<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
AMENDMENT NO. 2
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended May 31, 1996 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
Corona del Mar, 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 26, 1996, was $23,633,115 based on the closing sale
price of the Common Stock on August 26, 1996 as reported on the New York Stock
Exchange composite tape.
At August 26, 1996, the Registrant had 2,864,620 shares of Common Stock
outstanding.
<PAGE> 2
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, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
Report of Independent Auditors............................................................................ 35
Report of Independent Public Accountants.................................................................. 36
Consolidated Balance Sheets, May 31, 1996 and 1995........................................................ 37
Consolidated Statements of Operations, Years Ended May 31, 1996, 1995 and 1994............................ 38
Consolidated Statements of Stockholders' Equity, Years Ended May 31, 1996, 1995 and 1994.................. 39
Consolidated Statements of Cash Flows, Years Ended May 31, 1996, 1995 and 1994............................ 40
Notes to Consolidated Financial Statements................................................................ 41
</TABLE>
34
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Comprehensive Care Corporation
We have audited the accompanying consolidated balance sheets of
Comprehensive Care Corporation and subsidiaries as of May 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years 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 audits.
We conducted our audits 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 audits provide 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, 1996 and 1995, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements for the years ended
May 31, 1996 and 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 working capital
deficiencies of $20.2 million and $15.3 million and deficits in total
stockholders' equity of $6.8 million and $4.9 million as of May 31, 1996 and May
31, 1995, respectively. Approximately $9.5 million of the working capital
deficiency at May 31, 1996, 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, and an
additional $1.6 million of the working capital deficiency results from accrued
unpaid interest on this obligation. 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 debt acceleration, and the
Company to obtain and expend up to $5.5 million in cash during fiscal 1997 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 1996 and 1995 consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ ERNST & YOUNG LLP
Orange County, California
August 27, 1996
35
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comprehensive Care Corporation:
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Comprehensive Care Corporation (a
Delaware corporation) and subsidiaries for the year 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 audit.
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 schedule 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 results of Comprehensive Care
Corporation and subsidiaries' operations and their cash flows for the year ended
May 31, 1994, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred significant
recurring losses and negative cash flows from operations which raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
- -------------------------------
ARTHUR ANDERSEN LLP
St. Louis, Missouri
August 22, 1994 (except with respect to the
matter discussed in (c) of Note 10, as to which
the date is December 5, 1994).
36
<PAGE> 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
--------------------
1996 1995
---- ----
A S S E T S (DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 4,433 $ 1,542
Accounts receivable, less allowance for
doubtful accounts of $877 and $1,096................................ 2,476 3,304
Other receivables...................................................... 1,478 2,775
Property and equipment held for sale................................... 1,233 ---
Other current assets................................................... 352 391
------ ------
Total current assets....................................................... 9,972 8,012
------ ------
Property and equipment..................................................... 9,863 25,181
Less accumulated depreciation and amortization............................. (3,590) (13,074)
------- ------
Net property and equipment................................................. 6,273 12,107
------- ------
Property and equipment held for sale....................................... 6,915 3,746
Other assets............................................................... 1,958 2,136
------- ------
Total assets............................................................... $25,118 $26,001
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................... $10,714 $10,235
Long-term debt in default (see Note 10)................................ 9,538 9,538
Current maturities of long-term debt .................................. 2,464 3,285
Unbenefited tax refunds received....................................... 7,018 ---
Income taxes payable................................................... 410 296
-------- -------
Total current liabilities.................................................. 30,144 23,354
------ ------
Long-term debt, excluding current maturities............................... 24 5,077
Other liabilities.......................................................... 749 1,503
Minority interests......................................................... 1,000 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 2,848,685 and 2,464,516 shares............... 28 25
Additional paid-in capital............................................. 43,931 41,558
Accumulated deficit.................................................... (50,758) (46,516)
------ ------
Total stockholders' equity (deficit)....................................... ( 6,799) ( 4,933)
------- -------
Total liabilities and stockholders' equity................................. $25,118 $26,001
====== ======
</TABLE>
See accompanying notes.
37
<PAGE> 6
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Operating revenues........................................ $32,488 $ 29,282 $34,277
Costs and expenses:
Direct healthcare operating expenses...................... 29,208 31,497 31,875
General and administrative expenses....................... 7,632 4,331 5,455
Provision for doubtful accounts........................... 934 1,423 1,558
Depreciation and amortization............................. 2,099 1,797 1,762
Write-down of assets...................................... --- 741 1,825
Restructuring expenses.................................... 94 --- ---
Equity in loss of unconsolidated affiliates............... 191 --- ---
------- ---------- ---------
40,158 39,789 42,475
------ ------- ------
Loss from operations...................................... (7,670) (10,507) (8,198)
Other income/(expenses):
Gain on sale of assets.................................... 1,336 836 1,825
Loss on sale of assets.................................... (82) (354) ---
Interest income........................................... 210 38 50
Interest expense.......................................... (1,374) (1,366) (1,228)
Non-operating gain........................................ 860 --- ---
-------- ---------- ---------
Loss before income taxes...................................... (6,720) (11,353) (7,551)
Provision (benefit) for income taxes.......................... (2,478) 180 301
------- -------- --------
Net loss...................................................... $(4,242) $(11,533) $ (7,852)
====== ====== =======
Net loss per share............................................ $(1.60) $(5.11) $(3.57)
==== ==== ====
</TABLE>
See accompanying notes.
38
<PAGE> 7
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------- ------- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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)
Net loss...................... --- --- --- (4,242) (4,242)
Shares issued for
note conversion............ 133 1 999 --- 1,000
Issuance of shares for the
purchase of AMH............ 44 --- 331 --- 331
Exercise of stock options..... 14 --- 104 --- 104
Shares issued for
private placements......... 193 2 939 --- 941
----- --- ------- --------- -------
Balance, May 31, 1996............. 2,849 $28 $43,931 $(50,758) $ (6,799)
===== == ====== ====== =======
</TABLE>
See accompanying notes.
39
<PAGE> 8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $(4,242) $(11,533) $(7,852)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization....................................... 2,099 1,797 1,762
Provision for doubtful accounts, net of recoveries.................. 934 1,423 1,558
Write-down of properties held for sale.............................. --- 741 1,825
Carrying costs incurred on property and equipment held for sale..... (473) (420) (1,241)
Equity in loss of unconsolidated affiliates......................... 191 --- ---
Restructuring expenses.............................................. 94 --- ---
Gain on properties held for sale.................................... (256) (836) (1,825)
Gain on sale of assets.............................................. (1,080) --- ---
Loss on sale of assets.............................................. 82 354 36
Increase in other assets............................................ (1,008) --- ---
Decrease in accounts and other receivables.......................... 1,277 1,108 452
Increase (decrease) in accounts payable and accrued liabilities..... 436 (116) (2,762)
Increase in unbenefited tax refunds received........................ 7,018 --- ---
Increase (decrease) in income taxes payable......................... 114 (438) 68
Increase (decrease) other liabilities............................... (754) 56 818
------ ------- ------
Net cash provided by (used in) operating activities.............. 4,432 (7,864) (7,161)
----- ------ -----
Cash flows from investing activities:
Proceeds from sale of property and equipment
(operating and held for sale).................................... 2,101 3,204 10,357
Additions to property and equipment, net............................ (814) (362) (383)
Purchase of operating entity........................................ --- (50) ---
------ ------- -------
Net cash provided by investing activities........................ 1,287 2,792 9,974
----- ------ ------
Cash flows from financing activities:
Repayment of debt................................................... (4,566) --- ---
Repayment to banks and other........................................ (1,638) (725) (2,158)
Borrowings from banks and other..................................... 1,000 3,055 ---
Exercise of stock options........................................... 104 --- ---
Proceeds from the issuance of stock................................. 2,272 2,503 ---
----- ------ -------
Net cash provided by (used in) financing activities.............. (2,828) 4,833 (2,158)
----- ------ -----
Net increase (decrease) in cash and cash equivalents................... 2,891 (239) 655
Cash and cash equivalents at beginning of year......................... 1,542 1,781 1,126
----- ------ -----
Cash and cash equivalents at end of year............................... $ 4,433 $ 1,542 $ 1,781
===== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................................ $ 482 $ 527 $1,302
===== ====== =====
Income taxes........................................................ $ 48 $ 507 $ 233
====== ====== ======
</TABLE>
See accompanying notes.
40
<PAGE> 9
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
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").
Description of the Company's Business
The Company provides managed care behavioral healthcare services
including 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. In addition, the Company is a
provider of inpatient and outpatient treatment programs for psychiatric
disorders and chemical dependency (including drug and alcohol). Programs are
provided at freestanding facilities owned and operated by the Company and at
independent general hospitals under contract with the Company.
Revenue Recognition
The Company's managed care activities have agreements with HMOs, PPOs
and other payors to provide contracted medical services to subscribing
participants. Under these agreements, revenue arises from agreements to provide
contracted services to qualified beneficiaries and is earned monthly based on
the number of qualified participants, regardless of services actually provided
(generally referred to as capitation arrangements). Certain contracted
healthcare providers assume the financial risk for participant care rendered by
them and are compensated on a sub-capitated basis whereby the sub-capitation
cost is recognized in expense in the same period as the Company recognizes its
related revenues. Other managed care expense is incurred under discounted
fee-for-service arrangements whereby expense is recognized as services are
provided, including an estimate of incurred but not reported claims. The
Company's revenues from provision of other healthcare services are earned on a
fee-for-service basis and are recognized as services are rendered.
Approximately 60 percent, 52 percent, and 66 percent of the Company's
operating revenues were received from private sources in fiscal 1996, 1995 and
1994, 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
$414,000 and $(8,000) during fiscal 1996 and 1995, respectively.
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.
41
<PAGE> 10
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
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, that 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, 1996 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 operations.
Intangible Assets
Intangible assets include costs in excess of fair value of net assets
of businesses purchased (goodwill), licenses, and similar rights. Costs in
excess of net assets purchased are amortized on a straight line basis up to 21
years. The costs of other intangible assets are amortized over the period of
benefit. In the fourth quarter of fiscal 1996, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121 - "Accounting
for the Impairment of Long-Lived Assets to be Disposed of," ("SFAS No. 121") and
evaluated its intangible assets for any impairment losses. The Company evaluated
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 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. In the fourth quarter of fiscal 1996, $0.8 million of goodwill was
written off as a result of the sale, closure or anticipated closure of operating
facilities. This write-off is included with Depreciation and amortization on the
Company's consolidated statements of operations. The Company believes that the
remaining $0.7 million of net recorded intangible assets at May 31, 1996, are
recoverable from future estimated undiscounted cash flows. The amounts of
goodwill reported in the consolidated balance sheets are net of accumulated
amortization of goodwill of $146,000 and $731,000 at May 31, 1996 and 1995,
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. In conjunction with the adoption by the
Company of SFAS No. 121 - "Accounting for the Impairment of Long-Lived Assets to
be Disposed of," deferred contract costs were evaluated for any impairment
losses and recognized in fiscal 1996. There were no indicators of impairment
present at May 31, 1996.
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 aggregated $561,000 and $318,000 at May 31, 1996 and 1995,
respectively.
42
<PAGE> 11
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
Excluded from cash and cash equivalents is a certificate of deposit in
the amount of $77,000 and $55,000 at May 31, 1996 and 1995, respectively. 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, 1996 and 1995, respectively.
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 percent
of the Company's operating revenues for fiscal 1996, 1995 and 1994.
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 1996, 1995 and 1994, 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.
43
<PAGE> 12
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
The weighted average number of common and common equivalent shares used
to calculate loss per share was 2,654,000, 2,257,000, and 2,199,000 for the
years ended May 31, 1996, 1995 and 1994, respectively.
Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practical to estimate that value. The following methods and assumptions were
used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
Accounts receivable: The carrying amount reported in the balance sheet for
accounts and notes receivable approximates its fair value.
Other receivables: The carrying amount reported in the balance sheet for note
receivable approximates its fair value.
Accounts payable and accrued liabilities: The carrying amount reported in the
balance sheet for accounts payable and accrued liabilities approximates its fair
value.
Long-term debt in default: The fair value of the Company's long-term debt in
default are based on the median of the bid and asked price as of the last day of
each fiscal year.
Long-term debt: The carrying amount reported in the balance sheet for long-term
debt approximates its fair value.
Other liabilities: The carrying amount reported in the balance sheet for other
liabilities approximates its fair value.
The carrying amounts and fair values of the Company's financial instruments at
May 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 4,433 $ 4,433 $ 1,542 $ 1,542
Accounts receivable....................... 2,476 2,476 3,304 3,304
Other receivables......................... 1,478 1,478 2,775 2,775
Accounts payable and accrued expenses..... 10,714 10,714 10,235 10,235
Long-term debt in default................. 9,538 6,390 9,538 4,531
Long-term debt............................ 2,488 2,488 8,362 8,362
Other liabilities......................... 749 749 1,503 1,503
</TABLE>
44
<PAGE> 13
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Recently Issued Accounting Standards
In the fourth quarter of fiscal 1996, the Company elected to adopt
early the provisions of SFAS No. 121. 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. As indicated under the caption "Intangible Assets", during the
fiscal year, the Company recorded impairment losses of $0.8 million pertaining
to assets held for sale.
In conjunction with the adoption of SFAS No. 121, the Company evaluated
its property, plant and equipment for any impairment losses. This review
included the estimation of the future undiscounted cash flows expected to result
from the use of property, plant and equipment and its eventual disposal. Based
upon this review, the Company believes that the carrying value of its property,
plant and equipment is recoverable from future undiscounted cash flows.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS No. 123"),
which becomes effective for fiscal years beginning after December 15, 1995. SFAS
No. 123 establishes new financial accounting and reporting standards for
stock-based compensation plans. Entities will be allowed to measure compensation
expense for stock-based compensation under SFAS No. 123 or APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting in APB Opinion No. 25 will be required to make pro forma disclosures
of net income and earnings per share as if the provisions of SFAS No. 123 had
been applied. The Company is in the process of evaluating SFAS No. 123 and the
potential impact on the Company of adopting the new standard has not been
quantified at this time.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
NOTE 2-- OPERATING LOSSES AND LIQUIDITY
The Company reported a net loss of $4.2 million for the year ended May
31, 1996 and has reported net losses in each of the five preceding fiscal years
aggregating an additional $51.3 million. As a result, the Company has an
accumulated deficit of $50.8 million and a total stockholders' deficiency of
$6.8 million as of May 31, 1996. Additionally, the Company's current assets at
May 31, 1996 amounted to approximately $9.9 million and current liabilities were
approximately $30.1 million, resulting in a working capital deficiency of
approximately $20.2 million and a negative current ratio of 1:3.3.
45
<PAGE> 14
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
The Company generated $4.4 million from its operating activities, an
additional $1.3 million from its investing activities, and utilized $2.8 million
in its financing activities during fiscal 1996. The ending cash position for the
Company on May 31, 1996 was $4.4 million, an increase of $2.9 million from the
prior year.
Included in current liabilities are $9.5 million principal amount 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 1997, over and above
cash required to fund other financing, operating and investing needs.
Additionally, the currently proposed Debenture exchange provides for the Company
to issue $180 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 actions that may include filing for voluntary protection from creditors.
Alternatively, if the Debenture exchange is accomplished, the elimination of the
Debentures' 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 $2.0
million, which represents the Company's obligation pursuant to its Secured
Convertible Note due in January 1997. Although the Company intends to convert
this Note into Common Stock prior to its maturity, there can be no assurance
that it will consummate the transaction prior to January 1997.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The 1996 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 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 1996, many of the
Company's inpatient freestanding facilities have been sold or are in the process
of being closed or sold. Additionally, during fiscal 1995 and continuing through
fiscal 1996, management implemented its plans for expanding the Company's
contract management and managed care operations (see Note 3--"Acquisitions and
Dispositions"). As a result, and assuming reasonable expansion of its business,
management anticipates that this subsidiary will continue to be in a position to
fund its own operations during fiscal 1997. The elimination of such funding will
decrease the Company's future cash flow requirements and assist it in attaining
a cash flow positive position from operations.
In previous years, the Company was obligated to support and fund
certain freestanding facilities that now have been closed, including one
facility closed in fiscal 1996, as well as another facility whose operations
were sold in fiscal 1996 (see Note 5-- "Property and Equipment Held for Sale").
During fiscal 1996, the Company established an
46
<PAGE> 15
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
additional restructuring reserve of $0.1 million for severance and other cash
outlays. The purpose of this reserve is for the planned closure and disposition
of the Company's freestanding facility in Cincinnati, Ohio. 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 1996 with adjustments for reduced cash flow requirements
associated with facilities closed and/or sold in fiscal 1996, known contract and
cyclical changes, anticipated growth and also giving consideration to cash on
hand at May 31, 1996 of $4.4 million, management expects the Company to be able
to meet its cash obligations required by operations during fiscal 1997,
including 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. Therefore, no assurance can be given that the
Company will generate adequate cash flows to meet cash obligations required by
operations, including the Company's obligations under the Debentures, in fiscal
1997.
To provide funds for the Debenture exchange and/or additional operating
needs, in addition to cash on hand at May 31, 1996 of $4.4 million, the Company
anticipates utilizing one or more of the following potential sources of cash:
- The Company has received a firm commitment from a mutual fund to
purchase in a private placement at least $5.0 million of 15% fully
secured Company notes due no earlier than November 1997 if offered
by the Company.
- The Company filed its fiscal 1995 Federal tax return, and a Form
1139 "Corporate Application for Tentative Refund" in the amount of
$9.4 million. The Company received the full refund claim for
fiscal 1995 in October 1995. 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. The Company
is currently under audit by the IRS regarding its 1995 Federal tax
return and the amended returns for prior years. Accordingly, no
assurances can be made to the Company's entitlement to such
refunds or the timing of the receipt thereof (see Note 12--
"Income Taxes").
- Included in property and equipment held for sale is one hospital
facility currently under contract to be sold. The sale of this
facility is scheduled to close in September 1996. The proceeds
from the sale are expected to be $1.3 million.
- Included in property and equipment held for sale (non-current) are
three hospital facilities designated as property and equipment
held for sale with a total carrying value of $6.9 million.
Although the Company has not fully negotiated contracts for the
sale of two of these facilities, the Company expects to sell both
of these facilities during fiscal 1997. The Company sold the third
facility during the first quarter of fiscal 1997. As part of the
transaction that occurred in the first quarter of fiscal 1997, the
Company took back a note on the property with provisions that
allow the buyer a discount of $400,000 if the note is redeemed in
the first six months. In the event the buyer exercises this
option, the proceeds to the Company would be $1.55 million. The
Company will account for this sale using the installment method of
accounting. Proceeds from the sale of such assets may not be
available by the time the proposed Debenture exchange is expected
to occur. Accordingly, management expects to use such cash
proceeds, if received during fiscal 1997, to fund and expand the
Company's operations.
- 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
47
<PAGE> 16
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
award and has filed an appeal of the judgment. Although verbal
argument was heard on this lawsuit in June 1996, management is
unable to predict whether any proceeds from this judgment will be
received in fiscal 1997 (see Note 15-- "Commitments and
Contingencies").
All of these potential sources of additional cash in fiscal 1997 are
subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1997 the Company
will complete the transactions required to fund its working capital deficit.
NOTE 3-- ACQUISITIONS AND DISPOSITIONS
On October 3, 1995, the Company sold the operations of its CareUnit
Hospital of Kirkland in Washington and recorded a gain on the sale of $1.0
million during the second quarter of fiscal 1996. Proceeds from the sale were
utilized for working capital purposes. On November 20, 1995, the Company
purchased 20 percent of the issued and outstanding capital stock of Behavioral
Health Resources, Inc. ("BHR") for $24,000. In addition, the Company has a
promissory note from BHR in the principal amount of $150,000, which has been
fully reserved as of May 31, 1996 due to poor financial performance of the
investee. The Company has recorded approximately $78,000 of revenue related to a
CCI contract with a wholly-owned subsidiary of BHR. On May 28, 1996, the Company
sold its CareUnit of San Diego in California and recorded a gain on the sale of
$0.3 million during the fourth quarter of fiscal 1996. Proceeds from the sale
will be utilized for working capital purposes and to provide funds for the
Debenture exchange.
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 percent 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 agreement provides, 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 has a $3.75 million investment in
its subsidiary, Comprehensive Behavioral. The agreement further provides that
prior to a qualified public offering, Comprehensive Behavioral may not declare
or pay any dividends on any class of its capital stock which would reduce the
aggregate amount invested by the Company in Comprehensive Behavioral below $3.75
million. Effective June 1, 1995, Comprehensive Behavioral began providing
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 was reimbursable to PCA in 12 equal
monthly installments and during fiscal 1996, Comprehensive Behavioral reimbursed
the entire advance of $360,000 to PCA. As of May 31, 1996, PCA's investment in
Comprehensive Behavioral of $1.0 million is classified as minority interests on
the Company's consolidated balance sheets.
On April 30, 1995, the Company's lease ended in Grand Rapids, Michigan,
and, 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
48
<PAGE> 17
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
management contract had not been fully executed; and as a result, AMH assigned
its revenues and associated expenses to Comprehensive Behavioral effective April
1, 1995. The Company's consolidated financial statements reflect such revenue
assignment and expense assumption. In April 1996, the Company issued a stock
certificate to AMH for 44,054 shares and has extended the option to August 31,
1996.
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 in November 1994 and resigned his position as
Chief Operating Officer on August 14, 1996. 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 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 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. In January 1996, the Company issued the former owner 1,160 shares
of the Company's Common Stock pursuant to the terms of the amended settlement
agreement. Such shares were issued as a result of the delay in registration of
shares.
49
<PAGE> 18
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
NOTE 4-- ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
The following table summarizes changes in the Company's allowances for
doubtful accounts for the years ended May 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
BALANCE AT WRITE-OFF BALANCE AT
BEGINNING ADDITIONS CHARGED TO OF END OF
OF YEAR EXPENSE RECOVERIES ACCOUNTS YEAR
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1996.......... $1,096 $2,355 $(1,421) $(1,003) $1,027
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
</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 26 percent, 25 percent, and 21 percent of total receivables for
fiscal years ended May 31, 1996, 1995 and 1994, respectively.
Other receivables at May 31, 1996 includes $1.4 million of professional
services fees paid related to the preparation of the Company's fiscal 1995
Federal income tax return. These fees are refundable on a pro rata basis to the
extent that the related unbenefited 1995 Federal income tax refund of $7.0
million is disallowed by the IRS; the ultimate amount of this fee will be
recognized as an expense when the uncertainties concerning the amount of the
$7.0 million that will be allowed by the IRS is determined. Other receivables at
May 31, 1995 represented financing on the sale of a property in fiscal 1995 and
were collected in fiscal 1996.
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 $12.6 million and
$11.8 million at May 31, 1996 and 1995, respectively, is carried at estimated
net realizable value of approximately $8.1 million and $3.7 million at May 31,
1996 and 1995, respectively. Operating revenues and operating expenses of the
facilities designated for disposition were approximately $0.3 million and $0.6
million, respectively, for the year ended May 31, 1996, $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. In fiscal 1994, the
Company determined that one operating facility and one property held for sale
had impairments to net realizable value and reduced the carrying amount by $1.8
million.
50
<PAGE> 19
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
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,
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance...................................................... $3,746 $6,939 $15,352
Designation of facilities as property and equipment held for sale...... 5,682 2,347 ---
Carrying costs incurred during phase-out period........................ 342 420 1,241
Carrying value of assets sold.......................................... (1,804) (5,219) (7,981)
Contingencies on properties sold....................................... 182 --- (848)
Write-downs of assets held for sale to net realizable value............ --- (741) (825)
------- ----- -------
Ending balance......................................................... $8,148 $3,746 $ 6,939
===== ===== ======
</TABLE>
Included in the fiscal 1996 results is a restructuring charge of $0.1
million related to the Company's planned closure of its freestanding facility in
Cincinnati, Ohio. The components of this charge are predominantly severance to
hospital employees. Closure of this facility is consistent with the Company's
global restructuring plans and will eliminate the funding of operating losses
and cash flow deficits required by this facility.
Contingencies for properties sold represent unresolved liabilities at
the time of sale. Proceeds from the sale of property and equipment held for sale
were $1.9 million and $3.1 million (net of the $2.7 million note receivable) for
fiscal 1996 and 1995, respectively. The Company recognized gains on the sale of
property in fiscal 1996 and 1995 of $1.3 million and $0.8 million, respectively.
The write-down and losses of operating property and equipment and assets held
for sale are reflected on the Company's consolidated statement of operations.
The following is a summary:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1996 1995 1994
---- ---- ----
(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)
---- ---- -----
$ --- $(741) $(1,825)
==== ==== =====
Loss on sale of assets............................................. $(82) $(354) $ ---
Loss on properties held for sale................................... --- --- ---
---- ------ --------
$(82) $(354) $ ---
=== ==== =======
</TABLE>
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. In
fiscal 1995, a property was written-off for $0.4 million because it had no
market value. In fiscal 1996, two operating facilities were designated held for
sale with a net realizable value of $5.7 million.
51
<PAGE> 20
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
NOTE 6-- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and improvements.............................................. $2,122 $ 2,122
Buildings and improvements......................................... 4,441 16,260
Furniture and equipment............................................ 3,109 4,710
Leasehold improvements............................................. 191 1,280
Capitalized leases................................................. --- 809
-------- -------
9,863 25,181
Less accumulated depreciation...................................... 3,590 13,074
----- ------
Net property and equipment......................................... $6,273 $12,107
===== ======
</TABLE>
On October 3, 1995, the Company sold the operations of its facility in
Kirkland, Washington. Although the Company recognized a gain on the sale of $1.0
million, the proceeds from the sale were $0.2 million (net of a note receivable
of $0.1 million) for fiscal 1996. Proceeds from the sale of property and
equipment was $0.1 million for fiscal 1995. The loss on sale of property and
equipment for the fiscal years ended May 31, 1996 and 1995 were $82,000 and
$354,000, respectively, and are reflected on the Company's statement of
operations. There were no write-downs to property and equipment during fiscal
1996, and write-downs for fiscal 1995 and 1994 were $0.7 million and $1.8
million, respectively.
NOTE 7-- INVESTMENTS IN UNCONSOLIDATED AFFILIATES
NeuroAffiliates
The Company has a 50 percent 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.
Healthcare Management Services, Inc. and Related Companies
On December 28, 1995, the Company entered into a letter of intent to
purchase 100 percent of the outstanding stock of Healthcare Management Services,
Inc., Healthcare Management Services of Ohio, Inc., Healthcare Management
Services of Michigan, Inc. and Behavioral Healthcare Management, Inc. Each of
the companies is based in Detroit, Michigan and is owned by the same two
principals. On April 30, 1996, the Company entered into a Stock Purchase
Agreement which was subject to certain escrow provisions and other contingencies
which were not completed until July 25, 1996. Between January 1, 1996 and May
31, 1996, the Company advanced to these entities substantially all of their
working capital requirements. As of July 25, 1996, the net amount of these
advances aggregated $0.5 million. These advances were collateralized by an
option agreement allowing the Company to purchase 90 percent of the stock of
Behavioral Health Management, Inc. for the sum of one dollar. Losses of $191,000
incurred by the investee during the period January 1, 1996 through May 31, 1996
that were fully funded by the Company's advances have been included in the
Company's equity in loss of unconsolidated affiliates in the
52
<PAGE> 21
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
accompanying consolidated statements of operations. The losses are reflected as
an allowance against such advances in the accompanying consolidated balance
sheet as of May 31, 1996.
NOTE 8-- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Intangible assets, net............................................. $ 696 $1,636
Deferred contract costs, net....................................... 45 99
Investments and deposits........................................... 1,027 401
Other notes receivable, less allowance of $150..................... 190 ---
------ --------
$1,958 $2,136
===== =====
</TABLE>
NOTE 9-- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities........................... $ 5,324 $ 5,737
Accrued claims payable............................................. 2,683 1,584
Accrued restructuring.............................................. 377 508
Accrued salaries and wages......................................... 754 980
Accrued vacation................................................... 364 407
Accrued legal...................................................... 167 198
Payable to third-party intermediaries.............................. 899 584
Deferred compensation.............................................. 146 237
-------- -------
$10,714 $10,235
======== =======
</TABLE>
The estimate for accrued claims payable is based on projections of costs
using historical studies of claims paid. Estimates are continually monitored and
reviewed and, as settlements are made or estimates adjusted, differences are
reflected in current operations.
A reserve for restructuring was established in fiscal 1993 for $5.4
million for the purpose of implementing management's plan for the "global
restructuring" of the Company. It is management's intent to complete the "global
restructuring" plan in fiscal 1997. In fiscal 1996, a charge for approximately
$0.1 million was made for the scheduled closure of the Company's freestanding
facility in Cincinnati, Ohio. Management intends to allocate the remaining
balance accordingly: $0.3 million for corporate and operations relocation and
consolidation and $0.1 million as severance payments.
53
<PAGE> 22
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
The following table sets forth the activity during the years ended May
31, 1996 and 1995:
<TABLE>
<CAPTION>
May 31, Charges May 31, Charges May 31,
1994 Income Expense Payments 1995 Income Expense Payments 1996
------- ------ ------- -------- ------- ------ ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Restructuring:
Severance ........................ $ 330 $ -- $ 69 $ (279) $ 120 $ -- $ 57 $ (96) $ 81
Operations/corporate relocation .. 870 (69) 28 (441) 388 (78) 114 (128) 296
Other ............................ 28 (28) -- -- -- -- -- -- --
Non-recurring:
Legal ............................ -- -- -- -- -- -- -- -- --
State payroll taxes .............. -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 1,228 $ (97) $ 97 $ (720) $ 508 $ (78) $ 171 $ (224) $ 377
======= ======= ======= ======= ======= ======= ------- ======= =======
</TABLE>
Severance payments of $0.1 million and $0.3 million paid in fiscal 1996
and 1995, respectively, were the result of the closure and relocation of two
facilities, as well as the general downsizing as part of the Company's "global
restructuring" plan. This restructuring resulted in the termination of 71 and 91
employees during fiscal 1996 and 1995, respectively. The majority of those
employees terminated during fiscal 1996 and 1995 were hospital employees with
the remainder representing corporate and administrative employees.
NOTE 10-- LONG-TERM DEBT AND SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Long-term debt consists of the following: YEAR ENDED MAY 31,
1996 1995
---- ----
(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
------ ------
2,000 2,000
7 1/2 % convertible subordinated debentures due 2010 (b).................. 9,538 9,538
9% note payable in monthly installments maturing in 1996,
secured by real and personal property having a net book
value of $2,281 ...................................................... --- 4
9% offer in compromise (c)................................................ --- 4,566
10% secured promissory note, payable in monthly installments,
maturing in January 1997 (d).......................................... 368 899
Capital lease obligations................................................. --- 677
Bank debt, interest and principal payable in monthly installments maturing
in August 1997, collateralized by the trust of the
former owner (e)...................................................... 120 216
-------- -------
Total long-term debt...................................................... 12,026 17,900
Less long-term debt in default (b)........................................ 9,538 9,538
Less current maturities of long-term debt................................. 2,464 3,285
------- ------
Long-term debt, excluding current maturities.............................. $ 24 $ 5,077
========= ======
</TABLE>
As of May 31, 1996, aggregate annual maturities of long-term debt for
the next two years (in accordance with stated maturities of the respective loan
agreements) are approximately $2,464,000 in 1997 and $24,000 in 1998. The
Company has no annual maturities of long-term debt after fiscal 1998.
The Company had no revolving loan or short-term borrowings during
fiscal 1996 and 1995. In November 1995, the Company entered into a Secured
Conditional Exchangeable Note Purchase Agreement. On May 31, 1996, the Company
issued 132,560 shares of the Company's Common Stock to Premier Strategic Growth
Fund and paid $61,520 representing accrued interest to date (see Note 14--
"Stockholders' Equity").
54
<PAGE> 23
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
(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 percent per annum, payable quarterly, and in the
event of a default, a charge of 2 1/2 percent 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 percent of the
amount of principal redeemed, declining after January 9, 1996 to 110 percent of
principal. Until paid, the principal amount of the Note is convertible into the
Company's Common Stock, par value $0.01, at the rate of $6.00 per share (which
was the fair market value on the date of signing). The maximum number of shares
issuable upon conversion of the Note was approximately 333,333, subject to
adjustments for dilution and recapitalization, which is under 15 percent 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 percent 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
percent 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.
Pursuant to the terms of the Indenture, the Company may reduce the principal
amount of securities to be redeemed by the principal amount of securities (i)
that have been converted by Securityholders, (ii) that the Company has delivered
to the Trustee for cancellation, or (iii) that the Company has redeemed. In
March 1991, $36.0 million of such securities was converted into Common Stock by
Securityholders. The Securities that were converted may, in accordance with the
Indenture, reduce the principal amount to be redeemed because such Securities
had not been called for mandatory redemption prior to conversion. As a result,
in March 1996, the Company informed the Trustee that the $36.0 million amount
available to reduce the redemptions was substantially greater than the amount of
redemptions otherwise required under the Indenture. Accordingly, the Company is
not required to redeem any Securities prior to maturity in 2010. Should the
Company default on its senior debt, then the Company may be precluded from
paying principal or interest on the Debentures, and dividends to its
stockholders, 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, for the principal
balance, plus $80 in cash and $60 worth of shares of Common Stock as interest
for each $1,000 in face amount of Debentures. Tendering holders will not receive
additional interest calculated from and after April 15, 1994 (which includes the
October 17, 1994, April 17, 1995, October 16, 1995 and April 15, 1996 payments).
If the exchange offer with holders of Debentures is consummated on the terms in
the letter agreement and assuming the tender of 100 percent 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
55
<PAGE> 24
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
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 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 letter agreement provides for a pledge of
all of the shares of CCI 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 events, 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, 1996. Accrued interest on the Debentures was
$1.6 million, which includes $0.1 million of default interest, as of May 31,
1996.
(c) In December 1994, the Company reached a final settlement with the
Internal Revenue Service ("IRS") on the payroll tax audit pursuant to which the
Company entered into an Offer in Compromise to pay the IRS $5.0 million in
installments with the Company having no obligation to pay any penalties or
accrued interest through the date of the final settlement. In March 1995, the
Company paid $350,000 to the IRS against the initial payment due and commenced
monthly installment payments to the IRS in April 1995. The Company paid
$2,150,000 on July 10, 1995 and on October 20, 1995 it paid the remaining
balance outstanding, including accrued interest. The Company utilized the
proceeds from the 1995 Federal tax refund to make the final payment.
(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 percent per
annum. The Company made a principal payment of $125,000 in April 1995 and paid
$50,000 each month commencing in May 1995 through July 1996. The note requires
equal monthly principal payments commencing June 1, 1995 and continuing through
February 1997. This note was paid in full on August 13, 1996 through the
proceeds from the sale of Starting Point, Orange County.
(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--"Acquisitions 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 percent.
The net book value of assets pledged to secure the above debt aggregated $12.4
million at May 31, 1996.
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. There were no capital leases at May 31, 1996. Total rental expense for
all operating leases was $0.9, $1.1 and $1.3 million for fiscal years 1996, 1995
and 1994, respectively.
Assets under capital leases were capitalized using interest rates
appropriate at the inception of each lease; contingent rents associated with
capital leases in fiscal 1996, 1995 and 1994 were $26,000, $79,000, and $61,000,
respectively. There were no capital leases at May 31, 1996 and $549,000 in
capital leases at May 31, 1995. The change in capital leases was the result of
the lease termination sale of operations for the CareUnit Hospital of Kirkland
in October, 1995, which was a leased facility (see Note 3-- "Acquisitions and
Dispositions").
Future minimum payments, by year and in the aggregate, under
noncancellable operating leases with initial or remaining terms of one year or
more consist of the following at May 31, 1996:
56
<PAGE> 25
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
(DOLLARS IN THOUSANDS)
<S> <C>
1997................................................................... $ 902
1998................................................................... 664
1999................................................................... 620
2000................................................................... 601
2001................................................................... 460
Later years............................................................ ---
-------
Total operating lease payments......................................... $3,247
=====
</TABLE>
NOTE 12-- INCOME TAXES
Provision for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................................... $(2,568) $ --- $ ---
State........................................................ 90 180 301
------- --- ---
$(2,478) $180 $301
===== === ===
</TABLE>
A reconciliation between the provision for income taxes and the amount
computed by applying the statutory Federal income tax rate (34 percent) to loss
before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Benefit from income taxes at the statutory tax rate................ $(2,285) $(3,860) $(2,567)
State income taxes, net of federal tax benefit..................... 60 119 199
Amortization of intangible assets.................................. 273 39 38
Valuation allowance................................................ 1,930 3,701 2,607
Refund of prior year loss carryback not previously benefited....... (2,568) --- ---
Other, net......................................................... 112 181 24
------ ------ ------
$(2,478) $ 180 $ 301
===== ====== ======
</TABLE>
The Company paid $48,000, $507,000 and $233,000 for income taxes in
fiscal 1996, 1995 and 1994, respectively, and in 1996 received a tax refund of
$9.4 million associated with its final 1995 federal tax return as discussed
further below.
57
<PAGE> 26
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
Significant components of the Company's deferred tax liabilities and
assets are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating losses ................... $ 11,366 $ 18,867
Restructuring/non-recurring costs ...... 2,105 4,853
Alternative minimum tax credits ........ 667 666
Bad debt expense ....................... 374 333
Employee benefits and options .......... 292 432
Other, net ............................. 189 273
-------- --------
Total Deferred Tax Assets ....... 14,993 25,424
Valuation Allowance .................... (12,023) (22,439)
-------- --------
Net Deferred Tax Assets ......... 2,970 2,985
-------- --------
Deferred Tax Liabilities:
Depreciation ........................... (2,400) (1,866)
State income taxes ..................... (418) (806)
Cash to accrual differences ............ (152) (313)
-------- --------
Total Deferred Tax Liabilities .. (2,970) 2,985)
-------- --------
Net Deferred Tax Assets ..................... $ -- $ --
======== ========
</TABLE>
On July 20, 1995, the Company filed its Federal tax return for
fiscal 1995 and subsequently filed Form 1139 "Corporate Application for
Tentative Refund" to carry back losses described in Section 172(f) requesting a
refund to the Company in the amount of $9.4 million. Section 172(f) provides for
a 10 year net operating loss carryback for losses attributable to specified
liability losses. A specified liability loss is defined, in general, as any
amount otherwise allowable as a deduction which is attributable to (i) a product
liability or (ii) a liability arising under a federal or state law or out of any
tort if the act giving rise to such liability occurs at least three years before
the beginning of the taxable year. In October 1995, the Company received a $9.4
million refund for fiscal 1995. Of this refund, $2.4 million was recognized as a
tax benefit during the second quarter of fiscal 1996. Receipt of the 1995
Federal tax refund does not imply IRS approval. Due to the lack of legal
precedent regarding Section 172(f), the remaining amount, $7.0 million, is
reflected on the Company's consolidated balance sheet in current liabilities. 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) and recognized a
tax benefit of $0.2 million related thereto in the second quarter of fiscal
1996. The amount of refund claimed on the amended returns is approximately $11.7
million for 1986; $0.4 million for 1985; $0.7 million for 1983 and $0.4 million
for 1982, which is a total of $13.2 million for the refunds from amended returns
and a total of $22.6 million for all refunds requested. Section 172(f) is an
area of the tax law without substantial legal precedent and there may be
opposition by the IRS as to the Company's ability to obtain benefits from
refunds claimed under this section. Therefore, no assurances can be made as to
the Company's entitlement to all claimed refunds.
The valuation allowance decreased by approximately $10.4 million at May
31, 1996 as compared to the prior year as a result of the decline in deferred
tax assets. The major components of this decrease relate primarily to a
decrease in the net operating loss of $7.5 million and a decrease in
restructuring expenses of $2.8 million. Deferred tax assets which reversed in
the current year, were carried back in connection with the Company's 10 year
net operating loss carryback claims under Section 172(f).
At May 31, 1996, the Company has Federal accumulated net operating
losses of approximately $29.9 million, which if carried forward would expire in
2007 through 2010. The Company is subject to alternative minimum tax ("AMT") at
a 20 percent 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 carrybacks may be used
58
<PAGE> 27
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
to offset only 90 percent of the Company's alternative minimum taxable income.
The Company will be allowed a credit carryover of $667,000 against regular tax
in the event that regular tax expense exceeds the alternative minimum tax
expense.
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, 1996 reflects the present value of
the obligation to the participants under the plan of $334,000.
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, 1995, eligibility was
modified to six months of employment and a minimum of twenty (20) regular
scheduled hours per week. Each participant may contribute from 2 percent to 15
percent of his or her compensation to the plan subject to limitations on the
highly compensated employees to ensure the plan is non-discriminatory. Company
contributions are discretionary and are determined quarterly by the Company's
Board of Directors or the Plan Committee. The Company made approximately
$30,000, $29,000, and $20,000 in contributions to the Plan in fiscal 1996, 1995
and 1994, 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, 1996, 1995 and 1994:
59
<PAGE> 28
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ------------
SHARES PER SHARE AGGREGATE
------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
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
Options canceled in fiscal 1996 ... (5,500) $ 6.25 - 7.875 (43)
Options issued in fiscal 1996 ..... 122,500 $ 7.875- 8.00 966
Options forfeited in fiscal 1996 .. (114,154) $ 6.25 - 21.25 (947)
Options exercised in fiscal 1996 .. (14,000) $ 6.25 - 7.875 (106)
-------- -------
Balance May 31, 1996 ................. 175,013 $ 6.25 - 30.00 $ 1,376
======== =======
</TABLE>
Options under the 1988 ISO Plan to purchase 118,961 and 62,115
shares were exercisable as of May 31, 1996 and 1995, respectively.
The following table sets forth the activity related to nonstatutory
options for the years ended May 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ------------
SHARES PER SHARE AGGREGATE
------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
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 ................ -- -- --
Options issued in fiscal 1996 ..... 86,237 $6.25-12.00 710
------- -----
Balance May 31, 1996 ................. 86,237 $6.25-12.00 $ 710
======= =====
</TABLE>
Nonstatutory options to purchase 64,570 shares were exercisable as
of May 31, 1996. 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 percent
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.
60
<PAGE> 29
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
The Company has a 1995 Incentive Plan (the "1995 Plan"). The purpose
of the 1995 Plan is to provide an incentive to key management employees and
consultants whose present and potential contributions to the Company and its
subsidiaries are important to the success of the Company by affording them an
opportunity to acquire a proprietary interest in the Company. Options granted as
incentive stock rights, stock options, stock appreciation rights, limited stock
appreciation rights and restricted stock grants under the 1995 Plan may qualify
as ISO's under Section 422A of the Internal Revenue Code. The total number of
shares reserved for issuance under the 1995 Plan is 450,000.
During fiscal 1996, 105,500 options were granted in the 1995 Plan at
$8.50 per share, including a Restricted Stock Grant for 100,000 which vests over
a 20-year period of time. As of May 31, 1996, 10,500 shares were exercisable
under the 1995 Plan.
In fiscal 1995, the Company implemented the Company's Directors'
Stock Option Plan (the "Directors' 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 were
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 percent 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 percent 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.
In fiscal 1996, the Directors' Plan was amended to increase the
number of shares authorized for issuance to 250,000. In addition, the number of
options awarded annually to all non-employee directors was increased from 2,500
to 5,000 and provided for an annual grant of special service options to the Vice
Chairman of the Board of 3,333 and to each committee chairman of 8,333 and each
committee member of 2,500. The amended and restated plan continues to provide
that each non-employee director will automatically be granted an option to
purchase 10,000 shares upon joining the Board of Directors and options to
purchase 5,000 shares on each anniversary of the initial date of service. Such
amendment and restatement was ratified by the shareholders on November 9, 1995.
The following table sets forth the activity related to the
Directors' Plan for the years ended May 31, 1996 and 1995:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ----------------------
SHARES PER SHARE AGGREGATE
------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Options granted in fiscal 1995 .... 50,000 $ 7.00 $ 350
------- -----
Balance, May 31, 1995 ................ 50,000 $ 7.00 350
Options canceled in fiscal 1996 ... (13,333) $ 8.625 (115)
Options forfeited in fiscal 1996 .. (12,500) $ 7.00 (88)
Options granted in fiscal 1996 .... 49,999 $ 8.625 431
------- -----
Balance May 31, 1996 ................. 74,166 $7.00-8.625 $ 578
======= =====
</TABLE>
61
<PAGE> 30
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
There were 15,000 non-qualified options exercisable in the
Directors' Plan as of May 31, 1996. There were no options exercisable as of May
31, 1995.
In November 1995, the Company entered into a Secured Conditional
Exchangeable Note Purchase Agreement. The principal amount of the Note was $1.0
million, accrued interest at 12 percent per annum, and was secured by a deed of
trust. The principal amount of the Note was exchangeable into the Company's
Common Stock at the exchange rate of $7.54375 per share. On May 30, 1996,
exchange of this Note was effectuated. As a result, on May 31, 1996, the Company
issued 132,560 shares of the Company's Common Stock to Premier Strategic Growth
Fund and paid $61,520 representing accrued interest to date.
In August 1995, the Company sold an aggregate of 19,933 shares of
Common Stock to three accredited investors in a private offering for an
aggregate purchase price of $119,598 paid in cash on August 16, 1995.
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 percent 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 percent 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 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 South Florida. The terms of the management agreement
include an employment contract with Comprehensive Behavioral for the former
president of AMH. The Company issued 44,054 shares to AMH in April 1996 and
extended the one-year option through August 31, 1996.
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. During the second quarter of fiscal
1996, the Company amended this agreement for an additional 22,500 shares as an
adjustment for delay in registration of shares without additional payment.
In October 1994, options not under any plan were issued to a
non-policy making vice president of a subsidiary of the Company. Options for
20,000 shares were granted at an exercise price ranging from $7.50 to $15.00 per
share. Options for 7,500 shares vest one year from the date of grant; options
for 7,500 shares two years from the date of grant and the remaining options for
5,000 shares vest on the three year anniversary of the date of grant. In
addition,
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<PAGE> 31
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
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.
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 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. These options were forfeited during fiscal 1996 upon the grant of a
Restricted Stock Grant in the Company's 1995 Plan.
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 January 1996, the Company issued the
former owner an additional 1,160 shares pursuant to the amended settlement
agreement. 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.
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 percent 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 percent or more of the
Company's Common Stock. In the event that a person acquires 25 percent 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 percent 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 percent of its assets are sold,
proper provision shall be made so that each Right holder shall have the right to
receive or exercise, at the then current exercise price of the Right, that
number of shares of Common Stock of the acquiring company that at the time of
the transaction would have a market value of two times the exercise price of the
Right. The Rights are redeemable at a price of $.20 per Right at any time prior
to ten days after a person has acquired 25 percent or more of the Company's
Common Stock.
As of May 31, 1996, the Company has reserved 265,912 shares of
Common Stock for future issuances related to business acquisitions,
approximately 565,612 shares related to the conversion of convertible debt and
private placements and 1,408,600 shares for the exercise of stock options of
which approximately 674,000 shares are for options granted under the Company's
1988 Plans, 450,000 under the 1995 Incentive Plan, and 250,000 shares under the
Directors' Plan. Each of the shares reserved for future issuance includes one
Right as referenced above. As of May 31, 1996, no Preferred Stock is outstanding
or reserved for issuance.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
63
<PAGE> 32
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
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 in 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. RehabCare filed its first brief to set forth argument on January 29,
1996, the Company filed its brief on March 19, 1996 and RehabCare filed its
reply on April 6, 1996. Verbal argument was heard by the District Court in June
1996 and the Company expects to hear a determination in the next six months.
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 will not have a material adverse impact on the
Company's results of operations.
In July 1994, the Company 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, Mr. Leslie Livingston and Livingston & Co., and its
former legal counsel, Schwabe, Williamson & Wyatt, to recover advances for
services in connection with an uncompleted sale and leaseback of CMP Properties,
Inc. On February 15, 1996, the Company settled this dispute for $860,000. This
settlement amount was received by the Company during the third quarter of fiscal
1996 and is reflected in the statement of operations as a non-operating gain.
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). The Company settled this dispute on February 13, 1996 for $550,000.
This settlement amount was paid by the Company during the third quarter of
fiscal 1996 and included obligations under the Tax Sharing Agreement through
December 1989. The Company had established a reserve for this settlement in a
prior fiscal year and, as a result there was no impact related to this
settlement on the Company's statements of operations for fiscal 1996. During
fiscal 1996, the Company recorded $0.2 million in connection with its
obligations under the Tax Sharing Agreement related to the period 1989 through
1991. This charge is reflected in the Company's fiscal 1996 statements of
operations.
On December 27, 1995, AGCA, Inc. and Merit Behavioral Care Systems,
Inc. filed a lawsuit against a subsidiary of the Company, one of its employees,
and other non-related parties. The cause, originally filed in Travis County, has
been moved to the 101st District Court of Dallas County (Case No. 962970E). On
January 29, 1996, AGCA, Inc. also filed a lawsuit against a subsidiary of the
Company and one of its employees in the U.S. District Court, Tampa Division
(Case No. 95-15768). Both lawsuits seek injunctive relief and the Texas action
includes a claim of conspiracy. Plaintiffs have agreed to mediate both the Texas
and Florida action on September 3, 1996, in Tampa, Florida. The Company is
unable to predict at this time what effect, if any such lawsuits will have on
the Company's financial position, result of operations and cash flows.
The Company entered into a Stock Purchase Agreement on April 30,
1996 to purchase the outstanding stock of Healthcare Management Services, Inc.,
Healthcare Management Services of Ohio, Inc., Healthcare Management Services of
Michigan, Inc. and Behavioral Healthcare Management, Inc. (hereafter
collectively referred to as "HMS"). The Stock Purchase Agreement was subject to
certain escrow provisions and other contingencies which were not completed until
July 25, 1996. (See Note 17-- "Events Subsequent to the Balance Sheet Date.) In
conjunction with
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<PAGE> 33
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
this transaction, HMS initiated an arbitration against The Emerald Health
Network, Inc. ("Emerald") claiming breach of contract and seeking damages and
other relief. In August 1996, Emerald, in turn, initiated action in the U.S.
District Court for the Northern District of Ohio, Eastern Division, against the
Company claiming, among other things, interference with the contract between
Emerald and HMS and seeking unspecified damages and other relief. An answer has
not yet been interposed and no discovery has commenced. The action, therefore,
is in its formative stages and the Company believes it has good and meritorious
defenses and that HMS has meritorious claims in its arbitration. The Company
believes that it may have claims arising from this transaction against the
accountants and legal counsel of HMS as well as HMS's lending bank. These claims
are presently being investigated and have not as yet been quantified. The
Company does not believe that the impact of these claims will have a material
adverse effect on the Company's financial position, result of operations and
cash flows.
In October 1994, the New York Stock Exchange, Inc. 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 and fourth quarters 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.
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 a combination of cash and shares. See
Note 2 to the Company's Condensed Consolidated Financial Statements 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.
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-- FOURTH QUARTER RESULTS FOR FISCAL 1996
The net loss for the fourth quarter of fiscal 1996 was $2.5 million.
Affecting these results were certain unusual and infrequent transactions that
had both positive and negative effects. The unusual transactions that had a
positive effect on earnings were an adjustment of $0.3 million for favorable
settlements in the current year related to prior year third party liabilities
and a $0.3 gain on the sale of the Company's freestanding facility in San Diego,
California. One-time or infrequent transactions that had a negative effect on
earnings included the write-off of goodwill for two facilities that were closed
during the period of $0.8 million, a loss in the equity of an unconsolidated
affiliate of $0.2 million, and a non-recurring charge of $0.1 million for
restructuring reserve for the planned closure of the freestanding facility in
Cincinnati, Ohio.
NOTE 17-- EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
As of April 30, 1996, the Company entered into a Stock Purchase
Agreement to purchase the outstanding Common Stock of Healthcare Management
Services, Inc., Healthcare Management Services of Ohio, Inc., Healthcare
Management Services of Michigan, Inc. and Behavioral Healthcare Management, Inc.
(hereinafter collectively referred to as "HMS"). Such Stock Purchase Agreement
was subject to certain escrow provisions and
65
<PAGE> 34
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1996, 1995 and 1994
other contingencies. On July 25, 1996, the Company consented to closing,
reserving its rights to assert certain claims against the Sellers and others.
Subsequent to July 25, 1996, the Company entered into negotiations with the
Sellers or their representatives relating to the disposition of the claims that
the Company had reserved its rights to. These negotiations relate to (i) Sellers
relinquishing their rights to stock to be received; (ii) Sellers being relieved
of certain indemnity obligations under the Stock Purchase Agreement; (iii)
modification of the commission structure in the employment agreements; and, (iv)
modification in the number of warrants to be received by Sellers from Buyer. As
of August 27, 1996, a definitive agreement relating to the Company's
post-closing claims had not been entered into although the Company believes that
such an agreement will be executed on terms satisfactory to it. The Company has
several legal issues in connection with this transaction (see Note 15--
"Commitments and Contingencies").
On July 23, 1996, the Company closed CCI's administrative office in
San Ramon, California. Closure of this office and several non-performing
contract units are part of the planned restructuring of these operations. The
impact of this restructuring is approximately $0.2 million and will be reflected
in the Company's statements of operations for the quarter ended August 31, 1996.
On August 12, 1996, the Company sold its 70-bed freestanding
facility in Costa Mesa, California.
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<PAGE> 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, recommendations and administrative decisions
regarding the compensation of the Company's executives were made by the
Compensation Committee of the Board of Directors, which is currently comprised
entirely of persons who are not officers or employees of the Company. Mr. Nicol,
who served as a director of the Company and a member of the Compensation
Committee during fiscal 1996, served as President of the Company from October
1989 until August 1990 and as an Executive Vice President of the Company and in
other positions from 1973 through June 1989.
Mr. Street is a director of the Company and serves on the stock
option committee of the board of directors of Nu-Tech Bio-Med, Inc. Mr.
Feigenbaum, the Company's Vice-Chairman and also the Chairman of the
Compensation Committee, is also the chairman of Nu-Tech Bio-Med, Inc.
CERTAIN TRANSACTIONS
Mr. Rudy R. Miller served as a director of the Company and Chairman
of the Audit Committee for five and one-half months of fiscal 1996 until his
resignation on November 15, 1995. During such time and through December 31,
1995, the Company had engaged The Miller Group, of which Mr. Rudy Miller was a
principal, to provide investor-relations services at a monthly rate of $5,500
(exclusive of out-of-pocket expenses).
The Company has from time to time engaged and compensated firms for
the purpose of advising, structuring and negotiating the private placement of
securities. During fiscal 1995, the Company's Board of Directors approved the
payment to Chriss Street & Co., an investment banking firm affiliated and
controlled by Chriss W. Street, the Company's Chairman and Chief Executive
Officer, of fees aggregating $100,000 based upon its determination that the
amount of the investment banking fees charged were reasonable and on terms at
least as favorable as the terms available from other professionals rendering
such services. The Audit Committee reviewed the fees submitted by Chriss Street
& Company and the Chairman recommended approval of the fees based upon an
independent investment banking firm's opinion that the fees were standard market
rate for the transaction.
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 from Drew Q. Miller. Such
purchase price was $50,000 and included the assumption by the Company of certain
operating leases. APC had two operating locations with three contract units
offering inpatient and partial hospitalization services. The addition of these
APC contracts contributed 11% of CareUnit's total operating revenues during
fiscal 1995 although these contracts were owned by the Company for only four
months during fiscal 1995.
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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, 1996 and 1995
Consolidated Statements of Operations, Years Ended May 31,
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity,
Years Ended May 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows,
Years Ended May 31, 1996, 1995 and 1994
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).
10.37 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).*
10.50 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).
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<PAGE> 37
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 (15).
10.63 Common Stock Purchase Agreement dated July 31, 1995,
between the Company and W.V.C. Limited, an accredited
investor (15).
10.64 Common Stock Purchase Agreement dated August 15, 1995
between the Company and Helen Jean Quinn, an accredited
investor (15).
10.65 Common Stock Purchase Agreement dated August 15,1995
between the Company and BLC Investments, an accredited
investor (15).
10.66 Preferred Stock Purchase Agreement dated May 23, 1995
between Physician Corporation of America and
Comprehensive Behavioral Care, Inc. (14).
10.67 First Right of Refusal Agreement dated May 23, 1995
between Physician Corporation of America and
Comprehensive Behavioral Care, Inc. (14).
10.68 Comprehensive Care Corporation 1995 Incentive Plan
(16)*.
10.69 Amended and Restated Non-Employee Director's Stock
Option Plan (16)*.
10.70 Restricted Stock Grant between Chriss Street and the
Company dated November 9, 1995 (16)*.
10.71 Secured Conditional Exchangeable Note Purchase
Agreement between Dreyfus Strategic Growth, L.P. and
the Company dated November 30, 1995 (17).
11 Computation of Loss Per Share (18).
21 List of the Company's subsidiaries (18).
23.1 Consent of Ernst & Young LLP (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).
27 Financial Data Schedules (18).
------------------------------------
* 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.
(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.
(15) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1995.
(16) Filed as an exhibit to the Company's Form 8-K dated November 9, 1995.
(17) Filed as an exhibit to the Company's Form 8-K dated November 30, 1995.
(18) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1996.
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<PAGE> 38
(B) REPORTS ON FORM 8-K
(1) Form 8-K dated April 17, 1996, to report under Item 5,
that it had amicably terminated merger discussions
relating to the acquisition of Mustard Seed Corporation.
(2) Form 8-K dated May 30, 1996, to report, under Item 5, that
the Company had sold its freestanding facility in San
Diego, California; effectuated the exchange of its Secured
Conditional Exchangeable Note Purchase Agreement and
relocated its corporate headquarters to Corona del Mar,
California.
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<PAGE> 39
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, November 6,
1996.
COMPREHENSIVE CARE CORPORATION
By /s/ CHRISS W. STREET
__________________________________________
Chriss W. Street
(Principal Executive 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
Chairman,
President and
Chief Executive Officer
/s/ CHRISS W. STREET (Principal Executive Officer) November 6, 1996
_______________________________________
Chriss W. Street
Senior Vice President, Secretary/Treasurer and
Chief Financial Officer
(Principal Financial and
/s/ KERRI RUPPERT Accounting Officer) November 6, 1996
_______________________________________
Kerri Ruppert
/s/ J. MARVIN FEIGENBAUM Vice Chairman November 6, 1996
_______________________________________
J. Marvin Feigenbaum
/s/ WILLIAM H. BOUCHER Director November 6, 1996
_______________________________________
William H. Boucher
/s/ W. JAMES NICOL Director November 6, 1996
_______________________________________
W. James Nicol
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1
We consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-43841 and No. 33-27213) of our report dated August
27, 1996 with respect to the consolidated financial statements of Comprehensive
Care Corporation and subsidiaries for the year ended May 31, 1996, included in
its Annual Report (Form 10-K/A,No.2) for the year ended May 31, 1996.
/s/ ERNST & YOUNG LLP
----------------------------------
Orange County, California
November 4, 1996
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.2
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K/A No. 2 into the
Company's previously filed S-8 Registration Statement File No. 33-43841 and
the S-8 Registration Statement File No. 33-27213.
/s/ Arthur Anderson LLP
- ------------------------------
ARTHUR ANDERSON LLP
November 7, 1996
St. Louis, Missouri
