closed in April 1993. Effective January 1,
1992, the Company no longer reported the results of operations for the
NeuroAffiliates joint venture as an investment in unconsolidated affiliates.
Golden Valley Health Center
The Company has a 50% interest in a joint venture agreement with a
subsidiary of HealthOne Corporation (formerly The Health Central System). The
joint venture owned and operated Golden Valley Health Center, a behavioral
medicine facility located in a suburb of Minneapolis, Minnesota. This facility
was sold to GVHC, Inc., an unrelated entity, during fiscal 1989. The terms of
the sale included the joint venture holding a promissory note from the purchaser
of the facility for $2.5 million. The Company serves as managing partner of the
joint venture. The purchaser was forced into receivership in January 1992 and
was dissolved during fiscal 1994. The Company did not receive any proceeds from
this dissolution. In fiscal 1991, the Company recorded its respective loss in
the joint venture as a result of the uncollectability of the promissory note.
The Company is in the process of dissolving this legal entity; however, there
are no longer any transactions or results of operations to report.
47
<PAGE> 48
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
RehabCare Corporation
On July 3, 1991, RehabCare Corporation ("RehabCare"), a wholly-owned
subsidiary of the Company as of May 31, 1991, and the Company completed an
initial public offering of 2,500,000 shares of RehabCare common stock. The
Company's remaining 48% interest (2,300,000 shares) in RehabCare was accounted
for on the equity method. The Company sold its remaining 48% interest in
RehabCare to RehabCare during fiscal 1993 and a gain of approximately $13.1
million was recorded in the Company's consolidated statement of operations for
the second quarter of 1993. Net proceeds to the Company totaled $18.8 million
which were used for the paydown of a portion of senior secured debt, short-term
borrowings, and to fund working capital. As of May 31, 1993, the Company no
longer had any interest in the outstanding common stock of RehabCare. Earnings
under the equity method related to the Company's ownership in RehabCare amounted
to $384,000 for the year ended May 31, 1993. The condensed combined operating
results of affiliates for fiscal 1993 include the results of RehabCare through
the sale of the Company's remaining interest in November 1992. The Company no
longer reports any investment in RehabCare.
Summary of Unconsolidated Affiliates
The Company reported its interest in these affiliates on the equity
method. Due to the termination of operations and/or dissolution of the above
joint ventures, the condensed consolidated assets and liabilities of these
affiliates are zero at May 31, 1995 and 1994. The condensed combined operating
results of affiliates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $11,928
Costs and expenses:
Operating, general and administrative . . . . . . . . . . . $ --- --- 10,536
Depreciation and amortization . . . . . . . . . . . . . . . --- --- 148
------- ------- -------
--- --- 10,684
------- ------- -------
Earnings before income taxes . . . . . . . . . . . . . . . . . --- --- 1,244
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 443
------- ------- -------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $ 801
======= ======= =======
</TABLE>
NOTE 8-- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
-------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Intangible assets, net . . . . . . . . . . . . . . . . . . . . $1,636 $1,762
Deferred contract costs, net . . . . . . . . . . . . . . . . . 99 81
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 319
------ ------
$2,136 $2,162
====== ======
</TABLE>
48
<PAGE> 49
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
NOTE 9-- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
-------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities . . . . . . . . . . . $ 5,737 $ 7,729
Accrued claims payable . . . . . . . . . . . . . . . . . . . . 1,584 454
Accrued restructuring/non-recurring . . . . . . . . . . . . . . 508 1,228
Accrued salaries and wages . . . . . . . . . . . . . . . . . . 980 1,140
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . 407 576
Accrued legal . . . . . . . . . . . . . . . . . . . . . . . . . 198 353
Payable to third-party intermediaries . . . . . . . . . . . . . 584 1,751
Deferred compensation . . . . . . . . . . . . . . . . . . . . . 237 545
------- -------
$10,235 $13,776
======= =======
</TABLE>
One of the Company's subsidiaries provides managed behavioral health and
substance abuse services to members under capitated contracts. The cost of
health care services is recognized in the period in which it is provided and
includes an estimate of the costs of services which have been incurred but not
yet reported. The estimate for accrued claims payable is based on projections of
costs using historical studies of claims paid. Estimates are continually
monitored and reviewed and, as settlements are made or estimates adjusted,
differences are reflected in current operations.
A reserve for restructuring was established in fiscal 1993 for $5.4 million
for the purpose of implementing management's plan for the "global restructuring"
of the Company. It is management's intent to complete the "global restructuring"
plan in fiscal 1996. Management intends to allocate the remaining balance
accordingly: $0.3 million for corporate relocation and consolidation and $0.2
million as severance payments.
The following table sets forth the activity during the years ended May 31,
1995 and 1994:
<TABLE>
<CAPTION>
AS OF MAY 31,
-------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . $1,228 $2,642
Less:
Cash items . . . . . . . . . . . . . . . . . . . . . . . . 620 1,377
Non-cash items . . . . . . . . . . . . . . . . . . . . . . 100 37
------ ------
$ 508 $1,228
====== ======
</TABLE>
Severance payments of $0.3 million and $0.1 million paid in fiscal 1995 and
1994, respectively, were the result of the closure and relocation of three
facilities, as well as, the general downsizing as part of the Company's "global
restructuring" plan. This restructuring resulted in the termination of 91 and 43
employees during fiscal 1995 and 1994, respectively.
49
<PAGE> 50
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
NOTE 10-- LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Senior secured debt:
12.5% secured convertible note, with quarterly interest
payments, maturing in January 1997 (a) . . . . . . . . . . . . $ 2,000 $ ---
------- --------
2,000 ---
7.5% convertible subordinated debentures due 2010 (b) . . . . . . . 9,538 9,538
9% note payable in monthly installments maturing in 1996,
by real and personal property having a net book value
of $2,281 . . . . . . . . . . . . . . . . . . . . . . . . . . 4 41
9% offer in compromise (c) . . . . . . . . . . . . . . . . . . . . 4,566 ---
10% secured promissory note, payable in monthly installments,
maturing in January 1997 (d) . . . . . . . . . . . . . . . . . 899 ---
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . 677 740
Bank debt, interest and principal payable in monthly installments maturing in
August 1997, collateralized by the trust of the
former owner (e) . . . . . . . . . . . . . . . . . . . . . . . 216 312
------- --------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . 17,900 10,631
Less long-term debt in default (b) . . . . . . . . . . . . . . . . 9,538 ---
Less current maturities of long-term debt . . . . . . . . . . . . . 3,285 154
------- --------
Long-term debt, excluding current maturities . . . . . . . . . . . $ 5,077 $10,477
======= ========
</TABLE>
As of May 31, 1995, aggregate annual maturities of long-term debt for
the next five years (in accordance with stated maturities of the respective loan
agreements) are approximately $3,285,000 in 1996, $2,968,000 in 1997, $528,000
in 1998 and $504,000 in 1999, and $400,000 in 2000.
The Company had no revolving loan or short-term borrowings during fiscal
1994 and 1995. The maximum amount outstanding on the revolving loan and
short-term borrowings was approximately $4.2 million during the year ended May
31, 1993. The average amount outstanding of such borrowings, based upon an
average of month-end balances for periods when the Company had such debt
outstanding, was $2.2 million during the year ended May 31, 1993. Weighted
average interest rates for short-term borrowings were 7.54% for the year ended
May 31, 1993.
(a) On January 9, 1995, the Company issued a $2.0 million Secured
Convertible Note due January 9, 1997 to Lindner Bulwark Fund, a series of
Lindner Investments, a business trust. The Note is secured by first priority
liens on two of the Company's operating hospital properties. The Note bears
interest at the rate of 12 1/2% per annum, payable quarterly, and in the event
of a default, a charge of 2 1/2% per annum until the default is cured. Prior to
maturity, the Note is redeemable, in whole or in part, at the option of the
Company at a redemption price initially of 120% of the amount of principal
redeemed, declining after January 9, 1996 to 110% of principal. Until paid, the
principal amount of the Note is convertible into the Company's Common Stock, par
value $0.01, at the rate of $6.00 per share (which was the fair market value on
the date of signing). The maximum number of shares issuable upon conversion of
the Note was approximately 333,333, subject to adjustments for dilution and
recapitalization, which is under 15% of the undiluted number of shares of Common
Stock outstanding. The
50
<PAGE> 51
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
proceeds were used to pay costs of closing unprofitable operations, working
capital and other general corporate purposes.
(b) In April 1985, the Company issued $46 million in 7 1/2% Convertible
Subordinated Debentures (the "Debentures"). These Debentures require that the
Company make semi-annual interest payments in April and October at an interest
rate of 7.5% per annum. The Debentures are due in 2010 but may be converted to
common stock of the Company at the option of the holder at a conversion price of
$230.00 per share, subject to adjustment in certain events. The Debentures are
also redeemable at the option of the Company in certain circumstances. Mandatory
annual sinking fund payments sufficient to retire 5% of the aggregate principal
amount of the Debentures are required to be made on each April 15 commencing in
April 1996 to and including April 15, 2009. Should the Company default on its
senior debt, then the Company may be precluded from paying principal or interest
on the Debentures until such default is cured or waived. During fiscal 1991,
holders of approximately $36.5 million Debentures voluntarily converted their
Debentures into 11,667,200 shares of common stock at a temporarily reduced
conversion price.
The Company did not make its payment of interest on the Debentures when
such payment was scheduled on October 17, 1994. In early February 1995, a group
of holders and purported holders of the Debentures gave notice of acceleration
of the entire amount of principal and interest due under the Debentures, and on
February 24, 1995, a subset of such persons filed an involuntary petition in the
United States Bankruptcy Court for the Northern District of Texas under Chapter
7 of the U.S. Bankruptcy Code. On March 3, 1995, the Company entered into a
letter agreement with a representative of the certain holders of the Debentures
who had taken such actions. The agreement provides for a consensual,
out-of-court resolution that the Company's Board of Directors has approved as in
the best interests of the Company, its stockholders and other stakeholders. The
holders' representative agreed to use best efforts to provide notices of waiver
of the interest non-payment default, notices of rescission of the Debenture
acceleration and the effects thereof, and consent to the immediate dismissal of
the involuntary Chapter 7 petition. In return, the Company has agreed to use
best efforts to provide an opportunity to holders of Debentures to tender their
Debentures to the Company pursuant to an exchange offer to be made by the
Company to the holders of the Debentures. The offer consideration will consist
of $500 in cash and $120 worth in shares of Common Stock at a defined value per
each $1,000 in face amount of Debentures. Tendering holders will not receive
interest calculated from and after April 15, 1994 (which includes the October
17, 1994 and April 17, 1995 payments) and in lieu of calculated interest will
receive an interest payment of $80 per $1,000 principal amount of Debentures. If
the exchange offer with holders of Debentures is consummated on the terms in the
letter agreement and assuming the tender of 100% of the outstanding Debentures,
the portion of the offer consideration which will be payable in cash by the
Company would be approximately $5,550,000. Among the factors affecting the
anticipated exchange offering are the various conditions to the consummation of
the offer and the ability of the Company to finance the cash payment necessary,
and no assurance can be made that the exchange offer will be successfully
completed. Failure to consummate the Debenture exchange offer may result in the
Debenture holders instituting involuntary bankruptcy proceedings and/or in the
Company considering alternative actions including filing for voluntary
protection from creditors. In such case, the Company believes that the recovery
to it security holders would be less in a bankruptcy case than the recovery that
may be achieved under the consensual, out-of-court arrangement the Company has
reached. In addition, the letter agreement provides for a pledge of all of the
shares of CareUnit, Inc. to secure the Company's obligation to purchase the
Debentures, pursuant to the exchange or otherwise; and failure to complete an
exchange could result in a foreclosure sale of such shares. The foregoing is
intended to disclose event, and does not constitute an offer to the holders of
the Company's Debentures. Any such offer may only be made pursuant to an
exchange offer, and in conformity with the relevant rules and regulations of the
Securities Act of 1933. As a result of the default on the interest payment to
the holders, the Company has classified the outstanding principal amount of the
Debentures as current as of May 31, 1995.
51
<PAGE> 52
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
(c) In December 1994, the Company reached a final settlement with the
Internal Revenue Service ("IRS") on the payroll tax audit (see Note 15--
"Commitment and Contingencies") pursuant to which the Company entered into an
Offer in Compromise and will pay the IRS $5.0 million with the Company having no
obligation to pay any penalties or accrued interest. Payment terms have been
accepted at 50% within 90 days (extended an additional 120 days) of finalization
with the remaining balance financed over the next five years. In March 1995, the
Company paid $350,000 to the IRS against the initial payment due. The Company
paid the remaining balance (of the initial payment) of $2,150,000 on July 10,
1995. The Company commenced monthly installment payments to the IRS in April
1995. Interest accrues at 9% per annum and is due and payable upon billing at
the end of the term.
The Company has filed its 1995 Federal tax return which included a
refund claim to the Company for $9.4 million (see Note 12-- "Income Taxes").
This refund is not reflected on the Company's consolidated financial statements
as of May 31, 1995.
(d) In May 1995, the Company and a subsidiary entered into a $1.0
million promissory note with PMR Corporation. Performance of the obligations
under the note is secured by a deed of trust on the property of a subsidiary.
The note provides for the payment of interest at a fixed rate of 10% per annum.
The Company made a principal payment of $125,000 in April 1995 and paid $50,000
in May 1995. The note requires equal monthly principal payments commencing June
1, 1995 and continuing through February 1997.
(e) On December 30, 1992, the Company assumed approximately $456,000 in
bank debt with the purchase of Mental Health Programs, Inc. (see Note
3--"Acquisition and Dispositions"). The note is secured and guaranteed by the
trust of the former owner of Mental Health Programs, Inc. The release of
collateral and guarantee are contingent upon continued employment of the former
owner with the Company. The note is payable at $8,000 per month with the balance
due on August 31, 1997. Interest is at prime plus 1.5%.
The net book value of assets pledged to secure the above debt aggregated $11.5
million at May 31, 1995.
NOTE 11-- LEASE COMMITMENTS
The Company leases certain facilities, furniture and equipment. The
facility leases contain escalation clauses based on the Consumer Price Index and
provisions for payment of real estate taxes, insurance, maintenance and repair
expenses. Total rental expenses for all operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals . . . . . . . . . . . . . . . . . . . . . . $1,085 $1,342 $1,257
Contingent rentals . . . . . . . . . . . . . . . . . . . . --- --- 15
------ ------ ------
Total rentals . . . . . . . . . . . . . . . . . . . . . . . $1,085 $1,342 $1,272
====== ====== ======
</TABLE>
Assets under capital leases are capitalized using interest rates
appropriate at the inception of each lease; contingent rents associated with
capital leases in fiscal 1995, 1994 and 1993 were $79,000, $61,000 and $60,000,
respectively. The net book value of capital leases at May 31, 1995 and 1994 was
$549,000 and $567,000, respectively.
52
<PAGE> 53
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
Future minimum payments, by year and in the aggregate, under capital
leases and noncancellable operating leases with initial or remaining terms of
one year or more consist of the following at May 31, 1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138 $ 319
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 149
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 84
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 22
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 2
Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . 770 ---
------ -------
Total minimum lease payments . . . . . . . . . . . . . . . . . . . 1,436 $ 576
=======
Less amounts representing interest . . . . . . . . . . . . . . . . 759
------
Present value of net minimum lease payments . . . . . . . . . . . $ 677
======
</TABLE>
NOTE 12-- INCOME TAXES
Provision for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $ ---
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 301 194
------ ------ ------
$ 180 $ 301 $ 194
====== ====== ======
</TABLE>
A reconciliation between the provision for income taxes and the amount
computed by applying the statutory Federal income tax rate (34%) to loss before
income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Benefit from income taxes at the statutory tax rate . . . . . . . . $(3,860) $(2,567) $(3,878)
State income taxes, net of federal tax benefit . . . . . . . . . . 119 199 128
Amortization of intangible assets . . . . . . . . . . . . . . . . . 39 38 30
Tax effect of net operating loss . . . . . . . . . . . . . . . . . 3,701 2,607 3,888
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 24 26
------- ------- -------
$ 180 $ 301 $ 194
======= ======= =======
</TABLE>
Significant components of the Company's deferred tax liabilities and assets are
comprised of the following:
53
<PAGE> 54
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1995 1994
---- ----
<S> <C> <C>
Deferred Tax Assets:
Net operating losses . . . . . . . . . . . . . . . . $18,867 $14,968
Restructuring/non-recurring costs . . . . . . . . . . 4,853 9,418
Alternative minimum tax credits . . . . . . . . . . . 666 666
Bad debt expense . . . . . . . . . . . . . . . . . . 333 568
Employee benefits and options . . . . . . . . . . . . 432 663
Other, net . . . . . . . . . . . . . . . . . . . . . 273 2,186
------- -------
Total Deferred Tax Assets . . . . . . . . . . . 25,424 28,469
Valuation Allowance . . . . . . . . . . . . . . . . . (22,439) (24,417)
------- -------
Net Deferred Tax Assets . . . . . . . . . . . . 2,985 4,052
------- -------
Deferred Tax Liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . (1,866) (2,929)
State income taxes . . . . . . . . . . . . . . . . . (806) (654)
Cash to accrual differences . . . . . . . . . . . . . (313) (469)
------- -------
Total Deferred Tax Liabilities . . . . . . . . . ( 2,985) (4,052)
------- -------
Net Deferred Tax Assets . . . . . . . . . . . . . . . . . $ --- $ ---
======= =======
</TABLE>
The Company was previously subject to alternative minimum tax ("AMT") at
a 20% rate on alternative minimum taxable income which is determined by making
statutory adjustments to the Company's regular taxable income. Net operating
loss carryforwards and carry backs may be used to offset only 90% of the
Company's alternative minimum taxable income. The Company will be allowed a
credit carryover of $666,000 against regular tax in the event that regular tax
expense exceeds the alternative minimum tax expense (see Note 15-- "Commitments
and Contingencies").
On July 20, 1995, the Company filed its Federal tax return for fiscal
1995. On August 11, 1995, the Company filed Form 1139 "Corporate Application for
Tentative Refund" to carry back losses described in Section 172(f) requesting a
refund to the Company in the amount of $9.4 million. On August 30, 1995, the
Company also filed amended Federal tax returns for several prior fiscal years to
carry back losses under Section 172(f). The amount of refund claimed on the
amended returns is approximately $11.7 million for 1986; $0.4 million for 1985;
$0.7 million for 1983 and $0.4 million for 1982 which is a total of $13.2
million for the refunds from amended returns and a total of $22.6 million for
all refunds requested. Section 172(f) is an area of the tax law without
substantial legal precedent. There may be opposition by the IRS as to the
Company's ability to carry back such claim. Therefore, no assurances can be made
to the Company's entitlement to such claim. Consequently, a valuation allowance
was established against the potential tax benefit.
At May 31, 1995, the Company has Federal accumulated net operating
losses of approximately $50 million, which if carried forward would expire in
2006 through 2009. Subsequent to May 31, 1995, and in accordance with Section
172(f), the Company has carried back the entire $50 million of Federal
accumulated net operating losses requesting refunds of approximately $22.6
million. In the event these refund requests are ever challenged by the IRS, the
Company may be unable to utilize some or all of its net operating losses
depending upon the availability of sufficient net income from which to deduct
such losses during a three-year carry back or fifteen-year carryover period. The
Company may be further restricted as to its use of any of these losses if the
Company issues or agrees to issue amounts of additional equity which may
constitute a change in ownership under Section 382. All benefits recoverable
from Federal income taxes paid since May 31, 1990 have been recognized. No
further carry backs are available.
54
<PAGE> 55
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
NOTE 13-- EMPLOYEE BENEFIT PLANS
The Company had deferred compensation plans ("Financial Security Plans")
for its key executives and medical directors. Under provisions of these plans,
participants elected to defer receipt of a portion of their compensation to
future periods. Upon separation from the Company, participants received payouts
of their deferred compensation balances over periods from five to fifteen years.
Effective January 1, 1989, participants were not offered the opportunity to
defer compensation to future periods. In June 1992, the Company terminated the
plan and placed the remaining participants on 5-year payments. The consolidated
balance sheet as of May 31, 1995 reflects the present value of the obligation to
the participants under the plan of $660,000.
The Company has a 401(k) Plan, which is a defined contribution plan
qualified under Section 401(k) of the Internal Revenue Code, for the benefit of
its eligible employees. All full-time and part-time employees who have attained
the age of 21 and have completed six consecutive months of employment are
eligible to participate in the plan. Effective June 1, 1994, eligibility was
modified to one year of employment and a minimum of twenty (20) regular
scheduled hours per week. Each participant may contribute from 2% to 15% of his
or her compensation to the plan subject to limitations on the highly compensated
employees to ensure the plan is non-discriminatory. The Company made
approximately $29,000, $20,000 and $9,000 in contributions to the Plan in fiscal
1995, 1994 and 1993, respectively.
NOTE 14-- STOCKHOLDERS' EQUITY
The Company is authorized to issue 60,000 shares of preferred stock with
a par value of $50 per share. No preferred shares have been issued.
The Company has a 1988 Incentive Stock Option Plan and a 1988
Nonstatutory Stock Option Plan (the "1988 Plans"). Options granted under the
1988 Incentive Stock Option Plan are intended to qualify as incentive stock
options ("ISOs") under Section 422 of the Internal Revenue Code. In fiscal 1992,
the 1988 Incentive Stock Option Plan and 1988 Nonstatutory Stock Option Plan
were amended to increase the total number of shares reserved for issuance under
the plans and to expand the class of eligible persons under the nonstatutory
plan to include advisors and consultants. Options granted under the 1988
Nonstatutory Stock Option Plan do not qualify as ISOs. The maximum number of
shares originally subject to options were 150,000 and 40,000 for the ISOs and
nonstatutory options, respectively. In fiscal 1995, the plans were amended to
increase the number of shares authorized for issuance under the Company's 1988
incentive stock option plan to 500,000 and the Company's 1988 Nonstatutory Stock
Option Plan to 200,000. Such amendment was ratified by the shareholders on
November 14, 1994. The following table sets forth the activity related to ISOs
for the years ended May 31, 1995, 1994 and 1993:
55
<PAGE> 56
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
-------------------------
SHARES PER SHARE AGGREGATE
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, May 31, 1992 . . . . . . . . . . . . . . . . . . . . . 76,517 $12.50-33.80 $1,462
Options forfeited in fiscal 1993 . . . . . . . . . . . . . (13,000) $12.50-33.80 (283)
------- ------
Balance, May 31, 1993 . . . . . . . . . . . . . . . . . . . . . 63,517 $12.50-30.00 $1,179
Options forfeited in fiscal 1994 . . . . . . . . . . . . . (46,750) $12.50-30.00 (830)
------- ------
Balance, May 31, 1994 . . . . . . . . . . . . . . . . . . . . . 16,767 $12.50-30.00 $ 349
Options canceled in fiscal 1995 . . . . . . . . . . . . . . (5,000) $ 6.25- 7.50 (34)
Options issued in fiscal 1995 . . . . . . . . . . . . . . . 227,500 $ 6.25-12.00 1,684
Options forfeited in fiscal 1995 . . . . . . . . . . . . . (53,100) $ 6.25-30.00 (493)
------- ------
Balance, May 31, 1995 . . . . . 186,167 $ 6.25-30.00 $1,506
======= ======
</TABLE>
Options under the 1988 ISO Plan to purchase 62,115 shares and 12,601
shares were exercisable as of May 31, 1995 and 1994, respectively.
The following table sets forth the activity related to nonstatutory
options for the years ended May 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
-------------------------
SHARES PER SHARE AGGREGATE
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, May 31, 1992 . . . . . . . . . . . . . . . . . . . . . 32,000 $12.50 $ 400
Options exercised in fiscal 1993 . . . . . . . . . . . . . (4,000) $12.50 (50)
------- ------
Balance, May 31, 1993 . . . . . . . . . . . . . . . . . . . . . 28,000 $12.50 $ 350
Options forfeited in fiscal 1994 . . . . . . . . . . . . . (12,000) $12.50 (150)
------- ------
Balance, May 31, 1994 . . . . . . . . . . . . . . . . . . . . . 16,000 $12.50 $ 200
Options forfeited in fiscal 1995 . . . . . . . . . . . . . (12,000) $12.50 (150)
Options canceled in fiscal 1995 . . . . . . . . . . . . . . (4,000) $12.50 (50)
------- ------
Balance, May 31, 1995 . . . . . . . . . . . . . . . . . . . . . --- $ ---
======= ======
</TABLE>
There were no nonstatutory options exercisable as of May 31, 1995.
Nonstatutory options to purchase 16,000 shares were exercisable as of May 31,
1994.
The per share exercise price of options issued under the plans is
determined by the Board of Directors, but in no event is the option exercise
price so determined less than the then fair market value (as defined in the
plans) of the shares at the date of grant. In the case of an ISO, if, on the
date of the grant of such option, the optionee is a restricted stockholder (as
defined in the plans), the option exercise price cannot be less than 110% of the
fair market value of the shares on the date of the grant.
Options vest and become exercisable at such times and in such
installments as the Board of Directors provides for in the individual option
agreement, except that an option granted to a director may not be exercised
until the expiration of one year from the date such option is granted. Subject
to the limitation with respect to the vesting of options granted to directors,
the Board of Directors may in its sole discretion accelerate the time at which
an option or installment thereof may be exercised.
56
<PAGE> 57
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
In fiscal 1995, the Company implemented the Company's Directors' Stock
Option Plan (the "Director's Plan"). The terms of the Directors' Plan provides
for the grant of only non-qualified stock options. The Directors' Plan is not
subject to ERISA, nor is it qualified under code section 401(a) of the Internal
Revenue Code. The maximum number of shares subject to option are 200,000, and
all non-employee directors of the Company are eligible to participate in the
Directors' Plan. The Directors' Plan provides for the grant of non-qualified
stock options to non-employee directors as follows: (1) each individual serving
as a non-employee director as of the effective date were granted a non-qualified
stock option to purchase 10,000 share of common stock ("Initial Grant"); (2)
each individual who first becomes a non-employee director on or after the
effective date, will be granted, at the time of such election or appointment a
non-qualified stock option to purchase 10,000 shares of common stock ("Initial
Grant"); (3) commencing with the 1995 annual meeting of the Company's
stockholders, each individual who at each annual meeting of the Company's
stockholders remains a non-employee director will receive an additional
non-qualified stock option to purchase 2,500 shares of common stock. Each
non-qualified stock option is exercisable at a price equal to the common stock's
fair market value as of the date of grant. Initial grants vest annually in 25%
increments beginning on the first anniversary of the date of grant, provided the
individual is still a director on those dates. Annual grants will become 100%
vested as of the first annual meeting of the Company's stockholders following
the date of grant, provided the individual is still a director as of that date.
An optionee who ceases to be a director shall forfeit that portion of the option
attributable to such vesting dates on or after the date he or she ceases to be a
director.
During fiscal 1995, 50,000 non-qualified options were granted in the
Directors' Plan at $7.00 per share. There were no options under the Directors'
Plan exercisable as of May 31, 1995.
In July 1992, options not under any plan were issued to the former Vice
Chairman. Options for 100,000 shares were granted at an exercise price ranging
from $15.00 to $30.00. These options were exercisable 25 percent at grant date
and each year thereafter. The option was amended in November 1994 for 12,500
shares at $7.50 and expired on August 18, 1995. In December 1992, options not
under any plan were issued to the former owner of Mental Health Programs, Inc.,
as an inducement essential to the purchase of Mental Health Programs, Inc. (see
Note 3-- "Acquisitions and Dispositions"). Options for 10,000 shares were
granted at an exercise price ranging from $15.00 to $30.00. These options are
exercisable 25 percent after one year from the grant date and each year
thereafter and were contingent upon the continued employment with the Company.
In July 1993, the Company terminated the employment agreement with the former
owner and subsequently entered into litigation. On November 21, 1994, the
Company reached a settlement agreement with the former owner and as part of the
settlement agreement issued 16,000 shares of the Company's common stock. In
February 1993, options not under any plan were issued to the Company's former
Chief Financial Officer. Options for 50,000 shares were granted at an exercise
price ranging from $10.00 to $20.00. These options become exercisable 25 percent
after one year from the grant date and each year thereafter. In November 1994,
the former Chief Financial Officer resigned and all options have expired.
In August 1994, options not under any plan were issued to the interim
President and Chief Executive Officer as an inducement essential to his
appointment as President and Chief Executive Officer. Options for 50,000 shares
were granted at an exercise price ranging from $7.50 to $15.00 per share. These
options were exercisable 50 percent at grant date and 25 percent each year
thereafter.
In August 1994, options not under any plan were issued to the President of
a subsidiary of the Company. Options for 15,000 shares were granted as an
exercise price ranging from $7.50 to $15.00 per share. These options vest
one-third one year from the date of grant and one-third each year thereafter.
57
<PAGE> 58
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
In October 1994, options not under any plan were issued to a non-policy
making vice president of a subsidiary of the Company. Options for 20,000 shares
were granted at an exercise price ranging from $7.50 to $15.00 per share.
Options for 7,500 shares vest one year from the date of grant; options for 7,500
shares two years from the date of grant and the remaining options for 5,000
shares vest on the three year anniversary of the date of grant. In addition,
vesting of all options are subject to certain performance requirements. Failure
to meet such annual performance requirements will result in the forfeiture of
all or part of such options which vest in that year.
On February 1, 1995, the Company sold an aggregate of 100,000 shares of
Common Stock to one accredited investor in a private offering for an aggregate
purchase price of $600,000 paid in cash on February 7, 1995. Such agreement was
amended in June 1995 for an additional 15,000 shares as an adjustment for delay
in registration of shares without additional payment. On April 15, 1995 the
Company sold an aggregate of 150,000 shares of Common Stock to an accredited
investor in a private offering for an aggregate purchase price of $975,000 paid
in cash on April 19, 1995. It is the Company's intent to amend this agreement
for an additional 22,500 shares as an adjustment for delay in registration of
shares without additional payment.
On April 1, 1995, the Company agreed to issue American Mental Health Care,
Inc. ("AMH") 44,054 shares of the Company's Common Stock in return for a
one-year management contract between Comprehensive Behavioral and AMH, one-third
of the shares of AMH and a one year option to acquire all of the shares of AMH
for up to 132,162 additional shares of the Company's Common Stock to be issued
based on three-year net revenue requirements. AMH currently provides behavioral
managed care services in Florida. The terms of the management agreement include
an employment contract with Comprehensive Behavioral for the former president of
AMH.
On May 22, 1995, the Company and its subsidiary, Comprehensive Behavioral
entered into an agreement with Physicians Corporation of America ("PCA"),
providing for PCA to invest $1.0 million in Comprehensive Behavioral for 13 1/2%
of the voting power of Comprehensive Behavioral represented by all of the Series
A Preferred Stock of Comprehensive Behavioral which is also exchangeable at the
option of PCA for 100,000 shares of the Company's Common Stock. The right to
exchange expires in 10 years. As a key to the agreement, so long as PCA remains
an equity holder of Comprehensive Behavioral, PCA and its subsidiaries will
negotiate in good faith to contract with Comprehensive Behavioral for the
delivery of mental health services in all PCA service areas where Comprehensive
Behavioral has an adequate network. In addition, PCA was granted a first right
of refusal regarding any sale of Comprehensive Behavioral. The Series A
Preferred Stock is convertible into 13 1/2% of the common stock of Comprehensive
Behavioral on a fully-diluted basis, subject to certain antidilution
adjustments. The redemption price for the Series A Preferred Stock is equal to
the original purchase price plus 4% for each year the stock is outstanding. The
Company has the right to redeem the Series A Preferred Stock after approximately
five years, and PCA has the right to require the Company to redeem the Series A
Preferred Stock after approximately three years. On liquidation, the holder of
the Series A Preferred Stock will be entitled to a liquidation preference equal
to the redemption price. The Series A Preferred Stock is entitled to receive
dividends, if any, in an amount proportionate to its voting power when any
dividends are declared and paid on the common stock of Comprehensive Behavioral.
On April 19, 1988, the Company declared a dividend of one common share
purchase right ("Right") for each share of common stock outstanding at May 6,
1988. Each Right entitles the holder to purchase one share of common stock at a
price of $300 per share, subject to certain anti-dilution adjustments. The
Rights are not exercisable and are transferable only with the common stock until
the earlier of ten days following a public announcement that a person has
acquired ownership of 25% or more of the Company's common stock or the
commencement or announcement of a tender or exchange offer, the consummation of
which would result in the ownership by a person of 30% or more of the Company's
common stock. In the event that a person acquires 25% or more of the Company's
common stock or if the Company is the surviving corporation in a merger and its
58
<PAGE> 59
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
common stock is not changed or exchanged, each holder of a Right, other than the
25% stockholder (whose Rights will be void), will thereafter have the right to
receive on exercise that number of shares of common stock having a market value
of two times the exercise price of the Right. If the Company is acquired in a
merger or more than 50% of its assets are sold, proper provision shall be made
so that each Right holder shall have the right to receive or exercise, at the
then current exercise price of the Right, that number of shares of common stock
of the acquiring company that at the time of the transaction would have a market
value of two times the exercise price of the Right. The Rights are redeemable at
a price of $.20 per Right at any time prior to ten days after a person has
acquired 25% or more of the Company's common stock.
As of May 31, 1995, the Company has reserved 276,216 shares of Common
Stock for future issuances related to business acquisitions, approximately
773,441 shares related to the conversion of convertible debt and private
placements and 985,500 shares for the exercise of stock options of which
approximately 688,000 shares are for options granted under the Company's 1988
Plans and 200,000 shares under the Directors' Plan. Each of the shares
reserved for future issuance includes one Right as referenced above. As of May
31, 1995, no Preferred Stock is outstanding or reserved for issuance.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
On October 30, 1992, the Company filed a complaint in the United States
District Court for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare") seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost
benefit of certain stockholder appreciation rights in an amount in excess of
$3.6 million and punitive damages. RehabCare filed a counterclaim in the case
seeking a declaratory judgement with respect to the rights of both parties under
the Stock Redemption Agreement, an injunction enjoining the Company from taking
certain action under the Stock Redemption or Restated Shareholders Agreements
and damages in the form of attorneys' fees and costs allegedly incurred by
RehabCare with respect to its issuance of certain preferred stock and with
respect to prior litigation between the parties. The case was tried before a
jury commencing on February 21, 1995. Prior to the presentation of evidence to
the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8,
1995, the jury returned its verdict awarding the Company $2,681,250 in damages,
plus interest and the costs of the action against RehabCare for securities fraud
and for breach of contract. RehabCare has posted a bond in the amount of $3.0
million and filed a motion for new trial or in the alternative, for judgement
as a matter of law, which the court denied its entirety on August 4, 1995. On
September 1, 1995, RehabCare filed a notice of appeal with the District Court
indicating its intent to appeal the matter to the United States Court of
Appeals. Although the Company feels that RehabCare will not prevail in its
appeal, the Company has not recognized any gain with relation to the judgement.
In connection with the proposed sale and lease-back of hospitals to CMP
Properties, Inc., a real estate investment trust, the Company advanced $1.1
million to its financial advisor in fiscal 1992. The financial advisor was
affiliated with several members of the Company's Board of Directors at that
time. The advances, which were to be repaid if the transaction was not
completed, were to be secured by a pledge of common stock in an unrelated
company. The pledged shares of common stock were in the possession of the
Company's primary legal counsel at that time, as collateral for the advances.
After the transaction was terminated, the financial advisor refused to repay the
advances and the Company's legal counsel refused to turn over the collateral to
the Company. The Company has filed an action in the United States District Court
for the District of Oregon (Civil Case No. 94-384 FR) against its former
financial advisor and former legal counsel to recover the advances. The former
financial advisor has counterclaimed against the Company for $1,688,000 for
breach of contract and unjust enrichment. The Company's former law firm has
filed a counterclaim for $193,000 for unpaid legal fees. Management believes
that the counterclaims are without merit and intends to vigorously defend
against them and to pursue the Company's claims.
On June 8, 1994, RehabCare filed a lawsuit against the Company in the
Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement
entered into between the Company and RehabCare in May 1991 (Case No. 663957). An
amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges
that it has incurred attorneys fees in connection with the settlement of certain
tax issues with the IRS and has paid the IRS a settlement amount with respect to
the years 1987 and 1988. RehabCare seeks the recovery from the Company of
$588,000, plus interest, which RehabCare alleges is the amount it incurred for
payments to the IRS in settlement
59
<PAGE> 60
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
and attorneys fees it incurred in dealing with the IRS. The Company has filed
its answer and affirmative defenses contesting the right of RehabCare to obtain
the relief it seeks. Discovery is ongoing. Until such discovery is complete, it
is not possible to predict the likely outcome of the lawsuit. The Company
intends to continue to vigorously defend this matter.
In December 1994, the Company reached a settlement with the Appeals Office
of the Internal Revenue Service ("IRS") on the payroll tax audit for the
calendar years 1983 through 1991 pursuant to which the Company agreed to pay the
IRS $5.0 million with the Company having no obligation to pay any penalties or
accrued interest. The IRS agent conducting the audit asserted that certain
physicians and psychologists and other staff engaged as independent contractors
by the Company should have been treated as employees for payroll tax purposes.
The settlement was reviewed and accepted on behalf of the IRS by its district
counsel. Payment terms have been accepted at 50% within 90 days of finalization
with the remainder financed over the next five years. In March 1995, the Company
paid $350,000 to the IRS against the initial payment due. In return, the IRS
granted the Company an additional 120 days to pay the remaining balance of
$2,150,000. In July 1995, the Company paid the remaining balance of the initial
payment, and continues to make the monthly installment payment pursuant to the
terms of the settlement. The unpaid balance bears interest at 9% per annum due
and payable after the $5.0 million is paid.
The Federal income tax returns of the Company for its fiscal years ended
1984 and 1987 through 1991 were examined by the IRS resulting in a disallowance
of approximately $229,000 in deductions which were offset against the Company's
net operating losses available for carryover. The examination also included the
review of the Company's claim for refund of approximately $205,000 relating to
an amended return for the fiscal year ended May 31, 1992. During completion of
the audit, the IRS noted that the Company had received excess refunds
representing its alternative minimum tax ("AMT") liability of approximately
$666,000 in 1990 and 1991 from the carry back of net operating losses to the
fiscal years ended May 31, 1988 and 1989, respectively. On March 29, 1994, the
Company agreed to the assessment of $666,000 plus interest and received the
final bill of $821,000 during the fourth quarter of fiscal 1994. The Company
paid the assessment including interest during the third quarter of fiscal year
1995. The Company will no longer report on this issue.
An involuntary bankruptcy petition was dismissed on March 6, 1995 pursuant
to an agreement dated March 3, 1995 between the Company and a representative of
the petitioners. Under such agreement the Company has agreed, subject to the
conditions therein, to offer to exchange for its outstanding 7 1/2% Convertible
Subordinated Debentures with a combination of cash and shares. See Note 10--
"Long-Term Debt and Short-Term Borrowings" for a discussion of the Company's
default in the payment of interest on its 7 1/2 % Convertible Subordinated
Debentures and the consequent acceleration of the full principal amount thereof.
The foregoing is intended to disclose an event, and does not constitute an offer
to the holders of the Company's Debentures. Any such offer may only be made
pursuant to an exchange offer, and in conformity with the relevant securities
laws, rules and regulations.
In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criterion
in regard to net tangible assets available to common stock and three year
average net income among others. The Listing and Compliance Committee of the
NYSE has determined to monitor the Company's progress toward returning to
continuing listing standards. Management anticipates success in "global
restructuring" (see Note 2-- "Operating Losses and Liquidity") will be necessary
in order to satisfy the Committee of the Company's progress. The Company met
with representatives of the NYSE during the third quarter of fiscal 1995 and
during the first quarter of fiscal 1996, to discuss the Company's financial
condition and intention to issue shares without seeking approval of shareholders
pursuant to the exception to the NYSE policy for financially distressed
companies.
60
<PAGE> 61
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993
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 some pending cases, claims exceed insurance policy limits and the
Company or a subsidiary may have exposure to liability that is not covered by
insurance. Management believes that the outcome of such lawsuits will not have a
material adverse impact on the Company's financial statements.
NOTE 16-- EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
On June 29, 1995, the Company entered into an amended common stock purchase
agreement with Lindner Growth Fund ("Lindner"). The agreement, among other
things, amends the original common stock purchase between the Company and
Lindner Fund, Inc. dated February 1, 1995 for the purchase of 100,000 shares of
common stock at $6.00 per share. The amended agreement allows for an additional
15,000 shares as an adjustment in the February 1, 1995 purchase for delay in
registration of shares and without additional payment. In addition, the amended
agreement provides that Lindner agreed to acquire an additional 135,000 shares
of common stock for $6.00 per share. The Company received the proceeds for such
purchase on July 14, 1995.
On July 31, 1995, the Company entered into an agreement with an accredited
investor to acquire, through private placement, 4,100 respectively, of common
stock of the Company for $6.00 per share. The Company received the proceeds on
August 15, 1995.
On August 15, 1995, the Company entered into agreements with two accredited
investors to acquire, through private placement, 10,833 and 5,000 shares,
respectively, of common stock of the Company for $6.00 per shares. The Company
received the proceeds on August 17, 1995.
On August 18, 1995, the Company settled its claim filed against its
fidelity bond carrier in the amount of $425,000. The Company received the
proceeds on September 6, 1995.
61
<PAGE> 62
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Previously reported on Form 8-K dated May 22, 1995, Form 8-K/A dated May
22, 1995 and Form 8-K dated July 5, 1995 incorporated herein by reference.
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EXECUTIVE
COMPENSATION.
The Company expects to file its definitive proxy statement for the 1995
annual meeting of shareholders no later than 120 days after the end of the
fiscal year with the Securities and Exchange Commission. The information set
forth therein under "Election of Directors" and "Executive Compensation" is
incorporated herein by reference. Executive Officers of Comprehensive Care
Corporation and principal subsidiaries are listed on page 14 of this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required is set forth under the caption "Principal
Stockholders" in the proxy statement for the 1995 annual meeting of shareholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required is set forth under the captions "Compensation
Committee Interlocks and Insider Participation" and "Certain Transactions" in
the proxy statement for the 1995 annual meeting of shareholders and is
incorporated herein by reference.
62
<PAGE> 63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
Included in Part II of this report:
Report of Independent Auditors
Report of Independent Accountants
Consolidated Balance Sheets, May 31, 1995 and 1994
Consolidated Statements of Operations, Years Ended May 31, 1995,
1994 and 1993
Consolidated Statements of Stockholders' Equity, Years Ended May
31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows, Years Ended May 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
None.
Other schedules are omitted, as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND REFERENCE
------ -------------------------
<S> <C>
3.1 Restated Certificate of Incorporation as amended (12).
3.2 Restated Bylaws as amended November 14, 1994 (12).
4.1 Indenture dated April 25, 1985 between the Company and Bank
of America, NT&SA, relating to Convertible Subordinated
Debentures (1).
4.3 Rights Agreement dated as of April 19, 1988 between the
Company and Security Pacific National Bank (2).
4.4 Rights Agreement between the Registrant and Continental Stock
Transfer & Trust Company dated April 19, 1988 restated and
amended October 21, 1994 (11).
10.1 Standard form of CareUnit Contract (3).
10.2 Standard form of CarePsychCenter Contract (3).
10.4 Financial Security Plan for executive management and medical
directors (4).*
10.5 Form of Stock Option Agreement (3).*
10.6 Form of Indemnity Agreement as amended March 24, 1994 (9).*
10.28 The Company's Employee Savings Plan as amended and restated
as of June 30, 1993 (5).*
10.31 Agreement between the Company and Livingston & Company dated
April 1, 1991 (5).
10.32 Shareholder Agreement dated as of May 8, 1991 between the
Company and RehabCare Corporation (6).
10.33 Tax Sharing Agreement dated as of May 8, 1991 between the
Company and RehabCare Corporation (6).
10.35 Agreement between Company and Livingston & Co. dated December
21, 1991 (7).
10.36 Option Agreement with Richard W. Wolfe dated July 1, 1992
(7).
10.37 Redemption Agreement dated September 1, 1992 between
RehabCare and the Company (7).
10.40 1988 Incentive Stock Option and 1988 Nonstatutory Stock
Option Plans, as amended (11).*
10.46 Employment Agreement dated December 30, 1992 between the
Company and Walter E. Afield, M.D. (8).
</TABLE>
63
<PAGE> 64
<TABLE>
<S> <C>
10.47 Non-qualified Option Agreement dated December 30, 1992
between the Company and Walter E. Afield, M.D. (8).
10.48 Non-qualified Stock Option Agreement dated February 2, 1993,
between the Company and Fred C. Follmer (9).*
10.49 Non-qualified Stock Option Agreement dated August 25, 1994
between the Company and Chriss W. Street (10).*
10.50 Non-qualified Stock Option Agreement dated August 25, 1994
between the Company and Ronald G. Hersch (10).
10.54 1995 Directors Stock Option Plan (11).*
10.55 Non-qualified Stock Option Agreement dated October 11, 1994
between the Company and Richard L. Powers (11).
10.56 Employment Agreement dated January 1, 1995 between the
Company and Chriss W. Street (11).*
10.57 Secured Convertible Note Purchase Agreement dated January 5,
1995 between the Company and Lindner Bulwark Fund, an
accredited investor (11).
10.58 Stock Purchase Agreement dated February 1, 1995 between the
Company and Lindner Funds, Inc., an accredited investor (12).
10.59 Directors and Officers Trust dated February 27, 1995 between
the Company and Mark Twain Bank (12).*
10.60 Letter Agreement between the Company and Jay H. Lustig, a
representative of the holders of the 7 1/2% Convertible
Subordinated Debentures (12).
10.61 Common Stock Purchase Agreement dated April 15, 1995 between
the Company and James R. Moriarty, an accredited investor
(13).
10.62 Amended Common Stock Purchase Agreement dated June 29, 1995
between the Company and Lindner Growth Fund, an accredited
investor (14).
10.63 Common Stock Purchase Agreement dated July 31, 1995, between
the Company and W.V.C. Limited, an accredited investor (14).
10.64 Common Stock Purchase Agreement dated August 15, 1995 between
the Company and Helen Jean Quinn, an accredited investor
(14).
10.65 Common Stock Purchase Agreement dated August 15,1995 between
the Company and BLC Investments, an accredited investor (14).
10.66 Preferred Stock Purchase Agreement dated May 23, 1995 between
Physician Corporation of America and Comprehensive Behavioral
Care, Inc. (filed herewith).
10.67 First Right of Refusal Agreement dated May 23, 1995 between
Physician Corporation of America and Comprehensive Behavioral
Care, Inc. (filed herewith).
11 Computation of Loss Per Share (filed herewith).
21 List of the Company's subsidiaries (filed herewith).
23.1 Consent of Ernst & Young LLP (filed herewith)
23.2 Consent of Arthur Andersen LLP (filed herewith).
27 Financial Data Schedules (filed herewith).
</TABLE>
------------------------------------
*Management contract or compensatory plan or arrangement with one or more
directors or executive officers.
<TABLE>
<S> <C>
(1) Filed as an exhibit to the Company's Form S-3 Registration Statement
No. 2-97160.
(2) Filed as an exhibit to the Company's Form 8-K dated May 4, 1988.
(3) Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended May 31, 1988.
(4) Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended May 31, 1990.
(5) Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended May 31, 1991.
(6) Filed as an exhibit to RehabCare Corporation's Form S-1 Registration
Statement No. 33-40467.
(7) Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended May 31, 1992.
</TABLE>
64
<PAGE> 65
<TABLE>
<S> <C>
(8) Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended May 31, 1993.
(9) Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended May 31, 1994.
(10) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
August 31, 1994.
(11) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
November 30, 1994.
(12) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
February 28, 1995.
(13) Filed as an exhibit to the Company's Form 8-K dated April 19, 1995.
(14) Filed as an exhibit to the Company's Form 8-K dated July 17, 1995.
</TABLE>
(b) REPORTS ON FORM 8-K
1) The Company filed a current report on Form 8-K, dated April 19,
1995, to announce, under Item 4, that an accredited investor had
acquired, through private placement, 150,000 shares of restricted
Common Stock of the Company for $6.50 per share.
2) The Company filed a current report on Form 8-K, dated May 22,
1995, to report, under Item 4, Arthur Andersen LLP, ("AA"), the
Company's independent accountants, advised the Company that the
Company did not meet Arthur Andersen's client profile so as to
enable AA to proceed with the Company's audit for the fiscal year
ending May 31, 1995.
3) The Company filed a current report on Form 8-K/A, dated May 22,
1995, to amend the Company's Form 8-K dated May 25, 1995, for the
purpose of appending as an exhibit, under Item 4, the response of
Arthur Andersen LLP ("AA") to the statements made by the Company
in said Form 8-K.
65
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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, September, 1995.
COMPREHENSIVE CARE CORPORATION
By /s/ CHRISS W. STREET
----------------------------
Chriss W. Street
Chairman, President
and Chief Executive Officer
By /s/ DREW Q. MILLER
----------------------------
Drew Q. Miller
(Principal Financial Officer)
By /s/ KERRI RUPPERT
----------------------------
Kerri Ruppert
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates so indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman, President and
Chief Executive Officer
/s/ CHRISS W. STREET (Principal Executive Officer) September 12, 1995
-----------------------------------
Chriss W. Street
Vice President, Chief Financial Officer
and Chief Operating Officer
/s/ DREW Q. MILLER (Principal Financial Officer) September 12, 1995
-----------------------------------
Drew Q. Miller
Vice President, Secretary/Treasurer and
Chief Accounting Officer
/s/ KERRI RUPPERT (Principal Accounting Officer) September 12, 1995
-----------------------------------
Kerri Ruppert
/s/ J. MARVIN FEIGENBAUM Vice Chairman September 12, 1995
-----------------------------------
J. Marvin Feigenbaum
/s/ WILLIAM H. BOUCHER Director September 12, 1995
-----------------------------------
William H. Boucher
</TABLE>
66
<PAGE> 67
<TABLE>
<S> <C> <C>
/s/ RUDY R. MILLER Director September 12, 1995
-----------------------------------
Rudy R. Miller
/s/ W. JAMES NICOL Director September 12, 1995
-----------------------------------
W. James Nicol
</TABLE>
67
<PAGE> 68
COMPREHENSIVE CARE CORPORATION
EXHIBIT INDEX
FISCAL YEAR ENDED MAY 31, 1994
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C> <C>
10.66 Preferred Stock Purchase Agreement dated May 23, 1995 between 69
Physician Corporation of America and Comprehensive
Behavioral Care, Inc. (filed herewith).
10.67 First Right of Refusal Agreement dated May 23, 1995 between 103
Physician Corporation of America and Comprehensive
Behavioral Care, Inc. (filed herewith).
11 Computation of Loss Per Share (filed herewith). 112
21 List of the Company's subsidiaries (filed herewith). 113
23.1 Consent of Ernst & Young LLP (filed herewith) 114
23.2 Consent of Arthur Andersen LLP (filed herewith). 115
27 Financial Data Schedules (filed herewith). 116
</TABLE>
<PAGE> 1
EXHIBIT 10.66
================================================================================
ACCESSCARE, INC.
-------------------
ACCESSCARE PREFERRED
STOCK PURCHASE AGREEMENT
-------------------
Dated as of May 23, 1995
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.1 CERTAIN DEFINED TERMS................................. 1
(a) "Common Stock"............................... 1
(b) "CompCare"................................... 1
(c) "Consolidated"............................... 1
(d) "Debt Securities"............................ 2
(e) "Event of Default"........................... 2
(f) "Indebtedness"............................... 2
(g) "Person"..................................... 2
(h) "Preferred Stock"............................ 2
(i) "Qualified Public Offering".................. 2
(j) "Series A Preferred Stock"................... 3
(k) "Securities Act"............................. 3
(l) "Subsidiary"................................. 3
(m) "Transaction Documents"...................... 3
1.2 ACCOUNTING TERMS...................................... 3
ARTICLE II
PURCHASE, SALE AND TERMS OF SERIES A PREFERRED STOCK
2.1 THE SERIES A PREFERRED STOCK.......................... 3
2.2 CLOSING............................................... 3
ARTICLE III
CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS
3.1 REPRESENTATIONS AND WARRANTIES........................ 4
3.2 DOCUMENTATION AT CLOSING.............................. 4
3.3 CONSENTS, WAIVERS, ETC................................ 5
3.4 ABSENCE OF LITIGATION................................. 5
3.5 PERFORMANCE OF OBLIGATIONS............................ 5
3.6 MATERIAL ADVERSE CHANGE............................... 5
</TABLE>
i
<PAGE> 3
ARTICLE IV
CONDITIONS PRECEDENT TO ACCESSCARE'S OBLIGATIONS
<TABLE>
<S> <C>
4.1 REPRESENTATIONS AND WARRANTIES........................ 6
4.2 DOCUMENTATION AT CLOSING.............................. 6
4.3 CONSENTS, WAIVERS, ETC................................ 6
4.4 ABSENCE OF LITIGATION................................. 7
4.5 PERFORMANCE OF OBLIGATIONS............................ 7
4.6 PAYMENT............................................... 7
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACCESSCARE
5.1 ORGANIZATION AND STANDING OF ACCESSCARE............... 7
5.2 CORPORATE ACTION...................................... 7
5.3 GOVERNMENTAL APPROVALS................................ 7
5.4 LITIGATION............................................ 8
5.5 COMPLIANCE WITH OTHER INSTRUMENTS..................... 8
5.6 STOCK OWNERSHIP....................................... 8
5.7 SECURITIES ACT OF 1933................................ 9
5.8 NO BROKERS OR FINDERS................................. 9
5.9 CAPITALIZATION; STATUS OF CAPITAL STOCK............... 9
5.10 FINANCIAL STATEMENTS.................................. 9
5.11 ABSENCE OF CHANGES.................................... 9
5.12 PROPERTY.............................................. 10
5.13 SUBSIDIARIES.......................................... 10
5.14 TAXES AND TAX RETURNS................................. 10
5.15 INSURANCE............................................. 11
5.16 CERTAIN TRANSACTIONS.................................. 11
5.17 CONTRACTS AND COMMITMENTS............................. 11
5.18 EMPLOYMENT BENEFIT PLANS.............................. 11
5.19 PATENTS, COPYRIGHTS AND TRADEMARKS.................... 12
5.20 ENVIRONMENTAL MATTERS................................. 12
5.21 COMPLIANCE WITH LAWS, CERTIFICATES.................... 12
5.22 DISCLOSURE............................................ 12
5.23 ABSENCE OF UNDISCLOSED LIABILITIES.................... 13
5.24 PROJECTIONS........................................... 13
</TABLE>
ii
<PAGE> 4
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF INVESTOR
<TABLE>
<S> <C>
6.1 RESTRICTED SHARES..................................... 13
6.2 INVESTMENT INTENT..................................... 13
6.3 ABILITY TO BEAR RISK.................................. 13
6.4 INVESTMENT EXPERIENCE................................. 13
6.5 UNMARKETABLE SHARES................................... 14
6.6 ACCREDITED INVESTOR................................... 14
6.7 CORPORATE ASSETS...................................... 14
6.8 LEGENDS............................................... 14
6.9 DUE AUTHORIZATION..................................... 14
6.10 BINDING EFFECT........................................ 15
6.11 CONSENTS AND APPROVALS................................ 15
6.12 CONTRACTS AND COMMITMENTS............................. 15
6.13 NO BROKERS OR FINDERS................................. 15
ARTICLE VII
COVENANTS OF ACCESSCARE AND INVESTOR
7.1 REPORTING REQUIREMENTS................................ 15
7.2 AFFIRMATIVE COVENANTS OF ACCESSCARE OTHER THAN
REPORTING REQUIREMENTS.............................. 16
(a) PAYMENT OF TAXES AND TRADE DEBT.............. 16
(b) MAINTENANCE OF INSURANCE..................... 16
(c) PRESERVATION OF CORPORATE EXISTENCE.......... 16
(d) COMPLIANCE WITH LAWS......................... 16
(e) KEEPING OF RECORDS AND BOOKS OF ACCOUNT...... 17
(f) MAINTENANCE OF PROPERTIES, ETC............... 17
(g) BUDGETS AND BOARD APPROVAL................... 17
(h) FINANCINGS................................... 17
(i) BOARD OF DIRECTORS; INDEMNIFICATION.......... 17
(j) BOARD OF DIRECTORS MEETINGS.................. 17
(k) COMPENSATION COMMITTEE....................... 17
(l) INSPECTION, CONSULTATION AND ADVICE.......... 18
(m) USE OF PROCEEDS.............................. 18
(n) BY-LAWS...................................... 18
7.3 NEGATIVE COVENANTS OF ACCESSCARE...................... 18
(a) DEALINGS WITH AFFILIATES AND OTHERS.......... 18
(b) DIVIDENDS.................................... 19
(c) RESTRICTIVE AGREEMENTS PROHIBITED............ 19
(d) COMPENSATION................................. 19
7.4 CONFIDENTIALITY....................................... 19
7.5 COOPERATION........................................... 19
</TABLE>
iii
<PAGE> 5
ARTICLE VIII
RIGHT TO PARTICIPATE IN FINANCINGS
<TABLE>
<S> <C>
8.1 RIGHT OF PARTICIPATION................................ 20
8.2 EXCEPTIONS............................................ 20
8.3 NO ASSIGNMENT OF RIGHTS............................... 20
ARTICLE IX
OBLIGATIONS PENDING THE CLOSING
9.1 ACCESS................................................ 21
9.2 CONDUCT OF COMPANY'S BUSINESS......................... 21
(a) COMPENSATION................................. 21
(b) ORGANIZATION................................. 21
(c) VENDORS...................................... 21
(d) INSURANCE.................................... 21
(e) LAWSUITS, CLAIMS............................. 22
(f) CERTAIN CHANGES.............................. 22
(g) CONDITION OF ASSETS.......................... 22
(h) TAXES........................................ 22
(i) DIVIDENDS, ETC............................... 22
(j) CORPORATE MATTERS............................ 22
(k) LIABILITIES AND EXPENSES..................... 22
9.3 CONSENTS.............................................. 23
9.4 NOTICE OF BREACH...................................... 23
ARTICLE X
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES............ 23
ARTICLE XI
INDEMNIFICATION
11.1 INDEMNIFICATION BY ACCESSCARE......................... 23
11.2 LIMITATIONS ON INDEMNIFICATION BY ACCESSCARE.......... 23
11.3 INDEMNIFICATION BY INVESTOR........................... 24
11.4 LIMITATIONS ON INDEMNIFICATION BY INVESTOR............ 24
11.5 CLAIMS FOR INDEMNIFICATION............................ 24
11.6 DEFENSE BY INDEMNITOR................................. 24
</TABLE>
iv
<PAGE> 6
ARTICLE XII
MISCELLANEOUS
<TABLE>
<S> <C>
12.1 NO WAIVER; CUMULATIVE REMEDIES........................ 25
12.2 AMENDMENTS, WAIVERS AND CONSENTS...................... 25
12.3 ADDRESSES FOR NOTICES, ETC............................ 25
12.4 COSTS, EXPENSES AND TAXES............................. 26
12.5 BINDING EFFECT; ASSIGNMENT............................ 27
12.6 TERMINATION........................................... 27
12.7 PRIOR AGREEMENTS...................................... 27
12.8 SEVERABILITY.......................................... 27
12.9 GOVERNING LAW......................................... 27
12.10 HEADINGS.............................................. 27
12.11 COUNTERPARTS.......................................... 27
12.12 FURTHER ASSURANCES.................................... 28
12.13 COVENANT OF GOOD FAITH AND FAIR DEALING............... 28
EXHIBITS
Exhibit Index.................................................. 29
</TABLE>
<PAGE> 7
ACCESSCARE PREFERRED STOCK PURCHASE AGREEMENT
THIS ACCESSCARE PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement")
is made and entered into as of May 23, 1995, by and between ACCESSCARE, INC., a
Nevada corporation ("AccessCare"), and PHYSICIAN CORPORATION OF AMERICA, a
Delaware corporation ("Investor").
R E C I T A L S
A. On the date of this Agreement, Comprehensive Care Corporation, a
Delaware corporation ("CompCare") owns 100% of the outstanding capital stock of
AccessCare.
B. AccessCare desires to sell to Investor, and Investor desires to
purchase from AccessCare, the Series A Preferred Stock, as hereinafter defined,
on the terms and conditions of this Agreement and the Transaction Documents.
AGREEMENT
NOW, THEREFORE, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
(a) "Common Stock" includes (a) AccessCare's Common Stock, par
value $1.00 per share, as authorized on the date of this Agreement, (b) any
other capital stock of any class or classes (however designated) of AccessCare,
authorized on or after the date hereof, the holders of which shall have the
right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating dividends after the payment of
dividends and distributions on any shares entitled to preference, and the
holders of which shall ordinarily, in the absence of contingencies, be entitled
to vote for the election of directors of AccessCare (even though the right so to
vote has been suspended by the happening of such a contingency), and (c) any
other securities into which or for which any of the securities described in (a)
or (b) may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
(b) "CompCare" means Comprehensive Care Corporation, a
Delaware corporation.
(c) "Consolidated" when used with reference to any term
defined herein shall mean that term as applied to the accounts of AccessCare and
its Subsidiaries, if any, consolidated in accordance with generally accepted
accounting principles after eliminating intercompany items.
<PAGE> 8
(d) "Debt Securities" means and includes (i) any debt security
of AccessCare that by its terms is convertible into or exchangeable for any
equity security of AccessCare that is a combination of debt and equity, or (ii)
any option, warrant or other right to subscribe for, purchase or otherwise
acquire any such debt security of AccessCare.
(e) "Event of Default" means as to the respective party (i) any
representation or warranty made by AccessCare or Investor in this Agreement, or
by AccessCare (or any officers of AccessCare) or Investor (or any officers of
Investor) in any certificate, instrument or written statement contemplated by or
made or delivered pursuant to or in connection with this Agreement, that shall
prove to have been incorrect in any material respect when made; or (ii)
AccessCare or Investor failing to perform or observe any material term, covenant
or agreement contained in this Agreement or the Series A Preferred Stock or the
Transaction Documents on its part to be performed or observed, and any such
failure remaining unremedied for thirty (30) days after written notice thereof
shall have been given to AccessCare or Investor, as applicable, by the other,
unless such default cannot reasonably be corrected within such period, then, so
long as the party so failing has in good faith commenced to cure such default
and continues to act diligently to cure such default, the period to so cure
shall be extended by such time as may be reasonably necessary to correct such
default for up to thirty (30) additional days (except in the case of any failure
which cannot, by its nature, be remedied, then upon delivery of such notice
there shall have occurred an Event of Default).
(f) "Indebtedness" means all obligations, contingent and
otherwise, which should, in accordance with generally accepted accounting
principles consistently applied, be classified upon the obligor's balance sheet
as liabilities, excluding any liabilities in respect of deferred federal or
state income taxes, but in any event including, without limitation, liabilities
secured by any mortgage on property owned or acquired subject to such mortgage,
whether or not the liability secured thereby shall have been assumed, and also
including, without limitation, (i) all guaranties, endorsements and other
contingent obligations in respect of Indebtedness of others, whether or not the
same are or should be so reflected in said balance sheet, except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business and (ii) the present value of
any lease payments due under leases required to be capitalized in accordance
with applicable Statements of Financial Accounting Standards, determined by
discounting all such payments at the interest rate determined in accordance with
applicable Statements of Financial Accounting Standards.
(g) "Person" means an individual, corporation, partnership,
joint venture, trust, or unincorporated organization, or a government or any
agency or political subdivision thereof.
(h) "Preferred Stock" includes (a) AccessCare's Preferred Stock
as authorized on the date of this Agreement, and (b) any other securities into
which or for which any of the securities described in (a) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger, sale
of assets or otherwise.
(i) "Qualified Public Offering" means and includes the closing
of an underwritten public offering pursuant to an effective registration
statement under the Securities Act, covering the offer and sale of Common Stock
for the account of AccessCare from which the aggregate gross proceeds to
AccessCare shall equal or exceed $5,000,000.
2
<PAGE> 9
(j) "Series A Preferred Stock" shall mean (a) the 135 shares of
AccessCare's Series A Preferred Stock, par value $1.00 per share, as authorized
on the date of this Agreement, and (b) any other securities into which or for
which any of the securities described in (a) may be converted or exchanged
pursuant to a plan of recapitalization, reorganization, merger, sale of assets
or otherwise.
(k) "Securities Act" means the Securities Act of 1933, as
amended, or any similar Federal statute, and the rules and regulations of the
Securities and Exchange Commission (or of any other Federal agency then
administering the Securities Act) thereunder, all as the same shall be in effect
at the time.
(l) "Subsidiary" means any corporation, 50% or more of the
outstanding voting stock of which shall at the time be owned by AccessCare or by
one or more Subsidiaries, or any other entity or enterprise, 50% or more of the
equity of which shall at the time be owned by AccessCare or by one or more
Subsidiaries.
(m) "Transaction Documents" means, collectively, this
Agreement, the Certificate of Designation, the Option Agreement and the First
Right of Refusal Agreement, each as defined elsewhere herein.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles, and all other financial data submitted pursuant to this Agreement
shall be prepared and calculated in accordance with such principles.
ARTICLE II
PURCHASE, SALE AND TERMS OF SERIES A PREFERRED STOCK
2.1 THE SERIES A PREFERRED STOCK. AccessCare has authorized the
issuance, sale and delivery of one hundred thirty-five (135) shares of its
Series A Preferred Stock at an aggregate price of $1,000,000.00 to Investor. The
designation, rights, preferences and other terms and conditions relating to the
Series A Preferred Stock shall be as set forth in the Certificate of Designation
of Rights, Preferences and Privileges of the Series A Preferred Stock attached
as Exhibit 2.1 ("Certificate of Designation").
2.2 CLOSING. AccessCare agrees to issue and sell to Investor and,
subject to and in reliance upon the representations, warranties, terms and
conditions of this Agreement, Investor agrees to purchase, the 135 shares of
Series A Preferred Stock for $1,000,000 in cash payable by wire transfer of
same-day or next-day funds. Such purchase and sale shall take place at a closing
(the "Closing") to be held at Physician Corporation of America, 5835 Blue Lagoon
Drive, Miami, Florida 33126, on May 23, 1995, at 1:00 P.M. Eastern Daylight
Time, or on such other date and at such time as may be mutually agreed upon by
the parties. At the Closing, AccessCare will issue and deliver a certificate
evidencing the Series A Preferred Stock sold at the Closing against wire
transfers to the account of AccessCare in same-day or next-day funds in payment
of the full purchase price for such Series A Preferred Stock.
3
<PAGE> 10
ARTICLE III
CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS
The obligation of Investor to purchase and pay for the Series A
Preferred Stock at the Closing is subject to the following conditions, any one
of which may be waived in writing by Investor:
3.1 REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of AccessCare set forth in Article V hereof shall be true and correct
in all material respects on the date of the Closing with the same force and
effect as though made at and as of that time.
3.2 DOCUMENTATION AT CLOSING. Investor shall have received prior to or
at the Closing all of the following, each in form and substance reasonably
satisfactory to Investor and its counsel, and all of the following events shall
have occurred prior to or simultaneous with the Closing hereunder:
(a) A copy of all charter documents of AccessCare certified by
the Nevada Secretary of State, a certified copy of the resolutions of the Board
of Directors and the shareholder of AccessCare, evidencing approval of this
Agreement, the Transaction Documents, and the transactions contemplated thereby,
the authorization for issuance and delivery of the Series A Preferred Stock and
other matters contemplated hereby, a certified copy of the bylaws of AccessCare
and certified copies of all documents evidencing other necessary corporate or
other action and governmental approvals, if any, with respect to this Agreement
and the Series A Preferred Stock;
(b) A certificate of the Secretary or an Assistant Secretary of
AccessCare stating the names of the officers of AccessCare authorized to sign
this Agreement and the other Transaction Documents to which it is a party, the
certificates for the Series A Preferred Stock and the other documents or
certificates to be delivered pursuant to this Agreement by AccessCare or any of
its officers, together with the true signatures of such officers;
(c) A certificate from AccessCare signed by a duly authorized
officer of AccessCare stating that the representations and warranties of
AccessCare contained in Article V hereof and otherwise made by AccessCare or
CompCare in writing in connection with the transactions contemplated hereby or
in the other Transaction Documents were true and correct in all material
respects when made and are true and correct in all material respects as of the
date of Closing, with the same force and effect as if such representations and
warranties had been made at and as of that time and that all conditions required
to be performed by AccessCare prior to or at the Closing have been performed or
complied with in all material respects, except as may be waived in writing by
Investor, and that no condition or event has occurred or is continuing or will
result from the execution and delivery of this Agreement or the issuance and
delivery of the Series A Preferred Stock which constitutes an Event of Default
or would constitute an Event of Default but for the requirement that notice be
given or time elapse or both;
(d) A copy of the Certificate of Designation, executed by
AccessCare and filed on behalf of AccessCare in the office of the Nevada
Secretary of State;
4
<PAGE> 11
(e) A First Right of Refusal Agreement, in the form set forth
in Exhibit 3.2(e) ("First Right of Refusal Agreement"), executed and delivered
by AccessCare and CompCare;
(f) An Option Agreement, in the form set forth in Exhibit
3.2(f) ("Option Agreement"), executed and delivered by CompCare; and
(g) One or more fully executed and completed stock
certificates representing the Series A Preferred Stock registered in the
Investor's name.
3.3 CONSENTS, WAIVERS, ETC. Prior to the Closing, AccessCare or
CompCare, as the case may be, shall have obtained all consents or waivers, if
any, necessary for AccessCare to execute and deliver this Agreement and for
AccessCare or CompCare to execute and deliver the other documents and
certificates to be delivered pursuant to this Agreement or the other Transaction
Documents, to issue and deliver the Series A Preferred Stock and to carry out
the transactions contemplated hereby and thereby, and all such consents and
waivers shall be in full force and effect. All corporate and other actions and
governmental filings necessary to effectuate the terms of this Agreement, the
Series A Preferred Stock and other agreements and instruments executed and
delivered by AccessCare or CompCare in connection herewith shall have been made
or taken, except for any post-sale filing that may be required under federal and
state securities laws. In addition to the documents set forth above, AccessCare
and CompCare, respectively, shall have provided Investor any other information
or copies of documents that they may reasonably request.
3.4 ABSENCE OF LITIGATION. There shall be no litigation, whether
brought against CompCare, AccessCare, or Investor seeking to prevent the
consummation of the transactions contemplated by this Agreement or the other
Transaction Documents, and no such litigation shall have been threatened.
Further, there shall not be in effect any order restraining or prohibiting the
consummation of the transactions contemplated by the Transaction Documents nor
any proceedings pending with respect thereto.
3.5 PERFORMANCE OF OBLIGATIONS. AccessCare or CompCare, as the case may
be, shall have performed and complied, in all material respects, with all
covenants, conditions and obligations required by this Agreement to have been
performed or complied with by AccessCare or CompCare, respectively, at or prior
to the Closing.
3.6 MATERIAL ADVERSE CHANGE. There shall not have been, subsequent to
the balance sheet of AccessCare dated May 31, 1994, any material adverse change
in the financial condition of the business of AccessCare, or its assets,
liabilities, business, results of operations, or customer, supplier or employee
relations, other than changes occurring in the normal course of the business of
AccessCare.
5
<PAGE> 12
ARTICLE IV
CONDITIONS PRECEDENT TO ACCESSCARE'S OBLIGATIONS
The obligations of AccessCare to consummate the sale of the Series A
Preferred Stock to Investor and to perform under this Agreement and the other
Transaction Documents shall be subject to the fulfillment, at or prior to the
Closing, of each of the following conditions, any one of which may be waived in
writing by AccessCare:
4.1 REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Investor set forth in Article III of this Agreement shall be true
and correct in all material respects on the date of the Closing with the same
force and effect as though made at and as of that time.
4.2 DOCUMENTATION AT CLOSING. AccessCare or CompCare, as applicable,
shall have received prior to or at the Closing all of the following, each in
form and substance satisfactory to AccessCare and its counsel, and all of the
following events shall have occurred prior to or simultaneous with the Closing
hereunder:
(a) A certificate from Investor, signed by a duly authorized
officer of Investor, certifying that Investor's representations and
warranties contained herein and otherwise made by Investor in
connection with the transactions contemplated hereby were true and
correct in all material respects when made and are true and correct in
all material respects on and as of the Closing Date, with the same
force and effect as if such representations and warranties had been at
and as of that time, and that all conditions required to be performed
by Investor prior to or at the Closing have been performed or complied
with in all material respects, except as may be waived in writing by
AccessCare and CompCare, and that no condition or event has occurred or
is continuing or will result from the execution and delivery of this
Agreement which constitutes an Event of Default or would constitute an
Event of Default but for the requirement that notice be given or time
elapse or both;
(b) The First Right of Refusal Agreement, executed and
delivered by Investor; and
(c) The Option Agreement, executed and delivered by Investor.
4.3 CONSENTS, WAIVERS, ETC. Investor shall have obtained all consents
or waivers, if any, necessary to execute and deliver this Agreement and the
other documents and certificates to be delivered pursuant to this Agreement,
issue and deliver the Series A Preferred Stock and to carry out the transactions
contemplated hereby and thereby, and all such consents and waivers shall be in
full force and effect. All corporate and other actions and governmental filings
necessary to effectuate the terms of this Agreement, the Series A Preferred
Stock and other agreements and instruments executed and delivered by Investor in
connection herewith shall have been made or taken, except for any post-sale
filing that may be required under federal and state securities laws. Investor
shall have provided AccessCare and CompCare any other information or documents,
including without limitation resolutions, certified or in such other form as may
reasonably be requested by AccessCare or CompCare, as the case may be.
6
<PAGE> 13
4.4 ABSENCE OF LITIGATION. There shall be no litigation, whether
brought against AccessCare, Investor or CompCare, seeking to prevent the
consummation of the transactions contemplated by this Agreement, and no such
litigation shall have been threatened. Further, there shall not be in effect any
order restraining or prohibiting the consummation of the transactions
contemplated by this Agreement nor any proceedings pending with respect thereto.
4.5 PERFORMANCE OF OBLIGATIONS. Investor shall have performed and
complied, in all material respects, with all of its respective covenants,
conditions and obligations required by this Agreement to have been performed or
complied with by Investor at or prior to the Closing.
4.6 PAYMENT. AccessCare shall have received payment in full, from
Investor, for the Series A Preferred Stock.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACCESSCARE
Except as set forth on the disclosure schedule attached hereto as
Exhibits 5.00, et seq. ("Disclosure Schedule") pursuant to this Article V, which
disclosures shall be deemed to be representations and warranties as if made
hereunder, AccessCare represents and warrants to the Investor that:
5.1 ORGANIZATION AND STANDING OF ACCESSCARE. AccessCare is a duly
incorporated and validly existing corporation in good standing under the laws of
the State of Nevada and has all requisite corporate power and authority for the
ownership and operation of its properties and for the carrying on of its
business as now conducted and as now proposed to be conducted. AccessCare is
duly licensed or qualified, and in good standing as a foreign corporation
authorized to do business, in all jurisdictions in which the character of the
property owned or leased, or the nature of the activities conducted, by it makes
such licensing or qualification necessary and where failure to be licensed or to
so qualify would have a material adverse effect upon AccessCare.
5.2 CORPORATE ACTION. AccessCare has all necessary corporate power and
has taken all corporate action required to make all the provisions of this
Agreement, the Series A Preferred Stock and any other agreements and instruments
executed in connection herewith and therewith, the valid and enforceable
obligations of AccessCare upon execution thereof. The issuance of the Series A
Preferred Stock is not subject to preemptive or other preferential rights, or
similar statutory or contractual rights of third parties, either arising
pursuant to any agreement or instrument to which AccessCare is a party or by
which AccessCare is otherwise bound.
5.3 GOVERNMENTAL APPROVALS. No authorization, consent, approval,
license, exemption of, or filing or registration with, any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, is or will be necessary for, or in connection with, the offer,
issuance, sale, execution or delivery by AccessCare, or for the performance by
it of its obligations under, this Agreement or the Series A Preferred Stock
except for post-sale filings to be made, if any, to comply with exemptions from
registration or qualification under federal and state securities laws.
7
<PAGE> 14
5.4 LITIGATION. There is no litigation or governmental proceeding or
investigation pending or, to the knowledge of AccessCare after due inquiry,
threatened against AccessCare or affecting any of its properties or assets, or,
to the knowledge of AccessCare after due inquiry, against any officer of
AccessCare that is likely to result, either in any case or in the aggregate, in
any material adverse change in the business, operations, affairs or conditions
of AccessCare or any of its properties or assets taken as a whole, or that is
likely to call into question the validity of this Agreement, any of the Series A
Preferred Stock or any action taken or to be taken pursuant hereto or thereto.
Neither AccessCare nor CompCare is in default with respect to any order, writ,
injunction, decree, ruling or decision of any court, commission, board or other
government agency, which default is likely to result, either in any case or in
the aggregate, in any material adverse change in the business, operations,
affairs or conditions of AccessCare or any of its properties or assets taken as
a whole.
5.5 COMPLIANCE WITH OTHER INSTRUMENTS. AccessCare is in compliance in
all respects with the terms and provisions of its articles of incorporation and
bylaws and in all material respects with the terms and provisions of this
Agreement. To the best of AccessCare's knowledge, AccessCare is in compliance in
all material respects with (i) the terms and provisions of each mortgage,
indenture, lease, agreement and other instrument relating to obligations of
AccessCare in excess of $25,000, individually or in the aggregate, and (ii) all
judgments, decrees, governmental orders, statutes, rules or regulations by which
it is bound or to which its properties or assets are subject, except in each
case any such noncompliance which would not have a material adverse effect on
the business, assets or financial condition of AccessCare. Neither the execution
and delivery of this Agreement or the Series A Preferred Stock, nor the
consummation of any transaction contemplated hereby or thereby, has constituted
or resulted in or will constitute or result in a default or violation of any
term or provision in the articles of incorporation or bylaws of AccessCare and,
to the best of AccessCare's knowledge, has constituted or resulted in or will
constitute or result in a material default or violation of any term or provision
in any documents or instruments.
5.6 STOCK OWNERSHIP. On the date of this Agreement, CompCare is the
sole owner, beneficially and of record, of eight hundred sixty-five (865) shares
of the Common Stock, comprising all of the outstanding Common Stock of
AccessCare, free and clear of all claims, liens, encumbrances, security
interests, pledges, options, charges, restrictions and defects in title of any
nature whatsoever, other than restrictions imposed by federal and applicable
state securities laws or the Transaction Documents. At the Closing, CompCare
will be the sole owner, beneficially and of record, of eight hundred sixty-five
(865) shares of Common Stock, which will comprise all of the then outstanding
Common Stock of AccessCare, free and clear of all claims, liens, encumbrances,
security interests, pledges, options, charges, restrictions and defects in title
of any nature whatsoever, other than restrictions imposed by federal and
applicable state securities laws or the Transaction Documents. Prior to the
Closing, 135 shares of Common Stock presently held by CompCare will be cancelled
and returned to the status of authorized and unissued shares. CompCare has not,
and as of the Closing shall not have, granted or sold, and is not, and at the
time of Closing will not be, a party to any agreement, commitment or
understanding, written or oral, providing for the grant or sale of, options or
other rights to purchase or restricting the transfer of, and is not, and at the
Closing will not be, obligated to sell or otherwise transfer, any of the shares
of the outstanding capital stock of AccessCare to any person or entity.
8
<PAGE> 15
5.7 SECURITIES ACT OF 1933. AccessCare has complied, and will comply,
with all applicable federal or state securities laws in connection with the
issuance and sale of the Series A Preferred Stock. Neither AccessCare nor anyone
authorized to act on its behalf has offered or will offer to sell the Series A
Preferred Stock or similar securities to, or solicit offers with respect thereto
from, or enter into any preliminary conversations or negotiations relating
thereto with, any Person, so as to bring the issuance and sale of the Series A
Preferred Stock under the registration provisions of the Securities Act.
5.8 NO BROKERS OR FINDERS. AccessCare has taken no action or failed to
take any action, and knows of no such act or omission by any Person, which would
give rise to any right, interest or valid claim against or upon AccessCare or
Investor for any commission, fee or other compensation as a finder or broker as
a result of the transactions contemplated by this Agreement, and AccessCare
agrees to indemnify and hold Investor harmless against any liability for or
related to such commissions, fees, expenses or other compensation.
5.9 CAPITALIZATION; STATUS OF CAPITAL STOCK. Immediately preceding the
Closing, AccessCare will have a total authorized capitalization consisting of
25,000 shares of Common Stock, par value $1.00 per share, of which 865 shares
will be outstanding, and 10,000 shares of Preferred Stock, of which 135 shares
are designated as Series A Preferred Stock, none of which are outstanding.
Immediately following the Closing, there will be 865 shares of Common Stock and
135 shares of Series A Preferred Stock outstanding. As of the Closing, all of
the outstanding shares of capital stock of AccessCare will have been duly
authorized, validly issued and fully paid and nonassessable. The Series A
Preferred Stock, when issued and delivered in accordance with the terms hereof,
will be duly authorized, validly issued and fully paid and nonassessable free
and clear of all liens and encumbrances created by AccessCare. There are no
authorized, issued or outstanding options, warrants or rights to purchase which
obligate AccessCare to issue any shares of capital stock or other securities nor
is AccessCare obligated in any other manner to issue shares of its capital stock
or other securities. Except as set forth in the Disclosure Schedule, there are
no restrictions on the transfer of shares of capital stock of AccessCare other
than those imposed by relevant state and federal securities laws or the
Transaction Documents. Prior to the Closing, no holder of any security of
AccessCare is entitled to preemptive or similar statutory or contractual rights,
either arising pursuant to any agreement or instrument to which AccessCare is a
party or that are otherwise binding upon AccessCare. The offer and sale of all
shares of capital stock or other securities of AccessCare issued before the
Closing complied with or were exempt from registration or qualification under
all federal and state securities laws.
5.10 FINANCIAL STATEMENTS. The unaudited financial statements of
AccessCare for the year ended May 31, 1994, as reviewed by Arthur Andersen & Co.
and unaudited financial statements for the 11 months ended April 30, 1995
(collectively, the "Financial Statements"), copies of which Financial
Statements, along with any officers' reports, have heretofore been delivered to
Investor or its counsel and are attached to the Disclosure Schedule, and fairly
present the financial position and results of operations of AccessCare for the
periods covered. The financial statements for the year ended May 31, 1994 were
prepared in accordance with generally accepted accounting principles
consistently applied throughout the period involved.
5.11 ABSENCE OF CHANGES. Since May 31, 1994: (i) AccessCare has not
entered into any material transaction which was not in the ordinary course of
its businesses; (ii) there has
9
<PAGE> 16
been no materially adverse change in the condition (financial or otherwise),
business, properties, assets, or liabilities of AccessCare; (iii) there has been
no damage to or destruction or loss of physical property of AccessCare (whether
or not covered by insurance) materially adversely affecting the business or
operations of AccessCare; (iv) AccessCare has not declared or paid any dividend
or made any distribution on its capital stock or redeemed, purchased or
otherwise acquired any of its capital stock (other than as contemplated by the
Transaction Documents); (v) there has been no organized labor dispute involving
AccessCare or any of its employees and none is pending or, to the best knowledge
of AccessCare threatened; (vi) there has been no material adverse change, except
in the ordinary course of business, in the contingent obligations of AccessCare,
by way of guaranty, endorsement, indemnity, warranty, or otherwise; (vii)
AccessCare has not mortgaged, pledged, transferred a security interest in, or
subjected to lien any of its properties or assets, except (A) liens for current
taxes not yet delinquent, (B) liens imposed by law and incurred in the ordinary
course of business for obligations not yet due to carriers, warehousemen,
laborers, materialmen and the like, (C) liens in respect of pledges or deposits
under workers' compensation laws or similar legislation, (D) minor defects in
title which, individually or in the aggregate, do not materially interfere with
the use of such property, (E) liens outstanding and in the aggregate less than
$10,000 or (F) liens disclosed in the Financial Statements or the notes thereto
(collectively, the "Liens"); and (viii) to the best knowledge of AccessCare,
there has been no other event or condition of any character specifically
relating to AccessCare which specifically pertains to and materially adversely
affects its business, properties or condition, financial or otherwise.
5.12 PROPERTY.
(a) Except for the Liens, AccessCare has good and marketable
title to, or a valid leasehold interest in, its properties and assets in each
case free and clear of all liens, claims, security interests, charges and
encumbrances and has the right to use all the assets it presently uses in the
operation of its business. The properties and assets of AccessCare in all
material respects are in good working order, operating condition and state of
repair, ordinary wear and tear excepted.
(b) All of the accounts receivable reflected on the balance
sheet at April 30, 1995 included in the Financial Statements, and all accounts
receivable created after the date hereof as of the Closing, arose from valid
sales in the ordinary course of business and are generally collectible in the
ordinary course of business, subject to reserves for uncollectible accounts set
forth in the Financial Statements.
5.13 SUBSIDIARIES. AccessCare does not control, directly or indirectly,
any other corporation, association, partnership, joint venture or other business
entity or own any shares of capital stock or other securities of any other
Person.
5.14 TAXES AND TAX RETURNS. Except as disclosed in the Disclosure
Schedule: (i) AccessCare has duly filed all tax returns which are required by
law to be filed by it ("Tax Return"); (ii) AccessCare has duly paid all taxes
due or claimed to be due from it ("Taxes") (whether or not shown on any Tax
Return), and there are no assessments or claims for payment of Taxes now pending
or, to the knowledge of AccessCare after due inquiry, threatened, nor is there
any audit of the records of AccessCare being made or, to the knowledge of
AccessCare after due inquiry, threatened by any taxing authority; (iii) each Tax
Return of AccessCare
10
<PAGE> 17
previously filed, or to be filed in the future relating to any period up to the
date of Closing, is or will be (as the case may be) correct and complete in all
material respects; and (iv) AccessCare is not currently the beneficiary of any
extension of time within which to file any Tax Return.
5.15 INSURANCE. Set forth in the Disclosure Schedule is a complete list
of all insurance policies currently maintained by AccessCare and in effect and,
with respect to each of such policies, a general description of the risks
covered and claims insured. Copies of all of such policies will have been
furnished or made available to Investor or its representatives upon reasonable
request.
5.16 CERTAIN TRANSACTIONS. AccessCare is not indebted, either directly
or indirectly, to any of the officers or directors of AccessCare, or to their
respective spouses or children, in any amount whatsoever, other than for payment
of salary for services rendered and reasonable expenses, and none of said
officers or directors or any members of their immediate families, are indebted
to AccessCare.
5.17 CONTRACTS AND COMMITMENTS.
(a) Except as expressly contemplated by this Agreement, or as
set forth in the Disclosure Schedule, and to the best of AccessCare's knowledge,
as of the Closing AccessCare will not be a party to, or bound by, any currently
effective written or oral agreement except for any entered into in the ordinary
course of its business.
(b) AccessCare has performed in all material respects all
obligations required to be performed by it and is not in default under, in
material breach of or, after due inquiry, in receipt of any written claim, or
other claim that is otherwise known by AccessCare, of default under or breach of
any material agreement disclosed in the Disclosure Schedule to which it is a
party or to which its assets are subject and AccessCare has no present
expectation or intention of not fully performing all such obligations.
5.18 EMPLOYMENT BENEFIT PLANS.
(a) Set forth in the Disclosure Schedule is a complete list of
all employee benefit plans, as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA"), and all other profit-sharing,
deferred compensation, bonus, stock option, stock purchase, vacation pay,
holiday pay, and other compensation arrangements maintained or contributed to by
AccessCare for the benefit of its employees (or former employees) and/or their
beneficiaries. Both of these types of plans shall be collectively referred to as
"Benefit Plans." AccessCare does not have, nor has it ever had, any Benefit Plan
that is or was subject to Title IV of ERISA or any "multiemployer plans" (as
defined in Section 3(37) of ERISA).
(b) Each Benefit Plan complies currently, and has complied in
the past, in form and operation, in all material respects with all applicable
law including ERISA and the Code (including Section 4980B thereof), except any
such failure to comply which would not have a material adverse effect on
AccessCare. No excise tax is due or owing from AccessCare with respect to any
"prohibited transaction" (as defined in Section 4975(c)(1) of the Code) relating
to any of the Benefit Plans. There are no lawsuits or other claims, pending or,
to the knowledge of AccessCare after due inquiry, threatened (other than routine
claims for benefits under the plan)
11
<PAGE> 18
against (i) any Benefit Plan, or (ii) any "fiduciary" of such plan (within the
meaning of Section 3(21)(A) of ERISA) brought on behalf of any participant,
beneficiary or fiduciary thereunder, nor is there any reasonable basis for any
such claim.
5.19 PATENTS, COPYRIGHTS AND TRADEMARKS. AccessCare has sufficient
title to and ownership of, or has sufficient licenses to, or can obtain on terms
which will not result in any material adverse effect on its business, all
necessary patents, licenses, trademarks, service marks, trade names, copyrights,
trade secrets, inventions, franchises, computer software and other proprietary
rights necessary for its business as now conducted, without any conflict with or
infringement of the rights of others.
5.20 ENVIRONMENTAL MATTERS. AccessCare has not, contrary to applicable
statutes and regulations now in effect, stored or disposed of on, under or about
its existing or prior premises hazardous materials, and to the best of
AccessCare's knowledge, during the time period any prior owners owned or leased
such premises, such prior owners or lessees or third parties did not, contrary
to applicable statutes and regulations now in effect, so store or dispose of on,
under or about such premises or transfer to or from the premises any hazardous
materials. As used in this Agreement, the term "hazardous materials" shall mean
substances defined as "hazardous substances" or "hazardous materials" or "toxic
substances" in the Comprehensive Environmental Response and Compensation
Liability Act of 1980, as amended, 42 U.S.C., Section 9601, et seq.; The
Hazardous Materials Transportation Act, 49 U.S.C., Section 1801, et seq.; The
Resource Conservation Recovery Act, 42 U.S.C., Section 6901, et seq.; and those
substances defined as hazardous wastes or hazardous substances in any applicable
Florida statutes or codes and any regulations or publication promulgated
pursuant to any of said laws or regulations.
5.21 COMPLIANCE WITH LAWS, CERTIFICATES. AccessCare has complied in all
material respects with all applicable United States' federal, state, municipal
and other political subdivision or governmental agency statutes, ordinances and
regulations. All certificates, licenses, approvals and permits necessary in
connection with the present use and operation of AccessCare's business and the
real property on which such business is located, and the lawful occupancy
thereof, have been issued by the appropriate governmental authorities, except
such certificates, licenses, approvals, and permits the failure of which to be
issued would not have a material adverse effect on AccessCare. To the best
knowledge of AccessCare, all such licenses, approvals, permits and certificates
shall continue in full force and effect after giving effect to the transactions
contemplated hereby.
5.22 DISCLOSURE. No representation, warranty or statement by AccessCare
in this Agreement or in any written statement or certificate required to be
furnished to Investor or its counsel pursuant to this Agreement contains or will
contain any untrue statement of material fact or omits or will omit to state a
material fact necessary to make the statements made herein or therein, in light
of the circumstances under which they were made, not misleading, it being
understood that Investor has not received or been provided with a "prospectus"
(as defined in the Securities Act) covering AccessCare.
12
<PAGE> 19
5.23 ABSENCE OF UNDISCLOSED LIABILITIES. Neither does AccessCare have
any debt, liability or obligation of any nature, whether accrued, absolute,
contingent or otherwise, nor, to the knowledge of AccessCare's management, is
there any basis for the assertion against AccessCare of any such debt, liability
and/or obligation, except for (i) debts, liabilities and/or obligations
described in the Disclosure Schedule; or (ii) debts, liabilities and/or
obligations reserved or reflected in the Financial Statements or incurred in the
ordinary course of business after April 30, 1995.
5.24 PROJECTIONS. Management of AccessCare has prepared the Financial
Projections of AccessCare attached hereto as Exhibit 5.24 (the "Projections").
To the best knowledge of the management of AccessCare, the Projections are based
on reasonable assumptions, subject to, among other things, changes adversely
affecting the industry generally, and, in management's reasonable judgment, the
results presented in the Projections are reasonably achievable results based on
the assumptions presented. Nothing in this Section 5.24 shall be construed as a
representation or warranty of AccessCare to Investor that AccessCare will
actually achieve the financial results set forth in the Projections.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor represents and warrants to AccessCare that:
6.1 RESTRICTED SHARES. Investor has been advised that the Series A
Preferred Stock has not been registered under the Securities Act nor qualified
under any state securities laws on the ground, among others, that no
distribution or public offering of the Series A Preferred Stock is to be
effected, and that in this connection AccessCare is relying in part on the
representations of Investor set forth herein.
6.2 INVESTMENT INTENT. Investor's intention is to acquire the Series A
Preferred Stock for its own account and that the securities are being and will
be acquired for the purpose of investment and not with a view to distribution or
resale thereof.
6.3 ABILITY TO BEAR RISK. Investor is able to bear the economic risk of
an investment in the Series A Preferred Stock acquired by it pursuant to this
Agreement and can afford to sustain a total loss on such investment.
6.4 INVESTMENT EXPERIENCE. Investor is an experienced and sophisticated
investor, is able to fend for itself in the transactions contemplated by this
Agreement and has such knowledge and experience in financial and business
matters that it is capable of evaluating the risks and merits of acquiring the
Series A Preferred Stock. It has not been formed or organized for the specific
purpose of acquiring the Series A Preferred Stock. Investor has had, during the
course of this transaction and prior to its purchase of the Series A Preferred
Stock, the opportunity to ask questions of, and receive answers from, AccessCare
and its management concerning AccessCare and the terms and conditions of this
Agreement. Investor hereby acknowledges that it or its representatives have
received all such information as it considers necessary for evaluating the risks
and merits of acquiring the Series A Preferred Stock and for verifying the
accuracy of any information furnished to it or to which it had access. Investor
represents and warrants that
13
<PAGE> 20
the nature and amount of the Series A Preferred Stock it is purchasing is
consistent with its investment objectives, abilities and resources. Investor's
representation's and warranties in this Section do not limit AccessCare's
liability for a breach of its representations or warranties under this
Agreement.
6.5 UNMARKETABLE SHARES. Investor understands that there is no public
market for the Series A Preferred Stock and that there may never be a public
market, and that even if a market develops it may never be able to sell or
dispose of the Series A Preferred Stock and may thus have to bear the risk of
its investment for a substantial period of time, or forever. Investor is aware
that none of the Series A Preferred Stock may be sold pursuant to Rule 144
adopted under the Securities Act unless certain conditions have been met and
until Investor has held the Series A Preferred Stock for at least two (2) years.
Among the conditions for use of the Rule is the availability of current
information to the public about AccessCare. Investor understands that AccessCare
has not made such information available and has no present plans to do so.
6.6 ACCREDITED INVESTOR. Investor is an "accredited investor" for
purposes of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act and the rules of the Florida Department of Banking and
Finance and is not counted for purposes of Section 517.061(11)(a) of the Florida
Securities and Investor Protection Act or Section 25102(f) of the California
Corporate Securities Law of 1968.
6.7 CORPORATE ASSETS. Investor is a corporation with assets of $500,000
or more for purposes of Section 517.061(8) of the Florida Securities and
Investor Protection Act.
6.8 LEGENDS. Investor acknowledges that the certificates representing
the Series A Preferred Stock and any other securities receivable by Investor
pursuant to this Agreement, when issued, shall contain substantially the
following legend, in addition to any other legends required by the Transaction
Documents:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (INCLUDING ANY
SECURITIES ISSUABLE ON CONVERSION, EXCHANGE OR WITH RESPECT TO ANY
OTHER RIGHT CONNECTED HEREWITH) HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR
INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES
ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. ANY
TRANSFEREE OR ISSUEE OF SUCH SECURITIES MAY BE REQUIRED TO PROVIDE
APPROPRIATE INVESTMENT REPRESENTATIONS PRIOR TO ANY SUCH TRANSFER OR
ISSUANCE.
6.9 DUE AUTHORIZATION. Investor has duly authorized, executed and
delivered this Agreement, the Transaction Documents and any other agreements and
instruments executed in connection herewith or therewith.
14
<PAGE> 21
6.10 BINDING EFFECT. This Agreement and such other agreements and
instruments constitute the valid and binding obligations of Investor,
enforceable against it in accordance with their respective terms.
6.11 CONSENTS AND APPROVALS. No consent or approval of any Person is
required in connection with the execution, delivery and performance of this
Agreement and such other agreements and instruments by Investor which has not
heretofore been obtained.
6.12 CONTRACTS AND COMMITMENTS. The execution and performance of this
Agreement shall not result in a material default of other agreements or
instruments by Investor.
6.13 NO BROKERS OR FINDERS. No Person has or will have, as a result of
the transactions contemplated by this Agreement, any right, interest or valid
claim upon or against AccessCare for any commission, fee or other compensation
as a finder or broker because of any act or omission by Investor, and Investor
agrees to indemnify and hold AccessCare harmless against all liability for or
related to any such commissions, fees or other compensation.
ARTICLE VII
COVENANTS OF ACCESSCARE AND INVESTOR
7.1 REPORTING REQUIREMENTS.
AccessCare will furnish the following to each holder who owns
of record or beneficially or has the right to acquire from AccessCare any shares
of Series A Preferred Stock as soon as available, and in any event within ninety
(90) days after the end of each fiscal year of AccessCare, (a) respecting the
fiscal year ending on May 31, 1995, and each subsequent fiscal year of
AccessCare, a copy of the annual audit report for such year for AccessCare and
its Subsidiaries, including therein Consolidated and consolidating balance
sheets of AccessCare and its Subsidiaries as of the end of such fiscal year and
Consolidated and consolidating statements of income and retained earnings and of
statements of cash flow of AccessCare and its Subsidiaries for such fiscal year,
setting forth in each case in comparative form the corresponding figures for the
preceding fiscal year, all duly certified by a "Big Six" independent public
accounting firm; (b) at the time of delivery of each annual financial statement
pursuant to the preceding clause (a), a certificate executed by the chief
financial officer of AccessCare stating that such officer has caused this
Agreement and the terms of the Certificate of Designation to be reviewed and has
no knowledge of any default by AccessCare in the performance or observance of
any of the provisions of this Agreement or the Certificate of Designation, or if
such officer has such knowledge, specifying such default and the nature thereof;
(c) promptly following receipt by AccessCare, each audit response letter,
accountant's management letter and other written report submitted to AccessCare
by its independent public accountants in connection with an annual or interim
audit of the books of AccessCare or any of its subsidiaries; (d) promptly after
the commencement thereof, notice of all actions, suits, claims, proceedings,
investigations and inquiries of any type that could materially adversely affect
AccessCare or any of its subsidiaries; (e) promptly upon sending, making
available or filing the same, all press releases, reports and financial
statements that AccessCare sends or makes available to its shareholders or files
with the Securities and Exchange Commission; and (f) promptly, from time to
time, such other information regarding the business, prospects, financial
condition, operations, property or affairs
15
<PAGE> 22
of AccessCare and its subsidiaries as Investor reasonably may request. Any
Person receiving the information agrees to hold such information in confidence
to the same extent that would be required of a member of AccessCare's Board of
Directors.
7.2 AFFIRMATIVE COVENANTS OF ACCESSCARE OTHER THAN REPORTING
REQUIREMENTS. Without limiting any other covenants and provisions hereof,
AccessCare covenants and agrees that, so long as any of the shares of Series A
Preferred Stock remain outstanding and are held by Investor and prior to a
Qualified Public Offering, it will perform and observe the following covenants
and provisions and will cause each Subsidiary to perform and observe such of the
following covenants and provisions as are applicable to such Subsidiary, and
will not, without approval of holders of the Series A Preferred Stock, amend or
revise any terms of this Section 7.2.
(a) PAYMENT OF TAXES AND TRADE DEBT. AccessCare shall pay and
discharge, and cause each Subsidiary to pay and discharge, all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or profits or business, or upon any properties belonging to it, prior to
the date on which penalties attach thereto, and all lawful claims, which, if
unpaid, might become a lien or charge upon any properties of AccessCare or any
Subsidiary, provided that neither AccessCare nor any Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim that is being
contested in good faith and by appropriate proceedings if AccessCare or
Subsidiary concerned shall have set aside on its books adequate reserves with
respect thereto as shall be determined by its Board of Directors. AccessCare
shall pay and cause each Subsidiary to pay, when due, or in conformity with
customary trade terms, all lease obligations, all trade debt, and all other
Indebtedness incident to the operations of AccessCare or its Subsidiaries,
except such as are being contested in good faith and by appropriate proceedings
if AccessCare or Subsidiary concerned shall have set aside on its books adequate
reserves with respect thereto as shall be determined by its Board of Directors.
(b) MAINTENANCE OF INSURANCE. AccessCare shall maintain, and
cause each Subsidiary to maintain, with responsible and reputable insurance
companies or associations insurance in such amounts and covering such risks as
is usually carried by companies of similar size engaged in similar businesses
and owning similar properties in the same general areas in which AccessCare or
such Subsidiary operates.
(c) PRESERVATION OF CORPORATE EXISTENCE. AccessCare shall
preserve and maintain, and cause each Subsidiary to preserve and maintain, its
corporate existence, rights, franchises and privileges in the jurisdiction of
its incorporation, and qualify and remain qualified, and cause each Subsidiary
to qualify and remain qualified, as a foreign corporation in each jurisdiction
in which such qualification is necessary or desirable in view of its business
and operations or the ownership of its properties. AccessCare shall preserve and
maintain, and cause each Subsidiary to preserve and maintain, all material
licenses and other rights to use patents, processes, licenses, trademarks, trade
names, inventions, intellectual property rights or copyrights owned or possessed
by it and necessary to the conduct of its business.
(d) COMPLIANCE WITH LAWS. AccessCare shall comply, and cause
each Subsidiary to comply, in all material respects with all applicable laws,
rules, regulations and orders of any United States' federal or State
governmental authority, noncompliance with which could materially adversely
affect its business or condition, financial or otherwise, except
16
<PAGE> 23
non-compliance being contested in good faith through appropriate proceedings so
long as AccessCare shall have set up sufficient reserves, if any, required under
generally accepted accounting principles with respect to such items.
(e) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. AccessCare shall
keep, and cause each Subsidiary to keep, adequate records and books of account,
in which complete entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of AccessCare and such Subsidiary, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection within its
business shall be made.
(f) MAINTENANCE OF PROPERTIES, ETC. AccessCare shall maintain
and preserve, and cause each Subsidiary to maintain and preserve, all of its
properties necessary or useful in the proper conduct of its business, in good
repair, working order and condition, ordinary wear and tear excepted.
(g) BUDGETS AND BOARD APPROVAL. Prior to the commencement of
each fiscal year, AccessCare shall prepare and submit to, and obtain the
approval of a majority of, the Board of Directors a budget and operating plan
for the then upcoming fiscal year, including projections or forecasts of capital
and operating expenses, cash flow, and profits and losses, all itemized in
reasonable detail and attempt to obtain the approval of such budget and plan not
more than sixty (60) days following the end of the prior fiscal year.
(h) FINANCINGS. AccessCare shall promptly, fully and in detail,
inform the Board of Directors in advance of any commitments or contracts
relating to financing of any nature in which AccessCare pledges corporate
assets, other than under purchase money security interests secured only by the
assets purchased with such financing in the ordinary course of business.
(i) BOARD OF DIRECTORS; INDEMNIFICATION. The Board of Directors
shall consist of five (5) directors, elected pursuant to the Certificate of
Designation. The bylaws of AccessCare shall provide for a maximum authorized
number of directors equal to or less than (5) directors, except with the prior
written consent of Investor, which shall not be unreasonably withheld. The
articles of incorporation or bylaws of AccessCare shall at all times provide for
the indemnification of the Board of Directors to the full extent provided by the
law of the jurisdiction in which AccessCare is organized. AccessCare shall use
its best efforts to obtain and maintain directors and officers liability
insurance with coverage and premium levels consistent with policies carried by
similar companies of similar size. AccessCare shall pay for reasonable travel
and living expenses of the members of the Board of Directors in attending
meetings of the Board of Directors and committees thereof and in conducting
other business on behalf of AccessCare.
(j) BOARD OF DIRECTORS MEETINGS. AccessCare shall use its best
effort to ensure that meetings of its Board of Directors are held at least once
each calendar quarter.
(k) COMPENSATION COMMITTEE. AccessCare shall have a
Compensation Committee of the Board of Directors, which shall be comprised of
two directors designated by CompCare and one director designated by the
Investor. The Compensation Committee shall
17
<PAGE> 24
determine management compensation, including the awarding of any stock options
or other non-cash compensation to the management of AccessCare.
(l) INSPECTION, CONSULTATION AND ADVICE. AccessCare shall
permit and cause each of its Subsidiaries to permit Investor and such persons as
Investor may designate, at Investor's expense, as applicable, to visit and
inspect any of the properties of AccessCare and its Subsidiaries, examine their
books and take copies and extracts therefrom, discuss the affairs, finances and
accounts of AccessCare and its Subsidiaries with their officers, employees and
public accountants (and AccessCare hereby authorizes said accountants to discuss
with Investor and such designees such affairs, finances and accounts), and
consult with and advise the management of AccessCare and its Subsidiaries as to
their affairs, finances and accounts, all at reasonable times and upon
reasonable notice.
(m) USE OF PROCEEDS. AccessCare shall use the proceeds from the
sale of the Series A Preferred Stock for repayment of existing debts of
AccessCare and/or for working capital. AccessCare will not use the proceeds to
pay existing debt to CompCare, other than to reimburse CompCare for funds it has
advanced to the suppliers or vendors of AccessCare for bona fide costs or
expenses of AccessCare.
(n) BY-LAWS. AccessCare shall at all times cause its By-laws to
provide that (a) unless otherwise required by the laws of the state of its
incorporation, any two directors and any holder or holders of at least 75% of
the outstanding shares of Series A Preferred Stock shall have the right to call
a meeting of the Board of Directors or shareholders; and (b) the number of
directors fixed in accordance therewith shall in no event conflict with any of
the terms of the Series A Preferred Stock as set forth in the Certificate of
Designation.
7.3 NEGATIVE COVENANTS OF ACCESSCARE. Without limiting any other
covenants and provisions hereof, AccessCare covenants and agrees that, so long
as any of the shares of Series A Preferred Stock remain outstanding and are held
by Investor or until a Qualified Public Offering, it will not take the actions
contained in the following covenants and provisions, and will cause each
Subsidiary to not take actions contained in the following covenants and
provisions as are applicable to such Subsidiary, and will not, without the
approval of holders of the Series A Preferred Stock voting as a separate class,
amend or revise any terms of this Section 7.3:
(a) DEALINGS WITH AFFILIATES AND OTHERS. Except as specifically
contemplated by this Agreement, AccessCare shall not enter into any transaction,
including, without limitation, any loans or extensions of credit or royalty
agreements, with CompCare, or any officer or director of CompCare, or any
officer or director of AccessCare or any officer or director of any Subsidiary
or holder of any class of capital stock of AccessCare, or any member of their
respective immediate families or any corporation or other entity directly or
indirectly controlled by one or more of such officers, directors or shareholders
or members of their immediate families (other than any such transactions in the
ordinary course of business which are specifically determined by the Board of
Directors to be beneficial to AccessCare and on terms no less favorable to
AccessCare than would be available from any unrelated third party under similar
circumstances). All corporate allocations between CompCare and AccessCare will
be fair and reasonable and represent fair value for actual services rendered.
18
<PAGE> 25
(b) DIVIDENDS. AccessCare shall not prior to a Qualified
Public Offering or while the Series A Preferred Stock is outstanding, declare or
pay any dividends on any class of AccessCare's or any Subsidiary's capital stock
now or hereafter outstanding (other than dividends on the Series A Preferred
Stock or payable in Common Stock or by any Subsidiary either to AccessCare or to
another Subsidiary that is the parent of the paying Subsidiary), or purchase,
redeem or otherwise acquire or retire any of AccessCare's or any Subsidiary's
capital stock of any class now or hereafter outstanding or otherwise return
capital or make distributions of assets to shareholders as such, which would
reduce the aggregate amount invested by CompCare in debt or equity of AccessCare
below $3,750,000 as determined in accordance with Generally Accepted Accounting
Principles.
(c) RESTRICTIVE AGREEMENTS PROHIBITED. Neither AccessCare nor
any of its Subsidiaries shall become a party to any agreement that by its terms
restricts AccessCare's performance of this Agreement or the Certificate of
Designation.
(d) COMPENSATION. AccessCare shall not pay any compensation to
its management employees unless such compensation shall have been approved by
the Compensation Committee of the Board of Directors. In no event shall such
compensation exceed the compensation customarily paid to management in companies
of similar size, of similar maturity, and in similar businesses, as AccessCare.
7.4 CONFIDENTIALITY. Any information obtained by Investor any holder of
the Series A Preferred Stock pursuant to this Agreement, prior to or following
the Closing, shall be treated as confidential and shall not be disclosed to a
third party without the consent of the Board of Directors, except that such
information shall not be deemed confidential for the purpose of enforcement of
this Agreement or valuation of the Series A Preferred Stock or other capital
stock and except that any such holder may otherwise disclose such information to
its partners (or its third party valuation firm for the purpose of valuing the
Series A Preferred Stock or other capital stock) if such partners (and valuation
firm) agree to be bound by the restrictions contained in this Section 6.3, and
except for disclosure (i) in response to legal process, (ii) to the extent
required to comply with applicable law, or (iii) to the extent disclosed to any
bank, finance company or other lender or investor in connection with the
financing of the transactions contemplated by this Agreement. Investor shall not
be obligated to maintain as confidential any information obtained from
AccessCare which is publicly available, readily available from public sources,
known to it at the time the information was disclosed or which was rightly
obtained from a third party. At the request of the Board of Directors, any
Person receiving any information pursuant to this Agreement shall execute
reasonable confidentiality agreements consistent with this Section 7.4.
7.5 COOPERATION. So long as Investor remains an equity holder of
AccessCare, Investor and its Subsidiaries will negotiate in good faith to
contract with AccessCare for the delivery of mental health services in all of
Investor's and its subsidiaries' service areas where AccessCare or a subsidiary
then has an adequate network. The AccessCare capitation rate to Investor and its
subsidiaries shall be the rate competitive with those rates charged to like
customers by behavioral health care companies for similar services in specific
service areas. The provisions of this Section 7.5 shall inure to the benefit of,
and be binding upon, the successors of the parties hereto.
19
<PAGE> 26
ARTICLE VIII
RIGHT TO PARTICIPATE IN FINANCINGS
8.1 RIGHT OF PARTICIPATION. Until AccessCare has completed a Qualified
Public Offering, Investor shall have a preemptive right to purchase or subscribe
for (i) any shares of Common Stock, (ii) any other equity security of
AccessCare, including, without limitation, shares of Preferred Stock, (iii) any
option, warrant or other right to subscribe for, purchase or otherwise acquire
any equity security of AccessCare, or (iv) any Debt Securities (the "Offered
Securities"). Investor's preemptive right in this Article VIII shall however be
only to purchase or subscribe for that portion of the Offered Securities as the
aggregate number of shares of Common Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares) then held by or issuable
upon conversion of Preferred Stock to Investor bears to the total number of
shares of Common Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares) of AccessCare then held by or issuable to
any Person.
8.2 EXCEPTIONS. The rights of Investor under this Article VIII shall
not apply to:
(a) Common Stock issued as a stock dividend to holders of
Common Stock or upon any subdivision or combination of shares of Common
Stock; or
(b) the issuance of shares of Common Stock, or options
exercisable therefor, including options outstanding on the date of this
Agreement (such number to be equitably adjusted in the event of any
stock split, combination, reclassification or other similar event
occurring on or after the date of this Agreement) issuable to officers,
directors or employees of the Company and any Subsidiary pursuant to
any stock option agreement or plan or stock purchase agreement or plan
approved by a vote of the Compensation Committee of the Board of
Directors, provided that the aggregate number of shares issued or
issuable to such persons shall not exceed ten percent (10%) of the
outstanding shares of Common Stock of the Company at the Closing on a
fully-diluted basis; or
(c) the issuance of any shares of Common Stock in connection
with any public offering by AccessCare; or
(d) the issuance of any shares of capital stock or other
securities in connection with a merger of AccessCare with or into
another entity, or a purchase or sale of assets of AccessCare;
provided, that in each such case such transaction is in compliance with
the terms of the First Right of Refusal Agreement; or
(e) Common Stock issued upon conversion of Series A Preferred
Stock or exercise or conversion of any Offered Securities issued in
accordance with the requirements of this Section.
8.3 NO ASSIGNMENT OF RIGHTS. Investor may not assign its
rights hereunder, whether in connection with any transfer of its Series
A Preferred Stock or otherwise.
20
<PAGE> 27
ARTICLE IX
OBLIGATIONS PENDING THE CLOSING
Between the date hereof and the Closing, unless this Agreement is
terminated sooner, pursuant to Section 12.6 hereof:
9.1 ACCESS. AccessCare shall give to Investor and its counsel,
accountants and other authorized representatives from and after the date of
execution of this Agreement, on prior request therefor from Investor or such
representatives, such access to the premises, employees, agents and consultants
of AccessCare, and such copies of AccessCare's financial statements, books and
records, and contracts and leases and other documentation, so as to enable
Investor to inspect and evaluate all aspects of the business and operations,
assets, operating results, financial condition, future prospects,
capitalization, ownership, and legal and regulatory affairs of AccessCare and to
verify the accuracy of the information heretofore furnished to Investor and the
representations and warranties made in this Agreement, by AccessCare with
respect to the foregoing matters. AccessCare will furnish all information
reasonably requested by Investor. Investor agrees to conduct its review in a
manner designed to minimize any disruption of AccessCare's operations.
9.2 CONDUCT OF COMPANY'S BUSINESS. Unless Investor gives its prior
written consent for actions to be taken to the contrary, from the date of this
Agreement and until the Closing or termination of this Agreement, whichever
first occurs, AccessCare shall:
(a) COMPENSATION. Operate and conduct AccessCare's business and
operations diligently and only in the ordinary course of business consistent
with past practices. AccessCare shall not increase the compensation or benefits
of any employee, independent contractor or agent or adopt or amend any
commission plan or arrangement or any employee benefit plan or arrangement of
any type which results or may result in an increase in costs or liabilities
thereunder of more than $25,000 per month, in the aggregate, above those
existing on the date hereof, or otherwise lend or advance any sum or extend
credit to any employee, director or shareholder or any of their respective
affiliates;
(b) ORGANIZATION. Preserve intact AccessCare's organization
and use its reasonable best efforts to retain all employees of and consultants
to AccessCare, commensurate with the requirements of AccessCare's business;
(c) VENDORS. Use its reasonable best efforts to retain the
services of all vendors, suppliers, agents and consultants used in AccessCare's
business, commensurate with the requirements of AccessCare's business;
(d) INSURANCE. Use its reasonable best efforts to maintain
insurance, including liability and errors and omissions insurance, consistent
with past practices and, unless comparable insurance is substituted therefor or
is not generally available to businesses of the type conducted by AccessCare,
not take any action to terminate or modify, nor permit the lapse or termination
of, the present insurance policies and coverages of AccessCare as set forth in
the Disclosure Schedule;
21
<PAGE> 28
(e) LAWSUITS, CLAIMS. Promptly notify Investor of, and if
requested by Investor, use its reasonable best efforts to defend against, all
lawsuits, claims, proceedings or investigations that are, or which any officers
of AccessCare, as a result of events or circumstances actually known to them,
has reason to believe may be, threatened, brought, asserted or commenced against
AccessCare or any of its officers or directors, involving or affecting in any
way AccessCare's business or operations, or any of its assets, or the Series A
Preferred Stock or the transactions contemplated hereby;
(f) CERTAIN CHANGES. Not sell or otherwise dispose, or enter
into any agreement for the sale, of any of its assets or properties, except in
the ordinary course of business and consistent with past practices, and not
permit or allow, or enter into any agreements providing for or permitting, any
of its assets or properties to be subjected to any mortgage, security interest,
pledge, option, lien, charge or encumbrance other than liens or security
interests in existence on the date hereof and statutory liens to secure taxes
that are not yet due and payable;
(g) CONDITION OF ASSETS. Maintain in good working order and
condition, ordinary wear and tear excepted, and in compliance in all material
respects with all applicable laws and regulations, all vehicles, machinery,
equipment, computers, furniture, fixtures, tools, and other tangible assets,
wherever located, that are used, leased or owned by AccessCare;
(h) TAXES. Pay, when due, and prior to the imposition or
assessment of any interest, penalties or liens by reason of the non-payment of,
all Taxes assessed against AccessCare, any of its assets or its operations;
(i) DIVIDENDS, ETC. Except as contemplated by this Agreement
not: (i) declare or pay any dividends or make any distributions with respect to
or redeem any shares of AccessCare's capital stock; (ii) accelerate the payment
of or prepay any indebtedness or other obligations of AccessCare; (iii) approve
or effect any reclassification or recapitalization of AccessCare or its
authorized or outstanding shares; (iv) merge or consolidate AccessCare with or
sell any of its assets to a third party other than sales of assets in the
ordinary course of business and consistent with past practices; (v) approve or
commence any proceedings for the liquidation of AccessCare; or (vi) enter into
any agreement to do any of the foregoing;
(j) CORPORATE MATTERS. Other than to provide for the Series A
Preferred Stock, not: (i) amend in any manner the articles of incorporation or
bylaws of AccessCare; (ii) alter the composition or membership of AccessCare's
Board of Directors; (iii) except for shares purchased upon exercise of
outstanding options, authorize or issue any shares of capital stock of any class
or series; (iv) create or issue any warrants, obligations, subscriptions,
options, convertible securities or other commitments under which any additional
shares of the capital stock of any class or other equity securities of
AccessCare may be directly or indirectly authorized, issued or transferred; or
(v) agree to do any of the above; and
(k) LIABILITIES AND EXPENSES. Not create or incur (whether as
principal, surety or otherwise) any actual or contingent liabilities or expenses
other than liabilities and expenses incurred in the ordinary course of business
consistent with past practices.
22
<PAGE> 29
9.3 CONSENTS. Each party to this Agreement shall use its reasonable
best efforts to obtain or cause to be obtained at the earliest practicable date,
and prior to the Closing, all consents, approvals and licenses, if any, which
such party requires to permit it to consummate the transactions contemplated
hereby without violating any material agreement, contract, instrument or
applicable law or regulation, license or permit, to which it is a party or to
which it or its assets are subject. The parties hereto shall cooperate with each
other in their efforts to obtain all such consents, approvals and licenses.
9.4 NOTICE OF BREACH. Each party to this Agreement will immediately
give notice to the other parties of the occurrence of any event, or the failure
of any event to occur, that results in a breach by it of any representation or
warranty or a failure by it to comply with or fulfill any covenant, condition or
agreement contained herein.
ARTICLE X
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in this Agreement, or any other Transaction Document or
instrument or document delivered on or before the Closing referred to herein or
therein, shall survive the Closing and the consummation of the transactions
contemplated hereby and shall expire one hundred fifty (150) days after
AccessCare's fiscal year ending May 31, 1996. Notwithstanding the foregoing, the
representations and warranties made by AccessCare in Sections 5.6 and 5.9 shall
survive the Closing indefinitely.
ARTICLE XI
INDEMNIFICATION
11.1 INDEMNIFICATION BY ACCESSCARE. AccessCare shall defend, indemnify
and hold harmless Investor and its respective officers, directors, employees,
successors and assigns in respect of any and all claims, actions, suits or other
proceedings and any and all losses, costs, expenses, liabilities, fines,
penalties, interest and damages, whether or not arising out of any claim,
action, suit or other proceeding (and including reasonable counsel and
accountants' fees and expenses and all other reasonable costs and expenses of
investigation, defense or settlement of claims and amounts paid in settlement)
("Damages") incurred by, imposed on or borne by Investor or AccessCare resulting
from the breach of any of the representations, warranties, covenants or
agreements made by AccessCare in this Agreement.
11.2 LIMITATIONS ON INDEMNIFICATION BY ACCESSCARE. Anything to the
contrary notwithstanding herein, (i) Investor shall not be indemnified and held
harmless in respect of any Damages which are covered by insurance owned by
AccessCare to the extent that any net loss is reduced by such insurance; (ii)
Investor shall not be indemnified and held harmless in respect of any Damages
until the total of all Damages covered by indemnification under this section
exceeds an aggregate indemnification deductible of Twenty- five Thousand Dollars
($25,000), at which point all Damages incurred above such amount are covered;
and (iii) the liability of AccessCare shall be limited to an aggregate amount
equal to One Million Dollars ($1,000,000).
23
<PAGE> 30
11.3 INDEMNIFICATION BY INVESTOR. Investor shall defend, indemnify and
hold harmless AccessCare in respect of any and all Damages incurred by, imposed
on or borne by AccessCare resulting from the breach of any of the
representations, warranties, covenants or agreements made by Investor pursuant
to this Agreement.
11.4 LIMITATIONS ON INDEMNIFICATION BY INVESTOR. Anything to the
contrary notwithstanding herein, (i) AccessCare shall not be indemnified and
held harmless in respect of any Damages which are covered by insurance owned by
Investor to the extent that any net loss is reduced by such insurance; (ii)
AccessCare shall not be indemnified and held harmless in respect of any Damages
until the total of all Damages covered by indemnification under this section
exceeds an aggregate indemnification deductible of Twenty-five Thousand Dollars
($25,000), at which point all Damages incurred above such amount are covered;
and (iii) the liability of Investor shall be limited to an aggregate amount
equal to One Million Dollars ($1,000,000).
11.5 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise for
indemnification hereunder, the indemnified party ("Indemnitee") shall promptly
notify the indemnifying party ("Indemnitor") of the claim and, when known, the
facts constituting the basis for such claim; provided, however, that the
Indemnitee's failure to give such notice shall not affect any rights or remedies
of the Indemnitee hereunder with respect to indemnification for damages except
to the extent that the Indemnitor is materially prejudiced thereby. In the event
of any claim for indemnification hereunder resulting from or in connection with
any claim or legal proceedings by a third party, the notice to the Indemnitor
shall specify, if known, the amount or an estimate of the amount of the
liability arising therefrom. The Indemnitee shall not settle or compromise any
claim by a third party for which they are entitled to indemnification hereunder,
without the prior written consent of the Indemnitor (which shall not be
unreasonably withheld) unless suit shall have been instituted against it and the
Indemnitor shall not have taken control of such suit after notification thereof
as provided in Section 11.6 of this Agreement.
11.6 DEFENSE BY INDEMNITOR. In connection with any claim giving rise to
indemnity hereunder or resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, Indemnitor at its
sole cost and expense may, upon written notice to Indemnitee, assume the defense
of any such claim or legal proceeding if they acknowledge to Indemnitee in
writing its obligations to indemnify Indemnitee with respect to all elements of
such claim, and thereafter diligently conduct the defense thereof with counsel
reasonably acceptable to Indemnitee. Indemnitee shall be entitled to participate
in (but not control) the defense of any such action with its counsel and at its
own expense. If Indemnitor does not assume or fail to conduct in a diligent
manner the defense of any such claim or litigation resulting therefrom, (i)
Indemnitee may defend against such claim or litigation, in such manner as they
may deem appropriate, including, but not limited to, settling such claim or
litigation, after obtaining the consent thereto of Indemnitor (which consent
shall not be unreasonably withheld), on such terms as Investor may deem
appropriate, and (ii) Indemnitor shall be entitled to participate in (but not
control) the defense of such action, with its counsel and at its own expense. If
Indemnitor thereafter seeks to question the manner in which Indemnitee defended
such third party claim or the amount or nature of any such settlement,
Indemnitor shall have the burden to prove by a preponderance of the evidence
that Indemnitee did not defend or settle such third party claim in a reasonably
prudent manner. Each party agrees to cooperate fully with the other, such
cooperation to include, without limitation, attendance at depositions and the
provision of relevant documents as may be reasonably requested by the other
party, provided that Indemnitor will hold
24
<PAGE> 31
Indemnitee harmless from all of their expenses, including reasonable attorneys'
fees, incurred in connection with such cooperation by Indemnitee.
ARTICLE XII
MISCELLANEOUS
12.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of
any party hereto in exercising any right, power or remedy hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy hereunder. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
12.2 AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this Agreement
or the Series A Preferred Stock to the contrary notwithstanding, changes in or
additions to this Agreement or the Series A Preferred Stock issued pursuant
hereto may be made, and compliance with any covenant or provision herein or
therein set forth may be omitted or waived, if AccessCare shall obtain consent
thereto in writing from Persons holding a majority of the Series A Preferred
Stock affected by the proposed change, addition or waiver; and shall, in each
such case, deliver copies of such consent in writing to any holders who did not
execute the same; provided, however, that no such consent shall be effective to
reduce or to postpone the date fixed for the payment of the amount redeemable on
the Series A Preferred Stock, without the consent of the respective holder
thereof. Any waiver or consent may be given subject to satisfaction of
conditions stated therein and any waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
12.3 ADDRESSES FOR NOTICES, ETC. All notices, requests, demands or
other communications hereunder shall be in writing and shall be deemed to have
been duly given if delivered in person or mailed, certified, return receipt
requested, postage prepaid:
(i) If to AccessCare, addressed to:
AccessCare, Inc.
2203 North Lois Avenue, Suite 1150
Tampa, Florida 33607
Attention: Ronald G. Hersch, President
with copies to:
Comprehensive Care Corporation
4350 Von Karman, Suite 280
Newport Beach, California 92660
Attention: Drew Q. Miller, Chief Financial Officer
25
<PAGE> 32
with a copy to:
James A. Rowe
Corporate Counsel
AccessCare, Inc.
2203 N. Lois Avenue, Suite 1150
Tampa, Florida 33607
(ii) If to Investor addressed to
Physician Corporation of America
P.O. Box 527500
Miami, Florida 33152-7500
Attention: Peter E. Kilissanly, President and COO
or delivered in person to
Physician Corporation of America
5835 Blue Lagoon Drive
Miami, Florida 33126
Attention: Peter E. Kilissanly, President and COO
with a copy, in either case, to:
John A. Hageman, Esq., General Counsel
Physician Corporation of America
5835 Blue Lagoon Drive
Miami, Florida 33126
Any party hereto may from time to time, upon written notice to the other
parties, designate a different address, which shall be substituted for the one
specified above for such party. If any notice or other document is sent by
certified or registered mail, return receipt requested, postage prepaid,
properly addressed as aforementioned, the same shall be deemed served or
delivered forty-eight (48) hours after mailing thereof. If any notices are sent
by facsimile ("fax") to a party, it will be deemed to have been delivered on the
date the fax thereof is actually received, provided the original thereof is sent
by mail in the manner set forth above within twenty-four (24) hours after the
fax is sent.
12.4 COSTS, EXPENSES AND TAXES. Each of the parties agrees to pay all
of its own costs and expenses in connection with the investigation, preparation,
execution and delivery of this Agreement, the Series A Preferred Stock and other
instruments and documents to be delivered hereunder and the transactions
contemplated hereby and the other Transaction Documents, including the fees and
out-of-pocket expenses of its legal counsel, independent public accountants and
other outside experts. Any and all stamp and other taxes and any and all filing
fees payable or determined to be payable in connection with the execution and
delivery of this Agreement, the Series A Preferred Stock and other instruments
and documents to be delivered hereunder or under other Transaction Documents
shall be paid by the respective party thereto responsible therefor under
applicable law.
26
<PAGE> 33
12.5 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of AccessCare and Investor and their respective
successors and assigns, except that neither party shall have the right to assign
its rights hereunder or any interest herein without the prior written consent of
the other party.
12.6 TERMINATION. This Agreement may be terminated prior to the Closing
(i) by the mutual consent of the parties hereto; (ii) by AccessCare if there has
been a material misrepresentation or material breach on the part of Investor in
the representations and warranties of Investor set forth herein, which, if
curable, has not been cured within ten (10) business days after notice thereof
by AccessCare; (iii) by Investor if there has been a material misrepresentation
or material breach on the part of AccessCare or CompCare in the representations,
warranties and covenants of CompCare or AccessCare set forth in the Transaction
Documents, which, if curable, has not been cured within ten (10) business days
after notice thereof by Investor; (iv) by AccessCare upon delivery to Investor
of a written notice if any event occurs which renders impossible satisfaction of
one or more of the conditions to the AccessCare's obligations contained in
Article IV hereof and noncompliance is not waived by AccessCare; (v) by Investor
upon delivery to AccessCare of a written notice if any event occurs which
renders impossible satisfaction of one or more of the conditions to Investor's
obligations contained in Article III hereof and noncompliance is not waived by
Investor; and (vi) by any party by written notice to the other parties if the
Closing shall not have occurred by the close of business on May 26, 1995, or
such later date if the Closing is delayed by reason of any delay in receipt of
confirmation of the filing of the Certificate of Designation of AccessCare. The
termination of this Agreement except pursuant to subsection (i) shall not affect
the right of any party to bring an action against another party for breach of
this Agreement.
12.7 PRIOR AGREEMENTS. The Transaction Documents and this Agreement
constitute the entire agreement of the respective parties to each thereof
parties and supersede any prior understandings or agreements concerning the
subject matter hereof, including without limitation the letter agreement dated
March 22, 1995 among AccessCare, CompCare and Investor.
12.8 SEVERABILITY. The invalidity or unenforceability of any provision
hereto shall in no way affect the validity or enforceability of any other
provision.
12.9 GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Florida.
12.10 HEADINGS. Article, Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
12.11 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
27
<PAGE> 34
12.12 FURTHER ASSURANCES. From and after the date of this Agreement,
upon the request of either party, the other party shall execute and deliver or
cause to be executed or delivered such instruments, documents and other writings
as may be necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement and the Series A Preferred
Stock.
12.13 COVENANT OF GOOD FAITH AND FAIR DEALING. Each party hereto agrees
to act in good faith with respect to the other party or parties in exercising
its rights and discharging its obligations under this Agreement. Each party
further agrees to use its best efforts to ensure that the purposes of this
Agreement are realized and to take all steps as are reasonable in order to
implement the operational provisions of this Agreement. Each party agrees to
execute, deliver and file any document or instrument necessary or advisable to
realize the purposes of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this AccessCare
Preferred Stock Purchase Agreement to be executed by their respective officers
thereunto duly authorized, as of the date first above written.
ACCESSCARE, INC.
By: /s/ Ronald G. Hersch
------------------------------------
Ronald G. Hersch, Ph.D., President
PHYSICIAN CORPORATION OF AMERICA
By: /s/ Peter E. Kilissanly
------------------------------------
Peter E. Kilissanly, President and
Chief Operating Officer
28
<PAGE> 1
EXHIBIT 10.67
FIRST RIGHT OF REFUSAL AGREEMENT
THIS FIRST RIGHT OF REFUSAL AGREEMENT (this "Agreement") is
made as of this 23rd day of May, 1995, by and among COMPREHENSIVE CARE
CORPORATION, a Delaware corporation ("CompCare"), ACCESSCARE, INC., a Nevada
corporation ("AccessCare"), and PHYSICIAN CORPORATION OF AMERICA, a Delaware
corporation ("Investor").
R E C I T A L S :
A. AccessCare and Investor are concurrently herewith entering into the
AccessCare Preferred Stock Purchase Agreement dated as of May 23, 1995 (the
"Stock Purchase Agreement") whereby, among other things, Investor is purchasing
the Series A Preferred Stock of AccessCare (the 135 shares of AccessCare Series
A Preferred Stock, and any shares receivable therefor upon a stock dividend,
reclassification, merger or other corporate reorganization, but excluding the
common stock of AccessCare issuable upon conversion of the Series A Preferred
Stock (and excluding any other securities receivable on account of ownership of
such common stock), herein called the "Preferred Shares") on the terms and
conditions of the Stock Purchase Agreement and the other documents referred to
therein (sometimes collectively called "Transaction Documents").
B. Pursuant to the Stock Purchase Agreement, CompCare and AccessCare
hereby grant, and Investor hereby receives, a first right of refusal to purchase
AccessCare, on the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. Definitions.
1.1 The term "Acquisition Proposal" shall mean any proposal
made by a third party, orally or in writing, solicited or unsolicited by or for
CompCare or AccessCare, whether effected in one transaction or a series of
related transactions, for (i) the acquisition (other than in an "Excluded
Transaction" as defined below) of the capital stock of AccessCare then held by
CompCare representing all or any substantial portion (ie., more than 10%) of the
voting power of AccessCare; (ii) the acquisition (other than in an "Excluded
Transaction" as defined below), through sale, assignment, license, lease or
other transfer of all or substantially all of the assets of AccessCare; or (iii)
the acquisition, by merger, consolidation or any other reorganization of
AccessCare (other than in an "Excluded Transaction" as defined below), of the
capital stock of AccessCare then held by CompCare representing all or any
substantial portion (ie., more than 10%) of the voting power of AccessCare or
through which all or substantially all of the assets of AccessCare are converted
or released (other than in an "Excluded Transaction" as defined below).
<PAGE> 2
1.2 The term "Excluded Transaction" shall include any
transactions of a nature like those described in Section 1.1 as a result of
which the acquisition is made by a person or entity controlling, controlled by
or under common control with CompCare which agrees in writing to be a party to,
and be bound by, this Agreement with respect to any subsequent transaction
occurring prior to termination of this Agreement.
2. First Right of Refusal.
2.1 Notice of Acquisition Proposal . In the event that
AccessCare or CompCare receives an Acquisition Proposal, AccessCare or CompCare,
as the case may be, shall first deliver to Investor a written notice (the
"Notice") specifying the name and address of the party which submitted the
Acquisition Proposal and the terms and conditions of the Acquisition Proposal,
including the consideration offered to acquire AccessCare. In the event that
AccessCare or CompCare desires to accept such an Acquisition Proposal, the
Notice shall so specify or a supplement that so specifies to the Notice shall be
sent to Investor. A Notice so providing or supplemented shall be hereinafter
referred to as a "Notice of Acceptable Offer."
2.2 Notice of Election to Acquire . During the thirty (30) day
period following receipt of the Notice of Acceptable Offer, Investor shall have
the right to acquire AccessCare at the price (subject to the terms of subsection
2.4 below) and upon the terms and conditions specified in the Notice of
Acceptable Offer. Investor shall give written notice to AccessCare and CompCare
of such election to acquire AccessCare within such thirty (30) day period.
2.3 Consummation of Acquisition Proposal . In the event that
Investor does not elect to acquire AccessCare pursuant to subsection 2.2 above,
AccessCare or CompCare, as the case may be, may then accept the Acquisition
Proposal set forth in the Notice of Acceptable Offer and consummate such
transaction, provided such transaction is consummated within the ninety (90) day
period following the date of the Notice of Acceptable Offer, upon terms and
conditions, as a whole, as favorable as or superior to those set forth in the
Notice of Acceptable Offer, with the offering party or a third party.
2.4 Purchase Price . If Investor elects to acquire the
outstanding stock of AccessCare then held by CompCare or the assets of
AccessCare pursuant to subsection 2.2 above, Investor shall have the right to
acquire AccessCare for cash consideration, whether or not part or all of the
consideration specified in the Notice of Acceptable Offer is other than cash. If
part or all of the consideration to acquire AccessCare as stated in the Notice
of Acceptable Offer is other than cash, the price to acquire AccessCare stated
in the Notice of Acceptable Offer shall be deemed to be the sum of the cash
consideration, if any, specified in the Notice of Acceptable Offer, plus the
fair market value of the non-cash consideration. The fair market value of such
non-cash consideration shall be determined by the mutual agreement of Investor,
on the one hand, and CompCare or AccessCare, on the other hand as the case may
be. If Investor and either AccessCare or CompCare, as the case may be, cannot
agree upon the fair market value of the non-cash consideration within five (5)
days after Investor exercises its first right of refusal as set forth herein,
the fair market value of the non-cash consideration shall be determined by an
independent qualified appraiser agreed upon by Investor and CompCare. Such
appraiser shall submit his or her appraisal to CompCare, Investor and AccessCare
within ten (10) days of his or her appointment and such appraiser's
determination shall be binding upon all of the parties hereto. If CompCare,
Investor and AccessCare are unable to agree upon an appraiser within ten
2
<PAGE> 3
(10) days after Investor exercises its first right of refusal as set forth
herein, then Investor, on the one hand, and AccessCare and CompCare, together on
the other hand, each shall select, within five (5) days thereafter, an
independent qualified appraiser. Such two appraisers shall select, within five
(5) days after the selection of the second of such two appraisers, a third
similarly qualified appraiser. Within ten (10) days after the third appraiser is
selected, the appraisers shall independently determine the fair market value of
the non-cash consideration. On the date which is ten (10) days after the third
appraiser is selected, the three appraisers shall submit their appraisals to
CompCare, Investor and AccessCare, and the average of the two appraisals which
are closest in amount shall constitute the fair market value of the non-cash
consideration. If one appraisal is the mean of the other two appraisals, such
appraisal shall constitute the fair market value of the non-cash consideration.
If either party fails to appoint its appraiser within the required time period,
the appraiser appointed by the other party shall be the sole appraiser and such
appraiser's determination shall be binding upon all parties hereto. Investor and
AccessCare shall share equally the fees and expenses of the appraiser jointly
named. In the event Investor and AccessCare fail to agree upon an appraiser,
then Investor shall pay the fees and expenses of the appraiser appointed by
Investor and AccessCare shall pay the fees and expenses of the appraiser
appointed by AccessCare, and the cost of the third appraiser shall be shared
equally between Investor and AccessCare.
2.5 Transfers in Violation of this Section . Any sale,
assignment or other transfer of capital stock of AccessCare by CompCare pursuant
to an Acquisition Proposal contrary to the provisions of this Section 2 shall be
null and void, and the transferee shall not be recognized by AccessCare as a
holder or owner of the capital stock purported to have been sold, assigned or
transferred for any purposes, unless and until CompCare has satisfied the
requirements of this Section 2 with respect to such proposed sale, assignment or
other transfer. No transaction pursuant to an Acquisition Proposal shall be
deemed consummated unless and until the requirements of this Section 2 with
respect to such Acquisition Proposal have been satisfied in full.
3. Termination.
This Agreement shall terminate upon the earliest of (i) 1:00
p.m. New York City time on the tenth (10th ) anniversary of the date of this
Agreement; (ii) the conversion, sale or disposition, by way of redemption or
otherwise (excluding for purposes of this clause (ii) only a partial redemption
at the election of AccessCare) of all of the Preferred Shares, or any portion
thereof; (iii) the redemption at the election of AccessCare of all of the
Preferred Shares; or (iv) the failure of Investor to exercise its election to
acquire AccessCare within the thirty (30) day period specified in subsection 2.2
above (but, in the case of clause (iv), only if the transaction giving rise to
the Investor's election shall have been consummated by AccessCare or CompCare on
the terms provided in subsection 2.3 above); provided however, that if an
Acquisition Proposal is presented to AccessCare or CompCare prior to the
occurrence of the earliest of the events described above, the rights and
obligations hereunder shall continue through and including any period required
to satisfy the notice provisions and other requirements of Section 2 above.
3
<PAGE> 4
4. Non-transferability.
Neither this Agreement nor the first right of refusal may be
assigned or otherwise transferred by Investor to any other person or entity
except a transfer of this Agreement and the Right as a whole to a single entity
that either (i) acquires, in combination with one or more commonly-controlled
affiliates of such entity, substantially all of the assets and business of
Investor or (ii) is a surviving entity of a recapitalization, merger,
consolidation, or other form of corporation reorganization of Investor
succeeding to substantially all of Investor's assets and business and that, in
either case (i) or (ii), expressly assumes in writing Investor's obligations
under the Transaction Documents. Except as permitted in the preceding sentence,
any such assignment or transfer shall be void.
5. Representations and Warranties of Investor .
Investor hereby represents and warrants to CompCare and
AccessCare that:
5.1 Authorization . Investor has full power and authority to
enter into this Agreement, and this Agreement constitutes its valid and legally
binding obligation, enforceable in accordance with its terms.
5.2 Purchase Entirely for Own Account . This Agreement is made
with Investor in reliance upon Investor's representation that the first right of
refusal acquired hereby (the "Right"), any shares of AccessCare Common stock or
other securities to be purchased upon exercise of the Right by Investor and any
shares the Common Stock or other securities of AccessCare issuable upon
conversion or exercise of securities referred to above (collectively, the
"Securities") will be acquired for investment for Investor's own account, not as
a nominee or agent, and not with a view to the resale or distribution of any
part thereof, and that Investor has no present intention of selling, granting
any participation in, or otherwise distributing the same. By executing this
Agreement, Investor further represents that Investor does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
5.3 Disclosure of Information . Investor believes it has
received all the information it considers necessary or appropriate for deciding
whether to acquire the Right to purchase the Securities. Investor further
represents that it has had an opportunity to ask questions and receive answers
from CompCare and AccessCare regarding the terms and conditions of the offering
of the Securities. Investor's representation's and warranties in this Section do
not limit AccessCare's liability for a breach of its representations or
warranties under this Agreement.
5.4 Investment Experience . Investor is an "accredited
investor" within the meaning of Rule 501 of Regulation D promulgated by the
Securities and Exchange Commission ("SEC") and the rules of the Florida
Department of Banking and Finance and is not counted for purposes of Section
517.061(11)(a) of the Florida Securities and Investor Protection Act or Section
25102(f) of the California Corporate Securities Law of 1968 and further that
Investor is an investor in securities of companies in the development stage and
acknowledges that it is able to fend for itself, can bear the economic risk of
its investment and has such knowledge and
4
<PAGE> 5
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Right and an investment in the
Securities.
5.5 Florida Transaction Exemption . Investor is a corporation
with assets of $500,000 or more for purposes of Section 517.061(8) of the
Florida Securities and Investor Protection Act.
5.6 Restricted Securities . Investor understands that the
Securities are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from CompCare in a
transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, Investor represents that he is familiar with
SEC Rule 144, as presently in effect, and understands the resale limitations
imposed thereby and by the Act.
5.7 Legends . It is understood that certificates evidencing
the Securities may bear substantially one or more of the following legends:
(a) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN
EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
(b) Any legend required by any applicable state law.
(c) Any legend required by any applicable Transaction
Documents.
6. Representations and Warranties of AccessCare and CompCare . Each of
AccessCare and CompCare, jointly and severally, represents and warrants to
Investor that:
6.1 Organization and Standing of CompCare . CompCare is a duly
incorporated and validly existing corporation in good standing under the laws of
the State of Delaware, and AccessCare is a duly incorporated and validly
existing corporation in good standing under the laws of the State of Nevada, and
each, respectively, has all requisite corporate power and authority for the
ownership and operation of its properties and for the carrying on of its
business as now conducted and as now proposed to be conducted. Each of
AccessCare and CompCare, respectively, is duly licensed or qualified, and in
good standing as a foreign corporation authorized to do business, in all
jurisdictions in which the character of the property owned or leased, or the
nature of the activities conducted, by it makes such licensing or qualification
necessary and where failure to be licensed or to so qualify would have a
material adverse effect upon it.
6.2 Corporate Action . Each of AccessCare and CompCare,
respectively, has all necessary corporate power and has taken all corporate
action required to make all the
5
<PAGE> 6
provisions of this Agreement, and the documents and instruments executed in
connection herewith, its valid and enforceable obligations upon execution
thereof.
6.3 Governmental Approvals . No authorization, consent,
approval, license, exemption of, or filing or registration with, any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, is or will be necessary for, or in connection with, the
offer, issuance, sale, execution or delivery by AccessCare or CompCare,
respectively, or for the performance by it of its obligations under, this
Agreement except for post-sale filings to be made, if any, to comply with
exemptions from registration or qualification under federal and state securities
laws.
7. No Privilege of Stock Ownership .
Prior to exercise of this Right, Investor shall not be
entitled, by virtue of holding this Right, to any rights of a stockholder of
AccessCare, including (without limitation) the right to vote, receive dividends
or other distributions, exercise preemptive rights or be notified of stockholder
meetings, and such holder shall not be entitled to any notice or other
communication concerning the business or affairs of AccessCare.
8. Non-transferability .
Neither this Agreement nor the Right may be assigned or
otherwise transferred by Investor to any other person or entity. Any such
assignment or transfer shall be void.
9. Legend. Each certificate representing shares of capital stock of
AccessCare held by CompCare or outstanding on the date hereof shall contain a
legend in substantially the following form:
THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT
TO THE PROVISIONS OF A FIRST RIGHT OF REFUSAL AGREEMENT DATED AS OF MAY
23, 1995, WHICH AGREEMENT IS ON FILE AT THE OFFICES OF THE COMPANY, A
COPY OF WHICH SHALL BE PROVIDED UPON WRITTEN REQUEST.
10. Miscellaneous.
10.1 Notices . All notices, requests, demands or other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered in person or mailed, certified, return receipt
requested, postage prepaid:
6
<PAGE> 7
(a) If to CompCare or AccessCare, addressed to:
AccessCare, Inc.
2203 N. Lois Avenue, Suite 1150
Tampa, Florida 33607
Attn: Ronald G. Hersch, President
and
Comprehensive Care Corporation
4350 Von Karman
Suite 280
Newport Beach, California 92660
Attention: Drew Q. Miller, Chief Financial
Officer
with a copy to:
James A. Rowe
Corporate Counsel
AccessCare, Inc.
2203 N. Lois Avenue, Suite 1150
Tampa, Florida 33607
(b) If to Investor addressed to
Physician Corporation of America
P.O. Box 527500
Miami, Florida 33152-7500
Attention: Peter E. Kilissanly, President
and COO
or delivered in person to
Physician Corporation of America
5835 Blue Lagoon Drive
Miami, Florida 33126
Attention: Peter E. Kilissanly, President
and COO
with a copy, in either case, to:
Physician Corporation of America
5835 Blue Lagoon Drive
Miami, Florida 33126
Attention: John A. Hageman, Esq., General
Counsel
Any party hereto may from time to time, upon written notice to the other
parties, designate a different address, which shall be substituted for the one
specified above for such party. If any notice or other document is sent by
certified or registered mail, return receipt requested, postage prepaid,
properly addressed as aforementioned, the same shall be deemed served or
delivered
7
<PAGE> 8
forty-eight (48) hours after mailing thereof. If any notices are sent by
facsimile ("fax") to a party, it will be deemed to have been delivered on the
date the fax thereof is actually received, provided the original thereof is sent
by mail in the manner set forth above within twenty-four (24) hours after the
fax is sent.
10.2 Attorneys' Fees . In the event of any controversy or claim
or dispute between the parties hereto arising out of or relating to this
Agreement or any of the documents provided for herein, or the breach thereof,
the prevailing party shall be entitled to recover from the losing party
reasonable attorneys' fees, expenses and costs.
10.3 Binding Effect . This Agreement shall be binding upon the
heirs, executors, representatives, successors and assigns of the respective
parties hereto; provided, however, that no assignment hereunder by Investor
shall be permitted. Nothing in this Agreement, express or implied, is intended
to confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
10.4 Counterparts . This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which together shall be deemed to be one and the same instrument.
10.5 Headings . The subject headings of the sections and
subsections of this Agreement are included for purposes of convenience only and
shall not affect the construction or interpretation of any of its provisions.
10.6 Waivers . Any party to this Agreement may waive any right,
breach or default which it has the right to waive; provided that such waiver
will not be effective against the waiving party, unless it is in writing and
specifically refers to this Agreement and notice thereof is promptly given to
all parties in the manner provided in Subsection 5.3 of this Agreement. No
waiver will be deemed to be a waiver of any other matter, whenever occurring and
whether identical, similar or dissimilar to the matter waived.
10.7 Entire Agreement . The Transaction Documents collectively
embody the entire agreement and understanding of the parties hereto. This
Agreement supersedes the Letter Agreement and all other prior or contemporaneous
agreements or understandings (whether written or oral) among the parties, in
respect to the subject matter contained herein.
10.8 Governing Law . This Agreement shall be construed in
accordance with, and governed by, the laws of the State of Florida.
10.9 Covenant of Good Faith and Fair Dealing . Each party
hereto agrees to act in good faith with respect to the other party or parties in
exercising its rights and discharging its obligations under this Agreement. Each
party further agrees to use its best efforts to ensure that the purposes of this
Agreement are realized and to take all steps as are reasonable in order to
8
<PAGE> 9
implement the operational provisions of this Agreement. Each party agrees to
execute, deliver and file any document or instrument necessary or advisable to
realize the purposes of this Agreement.
IN WITNESS WHEREOF, the parties to this First Right of Refusal
Agreement have duly executed it on the day and year first above written.
"Investor" PHYSICIAN CORPORATION OF AMERICA, a
Delaware corporation
By: /s/ Peter E. Kilissanly
-------------------------------------------------
Peter E. Kilissanly, President and Chief
Operating Officer
"AccessCare" ACCESSCARE, INC., a Nevada corporation
By: /s/ Ronald G. Hersch
-------------------------------------------------
Ronald G. Hersch, Ph.D., President
"CompCare" COMPREHENSIVE CARE CORPORATION, a
Delaware corporation
By: /s/ Kerri Ruppert
-------------------------------------------------
Its: Vice President, Secretary/Treasurer and CAO
9
<PAGE> 1
COMPREHENSIVE CARE CORPORATION EXHIBIT 11
Calculation of Loss Per Share
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Primary and Fully Diluted:
Loss applicable to common stock:
Loss before extraordinary item $(11,533) $(7,852) $(11,600) $(4,562) $(27,500)
Extraordinary item - gain on debenture
conversion..................................... --- --- --- --- 11,465
-------- ------- -------- ------- --------
Net loss......................................... $(11,533) $(7,852) $(11,600) $(4,562) $(16,035)
======== ======= ======== ======= ========
Average number of shares of common stock and
common stock equivalents......................... 2,257 2,199 2,196 2,190 1,212
======== ======= ======== ======= ========
Loss per common and common equivalent share:
Loss before extraordinary item $(5.11) $(3.57) $(5.28) $(2.08) $(22.69)
Extraordinary item - gain on debenture
conversion..................................... --- --- --- --- 9.46
-------- ------- -------- ------- --------
Net loss......................................... $(5.11) $(3.57) $(5.28) $(2.08) $(13.23)
======== ======= ======== ======= ========
</TABLE>
<PAGE> 1
EXHIBIT 21
COMPREHENSIVE CARE CORPORATION
SCHEDULE OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY NAME INCORPORATION
--------------- -------------
<S> <C>
N.P.H.S., Inc. California
CareManor Hospital of Washington, Inc. Washington
Trinity Oaks Hospital, Inc. Texas
CareUnit, Inc. California
Starting Point Incorporated California
CareUnit Hospital of Albuquerque, Inc. New Mexico
Comprehensive Care Corporation Nevada
CareUnit Clinic of Washington, Inc. Washington
CareUnit Hospital of Ohio, Inc. Ohio
Comprehensive Care Corporation (Canada) Ltd. Canada
CareUnit, Inc. Delaware
CMP Properties, Inc. Oregon
CareUnit of Florida, Inc. Florida
Comprehensive Behavioral Care, Inc. Nevada
Managed Behavioral Healthcare, Inc. Florida
AccessCare of Washington, Inc. Washington
CareInstitute California
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-43841) and Registration Statement (Form S-8 No. 33-27213) of
our report dated September 7, 1995 with respect to the consolidated financial
statements of Comprehensive Care Corporation and subsidiaries for the year ended
May 31, 1995, included in the Annual Report (Form 10-K) for the year ended May
31, 1995.
/s/ Ernst & Young LLP
Orange County, California
September 11, 1995
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.2
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into the Company's previously filed S-8
Registration Statement File No. 33-43841 and the S-8 Registration Statement File
No. 33-27213.
/s/ Arthur Anderson LLP
-----------------------
ARTHUR ANDERSEN LLP
September 11, 1995
St. Louis, Missouri
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-31-1995
<CASH> 1542
<SECURITIES> 0
<RECEIVABLES> 3329
<ALLOWANCES> 1096
<INVENTORY> 0
<CURRENT-ASSETS> 8012
<PP&E> 25181
<DEPRECIATION> 13074
<TOTAL-ASSETS> 26001
<CURRENT-LIABILITIES> 23354
<BONDS> 5077
<COMMON> 25
0
0
<OTHER-SE> (4958)
<TOTAL-LIABILITY-AND-EQUITY> 26001
<SALES> 29282
<TOTAL-REVENUES> 29320
<CGS> 15421
<TOTAL-COSTS> 15421
<OTHER-EXPENSES> 37884
<LOSS-PROVISION> 1423
<INTEREST-EXPENSE> 1366
<INCOME-PRETAX> (11353)
<INCOME-TAX> 180
<INCOME-CONTINUING> (11533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,533)
<EPS-PRIMARY> (5.11)
<EPS-DILUTED> (5.11)
</TABLE>
