<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, 2000 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 1-9927
COMPREHENSIVE CARE CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2594724
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4200 WEST CYPRESS STREET, SUITE 300
TAMPA, FLORIDA 33607
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(Address of principal executive offices) (Zip Code)
(813) 876-5036
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE OVER THE COUNTER BULLETIN BOARD
COMMON SHARE PURCHASE RIGHTS OVER THE COUNTER BULLETIN BOARD
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 17, 2000, was $775,397 based on the average bid and ask
price of the Common Stock on August 17, 2000, as reported on the Over The
Counter Bulletin Board.
At August 17, 2000, the Registrant had 3,817,807 shares of Common Stock
outstanding.
<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 the Company's principal operating subsidiary,
Comprehensive Behavioral Care, Inc.SM (1) ("CompCare"SM (2) or "CBC") and
subsidiary corporations. Prior to Fiscal 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 Fiscal
1999, the Company completed its plan to dispose of its hospital business
segment.
Commencing in Fiscal 1993, the Company transitioned its business focus
to managed behavioral healthcare products and services through its wholly owned
subsidiary, CompCare. In addition to its managed care products, CompCare
provides contract services through its subsidiary, Comprehensive Care
Integration, Inc. ("CCI"). The Company's chief focus is its managed care
business.
As of May 31, 2000, the Company had the following active subsidiaries:
<TABLE>
<CAPTION>
<S> <C>
WHOLLY-OWNED SUBSIDIARIES OF COMPREHENSIVE CARE CORPORATION: STATE OF INCORPORATION
------------------------------------------------------------ ----------------------
Comprehensive Behavioral Care, Inc. Nevada
Comprehensive Health Associates, Inc. Puerto Rico
WHOLLY-OWNED SUBSIDIARIES OF COMPREHENSIVE BEHAVIORAL CARE, INC.:
-----------------------------------------------------------------
Comprehensive Care Integration, Inc. Delaware
Healthcare Management Services, Inc. Michigan
Healthcare Management Services of Michigan, Inc. Michigan
Behavioral Healthcare Management, Inc. Michigan
AFFILIATES SPONSORED BY COMPREHENSIVE BEHAVIORAL CARE, INC.:
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Comprehensive Provider Networks of Texas, Inc. Texas
</TABLE>
The following table sets forth, for each of the years in the five-year
period ended May 31, 2000, the percentage of operating revenues from the
Company's managed care operations, corporate and other operations, and
discontinued operations.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
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2000 1999 1998 1997 1996
--------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Managed care operations (1) 98% 87% 83% 72% 49%
Corporate and other operations 2% 3% 3% 11% 18%
Discontinued operations -- 10% 14% 17% 33%
----- ----- ---- ----- -----
100% 100% 100% 100% 100%
===== ===== ===== ===== =====
</TABLE>
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(1) The Company has provided managed care products since the acquisition of
AccessCare, Inc. in December 1992. On August 1, 1995, the Company renamed
this subsidiary to Comprehensive Behavioral Care, Inc.(SM)
--------------
(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.
2
<PAGE> 3
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
RECENT DEVELOPMENTS
- During the first quarter of Fiscal 2001, the Company's Florida
region implemented two new contracts to provide behavioral
healthcare benefits to approximately 200,000 new members.
- The Company has successfully retained two contracts with one HMO in
Texas, which were previously reported as expected cancellations.
These two contracts have accounted for approximately 6.3% and 3.7%
of operating revenue from continuing operations for Fiscal 2000 and
1999, respectively.
- As more fully described in Item 3, Legal Proceedings, effective July
11, 2000, the Company submitted an Offer in Compromise (the "Offer")
to the Appeals Office of the Internal Revenue Service ("IRS") to
resolve a controversy with respect to $12 million of refunds
received on the carryback of certain losses under Section 172(f) of
the Internal Revenue Code at a substantially reduced amount. There
can be no assurance that the IRS will accept the Offer.
- Effective June 30, 2000, Humana, Inc. ("Humana") completed the sale
of its North Florida Medicaid business to HealthEase of Florida,
Inc. Effective July 1, 2000, the Company has contracted with
HealthEase of Florida, Inc. to continue to provide behavioral
healthcare services to approximately 100,000 of 160,000 Florida
members that were managed by the Company under contracts with
Humana. Additionally, Humana's contracts with the Company, which
cover specific commercial, Medicaid, and Medicare populations of
approximately 60,000 members, will terminate September 30, 2000.
- As more fully described in Note 18 to the audited, consolidated
financial statements, the Company has recently reached agreements,
which fully settled two prior legal claims.
- The Company had two major contracts that terminated on December 31,
1999. Following the termination of these contracts, the Company
underwent a restructuring that included the elimination of the
Company's California administrative office and related executive and
staff positions and, additionally, the centralization of certain
contract management and clinical functions, which was completed
during February, 2000. Approximately 50 positions were eliminated
during Fiscal 2000.
OPERATIONAL OVERVIEW
For the fiscal year ended May 31, 2000, the Company had a net loss
from continuing operations of $5.8 million, which is primarily attributable to
the loss of two major contracts during the fourth quarter of Fiscal 1999 and two
major contracts during the third quarter of Fiscal 2000. Additionally, this loss
included approximately $0.9 million of restructuring expenses in connection with
the elimination of the Company's California office and affiliated employees,
approximately $0.6 million of increased marketing and other costs specific to
the Company's efforts to regain business in Puerto Rico, and in other regions,
approximately $0.1 million of operating costs incurred to manage the Company's
Year 2000 readiness program and approximately $0.1 million of costs in
connection with the NCQA accreditation. These expenses were offset in part by
$0.3 million of revenue related to favorable cost report settlements completed
during the year and $0.2 million of non-operating gains recognized during Fiscal
2000, primarily related to property tax refunds received specific to assets
disposed of during Fiscal 1999 or earlier. This compares to the net loss from
continuing operations of $3.0 million for the same period of 1999, which
included approximately $0.9 million of bad debt expense specific to two major
contracts that terminated during Fiscal 1999, $0.3 million of bad debt expense
specific to hospital accounts receivable that were written off after the March
11, 1999 disposal date, and $0.2 million of bad debt expense specific to CCI
contracts that terminated prior to May 31, 1999. Additionally, the Company
incurred $0.8 million of expense in its unsuccessful bid for a managed care
contract in Argentina and approximately $0.6 million of restructuring costs
related to the loss of the PCA contract in Puerto Rico during Fiscal 1999. These
expenses were offset by an extraordinary gain of $0.1 million related to the
debenture exchange that took place during Fiscal 1999.
Stockholders' deficit increased to $10.7 million in Fiscal 2000 from
$4.9 million as of May 31, 1999. Cash and cash equivalents decreased to $2.5
million as of May 31, 2000, from $7.8 million as of May 31, 1999. Managed care
3
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
operations accounted for approximately 98% of the Company's operating revenues
with discontinued and other operations accounting for 2% of the Company's
operating revenues for the fiscal year ended May 31, 2000.
BUSINESS GENERAL
The Company manages the delivery of a continuum of psychiatric and
substance abuse services to commercial, Medicare, and Medicaid members on behalf
of employers, health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), government organizations, third-party claims
administrators, and commercial and other group purchasers of behavioral
healthcare services. The services provided by the Company 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, per member per month ("PMPM") fee 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 through
experienced outpatient practitioners.
The Company currently provides services to contracted members in seven
states and provides managed behavioral healthcare services to recipients through
subcontracts with HMOs. The programs and services currently offered by the
Company include fully integrated, capitated behavioral healthcare services,
Employee Assistance Programs (EAPs), case management/utilization review
services, administrative services management (ASOs), provider sponsored health
plan development, preferred provider network development, management and
physician advisor reviews, and overall care management services. The Company
also manages behavioral healthcare services in correctional settings or for
parolees and probationers in three states. Fully integrated capitated lives
totaled approximately 369,000 and 571,000 at May 31, 2000, and 1999,
respectively. ASO lives were approximately 185,000 and 217,000 at May 31, 2000,
and 1999, respectively. EAP lives were approximately 60,000 at May 31, 2000 and
1999. The Company manages its clinical service programs using proven treatment
technologies and trains its providers to use effective, science-based treatment.
The Company has an incentive to keep its members healthy and to manage
its costs through measures such as the monitoring of hospital inpatient
admissions and the review of authorizations for various types of outpatient
therapy. The goal is to combine access to quality behavioral healthcare services
with effective management controls in order to ensure the most cost-effective
use of healthcare resources.
SOURCES OF REVENUE
The Company provides managed behavioral healthcare 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
healthcare providers include psychiatrists, clinical psychologists, and other
licensed healthcare professionals. Under 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 that is guided by stringent
quality standards. In most cases, claims are paid by the Company and deducted
from the capitation payment.
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 healthcare
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
per-case basis. During Fiscal 2000, the Company provided services under
capitated arrangements for commercial, Medicare and Medicaid patients in Florida
and Texas, commercial and Medicaid patients in Michigan, and commercial patients
in California, Georgia, Indiana, Idaho, Kentucky, Ohio, and Pennsylvania.
4
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The new business in fiscal year 2000 included capitated arrangements
under ASO contracts, in which the client reimburses the Company for the costs of
overall behavioral healthcare services rendered through contracted providers.
Additionally, the Company has recently been awarded ASO, commercial, and
Medicaid contracts in Florida and Medicaid and Children's Health Insurance
Program contracts in Texas that have effective dates beginning in Fiscal 2001.
The Company performs periodic reviews of its current contracts with payors and
may amend or review the terms of unprofitable contracts.
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 a growing emphasis on the correlation
between 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 to MBHOs
their interest in the expansion of pharmacy management.
Industry sources estimate that approximately $83 billion was spent on
behavioral healthcare services in the United States in 1998. In response to
escalating costs, behavioral healthcare companies, such as CompCare, have
expanded their focus on member care and arranging for the appropriate level of
service in a cost-effective manner. As a result of the transition to managed
behavioral healthcare, occupancy rates and average length of stay for inpatient
facilities have declined, while outpatient treatment and alternative care
services have increased.
GROWTH STRATEGY
The Company's objective is to expand its presence in both existing and
new managed behavioral healthcare markets by obtaining new contracts with HMOs,
corporations, government agencies, and other payors through its reputation of
providing quality managed behavioral healthcare services with the most
cost-effective use of healthcare resources. New products for existing and
potential clients include psychotropic pharmacy benefit management, violence
prevention and intervention, and catastrophic care management for medical and
psychiatric illness.
CompCare is actively pursuing the expansion of its Criminal Justice
programs. CompCare has developed its Behavioral Corrections Program and is
currently under contract with the state of Idaho to provide behavioral
healthcare services to inmates and parolees. In addition to the full range of
corrections healthcare services in the state of Idaho, CompCare is now providing
services in Florida and in Michigan under contracts with the Department of
Corrections ("DOC") in each of these two states. The Michigan DOC contract has
provided a unique opportunity for the Company to apply managed care principles
to the management of residential beds. The Company believes that the
privatization of corrections healthcare services will continue to provide
opportunities for the Company to expand the number and scope of its contracts
with state and federal correctional facilities. Additionally, the Company is
developing products that will bring its core competencies to new service areas
such as behavioral pharmacy management, juvenile justice, and public school
systems.
COMPETITION
The behavioral healthcare industry is highly competitive, with
approximately two dozen managed behavioral healthcare companies providing
service for more than 176 million lives in the United States. Additionally,
there are numerous local and regional group practices, community mental health
centers and behavioral healthcare hospitals that manage behavioral healthcare on
behalf of HMOs, PPOs and local governments. In the last several years, most
markets have seen greater migration to fully capitated HMO products, which is
the Company's primary niche. As a consequence of these changes, marketplace
spending on managed behavioral healthcare services is expected to grow.
The Company is subject to numerous state and federal regulations, as
well as changes in Medicaid and Medicare reimbursement. As of May 31, 2000, the
Company managed approximately 228,000 lives in connection with behavioral and
substance abuse services covered through Medicaid in Florida and Texas. In
addition, the Company manages approximately 16,000 lives covered through
Medicare in Florida. At this time, the Company is unable to predict what effect,
if any, changes in Medicaid and Medicare legislation may have on its business
(see "Business - Government Regulation").
5
<PAGE> 6
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 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 further 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.
ACCREDITATION
To develop standards that effectively evaluate the structure and
function of medical and quality management systems in managed care
organizations, the National Committee on Quality Assurance, ("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 Behavioral Healthcare Organizations
used by NCQA reviewers to evaluate a managed behavioral healthcare organization
address the following areas: quality improvement; utilization management;
credentialing; members' rights and responsibilities; access, availability,
referral and triage; preventative care guidelines; and medical records. These
standards validate that a managed behavioral healthcare organization is founded
on principles of quality and is continuously improving the clinical care and
services it provides. In 2001, NCQA will introduce these standards to health
plan accreditations and require more behavioral healthcare expertise to
maintain accreditation status. NCQA also utilizes Health Plan Employer Data and
Information Set ("HEDIS"), which is a core set of performance measurements
developed to respond to complex but clearly defined employer needs as standards
for patient care and customer satisfaction. CompCare's Southeast Region
operation was awarded NCQA accreditation in August 1999.
ADMINISTRATION AND EMPLOYEES
The Company's executive and administrative offices are located in
Tampa, Florida, where management maintains operations, business development,
accounting, and governmental and statistical reporting functions. The Company
currently employs a total of 101 employees who are assigned to its operations
as follows:
TOTAL
EMPLOYEES
-------------
Managed care operations................... 97
Corporate or other operations............. 4
---
Total.................................. 101
===
MANAGEMENT INFORMATION SYSTEMS
The Company utilizes a fully integrated information system 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
6
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
managed behavioral healthcare system in its three regions that are active in
providing managed behavioral healthcare services. 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 is responsible for generating
new sales leads and for preparing proposals and responses to formal commercial
and public sector Requests for Proposals ("RFPs"). The Company's marketing
initiatives are managed by the Chief Executive Officer. The regional sales
personnel strengthen the Company's marketing efforts by providing a local
presence and accountability. Sales expectations are integrated into the
performance requirements for executive staff and local sales personnel.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the
properties owned or leased by the Company at May 31, 2000. All leases are triple
net leases, under which the Company bears all costs of operations, including
insurance, taxes, and utilities.
<TABLE>
<CAPTION>
OWNED OR MONTHLY RENTAL
NAME AND LOCATION LEASED LEASE EXPIRES (IN DOLLARS)
--------------------------------------------------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
CORPORATE HEADQUARTERS, REGIONAL, ADMINISTRATIVE,
AND OTHER OFFICES
Tampa, Florida, Corporate Headquarters and Southeastern
Regional offices............................................ Leased 2000 $ 26,480
Grand Prairie, Texas........................................... Leased 2001 7,431
Houston, Texas................................................. Leased 2000 1,797
Bloomfield Hills, Michigan..................................... Leased 2001 7,313
Comprehensive Care Integration, Inc., Boise, Idaho............. Leased 2000 $ 2,650
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
(1) In July 2000, Steiner Corporation, a Colorado linen service company,
commenced an action against the Company seeking damages in the amount of,
approximately, $145,000 by reason of an alleged early termination of a
laundry service contract. While this claim has only recently been asserted,
the Company intends to deny liability. Additionally, the Company does not
believe that this claim will have a material adverse effect on the
Company's financial position, results of operations and cash flows.
(2) A collection proceeding has been filed against the Company in connection
with the previously active managed care operation in Puerto Rico. This
collection effort was filed by a Puerto Rico provider, Hato Rey Psychiatric
Hospital d/b/a Mepsi Center ("MEPSI"). MEPSI claims that the Company owes
MEPSI a total of $681,000, plus interest and legal fees, for services
rendered to patients managed by the Company under the prior Puerto Rico
Reforma Program contract, which was held by Humana, Inc. The Company is
conducting an audit to determine the final amount, if any, it believes is
owed to MEPSI. Such payment would be applied against the Company's existing
reserve for Puerto Rico claims and disbursed from the provider funds that
are held in escrow (see Note 2 to the audited, consolidated financial
statements - "Summary of Significant Accounting Policies", "Restricted
Cash"). The Company does not believe that this claim will have a material
adverse effect on the Company's financial position, results of operations
and cash flows.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
(3) The Company's subsidiary, Careunit Hospital of Ohio, Inc. ("Careunit") has
been named as a third party defendant in the principal action entitled
"Vencor, Inc. v. Empe, Inc." The principal action arises out of the sale by
Careunit of its Ohio hospital facility to Vencor, Inc. ("Vencor") and
relates to an alleged asbestos condition at the Ohio facility. Empe, Inc.
("Empe") apparently was Vencor's environmental expert in connection with
this transaction. In making Careunit a third party defendant, Empe claims
that it was misled and that Careunit allegedly failed to disclose the
asbestos condition in the facility when Vencor conducted its environmental
assessment. No specific amount of damages is claimed, but rather, the third
party complaint seeks apportionment, indemnity and compensatory damages as
may be determined at trial. The Company's insurance carrier has provided a
defense of this action, which is only in its formative stages. The Company
does not believe that this claim will have a material adverse effect on the
Company's financial position, results of operations and cash flows.
(4) In May, 1999, the Company commenced an action against Richard Powers, a
former Executive Vice President of the Company, and his current employer,
American Psych Systems ("APS"), in the Circuit Court in and for
Hillsborough County, Florida. The Company claims that Mr. Powers breached
his agreements with the Company by attempting to divert customers to APS.
The Company further claims that APS tortuously interfered with the
Company's business relationships by directing Powers to solicit these
customers in violation of his agreements. The suit is still in its early
stages. The Court has denied a motion to dismiss filed by Powers and APS,
and the parties have begun the discovery process. The complaint seeks
unspecified damages.
(5) Although no formal claim has been made or asserted, Humana Health Plans of
Puerto Rico, Inc. ("Humana") has claimed that the Company owes $3.0 million
to Humana in connection with the contract that was terminated by Humana on
March 31, 1999. Humana's claim relates to the pharmacy and laboratory costs
incurred by Humana throughout the contract period. The Company has
expressed to Humana its total disagreement with Humana's position. The
Company believes that Humana owes the Company in excess of $3.0 million in
relation to this same issue; however, the Company has not formally asserted
such claim. The Company does not believe that Humana's claim will have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
(6) On February 19, 1999, the California Superior Court denied the Company's
Petition for Writ of Mandate 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. The Company owned this facility
until its disposal in fiscal year 1991. The subject matter of the Superior
Court action involved 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". The Company does not plan to appeal the California Superior
Court decision for which the Notice of Entry of Judgment was entered on
February 26, 1999. As of May 31, 2000, the Company has $1.2 million accrued
relating to this matter.
(7) In connection with the filing of its Federal income tax returns for fiscal
years 1995 and 1996, the Company filed a tentative refund claim 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. No assurance
can be provided that the Company will be able to retain the refunds
received to date or that the additional refunds requested will be received.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 $5.2
million through May 31, 2000. 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, which is reported as "other
receivable" in the accompanying balance sheet. This report commenced the
administrative appeals process. The Company filed a protest letter with the
IRS on November 6, 1998. 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.
Additionally, the IRS reserves the right to assess and collect the tax
previously refunded to the Company at any time during the appeals process.
Effective July 11, 2000, the Company submitted an Offer in Compromise (the
"Offer") to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. There can be no
assurance that the IRS will accept the Offer.
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 may exceed insurance policy limits and
the Company or any one of its subsidiaries may have exposure to liability that
is not covered by insurance. Management believes that the outcome of such
lawsuits will not have a material adverse impact on the Company's financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
<PAGE> 10
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART II.
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Over The Counter Bulletin
Board ("OTC-BB") under the symbol CHCR. The following table sets forth
the range of high and low closing prices for the Common Stock for the
fiscal quarters indicated:
<TABLE>
<CAPTION>
PRICE
------------------------
FISCAL YEAR HIGH LOW
----------- ---- ---
<S> <C> <C> <C>
2000 FIRST QUARTER $ 13/16 (1) $ 13/32 (1)
SECOND QUARTER 15/32 (1) 3/16 (1)
THIRD QUARTER 45/64 (1) 7/32 (1)
FOURTH QUARTER $ 35/64 (1) $ 13/64 (1)
1999 FIRST QUARTER $10 15/16(2) $ 3 7/8 (2)
SECOND QUARTER 5 1/4 (2) 2 1/8 (2)
THIRD QUARTER 5 3/4 (2) 7/8 (1)
FOURTH QUARTER $ 1 1/16 (1) $ 1/2 (1)
</TABLE>
----------------
(1) Indicates high and low closing prices as reported by the OTC-BB.
(2) Indicates high and low closing prices as reported by the New York Stock
Exchange. During Fiscal 1999, the Company's Common Stock was traded on the
New York Stock Exchange through February 18, 1999.
(a) As of July 31, 2000, the Company had 1,454 stockholders of record of Common
Stock.
(b) The Company did not pay any cash dividends on its Common Stock during any
quarter of Fiscal 2000, 1999, or 1998 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 to the current year's presentation (see
ITEM 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations").
10
<PAGE> 11
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- ---------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
OPERATING REVENUES $ 17,719 $ 39,029 $ 39,787 $ 32,531 $ 21,742
COSTS AND EXPENSES:
Healthcare operating expenses 15,801 29,778 30,808 27,996 18,258
General and administrative expenses 6,974 9,148 7,085 7,383 8,150
Provision for (recovery of) doubtful accounts (606) 1,641 94 228 298
Depreciation and amortization 794 1,037 772 685 715
Restructuring expenses 831 600 -- 195 94
Equity in loss of unconsolidated affiliates -- -- -- -- 191
-------- -------- -------- -------- ---------
23,794 42,204 38,759 36,487 27,706
-------- -------- -------- -------- ---------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS (6,075) (3,175) 1,028 (3,956) (5,964)
OTHER INCOME (EXPENSES):
Gain on sale of assets 9 2 314 47 1,336
Loss on sale of assets (1) (4) (9) (33) (82)
Non-operating gain (loss) 204 (79) 50 (390) 860
Interest income 399 309 406 259 210
Interest expense (289) (281) (172) (732) (1,374)
-------- -------- -------- -------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (5,753) (3,228) 1,617 (4,805) (5,014)
Income tax expense (benefit) 13 (146) 63 (341) (2,478)
-------- -------- -------- -------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (5,766) (3,082) 1,554 (4,464) (2,536)
DISCONTINUED OPERATIONS:
Income (loss) from operations -- (334) 417 (505) (1,706)
Loss on disposal, including operating loss of $282 -- (698) -- -- --
-------- -------- -------- -------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (5,766) (4,114) 1,971 (4,969) (4,242)
EXTRAORDINARY GAIN -- 120 -- 2,172 --
-------- -------- -------- -------- ---------
NET INCOME (LOSS) (5,766) (3,994) 1,971 (2,797) (4,242)
Dividends on convertible Preferred Stock -- (55) (82) (31) --
-------- -------- -------- -------- ---------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (5,766) $ (4,049) $ 1,889 $ (2,828) $ (4,242)
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations $ (1.51) $ (0.88) $ 0.44 $ (1.46) $ (0.96)
Discontinued operations:
Income (loss) from operations -- (0.09) 0.12 (0.16) (0.64)
Loss on disposal -- (0.20) -- -- --
Extraordinary item -- 0.03 -- 0.70 --
-------- -------- -------- -------- ---------
Net income (loss) $ (1.51) $ (1.14) $ 0.56 $ (0.92) $ (1.60)
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations $ (1.51) $ (0.88) $ 0.40 $ (1.46) $ (0.96)
Discontinued operations:
Income (loss) from operations -- (0.09) 0.11 (0.16) (0.64)
Loss on disposal -- (0.20) -- -- --
Extraordinary item -- 0.03 -- 0.70 --
-------- -------- -------- -------- ---------
Net income (loss) $ (1.51) $ (1.14) $ 0.51 $ (0.92) $ (1.60)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital (deficit) $(12,245) $ (9,355) $ (8,859) $(12,657) $(21,171)
Total assets 21,275 29,066 30,405 24,746 25,119
Long-term debt 2,244 2,253 2,704 2,712 24
Long-term debt including current maturities and debentures 2,244 2,256 2,706 2,758 12,026
Stockholders' deficit $(10,672) $ (4,914) $ (1,286) $ (3,570) $ (7,798)
</TABLE>
11
<PAGE> 12
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 the Company's financial data for the
fiscal years ended May 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
CONSOLIDATED
CORPORATE AND CONTINUING DISCONTINUED
2000 MANAGED CARE OTHER OPERATIONS OPERATIONS OPERATIONS
----- -------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C>
Operating revenues $ 17,355 $ 364 $ 17,719 $ --
Healthcare operating expenses 15,474 327 15,801 --
General/administrative expenses 3,753 3,221 6,974 --
Other operating expenses 2,917 (1,898) 1,019 --
-------- -------- -------- -------
22,144 1,650 23,794 --
-------- -------- -------- -------
Operating loss $ (4,789) $ (1,286) $ (6,075) $ --
======== ======== ======== =======
1999
-------
Operating revenues $ 37,691 $ 1,338 $ 39,029 $ 4,187
Healthcare operating expenses 29,250 526 29,776 3,082
General/administrative expenses 5,140 4,010 9,150 16
Other operating expenses 2,622 656 3,278 1,705
-------- -------- -------- -------
37,012 5,192 42,204 4,803
-------- -------- -------- -------
Operating income (loss) $ 679 $ (3,854) $ (3,175) $ (616)
======== ======== ======== =======
</TABLE>
During Fiscal 2000, the Company's operating revenues from continuing
operations declined by 54.6%, or $21.3 million. Managed care operations
accounted for 98.0%, or $17.4 million of the Company's overall operating
revenues.
RESULTS OF OPERATIONS - THE YEAR ENDED MAY 31, 2000, COMPARED TO THE YEAR ENDED
MAY 31, 1999.
The Company reported an operating loss of approximately $6.1 million
from continuing operations for the fiscal year ended May 31, 2000, which is
primarily attributable to the loss of two major, managed care contracts during
the fourth quarter of Fiscal 1999. Additionally, this loss included
approximately $0.9 million of restructuring expenses in connection with the
elimination of the Company's California office and affiliated employees,
approximately $0.6 million of increased marketing and other costs specific to
the Company's efforts to regain business in Puerto Rico and in other regions,
approximately $0.1 million of operating costs incurred to manage the Company's
Year 2000 readiness program, and approximately $0.1 million of costs in
connection with the NCQA accreditation. These expenses were offset in part by
$0.3 million of revenue related to favorable cost report settlements that took
place during the year. This is compared to an operating loss of $3.2 million
from continuing operations reported for the fiscal year ended May 31, 1999,
which included approximately $0.9 million of bad debt expense specific to two
major contracts that terminated during Fiscal 1999, $0.3 million of bad debt
expense specific to hospital accounts receivable that were written off after
the March 11, 1999 disposal date, and $0.2 million of bad debt expense specific
to CCI contracts that terminated prior to May 31, 1999. Additionally, the
Company incurred $0.8 million of expense in its unsuccessful bid for a managed
care contract in Argentina and approximately $0.6 million of restructuring
costs related to the loss of the PCA contract in Puerto Rico during Fiscal
1999.
Operating revenues from continuing operations decreased by
approximately 54.6%, or $21.3 million, for the fiscal year ended May 31, 2000
compared to the fiscal year ended May 31, 1999. This decrease is primarily
12
<PAGE> 13
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
attributable to the loss of two major contracts during the fourth quarter of
Fiscal 1999 and two major contracts during the third quarter of Fiscal 2000.
Healthcare operating expenses from continuing operations decreased by
46.9%, or $14.0 million, for the fiscal year ended May 31, 2000 as compared to
the fiscal year ended May 31, 1999. This decrease is attributable to the loss
of revenue specific to two major contracts that terminated in Fiscal 1999 and
two major contracts that terminated in Fiscal 2000. Healthcare operating
expense as a percentage of net revenue from continuing operations increased
from 76.3% for the fiscal year ended May 31, 1999 to 89.2% for the fiscal year
ended May 31, 2000. This percentage increase is attributable to $0.3 million of
claims expense recorded during the fiscal year ended May 31, 2000 specific to
the Puerto Rico contract, which terminated in Fiscal 1999. Additionally, this
percentage increase is attributable to continuing fixed costs that cannot be
tied to the specific contracts that were terminated during Fiscal 1999. Efforts
are being made to reduce the overall costs to manage the Company's existing
contracts, including cost reductions related to managing the Company's
healthcare information systems and, also, the centralization of certain
contract management and clinical functions, which was completed during February
2000.
General and administrative expenses from continuing operations
decreased by approximately 23.8%, or $2.2 million, for the fiscal year ended
May 31, 2000 as compared to the fiscal year ended May 31, 1999. This decrease
is primarily attributable to $1.5 million of savings in legal and accounting
fees, a $0.5 million reduction in building lease costs, a $0.2 million savings
in directors fees, $0.2 million of savings in corporate salaries, and a $0.1
million reduction in shareholder reporting costs in comparison to costs
incurred for the same period during Fiscal 1999. These savings were offset by
$0.3 million of fees paid to marketing consultants during Fiscal 2000. General
and administrative costs as a percentage of revenue increased from 23.4% for
the fiscal year ended May 31, 1999 to 39.4% for the fiscal year ended May 31,
2000. This percentage increase is attributable to the continuing fixed costs
that cannot be tied to the specific contracts that were terminated during
Fiscal 1999. The Company has taken steps to reduce its general and
administrative costs by making significant staff reductions, including certain
executive and staff positions that were eliminated as a result of the decision
to close the Company's California office effective January 31, 2000.
Other operating expenses from continuing operations decreased by $2.3
million for the fiscal year ended May 31, 2000 compared to the fiscal year
ended May 31, 1999. This decrease is primarily attributable to the $0.9 million
of bad debt expense recognized during the fiscal year ended May 31, 1999
specific to the two major, managed care contracts that terminated during Fiscal
1999, $0.3 million of bad debt expense specific to hospital accounts receivable
that were written off after the March 11, 1999 disposal date, and $0.2 million
of bad debt expense specific to CCI contracts that were terminated prior to May
31, 1999. In contrast to the $1.6 million of bad debt expense recognized in
Fiscal 1999, the Company recognized recoveries totaling $0.6 million during the
fiscal year ended May 31, 2000. Additionally, expense for depreciation and
amortization decreased by $0.2 million during Fiscal 2000 in comparison to the
prior year. These gains were offset by a restructuring charge related to the
elimination of the Company's California administrative office and related
executive staff during Fiscal 2000. Such costs exceeded the prior year
restructuring charge, which pertained to the loss of the Puerto Rico contract,
by approximately $0.2 million.
The Company is taking steps designed to increase revenues primarily
through its managed care operations and continued development of its behavioral
medicine products in criminal justice and other markets.
RESULTS OF OPERATIONS - YEAR ENDED MAY 31, 1999 COMPARED TO THE YEAR ENDED
MAY 31, 1998
The Company reported a net loss from continuing operations of $3.0
million, which included approximately $0.9 million of bad debt expense specific
to two major contracts that terminated during Fiscal 1999, $0.3 million of bad
debt expense specific to hospital accounts receivable that were written off
after the March 11, 1999 disposal date, and $0.2 million of bad debt expense
specific to CCI contracts that were terminated prior to May 31, 1999.
Additionally, the Company incurred $0.8 million of expense in its unsuccessful
bid for a managed care contract in Argentina and approximately $0.6 million of
restructuring costs related to the loss of the PCA contract in Puerto Rico.
These expenses were offset by an extraordinary gain of $0.1 million related to
the debenture exchange. This compares to net income of $1.5 million from
continuing operations for the same period of 1998, which included $1.3 million
of income relating to an adjustment made in the Company's estimated claims
payable reserve.
Operating revenues from continuing operations decreased by 1.9% or
$0.8 million for the year ended May 31, 1999, compared to the year ended May
31, 1998. The decrease in operating revenues is attributable to decreases in
13
<PAGE> 14
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
operating revenues of $0.7 million and $0.1 million for managed care and
corporate and other operations, respectively. Managed care revenues decreased
due to the loss of two major contracts during the fourth quarter of Fiscal 1999
(see Note 4 to the audited consolidated financial statements -- "Major
Contracts/Customers"). The decline in operating revenue from corporate and other
operations is primarily due to the cancellation or termination of several
unprofitable CCI contracts during Fiscal 1999.
Healthcare operating expenses from continuing operations decreased by
$1.0 million for the year ended May 31, 1999, as compared to the year ended May
31, 1998. The decrease in healthcare operating expenses is primarily
attributable to the decrease in managed care and CCI revenues during Fiscal
1999. Healthcare operating expenses as a percentage of net revenues for managed
care operations decreased slightly from 77.4% for the year ended May 31, 1998,
to 76.3% for the year ended May 31, 1999.
General and administrative expenses from continuing operations
increased by 29.1%, or $2.1 million, for the year ended May 31, 1999, as
compared to the year ended May 31, 1998. This increase is primarily due to
approximately $1.7 million of increased costs for professional and consulting
fees and other administrative costs, including $0.2 million attributable to one
legal settlement and $0.7 million of increased costs to manage the Company's
information systems. These increases were offset by savings over the prior year
of approximately $0.2 million, resulting from the restructuring that was
completed during the quarter ended February 28, 1998.
Other operating costs from continuing operations increased by
approximately $2.4 million for the fiscal year ended May 31, 1999, compared to
the fiscal year ended May 31, 1998. This increase is directly attributable to
the $1.5 million of expense for the Company's provision for doubtful accounts,
a $0.3 million increase in depreciation expense and $0.6 million of
restructuring costs related to the loss of the Company's Puerto Rico contract.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2000, the Company had unrestricted cash and cash
equivalents of $2.5 million. During the fiscal year ended May 31, 2000, the
Company used $5.3 million in its continuing operations. Additionally, $0.1
million was provided by its investing activities. The Company reported a loss
of $5.8 million from continuing operations for the fiscal year ended May 31,
2000, compared to a loss of $3.1 million from continuing operations for the
fiscal year ended May 31, 1999. The Company has an accumulated deficit of $62.5
million and total stockholders' deficit of $10.7 million as of May 31, 2000.
Additionally, the Company's current assets at May 31, 2000, amounted to
approximately $17.4 million and current liabilities were approximately $29.6
million, resulting in a working capital deficiency of approximately $12.2
million. The Company's primary use of available cash resources is to expand its
managed care business and fund operations.
The Company's available sources of cash during the next fiscal year
will be derived from operations. In recent months, the Company has taken steps
necessary to reduce its operating costs by instituting staff reductions and
cost control measures. At this time, the Company cannot state with any degree
of certainty whether additional equity or debt financing will be available to
it and, if available, that the source of financing would be available on terms
and conditions acceptable to the Company. Any potential sources of additional
financing may be subject to business and economic conditions outside the
Company's control.
The working capital and stockholders' deficits may raise doubt about
the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome
of this uncertainty.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Year 2000 problem exists because many computer programs were
designed and developed without considering the upcoming change in century.
Historically, certain computerized systems have been designed to have two-digit
rather than four-digit fields to define the applicable year and this could mean
that many computer programs are unable to distinguish between the year 1900 and
14
<PAGE> 15
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
the year 2000 when a date of "00" is used for the applicable year. Potential
problems could exist for both information technology systems ("IT") and non-IT
systems. Non-IT systems typically include embedded technology, such as
micro-controllers, and may include equipment ranging from telephone switches
and fax machines to copy machines. Any failure to correct a Year 2000 problem
could result in an interruption in certain normal business activities or
operations due to errors or system failures.
The Company developed a compliance program ("Plan") which used an
enterprise wide, phased approach for assessing, remediating or replacing,
testing, and implementing each of its mission-critical systems. The Plan covers
many diverse systems and components of systems and, as such, each system was
treated separately in the Plan. Additionally, since the Company's Plan
addresses the Year 2000 problem from an enterprise wide approach, the Plan
covers both information technology ("IT") systems and non-IT systems. The Plan
also includes reviews of external vendors, EDI exchange partners, and
environmental infrastructure, including utilities and security systems.
The Company completed the Remediation, Testing, and Implementation
phases of its project for Mission Critical systems in September 1999, with
ongoing project management and, also, maintenance of the vendor compliance
process.
The Company also completed implementation for all regional offices to
its new clinical operating system (TXEN). The system was purchased from Nichols
Research Corporation and has been certified Year 2000 compliant. The
implementation occurred ahead of the scheduled implementation date of
September 30, 1999. The Company has also completed full remediation and
testing of its main financial and accounting system. Additionally, the Company
has also completed assessment of its mission critical systems, equipment and
infrastructure.
As of August 25, 2000, there has been no disruption of normal business
activities or system failures experienced by the Company. The Company is
continuing to address the potential impact of Year 2000 on its non-essential
information systems, its other equipment that may be affected by the Year 2000,
and the impact of transacting business with parties who do not have Year 2000
compliant systems. The Company has completed mailing of its Year 2000 survey to
all business partners, manufacturers of the Company's non-essential business
equipment, and other trade vendors. The Company has continued its vendor
compliance program by mailing surveys to all health providers that are utilized
by the Company. The Company cannot state with any certainty whether their
suppliers, vendors and data exchange partners will remain compliant even if
they have stated compliance in previous communications. Even though the Company
will observe `On-going Vigilance' for Year 2000 problems, they cannot ensure
that their vendors, providers, and manufacturers will be as vigilant.
During the fiscal year ended May 31, 2000, the Company recognized
approximately $0.1 million in expense specific to its Year 2000 compliance
program which has been paid to consultants or vendors providing services or
equipment for the Company's compliance program. Additionally, the Company paid
approximately $0.1 million that was recorded as capital expenditures during the
fiscal year ended May 31, 2000.
The following chart provides a summary of the Company's actual
expenditures to date related to its Year 2000 Plan. As of May 31, 2000, there
are no future expected costs related to the Company's Year 2000 Plan.
ACTUAL COSTS
INCURRED AT
MAY 31, 2000
------------
Capital expenditures................................. $ 825,000
Operating expense.................................... 238,000
-----------
Total................................................ $ 1,063,000
===========
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Except for historical
information, the matters discussed that may be considered forward-looking
statements may be subject to certain risks and uncertainties that could cause
the actual results to differ materially from those projected, including
uncertainties in the market, pricing, competition, procurement efficiencies,
uncertainties inherent in the Year 2000 problem, other matters discussed in
this annual report on Form 10-K, and other risks detailed from time to time in
the Company's SEC reports.
15
<PAGE> 16
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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)
expanding the managed behavioral healthcare operations, (ii) effective
management in the delivery of services, (iii) risk and utilization in context
of capitated payouts, and (iv) retaining certain refunds from the IRS (see Note
13 to the audited consolidated financial statements -- "Income Taxes").
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 currently has contracts with Humana, Inc. ("Humana") to
provide behavioral healthcare services under commercial, Medicaid, and Medicare
plans, to contracted members in Florida. These combined contracts represent
approximately 33.8% and 17.4% of the Company's operating revenue from
continuing operations for Fiscal 2000 and 1999, respectively. As of June 2000,
the Company provides services to approximately 160,000 Humana members in
Florida. Effective June 30, 2000, Humana completed the sale of its North
Florida Medicaid business to HealthEase of Florida, Inc. Effective July 1,
2000, the Company has contracted with HealthEase of Florida, Inc. to continue
to provide behavioral healthcare services to approximately 100,000 of 160,000
Florida members that were managed by the Company under contracts with Humana.
Additionally, Humana's contracts with the Company, which cover specific
commercial, Medicaid, and Medicare populations of approximately 60,000 members
will terminate September 30, 2000.
UNCERTAINTY OF FUTURE PROFITABILITY
As of May 31, 2000, the Company had stockholders' deficit of $10.7
million and a working capital deficiency of approximately $12.2 million. The
Company had a loss from continuing operations for the fiscal year ended May 31,
2000, of $5.8 million. There can be no assurance that the Company will be able
to achieve and sustain profitability or that the Company can achieve and
maintain positive cash flow on an ongoing basis. Present results of operations
are not necessarily indicative of anticipated future results of operations.
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. Issuance of additional equity securities by the Company could result in
substantial dilution to stockholders.
The Company may be required to repay a portion of the tax refunds
received from the Internal Revenue Service for Fiscal 1996 and 1995, which
amounted to $9.4 million and $5.4 million, respectively (see "Taxes" below and
Note 13 to the audited, consolidated financial statements - "Income Taxes").
Further, the Company may be required to repay some amount to Medi-Cal in
connection with the judgment entered on February 26, 1999, which is more fully
described under Item 3, Legal Proceedings, above.
TAXES
In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed a tentative refund claim 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
16
<PAGE> 17
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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. 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.
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 $5.2 million
through May 31, 2000. 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, which is reported as "other receivable" in the
accompanying balance sheet. This report commenced the administrative appeals
process. The Company filed a protest letter with the IRS on November 6, 1998.
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. Additionally, the IRS reserves the
right to assess and collect the tax previously refunded to the Company at any
time during the appeals process.
Effective July 11, 2000, the Company submitted an Offer in Compromise
("Offer") to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. There can be no
assurance that the IRS will accept the Offer.
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
have material, adverse effects on 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.
17
<PAGE> 18
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
SHARES ELIGIBLE FOR FUTURE SALE
The Company has issued or committed to issue 9,000 shares related to
the 7 1/2% convertible subordinated debentures due April 15, 2010, and options
or other rights to purchase approximately 1,120,000 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 price of the Company's
Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation provides for 60,000
authorized shares of Preferred Stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by the Board of Directors
without any vote or action by the stockholders that could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. As of May 31, 2000, there are no outstanding shares of
Preferred Stock (see Note 17 to the audited consolidated financial statements --
"Preferred Stock, Common Stock, and Stock Option Plans"). 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.
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 2000 would be
non-deductible.
18
<PAGE> 19
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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, 2000, 1999 and 1998
<TABLE>
<CAPTION>
<S> <C>
Report of Richard A. Eisner & Company, LLP............................................................. 20
Report of Ernst & Young, LLP............................................................................ 21
Consolidated Balance Sheets, May 31, 2000 and 1999...................................................... 22
Consolidated Statements of Operations, Years Ended May 31, 2000, 1999 and 1998.......................... 23
Consolidated Statements of Stockholders' Deficit, Years Ended May 31, 2000, 1999 and 1998............... 24
Consolidated Statements of Cash Flows, Years Ended May 31, 2000, 1999 and 1998.......................... 25
Notes to Consolidated Financial Statements, Years Ended May 31, 2000, 1999 and 1998..................... 26-43
</TABLE>
19
<PAGE> 20
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Comprehensive Care Corporation
We have audited the accompanying consolidated balance sheets of
Comprehensive Care Corporation and subsidiaries as of May 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the years then ended, in conformity with generally accepted accounting
principles.
As discussed in Note 3, the Company's 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
Notes 3 and 13. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Richard A. Eisner & Company, LLP
-------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
July 27, 2000
20
<PAGE> 21
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Comprehensive Care Corporation
We have audited the consolidated statement of operations, stockholders'
deficit and cash flows of Comprehensive Care Corporation and subsidiaries for
the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of their
operations and their cash flows for the year 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 10, the Company changed its method of
estimating its claim liability in 1998, which has been accounted for as a change
in accounting principle inseparable from a change in estimate.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Tampa, Florida
August 26, 1998
21
<PAGE> 22
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
2000 1999
-------------- ---------------
(Amounts in Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 2,518 $ 7,776
Restricted cash .................................................... 1,444 --
Accounts receivable, less allowance for doubtful accounts of $13
and $923 .......................................................... 276 932
Accounts receivable - pharmacy and laboratory costs ................ 10,469 10,469
Other receivable ................................................... 2,548 2,548
Other current assets ............................................... 147 481
-------- --------
Total current assets .................................................. 17,402 22,206
Property and equipment, net ........................................... 1,086 1,970
Notes receivable ...................................................... 1,145 1,172
Goodwill, net ......................................................... 1,008 1,080
Restricted cash ....................................................... 486 2,173
Other assets .......................................................... 148 465
-------- --------
Total assets .......................................................... $ 21,275 $ 29,066
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities ........................... $ 4,028 $ 4,552
Accrued claims payable ............................................. 3,014 4,369
Accrued pharmacy and laboratory costs payable ...................... 10,469 10,469
Current maturities of long-term debt ............................... -- 3
Unbenefitted tax refunds received .................................. 12,092 12,092
Income taxes payable ............................................... 44 76
-------- --------
Total current liabilities ............................................. 29,647 31,561
-------- --------
Long-term liabilities:
Long-term debt, excluding current maturities ....................... 2,244 2,253
Other liabilities .................................................. 56 166
-------- --------
Total long-term liabilities ........................................... 2,300 2,419
-------- --------
Total liabilities ..................................................... 31,947 33,980
-------- --------
Commitments and Contingencies (Notes 4 and 13)
Stockholders' deficit:
Preferred stock, $50.00 par value; authorized 60,000 shares; none
issued and outstanding ............................................ -- --
Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 3,817,822 and 3,817,812 ........................... 38 38
Additional paid-in-capital ......................................... 51,812 51,794
Deferred compensation .............................................. (10) --
Accumulated deficit ................................................ (62,512) (56,746)
-------- --------
Total stockholders' deficit ........................................... (10,672) (4,914)
-------- --------
Total liabilities and stockholders' deficit ........................... $ 21,275 $ 29,066
======== ========
</TABLE>
See accompanying notes.
22
<PAGE> 23
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------------------
2000 1999 1998
-------------- --------------- --------------
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
OPERATING REVENUES ......................................... $ 17,719 $ 39,029 $ 39,787
COSTS AND EXPENSES:
Healthcare operating expenses ............................ 15,801 29,778 30,808
General and administrative expenses ...................... 6,974 9,148 7,085
Provision for (recovery of) doubtful accounts ............ (606) 1,641 94
Depreciation and amortization ............................ 794 1,037 772
Restructuring expenses ................................... 831 600 --
-------- -------- --------
23,794 42,204 38,759
-------- -------- --------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE ITEMS SHOWN BELOW .............................. (6,075) (3,175) 1,028
OTHER INCOME (EXPENSE):
Gain on sale of assets ................................... 9 2 314
Loss on sale of assets ................................... (1) (4) (9)
Non-operating gain (loss) ................................ 204 (79) 50
Interest income .......................................... 399 309 406
Interest expense ......................................... (289) (281) (172)
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (5,753) (3,228) 1,617
Income tax expense (benefit) ............................... 13 (146) 63
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................... (5,766) (3,082) 1,554
DISCONTINUED OPERATIONS:
Income (loss) from operations ............................ -- (334) 417
Loss on disposal, including operating loss of $282 ....... -- (698) --
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN .................... (5,766) (4,114) 1,971
EXTRAORDINARY GAIN ......................................... -- 120 --
-------- -------- --------
NET INCOME (LOSS) .......................................... (5,766) (3,994) 1,971
Dividends on convertible Preferred Stock ................... -- (55) (82)
-------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ...... $ (5,766) $ (4,049) $ 1,889
======== ======== ========
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ................... $ (1.51) $ (0.88) $ 0.44
Discontinued operations:
Income (loss) from operations ............................ -- (0.09) 0.12
Loss on disposal ......................................... -- (0.20) --
Extraordinary item ......................................... -- 0.03 --
-------- -------- --------
Net income (loss) .......................................... $ (1.51) $ (1.14) $ 0.56
======== ======== ========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ................... $ (1.51) $ (0.88) $ 0.40
Discontinued operations:
Income (loss) from operations ............................ -- (0.09) 0.11
Loss on disposal ......................................... -- (0.20) --
Extraordinary item ......................................... -- 0.03 --
-------- -------- --------
Net income (loss) .......................................... $ (1.51) $ (1.14) $ 0.51
======== ======== ========
</TABLE>
See accompanying notes
23
<PAGE> 24
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- ---------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION DEFICIT
------ ------- ------- ------- ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1997 ......................... 41 $ 2,094 3,428 $34 $ 48,888 $(54,586) $ -- $ (3,570)
Net Income ................................. -- -- -- -- -- 1,971 -- 1,971
Adjust shares issued for the HMS acquisition -- -- (6) -- (138) -- -- (138)
Exercise of stock options .................. -- -- 44 -- 451 -- -- 451
Dividends on preferred stock ............... -- 82 -- -- -- (82) -- --
Cancellation of CEO restricted grant ....... -- -- (51) -- -- -- -- --
--- ------- ------ --- -------- -------- ---- --------
BALANCE, MAY 31, 1998 ......................... 41 $ 2,176 3,415 $34 $ 49,201 $(52,697) $ -- $ (1,286)
Net loss ................................... -- -- -- -- -- (3,994) -- (3,994)
Adjust shares issued for the HMS acquisition -- -- -- -- (94) -- -- (94)
Exercise of stock options .................. -- -- 22 -- 155 -- -- 155
Dividends on preferred stock ............... -- 55 -- -- -- (55) -- --
Shares issued for preferred stock conversion (41) (2,231) 344 4 2,227 -- -- --
Shares issued for debenture exchange offer . -- -- 37 -- 305 -- -- 305
--- ------- ------ --- -------- -------- ---- --------
BALANCE, MAY 31, 1999 ......................... -- $ -- 3,818 $38 $ 51,794 $(56,746) $ -- $ (4,914)
Net loss ................................... -- -- -- -- -- (5,766) -- (5,766)
Compensatory stock options granted ......... -- -- -- -- 18 -- (18) --
Amortization of deferred compensation ...... -- -- -- -- -- -- 8 8
--- ------- ------ --- -------- -------- ---- --------
BALANCE, MAY 31, 2000 ......................... -- $ -- 3,818 $38 $ 51,812 $(62,512) $(10) $(10,672)
=== ======= ====== === ======== ======== ==== ========
</TABLE>
See accompanying notes.
24
<PAGE> 25
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations before extraordinary item ............. $(5,766) $(3,082) $ 1,554
ADJUSTMENTS TO RECONCILE INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization ............................................... 794 1,037 772
Asset write-down ............................................................ 10 146 --
Provision for doubtful accounts ............................................. -- 1,641 94
Adjustment to deferred costs ................................................ -- -- 101
Gain on sale of assets ...................................................... (9) (2) (314)
Loss on sale of assets ...................................................... 1 4 9
Compensation expense - stock options issued ................................. 8 -- --
Restructuring expenses ...................................................... 89 455 --
Goodwill impairment ......................................................... -- 27 --
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable ......................................................... 656 (174) (749)
Accounts receivable - pharmacy and laboratory costs ......................... -- (4,814) (5,655)
Other current assets, restricted funds, and other non-current assets ........ 896 (434) (1,670)
Accounts payable and accrued liabilities .................................... (498) (379) (45)
Accrued claims payable ...................................................... (1,355) (477) (1,284)
Accrued pharmacy and laboratory costs payable ............................... -- 4,814 5,655
Income taxes payable ........................................................ (32) (109) (50)
Other liabilities ........................................................... (107) (31) (71)
------- ------- -------
NET CASH USED IN CONTINUING OPERATIONS ...................................... (5,313) (1,378) (1,653)
NET CASH USED IN DISCONTINUED OPERATIONS .................................... -- (1,070) (214)
------- ------- -------
NET CASH USED IN OPERATING ACTIVITIES ....................................... (5,313) (2,448) (1,867)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of hospital property and equipment related to
discontinued operations ................................................... -- 4,820 3,072
Net proceeds from sale of property and equipment ............................ 139 -- --
Payment received on note for sale of property and equipment ................. 25 -- 1,941
Additions to property and equipment ......................................... (107) (768) (1,413)
------- ------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES ................................... 57 4,052 3,600
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock .................................. -- 158 358
Repayment of debt ........................................................... (2) (2) (66)
------- ------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ........................ (2) 156 292
------- ------- -------
Net increase (decrease) in cash and cash equivalents ........................... (5,258) 1,760 2,025
Cash and cash equivalents at beginning of year ................................. 7,776 6,016 3,991
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................................... $ 2,518 $ 7,776 $ 6,016
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest ............................................................... $ 180 $ 180 $ 207
======= ======= =======
Income taxes ........................................................... $ 48 $ 87 $ 34
======= ======= =======
</TABLE>
See accompanying notes
25
<PAGE> 26
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
NOTE 1 -- DESCRIPTION OF THE COMPANY'S BUSINESS
Comprehensive Care Corporation (the "Company") is a Delaware
Corporation organized in 1969. Unless the context otherwise requires, all
references to the "Company" include Comprehensive Behavioral Care, Inc.
("CompCare" 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. 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.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of
Comprehensive Care Corporation and its wholly owned subsidiaries. Significant
inter-company accounts and transactions have been eliminated in consolidation.
The results of operations of the hospital business segment, which was disposed
of during Fiscal 1999, are shown in discontinued operations in the accompanying
statements of operations.
RECLASSIFICATION
Certain amounts for 1999 and 1998 have been reclassified to conform to
the 2000 presentation. These reclassifications had no effect on the previously
reported results of operations or stockholders' deficit.
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's revenues from providing other behavioral healthcare services are
earned on a fee-for-service basis and are recognized as services are rendered.
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-services, or a per-case basis. The
Company's capitation contracts typically exclude risk for chronic care
patients. The cost of healthcare services is recognized in the period that the
Company is obligated to provide such services. Certain contracted healthcare
providers assume the financial risk for participant care rendered by them and
they 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 behavioral
healthcare services, the Company establishes an accrual for estimated claims
payable (see Note 10 -- "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, 2000 or May 31, 1999.
26
<PAGE> 27
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 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 $1.8 million and $7.7 million at May 31, 2000 and 1999, respectively.
These investments are included in cash equivalents in the accompanying
consolidated balance sheets.
RESTRICTED CASH
Restricted accounts classified as current assets are required under
capitated contracts, primarily the Puerto Rico contract that expired March 31,
1999 (see Note 18 -- "Commitments and Contingencies", Item 4). Non-current
restricted accounts include $0.3 million of cash held in trust in connection
with the Company's Directors and Officers liability insurance policy.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of furniture
and equipment is computed using the straight-line method over the estimated
useful lives of 3 to 12 years. Leasehold improvements are amortized over the
term of the related lease.
GOODWILL
Goodwill includes costs in excess of the 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
business acquired excluding interest expense and amortization over the remaining
amortization period. The Company believes that the remaining $1.0 million of net
recorded goodwill at May 31, 2000 is recoverable from future estimated
undiscounted cash flows. The amounts of goodwill reported in the consolidated
balance sheets are net of accumulated amortization of $422,000 and $351,000 at
May 31, 2000 and 1999, respectively.
ACCRUED CLAIMS PAYABLE
The accrued claims payable liability represents the estimated ultimate
net amounts owed for all behavioral healthcare services provided through the
respective balance sheet dates.
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.
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" (SFAS 123) requires the use of option
27
<PAGE> 28
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
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. Compensation expense
recognized in 1998 included $83,000 for taxes paid on behalf of employees in
connection with stock options exercised.
In Fiscal 2000, the Company recognized deferred compensation totaling
$18,000 in relation to options that were issued to non-employee consultants
during Fiscal 2000. Such amount, which is based on the fair value of the options
granted in accordance with SFAS 123, is being amortized to expense over the
two-year vesting period of the options. Amortization for Fiscal 2000 amounted to
$8,000.
EARNINGS PER SHARE
In calculating basic earnings (loss) per share, net income (loss)
adjusted for dividends on preferred stock, is divided by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflect the assumed conversion of all dilutive securities, such as options and
convertible preferred stock. No such exercise or conversion is assumed where the
effect is antidilutive, such as when there is a loss from continuing operations.
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, 2000, and 1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 2,518 $ 2,518 $ 7,776 $ 7,776
Notes receivable..................................... 1,172 1,172 1,198 1,198
Restricted cash...................................... 1,930 1,930 2,173 2,173
LIABILITIES
Long-term debt....................................... $ 2,244 $ 978 $ 2,244 $ 1,346
</TABLE>
SEGMENT INFORMATION
During the fourth quarter of Fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial statements. SFAS 131 also establishes standards for related
disclosures about products and services and geographic areas. Operating segments
are defined as components of an enterprise about which separate financial
information is available, that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. The Company has evaluated the effects of this pronouncement and
determined that its only operating segment relating to continuing operations is
its managed care business.
NOTE 3 -- LIQUIDITY AND CAPITAL RESOURCES
For the years ended May 31, 2000 and 1999, the Company incurred losses
from continuing operations of $5.8 million and $3.0 million, respectively. As of
May 31, 2000, the Company had a working capital deficiency of approximately
$12.2 million and a stockholders' deficit of approximately $10.7 million. In
addition, for the years ended May 31, 2000, 1999, and 1998, continuing
operations used cash of approximately $5.3 million, $1.4 million, and $1.6
million, respectively. Further, a contract that generated approximately 44% of
28
<PAGE> 29
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
operating revenues from continuing operations during Fiscal 1999 expired in
March 1999 and was not renewed (see Note 4 -- "Major Contracts/Customers"). The
working capital deficiency referred to above results primarily from a $12.1
million liability related to Federal income tax refunds received in prior years.
The ultimate outcome of the Internal Revenue Service audit whereby it is seeking
recovery of the refunds from the Company, including the amount to be repaid, if
any, and the timing thereof, is not determinable (see Note 13 -"Income Taxes").
The Company cannot state with any degree of certainty whether any
required additional equity or debt financing to meet its obligations will be
available to it during Fiscal 2001 and, if available, that the source of
financing would be available on terms and conditions acceptable to the Company.
The above conditions raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustment that may result from the outcome of
this uncertainty.
During Fiscal 2000, management has taken steps to trim costs and save
cash, including making significant staff reductions, centralizing certain
contract management and clinical functions, and eliminating the Company's
California administrative office and related executive staff positions. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required and, ultimately, to attain
profitability.
NOTE 4 -- MAJOR CONTRACTS/CUSTOMERS
(1) During Fiscal 1999, the Company provided services to members of Humana
Health Plans of Puerto Rico, Inc. ["Humana of Puerto Rico" (successor in
interest to PCA Health Plans of Puerto Rico, Inc.)] under the terms of
management service agreements entered into pursuant to healthcare contracts
awarded to Humana of Puerto Rico by the Puerto Rico Insurance
Administration. These contracts expired on March 31, 1999, with an
extension period that ended April 30, 1999. For the fiscal years ended May
31, 1999 and 1998, these agreements accounted for approximately 44%, or
$17.1 million, and 47%, or $18.8 million, of the Company's operating
revenues from continuing operations, respectively.
Additionally, the contract with Humana established an amount that was
withheld from Humana's monthly remittances to the Company to cover pharmacy
and laboratory costs that are the financial responsibility of the Company,
but were administered by Humana. 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 for the contract to
date pending clarification of the actual costs incurred. As a result, the
Company has reported $10.5 million as accounts receivable and accrued
claims payable in the accompanying balance sheets at May 31, 2000 and 1999.
During Fiscal 1999, Humana sent written notice to the Company that the
Company owed $3.0 million to Humana in connection with these pharmacy and
laboratory costs. The Company has expressed to Humana its total
disagreement with Humana's position. The Company believes that Humana owes
the Company in excess of $3.0 million in relation to this same issue.
Efforts are being made to work with Humana to resolve the uncertainty.
The Company also has contracts with Humana Health Plans ("Humana") under
which it provides services to members in Florida. For the fiscal year ended
May 31, 2000, such contracts accounted for 33.8%, or $6.0 million, of the
Company's operating revenues from continuing operations compared to 17.4%,
or $6.8 million, and 18.1%, or $7.2 million, for the fiscal years ended May
31, 1999 and 1998, respectively.
Effective June 30, 2000, Humana, Inc. ("Humana") completed the sale of its
North Florida Medicaid business to HealthEase of Florida, Inc. Effective
July 1, 2000, the Company has entered into a one-year contract with
HealthEase of Florida, Inc. to continue to provide behavioral healthcare
services to approximately 100,000 of 160,000 Florida members that were
managed by the Company under contracts with Humana as of June 2000.
Additionally, Humana's contracts with the Company, which cover specific
commercial, Medicaid and Medicare populations of approximately 60,000
members will terminate September 30, 2000. Further, although the Company
has received no formal notice from Humana, Humana has verbally alleged that
29
<PAGE> 30
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
there is a payment discrepancy and that payment for at least a portion of
the July and August capitation amounts is being withheld by Humana until
Humana completes an eligibility reconciliation. The Company does not
believe that there will be any material adverse impact on the Company's
financial position resulting from the alleged discrepancy.
(2) The Company has two contracts with one HMO to provide behavioral healthcare
services to contracted members in Texas. These combined contracts
represented approximately 11.8%, 6.0%, and 1.4% of the Company's operating
revenue from continuing operations for the fiscal years ended May 31, 2000,
1999, and 1998, respectively. The Company recently renewed these contracts
for two years, with effective dates of February 8, 2000.
(3) The Company has two contracts with one HMO to provide behavioral healthcare
services to contracted members in Texas. These combined contracts
represented approximately 6.3%, 3.7%, and 2.1% of the Company's operating
revenue from continuing operations for the fiscal years ended May 31, 2000,
1999, and 1998, respectively. The Company continues to provide behavioral
healthcare services to members covered under these contracts, which were
previously reported as expected cancellations.
(4) The Company has one contract with one HMO to provide behavioral healthcare
services to contracted members in Texas. This contract represented 5.2%,
2.2%, and 0.8% of the Company's operating revenues from continuing
operations for the fiscal years ended May 31, 2000, 1999, and 1998,
respectively.
(5) During the fiscal year ended May 31, 2000, the Company had one contract
with one HMO to provide behavioral healthcare services to contracted
members in Indiana. This contract, which represented approximately 6.4%,
4.5%, and 3.6% of operating revenue from continuing operations for the
fiscal years ended May 31, 2000, 1999, and 1998, respectively, was
terminated effective December 31, 1999.
(6) During the fiscal year ended May 31, 2000, the Company had contracts with
one HMO to provide behavioral healthcare services to contracted members in
Texas. These contracts represented approximately 5.3%, 1.9%, and 0.5% of
operating revenue from continuing operations for the fiscal years ended May
31, 2000, 1999, and 1998, respectively. These contracts were not renewed by
the HMO and, as a result, terminated December 31, 1999.
30
<PAGE> 31
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
NOTE 5 -- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
MAY 31,
-------------------------------------
2000 1999
------------------ -----------------
(Amounts in thousands)
<S> <C> <C>
Accounts receivable - managed care capitation contracts.................... $ 231 $ 456
Accounts receivable withholdings - managed care capitation contracts........ -- 576
Other trade accounts receivable............................................. 58 823
------- ------
Total accounts receivable................................................ $ 289 $ 1,855
====== =====
</TABLE>
The following table summarizes changes in the Company's allowances for doubtful
accounts for the years ended May 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
BALANCE ADDITIONS
BEGINNING OF CHARGED TO WRITE-OFF OF BALANCE END OF
YEAR EXPENSE RECOVERIES ACCOUNTS YEAR
---------------- ---------------- --------------- ---------------- ----------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Year ended May 31, 2000............. $ 923 $ 11 $ (268)** $ (653) $ 13
Year ended May 31, 1999*............ 893 3,582 (268) (3,284) 923
Year ended May 31, 1998............. $ 883 $ 575 $ (324) $ (241) $ 893
</TABLE>
-----------
* Includes $1,673 charged to discontinued operations.
** Excludes $349 of recoveries from accounts previously written off.
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.
NOTE 6 -- OTHER RECEIVABLE
Other receivable at May 31, 2000 and 1999 represents $2.5 million paid
to a vendor to prepare a federal income tax refund that is more fully described
in Note 13. The costs incurred will be refunded to the Company should the
Internal Revenue Service ("IRS") 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.
NOTE 7 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MAY 31,
--------------------
2000 1999
-------- --------
(Amounts in thousands)
<S> <C> <C>
Furniture and equipment............................................................ $ 3,346 $ 3,978
Leasehold improvements............................................................. 145 301
Capitalized leases................................................................. -- 17
-------- --------
3,491 4,296
Less accumulated depreciation...................................................... (2,405) (2,326)
-------- --------
Net property and equipment......................................................... $ 1,086 $ 1,970
======== ========
</TABLE>
31
<PAGE> 32
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
NOTE 8 -- NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
MAY 31,
------------------------
2000 1999
----------- -----------
(Amounts in Thousands)
<S> <C> <C>
8% promissory note, payable in monthly installments of approximately
$10,000, with a $1.0 million principal payment due at maturity on
April 1, 2006 (see Note 14)........................................ $1,172 $1,200
Less current maturities............................................... (27) (28)
------- -------
$1,145 $1,172
======= =======
</TABLE>
NOTE 9 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MAY 31,
------------------------
2000 1999
----------- -----------
(Amounts in Thousands)
<S> <C> <C>
Accounts payable...................................................... $ 1,345 $ 1,571
Accrued restructuring................................................. 104 433
Accrued salaries and wages............................................ 558 524
Accrued vacation...................................................... 168 275
Accrued legal and audit............................................... 503 626
Payable to third-party intermediaries................................. 1,321 1,094
Deferred compensation................................................. 29 29
------- -------
$ 4,028 $ 4,552
======= =======
</TABLE>
NOTE 10 -- 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. Prior to
Fiscal 1998, 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 applicable to continuing
operations and net income for Fiscal 1998 by $.38 and $.34, respectively.
Accrued claims payable consist of the following:
<TABLE>
<CAPTION>
MAY 31,
------------------------
2000 1999
----------- -----------
(Amounts in Thousands)
<S> <C> <C>
Actuarially estimated claims payable.................................. $ 2,809 $ 4,093
Subcapitation payable................................................. 205 276
------- --------
Total accrued claims payable.......................................... $ 3,014 $ 4,369
======= ========
</TABLE>
The Company recognized approximately $1.0 million, $1.6 million, and
$2.6 million in subcapitation expense for the years ended May 31, 2000, 1999 and
1998, 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 11 - RESTRUCTURING
During Fiscal 2000, following the termination of two major contracts on
December 31, 1999, the Company underwent a restructuring that included the
closing of the Company's California administrative office, terminating related
executive and staff positions, and centralizing certain contract management and
32
<PAGE> 33
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
clinical functions. The Company incurred restructuring charges of $881,000 in
connection therewith, including a separation payment of $760,000 to the
Company's former Chairman and CEO. Rentals under the lease for the California
office were assumed by an entity affiliated with the Company's former Chairman
and CEO. In addition, during Fiscal 1999, the Company incurred restructuring
charges of $600,000 related to the loss of a major contract in Puerto Rico.
Following is an analysis of the restructuring charges together with related
payments reflected in a reserve for restructuring charges:
<TABLE>
<CAPTION>
BALANCE BALANCE
JUNE 1, PAYMENTS/ MAY 31,
1999 EXPENSE CHARGES 2000
------- ------- --------- -------
(Amounts in thousands)
<S> <C> <C> <C> <C>
FISCAL 2000
RESTRUCTURING:
Severance and separation benefits ...... $ -- $ 721 $ (721) $ --
Write-off of assets(1) ................. -- 116 (106) 10
Other closing costs .................... -- 44 (9) 35
---- ----- ------- -----
Totals ................................... $ -- $ 881 $ (836) $ 45
Puerto Rico and other prior reserves 433 (50) (324) 59
---- ----- ------- -----
Totals ................................... $433 $ 831 $(1,160) $ 104(2)
==== ===== ======= =====
</TABLE>
------------
(1) Includes $90,000 for write-off of leasehold improvements.
(2) Included in Accounts payable and accrued liabilities at May 31, 2000 (see
Note 9 - "Accounts Payable and Accrued Liabilities").
<TABLE>
<CAPTION>
BALANCE BALANCE
JUNE 1, PAYMENTS/ MAY 31,
1998 EXPENSE CHARGES 1999
------- ------- --------- -------
(Amounts in thousands)
<S> <C> <C> <C> <C>
FISCAL 1999
RESTRUCTURING:
Severance and separation benefits $ -- $ 178 $ (143) $ 35
Write-down of fixed assets(1) .......... -- 242 (32) 210
Other closing costs .................... -- 180 -- 180
---- ----- ------ -----
Totals ................................... $ -- $ 600 $ (175) $ 425
Other prior reserves .................... 8 -- -- 8
---- ----- ------ -----
Totals ................................... $ 8 $ 600 $ (175) $ 433(2)
==== ===== ====== =====
</TABLE>
---------------
(1) Includes $177,000 for write-off of leasehold improvements.
(2) Included in Accounts payable and accrued liabilities at May 31, 1999 (see
Note 9 - "Accounts Payable and Accrued Liabilities").
NOTE 12 -- LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MAY 31,
--------------------------
2000 1999
----------- -----------
(Amounts in Thousands)
<S> <C> <C>
7 1/2% convertible subordinated debentures due April, 2010, interest
payable semi-annually in April and October .......................... $ 2,244 $ 2,244
Other long-term debt ................................................... -- 12
------- -------
Total long-term debt ................................................... 2,244 2,256
Less current maturities of long-term debt .............................. -- (3)
------- -------
Long-term debt, excluding current maturities ........................... $ 2,244 $ 2,253
======= =======
</TABLE>
As of May 31, 2000, the Company has no annual maturities of long-term
debt until 2010.
On July 24, 1998, the Company completed a debenture exchange offer
with its debentureholders. An aggregate of $0.4 million of principal amount of
Debentures, representing approximately 17% of the issued and outstanding
33
<PAGE> 34
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
Debentures, were tendered for exchange to the Company pursuant to the terms of
the Exchange Offer and a total of 33,185 shares of Common Stock were issued by
the Company. The resulting gain on the Debenture Exchange of $0.1 million after
related costs and expenses was recorded as an extraordinary gain in the
accompanying consolidated statement of operations for the year ended May 31,
1999.
NOTE 13 -- INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
2000 1999 1998
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Current:
Federal....................................................... $ -- $ -- $ --
State ........................................................ 13 (146) 63
----- ----- ----
$ 13 $(146) $ 63
===== ===== ====
</TABLE>
Reconciliation between the provision for income tax applicable to
continuing operations and the amount computed by applying the statutory Federal
income tax rate (34%) to income (loss) from continuing operations before income
tax is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------
2000 1999 1998
---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C>
Expense (Benefit) from income taxes at the statutory tax rate............ $ (1,957) $ (1,407) $ 692
State income taxes, net of federal tax effect............................ (228) (158) 81
Non-deductible items..................................................... 161 52 137
Increase (decrease) in valuation allowance............................... 1,596 3,273 (995)
Adjustment of net operating losses carryforwards......................... 428 (1,987) --
Other, net............................................................... 13 81 148
-------- -------- ------
$ 13 $ (146) $ 63
======== ======== ======
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities are comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
---------------------
2000 1999
---- ----
(Amounts in thousands)
<S> <C> <C>
Deferred Tax Assets:
Net operating losses................................................... $ 15,345 $ 13,869
Restructuring/non-recurring costs...................................... 39 164
Alternative minimum tax credits........................................ 667 667
Payable to Third Party Intermediaries.................................. 459 418
Bad debt expense....................................................... 5 350
Employee benefits and options.......................................... 191 152
Other, net............................................................. 362 294
-------- --------
Total Deferred Tax Assets......................................... 17,068 15,914
Valuation Allowance.................................................... (16,151) (14,555)
-------- --------
Net Deferred Tax Assets................................................ 917 1,359
-------- --------
Deferred Tax Liabilities:
Depreciation........................................................... -- (442)
State income taxes..................................................... (386) (386)
Cash to accrual differences............................................ (531) (531)
-------- --------
Total Deferred Tax Liabilities.................................... (917) (1,359)
-------- --------
Net Deferred Tax Assets.................................................... $ 0 $ 0
======== ========
</TABLE>
34
<PAGE> 35
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
At May 31, 2000, the Company had Federal accumulated net operating
loss carryforwards of approximately $40 million, which expires in 2010 through
2020. In addition, the Company has a minimum tax credit carryover 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 taxable income from which to deduct such losses during limited
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.
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, 2000, and 1999, was
necessary to offset the deferred tax assets based on the likelihood of future
realization.
UNBENEFITTED TAX REFUNDS RECEIVED
In connection with the filing of its Federal income tax returns for
fiscal year 1995 and 1996, the Company filed a tentative refund claim to carry
back losses described in Section 172(f) of the Internal Revenue Code ("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 for 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.
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. 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.
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 Internal Revenue Service ("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.
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 $5.2 million through May 31,
2000. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refunds of approximately $2.5
million, which is reported as "other receivable" in the accompanying balance
sheets. This report commenced the administrative appeals process. The Company
filed a protest letter with the IRS on November 6, 1998 and believes that its
position with respect to its right to the tax refunds 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 the commencement of the appeals process in
the United States Tax Court. The IRS reserves the right to assess and collect
the tax previously refunded to the Company at any time during the appeals
process.
35
<PAGE> 36
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
Effective July 11, 2000, the Company submitted an Offer in Compromise
(the "Offer") to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. There can be no
assurance that the IRS will accept the Offer.
If the IRS were to disallow the refunds claimed, or the terms of the
Offer in Compromise as presented or modified are not adhered to, the Company
will have additional loss carry forwards of approximately $50 million, which
will expire if unused by the year 2010.
NOTE 14 -- DISCONTINUED OPERATIONS
On March 11, 1999, the Company sold its Aurora, Colorado hospital for
$3.3 million of cash plus a $1.2 million note receivable, and recognized a loss
on sale of $416,000. This sale completed the Company's plan to dispose of its
hospital business segment. Financial information relating to the operation of
the discontinued hospital business follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31,
---------------------------
1999* 1998
------------- -----------
(Amounts in thousands)
<S> <C> <C>
Operating revenues ......................................... $ 2,713 $ 6,276
------- -------
Costs and expenses:
Healthcare operating expenses ........................... 2,492 5,658
General and administrative expenses ..................... 16 145
Provision for doubtful accounts ......................... 521 2
Depreciation and amortization ........................... 18 54
------- -------
3,047 5,859
------- -------
Income (loss) from operations .............................. $ (334) $ 417
======= =======
</TABLE>
---------------
* Year-to-date through the November 30, 1998 measurement date.
During the fiscal year ended May 31, 1999, the Company sold its
non-operating facility located in Fort Worth, Texas for $1.8 million in cash,
which approximated its net book value.
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.
36
<PAGE> 37
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
NOTE 15 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------
2000 1999 1998
---------- ---------- -----------
(Amounts in thousands, except per share data)
<S> <C> <C> <C>
NUMERATOR:
Income (loss) from continuing operations ....................................... $ (5,766) $ (3,082) $ 1,554
Less preferred stock dividends ................................................. -- (55) (82)
-------- -------- -------
Income (loss) from continuing operations available to common
stockholders before extraordinary item .................................... (5,766) (3,137) 1,472
Effect of dilutive securities:
Preferred Stock dividends ................................................... -- -- 82
-------- -------- -------
Numerator for diluted earnings (loss) per share available to common
stockholders from continuing operations after assumed conversions ......... (5,766) (3,137) 1,554
Discontinued Operations:
Operating income (loss) ..................................................... -- (334) 417
Loss on disposal ............................................................ -- (698) --
Extraordinary item ............................................................. -- 120 --
-------- -------- -------
Net income (loss) available to common stockholders after assumed conversions ... $ (5,766) $ (4,049) $ 1,971
======== ======== =======
DENOMINATOR:
Weighted average shares ........................................................ 3,818 3,562 3,384
Effect of dilutive securities:
Employee stock options ...................................................... -- -- 137
Convertible preferred stock ................................................. -- -- 344
-------- -------- -------
Dilutive potential common shares ............................................ -- -- 481
Denominator for diluted earnings (loss) per share - adjusted weighted average
shares after assumed conversions .......................................... 3,818 3,562 3,865
======== ======== =======
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ....................................... $ (1.51) $ (0.88) $ 0.44
Discontinued operations:
Income (loss) from operations ............................................... -- (0.09) 0.12
Loss on disposal ............................................................ -- (0.20) --
Extraordinary item ............................................................. -- 0.03 --
-------- -------- -------
Net income (loss) .............................................................. $ (1.51) $ (1.14) $ 0.56
======== ======== =======
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ....................................... $ (1.51) $ (0.88) $ 0.40
Discontinued operations:
Income (loss) from operations ............................................... -- (0.09) 0.11
Loss on disposal ............................................................ -- (0.20) --
Extraordinary item ............................................................. -- 0.03 --
-------- -------- -------
Net income (loss) .............................................................. $ (1.51) $ (1.14) $ 0.51
======== ======== =======
</TABLE>
Authorized shares of common stock reserved for possible issuance for convertible
debentures and stock options are as follows at May 31, 2000:
<TABLE>
<S> <C>
Convertible debentures..................................................... 9,044
Outstanding stock options.................................................. 884,675
Possible future issuance under stock option plans.......................... 235,534
---------
Total...................................................................... 1,129,253
=========
</TABLE>
37
<PAGE> 38
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
NOTE 16 -- EMPLOYEE BENEFIT PLANS
The Company offers a 401(k) Plan (the "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) regularly 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 by the Company's Board of
Directors or the Plan Committee. The Company's employer matching contributions
were $17,000, $22,000, and $31,000 to the Plan in Fiscal 2000, 1999, and 1998
respectively.
NOTE 17 -- 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 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 had 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 had a cumulative
quarterly dividend of 4% per annum which was payable when and as declared by the
Board of Directors. However, no dividends were to be paid on the Preferred Stock
until the Company had positive stockholder's equity. The Preferred Stock was
preferred to the extent of $50 per share plus accrued dividends; was 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 had no voting privileges.
During February 1999, the 41,260 outstanding shares of Preferred Stock
were converted into 343,833 shares of Common Stock.
COMMON STOCK
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.
38
<PAGE> 39
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
STOCK OPTION PLANS
The Company 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 options, stock rights, stock
appreciation rights, limited stock appreciation rights and restricted stock
grants under the 1995 Plan may qualify as Incentive Stock Options ("ISOs") under
Section 422A of the Internal Revenue Code. Options for ISOs may be granted for
terms of up to ten years and are generally exercisable in cumulative increments
of either 33% each year or 50% each six months. Options for Non-statutory Stock
Options ("NSOs") may be granted for terms of up to 13 years. The exercise price
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
1,000,000. As of May 31, 2000, there were 867,175 options outstanding, and of
these options, 224,525 options were exercisable under the 1995 Plan.
In September 1995, the Board of Directors granted and issued to its
former President and Chief Executive Officer ("CEO"), 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
the CEO, 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 the CEO 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 the
CEO's employment with the Company continues through that date. In accordance
with the terms of the CEO's separation agreement, these options were cancelled
effective January 14, 2000.
On November 17, 1998, the Company's Board of Directors approved the
re-pricing of stock option grants to employees below the level of Executive
Officers, subject to each employee returning his or her old options for
cancellation. The cancelled options were replaced by an equivalent number of new
options at an exercise price equal to the November 30, 1998 closing price of
$3.5625.
On December 14, 1998, the Company's Board of Directors approved the
re-pricing of stock option grants for Executive Officers, subject to each
Executive Officer returning his or her old options for cancellation. For every
two options cancelled under the 1988 Incentive Stock Option and Non-statutory
Stock Option Plans, one option was reissued under the 1995 Incentive Stock
Option Plan. For every four options cancelled under the 1995 Incentive Stock
Option Plan, three new options were reissued. All reissued options are subject
to the provisions of the 1995 Plan, including vesting in accordance with the
Company's vesting policy. The exercise price of the reissued options equals the
December 14, 1998 closing price of $4.00.
The Company has a non-qualified stock option plan for its outside
directors (the "Directors' Plan"). 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. As of May 31, 2000, the Company had no outside directors and there were
no options outstanding to former directors.
The Company also has a 1988 ISO Plan and a 1988 NSO Plan. Effective
February 3, 1998, the 1988 Plans expired and no new grants will be issued. As of
May 31, 2000, there were 17,500 options outstanding and exercisable under the
1988 Plans.
39
<PAGE> 40
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
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
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
--------------------------------------------
2000 1999 1998
----------- ------------ -----------
<S> <C> <C> <C>
Volatility factor of the expected market price of the
Company's Common Stock............................. 65.0% 63.0% 52.6%
Expected life (in years) of the options............... 6, 5, and 4 5 and 4 6, 5, and 4
Risk-free interest rate............................... 6.5% 5.5% 5.5%
Dividend yield........................................ 0% 0% 0%
</TABLE>
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, it is management's opinion that 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 that were granted by the Company from June 1, 1995
through May 31, 2000. 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,
-----------------------------------------------
2000 1999 1998
-------------- --------------- --------------
<S> <C> <C> <C>
Pro forma net income (loss) attributed to common stockholders........ $(6,461) $ (4,773) $ 1,212
Pro forma net earnings (loss) per common share:
Basic............................................................. $ (1.69) $ (1.34) $ 0.36
Diluted........................................................... $ (1.69) $ (1.34) $ 0.36
</TABLE>
40
<PAGE> 41
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
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, 1997............................................ 629,249 $ 10.02
Cancelled................................................................. (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
Cancelled................................................................. (474,550) 9.15
Granted................................................................... 548,651 5.21
Exercised................................................................. (22,000) 7.20
Forfeited................................................................. (208,283) 8.84
Outstanding as of May 31, 1999............................................ 568,033 $ 5.63
Cancelled................................................................. (222,500) 4.89
Granted................................................................... 896,750 0.48
Exercised................................................................. 0
Forfeited................................................................. (357,608) 4.14
Outstanding as of May 31, 2000............................................ 884,675 $ 1.19
</TABLE>
The weighted average fair values of options granted were $0.41, $4.91,
and $5.18 in Fiscal 2000, 1999, and 1998 respectively.
A summary of options outstanding and exercisable as of May 31, 2000
follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
WEIGHTED- AVERAGE AVERAGE
EXERCISE AVERAGE REMAINING EXERCISE PRICE OF
OPTIONS PRICE EXERCISE CONTRACTUAL OPTIONS EXERCISABLE
OUTSTANDING RANGE PRICE LIFE EXERCISABLE OPTIONS
----------- ----------------- -------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
726,125 $ 0.26 - $ 0.5625 $ 0.46 9.46 120,875 $ 0.56
142,050 $ 3.56 - $ 4.000 $ 3.83 8.51 104,650 $ 3.88
16,500 $10.00 - $11.00 $10.88 7.27 16,500 $10.88
------- -------
884,675 $ 1.19 9.27 242,025 $ 2.70
======= =======
</TABLE>
NOTE 18 -- 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, and maintenance and
repair expenses. Total rental expense for all operating leases applicable to
continuing operations was $0.8 million, $1.3 million, and $1.0 million for
fiscal years 2000, 1999, and 1998 respectively. During Fiscal 2000 and Fiscal
1999, the Company received rental income of $84,000 and $106,000, respectively,
in connection with the sublease of a portion of its California facilities
(which were closed in Fiscal 2000) to entities operated by the Company's former
Chief Executive Officer ("CEO"). As of February 1, 2000, the Company has no
future obligation under the California lease, having completed a transfer of
this lease to an entity managed by the Company's former CEO.
41
<PAGE> 42
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
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, 2000:
FISCAL YEAR OPERATING LEASES
----------- ----------------------
(Amounts in thousands)
2001........................................ $ 432
2002........................................ 51
2003........................................ 12
2004........................................ 1
2005........................................ 0
Later Years................................. 0
-----
Total minimum lease payments................ $ 496
=====
OTHER COMMITMENTS AND CONTINGENCIES
(1) During the fiscal year ended May 31, 2000, the Company renewed one
contract, which included a requirement that the Company maintains a
$550,000 performance bond throughout the two-year renewal term of the
contract. This bond was secured by a $150,000 cash deposit, which is
included in the non-current, restricted cash balance at May 31, 2000.
The term of the bond is for one year and the bond is automatically
renewable as long as the contract remains in force.
(2) In June 2000, the Company submitted a bid to provide substance abuse
treatment services to a specific population covered through the
Department of Justice in Puerto Rico. The bid included a $300,000 bid
bond requirement, which is to be maintained until the bid has been
awarded. The Company secured this bond with a $300,000 cash deposit
made on June 6, 2000.
(3) In July 2000, Steiner Corporation, a Colorado linen service company,
commenced an action against the Company seeking damages in the amount
of, approximately, $145,000 by reason of an alleged early termination
of a laundry service contract. While this claim has only recently been
asserted, the Company intends to deny liability. Additionally, the
Company does not believe that this claim will have a material adverse
effect on the Company's financial position, results of operations and
cash flows.
(4) A collection proceeding has been filed against the Company in
connection with the previously active managed care operation in Puerto
Rico. This collection effort was filed by a Puerto Rico provider, Hato
Rey Psychiatric Hospital d/b/a Mepsi Center ("MEPSI"). MEPSI claims
that the Company owes MEPSI a total of $681,000, plus interest and
legal fees, for services rendered to patients managed by the Company
under the prior Puerto Rico Reforma Program contract, which was held by
Humana, Inc. The Company is conducting an audit to determine the final
amount, if any, it believes is owed to MEPSI. Such payment would be
applied against the Company's existing reserve for Puerto Rico claims
and disbursed from the provider funds that are held in escrow (see Note
2 - "Summary of Significant Accounting Policies", "Restricted Cash").
The Company does not believe that this claim will have a material
adverse effect on the Company's financial position, results of
operations and cash flows.
(5) The Company's subsidiary, Careunit Hospital of Ohio, Inc. ("Careunit")
has been named as a third party defendant in the principal action
entitled "Vencor, Inc. v. Empe, Inc." The principal action arises out
of the sale by Careunit of its Ohio hospital facility to Vencor, Inc.
("Vencor") and relates to an alleged asbestos condition at the Ohio
facility. Empe, Inc. ("Empe") apparently was Vencor's environmental
expert in connection with this transaction. In making Careunit a third
party defendant, Empe claims that it was misled and that Careunit
allegedly failed to disclose the asbestos condition in the facility
when Vencor conducted its environmental assessment. No specific amount
of damages is claimed, but rather, the third party complaint seeks
apportionment, indemnity and compensatory damages as may be determined
at trial. The Company's insurance carrier has provided a defense of
this action, which is only in its formative stages. The Company does
not believe that this claim will have a material adverse effect on the
Company's financial position, results of operations and cash flows.
42
<PAGE> 43
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 31, 2000, 1999 and 1998
(6) On February 19, 1999, the California Superior Court denied the
Company's Petition for Writ of Mandate 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
involved 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". The Company does not plan to appeal the California Superior
Court decision for which the Notice of Entry of Judgment was entered on
February 26, 1999. As of May 31, 2000, the Company has $1.2 million
accrued relating to this matter.
(7) With respect to the contingency related to prior years' income taxes,
see Note 13, "Income Taxes".
(8) With respect to the contingency related to the Humana claim, see Note
4, "Major Contracts/Customers".
(9) The legal matter involving the Company's former Chief Financial Officer
was fully settled effective May 31, 2000.
(10) The legal matter involving PMR Corporation was fully settled effective
May 5, 2000.
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 may exceed insurance policy limits
and the Company or any one of its subsidiaries 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.
REGULATORY MONITORING AND COMPLIANCE
The Company is subject to extensive and evolving state and federal
regulations, including licensure and compliance with regulations related to
healthcare providers, insurance companies, and other risk assuming entities.
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 could 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 19 -- FOURTH QUARTER RESULTS FOR FISCAL 2000 AND 1999 - UNAUDITED
The loss from continuing operations for the fourth quarter of Fiscal
2000 was $0.7 million, or $0.18 loss per share, compared to the loss from
continuing operations of $2.5 million, or $0.66 diluted earnings per share, for
the quarter ended May 31, 1999. Included in the fourth quarter results from
Fiscal 1999 was a non-recurring restructuring charge totaling $0.6 million,
related to the loss of the Company's Puerto Rico contract, $0.5 million of bad
debt expense, and $0.5 million of operating expense incurred after the
termination dates specific to the two major contracts that ended during the
fourth quarter. The remaining loss was primarily attributable to the loss of
revenue following the termination of the Puerto Rico contract.
43
<PAGE> 44
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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>
Mary Jane Johnson 50 President(1)(2), Chief Executive Officer(1)(2),
and Director(1)(2)
Robert Landis 41 Chairman of the Board of Directors(1)(2),
Chief Financial Officer (1)(2), and Treasurer (1)(2)
Chriss W. Street (3) 50 Chairman of the Board of Directors(3),
President(3), and Chief Executive Officer(3)
</TABLE>
---------------
(1) Comprehensive Care Corporation.
(2) Comprehensive Behavioral Care, Inc. (Principal subsidiary of the Company).
(3) Mr. Street separated from the Company and resigned as Chairman of the Board
of Directors effective January 14, 2000.
The Board of Directors comprises three classes of directors with
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. Ms. Johnson is a Class I director whose term expires at the 2000 Annual
Meeting. Mr. Landis is a Class III director whose term expires at the 2001
Annual Meeting. Mr. Street served as a Class II director until his separation
from the Company on January 14, 2000. The Class II director seat remains vacant
as of July 31, 2000.
During Fiscal 2000, recommendations and administrative decisions
regarding the compensation of the Company's executives were made by the Board of
Directors, which is currently comprised entirely of persons who are officers or
employees of the Company.
MARY JANE JOHNSON, RN, MBA, age 50. 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. In July 1999, Ms. Johnson was appointed to the position of
Chief Operating Officer of Comprehensive Care Corporation. Beginning on April
23, 1999, Ms. Johnson is a Class I director whose term expires at the 2000
Annual Meeting. Effective January 14, 2000, Ms. Johnson was appointed to the
position of President and Chief Executive Officer. 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.
ROBERT J. LANDIS, CPA, MBA, age 41. Mr. Landis has served as Executive
Vice President, Chief Financial Officer, and Treasurer since July 1998.
Beginning on April 23, 1999, Mr. Landis is a Class III director whose term
expires at the 2001 Annual Meeting. Effective January 14, 2000, Mr. Landis was
selected to serve as Chairman of the Board of Directors. Mr. Landis served as
Treasurer of Maxicare Health Plans, Inc., a health maintenance organization,
from November 1988 to July 1998. Mr. Landis, a Certified Public Accountant,
received a Bachelors Degree in Business Administration from the University of
Southern California, and a Masters Degree in Business Administration from
California State University at Northridge.
44
<PAGE> 45
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 2000 exceed $100,000 (together, these persons are sometimes referred
to as the "named executives").
TABLE I - SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------
RESTRICTED
OTHER ANNUAL STOCK
COMPENSATION AWARD(S)
FY NAME POSITION SALARY($) BONUS($) ($) ($)
-- ---- -------- --------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
2000 Mary Jane Johnson President(1,2), Chief, 175,000 -- 1,400 (4) --
1999 Mary Jane Johnson Executive Officer(1,2), 146,930 50,000 -- --
1998 Mary Jane Johnson and Director(1,2) 110,040 20,000 -- --
2000 Robert Landis Chairman of the Board of 159,141 -- 3,000 (7) --
1999 Robert Landis Directors(1,2), Chief Financial 139,408 (6) 45,000 32,967 (8) --
1998 Robert Landis Officer(1,2), and Treasurer(1,2) -- (6) -- -- --
2000 Chriss W. Street Chairman of the Board of 190,385 -- 793,646 (10) --
1999 Chriss W. Street Directors(3), President(3) 300,861 80,000 5,831 (11) --
1998 Chriss W. Street and Chief Executive Officer(3) 264,263 -- 6,000 (11) --
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------------------
SECURITIES LONG-TERM
UNDERLYING INCENTIVE ALL OTHER
OPTIONS/SARS PAYOUTS COMPENSATION
FY NAME POSITION (#) ($) ($)
-- ---- -------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
2000 Mary Jane Johnson President(1,2), Chief, 150,000 -- 1,323 (5)
1999 Mary Jane Johnson Executive Officer(1,2), 20,000 -- 1,051 (5)
1998 Mary Jane Johnson and Director(1,2) 37,000 -- 1,012 (5)
2000 Robert Landis Chairman of the Board of 150,000 -- 613 (5)
1999 Robert Landis Directors(1,2), Chief Financial 153,125 (9) -- --
1998 Robert Landis Officer(1,2), and Treasurer(1,2) -- -- --
2000 Chriss W. Street Chairman of the Board of 325,000 (14) -- 884 (5)
1999 Chriss W. Street Directors(3), President(3) 217,501 (12) -- 906 (5)
1998 Chriss W. Street and Chief Executive Officer(3) 120,000 (13) -- 76,998 (15)
</TABLE>
--------------
(1) Comprehensive Care Corporation.
(2) Comprehensive Behavioral Care, Inc., Principal Subsidiary of the Company.
(3) Mr. Street separated from the Company and resigned as Chairman of the Board
of Directors effective January 14, 2000.
(4) Represents a car allowance in accordance to Ms. Johnson's employment
agreement.
(5) Represents amounts contributed by the Company to the indicated person's
401(k) Plan Account.
45
<PAGE> 46
(6) Mr. Landis was employed by the Company on July 2, 1998.
(7) Represents compensation expense for personal use mileage.
(8) Represents moving expenses paid to Mr. Landis.
(9) Includes 87,500 options issued at $10.00 per share that were cancelled and
repriced at $4.00 per share on December 14, 1998.
(10) Includes separation pay of $760,000 and a $4,800 car allowance in
accordance with Mr. Street's employment agreement. Also includes payment
for accrued vacation, in the amount of $28,846 as of Mr. Street's
January 14, 2000 separation date.
(11) Represents a car allowance paid by the Company and in accordance with Mr.
Street's employment agreement.
(12) Includes $100,000 of options issued at $6.00 per share that were cancelled
and repriced at $4.00 per share on December 14, 1998.
(13) 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 per value. The Restricted Shares are subject to vesting
at the rate of 5,000 Restricted Shares over a 20-year period. The vesting
is subject to acceleration upon the occurrence of certain events as
described below. As of May 31, 1998, 49,500 Restricted Shares were vested
and 50,500 were unvested, with the holder having sole voting power. On
December 16, 1998, 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. The options are fully vested, non-incentive stock options,
exercisable on and after June 17, 1999, and through December 19, 2002,
regardless of whether Mr. Street's employment with the Company continues
through that date. In accordance with the terms of Mr. Street's separation
agreement, these options were cancelled effective January 14, 2000.
(14) Includes 62,500 options that were forfeited and 62,500 options that were
cancelled effective with Mr. Street's January 14, 2000 termination date.
(15) 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.
EMPLOYMENT AGREEMENTS
On July 2, 1999, the Company entered into an employment agreement with Ms.
Mary Jane Johnson. Ms. Johnson's employment agreement provides for a salary at
the rate of $175,000 per annum and includes a performance-based bonus of up to a
target amount of $75,000 in connection with the Company's Annual Management
Bonus Plan ("MBP Plan"). In addition, Ms. Johnson is provided with an auto
allowance of $200 per month as well as health insurance and other benefits and a
policy of life insurance. Ms. Johnson's employment agreement provides that, in
the event of a change in control of the Company as defined, Ms. Johnson will be
paid a severance benefit equal to twelve (12) months base salary, together with
her incentive bonus.
On September 14, 1998, the Company entered into an employment agreement
with Mr. Robert J. Landis. Mr. Landis' employment agreement as amended provides
for a salary at the rate of $175,000 per annum and a performance-based bonus of
up to a target amount of $60,000 in connection with the Company's MBP Plan. In
addition, Mr. Landis is provided with health insurance and other benefits and a
policy of life insurance. Mr. Landis' employment agreement provides that, in the
event of a change in control of the Company as defined, Mr. Landis will be paid
a severance benefit equal to the greater of (i) the balance of his base salary
for the remainder of the unexpired term of his agreement or (ii) twelve (12)
months base salary, together with his incentive bonus.
On September 14, 1998, the Company entered into an employment agreement
with Mr. Chriss W. Street that had a term expiring on November 30, 2001. Mr.
Street's employment agreement as amended provided for a salary at the rate of
$300,000 per annum and included a performance based bonus of up to a target
amount of $100,000 in connection with the Company's MBP Plan. In addition, Mr.
Street was provided with health insurance and other benefits and a policy of
life insurance. He also received an auto allowance of $600 per month and
reimbursement for expenses incurred on behalf of the Company and in connection
with the performance of his duties. The agreement provided that the Company
procures Directors and Officers Liability Insurance in an amount not less than
$1.0 million. Mr. Street's employment agreement provided that in the event of a
change of control of the Company as defined, Mr. Street will be paid a severance
benefit equal to the greater of (i) the balance of his base salary for the
remainder of the unexpired term of his agreement or (ii) two times the sum of
Mr. Street's then prevailing base salary. Effective January 14, 2000, Mr. Street
separated from the Company and resigned as Chairman of the Board of Directors.
46
<PAGE> 47
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Effective July 2, 1999, Mr. Landis and Ms. Johnson are each eligible
to receive a retention bonus in connection with the Company's Stay Bonus
Retention Pool program, provided that he or she continues as an active employee
through December 31, 2000.
INDEMNIFICATION AGREEMENT
In connection with the Company's indemnification program for executive
officers and directors, Ms. Johnson and Mr. Landis, as well as nine former
directors and six 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, see the
description of "Employment Agreements" for Ms. Johnson and Mr. Landis under
Executive Compensation.
TABLE II - OPTIONS HELD AT MAY 31, 2000
The following tables present information regarding the number of
unexercised options held by the Company's named executives at May 31, 2000.
There were no options exercised by the Company's named executives during Fiscal
2000. No stock appreciation rights were granted or held by such persons during
Fiscal 2000.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE GRANT DATE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE VALUE
------------------- ------------- ---------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Mary Jane Johnson 75,000 8.4% $ 0.5625 07/06/2009 $ 0.37
75,000 8.4% $ 0.2656 01/14/2010 $ 0.17
Robert J. Landis 75,000 8.4% $ 0.5625 07/06/2009 $ 0.37
75,000 8.4% $ 0.2656 01/14/2010 $ 0.17
Chriss W. Street(1) 125,000(2) 13.9% $ 0.5625 07/06/2009 $ 0.11
100,000 11.2% $ 0.5625 01/14/2010 $ 0.09
100,000(3) 11.2% $ 0.5625 01/14/2010 $ 0.18
</TABLE>
------------------
(1) Mr. Street separated from the Company and resigned as Chairman of the Board
of Directors effective January 14, 2000.
(2) Includes 62,500 options that were forfeited and 62,500 options that were
cancelled effective with Mr. Street's January 14, 2000 termination date.
(3) Options are contingent upon the Company's success in reducing its existing
obligations to the Internal Revenue Service, with respect to both principal
and accrued interest, by an amount which is not less than 50% of the
obligation that existed at January 14, 2000.
47
<PAGE> 48
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The present 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/SAR EXERCISE IN LAST FISCAL YEAR
AND AGGREGATED FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY OPTIONS/SARS AT
SHARES VALUE END (#) FY END ($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
-------------------------- ------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Mary Jane Johnson -- -- 47,500/122,500 0/0
Robert J. Landis -- -- 103,125/112,500 0/0
Chriss W. Street(1) -- -- 0/200,000 0/0
</TABLE>
-------------
(1) Mr. Street separated from the Company and resigned as Chairman of the Board
of Directors effective January 14, 2000.
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 and by each person who, to the
knowledge of the Company, beneficially owned more than 5% of any class of the
Company's voting stock as of July 31, 2000. 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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
---------------------------------------------- ----------------------------- -------------------
<S> <C> <C>
Mary Jane Johnson(4) 122,500 3.2%
Robert J. Landis (1) 178,625 4.7%
Chriss W. Street (2,3) 110,260 2.9%
All executive officers and directors
As a group (3 persons) 411,385 10.8%
</TABLE>
-------------
(1) Includes 500 shares held directly and 178,125 shares subject to options
that are exercisable within 60 days of July 31, 2000.
(2) Mr. Street separated from the Company and resigned as Chairman of the Board
of Directors effective January 14, 2000.
(3) Includes 10,760 shares held directly and 50,000 shares subject to options
that are presently exercisable or exercisable within 60 days of July 31,
2000. Also includes 49,500 vested shares under a Restricted Stock Agreement
over which the holder has the sole voting power.
(4) Shares subject to options that are exercisable within 60 days of July 31,
2000.
48
<PAGE> 49
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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, 2000 and 1999
Consolidated Statements of Operations, Years Ended May 31, 2000,
1999 and 1998
Consolidated Statements of Stockholders' Deficit, Years Ended May
31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows, Years Ended May 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
None.
Other schedules are omitted, as 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 July 20, 2000 (filed herewith).
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)
10.12 Employment agreement dated September 14, 1998, between the Company and Chriss W. Street. *(13)
10.13 Employment agreement dated September 14, 1998, between the Company and Robert J. Landis. *(14)
10.14 Addendum to employment agreement between the Company and Robert J. Landis. (17)
16. Letter dated May 19, 1999 from Ernst & Young, LLP ("E&Y") in concurrence with the Company's
statement made concerning E&Y's dismissal as the Company's principal accountant. (16)
21. List of the Company's active subsidiaries (filed herewith).
23. Consent of Richard A. Eisner & Company, LLP (filed herewith).
27. Financial Data Schedules (for SEC use only).
99.1 Comprehensive Care Corporation 1995 Incentive Plan, as amended on November 17, 1998. (15)
</TABLE>
49
<PAGE> 50
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
----------------
* Management contract or compensatory plan or arrangement with one or more
directors or executive officers.
(1) Filed as an exhibit to the Company's Form S-3 Registration Statement No.
2-97160.
(2) Filed as an exhibit to the Company's Form 8-K dated May 4, 1988.
(3) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1988.
(4) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1991.
(5) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1994.
(6) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
November 30, 1994.
(7) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
February 28, 1995.
(8) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1995.
(9) Filed as an exhibit to the Company's Form 8-K dated November 9, 1995.
(10) Filed as an exhibit to the Company's Form 8-K dated January 30, 1997.
(11) Filed with original 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.
(13) Filed as an exhibit to the Company's Form 8-K dated September 24, 1998.
(14) Filed as an exhibit to the Company's Form 8-K dated September 24, 1998.
(15) Filed as an exhibit to the Company's Form 8-K dated November 25, 1998.
(16) Filed as an exhibit to the Company's Form 8-K dated May 19, 1999.
(17) Filed as an exhibit to the Company's Form 8-K dated July 2, 1999.
(b) Reports on Form 8-K.
None
50
<PAGE> 51
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
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 25, 2000.
COMPREHENSIVE CARE CORPORATION
By /s/ MARY JANE JOHNSON
-------------------------------
Mary Jane Johnson
(Principal Executive Officer)
By /s/ ROBERT J. LANDIS
-------------------------------
Robert J. Landis
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates so indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT J. LANDIS Chairman of the Board of Directors, August 25, 2000
---------------------------------- Chief Financial Officer, and Treasurer
Robert J. Landis (Principal Financial and
Accounting Officer)
/s/ MARY JANE JOHNSON President, Chief Executive Officer, August 25, 2000
----------------------------------- and Director
Mary Jane Johnson
</TABLE>
51
<PAGE> 52
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Exhibit Index
Fiscal Year Ended May 31, 2000
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
3.2 Restated Bylaws as amended July 20, 2000 .......... 53-68
21 List of the Company's subsidiaries ................ 69
23 Consent of Richard A. Eisner & Company, LLP ....... 70
27 Financial Data Schedules ........................... 71
