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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended May 31, 1997 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-5751
COMPREHENSIVE CARE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-2594724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1111 Bayside Drive, Suite 100
Corona del Mar, California 92625
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 222-2273
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $.01 per share New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7 1/2% Convertible Subordinated Debentures due 2010 Over-the-Counter
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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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 25, 1997, was $37,997,219 based on the closing sale price
of the Common Stock on August 25, 1997 as reported on the New York Stock
Exchange composite tape.
At August 25, 1997, the Registrant had 3,432,847 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference from the Registrant's definitive
proxy statement for the Registrant's 1997 annual meeting of stockholders
presently scheduled to be held on November 17, 1997, which proxy statement will
be filed no later than 120 days after the close of the Registrant's fiscal year
ended May 31, 1997.
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PART I
ITEM 1. BUSINESS.
Comprehensive Care Corporation(R) ("CompCare" or the "Company")(1), is a
Delaware corporation organized in 1969. Prior to its fiscal year 1993, the
Company principally engaged in the ownership, operation and management of
freestanding psychiatric and substance abuse facilities, and the management of
in-hospital psychiatric and substance abuse programs located in unaffiliated
hospitals. Commencing in fiscal 1993, the Company transitioned itself and
redirected its business focus through its wholly-owned subsidiary, Comprehensive
Behavioral Care(sm), Inc. ("Comprehensive Behavioral"). Comprehensive
Behavioral, as part of managed care operations, provides the delivery of a
continuum of psychiatric and substance abuse services on behalf of health
maintenance and preferred provider organizations, and other healthcare
providers. Unless the context otherwise requires, all references to the
"Company" include CompCare, Comprehensive Behavioral and subsidiary
corporations.
The services provided by managed care operations are effected
through management services agreements, administrative service agreements,
fee-for-service agreements or capitation contracts through which the primary
payor of healthcare services pays a fixed per member per month fee for covered
psychiatric and substance abuse services made available to covered members
regardless of actual member utilization. Current services include risk based
contract capitation of behavioral health services for specific populations, and
a broad spectrum of inpatient and outpatient mental health and substance abuse
therapy and counseling. Programs are provided at the freestanding facility
operated by the Company, and at independent general hospitals under contracts
with the Company. A wholly-owned subsidiary, Comprehensive Care Integration(SM),
Inc. ("CCI"), formerly known as CareUnit(R), Inc., develops, markets and manages
the Company's contract programs. For the fiscal year ended May 31, 1997,
psychiatric and chemical dependency treatment programs (freestanding operations
and contract operations) accounted for approximately 27 percent of the Company's
operating revenues. Managed care operations accounted for approximately 72
percent of the Company's operating revenues for the fiscal year ended May 31,
1997. The remaining revenues for the respective periods were derived from other
activities.
Freestanding facilities are designated either as psychiatric or
chemical dependency based on the license of the facility and the predominant
treatment provided. The Company believes that the increasing role of health
maintenance organizations, reduced benefits from employers and indemnity
companies, and a shifting to outpatient programs continue to cause a decline in
utilization of freestanding facilities. As a result of the foregoing, the
Company has implemented cost reduction measures, including the closure of
selected Company facilities. During the second quarter of fiscal 1996, the
Company sold the operations of one facility, representing 83 beds and closed one
facility representing 70 beds. During fiscal 1997, the Company closed one
facility representing 128 beds and sold two other facilities. The Company owns
and continues to operate one freestanding facility representing 38 available
beds. See "Business - Freestanding Operations".
The Company experienced a net loss in fiscal 1997 and prior years, had a
working capital deficiency of $12.4 million and a deficit in stockholders'
equity of $2.6 million as of May 31, 1997. The Company is refocusing its
activities through the closure and/or sale of its freestanding facilities and
expansion of managed care activities. See Item 7, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of
these matters as well as other risk factors that the Company faces.
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(1) CompCare is a registered service mark of the Company.
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The following table sets forth for each of the years in the five-year
period ended May 31, 1997, the operating revenues of the Company's managed care
operations, freestanding operations, contract operations and other activities.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Managed care operations(1).................. 72% 49% 19% 10% 2%
Freestanding operations..................... 17 33 62 70 81
Contract management operations(2)........... 10 17 18 16 12
Other activities(3)......................... 1 1 1 4 5
--- ---- ---- ---- ----
100% 100% 100% 100% 100%
=== ==== ==== ==== ====
</TABLE>
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(1) The Company has provided managed care products since the acquisition of
Comprehensive Behavioral Care, Inc.'s predecessor in December 1992. On
August 1, 1995, the Company changed the name of this subsidiary from
AccessCare, Inc. to Comprehensive Behavioral Care, Inc.
(2) On April 1, 1996, the Company changed the name of this subsidiary from
CareUnit, Inc. to Comprehensive Care Integration, Inc.
(3) 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 percent stake in RehabCare. Accordingly, revenues from
RehabCare were not material to the Company during fiscal 1993.
MANAGED CARE OPERATIONS
The Company provides managed behavioral healthcare and substance abuse
services for employers, Health Maintenance Organizations ("HMOs"), Preferred
Provider Organizations ("PPOs"), government organizations, third-party claim
administrators and commercial and other group purchasers of healthcare. The
Company currently provides services to contracted members in 21 states and
Puerto Rico, and provides behavioral medicine managed care services to Medicaid
recipients through subcontracts with HMOs focused on Medicaid and Medicare
beneficiary populations. The programs and services currently offered by managed
care operations include fully integrated capitated behavioral healthcare
services, employee assistance programs ("EAP"), case management/utilization
review services, provider sponsored health plan development, preferred provider
network development and management, physician advisor reviews and overall care
management services. The Company manages its clinical service programs on proven
treatment technologies and trains its providers to use science-based efficacious
treatment.
Managed care operations accounted for approximately 72 percent of the
Company's operating revenues in fiscal 1997 versus 49 percent in fiscal 1996.
The Company believes that managed care operations, in concert with a network of
providers, will be instrumental in assisting the Company in developing an
integrated service model to provide high quality, cost effective care.
In May 1995, the Company entered into an agreement with Physicians
Corporation of America ("PCA") providing for PCA to invest $1.0 million into
Comprehensive Behavioral for an equity position equal to 13 1/2 percent of
Comprehensive Behavioral voting power on a fully diluted basis, represented by
shares of Series A Preferred Stock, which is also exchangeable at the option of
PCA for 100,000 shares of the Company's Common Stock. In the third quarter of
fiscal 1997, PCA exercised its option to exchange its equity position in
Comprehensive Behavioral into 100,000 shares of the Company's Common Stock (see
Note 3 to the Company's Consolidated Financial Statements included herein).
SOURCES OF REVENUE
The Company provides managed behavioral health and substance abuse
services to the members under contract. Generally, the Company receives a
negotiated per member per month amount, or a capitation, to provide these
services. The Company is responsible for the development of service networks,
including physicians, therapists and hospitalization services. In two of the
Company's contracts, a per member per month amount is withheld from the monthly
capitation amount to guarantee certain performance measures. Noncompliance by
the Company with respect to the performance guarantees could result in the
forfeiture, in whole or in part, of such withholds.
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The Company has a contract which requires the Company to maintain an
equity to premium ratio of 1:7 and has certain performance guarantees. A per
member per month withhold is deducted from the Company's monthly capitation
amount into a Performance Guarantee Reserve Fund ("PGRF") to ensure the Company
maintains such performance guarantees. The PGRF is reconciled quarterly and if
the performance guarantees are met, the withhold amounts are disbursed to the
Company. A per member per month amount is withheld from the Company's monthly
capitation amount and cash contributions by the Company have been deposited into
an Equity Reserve Account ("ERA") to maintain the required equity to premium
ratio. In addition, in the event the Company does not meet the claims payment
obligations under the terms of the contract, funds in the ERA may be utilized to
guarantee such payment obligations.
Contracts are generally entered into for a period of one to three years
and automatically renew for successive one-year periods unless either party
gives notice of termination.
The Company contracts with a variety of providers on a capitated basis.
The Company attempts to control its risk by entering into contractual
relationships with healthcare providers, including hospitals, physician groups
and other managed care organizations, on sub-capitated, discounted
fee-for-service or per case bases. The Company's contracts typically exclude
capitation risk for chronic care patients. During fiscal 1997, the Company
provided services under capitated arrangements for commercial, Medicare and
Medicaid patients in South Florida, commercial and Medicaid patients in Puerto
Rico, Medicaid patients in Texas, and commercial patients in Indiana, Michigan
and New Jersey. The Company added approximately 220,000 capitated lives under
Administrative Services Organization ("ASO") contracts. Under an ASO contract,
the Company provides overall care management services; however, the Company is
not at risk for provider claims. The Company performs periodic reviews of its
current contracts with payors and may amend or revise the terms of unprofitable
contracts. The Company terminated one unprofitable contract during fiscal 1997.
DEVELOPMENT, COMPETITION, AND PROMOTION
Approximately 40 managed behavioral healthcare companies provide service
for 130 million people in the United States and the Commonwealth of Puerto Rico.
Additionally, there are numerous local and regional group practices, community
mental health centers and behavioral healthcare hospitals that manage behavioral
healthcare on behalf of HMOs, PPOs and local governments. Approximately 30
percent of the potential private marketplace still operates through indemnity
coverage (approximately 60 million lives) and another third are covered through
PPO products. The last several years have seen an increased migration to fully
capitated HMO products in most markets. This is the Company's primary niche.
Approximately 19 percent of all mental healthcare expenditures nationally are
funded through Medicaid. Currently 18 states have received Health Care Finance
Administration ("HCFA") 1915B approval for statewide privatization of mental
health Medicaid expenditures, seven states have submitted HCFA applications for
waivers. Additionally, approximately nine million people covered through Champus
are being moved to managed care products in the next few years. As a consequence
of these changes in the marketplace, the potential dollars expended for managed
behavioral services in the market are expected to grow significantly. As of May
31, 1997, the Company managed approximately 688,000 people covered through
Medicaid in Florida, Texas and Puerto Rico and has partnered with PCA and other
HMOs to attract additional business in other states. The Company anticipates
that governmental agencies will continue to implement a significant number of
managed care Medicaid products and programs through HMOs and that many of these
HMOs will subcontract for behavioral healthcare services with managed care
behavioral health companies such as the Company. In addition, the Company
manages approximately 60,000 people covered through Medicare in Florida.
Managed behavioral care is an extremely competitive business and three
companies currently dominate the market and include: Merit Behavioral Care
(approximately 15 million lives), Value Behavioral Health (approximately 24
million lives) and Magellan/Green Spring (approximately 34 million lives).
Contracts are competitively bid and are awarded based upon price, customer
service, capacity to satisfy the standards of the National Committee of
Quality Assurance ("NCQA") and capacity to deliver the product, including
financial viability of the bidder. The Company has developed a reputation as a
price efficient company with high ratings by customers and members. As a
subcontractor to four NCQA accredited HMOs, Comprehensive Behavioral has
completed the NCQA evaluation process on repeated occasions and has met its
stringent criteria.
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The Company is subject to multiple state and federal regulations, as
well as changes in Medicaid and Medicare reimbursement. At this point in time
the Company is unable to predict what effect, if any, the changes in legislation
for Medicaid and Medicare may have on its business.
The Company has certificates of authority in 24 states or provinces. The
Company intends to become qualified to provide managed behavioral healthcare in
all 50 states and the Commonwealth of Puerto Rico.
CONTRACT OPERATIONS
Comprehensive Care Integration 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 with the Company, the hospital furnishes patients with
all hospital facilities and services necessary for their generalized medical
care, including nursing, dietary and housekeeping. The Company 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. The Company 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 the Company have been subject to intense evaluation. In general,
some prospective client hospitals have expressed a desire for more control over
the services provided by the Company and, in response, the Company is providing
a more flexible approach to contract management. Responding to market demands,
the Company has implemented, in the majority of its contracts, a variety of
levels of care, offering a wide range of treatment options including
detoxification, inpatient, residential, day-treatment or partial hospitalization
and outpatient services. As a result, inpatient occupancy rates have declined as
patients are moved to a less acute level of care.
During fiscal 1997, the Company experienced a decline in the number of
contracts and a decline in available beds. Although one new contract was opened,
the Company experienced a decline in inpatient census during fiscal 1997. The
Company believes that the decline in the number of inpatient beds is a result of
the continued influence of managed care and reduction in available reimbursement
from third parties, which have had the effect of making the Company's contracts
less profitable to hospitals. During fiscal 1997, CCI terminated 11 contracts
and three were terminated by the contracting hospital. As a result, CCI manages
three adult CareUnit programs (chemical dependency treatment) and one
CarePsychCenter (psychiatric treatment) as of May 31, 1997. The Company, through
CareInstitute(R), a related non-profit entity, also managed five contracts for
the State of Idaho since fiscal 1993. These programs provided behavioral
medicine services in a residential and outpatient setting.
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, the Company
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. The Company and the hospital share the risk
of nonpayment by patients based on a predetermined percentage participation by
the Company in bad debts. The Company may also participate with a contracting
hospital in charity care and certain contractual allowances and discounts.
Hospitals contracting for programs experience the same reimbursement pressures
as the Company's freestanding facilities.
Management contracts are generally entered into for a period of two to
five years and thereafter are automatically renewed for successive one-year
periods unless either party gives notice of termination at least 90 days prior
to the end of such periods. Contracts are also terminable for material defaults.
A significant number of contracts are terminable by either party on their
anniversary dates.
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DEVELOPMENT, COMPETITION AND PROMOTION
The Company directs its development activities toward increasing the
number of management contracts with hospitals. The primary competitors of CCI
are hospitals and hospital management companies that offer programs similar to
those offered by CCI.
FREESTANDING OPERATIONS
The Company currently owns and operates one facility representing 38
available beds. During the first quarter of fiscal 1997, the Company closed the
128-bed Tri-State Behavioral Health Center in Cincinnati, Ohio and sold the
70-bed Starting Point(R), Orange County which was closed in fiscal 1996. During
the fourth quarter of fiscal 1997, the Company sold the 100-bed CareUnit of
Jacksonville Beach. The sale and/or closure of these facilities was part of the
Company's plan of operations and restructuring.
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 diagnoses suggests the
need for supplemental services are accommodated as dictated by the individual
treatment plan developed for each patient.
Psychiatric. Psychiatric programs are offered at the Company's
freestanding facility. Admission to the programs offered by the Company is
typically voluntary although the facility provides emergency psychiatric
services and accepts 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, partial, day treatment and outpatient basis and form a continuum of
care.
Chemical Dependency. Chemical dependency programs are delivered under the
names CareUnit, Starting Point, and Aurora Behavioral Health Hospital and
include programs for adults and adolescents. The Company's freestanding facility
offers comprehensive treatment programs 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.
The facility offers 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.
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SOURCES OF REVENUES
During fiscal 1997, approximately 11 percent 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. The
Company believes these changing payment mechanisms will continue to have a
negative effect on its revenues and require the Company to offer a continuum of
care ranging from outpatient to intensive inpatient services.
Employers, union trusts and other major purchasers of healthcare services
have become increasingly aggressive in pursuing cost containment. To the extent
that major purchasers are self-insured, they actively negotiate with hospitals,
HMOs and 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 healthcare 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 ("DRGs").
In general, a hospital's payment for Medicare inpatients is limited to the DRG
rate and capital costs, regardless of the amount of services provided to the
patient or the length of the patient's hospital stay. Under PPS, a hospital may
keep any excess of its prospective payment rate over its operating costs
incurred in furnishing inpatient services, but is at risk for any operating
costs that exceed its payment rate. Qualified providers of alcohol and drug
treatment services are paid under PPS. Psychiatric hospitals are exempt from
PPS. Inpatient psychiatric units within acute care hospitals are eligible to
obtain an exemption from PPS upon satisfaction of specified federal criteria.
Exempt hospitals and exempt units within acute care hospitals are subject to
limitations on the level of cost or the permissible increase in cost subject to
reimbursement under the Medicare program, including those limitations imposed
under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). No
assurance can be given that psychiatric services will continue to be eligible
for exemption from PPS or that other regulatory or legislative changes will not
adversely affect the Company's hospital operations business.
The Company's remaining facility currently participates in the Medicare
program, and is currently excluded from PPS (TEFRA limits are applicable to this
facility). Medicare utilization at this facility averaged approximately 25
percent for inpatient and 87 percent for outpatient in fiscal 1997. 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 facility or that loss of
exclusion from PPS would materially impact the Company's business. During fiscal
1997, the Company's facility reflected an increase in Medicare utilization
primarily due to its partial hospitalization programs.
Hospitals participating in the Medicare program are required to retain
the services of a peer review organization ("PRO"). The PRO is responsible for
determining the medical necessity, appropriateness and quality of care given
Medicare program patients. In instances where the medical necessity of an
admission or procedure is challenged by the PRO, payment may be delayed, reduced
or denied in its entirety. Amounts denied because of medical review may not be
charged to the service recipient, and are absorbed by the hospital. In
non-emergency admissions (which encompass most of the Company's admissions)
review is performed prior to the patient's arrival
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at the hospital. In the event that the patient does not meet the PRO criteria
for admission, the patient may be admitted for outpatient treatment, referred to
an alternative treatment provider or sent home. The Company believes that the
existence of PROs has reduced inpatient admissions in its facility 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. Approximately 19 percent of the Company's
freestanding facility revenues are derived from the Medicaid program.
Accordingly, changes in Medicaid program reimbursement are not expected to have
a material adverse impact on the Company's business.
COMPETITION AND PROMOTION
The Company's primary competitors are hospitals and hospital management
companies (both not-for-profit and investor-owned) that offer programs similar
to those of the Company. The Company has faced generally increasing competition
in the last few years. Some of the hospitals that compete with the Company are
either owned or supported by governmental agencies or are owned by
not-for-profit corporations supported by endowments and charitable contributions
enabling some of these hospitals to provide a wide range of services regardless
of cost effectiveness.
Most patients are directed to a specific facility by their employer (or
its agent), the employer's insurance company (i.e. managed care companies), a
physician, a social services agency or another healthcare 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.
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 programs in conjunction with its
freestanding facilities. The Company also shifted its marketing activities
toward developing relationships and contracts with managed care and other
organizations which pay for or broker such services.
GOVERNMENTAL REGULATION
The development and operations of healthcare facilities are subject to
compliance with various federal, state and local laws and regulations. The
Company's freestanding facility, as well as hospitals under contract with CCI,
must comply with the licensing requirements of federal, state and local
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
healthcare reimbursement programs) may impact the Company's ability to generate
revenue and the utilization of its healthcare services.
The freestanding facility operated by the Company is certified as a
provider for Medicare services. Both the Medicare and Medicaid programs contain
specific physical plant, safety, patient care and other requirements that must
be satisfied by healthcare facilities in order to qualify under those programs.
The Company believes that the facilities it owns, leases or manages 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 facility, equipment, personnel and services.
Under the Social Security Act, 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
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Social Security Act also contains provisions making it a felony for a hospital
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 under the Medicare or Medicaid programs. Civil
penalties range from monetary fines that may be levied on a per-violation basis
to temporary or permanent exclusion from the Medicare program.
Various federal and state laws regulate the relationship between
providers of healthcare services and physicians. These laws include the "fraud
and abuse" provisions of the Social Security Act, under which civil and criminal
penalties can be imposed upon persons who pay or receive remuneration in return
for inducement of referrals of patients who are eligible for reimbursement under
the Medicare or Medicaid programs. Civil penalties range from monetary fines
that may be levied on a per-violation basis to temporary or permanent
exclusion from the Medicare and/or Medicaid programs.
The Company believes that 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 healthcare 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 healthcare
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 healthcare businesses.
The report contained a number of recommendations, including a prohibition of
physician referrals to any facilities in which the physician has a financial
interest. The original Stark Law (Stark I) passed in 1989 as Sec 6204 of Public
Law 101-508 in the Omnibus Budget Reconciliation Act of 1989 ("OBRA 1989") and
became effective January 1, 1992. Unless an exception is otherwise available,
Stark I forbids a physician from making a referral for which Medicare
reimbursement may be made to a clinical laboratory with which such physician has
a financial relationship, and prohibits such clinical laboratory from billing
for or receiving reimbursement from the Medicare or Medicaid programs on account
of such referral. On March 11, 1992, proposed regulations implementing the Stark
Amendment were issued. The final Stark I regulations were published by the
Health Care Financing Administration on August 14, 1995, and were effective
September 14, 1995. The Company believes that it is in compliance with the
regulations in all material respects.
Additional legislation expanding the Stark Amendment to other physician
and healthcare business relationships has been passed as part of the Omnibus
Budget Reconciliation Act of 1993 ("OBRA 1993"). OBRA 1993 broadens the services
included within the referral prohibition of Stark I: a physician having a
financial relationship with an entity may not make referrals to that entity for
"designated health services," which include, in addition to clinical laboratory
services, physical therapy services; occupational therapy services; radiology or
other diagnostic services; radiation therapy services; durable medical
equipment; parenteral and enteral nutrients; equipment and supplies;
prosthetics, orthotics and prosthetic devices; home health services; outpatient
prescription drugs; and inpatient and outpatient hospital services. This law,
Stark II, expanded its application to include Medicaid, as well as Medicare
patients, and took effect January 1, 1995, with respect to referrals for the
expanded list of designated health services.
Numerous exceptions are allowed under the OBRA 1993 of Stark II for
financial arrangements that would otherwise trigger the referral prohibition.
These provide, under certain conditions, exceptions for relationships involving
rental of office space and equipment, employment relationships, personal service
arrangements, payments unrelated to designated services, physician recruitment,
group practice arrangements with hospitals, and certain
9
<PAGE> 10
isolated transactions. A key element of the exceptions relating to transactions
between providers and physicians is that the transaction be at fair market value
(not taking into account, of course, the value to the providers of any referrals
from the physician). Other technical requirements must also be met, such as the
agreement being in writing and having a minimum term of one year. HHS may adopt
regulations in the future which expand upon the conditions attached to
qualification for these exceptions. Currently Stark II is being actively
reconsidered by the House Ways and Means Subcommittee on Health for major
amendments to the statute. A "Physician Self-Referral Improvement Act" has been
proposed by Congressman Stark. Certain of the Company's relationships with
physicians in its contract operations, as well as the Company's development of
relationships with physicians, may require continued evaluation as to the
availability of an applicable exception or modification, if necessary, to be
in compliance with the law and its exceptions, including any future
regulations. During fiscal 1997 and 1996, the Company's freestanding facility
in Texas provided certain documents pertaining to contracts and related
payments to several physicians and institutions under subpoena to the Texas
Grand Jury. Management believes that the Company has been, and will be, in
material compliance; however, the Company is unable to predict at this time
what effect, if any, Stark II, and any future regulations implementing its
provisions, will have upon its business.
National healthcare reform capable of accelerating massive changes in the
healthcare marketplace is again under active consideration by the Congress. The
focus is on reforming the Medicare and Medicaid programs only, with a move
toward managed care and reduced spending. Both the House of Representatives and
the Senate have introduced proposals that would transform the Medicaid program
into a block-grant program to the states. At this time, it is not possible to
determine the exact nature of the proposals, or their legislative outcome, or
their likely impact upon institutional providers.
In addition, several states are undertaking analysis and legislation
designed to modify the financing and delivery of healthcare at the state level.
A wide variety of bills and regulations are pending in several states proposing
to regulate, control or alter the financing of healthcare 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
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, healthcare 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, continuity of care, and medical records.
These standards validate that a managed care organization is founded on
principles of quality and is continuously improving the clinical care and
services provided. NCQA also utilizes Health Plan Data and Information Set
("HEDIS"), which is a core set of performance measurements developed to respond
to complex but simply defined employer needs as standards for patient and
customer satisfaction. Comprehensive Behavioral meets the standards for NCQA
accreditation and has adopted HEDIS performance and reporting standards. During
fiscal 1998, Comprehensive Behavioral Care will be applying for accreditation as
a managed behavioral healthcare organization ("MBHO)" and measured against the
newly published MBHO NCQA standards.
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 healthcare
facilities. Generally, hospitals including dedicated units, long-term care
facilities and certain other healthcare facilities may apply for JCAHO
accreditation. If a hospital under contract with CCI 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. The
Company's freestanding facility is accredited and the hospitals under contract
with CCI have received or have applied for such accreditation.
10
<PAGE> 11
ADMINISTRATION AND EMPLOYEES
The Company's executive and administrative offices are located in Corona
del Mar, California, where management maintains operations, business
development, legal and accounting functions, and governmental and statistical
reporting. The Company is in the process of relocating certain functions to
Tampa, Florida due to the significance of the business and managed care
operations, and the completion of the de-emphasis of facilities and emphasis of
managed care. Principal functions to be transitioned are administration,
operations, legal and accounting, and management information services. In
connection with the anticipated relocation of certain core functions, the
Company is actively recruiting potential candidates to assume the position of
Chief Financial Officer as that position is to be newly configured and will be
Tampa-based. It is intended that, at least for the foreseeable future,
Mr. Chriss W. Street, the Chief Executive Officer of both the Company and its
principal subsidiary, will assume the additional position of Chief Operating
Officer of each of these companies. As of August 1997, 1996 and 1995, the
following persons were assigned to the Company's various operations.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Managed care operations................................ 178 114 74
Freestanding facilities................................ 79 163 243
Contract operations.................................... 28 141 105
Corporate and administrative offices................... 18 20 24
Other operations....................................... --- 1 2
---- ---- ----
303 439 448
==== ==== ====
</TABLE>
Many of the physicians and psychiatrists who are the medical directors
of the Company's contract units, the psychologists serving on treatment teams
and the physicians utilizing the facilities operated by the Company were not
previously employed by the Company and were treated as independent contractors.
As part of the Company's settlement with the Internal Revenue Service regarding
qualification as an independent contractor pursuant to IRS definitions, each of
these individuals must comply with certain criteria in order to remain
classified as an independent contractor. The Company has not encountered any
work stoppages due to labor disputes with its employees.
11
<PAGE> 12
ITEM 2. PROPERTIES.
The following table sets forth certain information regarding the
properties owned or leased by the Company at May 31, 1997:
<TABLE>
<CAPTION>
OWNED OR LEASE MONTHLY
NAME AND LOCATION LEASED EXPIRES(1) RENTAL
----------------- ------ ---------- ------
<S> <C> <C> <C>
PSYCHIATRIC/CHEMICAL DEPENDENCY
FREESTANDING TREATMENT FACILITIES
CareUnit Hospital(2)............... Owned --- ---
Fort Worth, Texas
CareUnit Hospital(3)............... Owned --- ---
Cincinnati, Ohio
Aurora Behavioral Health Hospital
Aurora, Colorado................ Owned --- ---
Aurora, Colorado................ Leased 1997 2,385
OTHER OPERATING FACILITIES
Comprehensive Behavioral Care, Inc.
Tampa, Florida(4)............... Leased 2000 26,597
Grand Prairie, Texas(4)......... Leased 1997 7,230
Healthcare Management Services, Inc.
Bloomfield Hills, Michigan(4)... Leased 1999 4,500
Comprehensive Care Integration, Inc.
San Ramon, California(5)........ Leased 1998 1,926
Seattle, Washington(6).......... Leased 1997 2,766
Pico Rivera, California(7)...... Leased 1998 2,100
Boise, Idaho(4)................. Leased 1997 2,085
CompCare Publishers(8)............. Leased 1997 7,991
Minneapolis, Minnesota
ADMINISTRATIVE FACILITIES
Corporate Headquarters
Corona del Mar, California(4)... Leased 2006 13,780
</TABLE>
- ----------
(1) Assumes all options to renew will be exercised.
(2) Closed January 1995. The Company intends to sell this property.
(3) Closed on August 31, 1996 and sold June 4, 1997.
(4) 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.
(5) Closed on August 31, 1996. The Company has sublet this property.
(6) Operations closed February 1996. Lease terminated on May 31, 1997.
(7) Assumed in conjunction with purchase from Alternative Psychiatric Centers.
The Company intends to sublease this property.
(8) Office/operation sold in April 1994; Company has sublet this property.
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS.
On October 30, 1992, the Company filed a complaint in the United States
District Court for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare") seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost
benefit of certain stockholder appreciation rights in an amount in excess of
$3.6 million and punitive damages. On March 8, 1995, the jury returned its
verdict awarding the Company $2,681,250 in damages, plus interest and the costs
of the action against RehabCare for securities fraud and for breach of contract.
RehabCare posted a bond in the amount of $3.0 million and filed a motion for new
trial or in the alternative, for judgment as a matter of law, which the court
denied in its entirety on August 4, 1995. On September 1, 1995, RehabCare filed
a notice of appeal with the District Court indicating its intent to appeal the
matter to the United States Court of Appeals. On October 22, 1996, the U.S.
Court of Appeals for the Eighth Circuit reversed the judgment in favor of the
Company and against RehabCare entered by the District Court following the jury's
verdict in favor of the Company. On November 5, 1996, the Company filed a
Petition for Rehearing with the Eighth Circuit. Any effect from the outcome of
this lawsuit will not have a material adverse impact on the Company's results of
operations.
The Company entered into a Stock Purchase Agreement on April 30, 1996 to
purchase the outstanding stock of HMS (see Note 3 to the Company's Consolidated
Financial Statements included herein). The Stock Purchase Agreement was subject
to certain escrow provisions and other contingencies which were not completed
until July 25, 1996. In conjunction with this transaction, HMS initiated an
arbitration against The Emerald Health Network, Inc. ("Emerald") claiming breach
of contract and seeking damages and other relief. In August 1996, Emerald, in
turn, initiated action in the U.S. District Court for the Northern District of
Ohio, Eastern Division, (Case No. 1:96 CV 1759), against the Company claiming,
among other things, interference with the contract between Emerald and HMS and
seeking unspecified damages and other relief. The Company filed counterclaims
against Emerald for deceptive trade practices, defamation, tortious interference
with business relationships and unfair competition. A confidential settlement
has been reached between Emerald and the Company. The Company believes that it
has claims arising from this transaction against the accountants and legal
counsel of HMS as well as HMS's lending bank. On October 1, 1996, the Company
filed a claim of malpractice against the legal counsel of HMS. These claims are
presently being investigated and have not as yet been quantified. The Company
does not believe that the impact of these claims will have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
On September 6, 1996, the Company instituted an arbitration against the
Sellers of HMS with the American Arbitration Association in Orange County,
California seeking, among other things, reimbursement from the Sellers for
damages which the Company sustained by reason of the inaccuracies of the
representations and warranties made by the Sellers and for the indemnification
from each of the Sellers as provided for under the terms of the Stock Purchase
Agreement. One seller has settled his case with the Company. The remaining
seller has not interposed an answer to the arbitration, and the arbitration is
therefore in its formative stages. The Company does not believe that the
impact of these claims will have a material adverse effect on the Company's
financial position, results of operations and cash flows.
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 a liability that is not covered by
insurance. Management believes that the outcome of such lawsuits will not have a
material adverse impact on the Company's financial statements.
EXECUTIVE OFFICERS OF THE COMPANY
CHRISS W. STREET, age 47. 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 served as a director for StreamLogic Corp., formerly known as
Micropolis Corporation from March 1995 to May 1997, where he also served as
Chairman of the compensation committee. In addition, in August 1995, Mr. Street
was elected as a director of Nu-Tech Bio Med, Inc. where he also serves on the
stock option and compensation committees. In January 1996, he joined the Orange
County Retirement Board. In June 1996, he joined the Board of Directors of
Fruehauf Corporation and was named President in April 1997. In June 1997, Mr.
Street was named a director of Drug Use is Life Abuse. Mr. Street is founder and
sole stockholder of Chriss
13
<PAGE> 14
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.
KERRI RUPPERT, age 38. Ms. Ruppert has been employed by the Company since
1988. In October 1992, she was appointed Vice President and Chief Accounting
Officer, and in January 1993, she was elected Secretary of the Company and
Treasurer in November 1994. In November 1995, Ms. Ruppert was appointed Senior
Vice President and in July 1996, was appointed Chief Financial Officer. 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., a publicly-owned company, from 1983 to 1988. Ms. Ruppert will
continue to serve in her present position for an indefinite interim period and
does not intend to relocate in connection with the proposed restructuring (see
Note 19 to the Company's Consolidated Financial Statements included herein).
STUART GHERTNER, Ph.D., age 54. Dr. Ghertner has been a consultant for
the Company in various capacities since August 1994. Prior to his appointment as
interim Chief Operating Officer in August 1996 and Chief Operating Officer and
President of Comprehensive Behavioral on January 1, 1997, Dr. Ghertner was a
principal in Behavioral Health Strategies, a privately-owned behavioral
healthcare consulting company. He held this position commencing January 1994.
From 1991 to 1994, Dr. Ghertner was Chairman, President and Chief Executive
Officer of Behavioral Healthcare Options, Inc., a subsidiary of a publicly-owned
company. Dr. Ghertner has tendered his resignation effective September 12, 1997.
The Company is in the process of recruiting potential candidates to
assume the position of Chief Financial Officer as that position is to be newly
configured. It is intended that, at least for the foreseeable future, Mr. Chriss
W. Street, the Chief Executive Officer of both the Company and its principal
subsidiary, will assume the additional position of Chief Operating Officer of
each of these companies.
During the fiscal year ended May 31, 1997 and until his resignation on
January 15, 1997, Ronald G. Hersch, Ph.D., served as Vice President,
Acquisitions and Development. As previously reported on Form 8-K dated October
15, 1996, Dr. Hersch resigned effective January 15, 1997.
During the fiscal year ended May 31, 1997 and until his resignation on
August 14, 1996, Drew Q. Miller served as Senior Vice President and Chief
Operating Officer. As previously reported on Form 8-K dated August 14, 1996, Mr.
Miller resigned effective August 14, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock is traded on the New York Stock Exchange
("NYSE") under the symbol CMP. The following table sets forth the range of
high and low closing sale prices for the Common Stock for the fiscal
quarters indicated:
<TABLE>
<CAPTION>
PRICE
--------------------
FISCAL YEAR HIGH LOW
----------- -------- -------
<S> <C> <C>
1996:
First Quarter........................................ $ 9 1/8 $ 6 1/8
Second Quarter....................................... 9 5/8 8 1/8
Third Quarter........................................ 10 1/2 8 1/4
Fourth Quarter....................................... 9 7/8 7 1/2
PRICE
--------------------
FISCAL YEAR HIGH LOW
----------- -------- -------
1997:
First Quarter........................................ $ 9 3/8 $ 7 1/4
Second Quarter....................................... 15 1/4 8 1/2
Third Quarter........................................ 17 5/8 11 1/4
Fourth Quarter....................................... 16 3/4 13 1/2
</TABLE>
(b) As of July 31, 1997, the Company had 1,666 stockholders of record of
Common Stock.
(c) In October 1994, the NYSE notified the Company that it was below certain
quantitative and qualitative listing criteria in regard to net tangible
assets available to Common Stock and three year average net income. The
Listing and Compliance Committee of the NYSE has determined to monitor the
Company's progress toward returning to continuing listing standards and
has so indicated in approving the Company's Additional Listing Application
on December 30, 1996. Management believes that the recent completion of
the Company's Debenture Exchange Offer and exchange of the Secured
Convertible Note will enable the Company to seek additional financing
equity and thereby satisfy the Committee of the Company's progress.
However, no assurance may be given that the Company will be successful in
its efforts to obtain either equity financing through public or private
sources, or will be able to do so on terms favorable to the Company.
(d) No cash dividend was declared during any quarter of fiscal 1997, 1996 or
1995, a result of the Company's operating losses and restrictions
contained in the Company's 7 1/2% Convertible Subordinated Debentures due
2010. The Company does not expect to resume payment of cash dividends in
the foreseeable future. See Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
The following tables summarize selected consolidated financial data and
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this report. Reclassification of prior year
amounts have been made to conform with the current year's presentation. See Item
7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," for a discussion of recent results of operations and liquidity.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Operating revenues ........................... $ 39,504 $ 32,488 $ 29,282 $ 34,277 $ 51,847
Costs and expenses:
Direct healthcare operating expenses ......... 35,147 29,208 31,497 31,875 50,924
General and administrative expenses .......... 7,370 7,632 4,331 5,455 5,754
Provision for doubtful accounts .............. 539 934 1,423 1,558 6,187
Depreciation and amortization ................ 714 2,099 1,797 1,762 2,946
Write-down of assets ......................... -- -- 741 1,825 3,670
Restructuring expenses ....................... 195 94 -- -- 2,097
Equity in (earnings) loss of
unconsolidated affiliates .................. -- 191 -- -- (384)
Other non-recurring expenses ................. -- -- -- -- 3,355
---------- ---------- ---------- ---------- ----------
43,965 40,158 39,789 42,475 74,549
---------- ---------- ---------- ---------- ----------
Loss from operations ......................... (4,461) (7,670) (10,507) (8,198) (22,702)
Other income/(expenses):
Gain on the sale of RehabCare stock, net ..... -- -- -- -- 13,114
Gain on Sovran settlement, net ............... -- -- -- -- 584
Gain on sale of assets ....................... 47 1,336 836 1,825 --
Loss on sale of assets ....................... (33) (82) (354) -- (712)
Non-operating gain (loss) .................... (390) 860 -- -- --
Interest income .............................. 259 210 38 50 69
Interest expense ............................. (732) (1,374) (1,366) (1,228) (1,759)
---------- ---------- ---------- ---------- ----------
Loss before income taxes ........................ (5,310) (6,720) (11,353) (7,551) (11,406)
Provision (benefit) for income taxes ............ (341) (2,478) 180 301 194
---------- ---------- ---------- ---------- ----------
Net loss before extraordinary gain .............. $ (4,969) $ (4,242) $ (11,533) $ (7,852) $ (11,600)
Extraordinary gain, net of taxes of $0 ....... 2,172 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss ........................................ (2,797) (4,242) (11,533) (7,852) (11,600)
Dividends on convertible preferred stock ........ (31) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss attributable to common stockholders .... $ (2,828) $ (4,242) $ (11,533) $ (7,852) $ (11,600)
========== ========== ========== ========== ==========
Loss per common share:
Net loss before extraordinary gain ........... $ (1.62) $ (1.60) $ (5.11) $ (3.57) $ (5.28)
Extraordinary gain, net of taxes of $0 ....... 0.70 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss attributable to common stockholders $ (0.92) $ (1.60) $ (5.11) $ (3.57) $ (5.28)
========== ========== ========== ========== ==========
Supplemental loss per share:
Net loss ..................................... $ (0.81) $ (1.60) $ (5.11) $ (3.57) $ (5.28)
========== ========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding ................ 3,088 2,654 2,257 2,199 2,196
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
AS OF MAY 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital (deficit) ....................... $ (12,387) $ (20,171) $ (15,342) $ 412 $ 438
Total assets .................................... 24,746 25,119 26,001 33,226 46,968
Long-term debt .................................. 2,712 24 5,077 10,477 10,652
Long-term debt including current maturities
and debentures ................................. 2,758 12,026 17,900 10,631 12,789
Stockholders' equity (deficit) .................. (2,570) (6,798) (4,933) 5,099 12,951
</TABLE>
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Annual Report on Form 10-K includes forward-looking statements, the
realization of which may be impacted by certain important factors discussed
below under "Risk Factors -- Important Factors Related to Forward-Looking
Statements and Associated Risks."
General
The following utilization statistics include data from all operations
including closures during the periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
------------------------------------------------------ ------------------------
MAY 31, FEBRUARY 28, NOVEMBER 30, AUGUST 31, MAY 31, MAY 31,
1997 1997 1996 1996 1997 1996
--------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
MANAGED CARE OPERATIONS:
Carve-out (capitated) ............ 1,099,360 1,226,555 1,179,728 1,035,510 1,099,360 943,081
ASO services .................... 225,518 229,204 76,526 33,770 225,518 6,260
EAP services .................... 65,183 66,988 66,162 70,596 65,183 83,493
Blended products ................. 1,384 3,291 4,680 4,601 1,384 4,579
--------- --------- --------- --------- --------- ---------
Total* ...................... 1,391,445 1,526,038 1,327,096 1,144,477 1,391,445 1,037,413
========= ========= ========= ========= ========= =========
FREESTANDING FACILITIES:
Patient days ..................... 1,249 1,470 1,591 1,516 5,826 9,361
Occupancy rate ................... 37% 43% 47% 29% 38% 19%
Admissions ....................... 285 301 301 312 1,199 1,632
Average length of stay (days) .... 4 5 5 5 5 6
BEHAVIORAL MEDICINE CONTRACTS:
Patient days ..................... 1,634 1,281 2,256 2,914 8,085 15,875
Average occupied beds per
contract ...................... 4 3 5 5 6 4
Admissions ....................... 366 334 358 464 1,522 2,304
Average length of stay (days) .... 4 4 6 6 5 7
TOTAL BEDS AVAILABLE AT END OF PERIOD:
Freestanding facilities .......... 38 38 38 58 38 58
Behavioral medicine contracts .... 92 55 55 82 92 105
</TABLE>
- -----------
* Includes adjustments for retroactivity.
In response to continuing changes in the behavioral healthcare industry,
the Company has made significant changes in its operations, including the
divestiture of many freestanding facilities, so that the Company can focus on
its network solutions related to managed care and behavioral medicine contract
management operations. During fiscal 1997 and 1996, managed care operations
experienced significant growth through internal development and the expansion
into new managed behavioral healthcare markets and products. During fiscal
1997, the Company's operating revenues increased by $7.0 million or 22 percent
to $39.5 million with managed care operations increasing to 72 percent of the
Company's overall operating revenues. In addition, managed care operations
experienced a 34 percent growth in covered lives through internal development
and the expansion into new behavioral health managed care markets and products.
As a result of the Company's continued net losses, the Company has had
difficulty generating sufficient cash flows from operations to meet its
obligations and sustain its operations. During fiscal 1997, the Company has
utilized the proceeds from the sale of assets, income tax refunds and available
cash on hand to fund its working capital deficit and its Debenture Exchange
Offer.
Global Restructuring
In early fiscal 1995, Management developed a "global restructuring" plan
intended to address the Company's immediate challenges. Management achieved all
of the then identified objectives of the plan, including the restructuring of
the Company's financial obligations represented by the Company's 7 1/2%
Convertible Subordinated
18
<PAGE> 19
Debentures (the "Debentures") which occurred during the third quarter of fiscal
1997 (see Note 11 to the Company's Consolidated Financial Statements included
herein).
During fiscal 1996, the Company recorded $0.1 million in restructuring
charges related to the Company's planned closure and disposition of its
freestanding facility in Cincinnati, Ohio which occurred during the first
quarter of fiscal 1997. The components of this charge are predominately
severance to hospital employees. Closure of this facility was consistent with
the Company's global restructuring plans and will eliminate the funding of
operating losses and cash flow deficits generated by this facility. During
fiscal 1997, the Company closed the administrative offices of Comprehensive Care
Integration located in San Ramon, California. Closure of this office and several
non-performing contract units was part of the planned restructuring of these
operations. The impact of this restructuring was approximately $0.2 million. The
following table sets forth the activity to the restructuring reserve during
fiscal 1997:
<TABLE>
<CAPTION>
CHARGES
MAY 31, ---------------------- MAY 31,
1996 INCOME EXPENSE PAYMENTS 1997
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Restructuring Reserve:
Severance ..................... $ 81 $ (36) $ 86 $ (53) $ 78
Operations/corporate relocation 296 -- 145 (221) 220
-------- -------- -------- -------- --------
$ 377 $ (36) $ 231 $ (274) $ 298
======== ======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS - FISCAL 1997 (COMPARED WITH FISCAL 1996)
The Company reported year-to-year improvement of $1.4 million or $0.68
per share. The net loss for the Company declined to $2.8 million or $0.92 per
share for the fiscal year ending May 31, 1997 versus $4.2 million or $1.60 loss
per share for the prior year. The Company's results for fiscal 1997 included:
$0.2 million of restructuring charges, a $0.1 million loss on disposal of the
interest in an unconsolidated affiliate, a $0.3 million legal settlement, a $0.8
million charge for performance compensation expenses related to the accelerated
vesting of restricted common shares and an extraordinary gain of $2.2 million
related to the Company's Debenture Exchange Offer. Non-recurring items included
in the results for fiscal 1996 were: a gain of $1.3 million from the sale of
assets, litigation settlement proceeds of $0.9 million, a credit of $0.4 million
from settlement with the Company's insurance carrier, a $0.2 million loss in the
equity of unconsolidated affiliates, $0.1 million of restructuring charges and
$0.8 million in write-offs of goodwill. Exclusive of these non-recurring items,
the net loss for fiscal 1997 was $3.6 million compared to the net loss of $5.7
million for the prior year. (See the Notes to the Company's Consolidated
Financial Statements).
The net loss for fiscal 1997 attributable to common stockholders
further increases the net loss for the dividend on preferred stock of $31,000.
During fiscal 1997 the Company exchanged its Secured Convertible Note into
Series A Non-Voting 4% Cumulative Convertible Preferred Stock (the "Preferred
Stock") (see Note 16 to the Company's Consolidated Financial Statements
included herein).
During fiscal 1997, the Company's operating revenues increased 22
percent versus the prior year primarily due to a 78 percent increase in managed
care revenues. As part of the Company's global restructuring plan, revenues from
freestanding and contract operations declined by 64 percent as the Company
terminated a significant portion of those businesses. Consequently, direct
healthcare operating expenses during fiscal 1997 increased by 20 percent or $5.9
million to $35.1 million from the prior year due to the change in the Company's
mix of behavioral services to emphasize managed care.
General and administrative expenses for fiscal 1997, including an $0.8
million of performance compensation expenses primarily related to the
accelerated vesting of restricted common shares granted to the Chief Executive
Officer and $0.1 million for fees recognized related to the Company's fiscal
1996 Federal tax refund, declined from the prior year by $0.3 million to $7.4
million. Fiscal 1996 general and administrative expenses included $0.5 million
in fees recognized related to the Company's fiscal 1995 Federal tax refund
(see Note 13 to the Company's Consolidated Financial Statements included
herein). Net of these charges, general and administrative expenses for fiscal
1997 decreased by $0.7 million as compared to the prior year.
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Depreciation and amortization for the fiscal 1997 year declined by $1.4
million or 66 percent as compared to fiscal 1996 primarily due to the closure
and sale of facilities and the write-off during fiscal 1996 of $0.8 million of
goodwill.
Interest expenses for fiscal 1997 declined by $0.6 million or 47 percent
to $0.7 million as compared to $1.4 million for fiscal 1996 primarily due to the
decrease in long-term debt as a result of the exchange of the Company's Secured
Convertible Note and the exchange of 72 percent of the Company's Debentures
effected during fiscal 1997 (see Note 11 to the Company's Consolidated Financial
Statements included herein).
Included in the Company's provision for income taxes is an income tax
benefit of $0.3 million related to the carryback of fiscal 1996 losses defined
under Section 172(f) (see Note 13 to the Company's Consolidated Financial
Statements included herein). The Company is currently under audit by the IRS
related to its 1996 and 1995 Federal tax returns and the amended returns for
prior years.
The Company's current assets increased by $1.5 million during fiscal
1997 to $11.5 million from $10.0 million. This increase is primarily due to the
reclassification of one freestanding facility under contract to be sold as
current assets held for sale. Other receivables as of May 31, 1997 increased by
$1.0 million from the prior year. This receivable is related to the Company's
1996 and 1995 Federal tax refunds (see Note 13 to the Company's Consolidated
Financial Statement included herein). This increase was offset by a decrease in
cash and cash equivalents of $0.4 million and accounts receivable of $0.5
million from the prior year. The decline in accounts receivable is consistent
with the closure of one freestanding facility during fiscal 1997 and 14 contract
units.
Non-current property and equipment held for sale decreased by $5.0
million to $1.9 million at May 31, 1997. This decrease is due to the
reclassification of one facility to current assets held for sale and the sale of
another facility during fiscal 1997 (see Note 3 to the Company's Consolidated
Financial Statements included herein).
The Company's current liabilities decreased during fiscal 1997 by $6.2
million to $23.9 million. This decrease is a result of the Debenture Exchange
Offer (see Note 11 to the Company's Consolidated Financial Statements included
herein) which resulted in $6.9 million of principal amount of Debentures being
tendered for exchange and the remaining $2.7 in principal amount reclassified to
long-term debt. The increase in accrued claims payable at May 31, 1997 of $3.6
million was more than offset by the decrease in accounts payable and accrued
liabilities of $2.9 million and decrease in current maturities of long-term debt
of $2.4 million. The decrease in current maturities of long-term debt is
predominately a result of the exchange of the Company's $2.0 million Secured
Convertible Note into Preferred Stock. Also affecting current liabilities as of
May 31, 1997 is the increase in unbenefitted tax refunds received of $5.1
million. The increase is related to the receipt of the Company's 1996 Federal
tax refund in October 1996.
Long-term debt as of May 31, 1997 increased by $2.7 million from the
prior year due to the reclassification related to the Debenture Exchange Offer.
In addition, minority interest as of May 31, 1997 decreased by $1.0 million from
the prior year. During the third quarter of fiscal 1997, PCA exercised its
option to exchange its interest in the Company's subsidiary into 100,000 shares
of the Company's Common Stock (see Note 3 to the Company's Consolidated
Financial Statements included herein).
During fiscal 1997 the number of covered lives increased by 34 percent
from fiscal 1996. This increase is primarily attributable to new contracts added
for managed care operations during fiscal 1997 and growth in existing contracts
in South Florida. Of this increase, covered lives for existing contracts
including Medicaid expansion in Puerto Rico, experienced a 36 percent increase.
The remaining growth, 303,000 lives, relates to new contracts added in South
Florida, Texas, New Jersey and Michigan. As a result, fiscal 1997 operating
revenue increased $12.4 million or 78 percent from fiscal 1996, which is
attributable to new contracts added during the fiscal year and growth in
existing contracts. Direct healthcare operating expenses increased by $11.8
million to $25.0 million or by 89 percent in fiscal 1997. This increase is
primarily a result of an increase in the costs associated with the expansion,
development, and implementation of new contracts in multiple states and Puerto
Rico. Direct healthcare operating expenses include charges for claims for
services rendered and reported as well as estimates for services rendered and
not reported. Claims expense in fiscal 1997 increased $9.3 million or 109
percent from fiscal 1996 predominately as a result of increased covered lives
and Medicaid contracts. General and administrative expenses increased to $2.8
million for fiscal 1997 versus $2.1 million for the prior year. In addition,
fiscal 1997 includes a legal settlement of $0.3 million.
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During fiscal 1997, patient days of service under CCI contracts declined
by approximately 49 percent from 15,875 patient days to 8,085 patient days. CCI
opened one new unit and closed 14 units during fiscal 1997. Of the 14 units
closed during fiscal 1997, five provided inpatient services. As a result, the
decline in patient days is primarily attributable to the units closed during
fiscal 1997, a decline in length of stay and increased influence of managed
care. During fiscal 1997, operating revenues for contract operations decreased
by $1.5 million or 27 percent and direct healthcare expenses decreased by $2.2
million or 40 percent from the prior year. The decrease in operating revenue and
direct healthcare expenses in fiscal 1997 is attributable to the closure of
non-performing contract units. The results for fiscal 1997 also include a
restructuring charge of $0.2 million related to the closure of the
administrative offices in San Ramon, California. This office closure is
predominately responsible for the decrease of $0.6 million in general and
administrative expenses during fiscal 1997. As a result of the above, net
operating income for contract operations for fiscal 1997 increased by $1.9
million from the prior year. During fiscal 1997, overall outpatient revenues
decreased by 27 percent due to the closure of eight outpatient units during the
fiscal year. Of the eight closures, five were partial hospitalization programs
that contributed 42 percent of total operating revenue for fiscal 1997. For
units operational in both fiscal years, direct healthcare operating expenses
decreased 13 percent. This decrease, combined with the increase in operating
revenues, resulted in an overall increase in net income of $0.3 million in
fiscal 1997 from $0.1 million in fiscal 1996.
Admissions for freestanding operations in fiscal 1997 declined overall
by 433 to 1,199 from 1,632 in fiscal 1996, an overall decline of 27 percent.
This decline in admissions was attributable to the closure of one facility in
the first quarter of fiscal 1997. The Company's remaining freestanding facility
experienced an increase in admissions in fiscal 1997 with no change in average
length of stay of five days when compared to the prior fiscal year. Overall
operating revenue per patient day decreased by 3 percent to $1,111 in fiscal
1997 from fiscal 1996 and overall patient days declined 38 percent to 5,826,
resulting in a decrease of approximately $4.3 million, or 40 percent, in
operating revenues. Operating revenues declined by $3.9 million to $6.8 million
during fiscal 1997 due to the closure of one facility in the first quarter of
fiscal 1997. Direct healthcare operating expenses declined by $4.8 million or 44
percent to $6.1 million in fiscal 1997 from $10.9 million in fiscal 1996. In
addition, the provision for doubtful accounts declined by $0.3 million or 49
percent. Depreciation and amortization expenses decreased during fiscal 1997 by
$1.4 million compared to fiscal 1996, due to the write-down of goodwill for two
freestanding facilities during fiscal 1996 and a decrease in depreciation
expense as the Company continues to implement its plan for the disposal and sale
of freestanding facilities.
RESULTS OF OPERATIONS - FISCAL 1996 (COMPARED WITH FISCAL 1995)
The Company incurred a loss of approximately $4.2 million or $1.60 loss
per share for the fiscal year ended May 31, 1996, which was an improvement of
$7.3 million or $3.51 per share compared to the $11.5 million or $5.11 loss per
share in the prior year.
During fiscal 1996, operating revenues increased $3.2 million or 11
percent from fiscal 1995, primarily as a result of an increase in managed care
revenues. The increase in managed care revenues of $10.5 million or 192 percent
during fiscal 1996 was partially offset by a decline in freestanding operations
revenues of $7.5 million or 41 percent. The decline in revenues from
freestanding operations was primarily due to the planned closure and sale of
facilities during fiscal 1995 and 1996. In addition, revenues for contract
operations increased by 5 percent during fiscal 1996 as compared to the prior
year.
Direct healthcare operating expenses decreased by $2.0 million during
fiscal 1996 to $29.5 million as compared to $31.5 million for fiscal 1995. The
decrease in direct healthcare operating expenses experienced by freestanding
facilities of $8.9 million or 45 percent was offset by an 84 percent or $6.0
million increase in managed care direct healthcare expenses. General and
administrative expenses increased by $3.3 million, primarily as a result of an
increase in managed care expenses of $2.0 million, and an increase of $1.5
million in corporate overhead expenses.
In fiscal 1996, the Company recorded $0.2 million for the equity in the
loss of unconsolidated joint ventures (see Note 7 to the Company's Consolidated
Financial Statements included herein) and $0.1 million in restructuring charges.
The restructuring charges during fiscal 1996 related to the planned closure of
the Company's freestanding facility in Cincinnati, Ohio. Bad debt expense
declined by $0.5 million or 34 percent in fiscal 1996 as compared to the prior
year. The decline in bad debt was the result of the significant decline in
hospital operations, which was partially offset by an increase in bad debt
expense attributable to behavioral medicine contract operations.
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In fiscal 1996, depreciation and amortization expense increased by $0.3
million or 17 percent compared to the prior year. The decline of depreciation
expense as the Company continued to implement its plan for the disposal and sale
of freestanding facilities was offset during fiscal 1996 by the write-off of
$0.8 million in goodwill. The Company determined that its long-lived asset was
impaired due to the intended closure of its freestanding facility in Cincinnati,
Ohio and the sale of the facility in Costa Mesa, California.
Included in other income/(expense), was a gain on sale of assets of $1.3
million, of which $0.3 million related to the sale of the Company's freestanding
facility in San Diego, California, and $1.0 million related to the sale of
operations in Kirkland, Washington. In fiscal 1996 and 1995, the Company
reported a loss on the sale of assets of $0.1 million and $0.3 million,
respectively. Fiscal 1996 also included the proceeds of $0.9 million related to
a legal settlement. Interest income increased during fiscal 1996 by $0.2 million
compared to the prior year while interest expense remained constant.
Included in the Company's provision for income taxes was an income tax
benefit of $2.6 million related to the carryback of fiscal 1995 losses defined
under Section 172(f) (see Note 13 to the Company's Consolidated Financial
Statements included herein").
During fiscal 1996, the number of covered lives for managed care
operations increased by 134 percent from fiscal 1995. This increase is primarily
attributable to new contracts added during fiscal 1996 and growth in existing
contracts in South Florida. Of this increase, covered lives for existing
contracts experienced a 26 percent increase. The remaining growth, 441,000
lives, related to new contracts added in South Florida, Texas, and new contracts
for Medicaid in Puerto Rico. As a result, operating revenue for managed care
operations increased $10.5 million or 192 percent from fiscal 1995, which was
attributable to new contracts added during the fiscal year. Direct healthcare
operating expenses increased by $6.0 million to $13.2 million or by 84 percent
in fiscal 1996, which was primarily a result of an increase in the costs
associated with the expansion, development, and implementation of new contracts
in multiple states. General and administrative expenses increased to $2.1
million for fiscal 1996 versus $0.1 million in fiscal 1995. In fiscal 1995,
managed care operations reported $0.1 million for general and administrative
expenses. Also, fiscal 1995 results included a one-time legal settlement of
$0.2 million.
During fiscal 1996, patient days of service under CCI contracts declined
by approximately 45 percent from 29,082 patient days to 15,875 patient days.
Although CCI opened seven new units during fiscal 1996, only one provided
inpatient services. Of the seven units closed during fiscal 1996, six of the
seven provided inpatient services. As a result, the decline in patient days was
attributable to the units closed during fiscal 1996, a decline in length of stay
and increased influence of managed care. During fiscal 1996, CCI opened seven
contracts, of which three were partial hospitalization programs. During fiscal
1996, CCI's operating revenue increased by $0.3 million or 5 percent while
direct healthcare operating expenses increased by $1.1 million or 26 percent
from the prior year, resulting in a decrease in net operating income of $1.5
million from the prior year. The increase in direct healthcare operating
expenses was primarily attributable to the increase in overhead and marketing
and the costs associated with the seven units added during fiscal 1996.
Admissions in freestanding operations in fiscal 1996 declined overall by
1,697 to 1,632 from 3,329 in fiscal 1995, an overall decline of 51 percent. Of
this decline, 1,639 fewer admissions were attributable to facilities which were
closed or under contract to be sold as of May 31, 1996. The Company sold the
operations of one facility and closed another during fiscal 1996 due to poor
performance. The remaining facilities ("same store") experienced a decrease in
admissions and a 44 percent decline in length of stay to five days, resulting in
45 percent fewer patient days than the prior fiscal year. Overall operating
revenue for freestanding operations per patient day increased by 79 percent to
$1,148 in fiscal 1996 from fiscal 1995 and overall patient days declined 66
percent to 9,361, resulting in a decrease of approximately $7.5 million, or 41
percent, in operating revenues. Direct healthcare operating expenses declined by
$8.9 million or 45 percent to $10.9 million in fiscal 1996 from $19.8 million in
fiscal 1995. This decline was primarily attributable to the sale and/or closure
of facilities during fiscal 1996. Fiscal 1995 included a one-time legal expense
related to the Company's freestanding facility in Aurora, Colorado of $0.2
million. In addition, the provision for bad debts declined by $0.6 million or 50
percent. General and administrative expenses declined by $0.6 million, of which
$0.4 million was due to a favorable settlement in the first quarter of fiscal
1996. Included in the fiscal 1996 results was a restructuring charge of $0.1
million related to the Company's planned closure of its freestanding facility in
Cincinnati, Ohio. The Company recorded no write-downs during fiscal 1996 and a
write-down of $0.7 million in fiscal 1995 due to an impairment of net realizable
value. In addition, the Company recorded a gain on the sale of assets during
fiscal 1996 and 1995 of $1.3 million and $0.8 million, respectively. Included in
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the gain on sale of assets for fiscal 1996 was the sale of operations in
Kirkland, Washington and the sale of the facility in San Diego, California.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1997, the Company had cash and cash equivalents of $4.0
million. During the fiscal year ended May 31, 1997, the Company provided $1.1
million from its operating activities, including $5.1 million of receipts from
income tax refunds; provided $1.1 million from its investing activities; and
utilized $2.6 million in its financing activities. The Company reported a net
loss of $2.8 million for the fiscal year ended May 31, 1997, versus a net loss
of $4.2 million for the fiscal year ended May 31, 1996, an improvement of $1.4
million. As a result, the Company has an accumulated deficit of $53.6 million
and total stockholders' deficit of $2.6 million as of May 31, 1997.
Additionally, the Company's current assets at May 31, 1997 amounted to
approximately $11.5 million and current liabilities were approximately $23.9
million, resulting in a working capital deficiency of approximately $12.4
million and a negative current ratio of 1:2.1. Included in current liabilities
is $12.1 million of unbenefitted tax refunds received (see Note 13 to the
Company's Consolidated Financial Statements included herein). The Company's
primary use of available cash resources is to expand its behavioral medicine
managed care and contract management businesses and fund operations while it
seeks to dispose of certain of its freestanding facilities.
Included in operating activities for fiscal 1997 is a gain on the
Debenture Exchange Offer of $2.2 million (see Note 11 to the Company's
Consolidated Financial Statements included herein). The increase in Notes and
other receivables of $0.7 million is related to the Company's Federal tax refund
received in October 1996. The receipt of the tax refund is reflected as an
increase in unbenefitted tax refunds received of $5.1 million. Depreciation and
amortization expenses declined by $1.4 million to $0.7 million for fiscal 1997.
The decrease is due to the results for fiscal 1996 including a write-down of
goodwill of $0.8 million. In addition, depreciation expense continues to decline
as the Company completes its plan for the disposal and sale of freestanding
facilities. The provision for doubtful accounts declined during fiscal 1997 by
$0.4 million to $0.5 million. This decline is also attributable to the disposal
and sale of freestanding facilities during fiscal 1997. Current and other assets
increased by $1.0 million which was offset by an increase in accounts payable
and accrued liabilities of $0.7 million.
Included in the funds provided from investing activities during fiscal
1997 are the proceeds from the sale of property and equipment of $1.6 million
which was partially offset by additions to property and equipment of $0.5
million. In addition, the Company utilized $4.2 million for the repayment of
debt primarily related to the Debenture Exchange Offer and received $1.5 million
of proceeds from the sale of Common Stock related to employee stock options.
The cumulative effect of the above resulted in an ending cash position
on May 31, 1997 of $4.0 million, a decrease of $0.4 million.
Included in current and non-current assets are two hospital facilities
designated as property and equipment held for sale with a total carrying value
of $4.7 million. In previous years, the Company was obligated to support and
fund certain poorly performing freestanding facilities that now have been
closed, including two such facilities closed in fiscal 1996 and another in
fiscal 1997 (see Note 5 to the Company's Consolidated Financial Statements
included herein). The Company sold two closed and non-operating facilities
during fiscal 1997 and a third facility during the first quarter of fiscal 1998.
As a result, the Company will no longer be burdened with the negative cash flow
requirements associated with such facilities. Additionally, during prior years,
management implemented its plans for expanding its managed care operations which
were funded by the parent. During fiscal 1997, due to the expansion of its
business, the managed care subsidiary required little additional funding. Should
this continue in future periods, the elimination of such funding requirements
would decrease the Company's future cash flow requirements and assist it in
attaining a cash flow positive position from operations.
During fiscal 1997, the Company completed its Debenture Exchange Offer
(see Note 11 to the Company's Consolidated Financial Statements included
herein). In addition to recognizing a gain on the exchange of $2.2 million, the
Exchange resulted in a reduction of debt of $6.8 million with the remaining $2.7
million in Debentures due in 2010. The Debenture Exchange will also result in a
reduction of interest expense for future periods. The bondholders also consented
to the waiver and elimination of the Debenture sinking fund. Annual sinking fund
installments of 5 percent would have been payable commencing in April 1996 and
continuing annually through April 2009. The sinking fund requirements were
eliminated during fiscal 1997. During the third quarter of fiscal 1997, the
Company
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exchanged its Secured Convertible Note into Preferred Stock and also exchanged a
minority interest in one of its subsidiaries into 100,000 shares of its Common
Stock (see Note 3 to the Company's Consolidated Financial Statements included
herein). As a result of the above transactions, current liabilities were reduced
by $11.5 million, non-current liabilities were increased by $1.6 million, and
stockholders' deficit was improved by $5.3 million. These transactions also
reduced the Company's future cash obligations with the significant reduction in
debt, interest expense and future sinking fund requirements.
Based upon current levels of operation and cash on hand of $4.0 million,
cash generated in the amount of $2.9 million from the sale of the Company's
freestanding facility on June 4, 1997, and cash anticipated to be internally
generated from operations, the Company believes that it has sufficient working
capital to meet obligations as they become due; however, the ultimate resolution
of the Company's entitlement to certain IRS refund claims, the occurrence of
business or economic conditions beyond the control of the Company or the loss of
existing contracts from which cash from operations is internally generated or
the inability to conclude pending contract proposals may adversely affect the
adequacy of such working capital.
The Company also has the following potential sources of cash to fund
additional operating needs:
- A firm commitment from a mutual fund to purchase in a private
placement at least $5.0 million of 15 percent fully secured Company
notes due no earlier than November 1998 if offered by the Company.
- Filed amended Federal tax returns: The Company filed its fiscal 1995
Federal tax return, and a Form 1139 "Corporate Application for
Tentative Refund" in the amount of $9.4 million. The Company received
the full refund claim for fiscal 1995 in October 1995. In September
1996, the Company filed its fiscal 1996 Federal tax return and also
filed a Form 1139. The Company received a refund in the amount of
$5.4 million during the second quarter of fiscal 1997. The Company
has also filed amended Federal tax returns for prior years to claim
refunds for an additional $7.7 million. These refund claims have been
made under Section 172(f) of the Internal Revenue Code, an area of
the tax law without significant precedent, and there may be
substantial opposition by the IRS to the Company's refund claims. The
Company is currently under audit by the IRS regarding its 1996 and
1995 Federal tax returns and the amended returns for prior years.
Accordingly, no assurances can be made as to the Company's ultimate
entitlement to refunds received or the timing of the receipt of the
balance of the refund claims (see Note 13 to the Company's
Consolidated Financial Statements included herein).
- Included in assets held for sale (non-current) is one hospital
facility designated as property and equipment held for sale with a
total carrying value of $1.9 million. The Company expects to sell
this facility during fiscal 1998.
The Company has announced its intention to relocate certain corporate
functions during the second quarter of fiscal 1998 (see Note 19 to the Company's
Consolidated Financial Statements included herein). The Company has not
completed the estimate of the costs associated with this relocation but expects
the costs and funding requirements during fiscal 1998 may be in excess of $0.6
million and $0.4 million, respectively. The Company believes that it will have
sufficient working capital to meet the funding requirements related to the
relocation.
Additionally, the Company believes that it would be able to raise
additional working capital through either an equity offering or borrowings if it
so desired. However, the Company cannot state with any degree of certainty at
this time whether additional equity capital or working capital would be
available to it, and if available, would be at terms and conditions acceptable
to the Company. All of these potential sources of additional cash in fiscal 1998
are subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1998 the Company
will complete the transactions required to fund its working capital deficit.
RISK FACTORS
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Annual Report on Form 10-K contains or may contain certain
forward-looking statements that are based on current expectations and involve a
number of risks and uncertainties. Factors that may materially affect revenues,
expenses and operating results include, without limitation, the Company's
success in (i) disposing of certain remaining
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facilities on acceptable terms, (ii) expanding the behavioral medicine managed
care operations of the Company's business, (iii) securing and retaining certain
refunds from the IRS and recovering monetary damages from adverse parties in
pending legal proceedings, (iv) the ability to obtain and perform risk-based
capitation contracts at profitable levels, (v) maintaining the listing of the
Company's Common Stock on the New York Stock Exchange, Inc., (vi) obtaining
additional equity capital to fund losses from operations and to expand the
Company's principal behavioral healthcare business, as to which no assurance can
be given that such additional equity may be obtained on terms favorable to the
Company, (vii) the ability of the Company to successfully relocate certain core
functions from California to Florida and to re-establish such functions in
Florida, and to successfully recruit executive personnel and support personnel
necessary to carry out such functions, including the recruitment of experienced
chief financial and chief operating officers, and (viii) the impact and
consideration of other business, economic or other considerations discussed
below.
The forward-looking statements included herein are based on current
assumptions including that competitive conditions within the healthcare industry
will not change materially or adversely, that the Company will retain existing
key management personnel, that the Company's forecasts will accurately
anticipate market demand for its services, and that there will be no material
adverse change in the Company's operations or business. Assumptions relating to
the foregoing involve judgments that are difficult to predict accurately and are
subject to many factors that can materially affect results. Budgeting and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its budgets,
which may in turn affect the Company's results. In light of the factors that can
materially affect the forward-looking information included herein, the inclusion
of such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY; FAILURE TO MEET NEW YORK STOCK EXCHANGE LISTING CRITERIA
As of May 31, 1997, the Company had a stockholders' deficiency of $2.6
million, a working capital deficiency of approximately $12.4 million and a
negative current ratio of 1:2.1. The net loss from operations for fiscal 1997
was $4.5 million.
There can be no assurance that the Company will be able to achieve
profitability and maintain positive cash flows from operations or that
profitability and positive cash flow from operations can be sustained on an
ongoing basis. Moreover, if achieved, the level of that profitability or that
positive cash flow cannot accurately be predicted.
The Company's lack of profitability has resulted in the Company failing
to satisfy listing standards of the NYSE. No assurance can be made that the
Common Stock will continue to trade on the NYSE or that the Company can satisfy
the comparable requirements of any other stock exchange or the NASDAQ stock
market.
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN
The Company's independent auditors have included an explanatory
paragraph in their report that states that the Company's history of losses and
consolidated financial position raise substantial doubt about its ability to
continue as a going concern.
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING
The Company's negative cash flow from operations has consumed
substantial amounts of cash. The completion of the Debenture Exchange Offer
required substantial amounts of cash for the payment of $4.6 million of default
interest and/or payment in exchange for surrender of Debentures which resulted
in a depletion of the Company's cash resources (see Note 11 to the Company's
Consolidated Financial Statements included herein).
During prior fiscal years, a principal source of liquidity has been the
private sale of equity securities and debt securities convertible into equity.
Under the shareholder policies of the NYSE, the Company may not be able to
effect large placements of equity without shareholder approval, which, if not
obtained, may adversely affect the Company with respect to future capital
formation. In addition, issuance of additional equity securities by the Company
could result in substantial dilution to stockholders.
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The Company has received tax refunds for fiscal 1996 and 1995 in the
amounts of $9.4 million and $5.4 million, respectively. Such refunds are based
on loss carrybacks under Section 172(f) of the Internal Revenue Code. Any IRS
claim for return of all or any portion thereof could have an adverse effect on
the Company's cash flows. See "Taxes," below.
DISPOSITION OF ASSETS
The Company has been required to dispose of various properties in order
to raise working capital, and no assurance can be made that such dispositions
will not have adverse effects on the Company's financial condition or that the
Company has additional assets that could be disposed of or utilized as
collateral in order to fund its capital requirements.
TAXES
The Company has received tax refunds of approximately $14.8 million from
the carry back of fiscal 1996 and 1995 specified losses defined in Section
172(f). Section 172(f) provides for a 10 year net operating loss carryback for
losses attributable to specified liability losses. A specified liability loss is
defined, in general, as any amount otherwise allowable as a deduction which is
attributable to (i) a product liability or (ii) a liability arising under a
federal or state law or out of any tort if the act giving rise to such liability
occurs at least three years before the beginning of the taxable year. Receipt of
the 1996 and 1995 tax refunds does not imply IRS approval. The proceeds to the
Company of the 1995 refund were reduced by a $2.5 million offset for the
Company's outstanding payroll tax obligation to the Internal Revenue Service
("IRS"), including interest, pursuant to a settlement agreement relating to tax
years 1983 through 1991. Also, a $3.0 million contingency fee was paid to
Deloitte & Touche, LLP from the refund proceeds. Section 172(f) is an area of
the tax law without guiding legal precedent. There may be substantial opposition
by the IRS to all or a substantial portion of such claims, and no assurances can
be made as to the ability to retain tax refunds based on such deductions.
Although the Company is currently being audited by the IRS, neither the Company
nor the IRS will be precluded in any resultant tax audit from raising these and
additional issues.
The Company may be unable to utilize some or all of its allowable tax
deductions or losses, which depends upon factors including the availability of
sufficient net income from which to deduct such losses during limited carryback
and carryover periods. Further, the Company's ability to use any Net Operating
Losses may be subject to limitation in the event that the Company issues or
agrees to issue substantial amounts of additional equity. The Company monitors
the potential for "change of ownership" and believes that its financing plans as
contemplated will not cause a "change of ownership;" however, no assurances can
be made that future events will not act to limit the Company's tax benefits.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company's ability to succeed in increasing revenues may depend in
part on the extent to which reimbursement of the cost of such treatment will be
available from government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price of medical products and services. As a result of
reimbursement changes and competitive pressures, the contractual obligations of
the Company have been subject to intense evaluation.
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS
Managed care operations are at risk for costs incurred to supply agreed
upon levels of service. Failure to anticipate or control costs could materially
adversely affect the Company. Additionally, the business of providing services
on a full risk capitation basis exposes the Company to the additional risk that
contracts negotiated and entered into may ultimately be determined to be
unprofitable, and result in significant losses by reason of unanticipated
utilization levels requiring the Company to deliver and provide services at
capitation rates which do not account for or factor in such utilization levels.
The levels of revenues and profitability of healthcare companies may be
affected by the continuing efforts of governmental and third-party payors to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement governmental controls on
the price of healthcare. It is uncertain what legislative proposals will
26
<PAGE> 27
be adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business, and no assurance can be given that any such reforms will not
have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company depends and will continue to depend upon the services of
its senior management and skilled personnel. The Company is presently in the
process of relocating certain significant management functions to Tampa,
Florida, where Comprehensive Behavioral, the Company's principal subsidiary, is
located. In connection with such relocation, the Company is in the process of
an executive search for a Chief Financial Officer and Chief Operating Officer
who will be based in Tampa, Florida. There is no assurance that the Company will
be able to successfully recruit individuals for such senior management
positions who have the necessary background and experience in the managed
healthcare field, nor is there any assurance, in connection with such pending
relocation, that the Company will be able to successfully recruit additional
middle management and support personnel who will be necessary to take over such
transitioned functions. On an interim basis, the Chief Executive Officer of the
Company will additionally assume the functions of Chief Operating Officer, and
the Company's current Chief Financial Officer will continue in such capacity
for an indeterminate period of time. In the event the Company is not able to
successfully recruit such new or additional management personnel, such event
could have a material adverse effect upon the Company's business, operations
and ultimate financial condition.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has issued or committed to issue no shares for future
issuances related to business transactions, approximately 344,000 shares related
to the conversion of debt or private placements, and options or other rights to
purchase approximately 1,093,000 shares; and contemplates issuing additional
amounts of debt, equity or convertible securities in private transactions in
furtherance of fulfilling its future capital needs (see "Need for Additional
Funds: Uncertainty of Future Funding"). Issuance of additional equity, and such
shares becoming free of restrictions on resale pursuant to Rule 144 or upon
registration thereof pursuant to registration rights granted on almost all of
these shares, and additional sales of equity, could adversely affect the trading
prices of the Common Stock.
PRICE VOLATILITY IN PUBLIC MARKET
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. Trading prices of securities of companies in the
healthcare and managed care sectors have experienced significant volatility. The
Company has determined, based upon inquiry made to the NYSE, that a "short
position" has existed with respect to the Company's Common Stock. This "short
position" has varied from time to time and the Company has been advised that the
net of "short position" as of August 20, 1997 was 109,580 shares. The Company
cannot predict the effect, if any, that such "short position" may have on either
the market or prices for the Company's Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation provides for 60,000
authorized shares of Preferred Stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by the Board of Directors
without any vote or action by the stockholders, which could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. There is currently issued and outstanding 41,260
shares of Preferred Stock designated as Series A Non-Voting 4% Cumulative
Convertible Preferred Stock (see Note 16 to the Company's Consolidated Financial
Statements included herein). The Company's Restated Certificate of Incorporation
also provides for a classified board of directors, with directors divided into
three classes serving staggered terms. In addition, the Company's stock option
plans generally provide for the acceleration of vesting of options granted under
such plans in the event of certain transactions which result in a change of
control of the Company. In addition, Section 203 of the General Corporation Law
of Delaware prohibits the Company from engaging in certain business combinations
with interested stockholders. In addition, each share of the Company's Common
Stock includes one right on the terms, and subject to the conditions, of the
Rights Agreement between the Company and Continental Stock Transfer & Trust
Company. These provisions may have the effect of delaying or preventing a change
in control of the Company without action by the stockholders, and therefore
could adversely affect the price of the Company's Common Stock or the
possibility of sale of shares to an acquiring person.
CONTINUED LISTING ON NYSE
The Company has been below certain continued listing criteria of the
NYSE since prior to October 1994. The continued listing of the Company's Common
Stock on the NYSE is subject to continual review and possible delisting upon
notices from the Listing and Compliance Committee of the NYSE.
27
<PAGE> 28
LIMITATIONS ON THE DEDUCTIBILITY OF COMPENSATION UNDER CERTAIN CIRCUMSTANCES
Pursuant to the 1993 Omnibus Budget Reconciliation Act, a portion of
annual compensation payable after 1993 to any of the Company's five highest paid
executive officers would not be deductible by the Company for federal income tax
purposes to the extent such officers' overall compensation exceeds $1.0 million
per executive officer. Qualifying performance-based incentive compensation,
however, would be both deductible and excluded for purposes of calculating the
$1.0 million base. The Board of Directors has determined that no portion of
anticipated compensation payable to any executive officer in 1997 would be
non-deductible.
28
<PAGE> 29
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, 1997, 1996 and 1995
<TABLE>
Page
Number
------
<S> <C>
Report of Independent Auditors......................................................... 30
Consolidated Balance Sheets, May 31, 1997 and 1996..................................... 31
Consolidated Statements of Operations, Years Ended May 31, 1997, 1996 and 1995......... 32
Consolidated Statements of Stockholders' Equity (Deficit), Years
Ended May 31, 1997, 1996 and 1995 ................................................... 33
Consolidated Statements of Cash Flows, Years Ended May 31, 1997, 1996 and 1995......... 34
Notes to Consolidated Financial Statements............................................. 35
</TABLE>
29
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Comprehensive Care Corporation
We have audited the accompanying consolidated balance sheets of
Comprehensive Care Corporation and subsidiaries as of May 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the three years in the period ended May 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Comprehensive Care Corporation and subsidiaries as of May 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended May 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements for the years ended
May 31, 1997 and 1996 have been prepared assuming the Company will continue as a
going concern. As more fully described in Note 2, the Company has reported
annual net losses for each of the last six fiscal years and has working capital
deficiencies of $12.4 million and $20.2 million and deficits in total
stockholders' equity of $2.6 million and $6.8 million as of May 31, 1997 and May
31, 1996, respectively. The current year reductions in both the working capital
deficiency and the deficit in total stockholders' equity result primarily from
the completion of the Debenture Exchange Offer, the exchange of the secured
convertible note and the conversion of a minority interest in a subsidiary into
the Company's common stock, as further discussed in Notes 12 and 16. The
remaining working capital deficiency of $12.4 million at May 31, 1997 relates
primarily to $12.1 million of unbenefitted tax refunds received for claims filed
under Section 172(f) of the Internal Revenue Code, which are included within the
scope of an audit of the Company by the Internal Revenue Service currently in
process. The Company has also filed refund claims with the IRS for an additional
$7.7 million under Section 172(f) for which no refunds have been received. As
there is little precedent in this area of tax law, no assurances can be made as
to the Company's ultimate entitlement to the $12.1 million of such unbenefitted
tax refund receipts, nor the timing of any settlement of these refund claims
with the IRS. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 2. The 1997 and 1996 consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Orange County, California
July 30, 1997, except for Note 19 as
to which the date is August 18, 1997
30
<PAGE> 31
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
--------------------------
1997 1996
---------- ----------
A S S E T S (DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 3,991 $ 4,433
Accounts receivable, less allowance for
doubtful accounts of $883 and $877 ................................. 1,988 2,476
Other receivables ..................................................... 2,486 1,479
Property and equipment held for sale .................................. 2,797 1,233
Other current assets .................................................. 259 352
---------- ----------
Total current assets ...................................................... 11,521 9,973
---------- ----------
Property and equipment .................................................... 10,138 9,863
Less accumulated depreciation and amortization ............................ (3,820) (3,590)
---------- ----------
Net property and equipment ................................................ 6,318 6,273
---------- ----------
Property and equipment held for sale ...................................... 1,910 6,915
Notes receivable .......................................................... 1,941 62
Goodwill, net ............................................................. 1,567 696
Other assets .............................................................. 1,489 1,200
---------- ----------
Total assets .............................................................. $ 24,746 $ 25,119
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities .............................. $ 5,152 $ 8,031
Accrued claims payable ................................................ 6,256 2,683
Long-term debt in default (see Note 11) ............................... -- 9,538
Current maturities of long-term debt .................................. 46 2,464
Unbenefitted tax refunds received ..................................... 12,092 7,018
Income taxes payable .................................................. 362 410
---------- ----------
Total current liabilities ................................................. 23,908 30,144
---------- ----------
Long-term debt, excluding current maturities .............................. 2,712 24
Other liabilities ......................................................... 696 749
Minority interest ......................................................... -- 1,000
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $50.00 par value; authorized 60,000 shares; issued and
outstanding 41,260 shares of Series A Non-Voting 4% Cumulative
Convertible Preferred Stock at redemption value..................... 2,094 --
Common stock, $.01 par value; authorized 12,500,000 shares;
issued and outstanding 3,427,516 and 2,948,685 shares .............. 34 29
Additional paid-in capital ............................................ 48,888 43,931
Accumulated deficit ................................................... (53,586) (50,758)
---------- ----------
Total stockholders' deficit ............................................... (2,570) (6,798)
---------- ----------
Total liabilities and stockholders' deficit ............................... $ 24,746 $ 25,119
========== ==========
</TABLE>
See accompanying notes.
31
<PAGE> 32
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Operating revenues ......................... $ 39,504 $ 32,488 $ 29,282
Costs and expenses:
Direct healthcare operating expenses ....... 35,147 29,208 31,497
General and administrative expenses ........ 7,370 7,632 4,331
Provision for doubtful accounts ............ 539 934 1,423
Depreciation and amortization .............. 714 2,099 1,797
Write-down of assets ....................... -- -- 741
Restructuring expenses ..................... 195 94 --
Equity in loss of unconsolidated affiliates -- 191 --
---------- ---------- ----------
43,965 40,158 39,789
---------- ---------- ----------
Loss from operations ........................... (4,461) (7,670) (10,507)
---------- ---------- ----------
Other income (expenses):
Gain on sale of assets ..................... 47 1,336 836
Loss on sale of assets ..................... (33) (82) (354)
Non-recurring gain (loss) .................. (390) 860 --
Interest income ............................ 259 210 38
Interest expense ........................... (732) (1,374) (1,366)
---------- ---------- ----------
Loss before income taxes ....................... (5,310) (6,720) (11,353)
Provision (benefit) for income taxes ........... (341) (2,478) 180
---------- ---------- ----------
Loss before extraordinary gain ................. (4,969) (4,242) (11,533)
---------- ---------- ----------
Extraordinary gain, net of taxes of $0 ......... 2,172 -- --
---------- ---------- ----------
Net loss ....................................... (2,797) (4,242) (11,533)
Dividends on convertible preferred stock ....... (31) -- --
---------- ---------- ----------
Net loss attributable to common stockholders ... $ (2,828) $ (4,242) $ (11,533)
========== ========== ==========
Loss per common share:
Net loss before extraordinary gain ......... $ (1.62) $ (1.60) $ (5.11)
Extraordinary gain, net of taxes of $0 ..... 0.70 -- --
---------- ---------- ----------
Net loss attributable to common stockholders $ (0.92) $ (1.60) $ (5.11)
========== ========== ==========
Supplemental loss per share:
Net loss ................................... $ (0.81) $ (1.60) $ (5.11)
========== ========== ==========
</TABLE>
See accompanying notes.
32
<PAGE> 33
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------- ----------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Balance, May 31, 1994 ......... -- $ -- 2,199 $ 22 $ 40,060 $(34,983) $ 5,099
Net loss ................... -- -- -- -- -- (11,533) (11,533)
Issuance of shares for the
purchase of Mental
Health Programs, Inc. .... -- -- 16 -- -- -- --
Odd lot shares purchase .... -- -- -- -- (2) -- (2)
Shares issued for
private placements ....... -- -- 250 3 1,500 -- 1,503
------- -------- -------- -------- -------- -------- --------
Balance May 31, 1995 .......... -- $ -- 2,465 $ 25 $ 41,558 $(46,516) $ (4,933)
Net loss ................... -- -- -- -- -- (4,242) (4,242)
Shares issued for
note conversion .......... -- -- 133 1 999 -- 1,000
Issuance of shares for the
purchase of AMH ......... -- -- 44 -- 331 -- 331
Exercise of stock options .. -- -- 14 -- 104 -- 104
Restricted common stock
granted to CEO ........... -- -- 100 1 -- -- 1
Shares issued for
private placements ....... -- -- 193 2 939 -- 941
------- -------- -------- -------- -------- -------- --------
Balance, May 31, 1996 ......... -- $ -- 2,949 $ 29 $ 43,931 $(50,758) $ (6,798)
Net loss ................... -- -- -- -- -- (2,797) (2,797)
Issuance of shares for the
purchase of HMS .......... -- -- 16 -- 120 -- 120
Shares issued for Debenture
Exchange Offer ........... -- -- 164 2 1,888 -- 1,890
Shares issued for secured
note conversion .......... 41 2,063 -- -- -- -- 2,063
Exercise of stock options .. -- -- 210 2 1,521 -- 1,523
Shares issued for conversion
of subsidiary stock ...... -- -- 100 1 999 -- 1,000
Retirement of common
stock .................... -- -- (11) -- (159) -- (159)
Dividends on preferred
stock .................... -- 31 -- -- -- (31) --
Vesting of restricted shares -- -- -- -- 588 -- 588
------- -------- -------- -------- -------- -------- --------
Balance, May 31, 1997 ......... 41 $ 2,094 3,428 $ 34 $ 48,888 $(53,586) $ (2,570)
======= ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
33
<PAGE> 34
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................................. $ (2,797) $ (4,242) $ (11,533)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................ 714 2,099 1,797
Provision for doubtful accounts, net of recoveries ....................... 539 934 1,423
Gain on Debenture conversion ............................................. (2,172) -- --
Gain on sale of assets ................................................... (47) (1,336) (836)
Loss on sale of assets ................................................... 33 82 354
Write-down of properties held for sale ................................... -- -- 741
Carrying costs incurred on property and equipment held for sale .......... -- (473) (420)
Equity in loss of unconsolidated affiliates .............................. -- 191 --
Vesting of restricted shares ............................................. 588 -- --
Restructuring expenses ................................................... 195 94 --
Changes in assets and liabilities net of effect of acquisitions:
Decrease (increase) in accounts receivable ........................... (17) 24 1,108
Decrease (increase) in notes and other receivables ................... (715) 2,558 --
Increase in other current assets and other assets .................... (952) (2,123) (84)
Increase (decrease) in accounts payable and accrued liabilities ...... 728 530 (116)
Increase (decrease) in other liabilities ............................. 14 (1,039) 140
Increase in unbenefitted tax refunds received ............................ 5,074 7,018 --
Increase (decrease) in income taxes payable .............................. (40) 114 (438)
--------- --------- ---------
Net cash provided by (used in) operating activities ................. 1,145 4,431 (7,864)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment (operating and
held for sale) ......................................................... 1,557 2,101 3,204
Additions to property and equipment ...................................... (502) (814) (362)
Purchase of operating entity ............................................. -- -- (50)
--------- --------- ---------
Net cash provided by investing activities ........................... 1,055 1,287 2,792
--------- --------- ---------
Cash flows from financing activities:
Bank and other borrowings ................................................ -- 1,000 3,055
Repayment of debt ........................................................ (4,165) (6,204) (725)
Proceeds from the issuance of common stock ............................... 1,523 2,377 2,503
--------- --------- ---------
Net cash provided by (used in) financing activities ................. (2,642) (2,827) 4,833
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........................... (442) 2,891 (239)
Cash and cash equivalents at beginning of year ................................. 4,433 1,542 1,781
--------- --------- ---------
Cash and cash equivalents at end of year ....................................... $ 3,991 $ 4,433 $ 1,542
========= ========= =========
Supplemental disclosures of cash flow information (Note 15):
Cash paid during the year for:
Interest ................................................................. $ 1,327 $ 482 $ 527
========= ========= =========
Income taxes.............................................................. $ 54 $ 48 $ 507
========= ========= =========
</TABLE>
See accompanying notes.
34
<PAGE> 35
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
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 working capital issues (see Note 2-- "Operating Losses and
Liquidity").
Description of the Company's Business
The Company provides managed care behavioral healthcare services
including risk-based contract capitation of behavioral health expenses for
specific populations and a broad spectrum of inpatient and outpatient mental
health and substance abuse therapy and counseling. In addition, the Company is a
provider of inpatient and outpatient treatment programs for psychiatric
disorders and chemical dependency (including drug and alcohol). Programs are
provided at a freestanding facility owned and operated by the Company and at
independent general hospitals under contract with the Company.
Revenue Recognition
The Company's managed care activities are performed under the terms of
agreements with HMOs, PPOs and other payors to provide contracted medical
services to subscribing participants. Under these agreements, revenue arises
from agreements to provide contracted services to qualified beneficiaries and is
earned monthly based on the number of qualified participants, regardless of
services actually provided (generally referred to as capitation arrangements).
The Company has certain capitation arrangements whereby a portion of the monthly
capitation amount is deducted as a withhold for certain performance guarantees.
Noncompliance by the Company with respect to the performance guarantees could
result in the forfeiture, in whole or in part, of such withholds. During fiscal
1997, the Company determined that the performance guarantees had been met and as
a result, reflected the withhold amounts as revenue. The Company's revenues from
provision of other healthcare services are earned on a fee-for-service basis and
are recognized as services are rendered.
Approximately 45 percent, 60 percent and 52 percent of the Company's
operating revenues were received from private sources in fiscal 1997, 1996 and
1995, respectively. The remainder was received from Medicare, Medicaid and other
governmental programs. The latter are programs which provide for payments at
rates generally less than established billing rates. Payments are subject to
audit by intermediaries administering these programs. Revenues from these
programs are recorded under reimbursement principles applicable to each of the
programs. Although management believes estimated provisions currently recorded
properly reflect these revenues, any differences between final settlement and
these estimated provisions are reflected in operating revenues in the year
finalized. Such differences between estimated and final settlements approximated
$235,000, $414,000 and $(8,000) during fiscal 1997, 1996 and 1995, respectively.
Healthcare Expense Recognition
The Company attempts to control its risk by entering into contractual
relationships with healthcare providers, including hospitals, physician groups
and other managed care organizations, on sub-capitated, discounted
fee-for-service or per case bases. The Company's contracts typically exclude
capitation risk for chronic care patients. The cost of healthcare services is
expensed either in the period the Company is obligated to provide such services
under sub-capitation arrangements or at the time the services are actually
provided under case rate and discounted fee for service arrangements. Certain
contracted healthcare providers assume the financial risk for participant care
rendered by them and are compensated on a sub-capitated basis. Where the Company
retains the financial responsibility for authorizations, hospital utilization
and the cost of other healthcare services, the Company establishes an accrual
for estimated claims payable, including claims reported by providers as of the
balance sheet date and estimated (based upon
35
<PAGE> 36
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
utilization trends and projections of historical developments) costs of
healthcare services rendered but not reported by providers. Estimates are
continually monitored and reviewed and, as settlements are made or estimates
adjusted, differences are reflected in current operations.
Depreciation
Depreciation and amortization of property, equipment and assets under
capital lease are computed on the straight-line method over the estimated useful
lives of the related assets or lives of the leases, whichever is less,
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. Amortization of assets recorded under capital leases
is included with depreciation expense.
Property and Equipment Held for Sale
Property and equipment held for sale represents net assets of certain
freestanding facilities and other properties that the Company intends to sell,
and is carried at estimated net realizable value.
Property and equipment held for sale, that are expected to be sold in the
next fiscal year and are under contract, are shown as current assets on the
consolidated balance sheet. Property and equipment that are shown as non-current
assets on the consolidated balance sheet as of May 31, 1997 are those for which
contracts for sale have not been negotiated. Losses on facilities sold have been
reflected in the consolidated statements of operations. Gains on facilities
sold have either been deferred, if conditions for current recognition have not
been met, or have been reflected in the consolidated statements of operations.
Any impairments to the net realizable value of property and equipment held for
sale have also been recorded in the consolidated statements of operations.
Intangible Assets
Intangible assets include costs in excess of fair value of net assets of
businesses purchased (goodwill), licenses, and similar rights. Costs in excess
of net assets purchased are amortized on a straight line basis up to 21 years.
The costs of other intangible assets are amortized over the period of benefit.
In the fourth quarter of fiscal 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for
the Impairment of Long-Lived Assets to be Disposed of," and evaluated its
intangible assets for any impairment losses. The Company evaluates the
recoverability and the amortization period of goodwill by determining whether
the amount can be recovered through undiscounted cash flows of the businesses
acquired, excluding interest expense and amortization, over the remaining
amortization period. The Company considers external factors relating to each
acquired business, including local market developments, regional and national
trends, regulatory developments and other pertinent factors including the
business' current and expected financial performance in making its assessment.
In the fourth quarter of fiscal 1996, $0.8 million of goodwill was written off
as a result of the sale, closure or anticipated closure of operating facilities.
This write-off is included with depreciation and amortization on the Company's
consolidated statements of operations. The Company believes that the remaining
$1.6 million of net recorded goodwill at May 31, 1997, is recoverable from
future estimated undiscounted cash flows. The amounts of goodwill reported in
the consolidated balance sheets are net of accumulated amortization of goodwill
of $218,000 and $146,000 at May 31, 1997 and 1996, respectively.
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less. Such investments
are deemed to be cash equivalents for purposes of the consolidated statements of
cash flow and aggregated $2.5 million and $3.6 million at May 31, 1997 and 1996,
respectively.
Excluded from cash and cash equivalents is a certificate of deposit and
restricted cash in the amount of $210,000 and $77,000 at May 31, 1997 and 1996,
respectively. These restricted accounts are required under capitated contract
and state licensure requirements and are subject to adjustments annually. As a
result, these investments have been classified as other current and long-term
assets, respectively, in the financial statements at May 31, 1997 and 1996.
36
<PAGE> 37
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
Income Taxes
The Company calculates deferred taxes and related income tax expense
using the liability method. This method determines deferred taxes by applying
the current tax rate to the cumulative temporary differences between recorded
carrying amounts and the corresponding tax basis of assets and liabilities. A
valuation allowance is established for deferred tax assets unless their
realization is considered more likely than not. The Company's provision for
income taxes is the sum of the change in the balance of deferred taxes between
the beginning and the end of the period and income taxes currently payable or
receivable.
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 1.5 percent of the
Company's operating revenues for fiscal year 1997 and less than 1 percent of
the Company's operating revenues for fiscal years 1996 and 1995.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB No. Statement 123,
"Accounting for Stock-based Compensation", requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, in the event that the exercise price of the Company's employee stock
options is less than the market price of the underlying stock on the date of
grant, compensation expense is recognized.
Loss Per Common Share and Common Share Equivalent
Primary and fully diluted loss per common and common equivalent share has
been computed by dividing net loss attributable to common stock by the weighted
average number of common shares outstanding during the period. The net loss
attributable to common stock includes the dividend for the Series A Non-Voting
4% Cumulative Convertible Preferred Stock (the "Preferred Stock"). During fiscal
years 1997, 1996 and 1995, the effect of outstanding stock options and the
conversion of the Debentures had an antidilutive impact on loss per share and,
accordingly, were excluded from per share computations. The weighted average
number of common and common equivalent shares used to calculate loss per share
was 3,088,000, 2,654,000 and 2,257,000 for the years ended May 31, 1997, 1996
and 1995, respectively.
The supplemental loss per share of $0.81 for the year ended May 31, 1997,
gives effect to the Debenture Exchange Offer, Secured Note conversion, and the
conversion of subsidiary stock as if they had occurred at the beginning of the
period being presented (see Note 11--"Long-Term Debt and Short-Term Borrowings"
and Note 16--"Stockholders' Equity").
37
<PAGE> 38
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practical to estimate that value. The following methods and assumptions were
used by the Company in estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
Notes receivable: The carrying amount reported in the balance sheet for notes
receivable approximates its fair value.
Current maturities of long-term debt: The carrying amount reported in the
balance sheet for current maturities of long-term debt approximates its fair
value.
Long-term debt in default: The fair value of the Company's long-term debt in
default is based on the median of the bid and asked price as of the last day of
the fiscal year.
Long-term debt: The carrying amount reported in the balance sheet for the
majority of the Company's long-term debt approximates its fair value. The fair
value of the Company's Debentures are based on the closing price of the
Debentures as of the last day of the fiscal year.
Other liabilities: The carrying amount reported in the balance sheet for other
liabilities approximates its fair value.
The carrying amounts and fair values of the Company's financial
instruments at May 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ---------- ------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 3,991 $ 3,991 $ 4,433 $ 4,433
Other receivables......................... 2,486 2,486 1,479 1,479
Current maturities of long-term debt...... 46 46 2,464 2,464
Long-term debt in default................. -- -- 9,538 6,390
Long-term debt............................ 2,712 1,367 24 24
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
which is required to be adopted by the Company on February 28, 1998. At that
time, the Company will be required to change the method currently used to
compute earnings (loss) per share and to restate all prior periods. Under the
new requirements for calculating basic earnings (loss) per share, net income
(loss) is divided by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share reflect the potential dilution
of securities that could share in the earnings
38
<PAGE> 39
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
of the Company. The impact of SFAS No. 128 on the calculation of either basic or
diluted net loss per share for the fiscal years ended May 31, 1997, 1996 and
1995 is expected to be immaterial.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
NOTE 2-- OPERATING LOSSES AND LIQUIDITY
At May 31, 1997, the Company had cash and cash equivalents of $4.0
million. During the fiscal year ended May 31, 1997, the Company provided $1.1
million from its operating activities, including $5.1 million of receipts from
income tax refunds; provided $1.1 million from its investing activities; and
utilized $2.6 million in its financing activities. The Company reported a net
loss of $2.8 million for the fiscal year ended May 31, 1997, versus a net loss
of $4.2 million for the fiscal year ended May 31, 1996, an improvement of $1.4
million. As a result, the Company has an accumulated deficit of $53.6 million
and total stockholders' deficit of $2.6 million as of May 31, 1997.
Additionally, the Company's current assets at May 31, 1997 amounted to
approximately $11.5 million and current liabilities were approximately $23.9
million, resulting in a working capital deficiency of approximately $12.4
million and a current ratio of 1:2.1. Included in current liabilities is $12.1
million of unbenefitted tax refunds received (see Note 13-- "Income Taxes"). The
Company's primary use of available cash resources is to expand its behavioral
medicine managed care and contract management businesses and fund operations
while it seeks to dispose of certain of its freestanding facilities.
Included in current and non-current assets are two hospital facilities
designated as property and equipment held for sale with a total carrying value
of $4.7 million. In previous years, the Company was obligated to support and
fund certain poorly performing freestanding facilities that now have been
closed, including two such facilities closed in fiscal 1996 and another in
fiscal 1997 (see Note 5-- "Property and Equipment Held for Sale"). The Company
sold two closed and non-operating facilities during fiscal 1997 and a third
facility during the first quarter of fiscal 1998. As a result, the Company will
no longer be burdened with the negative cash flow requirements associated with
such facilities. Additionally, during prior years, management implemented its
plans for expanding its managed care operations which were funded by the parent.
During fiscal 1997, due to the expansion of its business, the managed care
subsidiary required little additional funding. Should this continue in future
periods, the elimination of such funding requirements would decrease the
Company's future cash flow requirements and assist it in attaining a cash flow
positive position from operations.
During fiscal 1997, the Company completed its Debenture Exchange Offer
(see Note 12-- "Long-Term Debt and Short-Term Borrowings"). In addition to
recognizing a gain on the Exchange of $2.2 million, the Exchange resulted in a
reduction of debt of $6.8 million with the remaining $2.7 million in Debentures
due in 2010. The Debenture Exchange will also result in a reduction of interest
expense for future periods. The bondholders also consented to the waiver and
elimination of the Debenture sinking fund. Annual sinking fund installments of 5
percent would have been payable commencing in April 1996 and continuing annually
through April 2009. During the third quarter of fiscal 1997, the Company
exchanged its Secured Convertible Note into Series A Non-Voting 4% Cumulative
Convertible Preferred Stock and also exchanged a minority interest in one of its
subsidiaries into 100,000 shares of its Common Stock (see Note 3-- "Acquisitions
and Dispositions"). As a result of the above transactions, current liabilities
were reduced by $11.5 million, non-current liabilities were increased by $1.6
million, and stockholders' deficit was improved by $5.3 million. These
transactions also reduced the Company's future cash obligations with the
significant reduction in debt, interest expense and future sinking fund
requirements.
Based upon current levels of operation and cash on hand of $4.0 million,
cash generated in the amount of $2.9 million from the sale of the Company's
freestanding facility on June 4, 1997, and cash anticipated to be internally
generated from operations, the Company believes that it has sufficient working
capital to meet obligations as they become due; however, the ultimate resolution
of the Company's entitlement to certain IRS refund claims, the occurrence of
business or economic conditions beyond the control of the Company or the loss of
existing contracts from which cash from operations is internally generated or
the inability to conclude pending contract proposals may adversely affect the
adequacy of such working capital.
The Company also has the following potential sources of cash to fund
additional operating needs:
39
<PAGE> 40
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
- A firm commitment from a mutual fund to purchase in a private
placement at least $5.0 million of 15 percent fully secured Company
notes due no earlier than November 1998 if offered by the Company.
- Filed amended Federal tax returns: The Company filed its fiscal 1995
Federal tax return, and a Form 1139 "Corporate Application for
Tentative Refund" in the amount of $9.4 million. The Company received
the full refund claim for fiscal 1995 in October 1995. In September
1996, the Company filed its fiscal 1996 Federal tax return and also
filed a Form 1139. The Company received a refund in the amount of
$5.4 million during the second quarter of fiscal 1997. The Company
has also filed amended Federal tax returns for prior years to claim
refunds for an additional $7.7 million. These refund claims have been
made under Section 172(f) of the Internal Revenue Code, an area of
the tax law without significant precedent, and there may be
substantial opposition by the IRS to the Company's refund claims. The
Company is currently under audit by the IRS regarding its 1996 and
1995 Federal tax returns and the amended returns for prior years.
Accordingly, no assurances can be made as to the Company's ultimate
entitlement to refunds received or the timing of the receipt of the
balance of the refund claims (see Note 13-- "Income Taxes").
- Included in assets held for sale (non-current) is one hospital
facility designated as property and equipment held for sale with a
total carrying value of $1.9 million. The Company expects to sell
this facility during fiscal 1998.
Additionally, the Company believes that it would be able to raise
additional working capital through either an equity offering or borrowings if it
so desired. However, the Company cannot state with any degree of certainty at
this time whether additional equity capital or working capital would be
available to it, and if available, would be at terms and conditions acceptable
to the Company. All of these potential sources of additional cash in fiscal 1998
are subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1998 the Company
will complete the transactions required to fund its working capital deficit.
NOTE 3-- ACQUISITIONS AND DISPOSITIONS
On April 3, 1997, the Company sold its freestanding facility located in
Jacksonville Beach, Florida. Proceeds from the sale were utilized for working
capital purposes.
On August 12, 1996, the Company sold its freestanding facility in Costa
Mesa, California. As part of this transaction, the Company took back a note
equal to 83 percent of the selling price (see Note 8-- "Notes Receivable"). The
cash proceeds were utilized to retire long-term debt and for working capital
purposes.
On July 25, 1996, the Company consented to closing the acquisition of
Healthcare Management Services, Inc., Healthcare Management Services of Ohio,
Inc., Healthcare Management Services of Michigan, Inc. and Behavioral Healthcare
Management, Inc. (hereafter collectively referred to as "HMS"). The Company
consented to the closing, reserving its rights to assert certain claims against
the former owners (the "Sellers") and others (see Note 17-- "Commitments and
Contingencies"). HMS contracts with commercial and governmental agencies to
provide managed behavioral healthcare programs to patients in Michigan and Ohio.
Additionally, HMS provides the following on a contract basis: case management
(precertification, concurrent review, quality assurance, retrospective chart
reviews, peer review and clinical audits as requested by their clients), claims
review, network development, credentialing and management of clinical services
for hospitals and community providers. The Company recorded the acquisition
using the purchase method of accounting. The Company's Consolidated Financial
Statements for the fiscal year ended May 31, 1997 reflect the results of
operations for HMS for the period of July 25, 1996 through May 31,1997. In
conjunction with this acquisition, the Company originally issued 16,000 shares
of its Common Stock. In addition, certain provisions of the employment
agreements with the Sellers provided for an additional earn out of stock
warrants based on performance. The Company recorded $0.8 million in goodwill
related to the acquisition which will be amortized on a straight line basis over
20 years. The unaudited pro forma information below presents the combined
results of operations as if the HMS acquisition has occurred at the beginning of
the respective periods presented. The unaudited pro forma information is not
necessarily indicative of the results of operations of the combined company had
40
<PAGE> 41
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
the acquisition actually occurred at the beginning of the periods presented, nor
is it necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating revenues ......................... $39,896 $36,332
Loss before extraordinary gain ............. (5,192) (4,427)
Net loss ................................... (3,020) (4,427)
Loss per share:
Loss before extraordinary gain .......... $ (1.68) $ (1.66)
Loss applicable to common stock ......... $ (0.98) $ (1.66)
</TABLE>
On May 28, 1996, the Company sold its CareUnit of San Diego in
California and recorded a gain on the sale of $0.3 million during the fourth
quarter of fiscal 1996. Proceeds from the sale were utilized for working capital
purposes and to provide funds for the Debenture Exchange.
On October 3, 1995, the Company sold the operations of its CareUnit
Hospital of Kirkland in Washington and recorded a gain on the sale of $1.0
million during the second quarter of fiscal 1996. Proceeds from the sale were
utilized for working capital purposes. On November 20, 1995, the Company
purchased 20 percent of the issued and outstanding capital stock of Behavioral
Health Resources, Inc. ("BHR") for $24,000. In addition, the Company has a
promissory note from BHR in the principal amount of $150,000, which was fully
reserved as of May 31, 1996 due to poor financial performance of the investee.
During fiscal 1996, the Company recorded approximately $78,000 of revenue
related to a CCI contract with a wholly-owned subsidiary of BHR. On February 5,
1997, the Company entered into a settlement agreement for a one-time cash
payment of $75,000 for the promissory note and $5,000 for the Company's interest
in BHR. The settlement agreement also provided for a payment plan for the
receivable due to CCI. The balance of this receivable was $58,000 as of May 31,
1997. The Company is proportionately recognizing bad debt recovery as the
monthly payments are received. BHR was current in its payments to the Company as
of May 31, 1997, however, was delinquent in the July and August 1997 payments.
On May 22, 1995, the Company and its subsidiary, Comprehensive
Behavioral, entered into an agreement with Physician Corporation of America
("PCA"), providing for PCA to invest $1.0 million in Comprehensive Behavioral
for 13 1/2 percent of the voting power of Comprehensive Behavioral represented
by all of the Series A Preferred Stock of Comprehensive Behavioral which was
also exchangeable at the option of PCA for 100,000 shares of the Company's
Common Stock. The agreement provided, so long as PCA remained an equity holder
of Comprehensive Behavioral, PCA and its subsidiaries would negotiate in good
faith to contract with Comprehensive Behavioral for the delivery of mental
health services in all PCA service areas where Comprehensive Behavioral has an
adequate network. In addition, PCA was granted a first right of refusal
regarding any sale of Comprehensive Behavioral. The Company had a $3.75 million
investment in its subsidiary, Comprehensive Behavioral. The agreement further
provided that prior to a qualified public offering, Comprehensive Behavioral may
not declare or pay any dividends on any class of its capital stock which would
reduce the aggregate amount invested by the Company in Comprehensive Behavioral
below $3.75 million. Effective June 1, 1995, Comprehensive Behavioral commenced
providing services on a capitated basis to 220,000 of PCA's 700,000 members in
the Tampa area. In conjunction with this contract, in May 1995, PCA advanced
$360,000 to Comprehensive Behavioral. Such advance was reimbursable to PCA in 12
equal monthly installments and during fiscal 1996, Comprehensive Behavioral
reimbursed the entire advance of $360,000 to PCA. As of May 31, 1996, PCA's
investment in Comprehensive Behavioral of $1.0 million was classified as
minority interests on the Company's consolidated balance sheets. In February
1997, PCA exercised its option to exchange 135 shares of Series A NonVoting 4%
Cumulative Convertible Preferred Stock of Comprehensive Behavioral, representing
13 1/2 percent of the voting power of Comprehensive Behavioral into 100,000
shares of the Company's Common Stock. Contracts with PCA and its subsidiaries
represented 35 percent of the Company's operating revenues for fiscal 1997.
On April 30, 1995, the Company's lease ended in Grand Rapids, Michigan,
and the Company ceased operations in that facility; however, the Company entered
into an agreement with Longford Health Sources, Inc. to operate a
41
<PAGE> 42
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
chemical dependency unit in Kent Community Hospital in Grand Rapids, Michigan.
On April 1, 1995, the Company agreed to issue American Mental Health
Care, Inc. ("AMH") 44,054 shares of the Company's Common Stock in return for a
one-year management contract between Comprehensive Behavioral and AMH, one-third
of the shares of AMH and a one-year option to acquire all of the shares of AMH
for up to 132,162 additional shares of the Company's Common Stock to be issued
based on three-year net revenue requirements. AMH provided behavioral managed
care services in Florida. The terms of the management agreement included an
employment contract with Comprehensive Behavioral for the former president of
AMH. The management contract had not been fully executed; and as a result, AMH
assigned its revenues and associated expenses to Comprehensive Behavioral
effective April 1, 1995. The Company's consolidated financial statements reflect
such revenue assignment and expense assumption. In April 1996, the Company
issued a stock certificate to AMH for 44,054 shares and extended the option to
August 31, 1996. During fiscal 1997, the Company did not elect to exercise its
option to acquire the remaining two-thirds of the outstanding shares in AMH or
to renew the employment agreement with the former president beyond March 31,
1997. Effective March 31, 1997, the Company entered into a settlement whereby
AMH returned its stock certificate representing 44,054 Common Shares of the
Company in exchange for the 3,750 shares of AMH common stock held by the
Company. AMH also assigned and transferred its interest in certain contracts,
agreed to a non-compete clause related to such contracts and to pay the Company
$7,500. Upon return of the stock certificate for 44,054 shares of the Company's
Common Stock, the Company will issue to AMH 32,721 Common Shares of the Company.
The remaining 11,333 Common Shares will be retired. As a result of the above,
the Company no longer has any ownership in AMH.
On February 1, 1995, the Company purchased certain assets of Alternative
Psychiatric Centers, Inc., ("APC"), a behavioral medicine contract management
company based in Southern California, for $50,000, from Drew Q. Miller, who
joined the Company in November 1994 and resigned his position as Chief Operating
Officer on August 14, 1996. APC had two operating locations with three contract
units offering inpatient, outpatient and partial hospitalization services.
On November 22, 1994, the Company sold its CareUnit Hospital of Orlando.
Proceeds from the sale were utilized for working capital purposes. On March 3,
1995, the Company sold its Starting Point, Oak facility in Sacramento,
California. Proceeds from this sale were utilized for working capital purposes
and for payment to the IRS in accordance with the Company's offer in compromise
with the IRS.
In December 1992, the Company purchased Mental Health Programs, Inc.
based in Tampa, Florida, from the former owner. The Company was operating as
AccessCare, Inc.; however, effective August 1, 1995, the Company changed its
name to Comprehensive Behavioral Care, Inc. The terms of the purchase included a
payment of $75,000, issuance of 4,000 shares of the Company's Common Stock, an
employment agreement, a stock option agreement and the assumption of bank debt
from the former owner. Both the stock option and employment agreements and the
release of the former owner as guarantor of the bank debt were contingent upon
the continued employment of the former owner with the Company. In connection
with this acquisition, the Company recorded goodwill of approximately $829,000.
In July 1993, the Company terminated the employment agreement and subsequently
entered into litigation with the former owner. On November 21, 1994, the Company
reached a settlement agreement with the former owner to pay $250,000 in
installments through September 1996; forgive the obligations owed under the
indemnification agreement between the Company and the former owner; and
satisfied the terms under the stock purchase agreement dated December 30, 1992
between the former owner and the Company to issue 16,000 shares of the Company's
Common Stock. The Company established a reserve of $0.2 million with respect to
this settlement. During the third quarter of 1995, the Company satisfied the
terms of the stock purchase agreement and commenced installment payments to the
former owner.
42
<PAGE> 43
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
NOTE 4-- ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
The following table summarizes changes in the Company's allowances for
doubtful accounts for the years ended May 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED TO WRITE-OFF BALANCE AT
BEGINNING ------------------------- OF END OF
OF YEAR EXPENSE RECOVERIES ACCOUNTS YEAR
---------- ------- ---------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1997.... $1,027 $ 914 $ (375) $ (683) $ 883
Year ended May 31, 1996.... 1,096 2,355 (1,421) (1,003) 1,027
Year ended May 31, 1995.... 1,574 2,808 (1,385) (1,901) 1,096
</TABLE>
The above amounts include allowances related to the Company's
non-current note receivable (see Note 8-- "Notes Receivable"). Recoveries are
reflected on the Company's statement of operations as a reduction to the
provision for doubtful accounts in the period in which it is received. The
Company's reserve for bad debt represented 31 percent, 26 percent and 25 percent
of total receivables for fiscal years ended May 31, 1997, 1996 and 1995,
respectively.
Other receivables at May 31, 1997 and 1996 include $2.4 million and $1.4
million, respectively, of professional services fees paid related to the
preparation of the Company's fiscal 1996 and 1995 Federal income tax returns.
These fees are refundable on a pro rata basis to the extent that the related
unbenefitted 1996 and 1995 Federal income tax refunds of $5.1 million and $7.0
million, respectively, are disallowed by the IRS; the ultimate amount of this
fee will be recognized as an expense when the uncertainties concerning the
amount of the $12.1 million that will be allowed by the IRS is determined.
NOTE 5-- PROPERTY AND EQUIPMENT HELD FOR SALE
The Company has decided to dispose of certain freestanding facilities and
other assets. Property and equipment held for sale, consisting of land,
building, equipment and other fixed assets with an historical net book value of
approximately $8.8 million and $12.6 million at May 31, 1997 and 1996,
respectively, are carried at estimated net realizable value of approximately
$4.7 million and $8.1 million at May 31, 1997 and 1996, respectively. Operating
revenues and operating expenses of the facilities designated for disposition
were approximately $0.1 million and $1.1 million, respectively, for the year
ended May 31, 1997, $0.3 million and $0.6 million, respectively, for the year
ended May 31, 1996, and $0.1 million and $0.5 million, respectively, for the
year ended May 31, 1995.
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,
-----------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance ...................................................... $ 8,148 $ 3,746 $ 6,939
Designation of facilities as property and equipment held for sale ...... -- 5,682 2,347
Carrying costs incurred during phase-out period ........................ -- 342 420
Carrying value of assets sold .......................................... (3,432) (1,804) (5,219)
Contingencies on properties sold ....................................... (9) 182 --
Write-downs of assets held for sale to net realizable value ............ -- -- (741)
------- ------- -------
Ending balance ......................................................... $ 4,707 $ 8,148 $ 3,746
======= ======= =======
</TABLE>
43
<PAGE> 44
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
Proceeds from the sale of property and equipment held for sale were $1.2
million of cash and a $1.9 million note receivable (see Note 8-- "Notes
Receivable"), and $1.9 million of cash for fiscal 1997 and 1996, respectively.
The Company recognized gains on the sale of property in fiscal 1997 and 1996
of $14,000 and $1.3 million, respectively. The write-down and losses of
operating property and equipment and assets held for sale are reflected on the
Company's consolidated statement of operations. The following is a summary:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Write-down of assets held for sale to net realizable value ....... $ -- $ -- $ (741)
======= ======= =======
Loss on sale of assets ........................................... $ (33) $ (82) $ (354)
======= ======= =======
</TABLE>
In fiscal 1995, a property was written-off for $0.4 million because it
had no market value. In fiscal 1996, two operating facilities were designated
held for sale with a net realizable value of $5.7 million. During fiscal 1997,
no additional properties were designated for sale.
NOTE 6-- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land and improvements .................. $ 2,122 $ 2,122
Buildings and improvements ............. 4,427 4,441
Furniture and equipment ................ 3,274 3,109
Leasehold improvements ................. 271 191
Capitalized leases ..................... 44 --
-------- --------
10,138 9,863
Less accumulated depreciation .......... 3,820 3,590
-------- --------
Net property and equipment ............. $ 6,318 $ 6,273
======== ========
</TABLE>
44
<PAGE> 45
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
NOTE 7-- INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Healthcare Management Services, Inc. and Related Companies
On December 28, 1995, the Company entered into a letter of intent to
purchase 100 percent of the outstanding stock of Healthcare Management Services,
Inc., Healthcare Management Services of Ohio, Inc., Healthcare Management
Services of Michigan, Inc. and Behavioral Healthcare Management, Inc. Each of
the companies is based in Detroit, Michigan and was owned by the same two
principals. On April 30, 1996, the Company entered into a Stock Purchase
Agreement which was subject to certain escrow provisions and other contingencies
which were not completed until July 25, 1996. Between January 1, 1996 and May
31, 1996, the Company advanced to these entities substantially all of their
working capital requirements. As of July 25, 1996, the net amount of these
advances aggregated $0.5 million. These advances were collateralized by an
option agreement allowing the Company to purchase 90 percent of the stock of
Behavioral Health Management, Inc. for the sum of one dollar. Losses of $191,000
incurred by the investee during the period January 1, 1996 through May 31, 1996
that were fully funded by the Company's advances were included in the Company's
equity in loss of unconsolidated affiliates in the accompanying consolidated
statements of operations. The losses were reflected as an allowance against such
advances in the accompanying consolidated balance sheet as of May 31, 1996 (see
Note 3-- "Acquisitions and Dispositions").
NOTE 8-- NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1997 1996
------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
8% secured promissory note with monthly payments,
maturing in August 2011 (a)........................ $1,950 $ --
4% unsecured note with monthly payments,
maturing in April 1998 (b)......................... 62 118
9-3/4% promissory note with quarterly payments,
maturing in November 1999 (c)...................... -- 150
------- ------
Total notes receivable................................ 2,012 268
Less allowance for doubtful accounts (c).............. -- 150
------- ------
2,012 118
Less current maturities............................... 71 56
------- ------
Notes receivable, excluding current maturities........ $ 1,941 $ 62
======= ======
</TABLE>
(a) On August 12, 1996, the Company sold a non-operating facility in
Costa Mesa, California. As part of this transaction, the Company took back a
note of $1.9 million, equal to 83 percent of the selling price. This note
provided the buyer with an incentive option should the note be paid off in full
on or before six months from closing date. In the event the buyer elected this
option, it would receive a 21 percent discount on the note. The buyer did not
elect this incentive option. The terms of the note require monthly interest
payments only for the first year of the note. Monthly payments of principal and
interest of $14,308 commence in August 1997 and continue for 15 years, at which
time all accrued and unpaid principal and interest is due and payable. Interest
accrues at the rate of 8 percent per annum. Given that this sale was highly
leveraged, the Company has deferred recognition of any gain on this sale.
Should all payments be made, the Company will recognize a gain of $127,000.
(b) On October 3, 1995, the Company sold the operations of its CareUnit
hospital of Kirkland in Washington to Lakeside-Milam Recovery Centers. The
Company agreed to finance part of this sale by taking back a note receivable in
the amount of $150,000 at a 4 percent interest rate, principal and interest
payable in monthly payments of $5,000. As of May 31, 1997, principal and
interest payments are current. The maturity date of this note is April 1, 1998.
45
<PAGE> 46
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
(c) On November 20, 1995, the Company advanced $150,000 in the form of a
promissory note to Behavioral Health Resources, Inc. Interest was due and
payable monthly at a rate of 9 3/4 percent. This note was fully reserved at May
31, 1996 due to poor financial performance of the investee. On February 5, 1997,
the Company settled this note for a one-time cash payment of $75,000 (see Note
3--"Acquisitions and Dispositions").
NOTE 9--OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
-----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Capitation withholds ......................... $ 842 $ 113
Deferred contract costs, net ................. 14 45
Investments, net ............................. -- 561
Deposits and other ........................... 633 481
-------- --------
$ 1,489 $ 1,200
======== ========
</TABLE>
NOTE 10--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
AS OF MAY 31,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities ....... $ 2,272 $ 5,324
Accrued restructuring .......................... 298 377
Accrued salaries and wages ..................... 539 754
Accrued vacation ............................... 279 364
Accrued legal .................................. 94 167
Payable to third-party intermediaries .......... 1,575 899
Deferred compensation .......................... 95 146
-------- --------
$ 5,152 $ 8,031
======== ========
</TABLE>
A reserve for restructuring was established in fiscal 1993 for $5.4
million for the purpose of implementing management's plan for the "global
restructuring" of the Company. It is management's intent to complete the "global
restructuring" plan in fiscal 1998. In fiscal 1996, a charge for approximately
$0.1 million was made for the scheduled closure of the Company's freestanding
facility in Cincinnati, Ohio. In fiscal 1997, the Company established an
additional reserve of $231,000 primarily for the closure of CCI's administrative
offices in July 1996 and the planned closure of several contract units.
The following table sets forth the activity during the years ended May
31, 1997 and 1996:
<TABLE>
<CAPTION>
May 31, Charges May 31, Charges May 31,
1995 Income Expense Payments 1996 Income Expense Payments 1997
------- ------ ------- -------- ---- ------ ------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Restructuring:
Severance ..................... $ 120 $ -- $ 57 $ (96) $ 81 $ (36) $ 86 $ (53) $ 78
Operations/corporate relocation 388 (78) 114 (128) 296 -- 145 (221) 220
----- ----- ----- ----- ----- ----- ----- ----- -----
$ 508 $ (78) $ 171 $(224) $ 377 $ (36) $ 231 $(274) $ 298
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Severance payments of $0.1 million were paid in both fiscal 1997 and
1996, and were the result of the closure and relocation of two facilities, as
well as the general downsizing as part of the Company's "global restructuring"
plan. This restructuring resulted in the termination of 80 and 71 employees
during fiscal 1997 and 1996, respectively. The
46
<PAGE> 47
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
majority of those employees terminated during fiscal 1997 and 1996 were hospital
and contract employees with the remainder representing corporate and
administrative employees.
NOTE 11-- LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
12-1/2% senior secured convertible note, with quarterly interest
payments, maturing in January 1997 (a)................................ $ -- $ 2,000
7-1/2% convertible subordinated debentures due 2010 (b)................... 2,692 9,538
10% secured promissory note, payable in monthly installments,
maturing in January 1997 (c).......................................... -- 368
Bank debt, interest and principal payable in monthly installments
maturing in August 1997, collateralized by the trust of the
former owner (d)...................................................... 24 120
Capital leases............................................................ 42 --
------- --------
Total long-term debt...................................................... 2,758 12,026
Less long-term debt in default (b)........................................ -- 9,538
Less current maturities of long-term debt and capital leases.............. 46 2,464
------- --------
Long-term debt, excluding current maturities.............................. $ 2,712 $ 24
======= ========
</TABLE>
As of May 31, 1997, aggregate annual maturities of long-term debt for the
next year (in accordance with stated maturities of the respective loan
agreements) is approximately $46,000 in fiscal 1998. The Company has no annual
maturities of long-term debt after fiscal 1998 until 2010.
(a) On January 9, 1995, the Company issued a $2.0 million Secured
Convertible Note due January 9, 1997 to Lindner Bulwark Fund, a series of
Lindner Investments, a business trust. The Note was secured by first priority
liens on two of the Company's operating hospital properties. On January 15,
1997, the Company exchanged its $2.0 million Secured Convertible Note into
40,000 shares of newly designated Series A NonVoting 4% Cumulative Convertible
Preferred Stock (the "Preferred Stock"). In addition, the holder of the Note
was also issued an additional 1,260 shares of Preferred Stock in lieu of
approximately $63,000 of accrued interest (see Note 16-- "Stockholders'
Equity").
(b) In April 1985, the Company issued $46 million in 7 1/2% Convertible
Subordinated Debentures (the "Debentures"). These Debentures require that the
Company make semi-annual interest payments in April and October at an interest
rate of 7 1/2 percent per annum.
47
<PAGE> 48
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
On December 30, 1996, the Company completed a Debenture Exchange
Offer with its Debentureholders. The Company was advised by the Exchange Agent
that affirmative consents of Debentureholders in excess of 82 percent had been
received, and that all propositions had been consented to and approved by
Debentureholders, including the waiver of any sinking fund installments. An
aggregate of $6.8 million of principal amount of Debentures (the "Tendered
Debentures"), representing 72 percent of the issued and outstanding Debentures,
were tendered for exchange to the Company pursuant to the terms of the Exchange
Offer. With respect to the Tendered Debentures, the Company paid the Exchange
Agent, on behalf of tendering Debentureholders, an aggregate amount of $4.0
million and requisitioned for issue 164,304 shares of the Company's Common
Stock, representing the stock portion of the Exchange Offer. The distribution of
the exchange consideration to tendering Debentureholders was made by the
Exchange Agent within five days after the closing date of December 30, 1996.
With respect to the $2.7 million of principal amount of Debentures which were
not tendered for exchange, the Company paid an aggregate of $0.6 million of
interest and default interest to such non-tendering Debentureholders. Due to the
affirmative result of the Consent Solicitation and the payment by the Company of
interest and default interest with respect to all Debentures which have not been
tendered for exchange, the Company is no longer in default with respect to such
Debentures.
48
<PAGE> 49
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
The resulting gain on the Debenture Exchange was $2.5 million less
approximately $0.3 million in related costs and expenses for a net gain of $2.2
million with the remaining amount of $1.9 million being recorded to additional
paid-in capital.
(c) In May 1995, the Company and a subsidiary entered into a $1.0
million promissory note with PMR Corporation. This note was paid in full on
August 13, 1996 through the proceeds from the sale of its freestanding facility
in Costa Mesa, California.
(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 --
"Acquisitions and Dispositions"). The note is secured and guaranteed by the
trust of the former owner of Mental Health Programs, Inc. The release of
collateral and guarantee were 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 1/2 percent.
No assets were pledged to secure debt as of May 31, 1997. The net book
value of assets pledged to secure the above debt aggregated $12.4 million at
May 31, 1996.
NOTE 12 -- 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 expense for all operating leases was $1.0 million, $0.9
million and $1.1 million for fiscal years 1997, 1996 and 1995, respectively.
Assets under capital leases were capitalized using interest rates
appropriate at the inception of each lease. In fiscal year 1997, there were no
contingent rents associated with capital leases. In 1996 and 1995, there were
$26,000 and $79,000, respectively, in contingent rents associated with capital
leases.
Future minimum payments, by year and in the aggregate, under
noncancellable operating leases with initial or remaining terms of one year or
more, consist of the following at May 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1998..................................................... $ 29 $ 666
1999..................................................... 27 543
2000..................................................... -- 526
2001..................................................... -- 385
2002..................................................... -- --
Later years.............................................. -- --
----- -------
Total minimum lease payments............................. 56 $ 2,120
=======
Less amounts representing interest....................... 14
-----
Present value of net minimum lease payments.............. $ 42
=====
</TABLE>
49
<PAGE> 50
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
NOTE 13-- INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
Current:
<S> <C> <C> <C>
Federal .................................... $ (345) $(2,568) $ --
State ...................................... 4 90 180
------- ------- -------
$ (341) $(2,478) $ 180
======= ======= =======
</TABLE>
A reconciliation between the provision for income taxes and the amount
computed by applying the statutory Federal income tax rate (34 percent) to loss
before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Benefit from income taxes at the statutory tax rate ......... $(1,103) $(2,285) $(3,860)
State income taxes, net of federal tax benefit .............. 3 60 119
Amortization of intangible assets ........................... 51 273 39
Valuation allowance ......................................... 952 1,930 3,701
Refund of prior year loss carryback not previously benefitted (345) (2,568) --
Other, net .................................................. 101 112 181
------- ------- -------
$ (341) $(2,478) $ 180
======= ======= =======
</TABLE>
The Company paid $54,000, $48,000 and $507,000 for income taxes in fiscal
1997, 1996 and 1995, respectively. The Company also received tax refunds of $5.4
million in 1997 and $9.4 million in 1996, associated with its final 1996 and
1995 Federal tax returns, respectively, as discussed further below.
Significant components of the Company's deferred tax liabilities and
assets are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Net operating losses ............... $ 10,531 $ 11,366
Restructuring/non-recurring costs .. 2,261 2,105
Alternative minimum tax credits .... 667 667
Bad debt expense ................... 431 374
Employee benefits and options ...... 200 292
Other, net ......................... (711) 189
-------- --------
Total Deferred Tax Assets .... 13,379 14,993
Valuation Allowance ................ (11,897) (12,023)
-------- --------
Net Deferred Tax Assets ...... 1,482 2,970
-------- --------
Deferred Tax Liabilities:
Depreciation ....................... (1,113) (2,400)
State income taxes ................. (369) (418)
Cash to accrual differences ........ -- (152)
-------- --------
Total Deferred Tax Liabilities (1,482) (2,970)
-------- --------
Net Deferred Tax Assets ............... $ -- $ --
======== ========
</TABLE>
On July 20, 1995, the Company filed its Federal tax return for fiscal
1995 and subsequently filed Form 1139 "Corporate Application for Tentative
Refund" to carry back losses described in Section 172(f) requesting a refund to
50
<PAGE> 51
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
the Company in the amount of $9.4 million. On September 20, 1996, the Company
filed its Federal income tax return for fiscal 1996, and subsequently filed form
1139 "Corporate Application for Tentative Refund" to carry back losses described
under Section 172(f) requesting a refund to the Company in the amount of $5.5
million. Section 172(f) provides for a 10-year net operating loss carryback for
losses attributable to specified liability losses. A specified liability loss is
defined, in general, as any amount otherwise allowable as a deduction which is
attributable to (i) a product liability or (ii) a liability arising under a
federal or state law or out of any tort if the act giving rise to such liability
occurs at least three years before the beginning of the taxable year. On August
30, 1995, the Company also filed amended Federal tax returns for several prior
fiscal years to carry back losses under Section 172(f). The refunds requested on
the amended returns are approximately $6.2 million for 1986; $0.4 million for
1985; $0.7 million for 1983; and $0.4 million for 1982. There may be opposition
by the Internal Revenue Service ("IRS") as to the Company's ability to obtain
benefits from refunds claimed under Section 172(f). Therefore, no assurances
can be made as to the Company's entitlement to all claimed refunds.
In September 1996, the Company received a $5.4 million tentative refund
for fiscal 1996. Of this refund, $0.3 million has been recognized as a tax
benefit during the second quarter of fiscal 1997. In October 1995, the Company
received a $9.4 million tentative refund for fiscal 1995. Of this refund, $2.4
million was recognized as a tax benefit during the second quarter of fiscal
1996. Receipt of the 1996 and 1995 Federal refunds does not imply IRS approval.
Due to the lack of significant precedent regarding Section 172(f), the
unbenefitted amounts from fiscal 1996 and 1995 of $5.1 million and $7.0 million,
respectively, are reflected on the Company's consolidated balance sheet in
unbenefitted tax refunds received. In connection with the refund claims, the
Company paid contingency fees of $1.1 million and $1.9 million relating to the
fiscal 1996 and 1995 refunds, respectively. The Company expensed a pro rata
portion of the contingency fees as related tax benefits were recognized. The
remaining amount of $2.4 million is reflected in the Company's consolidated
balance sheet as other receivables. In the event the IRS Appeals Office
determines that the Company is not entitled to all or a portion of the
deductions under Section 172(f), this fee is reimbursable to the Company
proportionately.
At May 31, 1997, the Company had Federal accumulated net operating loss
carryforwards of approximately $27.7 million, which would expire in 2008 through
2011. The Company will be allowed a minimum tax credit carryover in the future
of $667,000 against regular tax in the event that regular tax expense exceeds
the alternative minimum tax expense.
The Company may be unable to utilize some or all of its allowable tax
deductions or losses, which depends upon factors including the availability of
sufficient net income from which to deduct such losses during limited carryback
and carryover periods. Further, the Company's ability to use any Net Operating
Losses may be subject to limitation in the event that the Company issues or
agrees to issue substantial amounts of additional equity. The Company monitors
the potential for "change of ownership" and believes that its financing plans as
contemplated will not cause a "change of ownership;" however, no assurances can
be made that future events will not act to limit the Company's tax benefits.
The Company is currently under audit by the IRS related to its fiscal
1996 and fiscal 1995 Federal income tax returns and the amended returns for
prior years. Neither the Company nor the IRS will be foreclosed from raising
other tax issues in regard to any audits of such returns, which also could
ultimately affect the Company's tax liability.
NOTE 14 -- EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan, which is a defined contribution plan
qualified under Section 401(k) of the Internal Revenue Code, for the benefit of
its eligible employees. All full-time and part-time employees who have attained
the age of 21 and have completed six consecutive months of employment are
eligible to participate in the plan. Effective June 1, 1995, eligibility was
modified to six months of employment and a minimum of twenty (20) regular
scheduled hours per week. Each participant may contribute from 2 percent to 15
percent of his or her compensation to the plan subject to limitations on the
highly compensated employees to ensure the plan is non-discriminatory. Company
contributions are discretionary and are determined quarterly by the Company's
Board of Directors or the Plan Committee. The Company made approximately
$26,000, $30,000, and $29,000 in contributions to the Plan in fiscal 1997, 1996
and 1995, respectively.
The Company had deferred compensation plans ("Financial Security Plans")
for its key executives and medical directors. The Company's consolidated
balance sheet as of May 31, 1997 also reflects the present value of the
obligation to the participants under the Financial Security Plans, which were
terminated in June 1992, of $215,000.
51
<PAGE> 52
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
NOTE 15 -- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
MAY 31,
1997
--------
(DOLLARS IN
THOUSANDS)
<S> <C>
Issuance of 164,304 shares of Common Stock in
connection with Debenture Exchange Offer ....................... $ 1,890
Exchange of Secured Convertible Note and accrued
interest for 41,260 shares of Preferred Stock .................. 2,063
Exchange of minority interest into 100,000 shares of
Common Stock ................................................... 1,000
Capital lease ..................................................... 42
Retirement of Common Stock ........................................ 159
Purchased goodwill for managed care contract ...................... 151
Dividends on Preferred Stock ...................................... 31
</TABLE>
During fiscal 1997, the Company purchased all of the capital stock of
HMS. In conjunction with this acquisition, the assets acquired and liabilities
assumed were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired ..................................... $ 356
Purchased goodwill ................................................ 806
Liabilities assumed ............................................... (1,042)
Issuance of Common Stock .......................................... (120)
--------
$ --
========
</TABLE>
NOTE 16 -- STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 60,000 shares of Preferred
Stock, $50 par value, in one or more series, each series to have such
designation and number of shares as the Board of Directors may fix prior to the
issuance of any shares of such series. Each series may have such preferences and
relative participation, optional or special rights with such qualifications,
limitations or restrictions as stated in the resolution or resolutions providing
for the issuance of such series as may be adopted from time to time by the Board
of Directors prior to the issuance of any such series. The Board of Directors
has designated 41,260 shares of Preferred Stock as Series A Non-Voting 4%
Cumulative Convertible Preferred Stock, $50 par value (the "Preferred Stock") on
January 17, 1997. The Preferred Stock was issued by the Company in exchange for
the Secured Convertible Note of the Company due January 9, 1997 in the principal
amount of $2.0 million and bearing interest at the rate of 12 percent per annum
and $63,000 of interest accrued thereon. The Preferred Stock pays a cumulative
quarterly dividend of 4 percent per annum, when and as declared by the Board of
Directors; is preferred to the extent of $50 per share plus accrued dividends;
is convertible into shares of Common Stock of the Company at $6 per share, which
was the same price at which the principal of the note was exchangeable; and is
not entitled to vote.
52
<PAGE> 53
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
Common Stock
The Company is authorized to issue 12.5 million shares of $.01 par value
Common Stock. During fiscal 1995, the Company effected a reverse stock split of
one share for each ten or fewer shares of the Company's Common Stock (see Note
1-- "Summary of Significant Accounting Policies"). As of May 31, 1997,
approximately 3.4 million shares of the Company's Common Stock were outstanding.
On December 30, 1996, the Company completed its Debenture Exchange Offer
(see Note 11-- "Long-Term Debt and Short-Term Borrowings). As a result, the
Company requisitioned for issue 164,304 shares of the Company's Common Stock,
representing the stock portion of the Exchange Offer.
In November 1995, the Company entered into a Secured Conditional
Exchangeable Note Purchase Agreement. The principal amount of the Note was $1.0
million, accrued interest at 12 percent per annum, and was secured by a deed of
trust. The principal amount of the Note was exchangeable into the Company's
Common Stock at the exchange rate of $7.54375 per share. On May 30, 1996,
exchange of this Note was effectuated. As a result, on May 31, 1996, the Company
issued 132,560 shares of the Company's Common Stock to Premier Strategic Growth
Fund and paid $61,520 representing accrued interest to date.
In August 1995, the Company sold an aggregate of 19,933 shares of Common
Stock to three accredited investors in a private offering for an aggregate
purchase price of $119,598 paid in cash on August 16, 1995.
On May 22, 1995, the Company and its subsidiary, Comprehensive
Behavioral, entered into an agreement with PCA (see Note 3-- "Acquisitions and
Dispositions").
On April 1, 1995, the Company agreed to issue AMH 44,054 shares (see
Note 3-- "Acquisitions and Dispositions").
On February 1, 1995, the Company sold an aggregate of 100,000 shares of
Common Stock to one accredited investor in a private offering for an aggregate
purchase price of $600,000 paid in cash on February 7, 1995. Such agreement was
amended in June 1995 for an additional 15,000 shares as an adjustment for delay
in registration of shares without additional payment. On April 15, 1995, the
Company sold an aggregate of 150,000 shares of Common Stock to an accredited
investor in a private offering for an aggregate purchase price of $975,000 paid
in cash on April 19, 1995. During the second quarter of fiscal 1996, the Company
amended this agreement for an additional 22,500 shares as an adjustment for
delay in registration of shares without additional payment.
In December 1992, options not under any plan were issued to the former
owner of Mental Health Programs, Inc., as an inducement essential to the
purchase of Mental Health Programs, Inc. (see Note 3-- "Acquisitions and
Dispositions"). Options for 10,000 shares were granted at an exercise price
ranging from $15.00 to $30.00. These options were exercisable 25 percent after
one year from the grant date and each year thereafter and were contingent upon
the continued employment with the Company. In July 1993, the Company terminated
the employment agreement with the former owner and subsequently entered into
litigation. On November 21, 1994, the Company reached a settlement agreement
with the former owner and as part of the settlement agreement issued 16,000
shares of the Company's Common Stock. In January 1996, the Company issued the
former owner an additional 1,160 shares pursuant to the amended settlement
agreement.
On April 19, 1988, the Company declared a dividend of one common share
purchase right ("Right") for each share of Common Stock outstanding at May 6,
1988. Each Right entitles the holder to purchase one share of Common Stock at a
price of $300 per share, subject to certain anti-dilution adjustments. The
Rights are not exercisable and are transferable only with the Common Stock until
the earlier of ten days following a public announcement that a person has
acquired ownership of 25 percent or more of the Company's Common Stock or the
commencement or announcement of a tender or exchange offer, the consummation of
which would result in the ownership by a person of 30 percent or
53
<PAGE> 54
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
more of the Company's Common Stock. In the event that a person acquires 25
percent or more of the Company's Common Stock or if the Company is the surviving
corporation in a merger and its Common Stock is not changed or exchanged, each
holder of a Right, other than the 25 percent stockholder (whose Rights will be
void), will thereafter have the right to receive on exercise that number of
shares of Common Stock having a market value of two times the exercise price of
the Right. If the Company is acquired in a merger or more than 50 percent of its
assets are sold, proper provision shall be made so that each Right holder shall
have the right to receive or exercise, at the then current exercise price of the
Right, that number of shares of Common Stock of the acquiring company that at
the time of the transaction would have a market value of two times the exercise
price of the Right. The Rights are redeemable at a price of $.20 per Right at
any time prior to ten days after a person has acquired 25 percent or more of the
Company's Common Stock.
As of May 31, 1997, the Company had reserved no shares of Common Stock
for future issuances related to business acquisitions, approximately 344,000
shares related to the conversion of convertible debt and private placements and
1,093,000 shares for the exercise of stock options of which approximately
549,000 shares are for options granted under the Company's 1988 Plans, 316,000
under the 1995 Incentive Plan, and 208,000 shares under the Directors' Plan.
Each of the shares reserved for future issuance includes one Right as referenced
above.
Stock Option Plans
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 ("ISO's") under Section 422 of the Internal Revenue Code. Options
granted under the 1988 Nonstatutory Stock Option Plan do not qualify as ISO's.
Options may be granted for terms up to ten years and are generally exercisable
in cumulative annual increments of 25 percent to 50 percent each year. Options
must equal or exceed the fair market value of the shares on the date of grant.
The maximum number of shares authorized for issuance under the Company's 1988
Incentive Stock Option Plan is 500,000 and the Company's 1988 Nonstatutory Stock
Option Plan is 200,000.
The Company also has a 1995 Incentive Plan (the "1995 Plan"). The 1995
Plan provides for the granting of options to eligible employees and consultants
to the Company. Options granted as incentive stock rights, stock options, stock
appreciation rights, limited stock appreciation rights and restricted stock
grants under the 1995 Plan may qualify as ISO under Section 422A of the Internal
Revenue Code. Options for ISO's may be granted for terms up to ten years and are
generally exercisable in cumulative increments of 33 percent each year. Options
for NSO's may be granted for terms up to 13 years. Options for ISO's must equal
or exceed the fair market value of the shares on the date of grant, and 65
percent in the case of other options. The 1995 Plan also provides for the full
vesting of all outstanding options under certain change of control events. The
maximum number of shares authorized for issuance under the 1995 Plan is 450,000.
In September 1995, the Board of Directors granted and issued to its
President and Chief Executive Officer, 100,000 Restricted Shares of its Common
Stock, $0.01 par value. Such grant of Restricted Shares was issued from the
Company's 1995 Incentive Plan and was ratified by the stockholders at the 1995
Annual Meeting. The Restricted Shares are subject to vesting at the rate of
5,000 shares per fiscal year (the "Annual Vested Shares") over a 20-year period.
The vesting of the Restricted Shares is subject to acceleration upon the
occurrence of certain events of acceleration as described below. With respect to
all Restricted Shares which may become vested, the Company is to pay to the
Chief Executive Officer a bonus equivalent to the amount of the combined federal
and applicable state and city income taxes associated with the Restricted Shares
that have become vested. While the Restricted Shares have been issued and the
Chief Executive Officer is entitled to vote said shares, all Restricted Shares
are held in escrow until their vesting and said shares may not be sold,
assigned, transferred or hypothecated until the time they have become vested.
In addition to the vesting of the Annual Vested Shares, an additional
number of Restricted Shares vest as follows: (i) for each fiscal year of the
Company, 1,000 additional Restricted Shares vest for each $1,000,000 of net
pre-tax profit of the Company as reported for that fiscal year; (ii) in the
event the Company effects a merger, acquisition, corporate combination or
purchase of assets (an "Acquisition Event") 1,000 additional Restricted Shares
vest for each $1,000,000 of Acquisition Event value paid for the Company; and
(iii) as of May 31 of each year, for each 1 percent of increase of market value
of the Company's voting securities above 110 percent of the market value
54
<PAGE> 55
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
as of May 31 of the preceding year, 1,000 additional Restricted Shares vest.
In addition, upon the occurrence of (a) the approval by the stockholders
of the Company of an Approved Transaction, as defined; (b) a Control Purchase,
as defined; (c) a Board change; or (d) the failure by the Company to renew the
Chief Executive Officer's Employment Agreement on the conclusion of its term on
December 31, 1998, or any subsequent or renewed term, on terms identical to
those in the Employment Agreement then prevailing, all Restricted Shares become
vested. Upon the death or total disability of the Chief Executive Officer prior
to the complete vesting of the Restricted Shares, all Restricted Shares not
theretofore vested shall become vested.
During fiscal 1997, the Company determined that certain conditions for
acceleration were achieved, and that it was probable that such conditions would
also be present on May 31, 1997. Based on increases in the fair market value of
the Company's Common Stock, the Company provided for compensation expenses for
the acceleration of approximately 37,000 Restricted Shares; to be earned in the
fiscal year ended May 31, 1997. In addition, the estimated bonus payments for
income taxes as provided by the Agreement were accrued during fiscal 1997.
Included in the results for fiscal 1997 are compensation expenses related to the
Chief Executive Officer's Annual Grant and acceleration of Restricted Shares of
$70,000 and $0.5 million, respectively. Compensation expenses related to the
reimbursement of income taxes to the Chief Executive Officer for the Annual
Grant and acceleration of Restricted Shares were $27,000 and $0.2 million,
respectively, for the fiscal year ended May 31, 1997. As of May 31, 1997, 47,000
Restricted Shares were vested and 53,000 shares were unvested.
The Company entered into an Employment Agreement effective January 1,
1997, with its Chief Operating Officer. In conjunction with this Employment
Agreement, the Company granted its Chief Operating Officer options to purchase
120,000 shares of the Company's Common Stock from the Company's 1995 Incentive
Plan. The vesting of 100,000 options is subject to certain performance-related
criteria relating to quarterly revenues from operations and net earnings before
taxes. If the Chief Operating Officer is terminated for cause or resigns without
Good Reason (as defined), any unvested options would be forfeited. As
consideration for entering into the Employment Agreement, the Chief Operating
Officer has agreed not to disclose confidential information and not to compete
with the Company's existing business or clients for a one-year period following
termination. In addition, in the event of a Transaction (as defined), all stock
options granted immediately vest.
During fiscal 1997, the Company recognized $17,500 in compensation
expense related to the vesting of options for the Chief Operating Officer which
were not performance-related. The Company determined that the
performance-related criteria had not been met by the Chief Operating Officer as
of May 31, 1997 and, as a result, no compensation expense related to the vesting
of such options for the Chief Operating Officer was recognized during fiscal
1997. The Company continues to evaluate the performance-related criteria and in
the event that conditions for achievement of such performance-related criteria
appear to be present and are probable to be present, the Company will recognize
the applicable compensation expense related to the vesting of options for the
Chief Operating Officer. Such compensation expense will utilize the estimated
fair market value on the date of evaluation.
As a result, the total compensation expense recognized in fiscal 1997
for employee compensation awards was $0.8 million.
The Company has a non-qualified stock option plan for its outside
directors (the "Directors' Stock Option Plan" or the "Directors' Plan"). The
Directors' Plan provides for the Company to grant to each non-employee director
options as follows: (1) each individual serving as a non-employee director as of
the effective date were granted a non-qualified stock option to purchase 10,000
share of Common Stock ("Initial Grant"); (2) each individual who first becomes a
non-employee director on or after the effective date, will be granted, at the
time of such election or appointment a non-qualified stock option to purchase
10,000 shares of Common Stock ("Initial Grant"); (3) commencing with the 1995
annual meeting of the Company's stockholders, each individual who at each annual
meeting of the Company's stockholders remains a non-employee director will
receive an additional non-qualified stock option to purchase 2,500 shares of
Common Stock. Commencing with the 1996 annual meeting, the number of options
awarded annually to all non-employee directors was increased from 2,500 to 5,000
and provided for an annual grant of special service options to the Vice Chairman
of the Board of 3,333 and to each committee chairman of 8,333 and each committee
55
<PAGE> 56
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
member of 2,500. In addition, each non-employee director will automatically be
granted an option to purchase 10,000 shares upon joining the Board of Directors
and options to purchase 5,000 shares on each anniversary of the initial date of
service. Each non-qualified stock option is exercisable at a price equal to the
Common Stock's fair market value as of the date of grant. Initial grants vest
annually in 25 percent increments beginning on the first anniversary of the date
of grant, provided the individual is still a director on those dates. Annual
grants will become 100 percent vested as of the first annual meeting of the
Company's stockholders following the date of grant, provided the individual is
still a director as of that date. An optionee who ceases to be a director shall
forfeit that portion of the option attributable to such vesting dates on or
after the date he or she ceases to be a director. The maximum number of shares
authorized for issuance under the Directors' Plan is 200,000.
The Company has elected to follow APB Opinion No. 25 and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB Opinion No. 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Adjusted pro forma information regarding net income or loss and earnings
or loss per share is required by SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that SFAS 123. The fair value of these options was estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for both 1997 and 1996, respectively: volatility factor of
the expected market price of the Company's Common Stock of 0.524; a
weighted-average expected life of the options of 6 years and 5 years;
risk-free interest rate of 5.5 percent and dividend yield of 0 percent.
The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Pro forma disclosures required by SFAS No. 123 include the effects of
all stock option awards granted by the Company from June 1, 1995 through May 31,
1997. During the phase-in period, the effects of applying this Statement for
generating pro forma disclosures are not likely to be representative of the
effects on pro forma net income (loss) for future years. For the purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma information is
as follows for the fiscal years ended May 31 (in thousands except for earnings
(loss) per share information):
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Pro forma net loss................................ $(3,210) $(4,383)
Pro forma loss per common share:
Primary........................................ $ (0.95) $ (1.54)
</TABLE>
The pro forma effect on the net loss for the years ended May 31, 1997
and 1996 is not likely to be representative of the effects on reported income or
loss in future years because these amounts reflect only two years of vesting,
respectively.
56
<PAGE> 57
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
A summary of the Company's stock option activity and related information
for the years ended May 31, is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE
SHARES PRICE
---------- ----------
<S> <C> <C>
Outstanding as of May 31, 1994 .................. 32,767 $ 16.75
Canceled ........................................ (9,000) 9.33
Granted ......................................... 262,500 7.82
Exercised ....................................... -- --
Forfeited ....................................... (65,100) 9.88
---------- ----------
Outstanding as of May 31, 1995 .................. 221,167 $ 8.48
Canceled ........................................ (5,500) 7.82
Granted ......................................... 314,237 8.19
Exercised ....................................... (14,000) 7.57
Forfeited ....................................... (114,154) 8.30
---------- ----------
Outstanding as of May 31, 1996 .................. 401,750 $ 8.34
Canceled ........................................ (1,300) 13.85
Granted ......................................... 346,675 10.97
Exercised ....................................... (178,207) 8.24
Forfeited ....................................... (24,668) 9.45
---------- ----------
Outstanding as of May 31, 1997 .................. 544,250 $ 9.99
========== ==========
</TABLE>
At May 31, 1997, options to purchase 189,499 shares and 60,500 shares of
Common Stock were exercisable under the 1988 Plans and the 1995 Plan,
respectively. In addition, 337,133 shares were available for future issuance
under the 1988 and 1995 Plans.
The weighted average fair values of options granted were $5.96 and $5.86
in fiscal 1997 and 1996, respectively.
A summary of options outstanding and exercisable as of May 31, 1997
follows:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
OPTIONS AVERAGE REMAINING OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISE CONTRACTUAL EXERCISABLE EXERCISE
(IN 000'S) RANGE PRICE LIFE (IN 000'S) PRICE
- ------------- --------------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
251,000 $ 6.25 - $ 8.50 $ 7.72 1.00 189,500 $ 7.55
286,000 $10.00 - $15.00 $11.79 1.56 72,250 $11.65
6,750 $15.25 - $21.25 $16.81 2.75 1,750 $21.25
500 $30.00 $30.00 4.00 500 $30.00
</TABLE>
NOTE 17 -- 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
57
<PAGE> 58
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1997, 1996 and 1995
(Case No. 4:92CV002194 CAS). The Company sought damages for the lost benefit of
certain stockholder appreciation rights in an amount in excess of $3.6 million
and punitive damages. On March 8, 1995, the jury returned its verdict awarding
the Company $2,681,250 in damages, plus interest and the costs of the action
against RehabCare for securities fraud and for breach of contract. RehabCare
posted a bond in the amount of $3.0 million and filed a motion for new trial or
in the alternative, for judgment as a matter of law, which the court denied in
its entirety on August 4, 1995. On September 1, 1995, RehabCare filed a notice
of appeal with the District Court indicating its intent to appeal the matter to
the United States Court of Appeals. On October 22, 1996, the U.S. Court of
Appeals for the Eighth Circuit reversed the judgment in favor of the Company and
against RehabCare entered by the District Court following the jury's verdict in
favor of the Company. On November 5, 1996, the Company filed a Petition for
Rehearing with the Eighth Circuit. Any effect from the outcome of this lawsuit
will not have a material adverse impact on the Company's results of operations.
The Company entered into a Stock Purchase Agreement on April 30, 1996 to
purchase the outstanding stock of HMS (see Note 3 to the Company's Consolidated
Financial Statements). The Stock Purchase Agreement was subject to certain
escrow provisions and other contingencies which were not completed until July
25, 1996. In conjunction with this transaction, HMS initiated an arbitration
against The Emerald Health Network, Inc. ("Emerald") claiming breach of contract
and seeking damages and other relief. In August 1996, Emerald, in turn,
initiated action in the U.S. District Court for the Northern District of Ohio,
Eastern Division, Case No. 1:96 CV 1759), against the Company claiming, among
other things, interference with the contract between Emerald and HMS and seeking
unspecified damages and other relief. The Company filed counterclaims against
Emerald for deceptive trade practices, defamation, tortious interference with
business relationships and unfair competition. A confidential settlement has
been reached between Emerald and the Company. The Company believes that it has
claims arising from this transaction against the accountants and legal counsel
of HMS as well as HMS's lending bank. On October 1, 1996, the Company filed a
claim of malpractice against the legal counsel of HMS. These claims are
presently being investigated and have not as yet been quantified. The Company
does not believe that the impact of these claims will have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
On September 6, 1996, the Company instituted an arbitration against the
Sellers of HMS with the American Arbitration Association in Orange County,
California seeking, among other things, reimbursement from the Sellers for
damages which the Company sustained by reason of the inaccuracies of the
representations and warranties made by the Sellers and for the indemnification
from each of the Sellers as provided for under the terms of the Stock Purchase
Agreement. One seller has settled his case with the Company. The remaining
seller has not interposed an answer to the arbitration, and the arbitration is
therefore in its formative stages. The Company does not believe that the impact
of these claims will have a material adverse effect on the Company's financial
position, results of operations and cash flows.
In October 1994, the NYSE notified the Company that it was below certain
quantitative and qualitative listing criteria in regard to net tangible assets
available to Common Stock and three year average net income. The Listing and
Compliance Committee of the NYSE has determined to monitor the Company's
progress toward returning to continuing listing standards and has so indicated
in approving the Company's most recent Listing Application on December 30, 1996.
Management believes, though no assurance may be given, that the recent
completion of the Company's Debenture Exchange Offer will enable the Company to
seek additional equity and thereby satisfy the Committee of the Company's
progress. No assurance may be given that additional equity may be obtained on
terms favorable to the Company.
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 a liability that is not covered by
insurance. Management believes that the outcome of such lawsuits will not have a
material adverse impact on the Company's financial statements.
NOTE 18 -- FOURTH QUARTER RESULTS FOR FISCAL 1997
The net loss for the fourth quarter of fiscal 1997 was $1.1 million.
Affecting these results were certain unusual and infrequent transactions that
had both positive and negative effects. The unusual transactions that had a
positive
58
<PAGE> 59
effect on earnings were an adjustment of $0.2 million for favorable settlements
in the current year related to prior year third-party liabilities, $0.1 million
related to adjustments in third-party contractual allowances, $0.1 million for
insurance refunds received related to a prior year and a decrease in estimate
for tax liabilities of $0.1 million. The one time or infrequent transaction that
had a negative effect on earnings was the reserve for bad debt of $0.1 million.
NOTE 19 -- EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
On June 4, 1997, the Company sold its freestanding facility in
Cincinnati, Ohio for $3.0 million in cash.
In August 1997, the Company announced its intention to relocate most of
its administrative and corporate functions to Tampa, Florida to co-locate with
its principal subsidiary, Comprehensive Behavioral. The Company has not
completed its estimate of the costs associated with this relocation but expects
that it may be in excess of $0.6 million. Certain of these costs are expected
to be recorded as a restructuring provision in the second quarter of fiscal
1998 when the criteria for recognizing such restructuring are met.
59
<PAGE> 60
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS, AND EXECUTIVE COMPENSATION.
The Company expects to file its definitive proxy statement 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" and in the proxy statement for the 1997 annual meeting of
stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required is set forth under the caption "Election of
Directors" in the proxy statement for the 1997 annual meeting of stockholders
and is incorporated herein by reference.
60
<PAGE> 61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
Included in Part II of this report:
Report of Independent Auditors
Consolidated Balance Sheets, May 31, 1997 and 1996
Consolidated Statements of Operations, Years Ended
May 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended May 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows, Years Ended
May 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None.
Other schedules are omitted, as the required information is inapplicable or
the information is presented in the consolidated financial statements or
related notes.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description and Reference
------ -------------------------
<S> <C>
3.1 Restated Certificate of Incorporation as amended (7).
3.2 Restated Bylaws as amended November 14, 1994 (7).
3.3 Certificate of Designation of Preferences and Rights of Series A
Non-Voting 4% Cumulative Convertible Preferred Stock (10).
4.1 Indenture dated April 25, 1985 between the Company and Bank of
America, NT&SA, relating to Convertible Subordinated Debentures
(1).
4.3 Rights Agreement dated as of April 19, 1988 between the Company
and Security Pacific National Bank (2).
4.4 Rights Agreement between the Registrant and Continental Stock
Transfer & Trust Company dated April 19, 1988 restated and
amended October 21, 1994 (6).
4.5 Form of Common Stock Certificate (11).
10.1 Form of Stock Option Agreement (3)*.
10.2 Form of Indemnity Agreement as amended March 24, 1994 (5)*.
10.3 The Company's Employee Savings Plan as amended and restated as of
June 30, 1993 (4)*.
10.4 1988 Incentive Stock Option and 1988 Nonstatutory Stock Option
Plans, as amended (6)*.
10.5 Non-qualified Stock Option Agreement dated October 11, 1994
between the Company and Richard L. Powers (6).
10.6 Employment Agreement dated January 1, 1995 between the Company
and Chriss W. Street (6).*
10.7 Directors and Officers Trust dated February 27, 1995 between the
Company and Mark Twain Bank (7).*
10.8 Comprehensive Care Corporation 1995 Incentive Plan (9)*.
10.9 Amended and Restated Non-Employee Director's Stock Option Plan
(8)*.
10.10 Restricted Stock Grant between Chriss W. Street and the Company
dated November 9, 1995 (9)*.
10.11 Series A Non-Voting 4% Cumulative Convertible Preferred Stock
Exchange Agreement (10)*.
10.12 Employment Agreement effective January 1, 1997, between the
Company and Stuart J. Ghertner, Ph.D. (12)*.
10.13 Letter Agreement dated April 4, 1997 between the Company and
Chriss W. Street (12)*.
</TABLE>
61
<PAGE> 62
<TABLE>
<S> <C>
11 Computation of Loss Per Share (filed herewith).
21 List of the Company's subsidiaries (filed herewith).
23 Consent of Ernst & Young LLP (filed herewith).
27 Financial Data Schedules (filed herewith).
</TABLE>
- ----------
*Management contract or compensatory plan or arrangement with one or more
directors or executive officers.
(1) Filed as an exhibit to the Company's Form S-3 Registration Statement No.
2-97160.
(2) Filed as an exhibit to the Company's Form 8-K dated May 4, 1988.
(3) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1988.
(4) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1991.
(5) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1994.
(6) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
November 30, 1994.
(7) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
February 28, 1995.
(8) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1995.
(9) Filed as an exhibit to the Company's Form 8-K dated November 9, 1995.
(10) Filed as an exhibit to the Company's Form 8-K dated January 30, 1997.
(11) Filed with original filing of Registration Statement on Form S-1, dated
January 29, 1997.
(12) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
February 28, 1997.
(b) Reports on Form 8-K
(1) Form 8-K dated April 4, 1997, to report under Item 5, that the
number of members comprising the Board of Directors was increased
to five; the number of directors comprising Class III directors was
increased to two; and Mr. A. Richard Pantuliano was appointed as a
Class III director until the 1998 Annual Meeting of Stockholders.
62
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, August 28, 1997.
COMPREHENSIVE CARE CORPORATION
By /s/ CHRISS W. STREET
---------------------------------------
Chriss W. Street
(Principal Executive Officer)
By /s/ KERRI RUPPERT
---------------------------------------
Kerri Ruppert
(Principal Financial and
Accounting Officer)
By /s/ STUART J. GHERTNER, PH.D.
---------------------------------------
Stuart J. Ghertner, Ph.D.
(Principal Operating 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) August 28, 1997
- ---------------------------------------
Chriss W. Street
Senior Vice President,
Secretary/Treasurer and
Chief Financial Officer
(Principal Financial and
/s/ KERRI RUPPERT Accounting Officer) August 28, 1997
- ---------------------------------------
Kerri Ruppert
Chief Operating Officer
/s/ STUART J. GHERTNER, PH.D. (Principal Operating Officer) August 28, 1997
- ---------------------------------------
Stuart J. Ghertner, Ph.D.
/s/ J. MARVIN FEIGENBAUM Vice Chairman August 28, 1997
- ---------------------------------------
J. Marvin Feigenbaum
/s/ WILLIAM H. BOUCHER Director August 28, 1997
- ---------------------------------------
William H. Boucher
/s/ W. JAMES NICOL Director August 28, 1997
- ---------------------------------------
W. James Nicol
/s/ A. RICHARD PANTULIANO Director August 28, 1997
- ---------------------------------------
A. Richard Pantuliano
</TABLE>
63
<PAGE> 64
COMPREHENSIVE CARE CORPORATION
EXHIBIT INDEX
FISCAL YEAR ENDED MAY 31, 1997
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------
<S> <C> <C>
11 Computation of Loss Per Share (filed herewith).......................... 65
21 List of the Company's subsidiaries (filed herewith)..................... 66
23 Consent of Ernst & Young LLP (filed herewith)........................... 67
27 Financial Data Schedules (filed herewith)............................... 68
</TABLE>
64
<PAGE> 1
EXHIBIT 11
COMPREHENSIVE CARE CORPORATION
Calculation of Loss Per Share
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- ------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Primary and Fully Diluted:
Loss applicable to common stock:
Net loss .................................. $(2,828) $(4,242) $(11,533) $(7,852) $(11,600)
======= ======= ======== ======= ========
Average number of shares of common stock and
common stock equivalents .................. 3,088 2,654 2,257 2,199 2,196
======= ======= ======== ======= ========
Loss per common and common equivalent share:
Net loss .................................. $ (0.92) $ (1.60) $ (5.11) $ (3.57) $ (5.28)
======= ======= ======== ======= ========
</TABLE>
65
<PAGE> 1
EXHIBIT 21
COMPREHENSIVE CARE CORPORATION
SCHEDULE OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY NAME INCORPORATION
- --------------- -------------
<S> <C>
N.P.H.S., Inc. California
CareManor Hospital of Washington, Inc. Washington
Trinity Oaks Hospital, Inc. Texas
Starting Point Incorporated California
CareUnit Hospital of Albuquerque, Inc. New Mexico
Comprehensive Care Corporation Delaware
CareUnit Clinic of Washington, Inc. Washington
CareUnit Hospital of Ohio, Inc. Ohio
Comprehensive Care Integration, Inc. Delaware
CareUnit of Florida, Inc. Florida
Comprehensive Behavioral Care, Inc. Nevada
Managed Behavioral Healthcare, Inc. Florida
AccessCare of Washington, Inc. Washington
Healthcare Management Services, Inc. Michigan
Healthcare Management Services of Michigan, Inc. Michigan
Healthcare Management Services of Ohio, Inc. Michigan
Behavioral Health Management, Inc. Michigan
Comprehensive Health Associates Puerto Rico
Comprehensive Orthopedic Care, Inc. Florida
Aurora Behavioral Health Hospital, Inc. Colorado
</TABLE>
66
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-43841, No. 33-27213, and No. 333-15929) of our report dated
July 30, 1997 with respect to the consolidated financial statements of
Comprehensive Care Corporation and subsidiaries for the year ended May 31, 1997,
included in the Annual Report (Form 10-K) for the year ended May 31, 1997.
/s/ ERNST & YOUNG LLP
Orange County, California
August 28, 1997
67
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