<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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, 1994 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.)
350 W. BAY ST.
COSTA MESA, CALIFORNIA 92627
(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 $.10 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
(Title of Class) Over-the-Counter
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 22, 1994, was $14,839,164.
At August 25, 1994, the Registrant had 21,986,916 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
definitive proxy statement for the Registrant's 1994 annual meeting of
shareholders presently scheduled to be held on November 14, 1994, which Proxy
Statement will be filed no later than 120 days after the close of the
Registrant's fiscal year ended May 31, 1994.
1
<PAGE> 2
PART I
ITEM 1. BUSINESS.
Comprehensive Care Corporation (the "Company") is a Delaware
corporation organized in January 1969. The Company is transitioning from
predominantly a provider of treatment programs for psychiatric disorders and
chemical dependency (including alcohol and drug) to a managed care behavioral
health care company providing a continuum of services. Such services include
risk based contract capitation of behavioral health expenses for specific
populations and a broad spectrum of inpatient and outpatient mental health and
substance abuse therapy and counseling. Programs are provided at freestanding
facilities operated by the Company and at independent general hospitals under
contracts with the Company. A wholly-owned subsidiary, CareUnit, Inc.,
develops, markets and manages the Company's contract programs. During fiscal
1994, psychiatric and chemical dependency treatment programs accounted for
approximately 86% of the Company's operating revenues. AccessCare, Inc.
("AccessCare") a wholly-owned subsidiary primarily engaged in the development
and delivery of managed care services for behavioral medicine, accounted for
approximately 10% of the Company's operating revenues. The remaining 4% of
fiscal 1994 revenues were derived from other activities.
The following table sets forth for each of the years in the five-year
period ended May 31, 1994, the contribution to operating revenues of the
Company's freestanding operations, CareUnit, Inc. contracts, AccessCare
operations, RehabCare programs, and other activities.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freestanding operations . . . . . . . . . . . . . . 70% 81% 75% 34% 53%
CareUnit, Inc. contracts . . . . . . . . . . . . . 16 12 14 14 19
AccessCare operations . . . . . . . . . . . . . . . 10 2 -- -- --
RehabCare programs (1) . . . . . . . . . . . . . . -- -- 6 47 23
Other activities . . . . . . . . . . . . . . . . . 4 5 5 5 5
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
- ---------------------
(1) The Company formerly owned a company known as RehabCare Corporation
("RehabCare"), which developed, marketed and managed the delivery of
comprehensive medical rehabilitation services for functionally disabled
persons. The Company offered RehabCare common stock to the public in
fiscal 1992, maintaining a minority interest, and during fiscal 1993, sold
its remaining 48% stake in RehabCare. Accordingly, revenues from
RehabCare were not material to the Company during fiscal 1993.
2
<PAGE> 3
FREESTANDING OPERATIONS
The Company currently operates six owned or leased facilities representing 347
available beds. The following table sets forth selected operating data
regarding the Company's freestanding facilities. Facilities are designated
either psychiatric or chemical dependency based on the license of the facility
and the predominant treatment provided. For information concerning the nature
of the Company's interest in the facilities, see Item 2, "PROPERTIES".
<TABLE>
<CAPTION>
INPATIENT DAYS FOR YEAR ENDED MAY 31,
YEAR LICENSED ----------------------------------------------
ACQUIRED(1) BEDS 1994 1993 1992 1991 1990
----------- ---- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PSYCHIATRIC/CHEMICAL DEPENDENCY FACILITIES
CareUnit Hospital of Fort Worth . . . 1971 83 9,027 10,910 13,534 10,591 15,612
CareUnit Hospital of Kirkland . . . . 1981 83 5,699 6,506 9,478 9,682 12,812
CareUnit Hospital of Cincinnati . . . 1982 128 12,133 12,243 12,744 12,131 20,608
Starting Point, Orange County . . . . 1983 70 2,422 3,487 7,046 10,349 12,818
CareUnit of Grand Rapids . . . . . . . 1985 76 6,545 6,348 6,221 7,662 10,190
Aurora Behavioral Health Hospital (2) 1988 100 2,859 7,237 22,070 8,730 11,709
CLOSED/FACILITIES HELD FOR SALE
CareUnit of Jacksonville Beach (3) . . 1982 -- -- -- 5,026 6,119 12,430
Starting Point, Oak Avenue (4)(5) . . 1983 -- -- 8,868 11,988 14,639 21,155
CareUnit of Orlando (6) . . . . . . . 1987 -- -- -- -- 1,492 7,486
CareUnit of San Diego (7) . . . . . . 1988 -- -- -- -- -- 2,972
CLOSED/SOLD FACILITIES
Crossroads Hospital (8) . . . . . . . -- -- -- 1,705 5,078 6,747
CareUnit Hospital of Albuquerque (4)(9) -- -- 4,150 4,098 4,522 7,215
CareUnit of Coral Springs (4)(10) . . -- -- 3,539 7,617 9,611 13,293
CareUnit Hospital of Nevada (11) . . . -- -- 6,920 7,881 8,632 11,644
CareUnit of South Florida/Tampa (4)(10) -- -- 6,891 6,761 6,957 7,813
Newport Point, Inc. (12) . . . . . . . -- -- 4,669 -- -- --
Woodview-Calabasas Hospital (8) . . . -- -- -- 7,913 13,809 14,318
Other (13) . . . . . . . . . . . . . . -- -- -- 6,089 53,402
------ ------ ------- ------- -------
Patient days served during period . . 38,685 81,768 124,082 136,093 242,224
====== ====== ======= ======= =======
Admissions . . . . . . . . . . . . . . . 3,916 7,047 8,859 9,312 14,388
Available beds at end of period (14) . . 347 385 748 1,059 1,513
Average occupancy rate for period (15) . 30% 28% 38% 29% 39%
====== ====== ======= ======= =======
</TABLE>
- ----------------
(1) Calendar year acquired or leased.
(2) Formerly known as CareUnit of Colorado.
(3) In February 1992, CareUnit of Jacksonville Beach, an 84-bed chemical
dependency facility, was closed. This facility is currently for sale.
(4) In March 1993, CareUnit Hospital of Albuquerque, a seventy-bed chemical
dependency facility, CareUnit of Coral Springs, a 100-bed chemical
dependency facility, CareUnit of South Florida/Tampa, a 100-bed chemical
dependency facility and Starting Point, Oak Avenue, a 136-bed chemical
dependency facility were closed.
(5) Includes Starting Point, Grand Avenur which was sold in July 1991.
(6) In October 1990, CareUnit of Orlando, a 100-bed chemical dependency
facility was closed. This facility is currently for sale.
(7) In December 1989, CareUnit of San Diego, a 92-bed chemical dependency
facility, was closed. This facility is currently for sale.
(8) The Company is currently in negotiations to dissolve, retroactive to
December 31, 1991, the joint venture which leased Crossroads Hospital and
Woodview-Calabasas Hospital. Crossroads Hospital continued to be managed
by the Company although in August 1992 it was closed and was subleased
through the term of the lease which expired in September 1993. Woodview-
Calabasas continues to be managed by the Company's joint venture partner
although it was closed in April 1993.
(9) On July 1, 1993, CareUnit Hospital of Albuquerque was sold.
(10) On October 1, 1993, CareUnit of So. Florida/Tampa was sold and on
December 10, 1993, CareUnit of Coral Springs was sold.
(11) On April 5, 1993, CareUnit Hospital of Nevada, a 50-bed psychiatric
facility, was sold.
(12) Joint operating agreement between Century Healthcare of California and
Starting Point, Inc. to manage Newport Harbor Psychiatric Hospital, a
68-bed adolescent psychiatric hospital and Starting Point, Orange County, a
70-bed psychiatric facility. This agreement was mutually dissolved on
February 28, 1993.
(13) Includes Brea Hospital Neuropsychiatric Center, CareUnit Hospital of
Orange, CareUnit Hospital of St. Louis, CareUnit of DuPage, Sutter Center
for Psychiatry and Golden Valley Health Center. These facilities were
closed or sold in fiscal 1989 through 1991.
(14) A facility may have appropriate licensure for more beds than are in use
for a number of reasons, including lack of demand, anticipation of future
need, renovation and practical limitations in assigning patients to
multiple-bed rooms. Available beds is defined as the number of beds which
are available for use at any given time.
(15) Average occupancy rate is calculated by dividing total patient days by
the average number of available bed-days during the relevant period.
3
<PAGE> 4
FREESTANDING FACILITY PROGRAMS
The services offered at a freestanding facility are determined by the
licensure of the facility, the needs of the patient community and reimbursement
considerations including working relationships with managed care companies. A
program within the facility represents a separately staffed unit dedicated to
the treatment of patients whose primary diagnosis suggests that their treatment
needs will best be met within the unit. Patients whose diagnosis suggests the
need for supplemental services are accommodated throughout their stay as
dictated by the individual treatment plan developed for each patient.
Psychiatric. Psychiatric programs are offered in most of the Company's
freestanding facilities. Admission to the programs offered by the Company is
typically voluntary although certain facilities provide emergency psychiatric
services and accept involuntary patients who are suffering an acute episodic
psychiatric incident.
Each patient admitted to a psychiatric program undergoes a complete
assessment including an initial evaluation by a psychiatrist, a medical
history, physical examination, a laboratory work-up, a nursing assessment, a
psychological evaluation, and social and family assessments. The assessments
are utilized to develop an individualized treatment plan for each patient.
The treatment programs are undertaken by an interdisciplinary team of
professionals experienced in the treatment of psychiatric problems. Length of
stay varies in accordance with the severity of the patient's condition. A
comprehensive discharge plan which may include outpatient psychiatric or
psychological treatment, or referral to an alternate treatment facility is
prepared for each patient. Psychiatric programs are also available on an
inpatient, day treatment and outpatient basis and form a continuum of care.
Chemical Dependency. Chemical dependency programs, offered in all
freestanding facilities, are delivered under the names CareUnit(SM), Starting
Point and Aurora Behavioral Health and include programs for adults and
adolescents. Facilities offer a comprehensive treatment program based on
therapy and education. The medically based programs utilize a team approach to
treatment, with a supervising physician, psychologists, counselors, therapists
and specially trained nurses. This multi-disciplinary team approach means that
the medical, emotional, psychological, social and physical needs of the patient
are all addressed in treatment.
Facilities offer levels of care that can form a continuum, including
detoxification, inpatient, residential, day treatment and outpatient programs
which meet the evolving needs of patients and their families. Based on an
initial assessment, each patient is placed into the level of care that is most
appropriate for his or her needs. Following assessment, each patient admitted
into treatment receives a full medical and social history as well as a physical
examination that includes those diagnostic studies ordered by the patient's
attending physician. Throughout the course of treatment, each plan is reviewed
frequently to ensure that it continues to meet the changing needs of the
patient. The length of time spent in treatment is dependent on an individual's
needs and can range from several weeks to several months.
SOURCES OF REVENUES
During fiscal 1994, approximately 57% of the Company's operating
revenues from freestanding operations were received from private sources
(private health insurers, managed care companies and directly from patients)
and the balance from Medicare, Medicaid and other governmental programs.
Private health insurers offer plans that typically include coverage for
psychiatric and chemical dependency treatment. In many instances, the level of
coverage for psychiatric and chemical dependency benefits is less than that
provided for medical/surgical services. Lower coverage levels result in higher
co-payments by the patient, who is often unable to meet his or her commitment
in its entirety or is unable to pay as rapidly as the insurance company. This
pattern tends to increase bad debts and days outstanding in receivables.
Private insurance plans vary significantly in their methods of payment,
including cost, cost plus, prospective rate, negotiated rate, percentage of
charges, and billed charges. Health insurers have adopted a number of payment
mechanisms for the primary purpose of decreasing the amounts paid to hospitals
(including the Company's operations) for services rendered. These mechanisms
include various forms of utilization review, preferred provider arrangements
where use of participating hospitals is encouraged in exchange for a discount,
and payment limitations or negotiated rates based on community standards.
Without program changes that offer a continuum of care ranging from outpatient
to
4
<PAGE> 5
intensive inpatient services, the Company believes these changing payment
mechanisms will continue to have a negative effect on its revenues.
Employers, union trusts and other major purchasers of health care
services have become increasingly aggressive in pursuing cost containment. To
the extent that major purchasers are self-insured, they actively negotiate with
hospitals, Health Maintenance Organizations ("HMOs") and Preferred Provider
Organizations ("PPOs") for lower rates. Those major purchasers that are
insured or use a third-party administrator expect the insurer or administrator
to control claims costs. In addition, many major purchasers of health care
services are reconsidering the benefits that they provide and in many cases
reducing the level of coverage, thereby shifting more of the burden to their
employees or members. Such reductions in benefits have had a negative impact
on the Company's business.
Under the Social Security Amendments Act of 1983, a prospective payment
system ("PPS") was adopted to cover routine and ancillary operating costs of
most Medicare inpatient hospital services. Under this system, the Secretary of
the United States Department of Health and Human Services ("HHS") established
fixed payment amounts per discharge based on diagnostic-related groups
("DRG's"). In general, a hospital's payment for Medicare inpatients is limited
to the DRG rate and capital costs, regardless of the amount of services
provided to the patient or the length of the patient's hospital stay. Under
PPS, a hospital may keep any difference between its prospective payment rate
and its operating costs incurred in furnishing inpatient services, but is at
risk for any operating costs that exceed its payment rate. Qualified providers
of alcohol and drug treatment services are paid under PPS. Psychiatric
hospitals, freestanding inpatient rehabilitation facilities and outpatient
rehabilitation services are exempt from PPS. Inpatient psychiatric and
rehabilitation units within acute care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of specified federal criteria. Exempt
hospitals and exempt units within acute care hospitals are subject to
limitations on the level of cost or the permissible increase in cost subject to
reimbursement under the Medicare program, including those limitations imposed
under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). No
assurance can be given that psychiatric services will continue to be eligible
for exemption from PPS or that other regulatory or legislative changes will not
adversely affect the Company's business.
Five of the Company's facilities participate in the Medicare program.
Of these, three are currently excluded from PPS (TEFRA limits are applicable to
these facilities). Medicare utilization at those facilities participating in
the Medicare program averaged approximately 34% in fiscal 1994. The Company
does not believe that the imposition of TEFRA limits or PPS has had a material
adverse impact on its business at its freestanding facilities or that loss of
exclusion from PPS at freestanding facilities would materially impact the
Company's business. During fiscal 1994, three of the Company's facilities
reflected an increase in Medicare utilization primarily due to their partial
hospitalization programs. In addition, two of the Company's facilities' first
full year in the Medicare program was fiscal 1994.
Hospitals participating in the Medicare program are required to retain
the services of a peer review organization ("PRO"). The PRO is responsible for
determining the medical necessity, appropriateness and quality of care given
Medicare program patients. In instances where the medical necessity of an
admission or procedure is challenged by the PRO, payment may be delayed,
reduced or denied in its entirety. Amounts denied because of medical review
may not be charged to the service recipient, and are absorbed by the hospital.
In non-emergency admissions (which encompass most of the Company's admissions)
review is performed prior to the patient's arrival at the hospital. In the
event that the PRO does not approve inpatient admission, the patient may be
admitted for outpatient treatment, referred to an alternative treatment
provider or sent home. The Company believes that the existence of PROs has
reduced inpatient admissions in its facilities serving Medicare patients.
The Medicaid program is a combined federal and state program providing
coverage for low income persons. The specific services offered and
reimbursement methods vary from state to state. Less than 9% of the Company's
freestanding facility revenues are derived from the Medicaid program.
Accordingly, changes in Medicaid program reimbursement are not expected to have
a material adverse impact on the Company's business.
5
<PAGE> 6
COMPETITION AND PROMOTION
The Company's primary competitors are hospitals and hospital management
companies (both not-for-profit and investor-owned) that offer programs similar
to those of the Company. The Company has faced generally increasing
competition in the last few years. Some of the hospitals that compete with the
Company are either owned or supported by governmental agencies or are owned by
not-for-profit corporations supported by endowments and charitable
contributions enabling some of these hospitals to provide a wide range of
services regardless of cost-effectiveness.
Most patients are directed to a specific facility by their employer (or
their agent), the employer's insurance company (i.e. managed care companies), a
physician, a social services agency or another health care provider. The
Company markets its services by contracting with these referral sources. The
primary competitive factors in attracting referral sources and patients are
reputation, success record, cost and quality of care, location and scope of
services offered at a facility. The Company believes it is competitive in
factors necessary for patient attraction. The Company and its competitors also
compete to attract qualified physicians and psychiatrists and other licensed
mental health providers.
The Company maintains a public relations program designed to increase
public awareness of its treatment programs. During fiscal 1994, the Company
spent approximately $0.4 million for media advertising (television, radio and
print) in support of its freestanding operations. The forms of media used are
specifically tailored to the geographic area in which the public relations
efforts are directed.
CONTRACT OPERATIONS
CareUnit, Inc. operates contract programs for behavioral medicine
services in dedicated units of independent hospitals. The programs offered are
similar to the behavioral medicine services offered in the Company's
freestanding facilities.
Under a contract, the hospital furnishes patients with all hospital
facilities and services necessary for their generalized medical care, including
nursing, dietary and housekeeping. CareUnit, Inc. is obligated to provide a
multi-disciplinary team consisting of a physician (who serves as medical
director for the program), a program manager, a social worker, a therapist and
other appropriate supporting personnel. CareUnit, Inc. also typically provides
support in the areas of program implementation and management, staff
recruiting, continuing education, treatment team training, community education,
advertising, public relations, insurance and ongoing program quality assurance.
As a result of reimbursement changes and competitive pressures, the contractual
obligations of CareUnit, Inc. have been subject to intense evaluation. In
general, some prospective client hospitals have expressed a desire for more
control over the services provided by CareUnit, Inc. and, in response,
CareUnit, Inc. is providing a more flexible approach to contract management.
During fiscal 1994 and 1993, CareUnit, Inc. through CareInstitute, a wholly
owned non-profit subsidiary, managed two contracts for the State of Idaho.
These programs provide behavioral medicine services in a residential and
outpatient setting.
During fiscal 1994, CareUnit, Inc. continued to experience a decline in
the number of contracts and beds although three new contracts were opened. The
Company believes that the decline in the number of contracts and beds under
contract is a result of managed care intervention and reduction in available
reimbursement from third parties, which have had the effect of making CareUnit,
Inc.'s contracts less profitable to hospitals. In addition, CareUnit, Inc.
terminated one unprofitable contract during the fiscal year and four were
terminated by the contracting hospital.
Responding to market demands, CareUnit, Inc. has implemented, in the
majority of its contracts, a program of levels of care, offering a wide range
of treatment options including detoxification, inpatient, residential,
day-treatment and outpatient. As a result, inpatient occupancy rates have
declined as patients are moved to a more appropriate level of care.
6
<PAGE> 7
The following table sets forth selected operating data regarding
behavioral medicine programs managed under contract:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------
1994 1993 1992 1991 1990
----- ----- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Number of contracts at end of period (1):
Adult CareUnits (2)(3) . . . . . . . . . . . 10 12 15 21 36
Adolescent CareUnits (2) . . . . . . . . . . . 1 1 1 2 4
Adult CarePsychCenters (2) . . . . . . . . . . 3 3 3 4 6
Adolescent CarePsychCenters (2) . . . . . . . 0 0 0 0 1
Eating disorders units . . . . . . . . . . . . 1 1 2 2 2
----- ------ ------ ------- ------
Total . . . . . . . . . . . . . . . . . . . . 15(5) 17 21 29 49
===== ====== ====== ======= ======
Available beds at end of period . . . . . . . . . 236 306 479 685 1,210
Patient days served during period . . . . . . . . 34,464 51,524 92,574 151,219 358,185
Admissions . . . . . . . . . . . . . . . . . . . 3,992 5,139 7,867 11,902 23,996
Average occupied beds per contract . . . . . . . 7.3 8.3 9.9 10.6 12.9
Average occupancy rate for period (4) . . . . . . 37% 39% 42% 45% 50%
</TABLE>
- -------------
(1) Excludes contracts which have been executed but are not operational as of
the end of the period.
(2) CareUnit is the service mark under which the Company markets chemical
dependency treatment programs. CarePsychCenter is the service mark under
which the Company markets psychiatric treatment programs.
(3) Includes two state chemical dependency full-service contracts.
(4) Average occupancy rate is calculated by dividing total patient days by the
number of available bed-days during the relevant period.
(5) During fiscal 1994, CareUnit, Inc. opened 3 contracts and closed 5
contracts, 1 of which was terminated by CareUnit, Inc. and 4 by the
contracting hospitals.
SOURCES OF REVENUES
Patients are admitted to a behavioral medicine program under the
contracting hospital's standard admission policies and procedures. The
hospital submits to the patient, the patient's insurance company, or other
responsible party a bill that covers the services of the hospital. Generally,
CareUnit, Inc. receives a negotiated fee for each patient day of service
provided and in many cases also receives a fixed monthly management fee or a
percentage of net revenue. Fees paid by the hospital are subject to annual
adjustments to reflect changes in the Consumer Price Index. CareUnit, Inc. and
the hospital share the risk of nonpayment by patients based on a predetermined
percentage participation by CareUnit, Inc. in bad debts. CareUnit, Inc. may
also participate with a contracting hospital in charity care and certain
contractual allowances and discounts. Hospitals contracting for programs
generally suffer from the same reimbursement pressures as the Company's
freestanding facilities.
Management contracts are generally entered into for a period of two to
five years and thereafter are automatically renewed for successive one-year
periods unless either party gives notice of termination at least 90 days prior
to the end of such periods. Contracts are also terminable for material
defaults. A significant number of contracts are terminable by either party on
their anniversary dates.
DEVELOPMENT, COMPETITION AND PROMOTION
CareUnit, Inc. directs its development activities toward increasing the
number of management contracts with hospitals. The primary competitors of
CareUnit, Inc. are hospitals and hospital management companies that offer
programs similar to those offered by CareUnit, Inc. A major development effort
will be made in conjunction with the Company's managed care subsidiary,
AccessCare, Inc., to expand the contract operations in general hospitals and
develop the continuum of care.
PUBLISHING ACTIVITIES
Since 1976, the Company (under the name CompCare Publishers) has been
engaged in the publication, distribution and sale of books, pamphlets and
brochures generally relating to the Company's health care activities.
Literature distributed by the Company is sold to the general public and
educational institutions. Such literature is also sold to patients
participating in programs managed by the Company. The Company does not own or
operate the printing facilities used in the publication of its literature.
7
<PAGE> 8
In April 1994, certain assets and rights representing a material
portion of the publishing business were sold. CompCare Publishers is currently
operating and distributing the books and material remaining after the sale via
a distribution agreement with the buyer that expires on April 30, 1995. The
Company will determine on or before April 30, 1995 as to whether it will
liquidate the remaining assets and rights or continue to operate via a
distribution agreement. Publishing activities accounted for less than 3% of
the Company's operating revenues in fiscal 1994.
MANAGED CARE OPERATIONS
The Company has provided a managed care product since the acquisition
of AccessCare, Inc's predecessor in December 1992. AccessCare provides
managed behavioral health care and substance abuse service for employers,
HMO's, PPO's, government organizations, third party claim administrators and
other group purchasers of health care. AccessCare currently provides service
to contracted members in 29 states. The programs and services currently
offered by AccessCare include fully integrated capitated behavioral health care
services, employee assistance programs, case management/utilization review
services, provider sponsored health plan development, preferred provider
network development and management and physician advisor reviews. AccessCare
distinguishes itself from other providers by furnishing superior clinical
management systems, total quality management and supervision, mutual respect
for both providers and clients and responsive and appropriate care that
includes quality and cost effectiveness. AccessCare distinguishes itself from
the competition by being the "science-based" provider of care. AccessCare
manages its clinical service programs on proven treatment technologies and is a
leader in training its providers to use science- based efficacious treatment.
AccessCare accounted for approximately 10% of the Company's operating
revenues in fiscal 1994. AccessCare, in concert with a network of providers
(i.e., CareUnit, Inc.), will assist the Company in developing an integrated
service model to provide high quality, cost effective care.
GOVERNMENTAL REGULATION
The development and operations of health care facilities are subject to
compliance with various federal, state and local laws and regulations. Health
care facilities operated by the Company as well as by hospitals under contract
with CareUnit, Inc. must comply with the licensing requirements of federal,
state and local health agencies, with state-mandated rate control initiatives,
with state certificate of need and similar laws regulating various aspects of
the operation of health facilities (including construction of facilities and
initiation of new services), and with the requirements of municipal building
codes, health codes and local fire departments. State licensing of facilities
is a prerequisite to participation in the Medicare and Medicaid programs.
Legislative, regulatory and policy changes by governmental agencies (including
reduction of budgets for payments under the Medicare, Medicaid and other state
and federal governmental health care reimbursement programs) may impact the
Company's ability to generate revenue and the utilization of its health care
facilities.
Certain facilities operated by the Company are certified as providers
for Medicare and Medicaid services. Both the Medicare and Medicaid programs
contain specific physical plant, safety, patient care and other requirements
that must be satisfied by health care facilities in order to qualify under
those programs. The Company believes that the facilities it owns or leases are
in substantial compliance with the various Medicare and Medicaid regulatory
requirements applicable to them. The requirements for certification under
these governmental reimbursement programs are subject to change, and in order
to remain qualified for the program, it may be necessary for the Company to
effect changes from time to time in its facilities, equipment, personnel and
services.
Under the Social Security Act, the Department of Health and Human
Services ("HHS") has the authority to impose civil monetary penalties against
any participant in the Medicare program that makes claims for payment for
services that were not rendered as claimed or were rendered by a person or
entity not properly licensed under state law or other false billing practices.
The Social Security Act also contains provisions making it a felony for a
hospital to make false statements relating to claims for payments under the
Medicare program or to make false statements relating to compliance with the
Medicare conditions of participation. In addition, the making of false claims
for payment by providers participating in the Medicare program is subject to
criminal penalty under federal laws relating generally to claims for payment
made to the federal government or any agency.
Various federal and state laws regulate the relationship between
providers of health care services and physicians. These laws include the
"fraud and abuse" provisions of the Social Security Act, under which civil and
criminal penalties can be imposed upon persons who pay or receive remuneration
in return for inducement of referrals of patients who are eligible for
reimbursement under the Medicare or Medicaid programs. Violations of the law
may result in civil and
8
<PAGE> 9
criminal penalties. Civil penalties range from monetary fines that may be
levied on a per-violation basis to temporary or permanent exclusion from the
Medicare program.
The prohibitions on inducements for referrals are so broadly drafted
that they may create liability in connection with a wide variety of business
transactions and other hospital-physician relations that have been traditional
or commonplace in the health care industry. Courts, HHS and officials of the
Office of Inspector General have construed broadly the fraud and abuse
provisions of the Social Security Act concerning illegal remuneration
arrangements and, in so doing, have created uncertainty as to the legality of
numerous types of common business and financial relationships between health
care providers and practitioners. Such relationships often are created to
respond to competitive pressures.
Limiting "safe harbor" regulations define a narrow scope of practices
that will be exempted from prosecution or other enforcement action under the
illegal remuneration provisions of the fraud and abuse law. These clarifying
regulations may be followed by more aggressive enforcement of these provisions
with respect to relationships that do not fit within the specified safe harbor
rules. Activities that fall outside of the safe harbor rules include a wide
range of activities frequently engaged in between hospitals, physicians and
other third parties. These regulations identifying business practices that do
not constitute illegal remuneration do not eliminate this uncertainty, and may
cause providers and practitioners alike to abandon certain mutually beneficial
relationships. The Company does not believe that any such claims or
relationships exist with respect to the Company.
In April 1989, the Inspector General of the Department of HHS issued a
report on financial arrangements between physicians and health care businesses.
The report contained a number of recommendations, including a prohibition of
physician referrals to any facilities in which the physician has a financial
interest. Congress adopted legislation in 1989 (effective January 1992, the
"Stark Amendment"), that unless an exemption is otherwise available, prohibits
or restricts a physician from making a referral for which Medicare
reimbursement may be made to a clinical laboratory with which such physician
has a financial relationship, and prohibits such clinical laboratory from
billing for or receiving reimbursement on account of such referral. On March
11, 1992, proposed regulations implementing the Stark Amendment were issued,
but have not been adopted. The Company believes that it is in compliance with
the proposed regulations in all material respects.
Additional legislation expanding the Stark Amendment to other physician
and health care business relationships has been passed as part of the Omnibus
Reconciliation Act of 1993 ("OBRA 1993"). OBRA 1993 broadens the services
included within the referral prohibition of the Stark Amendment: a physician
having a financial relationship with an entity may not make referrals to that
entity for "designated health services," which include, in addition to clinical
laboratory services, physician therapy services; occupational therapy services;
radiology or other diagnostic services; radiation therapy services; durable
medical equipment; parenteral and enteral nutrients, equipment and supplies;
prosthetics, orthotics and prosthetic devices; home health services; outpatient
prescription drugs; and inpatient and outpatient hospital services. This law,
applicable to services covered by Medicaid as well as Medicare, takes effect
after December 31, 1994 with respect to referrals for the expanded list of
designated health services.
Numerous exceptions are allowed under the OBRA 1993 revisions to the
Stark Amendment for financial arrangements that would otherwise trigger the
referral prohibition. These provide, under certain conditions, exceptions for
relationships involving rental of office space and equipment, employment
relationships, personal service arrangements, payments unrelated to designated
services, physician recruitment and certain isolated transactions. HHS may
adopt regulations in the future which expand upon the conditions attached to
qualification for these exceptions. Certain of the Company's relationships
with physicians in its contract operations, as well as the Company's
development of relationships with physicians, will need to be structured in
compliance with the law and its exceptions, including any future regulations,
by the January 1, 1995 effective date. The Company is unable to predict at
this time what effect, if any, the expanded Stark Amendment and any future
regulations implementing its provisions, will have upon its business.
Proposals for health care reform on a national basis have been
introduced in both the House of Representatives and the Senate. The goals of
these health care proposals may include, but would not necessarily be limited
to, proposals which would impose short-term governmental price controls,
create a national health care budget limiting the amount to be spent on health
care coverage, and give federal and state governments new powers with respect
to medical fees and health insurance premiums. At this time, it is not
possible to determine the exact nature of the proposals, or their legislative
outcome, or their likely impact upon institutional providers.
In addition, several states are undertaking analysis and legislation
designed to modify the financing and delivery of health care at the state
level. A wide variety of bills and regulations are pending in several states
proposing to regulate,
9
<PAGE> 10
control or alter the financing of health care costs; however, it is not
possible at this time to predict with assurance the effect on the business of
the Company, if any, of such bills or regulatory actions.
ACCREDITATION
The Joint Commission on Accreditation of Healthcare Organizations
("JCAHO") is an independent commission that conducts voluntary accreditation
programs with the goal of improving the quality of care provided in health care
facilities. Generally, hospitals including dedicated units, long-term care
facilities and certain other health care facilities may apply for JCAHO
accreditation. If a hospital under contract with CareUnit, Inc. requests a
JCAHO survey of its entire facility, the contract program, if a psychiatric or
chemical dependency program, will be separately surveyed. After conducting
on-site surveys, JCAHO awards accreditation for up to three years to facilities
found to be in substantial compliance with JCAHO standards. Accredited
facilities are periodically resurveyed. Loss of JCAHO accreditation could
adversely affect the hospital's reputation and its ability to obtain
third-party reimbursement. All of the Company's freestanding facilities are
accredited and the hospitals under contract with CareUnit, Inc. have received
or have applied for such accreditation.
To develop standards that effectively evaluate the structure and
function of medical and quality management systems in managed care
organizations, the National Committee for Quality Assurance ("NCQA") has
developed in conjunction with the managed care industry, health care
purchasers, state regulators and consumers, an extensive review and development
process. The Standards for Accreditation of Managed Care Organizations used by
NCQA reviewers to evaluate a managed care organization address the following
areas: quality improvement, utilization management, credentialing, members'
rights and responsibilities, preventative care services guidelines and medical
records. These standards validate that a managed care organization is founded
on principals of quality and is continuously improving the clinical care and
services provided. NCQA also utilizes Health Plan Data and Information Set
("HEDIS") which is a core set of performance measurements developed to respond
to complex but simply defined employer needs as standards for patient and
customer satisfaction. AccessCare is accredited by NCQA and has adopted HEDIS.
ADMINISTRATION AND EMPLOYEES
The Company's executive and administrative offices are located in
Chesterfield, Missouri, where management controls operations, business
development, legal and accounting functions, governmental and statistical
reporting, research and treatment program evaluation.
At August 3, 1994, the Company employed approximately 32 persons in its
corporate and administrative offices, 326 persons in its freestanding
facilities, 104 persons assigned to CareUnit, Inc., 37 persons assigned to
AccessCare, Inc. and 2 persons in other operations. Many of the physicians and
psychiatrists who are the medical directors of the Company's contract units,
the psychologists serving on treatment teams and the physicians utilizing the
facilities operated by the Company are not employed by the Company and are
treated as independent contractors. The Company is in the process of reviewing
the treatment of these individuals as part of its settlement with the Internal
Revenue Service (see Note 15-- "Commitments and Contingencies"). The Company
has not encountered any work stoppages due to labor disputes with its
employees.
10
<PAGE> 11
ITEM 2. PROPERTIES.
The following table sets forth certain information regarding the
properties owned or leased by the Company at May 31, 1994:
<TABLE>
<CAPTION>
OWNED OR LEASE MONTHLY
NAME AND LOCATION LEASED(1) EXPIRES(2) RENTAL(3)
----------------- --------- ---------- ---------
<S> <C> <C> <C>
PSYCHIATRIC/CHEMICAL DEPENDENCY TREATMENT FACILITIES
CareUnit Hospital . . . . . . . . . . Owned --- ---
Fort Worth, Texas
CareUnit Hospital . . . . . . . . . . Leased 2035 $16,106(4)
Kirkland, Washington
CareUnit Facility (5) . . . . . . . . Owned --- ---
Jacksonville Beach, Florida
CareUnit Hospital . . . . . . . . . . Owned --- ---
Cincinnati, Ohio
Starting Point, Oak Avenue (6) . . . . Owned --- ---
Orangevale, California
Starting Point, Orange County . . . . Owned --- ---
Costa Mesa, California
CareUnit Facility . . . . . . . . . . Leased 1995 8,333
Grand Rapids, Michigan
CareUnit Facility (7) . . . . . . . . Owned --- ---
Orlando, Florida
Aurora Behavioral Health Hospital . . Owned --- ---
Aurora, Colorado
CareUnit Facility (8) . . . . . . . . Owned --- ---
San Diego, California
OTHER OPERATING FACILITIES
CompCare Publishers (9) . . . . . . . Leased 1997 3,009
Minneapolis, Minnesota
AccessCare, Inc.
Tampa, Florida . . . . . . . . . . Leased 1995 7,435
Las Vegas, Nevada . . . . . . . . . Leased 1995 1,997
Edgewood, Kentucky . . . . . . . . Leased 1995 392
Ft. Lauderdale, Florida . . . . . . Leased 1995 586
Tarrytown, New York . . . . . . . . Leased 1994 412
ADMINISTRATIVE FACILITIES
Corporate Headquarters . . . . . . . . Leased 1997 11,355
Chesterfield, Missouri
Regional Headquarters (9) . . . . . . Leased 1995 4,408
Newport Beach, California
Data Processing Center (10) . . . . . Leased 1997 3,882
Riverside, California
</TABLE>
- ----------------
(1) Subject to encumbrances. For information concerning the Company's
long-term debt, see Note 10 to the Company's consolidated financial
statements contained in this report.
(2) Assumes all options to renew will be exercised.
(3) All leases, other than those relating to the Company's administrative
facilities, are triple net leases under which the Company bears all costs
of operations, including insurance, taxes and utilities. The Company is
responsible for specified increases in taxes, assessments and operating
costs relating to its administrative facilities.
(4) Subject to increase every three years based upon increases in the
Consumer Price Index, not to exceed 10%.
(5) Closed February 1992. The Company intends to sell this property.
(6) Closed March 1993. The Company intends to sell this property.
(7) Closed October 1990. The Company intends to sell this property.
(8) Closed December 1989. The Company intends to sell this property.
(9) Office/operation closed; Company has sublet this property.
(10) This lease was converted to month-to-month.
11
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS.
On October 30, 1992, the Company filed a complaint in the United States
District Court for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare") seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4-92CV002194-SNL). The Company seeks relief of damages in
the lost benefit of certain stockholder appreciation rights in an amount in
excess of $3.6 million and punitive damages. On May 18, 1993, the District
Court denied a motion for summary judgement filed by RehabCare. On June 16,
1993, RehabCare filed a counterclaim seeking a declaratory judgement with
respect to the rights of both parties under the stock redemption agreement, an
injunction enjoining the Company from taking action under stock redemption or
restated shareholders agreements and damages. The Company has filed a motion
with the court to strike RehabCare's request for damages for attorney's fees
and costs on the grounds that such relief is not permitted by law nor
authorized by the agreements between the parties. This case was scheduled for
trial on May 9, 1994, but has been continued on the court's own initiative and
the new trial date has not been set. Management believes that the Company's
allegations have merit and intends to vigorously pursue this suit. Management
further believes that should RehabCare prevail at trial on its request for such
attorneys fees and costs, such fees and costs would not materially affect the
financial statements of the Company.
In connection with the proposed sale of hospitals to CMP Properties,
Inc. (see Note 5-- "Property and Equipment for Sale"), the Company advanced
$1.1 million to a former consultant which was to be returned in the event the
transaction was terminated. These advances were to be secured by the common
stock of an unrelated company. The shares of common stock pledged were
purported to be in the possession of the Company's former legal firm as
collateral for the advances, but were not provided to the Company when the
transaction was terminated. The Company is currently in litigation with the
former consultant and legal firm to recover the advances.
Other Litigation
The Company is currently undergoing a payroll tax audit by the Internal
Revenue Service ("IRS") for calendar years 1983 through 1991. The IRS agent
conducting the audit has asserted that certain physicians and psychologists and
other staff engaged as independent contractors by the Company should have been
treated as employees for payroll tax purposes. On April 8, 1991, the Company
received a proposed assessment related to this assertion claiming additional
taxes and penalties due totaling approximately $19.4 million for calendar years
1983 through 1988. The Company filed a protest with the IRS and contested the
proposed assessment with the Appeals Office of the Internal Revenue Service in
St. Louis, Missouri. The Appeals Office issued a reduced assessment in the
amount of approximately $6,300,000, plus penalties and interest of $6,500,000.
The IRS is also examining the Company's employment tax returns for the years
1989 through 1991, and the agent conducting the examination proposed the
assessment of additional taxes for those years in the approximate amount of
$1,600,000, plus penalties and interest in an undetermined amount. While
management believes the Company has strong arguments to support its treatment
of the payments to independent contractors to whom substantially all of the
assessment relates, the Company has submitted an offer in compromise to the IRS
for the calendar years 1983 through 1991 for $5 million. A reserve has been
established with respect to this matter to cover expenses the Company expects
to incur; however, there can be no assurance that such reserves are adequate
until a formal settlement is reached with the IRS. The Company and RehabCare,
in May 1991, entered into a Tax Sharing Agreement providing for the Company to
indemnify RehabCare for any claims of income or payroll taxes due for all
periods through February 28, 1991. The Company has established a reserve with
respect to covering expenses the Company expects RehabCare to incur under the
Tax Sharing Agreement.
The federal income tax returns of the Company for its fiscal years
ended 1984 and 1987 through 1991, have been examined by the IRS. The Company
has provided the IRS with satisfactory documentary support for the majority of
items questioned and those items have been deleted from the proposed assessment
and accepted as originally filed. The remaining items have been agreed to and
resulted in a disallowance of approximately $229,000 in deductions which will
be offset against the Company's net operating losses available for carryover.
The examination also included the review of the Company's claim for refund of
approximately $205,000 relating to an amended return for the fiscal year ended
May 31, 1992. During completion of the audit, the IRS noted that the Company
had received excess refunds representing its alternative minimum tax ("AMT")
liability of approximately $666,000 in 1990 and 1991 from the carry back of net
operating losses to the fiscal years ended May 31, 1988 and 1989, respectively.
On March 29, 1994, the Company agreed to the assessment of $666,000 plus
interest and received the final bill of $821,000 during the fourth quarter of
fiscal 1994. The Company has accrued for this liability, net of refunds, in
income taxes payable.
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
12
<PAGE> 13
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 7, 1994, the Board of Directors of the Company approved and
recommended to the Stockholders an amendment to the Company's Certificate of
Incorporation to effect a reverse stock split of the Company's Common Stock
proportionate to the range of two- (2) through ten- (10) for-one, while
reducing the par value of the Company's Common Stock to one (1) cent ($0.01)
per share. In addition, the number of Common Shares authorized would be
reduced to five (5) times the number of shares outstanding, reserved or
otherwise committed for future issuance but not less than 12,500,000. On May
16, 1994, the shareholders approved each proposal by written consent with the
following vote:
<TABLE>
<CAPTION>
FOR DISAPPROVE ABSTAIN
---------- ---------- -------
<S> <C> <C> <C>
1. Amendment to effect reverse stock split . . . . 18,378,536 1,219,079 106,856
2. Reduction in number of shares authorized . . . . 18,544,632 1,001,871 165,961
3. Reduction of the par value per share . . . . . . 18,455,658 1,009,317 247,489
</TABLE>
There were no broker non-votes. The reverse stock split would become effective
on any date selected by the Board of Directors occurring within nine months
after the end of the consent solicitation period (May 16, 1994). If no reverse
stock split is effected by February 16, 1995, the Board of Directors will take
action to abandon the reverse stock split. On August 25, 1994, the Board of
Directors authorized management to file an application with the New York Stock
Exchange for the reverse stock split.
EXECUTIVE OFFICERS OF THE COMPANY
CHRISS W. STREET, age 44. Mr. Street has been employed by the
Company since May 1994. Mr. Street was named interim Chief Executive Officer
on May 4, 1994 and in June 1994, he was appointed Chief Executive Officer of
the Company. Mr. Street was elected as Chairman of the Board of Directors in
November 1993. Mr. Street is founder and principal of Chriss Street & Company,
a firm specializing in investment banking, financial advisory services,
securities trading and factoring. Mr. Street commenced operations of Chriss
Street & Company in February 1992 and was Managing Director for Seidler-Amdec
Securities, Inc. from 1988 to 1992.
FRED C. FOLLMER, age 51. Mr. Follmer joined the Company as Senior Vice
President and Chief Financial Officer in January 1993. In September 1993, he
was appointed Senior Executive Vice President. In May 1994, he was named
interim Chief Operating Officer, and in June 1994, he was appointed Chief
Operating Officer of the Company. Prior to his employment with the Company,
he was a self-employed financial consultant providing services to the health
care and other industries. He was Executive Vice President of Healthcare
Services of America for a portion of 1987 and was Vice President of Hospital
Financial Operations at Charter Medical Corporation from 1978 to 1986.
KERRI RUPPERT, age 35. Ms. Ruppert has been employed by the Company
since 1988. In October 1992, she was appointed Vice President and Chief
Accounting Officer and in January 1993, she was elected Secretary of the
Company. She was Vice President and Controller from April 1990 to 1992 and
Assistant Corporate Controller from 1988 to 1990. Prior to her employment with
the Company, she served in a variety of financial management positions with
Maxicare Health Plans, Inc. from 1983 to 1988.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock is traded on the New York Stock Exchange under
the symbol CMP. The following table sets forth the range of high and low
sale prices for the Common Stock for the fiscal quarters indicated:
<TABLE>
<CAPTION>
PRICE
----------------------
FISCAL YEAR HIGH LOW
----------- ------ ------
<S> <C> <C> <C>
1993:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $1-3/4 $1-1/8
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 2 1-1/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 1-3/4 5/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 1 1/2
1994:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $1-1/8 $5/8
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 7/8 5/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 1-1/4 1/2
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 7/8 1/2
</TABLE>
(b) As of July 31, 1994, the Company had 2,174 stockholders of record.
(c) As a result of the Company's operating losses and restrictions contained
in the Company's primary loan agreement, no cash dividend was declared
during any quarter of fiscal 1994, 1993 or 1992. The Company does not
expect to resume payment of cash dividends in the foreseeable future. See
Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS".
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following tables summarize selected consolidated financial data and
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this report. Effective June 1, 1990, the
Company adopted the new accounting and reporting methods approved by the
American Institute of Certified Public Accountants ("AICPA") in its health care
industry audit guide (the "AICPA guide") dated July 15, 1990. Accordingly,
provision for losses on accounts receivable is included as an expense rather
than as a reduction of operating revenues beginning in fiscal 1991.
Reclassifications of prior year amounts have been made to conform with the
current year's presentation. See Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of recent
results of operations and liquidity.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues and gains:
Operating revenues . . . . . . . . . . . . . $34,277 $51,847 $59,969 $84,689 $163,235
Gain on sale of RehabCare stock, net . . . . --- 13,114 17,683 --- ---
Gain on Sovran settlement, net . . . . . . . --- 584 --- --- ---
Gain on reorganization agreement . . . . . . --- --- --- --- 5,000
Interest income . . . . . . . . . . . . . . . 50 69 336 531 1,093
Equity in earnings(loss) of unconsolidated
affiliates . . . . . . . . . . . . . . . . --- 384 168 (1,289) 231
Other . . . . . . . . . . . . . . . . . . . . --- --- --- --- 508
------- -------- ------- -------- --------
34,327 65,998 78,156 83,931 170,067
------- -------- ------- -------- --------
Costs and expenses:
Operating expenses . . . . . . . . . . . . . 31,875 50,924 38,810 65,362 100,437
General and administrative expenses . . . . . 5,455 5,754 12,946 21,267 61,599
Provision for doubtful accounts . . . . . . . 1,558 6,187 6,065 4,759 19,541
Depreciation and amortization . . . . . . . . 1,762 2,946 2,602 3,580 8,440
Loss on sale/write-down of assets . . . . . . --- 4,382 15,986 5,863 45,657
Interest expense . . . . . . . . . . . . . . 1,228 1,759 3,908 7,380 9,588
Other restructuring/non-recurring expenses . --- 5,452 2,152 2,819 4,407
------- -------- ------- -------- --------
41,878 77,404 82,469 111,030 249,669
------- -------- ------- -------- --------
Loss before income taxes . . . . . . . . . . . . (7,551) (11,406) (4,313) (27,099) (79,602)
Provision(benefit) for income taxes . . . . . . . 301 194 249 401 (20,294)
------- -------- ------- -------- --------
Loss before extraordinary item . . . . . . . . . (7,852) (11,600) (4,562) (27,500) (59,308)
Extraordinary item - gain on debenture
conversion . . . . . . . . . . . . . . . . . --- --- --- 11,465 ---
------- -------- ------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . $(7,852) $(11,600) $(4,562) $(16,035) $(59,308)
======= ======== ======= ======== ========
Loss per common and common
equivalent share:
Loss before extraordinary item . . . . . . . $(0.36) $(0.53) $(0.21) $(2.27) $(5.83)
Extraordinary item - gain on debenture
conversion . . . . . . . . . . . . . . . . --- --- --- .95 ---
------- -------- ------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . $(0.36) $(0.53) $(0.21) $(1.32) $(5.83)
======= ======== ======= ======== ========
Cash dividends per share . . . . . . . . . . . . $ --- $ --- $ --- $ --- $ ---
======= ======== ======= ======== ========
Weighted average common and common
equivalent shares outstanding . . . . . . . . 21,987 21,957 21,900 12,118 10,172
- -------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 31,
-------------------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- --------
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital . . . . . . . . . . . . . . . . . $ 412 $ 438 $11,901 $11,221 $ 49,832
Total assets . . . . . . . . . . . . . . . . . . 33,226 46,968 70,422 99,084 141,592
Long-term debt . . . . . . . . . . . . . . . . . 10,477 10,652 10,375 28,078 86,564
Stockholders' equity . . . . . . . . . . . . . . 5,099 12,951 24,441 28,976 20,214
</TABLE>
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In the 1970s and early 1980s the Company pioneered one of the earliest
forms of managed care by contracting with acute care hospitals to take over a
percentage of their beds and provide turn-key management of certain "disease
state" categories. The range of contract services extended from mental health
to rehabilitation to smoking cessation. This pioneering concept, which
operated under the CareUnit name, led to great financial success for the
Company as operations grew to over 250 contracts. Unfortunately, in the late
1980s and early 1990s the Company adopted a strategy to de-emphasize and sell
off most of the CareUnit contracts to support the acquisition of freestanding
behavioral health hospitals. Over the last five years, the Company has lost
over $47 million from the operations of its freestanding hospitals.
Furthermore, during this period management was unable to resolve large
potential tax claims being asserted by the Internal Revenue Service ("IRS"),
which by mid-1994 may have exceeded the value of the Company's assets. During
1994, the Company's senior management began to implement a strategy to
compromise the IRS claims on a favorable basis to the Company's shareholders
and restructure operations back to a managed care focus.
The future of the Company is to return to its contractor roots. Acute care
hospitals are facing greater pricing pressures and competition today than they
were 25 years ago, when CareUnit pioneered carving out a wing of the hospital
and providing cash flow for itself and the hospital administrator. The Company
plans to restaff CareUnit management and is attempting to recapture the
marketplace that the Company previously had abandoned. The Company also
believes that the change in the system of the managed health care industry from
paying providers on a fee-for-service basis to a fixed prepaid monthly fee
basis, referred to as capitation, and contracted rates for utilization creates
a new opportunity with powerful rewards to the health care contractor.
In 1992, the Company bought a small company in Tampa, Florida, now known as
AccessCare. AccessCare has been contracting with health maintenance
organizations ("HMO") to manage and provide all the behavioral health services
to the HMO's members. AccessCare contracts with providers on a
capitated/prepaid basis, as well as mutually agreed upon contracted rates for
specified encounters. This method of cost containment has demonstrated that
the quality of care is improved through standardization of services and volume
discounts. In addition, through case management and utilization review
procedures, providers work in collaboration with specialists in the community
to drive down the cost of providing quality services. The Company intends to
continue to build, and restructure if necessary, AccessCare to enhance its
ability to contract with HMOs and insurance companies across the United States
to manage specific "disease states" which the Company hopes to expand from
behavioral health to include AIDS, chronic pain, oncology and other maladies.
The Company's management has emphasized in its annual reports that
restructuring the Company would prove to be financially challenging. The
Company suffered losses of $7.9 million or $0.36 per share for the fiscal ended
May 31, 1994, which was comparable to the loss of approximately $11.6 million
or $0.53 per share for the previous year ended May 31, 1993. Although the
Company reflects improvement from fiscal 1994 as compared to fiscal 1993, the
Company will continue to implement its restructuring plan throughout fiscal
1995. An analysis of the successes, challenges and failures in restructuring
the balance sheet and operations follows.
Balance Sheet Restructure:
The Company has significant plans for the restructuring of its balance
sheet during fiscal 1995 including: (i) the finalization of the settlement with
the IRS compromising all outstanding IRS claims. The Company has submitted an
offer in compromise to the IRS for the calendar years 1983 through 1991 in the
amount of $5 million. Management believes that such offer will be accepted by
the IRS and expects to finalize the agreement during fiscal 1995; and (ii)
negotiating the opportunity to potentially exchange most of the Company's 7
1/2% Convertible Subordinated Debentures (the "Debentures"). Furthermore, the
Company intends to compromise or settle numerous litigation issues and
contingent liabilities during fiscal 1995. The biggest challenge facing the
Company regarding the balance sheet is the need to raise approximately $7.0
million through the sale of additional assets or the placement of equity to
meet the financial obligations anticipated to be associated with the proposed
settlement of the IRS and to eliminate the Company's obligation under the
Debentures (see Note 10-- "Long-term Debt and Short-term Borrowings").
Although, there can be no assurance that the Company will have the capital to
meet these obligations, management is having discussions regarding the sale of
properties included in current assets to meet the cash requirements of the
Company during fiscal 1995. Management also believes that it is in the best
interest of the Company to become debt free, given that major HMOs and insurers
who may want to contract with the Company are concerned about the viability of
highly leveraged vendors.
16
<PAGE> 17
Operational Restructure:
The Company's restructuring plans include the consolidation of facilities
and offices and may include the closure and relocation of functions and/or
personnel. The restructure of operations is expected to include: (i) closure
and/or consolidation of current facilities and offices including the Company's
Corporate Office in St. Louis, Missouri and the relocation of Corporate
Headquarters back to its prior home in Newport Beach, California. The
consolidation and relocation of the Corporate Headquarters are expected to
eliminate a sizable portion of ongoing corporate burden, estimated to be
approximately $1.2 million (over the remaining life of the Corporate office
lease of two and a half years) (ii) the staffing of senior management and key
marketing positions with executives that have proven health care track records;
(iii) the closure of any operating facility that is not performing or meeting
management's expectations; (iv) establishing additional contracts and products
in AccessCare that will increase capitated revenue; and (v) establishing
contracts or acquisitions that will grow and expand CareUnit. In addition, the
Company is evaluating and realigning its focus and business. Specifically,
the Company closed six hospitals and sold one hospital in fiscal 1993. The
closures of the facilities resulted in a reduction of work force from 1,223
employees at the beginning of fiscal 1993 to 501 employees as of May 31, 1994,
a 59% reduction during the two year period. Costs related to the closure of
these facilities, such as severance pay, were charged to the reserve for
restructuring. These decisions provided working capital of approximately $3.4
million and a reduction in freestanding hospitals' operating expenses of 17%
from the prior fiscal. During fiscal 1994 no freestanding hospitals were
closed, however, four of the previously closed hospitals were sold which
provided working capital of approximately $10.3 million for the year. The
freestanding hospitals' loss was reduced from $10.0 million in fiscal 1993 to
$.4 million in 1994 as a result of these decisions. It is the Company's intent
to redirect its emphasis from inpatient treatment to managed care and
outpatient treatment. A major challenge facing the Company is to increase net
revenues to offset the high expenses associated with implementing its "global
restructuring" and absorbing the corporate overhead cost associated with a
public company.
Management intends to seek to restructure several of its obligations and
commitments. Management intends that this "global restructuring" includes as
many of the following steps as possible: (I) the effectuation of a 1-for-10
reverse stock split; (ii) completion of the proposed settlement of the
Company's payroll tax audit with the IRS; (iii) restructuring of the Company's
financial obligations represented by the Company's Debentures; and (iv) an
equity capital infusion. While management believes that the steps described
in the "global restructuring" are obtainable during fiscal 1995, no assurance
can be given that all of the foregoing steps will be successfully completed.
The Company's primary use of working capital is to fund operating losses
while it seeks to restore profitability to certain of its freestanding
facilities, expand its behavioral medicine managed care business and contracts
and implement and complete the "global restructuring". Should the Company be
unable to complete the sales transactions during fiscal 1995 for the remaining
properties included in current assets, the Company's working capital may be
materially adversely affected. In addition, should the Company be unable to
improve the performance of hospital operations, the Company may be unable to
meet the terms and conditions required as part of the Company's "global
restructuring." The Company has experienced good success with the disposal of
its assets held for sale and has been able to dispose of such assets at
favorable prices and terms. The remaining properties included in current
assets are either under a letter of intent or are in active negotiation for
sale and expected to be sold in the near future. The proceeds from the sale of
assets will be utilized during fiscal 1995 to expand the Company's operations
and implement the Company's restructuring plans. Management believes that it
will complete the sales transactions required in order to meet the working
capital needs of the Company during fiscal 1995.
RESULTS OF OPERATIONS - FISCAL 1994 (COMPARED WITH FISCAL 1993)
The Company incurred a loss of approximately $7.9 million or $0.36 per
share for the fiscal year ended May 31, 1994, which was an improvement of $3.7
million or $0.17 per share more than the $11.6 million or $0.53 per share loss
incurred in the prior fiscal year. The fiscal 1994 fourth quarter loss of $4.0
million or $0.19 per share reflected an improvement from the fourth quarter of
the prior fiscal year by $0.3 million or $0.01 per share.
Results for fiscal 1993 were impacted by a gain of approximately $13.1
million recorded during the second quarter of the fiscal year as a result of
the sale by the Company of 2,300,000 shares of its formerly wholly-owned
subsidiary RehabCare. Prior to the sale the Company owned a 48% interest in
RehabCare which was accounted for on the equity method. Subsequent to the
sale, the Company no longer has an interest in RehabCare and no longer reports
a portion of RehabCare's earnings in its statement of operations. Included in
the loss for fiscal 1993 is a charge of approximately $6.7 million,
attributable to restructuring the organization, of which and $1.2 million was
reclassified as asset write-downs during the fourth quarter. In fiscal 1993,
the Company recorded pretax charges of approximately $4.4 million primarily
associated with the write-down of property and equipment held for sale. Of
this amount, $3.4 million was a result of revaluing certain under performing
assets that the Company had designated for disposition and the remaining $1.0
million was attributable to the write-down of other property and equipment to
net realizable value.
17
<PAGE> 18
Operating revenues declined $17.6 million or 34% from fiscal 1993,
primarily as the result of the closure of four facilities during fiscal 1993,
the sale of a fifth facility and the decline in both admissions and length of
stay.
Operating expenses decreased by approximately $19.0 million or 37%,
primarily as a result of the closure of four facilities during fiscal 1993 and
the sale of a fifth. General and administrative expenses declined by
approximately $0.3 million or 5% in fiscal 1994 primarily as a result of
management's continued effort to reduce corporate overhead expenses. Interest
expense was reduced by $0.5 million or 30%, primarily as the result of the pay
down of senior secured debt by approximately $1.9 million with the proceeds of
asset sales. In addition, general and administrative expenses reflect a credit
of $0.8 million for fiscal 1993. This credit is the result of the reduction of
provisions for general and administrative expenses.
Equity in the earnings of unconsolidated affiliates was approximately
$0.4 million during fiscal 1993. No equity in the earnings of unconsolidated
affiliates was included in the Company's financial statements for fiscal 1994
(see Note 7-- "Investments in Unconsolidated Affiliates").
The Financial Accounting Standards Board ("FASB") has issued Statement
No. 109, "Accounting for Income Taxes". Effective June 1, 1993, the Company
adopted Statement No. 109 which changed the Company's method of accounting for
income taxes from the deferred method to the asset and liability method. The
change to Statement No. 109 had no cumulative effect on the financial
statements of the Company.
Freestanding Operations
Admissions in fiscal 1994 declined overall by 3,131 to 3,916 from 7,047
in fiscal 1993, an overall decline of 44%. Of this decline, 2,843 fewer
admissions were attributable to facilities which were closed or under contract
to be sold as of May 31, 1994. The remaining facilities ("same store", i.e.,
those operational during both fiscal years) experienced a 7% decrease in
admissions and a 11% decline in length of stay to 10.0 days, resulting in 21%
fewer patient days than the prior fiscal year. The decrease in "same store"
patient days was primarily due to Aurora Behavioral Health Hospital which
experienced a 16% decrease in admissions and a 53% decline in length of stay
which resulted in 60% fewer patient days in fiscal 1994 compared to the prior
fiscal year. This decline was primarily attributable to the termination during
fiscal 1993 of an acute psychiatric program specializing in dissociative
disorders. Patients in the dissociative disorder program traditionally have a
higher acuity requiring additional care and a longer length of stay. The
following table sets forth selected quarterly utilization data on a "same
store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
-----------------------------------------------------------------------------
Fiscal 1994 Fiscal 1993
------------------------------------ ------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
----- ----- ----- ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Admissions . . . . . . . . 1,011 955 996 954 1,019 914 1,058 1,213
Average length of stay . . 10 9.9 9.9 10 10.1 10.2 11.8 12.0
Patient days . . . . . . . 9,792 9,409 9,897 9,587 10,277 9,348 12,524 14,582
Average occupancy rate . . 30% 30% 31% 30% 32% 30% 40% 46%
</TABLE>
Overall operating revenue per patient day increased by 20% to $618 in
fiscal 1994 from fiscal 1993 and overall patient days declined 53% to 38,685,
resulting in a decrease of approximately $18.0 million, or 43%, in operating
revenues. In addition to the decrease caused by the sale and/or closure of
hospitals, the Company believes that the increasing role of HMOs, reduced
benefits from employers and indemnity companies, a greater number of
competitive beds and a shifting to outpatient programs are responsible for this
decline in patient days. In response to these factors the Company accelerated
the development of effective, lower cost outpatient, day care, and partial
hospitalization programs in conjunction with its freestanding facilities, and
shifted its marketing activities toward developing relationships and contracts
with managed care and other organizations which pay for or broker such
services.
18
<PAGE> 19
The following table illustrates the revenues in outpatient and day care
programs offered by the freestanding facilities on a "same store" basis:
<TABLE>
<CAPTION>
Net Outpatient/Day care Revenues
------------------------------------------------------------------------------
(Dollars in thousands)
Fiscal 1994 Fiscal 1993
------------------------------------- ------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ------ ------ ------ ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Facilities offering . . . . 6 6 6 6 6 6 6 6
Net outpatient/day care
revenues . . . . . . . . $3,115 $2,546 $2,111 $1,965 $1,500 $988 $1,195 $1,539
% of total "same store"
net operating revenues . 48% 43% 37% 35% 29% 21% 17% 18%
</TABLE>
The Company recorded no asset write-downs during fiscal 1994 and $4.4
million in asset write-downs during fiscal 1993 primarily related to the
recognition of losses on facilities to be sold and revaluation of facilities
designated for disposition. These amounts include the estimated future
operating losses, selling costs and carrying costs of such facilities until
disposition at an assumed future point in time. To the extent that actual
costs and time required to dispose of the facilities differ from these
estimates, adjustments to the amount written- down may be required. Future
operating losses and carrying costs of such facilities will be charged back
directly to the carrying value of the respective assets held for sale. Because
chemical dependency treatment facilities are special purpose structures, their
resale value is negatively affected by the oversupply of beds resulting from
the diminished demand for inpatient treatment currently being experienced
throughout the industry. In the first quarter of 1993, one facility previously
designated for disposition was redesignated as continuing due to improved
operating performance. In the second quarter of fiscal 1993, eight facilities
previously designated for disposition were redesignated as continuing
operations. These facilities were redesignated upon the termination of the
sale/leaseback of properties to CMP Properties, Inc., a wholly-owned subsidiary
(see Note 5-- "Property and Equipment Held for Sale"). In the fourth quarter
of fiscal 1993, the Company closed four facilities which were listed for sale
and sold another one. Additionally, three facilities closed in the fourth
quarter of 1993, were sold during fiscal 1994. The Company currently has four
facilities listed for sale, of which one was closed in fiscal 1993, and the
other three in prior fiscal years. These facilities have been designated for
disposition because of their weak market positions relative to competitors and
limited prospects for generating an acceptable return on investment as an
operating property. The Company will continue to evaluate the performance of
all of these facilities in their respective markets, and, if circumstances
warrant, may increase or reduce the number of facilities designated for
disposition.
Contract Operations
During fiscal 1994, patient days of service under CareUnit, Inc.
contracts declined by approximately 33% from 51,524 patient days to 34,464
patient days. This decline is attributable to the 5 units which were closed
during fiscal 1994, a decline in length of stay and managed care intervention.
Of the units closed, 1 contract was terminated by CareUnit, Inc. for poor
operating performance. The remaining 4 closures were terminated by the
contracting hospitals upon expiration of their term. The Company believes that
these non-renewals were influenced primarily by increased competition and
changes in reimbursement patterns by third-party payers. During fiscal 1994,
CareUnit, Inc. opened 3 new contracts.
The following table sets forth quarterly utilization data on a "same
store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
------------------------------------------------------------------------------
Fiscal 1994 Fiscal 1993
------------------------------------ -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Admissions . . . . . . . . 713 630 644 645 598 636 629 588
Average length of stay . . 7.8 6.9 7.4 7.6 7.7 8.0 8.9 8.7
Patient days . . . . . . . 5,733 4,955 5,375 5,591 5,697 5,856 6,426 6,439
Average occupancy rate . . 40% 36% 38% 39% 40% 42% 46% 45%
</TABLE>
Units which were operational for both fiscal years experienced a 7%
increase in admissions which combined with the decrease in length of stay
resulted in an 11% decline in utilization to 21,654 patient days. Since
average net revenue per patient day at these units increased by $19, net
inpatient operating revenues increased by 10% to $2.1 million. An additional
$0.6 million was generated by units closed during the fiscal year. Outpatient
revenues increased 11% in fiscal 1994.
19
<PAGE> 20
The following table illustrates the revenues in outpatient and day care
programs offered by eight contract units on a "same store" basis:
<TABLE>
<CAPTION>
Net Outpatient/Day care Revenues
----------------------------------------------------------------------------
(Dollars in thousands)
Fiscal 1994 Fiscal 1993
---------------------------------- ----------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
---- ----- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Facilities offering . . . . 8 8 8 8 8 8 8 8
Net outpatient/day care
revenues . . . . . . . . $178 $160 $135 $153 $175 $146 $146 $134
% of total "same store"
net operating revenues . 13% 13% 10% 10% 10% 11% 9% 8%
</TABLE>
For units operational in both fiscal years, operating expenses
decreased less than 1%, which, combined with the increase in inpatient and
outpatient operating revenues, caused operating income at the unit level to
increase 10% from fiscal 1993. Consequently, overall unit operating income
increased to $0.8 million in fiscal 1994 from $0.7 million in fiscal 1993.
Managed Care Operations
During fiscal 1994, the number of covered lives increased by 33%. This
increase is attributable to new contracts added during fiscal 1994. AccessCare
distinguishes itself from its competition by being the "science-based" provider
of care and manages all clinical programs based upon proven treatment
technologies.
In fiscal 1994, operating revenue increased 191% from fiscal 1993 due
to the fact that fiscal 1993 consisted of only five months. In addition,
AccessCare is a start-up venture and is in its growth stage. Operating
expenses increased 134% in fiscal 1994 also as a result that fiscal 1993
consisted of only five months and the expenses related to AccessCare's
expansion and development. Although AccessCare experienced an increase in
operating revenue during fiscal 1994, it was more than offset by the increase
in total operating expenses resulting in an increase in AccessCare's net
operating loss of 70% or $0.7 million from fiscal 1993.
RESULTS OF OPERATIONS - FISCAL 1993 (COMPARED WITH FISCAL 1992)
The Company incurred a loss of approximately $11.6 million or $0.53 per
share for the fiscal year ended May 31, 1993, which was a loss of $7.0 million
or $0.32 per share more than the $4.6 million or $0.21 per share loss incurred
in the prior fiscal year. The fiscal 1993 fourth quarter loss of $4.3 million
or $0.20 per share reflected a deterioration from the fourth quarter of the
prior fiscal year by $5.0 million or $0.23 per share.
Results for fiscal 1993 were impacted by a gain of approximately $13.1
million recorded during the second quarter of the fiscal year as a result of
the sale by the Company of 2,300,000 shares of its formerly wholly-owned
subsidiary RehabCare. Prior to the sale the Company owned a 48% interest in
RehabCare which was accounted for on the equity method. Subsequent to the
sale, the Company no longer has an interest in RehabCare and no longer reports
a portion of RehabCare's earnings in its statement of operations. Included in
the loss for fiscal 1993 is a charge of approximately $5.5 million,
attributable to restructuring the organization, of which and $1.2 million was
reclassified as asset write-downs during the fourth quarter. In fiscal 1993,
the Company recorded pretax charges of approximately $4.4 million primarily
associated with the write-down of property and equipment held for sale. Of
this amount, $3.4 million was a result of revaluing certain under performing
assets that the Company had designated for disposition and the remaining $1.0
million was attributable to the write-down of other property and equipment to
net realizable value. During fiscal 1992, the Company recorded pretax charges
of approximately $16.0 million primarily associated with the write-down of
property and equipment held for sale. Of this amount, approximately $9.3
million was a result of revaluing certain under performing assets that the
Company had designated for disposition. The remaining $6.7 million was
attributable to the write-down to net realizable value of certain hospitals.
Operating revenues declined $8.1 million or 14% from fiscal 1992,
primarily as the result of the closure of four facilities during fiscal 1993,
sale of a fifth facility, the decline in both admissions and length of stay and
the redesignation of facilities as continuing operations.
20
<PAGE> 21
Operating expenses increased by approximately $12.1 million or 31%,
primarily as a result of the redesignation of facilities as continuing
operations, the expenses incurred in the development of psychiatric services at
the company's freestanding facilities and the start- up costs associated with
the development of its behavioral medicine managed care business. General and
administrative expenses declined by approximately $7.2 million or 56% in fiscal
1993 primarily as a result of management's continued effort to reduce corporate
overhead expenses. Interest expense was reduced by $2.1 million or 55%,
primarily as the result of the pay down of senior secured debt by approximately
$11.8 million with the proceeds of asset sales, the lowering of the prime
interest rate, and the reduction of interest expense attributable to the
Financial Security Plan (see Note 13-- "Employee Benefit Plans").
Equity in the earnings of unconsolidated affiliates improved by
approximately $.2 million during fiscal 1993, primarily as a result of the
termination of a joint venture from which the company reported losses of $1.1
million in fiscal 1992 (see Note 7-- "Investments in Unconsolidated
Affiliates").
LIQUIDITY AND CAPITAL RESOURCES
The Company's current assets at May 31, 1994 amounted to approximately
$15.1 million and current liabilities were approximately $14.7 million,
resulting in working capital of approximately $0.4 million and a current ratio
of 1:1. Included in current assets are four hospital facilities designated as
property and equipment held for sale with a total carrying value of $6.9
million.
During fiscal 1994, the Company paid off its senior secured creditors
and as a result, the Company had no senior secured debt at May 31, 1994.
Management intends to seek to restructure several of its obligations
and commitments. Management intends that this "global restructuring" includes
as many of the following steps as possible: (I) the effectuation of a 1-for-10
reverse stock split; (ii) completion of the proposed settlement of the
Company's payroll tax audit with the IRS; (iii) restructuring of the Company's
financial obligations represented by the Company's Debentures; and (iv) an
equity capital infusion. While management believes that the steps described in
the "global restructuring" are obtainable, no assurance can be given that all
of the foregoing steps will be successfully completed.
The Company's primary use of working capital is to fund operating
losses while it seeks to restore profitability to certain of its freestanding
facilities, expand its behavioral medicine managed care business and contracts
and implement and complete the "global restructuring". Should the Company be
unable to complete the sales transactions during fiscal 1995 for the remaining
properties included in current assets, the Company's working capital would be
adversely affected in a material manner. In addition, should the Company be
unable to improve the performance of its freestanding hospital operations, the
Company may be unable to meet the terms and conditions required as part of the
Company's "global restructuring.". The Company has experienced good success
with the disposal of its assets held for sale and has been able to dispose of
such assets at favorable prices and terms. The remaining properties included
in current assets are either under a letter of intent or are in active
negotiation for sale and expected to be sold in the near future. The proceeds
from the sale of assets will be utilized during the fiscal to fund and expand
the Company's operations and implement the Company's restructuring plans.
Management believes that it will complete the sales transactions required in
order to meet the working capital needs of the Company.
Based upon the Company's current level of business operations and upon
the Company's current cash flow from operations combined with current cash on
hand of $1.8 million, the Company expects to be able to meet the obligations
required by operations during fiscal 1995. The cash needs of the Company may
vary from month to month depending upon the actual level of business activity.
This activity has been projected based upon actual performance during fiscal
1994, and known contract and cyclical changes to project fiscal 1995.
The Company estimates expenses or obligations reflecting extraordinary
expenses; (i.e., the IRS settlement payment proposed at $5 million), and
inflows; (i.e., equity infusions, legal settlements), which will assist the
Company to meet certain obligations and provide for working capital. Other
inflows expected by the Company during the next fiscal year are the proceeds
from the sale of assets currently held for sale. The Company assumes that it
will sell its facilities held as current assets and projects the gross proceeds
from such sales to be approximately $7.0 million. The Company intends to
utilize such proceeds to meet the working capital needs of the Company while it
seeks to expand its behavioral medicine managed care and contracts businesses
and complete its restructuring plans. In addition to the proposed settlement
with the IRS, proceeds will be utilized to meet the Company's obligation with
the Debenture Holders (see Note 10-- "Long-Term Debt and Short-Term
Borrowings"). The above is subject to variation due to unforeseen business and
economic influences outside the Company's control.
21
<PAGE> 22
In prior years, 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 underutilized assets.
Many of the Company's inpatient facilities have been sold or are in the process
of being closed or sold. In previous years, the Company was obligated to
support and fund freestanding facilities with negative cash flow. As a result,
in the future, the Company will no longer be obligated with the cash flow
requirements associated with such facilities.
During fiscal 1995, the Company intends to restructure its debt service
which is primarily the Company's obligation under the Debentures. Such relief
may be contingent upon the Company's ability to file certain registration
statements with the Securities and Exchange Commission and to raise capital
which may be required under the terms of any agreement with the holders of the
Company's debentures. The elimination of such debt service will decrease the
Company's future cash flow requirements
22
<PAGE> 23
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, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets, May 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Operations, Years Ended May 31, 1994, 1993 and 1992 . . . . . . . . . . 24
Consolidated Statements of Stockholders' Equity, Years Ended May 31, 1994, 1993 and 1992 . . . . . 25
Consolidated Statements of Cash Flows, Years Ended May 31, 1994, 1993 and 1992 . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Financial Statement Schedules:
V. Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
VI. Accumulated Depreciation and Amortization of Property and Equipment . . . . . . . . . . . . . 47
X. Supplementary Statements of Operations Information . . . . . . . . . . . . . . . . . . . . . . 48
</TABLE>
23
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Comprehensive Care Corporation:
We have audited the accompanying consolidated balance sheets of
Comprehensive Care Corporation (a Delaware corporation) and subsidiaries as of
May 31, 1994 and 1993, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These
consolidated financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Comprehensive Care
Corporation and subsidiaries as of May 31, 1994 and 1993, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As further discussed in Note 15, the Company is negotiating a settlement
with the Internal Revenue Service (IRS) regarding assessments of payroll taxes.
Management believes that adequate reserves have been provided for the
additional taxes to be assessed by the IRS. There can be no assurance,
however, that such reserves will be sufficient until a formal settlement is
reached.
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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules V, VI
and X for the years ended May 31, 1994 and 1993, are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri
August 22, 1994
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Comprehensive Care Corporation:
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Comprehensive Care Corporation and subsidiaries (the
"Company") for the year ended May 31, 1992. In connection with our audit of
the consolidated financial statements, we also have audited the related
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and related financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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's operations and their cash flows for the year ended May 31, 1992,
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussed in Note 15 to the consolidated financial statements, the
Company is currently undergoing a payroll tax audit by the Internal Revenue
Service ("IRS") for calendar years 1983 through 1991. The IRS asserted that
certain physicians and psychologists engaged as independent contractors by the
Company should have been treated as employees for payroll tax purposes and has
issued an assessment claiming additional taxes due on that basis. Management
believes that its treatment of the independent contractors is consistent with
IRS guidelines and established industry practice. Management has filed a
protest to the assessment and intends to defend vigorously the claims made by
the IRS related to this issue. Also, as discussed in Note 15 to the
consolidated financial statements, on August 15, 1991 the Company, along with
others, were named in a stockholder complaint filed in District Court related
to the terminated reorganization with First Hospital Corporation. Management
intends to defend vigorously the claims related to this issue. The ultimate
outcome of these matters cannot presently be determined. Accordingly, no
provision for any liability that may result upon resolution of these matters
has been recognized in the accompanying consolidated financial statements.
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 incurred
significant recurring losses and has a substantial portion of its senior
secured debt due on November 15, 1992. The potential need for additional
financing to repay debt as it comes due and finance the Company's anticipated
working capital requirements during fiscal 1993 raises 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 consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
August 27, 1992
25
<PAGE> 26
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
-------------------------
1994 1993
-------- --------
A S S E T S (DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 1,781 $ 1,126
Accounts and notes receivable, less allowance for
doubtful accounts of $1,574 and $2,489 . . . . . . . . . . . . 5,848 7,702
Property and equipment held for sale . . . . . . . . . . . . . . 6,939 8,254
Other current assets . . . . . . . . . . . . . . . . . . . . . . 508 1,896
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 15,076 18,978
-------- --------
Property and equipment, at cost . . . . . . . . . . . . . . . . . . . 29,326 31,432
Less accumulated depreciation and amortization . . . . . . . . . . . (13,338) (13,229)
-------- --------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . 15,988 18,203
-------- --------
Property and equipment held for sale . . . . . . . . . . . . . . . . --- 7,098
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,162 2,689
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,226 $ 46,968
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . . $ 13,776 $ 15,737
Current maturities of long-term debt . . . . . . . . . . . . . . 154 2,137
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 734 666
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 14,664 18,540
-------- --------
Long-term debt, excluding current maturities . . . . . . . . . . . . 10,477 10,652
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,986 4,825
Commitments and contingencies (see Note 15)
Stockholders' equity:
Preferred stock, $50.00 par value; authorized 60,000 shares . . . --- ---
Common stock, $.10 par value; authorized 30,000,000 shares;
issued and outstanding 21,986,916 shares . . . . . . . . . . . 2,199 2,199
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 37,883 37,883
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (34,983) (27,131)
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 5,099 12,951
-------- --------
Total liabilities and stockholders' equity . . . . . . . . . . . . . $ 33,226 $ 46,968
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------
1994 1993 1992
------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues and gains:
Operating revenues . . . . . . . . . . . . . . . . . $34,277 $ 51,847 $59,969
Gain on sale of RehabCare stock, net . . . . . . . . --- 13,114 17,683
Gain on Sovran settlement, net . . . . . . . . . . . --- 584 ---
Interest income . . . . . . . . . . . . . . . . . . . 50 69 336
Equity in earnings of unconsolidated affiliates . . . --- 384 168
------- -------- -------
34,327 65,998 78,156
------- -------- -------
Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . . 31,875 50,924 38,810
General and administrative expenses . . . . . . . . . 5,455 5,754 12,946
Provision for doubtful accounts . . . . . . . . . . . 1,558 6,187 6,065
Depreciation and amortization . . . . . . . . . . . . 1,762 2,946 2,602
Loss on sale/write-down of assets . . . . . . . . . . --- 4,382 15,986
Interest expense . . . . . . . . . . . . . . . . . . 1,228 1,759 3,908
Other restructuring/nonrecurring expenses . . . . . . --- 5,452 2,152
------- -------- -------
41,878 77,404 82,469
------- -------- -------
Loss before income taxes . . . . . . . . . . . . . . . . (7,551) (11,406) (4,313)
Provision for income taxes . . . . . . . . . . . . . . . 301 194 249
------- -------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(7,852) $(11,600) $(4,562)
======= ======== =======
Net loss per share . . . . . . . . . . . . . . . . . . . $(0.36) $(0.53) $(0.21)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 28
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCK STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT EQUITY
------ ------ ---------- ----------- -------- ------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1991 . . . . . 21,921 $2,192 $38,743 $(10,969) (80) $(990) $28,976
Net loss . . . . . . . . . --- --- --- (4,562) --- --- (4,562)
Shares issued from
treasury stock . . . . --- --- (597) --- 49 602 5
Retirement of treasury stock (31) (3) (385) --- 31 388 ---
Exercise of stock options . 17 2 20 --- --- --- 22
------- ------ ------- -------- ------- ------- -------
Balance, May 31, 1992 . . . . . 21,907 2,191 37,781 (15,531) --- --- 24,441
Net loss . . . . . . . . . --- --- --- (11,600) --- --- (11,600)
Exercise of stock options . 40 4 46 --- --- --- 50
Issuance of shares for the
purchase of Mental
Health Programs, Inc. 40 4 56 --- --- --- 60
------- ------ ------- -------- -------- -------- -------
Balance, May 31, 1993 . . . . . 21,987 2,199 37,883 (27,131) --- --- 12,951
Net loss . . . . . . . . . --- --- --- (7,852) --- --- (7,852)
------- ------ ------- -------- -------- -------- -------
Balance, May 31, 1994 . . . . . 21,987 $2,199 $37,883 $(34,983) --- $ --- $ 5,099
======= ====== ======= ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 29
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1994 1993 1992
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,852) $(11,600) $ (4,562)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 1,762 2,946 2,602
Provision for doubtful accounts . . . . . . . . . . . . . . . 1,558 6,187 6,065
Gain on sale of RehabCare stock, net . . . . . . . . . . . . . --- (13,114) (17,683)
Gain on Sovran settlement, net . . . . . . . . . . . . . . . . --- (584) ---
Loss on sale/write-down of assets . . . . . . . . . . . . . . 36 4,382 15,986
Carrying costs incurred on property and equipment
held for sale . . . . . . . . . . . . . . . . . . . . . . . (1,241) (1,330) (4,487)
Other restructuring/non-recurring expenses . . . . . . . . . . --- 5,452 ---
Equity in earnings of unconsolidated affiliates . . . . . . . --- (384) (168)
Decrease in refundable income taxes . . . . . . . . . . . . . --- --- 4,650
Decrease(increase) in accounts and notes receivable . . . . . 452 2,542 (3,554)
Decrease in accounts payable and accrued liabilities . . . . . (2,762) (4,927) (1,719)
Increase in income taxes payable . . . . . . . . . . . . . . . 68 --- ---
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 818 278 (6,759)
------- -------- --------
Net cash used in operating activities . . . . . . . . . . . (7,161) (10,152) (9,629)
------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment
(operating and held for sale) . . . . . . . . . . . . . . . 10,357 3,489 4,700
Proceeds from the sale of RehabCare stock . . . . . . . . . . --- 18,825 20,553
Proceeds from Sovran settlement, net . . . . . . . . . . . . . --- 584 ---
Additions to property and equipment, net . . . . . . . . . . . (383) (474) (726)
Purchase of operating entity . . . . . . . . . . . . . . . . . --- (75) (750)
Distributions from joint ventures . . . . . . . . . . . . . . --- --- 50
------- -------- --------
Net cash provided by investing activities . . . . . . . . . 9,974 22,349 23,827
------- -------- --------
Cash flows from financing activities:
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . (2,158) (11,835) (17,071)
Bank and other (repayments)borrowing . . . . . . . . . . . . . --- (1,266) 1,266
Exercise of stock options . . . . . . . . . . . . . . . . . . --- 50 22
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 5
------- -------- --------
Net cash used in financing activities . . . . . . . . . . . (2,158) (13,051) (15,778)
------- -------- --------
Net increase(decrease) in cash and cash equivalents . . . . . . . 655 (854) (1,580)
Cash and cash equivalents at beginning of year . . . . . . . . . 1,126 1,980 3,560
------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . $ 1,781 $ 1,126 $ 1,980
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,302 $ 2,050 $ 4,237
======= ======== ========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 233 $ 338 $ 135
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 30
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of
Comprehensive Care Corporation (the "Company") and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company's consolidated financial statements are presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
continuation of the Company's business is dependent upon the resolution of
operating and short-term liquidity problems (see Note 2-- "Operating Losses
and Liquidity").
Revenue Recognition
Approximately 66%, 88% and 91% of the Company's operating revenues were
received from private sources in fiscal 1994, 1993 and 1992, 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.
Property and Equipment
Depreciation and amortization of property and equipment are computed on
the straight-line method over the estimated useful lives of the related assets,
principally: buildings and improvements -- 5 to 40 years; furniture and
equipment -- 3 to 12 years; leasehold improvements -- life of lease or life of
asset, whichever is less. Property and equipment is carried at estimated net
realizable value.
Property and Equipment Held for Sale
Property and equipment held for sale represents net assets of certain
freestanding facilities and other properties that the Company intends to sell,
and is carried at estimated net realizable value.
Property and equipment held for sale, which are expected to be sold in
the next fiscal year, are shown as current assets on the consolidated balance
sheets. Gains and losses on facilities sold have been reflected in the
statement of operations. Any impairments to the net realizable value of
property and equipment held for sale have also been recorded in the statement
of operations.
Intangible Assets
Intangible assets include costs in excess of fair value of net assets
of businesses purchased (goodwill), licenses, and similar rights. Costs in
excess of net assets purchased are amortized over 20 to 25 years. The costs of
other intangible assets are amortized over the period of benefit. The amounts
in the consolidated balance sheets are net of accumulated amortization of
goodwill of $652,000 and $536,000 at May 31, 1994 and 1993, respectively.
30
<PAGE> 31
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
Deferred Contract Costs
The Company has entered into contracts with independent general
hospitals whereby it will provide services in excess of the standard agreement.
In recognition of the hospitals' long-term commitment, the Company has paid
certain amounts to them. These amounts may be used by the hospitals for
capital improvements or as otherwise determined by the hospital. The Company
is entitled to a prorata refund in the event that the hospital terminates the
contract before its scheduled termination date; accordingly, these amounts are
charged to expense over the life of the contract.
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less. Such investments
are deemed to be cash equivalents for purposes of the consolidated statements
of cash flows. Included in cash are short-term investments of $1,294,000 and
$228,000 at May 31, 1994 and 1993, 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% of the Company's operating revenues for fiscal 1994 and 1993.
Loss Per Share
Primary and fully diluted loss per common and common equivalent share
have been computed by dividing net loss by the weighted average number of
common shares outstanding during the period. During fiscal 1994, 1993 and
1992, the convertible subordinated debentures had an antidilutive impact on
loss per share and, accordingly, were excluded from the computation.
The weighted average number of common and common equivalent shares used
to calculate loss per share was 21,987,000, 21,957,000 and 21,900,000 for the
years ended May 31, 1994, 1993 and 1992, respectively.
31
<PAGE> 32
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
NOTE 2-- OPERATING LOSSES AND LIQUIDITY
The Company incurred losses before income taxes totaling approximately
$7.6 million for the year ended May 31, 1994, which was principally a result of
poor utilization of its freestanding facilities and behavioral medicine
contracts and the development and expansion of its behavioral medicine managed
care business.
In response to these continuing losses, the Company has taken steps to
bring expenses in line with revenues by reducing staff, closure and disposition
of various freestanding facilities and other cost cutting measures.
Specifically, the Company closed six hospitals and sold one hospital in fiscal
1993. The closures of the facilities resulted in a reduction of work force
from 1,223 employees at the beginning of fiscal 1993 to 501 employees as of May
31, 1994, a 59% reduction during the two year period. Costs related to the
closure of these facilities, such as severance pay, were charged to the reserve
for restructuring. Implementation of the closures provided working capital of
approximately $3.4 million and a reduction in freestanding hospitals' operating
expenses of 17% from the prior fiscal year. During fiscal 1994, no
freestanding hospitals were closed, however, four of the previously closed
hospitals were sold which provided working capital of approximately $10.3
million. The freestanding hospitals' loss was reduced from $10.0 million in
fiscal 1993 to $0.4 million in 1994 as a result of these decisions. If
utilization at particular facilities continues to deteriorate such that
anticipated reductions in operating losses are not achieved, those facilities
will also be considered for closure and disposition.
The Company recorded $1.0 million in asset write-downs during fiscal
1994 and $4.4 million in asset write-downs during fiscal 1993, of which $1.0
million were asset write-downs related to the recognition of losses on
facilities to be sold and $3.4 million for the revaluation of facilities
designated for disposition. These amounts include the estimated future
operating losses, selling costs and carrying costs of such facilities until
disposition at an assumed future point in time. To the extent that actual
costs and time required to dispose of the facilities differ from these
estimates, adjustments to the amount written-down may be required. Future
operating losses and carrying costs of such facilities will be charged back
directly to the carrying value of the respective assets held for sale. Because
chemical dependency treatment facilities are special purpose structures, their
resale value is negatively affected by the oversupply of beds resulting from
the diminished demand for inpatient treatment currently being experienced
throughout the industry. In the second quarter of 1993, the Company
redesignated various facilities as continuing operations and in the fourth
quarter of 1993, closed four facilities, incurring significant operating
losses. During fiscal 1994, none of the Company's remaining six operating
facilities were designated for disposition.
The Company's current assets at May 31, 1994, amounted to approximately
$15.1 million and current liabilities were approximately $14.7 million,
resulting in working capital of approximately $0.4 million and a current ratio
of 1:1. Included in current assets are four hospital facilities and two other
properties designated as property and equipment held for sale with a total
carrying value of $6.9 million. The Company sold three facilities during
fiscal 1994 and is seeking to sell the remaining facilities and properties
during fiscal 1995. Should the Company be unable to complete the sale
transactions during fiscal 1995, the Company's working capital would be
materially adversely affected. The Company's primary use of working capital is
to fund operating losses while it seeks to restore profitability to certain of
its freestanding facilities and expand its behavioral medicine managed care
business.
32
<PAGE> 33
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
The Company's restructuring plans include the consolidation of
facilities and offices and may include the closure and relocation of functions
and/or personnel. The restructure of operations is expected to include: (I)
closure and/or consolidation of current facilities and offices including the
Company's Corporate Office in St. Louis, Missouri and the relocation of
Corporate Headquarters back to its prior home in Newport Beach, California.
The consolidation and relocation of the Corporate Headquarters is expected to
eliminate a sizable portion of ongoing corporate burden, estimated to be
approximately $1.2 million (over the remaining life of the Corporate office
lease of two and a half years) (ii) the staffing of senior management and key
marketing positions with executives that have proven health care track records;
(iii) the closure of any operating facility that is not performing or meeting
management's expectations; (iv) establishing additional contracts and products
in AccessCare that will increase capitated revenue; and (v) establishing
contracts or acquisitions that will grow and expand CareUnit. In addition, the
Company is evaluating and realigning its focus and business. It is the
Company's intent to redirect its emphasis from inpatient treatment to managed
care and outpatient treatment. A major challenge facing the Company is to
increase net revenues to offset the high expenses associated with implementing
its "global restructuring" and absorbing the corporate overhead cost associated
with a public company.
Management intends to seek to restructure several of its obligations
and commitments. Management intends that this "global restructuring" includes
as many of the following steps as possible: (I) the effectuation of a 1-for-10
reverse stock split; (ii) completion of the proposed settlement of the
Company's payroll tax audit with the IRS; (iii) restructuring of the Company's
financial obligations represented by the Company's Debentures and (iv) an
equity capital infusion. No assurance can be given that all of the foregoing
steps will be successfully completed. The material components of the remaining
liability as of May 31, 1994 includes severance, facility consolidation and
relocation of operations, legal and tax settlements. Sources of funding are
from the collections of patient and host hospital accounts receivable,
capitation payments, existing cash on hand and the sale of assets as identified
in the consolidated statements of cash flows.
The Company's primary use of working capital is to fund operating
losses while it seeks to restore profitability to certain of its freestanding
facilities, expand its behavioral medicine managed care business and contracts
and implement and complete the "global restructuring.". Should the Company be
unable to complete the sales transactions for the remaining properties included
in current assets, the Company's working capital would be materially adversely
affected. In addition, should the Company be unable to improve the performance
of hospital operations, the Company may be unable to meet the terms and
conditions required as part of the Company's "global restructuring.". The
Company has experienced success with the disposal of its assets held for sale
and has been able to dispose of such assets at favorable prices and terms. The
remaining properties included in current assets are either under a letter of
intent or are in active negotiation for sale and expected to be sold during
fiscal 1995. The proceeds from the sale of assets will be utilized during
fiscal 1995 to fund and expand the Company's operations and implement the
Company's restructuring plans. Management believes that it will complete the
sales transactions required in order to meet the working capital needs of the
Company during fiscal 1995.
Based upon the Company's current level of business operations and upon
the Company's current cash flow from operations combined with current cash on
hand of approximately $1.8 million, the Company expects to be able to meet the
obligations required by operations during fiscal 1995. The cash needs of the
Company may vary slightly from month to month depending upon the actual level
of business activity. This activity has been projected utilizing actual
performance during fiscal 1994 and implementing known contract and cyclical
changes to project fiscal 1995. The Company can estimate reasonable levels of
cash requirements and reasonable levels of revenue for the next fiscal year.
The Company can also project expenses and revenue of an extraordinary nature;
i.e., the IRS settlement payments, and any other known one-time, non- recurring
income items; i.e., equity infusions, legal settlements during the year which
will assist the Company to meet certain obligations and provide for working
capital. The above is subject to variation due to unforeseen business and
economic influences outside the Company's control.
Other inflows expected by the Company during the next fiscal year are
the proceeds from the sale of assets currently held for sale. The Company
assumes that it will sell its facilities held as current assets and projects
the gross proceeds from such sales to be approximately $7.0 million. The
Company intends to utilize such proceeds to meet the working capital
33
<PAGE> 34
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
needs of the Company while it seeks to expand its behavioral medicine managed
care and contracts businesses and complete its restructuring plans. In
addition, proceeds will be utilized to meet the Company's obligations under the
Debentures (see Note 10-- "Long-Term Debt and Short- Term Borrowings").
In prior years, the Company established a restructuring reserve. 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
underutilized assets. Many of the Company's inpatient facilities have been
sold or are in the process of being closed or sold. In previous years, the
Company was obligated to support and fund freestanding facilities with
operations that resulted in negative cash flow. Many of these facilities have
been closed and/or sold. As a result, in the future, the Company will no
longer be obligated with the cash flow requirements associated with such
facilities.
During fiscal 1995, the Company intends to seek relief of its debt
service which is the Company's obligation under the Debentures. Such relief
may be contingent upon the Company's ability to file certain registration
statements with the Securities and Exchange Commission and to raise capital
which may be required under the terms of any agreement with the holders of the
Company's debentures. The elimination of such debt service will decrease the
Company's monthly cash flow requirements in the future.
NOTE 3-- ACQUISITIONS AND DISPOSITIONS
On July 3, 1991, RehabCare, a wholly-owned subsidiary of the Company as
of May 31, 1991, and the Company completed an initial public offering of
2,500,000 shares of RehabCare common stock. Of the total shares sold to the
public, 1,700,000 shares were sold by the Company and 800,000 shares were new
shares issued by RehabCare. Net proceeds to the Company totaled approximately
$20.6 million, of which approximately $11.3 million was used to pay a portion
of the Company's senior secured debt. A gain of approximately $18 million on
the sale of the RehabCare shares was recorded in the Company's consolidated
statement of operations for the first quarter of fiscal 1992. The Company's
remaining 48% interest (2,300,000 shares) in RehabCare was accounted for on the
equity method (see Note 7-- "Investments in Unconsolidated Affiliates"). The
Company sold its remaining 48% interest in RehabCare to RehabCare during fiscal
1993 and a gain of approximately $13.1 million was recorded in the Company's
consolidated statement of operations for the second quarter of 1993. Net
proceeds to the Company totaled $18.8 million which were used for the pay down
of a portion of senior secured debt, short-term borrowings, and to fund working
capital.
In November 1991, the Company sold its CareUnit Hospital of Orange
which closed in February 1991. In February 1992, the Company sold its
long-term care facility in Tustin, California as an operating facility.
In December 1992, the Company purchased Mental Health Programs, Inc.
based in Tampa, Florida, from the former owner. The Company has changed the
name to AccessCare, Inc. The terms of the purchase included a payment of
$75,000, issuance of 40,000 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 July 1993, the
Company terminated the employment agreement and is currently in litigation with
the former owner. In connection with this acquisition, the Company recorded
goodwill of approximately $829,000.
In October 1992, the Company's wholly-owned subsidiary, Starting Point,
Inc., entered into a joint operating agreement with Century HealthCare of
California to manage Newport Harbor Psychiatric Hospital, a 68-bed adolescent
psychiatric facility and Starting Point, Orange County, a 70-bed adult
psychiatric facility. The Company has an 80% interest in this venture. This
agreement was mutually dissolved on February 28, 1993. A pretax loss of
approximately $0.1 million and $1.1 million, net of minority interest, was
included in the consolidated financial statements for the years ended May 31,
1994 and 1993, respectively.
34
<PAGE> 35
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
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 will be
used for working capital purposes.
NOTE 4-- ACCOUNTS AND NOTES RECEIVABLE
There were no current notes receivable as of May 31, 1994. Current
notes receivable were $215,000 at May 31, 1993. The following table summarizes
changes in the Company's allowance for doubtful accounts for the years ended
May 31, 1994 and 1993 and the allowance for doubtful accounts and contractual
adjustments for the year ended May 31, 1992:
<TABLE>
<CAPTION>
ADDITIONS CHARGED TO
--------------------
BALANCE AT RESERVE FOR WRITE-OFF BALANCE AT
BEGINNING CLOSED OF END OF
OF YEAR EXPENSE FACILITIES RECOVERIES ACCOUNTS YEAR
---------- ------- ---------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Year ended May 31, 1994 . . . $2,489 $3,841 $ --- $(2,283) $(2,473) $ 1,574
Year ended May 31, 1993 . . . 4,137 9,379 --- (3,192) (7,835) 2,489
Year ended May 31, 1992 . . . 8,714 6,065 2,777 3,815 (10,489) 10,882
</TABLE>
The summary table for fiscal years 1994 and 1993 presents the
rollforward of the allowance for doubtful accounts. Fiscal 1992 presents the
allowance for doubtful accounts and contractual allowances. The effect of this
change of presentation in this table represents, approximately, $6.7 million in
contractual adjustments that are not included in the beginning balance at
June 1, 1992. During fiscal 1993, the Company's freestanding facilities fully
implemented their 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. For fiscal
1994 and 1993, any recoveries are reflected on the Company's consolidated
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 21%, 24% and 20% of total receivables, for the years ended May 31,
1994, 1993 and 1992, respectively.
NOTE 5-- PROPERTY AND EQUIPMENT HELD FOR SALE
The Company has decided to dispose of certain freestanding
facilities and other assets (see Note 2-- "Operating Losses and Liquidity").
Property and equipment held for sale, consisting of land, building, equipment
and other fixed assets with an historical net book value of approximately $23.3
million and $38.2 million at May 31, 1994 and 1993, respectively, is carried at
estimated net realizable value of approximately $6.9 million and $15.4 million
at May 31, 1994 and 1993, respectively. In fiscal 1993 and 1992, aggregate
losses were recorded totaling approximately $3.7 million and $15.2 million,
respectively, to reflect these assets at estimated net realizable value and
are included in loss on sale/write-down of assets in the consolidated
statements of operations. Operating revenues and operating expenses of the
facilities designated for disposition were approximately $0.1 million and $1.3
million, respectively, for the year ended May 31, 1994, and $0.8 million and
$2.1 million, respectively, for the year ended May 31, 1993. In fiscal 1994,
the Company determined that one operating facility had an impairment to its net
realizable value and was reduced by $1.0 million.
35
<PAGE> 36
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
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,
-----------------------------------
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . $15,352 $ 35,568 $ 21,496
Designation of facilities as property and equipment held for sale --- 10,977 29,456
Carrying costs incurred during phase-out period . . . . . . . . . 1,241 1,330 4,487
Carrying value of assets sold . . . . . . . . . . . . . . . . . . (7,981) --- (4,700)
Contingencies for properties sold . . . . . . . . . . . . . . . . (848) --- ---
Loss on sale/write-down of facilities . . . . . . . . . . . . . . (825) (3,670) (15,171)
Redesignation of facilities as continuing operations . . . . . . --- (28,853) ---
------- -------- --------
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,939 $ 15,352 $ 35,568
======= ======== ========
</TABLE>
Contingencies for properties sold represent unresolved liabilities at the
time of sale. Proceeds from the sale of property were $9.8 million for fiscal
1994 and $4.7 million for fiscal 1992. There were no property sales during
fiscal 1993. The loss on sale/write-down of property and equipment held for
sale and its operating properties are being reflected in the Company's
consolidated statement of operations and consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Write-down of properties held for sale
to net realizable value . . . . . . . . . . . . . $ (825) $(3,670) $(15,171)
Gain on properties held for sale . . . . . . . . . . . 1,825 --- ---
------- ------- --------
1,000 (3,670) (15,171)
------- ------- --------
Write-down of operating properties . . . . . . . . . . (1,000) --- ---
Loss on sale of operating properties . . . . . . . . . --- (712) (815)
------- ------- --------
(1,000) (712) (815)
------- ------- --------
Loss on sale/write-down of assets . . . . . . . . . . . $ --- $(4,382) $(15,986)
======= ======= ========
</TABLE>
Property and equipment held for sale at May 31, 1992 included certain
hospitals which were proposed for inclusion in sale/leaseback transactions and
were carried at estimated net realizable value totaling $27.8 million. In
early fiscal 1993, the Company had expected to sell certain freestanding
facilities to CMP Properties, Inc. and lease them back. The facilities
expected to be sold and leased back were carried at estimated net realizable
value which had been reduced for estimated selling costs for these facilities.
On October 28, 1992, the board of directors of the Company terminated its plans
for the public offering of shares of common stock of its wholly owned
subsidiary CMP Properties, Inc. As a result, the proposed sale of hospitals to
CMP Properties subject to leaseback to the Company was not completed, and the
properties which were to be part of the transaction and were designated as
assets held for sale were reclassified during the second quarter as property
and equipment. In connection with this proposed transaction, the Company
advanced $1.1 million to a former consultant which was to be returned in the
event the transaction was terminated. These advances were to be secured by the
common stock of an unrelated company and were classified as accounts receivable
at May 31, 1993. The shares of common stock pledged were purported to be in
the possession of the Company's former legal counsel as collateral for the
advances, but were not provided to the Company when the transaction was
terminated. The Company is currently in litigation with the former consultant
and legal firm to recover the advances and has no receivable recorded as of May
31, 1994.
36
<PAGE> 37
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
NOTE 6-- PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
-----------------------
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and improvements . . . . . . . . . . . . . . . . . . . . . . $ 4,063 $ 4,117
Buildings and improvements . . . . . . . . . . . . . . . . . . . 18,192 19,209
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . 4,817 5,866
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . 1,365 1,364
Capitalized leases . . . . . . . . . . . . . . . . . . . . . . . 889 876
------- -------
$29,326 $31,432
======= =======
</TABLE>
Included in property and equipment are write-downs to net realizable
value totaling $4,631,700 and $3,490,000 as of May 31, 1994 and 1993,
respectively. The loss on sale of property and equipment for the years ended
May 31, 1994 and 1993 were $0 and $712,000 respectively, and are reflected on
the Company's consolidated statement of operations.
NOTE 7-- INVESTMENTS IN UNCONSOLIDATED AFFILIATES
NeuroAffiliates
The Company has a 50% interest in a joint venture partnership with
another corporation for the purpose of operating two hospitals. Under the
terms of the joint venture agreement, the Company managed Crossroads Hospital
and its partner managed Woodview-Calabasas Hospital. Each of the partners in
the joint venture received a management fee for the hospital it managed. The
Company is currently in negotiation to dissolve this joint venture retroactive
to December 1991. The Company retained the hospital it managed and its partner
retained the other. The results of operations of the hospital retained have
been included in the consolidated financial statements beginning January 1,
1992. Crossroads Hospital continued to be managed by the Company although it
was closed in August 1992, and was subleased through the remaining term of the
lease which expired in September 1993. Woodview-Calabasas Hospital continues
to be managed by its joint-venture partner although it was closed in April
1993. Effective January 1, 1992, the Company no longer reported the results of
operations for the NeuroAffiliates joint venture as an investment in
unconsolidated affiliates.
Golden Valley Health Center
The Company has a 50% interest in a joint venture agreement with a
subsidiary of HealthOne Corporation (formerly The Health Central System). The
joint venture owned and operated Golden Valley Health Center, a behavioral
medicine facility located in a suburb of Minneapolis, Minnesota. This facility
was sold to GVHC, Inc., an unrelated entity, during fiscal 1989. The terms of
the sale included the joint venture holding a promissory note from the
purchaser of the facility for $2.5 million. The Company serves as managing
partner of the joint venture which holds a promissory note from the purchaser
of the facility in the amount of $2.5 million. The purchaser was forced into
receivership in January 1992 and was dissolved during fiscal 1994. The Company
did not receive any proceeds from this dissolution. In fiscal 1991, the
Company recorded its respective loss as a result of the uncollectability of the
promissory note. The Company is in the process of dissolving this legal
entity; however, there are no longer any transactions or results of operations
to report.
37
<PAGE> 38
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
RehabCare Corporation
On July 3, 1991, RehabCare Corporation ("RehabCare"), a wholly-owned
subsidiary of the Company as of May 31, 1991, and the Company completed an
initial public offering of 2,500,000 shares of RehabCare common stock. Of the
shares sold to the public, 1,700,000 shares were sold by the Company and
800,000 shares were new stock issued by RehabCare. Net proceeds to the Company
totaled approximately $20.6 million, of which approximately $11.3 million was
used to pay a portion of the Company's senior secured debt. A gain of
approximately $18.0 million on the sale of the RehabCare shares was recorded in
the Company's consolidated statement of operations for the first quarter of
fiscal 1992. The Company's remaining 48% interest (2,300,000 shares) in
RehabCare was accounted for on the equity method. The Company sold its
remaining 48% interest in RehabCare to RehabCare during fiscal 1993 and a gain
of approximately $13.1 million was recorded in the Company's consolidated
statement of operations for the second quarter of 1993. Net proceeds to the
Company totaled $18.8 million which were used for the pay down of a portion of
senior secured debt, short-term borrowings, and to fund working capital. As of
May 31, 1993, the Company no longer had any interest in the outstanding common
stock of RehabCare. Earnings under the equity method related to the Company's
ownership in RehabCare amounted to $384,000 and $1,224,000 for the years ended
May 31, 1993 and 1992, respectively. Carrying value, cost and market value of
the Company's remaining investment in RehabCare was $4.0, $3.1 and $19.6
million, respectively, at May 31, 1992. The condensed combined operating
results of affiliates for fiscal 1993 and 1992 include the results of RehabCare
subsequent to July 3, 1991 through the sale of the Company's remaining interest
in November 1992. The Company no longer reports any investment in RehabCare.
Summary of Unconsolidated Affiliates
The Company reported its interest in these affiliates on the equity
method. Due to the termination of operations and/or dissolution of the above
joint ventures, the condensed consolidated assets and liabilities of these
affiliates are zero for fiscal 1993 and 1994. The condensed combined operating
results of affiliates are as follows:
38
<PAGE> 39
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $11,928 $47,854
Costs and expenses:
Operating, general and administrative . . . . . . . . . . . --- 10,536 45,500
Depreciation and amortization . . . . . . . . . . . . . . . --- 148 559
------- ------- -------
--- 10,684 46,059
------- ------- -------
Earnings before income taxes . . . . . . . . . . . . . . . . . --- 1,244 1,795
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . --- 443 1,360
------- ------- -------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ 801 $ 435
======= ======= =======
</TABLE>
NOTE 8-- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
----------------------
1994 1993
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Intangible assets, net . . . . . . . . . . . . . . . . . . . . $1,762 $1,877
Deferred contract costs, net . . . . . . . . . . . . . . . . . 81 142
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 670
------ ------
$2,162 $2,689
====== ======
</TABLE>
NOTE 9-- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
----------------------
1994 1993
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities . . . . . . . . . . . $8,183 $8,974
Accrued restructuring/ non-recurring expenses . . . . . . . 1,228 2,642
Accrued salaries and wages . . . . . . . . . . . . . . . . . . 1,140 1,527
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . 576 628
Accrued legal . . . . . . . . . . . . . . . . . . . . . . . . . 353 234
Payable to third-party intermediaries . . . . . . . . . . . . . 1,751 852
Deferred compensation and severance . . . . . . . . . . . . . . 545 880
------- -------
$13,776 $15,737
======= =======
</TABLE>
A reserve for restructuring was established in fiscal 1993 for the purpose
of implementing management's plan for the "global restructuring" of the
Company. The following presents the amounts expensed and paid during fiscal
1994 and 1993:
39
<PAGE> 40
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
As of May 31,
----------------------
1994 1993
------ -------
(Dollars in thousands)
<S> <C> <C>
Beginning balance . . . . . . . . . . . . . . . . . . . . . . $2,642 $ ---
Restructuring/ non-recurring expense . . . . . . . . . . . . --- 5,452
Less:
Cash items . . . . . . . . . . . . . . . . . . . . . . . . 1,377 1,460
Non-cash items . . . . . . . . . . . . . . . . . . . . . . 37 ---
Reclassification to other non-current liabilities. . . . . . --- 1,350
------ ------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,228 $2,642
====== ======
</TABLE>
Severance payments of $0.2 million and $0.6 million paid in fiscal 1994 and
1993, respectively, were the result of the closure and relocation of six
freestanding facilities as part of the Company's "global restructuring" plan.
This restructuring resulted in the termination of 53 employees during fiscal
1994 and 669 employees during fiscal 1993.
NOTE 10-- LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------
1994 1993
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Senior secured debt:
Senior secured notes, bearing interest at 11.4%, payable
semiannually, maturing in 1995 (b)(c) . . . . . . . . . . . $ --- $ 1,944
------- -------
--- 1,944
9% to 10% notes, payable in monthly installments with maturity
dates through 1995, collateralized by real and personal
property having a net book value of $4,886 . . . . . . . . . . 41 96
7.5% convertible subordinated debentures due 2010 (a) . . . . . . . 9,538 9,538
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . 740 780
Bank debt, interest and principal payable in monthly installments
maturing in August 1997, collateralized by the trust of the
former owner (d) . . . . . . . . . . . . . . . . . . . . . . . 312 408
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 23
------- -------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . 10,631 12,789
Less current maturities of long-term debt . . . . . . . . . . . . . 154 2,137
------- -------
Long-term debt, excluding current maturities . . . . . . . . . . . $10,477 $10,652
======= =======
</TABLE>
As of May 31, 1994, aggregate annual maturities of long-term debt for
the next five years (in accordance with stated maturities of the respective
loan agreements) are approximately $154,000 in 1995, $614,000 in 1996, $578,000
in 1997, $488,000 in 1998 and $449,000 in 1999.
In March 1992, to fund operations, the Company obtained approximately
$1.3 million in short-term borrowings secured by accounts and notes receivable
of CareUnit, Inc., bearing interest at 12% per annum, and due August 31, 1992.
The Company paid the principal and interest with the proceeds from the sale of
RehabCare stock.
40
<PAGE> 41
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
The Company had no revolving loan or short-term borrowings during
fiscal 1994. The maximum amount outstanding on the revolving loan and
short-term borrowings was approximately $4.2 million during the years ended May
31, 1993 and 1992. The average amount outstanding of such borrowings, based
upon an average of month-end balances for periods when the Company had such
debt outstanding, was $2.2 million and $3.2 million during the years ended May
31, 1993 and 1992, respectively. Weighted average interest rates for
short-term borrowings were 7.54% and 8.63% for the years ended May 31, 1993 and
1992, respectively.
(a) In April 1985, the Company issued $46 million in convertible
subordinated debentures. These debentures require that the Company make
semi-annual interest payments in April and October at an interest rate of 7.5%.
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 $25.97 per share,
subject to adjustment in certain events. The debentures are also redeemable at
the option of the Company in certain circumstances. Mandatory annual sinking
fund payments sufficient to retire 5% of the aggregate principal amount of the
debentures are required to be made on each April 15 commencing in April 1996 to
and including April 15, 2009. 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.
(b) In July 1988, the Company and two subsidiaries of the Company
issued $20 million in senior secured notes to a group of insurance companies.
The notes were originally secured by three of the Company's freestanding
facilities. See also note (C) below. Performance of the subsidiaries'
obligations under the notes is guaranteed by the Company. The notes originally
provided for the payment of interest at a fixed rate of 10.5% per annum. The
notes require principal payments in five equal annual installments beginning on
August 1, 1991, the first of which was prepaid in July 1990. Interest on the
unpaid balance was payable semi-annually commencing February 1, 1989. From May
1990 to July 1992, the Company entered into several amendments to the trust
indenture which changed certain restrictive covenants, collateral provisions,
maturity dates and interest rates. The Company paid $5.5 million and $1.3
million with the proceeds of the sale of RehabCare stock on September 30, 1992
and November 13, 1992, respectively. The remaining balance at May 31, 1993
totaled $1.9 million, of which $0.6 million was paid on July 1, 1993, $0.6
million was paid on August 1, 1993 and the remaining balance was paid on
October 1, 1993.
(c) On May 3, 1990, the Company entered into a Collateral Trust
Agreement for the benefit of the holders of the Company's senior secured debt,
that is, the banks, the insurance companies and the revenue bondholder. Under
this agreement, substantially all the Company's assets not previously pledged
were pledged as additional collateral to secure the senior indebtedness.
Substantially all the proceeds resulting from a sale of any of the pledged
assets was used to repay senior indebtedness.
(d) On December 30, 1992, the Company assumed approximately $456,000
in bank debt with the purchase of Mental Health Programs, Inc. (see Note 3--
"Acquisition and Dispositions"). The note is secured and guaranteed by the
trust of the former owner of Mental Health Programs, Inc. The release of
collateral and guarantee are contingent upon continued employment of the former
owner with the Company. The note is payable at $8,000 per month with the
balance due on August 31, 1997. Interest is at prime plus 1.5%.
NOTE 11-- LEASE COMMITMENTS
The Company leases certain facilities, furniture and equipment. The
facility leases contain escalation clauses based on the Consumer Price Index
and provisions for payment of real estate taxes, insurance, maintenance and
repair expenses. Total rental expenses for all operating leases are as
follows:
41
<PAGE> 42
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------
1994 1993 1992
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals . . . . . . . . . . . . . . . . . . . . . . $1,342 $1,257 $1,393
Contingent rentals . . . . . . . . . . . . . . . . . . . . --- 15 59
------ ------ ------
Total rentals . . . . . . . . . . . . . . . . . . . . . . . $1,342 $1,272 $1,452
====== ====== ======
</TABLE>
Assets under capital leases are capitalized using interest rates
appropriate at the inception of each lease; contingent rents associated with
capital leases in fiscal 1994, 1993 and 1992 were $61,000, $60,000 and $60,000,
respectively. The net book value of capital leases at May 31, 1994 and 1993
was $567,000 and $580,000, respectively.
Future minimum payments, by year and in the aggregate, under capital
leases and noncancellable operating leases with initial or remaining terms of
one year or more consist of the following at May 31, 1994:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 167 $ 719
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 359
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 263
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 7
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 ---
Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . 902 ---
------ ------
Total minimum lease payments . . . . . . . . . . . . . . . . . . . $1,603 $1,348
======
Less amounts representing interest . . . . . . . . . . . . . . . . 863
------
Present value of net minimum lease payments . . . . . . . . . . . $ 740
======
</TABLE>
NOTE 12-- INCOME TAXES
Provision for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $--- $--- $139
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 194 110
---- ---- ----
$301 $194 $249
==== ==== ====
</TABLE>
A reconciliation between benefit from income taxes and the amount
computed by applying the statutory Federal income tax rate (34%) to loss before
income taxes is as follows:
42
<PAGE> 43
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Benefit from income taxes at the statutory tax rate . . . . . . . . $(2,567) $(3,878) $(1,466)
State income taxes, net of federal tax benefit . . . . . . . . . . 199 128 73
Amortization of intangible assets . . . . . . . . . . . . . . . . . 38 30 23
Tax effect of net operating loss . . . . . . . . . . . . . . . . . 2,607 3,888 1,459
Alternative minimum tax expense in excess of regular
tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 139
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 26 21
------- ------- -------
$ 301 $ 194 $ 249
======= ======= =======
</TABLE>
Deferred income taxes represent the tax effect related to recording
revenue and expense items that are reported in different years for financial
reporting purposes and income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are comprised of the following as
of May 31, 1994 (dollars in thousands):
<TABLE>
<S> <C>
Deferred Tax Assets:
Net operating loss carry forward . . . . . . . . . . $ 14,968
Restructuring/non-recurring costs . . . . . . . . . . 9,418
Bad debt expense . . . . . . . . . . . . . . . . . . 568
Employee benefits and options . . . . . . . . . . . . 663
Other, net . . . . . . . . . . . . . . . . . . . . . 2,185
--------
Total Deferred Tax Assets . . . . . . . . . . . 27,802
Valuation Allowance . . . . . . . . . . . . . . . . . (24,404)
--------
Net Deferred Tax Assets . . . . . . . . . . . . 3,398
--------
Deferred Tax Liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . (2,929)
Cash to accrual differences . . . . . . . . . . . . . (469)
--------
Total Deferred Tax Liabilities . . . . . . . . . (3,398)
--------
Net Deferred Tax Assets . . . . . . . . . . . . . . . . . $ ---
========
</TABLE>
The Company is subject to alternative minimum tax ("AMT") at a 20% rate
on alternative minimum taxable income which is determined by making statutory
adjustments to the Company's regular taxable income. Net operating loss carry
forwards may be used to offset only 90% of the Company's alternative minimum
taxable income. The Company expensed federal income tax of $139,000 in 1992
and this amount is expected to be offset against another federal income tax
liability relating to an AMT liability on earlier years (see Note 15--
"Commitments and Contingencies"). The Company will be allowed a credit
carryover of $666,000 against regular tax in the event that regular tax
expense exceeds the alternative minimum tax expense (see Note 15-- "Commitments
and Contingencies").
At May 31, 1994, the Company has net operating loss carry forwards of
approximately $67 million for financial reporting purposes. For tax purposes,
the Company has operating loss carry forwards of approximately $39 million
which expire in 2006 through 2009. All benefits from recoverable Federal
income taxes paid in prior years (tax carry backs) were recognized as of May
31, 1990. No further tax carry backs are available.
43
<PAGE> 44
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
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 payout 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, 1994 reflects the present value of
the obligation to the participants under the plan of $924,000.
The Company has a 401(k) Plan, which is a defined contribution plan
qualified under Section 401(k) of the Internal Revenue Code, for the benefit of
its eligible employees. All full-time and part-time employees who have
attained the age of 21 and have completed six consecutive months of employment
are eligible to participate in the plan. Effective June 1, 1994, eligibility
was modified to one year of employment and a minimum of twenty (20) regular
scheduled hours per week. Each participant may contribute from 2% to 15% of
his or her compensation to the plan subject to limitations on the highly
compensated employees to ensure the plan is non-discriminatory. The Company
made approximately $20,000 and $9,000 in contributions to the Plan in fiscal
1994 and 1993, respectively. The Company did not make any matching
contributions to the plan in fiscal 1992.
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 subject to options are 1,500,000 and 400,000 for the ISOs and
nonstatutory options, respectively. The following table sets forth the
activity related to ISOs for the years ended May 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE PER
SHARES SHARE AGGREGATE
--------- ------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, May 31, 1991 . . . . . . . . . . . . . . . . . . . . . 432,500 $1.25-3.00 $ 800
Options exercised in fiscal 1992 . . . . . . . . . . . . . (17,334) $1.25 (22)
Options canceled in fiscal 1992 . . . . . . . . . . . . . . (42,500) $2.125 (90)
Options issued or regranted in fiscal 1992 . . . . . . . . 492,500 $2.125-3.38 1,057
Options forfeited in fiscal 1992 . . . . . . . . . . . . . (100,000) $1.25-3.00 (283)
-------- ------
Balance, May 31, 1992 . . . . . . . . . . . . . . . . . . . . . 765,166 $1.25-3.38 $1,462
Options forfeited in fiscal 1993 . . . . . . . . . . . . . (130,000) $1.25-3.38 (283)
-------- ------
Balance, May 31, 1993 . . . . . . . . . . . . . . . . . . . . . 635,166 $1.25-3.00 $1,179
Options forfeited in fiscal 1994 . . . . . . . . . . . . . (467,500) $1.25-3.00 (830)
-------- ------
Balance, May 31, 1994 . . . . . . . . . . . . . . . . . . . . . 167,666 $1.25-3.00 $ 349
======== ======
</TABLE>
44
<PAGE> 45
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
Options under the 1988 Plans to purchase 126,009 shares and 464,123
shares were exercisable as of May 31, 1994 and 1993, respectively.
The following table sets forth the activity related to nonstatutory
options for the years ended May 31, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE PER
SHARE SHARE AGGREGATE
--------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, May 31, 1991 . . . . . . . . . . . . . . . . . . . . . 200,000 $1.25 $ 250
Options issued or regranted in fiscal 1992 . . . . . . . . 120,000 $1.25 150
-------- -----
Balance, May 31, 1992 . . . . . . . . . . . . . . . . . . . . . 320,000 $1.25 $ 400
Options exercised in fiscal 1993 . . . . . . . . . . . . . (40,000) $1.25 (50)
-------- -----
Balance, May 31, 1993 . . . . . . . . . . . . . . . . . . . . . 280,000 $1.25 $ 350
Options forfeited in fiscal 1994 . . . . . . . . . . . . . (120,000) $1.25 (150)
-------- -----
Balance, May 31, 1994 . . . . . . . . . . . . . . . . . . . . . 160,000 $1.25 $ 200
======== =====
</TABLE>
Nonstatutory options to purchase 160,000 and 280,000 shares were exercisable as
of May 31, 1994 and 1993, respectively.
The per share exercise price of options issued under the plans is
determined by the Board of Directors, but in no event is the option exercise
price so determined less than the then fair market value (as defined in the
plans) of the shares at the date of grant. In the case of an ISO, if, on the
date of the grant of such option, the optionee is a restricted stockholder (as
defined in the plans), the option exercise price cannot be less than 110% of
the fair market value of the shares on the date of the grant.
Options vest and become exercisable at such times and in such
installments as the Board of Directors provides for in the individual option
agreement, except that an option granted to a director may not be exercised
until the expiration of one year from the date such option is granted. Subject
to the limitation with respect to the vesting of options granted to directors,
the Board of Directors may in its sole discretion accelerate the time at which
an option or installment thereof may be exercised.
In July 1992, options not under any plan were issued to the former Vice
Chairman. Options for 1,000,000 shares were granted at an exercise price
ranging from $1.50 to $3.00. These options were exercisable 25 percent at
grant date and each year thereafter. Options for 250,000 shares are currently
exercisable at $1.50 and expire in February 1995. The remaining 750,000
options were forfeited. 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 100,000 shares were granted at
an exercise price ranging from $1.50 to $3.00. 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, and as a result, the 100,000
options were forfeited. In February 1993, options not under any plan were
issued to the Company's Chief Financial Officer. Options for 500,000 shares
were granted at an exercise price ranging from $1.00 to $2.00. These options
become exercisable 25 percent after one year from the grant date and each year
thereafter.
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 $30 per share, subject to certain anti-dilution adjustments. The
Rights are not exercisable and are transferable only with the common stock
until the earlier of ten days following a public announcement that a person has
acquired ownership of 25% or more of the Company's common stock or the
commencement or announcement of a tender or exchange offer, the consummation of
which would result in the ownership by a person of 30% or more of the Company's
common stock. In the
45
<PAGE> 46
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
event that a person acquires 25% or more of the Company's common stock or if
the Company is the surviving corporation in a merger and its common stock is
not changed or exchanged, each holder of a Right, other than the 25%
stockholder (whose Rights will be void), will thereafter have the right to
receive on exercise that number of shares of common stock having a market value
of two times the exercise price of the Right. If the Company is acquired in a
merger or more than 50% of its assets are sold, proper provision shall be made
so that each Right holder shall have the right to receive or exercise, at the
then current exercise price of the Right, that number of shares of common stock
of the acquiring company that at the time of the transaction would have a
market value of two times the exercise price of the Right. The Rights are
redeemable at a price of $.02 per Right at any time prior to ten days after a
person has acquired 25% or more of the Company's common stock.
NOTE 15-- COMMITMENTS AND CONTINGENCIES
On October 30, 1992, the Company filed a complaint in the United States
District Court for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare") seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4-92CV002194-SNL). The Company seeks relief of damages in
the lost benefit of certain stockholder appreciation rights in an amount in
excess of $3.6 million and punitive damages. On May 18, 1993, the District
Court denied a motion for summary judgement filed by RehabCare. On June 16,
1993, RehabCare filed a counterclaim seeking a declaratory judgement with
respect to the rights of both parties under the stock redemption agreement, an
injunction enjoining the Company from taking action under stock redemption or
restated shareholders agreements and damages. The Company has filed a motion
with the court to strike RehabCare's request for damages for attorney's fees
and costs on the grounds that such relief is not permitted by law nor
authorized by the agreements between the parties. This case was scheduled for
trial on May 9, 1994, but has been continued on the court's own initiative and
the new trial date has not been set. Management believes that the Company's
allegations have merit and intends to vigorously pursue this suit. Management
further believes that should RehabCare prevail at trial on its request for such
attorneys fees and costs, such fees and costs would not materially affect the
financial statements of the Company.
In connection with the proposed sale of hospitals to CMP Properties,
Inc. (see Note 5-- "Property and Equipment for Sale"), the Company advanced
$1.1 million to a former consultant which was to be returned in the event the
transaction was terminated. These advances were to be secured by the common
stock of an unrelated company. The shares of common stock pledged were
purported to be in the possession of the Company's former legal firm as
collateral for the advances, but were not provided to the Company when the
transaction was terminated. The Company is currently in litigation with the
former consultant and legal firm to recover the advances.
The Company is currently undergoing a payroll tax audit by the Internal
Revenue Service ("IRS") for calendar years 1983 through 1991. The IRS agent
conducting the audit has asserted that certain physicians and psychologists and
other staff engaged as independent contractors by the Company should have been
treated as employees for payroll tax purposes. On April 8, 1991, the Company
received a proposed assessment related to this assertion claiming additional
taxes and penalties due totaling approximately $19.4 million for calendar years
1983 through 1988. The Company filed a protest with the IRS and contested the
proposed assessment with the Appeals Office of the Internal Revenue Service in
St. Louis, Missouri. The Appeals Office issued a reduced assessment in the
amount of approximately $6,300,000, plus penalties and interest of $6,500,000.
The IRS is also examining the Company's employment tax returns for the years
1989 through 1991, and the agent conducting the examination proposed the
assessment of additional taxes for those years in the approximate amount of
$1,600,000, plus penalties and interest in an undetermined amount. While
management believes the Company has strong arguments to support its treatment
of the payments to independent contractors to whom substantially all of the
assessment relates, the Company has submitted an offer in compromise to the IRS
for the calendar years 1983 through 1991 for $5 million. A reserve has been
established with respect to this matter to cover expenses the Company expects
to incur; however, there can be no assurance that such reserves are adequate
until a formal settlement is reached with the IRS. The Company and RehabCare,
in May 1991, entered into a Tax Sharing Agreement providing for the Company to
indemnify RehabCare for any claims of income or payroll taxes due for all
periods through February 28, 1991. The Company has
46
<PAGE> 47
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992
established a reserve with respect to covering expenses the Company expects
RehabCare to incur under the Tax Sharing Agreement.
The federal income tax returns of the Company for its fiscal ended 1984
and 1987 through 1991, have been examined by the IRS. The Company has provided
the IRS with satisfactory documentary support for the majority of items
questioned and those items have been deleted from the proposed assessment and
accepted as originally filed. The remaining items have been agreed to and
resulted in a disallowance of approximately $229,000 in deductions which will
be offset against the Company's net operating losses available for carryover.
The examination also included the review of the Company's claim for refund of
approximately $205,000 relating to an amended return for the fiscal year ended
May 31, 1992. During completion of the audit, the IRS noted that the Company
had received excess refunds representing its AMT liability of approximately
$666,000 in 1990 and 1991 from the carry back of net operating losses to the
fiscal ended May 31, 1988 and 1989, respectively. On March 29, 1994, the
Company agreed to the assessment of $666,000 plus interest and received the
final bill of $821,000 during the fourth quarter of fiscal 1994. The Company
has accrued for this liability, net of refunds, in income taxes payable.
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.
47
<PAGE> 48
PART III
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EXECUTIVE
COMPENSATION.
The Company expects to file its definitive proxy statement for the 1994
annual meeting of shareholders no later than 120 days after the end of the
fiscal year with the Securities and Exchange Commission. The information set
forth therein under "Election of Directors" and "Executive Compensation" is
incorporated herein by reference. Executive Officers of Comprehensive Care
Corporation and principal subsidiaries are listed on page 13 of this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required is set forth under the caption "Principal
Stockholders" in the proxy statement for the 1994 annual meeting of
shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required is set forth under the caption "Compensation
Committee Interlocks and Insider Participation" in the proxy statement for the
1994 annual meeting of shareholders and is incorporated herein by reference.
48
<PAGE> 49
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 Public Accountants
Independent Auditors' Report
Consolidated Balance Sheets, May 31, 1994 and 1993
Consolidated Statements of Operations, Years Ended May
31, 1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity, Years Ended
May 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows, Years Ended May 31,
1994, 1993 and 1992
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
V. Property and Equipment
VI. Accumulated Depreciation and Amortization of Property and
Equipment
X. Supplementary Statements of Operations Information
Other schedules are omitted, as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND REFERENCE
------- -------------------------
<S> <C>
3.1 Restated Certificate of Incorporation (1).
3.2 Restated Bylaws as amended March 24, 1994 (10).
4.1 Indenture dated April 25, 1985 between the Company and Bank of America, NT&SA, relating to Convertible
Subordinated Debentures (2).
4.3 Rights Agreement dated as of April 19, 1988 between the Company and Security Pacific National Bank (3).
10.1 Standard form of CareUnit Contract (4).
10.2 Standard form of CarePsychCenter Contract (4).
10.4 Financial Security Plan for executive management and medical directors (5)*.
10.5 Form of Stock Option Agreement (4)*.
10.6 Form of Indemnity Agreement as amended March 24, 1994 (10)*.
10.28 The Company's Employee Savings Plan as amended and restated as of June 30, 1993 (6)*.
10.31 Agreement between the Company and Livingston & Company dated April 1, 1991 (7).
10.32 Shareholder Agreement dated as of May 8, 1991 between the Company and RehabCare Corporation (7).
10.33 Tax Sharing Agreement dated as of May 8, 1991 between the Company and RehabCare Corporation (7).
10.35 Agreement between Company and Livingston & Co. dated December 21, 1991 (8).
10.36 Option Agreement with Richard W. Wolfe dated July 1, 1992 (8).*
10.37 Redemption Agreement dated September 1, 1992 between RehabCare and the Company (8).
10.40 1988 Incentive Stock Option and 1988 Nonstatutory Stock Option Plans, as amended (8).*
10.46 Employment Agreement dated December 30, 1992 between the Company and Walter E. Afield, M.D. (9).
</TABLE>
49
<PAGE> 50
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND REFERENCE
------- -------------------------
<S> <C>
10.47 Non-qualified Option Agreement dated December 30, 1992 between the Company and Walter E. Afield, M.D. (9).
10.48 Non-Qualified Stock Option Agreement dated February 2, 1993, between the Company and Fred C. Follmer (10).
11 Computation of Loss Per Share (10).
22 List of the Company's subsidiaries (10).
23.1 Consent of Arthur Andersen LLP (filed herewith).
23.2 Consent of KPMG Peat Marwick LLP (filed herewith).
27 Financial Data Schedule
</TABLE>
- -----------------------
* 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 10-Q for the quarter ended
August 31, 1986.
(2) Filed as an exhibit to the Company's Form S-3 Registration Statement No.
2-97160.
(3) Filed as an exhibit to the Company's Form 8-K dated May 4, 1988.
(4) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1988.
(5) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1990.
(6) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1991.
(7) Filed as an exhibit to RehabCare Corporation's Form S-1 Registration
Statement No. 33-40467.
(8) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1992.
(9) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1993.
(10) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1994.
(B) REPORTS ON FORM 8-K
1) On March 7, 1994, the Company filed a current report on Form
8-K to report new members of the Board of Directors, new
members of the Compensation Committee, the Board approval of
amendment of the Company's Certificate of Incorporation
(subject to shareholder approval) and the tentative approval
of voluntary, temporary reduction of conversion price of
convertible debentures.
2) On May 10, 1994, the Company filed a current report on Form
8-K reporting the resignation of Richard C. Peters, President
and Chief Executive Officer.
3) On June 30, 1994, the Company filed a current report on Form
8-K to report an assessment received from the IRS relating to
the payroll tax audit for calendar years 1983 through 1988
(see Note 15 -- "Commitments and Contingencies").
50
<PAGE> 51
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTIONS 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, SEPTEMBER 20, 1995.
COMPREHENSIVE CARE CORPORATION
BY /S/ CHRISS W. STREET
-----------------------------
CHRISS W. STREET
CHAIRMAN
AND CHIEF EXECUTIVE OFFICER
BY /S/ DREW Q. MILLER
-----------------------------
DREW Q. MILLER
(PRINCIPAL FINANCIAL OFFICER)
BY /S/ KERRI RUPPERT
-----------------------------
KERRI RUPPERT
(PRINCIPAL 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) DECEMBER 13, 1995
- -------------------------------
CHRISS W. STREET
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND CHIEF OPERATING OFFICER
/S/ DREW Q. MILLER (PRINCIPAL FINANCIAL OFFICER) DECEMBER 13, 1995
- -------------------------------
DREW Q. MILLER
VICE PRESIDENT, SECRETARY/TREASURER AND
CHIEF ACCOUNTING OFFICER
/S/ KERRI RUPPERT (PRINCIPAL ACCOUNTING OFFICER) DECEMBER 13, 1995
- -------------------------------
KERRI RUPPERT
/S/ J. MARVIN FEIGENBAUM VICE CHAIRMAN DECEMBER 13, 1995
- -------------------------------
J. MARVIN FEIGENBAUM
/S/ WILLIAM H. BOUCHER DIRECTOR DECEMBER 13, 1995
- -------------------------------
WILLIAM H. BOUCHER
/S/ W. JAMES NICOL DIRECTOR DECEMBER 13, 1995
- -------------------------------
W. JAMES NICOL
</TABLE>
51
<PAGE> 52
COMPREHENSIVE CARE CORPORATION
SCHEDULE V - PROPERTY AND EQUIPMENT
YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
BALANCE AT SALES BALANCE AT
BEGINNING OF ADDITIONS AND RECLASSI- END OF
PERIOD AT COST RETIREMENTS FICATIONS(1) PERIOD
------------ --------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1994
Land and improvements . . . . . . . . $ 4,117 $--- $ --- $ (54) $ 4,063
Buildings and improvements . . . . . 19,209 82 99 (1,000) 18,192
Furniture and equipment . . . . . . . 5,866 280 1,956 627 4,817
Leasehold improvements . . . . . . . 1,364 3 15 13 1,365
Capitalized leases . . . . . . . . . 876 18 --- (5) 889
------- ---- ------ -------- -------
$31,432 $383 $2,070 $ (419) $29,326
======= ==== ====== ======== =======
Year ended May 31, 1993
Land and improvements . . . . . . . . $ --- $--- $ --- $ 4,117 $ 4,117
Buildings and improvements . . . . . 2,963 203 2,731 18,774 19,209
Furniture and equipment . . . . . . . 3,440 360 3,201 5,267 5,866
Leasehold improvements . . . . . . . 463 136 24 789 1,364
Capitalized leases . . . . . . . . . --- 67 --- 809 876
------- ---- ------ -------- -------
$ 6,866 $766 $5,956 $ 29,756 $31,432
======= ==== ====== ======== =======
Year ended May 31, 1992
Land and improvements . . . . . . . . $ 7,525 $--- $ --- $ (7,525) $ ---
Buildings and improvements . . . . . 25,309 337 56 (22,627) 2,963
Furniture and equipment . . . . . . . 11,463 403 2,330 (6,096) 3,440
Leasehold improvements . . . . . . . 829 11 377 --- 463
Capitalized leases . . . . . . . . . 745 --- 745 --- ---
------- ---- ------ -------- -------
$45,871 $751 $3,508 $(36,248) $ 6,866
======= ==== ====== ======== =======
</TABLE>
(1) Includes amounts which have been reclassified from(to) property and
equipment held for sale.
See accompanying Report of Independent Public Accountants.
52
<PAGE> 53
COMPREHENSIVE CARE CORPORATION
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND
EQUIPMENT
YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
BALANCE AT SALES BALANCE AT
BEGINNING OF ADDITIONS AND RECLASSI- END OF
PERIOD AT COST RETIREMENTS FICATIONS(1) PERIOD
------------ --------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1994
Buildings and improvements . . . . . $ 7,670 $ 887 $ 95 $ 205 $ 8,667
Furniture and equipment . . . . . . . 4,470 507 1,877 311 3,411
Leasehold improvements . . . . . . . 792 79 14 81 938
Capitalized leases . . . . . . . . . 297 25 --- --- 322
------- ------ ------ ------- -------
$13,229 $1,498 $1,986 $ 597 $13,338
======= ====== ====== ======= =======
Year ended May 31, 1993
Buildings and improvements . . . . . $ 871 $1,371 $ 869 $ 6,297 $ 7,670
Furniture and equipment . . . . . . . 1,338 926 922 3,129 4,471
Leasehold improvements . . . . . . . 383 82 22 349 792
Capitalized leases . . . . . . . . . --- --- --- 296 296
------- ------ ------ ------- -------
$ 2,592 $2,379 $1,813 $10,071 $13,229
======= ====== ====== ======= =======
Year ended May 31, 1992
Buildings and improvements . . . . . $ 1,664 $1,268 $ 8 $(2,053) $ 871
Furniture and equipment . . . . . . . 8,579 982 1,246 (6,977) 1,338
Leasehold improvements . . . . . . . 528 66 308 97 383
Capitalized leases . . . . . . . . . 612 52 631 (33) ---
------- ------ ------ ------- -------
$11,383 $2,368 $2,193 $(8,966) $ 2,592
======= ====== ====== ======= =======
</TABLE>
(1) Includes amounts which have been reclassified from(to) property and
equipment held for sale.
See accompanying Report of Independent Public Accountants.
53
<PAGE> 54
COMPREHENSIVE CARE CORPORATION
SCHEDULE X - SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION
YEARS ENDED MAY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Advertising costs . . . . . . . . . . . . . . . . . . . . . . $566 $2,238 $2,557
==== ====== ======
</TABLE>
See accompanying Report of Independent Public Accountants.
54
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION AND REFERENCE
------- -------------------------
<S> <C>
3.1 Restated Certificate of Incorporation (1).
3.2 Restated Bylaws as amended March 24, 1994 (10).
4.1 Indenture dated April 25, 1985 between the Company and Bank of America, NT&SA, relating to Convertible
Subordinated Debentures (2).
4.3 Rights Agreement dated as of April 19, 1988 between the Company and Security Pacific National Bank (3).
10.1 Standard form of CareUnit Contract (4).
10.2 Standard form of CarePsychCenter Contract (4).
10.4 Financial Security Plan for executive management and medical directors (5)*.
10.5 Form of Stock Option Agreement (4)*.
10.6 Form of Indemnity Agreement as amended March 24, 1994 (10)*.
10.28 The Company's Employee Savings Plan as amended and restated as of June 30, 1993 (6)*.
10.31 Agreement between the Company and Livingston & Company dated April 1, 1991 (7).
10.32 Shareholder Agreement dated as of May 8, 1991 between the Company and RehabCare Corporation (7).
10.33 Tax Sharing Agreement dated as of May 8, 1991 between the Company and RehabCare Corporation (7).
10.35 Agreement between Company and Livingston & Co. dated December 21, 1991 (8).
10.36 Option Agreement with Richard W. Wolfe dated July 1, 1992 (8).*
10.37 Redemption Agreement dated September 1, 1992 between RehabCare and the Company (8).
10.40 1988 Incentive Stock Option and 1988 Nonstatutory Stock Option Plans, as amended (8).*
10.46 Employment Agreement dated December 30, 1992 between the Company and Walter E. Afield, M.D. (9).
10.47 Non-qualified Option Agreement dated December 30, 1992 between the Company and Walter E. Afield, M.D. (9).
10.48 Non-Qualified Stock Option Agreement dated February 2, 1993, between the Company and Fred C. Follmer (10).
11 Computation of Loss Per Share (10).
22 List of the Company's subsidiaries (10).
23.1 Consent of Arthur Andersen LLP (filed herewith).
23.2 Consent of KPMG Peat Marwick LLP (filed herewith).
27 Financial Data Schedule
</TABLE>
- -----------------------
* 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 10-Q for the quarter ended
August 31, 1986.
(2) Filed as an exhibit to the Company's Form S-3 Registration Statement No.
2-97160.
(3) Filed as an exhibit to the Company's Form 8-K dated May 4, 1988.
(4) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1988.
(5) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1990.
(6) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1991.
(7) Filed as an exhibit to RehabCare Corporation's Form S-1 Registration
Statement No. 33-40467.
(8) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1992.
(9) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1993.
(10) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1994.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1
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 Post-Effective Amendment No. 3 to the S-8 Registration Statement File No.
33-43841 and the S-8 Registration Statement File No. 33-27213.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
January 8, 1996
<PAGE> 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.2
To the Stockholders and Board of Directors
Comprehensive Care Corporation:
We consent to the incorporation by reference in the Post-Effective Amendment
No. 3 to the Registration Statement (No. 33-43841) on Form S-8 and in the
Registration Statement (No. 33-27213) on Form S-8 of Comprehensive Care
Corporation of our report dated August 27, 1992, relating to the consolidated
statements of operations, stockholders' equity and cash flows and related
schedules of Comprehensive Care Corporation and subsidiaries for the year ended
May 31, 1992, which report appears in the May 31, 1994 annual report on Form
10-KA No. 2 of Comprehensive Care Corporation.
KPMG Peat Marwick LLP
St. Louis, Missouri
January 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1994
<PERIOD-START> JUN-01-1993
<PERIOD-END> MAY-31-1994
<CASH> 1,781
<SECURITIES> 0
<RECEIVABLES> 5,848
<ALLOWANCES> 1,574
<INVENTORY> 0
<CURRENT-ASSETS> 15,076
<PP&E> 29,326
<DEPRECIATION> 13,338
<TOTAL-ASSETS> 33,226
<CURRENT-LIABILITIES> 14,664
<BONDS> 10,477
<COMMON> 22
0
0
<OTHER-SE> 5,077
<TOTAL-LIABILITY-AND-EQUITY> 33,226
<SALES> 34,277
<TOTAL-REVENUES> 34,327
<CGS> 31,875
<TOTAL-COSTS> 31,875
<OTHER-EXPENSES> 7,013
<LOSS-PROVISION> 1,558
<INTEREST-EXPENSE> 1,228
<INCOME-PRETAX> (7,551)
<INCOME-TAX> 301
<INCOME-CONTINUING> (7,852)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,852)
<EPS-PRIMARY> (3.57)
<EPS-DILUTED> (3.57)
</TABLE>
