COMPREHENSIVE CARE CORP, 10-K405/A, 1996-08-08

COMPREHENSIVE CARE CORP
10-K405/A, 1996-08-08
HOSPITALS

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
AMENDMENT NO. 4

[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.)

1111 Bayside Drive
Suite 100
Newport Beach, California 92625
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (714) 222-2273

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 exchangeable at the 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 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.

3
<PAGE> 4
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 . . . . . . . . 29,082 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>
INPATIENT DAYS FOR YEAR ENDED MAY 31,
YEAR LICENSED ----------------------------------------------
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.
(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.

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<PAGE> 7
(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 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

7
<PAGE> 8
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
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.

8
<PAGE> 9
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
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

9
<PAGE> 10
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.

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

10
<PAGE> 11
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.

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.

11
<PAGE> 12
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.
(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.

12
<PAGE> 13

punitive damages. RehabCare filed a counterclaim in the case seeking a
declaratory judgment 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 judgment 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 judgment. Any effect from the outcome of this lawsuit would
not have a material adverse impact on the Company's results of operations.

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, Mr. Leslie Livingston and Livingston & Co.,
in fiscal 1992. The Company had classified these advances as accounts
receivable and wrote off all such receivables through fiscal 1994. Mr.
Livingston 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, Schwabe,
Williamson & Wyatt, 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. Any effect of this lawsuit would not have
a material adverse impact on the Company's results of operations.

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. The Company established a reserve
for this lawsuit in a prior fiscal year. Any effect of this lawsuit would not
be material to the Company's financial statements or results of operations.

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 Company had
accrued for this settlement amount over several previous fiscal years and, as a
result, any effect would not be material to the Company's current year
financial statements. The Company's future statements of operations will
reflect the interest expense related to the outstanding settlement amount.

13
<PAGE> 14
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 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.

14
<PAGE> 15
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> <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> <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 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.

15
<PAGE> 16
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:
Operating revenues . . . . . . . . . . . . . $ 29,282 $ 34,277 $ 51,847 $ 59,969 $ 84,689

Costs and expenses:
Direct healthcare 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
Write-down of assets . . . . . . . . . . . . 741 1,825 3,670 15,986 5,863
Restructuring expenses . . . . . . . . . . . -- -- 2,097 854 --
Other non-recurring expenses . . . . . . . . -- -- 3,355 1,298 2,819
-------- -------- -------- -------- --------
39,789 42,475 74,933 78,561 103,650
-------- -------- -------- -------- --------
Loss from operations . . . . . . . . . . . . (10,507) (8,198) (23,086) (18,592) (18,961)

Other income/(expenses):
Gain on the sale of RehabCare stock, net . . -- -- 13,114 17,683 --
Gain on Sovran settlement, net . . . . . . . -- -- 584 -- --
Gain on sale of assets . . . . . . . . . . . 836 1,825 -- -- --
Loss on sale of assets . . . . . . . . . . . (354) -- (712) -- --
Interest income . . . . . . . . . . . . . . 38 50 69 336 531
Interest expense . . . . . . . . . . . . . . (1,366) (1,228) (1,759) (3,908) (7,380)
Equity in earnings of unconsolidated
affiliates . . . . . . . . . . . . . . . . -- -- 384 168 (1,289)
-------- -------- -------- -------- --------

Loss before income taxes . . . . . . . . . . . . . (11,353) (7,551) (11,406) (4,313) (27,099)
Provision 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
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>

BALANCE SHEET DATA:
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
Long-term debt including current maturities
and debentures . . . . . . . . . . . . . . . . . . 17,900 10,631 12,789 24,113 41,184
Stockholders' equity (deficit) . . . . . . . . . . (4,933) 5,099 12,951 24,441 28,976
</TABLE>

16
<PAGE> 17
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:

o A failed merger in 1989.
o Movement of the Company's headquarters from California
to Missouri in 1989.
o A proxy fight in 1990 which eliminated most of the
health care expertise from the board of directors.
o Prior management's reliance on the sale of productive
CareUnit, Inc. assets to offset hospital operating
losses.
o 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 judgment
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
(see Note 10-- Long-Term Debt and Short-Term Borrowings). On February 1, 1995,
the Company sold an aggregate of 100,000 shares

17
<PAGE> 18
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 judgment 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 judgment.
The Company is unable to predict whether any proceeds from this judgment 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 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

18
<PAGE> 19
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 a loss on the write-down of assets held for sale of
$0.7 million.

Included in other income/(expense) in fiscal 1995, the Company
recorded a gain on sale of assets of $0.4 million which was partially offset by
a loss on the sale of assets of $0.8 million. 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, 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

19
<PAGE> 20
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 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

20
<PAGE> 21
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>

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

21
<PAGE> 22
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>

The Company recorded a write-down during fiscal 1995 of $0.3
million and recorded $1.8 million during fiscal 1994 for one operating facility
due to an impairment of its net realizable value. For fiscal years 1993 and
prior, asset write-downs included the estimated future operating losses,
selling costs and carrying costs of such closed facilities for closed
operations until the estimated disposition date. 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

22
<PAGE> 23

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.

Operating revenues declined $17.6 million or 34% from fiscal 1993,
primarily as the result of the closure of four freestanding facilities during
fiscal 1993, the sale of a fifth facility. In addition, a decline in both
admissions and length of stay experienced by freestanding operations and the
decline in length of stay for contract operations contributed to the decline in
operating revenues.

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. The provision
for doubtful accounts decreased by $4.6 million during fiscal 1994 primarily
due to the decline in operating revenues experienced as a result of the closure
of four freestanding facilities during fiscal 1993 and the sale of a fifth
facility. The provision for doubtful accounts for fiscal 1994 is predominately
related to the Company's freestanding operations. During fiscal 1994, the
Company's payor mix declined from 86% received from private sources in fiscal
1993 to 57% in fiscal 1994. This shift created a decrease in those revenues
which traditionally experience a greater degree of bad debts. For fiscal 1993,
the Company recorded a charge of $2.0 million for restructuring and $3.4
million for other non-recurring expenses. In addition, in fiscal 1994 and
1993, the Company recorded a write-down on the sale of properties held for sale
of $1.8 million and $3.7 million, respectively.

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").

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. In fiscal
1994, the Company, recorded a gain on the sale of property held for sale of
$1.8 million. In addition, the Company recorded a loss on the sale of
operating assets of $0.7 million.

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.

Managed Care Operations

During fiscal 1994, the number of covered lives for managed care
operations increased by 33%. This increase is attributable to new contracts
added during fiscal 1994. AccessCare distinguishes itself from its competition
by being the "science-based" provider of care and manages all clinical programs
based upon proven treatment technologies.

In fiscal 1994, operating revenue for managed care operations
increased 191% from fiscal 1993 due to the fact that fiscal 1993 consisted of
only five months. In addition, AccessCare is a start-up venture and is in its
growth stage. Operating expenses increased 134% in fiscal 1994 also as a
result that fiscal 1993 consisted of only five months and the expenses related
to AccessCare's expansion and development. Although AccessCare experienced an
increase in operating

23
<PAGE> 24
revenue during fiscal 1994, it was more than offset by the increase in total
operating expenses resulting in an increase in AccessCare's net operating loss
of 70% or $0.7 million from fiscal 1993.

Contract Operations

During fiscal 1994, patient days of service under CareUnit, Inc.
contracts declined by approximately 33% from 51,524 patient days to 34,464
patient days. This decline is attributable to the 5 units which were closed
during fiscal 1994, a decline in length of stay and managed care intervention.
Of the units closed, 1 contract was terminated by CareUnit, Inc. for poor
operating performance. The remaining 4 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 1994,
CareUnit, Inc. opened 3 new contracts.

For units operational in both fiscal years, operating expenses
decreased less than 1%, which, combined with the increase in inpatient and
outpatient operating revenues, caused operating income at the unit level to
increase 10% from fiscal 1993. Consequently, overall unit operating income
increased to $0.8 million in fiscal 1994 from $0.7 million in fiscal 1993.

Freestanding Operations

Admissions for freestanding operations in fiscal 1994 declined
overall by 3,131 to 3,916 from 7,047 in fiscal 1993, an overall decline of 44%.
Of this decline, 2,843 fewer admissions were attributable to facilities which
were closed or under contract to be sold as of May 31, 1994. The remaining
"same stores" facilities, i.e., those operational during both fiscal years
experienced a 7% decrease in admissions and a 11% decline in length of stay to
10.0 days, resulting in 21% fewer patient days than the prior fiscal year. The
decrease in "same store" patient days was primarily due to Aurora Behavioral
Health Hospital which experienced a 16% decrease in admissions and a 53%
decline in length of stay which resulted in 60% fewer patient days in fiscal
1994 compared to the prior fiscal year. This decline was primarily
attributable to the termination during fiscal 1993 of an acute psychiatric
program specializing in dissociative disorders. Patients in the dissociative
disorder program traditionally have a higher acuity requiring additional care
and a longer length of stay.

Overall operating revenue per patient day for freestanding
operations increased by 20% to $618 in fiscal 1994 from fiscal 1993 and overall
patient days declined 53% to 38,685, resulting in a decrease of approximately
$18.0 million, or 43%, in operating revenues. 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, day care, 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.

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. The Company utilized
$7.9 million for its operating activities, and provided $2.8 million and $4.8
million from its investing and financing activities respectively. Included in
the Company's funds provided from its investing activities, is the proceeds
from the sale of property and equipment in the Company's funds provided from
its investing activities, is the proceeds from the sale of property and
equipment in the amount of $3.2 million. These proceeds from the sale of the
Company's freestanding facility in Sacramento, California and Orlando, Florida
were utilized to fund the Company's operating deficit. In addition, the
Company utilized $2.5 million of proceeds from the sale of common stock in
private offerings and borrowings of $3.1 million from banks and/or other
lenders (including the Secured Convertible Note) to also assist with funding
the deficit from operations and repaid $0.7 million to banks and other lenders.
Included in operating activities is the gain on sale of assets of $0.8 million
which was offset by the write-down of assets and the loss on sale of assets of
$1.1 million ($0.7 million and $0.4 million, respectively). There was a
decline in accounts receivable of $1.1 million from the prior fiscal year due
to the reduction of operating revenue as a result of the sale and/or closure of
several of the Company's freestanding facilities. The cumulative result of the
above resulted in an ending cash position of the Company on May 31, 1995 of
$1.5 million, a decline of $0.2 million from the prior fiscal year.

24
<PAGE> 25

In fiscal 1994 and 1993, the Company utilized $7.2 million and
$10.2 million in its operating activities, provided $10.0 million and $22.3
million from its investing activities and utilized $2.2 million and $13.1
million in its financing activities, respectively. Included in the Company's
operating activities for fiscal 1994 and 1993, was a decrease of $2.8 million
and $4.9 million, respectively, reflecting the decline in accounts payable and
accrued liabilities. Included in the operating activities for fiscal 1994 is
the gain on the sale of assets of $1.8 million which was offset by the
write-down of property held for sale of $1.8 million. The Company's use of
funds related to its operating activities for fiscal 1993 includes $6.2 million
related to the Company's provision for doubtful accounts (net of recoveries),
$2.1 million related to the Company's restructuring reserve, $3.4 million in
other non-recurring expenses, $0.7 million related to the loss on the sale of
assets and $3.7 million in write-downs of properties held for sale. Fiscal
1993 operating activities also provided $13.1 million which represents the gain
on the sale of stock related to RehabCare Corporation, a former subsidiary of
the Company (see Note 3 -- "Acquisitions and Dispositions").

During fiscal 1994 and 1993, investing activities provided funds
for operations from the sale of properties in the amount of $10.4 million and
$3.5 million, respectively. During fiscal 1994, the company sold its
freestanding facilities in Tampa and Coral Springs, Florida and a material
portion of its publishing business. During fiscal 1993, in addition to the
proceeds related to the sale of property for the freestanding facility in Las
Vegas, Nevada, the Company sold its remaining interest in its former
subsidiary, RehabCare Corporation for proceeds of $18.8 million and received
the proceeds from a legal settlement (related to the Company's proposed merger
in fiscal 1990) of $0.6 million.

During fiscal 1994 and 1993, the Company utilized $2.2 million and
$1.3 million, respectively, for the repayment of debt to banks and other
lenders. In addition, during fiscal 1993, the Company utilized $11.8 million
for the repayment of debt related to the Company's term and revolving loans.

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.)

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").

25
<PAGE> 26

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:

o 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.

o 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").

o 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.

o 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.

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<PAGE> 27
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 Company has not, nor does
it recognize an obligation to have pledged such shares. 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."
Although the Company believes that the Participating Securityholders did not
fully perform their obligations and are not entitled to such pledged shares, 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, 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

27
<PAGE> 28
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.

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

28
<PAGE> 29
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.

29
<PAGE> 30
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Balance Sheets, May 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Operations, Years Ended May 31, 1995, 1994 and 1993 . . . . . . . . . 34
Consolidated Statements of Stockholders' Equity, Years Ended May 31, 1995, 1994 and 1993 . . . . 35
Consolidated Statements of Cash Flows, Years Ended May 31, 1995, 1994 and 1993 . . . . . . . . . 36
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>

30
<PAGE> 31
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.

Orange County, California
September 7, 1995

31
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Comprehensive Care Corporation:

We have audited the accompanying consolidated balance sheet 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 each of the two fiscal years in the
period ended May 31, 1994. 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.

ARTHUR ANDERSEN LLP

St. Louis, Missouri
August 22, 1994 (except with respect
to the matter discussed in the fourth
paragraph of Note 15, as to which
the date is December 5, 1994).

32
<PAGE> 33
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 Notes 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.

33
<PAGE> 34
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:
Operating revenues . . . . . . . . . . . . . . . . . $ 29,282 $ 34,277 $ 51,847

Costs and expenses:
Direct healthcare 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
Write-down of assets . . . . . . . . . . . . . . . . 741 1,825 3,670
Restructuring expenses . . . . . . . . . . . . . . . -- -- 2,097
Other non-recurring expenses . . . . . . . . . . . . -- -- 3,355
-------- -------- --------
39,789 42,475 74,933
-------- -------- --------

Loss from operations . . . . . . . . . . . . . . . . (10,507) (8,198) (23,086)

Other income/(expenses):
Gain on sale of RehabCare, net . . . . . . . . . . . -- -- 13,114
Gain on Sovran settlement, net . . . . . . . . . . . -- -- 584
Gain on sale of assets . . . . . . . . . . . . . . . 836 1,825 --
Loss on sale of assets . . . . . . . . . . . . . . . (354) -- (712)
Interest income . . . . . . . . . . . . . . . . . . . 38 50 69
Interest expense . . . . . . . . . . . . . . . . . . (1,366) (1,228) (1,759)
Equity in earnings of unconsolidated affiliates . . . -- -- 384
-------- -------- --------

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.

34
<PAGE> 35
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ 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.

35
<PAGE> 36
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
Write-down of properties held for sale . . . . . . . . . . . . 741 1,825 3,670
Carrying costs incurred on property and equipment
held for sale . . . . . . . . . . . . . . . . . . . . . . . (420) (1,241) (1,330)
Restructuring expenses . . . . . . . . . . . . . . . . . . . . -- -- 2,097
Other non-recurring expenses . . . . . . . . . . . . . . . . . -- -- 3,355
Gain on sale of RehabCare stock, net . . . . . . . . . . . . . -- -- (13,114)
Gain on Sovran settlement, net . . . . . . . . . . . . . . . . -- -- (584)
Gain on properties held for sale . . . . . . . . . . . . . . . (836) (1,825) --
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . 354 36 712
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 . . . . . . . . . . . . . . . . . . . . . . -- -- (11,835)
Repayment to banks and other . . . . . . . . . . . . . . . . . (725) (2,158) (1,266)
Borrowings from banks and other . . . . . . . . . . . . . . . 3,055 -- --
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.

36
<PAGE> 37
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. Revenues are recognized in the month in which services are
provided.

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, and is carried at estimated net realizable value.

Property and equipment held for sale, which are expected to be sold
in the next fiscal year are shown as current assets on the consolidated balance
sheet. Such property and equipment are 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 in the consolidated statement of operations. Any
impairments to the net realizable value of property and equipment held for sale
have also been recorded in the consolidated statements of operation.

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 period. The

37
<PAGE> 38
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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 flow 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.

38
<PAGE> 39
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
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,

39
<PAGE> 40
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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

To address the Company's operational issues, in fiscal 1993 the
Company established a restructuring reserve (see Note 9-- "Accounts Payable 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

40
<PAGE> 41
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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").

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:

41
<PAGE> 42
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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
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

42
<PAGE> 43
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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 of $0.2 million 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 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:

43
<PAGE> 44
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

BALANCE AT ADDITIONS CHARGED TO WRITE-OFF BALANCE AT
BEGINNING ------------------------ 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
fiscal 1994, the Company determined that one operating facility and property
held for sale had impairments to net realizable value and were reduced by $1.8
million.

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 . . . . . . . . . . . . . . . . . . (5,219) (7,981) --
Contingencies on properties sold . . . . . . . . . . . . . . . . -- (848) --
Write-downs of assets held for sale to net realizable value . . . (741) (825) (3,670)
Redesignation of facilities as continuing operations . . . . . . -- -- (28,853)
------- ------- --------

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,746 $ 6,939 $ 15,352
======= ======= ========
</TABLE>

44
<PAGE> 45
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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. The Company recognized gains
on the sale of property in fiscal 1995 and 1994 of $0.8 million and $1.8
million, respectively. There were no gains on the sale of property held for
sale in fiscal 1993. The write-downs and losses of operating property and
equipment and assets held for sale are reflected on the Company's consolidated
statements of operations. The following is a summary:

<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------
1995 1994 1993
-------- ------ --------
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C>
Write-down of operating properties . . . . . . . . . . . . . $ -- $(1,000) $ --
Write-down of assets held for sale to net realizable value . (741) (825) (3,670)
-------- ------- -------
$ (741) $(1,825) $(3,670)
======== ======= =======

Loss on sale of assets . . . . . . . . . . . . . . . . . . . $ (354) $ -- $ (712)
Loss on properties held for sale . . . . . . . . . . . . . . -- -- --
-------- ------ -------
$ (354) $ -- $ (712)
======== ====== =======
</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. In fiscal 1995 a property was written-off for $0.4 million
because it had no market value. In fiscal 1994, the Company determined that
one operating facility had an impairment to its net realizable value and was
reduced by $1.0 million.

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>

45
<PAGE> 46
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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.

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.

46
<PAGE> 47
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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>

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
Restructuring expense . . . . . . . . . . . . . . . . . . . 508 1,228
Other non-recurring expenses . . . . . . . . . . . . . . . -- --
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>

47
<PAGE> 48
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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. Of this amount, $2.1 million was related to the
formal restructuring plan and $3.4 million was for other non-recurring expenses
related to the implementation of such plan. Included in other non-recurring
expenses of $3.4 million are legal fees of $0.8 million and expenses related to
the Company's independent contractor issues of $1.8 million. 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>
Charges Charges
May 31, --------------- May 31, ---------------- May 31,
1993 Income Expense Payments 1994 Income Expense Payments 1995
------- ------ ------- -------- ------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Restructuring:
Severance.................... $ 550 $ -- $ -- $ (220) $ 330 $ -- $ 69 $ (279) $ 120
Operations/corporate
relocation................. 900 (30) -- -- 870 (69) 28 $ (441) 388
Other........................ -- -- 28 -- 28 (28) -- -- --
Non-recurring:
Legal........................ 800 -- -- (800) -- -- -- -- --
State payroll taxes.......... 392 (35) -- (357) -- -- -- -- --
------ ------ ----- ------- ------ ------ ------ ------ -------
$2,642 $ (65) $ 28 $(1,377) $1,228 $ (97) $ 97 $ (720) $ 508
====== ====== ===== ======= ====== ====== ====== ====== =======
</TABLE>

Severance payments of $0.3 million and $0.2 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.

48
<PAGE> 49
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

49
<PAGE> 50
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

under 15% of the undiluted number of shares of Common Stock outstanding. The
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. Accrued interest on the
Debentures was $0.7 million as of May 31, 1995.

(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

50
<PAGE> 51
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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.

51
<PAGE> 52
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>

52
<PAGE> 53
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

Significant components of the Company's deferred tax liabilities and
assets are comprised of the following:

<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 income tax return for
fiscal 1995. On August 11, 1995, the Company filed Form 1139 "Corporate
Application for Tentative Refund" to carry back losses under 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 guiding legal precedent. There may be opposition by the IRS as to
the Company's ability to carry back such losses. Therefore, no assurances can
be made to the Company's entitlement to such claim. Consequently, a valuation
allowance has been established against $20.0 million of this potential tax
benefit.

At May 31, 1995, the Company has Federal accumulated net operating
losses, of approximately $50.0 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

53
<PAGE> 54
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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.

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:

54
<PAGE> 55
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF -------------------------
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>
OPTION PRICE
NUMBER OF -----------------------
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.

55
<PAGE> 56
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.

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

56
<PAGE> 57
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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
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

57
<PAGE> 58
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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 judgment 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 judgment 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 judgment. Any effect from the outcome of this lawsuit would
not have a material adverse impact on the Company's results of operations.

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, Mr. Leslie Livingston and Livingston & Co.,
in fiscal 1992. The Company had classified these advances as accounts
receivable and wrote off all such receivable through fiscal 1994. Mr.
Livingston 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, Schwabe,
Williamson & Wyatt, 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. Any effect of this lawsuit would not have a
material adverse impact on the Company's results of operation.

58
<PAGE> 59
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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.
The Company established a reserve for this lawsuit in a prior fiscal year. Any
effect of this lawsuit would not be material to the Company's financial
statements or results of operations.

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 Company had
accrued for this settlement amount over several previous fiscal years and, as a
result, there was no impact on the Company's current year financial statements
for this settlement. The Company's future statements of operations will
reflect the interest expense related to the outstanding settlement amount. The
Company had accrued for this settlement amount over several previous fiscal
years and, as a result, any effect would not be material to the Company's
current year financial statements. The Company's future statements of
operation will reflect the interest expense related to the outstanding
settlement amount.

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.

59
<PAGE> 60
COMPREHENSIVE CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1995, 1994 AND 1993

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.

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 shares 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 share. 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.

60
<PAGE> 61

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.

61
<PAGE> 62

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

EXHIBIT
NUMBER DESCRIPTION AND REFERENCE
------- -------------------------

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).

62
<PAGE> 63

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. (15).
10.67 First Right of Refusal Agreement dated May 23, 1995 between
Physician Corporation of America and Comprehensive
Behavioral Care, Inc. (15).
11 Computation of Loss Per Share (15).
21 List of the Company's subsidiaries (15).

23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).

27 Financial Data Schedules (filed herewith).

- -------------------

* Management contract or compensatory plan or arrangement with one or more
directors or executive officers.
(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.
(8) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1993.

63
<PAGE> 64

(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.
(14) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1995.

(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.

64
<PAGE> 65
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, August 8, 1996.

COMPREHENSIVE CARE CORPORATION

By /s/ CHRISS W. STREET
------------------------------------
Chriss W. Street
Chairman and Chief Executive Officer

By /s/ DREW Q. MILLER
------------------------------------
Drew Q. Miller
(Principal Financial Officer)

By /s/ KERRI RUPPERT
------------------------------------
Kerri Ruppert
(Principal Financial and
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.

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CHRISS W. STREET Chairman, President and
- --------------------------- Chief Executive Officer
Chriss W. Street (Principal Executive Officer) August 8, 1996

/s/ DREW Q. MILLER Senior Vice President
- --------------------------- and Chief Operating Officer
Drew Q. Miller (Principal Operational Officer) August 8, 1996

/s/ KERRI RUPPERT Senior Vice President,
- --------------------------- Secretary/Treasurer and
Kerri Ruppert Chief Financial Officer
(Principal Financial and
Accounting Officer) August 8, 1996

/s/ J. MARVIN FEIGENBAUM Vice Chairman August 8, 1996
- ---------------------------
J. Marvin Feigenbaum

/s/ WILLIAM H. BOUCHER Director August 8, 1996
- ---------------------------
William H. Boucher

/s/ W. JAMES NICOL Director August 8, 1996
- ---------------------------
W. James Nicol
</TABLE>

<PAGE> 66

COMPREHENSIVE CARE CORPORATION

EXHIBIT INDEX

FISCAL YEAR ENDED MAY 31, 1995

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------

<S> <C> <C>
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>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

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/A, No. 4) for the year ended May 31, 1995.

/s/ ERNST & YOUNG LLP
-------------------------------
ERNST & YOUNG LLP

Orange County, California
August 8, 1996

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K/A No. 4 into the
Company's previously filed post-effective Amendment No. 3 in the S-8
Registration Statement File No. 33-43841 and the S-8 Registration Statement
File No. 33-27213.

/s/ ARTHUR ANDERSEN LLP
------------------------------
ARTHUR ANDERSEN LLP

August 8, 1996
St. Louis, Missouri

<ARTICLE> 5
<CIK> 0000022872
<NAME> COMPREHENSIVE CARE CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1995
<EXCHANGE-RATE> 1,000
<CASH> 1,542
<SECURITIES> 0
<RECEIVABLES> 3,329
<ALLOWANCES> 1,096
<INVENTORY> 0
<CURRENT-ASSETS> 8,012
<PP&E> 25,181
<DEPRECIATION> 13,074
<TOTAL-ASSETS> 26,001
<CURRENT-LIABILITIES> 23,354
<BONDS> 5,077
0
0
<COMMON> 25
<OTHER-SE> (4,958)
<TOTAL-LIABILITY-AND-EQUITY> 26,001
<SALES> 29,282
<TOTAL-REVENUES> 29,282
<CGS> 31,497
<TOTAL-COSTS> 39,389
<OTHER-EXPENSES> 4,331
<LOSS-PROVISION> 1,423
<INTEREST-EXPENSE> 1,366
<INCOME-PRETAX> (11,353)
<INCOME-TAX> 180
<INCOME-CONTINUING> (11,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,533)
<EPS-PRIMARY> (5.11)
<EPS-DILUTED> (5.11)

</TABLE>