<PAGE> 1
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, 1998 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.)
4200 West Cypress Street, Suite 300
Tampa, Florida 33607
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (813) 876-5036
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, Par Value $.01 per share New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
7 1/2% Convertible Subordinated Debentures due 2010 Over-the-Counter
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ X ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant at August 21, 1998, was $31,131,306 based on the closing sale
price of the Common Stock on August 21, 1998 as reported on the New York Stock
Exchange composite tape.
At August 21, 1998, the Registrant had 3,459,034 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 1998 annual meeting of stockholders
presently scheduled to be held on November 17, 1998, proxy statement will be
filed no later than 120 days after the close of the Registrant's fiscal year
ended May 31, 1998.
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PART I
ITEM 1. BUSINESS
Organizational History
Comprehensive Care Corporation(R) (the "Company") is a Delaware
Corporation organized in 1969. Unless the context otherwise requires, all
references to the "Company" include Comprehensive Behavioral Care Inc.(SM)(1)
("CompCare"(SM)(2) or "CBC")and subsidiary corporations. Prior to fiscal year
1993, the Company principally engaged in the ownership, operation and management
of psychiatric and substance abuse programs in company owned, leased, or
unaffiliated hospitals. During the fiscal years 1993 through 1998, the Company
disposed of ten hospital facilities and currently has one non-operating hospital
located in Ft. Worth, Texas that is held for sale as of May 31, 1998. The
Company continues to operate one psychiatric hospital located in Aurora,
Colorado. However, it has entered into a Letter of Intent to sell this facility,
subject to the completion of a definitive agreement, for $5.1 million.
Commencing in fiscal 1993, the Company transitioned its business focus
to managed care products and services through its wholly owned subsidiary,
CompCare. During fiscal 1998, the Company's new business development has been
chiefly focused on managed care.
The following table sets forth, for each of the years in the five-year
period ended May 31, 1998, the percentage of operating revenues from the
Company's managed care operations and hospital, contract, and other operations.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Managed care operations (1) ................. 83% 72% 49% 19% 10%
Hospital, contract and other operations ..... 17 28 51 81 90
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
- ----------
(1) The Company has provided managed care products since the acquisition of
AccessCare, Inc. in December 1992. On August 1, 1995, the Company
changed the name of this subsidiary from AccessCare, Inc. to
Comprehensive Behavioral Care, Inc.(SM)
Recent Developments
- In August 1998, the Company entered into a Letter of Intent to sell its
Aurora, Colorado hospital facility, subject to the completion of a definitive
agreement, for $5.1 million.
- In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund to carry
back losses described in Section 172(f) of the Internal Revenue Code ("IRC"),
requesting a refund to the Company of $9.4 million and $5.5 million,
respectively, of which refunds of $9.4 million and $5.4 million were received.
In addition, the Company also filed amended Federal income tax returns for
fiscal years prior to 1995, requesting similar refunds of losses carried back
under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7
million for 1983; and $0.4 million for 1982, a total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, are recorded
as a deferred liability, "Unbenefitted tax refunds received" pending resolution
by the IRS of the appropriateness of the Section 172(f) carryback. The
additional refunds requested under Section 172(f) for prior years of $7.7
million have not been received, nor has the Company recognized any tax benefit
related to these potential refunds.
Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) 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. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. The IRS may determine that the
Company's position and use of Section 172(f) is inappropriate and request a
return of some or all of the refunds received to date. No assurance can be
provided that the Company will be able to retain the refunds received to date or
that the other refunds requested will be received. (see Note 21-- "Events
Subsequent to the Balance Sheet Date." in the audited consolidated financial
statements for additional information).
As a result of the Section 172(f) carryback claims filed by the
Company, and the tentative refunds received, the Company came under audit with
respect to the tax years previously mentioned.
On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million in refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be upheld,
the Company would be required to repay $12.4 million in refunds previously
received, plus accrued interest of approximately $4.0 million through May 31,
1998. Accordingly, the Company would be entitled to a repayment of the fees
advanced to the Company's tax advisor relating to these refund claims of
approximately $2.5 million. This report commences the administrative appeals
process. The Company intends to protest the examination report and believes that
its position with respect to its right to the tax refunds received will be
upheld. The Company's tax advisor relating to these refund claims has advised
management that the administrative appeals process could take twelve to eighteen
months. In the event the Company wishes to further protest the results of its
administrative appeal, it may further appeal to the United States Tax Court
following the final determination of the administrative appeal. The Company has
been advised that a determination by the United States Tax Court could take up
to an additional twelve months from commencement of the appeals process in the
United States Tax Court.
- During fiscal 1998, the Company completed an internal operational
restructuring which included the relocation of the corporate office and its
principal accounting functions from Corona Del Mar, California to the facilities
of its CompCare subsidiary located in Tampa, Florida. This relocation entailed
the rebuilding of senior management at both the parent and three operating
subsidiary levels. The rebuilding was accomplished through relocations, internal
management reassignments and new hires.
- During the current year, the Company began implementation of a
fully-integrated managed care Information System designed to improve service,
tracking, and reporting. See Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
- ----------
(1) Comprehensive Behavioral Care, Inc. is a registered service
mark of the Company.
(2) CompCare is a registered service mark of Comprehensive
Behavioral Care, Inc.
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Operational Overview
For the fiscal year ended May 31, 1998, the Company had net income of
$1.9 million versus a loss of $2.8 million for the same period of 1997.
Stockholders' deficit improved to $1.3 million in fiscal 1998 from $3.6 million
as of May 31, 1997. Cash and cash equivalents improved to $6.0 million in fiscal
1998 from $4.0 million as of May 31, 1997. Managed care operations accounted for
approximately 83% of the Company's operating revenues with hospital, contract,
and other operations accounting for 17% of the Company's operating revenues for
the fiscal year ended May 31, 1998.
Business General
The Company now views itself principally as a behavioral health managed
care company. Comprehensive Behavioral Care manages the delivery of a continuum
of psychiatric and substance abuse services to commercial, Medicare, and
Medicaid members on behalf of Health Maintenance Organizations ("HMOs"),
Preferred Provider Organizations ("PPOs"), and state and county governments. The
services provided by managed care operations are delivered through management
service agreements, administrative service agreements, and capitated contracts.
Under capitated contracts, the primary payor of healthcare services pre-pays a
fixed fee, per member per month ("PMPM") for covered psychiatric and substance
abuse services to the Company regardless of actual member utilization. Current
services include a broad spectrum of inpatient and outpatient mental health and
substance abuse therapy, counseling, and supportive interventions. Programs are
contracted through inpatient facilities as well as experienced outpatient
practitioners. In addition, Comprehensive Behavioral Care has developed staff
model outpatient treatment centers where existing treatment is performed by
doctors and professionals who are employees of the Company.
The Company has an incentive to keep its members healthy and to manage
its costs through measures such as the monitoring of hospital admissions
(inpatient) and the review of authorizations for various types of therapy
(outpatient). The goal is to combine the delivery of and access to quality
behavioral managed care services with effective management controls in order to
make the most cost-effective use of healthcare resources.
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MANAGED CARE OPERATIONS
The Company provides managed behavioral healthcare and substance abuse
services for employers, HMOs, PPOs, government organizations, third-party claim
administrators, commercial, and other group purchasers of healthcare. The
Company currently provides services to contracted members in 10 states and the
Commonwealth of Puerto Rico and provides behavioral medicine managed care
services to Medicaid recipients through subcontracts with HMOs focused on
Medicaid and Medicare beneficiary populations. Medicaid is a state operated
program that utilizes both state and federal funding to provide healthcare
services to qualified low-income residents. The programs and services currently
offered by the managed care operations include fully integrated capitated
behavioral healthcare services, Employee Assistance Programs ("EAP"), case
management/utilization review services, Administrative Services Organizations
("ASO"), provider sponsored health plan development, preferred provider network
development and management, physician advisor reviews and overall care
management services. Fully integrated capitated lives totaled approximately
1,014,000 and 1,099,000 at May 31, 1998 and 1997, respectively. ASO lives were
approximately 199,000 and 226,000 at May 31, 1998 and 1997, respectively. EAP
lives were approximately 63,000 and 65,000 at May 31, 1998 and 1997,
respectively. Blended products were eliminated in fiscal 1998 and totaled
approximately 1,400 lives in fiscal 1997. The Company manages its clinical
service programs on proven treatment technologies and trains its providers to
use science-based effective treatment.
Managed care operations accounted for approximately 83% of the
Company's operating revenues in fiscal 1998 versus 72% in fiscal 1997. 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 providing access to high quality, cost-effective care.
Sources of Revenue
The Company provides managed behavioral health and substance abuse
services to its members under contract. Generally, the Company receives a
negotiated amount on a PMPM or capitated basis to provide these services. The
Company then contracts directly with providers who receive a pre-determined
fee-for-service rate, case rate or alternatively, the Company may contract with
an integrated provider company on a sub-capitated basis. Behavioral health
providers include psychiatrists, clinical psychologists and other licensed
healthcare professionals. Under the full risk capitation arrangements, the
Company is responsible for the development and management of service networks
including physicians, therapists and hospitalization services and all claims are
managed and paid by the Company. In cases where the Company has made
sub-capitation arrangements, the outside company manages service delivery
through a Company approved and credentialed network guided by stringent quality
standards. Claims are paid by the Company and deducted from the network provider
capitation payment.
In April 1997, the Company entered into an agreement with PCA Health
Plans of Puerto Rico, Inc., a subsidiary of Humana, Inc. ("PCA"), to provide
psychiatric and substance abuse services to patients serviced by PCA under an
agreement between PCA and The Commonwealth of Puerto Rico. The company provides
service to approximately 430,000 members. Revenues from this contract accounted
for 39% and 13% of the Company's operating revenue for the fiscal years ended
May 31, 1998 and 1997, respectively. PCA has entered into a health insurance
contract with the Puerto Rico Health Insurance Administration ("PRHIA"), a
public instrumentality of the Commonwealth of Puerto Rico, to provide medical
and healthcare services to indigent patients in two rural regions of Puerto
Rico. The services are provided through a network of contracted and employed
professionals who are located throughout the two regions. PCA has subcontracted
with the Company to provide all mental health, substance abuse, and other
professional services necessary to identify, treat, or avoid behavioral health
illness or injury to all persons covered under its agreement with PRHIA.
In total, the Company has nine contracts with PCA to provide behavioral
healthcare services under Medicare, Medicaid, and commercial plans to contracted
members in Florida, Texas, and Puerto Rico. The combined PCA contracts represent
approximately 57% and 32% of the Company's operating revenue for fiscal 1998 and
1997, respectively. As of May 31, 1998, the Company was at full risk for
approximately 730,000 lives covered under contract with PCA.
The Company holds contracts that require a portion of the PMPM amounts
to be withheld 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. Contracts are generally
entered into for a period of one to three years and are automatically renewed
for successive one-year periods unless either party gives notice of termination.
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Delivery of Healthcare Services
Members are usually directed to the Company by their employer, HMO, or
physician and if deemed appropriate receive an initial authorization for a
consultation. Based upon the initial consultation, a treatment plan is
established for the member. The Company attempts to control its health care
expense risk by entering into contractual relationships with healthcare
providers including hospitals, physician groups and other managed care
organizations, either on a sub-capitated, discounted fee-for-service or a
per-case basis. During fiscal 1998, the Company provided services under
capitated arrangements for commercial, Medicare and Medicaid patients in
Florida, commercial and Medicaid patients in Puerto Rico, Texas, New Jersey and
Michigan, and commercial patients in Indiana.
The new business in fiscal year 1998 included capitated lives under
ASO contracts, in which the Company provides overall care management services
but is not at financial risk for the services rendered by providers. The Company
performs periodic reviews of its current contracts with payors and may amend or
revise the terms of unprofitable contracts. During fiscal 1998, CBC added seven
new contracts and terminated or cancelled six contracts. The seven new contracts
added approximately 166,000 members and approximately $0.6 million in monthly
revenue. The six terminated contracts represented coverage for approximately
141,000 members and provided approximately $0.3 million in monthly revenue. The
net benefit was an increase in membership of approximately 25,000 and
approximately $0.3 million in monthly revenue.
Overview of Behavioral Healthcare Industry
Behavioral healthcare involves the treatment of a variety of behavioral
health conditions such as emotional and mental health problems, substance abuse,
and other personal concerns that require outpatient and inpatient therapy. The
complexity of these conditions has required expanded services to address social
issues that exacerbate illness. There is an increasing emphasis on the
correlation of physical and mental illness, with resultant expansion of joint
HMO and Managed Behavioral Healthcare Organization ("MBHO") programs. As new
psychotropic medications have become available, HMOs have expressed interest to
the MBHOs in the expansion of pharmacy management.
Industry sources estimate that approximately $95 billion was spent on
behavioral health services in 1997 which is approximately 9% of the total U.S.
healthcare spending. Behavioral health spending includes money spent on mental
health and chemical dependency treatment and does not include spending on
psychotropic medications. In response to escalating costs, behavioral health
managed care companies, such as Comprehensive Behavioral Care have expanded.
These companies focus on member care and arranging for the appropriate level of
service in a cost-effective manner. This has resulted in a significant decrease
in occupancy rates and average lengths of stay for inpatient facilities and an
increase in outpatient treatment and alternative care services.
Growth Strategy
The Company's objective is to expand its presence in both existing and
new behavioral health managed care programs by obtaining new contracts with
HMOs, corporations and other payors through its reputation of providing quality
behavioral managed care services with the most cost-effective use of healthcare
resources.
The Company believes that the Medicaid sector offers a significant
opportunity for growth in the behavioral health managed care industry over the
near term. Management believes that more state governmental agencies will turn
to managed care organizations to administer their Medicaid programs. The
Company's expertise in managing capitated programs along with its experience in
managing the Medicaid population will allow the Company to participate in the
growing Medicaid sector. Governments are also looking to behavioral healthcare
companies to implement programs targeting substance abuse treatment within
prison systems and children's programs. Additionally, the Company intends to
expand its product lines based on proven Medicaid managed care programs.
Competition
The behavioral health managed care industry is highly competitive with
approximately 13 managed behavioral healthcare companies providing service for
more than 110 million lives in the United States and the Commonwealth of Puerto
Rico. Additionally, there are numerous local and regional group practices,
community mental health centers
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and behavioral healthcare hospitals that manage behavioral healthcare on behalf
of HMOs, PPOs and local governments. The last several years have seen an
increased migration to fully capitated HMO products in most markets, which is
the Company's primary niche. As a consequence of these changes in the
marketplace, the potential dollars spent for managed behavioral services are
expected to grow significantly. As of May 31, 1998, the Company managed
approximately 730,000 lives 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 to MBHOs through HMOs. Many of these HMOs will subcontract
for behavioral healthcare services with MBHOs similar to the Company. In
addition, the Company manages approximately 29,000 lives covered through
Medicare in Florida.
Managed behavioral care is a competitive market that has experienced
consolidation during the last year. The Company's two major competitors are
Magellan Health Services/Merit Behavioral Care and Options Health Care/Value
Behavioral Health.He Contracts are competitively bid and are generally 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 low overhead company with high ratings by
customers and members which is the principal basis on which the company
competes. As a subcontractor for NCQA accredited HMOs, Comprehensive Behavioral
Care has met the HMOs' stringent criteria. HMOs and freestanding MBHOs will be
required to meet behavioral healthcare specialty specific standards developed by
NCQA to obtain and maintain accreditation. The Company has acquired the
expertise and designated revenues to obtain NCQA accreditation in the near
future. MBHOs will likely duplicate the competitive advantage experienced by
HMOs by achieving NCQA accreditation early in the cycle.
The Company is subject to multiple state and federal regulations as
well as changes in Medicaid and Medicare reimbursement. At this time, the
Company is unable to predict what effect, if any, the changes in legislation for
Medicaid and Medicare may have on its business. (see "Business - Governmental
Regulation")
HOSPITAL FACILITY
The Company currently owns and operates one facility located in Aurora,
Colorado representing 62 available beds. In August 1998, the Company entered
into a Letter of Intent to sell this facility subject to the completion of a
definitive agreement for $5.1 million. This facility, offers levels of care that
form a continuum of service 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 this
assessment, each patient admitted into treatment receives a full medical and
social evaluation 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 days to several
months.
Sources of Revenues
During fiscal 1998, approximately 24% of the Company's operating
revenues from hospital operations were received from private sources (private
health insurers, managed care companies and directly from patients) and the
balance was from Medicare, Medicaid, and other governmental programs.
Medicare utilization at the Aurora facility averaged approximately 33%
for inpatient and 49% for outpatient treatment in fiscal 1998. This facility
currently participates in the Medicare program and is subject to the Tax Equity
and Fiscal Responsibility Act of 1982 ("TEFRA") limits. The facility is excluded
from the Prospective Payment System ("PPS"). The Company does not believe that
the imposition of TEFRA limits or PPS had a material adverse impact on the
business at its hospital facility or that loss of exclusion from PPS would
materially impact the Company's business.
The Medicaid program is a combined federal and state program providing
coverage for low-income individuals. The specific services offered and
reimbursement methods vary from state to state. Approximately 14% of the
Company's hospital 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.
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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.
GOVERNMENT REGULATION
Regulatory Monitoring and Compliance
The Company is subject to extensive and evolving state and federal
regulations. These regulations range from licensure and compliance with
regulations related to insurance companies and other risk assuming entities to
licensure and compliance with regulations related to healthcare providers. These
laws and regulations may vary considerably among states. As a result, the
Company may be subject to the specific regulatory approach adopted by each state
for the regulation of managed care companies and for providers of behavioral
healthcare treatment services.
The Company is licensed to operate in Michigan as a Limited Health
Service Organization ("LHSO") and is required to comply with certain laws and
regulations that, among other things, may require the Company to maintain
certain types of assets and minimum levels of deposits, capital, surplus,
reserves or net worth.
In many states, entities that assume risk under contract with licensed
insurance companies or HMOs have not been considered by state regulators to be
conducting an insurance or HMO business. As a result, the Company has not sought
licensure as either an insurer or HMO in certain states.
Currently, management cannot quantify the potential effects of
additional regulation of the managed care industry, but such costs will have an
adverse effect on future operations to the extent that they are not able to be
recouped in future managed care contracts. Management believes that the Company
is currently in material compliance with the laws and regulations of the
jurisdictions in which it operates.
The development and operations of healthcare facilities are subject to
compliance with various federal, state and local laws and regulations. The
Company's hospital facility, as well as hospitals under contract with
Comprehensive Care Integration ("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.
ACCREDITATION
To develop standards that effectively evaluate the structure and
function of medical and quality management systems in managed care
organizations, NCQA has developed an extensive review and development process
in conjunction with the managed care industry, healthcare purchasers, state
regulators and consumers. 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
guidelines, 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 Care believes it
meets the standards for NCQA accreditation and has adopted HEDIS performance and
reporting standards. CBC has submitted a survey application and will seek NCQA
accreditation in selected markets in fiscal 1999.
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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 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 and loss of JCAHO
accreditation could adversely affect the hospital's reputation and its ability
to obtain third-party reimbursement. The Company's hospital facility is
accredited and the hospitals under contract with CCI have received or have
applied for such accreditation.
ADMINISTRATION AND EMPLOYEES
The Company's executive and administrative offices have been
consolidated and are located in Tampa, Florida where management maintains
operations, business development, accounting functions and governmental and
statistical reporting. Mr. Chriss W. Street, Chairman, President, and Chief
Executive Officer of the Company, also serves as Chairman and President of the
Company's principal subsidiary. Mr. Street has assembled an experienced
executive management team and completed the three-year plan of restructuring
(see Item 10-- "Directors and Executive Officers of the Company"). As a result,
the Company has realized profitability and improved equity for stockholders. The
Company currently employs a total of 347 employees who are assigned to its
operations as follows:
<TABLE>
<CAPTION>
TOTAL EMPLOYEES % OF TOTAL
--------------- ----------
<S> <C> <C>
Managed care and contract operations ........ 249 72%
Aurora Hospital ............................. 82 24
Corporate or administrative operations ...... 16 4
--- ---
Total .............................. 347 100%
=== ===
</TABLE>
The Company employs many of the physicians and psychiatrists in its
staff model clinics along with the psychologists and nurses serving on treatment
teams. The Company views its relationship with its employees to be satisfactory.
MANAGEMENT INFORMATION SYSTEMS
The Company is in the process of transitioning from its UniCare data
system to a fully-integrated Information System ("IS") designed as a complete
managed care, three-tier application. The system, known as Nichols TXEN
("TXEN"), was developed by Nichols Research and the Company is a licensed user
of the TXEN system. The Company has implemented this system as a focused managed
behavioral healthcare system in one Region with planned expansion to all other
Regions. The Company views the system to be adequate for its current and future
needs.
All locations are strategically connected to the Company's frame relay
telecommunications network, allowing automated call path routing to overlap
coverage for peak call times. Electronic access is provided and encouraged
between the Company and all provider groups wishing to participate in e-mail,
electronic billing, and electronic forms. Major care functions such as
assessment information, service plans, initial authorizations, extension
requests, termination summaries, appeals, credentialing, billing and
claim/encounter processing are backed by decision aids to correctly adjudicate
patient specific transactions.
MARKETING AND SALES
The Company's business development staff are responsible for generating
new sales leads and for preparing proposals and responses for formal commercial
and public sector Requests for Proposals ("RFPs"). Much of the Company's new
business in the past year has been obtained through references from current
clients. The marketing department has developed and enhanced its marketing
campaign along with new brochures and promotional material designed to highlight
the Company's achievements and innovative programs. The Company has expanded its
marketing initiatives to the regional level. Additionally, product line
development teams have been established to create and develop new products.
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ITEM 2. PROPERTIES
The following table sets forth certain information regarding the
properties owned or leased by the Company at May 31, 1998:
<TABLE>
<CAPTION>
OWNED OR LEASE MONTHLY
NAME AND LOCATION LEASED EXPIRES(1) RENTAL
----------------- ------ ---------- ------
(In dollars)
<S> <C> <C> <C>
PSYCHIATRIC/CHEMICAL DEPENDENCY
HOSPITAL TREATMENT FACILITIES
-----------------------------
Aurora Behavioral Health Hospital (5)..... Owned
Aurora, Colorado
CareUnit Hospital (2)..................... Owned
Fort Worth, Texas
REGIONAL, ADMINISTRATIVE, AND OTHER OFFICES
-------------------------------------------
Corona del Mar, California (3) ........... Leased 2006 13,780
Corporate Headquarters and Regional Offices
Tampa, Florida (3)...................... Leased 2001 26,597
Grand Prairie, Texas (3)................ Leased 1999 7,030
Houston, Texas.......................... Leased 2000 1,797
San Juan, Puerto Rico................... Leased 2001 9,145
Aquas Buenas, Puerto Rico............... Leased 1998 450
Naranjito, Puerto Rico.................. Leased 2001 1,520
Las Marinas/Maricad, Puerto Rico........ Leased 1998 650
Juana Diaz, Puerto Rico................. Leased 1998 1,800
Barranquitas, Puerto Rico............... Leased 1998 1,400
Bloomfield Hills, Michigan (3).......... Leased 1999 4,500
Comprehensive Care Integration, Inc.
Boise, Idaho (3)........................ Leased 1998 2,085
CompCare Publishers
Minneapolis, Minnesota (4).............. Leased 1998 7,991
</TABLE>
- ----------
(1) Assumes all options to renew will be exercised.
(2) Closed January 1995. The Company intends to sell this property.
(3) All leases, other than those relating to the Company's administrative
facilities, are triple net leases under which the Company bears all
costs of operations, including insurance, taxes and utilities. The
Company is responsible for specified increases in taxes, assessments
and operating costs relating to its administrative facilities.
(4) Office/operation sold in April 1994; Company has sublet this property.
(5) In August 1998, the Company entered into a Letter of Intent to sell
this facility, subject to the completion of a definitive agreement, for
$5.1 million.
ITEM 3. LEGAL PROCEEDINGS
(1) In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund to
carry back losses described in Section 172(f) of the IRC, requesting a
refund to the Company of $9.4 million and $5.5 million, respectively,
of which refunds of $9.4 million and $5.4 million were received. In
addition, the Company also filed amended Federal income tax returns for
fiscal years prior to 1995, requesting similar refunds of losses
carried back under Section 172(f) of $6.2 million for 1986; $0.4
million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a
total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, are
recorded as a deferred liability, "Unbenefitted tax refunds received"
pending resolution by the IRS of the appropriateness of the Section
172(f) carryback. The additional refunds requested under Section 172(f)
for prior years of $7.7 million have not been received, nor has the
Company recognized any tax benefit related to these potential refunds.
9
<PAGE> 10
Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability
or (2) 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. The applicability of
Section 172(f) to the type of business in which the Company operates is
unclear. The IRS may determine that the Company's position and use of
Section 172(f) is inappropriate and request a return of some or all of
the refunds received to date. No assurance can be provided that the
Company will be able to retain the refunds received to date or that the
other refunds requested will be received. (see Note 21-- "Events
Subsequent to the Balance Sheet Date." in the audited consolidated
financial statements for additional information)
As a result of the Section 172(f) carryback claims filed by the
Company, and the tentative refunds received, the Company came under
audit with respect to the tax years previously mentioned.
On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was
disallowing $12.4 million of the $14.8 million in refunds previously
received, and the additional refunds requested of $7.7 million. If the
position of the IRS were to be upheld, the Company would be required to
repay $12.4 million in refunds previously received, plus accrued
interest of approximately $4.0 million through May 31, 1998.
Accordingly, the Company would be entitled to a repayment of the fees
advanced to the Company's tax advisor relating to these refund claims
of approximately $2.5 million. This report commences the administrative
appeals process. The Company intends to protest the examination report
and believes that its position with respect to its right to the tax
refunds received will be upheld. The Company's tax advisor relating to
these refund claims has advised management that the administrative
appeals process could take twelve to eighteen months. In the event the
Company wishes to further protest the results of its administrative
appeal, it may further appeal to the United States Tax Court following
the final determination of the administrative appeal. The Company has
been advised that a determination by the United States Tax Court could
take up to an additional twelve months from commencement of the appeals
process in the United States Tax Court.
(2) The Company is currently involved in an action in California Superior
Court contesting certain aspects of an adverse administrative appeal
decision regarding application of the Maximum Inpatient Reimbursement
Limitation ("MIRL") to Medi-Cal reimbursement paid to Brea
Neuropsychiatric Hospital for its fiscal periods 1983 through 1986.
This facility was owned by the Company until its disposal in fiscal
year 1991. The subject matter of the Superior Court action involves the
refusal of the administrative law judge to order further reductions in
the liability for costs associated with treating high cost, long stay
Medi-Cal patients, which are commonly referred to as "outliers". It is
anticipated that a final determination on the Superior Court action
will be obtained in late 1998 or early 1999. The Company currently has
$1.0 million accrued to settle this claim (see Note 4-- Prior Period
Adjustment - Error Correction" in the consolidated audited financial
statements).
(3) On December 29, 1997, Ms. Kerri Ruppert, the former Chief Financial
Officer of the Company, commenced an action against the Company and its
Chairman, Chriss W. Street, in the Superior Court of the State of
California arising out of the termination of her employment on
September 29, 1997. The action alleges alternate causes of action based
upon her employment relationship with the Company and seeks unspecified
damages for unpaid wages, unspecified actual, compensatory and punitive
damages; damages for emotional distress; and costs, legal fees and
penalties under applicable California law. The action is only in its
formative stages. The Company has denied its liability and has denied
the principal allegations of the complaint. The Company believes that
it has good and meritorious defenses to this action.
(4) 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.
10
<PAGE> 11
From time to time, the Company and its subsidiaries are also parties to
and their property is subject to ordinary routine litigation incidental to their
business. In some pending cases, claims exceed insurance policy limits and the
Company or a subsidiary may have exposure to liability that is not covered by
insurance. Management believes that the outcome of such lawsuits will not have a
material adverse impact on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not applicable.
11
<PAGE> 12
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>
1998:
First Quarter ....................... $ 15 1/8 $ 10 3/4
Second Quarter ...................... 11 11/16 8 13/16
Third Quarter ....................... 11 1/2 6
Fourth Quarter ...................... 12 15/16 9 5/16
</TABLE>
<TABLE>
<CAPTION>
PRICE
-----
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C>
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, 1998, the Company had 1,567 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. 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) The Company did not pay any cash dividends on its Common Stock during
any quarter of fiscal 1998, 1997, or 1996 and does not contemplate the
initiation of payment of any cash dividends in the foreseeable future
(see Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS").
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. Reclassifications of prior
year amounts have been made to conform with the current year's presentation.
(see Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS").
12
<PAGE> 13
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES ........................ $ 46,063 $ 39,504 $ 32,488 $ 29,282 $ 34,277
COSTS AND EXPENSES:
Direct healthcare operating expenses . 37,337 35,147 29,208 31,497 31,875
General and administrative expenses .. 6,359 7,370 7,632 4,331 5,455
Provision for doubtful accounts ...... 96 539 934 1,423 1,558
Depreciation and amortization ........ 826 714 2,099 1,797 1,762
Write-down of assets ................. -- -- -- 741 1,825
Restructuring expenses ............... -- 195 94 -- --
Equity in loss of unconsolidated
affiliates ......................... -- -- 191 -- --
-------- -------- -------- -------- --------
44,618 43,965 40,158 39,789 42,475
INCOME (LOSS) FROM OPERATIONS ............. 1,445 (4,461) (7,670) (10,507) (8,198)
OTHER INCOME (EXPENSE):
Gain on sale of assets ............... 314 47 1,336 836 1,825
Loss on sale of assets ............... (9) (33) (82) (354) --
Non-operating gain (loss) ............ 50 (390) 860 -- --
Interest income ...................... 406 259 210 38 50
Interest expense ..................... (172) (732) (1,374) (1,366) (1,228)
-------- -------- -------- -------- --------
589 (849) 950 (846) 647
INCOME (LOSS) BEFORE INCOME TAXES ......... 2,034 (5,310) (6,720) (11,353) (7,551)
Income tax expense (benefit) .............. 63 (341) (2,478) 180 301
-------- -------- -------- -------- --------
Income (loss) before extraordinary gain ... 1,971 (4,969) (4,242) (11,533) (7,852)
Extraordinary gain, net of taxes of $0 .... -- 2,172 -- -- --
-------- -------- -------- -------- --------
NET INCOME (LOSS) ......................... 1,971 (2,797) (4,242) (11,533) (7,852)
Dividends on convertible preferred stock .. (82) (31) -- -- --
-------- -------- -------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS ......................... $ 1,889 $ (2,828) $ (4,242) $(11,533) $ (7,852)
======== ======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE
Income (loss) before extraordinary item ... $ 0.56 $ (1.62) $ (1.60) $ (5.09) $ (3.57)
Extraordinary item ........................ -- 0.70 -- -- --
-------- -------- -------- -------- --------
Net income (loss) per common share ........ $ 0.56 $ (0.92) $ (1.60) $ (5.09) $ (3.57)
======== ======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE
Income (loss) before extraordinary item ... $ 0.51 $ (1.62) $ (1.60) $ (5.09) $ (3.57)
Extraordinary item ........................ -- 0.70 -- -- --
-------- -------- -------- -------- --------
Net income (loss) per common share ........ $ 0.51 $ (0.92) $ (1.60) $ (5.09) $ (3.57)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------------------
BALANCE SHEET DATE: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Restated(1) Restated(1) Restated(1) Restated(1)2
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Working capital (deficit) ................. $(10,769) $(12,657) $(21,171) $(16,342) $ (588)
Total assets .............................. 30,405 24,746 25,119 26,001 33,226
Long-term debt ............................ 2,704 2,712 24 5,077 10,477
Long-term debt including current maturities
and debentures .......................... 2,706 2,758 12,026 17,900 10,631
Stockholders' deficit ..................... $ (1,286) $ (3,570) $ (7,798) $ (5,933) $ 4,099
</TABLE>
- ----------
(1) Stockholders' deficit has been restated for the years ended May 31,
1997, 1996, 1995 and 1994 from amounts previously reported. This
restatement increased the previously reported deficit by $1.0 million
to reflect an accrual for third party liabilities that was
inappropriately reduced in the Company's 1992 fiscal year (see Note
4--"Prior Period Adjustment - Error Correction" in the audited
consolidated financial statements for additional information).
13
<PAGE> 14
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 table summarizes data from the Company's operating
segments for the fiscal years ended May 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
MANAGED CONTRACT CORPORATE
1998 CARE HOSPITAL OPERATIONS OVERHEAD CONSOLIDATED
- ----------------------------------- -------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 38,360 $ 6,152 $ 1,161 $ 390 $ 46,063
-------- -------- -------- -------- --------
Direct Healthcare Expenses 30,806 5,452 1,079 -- 37,337
General and Administrative Expenses 3,213 145 68 2,933 6,359
Other Operating Expenses 511 57 (16) 370 922
-------- -------- -------- -------- --------
34,530 5,654 1,131 3,303 44,618
-------- -------- -------- -------- --------
Operating Income (loss) $ 3,830 $ 498 $ 30 $ (2,913) $ 1,445
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MANAGED CONTRACT CORPORATE
1998 CARE HOSPITAL OPERATIONS OVERHEAD CONSOLIDATED
- ----------------------------------- -------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 28,285 $ 6,833 $ 4,620 $ (234) $ 39,504
-------- -------- -------- -------- --------
Direct Healthcare Expenses 25,064 6,017 3,806 260 35,147
General and Administrative Expenses 2,723 48 539 4,060 7,370
Other Operating Expenses 435 351 386 276 1,448
-------- -------- -------- -------- --------
28,222 6,416 4,731 4,596 43,965
-------- -------- -------- -------- --------
Operating Income (loss) $ 63 $ 417 $ (111) $ (4,830) $ (4,461)
======== ======== ======== ======== ========
</TABLE>
In response to continuing changes in the behavioral healthcare industry
the Company has made significant changes in its operations including the
divestiture of many hospital facilities. The Company can now focus on its
network solutions related to managed care and behavioral medicine contract
management operations. During fiscal 1998 and 1997, managed care operations
experienced significant growth through internal development and the expansion
into new managed behavioral healthcare markets and products. During fiscal 1998,
the Company's operating revenues increased by 17%, or $6.6 million. Managed care
operations accounted for 83%, or $38.4 million of the Company's overall
operating revenues.
Results of Operations - The Year Ended May 31, 1998 Compared To The Year Ended
May 31, 1997
The Company reported net income of approximately $1.9 million for the
year ended May 31, 1998, which included $1.3 million of income relating to an
adjustment in the estimated claims payable reserve during the fourth quarter of
fiscal 1998 (see Note 13-- "Accrued Claims Payable" in the audited consolidated
financial statements for additional information). Additionally, the Company
recognized approximately $0.4 million in income representing amounts collected
by the Company against the accounts receivable from closed facilities that was
previously written off. This is compared to a net loss of $2.8 million reported
for the year ended May 31, 1997. Included in the results for fiscal 1997 is a
restructuring charge of $0.2 million, a legal settlement of $0.3 million, and a
$2.2 million extraordinary gain relating to the Company's Exchange Offer of its
Debentures.
14
<PAGE> 15
Operating revenues increased by 17%, or $6.6 million for the year ended
May 31, 1998 compared to the year ended May 31, 1997. The increase in operating
revenues is attributable to increases in operating revenues of $10.1 million and
$0.6 million for managed care and corporate operations, respectively. These
increases in operating revenues were offset by reductions in net operating
revenue of $3.5 million and $0.7 million from contract operations and the
hospital, respectively. Managed care revenues increased 36% due, in part, to new
contracts effective in fiscal 1998.
Direct healthcare expenses increased by $2.2 million for the year ended
May 31, 1998 as compared to the year ended May 31, 1997. The increase in direct
healthcare expenses is primarily attributable to an increase in managed care
operations which was partially offset by a decline in direct healthcare expenses
for provider operations. Direct healthcare expenses as a percentage of net
revenues for managed care operations decreased from 89% for the year ended May
31, 1997 to 80% for the year ended May 31, 1998. This decrease in direct
healthcare expenses as a percentage of revenues is primarily attributable to
change in service mix as well as the Company reducing its accrued claims payable
by $1.3 million in the fourth quarter of the year ended May 31, 1998, as a
result of the Company changing its methodology from a method based on
authorizations to a traditional actuarial completion factor methodology (see
Note 13-- "Accrued Claims Payable" in the audited consolidated financial
statements for additional information). The increase in direct healthcare
expenses for the managed care operations was partially offset by a decline in
direct healthcare expenses for hospital and contract operations.
General and administrative expenses decreased by 14%, or $1.0 million
for the year ended May 31, 1998 as compared to the year ended May 31, 1997. This
reduction in expense reflects a decline in corporate overhead spending due to a
corporate restructuring. Other operating expenses declined by $0.5 million as a
result of a decrease in the provision for doubtful accounts which is primarily
attributable to $0.4 million of amounts collected by the Company against
accounts receivable from closed facilities that were previously written off.
Interest expense decreased by 77%, or $0.6 million for the year ended May 31,
1998 compared to the year ended May 31, 1997 as a result of the Debenture
Exchange in the third quarter of fiscal 1997.
The Company is taking steps designed to increase revenues primarily
through its managed care operations and the continued development of its
behavioral medicine managed care business. The Company is also implementing cost
reduction measures including the consolidation of selected corporate functions
with the managed care operations and achievement of various operating
efficiencies. In addition, the Company sold one poorly performing facility in
fiscal 1998 and two during fiscal 1997.
Results of Operations--Year Ended May 31, 1997 Compared to the Year Ended May
31, 1996
The Company reported a year-to-year improvement in income 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.
The net loss for fiscal 1997 attributable to common stockholders
further increased 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 18--"Preferred Stock, Common Stock, and Stock Option Plans" in
the audited consolidated financial statements for additional information).
During fiscal 1997, the Company's operating revenues increased 22%
versus the prior year primarily due to a 78% increase in managed care revenues.
As part of the Company's global restructuring plan revenues from hospital and
contract operations declined by 64% as the Company terminated a significant
portion of those businesses. Consequently, direct healthcare operating expenses
during fiscal 1997 increased by 20%, 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.
15
<PAGE> 16
General and administrative expenses for fiscal 1997 included $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 16--"Income Taxes" in the audited consolidated financial statements for
additional information). Net of these charges, general and administrative
expenses for fiscal 1997 decreased by $0.7 million as compared to the prior
year.
Depreciation and amortization for fiscal 1997 declined by $1.4 million
or 66% 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 47% 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% of the Company's Debentures effected during fiscal
1997 (see Note 14--"Long-Term Debt and Short-Term Borrowings" in the audited
consolidated financial statements for additional information).
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 16--"Income Taxes" in the audited consolidated
financial statements for additional information). On August 21, 1998, the
Company received an examination report from the IRS, dated August 6, 1998,
related to its Section 172(f) carryback claims and amended tax returns for prior
years, claiming taxes due totaling approximately $12.4 million for which the
Company has accrued $12.1 million as of May 31, 1998. The Company intends to
file a protest with the IRS and contest the examination report with the appeals
office of the Internal Revenue Service in Laguna Niguel, California. In the
event that the Company is unsuccessful in the appeal process, the Company is
entitled to a repayment of fees advanced to its tax advisor relating to these
refund claims totaling approximately $2.5 million (see Note 8--"Other
Receivables" in the audited consolidated financial statements for additional
information).
The Company's current assets increased by $2.3 million during fiscal
1997 to $12.3 million from $10.0 million. The increase is primarily due to the
reclassification of one hospital facility under contract to be sold as current
assets held for sale. Accounts receivable as of May 31, 1997 increased by $0.2
million from the prior year. This was due mainly to increased managed care
revenues. The increase was also offset by a decrease in cash and cash
equivalents of $0.4 million.
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 6--"Acquisitions and
Dispositions" in the audited consolidated financial statements for additional
information).
The Company's current liabilities decreased during fiscal 1997 by $6.2
million to $24.9 million. This decrease is a result of the Debenture Exchange
Offer (see Note 14--"Long-Term Debt and Short-Term Borrowings" in the audited
consolidated financial statements for additional information) 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 $2.7
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 the allowance for Federal 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 $2.6 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 6--"Acquisitions and Dispositions" in
the audited consolidated financial statements for additional information).
16
<PAGE> 17
During fiscal 1997 the number of covered lives increased 34%, or
approximately 354,000 lives, 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% 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 78%, or $12.4 million 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% 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% 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.
During fiscal 1997, patient days of service under CCI contracts
declined by approximately 49% 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 27%, or $1.5 million and direct healthcare expenses decreased by 40%, or $2.2
million 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% due to the closure of eight outpatient units during the fiscal
year. Of the eight closures, five were partial hospitalization programs that
contributed 42% of total operating revenue for fiscal 1997. For units
operational in both fiscal years, direct healthcare operating expenses decreased
13%. 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 hospital operations in fiscal 1997 declined overall by
433 to 1,199 from 1,632 in fiscal 1996, an overall decline of 27%. This decline
in admissions was attributable to the closure of one facility in the first
quarter of fiscal 1997. The Company's remaining hospital 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% to $1,111 in fiscal 1997 from fiscal 1996 and
overall patient days declined 38% to 5,826, resulting in a decrease of
approximately 40%, or $4.3 million, 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 44%, or $4.8 million to $6.1 million in fiscal 1997 from
$10.9 million in fiscal 1996. In addition, the provision for doubtful accounts
declined by 49%, or $0.3 million. 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 hospital facilities during fiscal 1996 and a
decrease in depreciation expense as the Company continues to implement its plan
for the disposal and sale of hospital facilities.
Liquidity and Capital Resources
At May 31, 1998, the Company had cash and cash equivalents of $6.0
million. During the fiscal year ended May 31, 1998, the Company used $1.9
million in its operating activities, provided $3.6 million from its investing
activities, and provided $0.3 million from its financing activities. The Company
reported net income of $1.9 million for the fiscal year ended May 31, 1998,
versus a net loss of $2.8 million for the fiscal year ended May 31, 1997, an
improvement of $4.7 million. The Company has an accumulated deficit of $52.7
million and total stockholders' deficit of $1.3 million as of May 31, 1998.
Additionally, the Company's current assets at May 31, 1998 amounted to
approximately $17.9 million and current liabilities were approximately $28.7
million, resulting in a working capital deficiency of approximately $10.8
million and a current ratio of 1:1.6. The Company's primary use of available
cash resources is to expand its behavioral medicine managed care business and
fund operations.
17
<PAGE> 18
While the Company improved its cash flow from operations in fiscal year
1998, management intends to continue the expansion of its managed care business.
Expansion will require competing with managed care companies that have more
available resources. In order to compete effectively, demands on the Company's
cash resources may increase significantly. There can be no assurance that the
Company will retain all of its existing contracts which generate cash from
operations. Other cash requirements during fiscal year 1999 may include the
following:
1. The Company intends to rapidly accelerate its efforts to
become year 2000 compliant and the cost of doing so has not
yet been determined, but such costs are believed to be
material to the financial position of the Company.
2. In addition, the Company recently received the preliminary
examination report from the Internal Revenue Service. While
the Company intends to vigorously contest the results of that
audit, no assurance can be provided as to the amount and
timing of the ultimate outcome (see Note 16--"Income Taxes"
and Note 21--"Events Subsequent to the Balance Sheet Date" in
the audited consolidated financial statements for additional
information).
3. As described in Note 19--"Commitments and Contingencies" the
Company expects to repay $1.0 million to the California
Medicaid program during fiscal year 1999.
The Company's available sources of cash during the next fiscal year
will be derived from operations or the sale of either the closed psychiatric
hospital, designated as held for sale with a reported carrying value of $1.9
million or other assets such as the operating hospital for which the Company
recently received a Letter of Intent to Purchase for $5.1 million (see Note
21--"Events Subsequent to the Balance Sheet Date" in the audited consolidated
financial statements for additional information). There can be no assurance that
the sale will occur and, if it does occur, that sufficient funds will be derived
in an amount or at a point in time that will allow the Company to meet its
obligations.
The Company cannot state with any degree of certainty at this time,
whether additional equity or debt financing will be available to it, and if
available, would be available on terms and conditions acceptable to the Company.
Any potential sources of additional financing are subject to business and
economic conditions outside the Company's control. There can be no assurance
during fiscal year 1999 that, if required to do so, the Company will be able to
complete the transactions necessary to eliminate the working capital deficit.
Impact of Year 2000 Computer Issues
The Company is currently in the early phases of assessing its ability
to make its information systems year 2000 compliant. While management intends to
do so, no assessment has been made of the Company's third party vendors and
customers. As a result, the Company is unable to state with any certainty the
costs of becoming compliant. However, such costs are not expected to exceed $1.0
million.
The preliminary assessment indicates that, while the Company has
initially converted one of its five regions to a new, year 2000 compliant claims
system, the remaining four regions will also require conversion to the new
claims system.
The Company has not addressed the potential impact of year 2000 on its
non-essential information systems and its other equipment that may be affected
by year 2000, or the impact of transacting business with third parties who do
not have year 2000 compliant systems.
Since it is in the early phase of assessing its ability to become
compliant with year 2000, the Company has not developed any contingency plans,
should it be unable to become compliant in a timely manner. Although a plan for
becoming year 2000 compliant has not been established, the costs of becoming
compliant are expected to be material. There can be no assurance that the
Company will become year 2000 compliant, in a timely manner. Although the costs
of compliance are expected to be material, the absolute costs cannot be
estimated at this time.
Should the Company be unable to become year 2000 compliant, the Company
will suffer severe adverse consequences to its financial position and results of
operations.
18
<PAGE> 19
Risk Factors
Important Factors Related to Forward-Looking Statements and Associated Risks
This Annual Report on Form 10-K contains 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 its two remaining psychiatric hospitals on acceptable terms, (ii)
expanding the behavioral medicine managed care operations, (iii) effective
management in the delivery of services, (iv) risk and utilization in context of
capitated payouts, (v) maintaining the listing of the Company's Common Stock on
the NYSE, (vi) securing and retaining certain refunds from the IRS. [On August
21, 1998, the Company received an examination report from the IRS,
dated August 6, 1998, related to its Section 172(f) carryback claims and amended
tax returns for prior years, claiming taxes due totaling approximately $12.4
million dollars for which the Company has accrued $12.1 million as of May 31,
1998. The Company intends to file a protest with the IRS and contest the
examination report with the appeals office of the Internal Revenue
Service in Laguna Niguel, California. In the event that the Company is
unsuccessful in the appeal process, the Company is entitled to a repayment of
fees advanced to its tax advisor relating to these refund claims totaling
approximately $2.5 million. (see Note 8--"Other Receivable" and see Note
21--"Events Subsequent to the Balance Sheet Date" in the audited consolidated
financial statements for additional information)], and (vii) certain judgments
from adverse parties in the legal proceedings described above.
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.
Concentration of Risk
The Company has nine contracts with one HMO to provide behavioral
healthcare services under Medicare, Medicaid, and commercial plans, to
contracted members in Florida, Texas, and Puerto Rico. These combined contracts
represent approximately 57% and 32% of the Company's operating revenue for
fiscal 1998 and 1997, respectively. The terms of each contract are for one-year
periods and are automatically renewable for additional one-year periods unless
terminated by either party. The Company views its relationship with this HMO to
be good.
Uncertainty of Future Profitability
As of May 31, 1998, the Company had stockholders' deficit of $1.3
million, a working capital deficiency of approximately $10.8 million and a
current ratio of 1:1.6. Net income from operations for the year ended May 31,
1998 was $1.9 million. Present results of operations are not necessarily
indicative of anticipated future results of operations.
There can be no assurance that the Company will be able to achieve and
sustain profitability and maintain positive cash flows or that profitability and
positive cash flow can be sustained on an ongoing basis. Moreover, the level of
profitability or positive cash flow cannot be accurately predicted.
Need for Additional Funds; Uncertainty of Future Funding
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 private 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.
19
<PAGE> 20
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. On August 21, 1998, the Company received an
examination report from the IRS, dated August 6, 1998, related to its Section
172(f) carryback claims and amended tax returns for prior years, claiming taxes
due totaling approximately $12.4 million dollars for which the Company has
accrued $12.1 million as of May 31, 1998. The Company intends to file a protest
with the IRS and contest the examination report with the appeals office of the
Internal Revenue Service in Laguna Niguel, California. In the event that the
Company is unsuccessful in the appeal process, the Company is entitled to a
repayment of fees advanced to the Company's tax advisor relating to these refund
claims, totaling approximately $2.5 million (see Note 8--"Other Receivables" and
see "Taxes" below and Note 21--"Events Subsequent to the Balance Sheet Date" in
the audited consolidated financial statements for additional information).
Taxes
In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund to carry
back losses described in Section 172(f) of the IRC, requesting a refund to the
Company of $9.4 million and $5.5 million, respectively, of which refunds of $9.4
million and $5.4 million were received. In addition, the Company also filed
amended Federal income tax returns for fiscal years prior to 1995, requesting
similar refunds of losses carried back under Section 172(f) of $6.2 million for
1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a
total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, are recorded
as a deferred liability, "Unbenefited tax refunds received" pending resolution
by the IRS of the appropriateness of the Section 172(f) carryback. The
additional refunds requested under Section 172(f) for prior years of $7.7
million have not been received, nor has the Company recognized any tax benefit
related to these potential refunds.
Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) 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. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. The IRS may determine that the
Company's position and use of Section 172(f) is inappropriate and request a
return of some or all of the refunds received to date. No assurance can be
provided that the Company will be able to retain the refunds received to date or
that the other refunds requested will be received. (see Note 21--"Events
Subsequent to the Balance Sheet Date." in the audited consolidated financial
statements for additional information)
As a result of the Section 172(f) carryback claims filed by the
Company, and the tentative refunds received, the Company came under audit with
respect to the tax years previously mentioned.
On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million in refunds previously received, and the additional refunds requested of
$7.7 million. If the position of the IRS were to be upheld, the Company would be
required to repay $12.4 million in refunds previously received, plus accrued
interest of approximately $4.0 million through May 31, 1998. Accordingly, the
Company would be entitled to a repayment of the fees advanced to its tax advisor
relating to these refund claims of approximately $2.5 million. This report
commences the administrative appeals process. The Company intends to protest the
examination report and believes that its position with respect to
its right to the tax refunds received will be upheld. The Company's tax advisor
relating to these refund claims has advised management that the administrative
appeals process could take twelve to eighteen months. In the event the Company
wishes to further protest the results of its administrative appeal, it may
further appeal to the United States Tax Court following the final determination
of the administrative appeal. The Company has been advised that a determination
by the United States Tax Court could take up to an additional twelve months from
commencement of the appeals process in the United States Tax Court. There can be
no assurance that the Company will be successful in the appeal process.
20
<PAGE> 21
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 if utilization levels require 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 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. In fiscal 1998, the Company
relocated certain significant management functions to Tampa, Florida where
Comprehensive Behavioral Care, the Company's principal subsidiary, is located.
Shares Eligible for Future Sale
The Company has issued or committed to issue approximately 344,000
shares related to the 4% convertible preferred stock, 11,000 shares related to
the 7 1/2% convertible subordinated debentures due April 15, 2010, and options
or other rights to purchase approximately 1,066,000 shares. The Company may
contemplate issuing additional amounts of debt, equity or convertible securities
in public or private transactions for use in fulfilling its future capital needs
(see "Need for Additional Funds: Uncertainty of Future Funding"). Issuance of
additional 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.
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 that 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. The Company's Restated Certificate of Incorporation
also provides for a classified board of directors with directors divided into
three classes serving staggered terms. 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. 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.
21
<PAGE> 22
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.
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 1998 would be
non-deductible.
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
YEARS ENDED MAY 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Certified Public Accountants.......................................................... 24
Consolidated Balance Sheets, May 31, 1998 and 1997.......................................................... 25
Consolidated Statements of Operations, Years Ended May 31, 1998, 1997 and 1996.............................. 26
Consolidated Statements of Stockholders' Deficit, Years Ended May 31, 1998, 1997 and 1996................... 27
Consolidated Statements of Cash Flows, Years Ended May 31, 1998, 1997 and 1996.............................. 28
Notes to Consolidated Financial Statements.................................................................. 29-47
</TABLE>
23
<PAGE> 24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 1998 and 1997, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the three years in the period ended May 31, 1998. 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended May 31, 1998, in conformity with generally
accepted accounting principles.
As discussed in Note 3, the Company's net working capital deficiency
and stockholders deficit raise substantial doubt about its ability to continue
as a going concern. Management's plans as to these matters are also described in
Note 3. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As more fully described in Note 4, the accumulated deficit at May 31,
1995 has been restated to reflect the accrual of a $1,000,000 liability.
As more fully described in Note 13, the Company changed its method of
estimating its claim liability which has been accounted for as a change in
accounting principle inseparable from a change in estimate.
/s/ Ernst & Young LLP
Tampa, Florida
August 26, 1998
24
<PAGE> 25
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
-------------------------
1998 1997
---- ----
RESTATED
(Amounts in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 6,016 $ 3,991
Accounts receivable, less allowance for doubtful
accounts of $893 and $883 ............................. 9,255 2,718
Property and equipment held for sale ...................... -- 2,797
Other receivable .......................................... 2,415 2,415
Other current assets ...................................... 235 330
-------- --------
Total current assets ........................................... 17,921 12,251
-------- --------
Property and equipment ......................................... 11,416 10,138
Less accumulated depreciation and amortization ................. (4,373) (3,820)
-------- --------
Net property and equipment ..................................... 7,043 6,318
-------- --------
Noncurrent assets:
Property and equipment held for sale ...................... 1,910 1,910
Notes receivable .......................................... 94 2,035
Goodwill, net ............................................. 1,187 1,567
Restricted cash ........................................... 1,848 210
Other assets .............................................. 402 455
-------- --------
Total noncurrent assets ........................................ 5,441 6,177
-------- --------
Total assets ................................................... $ 30,405 $ 24,746
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities .................. $ 5,789 $ 6,152
Accrued claims payable .................................... 10,501 6,256
Current maturities of long-term debt ...................... 2 46
Unbenefitted tax refunds received ......................... 12,092 12,092
Income taxes payable ...................................... 306 362
-------- --------
Total current liabilities ...................................... 28,690 24,908
-------- --------
Long-term liabilities:
Long-term debt, excluding current maturities .............. 2,704 2,712
Other liabilities ......................................... 297 696
-------- --------
Total long-term liabilities .................................... 3,001 3,408
-------- --------
Total liabilities .............................................. 31,691 28,316
======== ========
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 ................... 2,176 2,094
Common stock, $0.1 par value; authorized 12,500,000 shares;
issued and outstanding 3,415,402 and 3,427,516 shares . 34 34
Additional paid-in-capital ................................ 49,201 48,888
Accumulated deficit ....................................... (52,697) (54,586)
-------- --------
Total stockholders' deficit .................................... (1,286) (3,570)
-------- --------
Total liabilities and stockholders' deficit .................... $ 30,405 $ 24,746
======== ========
</TABLE>
See accompanying notes.
25
<PAGE> 26
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------
1998 1997 1996
-------- -------- --------
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
OPERATING REVENUES .................................. $ 46,063 $ 39,504 $ 32,488
COSTS AND EXPENSES:
Direct healthcare operating expenses ......... 37,337 35,147 29,208
General and administrative expenses .......... 6,359 7,370 7,632
Provision for doubtful accounts .............. 96 539 934
Depreciation and amortization ................ 826 714 2,099
Restructuring expenses ....................... -- 195 94
Equity in loss of unconsolidated affiliates .. -- -- 191
-------- -------- --------
44,618 43,965 40,158
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS ....................... 1,445 (4,461) (7,670)
OTHER INCOME (EXPENSE):
Gain on sale of assets ....................... 314 47 1,336
Loss on sale of assets ....................... (9) (33) (82)
Non-operating gain (loss) .................... 50 (390) 860
Interest income .............................. 406 259 210
Interest expense ............................. (172) (732) (1,374)
-------- -------- --------
589 (849) 950
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ................... 2,034 (5,310) (6,720)
Income tax expense (benefit) ........................ 63 (341) (2,478)
-------- -------- --------
Income (loss) before extraordinary gain ............. 1,971 (4,969) (4,242)
Extraordinary gain, net of taxes of $0 .............. -- 2,172 --
-------- -------- --------
Net income (loss) ................................... 1,971 (2,797) (4,242)
Dividends on convertible preferred stock ............ (82) (31) --
-------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 1,889 $ (2,828) $ (4,242)
======== ======== ========
BASIC EARNINGS PER COMMON SHARE
Income (loss) before extraordinary item ............. $ 0.56 $ (1.62) $ (1.60)
Extraordinary item .................................. -- 0.70 --
-------- -------- --------
Net income (loss) per common share .................. $ 0.56 $ (0.92) $ (1.60)
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE
Income (loss) before extraordinary item ............. $ 0.51 $ (1.62) $ (1.60)
Extraordinary item .................................. -- 0.70 --
-------- -------- --------
Net income (loss) per common share .................. $ 0.51 $ (0.92) $ (1.60)
======== ======== ========
</TABLE>
See accompanying notes.
26
<PAGE> 27
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
--------- ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE, MAY 31, 1995, AS REPORTED .............................. -- $ -- 2,465 $ 25
Prior period adjustment - correction of an error in the reporting
of third party liabilities - (see Note 4) ................ -- -- -- --
-------- -------- -------- --------
BALANCE, MAY 31, 1995, AS RESTATED .............................. -- -- 2,465 25
Net loss ................................................. -- -- -- --
Shares issued for note conversion ........................ -- -- 133 1
Issuance of shares ....................................... -- -- 44 --
Exercise of stock options ................................ -- -- 14 --
Restricted common stock granted to CEO ................... -- -- 100 1
Shares issued for private placements ..................... -- -- 193 2
-------- -------- -------- --------
BALANCE, MAY 31, 1996 .......................................... -- -- 2,949 29
Net loss ................................................. -- -- -- --
Issuance of Shares for the purchase of HMS ............... -- -- 16 --
Shares issued for Debenture Exchange Offer ............... -- -- 164 2
Shares issued for secured note conversion ................ 41 2,063 -- --
Exercise of stock options ................................ -- -- 210 2
Shares issued for conversion of subsidiary stock ......... -- -- 100 1
Retirement of common stock ............................... -- -- (11) --
Dividends of preferred stock ............................. -- 31 -- --
Vesting of restricted shares ............................. -- -- -- --
-------- -------- -------- --------
BALANCE, MAY 31, 1997 ........................................... 41 2,094 3,428 34
Net income ............................................... -- -- -- --
Adjust shares issued for the HMS acquisition ............. -- -- (6) --
Exercise of stock options ................................ -- -- 44 --
Dividends on preferred stock ............................. -- 82 -- --
Cancellation of CEO restricted grant ..................... -- -- (51) --
-------- -------- -------- --------
BALANCE, MAY 31, 1998 ........................................... 41 $ 2,176 3,415 $ 34
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL ACCUMULATED STOCKHOLDERS'
PAID-IN DEFICIT (DEFICIT)
CAPITAL RESTATED RESTATED
------- ------- ---------------
<S> <C> <C> <C>
BALANCE, MAY 31, 1995, AS REPORTED .............................. $ 41,558 $(46,516) $ (4,933)
Prior period adjustment - correction of an error in the reporting
of third party liabilities - (see Note 4) ................ -- (1,000) (1,000)
-------- -------- --------
BALANCE, MAY 31, 1995, AS RESTATED .............................. 41,558 (47,516) (5,933)
Net loss ................................................. -- (4,242) (4,242)
Shares issued for note conversion ........................ 999 -- 1,000
Issuance of shares ....................................... 331 -- 331
Exercise of stock options ................................ 104 -- 104
Restricted common stock granted to CEO ................... -- -- 1
Shares issued for private placements ..................... 939 -- 941
-------- -------- --------
BALANCE, MAY 31, 1996 .......................................... 43,931 (51,758) (7,798)
Net loss ................................................. -- (2,797) (2,797)
Issuance of Shares for the purchase of HMS ............... 120 -- 120
Shares issued for Debenture Exchange Offer ............... 1,888 -- 1,890
Shares issued for secured note conversion ................ -- -- 2,063
Exercise of stock options ................................ 1,521 -- 1,523
Shares issued for conversion of subsidiary stock ......... 999 -- 1,000
Retirement of common stock ............................... (159) -- (159)
Dividends of preferred stock ............................. -- (31) --
Vesting of restricted shares ............................. 588 -- 588
-------- -------- --------
BALANCE, MAY 31, 1997 ........................................... 48,888 (54,586) (3,570)
Net income ............................................... -- 1,971 1,971
Adjust shares issued for the HMS acquisition ............. (138) -- (138)
Exercise of stock options ................................ 451 -- 451
Dividends on preferred stock ............................. -- (82) --
Cancellation of CEO restricted grant ..................... -- -- --
-------- -------- --------
BALANCE, MAY 31, 1998 ........................................... $ 49,201 $(52,697) $ (1,286)
======== ======== ========
</TABLE>
See accompanying notes.
27
<PAGE> 28
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------
1998 1997 1996
------- ------- -------
(Amounts in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 1,971 $(2,797) $(4,242)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
USED IN OPERATING ACTIVITIES:
Depreciation and amortization ...................................... 827 714 2,099
Provision for doubtful accounts .................................... 96 539 934
Gain on Debenture conversion ....................................... -- (2,172) --
Adjustment to deferred costs ....................................... 101 -- --
Gain on sale of assets ............................................. (314) (47) (1,336)
Loss on sale of assets ............................................. 9 33 82
Carrying costs incurred on property and equipment held for sale .... -- -- (473)
Equity in loss of unconsolidated affiliates ........................ -- -- 191
Vesting of restricted shares ....................................... -- 588 --
Restructuring expenses ............................................. -- 195 94
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable ................................................ (6,632) (747) 24
Notes and other receivables ........................................ -- (902) 2,558
Other current assets, restricted funds, and other non-current assets (1,602) (35) (2,123)
Accounts payable and accrued liabilities ........................... 3,990 728 530
Unbenefitted tax refunds received .................................. -- 5,074 7,018
Income taxes payable ............................................... -- (40) 114
Other liabilities .................................................. (313) 14 (1,039)
------- ------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ................ (1,867) 1,145 4,431
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property and equipment -
(operating and held for sale) .................................. 3,072 1,557 2,101
Payment received on note for sale of psychiatric hospital........... 1,941 -- --
Additions to property and equipment ................................ (1,413) (502) (814)
------- ------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES .......................... 3,600 1,055 1,287
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank and other borrowings .......................................... -- -- 1,000
Proceeds from the issuance of Common Stock ......................... 358 1,523 2,377
Repayment of debt .................................................. (66) (4,165) (6,204)
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 292 (2,642) (2,827)
------- ------- -------
Net increase (decrease) in cash and cash equivalents .................... 2,025 (442) 2,891
Cash and cash equivalents at beginning of year .......................... 3,991 4,433 1,542
------- ------- -------
Cash and cash equivalents at end of year ................................ $ 6,016 $ 3,991 $ 4,433
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ....................................................... $ 207 $ 1,327 $ 482
======= ======= =======
Income taxes ................................................... $ 34 $ 54 $ 48
======= ======= =======
</TABLE>
See Accompanying Notes.
28
<PAGE> 29
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
NOTE 1-- DESCRIPTION OF THE COMPANY'S BUSINESS
Comprehensive Care Corporation(R) (the "Company") is a Delaware
Corporation organized in 1969. Unless the context otherwise requires, all
references to the "Company" include Comprehensive Behavioral Care, Inc. (SM)(1)
("CompCare" (SM)(2) or "CBC") and subsidiary corporations. The Company, through
its wholly-owned subsidiary, CompCare, primarily provides managed care services
in the behavioral health and psychiatric fields which represented approximately
83% of its revenues in fiscal year 1998. The managed care operations include
administrative service agreements, fee-for-service agreements, and capitation
contracts. The customer base for its services includes both corporate and
governmental entities. The Company's services are provided by employees or by
unrelated vendors on a subcontract or subcapitated basis.
During the past several years the Company has transitioned from its
ownership, operation and management of psychiatric hospitals, substance abuse
facilities, and the management of similar programs located in unaffiliated
hospitals to its behavioral health managed care operations. As of May 31, 1998,
the Company owned and operated one hospital in Aurora, Colorado. Additionally,
the Company owns a non-operating hospital that is held for sale as of May 31,
1998.
NOTE 2-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity and Basis of Presentation
The consolidated financial statements include the accounts of
Comprehensive Care Corporation and its wholly-owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
As of May 31, 1998, the Company had the following active subsidiaries:
<TABLE>
<S> <C>
Behavioral Health Managed Care: State of Incorporation:
------------------------------- -----------------------
Comprehensive Behavioral Care, Inc. Nevada
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 Provider Networks of Texas, Inc. Texas
Comprehensive Innovations Institute Texas
Behavioral Health Contract Management Services:
-----------------------------------------------
Comprehensive Care Integration, Inc. Delaware
Care Institute California
Psychiatric Hospital:
---------------------
Aurora Behavioral Health Hospital, Inc. Colorado
</TABLE>
Reclassification
Certain amounts for 1997 have been reclassified to conform to the 1998
presentation. These reclassifications had no effect on the previously reported
results of operations or stockholders' deficit.
- ----------
(1) Comprehensive Behavioral Care, Inc. is a registered service
mark of the Company.
(2) CompCare is a registered service mark of Comprehensive
Behavioral Care, Inc.
29
<PAGE> 30
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
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.
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 withheld 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 1998, 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
providing other healthcare services are earned on a fee-for-service basis and
are recognized as services are rendered.
The Company's psychiatric hospital receives a significant portion of
its operating revenues from Medicare, Medicaid and other governmental programs.
Governmental programs 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. While management
believes that the current estimates for contractual allowances have been
properly recorded and that revenues are properly stated, any differences between
final settlements and these estimated allowances will be reflected in operating
revenues in the year finalized. Certain of these final settlements pertained to
facilities that were closed by the Company in prior fiscal years.
Healthcare Expense Recognition
The Company attempts to control its costs and risk by entering into
contractual relationships with healthcare providers including hospitals,
physician groups and other managed care organizations either on a sub-capitated,
a discounted fee-for-service, or a per-case basis. The Company's capitation
contracts typically exclude risk for chronic care patients. The cost of
healthcare services is expensed in the period the Company is obligated to
provide such services. Certain contracted healthcare providers assume the
financial risk for participant care rendered by them and are compensated on a
sub-capitated basis.
In cases 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 (see Note 13--
"Accrued Claims Payable").
Premium Deficiencies
Estimated future healthcare costs and expenses in excess of estimated
future premiums are recorded as a loss when determinable. No such deficiencies
existed at May 31, 1998.
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less. These investments
aggregated $4.0 million and $2.5 million at May 31, 1998 and 1997, respectively.
These investments are included in cash equivalents in the accompanying
consolidated balance sheets.
30
<PAGE> 31
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
Restricted Cash
These restricted accounts are required under capitated contracts,
primarily the major managed care contract (see Note 5--"Major Contracts"), and
are subject to adjustments annually.
Property and Equipment
Property and equipment are recorded at cost and include improvements
that significantly add to the productive capacity or extend the useful lives of
the assets. Costs of maintenance and repairs are charged to expense as incurred.
The costs of major remodeling and improvements are capitalized as leasehold
improvements.
Depreciation and amortization of property, and equipment are computed
on the straight-line method over the estimated useful lives of the related
assets, principally: buildings and improvements -- 5 to 40 years; furniture and
equipment -- 3 to 12 years.
Property and Equipment Held for Sale
Property and equipment held for sale represents net assets of one
hospital facility that the Company intends to sell, and is carried at estimated
net realizable value. 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.
Goodwill
Goodwill includes costs in excess of fair value of net assets of
businesses purchased. Costs in excess of net assets purchased are amortized on a
straight-line basis up to 21 years. The Company evaluates the recoverability and
the amortization period of goodwill by determining whether the amount of
goodwill recorded can be recovered through undiscounted cash flows of the
businesses acquired excluding interest expense and amortization over the
remaining amortization period. The Company believes that the remaining $1.2
million of net recorded goodwill at May 31, 1998 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
$325,000 and $218,000 at May 31, 1998 and 1997, respectively.
Accrued Claims Payable
The accrued claims payable liability represents the estimated ultimate
net cost for all behavioral care services provided through May 31, 1998. The
unpaid claims liability is estimated using an actuarial paid completion factor
methodology and other statistical analyses. These estimates are subject to the
effects of trends in utilization and other factors. Although considerable
variability is inherent in such estimates, management believes that the unpaid
claims liability is adequate. The estimates are continually reviewed and
adjusted as experience develops or new information becomes known with
adjustments included in current operations.
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 the
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.
31
<PAGE> 32
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
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 Statement No. 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. However, total compensation expense
recognized in 1998 was $83,000 for taxes paid on behalf of employees in
connection with stock options exercised.
Earnings Per Common Share and Common Share Equivalent
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which the Company
adopted in the quarter ending February 28, 1998. Statement 128 replaced the
previously reported primary and fully diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any diluted effects of
options, warrants, and convertible securities. Diluted earnings per share are
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements (See Note 15--
"Earnings Per Share").
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 participate in the earnings of the
Company.
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.
For cash and cash equivalents, notes receivable, and restricted cash,
the carrying amount approximates fair value. For long-term debt, the fair value
is based on the estimated market price for the Debentures on the last day of the
fiscal year.
The carrying amounts and fair values of the Company's financial
instruments at May 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents ......... $6,016 $6,016 $3,991 $3,991
Notes receivable .................. 94 94 2,035 2,035
Restricted Cash ................... 1,848 1,848 210 210
Liabilities
Long-term debt .................... $2,692 $1,615 $2,692 $1,367
</TABLE>
32
<PAGE> 33
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
NOTE 3--LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1998, the Company had cash and cash equivalents of $6.0
million. During the fiscal year ended May 31, 1998, the Company used $1.9
million in its operating activities, provided $3.6 million from its investing
activities, and provided $0.3 million from its financing activities. The Company
reported net income of $1.9 million for the fiscal year ended May 31, 1998,
versus a net loss of $2.8 million for the fiscal year ended May 31, 1997, an
improvement of $4.7 million. The Company has an accumulated deficit of $52.7
million and total stockholders' deficit of $1.3 million as of May 31, 1998.
Additionally, the Company's current assets at May 31, 1998 amounted to
approximately $17.9 million and current liabilities were approximately $28.7
million, resulting in a working capital deficiency of approximately $10.8
million and a current ratio of 1:1.6. The Company's primary use of available
cash resources is to expand its behavioral medicine managed care business and
fund operations.
While the Company improved its cash flow from operations in fiscal year
1998, management intends to continue the expansion of its managed care business.
Expansion will require competing with managed care companies that have more
available resources. In order to compete effectively, demands on the Company's
cash resources may increase significantly. Other cash requirements during fiscal
year 1999 may include the following:
1. The Company intends to rapidly accelerate its efforts to
become year 2000 compliant and the cost of doing so has not
yet been determined, but such costs are believed to be
material to the financial position of the Company.
2. In addition, the Company recently received the preliminary
examination report from the Internal Revenue Service. While
the Company intends to vigorously contest the results of that
audit, no assurance can be provided as to the amount and
timing of the ultimate outcome (see Note 16-- "Income Taxes"
and Note 21--"Events Subsequent to the Balance Sheet Date").
3. As described in Note 19--"Commitments and Contingencies" the
Company expects to repay $1.0 million to the California
Medicaid program during fiscal year 1999.
The Company's available sources of cash during the next fiscal year
will be derived from operations or the sale of either the closed psychiatric
hospital, designated as held for sale with a reported carrying value of $1.9
million or other assets such as the operating hospital for which the Company
recently received a Letter of Intent to Purchase for $5.1 million (see Note 21--
"Events Subsequent to the Balance Sheet Date"). However, there can be no
assurance that the Company will retain all of its existing contracts which
generate cash from operations or that either sale will occur or, if they do
occur, that sufficient funds will be derived in an amount or at a point in time
that will allow the Company to meet its obligations.
The Company cannot state with any degree of certainty at this time,
whether additional equity or debt financing will be available to it, and if
available, would be available on terms and conditions acceptable to the Company.
Any potential sources of additional financing are subject to business and
economic conditions outside the Company's control. There can be no assurance
during fiscal year 1999 that, if required to do so, the Company will be able to
complete the transactions necessary to eliminate the working capital deficit.
NOTE 4-- PRIOR PERIOD ADJUSTMENT - ERROR CORRECTION
The accumulated deficit in the accompanying statement of Stockholders'
deficit as of May 31, 1995, the earliest period presented, has been restated
from amounts previously reported to reflect the correction of a $1.0 million
accounting error. This restatement increased the stockholders' deficit
previously reported by $1.0 million. The accounts payable and accrued
liabilities in the accompanying Balance Sheet for the year ended May 31, 1997
have also been restated to increase accounts payable and accrued liabilities by
the additional $1.0 million accrual.
33
<PAGE> 34
During the fourth quarter of fiscal 1992, the Company, recognized $0.7
million of income that related to amounts reserved for the California Medicaid
("Medi-Cal") program settlements, specifically, amounts appropriated to the
Maximum Inpatient Reimbursement Limitation ("MIRL"). These MIRL amounts were
applicable to the Company's fiscal 1986 Cost Report for Brea Neuropsychiatric
Hospital, a facility that was owned by the Company until its disposal in fiscal
1991. Prior to May 31, 1992, the Company had filed an administrative appeal on
behalf of the hospital to contest the MIRL. This matter was still under appeal
at May 31, 1992 when the error was made to release these allocated reserves and
recognize the $0.7 million income. The recognition of any repayments received
from Medi-Cal should have been deferred until the matter was fully resolved in
accordance with the Company's accounting policy.
Prior to July 1998, the company believed that a substantial portion of
the MIRL liability, slightly over $0.4 million, had been repaid to the State of
California. In July 1998, however, the Company learned that this was not the
case, and that the entire amount of the liability, principal and interest, was
due and owing. In the meantime, the Company had filed a court action in Superior
Court contesting certain aspects of an adverse administrative appeal decision on
the liabilities. Since it is not possible to predict the outcome of this
Superior Court action, which, if it were successful, would reduce the principal
amount owed by approximately $0.2 million with a corresponding reduction in
interest, management cannot anticipate a favorable outcome and therefore has
accrued approximately one million dollars in principal and interest to the State
of California as reimbursement for amounts paid to Brea Neuropsychiatric
Hospital that were in excess of the MIRL. Any such repayment will occur
following conclusion of the court action, which is likely to take place in late
1998 or early 1999.
NOTE 5--MAJOR CONTRACTS
In total, the Company has nine contracts with PCA Health Plans, Inc., a
subsidiary of Humana, Inc., to provide behavioral healthcare services, under
Medicare, Medicaid, and Commercial plans to contracted members in Florida,
Texas, and Puerto Rico. The combined PCA contracts represent approximately 57%
and 32% of the Company's operating revenue for fiscal 1998 and 1997
respectively. As of May 31, 1998 the Company was at full risk for 0.7 million
lives covered under the contract with PCA.
In April 1997, the Company entered into an agreement with PCA Health
Plans of Puerto Rico, Inc., a subsidiary of Humana, Inc. ("PCA"), which
accounted for 39% and 13% of the Company's operating revenue for the fiscal year
ended May 31, 1998 and 1997, respectively. PCA has entered into a health
insurance contract with the Puerto Rico Health Insurance Administration
("PRHIA"), a public instrumentality of the Commonwealth of Puerto Rico, to
provide medical and healthcare services to indigent patients in two rural
regions of Puerto Rico. The services are provided through a network of providers
who are located throughout the two regions. PCA has subcontracted with the
Company to provide all mental health, substance abuse, and other professional
services or supplies necessary to identify, treat, or avoid behavioral health
illness or injury to all persons covered under its agreement with PRHIA.
Under this agreement, the Company is paid a fixed fee per member per
month ("PMPM"). This same agreement establishes an amount that is withheld from
PCA's monthly remittances to the Company to cover pharmacy and laboratory costs
which are the financial responsibility of the Company, but currently
administered by PCA. The Company is also required to maintain restricted
deposits with PCA in order to meet the specific equity requirements for this
contract.
Because of the uncertainty surrounding the determination of the actual
pharmacy and laboratory costs incurred, the Company has reported the contract at
a 100% loss ratio pending resolution and clarification of the actual costs
incurred which are not expected to exceed 100% of revenue. For the fiscal year
ended May 31, 1998, the Company reported $5.7 million as revenue with a
corresponding amount as claims expense in the accompanying financial statements.
Additionally, the Company has reported the $5.7 million unsettled amount as a
component of accounts receivable, with a corresponding amount included in
accrued claims payable, in the accompanying Balance Sheet as of May 31, 1998.
34
<PAGE> 35
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
NOTE 6--ACQUISITIONS AND DISPOSITIONS
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 19--"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. In conjunction with this acquisition,
the Company issued a net of 10,000 shares of its Common Stock after giving
effect to a settlement with one of the principals in the HMS transaction. The
Company's consolidated financial statement for fiscal year ended May 31, 1997,
reflect the results of operations for HMS for the period from July 25, 1996
through May 31, 1997. 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 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
---- ----
(Amounts in thousands
except per share data)
<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 per common share (1.68) (1.66)
Net loss per common share ..................... (0.98) (1.66)
</TABLE>
NOTE 7--ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
Pharmacy and Laboratory costs withheld - PCA Puerto Rico contract .............. $5,655 $ --
Accounts receivable withholdings - managed care capitation contract............. 1,958 730
Other trade accounts receivable................................................. 1,642 1,988
----- ------
Total accounts receivable....................................................... $9,255 $2,718
====== ======
</TABLE>
The following table summarizes changes in the Company's allowances for
doubtful accounts for the years ended May 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS WRITE-OFF BALANCE AT
BEGINNING CHARGED TO OF END OF
OF YEAR EXPENSE RECOVERIES ACCOUNTS YEAR
---------- ---------- ---------- --------- ----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Year ended May 31, 1998.......... $ 883 $ 575 $ (324) $ (241) $ 893
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
</TABLE>
Recoveries are reflected on the Company's statement of operations as a
reduction to the provision for doubtful accounts in the period in which they are
received.
35
<PAGE> 36
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
NOTE 8-- OTHER RECEIVABLE
Other receivable at May 31, 1998 and 1997 represents $2.4 million paid
to a vendor to prepare a federal income tax refund that is more fully described
in Note 16--"Income Taxes". The costs incurred will be refunded to the Company
should the Internal Revenue Service disallow the refund and require its
repayment. To the extent that all or some portion of the refund is allowed by
the IRS, a portion of the fees paid will be recognized as expense in proportion
to the amount of refund allowed (see Note 21--"Events Subsequent to the Balance
Sheet Date").
NOTE 9--PROPERTY AND EQUIPMENT HELD FOR SALE
Property and equipment held for sale consists of a non-operating
hospital in Ft. Worth, Texas. This facility consists of land, buildings,
equipment, and other fixed assets with a historical net book value of
approximately $2.7 million and is reported at its estimated net realizable value
of approximately $1.9 million at May 31, 1998. Operating expenses of the
facility designated for disposition were approximately $0.2 million for the
twelve months ended May 31, 1998.
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,
-----------------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Beginning balance ............................................... $ 4,707 $ 8,148 $ 3,746
Designation of facilities as property and equipment held for sale -- -- 5,682
Carrying costs incurred during phase-out period ................. -- -- 342
Carrying value of assets sold ................................... (2,797) (3,432) (1,804)
Contingencies on properties sold ................................ -- (9) 182
------- ------- -------
Ending balance .................................................. $ 1,910 $ 4,707 $ 8,148
======= ======= =======
</TABLE>
During the fiscal year ended May 31, 1998, the Company sold its
non-operating hospital facility in Cincinnati, Ohio for $3.0 million cash. The
Company recognized a gain of $0.2 million on the disposition.
During the fiscal year ended May 31, 1997, the Company sold its
non-operating facility located in Costa Mesa, California for $2.3 million. The
Company received cash of $0.4 million and took a note receivable for $1.9
million (See Note 11--"Notes Receivable"). During the fourth quarter of fiscal
1998, the Company collected cash in full settlement of the note receivable and,
at the same time, recognized a gain of $0.1 million that was deferred from
fiscal 1997.
During the fiscal year ended May 31, 1997, the Company also sold its
non-operating facility located in Jacksonville Beach, Florida, for $1.1 million
cash which approximated its net book value.
NOTE 10--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
Property and equipment consists of the following:
Land and improvements....................................................... $ 2,122 $ 2,122
Buildings and improvements.................................................. 4,424 4,427
Furniture and equipment..................................................... 4,538 3,274
Leasehold improvements...................................................... 315 271
Capitalized leases.......................................................... 17 44
------- -------
11,416 10,138
Less accumulated depreciation............................................... (4,373) (3,820)
------- -------
Net property and equipment.................................................. $ 7,043 $ 6,318
======= =======
</TABLE>
36
<PAGE> 37
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
NOTE 11-- NOTES RECEIVABLE
Notes receivable consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997
---- ----
(Amounts 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 ......................................... -- 62
7% promissory note with monthly interest payments,
maturing in April, 2004 (b)..................................... 94 94
------- ------
Total notes receivable................................................. 94 2,106
Less current maturities......................................... -- 71
------- ------
Notes receivable, excluding current maturities......................... $ 94 $2,035
======= ======
</TABLE>
(a) On March 31, 1998, the Company collected cash totaling
approximately $1,950,000, representing approximately
$1,937,000 in principal and approximately $13,000 in interest
in full settlement of the promissory note.
(b) On April 6, 1996, the Company advanced approximately $94,000
in the form of a promissory note to Stephen A. Stewart, one of
the principals of HMS (see Note 6--"Acquisitions and
Dispositions").
NOTE 12--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
Accounts payable and accrued liabilities............................... $2,012 $2,036
Accrued restructuring.................................................. 50 298
Accrued salaries and wages............................................. 683 539
Accrued vacation....................................................... 376 279
Accrued legal and audit................................................ 271 330
Payable to third-party intermediaries.................................. 2,353 2,575
Deferred compensation.................................................. 44 95
------ ------
$5,789 $6,152
====== ======
</TABLE>
NOTE 13--ACCRUED CLAIMS PAYABLE
During the fourth quarter of the fiscal year ended May 31, 1998, the
Company changed its methodology for estimating accrued claims payable. In prior
years, the Company based its estimates on open authorizations. The revised
method uses a traditional actuarial completion factor methodology. This change
in methodology, which is inseparable from a change in estimate, provides a
better estimate of the ultimate liability that will be incurred. As a result of
the change, the company reduced the accrued claims payable by $1.3 million which
increased basic and diluted earnings per common share by $.38 and $.34
respectively.
Accrued claims payable consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
Actuarially estimated claims payable................................... $ 4,761 $ 6,163
Subcapitation payable.................................................. 85 93
Pharmacy and laboratory costs (see Note 5--"Major Contracts")........... 5,655 --
------- -------
Total accrued claims payable........................................... $10,501 $ 6,256
======= =======
</TABLE>
37
<PAGE> 38
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
The Company recognized $2.6 million and $3.9 million in subcapitation
expense for the years ended May 31, 1998 and 1997, respectively. The Company
would remain liable to perform the services covered under the subcapitation
agreements if the parties with which the Company subcapitates were unable to
fulfill their responsibilities under the subcapitation agreement.
NOTE 14-- LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------
1998 1997
---- ----
(Amounts in thousands)
<S> <C> <C>
7 1/2% convertible subordinated debentures due in fiscal 2010........ $2,692 $2,692
Other long-term debt................................................. 14 66
------ ------
Total long-term debt................................................. $2,706 $2,758
Less current maturities of long-term debt ........................... 2 46
------ ------
Long-term debt, excluding current maturities......................... $2,704 $2,712
====== ======
</TABLE>
As of May 31, 1998, aggregate annual maturities of long-term debt (in
accordance with stated maturities of the respective loan agreements) are
approximately $2,000 in fiscal 1999. The Company has no annual maturities of
long-term debt after fiscal 1999 until fiscal 2010.
In April 1985, the Company issued $46.0 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% per annum.
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% 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% of the issued and outstanding debentures, was 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.
The resulting net gain on the debenture exchange was $2.2 million,
which was recorded as an extraordinary gain in the accompanying income statement
for the year ended May 31, 1997.
38
<PAGE> 39
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
NOTE 15-- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share in accordance with Statement No. 128, Earnings Per Share:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands except per share data)
<S> <C> <C> <C>
NUMERATOR:
Income (loss) before extraordinary item .................... $ 1,971 $(4,969) $(4,242)
Less preferred stock dividends ............................. (82) (31) --
------- ------- -------
Income (loss) available to common stockholders before
extraordinary item ..................................... 1,889 (5,000) (4,242)
Extraordinary item ......................................... -- 2,172 --
------- ------- -------
Net income (loss) available to common stockholders ......... 1,889 (2,828) (4,242)
EFFECT OF DILUTIVE SECURITIES:
Preferred stock dividends .................................. 82 -- --
------- ------- -------
Numerator for diluted earnings (loss) per share available
to common stockholders after assumed conversions ....... $ 1,971 $(2,828) $(4,242)
======= ======= =======
DENOMINATOR:
Denominator for basic earnings (loss) per share -
weighted-average shares ................................ 3,384 3,088 2,654
Effect of dilutive securities:
Employee stock options ................................. 137 -- --
Convertible preferred stock ............................ 344 -- --
------- ------- -------
Dilutive potential common share ............................ 481 -- --
Denominator for diluted earnings (loss) per share - adjusted
weighted-average shares and assumed conversions ........ 3,865 3,088 2,654
======= ======= =======
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary item .................... $ 0.56 $ (1.62) $ (1.60)
Extraordinary item ......................................... -- 0.70 --
------- ------- -------
Net income (loss) .......................................... $ 0.56 $ (0.92) $ (1.60)
======= ======= =======
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item .................... $ 0.51 $ (1.62) $ (1.60)
Extraordinary item ......................................... -- 0.70 --
------- ------- -------
Net income (loss) .......................................... $ 0.51 $ (0.92) $ (1.60)
======= ======= =======
</TABLE>
The following number of potentially convertible shares of common stock
related to convertible preferred stock, convertible debentures, and stock
options are as follows at May 31, 1998:
<TABLE>
<S> <C>
For conversion of convertible preferred stock..................... 343,833
For conversion of convertible debentures.......................... 10,850
Outstanding stock options......................................... 724,215
Possible future issuance under stock option plans................. 341,594
---------
Total:............................................... 1,420,492
=========
</TABLE>
39
<PAGE> 40
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
NOTE 16--INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Current:
Federal .................................................... $ -- $(345) $(2,568)
State ...................................................... 63 4 90
---- ----- -------
$ 63 $(341) $(2,478)
==== ===== =======
</TABLE>
Reconciliation between the provision for income tax and the amount
computed by applying the statutory Federal income tax rate (34%) to income
(loss) before income tax is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Expense (Benefit) from income taxes at the statutory tax rate $ 692 $(1,103) $(2,285)
State income taxes, net of federal tax benefit ............... 81 3 60
Non-deductible items ......................................... 137 51 273
Change in valuation allowance ................................ (995) 952 1,930
Refund of prior year loss carryback not previously benefited . -- (345) (2,568)
Other, net ................................................... 148 101 112
------- ------- -------
$ 63 $ (341) $(2,478)
======= ======= =======
</TABLE>
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 assets and
liabilities are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------
1998 1997
---- ----
Restated
(Amounts in thousands)
<S> <C> <C>
Deferred Tax Assets:
Net operating losses .......................... $ 10,957 $ 10,531
Restructuring/non-recurring costs ............. 1,285 2,261
Alternative minimum tax credits ............... 667 667
Payable to Third Party Intermediaries ......... 380 380
Bad debt expense .............................. 461 431
Employee benefits and options ................. 331 200
Other, net .................................... 157 (711)
-------- --------
Total Deferred Tax Assets ............... 14,238 13,759
Valuation Allowance ........................... (11,282) (12,277)
-------- --------
Net Deferred Tax Assets ................. 2,956 1,482
-------- --------
Deferred Tax Liabilities:
Depreciation .................................. (1,240) (1,113)
State income taxes ............................ (410) (369)
Cash to accrual differences ................... (1,306) --
-------- --------
Total Deferred Tax Liabilities .......... (2,956) (1,482)
-------- --------
Net Deferred Tax Assets .......................... $ 0 $ 0
======== ========
</TABLE>
Gross deferred tax assets as of May 31, 1997, have been restated from
amounts previously reported to reflect the accrual of $1.0 million payable to
third party intermediaries that was inappropriately reduced in the Company's
1992 fiscal year (See Note 4--"Prior Period Adjustment - Error Correction").
40
<PAGE> 41
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed for a tentative refund to carry
back losses described in Section 172(f) of the Internal Revenue Service ("IRC"),
requesting a refund of $9.4 million and $5.5 million, respectively, of which
refunds of $9.4 million and $5.4 million were received. In addition, the Company
also filed amended Federal income tax returns for fiscal years prior to 1995,
requesting similar refunds of losses carried back under Section 172(f) of $6.2
million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million
for 1982, a total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is recorded
as a deferred liability, "Unbenefitted tax refunds received," pending resolution
by the IRS of the appropriateness of the 172(f) carryback. The other refunds
requested under Section 172(f) for prior years of $7.7 million have not been
received nor has the Company recognized any tax benefit related to these
potential refunds (see Note 21--"Events Subsequent to the Balance Sheet Date").
Section 172(f) of the IRC provides for a ten year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) 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. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. The IRS may determine that the
Company's position and use of Section 172(f) is inappropriate and request a
return of some or all of the refunds received to date. No assurance can be
provided that the Company will be able to retain the refunds received to date or
that the other refunds requested will be received (see Note 21--"Events
Subsequent to the Balance Sheet Date").
If the IRS were to disallow the refunds claimed, the Company will have
additional loss carry forwards of $50.1 million which will expire if unused by
the year 2013.
SFAS 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that a valuation allowance at May 31, 1998 and 1997 was necessary
to reduce the deferred tax assets to that amount that will more likely than not
be realized.
At May 31, 1998, the Company had Federal accumulated net operating loss
carryforwards of approximately $28.9 million, which would expire in 2009 through
2013. The Company will be allowed a minimum tax credit carryover in the future
of approximately $0.7 million 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 precluded from raising
other tax issues in regard to any audits of such returns, which also could
ultimately affect the Company's tax liability (see Note 21--"Events Subsequent
to the Balance Sheet Date").
41
<PAGE> 42
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
NOTE 17--EMPLOYEE BENEFIT PLANS
The Company offers 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% to 15% of his
or her compensation to the plan subject to limitations on the highly compensated
employees to ensure the plan is non-discriminatory. Company contributions are
discretionary and are determined quarterly by the Company's Board of Directors
or the Plan Committee. The Company paid $31,000, $26,000, and $30,000 to the
Plan in fiscal 1998, 1997 and 1996, respectively.
NOTE 18--PREFERRED STOCK, COMMON STOCK, AND STOCK OPTION PLANS
Preferred Stock
The Company is authorized to issue up to 60,000 shares of Preferred
Stock, $50.00 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 in exchange for the secured
convertible note due January 9, 1997 in the principal amount of $2.0 million and
bearing interest at the rate of 12% per annum and $63,000 of interest accrued
thereon. The Preferred Stock has a cumulative quarterly dividend of 4% per annum
which is payable when and as declared by the Board of Directors. However, no
dividends will be paid on the Preferred Stock until the Company has positive
stockholder's equity. The Preferred Stock is preferred to the extent of $50 per
share plus accrued dividends; is convertible into shares of Common Stock at $6
per share, which was the same price at which the principal of the note was
exchangeable; and has no voting privileges.
Common Stock
The Company is authorized to issue 12.5 million shares of $.01 par
value Common Stock. As of May 31, 1998, approximately 3.4 million shares of the
Company's Common Stock were outstanding. Cash dividends on the Common Stock are
prohibited as long as the Preferred Stock is outstanding.
On April 19, 1988, the Company declared a dividend of one common share
purchase right ("Right") for each share of Common Stock outstanding at May 6,
1988. Each Right entitles the holder to purchase one share of Common Stock at a
price of $300 per share, subject to certain anti-dilution adjustments. The
Rights are not exercisable and are transferable only with the Common Stock until
the earlier of ten days following a public announcement that a person has
acquired ownership of 25% or more of the Company's Common Stock or the
commencement or announcement of a tender or exchange offer, the consummation of
which would result in the ownership by a person of 30% or more of the Company's
Common Stock. In the event that a person acquires 25% or more of the Company's
Common Stock or if the Company is the surviving corporation in a merger and its
Common Stock is not changed or exchanged, each holder of a Right, other than the
25% stockholder (whose Rights will be void), will thereafter have the right to
receive on exercise that number of shares of Common Stock having a market value
of two times the exercise price of the Right. If the Company is acquired in a
merger or more than 50% of its assets are sold, proper provision shall be made
so that each Right holder shall have the right to receive or exercise, at the
then current exercise price of the Right, that number of shares of Common Stock
of the acquiring company that at the time of the transaction would have a market
value of two times the exercise price of the Right. The Rights are redeemable at
a price of $.20 per Right at any time prior to ten days after a person has
acquired 25% or more of the Company's Common Stock.
42
<PAGE> 43
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
Stock Option Plans
The Company has a 1988 Incentive Stock Option Plan ("ISO") and a 1988
Nonstatutory Stock Option Plan ("NSO"). Options granted under the 1988 ISO Plan
are intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code. Options granted under the 1988 NSO Plan do not qualify as
ISOs. Options may be granted for terms up to ten years and are generally
exercisable in cumulative annual increments of 25% to 50% 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
ISO Plan is 500,000 and the Company's 1988 NSO Plan is 200,000. As of May 31,
1998, there were 333,100 options outstanding and of these options, 158,849 were
exercisable under the 1988 Plans. Effective February 3, 1998, the 1988 Plans
expired and no new grants will be issued.
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 ISOs under Section 422A of the
Internal Revenue Code. Options for ISOs may be granted for terms up to ten years
and are generally exercisable in cumulative increments of 33% each year. Options
for NSOs may be granted for terms up to 13 years. Options for ISOs must equal or
exceed the fair market value of the shares on the date of grant, and 65% 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 600,000. As of May 31,
1998, there were 271,950 options outstanding, and of these options, zero options
were exercisable under the 1995 Plans.
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. On December 19, 1997, the Company, with the consent of Chriss W.
Street, terminated a grant of the 50,500 remaining, unvested shares of Company
common stock originally granted in September 1995. Coincident with this
transaction, the Company implemented a new program to grant Mr. Street 120,000
options of common stock at a price of $6.6875 (fair value on the date of grant).
These options are fully vested, non-incentive stock options, exercisable on and
after June 17, 1998 and through December 19, 2002, regardless of whether Mr.
Street's employment with the Company continues through that date.
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 was granted a non-qualified stock option to purchase 10,000
shares 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
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% increments beginning on the first anniversary of the date of
grant, provided the individual is still a director on those dates. Annual grants
will become 100% vested as of the first annual meeting of the Company's
stockholders following the date of grant, provided the individual is still a
director as of that date. An optionee who ceases to be a director shall forfeit
that portion of the option attributable to such vesting dates on or after the
date he or she ceases to be a director. The maximum number of shares authorized
for issuance under the Directors' Plan is 250,000. After May 31, 1998, there
were options for 119,165 shares outstanding and of these options, 49,166 shares
were exercisable under the Directors' Plan.
43
<PAGE> 44
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
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 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 1998: volatility factor of the expected market
price of the Company's Common Stock of 0.526; a weighted-average expected life
of the options of six years, five years, and four years; risk-free interest rate
of 5.5% and dividend yield of 0%. For both 1997 and 1996, the assumptions were:
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 six years, five years,
and four years, risk-free interest rate of 5.5% and a dividend yield of 0%.
The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options that 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,
1998. 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 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 ("in thousands" except for earnings (loss) per share information):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) attributed to common stock
holders.................................................... $1,212 $(3,210) $4,383
Pro forma earnings (loss) per common share:
Basic................................................ $ .36 $ (1.04) $ 1.54
Diluted.............................................. $ .36 $ (1.05) $ 1.54
</TABLE>
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
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding as of May 31, 1995................................ 258,667 $ 8.27
Canceled...................................................... (5,500) 7.82
Granted....................................................... 350,903 8.24
Exercised..................................................... (14,000) 7.57
Forfeited..................................................... (114,154) 8.30
Outstanding as of May 31, 1996................................ 475,916 $ 8.26
Canceled...................................................... (1,300) 13.85
Granted....................................................... 399,174 11.13
Exercised..................................................... (219,873) 8.26
Forfeited..................................................... (24,668) 9.45
Outstanding as of May 31, 1997................................ 629,249 $ 10.02
Canceled...................................................... (12,000) 13.64
Granted....................................................... 493,949 8.97
Exercised..................................................... (87,300) 8.42
Forfeited..................................................... (299,683) 10.50
Outstanding as of May 31, 1998................................ 724,215 $ 9.24
</TABLE>
44
<PAGE> 45
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
The weighted-average fair values of options granted were $5.18, $5.96,
and $5.86 in fiscal 1998, 1997, and 1996, respectively.
A summary of options outstanding and exercisable as of May 31, 1998
follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
WEIGHTED- AVERAGE AVERAGE
EXERCISE AVERAGE REMAINING EXERCISE PRICE
OPTIONS PRICE EXERCISE CONTRACTUAL OPTIONS OF EXERCISABLE
OUTSTANDING RANGE PRICE LIFE EXERCISABLE OPTIONS
----------- --------------- --------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
323,500 $ 6.25 - $ 8.50 $ 7.21 7.94 106,000 $ 7.11
106,949 $ 8.51 - $ 9.75 $ 9.23 9.75 0 N/A
288,266 $10.00 - $15.00 $11.41 8.86 99,016 $12.00
5,500 $15.25 - $21.25 $15.80 7.03 2,999 $16.25
</TABLE>
NOTE 19--COMMITMENTS AND CONTINGENCIES
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, $1.0
million and $0.9 million for fiscal years 1998, 1997 and 1996, respectively.
Future minimum payments, by year and in the aggregate, under
non-cancelable operating leases with initial or remaining terms of one year or
more, consist of the following at May 31, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING LEASES
----------- ----------------
(Amounts in thousands)
<S> <C>
1999................................................................... $ 763
2000................................................................... 678
2001................................................................... 528
2002................................................................... 24
2003................................................................... 2
Later Years............................................................ 0
------
Total minimum lease payments........................................... $1,995
======
</TABLE>
Other Commitments and Contingencies
(1) In connection with the filing of its Federal income tax returns
for fiscal years 1995 and 1996, the Company filed for a tentative refund to
carry back losses described in Section 172(f) of the IRC, requesting a refund to
the Company of $9.4 million and $5.5 million, respectively, of which refunds of
$9.4 million and $5.4 million were received. In addition, the Company also filed
amended Federal income tax returns for fiscal years prior to 1995, requesting
similar refunds of losses carried back under Section 172(f) of $6.2 million for
1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million for 1982, a
total of $7.7 million.
During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is recorded as
a deferred liability, "Unbenefitted tax refunds received" pending resolution by
the IRS of the appropriateness of the Section 172(f) carryback. The additional
refunds requested under Section 172(f) for prior years of $7.7 million have not
been received, nor has the Company recognized any tax benefit related to these
potential refunds.
Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) 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. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. The IRS may determine that the
Company's position and use of Section 172(f) is inappropriate and request a
return of some or all of the refunds received to date. No assurance can be
provided that the Company will be able to retain the refunds received to date or
that the other refunds requested will be received. (see Note 21--"Events
Subsequent to the Balance Sheet Date," in the audited consolidated financial
statements for additional information)
As a result of the Section 172(f) carryback claims filed by the
Company, and the tentative refunds received, the Company came under audit with
respect to the tax years previously mentioned.
On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be upheld,
the Company would be required to repay $12.4 million in refunds previously
received, plus accrued interest of approximately $4.0 million through May 31,
1998. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refund claims of approximately
$2.5 million. This report commences the administrative appeals process. The
Company intends to protest the examination report and believes that its position
with respect to its right to the tax refunds received will be upheld. The
Company's tax advisor relating to these refund claims has advised management
that the administrative appeals process could take twelve to eighteen months. In
the event the Company wishes to further protest the results of its
administrative appeal, it may further appeal to the United States Tax Court
following the final determination of the administrative appeal. The Company has
been advised that a determination by the United States Tax Court could take up
to an additional twelve months from commencement of the appeals process in the
United States Tax Court.
(2) The Company is currently involved in an action in California
Superior Court contesting certain aspects of an adverse administrative appeal
decision regarding application of the Maximum Inpatient Reimbursement Limitation
("MIRL") to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for
its fiscal periods 1983 through 1986. This facility was owned by the Company
until its disposal in fiscal year 1991. The subject matter of the Superior Court
action involves the refusal of the administrative law judge to order further
reductions in the liability for costs associated with treating high cost, long
stay Medi-Cal patients, which are commonly referred to as "outliers". It is
anticipated that a final determination on the Superior Court action will be
obtained in late 1998 or early 1999. The Company currently has $1.0 million
accrued to settle this claim (see Note 4--"Prior Period Adjustment - Error
Correction" in the Consolidated Audited Financial Statements).
(3) On December 29, 1997, Ms. Kerri Ruppert, the former Chief
Financial Officer of the Company, commenced an action against the Company and
its Chairman, Chriss W. Street, in the Superior Court of the State of California
arising out of the termination of her employment on September 29, 1997. The
action alleges alternate causes of action
45
<PAGE> 46
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
based upon her employment relationship with the Company and seeks unspecified
damages for unpaid wages, unspecified actual, compensatory and punitive damages;
damages for emotional distress; and costs, legal fees and penalties under
applicable California law. The action is only in its formative stages. The
Company has denied its liability, and has denied the principal allegations of
the complaint. The Company believes that it has good and meritorious defenses to
this action.
(4) 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.
(5) The Company entered into a Stock Purchase Agreement on April 30,
1996 to purchase the outstanding stock of HMS (see Note 6--"Acquisitions and
Dispositions"). 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, tortuous 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.
(6) 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.
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.
Impact of Year 2000 Computer Issues (Unaudited)
The Company is currently in the early phases of assessing its ability
to make its information systems year 2000 compliant. While management intends to
do so, no assessment has been made of the Company's third party vendors and
customers. As a result, the Company is unable to state with any certainty the
costs of becoming compliant. However, such costs are not expected to exceed $1.0
million.
The preliminary assessment indicates that while the Company has
initially converted one of its five regions to a new, year 2000 compliant claims
system, the remaining four regions will also require that they be converted to
the new claims system.
The Company has not addressed the potential impact of year 2000 on its
non-essential information systems its other equipment that may be affected by
year 2000, or the impact of transacting business with third parties who do not
have year 2000 compliant systems.
46
<PAGE> 47
COMPREHENSIVE CARE CORPORATION
Notes to Consolidated Financial Statements
May 31, 1998, 1997 and 1996
Since it is in the early phase of assessing its ability to become
compliant with year 2000, the Company has not developed any contingency plans,
should it be unable to become compliant in a timely manner. There can be no
assurance that the Company will become year 2000 compliant, in a timely manner.
Although the costs of compliance are not expected to exceed $1.0 million, the
absolute costs cannot be estimated at this time.
Should the Company be unable to become year 2000 compliant, the Company
will suffer severe adverse consequences to its financial position and results of
operations.
Regulatory Monitoring and Compliance
The Company is subject to extensive and evolving state and federal
regulations, ranging from licensure and compliance with regulations related to
insurance companies and other risk assuming entities to licensure and compliance
with regulations related to healthcare providers. These laws and regulations may
vary considerably among states and, as a result, the Company may be subject to
the specific regulatory approach adopted by each state for the regulation of
managed care companies and for providers of behavioral healthcare treatment
services.
Currently, management cannot quantify the potential effects of
additional regulation of the managed care industry, but such costs will have an
adverse effect on future operations to the extent that they are not able to be
recouped in future managed care contracts. Management believes that the Company
is currently in material compliance with the laws and regulations of the
jurisdictions in which it operates.
NOTE 20--FOURTH QUARTER RESULTS FOR FISCAL 1998
Net income for the fourth quarter of fiscal 1998 was $1.1 million.
Included in the results was a nonrecurring positive effect on net income due to
an adjustment to decrease accrued claims expense of $1.3 million, (see Note 13--
"Accrued Claims Payable").
NOTE 21--EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE
The Company is currently under audit by the Internal Revenue Service
("IRS") related to its fiscal 1996 and 1995 Federal Income Tax returns and the
amended returns for prior years. On August 21, 1998, the Company received a
preliminary examination report from the IRS, dated August 6, 1998, related to
its Section 172(f) carryback claims and amended tax returns for prior years,
claiming taxes due totaling approximately $12.4 million for which the Company
has accrued $12.1 million as of May 31, 1998. If the position of the IRS were to
be upheld, the Company would be required to repay $12.4 million in refunds
previously received, plus approximately $4.0 million of accrued interest through
May 31, 1998. The Company intends to file a protest with the IRS and contest the
proposed assessment with the appeals office of the Internal Revenue Service in
Laguna Niguel, California. In the event that the Company is unsuccessful in the
appeal process, the Company is entitled to a repayment of fees advanced to its
tax advisor relating to these refund claims totaling approximately $2.5 million
(see Note 8--"Other Receivable"). Management strongly believes that its
carryback claims meet the Section 172(f) criteria, and will vigorously defend
its position by asserting all available appeal rights.
In August , 1998, the Company received a Letter of Intent to Purchase
the Company's psychiatric hospital in Aurora Colorado, for $5.1 million. The
sale is subject to completion of a definitive agreement. The sale is expected to
close by December 31, 1998.
Subsequent to May 31, 1998, the holders of $448,000 aggregate principal
amount of the Company's 7 1/2% Convertible Subordinated Debentures (the
"Debentures"), due April 15, 2010, converted their Debentures to 33,185 shares
of the Company's Common Stock.
47
<PAGE> 48
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chriss W. Street 48 Chairman of the Board of Directors(1)(2)
Chief Executive Officer(1) President(1)(2)
Mary Jane Johnson 48 Executive Vice President (1)
Chief Executive Officer(2)
H.G. Whittington 69 Executive Vice President and National Medical Director(1)
Robert J. Landis 39 Executive Vice President, Chief Financial Officer and
Treasurer(1)(2)
Joni Cummings 50 Executive Vice President Business Development(1)
William H. Boucher 66 Director
J. Marvin Feigenbaum 48 Director
John A. McCarthy, Jr. 39 Director
A. Richard Pantuliano 53 Director
</TABLE>
- ----------
(1) Comprehensive Care Corporation
(2) Comprehensive Behavioral Care, Inc. (Principal subsidiary of the
Company)
During fiscal 1998, the members that comprise the entire Board of
Directors is five in number, of which two are Class I directors; two are Class
II directors; and the Board has one Class III director. The three classes serve
staggered three-year terms. Directors for each class are elected at the Annual
Meeting of Stockholders held in the year in which the term for such class
expires and serve for three years. Messrs. William H. Boucher and J. Marvin
Feigenbaum were Class I directors whose terms expire at the 1998 Annual Meeting.
Messr. Chriss W. Street is a Class II director whose term expires at the 1999
Annual Meeting. John A. McCarthy, Jr. is a Class II director whose term expires
at the 2000 annual meeting. Mr. A. Richard Pantuliano was a Class III director
whose term expires at the 1998 Annual Meeting. Directors who are employees of
the Company do not receive any compensation for serving on the Board of
Directors of the Company.
CHRISS W. STREET, age 48. Mr. Street has been employed by the Company
as Chairman, President and Chief Executive Officer of Comprehensive Care
Corporation since 1994. Mr. Street is a Class II director whose term expires at
the 1999 Annual Meeting. Mr. Street has served as a director, member of the
stock option committee, and member of the compensation committee of Nu-Tech Bio
Med, Inc., a company in which Mr. Feigenbaum is Chairman, President, and Chief
Executive Officer (see Item 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION"). In June 1996,
Mr. Street joined the Board of Directors of Fruehauf Trailer Corporation. On
October 7, 1996, Fruehauf Trailer Corporation filed for relief under Chapter 11
of the United States Bankruptcy Code and subsequently, Mr. Street was named
Chairman, President, and Chief Executive Officer. Fruehauf Trailer Corporation
has been operating as a debtor in possession since October 1996, but filed a
Plan of Reorganization on July 28, 1998. Mr. Street has served as a director of
Drug Use is Life Abuse since November 1997. Mr. Street is the founder and
principal of Chriss Street & Company, an investment banking corporation
specializing in corporate reorganization, factoring and securities trading. Mr.
Street served as a board member of the Orange County Employee's Retirement
System between February 1996 and December 1997. Mr. Street served as a member of
the Board of Directors of StreamLogic Corporation (formerly known as Micropolis
Corporation), from February 1996 to May 1997. Mr. Street is a graduate of the
University of California, Irvine and the Stanford Business School Executive
Program.
48
<PAGE> 49
MARY JANE JOHNSON, RN, MBA, age 48. Ms. Johnson has been employed by
the Company since August 1996 and was appointed Executive Vice President
Clinical Operations in September 1997. In August, 1998 Ms. Johnson was
appointed to the position of Chief Executive Officer for the Company's
principal subsidiary, CompCare. Ms. Johnson served as Executive Director
for Merit Behavioral Care from 1993 to 1996. Ms. Johnson, a Registered
Professional Nurse, has a Bachelors Degree in Nursing from the State University
of New York and a Masters Degree in Business Administration from Adelphi
University.
DR. H. G. WHITTINGTON, age 69. Dr. Whittington has been employed by the
Company since January 1997 as National Medical Director. During 1996 Dr.
Whittington served as both the Interim Medical Director for Dr. Pelchin
Children's Center and as Medical Director of El Paso Psychiatric Center. Between
1994 to 1996, Dr. Whittington served as Behavioral Health Consultant for William
M. Mercer, Inc. Dr. Whittington completed his psychiatric residency at Menninger
School of Psychiatry, his M.D. from Baylor College of Medicine, and a Bachelor
of Arts from Rice University. Effective August 15, 1998, Dr. Whittington
resigned from his position at the Company.
ROBERT J. LANDIS, CPA, MBA, age 39. Mr. Landis has served as Executive
Vice President, Chief Financial Officer, and Treasurer since July 1998. Mr.
Landis served as Treasurer of Maxicare Health Plans, Inc., a health maintenance
organization, from November 1988 to July 1998. Mr. Landis received a Bachelors
degree in Business Administration from the University of Southern California, a
Masters Degree in Business Administration from California State University at
Northridge and is a Certified Public Accountant.
JONI CUMMINGS, RN, MA, age 50. Ms. Cummings has been employed by the
Company since January, 1996 and was appointed Executive Vice President Business
Development in January, 1998. Ms. Cummings served as Vice President of Clinical
Operations for Merit Behavioral Care from September 1989 to August 1995. Ms.
Cummings is a Registered Nurse with a Bachelors Degree in Psychology from San
Diego State University and a Masters Degree from St. Joseph's College in
Healthcare Administration.
WILLIAM H. BOUCHER, age 66. Mr. Boucher is currently a self-employed
consultant providing services to the dental, behavioral medicine and
pharmaceutical industries. From February 1994 to September 1994, he served as
Vice President - Sales for Foundation Health Pharmaceutical Services, a health
maintenance organization ("HMO"), and was Vice President - Sales for Diagnostek,
Inc., a mail-order pharmacy company, from June 1991 to January 1994. Mr. Boucher
was also Vice President - Sales for Qual-Med, an HMO from May 1990 to June 1991,
and was Vice President - Sales and Marketing for PCS, Inc., a pharmacy
processing company, from April 1980 to September 1989. Mr. Boucher has served as
a director of the Company since January 1994.
J. MARVIN FEIGENBAUM, age 48. Mr. Feigenbaum is the Chairman and Chief
Executive Officer of Nu-Tech Bio Med, Inc. For the prior five years thereto, Mr.
Feigenbaum acted as an independent consultant in the medical and healthcare
industry generally. Mr. Feigenbaum has over 25 years experience in the
healthcare industry. Mr. Feigenbaum is chief executive officer of Physicians
Clinical Laboratories, Inc. ("PCL"), a general clinical laboratory located in
the State of California. PCL had, prior to Mr. Feigenbaum's appointment, filed
for relief under Chapter 11 of the United States Bankruptcy Code. PCL's
securities are not publicly traded. Mr. Feigenbaum is a guest lecturer at the
Anderson School of Business at U.C.L.A. Mr. Feigenbaum has served as a director
of the Company since March 1994.
JOHN A. MCCARTHY, JR., age 39. Mr. McCarthy is a Class II director
whose term expires at the 1999 Annual Meeting. Mr. McCarthy is Principal of
Crescent Gate L.P., a private equity partnership, since January 1998. From
August 1997, Mr. McCarthy served as President of Concentra Managed Care
Services, Inc. and Executive Vice President of Concentra Managed Care, Inc. From
August 1996 to August 1997, Mr. McCarthy served as Senior Vice President, Cost
Containment Services and Corporate Development of CRA, a wholly-owned subsidiary
of Concentra Managed Care, Inc. From August 1994 to August 1996, he served as
Vice President of Cost Containment Services and Corporate Development of CRA.
From June 1992 to July 1994, Mr. McCarthy was Senior Vice President and Chief
Financial Officer of MedChem Products, Inc., a manufacturer of specialty medical
products. From March 1989 to June 1992, he was a Partner at Kaufman & Company,
an investment-banking firm. From August 1987 to February 1989, Mr. McCarthy was
an associate at Morgan Stanley & Co. Incorporated, an investment banking firm.
Mr. McCarthy has been a director of the Company since September 11, 1997.
49
<PAGE> 50
A. RICHARD PANTULIANO, age 53. Mr. Pantuliano is a Class III director
whose term expires at the 1998 Annual Meeting. Commencing October 1996, Mr.
Pantuliano is founder and principal of ARP Associates, a company specializing in
human resources consulting. From 1968 to 1996, Mr. Pantuliano held various
senior management human resources positions with ITT Corporation. Mr. Pantuliano
currently renders independent consulting services to Fruehauf Trailer
Corporation, a company in which Mr. Street is Chairman, President and Chief
Executive Officer. Mr. Pantuliano has served as a director of the Company since
May 1997.
50
<PAGE> 51
ITEM 11. EXECUTIVE COMPENSATION
This section discloses the compensation earned by the Company's Chief
Executive Officer and its other executive officers whose total salary and bonus
for fiscal 1998 exceeded $100,000 (together, these persons are sometimes
referred to as the "named executives").
TABLE I - SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
OTHER RESTRICTED
ANNUAL STOCK
FISCAL SALARY BONUS COMPENSATION AWARDS
NAME AND POSITION YEAR ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
Chriss W. Street 1998 264,263 0 6,000(1) 0
Chairman of the Board of Directors,(17)(18) 1997 245,192 15,947 5,837(1) 589,919(2)
Chief Executive Officer(17) and 1996 207,324 0 9,225(1) 43,780
President(17)(18)
Mary Jane Johnson 1998 110,040 20,000 0 0
Executive Vice President(17)
Chief Executive Officer(18) 1997 97,125(5) 5,000 0 0
H.G. Whittington 1998 148,955(6) 20,000 0 0
Executive Vice President and 1997 50,468(7) 0 0 0
National Medical Director(17)
Joni Cummings 1998 100,025 0 18,412(8) 0
Executive Vice President, Business 1997 76,949 0 24,308(8) 0
Development(17) 1996 18,735 0 6,154(8) 0
Richard Powers 1998 124,661(9) 30,149 0 413,627
Executive Vice President, Sales and 1997 128,185 87,000 49,805(10) 5,812
Marketing(18) 1996 95,622 0 133,001(10) 15,449
Stuart Ghertner 1998 58,455(11) 13,333 17,500(14) 0
Chief Operating Officer(17) 1997 158,958(12)(13) 21,667 27,500(14) 0
Robert J. Landis 1998 0(16) 0 0 0
Executive Vice President-Chief Financial
Officer and Treasurer(17)(18)
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
SECURITIES LONG-TERM
UNDERLYING INCENTIVE ALL OTHER
FISCAL OPTIONS/SARS PAYOUTS COMPENSATION
YEAR (#) ($) ($)
<S> <C> <C> <C> <C>
Chriss W. Street 1998 120,000 0 76,998(3)
Chairman of the Board of Directors,(17)(18) 1997 25,000 0 229,508(4)
Chief Executive Officer(17) and 1996 100,000 0 1,495(15)
President(17)(18)
Mary Jane Johnson 1998 37,000 0 1,012(15)
Executive Vice President(17)
Chief Executive Officer(18) 1997 3,000 0 331(15)
H.G. Whittington 1998 19,000 0 0
Executive Vice President and 1997 1,000 0 0
National Medical Director(17)
Joni Cummings 1998 17,000 0 0
Executive Vice President, Business 1997 3,000 0 0
Development(17) 1996 0 0 0
Richard Powers 1998 0 0 1,125(15)
Executive Vice President, Sales and 1997 30,000 0 860(15)
Marketing(18) 1996 0 0 0
Stuart Ghertner 1998 0 0 0
Chief Operating Officer(17) 1997 125,000 0 0
Robert J. Landis 1998 0 0 0
Executive Vice President-Chief Financial
Officer and Treasurer(17)(18)
</TABLE>
51
<PAGE> 52
- ----------
(1) Represents a car allowance paid by the Company and in accordance with
Mr. Street's employment agreement.
(2) 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. The Restricted Shares are subject to
vesting at the rate of 5,000 Restricted Shares per fiscal year 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. As of May 31, 1997, 47,000 Restricted Shares were
vested and 53,000 were unvested, with the holder having sole voting
power. On December 16, 1997, the Company, with the consent of Chriss W.
Street, terminated a grant of the remaining unvested shares originally
granted in September 1995. Coincident with this transaction, the
Company implemented a new program to grant Mr. Street 120,000 options
of common stock at a price of $6.6875. These options are fully vested,
non-incentive stock options, exercisable on and after June 17, 1998 and
through December 19, 2002, regardless of whether Mr. Street's
employment with the Company continues through that date.
(3) Represents $75,873 of a one-time bonus for taxes payable due to the
acceleration of Restricted Shares and $1,125 in amounts contributed to
Mr. Street's 401(k) Plan Account.
(4) Represents $227,589 of a one-time bonus for taxes payable due to the
acceleration of Restricted Shares and $1,919 in amounts contributed to
Mr. Street's 401(k) Plan Account.
(5) Between August 1, 1996, and January 25, 1997, Ms. Johnson served as an
independent consultant to the Company for which she received an
aggregate compensation of $53,000.
(6) Dr. Whittington ceased to be an executive officer of the company on
August 15, 1998.
(7) Dr. Whittington was employed on January 13, 1997. Accordingly, amounts
shown for Dr. Whittington only reflect compensation that he earned from
his date of hire through the end of fiscal 1997.
(8) Represents commissions paid to Ms. Cummings.
(9) Mr. Powers ceased being an executive officer of the company on February
28, 1998.
(10) Represents commissions paid to Mr. Powers.
(11) Dr. Ghertner ceased being an executive officer of the Company on
September 12, 1997.
(12) Dr. Ghertner was employed by the Company on January 1, 1997.
Accordingly, amounts shown for Dr. Ghertner only reflect compensation
that he earned from his date of hire through the end of fiscal 1997.
(13) Between August 6, 1996 through December 31, 1996, Dr. Ghertner served
as an independent consultant to the Company for which he received an
aggregate compensation of $93,000.
(14) Represents compensation expense related to the vesting of options which
were not performance related.
(15) Represents amounts contributed by the Company to the indicated person's
401(k) Plan Account.
(16) Mr. Landis was employed by the Company on July 2, 1998. His
compensation includes a base salary of $150,000 per annum plus a bonus
that is performance related. The Company has granted options to
purchase 87,500 shares of common stock, which become 100% vested on
January 2, 1999 and expire on July 2, 2008. An employment agreement is
expected to be executed during fiscal 1999.
(17) Comprehensive Care Corporation.
(18) Comprehensive Behavioral Care, Inc., Principal Subsidiary of the
Company.
Employment Agreements
The Company is party to an amended and restated employment agreement
with Mr. Chriss W. Street that has a term expiring on December 31, 1998. Mr.
Street's employment agreement as amended on November 1, 1995 provides for a
salary at the rate of $250,000 per annum. In addition, Mr. Street is provided
with health insurance and other benefits and a policy of life insurance. He also
receives an auto allowance of $500 per month and reimbursement for expenses
incurred on behalf of the Company and in connection with the performance of his
duties. The agreement obligates the Company to use its best efforts to cause Mr.
Street to continue to be elected as a Class II director, and as Chairman of its
Board of Directors. The agreement provides that the Company procure Directors
and Officers Liability Insurance in an amount not less than $1.0 million. Mr.
Street's employment agreement provides that in the event of a change of control
of the Company as defined, Mr. Street will be paid for the remainder of the
unexpired term of his agreement plus two times the sum of Mr. Street's then
prevailing base salary.
During fiscal 1997, certain objective non-discretionary conditions for
acceleration related to the vesting of 37,000 Restricted Shares granted to the
CEO were achieved. Based on increases in the fair market value of the Company's
Common Stock, the Company provided for compensation expenses of $0.5 million for
the acceleration of 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 for in the employment agreement were approximately $0.2 million
during fiscal 1997.
52
<PAGE> 53
Indemnification Agreement
In connection with the Company's indemnification program for executive
officers and directors, Messrs. Street, Whittington, Landis, Boucher,
Feigenbaum, McCarthy, and Pantuliano, Ms. Cummings and Johnson, as well as four
former directors and five former executive officers, are entitled to
indemnification.
The Company considers it desirable to provide each Indemnitee with
specified assurances that the Company can and will honor the Company's
obligations under the Indemnification Agreements, including a policy of
insurance to provide for directors and officers liability coverage.
Executive Termination Agreements
For information related to the termination benefits for Mr. Street, see
the description of the amended and restated Employment Agreement and Restricted
Shares with Mr. Street under "Contracts with Executives."
53
<PAGE> 54
TABLE II - OPTIONS HELD AT MAY 31, 1998
The following tables present information regarding the number of
unexercised options held by the Company's named executives at May 31, 1998. Two
of the Company's named executives exercised options for 59,800 shares of the
Company's Common Stock in fiscal 1998. No stock appreciation rights were granted
or held by such persons during fiscal 1998.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANT
EMPLOYEES EXERCISE DATE
OPTIONS IN FISCAL PRICE PER EXPIRATION FAIR
NAME GRANTED YEAR SHARE DATE VALUE
---- ------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Chriss W. Street 120,000 24% $ 6.688 12/08/07 $ 2.68
Mary Jane Johnson 37,000 7% $10.875 09/06/07 $ 5.06
H.G. Whittington 19,000 4% $ 8.000 01/23/08 $ 3.72
Joni Cummings 17,000 3% $ 8.000 01/23/08 $ 3.72
Richard Powers -- -- -- -- --
</TABLE>
The fair value as of the date of grant, calculated using the
Black-Scholes method is based on assumptions about future interest rates, stock
price volatility and dividend yield. There is no assurance that these
assumptions will prove to be true in the future. The actual value, if any, that
may be realized by each individual will depend upon the market price of the
common stock on the date of exercise.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND AGGREGATED FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL YEAR-END(1) FISCAL YEAR-END(2)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE ($)
---- ------------- ------------ --------------- ------------------
<S> <C> <C> <C> <C>
Chriss W. Street(3) 39,500 534,719 125,000/120,000 257,375/412,500
Mary Jane Johnson -- -- 3,000/37,000 0/0
H.G. Whittington -- -- 1,000/19,000 0/40,375
Joni Cummings -- -- 3,000/17,000 0/36,125
Richard Powers 20,300 54,594 0/0 0/0
</TABLE>
(1) The numbers of options granted prior to October 21, 1994, have been
adjusted for the ten-for-one reverse stock split which was effective
October 21, 1994.
(2) Calculated on the basis of the closing sale price per share for the
Company's Common Stock on the New York Stock Exchange of $10.125 on May
31, 1998. Value was calculated on the basis of the difference between
the option exercise price and $10.125 multiplied by the number of
shares of Common Stock underlying the respective options.
(3) Exercisable options include options for 40,000, 25,000, 20,000, 20,000
and 20,000 shares granted in the Company's 1988 Incentive Stock Option
and Non-statutory Plans at $6.25, $7.875, $8.00, $10.00 and $12.00 per
share, respectively. Unexercisable options represent the 120,000
options granted during fiscal 1998 (see Note 18--"Preferred Stock,
Common Stock, and Stock Option Plans").
54
<PAGE> 55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of Common Stock by the directors of the Company, the executive
officers named in the Summary Compensation Table included elsewhere herein and
all directors and executive officers as a group. Such information is given as of
July 31, 1998. According to rules adopted by the Securities and Exchange
Commission, a person is the "beneficial owner" of securities if he or she has,
or shares, the power to vote them or to direct their investment. Except as
otherwise noted, the indicated owners have sole voting and investment power with
respect to shares beneficially owned. An asterisk in the % of Class column
indicates beneficial ownership of less than 1% of the outstanding Common Stock.
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------------- -------------------- --------
<S> <C> <C>
Lindner Growth Fund(1) 649,620 18.9%
Chriss W. Street(2) 305,760 8.9%
Mary Jane Johnson(3) 21,500 *
William H. Boucher(3) 20,000 *
J. Marvin Feigenbaum(3) 19,166 *
Joni Cummings(3) 3,000 *
A. Richard Pantuliano(3) 2,500 *
John A. McCarthy, Jr.(3) 2,500 *
H.G. Whittington(3)(4) 1,000 *
Robert J. Landis(5) 0 *
All executive officers and directors 375,426 10.9%
As a group (9 persons)
</TABLE>
- ----------
(1) The mailing address of Lindner Funds is c/o Ryback Management
Corporation, 7711 Carondelet Avenue, Suite 700, St. Louis, Missouri
63105. Includes approximately 343,820 shares as the result of the
conversion of 41,260 shares of Preferred Stock and 250,000 shares sold
under an Amended common Stock Purchase Agreement dated June 29, 1995.
The shares and convertible debt, as described in its Amendment Number 4
of Schedule 13G dated January 23, 1998, are held in the Lindner Growth
Fund.
(2) Includes 11,260 shares held directly and 245,000 shares subject to
options that are presently exercisable or exercisable within 60 days.
Also includes 49,500 vested shares under a Restricted Stock Agreement
over which the holder has the sole voting power.
(3) Includes shares subject to options that are presently exercisable or
exercisable within 60 days.
(4) On August 15, 1998, Dr. Whittington resigned from the Company as an
officer and from all positions. Inclusion of Dr. Whittington on this
table is only by reason of inclusion in the Summary Compensation Table.
(5) Mr. Landis was appointed Executive Vice President, Chief Financial
Officer and Treasurer of the Company on July 2, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Compensation Committee Interlocks and Intersider Participation's
During fiscal 1998, recommendations and administrative decisions
regarding the compensation of the Company's executives were made by the
Compensation Committee of the Board of Directors, which is currently comprised
entirely of persons who are not officers or employees of the Company. Mr. Nicol,
who served as a director of the Company and a member of the Compensation
Committee during fiscal 1998, served as President of the Company from October
1989 until August 1990 and as an Executive Vice President of the Company and in
other senior management positions from 1973 through June 1989.
Mr. Street is a director of the Company and serves on the stock option
committee of the board of directors of Nu-Tech Bio-Med, Inc. Mr. Feigenbaum, the
Company's Vice-Chairman and the Chairman of the Compensation Committee, is also
the Chairman of Nu-Tech Bio-Med, Inc.
55
<PAGE> 56
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 Certified Public Accountants
Consolidated Balance Sheets, May 31, 1998 and 1997
Consolidated Statements of Operations, Years Ended May 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Deficit, Years
Ended May 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows, Years Ended May 31, 1998,
1997 and 1996
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>
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)
4.2 Rights Agreement dated as of April 19, 1988 between the Company and Security Pacific National Bank.(2)
4.3 Rights Agreement between the Registrant and Continental Stock Transfer & Trust Company dated April 19, 1988
restated and amended October 21, 1994.(6)
4.4 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 Non-statutory Stock Option Plans, as amended.*(6)
10.5 Employment Agreement dated January 1, 1995 between the Company and Chriss W. Street.*(6)
10.6 Directors and Officers Trust dated February 27, 1995 between the Company and Mark Twain Bank.*(7)
10.7 Comprehensive Care Corporation 1995 Incentive Plan.*(9)
10.8 Amended and Restated Non-Employee Director's Stock Option Plan.*(8)
10.9 Restricted Stock Grant between Chriss W. Street and the Company dated November 9, 1995.*(9)
10.10 Series A Non-Voting 4% Cumulative Convertible Preferred Stock Exchange Agreement.*(10)
10.11 Letter Agreement dated April 4, 1997 between the Company and Chriss W. Street.*(12)
11 Computation of Income (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 Schedule (for SEC use only).
</TABLE>
- ----------
*Management contract or compensatory plan or arrangement with one or more
directors or executive officers.
56
<PAGE> 57
(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.
There were no 8-K filings in the fourth quarter of fiscal year 1998.
57
<PAGE> 58
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 27, 1998.
COMPREHENSIVE CARE CORPORATION
By /s/ CHRISS W. STREET
----------------------------
Chriss W. Street
(Principal Executive Officer)
By /s/ Robert J. Landis
-----------------------------
Robert J. Landis
(Executive Vice President, Chief Financial
Officer and Treasurer)
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 27, 1998
- ----------------------------------
Chriss W. Street
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and
/s/ ROBERT J. LANDIS Accounting Officer) August 27, 1998
- ----------------------------------
Robert J. Landis
/s/ J. MARVIN FEIGENBAUM Vice Chairman August 27, 1998
- ----------------------------------
J. Marvin Feigenbaum
/s/ WILLIAM H. BOUCHER Director August 27, 1998
- ----------------------------------
William H. Boucher
/s/ JOHN A. McCARTHY, JR. Director August 27, 1998
- ----------------------------------
John A. McCarthy, Jr.
/s/ A. RICHARD PANTULIANO Director August 27, 1998
- ----------------------------------
A. Richard Pantuliano
</TABLE>
58
<PAGE> 59
COMPREHENSIVE CARE CORPORATION
EXHIBIT INDEX
FISCAL YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
11 Computation of Income (Loss) Per Share (filed herewith).............................. 61
21 List of the Company's subsidiaries (filed herewith).................................. 62
23 Consent of Ernst & Young LLP (filed herewith)........................................ 63
27 Financial Data Schedules (filed herewith)............................................ 64
</TABLE>
59
<PAGE> 1
EXHIBIT 11
COMPREHENSIVE CARE CORPORATION
Calculation of Earnings Per Share
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
BASIC:
Income (loss) applicable to common stock:
Net income (loss) .................................................... $1,889 $(2,828) $(4,242)
Average number of shares of common stock and
common stock equivalents .......................................... 3,384 3,088 2,654
Income (loss) per common and common equivalent share:
Net income (loss) .................................................... $ 0.56 $ (0.92) $ (1.60)
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1998 1997 1996
---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
DILUTED:
Income (loss) applicable to common stock and dilutive securities:
Net income (loss) .................................................... $1,971 $(2,828) $(4,242)
Average number of shares of common stock and
common stock equivalents .......................................... 3,865 3,088 2,654
Income (loss) per common and common equivalent share:
Net income (loss) .................................................... $ 0.51 $ (0.92) $ (1.60)
</TABLE>
60
<PAGE> 1
EXHIBIT 21
COMPREHENSIVE CARE CORPORATION
SCHEDULE OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY NAME INCORPORATION
<S> <C>
Comprehensive Care Corporation Delaware
Comprehensive Behavioral Care, Inc. Nevada
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
Aurora Behavioral Health Hospital, Inc. Colorado
Comprehensive Provider Networks of Texas, Inc. Texas
Comprehensive Innovations Institute Texas
Care Institute California
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
CareUnit Clinic of Washington, Inc. Washington
CareUnit Hospital of Ohio, Inc. Ohio
Comprehensive Care Integration, Inc. Delaware
CareUnit of Florida, Inc. Florida
Managed Behavioral Healthcare, Inc. Florida
AccessCare of Washington, Inc. Washington
Comprehensive Orthopedic Care, Inc. Florida
</TABLE>
61
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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 August 26, 1998 with respect to the consolidated financial
statements of Comprehensive Care Corporation and subsidiaries for the year ended
May 31, 1998, included in the Annual Report (Form 10-K) for the year ended May
31, 1998.
/s/ ERNST & YOUNG, LLP
Tampa, Florida
August 26, 1998
62
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 6,016
<SECURITIES> 0
<RECEIVABLES> 9,255
<ALLOWANCES> 893
<INVENTORY> 0
<CURRENT-ASSETS> 17,921
<PP&E> 11,416
<DEPRECIATION> 4,373
<TOTAL-ASSETS> 30,405
<CURRENT-LIABILITIES> 28,690
<BONDS> 2,704
0
2,176
<COMMON> 34
<OTHER-SE> (3,496)
<TOTAL-LIABILITY-AND-EQUITY> 30,405
<SALES> 46,063
<TOTAL-REVENUES> 46,063
<CGS> 0
<TOTAL-COSTS> 44,618
<OTHER-EXPENSES> (761)
<LOSS-PROVISION> 96
<INTEREST-EXPENSE> 172
<INCOME-PRETAX> 2,034
<INCOME-TAX> 63
<INCOME-CONTINUING> 1,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,889
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.51
</TABLE>
