0000892569-95-000500.txt : 19950915 0000892569-95-000500.hdr.sgml : 19950915 ACCESSION NUMBER: 0000892569-95-000500 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19950531 FILED AS OF DATE: 19950914 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPREHENSIVE CARE CORP CENTRAL INDEX KEY: 0000022872 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 952594724 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-09927 FILM NUMBER: 95573894 BUSINESS ADDRESS: STREET 1: 4350 VON KARMAN AVE STREET 2: STE 280 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 7147980460 MAIL ADDRESS: STREET 1: 4350 VON KARMAN AVENUE STREET 2: SUITE 280 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES DATE OF NAME CHANGE: 19730501 FORMER COMPANY: FORMER CONFORMED NAME: JADE OIL CO DATE OF NAME CHANGE: 19700402 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES INC DATE OF NAME CHANGE: 19700402 10-K405/A 1 COMPREHENSIVE CARE CORPORATION FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K 405/A Amendment No. 1 /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended May 31, 1995 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission file number 0-5751 COMPREHENSIVE CARE CORPORATION (Exact name of Registrant as specified in its charter) Delaware 95-2594724 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4350 Von Karman Avenue Suite 280 Newport Beach, California 92660 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (714) 798-0460 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, Par Value $.01 per share New York Stock Exchange, Inc. Common Share Purchase Rights New York Stock Exchange, Inc. SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 7 1/2% Convertible Subordinated Debentures due 2010 Over-the-Counter (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of voting stock held by non-affiliates of the Registrant at August 31, 1995, was $20,635,655 based on the closing sale price of the Common Stock on August 31, 1995 as reported on the New York Stock Exchange composite tape. At August 31, 1995, the Registrant had 2,637,003 shares of Common Stock outstanding. The aggregate market value of Registrant's Common Stock held by non-affiliates as of August 31, 1995 and the number of shares outstanding, includes an aggregate of 422,500 shares previously sold by the Registrant and which the Registrant is obligated to issue. Issuance of which is pending the completion of administerial acts. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the Registrant's definitive proxy statement for the Registrant's 1995 annual meeting of stockholders presently scheduled to be held on November 9, 1995, which Proxy Statement will be filed no later than 120 days after the close of the Registrant's fiscal year ended May 31, 1995. 1 2 PART I ITEM 1. BUSINESS. Comprehensive Care Corporation(R) (the "Company") is a Delaware corporation organized in January 1969. The Company is transitioning from predominantly a provider of inpatient treatment programs for psychiatric disorders and chemical dependency (including alcohol and drug) to a managed care behavioral health care company providing a continuum of services. Such services include risk based contract capitation of behavioral health expenses for specific populations and a broad spectrum of inpatient and outpatient mental health and substance abuse therapy and counseling. Programs are provided at freestanding facilities operated by the Company and at independent general hospitals under contracts with the Company. A wholly-owned subsidiary, CareUnit(R), Inc., develops, markets and manages the Company's contract programs. During fiscal 1995, psychiatric and chemical dependency treatment programs (freestanding operations and CareUnit, Inc. contracts) accounted for approximately 80% of the Company's operating revenues. Comprehensive Behavioral Care, Inc., ("Comprehensive Behavioral"), formerly known as AccessCare, Inc., an 86.5% subsidiary primarily engaged in the development and delivery of managed care services for behavioral medicine, accounted for approximately 19% of the Company's operating revenues in fiscal 1995. The remaining 1% of fiscal 1995 revenues were derived from other activities. The Company has experienced significant net losses in 1995 and prior years, has a working capital deficiency of $15.3 million and a deficit in stockholders' equity of $4.9 million as of May 31, 1995, and is attempting to accomplish a Debenture exchange offer to cure a default in the payment of interest on these Debentures. Additionally, during the past five years, and in particular since fiscal 1994, the Company has begun to refocus its activities through closure and/or sale of its freestanding facilities and expansion of managed care activities. See Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of these matters as well as other risk factors that the Company faces. The following table sets forth for each of the years in the five-year period ended May 31, 1995, the operating revenues of the Company's freestanding operations, CareUnit, Inc. contracts, Comprehensive Behavioral operations, RehabCare programs, and other activities.
YEAR ENDED MAY 31, -------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Freestanding operations .................. 62% 70% 81% 75% 34% CareUnit, Inc. contracts ................. 18 16 12 14 14 Comprehensive Behavioral operations (1) .. 19 10 2 -- -- RehabCare programs (2) ................... -- -- -- 6 47 Other activities ......................... 1 4 5 5 5 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === ===
-------------------------------- (1) The Company has provided managed care products since the acquisition of Comprehensive Behavioral Care, Inc.'s predecessor in December 1992. On August 1, 1995, the Company changed the name of its subsidiary from AccessCare, Inc. to Comprehensive Behavioral Care, Inc. (2) The Company formerly owned a company known as RehabCare Corporation ("RehabCare"), which developed, marketed and managed the delivery of comprehensive medical rehabilitation services for functionally disabled persons. The Company offered RehabCare common stock to the public in fiscal 1992, maintaining a minority interest, and during fiscal 1993, sold its remaining 48% stake in RehabCare. Accordingly, revenues from RehabCare were not material to the Company during fiscal 1993. 2 3 MANAGED CARE OPERATIONS Comprehensive Behavioral Care, Inc. provides managed behavioral health care and substance abuse services for employers, HMO's, PPO's, government organizations, third party claim administrators and other group purchasers of health care. Comprehensive Behavioral currently provides services to contracted members in 35 states. The programs and services currently offered by Comprehensive Behavioral include fully integrated capitated behavioral health care services, employee assistance programs ("EAP"), case management/utilization review services, provider sponsored health plan development, preferred provider network development and management and physician advisor reviews. Comprehensive Behavioral distinguishes itself from the competition by being the "science-based" provider of care. Comprehensive Behavioral manages its clinical service programs on proven treatment technologies and is a leader in training its providers to use science-based efficacious treatment. Comprehensive Behavioral accounted for approximately 19% of the Company's operating revenues in fiscal 1995. Comprehensive Behavioral, in concert with a network of providers (e.g., CareUnit, Inc.), is expected to assist the Company in developing an integrated service model to provide high quality, cost effective care. In May 1995, the Company entered into an agreement with Physicians Corporation of America ("PCA") providing for PCA to invest $1.0 million into Comprehensive Behavioral for a voting equity position equal to 13 1/2% of Comprehensive Behavioral voting power on a fully diluted basis, represented by shares of Series A Preferred Stock which is also option of PCA for 100,000 shares of the Company's Common Stock (see Note 3-- "Acquisitions and Dispositions"). In addition, PCA was granted a first right of refusal regarding any sale of Comprehensive Behavioral. SOURCES OF REVENUE Comprehensive Behavioral provides managed behavioral health and substance abuse services to the members under contract. Generally, Comprehensive Behavioral receives a negotiated per member per month amount, or capitation, to provide these services. Comprehensive Behavioral is responsible for the development of service networks, including physicians, therapists and hospitalization services. Contracts are generally entered into for a period of one to three years and automatically renew for successive one-year periods unless either party gives notice of termination. DEVELOPMENT, COMPETITION, AND PROMOTION Approximately fifteen managed behavioral health care companies provide service for 80 million people in the United States and the Commonwealth of Puerto Rico. Additionally, there are numerous local and regional group practices, community mental health centers and behavioral health care hospitals that manage behavioral health care on behalf of HMOs, PPOs and local governments. Approximately one-third of the potential private marketplace still operates through indemnity coverage (approximately 60 million lives) and another third are covered through PPO products. The last two years have seen an increased migration to fully capitated HMO products in most markets. This is Comprehensive Behavioral's primary niche. Approximately 19% of all mental health care expenditures nationally are funded through Medicaid. Currently 11 states have received Health Care Finance Administration ("HCFA") approval for statewide privatization of mental health Medicaid expenditures, 9 states have submitted HCFA applications for waivers and 8 states have applications for waivers in the preparation stage. Additionally, 8.8 million people covered through Champus are being moved to managed care products in the next two years. As a consequence of these changes in the marketplace, the potential dollars expended for managed behavioral services in the market are expected to grow dramatically. Comprehensive Behavioral currently manages approximately 187,000 people covered through Medicaid in Florida and has partnered with PCA (see Note 3-- "Acquisitions and Dispositions") to attract such additional business in other states. Managed behavioral care is an extremely competitive business and seven companies currently dominate the market and include: Medco Behavioral Care (approximately 15 million lives), Value Behavioral Care (approximately 11 million lives), Greenspring (approximately 11 million lives), MCC (approximately 5 million lives), CMG (approximately 4 million lives), USBH (approximately 4 million lives) and Options Mental Health (approximately 3 million lives). Contracts are competitively bid and are awarded based upon price, customer service, capacity to satisfy the standards of the National Committee of Quality Assurance ("NCQA") and capacity to deliver the product including financial viability of the bidder. Comprehensive Behavioral has developed a 3 4 reputation as a price efficient company with high ratings by customers and members. As a subcontractor to four NCQA accredited HMOs, Comprehensive Behavioral has been through the NCQA evaluation on repeated occasions and has met its stringent criteria. Comprehensive Behavioral is subject to multiple state and federal regulations, as well as changes in Medicaid and Medicare reimbursement. At this point in time Comprehensive Behavioral is unable to predict what effect, if any, the changes in legislation for Medicaid and Medicare will have on Comprehensive Behavioral. Comprehensive Behavioral has certificates of authority in sixteen states and is awaiting such certificates in an additional six. Comprehensive Behavioral intends to become able to provide managed behavioral health care in all fifty states and the Commonwealth of Puerto Rico. CONTRACT OPERATIONS CareUnit, Inc. operates contract programs for behavioral medicine services in dedicated units of independent hospitals. The programs offered are similar to the behavioral medicine services offered in the Company's freestanding facilities. Under a contract, the hospital furnishes patients with all hospital facilities and services necessary for their generalized medical care, including nursing, dietary and housekeeping. CareUnit, Inc. is obligated to provide a multi-disciplinary team consisting of a physician (who serves as medical director for the program), a program manager, a social worker, a therapist and other appropriate supporting personnel. CareUnit, Inc. also typically provides support in the areas of program implementation and management, staff recruiting, continuing education, treatment team training, community education, advertising, public relations, insurance and ongoing program quality assurance. As a result of reimbursement changes and competitive pressures, the contractual obligations of CareUnit, Inc. have been subject to intense evaluation. In general, some prospective client hospitals have expressed a desire for more control over the services provided by CareUnit, Inc. and, in response, CareUnit, Inc. is providing a more flexible approach to contract management. During fiscal years 1995, 1994 and 1993, CareUnit, Inc. through CareInstitute(R), a related non-profit entity, managed two contracts for the State of Idaho. These programs provide behavioral medicine services in a residential and outpatient setting. During fiscal 1995, CareUnit, Inc. experienced an increase in the number of contracts and available beds. Although seven new contracts were opened, CareUnit experienced a decline in inpatient census during fiscal 1995. The Company believes that the decline in the number of inpatient beds is a result of the continued influence of managed care and reduction in available reimbursement from third parties, which have had the effect of making CareUnit, Inc.'s contracts less profitable to hospitals. During fiscal 1995, CareUnit purchased certain assets of Alternative Psychiatric Centers, Inc. ("APC"), a behavioral medicine contract company based in Southern California (see Note 3-- "Acquisitions and Dispositions"). The purchase of APC added three contracts to CareUnit. In addition, during fiscal 1995, CareUnit, Inc. terminated one unprofitable contract and four were terminated by the contracting hospital. Responding to market demands, CareUnit, Inc. has implemented, in the majority of its contracts, a variety of levels of care, offering a wide range of treatment options including detoxification, inpatient, residential, day- treatment or partial hospitalization and outpatient services. As a result, inpatient occupancy rates have declined as patients are moved to a less acute level of care. 4 5 The following table sets forth selected operating data regarding behavioral medicine programs managed under contract:
YEAR ENDED MAY 31, ------------------------------------------------------------- 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------- Number of contracts at end of period (1): Adult CareUnits(2)(3) ................ 11 10 12 15 21 Adolescent CareUnits(2) .............. -- 1 1 1 2 Adult CarePsychCenters(R)(2) ......... 2 3 3 3 4 Partial Hospitalization .............. 3 -- -- -- -- Eating disorders units ............... 1 1 1 2 2 ------ ------ ------ ------ ------- Total ................................ 17(5) 15 17 21 29 ====== ====== ====== ====== ======= Available beds at end of period ......... 157 236 306 479 685 Patient days served during period ....... 39,082 34,464 51,524 92,574 151,219 Admissions .............................. 3,634 3,992 5,139 7,867 11,902 Average occupied beds per contract ...... 5.8 7.3 8.3 9.9 10.6 Average occupancy rate for period(4) .... 42% 37% 39% 42% 45%
------------------------- (1) Excludes contracts which have been executed but are not operational as of the end of the period. (2) CareUnit is the service mark under which the Company markets chemical dependency treatment programs. CarePsychCenter is the service mark under which the Company markets psychiatric treatment programs. (3) Includes two state chemical dependency full-service contracts. (4) Average occupancy rate is calculated by dividing total patient days by the number of available bed-days during the relevant period. (5) During fiscal 1995, CareUnit, Inc. opened 7 contracts and closed 5 contracts, one of which was terminated by CareUnit, Inc. and 4 by the contracting hospitals. In March 1995, the Company entered into a letter agreement with a representative of certain holders of the Company's Debentures. The agreement, among other things, provides for a pledge of all of the shares of CareUnit, Inc. to secure the Company's obligation to purchase the Debentures on the agreed upon terms and conditions of the exchange offer or otherwise (see Note 10-- "Long-Term Debt and Short-Term Borrowings"). SOURCES OF REVENUES Patients are admitted to a behavioral medicine program under the contracting hospital's standard admission policies and procedures. The hospital submits to the patient, the patient's insurance company, or other responsible party a bill that covers the services of the hospital. Generally, CareUnit, Inc. receives a negotiated fee for each patient day of service provided and in many cases also receives a fixed monthly management fee or a percentage of net revenue. Fees paid by the hospital are subject to annual adjustments to reflect changes in the Consumer Price Index. CareUnit, Inc. and the hospital share the risk of nonpayment by patients based on a predetermined percentage participation by CareUnit, Inc. in bad debts. CareUnit, Inc. may also participate with a contracting hospital in charity care and certain contractual allowances and discounts. Hospitals contracting for programs experience the same reimbursement pressures as the Company's freestanding facilities. Management contracts are generally entered into for a period of two to five years and thereafter are automatically renewed for successive one-year periods unless either party gives notice of termination at least 90 days prior to the end of such periods. Contracts are also terminable for material defaults. A significant number of contracts are terminable by either party on their anniversary dates. DEVELOPMENT, COMPETITION AND PROMOTION CareUnit, Inc. directs its development activities toward increasing the number of management contracts with hospitals. The primary competitors of CareUnit, Inc. are hospitals and hospital management companies that offer programs similar to those offered by CareUnit, Inc. A major development effort will be made in conjunction with the Company's managed care subsidiary, Comprehensive Behavioral Care, Inc., to expand the contract operations in general hospitals and develop a continuum of care. 5 6 FREESTANDING OPERATIONS The Company currently operates four owned or leased facilities representing 237 available beds. During the second quarter of fiscal 1995, the Company sold the 100-bed CareUnit of Orlando and in the fourth quarter sold the 136-bed Starting Point(R), Oak Avenue. The sale of these facilities was part of the Company's plan of operations and restructuring. The following table sets forth selected operating data regarding the Company's freestanding facilities. Facilities are designated either psychiatric or chemical dependency based on the license of the facility and the predominant treatment provided. For information concerning the nature of the Company's interest in the facilities, see Item 2, "PROPERTIES".
YEAR LICENSED INPATIENT DAYS FOR YEAR ENDED MAY 31, ------------------------------------- ACQUIRED(1) BEDS 1995 1994 1993 1992 1991 ---------- ---- ---- ---- ---- ---- ---- PSYCHIATRIC/CHEMICAL DEPENDENCY FACILITIES CareUnit Hospital of Kirkland . . . . . . . 1981 83 5,062 5,699 6,506 9,478 9,682 CareUnit Hospital of Cincinnati . . . . . . 1982 128 9,348 12,133 12,243 12,744 12,131 Starting Point, Orange County . . . . . . . 1983 70 2,362 2,422 3,487 7,046 10,349 Aurora Behavioral Health Hospital (2) . . . . 1988 100 2,593 2,859 7,237 22,070 8,730 CLOSED/FACILITIES HELD FOR SALE CareUnit Hospital of Fort Worth(3) . . . . . 2,985 9,027 10,910 13,534 10,591 CareUnit of Jacksonville Beach (4) . . . . . --- --- --- 5,026 6,119 CLOSED/SOLD FACILITIES CareUnit Hospital of Albuquerque (5)(11) . . --- --- 4,150 4,098 4,522 CareUnit of Coral Springs (5)(12) . . . . . --- --- 3,539 7,617 9,611 CareUnit of Grand Rapids (6) . . . . . . . . 5,424 6,545 6,348 6,221 7,662 CareUnit Hospital of Nevada (7) . . . . . . --- --- 6,920 7,881 8,632 CareUnit of South Florida/Tampa (5)(12) . . . --- --- 6,891 6,761 6,957 Crossroads Hospital (8) . . . . . . . . . . --- --- --- 1,705 5,078 Newport Point, Inc. (9) . . . . . . . . . . --- --- 4,669 --- --- Starting Point, Oak Avenue (5)(10) . . . . --- --- 8,868 11,988 14,639 Woodview-Calabasas Hospital (8) . . . . . . --- --- --- 7,913 13,809 Other (13)(14) . . . . . . . . . . . . . . . --- --- --- --- 7,581 ------ ------ ------ ------- ------- Patient days served during period 27,774 38,685 81,768 124,082 136,093 ====== ====== ====== ======= ======= Admissions . . . . . . . . . . . . . . . . . . 3,329 3,916 7,047 8,859 9,312 Available beds at end of period (15) . . . . . 237 347 385 748 1,059 Average occupancy rate for period (16) . . . . 25% 30% 28% 38% 29%
------------------------------- (1) Calendar year acquired, built or leased. (2) Formerly known as CareUnit of Colorado. (3) On January 13, 1995, CareUnit Hospital of Ft. Worth, an 83-bed psychiatric facility was closed. The facility is currently for lease or sale. (4) In February 1992, CareUnit of Jacksonville Beach, an 84-bed chemical dependency facility, was closed. This facility is currently for sale. (5) In March 1993, CareUnit Hospital of Albuquerque, a seventy-bed chemical dependency facility, CareUnit of Coral Springs, a 100-bed chemical dependency facility, CareUnit of South Florida/Tampa, a 100-bed chemical dependency facility and Starting Point, Oak Avenue, a 136-bed chemical dependency facility were closed. (6) On April 30, 1995, CareUnit of Grand Rapids, a 76-bed chemical dependency facility lease terminated. The operations of this facility were transferred to Longford/CareUnit of Grand Rapids and currently operates under a joint management contract. (7) On April 5, 1993, CareUnit Hospital of Nevada, a 50-bed psychiatric facility, was sold. (8) The Company is currently in negotiations to dissolve, retroactive to December 31, 1991, the joint venture which leased Crossroads Hospital and Woodview-Calabasas Hospital. Crossroads Hospital continued to be managed by the Company although in August 1992 it was closed and was subleased through the term of the lease which expired in September 1993. Woodview-Calabasas continues to be managed by the Company's joint venture partner although it was closed in April 1993. (9) Joint operating agreement between Century Healthcare of California and Starting Point, Inc. to manage Newport Harbor Psychiatric Hospital, a 68-bed adolescent psychiatric hospital and Starting Point, Orange County, a 70-bed psychiatric facility. This agreement was mutually dissolved on February 28, 1993. (10) Includes Starting Point, Grand Avenue which was sold in July 1991. (11) On July 1, 1993, CareUnit Hospital of Albuquerque was sold. (12) On October 1, 1993, CareUnit of So. Florida/Tampa was sold and on December 10, 1993, CareUnit of Coral Springs was sold. 6 7 (13) Includes Brea Hospital Neuropsychiatric Center, CareUnit Hospital of Orange, CareUnit Hospital of St. Louis, CareUnit of Orlando, CareUnit of DuPage, Sutter Center for Psychiatry and Golden Valley Health Center. These facilities were closed or sold in fiscal 1989 through 1991. (14) Includes CareUnit of San Diego, a 92-bed chemical dependency facility, which was closed in December 1989 and is currently for sale. (15) A facility may have appropriate licensure for more beds than are in use for a number of reasons, including lack of demand, anticipation of future need, renovation and practical limitations in assigning patients to multiple-bed rooms. Available beds is defined as the number of beds which are available for use at any given time. (16) Average occupancy rate is calculated by dividing total patient days by the average number of available bed-days during the relevant period. FREESTANDING FACILITY PROGRAMS The services offered at a freestanding facility are determined by the licensure of the facility, the needs of the patient community and reimbursement considerations including working relationships with managed care companies. A program within the facility represents a separately staffed unit dedicated to the treatment of patients whose primary diagnosis suggests that their treatment needs will best be met within the unit. Patients whose diagnosis suggests the need for supplemental services are accommodated throughout their stay as dictated by the individual treatment plan developed for each patient. Psychiatric. Psychiatric programs are offered in most of the Company's freestanding facilities. Admission to the programs offered by the Company is typically voluntary although certain facilities provide emergency psychiatric services and accept involuntary patients who are suffering an acute episodic psychiatric incident. Each patient admitted to a psychiatric program undergoes a complete assessment including an initial evaluation by a psychiatrist, a medical history, physical examination, a laboratory work-up, a nursing assessment, a psychological evaluation, and social and family assessments. The assessments are utilized to develop an individualized treatment plan for each patient. The treatment programs are undertaken by an interdisciplinary team of professionals experienced in the treatment of psychiatric problems. Length of stay varies in accordance with the severity of the patient's condition. A comprehensive discharge plan which may include outpatient psychiatric or psychological treatment, or referral to an alternate treatment facility is prepared for each patient. Psychiatric programs are also available on an inpatient, day treatment and outpatient basis and form a continuum of care. Chemical Dependency. Chemical dependency programs, offered in all freestanding facilities, are delivered under the names CareUnit, Starting Point and Aurora Behavioral Health Hospital and include programs for adults and adolescents. Facilities offer a comprehensive treatment program based on therapy and education. The medically based programs utilize a team approach to treatment, with a supervising physician, psychologists, counselors, therapists and specially trained nurses. This multi-disciplinary team approach means that the medical, emotional, psychological, social and physical needs of the patient are all addressed in treatment. Facilities offer levels of care that can form a continuum, including detoxification, inpatient, residential, day treatment and outpatient programs which meet the evolving needs of patients and their families. Based on an initial assessment, each patient is placed into the level of care that is most appropriate for his or her needs. Following assessment, each patient admitted into treatment receives a full medical and social history as well as a physical examination that includes those diagnostic studies ordered by the patient's attending physician. Throughout the course of treatment, each plan is reviewed frequently to ensure that it continues to meet the changing needs of the patient. The length of time spent in treatment is dependent on an individual's needs and can range from several weeks to several months. SOURCES OF REVENUES During fiscal 1995, approximately 37% of the Company's operating revenues from freestanding operations were received from private sources (private health insurers, managed care companies and directly from patients) and the balance from Medicare, Medicaid and other governmental programs. Private health insurers offer plans that typically include coverage for psychiatric and chemical dependency treatment. In many instances, the level of coverage for psychiatric and chemical dependency benefits is less than that provided for medical/surgical services. Lower coverage levels result in higher co-payments by the patient, who 7 8 is often unable to meet his or her commitment in its entirety or is unable to pay as rapidly as the insurance company. This pattern tends to increase bad debts and days outstanding in receivables. Private insurance plans vary significantly in their methods of payment, including cost, cost plus, prospective rate, negotiated rate, percentage of charges, and billed charges. Health insurers have adopted a number of payment mechanisms for the primary purpose of decreasing the amounts paid to hospitals (including the Company's operations) for services rendered. These mechanisms include various forms of utilization review, preferred provider arrangements where use of participating hospitals is encouraged in exchange for a discount, and payment limitations or negotiated rates based on community standards. The Company believes these changing payment mechanisms will continue to have a negative effect on its revenues and require the Company to offer a continuum of care ranging from outpatient to intensive inpatient services. Employers, union trusts and other major purchasers of health care services have become increasingly aggressive in pursuing cost containment. To the extent that major purchasers are self-insured, they actively negotiate with hospitals, Health Maintenance Organizations ("HMOs") and Preferred Provider Organizations ("PPOs") for lower rates. Those major purchasers that are insured or use a third-party administrator expect the insurer or administrator to control claims costs. In addition, many major purchasers of health care services are reconsidering the benefits that they provide and in many cases reducing the level of coverage, thereby shifting more of the burden to their employees or members. Such reductions in benefits have had a negative impact on the Company's business. Under the Social Security Amendments Act of 1983, a prospective payment system ("PPS") was adopted to cover routine and ancillary operating costs of most Medicare inpatient hospital services. Under this system, the Secretary of the United States Department of Health and Human Services ("HHS") established fixed payment amounts per discharge based on diagnostic-related groups ("DRG's"). In general, a hospital's payment for Medicare inpatients is limited to the DRG rate and capital costs, regardless of the amount of services provided to the patient or the length of the patient's hospital stay. Under PPS, a hospital may keep any excess of its prospective payment rate over its operating costs incurred in furnishing inpatient services, but is at risk for any operating costs that exceed its payment rate. Qualified providers of alcohol and drug treatment services are paid under PPS. Psychiatric hospitals are exempt from PPS. Inpatient psychiatric units within acute care hospitals are eligible to obtain an exemption from PPS upon satisfaction of specified federal criteria. Exempt hospitals and exempt units within acute care hospitals are subject to limitations on the level of cost or the permissible increase in cost subject to reimbursement under the Medicare program, including those limitations imposed under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). No assurance can be given that psychiatric services will continue to be eligible for exemption from PPS or that other regulatory or legislative changes will not adversely affect the Company's business. The Company's four facilities currently participate in the Medicare program. Of these, two are currently excluded from PPS (TEFRA limits are applicable to these facilities). Medicare utilization at those facilities participating in the Medicare program averaged approximately 50% in fiscal 1995. The Company does not believe that the imposition of TEFRA limits or PPS has had a material adverse impact on its business at its freestanding facilities or that loss of exclusion from PPS at freestanding facilities would materially impact the Company's business. During fiscal 1995, all of the Company's facilities reflected an increase in Medicare utilization primarily due to their partial hospitalization programs. Hospitals participating in the Medicare program are required to retain the services of a peer review organization ("PRO"). The PRO is responsible for determining the medical necessity, appropriateness and quality of care given Medicare program patients. In instances where the medical necessity of an admission or procedure is challenged by the PRO, payment may be delayed, reduced or denied in its entirety. Amounts denied because of medical review may not be charged to the service recipient, and are absorbed by the hospital. In non-emergency admissions (which encompass most of the Company's admissions) review is performed prior to the patient's arrival at the hospital. In the event that the patient does not meet the PRO criteria for admission, the patient may be admitted for outpatient treatment, referred to an alternative treatment provider or sent home. The Company believes that the existence of PROs has reduced inpatient admissions in its facilities serving Medicare patients. The Medicaid program is a combined federal and state program providing coverage for low income persons. The specific services offered and reimbursement methods vary from state to state. Less than 7% of the Company's 8 9 freestanding facility revenues are derived from the Medicaid program. Accordingly, changes in Medicaid program reimbursement are not expected to have a material adverse impact on the Company's business. COMPETITION AND PROMOTION The Company's primary competitors are hospitals and hospital management companies (both not-for-profit and investor-owned) that offer programs similar to those of the Company. The Company has faced generally increasing competition in the last few years. Some of the hospitals that compete with the Company are either owned or supported by governmental agencies or are owned by not-for-profit corporations supported by endowments and charitable contributions enabling some of these hospitals to provide a wide range of services regardless of cost-effectiveness. Most patients are directed to a specific facility by their employer (or their agent), the employer's insurance company (i.e. managed care companies), a physician, a social services agency or another health care provider. The Company markets its services by contracting with these referral sources. The primary competitive factors in attracting referral sources and patients are reputation, success record, cost and quality of care, location and scope of services offered at a facility. The Company believes it is competitive in factors necessary for patient attraction. The Company and its competitors also compete to attract qualified physicians and psychiatrists and other licensed mental health providers. The Company maintains a public relations program designed to increase public awareness of its treatment programs. The Company spent approximately $400,000 for media advertising (television, radio and print) in support of its freestanding operations during fiscal 1995 and 1994. The forms of media used are specifically tailored to the geographic area in which the public relations efforts are directed. PUBLISHING ACTIVITIES Through March 1994, the Company (under the name CompCare Publishers) was engaged in the publication, distribution and sale of books, pamphlets and brochures generally relating to the Company's health care activities. Literature distributed by the Company was sold to the general public and educational institutions. Such literature was also sold to patients participating in programs managed by the Company. The Company did not own or operate the printing facilities used in the publication of its literature. In April 1994, certain assets and rights representing a material portion of the publishing business were sold. CompCare Publishers was operating and distributing the books and material remaining after the sale via a distribution agreement with the buyer that expired on April 30, 1995. The Company liquidated the remaining assets and rights. Publishing activities accounted for less than 1% of the Company's operating revenues in fiscal 1995. GOVERNMENTAL REGULATION The development and operations of health care facilities are subject to compliance with various federal, state and local laws and regulations. Health care facilities operated by the Company as well as by hospitals under contract with CareUnit, Inc. must comply with the requirements of federal, state and local health agencies, with state-mandated rate control initiatives, with state certificate of need and similar laws regulating various aspects of the operation of health facilities (including construction of facilities and initiation of new services), and with the requirements of municipal building codes, health codes and local fire departments. State licensing of facilities is a prerequisite to participation in the Medicare and Medicaid programs. Legislative, regulatory and policy changes by governmental agencies (including reduction of budgets for payments under the Medicare, Medicaid and other state and federal governmental health care reimbursement programs) may impact the Company's ability to generate revenue and the utilization of its health care facilities. Certain facilities operated by the Company are certified as providers for Medicare and Medicaid services. Both the Medicare and Medicaid programs contain specific physical plant, safety, patient care and other requirements that must be satisfied by health care facilities in order to qualify under those programs. The Company believes that the facilities it owns or leases are in substantial compliance with the various Medicare and Medicaid 9 10 regulatory requirements applicable to them. The requirements for certification under these governmental reimbursement programs are subject to change, and in order to remain qualified for the program, it may be necessary for the Company to effect changes from time to time in its facilities, equipment, personnel and services. Under the Social Security Act, the Department of Health and Human Services ("HHS") has the authority to impose civil monetary penalties against any participant in the Medicare program that makes claims for payment for services that were not rendered as claimed or were rendered by a person or entity not properly licensed under state law or other false billing practices. The Social Security Act also contains provisions making it a felony for health care providers to make false statements relating to claims for payments under the Medicare program or to make false statements relating to compliance with the Medicare conditions of participation. In addition, the making of false claims for payment by providers participating in the Medicare program is subject to criminal penalty under federal laws relating generally to claims for payment made to the federal government or any agency. Various federal and state laws regulate the relationship between providers of health care services and physicians. These laws include the "fraud and abuse" provisions of the Social Security Act, under which civil and criminal penalties can be imposed upon persons who pay or receive remuneration in return for inducement of referrals of patients who are eligible for reimbursement under the Medicare or Medicaid programs. Civil penalties range from monetary fines that may be levied on a per-violation basis to temporary or permanent exclusion from the Medicare program. The prohibitions on inducements for referrals are so broadly drafted that they may create liability in connection with a wide variety of business transactions and other hospital-physician relations that have been traditional or commonplace in the health care industry. Courts, HHS and officials of the Office of Inspector General have construed broadly the fraud and abuse provisions of the Social Security Act concerning illegal remuneration arrangements and, in so doing, have created uncertainty as to the legality of numerous types of common business and financial relationships between health care providers and practitioners. Such relationships often are created to respond to competitive pressures. Limiting "safe harbor" regulations define a narrow scope of practices that will be exempted from prosecution or other enforcement action under the illegal remuneration provisions of the fraud and abuse law. These clarifying regulations may be followed by more aggressive enforcement of these provisions with respect to relationships that do not fit within the specified safe harbor rules. Activities that fall outside of the safe harbor rules include a wide range of activities frequently engaged in between hospitals, physicians and other third parties. These regulations identifying business practices that do not constitute illegal remuneration do not eliminate this uncertainty, and may cause providers and practitioners alike to abandon certain mutually beneficial relationships. The Company does not believe that any such claims or relationships exist with respect to the Company. In April 1989, the Inspector General of the Department of HHS issued a report on financial arrangements between physicians and health care businesses. The report contained a number of recommendations, including a prohibition of physician referrals to any facilities in which the physician has a financial interest. The original Stark Law (Stark I) passed in 1989 as Sec 6204 of Public Law 101-508 in the Omnibus Budget Reconciliation Act of 1989 ("OBRA 1989") and became effective January 1, 1992. Unless an exception is otherwise available, Stark I forbids a physician from making a referral for which Medicare reimbursement may be made to a clinical laboratory with which such physician has a financial relationship, and prohibits such clinical laboratory from billing for or receiving reimbursement from the Medicare or Medicaid programs on account of such referral. On March 11, 1992, proposed regulations implementing the Stark Amendment were issued, but have not been adopted by the Inspector General. The Company believes that it is in compliance with the proposed regulations in all material respects. Additional legislation expanding the Stark Amendment to other physician and health care business relationships has been passed as part of the Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993"). OBRA 1993 broadens the services included within the referral prohibition of Stark I: a physician having a financial relationship with an entity may not make referrals to that entity for "designated health services", which include, in addition to clinical laboratory services, physical therapy services; occupational therapy services; radiology or other diagnostic services; radiation therapy services; durable medical equipment; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. This law, Stark II, expanded its application to include Medicaid, as well as Medicare patients, and took effect January 1, 1995, with respect to referrals for the expanded list of designated health services. 10 11 Numerous exceptions are allowed under the OBRA 1993 of Stark II for financial arrangements that would otherwise trigger the referral prohibition. These provide, under certain conditions, exceptions for relationships involving rental of office space and equipment, employment relationships, personal service arrangements, payments unrelated to designated services, physician recruitment and certain isolated transactions. A key element of the exceptions relating to transactions between providers and physicians is that the transaction be at fair market value (not taking into account, of course, the value to the providers of any referrals from the physician). Other technical requirements must also be met, such as the agreement being in writing and having a minimum term of one year. HHS may adopt regulations in the future which expand upon the conditions attached to qualification for these exceptions. Currently Stark II is being actively reconsidered by the House Ways and Means Subcommittee on Health for major amendments to the statute. A "Physician Self-Referral Improvement Act" has been proposed by Congressman Stark. The Company's relationships with physicians in its contract operations, as well as the Company's development of relationships with physicians will continue to be evaluated for access to an applicable exception and modified if necessary, to be in compliance with the law and its exceptions, including any future regulations. The Company is unable to predict at this time what effect, if any, Stark II and any future regulations implementing its provisions, will have upon its business. National health care reform capable of accelerating massive changes in the health care marketplace is again under active consideration by the Congress. The focus is on reforming the Medicare and Medicaid programs only, with a move toward managed care and reduced spending. Both the House of Representatives and the Senate have introduced proposals that would transform the Medicaid program into a block-grant program to the states. At this time, it is not possible to determine the exact nature of the proposals, or their legislative outcome, or their likely impact upon institutional providers. In addition, several states are undertaking analysis and legislation designed to modify the financing and delivery of health care at the state level. A wide variety of bills and regulations are pending in several states proposing to regulate, control or alter the financing of health care costs; however, it is not possible at this time to predict with assurance the effect on the business of the Company, if any, of such bills or regulatory actions. ACCREDITATION The Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") is an independent commission that conducts voluntary accreditation programs with the goal of improving the quality of care provided in health care facilities. Generally, hospitals including dedicated units, long-term care facilities and certain other health care facilities may apply for JCAHO accreditation. If a hospital under contract with CareUnit, Inc. requests a JCAHO survey of its entire facility, the contract program, if a psychiatric or chemical dependency program, will be separately surveyed. After conducting on-site surveys, JCAHO awards accreditation for up to three years to facilities found to be in substantial compliance with JCAHO standards. Accredited facilities are periodically resurveyed. Loss of JCAHO accreditation could adversely affect the hospital's reputation and its ability to obtain third-party reimbursement. All of the Company's freestanding facilities are accredited and the hospitals under contract with CareUnit, Inc. have received or have applied for such accreditation. To develop standards that effectively evaluate the structure and function of medical and quality management systems in managed care organizations, the National Committee for Quality Assurance ("NCQA") has developed in conjunction with the managed care industry, health care purchasers, state regulators and consumers, an extensive review and development process. The Standards for Accreditation of Managed Care Organizations used by NCQA reviewers to evaluate a managed care organization address the following areas: quality improvement, utilization management, credentialing, members' rights and responsibilities, preventative care services guidelines and medical records. These standards validate that a managed care organization is founded on principals of quality and is continuously improving the clinical care and services provided. NCQA also utilizes Health Plan Data and Information Set ("HEDIS") which is a core set of performance measurements developed to respond to complex but simply defined employer needs as standards for patient and customer satisfaction. Comprehensive Behavioral meets the standards for NCQA accreditation and has adopted HEDIS. 11 12 ADMINISTRATION AND EMPLOYEES In January 1995, the Company's executive and administrative offices were relocated to Newport Beach, California, where management controls operations, business development, legal and accounting functions, governmental and statistical reporting, research and treatment program evaluation. At August 9, 1995, the Company employed approximately 24 persons in its corporate and administrative offices, 74 persons assigned to Comprehensive Behavioral, 105 persons assigned to CareUnit, Inc., 243 persons in its freestanding facilities and 2 persons in other operations. Many of the physicians and psychiatrists who are the medical directors of the Company's contract units, the psychologists serving on treatment teams and the physicians utilizing the facilities operated by the Company were not previously employed by the Company and were treated as independent contractors. As part of the Company's settlement with the Internal Revenue Service (see Note 15-- "Commitments and Contingencies") each of these individuals must comply with certain criteria in order to remain classified as an independent contractor. The Company has not encountered any work stoppages due to labor disputes with its employees. ITEM 2. PROPERTIES. The following table sets forth certain information regarding the properties owned or leased by the Company at May 31, 1995:
OWNED OR LEASE MONTHLY NAME AND LOCATION LEASED(1) EXPIRES(2) RENTAL(3) ----------------- --------- ---------- --------- PSYCHIATRIC/CHEMICAL DEPENDENCY FREESTANDING TREATMENT FACILITIES CareUnit Hospital (4) . . . . . . . . Owned --- --- Fort Worth, Texas CareUnit Hospital . . . . . . . . . . Leased 2035 $16,106(5) Kirkland, Washington CareUnit Facility (6) . . . . . . . . Owned --- --- Jacksonville Beach, Florida CareUnit Hospital (10) . . . . . . . . Owned --- --- Cincinnati, Ohio Starting Point, Orange County . . . . Owned --- --- Costa Mesa, California Aurora Behavioral Health Hospital (10) Owned --- --- Aurora, Colorado CareUnit Facility (7) . . . . . . . . Owned --- --- San Diego, California OTHER OPERATING FACILITIES CareUnit, Inc. . . . . . . . . . . . . Leased 1996 2,278 Chesterfield, Missouri CompCare Publishers (8) . . . . . . . Leased 1997 3,009 Minneapolis, Minnesota Comprehensive Behavioral Care, Inc. Tampa, Florida . . . . . . . . . . Leased 1995 7,435 Las Vegas, Nevada . . . . . . . . . Leased 1995 1,997 Ft. Lauderdale, Florida . . . . . . Leased 1995 586 South Bend, Indiana . . . . . . . . Leased 1997 1,027 ADMINISTRATIVE FACILITIES Corporate Headquarters (9) . . . . . . Leased 1995 5,037 Newport Beach, California Data Processing Center (9) . . . . . . Leased 1997 3,882 Riverside, California
------------------------- (1) Subject to encumbrances. For information concerning the Company's long-term debt, see Note 10 to the Company's consolidated financial statements contained in this report. 12 13 (2) Assumes all options to renew will be exercised. (3) All leases, other than those relating to the Company's administrative facilities, are triple net leases under which the Company bears all costs of operations, including insurance, taxes and utilities. The Company is responsible for specified increases in taxes, assessments and operating costs relating to its administrative facilities. (4) Closed January 1995. The Company intends to sell this property. (5) Subject to increase every three years based upon increases in the Consumer Price Index, not to exceed 10%. (6) Closed February 1992. The Company intends to sell this property. (7) Closed December 1989. The Company intends to sell this property. (8) Office/operation sold in April 1994; Company has sublet this property. (9) This lease was converted to month-to-month. (10) Encumbered by a lien securing payment of a $2.0 million note due January 9, 1997. ITEM 3. LEGAL PROCEEDINGS. On October 30, 1992, the Company filed a complaint in the United States District Court for the Eastern District of Missouri against RehabCare Corporation ("RehabCare") seeking damages for violations by RehabCare of the securities laws of the United States, for common law fraud and for breach of contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost benefit of certain stockholder appreciation rights in an amount in excess of $3.6 million and punitive damages. RehabCare filed a counterclaim in the case seeking a declaratory judgement with respect to the rights of both parties under the Stock Redemption Agreement, an injunction enjoining the Company from taking certain action under the Stock Redemption or Restated Shareholders Agreements and damages in the form of attorneys' fees and costs allegedly incurred by RehabCare with respect to its issuance of certain preferred stock and with respect to prior litigation between the parties. The case was tried before a jury commencing on February 21, 1995. Prior to the presentation of evidence to the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8, 1995, the jury returned its verdict awarding the Company $2,681,250 in damages, plus interest and the costs of the action against RehabCare for securities fraud and for breach of contract. RehabCare has posted a bond in the amount of $3.0 million, and filed a motion for new trial or in the alternative, for judgement as a matter of law, which the court denied its entirety on August 4, 1995. On September 1, 1995, RehabCare filed a notice of appeal with the District Court indicating its intent to appeal the matter to the United States Court of Appeals. Although the Company feels that RehabCare will not prevail in its appeal, the Company has not recognized any gain with relation to the judgement. In connection with the proposed sale and lease-back of hospitals to CMP Properties, Inc., a real estate investment trust, the Company advanced $1.1 million to its financial advisor in fiscal 1992. The financial advisor was affiliated with several members of the Company's Board of Directors at that time. The advances, which were to be repaid if the transaction was not completed, were to be secured by a pledge of common stock in an unrelated company. The pledged shares of common stock were in the possession of the Company's primary legal counsel at that time, as collateral for the advances. After the transaction was terminated, the financial advisor refused to repay the advances and the Company's legal counsel refused to turn over the collateral to the Company. The Company has filed an action in the United States District Court for the District of Oregon (Civil Case No. 94-384 FR) against its former financial advisor and former legal counsel to recover the advances. The former financial advisor has counterclaimed against the Company for $1,688,000 for breach of contract and unjust enrichment. The Company's former law firm has filed a counterclaim for $193,000 for unpaid legal fees. Management believes that the counterclaims are without merit and intends to vigorously defend against them and to pursue the Company's claims. On June 8, 1994, RehabCare filed a lawsuit against the Company in the Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement entered into between the Company and RehabCare in May 1991 (Case No. 663957). An amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges that it has incurred attorneys fees in connection with the settlement of certain tax issues with the IRS and has paid the IRS a settlement amount with respect to the years 1987 and 1988. RehabCare seeks the recovery from the Company of $588,000, plus interest, which RehabCare alleges is the amount it incurred for payments to the IRS in settlement and attorneys fees it incurred in dealing with the IRS. The Company has filed its answer and affirmative defenses contesting the right of RehabCare to obtain the relief it seeks. Discovery is ongoing. Until such discovery is complete, it is not possible to predict the likely outcome of the lawsuit. The Company intends to continue to vigorously defend this matter. 13 14 Other Litigation In December 1994, the Company reached a settlement with the Appeals Office of the Internal Revenue Service ("IRS") on the payroll tax audit for the calendar years 1983 through 1991 pursuant to which the Company agreed to pay the IRS $5.0 million with the Company having no obligation to pay any penalties or accrued interest. The IRS agent conducting the audit asserted that certain physicians and psychologists and other staff engaged as independent contractors by the Company should have been treated as employees for payroll tax purposes. The settlement was reviewed and accepted on behalf of the IRS by its district counsel. Payment terms have been accepted at 50% within 90 days of finalization with the remainder financed over the next five years. In March 1995, the Company paid $350,000 to the IRS against the initial payment due. In return, the IRS granted the Company an additional 120 days to pay the remaining balance of $2,150,000. In July 1995, the Company paid the remaining balance of the initial payment, and continues to make the monthly installment payment pursuant to the terms of the settlement. The unpaid balance bears interest at 9% per annum due and payable after the $5.0 million is paid. The Federal income tax returns of the Company for its fiscal years ended 1984 and 1987 through 1991 were examined by the IRS resulting in a disallowance of approximately $229,000 in deductions which were offset against the Company's net operating losses available for carryover. The examination also included the review of the Company's claim for refund of approximately $205,000 relating to an amended return for the fiscal year ended May 31, 1992. During completion of the audit, the IRS noted that the Company had received excess refunds representing its alternative minimum tax ("AMT") liability of approximately $666,000 in 1990 and 1991 from the carry back of net operating losses to the fiscal years ended May 31, 1988 and 1989, respectively. On March 29, 1994, the Company agreed to the assessment of $666,000 plus interest and received the final bill of $821,000 during the fourth quarter of fiscal 1994. The Company paid the assessment including interest during the third quarter of fiscal year 1995. The Company will no longer report on this issue. An involuntary bankruptcy petition was dismissed on March 6, 1995 pursuant to an agreement dated March 3, 1995 between the Company and a representative of the petitioners. Under such agreement the Company has agreed, subject to the conditions therein, to offer to exchange for its outstanding 7 1/2% Convertible Subordinated Debentures with a combination of cash and shares. See Note 10-- "Long-Term Debt and Short-Term Borrowings" for a discussion of the Company's default in the payment of interest on its 7 1/2 % Convertible Subordinated Debentures and the consequent acceleration of the full principal amount thereof. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations. In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criterion in regard to net tangible assets available to common stock and three year average net income among others. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards. Management anticipates success in "global restructuring" (see Note 2-- "Operating Losses and Liquidity") will be necessary in order to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter of fiscal 1995 and during the first quarter of fiscal 1996, to discuss the Company's financial condition and intention to issue shares without seeking approval of shareholders pursuant to the exception to the NYSE policy for financially distressed companies. From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the Company or a subsidiary may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements. EXECUTIVE OFFICERS OF THE COMPANY CHRISS W. STREET, age 45. Mr. Street has been employed by the Company since May 1994. Mr. Street was named interim Chief Executive Officer on May 4, 1994 and in June 1994, he was appointed Chief Executive Officer of the Company. Mr. Street was elected as Chairman of the Board of Directors in November 14 15 1993. In February 1995, Mr. Street was elected as a director for Micropolis Corporation, where he also serves as Chairman of the compensation committee. In addition, in August 1995, Mr. Street was elected as a director of Nu-Tech Bio Med, Inc. where he also serves on the stock option committee. Mr. Street is founder and sole stockholder of Chriss Street & Company, a firm specializing in investment banking, financial advisory services, securities trading and factoring. Mr. Street commenced operations of Chriss Street & Company in February 1992 and was Managing Director for Seidler-Amdec Securities, Inc. from 1988 to 1992. DREW Q. MILLER, age 42. Mr. Miller has been employed by the Company since November 1994. In November 1994, Mr. Miller was appointed Vice President - Acquisitions and Development. In December 1994, Mr. Miller was appointed Chief Financial Officer and in January 1995 was appointed interim Chief Operating Officer. In July 1995, Mr. Miller was appointed Chief Operating Officer. Prior to his employment with the Company, Mr. Miller was President of Alternative Psychiatric Centers, Inc., which was purchased by the Company in February 1995. Prior to his employment in April 1993 with APC, Mr. Miller was Chief Financial Officer for Concept Psychiatric Health Group, Inc. commencing in July 1989. KERRI RUPPERT, age 36. Ms. Ruppert has been employed by the Company since 1988. In October 1992, she was appointed Vice President and Chief Accounting Officer, and in January 1993, she was elected Secretary of the Company and Treasurer in November 1994. She was Vice President and Controller from April 1990 to 1992 and Assistant Corporate Controller from 1988 to 1990. Prior to her employment with the Company, she served in a variety of financial management positions with Maxicare Health Plans, Inc. from 1983 to 1988. 15 16 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) The Company's Common Stock is traded on the New York Stock Exchange under the symbol CMP. The following table sets forth the range of high and low sale prices for the Common Stock for the fiscal quarters indicated:
PRICE ----- FISCAL YEAR HIGH LOW ----------- ---- --- 1994: First Quarter . . . . . . . . . . . . . . . . . . . . . . . $11 1/4 $6 1/4 Second Quarter . . . . . . . . . . . . . . . . . . . . . . 8 3/4 6 1/4 Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 12 1/2 5 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 8 3/4 5
PRICE ----- FISCAL YEAR HIGH LOW ----------- ---- --- 1995: First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $8 3/4 $2 1/2 Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 7 3/4 5 Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 9 3/8 5 1/4 Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 8 3/4 5
(b) As of July 31, 1995, the Company had 1,929 stockholders of record of Common Stock. (c) No cash dividend was declared during any quarter of fiscal 1995, 1994 or 1993, a result of the Company's operating losses and restrictions contained in the Company's primary loan agreement and 7 1/2% Convertible Subordinated Debentures due 2010. The Company does not expect to resume payment of cash dividends in the foreseeable future. See Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". (d) On May 16, 1994, the stockholders of the Company approved an amendment to the Company's Certificate of Incorporation to effect a reverse stock split of one share for each ten or fewer shares of the Company's Common Stock, with the specific ratio to be selected by the Board of Directors. The stockholders also approved amendments to the Certificate of Incorporation reducing the par value of the Company's Common Stock to $.01 per share and reducing the number of authorized shares of Common Stock to five times the number of shares outstanding, reserved or otherwise committed for future issuance but not less than 12.5 million. The reverse stock split and amendments to the Certificate of Incorporation were to become effective on any date selected by the Board of Directors prior to February 16, 1995. The Board of Directors effected a one-for-ten reverse stock split effective October 17, 1994. On the effective date of the reverse stock split, the Company's Certificate of Incorporation was amended to reduce the par value of the Common Stock to $.01 per share and to reduce the number of authorized shares of Common Stock to 12.5 million. All share and per share information contained in this Form 10-K reflect the effect of the reverse stock split, which is to reduce the number of shares set forth by a factor of ten, with each stockholder's proportionate ownership interest remaining constant, except for payment in cash in lieu of fractional shares. (e) In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criterion in regard to net tangible assets available to common stock and three year average net income. The Listing and Compliance Committee of the NYSE has determined to 16 17 monitor the Company's progress toward returning to continuing listing standards. Management anticipates success in "global restructuring" (see Note 2-- "Operating Losses and Liquidity") will be necessary in order to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter fiscal 1995 and first quarter of fiscal 1996 to discuss the Company's financial condition and intention to issue shares without seeking approval of shareholders. No assurance can be given as to the actions that the NYSE may take or that the steps of the restructuring will be successfully completed. 17 18 ITEM 6. SELECTED FINANCIAL DATA. The following tables summarize selected consolidated financial data and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. Reclassification of prior year amounts have been made to conform with the current year's presentation. See Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a discussion of recent results of operations and liquidity.
YEAR ENDED MAY 31, ------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues and gains: Operating revenues, net . . . . . . . . . . . $29,282 $34,277 $51,847 $59,969 $84,689 Gain on sale of RehabCare stock, net . . . . --- --- 13,114 17,683 --- Gain on Sovran settlement net . . . . . . . --- --- 584 --- --- Interest income . . . . . . . . . . . . . . . 38 50 69 336 531 Equity in earnings(loss) of unconsolidated affiliates . . . . . . . . . . . . . . . . --- --- 384 168 (1,289) -------- -------- -------- -------- -------- 29,320 34,327 65,998 78,156 83,931 ======== ======== ======== ======== ======== Costs and expenses: Operating expenses . . . . . . . . . . . . . 31,497 31,875 50,924 38,810 65,362 General and administrative expenses . . . . . 4,331 5,455 5,754 12,946 21,267 Provision for doubtful accounts . . . . . . . 1,423 1,558 6,187 6,065 4,759 Depreciation and amortization . . . . . . . . 1,797 1,762 2,946 2,602 3,580 Loss on sale/write-down of assets . . . . . . 259 --- 4,382 15,986 5,863 Interest expense . . . . . . . . . . . . . . 1,366 1,228 1,759 3,908 7,380 Other restructuring/non-recurring expenses . --- --- 5,452 2,152 2,819 -------- -------- -------- -------- -------- 40,673 41,878 77,404 82,469 111,030 ======== ======== ======== ======== ======== Loss before income taxes . . . . . . . . . . . . (11,353) (7,551) (11,406) (4,313) (27,099) Provision(benefit) for income taxes . . . . . . . 180 301 194 249 401 -------- -------- -------- -------- -------- Loss before extraordinary item . . . . . . . . . (11,533) (7,852) (11,600) (4,562) (27,500) ======== ======== ======== ======== ======== Extraordinary item - gain on debenture conversion . . . . . . . . . . . . . . . . . --- --- --- --- 11,465 Net loss . . . . . . . . . . . . . . . . . . . . $(11,533) $(7,852) $(11,600) $(4,562) $(16,035) ======== ======== ======== ======== ======== Loss per common and common equivalent share: Loss before extraordinary item . . . . . . . $(5.11) $(3.57) $(5.28) $(2.08) $(22.69) Extraordinary item - gain on debenture conversion . . . . . . . . . . . . . . . . --- --- --- --- 9.46 -------- -------- -------- -------- -------- Net loss . . . . . . . . . . . . . . . . . . $(5.11) $(3.57) $(5.28) $(2.08) $(13.23) ======== ======== ======== ======== ======== Cash dividends per share . . . . . . . . . . . . $ --- $ --- $ --- $ --- $ ---- Weighted average common and common ======== ======== ======== ======== ======== equivalent shares outstanding . . . . . . . . 2,257 2,199 2,196 2,190 1,212
------------------------------
AS OF MAY 31, ------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- BALANCE SHEET DATA: (DOLLARS IN THOUSANDS) Working capital(deficit) . . . . . . . . . . . . $(15,342) $ 412 $ 438 $11,901 $11,221 Total assets . . . . . . . . . . . . . . . . . . 26,001 33,226 46,968 70,422 99,084 Long-term debt . . . . . . . . . . . . . . . . . 5,077 10,477 10,652 10,375 28,078 Stockholders' equity(deficit) . . . . . . . . . . (4,933) 5,099 12,951 24,441 28,976
18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Company entered fiscal 1995 with a new business strategy that specifically addressed the threat of being liened by the Internal Revenue Service ("IRS") for tax liabilities primarily related to independent contractor issues. Although the Company has name recognition as a quality provider of traditional inpatient chemical dependency treatment, insurance reimbursement per length of stay for inpatient treatment had decreased over the last five years as a result of "managed care's" focus on outpatient services as the "most appropriate treatment." The Company's poor financial performance over the prior five years had been also exacerbated due to a series of tumultuous events including: - A failed merger in 1989. - Movement of the Company's headquarters from California to Missouri in 1989. - A proxy fight in 1990 which eliminated most of the health care expertise from the board of directors. - Prior management's reliance on the sale of productive CareUnit, Inc. assets to offset hospital operating losses. - Five different presidents over the past five years. In early fiscal 1995, Management developed a "global restructuring" plan intended to address the Company's immediate challenges and to build a base for future success. Management intended that this "global restructuring" include as many of the following steps as possible: (i) effect a reverse stock split to improve the Company's image; (ii) negotiate settlement of the Company's payroll tax audit with the IRS; (iii) restructure the Company's financial obligations represented by the Company's Debentures; and (iv) raise capital to finance the restructuring costs. The Company suffered significant operating losses and non-recurring charges during fiscal 1995, including almost $1.0 million in legal fees as the Company aggressively moved to restructure its balance sheet and operations. However, management was successful in completing many of the global restructuring steps. In October 1994, the Company implemented a one-for-ten reverse stock split. In December 1994, the Company finalized the settlement of the Company's outstanding payroll and income tax audits with the IRS. In January 1995, the Company issued a Secured Convertible Note in the amount of $2.0 million and in February and April 1995, the Company made private offerings of common stock which provide for some of the necessary and immediate equity capital infusion to the Company. In March 1995, the Company entered into a letter of agreement intended to restructure the Company's outstanding Debentures. In addition, in March 1995, the Company received a legal judgement in its favor for $2.7 million. In May 1995, the Company received a $1.0 million investment in its subsidiary that also includes an ongoing contractual relationship. A more detailed description of these transactions is set forth below. In December 1994, the Company reached a final settlement with the IRS on the payroll tax audit (see Note 15-- "Commitment and Contingencies") pursuant to which the Company will pay the IRS an aggregate of $5.0 million, with the Company having no obligation to pay any penalties or accrued interest. Payment terms have been accepted at 50% within 90 days (extended an additional 120 days) of finalization with the remaining balance financed over the next five years. In March 1995, the Company paid $350,000 to the IRS against the initial payment due. The Company paid the remaining balance of the initial payment of $2,150,000 on July 10, 1995. This obligation was paid with the balloon payment received pursuant to the Company's note receivable related to the sale of its facility in Sacramento, California. Among other terms, the note provided for a lump sum payment to the Company of $2,750,000 on or before July 11, 1995. The Company commenced monthly installment payments to the IRS in April 1995. The Company had received excess refunds representing its alternative minimum tax (AMT) liability of approximately $666,000 for 1990 and 1991 from the carry back of net operating losses to the fiscal years ended May 31, 1988 and 1989. In January 1995, the Company paid the IRS $821,000 related to the Federal income tax audit. The Company has filed its fiscal 1995 Federal tax return which included a refund claim to the Company for $9.4 million (see Note 12-- "Income Taxes"). In addition, the Company has filed amended Federal tax returns for fiscal 1986, 1985, 1983 and 1982. The aggregate amount of refund claimed on such amended returns is approximately $13.2 million for a total of approximately $22.6 million. No assurance can be given that the IRS will approve or process any refunds claimed by the Company. On January 5, 1995, the Company issued a $2.0 million Secured Convertible Note due January 9, 1997 to a business trust. The Note is secured by first priority liens on two of the Company's operating hospital properties 19 20 (see Note 10-- Long-Term Debt and Short-Term Borrowings). On February 1, 1995, the Company sold an aggregate of 100,000 shares of common stock to one accredited investor in a private offering for an aggregate purchase price of $600,000 paid in cash on February 7, 1995. Such agreement was amended in June 1995 for an additional 15,000 shares as an adjustment for delay in registration of shares without additional payment. On April 15, 1995, the Company sold an aggregate of 150,000 shares of common stock to an accredited investor in a private offering for an aggregate purchase price of $975,000 paid in cash on April 18, 1995. Commissions and fees related to the private placements were approximately $72,000 for net proceeds of $1,503,000. It is the Company's intent to amend this agreement for an additional 22,500 shares as an adjustment for delay in registration of shares without additional payment. In addition, during the first quarter of fiscal 1996, the Company entered into three private placements for 155,000 shares of common stock for an aggregate purchase of $930,000. The proceeds were used to pay costs of closing unprofitable or under performing operations, working capital and other general corporate purposes. The Company did not make its payment of interest on its Debentures when such payment was scheduled on October 17, 1994. In early February 1995, a group of holders and purported holders of the Debentures gave notice of acceleration of the entire amount of principal and interest due under the Debentures, and on February 24, 1995, a subset of such persons filed an involuntary petition in the United States Bankruptcy Court for the Northern District of Texas under Chapter 7 of the U.S. Bankruptcy Code. On March 3, 1995, the Company entered into a letter agreement with a representative of the holders of the Debentures who had taken such actions. The agreement provides for a consensual, out-of-court resolution that the Company's Board of Directors has approved as in the best interests of the Company, its stockholders and other stakeholders. The holders' representative agreed to use best efforts to provide notices of waiver of the interest non-payment default, notices of rescission of the Debenture acceleration and the effects thereof, and consent to the immediate dismissal of the involuntary Chapter 7 petition. In return, the Company has agreed to provide an opportunity to holders of Debentures to tender their Debentures to the Company pursuant to an exchange offer to be made by the Company to the holders of the Debentures. The offer consideration will consist of $500 in cash and $120 worth in shares of Common Stock at a defined value per each $1,000 in face amount of Debentures. Tendering holders will not receive interest calculated from and after April 15, 1994 (which includes the October 17, 1994 and April 17, 1995 payments) and in lieu of calculated interest will receive an interest payment of $80 per $1,000 face amount of Debentures. The maximum amount in cash necessary to exchange for 100% of the outstanding Debentures would be approximately $5,500,000. Among the factors affecting the anticipated exchange offering are the various conditions to the consummation of the offer and the ability of the Company to finance the cash payment necessary. Therefore, no assurance can be made that the exchange offer will be successfully completed. Failure to consummate the Debenture exchange offer may result in the Company considering alternative actions including filing for voluntary protection from creditors. The Company believes that the recovery to its security holders would be less in a bankruptcy case than the recovery that may be achieved under the consensual, out-of-court arrangement the Company has reached. In addition, the agreement provides for a pledge of all of the shares of CareUnit, Inc. to secure the Company's obligation to purchase Debentures, pursuant to the exchange or otherwise; and failure to complete an exchange could result in a foreclosure sale of such shares. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, in conformity with the relevant securities laws, rules and regulations. In March 1995, the Company was awarded a legal judgement in the amount of $2.7 million against its former subsidiary, RehabCare Corporation (see Note 15-- "Commitments and Contingencies"). RehabCare has posted a bond in the amount of $3.0 million and filed a notice of appeal on September 1, 1995. Although the Company feels that RehabCare will not prevail with the appeal, the Company has not recognized any gain with relation to this judgement. The Company is unable to predict whether any proceeds from this judgement would be forthcoming during fiscal year 1996. In February 1995, the Company purchased certain assets from Alternative Psychiatric Centers, Inc. ("APC") a contract management company based in Southern California (see Note 3-- "Acquisitions and Dispositions"). APC contracts contributed 11% of CareUnit's total operating revenues during fiscal 1995 although these contracts were only in effect for four months during fiscal 1995. In April 1995, the Company agreed to issue to American Mental Health Care, Inc. ("AMH") 44,054 shares of the Company's Common Stock in return for a one-year management contract between Comprehensive Behavioral and AMH (see Note 3-- "Acquisitions and Dispositions"), and one-third of the shares of AMH on a fully-diluted basis. This transaction will allow the Company to provide services on a capitated basis to approximately 82,000 20 21 lives in the Tampa, Florida area. The Company has an option to acquire the remaining two-thirds of AMH for 132,162 shares of Common Stock. In May 1995, the Company's subsidiary, Comprehensive Behavioral, received a cash infusion from Physicians Corporation of America ("PCA"), of $1.0 million in return for 13 1/2% of the voting power of Comprehensive Behavioral represented by all of the Series A Preferred Stock of Comprehensive Behavioral exchangeable at the option of PCA for 100,000 shares of the Company's Common Stock (see Notes 3 and 14-- "Acquisitions and Dispositions" and "Stockholders' Equity"). In addition, PCA was granted a first right of refusal regarding any sale of Comprehensive Behavioral. As a key to the agreement, so long as PCA remains an equity holder of Comprehensive Behavioral, PCA and its subsidiaries are required to negotiate in good faith to contract with Comprehensive Behavioral for the delivery of mental health services in all PCA service areas where Comprehensive Behavioral has an adequate network. In addition, Comprehensive Behavioral will provide services on a capitated basis to 220,000 of PCA's approximately 700,000 members effective June 1, 1995. In the past several years, the Company has been funding the operating losses and cash flow needs of its subsidiary, Comprehensive Behavioral. Given the above transactions, including the investment of PCA, this subsidiary has attained a positive cash flow during the early part of fiscal 1996 and, as a result, management anticipates that this subsidiary will be in position to fund its operations. RESULTS OF OPERATIONS - FISCAL 1995 (COMPARED WITH FISCAL 1994) The Company incurred a loss of approximately $11.5 million or $5.11 per share for the fiscal year ended May 31, 1995, which was a deterioration of $3.6 million or $1.54 per share more than the $7.9 million or $3.57 loss per share in the prior year. During fiscal 1995, operating revenues declined $5.0 million or 15% from fiscal 1994, primarily as a result of the closure of two freestanding facilities during fiscal 1995 and the continued decline in census experienced by the remaining freestanding operations. The decline in the freestanding operations revenue during fiscal 1995 of $6.0 million or 25% was partially offset by an increase in managed care revenues. Managed care revenues increased by $2.1 million or 65% during fiscal 1995 as compared to the prior year. Operating expenses decreased slightly during fiscal 1995. The decrease in operating expenses experienced by freestanding facilities of $1.5 million or 7% was offset by a 47% or $2.2 million increase in managed care operating expenses. General and administrative expenses declined by $1.1 million or 20% primarily as a result of management's continued efforts to reduce corporate overhead expenses. Included in general and administrative expenses is approximately $1.0 million in legal fees. During fiscal 1995, the Company relocated its corporate headquarters from Missouri to Southern California. The Company estimates this relocation, and the consolidation of administrative offices, eliminated a portion of ongoing corporate burden, which is estimated to be $1.2 million during fiscal 1995 and 1996. During fiscal 1995, the Company recorded $0.3 million for the loss on the sale/write-down of assets. This loss is primarily attributable to the write-off of leasehold improvements on locations no longer owned or operated by the Company. Interest expense increased by $0.1 million or 11% primarily as a result of the addition of interest related to the secured convertible note of $2.0 million and the IRS Offer in Compromise originally for $5.0 million, (see Note 10-- "Long-Term Debt and Short-Term Borrowings"), both of which were added during fiscal 1995. The Company's provision for income taxes declined by $0.1 million or 40%. This decline is primarily a result of the decrease in state income and franchise taxes payable as the Company withdraws from states in which it is no longer doing business and the dissolution of corporate entities no longer operating or whose operations have been sold or dissolved in prior years. The Company's current assets decreased by $7.1 million or 47% during fiscal 1995 to $8.0 million from $15.1 million in fiscal 1994. This decrease is primarily due to the sale during fiscal 1995 of two freestanding facilities and another property, and the write-off of an additional property, which was classified as current assets held for sale as of May 31, 1994 for approximately $5.4 million and the use of cash proceeds to fund operating losses. During fiscal 1995, the Company's freestanding facility in Fort Worth, Texas was closed due to poor performance. This facility has been classified with non-current assets held for sale at May 31, 1995. Other non-current assets held for sale includes two additional properties which are expected to be sold in the next fiscal year, however, 21 22 contracts for sale have not been fully negotiated. In addition, the Company's lease ended at its Grand Rapids, Michigan facility. These operations were moved to another location in April 1995 (see Note 3-- "Acquisitions and Dispositions"). The Company's current liabilities increased during fiscal 1995 by $8.7 million or 59% to $23.4 million from $14.7 million in fiscal 1994. Included in current liabilities is long-term debt in default which represents the $9.5 million of Debentures. The Debentures were previously classified as long-term debt, however, the Company did not make its payment of interest on the Debentures when such payment was scheduled (see Note 10-- "Long-Term Debt and Short-Term Borrowings"), and, as a result, the Debentures are in default and the holders have accelerated the entire principal amount. The Company has agreed to use best efforts to provide an opportunity to holders of the Debentures to tender their Debentures pursuant to an exchange offer to be made by the Company to the holders of the Debentures. Failure to consummate the Debenture exchange offer or rescind acceleration of the Debentures when contemplated may result in the Company considering alternative actions including filing for voluntary protection from creditors. Included in current maturities of long-term debt is approximately $2.7 million related to the Company's obligation pursuant to its settlement agreement with the IRS. Income taxes payable declined by $0.4 million during fiscal 1995 as a result the Company's payment of $0.8 million for the IRS assessment related to AMT (see Note 15-- "Commitments and Contingencies"). Long-term debt declined by $5.4 million or 51% from the prior fiscal year. This decline is attributable to the $9.5 million in Debentures which has been classified as current as of May 31, 1995, offset by the addition of the secured convertible note and IRS settlement (see Note 10-- "Long-Term Debt and Short-Term Borrowings"). Other non-current liabilities decreased in fiscal 1995 by $1.5 million or 50% to $1.5 million from $3.0 million in fiscal 1994. This decline is attributable to the IRS settlement which was reclassified as long-term debt during fiscal 1995. Minority interests at May 31, 1995, represents the investment by PCA in Comprehensive Behavioral (see Note 14-- "Stockholders' Equity"). Managed Care Operations During fiscal 1995, the number of covered lives increased by 113% from fiscal 1994. This increase is primarily attributable to new contracts added during fiscal 1995 and the additional lives related to the American Mental Health Care, Inc. ("AMH") one-year management contract with an option to acquire AMH for Common Stock (see Note 3-- "Acquisitions and Dispositions"). Comprehensive Behavioral attempts to distinguish itself from its competition by endeavoring to be a "science-based" provider of care and manages all clinical programs based upon what management believes are proven treatment technologies. The following table reflects covered lives by major product provided:
YEAR ENDED MAY 31, ----------------------- 1995 1994 ---- ---- Carve-out (capitated) . . . . . . . . . . . . . . . . . . . . . . 357,275 175,707 Blended products . . . . . . . . . . . . . . . . . . . . . . . . 4,491 3,334 EAP services . . . . . . . . . . . . . . . . . . . . . . . . . . 81,180 28,524 ------- ------- Total covered lives . . . . . . . . . . . . . . . . . . . . 442,946 207,565 ======= =======
Comprehensive Behavioral contracts with a variety of sources on a capitated basis. The Company attempts to control its risk by entering into contractual relationships with health care providers, including hospitals and physician groups on a sub-capitated, discounted fee-for-service or per case basis. The Company's contracts typically exclude capitation risk for chronic care patients. In fiscal 1995, operating revenue increased $2.2 million or 65% from fiscal 1994 which is attributable to new contracts added during fiscal 1995. In addition, during fiscal 1994, Comprehensive Behavioral was in its growth stage and still considered a start-up venture. Operating expenses increased by $2.4 million to $7.2 million or 51% in fiscal 1995 which is primarily a result of restructuring which occurred during fiscal 1995, and an increase in the costs associated with the expansion and development of new contracts. Also, fiscal 1995 results include a one time legal settlement of $0.2 million. Although Comprehensive Behavioral experienced an increase in operating revenue 22 23 during fiscal 1995, it was more than offset by the increase in total operating expenses resulting in a net operating loss of $2.1 million, an increase in Comprehensive Behavioral's net operating loss of 10% or $0.2 million from fiscal 1994. Contract Operations During fiscal 1995, patient days of service under CareUnit, Inc. contracts declined by approximately 26% from 39,103 patient days to 29,082 patient days. This decline is attributable to the five units which were closed during fiscal 1995, a decline in length of stay and increased influence of managed care. Of the units closed, one contract was terminated by CareUnit, Inc. for poor operating performance. The remaining four closures were terminated by the contracting hospitals upon expiration of their term. The Company believes that these non-renewals were influenced primarily by increased competition and changes in reimbursement patterns by third-party payers. During fiscal 1995, CareUnit, Inc. opened seven new contracts, of which three were partial hospitalization programs. During fiscal 1995, CareUnit's operating revenue declined by $0.1 million or 2% while operating expenses increased by 10% from the prior year resulting in a decrease in net operating income of $0.7 million from the prior year. The increase in operating expenses is primarily attributable to the increased costs associated with the seven units added during fiscal 1995. Traditionally, marketing and start-up costs for new programs average approximately $25,000 per unit. The following table sets forth quarterly utilization data on a "same store" basis:
Same Store Utilization ----------------------------------------------------------------------------- Fiscal 1995 Fiscal 1994 ------------------------------------ ----------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ---- ---- ---- ---- ---- ---- ---- ---- Admissions . . . . . . . . 715 647 706 721 708 629 618 625 Average length of stay . . 7.3 8.0 8.3 8.0 8.6 8.4 8.9 10.1 Patient days . . . . . . . 5,232 5,181 5,872 5,738 6,054 5,256 5,476 6,284 Average occupancy rate . . 45% 46% 51% 49% 55% 51% 54% 61%
Units which were operational for both fiscal years experienced an 8% increase in admissions which, when offset by the decrease in length of stay, resulted in a 5% decline in utilization to 22,023 patient days. Since average net revenue per patient day at these units increased by $6, net inpatient operating revenues increased slightly to $2.4 million. An additional $0.7 million was generated by units closed during the fiscal year. During fiscal 1995, outpatient revenues increased 21% in fiscal 1995. This increase is primarily attributable to one unit's increase in utilization which was twice the prior year. In addition, partial hospitalization programs contributed 10% of total revenue during fiscal 1995. The following table illustrates the revenues in outpatient and daycare programs offered by nine contract units on a "same store" basis:
Net Outpatient/Daycare Revenues ---------------------------------------------------------------------------- (Dollars in thousands) Fiscal 1995 Fiscal 1994 ----------------------------------- ---------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ---- ---- ---- ---- ---- ---- ---- ---- Facilities offering . . . . 9 9 9 9 9 9 9 9 Net outpatient/daycare revenues . . . . . . . . $344 $327 $323 $285 $287 $274 $232 $245 % of total "same store" net operating revenues . 22% 27% 26% 22% 21% 22% 18% 17%
23 24 For units operational in both fiscal years, operating expenses increased 2%, which, combined with the increase in inpatient and outpatient operating revenues, caused operating income at the unit level to increase 24% from fiscal 1994. Consequently, overall unit operating income increased to $0.9 million in fiscal 1995 from $0.7 million in fiscal 1994. Freestanding Operations Admissions in fiscal 1995 declined overall by 587 to 3,329 from 3,916 in fiscal 1994, an overall decline of 15%. Of this decline, 616 fewer admissions were attributable to facilities which were closed or under contract to be sold as of May 31, 1995. The Company closed one facility during fiscal 1995 due to poor performance. In addition, the Company's lease for its facility in Grand Rapids, Michigan ended in April 1995. The remaining facilities ("same store", i.e., those operational during both fiscal years) experienced a slight increase in admissions and a 16% decline in length of stay to 8.4 days, resulting in 16% fewer patient days than the prior fiscal year. The following table sets forth selected quarterly utilization data on a "same store" basis:
Same Store Utilization ---------------------------------------------------------------------------- Fiscal 1995 Fiscal 1994 ---------------------------------- ---------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ---- ---- ---- ---- ---- ---- ---- ---- Admissions . . . . . . . . 584 578 561 586 567 568 571 574 Average length of stay . . 6 8 10 9 10 10 10 11 Patient days . . . . . . . 3,708 4,705 5,395 5,557 5,524 5,711 5,743 6,135 Average occupancy rate . . 17% 22% 25% 26% 25% 27% 27% 28%
Overall operating revenue per patient day increased by 3% to $639 in fiscal 1995 from fiscal 1994 and overall patient days declined 28% to 27,774, resulting in a decrease of approximately $6.1 million, or 25%, in operating revenues. During fiscal 1995, the Company closed two freestanding facilities, one of which was due to poor performance. The other closed due to the termination of lease. In addition to the decrease caused by the sale and/or closure of hospitals, the Company believes that the increasing role of HMOs, reduced benefits from employers and indemnity companies, a greater number of competitive beds and a shifting to outpatient programs are responsible for this decline in patient days. In response to these factors the Company accelerated the development of effective, lower cost outpatient, daycare, and partial hospitalization programs in conjunction with its freestanding facilities, and shifted its marketing activities toward developing relationships and contracts with managed care and other organizations which pay for or broker such services. Overall operating expenses declined by $1.7 million or 8% to $19.5 million in fiscal 1995 from $21.2 million in fiscal 1994. This decline is primarily attributable to the facility closures during fiscal 1995. Fiscal 1995 includes a one-time legal expense related to the Company's freestanding facility in Aurora, Colorado of $0.2 million. In addition, the provision for bad debts declined by $0.2 million or 16%. General and administrative expenses declined by $0.2 or 62% as the Company continues to reduce its overhead expenses. The following table illustrates the revenues in outpatient, daycare and partial hospitalization programs offered by the freestanding facilities on a "same store" basis:
Net Outpatient/Daycare Revenues ---------------------------------------------------------------------------- (Dollars in thousands) Fiscal 1995 Fiscal 1994 ----------------------------------- ---------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ---- ---- ---- ---- ---- ---- ---- ---- Facilities offering . . . . 5 5 5 5 5 5 5 5 Net outpatient/daycare revenues . . . . . . . . $2,133 $1,652 $1,804 $2,352 $2,401 $2,135 $1,744 $1,723 % of total "same store" net operating revenues . 61% 52% 51% 60% 56% 55% 47% 46%
24 25 The Company recorded no asset write-downs during fiscal 1995 and recorded $1.0 million during fiscal 1994. Prior year asset write-downs included the estimated future operating losses, selling costs and carrying costs of such facilities until disposition at an assumed future point in time. To the extent that actual costs and time required to dispose of the facilities differ from these estimates, adjustments to the amount written-down may be required. Losses and carrying costs of such facilities are charged back directly to the carrying values of the respective assets held for sale. Because chemical dependency treatment facilities are special purpose structures, their resale value is negatively affected by the oversupply of beds resulting from the diminished demand for inpatient treatment currently being experienced throughout the industry. Three facilities closed in the fourth quarter of fiscal 1993 were sold during fiscal 1994. The Company sold two facilities during fiscal 1995, of which one was closed in fiscal 1993, and the other in a prior fiscal year. The Company currently has three facilities listed for sale, of which one was closed in fiscal 1995, and the other two in prior fiscal years. These facilities have been designated for disposition because of their weak market positions relative to competitors and limited prospects for generating an acceptable return on investment as an operating property. The Company will continue to evaluate the performance of all of these facilities in their respective markets, and, if circumstances warrant, may increase or reduce the number of facilities designated for disposition. RESULTS OF OPERATIONS - FISCAL 1994 (COMPARED WITH FISCAL 1993) The Company incurred a loss of approximately $7.9 million or $3.57 per share for the fiscal year ended May 31, 1994, which was an improvement of $3.7 million or $1.71 per share from the $11.6 million or $5.28 per share loss incurred in the prior fiscal year. The fiscal 1994 fourth quarter loss of $4.0 million or $1.84 per share reflected an improvement from the fourth quarter of the prior fiscal year by $0.3 million or $0.14 per share. Results for fiscal 1993 were impacted by a gain of approximately $13.1 million recorded during the second quarter of the fiscal year as a result of the sale by the Company of 2,300,000 shares of its formerly wholly-owned subsidiary RehabCare. Prior to the sale the Company owned a 48% interest in RehabCare which was accounted for on the equity method. Subsequent to the sale, the Company no longer has an interest in RehabCare and no longer reports a portion of RehabCare's earnings in its statement of operations. Included in the loss for fiscal 1993 is a charge of approximately $6.7 million, attributable to restructuring the organization, of which $1.2 million was reclassified as asset write-downs during the fourth quarter. In fiscal 1993, the Company recorded pretax charges of approximately $4.4 million primarily associated with the write-down of property and equipment held for sale. Of this amount, $3.4 million was a result of revaluing certain underperforming assets that the Company had designated for disposition and the remaining $1.0 million was attributable to the write-down of other property and equipment to net realizable value. Operating revenues declined $17.6 million or 34% from fiscal 1993, primarily as the result of the closure of four facilities during fiscal 1993, the sale of a fifth facility and the decline in both admissions and length of stay. Operating expenses decreased by approximately $19.0 million or 37%, primarily as a result of the closure of four facilities during fiscal 1993 and the sale of a fifth. General and administrative expenses declined by approximately $0.3 million or 5% in fiscal 1994 primarily as a result of management's continued effort to reduce corporate overhead expenses. Interest expense was reduced by $0.5 million or 30%, primarily as the result of the paydown of senior secured debt by approximately $1.9 million with the proceeds of asset sales. In addition, general and administrative expenses reflect a credit of $0.8 million for fiscal 1993. This credit is the result of the reduction of provisions for general and administrative expenses. Equity in the earnings of unconsolidated affiliates was approximately $0.4 million during fiscal 1993. No equity in the earnings of unconsolidated affiliates was included in the Company's financial statements for fiscal 1994 (see Note 7-- "Investments in Unconsolidated Affiliates"). The Financial Accounting Standards Board ("FASB") has issued Statement No. 109, "Accounting for Income Taxes". Effective June 1, 1993, the Company adopted Statement No. 109 which changed the Company's method of accounting for income taxes from the deferred method to the asset and liability method. The change to Statement No. 109 had no cumulative effect on the financial statements of the Company. 25 26 RISK FACTORS History of Losses and Anticipated Future Losses; Uncertainty of Future Profitability There can be no assurance that the Company will be able to achieve profitability and positive cash flows from operations or that profitability and positive cash flow from operations, if achieved, can be sustained on an ongoing basis. Moreover, if achieved, the level of that profitability or that positive cash flow cannot accurately be predicted. Need for Additional Funds; Uncertainty of Future Funding The Company's negative cash flow from operations has consumed substantial amounts of cash. The conversion of the Debentures, which the Company has agreed to use its best efforts to complete, will require substantial amounts of cash. There can be no assurance that additional financing will be available on acceptable terms, if at all. Issuance of additional equity securities by the Company could result in dilution to then-existing stockholders. In the event of a failure to meet these obligations on a timely basis, the Company will continue to be liable for the entire $9.5 million principal amount of Debentures outstanding in lieu of the negotiated amounts presently contemplated pursuant to the Debenture letter agreement. (See Note 10-- "Long-Term Debt and Short-Term Borrowings"). Disposition of Assets The Company has been required to dispose of various properties in order to raise working capital, and no assurance can be made that such dispositions will not have adverse effects on the Company's financial condition or that the Company has additional assets that could be disposed of in order to fund its capital requirements. In connection with a March 3, 1995 letter agreement with a representative of the debenture holders, the Company has agreed to pledge all of the shares of its CareUnit, Inc. subsidiary. The agreement provides that "At 150 days after the date of this Agreement, provided that the Participating Securityholders have in each material respect performed (with opportunity to cure if a cure is possible) their obligations required to be performed hereunder on or prior to such date, and if the Offer has not then been consummated, the Company shall pledge (with the Trustee, or an alternate acceptable to the Company, to act as pledgeholder on terms of a written agreement containing standard terms reasonably acceptable to the Participating Securityholders) all of the Shares as collateral for its obligation to purchase the Securities pursuant to the Offer or otherwise. Such pledge may only be foreclosed upon following 180 days after the date hereof at the request of any Securityholder or the Trustee if the Offer is not consummated on or prior to such date, provided that the Participating Securityholders have in each material respect performed (with opportunity to cure if a cure is possible) their obligations required to be performed hereunder on or prior to such date. ...Upon consummation of the Offer, the said pledges shall be released." No assurances can be made that any such pledged shares will be returned to the Company or that the Company will not be required to perform such agreement, or otherwise satisfy its obligations to Debenture holders. Two of the Company's freestanding facilities (Aurora, Colorado and Cincinnati, Ohio) secure the Company's $2.0 million note due January 9, 1997. See "Risk Factors -- Involuntary Bankruptcy Petition; Acceleration of Indebtedness". Involuntary Bankruptcy Petition; Acceleration of Indebtedness Despite the dismissal in March 1995 of the involuntary bankruptcy petition filed against the Company by three purported creditors, no assurance may be made that such person or other persons whom the Company owes any debt could not file another involuntary petition in bankruptcy court. The Company's Debentures continue to be in default, including the default in payment of interest accruing from April 1994 on approximately $9.5 million of outstanding principal amount, and interest on default interest; and such Debentures continue to be accelerated, and immediately payable in full (see Note 10-- "Long-Term Debt and Short-Term Borrowings"). To rescind the acceleration of the Debentures would require written consent of a majority of the Debentures and the cure of all existing defaults. No assurances can be made that the holders of Debentures will consent to rescission of the acceleration or that the defaults can be cured. In the event that the Company does not retire the Debentures as and when contemplated in the March 3, 1995 letter agreement, Debenture holders who filed the earlier involuntary petition, or other Debenture holders, may file another such petition. Other creditors may also file such a petition, 26 27 or institute other actions against the Company, in order to prevent the Debenture holders from collecting on their debts in advance of payment to themselves. The acceleration of the Debentures constitutes a default under certain senior debt of the Company. Previously, in January 1995, the Company's freestanding hospital facility in Aurora, Colorado and the CareUnit Hospital of Ohio, Inc., a freestanding hospital facility in Cincinnati, Ohio were given as collateral for the Company's $2.0 million Secured Convertible Note due January 9, 1997 payable to Lindner Funds. Taxes The Company has filed its consolidated Federal tax return and amended returns claiming net operating loss carry backs for tax deductions in accordance with Internal Revenue Code Section ("Section") 172(f) and intends to attempt to reduce its obligations to the IRS (see Note 12-- "Income Taxes"). Section 172(f) is an area of the tax law without substantial legal precedent. There may be substantial opposition by the IRS as to the Company's carry back claim; therefore no assurances can be made to the Company's entitlement to such claim. The IRS will not be precluded by the payroll tax settlement agreement from raising additional issues in connection with the Company's tax returns. Should the Company not utilize its net operating losses through carry backs, the Company may be unable to utilize some or all of its allowable tax deductions or losses, which depend upon factors including the availability of sufficient net income from which to deduct such losses during limited carryover periods. Further, the Company's ability to use any net operating losses in the future may be subject to limitation in the event that the Company issues or agrees to issue amounts of additional equity, which could constitute a change in ownership in accordance with Section 382. Dependence on Reimbursement by Third-Party Payors The Company's ability to succeed in increasing its revenues may depend in part on the extent to which reimbursement of the cost of treatment will be available from government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price of medical products and services. As a result of reimbursement changes and competitive pressures, the contractual obligations of the Company have been subject to intense evaluation. Uncertainty of Pricing; Health Care Reform and Related Matters The levels of revenues and profitability of health care companies may be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of health care 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 health care. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payors for health care goods and services may take in response to any health care reform proposals or legislation. The Company cannot predict the effect health care 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. Management of Expansion The Company's anticipated growth and expansion into areas and activities requiring additional expertise, such as managed care, are expected to place increased demands on the Company's resources. These demands are expected to require the addition of new management personnel and the development of additional expertise by existing management personnel. The failure to acquire such services or to develop such expertise could have a material adverse effect on the prospects for the Company's success. 27 28 Management of Transition The Company's prospects for success depend, to a degree, on its ability to successfully implement its current restructuring plans. The failure of the Company to successfully transition, or any unanticipated or significant delays in such transition, could have a material adverse effect on the Company's business. There can be no assurance that the Company will be able to achieve its planned transition without disruption to its business or that facilities or management information systems will be adequate to sustain future growth. Shares Eligible for Future Sale The Company contemplates issuing additional equity through private placements and other private transactions, pending listing on NYSE, shareholder approval or the exercise or conversion by holders of securities, and the Company anticipates issuance of additional equity, including without limitation to holders of approximately $9.5 million of outstanding convertible Debentures (see Note 10-- "Long-Term Debt and Short-Term Borrowings"). Issuance of these shares, registration thereof pursuant to registration rights or otherwise, and additional sales of the sales could adversely affect the trading prices of the Common Stock. Price Volatility in Public Market The securities markets have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. Trading prices of securities of companies in the managed care sector have experienced significant volatility. Anti-takeover Provisions 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. 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 further vote or action by the stockholders, which could have the effect of diluting the Common Stock. The Company's Restated Certificate of Incorporation also provides for a classified board of directors, with directors divided into three classes serving staggered terms. In addition, the Company's stock option plans generally provide for the acceleration of vesting of options granted under such plans in the event of certain transactions which result in a change of control of the Company. In addition, Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders. 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. LIQUIDITY AND CAPITAL RESOURCES The Company reported a net loss of $11.5 million for the year ended May 31, 1995 and has reported net losses in each of the four preceding fiscal years aggregating an additional $39.8 million. As a result, the Company has an accumulated deficit of $46.5 million and a total stockholders' deficiency of $4.9 million as of May 31, 1995. Additionally, the Company's current assets at May 31, 1995 amounted to approximately $8.0 million and current liabilities were approximately $23.4 million, resulting in a working capital deficiency of approximately $15.4 million and a current ratio of 1:2.9. Included in current liabilities are $9.5 million of Debentures in default as a result of the Company's failure to make scheduled payments of interest on the Debentures commencing in October 1994. As further discussed in Note 10-- "Long-Term Debt and Short-Term Borrowings", the Company has agreed to use its best efforts to provide an opportunity for Debenture holders to tender their Debentures pursuant to an exchange offer to be made by the Company. This proposed transaction requires the holders of a majority of the Debentures to give their approval to rescind the acceleration and the Company to obtain and expend up to $5.5 million of cash during fiscal 1996, over and above cash required to fund other financing, operating and investing needs. Additionally, the Debenture exchange provides for the Company to issue $120 worth of its common stock at a defined value for each $1,000 of Debentures, which may be contingent upon the Company's ability to effect certain filings with the Securities and Exchange Commission. The ability to timely proceed with any such proposed filings will, in part, depend upon the ability of the Company to obtain a consent from its prior auditors for the use of their report on the Company's 28 29 consolidated financial statements in such registration statements. Failure to obtain Debenture holder approval or to accomplish the Debenture exchange, or, in the alternative, a failure of the Company and the Debenture holders to otherwise reach a settlement, may cause the Debenture holders to pursue the involuntary bankruptcy of the Company and/or the Company to take alternative actions that may include filing for voluntary protection from creditors. Alternatively, if the Debenture exchange is accomplished, the elimination of the Debenture's debt service requirement would decrease the Company's future cash flow requirements. (The foregoing summary does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations.) Included in current maturities of long-term debt is approximately $2.7 million which represents the Company's obligation pursuant to its settlement agreement with the IRS (see Note 15-- "Commitment and Contingencies"). The Company has paid $2.3 million of this liability to the IRS during fiscal 1996 and intends to pay the remaining balance in monthly installments of $42,000 pursuant to the settlement agreement. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The 1995 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty. To address the Company's operational issues, in fiscal 1993 the Company established a restructuring reserve (see Note 9-- "Accounts Payables and Accrued Liabilities"). One purpose of such reserve was for the realignment of the Company's focus and business and the settlement and disposition of certain non-performing and under-utilized assets. Through May 31, 1995 many of the Company's inpatient freestanding facilities have been sold or are in the process of being closed or sold. Additionally, in fiscal 1995, management has begun to implement plans for expanding the Company's contract management and managed care operations (see Note 3-- "Acquisitions and Dispositions"). In previous years, the Company was obligated to support and fund certain freestanding facilities that now have been closed, including two such facilities closed in fiscal 1995 (see Note 5-- "Property and Equipment Held for Sale"). As a result, the Company will no longer be burdened with the negative cash flow requirements associated with such facilities. Based upon a projection of actual performance during fiscal 1995 with adjustments for reduced cash flow requirements associated with facilities closed and/or sold in fiscal 1995, known contract and cyclical changes, and also giving consideration to cash on hand at May 31, 1995 of $1.5 million, management expects the Company to be able to meet its cash obligations required by operations during fiscal 1996, excluding the Company's obligations under the Debentures. However, the cash needs of the Company may vary from month to month depending upon the actual level of business activity, and through the first quarter of fiscal 1996 the Company continues to incur losses. Therefore, no assurance can be given that the Company will generate adequate cash flows to meet cash obligations required by operations, excluding the Company's obligations under the Debentures, in fiscal 1996. To provide funds for the Debenture exchange and/or additional operating needs, the Company anticipates utilizing one or more of the following potential sources of cash: - The Company has received a firm commitment from a mutual fund to purchase in a private placement at least $5.0 million of 15% fully secured Company notes due no earlier than December 1996 if offered by the Company. - The Company has filed its fiscal 1995 Federal tax return, and a Form 1139 "Corporate Application for Tentative Refund" in the amount of $9.4 million. In the event the Company receives the full refund claim for fiscal 1995, the net amount of cash available for working capital purposes would be $7.5 million. The Company has also filed amended Federal tax returns for prior years to claim refunds of an additional $13.2 million. These refund claims have been made under Section 172(f) of the Internal Revenue Code, an area of the tax law without significant precedent, and there may be substantial opposition by the IRS to the Company's refund claims. Accordingly, no assurances can be made to the Company's entitlement to such refunds or the timing of the receipt thereof (see Note 12-- "Income Taxes"). 29 30 - Included in non-current assets are three hospital facilities designated as property and equipment held for sale with a total carrying value of $3.7 million. The Company expects to sell two of these facilities in the next fiscal year and may lease a third facility to an unrelated entity. However, the contracts have not been fully negotiated, and proceeds from the sales or lease of such assets are not expected to be available by the time the Debenture exchange is expected to occur. Accordingly, management expects to use such cash proceeds, if received during fiscal 1996, to fund and expand the Company's operations and implement the Company's restructuring plans. - In March 1995, a jury awarded the Company approximately $2.7 million, plus interest, in damages in its lawsuit against RehabCare Corporation. The defendant has posted a bond for the amount of the award and has filed an appeal of the judgment. Management is unable to predict whether any proceeds from this judgment will be received in fiscal 1996 (see Note 15-- "Commitments and Contingencies"). All of these potential sources of additional cash in fiscal 1996 are subject to variation due to business and economic influences outside the Company's control. There can be no assurance that during fiscal 1996 the Company will complete the transactions required to fund its working capital deficit. The Company continues to incur losses from operations. During fiscal 1995, the Company commenced various steps to seek to reduce the funding of operating losses and cash flow deficits of its subsidiaries. The Company estimates expenses or obligations reflecting non-recurring expenses and inflows which will assist the Company to meet certain obligations and provide for working capital and are essential to the achievement of the Company's plan of operations. During fiscal 1995, management implemented its plans for downsizing and conversion of existing operations while expanding its contract management and managed care operations. In addition, given the acquisitions (see Note 3-- "Acquisitions and Dispositions") during fiscal 1995, including the cash investment in Comprehensive Behavioral, Comprehensive Behavioral has achieved a cash flow positive state in fiscal 1996 (exclusive of corporate overhead allocations). As a result, and assuming reasonable expansion of its business, management anticipates that this subsidiary will be in a position to fund its operations during fiscal 1996. The elimination of such funding will decrease the Company's future cash flow requirements. 30 31 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, 1995, 1994 AND 1993
PAGE NUMBER ------ Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Consolidated Balance Sheets, May 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Consolidated Statements of Operations, Years Ended May 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . 35 Consolidated Statements of Stockholders' Equity, Years Ended May 31, 1995, 1994 and 1993 . . . . . . . . . . . 36 Consolidated Statements of Cash Flows, Years Ended May 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . 37 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
31 32 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders of Comprehensive Care Corporation We have audited the accompanying consolidated balance sheet of Comprehensive Care Corporation and subsidiaries as of May 31, 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the year 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 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 in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Comprehensive Care Corporation and subsidiaries as of May 31, 1995, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements for the year ended May 31, 1995 have been prepared assuming the Company will continue as a going concern. As more fully described in Note 2, the Company has reported annual net losses for each of the last five fiscal years and has a working capital deficiency of $15.3 million and a deficit in total stockholders' equity of $4.9 million as of May 31, 1995. Approximately $9.5 million of the working capital deficiency arises from presentation of the Company's convertible subordinated debentures as currently payable due to default in the payment of interest on this obligation commencing October 1994. The Company is seeking to remedy this default through the debenture exchange offer described in Note 10. Among other terms this proposed transaction requires the holders of a majority of the debentures to give their approval to rescind the acceleration, and the Company to obtain and expend up to $5.5 million in cash during fiscal 1996 over and above cash required to fund other financing, operating and investing needs. No assurance can be given that the debenture exchange will be successfully accomplished, and the failure to reach a settlement with the holders of the Company's debentures through the debenture exchange or otherwise may cause the debenture holders to pursue the involuntary bankruptcy of the Company and/or the Company to take alternative actions including filing for voluntary protection from creditors. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The 1995 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Orange County, California September 7, 1995 32 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Comprehensive Care Corporation: We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation (a Delaware corporation) and subsidiaries as of May 31, 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Comprehensive Care Corporation and subsidiaries as of May 31, 1994 and the results of their operations and their cash flows for each of the two fiscal years in the period ended May 31, 1994, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred significant recurring losses and negative cash flows from operations which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP St. Louis, Missouri August 22, 1994 33 34 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MAY 31, ------------------------ 1995 1994 ---- ---- A S S E T S (DOLLARS IN THOUSANDS) Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 1,542 $ 1,781 Accounts and notes receivable, less allowance for doubtful accounts of $1,096 and $1,574 . . . . . . . . . . . . 3,329 5,848 Note receivable . . . . . . . . . . . . . . . . . . . . . . . . . 2,750 --- Property and equipment held for sale . . . . . . . . . . . . . . --- 6,939 Other current assets . . . . . . . . . . . . . . . . . . . . . . 391 508 ------- ------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 8,012 15,076 ------- ------- Property and equipment . . . . . . . . . . . . . . . . . . . . . . . 25,181 29,326 Less accumulated depreciation and amortization . . . . . . . . . . . (13,074) (13,338) ------- ------- Net property and equipment . . . . . . . . . . . . . . . . . . . . . 12,107 15,988 ------- ------- Property and equipment held for sale . . . . . . . . . . . . . . . . 3,746 --- Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,136 2,162 ======= ======= Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,001 $33,226 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities . . . . . . . . . . . . $10,235 $ 13,776 Long-term debt in default (see Note 10) . . . . . . . . . . . . . 9,538 --- Current maturities of long-term debt . . . . . . . . . . . . . . 3,285 154 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 296 734 ------- ------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 23,354 14,664 ------- ------- Long-term debt, excluding current maturities . . . . . . . . . . . . 5,077 10,477 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,503 2,986 Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 --- Commitments and contingencies (see Note 2, 10 and 15) Stockholders' equity: Preferred stock, $50.00 par value; authorized 60,000 shares . . . --- --- Common stock, $.01 par value; authorized 12,500,000 shares; issued and outstanding 2,464,516 and 2,198,692 shares . . . . 25 22 Additional paid-in capital . . . . . . . . . . . . . . . . . . . 41,558 40,060 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (46,516) (34,983) ------- ------- Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . ( 4,933) 5,099 ------- ------- Total liabilities and stockholders' equity . . . . . . . . . . . . . $26,001 $33,226 ======= =======
See accompanying notes. 34 35 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, ------------------------------- 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues and gains: Operating revenues . . . . . . . . . . . . . . . . . $29,282 $34,277 $51,847 Gain on sale of RehabCare stock, net . . . . . . . . --- --- 13,114 Gain on Sovran settlement, net . . . . . . . . . . . --- --- 584 Interest income . . . . . . . . . . . . . . . . . . . 38 50 69 Equity in earnings of unconsolidated affiliates . . . --- --- 384 -------- ------- -------- 29,320 34,327 65,998 -------- ------- -------- Costs and expenses: Operating expenses . . . . . . . . . . . . . . . . . 31,497 31,875 50,924 General and administrative expenses . . . . . . . . . 4,331 5,455 5,754 Provision for doubtful accounts . . . . . . . . . . . 1,423 1,558 6,187 Depreciation and amortization . . . . . . . . . . . . 1,797 1,762 2,946 Loss on sale/write-down of assets . . . . . . . . . . 259 --- 4,382 Interest expense . . . . . . . . . . . . . . . . . . 1,366 1,228 1,759 Other restructuring/nonrecurring expenses . . . . . . --- --- 5,452 -------- ------- -------- 40,673 41,878 77,404 -------- ------- -------- Loss before income taxes . . . . . . . . . . . . . . . . (11,353) (7,551) (11,406) Provision for income taxes . . . . . . . . . . . . . . . 180 301 194 -------- ------- -------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(11,533) $(7,852) $(11,600) ======== ======= ======== Net loss per share . . . . . . . . . . . . . . . . . . . $(5.11) $(3.57) $(5.28) ======== ======= ========
See accompanying notes. 35 36 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCK STOCKHOLDER'S SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT EQUITY ------ ------ ------- ------- ------ ------ ------ (AMOUNTS IN THOUSANDS) Balance, May 31, 1992 . . . . . 2,191 $ 22 $39,950 $(15,531) --- $ --- $24,441 Net loss . . . . . . . . . --- --- --- (11,600) --- --- (11,600) Exercise of stock options . 4 --- 50 --- --- --- 50 Issuance of shares for the purchase of Mental Health Programs, Inc . . 4 --- 60 --- --- --- 60 ----- ------- ------- -------- --- ------- ------- Balance, May 31, 1993 . . . . . 2,199 $ 22 $40,060 $(27,131) --- $ --- $12,951 Net loss . . . . . . . . . --- --- --- (7,852) --- --- (7,852) ----- ------- ------- -------- --- ------- ------- Balance, May 31, 1994 . . . . . 2,199 $ 22 $40,060 $(34,983) --- $ --- $ 5,099 Net loss . . . . . . . . . --- --- --- (11,533) --- --- (11,533) Issuance of shares for the purchase of Mental Health Programs, Inc . . 16 --- --- --- --- --- --- Odd lot shares purchase . . (2) (2) Shares issued for private placements . . . 250 3 1,500 --- --- --- 1,503 ----- ------- ------- -------- --- ------- ------- Balance, May 31, 1995 . . . . . 2,465 $ 25 $41,558 $(46,516) --- $ --- $(4,933) ===== ======= ======= ======== === ======= =======
See accompanying notes. 36 37 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31, ----------------------------- 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(11,533) $(7,852) $(11,600) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . 1,797 1,762 2,946 Provision for doubtful accounts, net of recoveries . . . . . . 1,423 1,558 6,187 Gain on sale of RehabCare stock, net . . . . . . . . . . . . . --- --- (13,114) Gain on Sovran settlement, net . . . . . . . . . . . . . . . . --- --- (584) Loss on sale/write-down of assets . . . . . . . . . . . . . . 259 36 4,382 Carrying costs incurred on property and equipment held for sale . . . . . . . . . . . . . . . . . . . . . . . (420) (1,241) (1,330) Other restructuring/non-recurring expenses . . . . . . . . . . --- --- 5,452 Equity in earnings of unconsolidated affiliates . . . . . . . --- --- (384) Decrease in accounts and notes receivable . . . . . . . . . . 1,108 452 2,542 Decrease in accounts payable and accrued liabilities . . . . . (116) (2,762) (4,927) Increase(decrease) in income taxes payable . . . . . . . . . . (438) 68 --- Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 56 818 278 -------- ------- -------- Net cash used in operating activities . . . . . . . . . . . (7,864) (7,161) (10,152) -------- ------- -------- Cash flows from investing activities: Proceeds from sale of property and equipment (operating and held for sale) . . . . . . . . . . . . . . 3,204 10,357 3,489 Proceeds from the sale of RehabCare stock . . . . . . . . . . --- --- 18,825 Proceeds from Sovran settlement, net . . . . . . . . . . . . . --- --- 584 Additions to property and equipment, net . . . . . . . . . . . (362) (383) (474) Purchase of operating entity . . . . . . . . . . . . . . . . . (50) --- (75) -------- ------- -------- Net cash provided by investing activities . . . . . . . . . 2,792 9,974 22,349 -------- ------- -------- Cash flows from financing activities: Repayment of debt . . . . . . . . . . . . . . . . . . . . . . (725) (2,158) (11,835) Bank and other (repayments)borrowings . . . . . . . . . . . . 3,055 --- (1,266) Exercise of stock options . . . . . . . . . . . . . . . . . . --- --- 50 Proceeds from the issuance of stock . . . . . . . . . . . . . 2,503 --- --- -------- ------- -------- Net cash provided by(used in) financing activities . . . . 4,833 (2,158) (13,051) -------- ------- -------- Net increase(decrease) in cash and cash equivalents . . . . . . . (239) 655 (854) Cash and cash equivalents at beginning of year . . . . . . . . . 1,781 1,126 1,980 -------- ------- -------- Cash and cash equivalents at end of year . . . . . . . . . . . . $1,542 $ 1,781 $ 1,126 ======== ======= ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527 $1,302 $ 2,050 ======== ======= ======== Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 507 $ 233 $ 338 ======== ======= ========
See accompanying notes. 37 38 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Comprehensive Care Corporation (the "Company") and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company's consolidated financial statements are presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The continuation of the Company's business is dependent upon the resolution of operating and short-term liquidity problems (see Note 2-- "Operating Losses and Liquidity"). Revenue Recognition Approximately 52%, 66% and 88% of the Company's operating revenues were received from private sources in fiscal 1995, 1994 and 1993, respectively. The remainder is received from Medicare, Medicaid and other governmental programs. The latter are programs which provide for payments at rates generally less than established billing rates. Payments are subject to audit by intermediaries administering these programs. Revenues from these programs are recorded under reimbursement principles applicable to each of the programs. Although management believes estimated provisions currently recorded properly reflect these revenues, any differences between final settlement and these estimated provisions are reflected in operating revenues in the year finalized. Such differences between estimated and final settlements approximated $(8,000) during fiscal 1995. Depreciation Depreciation and amortization of property and equipment are computed on the straight-line method over the estimated useful lives of the related assets, principally: buildings and improvements -- 5 to 40 years; furniture and equipment -- 3 to 12 years; leasehold improvements -- life of lease or life of asset, whichever is less. Property and Equipment Held for Sale Property and equipment held for sale represents net assets of certain freestanding facilities and other properties that the Company intends to sell, within the next fiscal year, and is carried at estimated net realizable value less holding costs anticipated to be incurred. Property and equipment held for sale are expected to be sold in the next fiscal year. Such property and equipment is shown as non-current assets on the consolidated balance sheet as of May 31, 1995 due to the fact that contracts for sale have not been fully negotiated. Gains and losses on facilities sold have been reflected as adjustments to the estimated remaining property values. When all assets that are classified as property and equipment held for sale are sold, a net gain is anticipated that will be recognized and separately identified in the statement of operations. Intangible Assets Intangible assets include costs in excess of fair value of net assets of businesses purchased (goodwill), licenses, and similar rights. Costs in excess of net assets purchased are amortized over 20 to 25 years. The costs of other intangible assets are amortized over the period of benefit. The Company assesses the recoverability and the amortization period of goodwill by determining whether the amount can be recovered through undiscounted cash flows of the businesses acquired, excluding interest expense and amortization, over the remaining amortization 38 39 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 period. The Company considers external factors relating to each acquired business, including local market developments, regional and national trends, regulatory developments and other pertinent factors including the business' current and expected financial performance in making its assessment. The Company believes that the $1.6 million of net recorded intangible assets at May 31, 1995, are recoverable from future estimated undiscounted cash flows. The amounts in the consolidated balance sheets are net of accumulated amortization of goodwill of $731,000 and $652,000 at May 31, 1995 and 1994, respectively. Deferred Contract Costs The Company has entered into contracts with independent general hospitals whereby it will provide services in excess of the standard agreement. In recognition of the hospitals' long-term commitment, the Company has paid certain amounts to them. These amounts may be used by the hospitals for capital improvements or as otherwise determined by the hospital. The Company is entitled to a prorata refund in the event that the hospital terminates the contract before its scheduled termination date; accordingly, these amounts are charged to expense over the life of the contract. Cash and Cash Equivalents Cash in excess of daily requirements is invested in short-term investments with original maturities of three months or less. Such investments are deemed to be cash equivalents for purposes of the consolidated statements of cash flows and aggregate $318,000 and $1,294,000 at May 31, 1995 and 1994, respectively. Excluded from cash and cash equivalents is a certificate of deposit in the amount of $55,000 at May 31, 1995. Such certificate of deposit secures a letter of credit which is required under a capitated contract and is subject to adjustment annually. As a result, this short-term investment has been classified as other current assets in the financial statements at May 31, 1995. Income Taxes Effective June 1, 1993, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes" on a prospective basis. Prior to this date, the Company accounted for income taxes under APB 11. Statement No. 109 changed the Company's method of accounting for income taxes from the deferred method required under APB 11 to the asset and liability method. Under the deferred method, annual income tax expense is matched with pretax accounting income by providing deferred taxes at current tax rates for timing differences between the determination of net earnings for financial reporting and tax purposes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The change to Statement No. 109 had no cumulative effect on the financial statements of the Company as a result of recording a valuation allowance. Charity Care The Company provides charity care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Corporate policy allows for charity when appropriate, which must be prearranged, and the patient must meet applicable federal and/or state poverty guidelines. The Company will not pursue collection of charity accounts. Charity charges foregone, based upon established rates, were less than 1% of the Company's operating revenues for fiscal 1995, 1994 and 1993. 39 40 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 Loss Per Share Primary and fully diluted loss per common and common equivalent share have been computed by dividing net loss by the weighted average number of common shares outstanding during the period. During fiscal 1995, 1994 and 1993, the effect of outstanding stock options and the assumed conversion of the convertible subordinated debentures had an antidilutive impact on loss per share and, accordingly, were excluded from per share computations. On May 16, 1994, the stockholders of the Company approved an amendment to the Company's Certificate of Incorporation to effect a reverse stock split of one share for each ten or fewer shares of the Company's Common Stock, with the specific ratio to be selected by the Board of Directors. The stockholders also approved amendments to the Certificate of Incorporation reducing the par value of the Company's Common Stock to $.01 per share and reducing the number of authorized shares of Common Stock to five times the number of shares outstanding, reserved or otherwise committed for future issuance but not less than 12.5 million. The reverse stock split and amendments to the Certificate of Incorporation were to become effective on any date selected by the Board of Directors prior to February 16, 1995. The Board of Directors effected a one-for-ten reverse stock split effective October 17, 1994. On the effective date of the reverse stock split, the Certificate of Incorporation was amended to reduce the par value of the Common Stock to $.01 per share and to reduce the number of authorized shares of Common Stock to 12.5 million. All share and per share amounts contained in these financial statements retroactively reflect the effect of the reverse stock split for all periods presented, which effect is to reduce the number of shares set forth by a factor of ten, with each stockholder's proportionate ownership interest remaining constant, except for payment in lieu of fractional shares. The weighted average number of common and common equivalent shares used to calculate loss per share was 2,257,000, 2,199,000 and 2,196,000 for the years ended May 31, 1995, 1994 and 1993, respectively. Recently Issued Accounting Standards The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". The Company is required to adopt the provisions of this statement in 1997. SFAS No. 121 requires that the Company review long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This review requires the estimation of the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is to be recognized. Measurement of an impairment loss for long-lived assets and identified intangibles that an entity expects to hold and use should be based on the fair value of the assets. The statement further requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. When adopted by the Company, this statement will govern the accounting for the Company's Property and Equipment, Intangible Assets and Property and Equipment Held for Sale. As further described in Note 5, in 1992 the Company had transferred most of its recorded hospital plant and equipment, which were proposed for inclusion in a sale/leaseback transaction, into property and equipment held for sale and reported them at their net realizable value. Such sale/leaseback plans were terminated in October 1992, and the property and equipment was returned to operating assets at their then net realizable value. Given the 40 41 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 Company's ongoing losses and the presence of other industry related impairment indicators, the Company has continued to depreciate those assets from that basis. As a result, the Company's Property and Equipment is carried at a value that approximates its current fair value. Property and Equipment Held for Sale is reported at the assets net realizable value, which management believes approximates the fair values of those assets less holding costs anticipated to be incurred. Further, as indicated above (Intangible Assets), the Company continues to evaluate the recoverability of recorded intangible assets of $1.6 million (see Note 8-- "Other Assets"). Accordingly, implementation of SFAS No. 121 is not expected to have a significant impact upon the Company's financial statements. Reclassification Certain prior year amounts have been reclassified to conform with the current year's presentation. NOTE 2-- OPERATING LOSSES AND LIQUIDITY The Company reported a net loss of $11.5 million for the year ended May 31, 1995 and has reported net losses in each of the four preceding fiscal years aggregating an additional $39.8 million. As a result, the Company has an accumulated deficit of $46.5 million and a total stockholders' deficiency of $4.9 million as of May 31, 1995. Additionally, the Company's current assets at May 31, 1995 amounted to approximately $8.0 million and current liabilities were approximately $23.4 million, resulting in a working capital deficiency of approximately $15.4 million and a current ratio of 1:2.9. Included in current liabilities are $9.5 million of Debentures in default as a result of the Company's failure to make scheduled payments of interest on the Debentures commencing in October 1994. As further discussed in Note 10-- "Long-Term Debt and Short-Term Borrowings", the Company has agreed to use its best efforts to provide an opportunity for Debenture holders to tender their Debentures pursuant to an exchange offer to be made by the Company. This proposed transaction requires the holders of a majority of the Debentures to give their approval to rescind the acceleration and the Company to obtain and expend up to $5.5 million of cash during fiscal 1996, over and above cash required to fund other financing, operating and investing needs. Additionally, the Debenture exchange provides for the Company to issue $120 worth of its common stock at a defined value for each $1,000 of Debentures, which may be contingent upon the Company's ability to effect certain filings with the Securities and Exchange Commission. The ability to timely proceed with any such proposed filings will, in part, depend upon the ability of the Company to obtain a consent from its prior auditors for the use of their report on the Company's consolidated financial statements in such registration statements. Failure to obtain Debenture holder approval or to accomplish the Debenture exchange, or, in the alternative, a failure of the Company and the Debenture holders to otherwise reach a settlement, may cause the Debenture holders to pursue the involuntary bankruptcy of the Company and/or the Company to take alternative actions that may include filing for voluntary protection from creditors. Alternatively, if the Debenture exchange is accomplished, the elimination of the Debenture's debt service requirement would decrease the Company's future cash flow requirements. (The foregoing summary does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations.) These conditions raise substantial doubt about the Company's ability to continue as a going concern. The 1995 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. 41 42 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 To address the Company's operational issues, in fiscal 1993 the Company established a restructuring reserve (see Note 9-- "Accounts Payables and Accrued Liabilities"). One purpose of such reserve was for the realignment of the Company's focus and business and the settlement and disposition of certain non-performing and under-utilized assets. Through May 31, 1995 many of the Company's inpatient freestanding facilities have been sold or are in the process of being closed or sold. Additionally, in fiscal 1995, management has begun to implement plans for expanding the Company's contract management and managed care operations (see Note 3-- "Acquisitions and Dispositions"). In previous years, the Company was obligated to support and fund certain freestanding facilities that now have been closed, including two such facilities closed in fiscal 1995 (see Note 5-- "Property and Equipment Held for Sale"). As a result, the Company will no longer be burdened with the negative cash flow requirements associated with such facilities. Based upon a projection of actual performance during fiscal 1995 with adjustments for reduced cash flow requirements associated with facilities closed and/or sold in fiscal 1995, known contract and cyclical changes, and also giving consideration to cash on hand at May 31, 1995 of $1.5 million, management expects the Company to be able to meet its cash obligations required by operations during fiscal 1996, excluding the Company's obligations under the Debentures. However, the cash needs of the Company may vary from month to month depending upon the actual level of business activity, and through the first quarter of fiscal 1996 the Company continues to incur losses. Therefore, no assurance can be given that the Company will generate adequate cash flows to meet cash obligations required by operations, excluding the Company's obligations under the Debentures, in fiscal 1996. To provide funds for the Debenture exchange and/or additional operating needs, the Company anticipates utilizing one or more of the following potential sources of cash: - The Company has received a firm commitment from a mutual fund to purchase in a private placement at least $5.0 million of 15% fully secured Company notes due no earlier than December 1996 if offered by the Company. - The Company has filed its fiscal 1995 Federal tax return, and a Form 1139 "Corporate Application for Tentative Refund" in the amount of $9.4 million. In the event the Company receives the full refund claim for fiscal 1995, the net amount of cash available for working capital purposes would be $7.5 million. The Company has also filed amended Federal tax returns for prior years to claim refunds of an additional $13.2 million. These refund claims have been made under Section 172(f) of the Internal Revenue Code, an area of the tax law without significant precedent, and there may be substantial opposition by the IRS to the Company's refund claims. Accordingly, no assurances can be made to the Company's entitlement to such refunds or the timing of the receipt thereof (see Note 12-- "Income Taxes"). - Included in non-current assets are three hospital facilities designated as property and equipment held for sale with a total carrying value of $3.7 million. The Company expects to sell two of these facilities in the next fiscal year and may lease a third facility to an unrelated entity. However, the contracts have not been fully negotiated, and proceeds from the sales or lease of such assets are not expected to be available by the time the Debenture exchange is expected to occur. Accordingly, management expects to use such cash proceeds, if received during fiscal 1996, to fund and expand the Company's operations and implement the Company's restructuring plans. 42 43 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 - In March 1995, a jury awarded the Company approximately $2.7 million, plus interest, in damages in its lawsuit against RehabCare Corporation. The defendant has posted a bond for the amount of the award and has filed an appeal of the judgment. Management is unable to predict whether any proceeds from this judgment will be received in fiscal 1996 (see Note 15-- "Commitments and Contingencies"). All of these potential sources of additional cash in fiscal 1996 are subject to variation due to business and economic influences outside the Company's control. There can be no assurance that during fiscal 1996 the Company will complete the transactions required to fund its working capital deficit. NOTE 3-- ACQUISITIONS AND DISPOSITIONS On May 22, 1995, the Company and its subsidiary, Comprehensive Behavioral entered into an agreement with Physicians Corporation of America ("PCA"), providing for PCA to invest $1.0 million in Comprehensive Behavioral for 13 1/2% of the voting power of Comprehensive Behavioral represented by all of the Series A Preferred Stock of Comprehensive Behavioral which is also exchangeable at the option of PCA for 100,000 shares of the Company's Common Stock. As a key to the agreement, so long as PCA remains an equity holder of Comprehensive Behavioral, PCA and its subsidiaries will negotiate in good faith to contract with Comprehensive Behavioral for the delivery of mental health services in all PCA service areas where Comprehensive Behavioral has an adequate network. In addition, PCA was granted a first right of refusal regarding any sale of Comprehensive Behavioral. The Company is required to maintain a $3.75 million investment in its subsidiary, Comprehensive Behavioral, which limits the extent to which cash dividends may be paid to the parent. Effective June 1, 1995, Comprehensive Behavioral will provide services on a capitated basis to 220,000 of PCA's 700,000 members in the Tampa area. In conjunction with this contract, in May 1995, PCA advanced $360,000 to Comprehensive Behavioral. Such advance is reimbursable to PCA in 12 equal monthly installments. On April 30, 1995, the Company's lease ended in Grand Rapids, Michigan. As a result, the Company ceased operations in that facility; however the Company entered into an agreement with Longford Health Sources, Inc., to operate a chemical dependency unit in Kent Community Hospital in Grand Rapids, Michigan. On April 1, 1995, the Company agreed to issue American Mental Health Care, Inc. ("AMH") 44,054 shares of the Company's common stock in return for a one-year management contract between Comprehensive Behavioral and AMH, one-third of the shares of AMH and a one year option to acquire all of the shares of AMH for up to 132,162 additional shares of the Company's Common Stock to be issued based on three-year net revenue requirements. AMH currently provides behavioral managed care services in Florida. The terms of the management agreement include an employment contract with Comprehensive Behavioral for the former president of AMH. The management contract has not been fully executed; however, AMH has assigned its revenues and associated expenses to Comprehensive Behavioral effective April 1, 1995. The Company's consolidated financial statements as of May 31, 1995 reflect such revenue assignment and expense assumption. On February 1, 1995, the Company purchased certain assets of Alternative Psychiatric Centers, Inc., ("APC"), a behavioral medicine contract management company based in Southern California for $50,000, from Drew Q. Miller, who joined the Company and is currently Chief Financial Officer and Chief Operating Officer. APC had two operating locations with three contract units offering inpatient, outpatient and partial hospitalization services. On November 22, 1994, the Company sold its CareUnit Hospital of Orlando. Proceeds from the sale were utilized for working capital purposes. On March 3, 1995, the Company sold its Starting Point, Oak facility in 43 44 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 Sacramento, California. Proceeds from this sale were utilized for working capital purposes and for payment to the IRS in accordance with the Company's offer in compromise with the IRS. (see Note 15-- "Commitments and Contingencies"). On April 5, 1993, the Company sold its CareUnit Hospital of Nevada. Proceeds from the sale were utilized to reduce the Company's senior secured debt and the remainder was used for working capital purposes. On July 1, 1993, the Company sold its CareUnit Hospital of Albuquerque and on October 1, 1993, sold its CareUnit Hospital of South Florida/Tampa. Proceeds from both of these sales were utilized to reduce the Company's senior secured debt and the remainder was utilized for working capital purposes. On December 10, 1993, the Company sold its CareUnit Hospital of Coral Springs. Proceeds from the sale were utilized for working capital purposes. In April 1994, the Company sold a material portion of its publishing business. Proceeds from the sale were used for working capital purposes. In October 1992, the Company's wholly-owned subsidiary, Starting Point, Inc., entered into a joint operating agreement with Century HealthCare of California to manage Newport Harbor Psychiatric Hospital, a 68-bed adolescent psychiatric facility and Starting Point, Orange County, a 70-bed adult psychiatric facility. The Company has an 80% interest in this venture. This agreement was mutually dissolved on February 28, 1993. Pretax losses of approximately $0.0 million and $0.1 million, net of minority interest, were included in the consolidated financial statements for the years ended May 31, 1995 and 1994, respectively. In December 1992, the Company purchased Mental Health Programs, Inc. based in Tampa, Florida, from the former owner. The Company was operating as AccessCare, Inc., however, effective August 1, 1995, the Company changed its name to Comprehensive Behavioral Care, Inc. The terms of the purchase included a payment of $75,000, issuance of 4,000 shares of the Company's common stock, an employment agreement, a stock option agreement and the assumption of bank debt from the former owner. Both the stock option and employment agreements and the release of the former owner as guarantor of the bank debt are contingent upon the continued employment of the former owner with the Company. In connection with this acquisition, the Company recorded goodwill of approximately $829,000. In July 1993, the Company terminated the employment agreement and subsequently entered into litigation with the former owner. On November 21, 1994, the Company reached a settlement agreement with the former owner and will pay $250,000 in installments through September 1996; forgive the obligations owing under the indemnification agreement between the Company and the former owner; and satisfy the terms under the stock purchase agreement dated December 30, 1992 between the former owner and the Company to issue 16,000 shares of the Company's common stock. The Company has established a reserve with respect to this settlement. During the third quarter of 1995, the Company satisfied the terms of the stock purchase agreement and commenced installment payments to the former owner. Should the Company be unable to register the 20,000 shares issued to the former owner prior to December 31, 1995, the Company will be obligated to pay a penalty in the amount of $50,000. On July 3, 1991, RehabCare, a wholly-owned subsidiary of the Company as of May 31, 1991, and the Company completed an initial public offering of 2,500,000 shares of RehabCare common stock. Of the total shares sold to the public, 1,700,000 shares were sold by the Company and 800,000 shares were new shares issued by RehabCare. Net proceeds to the Company totaled approximately $20.6 million, of which approximately $11.3 million was used to pay a portion of the Company's senior secured debt. A gain of approximately $18 million on the sale of the RehabCare shares was recorded in the Company's consolidated statement of operations for the first quarter of fiscal 1992. The Company's remaining 48% interest (2,300,000 shares) in RehabCare was accounted for on the equity method (see Note 7-- "Investments in Unconsolidated Affiliates"). The Company sold its remaining 48% interest in RehabCare to RehabCare during fiscal 1993 and a gain of approximately $13.1 million was recorded in the Company's consolidated statement of operations for the second quarter of 1993. Net proceeds 44 45 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 to the Company totaled $18.8 million which were used for the paydown of a portion of senior secured debt, short-term borrowings, and to fund working capital. NOTE 4-- ACCOUNTS AND NOTES RECEIVABLE Current notes receivable was $2,750,000 at May 31, 1995 which represented financing on the sale of Starting Point Oak. The note was collected in July 1995. There were no current notes receivable as of May 31, 1994. The following table summarizes changes in the Company's allowance for doubtful accounts for the years ended May 31, 1995, 1994 and 1993:
BALANCE AT WRITE-OFF BALANCE AT BEGINNING ADDITIONS CHARGED TO OF END OF ------------------------ OF YEAR EXPENSE RECOVERIES ACCOUNTS YEAR ---------- ------- ---------- --------- ---------- (Dollars in thousands) Year ended May 31, 1995 . . . . . $1,574 $ 2,808 $(1,385) $(1,901) $1,096 Year ended May 31, 1994 . . . . . 2,489 3,841 (2,283) (2,473) 1,574 Year ended May 31, 1993 . . . . . 4,137 9,379 (3,192) (7,835) 2,489
During fiscal 1993, the freestanding facilities fully implemented the current write-off and reserve policy whereby all accounts past a certain aging category or otherwise deemed by management to be uncollectible are written-off and recorded as bad debt expense. Any recoveries are reflected on the Company's statement of operations as a reduction to the provision for doubtful accounts in the period in which it is received. The Company's reserve for bad debt represented 25%, 21% and 24% of total receivables, for fiscal years ended May 31, 1995, 1994 and 1993, respectively. NOTE 5-- PROPERTY AND EQUIPMENT HELD FOR SALE The Company has decided to dispose of certain freestanding facilities and other assets (see Note 2-- "Operating Losses and Liquidity"). Property and equipment held for sale, consisting of land, building, equipment and other fixed assets with an historical net book value of approximately $11.8 million and $23.3 million at May 31, 1995 and 1994, respectively, is carried at estimated net realizable value of approximately $3.7 million and $6.9 million at May 31, 1995 and 1994, respectively. Operating revenues and operating expenses of the facilities designated for disposition were approximately $0.1 million and $0.5 million, respectively, for the year ended May 31, 1995, $0.1 million and $1.3 million, respectively, for the year ended May 31, 1994, $0.8 million and $2.1 million, respectively, for the year ended May 31, 1993. In addition, $1.0 million was reclassified to property and equipment during fiscal 1994 to adjust property to its estimated fair market value. 45 46 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 A summary of the transactions affecting the carrying value of property and equipment held for sale is as follows:
YEAR ENDED MAY 31, 1995 1994 1993 (DOLLARS IN THOUSANDS) Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . $ 6,939 $ 15,352 $ 35,568 Designation of facilities as property and equipment held for sale 2,347 --- 10,977 Carrying costs incurred during phase-out period . . . . . . . . . 420 1,241 1,330 Carrying value of assets sold . . . . . . . . . . . . . . . . . . (5,619) (7,981) --- Contingencies on properties sold . . . . . . . . . . . . . . . . --- (848) --- Loss on sale/write-down of facilities . . . . . . . . . . . . . . (341) (825) (3,670) Redesignation of facilities as continuing operations . . . . . . --- --- (28,853) ------- -------- -------- Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,746 $ 6,939 $ 15,352 ======= ======== ========
Contingencies for properties sold represent unresolved liabilities at the time of sale. Proceeds from the sale of property and equipment held for sale were $3.1 million (net of the $2.7 million note receivable) and $9.8 million for fiscal 1995 and 1994, respectively. There were no sales proceeds in fiscal 1993. The loss on sale/write-down of property and equipment held for sale is reflected on the Company's statement of operations and consists of the following:
YEAR ENDED MAY 31, ----------------------------------- 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Gain on properties sold . . . . . . . . . . . . . . . . . . . $ 836 $ 1,825 $ --- Loss/write-down of property and equipment . . . . . . . . . . (495) (1,000) --- Adjustment to estimated property values . . . . . . . . . . . (341) (825) (3,670) ------ ------- -------- $ --- $ --- $ (3,670) ====== ======= ========
Property and equipment held for sale at May 31, 1992 included certain hospitals which were proposed for inclusion in sale/leaseback transactions and were carried at estimated net realizable value totaling $27.8 million. In early fiscal 1993, the Company had expected to sell certain freestanding facilities to CMP Properties, Inc. and lease them back. The facilities expected to be sold and leased back were carried at estimated net realizable value which had been reduced for estimated selling costs for these facilities. On October 28, 1992, the board of directors of the Company terminated its plans for the public offering of shares of common stock of its wholly owned subsidiary CMP Properties, Inc. As a result, the proposed sale of hospitals to CMP Properties subject to leaseback to the Company was not completed, and the properties which were to be part of the transaction and were designated as assets held for sale were reclassified during the second quarter as property and equipment. 46 47 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 NOTE 6-- PROPERTY AND EQUIPMENT Property and equipment consists of the following:
AS OF MAY 31, ------------- 1995 1994 ---- ---- (DOLLARS IN THOUSANDS) Land and improvements . . . . . . . . . . . . . . . . . . . . . . $ 2,122 $ 4,063 Buildings and improvements . . . . . . . . . . . . . . . . . . . 16,260 18,192 Furniture and equipment . . . . . . . . . . . . . . . . . . . . . 4,710 4,817 Leasehold improvements . . . . . . . . . . . . . . . . . . . . . 1,280 1,365 Capitalized leases . . . . . . . . . . . . . . . . . . . . . . . 809 889 ------- ------- 25,181 29,326 Less accumulated depreciation . . . . . . . . . . . . . . . . . . 13,074 13,338 ------- ------- Net property and equipment . . . . . . . . . . . . . . . . . . . $12,107 $15,988 ======= =======
Included in property and equipment are write-downs to net realizable value of $4.2 million and $4.6 million as of May 31, 1995 and 1994, respectively. The loss on sale/write-down of property and equipment for the years ended May 31, 1995, 1994 and 1993 were $259,000, $0, and $712,000, respectively, and are reflected on the Company's statement of operations. NOTE 7-- INVESTMENTS IN UNCONSOLIDATED AFFILIATES NeuroAffiliates The Company has a 50% interest in a joint venture partnership with another corporation for the purpose of operating two hospitals. Under the terms of the joint venture agreement, the Company managed Crossroads Hospital and its partner managed Woodview-Calabasas Hospital. Each of the partners in the joint venture received a management fee for the hospital it managed. The Company is currently in negotiation to dissolve this joint venture retroactive to December 1991. The Company retained the hospital it managed and its partner retained the other. The results of operations of the hospital retained have been included in the consolidated financial statements beginning January 1, 1992. Crossroads Hospital continued to be managed by the Company although it was closed in August 1992, and was subleased through the remaining term of the lease which expired in September 1993. Woodview- Calabasas Hospital continues to be managed by its joint-venture partner although it was closed in April 1993. Effective January 1, 1992, the Company no longer reported the results of operations for the NeuroAffiliates joint venture as an investment in unconsolidated affiliates. Golden Valley Health Center The Company has a 50% interest in a joint venture agreement with a subsidiary of HealthOne Corporation (formerly The Health Central System). The joint venture owned and operated Golden Valley Health Center, a behavioral medicine facility located in a suburb of Minneapolis, Minnesota. This facility was sold to GVHC, Inc., an unrelated entity, during fiscal 1989. The terms of the sale included the joint venture holding a promissory note from the purchaser of the facility for $2.5 million. The Company serves as managing partner of the joint venture. The purchaser was forced into receivership in January 1992 and was dissolved during fiscal 1994. The Company did not receive any proceeds from this dissolution. In fiscal 1991, the Company recorded its respective loss in the joint venture as a result of the uncollectability of the promissory note. The Company is in the process of dissolving this legal entity; however, there are no longer any transactions or results of operations to report. 47 48 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 RehabCare Corporation On July 3, 1991, RehabCare Corporation ("RehabCare"), a wholly-owned subsidiary of the Company as of May 31, 1991, and the Company completed an initial public offering of 2,500,000 shares of RehabCare common stock. The Company's remaining 48% interest (2,300,000 shares) in RehabCare was accounted for on the equity method. The Company sold its remaining 48% interest in RehabCare to RehabCare during fiscal 1993 and a gain of approximately $13.1 million was recorded in the Company's consolidated statement of operations for the second quarter of 1993. Net proceeds to the Company totaled $18.8 million which were used for the paydown of a portion of senior secured debt, short-term borrowings, and to fund working capital. As of May 31, 1993, the Company no longer had any interest in the outstanding common stock of RehabCare. Earnings under the equity method related to the Company's ownership in RehabCare amounted to $384,000 for the year ended May 31, 1993. The condensed combined operating results of affiliates for fiscal 1993 include the results of RehabCare through the sale of the Company's remaining interest in November 1992. The Company no longer reports any investment in RehabCare. Summary of Unconsolidated Affiliates The Company reported its interest in these affiliates on the equity method. Due to the termination of operations and/or dissolution of the above joint ventures, the condensed consolidated assets and liabilities of these affiliates are zero at May 31, 1995 and 1994. The condensed combined operating results of affiliates are as follows:
YEAR ENDED MAY 31, ------------------ 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $11,928 Costs and expenses: Operating, general and administrative . . . . . . . . . . . $ --- --- 10,536 Depreciation and amortization . . . . . . . . . . . . . . . --- --- 148 ------- ------- ------- --- --- 10,684 ------- ------- ------- Earnings before income taxes . . . . . . . . . . . . . . . . . --- --- 1,244 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 443 ------- ------- ------- Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $ 801 ======= ======= =======
NOTE 8-- OTHER ASSETS Other assets consist of the following:
AS OF MAY 31, ------------- 1995 1994 ---- ---- (DOLLARS IN THOUSANDS) Intangible assets, net . . . . . . . . . . . . . . . . . . . . $1,636 $1,762 Deferred contract costs, net . . . . . . . . . . . . . . . . . 99 81 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 319 ------ ------ $2,136 $2,162 ====== ======
48 49 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 NOTE 9-- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
AS OF MAY 31, ------------- 1995 1994 ---- ---- (DOLLARS IN THOUSANDS) Accounts payable and accrued liabilities . . . . . . . . . . . $ 5,737 $ 7,729 Accrued claims payable . . . . . . . . . . . . . . . . . . . . 1,584 454 Accrued restructuring/non-recurring . . . . . . . . . . . . . . 508 1,228 Accrued salaries and wages . . . . . . . . . . . . . . . . . . 980 1,140 Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . 407 576 Accrued legal . . . . . . . . . . . . . . . . . . . . . . . . . 198 353 Payable to third-party intermediaries . . . . . . . . . . . . . 584 1,751 Deferred compensation . . . . . . . . . . . . . . . . . . . . . 237 545 ------- ------- $10,235 $13,776 ======= =======
One of the Company's subsidiaries provides managed behavioral health and substance abuse services to members under capitated contracts. The cost of health care services is recognized in the period in which it is provided and includes an estimate of the costs of services which have been incurred but not yet reported. The estimate for accrued claims payable is based on projections of costs using historical studies of claims paid. Estimates are continually monitored and reviewed and, as settlements are made or estimates adjusted, differences are reflected in current operations. A reserve for restructuring was established in fiscal 1993 for $5.4 million for the purpose of implementing management's plan for the "global restructuring" of the Company. It is management's intent to complete the "global restructuring" plan in fiscal 1996. Management intends to allocate the remaining balance accordingly: $0.3 million for corporate relocation and consolidation and $0.2 million as severance payments. The following table sets forth the activity during the years ended May 31, 1995 and 1994:
AS OF MAY 31, ------------- 1995 1994 ---- ---- (DOLLARS IN THOUSANDS) Beginning balance . . . . . . . . . . . . . . . . . . . . . . . $1,228 $2,642 Less: Cash items . . . . . . . . . . . . . . . . . . . . . . . . 620 1,377 Non-cash items . . . . . . . . . . . . . . . . . . . . . . 100 37 ------ ------ $ 508 $1,228 ====== ======
Severance payments of $0.3 million and $0.1 million paid in fiscal 1995 and 1994, respectively, were the result of the closure and relocation of three facilities, as well as, the general downsizing as part of the Company's "global restructuring" plan. This restructuring resulted in the termination of 91 and 43 employees during fiscal 1995 and 1994, respectively. 49 50 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 NOTE 10-- LONG-TERM DEBT AND SHORT-TERM BORROWINGS Long-term debt consists of the following:
YEAR ENDED MAY 31, ------------------ 1995 1994 ---- ---- (DOLLARS IN THOUSANDS) Senior secured debt: 12.5% secured convertible note, with quarterly interest payments, maturing in January 1997 (a) . . . . . . . . . . . . $ 2,000 $ --- ------- -------- 2,000 --- 7.5% convertible subordinated debentures due 2010 (b) . . . . . . . 9,538 9,538 9% note payable in monthly installments maturing in 1996, by real and personal property having a net book value of $2,281 . . . . . . . . . . . . . . . . . . . . . . . . . . 4 41 9% offer in compromise (c) . . . . . . . . . . . . . . . . . . . . 4,566 --- 10% secured promissory note, payable in monthly installments, maturing in January 1997 (d) . . . . . . . . . . . . . . . . . 899 --- Capital lease obligations . . . . . . . . . . . . . . . . . . . . . 677 740 Bank debt, interest and principal payable in monthly installments maturing in August 1997, collateralized by the trust of the former owner (e) . . . . . . . . . . . . . . . . . . . . . . . 216 312 ------- -------- Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . 17,900 10,631 Less long-term debt in default (b) . . . . . . . . . . . . . . . . 9,538 --- Less current maturities of long-term debt . . . . . . . . . . . . . 3,285 154 ------- -------- Long-term debt, excluding current maturities . . . . . . . . . . . $ 5,077 $10,477 ======= ========
As of May 31, 1995, aggregate annual maturities of long-term debt for the next five years (in accordance with stated maturities of the respective loan agreements) are approximately $3,285,000 in 1996, $2,968,000 in 1997, $528,000 in 1998 and $504,000 in 1999, and $400,000 in 2000. The Company had no revolving loan or short-term borrowings during fiscal 1994 and 1995. The maximum amount outstanding on the revolving loan and short-term borrowings was approximately $4.2 million during the year ended May 31, 1993. The average amount outstanding of such borrowings, based upon an average of month-end balances for periods when the Company had such debt outstanding, was $2.2 million during the year ended May 31, 1993. Weighted average interest rates for short-term borrowings were 7.54% for the year ended May 31, 1993. (a) On January 9, 1995, the Company issued a $2.0 million Secured Convertible Note due January 9, 1997 to Lindner Bulwark Fund, a series of Lindner Investments, a business trust. The Note is secured by first priority liens on two of the Company's operating hospital properties. The Note bears interest at the rate of 12 1/2% per annum, payable quarterly, and in the event of a default, a charge of 2 1/2% per annum until the default is cured. Prior to maturity, the Note is redeemable, in whole or in part, at the option of the Company at a redemption price initially of 120% of the amount of principal redeemed, declining after January 9, 1996 to 110% of principal. Until paid, the principal amount of the Note is convertible into the Company's Common Stock, par value $0.01, at the rate of $6.00 per share (which was the fair market value on the date of signing). The maximum number of shares issuable upon conversion of the Note was approximately 333,333, subject to adjustments for dilution and recapitalization, which is under 15% of the undiluted number of shares of Common Stock outstanding. The 50 51 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 proceeds were used to pay costs of closing unprofitable operations, working capital and other general corporate purposes. (b) In April 1985, the Company issued $46 million in 7 1/2% Convertible Subordinated Debentures (the "Debentures"). These Debentures require that the Company make semi-annual interest payments in April and October at an interest rate of 7.5% per annum. The Debentures are due in 2010 but may be converted to common stock of the Company at the option of the holder at a conversion price of $230.00 per share, subject to adjustment in certain events. The Debentures are also redeemable at the option of the Company in certain circumstances. Mandatory annual sinking fund payments sufficient to retire 5% of the aggregate principal amount of the Debentures are required to be made on each April 15 commencing in April 1996 to and including April 15, 2009. Should the Company default on its senior debt, then the Company may be precluded from paying principal or interest on the Debentures until such default is cured or waived. During fiscal 1991, holders of approximately $36.5 million Debentures voluntarily converted their Debentures into 11,667,200 shares of common stock at a temporarily reduced conversion price. The Company did not make its payment of interest on the Debentures when such payment was scheduled on October 17, 1994. In early February 1995, a group of holders and purported holders of the Debentures gave notice of acceleration of the entire amount of principal and interest due under the Debentures, and on February 24, 1995, a subset of such persons filed an involuntary petition in the United States Bankruptcy Court for the Northern District of Texas under Chapter 7 of the U.S. Bankruptcy Code. On March 3, 1995, the Company entered into a letter agreement with a representative of the certain holders of the Debentures who had taken such actions. The agreement provides for a consensual, out-of-court resolution that the Company's Board of Directors has approved as in the best interests of the Company, its stockholders and other stakeholders. The holders' representative agreed to use best efforts to provide notices of waiver of the interest non-payment default, notices of rescission of the Debenture acceleration and the effects thereof, and consent to the immediate dismissal of the involuntary Chapter 7 petition. In return, the Company has agreed to use best efforts to provide an opportunity to holders of Debentures to tender their Debentures to the Company pursuant to an exchange offer to be made by the Company to the holders of the Debentures. The offer consideration will consist of $500 in cash and $120 worth in shares of Common Stock at a defined value per each $1,000 in face amount of Debentures. Tendering holders will not receive interest calculated from and after April 15, 1994 (which includes the October 17, 1994 and April 17, 1995 payments) and in lieu of calculated interest will receive an interest payment of $80 per $1,000 principal amount of Debentures. If the exchange offer with holders of Debentures is consummated on the terms in the letter agreement and assuming the tender of 100% of the outstanding Debentures, the portion of the offer consideration which will be payable in cash by the Company would be approximately $5,550,000. Among the factors affecting the anticipated exchange offering are the various conditions to the consummation of the offer and the ability of the Company to finance the cash payment necessary, and no assurance can be made that the exchange offer will be successfully completed. Failure to consummate the Debenture exchange offer may result in the Debenture holders instituting involuntary bankruptcy proceedings and/or in the Company considering alternative actions including filing for voluntary protection from creditors. In such case, the Company believes that the recovery to it security holders would be less in a bankruptcy case than the recovery that may be achieved under the consensual, out-of-court arrangement the Company has reached. In addition, the letter agreement provides for a pledge of all of the shares of CareUnit, Inc. to secure the Company's obligation to purchase the Debentures, pursuant to the exchange or otherwise; and failure to complete an exchange could result in a foreclosure sale of such shares. The foregoing is intended to disclose event, and does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant rules and regulations of the Securities Act of 1933. As a result of the default on the interest payment to the holders, the Company has classified the outstanding principal amount of the Debentures as current as of May 31, 1995. 51 52 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 (c) In December 1994, the Company reached a final settlement with the Internal Revenue Service ("IRS") on the payroll tax audit (see Note 15-- "Commitment and Contingencies") pursuant to which the Company entered into an Offer in Compromise and will pay the IRS $5.0 million with the Company having no obligation to pay any penalties or accrued interest. Payment terms have been accepted at 50% within 90 days (extended an additional 120 days) of finalization with the remaining balance financed over the next five years. In March 1995, the Company paid $350,000 to the IRS against the initial payment due. The Company paid the remaining balance (of the initial payment) of $2,150,000 on July 10, 1995. The Company commenced monthly installment payments to the IRS in April 1995. Interest accrues at 9% per annum and is due and payable upon billing at the end of the term. The Company has filed its 1995 Federal tax return which included a refund claim to the Company for $9.4 million (see Note 12-- "Income Taxes"). This refund is not reflected on the Company's consolidated financial statements as of May 31, 1995. (d) In May 1995, the Company and a subsidiary entered into a $1.0 million promissory note with PMR Corporation. Performance of the obligations under the note is secured by a deed of trust on the property of a subsidiary. The note provides for the payment of interest at a fixed rate of 10% per annum. The Company made a principal payment of $125,000 in April 1995 and paid $50,000 in May 1995. The note requires equal monthly principal payments commencing June 1, 1995 and continuing through February 1997. (e) On December 30, 1992, the Company assumed approximately $456,000 in bank debt with the purchase of Mental Health Programs, Inc. (see Note 3--"Acquisition and Dispositions"). The note is secured and guaranteed by the trust of the former owner of Mental Health Programs, Inc. The release of collateral and guarantee are contingent upon continued employment of the former owner with the Company. The note is payable at $8,000 per month with the balance due on August 31, 1997. Interest is at prime plus 1.5%. The net book value of assets pledged to secure the above debt aggregated $11.5 million at May 31, 1995. NOTE 11-- LEASE COMMITMENTS The Company leases certain facilities, furniture and equipment. The facility leases contain escalation clauses based on the Consumer Price Index and provisions for payment of real estate taxes, insurance, maintenance and repair expenses. Total rental expenses for all operating leases are as follows:
YEAR ENDED MAY 31, ------------------ 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Minimum rentals . . . . . . . . . . . . . . . . . . . . . . $1,085 $1,342 $1,257 Contingent rentals . . . . . . . . . . . . . . . . . . . . --- --- 15 ------ ------ ------ Total rentals . . . . . . . . . . . . . . . . . . . . . . . $1,085 $1,342 $1,272 ====== ====== ======
Assets under capital leases are capitalized using interest rates appropriate at the inception of each lease; contingent rents associated with capital leases in fiscal 1995, 1994 and 1993 were $79,000, $61,000 and $60,000, respectively. The net book value of capital leases at May 31, 1995 and 1994 was $549,000 and $567,000, respectively. 52 53 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 Future minimum payments, by year and in the aggregate, under capital leases and noncancellable operating leases with initial or remaining terms of one year or more consist of the following at May 31, 1995:
CAPITAL OPERATING FISCAL YEAR LEASES LEASES ----------- ------ ------ (DOLLARS IN THOUSANDS) 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138 $ 319 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 149 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 84 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 22 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 2 Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . 770 --- ------ ------- Total minimum lease payments . . . . . . . . . . . . . . . . . . . 1,436 $ 576 ======= Less amounts representing interest . . . . . . . . . . . . . . . . 759 ------ Present value of net minimum lease payments . . . . . . . . . . . $ 677 ======
NOTE 12-- INCOME TAXES Provision for income taxes consist of the following:
YEAR ENDED MAY 31, ------------------ 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $ --- State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 301 194 ------ ------ ------ $ 180 $ 301 $ 194 ====== ====== ======
A reconciliation between the provision for income taxes and the amount computed by applying the statutory Federal income tax rate (34%) to loss before income taxes is as follows:
YEAR ENDED MAY 31, ------------------ 1995 1994 1993 ---- ---- ---- (DOLLARS IN THOUSANDS) Benefit from income taxes at the statutory tax rate . . . . . . . . $(3,860) $(2,567) $(3,878) State income taxes, net of federal tax benefit . . . . . . . . . . 119 199 128 Amortization of intangible assets . . . . . . . . . . . . . . . . . 39 38 30 Tax effect of net operating loss . . . . . . . . . . . . . . . . . 3,701 2,607 3,888 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 24 26 ------- ------- ------- $ 180 $ 301 $ 194 ======= ======= =======
Significant components of the Company's deferred tax liabilities and assets are comprised of the following: 53 54 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993
YEAR ENDED MAY 31, ------------------ 1995 1994 ---- ---- Deferred Tax Assets: Net operating losses . . . . . . . . . . . . . . . . $18,867 $14,968 Restructuring/non-recurring costs . . . . . . . . . . 4,853 9,418 Alternative minimum tax credits . . . . . . . . . . . 666 666 Bad debt expense . . . . . . . . . . . . . . . . . . 333 568 Employee benefits and options . . . . . . . . . . . . 432 663 Other, net . . . . . . . . . . . . . . . . . . . . . 273 2,186 ------- ------- Total Deferred Tax Assets . . . . . . . . . . . 25,424 28,469 Valuation Allowance . . . . . . . . . . . . . . . . . (22,439) (24,417) ------- ------- Net Deferred Tax Assets . . . . . . . . . . . . 2,985 4,052 ------- ------- Deferred Tax Liabilities: Depreciation . . . . . . . . . . . . . . . . . . . . (1,866) (2,929) State income taxes . . . . . . . . . . . . . . . . . (806) (654) Cash to accrual differences . . . . . . . . . . . . . (313) (469) ------- ------- Total Deferred Tax Liabilities . . . . . . . . . ( 2,985) (4,052) ------- ------- Net Deferred Tax Assets . . . . . . . . . . . . . . . . . $ --- $ --- ======= =======
The Company was previously subject to alternative minimum tax ("AMT") at a 20% rate on alternative minimum taxable income which is determined by making statutory adjustments to the Company's regular taxable income. Net operating loss carryforwards and carry backs may be used to offset only 90% of the Company's alternative minimum taxable income. The Company will be allowed a credit carryover of $666,000 against regular tax in the event that regular tax expense exceeds the alternative minimum tax expense (see Note 15-- "Commitments and Contingencies"). On July 20, 1995, the Company filed its Federal tax return for fiscal 1995. On August 11, 1995, the Company filed Form 1139 "Corporate Application for Tentative Refund" to carry back losses described in Section 172(f) requesting a refund to the Company in the amount of $9.4 million. On August 30, 1995, the Company also filed amended Federal tax returns for several prior fiscal years to carry back losses under Section 172(f). The amount of refund claimed on the amended returns is approximately $11.7 million for 1986; $0.4 million for 1985; $0.7 million for 1983 and $0.4 million for 1982 which is a total of $13.2 million for the refunds from amended returns and a total of $22.6 million for all refunds requested. Section 172(f) is an area of the tax law without substantial legal precedent. There may be opposition by the IRS as to the Company's ability to carry back such claim. Therefore, no assurances can be made to the Company's entitlement to such claim. Consequently, a valuation allowance was established against the potential tax benefit. At May 31, 1995, the Company has Federal accumulated net operating losses of approximately $50 million, which if carried forward would expire in 2006 through 2009. Subsequent to May 31, 1995, and in accordance with Section 172(f), the Company has carried back the entire $50 million of Federal accumulated net operating losses requesting refunds of approximately $22.6 million. In the event these refund requests are ever challenged by the IRS, the Company may be unable to utilize some or all of its net operating losses depending upon the availability of sufficient net income from which to deduct such losses during a three-year carry back or fifteen-year carryover period. The Company may be further restricted as to its use of any of these losses if the Company issues or agrees to issue amounts of additional equity which may constitute a change in ownership under Section 382. All benefits recoverable from Federal income taxes paid since May 31, 1990 have been recognized. No further carry backs are available. 54 55 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 NOTE 13-- EMPLOYEE BENEFIT PLANS The Company had deferred compensation plans ("Financial Security Plans") for its key executives and medical directors. Under provisions of these plans, participants elected to defer receipt of a portion of their compensation to future periods. Upon separation from the Company, participants received payouts of their deferred compensation balances over periods from five to fifteen years. Effective January 1, 1989, participants were not offered the opportunity to defer compensation to future periods. In June 1992, the Company terminated the plan and placed the remaining participants on 5-year payments. The consolidated balance sheet as of May 31, 1995 reflects the present value of the obligation to the participants under the plan of $660,000. The Company has a 401(k) Plan, which is a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of its eligible employees. All full-time and part-time employees who have attained the age of 21 and have completed six consecutive months of employment are eligible to participate in the plan. Effective June 1, 1994, eligibility was modified to one year of employment and a minimum of twenty (20) regular scheduled hours per week. Each participant may contribute from 2% to 15% of his or her compensation to the plan subject to limitations on the highly compensated employees to ensure the plan is non-discriminatory. The Company made approximately $29,000, $20,000 and $9,000 in contributions to the Plan in fiscal 1995, 1994 and 1993, respectively. NOTE 14-- STOCKHOLDERS' EQUITY The Company is authorized to issue 60,000 shares of preferred stock with a par value of $50 per share. No preferred shares have been issued. The Company has a 1988 Incentive Stock Option Plan and a 1988 Nonstatutory Stock Option Plan (the "1988 Plans"). Options granted under the 1988 Incentive Stock Option Plan are intended to qualify as incentive stock options ("ISOs") under Section 422 of the Internal Revenue Code. In fiscal 1992, the 1988 Incentive Stock Option Plan and 1988 Nonstatutory Stock Option Plan were amended to increase the total number of shares reserved for issuance under the plans and to expand the class of eligible persons under the nonstatutory plan to include advisors and consultants. Options granted under the 1988 Nonstatutory Stock Option Plan do not qualify as ISOs. The maximum number of shares originally subject to options were 150,000 and 40,000 for the ISOs and nonstatutory options, respectively. In fiscal 1995, the plans were amended to increase the number of shares authorized for issuance under the Company's 1988 incentive stock option plan to 500,000 and the Company's 1988 Nonstatutory Stock Option Plan to 200,000. Such amendment was ratified by the shareholders on November 14, 1994. The following table sets forth the activity related to ISOs for the years ended May 31, 1995, 1994 and 1993: 55 56 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993
NUMBER OF OPTION PRICE ------------------------- SHARES PER SHARE AGGREGATE --------- --------- --------- (IN THOUSANDS) Balance, May 31, 1992 . . . . . . . . . . . . . . . . . . . . . 76,517 $12.50-33.80 $1,462 Options forfeited in fiscal 1993 . . . . . . . . . . . . . (13,000) $12.50-33.80 (283) ------- ------ Balance, May 31, 1993 . . . . . . . . . . . . . . . . . . . . . 63,517 $12.50-30.00 $1,179 Options forfeited in fiscal 1994 . . . . . . . . . . . . . (46,750) $12.50-30.00 (830) ------- ------ Balance, May 31, 1994 . . . . . . . . . . . . . . . . . . . . . 16,767 $12.50-30.00 $ 349 Options canceled in fiscal 1995 . . . . . . . . . . . . . . (5,000) $ 6.25- 7.50 (34) Options issued in fiscal 1995 . . . . . . . . . . . . . . . 227,500 $ 6.25-12.00 1,684 Options forfeited in fiscal 1995 . . . . . . . . . . . . . (53,100) $ 6.25-30.00 (493) ------- ------ Balance, May 31, 1995 . . . . . 186,167 $ 6.25-30.00 $1,506 ======= ======
Options under the 1988 ISO Plan to purchase 62,115 shares and 12,601 shares were exercisable as of May 31, 1995 and 1994, respectively. The following table sets forth the activity related to nonstatutory options for the years ended May 31, 1995, 1994 and 1993:
NUMBER OF OPTION PRICE ------------------------- SHARES PER SHARE AGGREGATE --------- --------- --------- (IN THOUSANDS) Balance, May 31, 1992 . . . . . . . . . . . . . . . . . . . . . 32,000 $12.50 $ 400 Options exercised in fiscal 1993 . . . . . . . . . . . . . (4,000) $12.50 (50) ------- ------ Balance, May 31, 1993 . . . . . . . . . . . . . . . . . . . . . 28,000 $12.50 $ 350 Options forfeited in fiscal 1994 . . . . . . . . . . . . . (12,000) $12.50 (150) ------- ------ Balance, May 31, 1994 . . . . . . . . . . . . . . . . . . . . . 16,000 $12.50 $ 200 Options forfeited in fiscal 1995 . . . . . . . . . . . . . (12,000) $12.50 (150) Options canceled in fiscal 1995 . . . . . . . . . . . . . . (4,000) $12.50 (50) ------- ------ Balance, May 31, 1995 . . . . . . . . . . . . . . . . . . . . . --- $ --- ======= ======
There were no nonstatutory options exercisable as of May 31, 1995. Nonstatutory options to purchase 16,000 shares were exercisable as of May 31, 1994. The per share exercise price of options issued under the plans is determined by the Board of Directors, but in no event is the option exercise price so determined less than the then fair market value (as defined in the plans) of the shares at the date of grant. In the case of an ISO, if, on the date of the grant of such option, the optionee is a restricted stockholder (as defined in the plans), the option exercise price cannot be less than 110% of the fair market value of the shares on the date of the grant. Options vest and become exercisable at such times and in such installments as the Board of Directors provides for in the individual option agreement, except that an option granted to a director may not be exercised until the expiration of one year from the date such option is granted. Subject to the limitation with respect to the vesting of options granted to directors, the Board of Directors may in its sole discretion accelerate the time at which an option or installment thereof may be exercised. 56 57 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 In fiscal 1995, the Company implemented the Company's Directors' Stock Option Plan (the "Director's Plan"). The terms of the Directors' Plan provides for the grant of only non-qualified stock options. The Directors' Plan is not subject to ERISA, nor is it qualified under code section 401(a) of the Internal Revenue Code. The maximum number of shares subject to option are 200,000, and all non-employee directors of the Company are eligible to participate in the Directors' Plan. The Directors' Plan provides for the grant of non-qualified stock options to non-employee directors as follows: (1) each individual serving as a non-employee director as of the effective date were granted a non-qualified stock option to purchase 10,000 share of common stock ("Initial Grant"); (2) each individual who first becomes a non-employee director on or after the effective date, will be granted, at the time of such election or appointment a non-qualified stock option to purchase 10,000 shares of common stock ("Initial Grant"); (3) commencing with the 1995 annual meeting of the Company's stockholders, each individual who at each annual meeting of the Company's stockholders remains a non-employee director will receive an additional non-qualified stock option to purchase 2,500 shares of common stock. Each non-qualified stock option is exercisable at a price equal to the common stock's fair market value as of the date of grant. Initial grants vest annually in 25% 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. During fiscal 1995, 50,000 non-qualified options were granted in the Directors' Plan at $7.00 per share. There were no options under the Directors' Plan exercisable as of May 31, 1995. In July 1992, options not under any plan were issued to the former Vice Chairman. Options for 100,000 shares were granted at an exercise price ranging from $15.00 to $30.00. These options were exercisable 25 percent at grant date and each year thereafter. The option was amended in November 1994 for 12,500 shares at $7.50 and expired on August 18, 1995. In December 1992, options not under any plan were issued to the former owner of Mental Health Programs, Inc., as an inducement essential to the purchase of Mental Health Programs, Inc. (see Note 3-- "Acquisitions and Dispositions"). Options for 10,000 shares were granted at an exercise price ranging from $15.00 to $30.00. These options are exercisable 25 percent after one year from the grant date and each year thereafter and were contingent upon the continued employment with the Company. In July 1993, the Company terminated the employment agreement with the former owner and subsequently entered into litigation. On November 21, 1994, the Company reached a settlement agreement with the former owner and as part of the settlement agreement issued 16,000 shares of the Company's common stock. In February 1993, options not under any plan were issued to the Company's former Chief Financial Officer. Options for 50,000 shares were granted at an exercise price ranging from $10.00 to $20.00. These options become exercisable 25 percent after one year from the grant date and each year thereafter. In November 1994, the former Chief Financial Officer resigned and all options have expired. In August 1994, options not under any plan were issued to the interim President and Chief Executive Officer as an inducement essential to his appointment as President and Chief Executive Officer. Options for 50,000 shares were granted at an exercise price ranging from $7.50 to $15.00 per share. These options were exercisable 50 percent at grant date and 25 percent each year thereafter. In August 1994, options not under any plan were issued to the President of a subsidiary of the Company. Options for 15,000 shares were granted as an exercise price ranging from $7.50 to $15.00 per share. These options vest one-third one year from the date of grant and one-third each year thereafter. 57 58 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 In October 1994, options not under any plan were issued to a non-policy making vice president of a subsidiary of the Company. Options for 20,000 shares were granted at an exercise price ranging from $7.50 to $15.00 per share. Options for 7,500 shares vest one year from the date of grant; options for 7,500 shares two years from the date of grant and the remaining options for 5,000 shares vest on the three year anniversary of the date of grant. In addition, vesting of all options are subject to certain performance requirements. Failure to meet such annual performance requirements will result in the forfeiture of all or part of such options which vest in that year. On February 1, 1995, the Company sold an aggregate of 100,000 shares of Common Stock to one accredited investor in a private offering for an aggregate purchase price of $600,000 paid in cash on February 7, 1995. Such agreement was amended in June 1995 for an additional 15,000 shares as an adjustment for delay in registration of shares without additional payment. On April 15, 1995 the Company sold an aggregate of 150,000 shares of Common Stock to an accredited investor in a private offering for an aggregate purchase price of $975,000 paid in cash on April 19, 1995. It is the Company's intent to amend this agreement for an additional 22,500 shares as an adjustment for delay in registration of shares without additional payment. On April 1, 1995, the Company agreed to issue American Mental Health Care, Inc. ("AMH") 44,054 shares of the Company's Common Stock in return for a one-year management contract between Comprehensive Behavioral and AMH, one-third of the shares of AMH and a one year option to acquire all of the shares of AMH for up to 132,162 additional shares of the Company's Common Stock to be issued based on three-year net revenue requirements. AMH currently provides behavioral managed care services in Florida. The terms of the management agreement include an employment contract with Comprehensive Behavioral for the former president of AMH. On May 22, 1995, the Company and its subsidiary, Comprehensive Behavioral entered into an agreement with Physicians Corporation of America ("PCA"), providing for PCA to invest $1.0 million in Comprehensive Behavioral for 13 1/2% of the voting power of Comprehensive Behavioral represented by all of the Series A Preferred Stock of Comprehensive Behavioral which is also exchangeable at the option of PCA for 100,000 shares of the Company's Common Stock. The right to exchange expires in 10 years. As a key to the agreement, so long as PCA remains an equity holder of Comprehensive Behavioral, PCA and its subsidiaries will negotiate in good faith to contract with Comprehensive Behavioral for the delivery of mental health services in all PCA service areas where Comprehensive Behavioral has an adequate network. In addition, PCA was granted a first right of refusal regarding any sale of Comprehensive Behavioral. The Series A Preferred Stock is convertible into 13 1/2% of the common stock of Comprehensive Behavioral on a fully-diluted basis, subject to certain antidilution adjustments. The redemption price for the Series A Preferred Stock is equal to the original purchase price plus 4% for each year the stock is outstanding. The Company has the right to redeem the Series A Preferred Stock after approximately five years, and PCA has the right to require the Company to redeem the Series A Preferred Stock after approximately three years. On liquidation, the holder of the Series A Preferred Stock will be entitled to a liquidation preference equal to the redemption price. The Series A Preferred Stock is entitled to receive dividends, if any, in an amount proportionate to its voting power when any dividends are declared and paid on the common stock of Comprehensive Behavioral. On April 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 58 59 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 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. As of May 31, 1995, the Company has reserved 276,216 shares of Common Stock for future issuances related to business acquisitions, approximately 773,441 shares related to the conversion of convertible debt and private placements and 985,500 shares for the exercise of stock options of which approximately 688,000 shares are for options granted under the Company's 1988 Plans and 200,000 shares under the Directors' Plan. Each of the shares reserved for future issuance includes one Right as referenced above. As of May 31, 1995, no Preferred Stock is outstanding or reserved for issuance. NOTE 15 -- COMMITMENTS AND CONTINGENCIES On October 30, 1992, the Company filed a complaint in the United States District Court for the Eastern District of Missouri against RehabCare Corporation ("RehabCare") seeking damages for violations by RehabCare of the securities laws of the United States, for common law fraud and for breach of contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost benefit of certain stockholder appreciation rights in an amount in excess of $3.6 million and punitive damages. RehabCare filed a counterclaim in the case seeking a declaratory judgement with respect to the rights of both parties under the Stock Redemption Agreement, an injunction enjoining the Company from taking certain action under the Stock Redemption or Restated Shareholders Agreements and damages in the form of attorneys' fees and costs allegedly incurred by RehabCare with respect to its issuance of certain preferred stock and with respect to prior litigation between the parties. The case was tried before a jury commencing on February 21, 1995. Prior to the presentation of evidence to the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8, 1995, the jury returned its verdict awarding the Company $2,681,250 in damages, plus interest and the costs of the action against RehabCare for securities fraud and for breach of contract. RehabCare has posted a bond in the amount of $3.0 million and filed a motion for new trial or in the alternative, for judgement as a matter of law, which the court denied its entirety on August 4, 1995. On September 1, 1995, RehabCare filed a notice of appeal with the District Court indicating its intent to appeal the matter to the United States Court of Appeals. Although the Company feels that RehabCare will not prevail in its appeal, the Company has not recognized any gain with relation to the judgement. In connection with the proposed sale and lease-back of hospitals to CMP Properties, Inc., a real estate investment trust, the Company advanced $1.1 million to its financial advisor in fiscal 1992. The financial advisor was affiliated with several members of the Company's Board of Directors at that time. The advances, which were to be repaid if the transaction was not completed, were to be secured by a pledge of common stock in an unrelated company. The pledged shares of common stock were in the possession of the Company's primary legal counsel at that time, as collateral for the advances. After the transaction was terminated, the financial advisor refused to repay the advances and the Company's legal counsel refused to turn over the collateral to the Company. The Company has filed an action in the United States District Court for the District of Oregon (Civil Case No. 94-384 FR) against its former financial advisor and former legal counsel to recover the advances. The former financial advisor has counterclaimed against the Company for $1,688,000 for breach of contract and unjust enrichment. The Company's former law firm has filed a counterclaim for $193,000 for unpaid legal fees. Management believes that the counterclaims are without merit and intends to vigorously defend against them and to pursue the Company's claims. On June 8, 1994, RehabCare filed a lawsuit against the Company in the Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement entered into between the Company and RehabCare in May 1991 (Case No. 663957). An amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges that it has incurred attorneys fees in connection with the settlement of certain tax issues with the IRS and has paid the IRS a settlement amount with respect to the years 1987 and 1988. RehabCare seeks the recovery from the Company of $588,000, plus interest, which RehabCare alleges is the amount it incurred for payments to the IRS in settlement 59 60 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 and attorneys fees it incurred in dealing with the IRS. The Company has filed its answer and affirmative defenses contesting the right of RehabCare to obtain the relief it seeks. Discovery is ongoing. Until such discovery is complete, it is not possible to predict the likely outcome of the lawsuit. The Company intends to continue to vigorously defend this matter. In December 1994, the Company reached a settlement with the Appeals Office of the Internal Revenue Service ("IRS") on the payroll tax audit for the calendar years 1983 through 1991 pursuant to which the Company agreed to pay the IRS $5.0 million with the Company having no obligation to pay any penalties or accrued interest. The IRS agent conducting the audit asserted that certain physicians and psychologists and other staff engaged as independent contractors by the Company should have been treated as employees for payroll tax purposes. The settlement was reviewed and accepted on behalf of the IRS by its district counsel. Payment terms have been accepted at 50% within 90 days of finalization with the remainder financed over the next five years. In March 1995, the Company paid $350,000 to the IRS against the initial payment due. In return, the IRS granted the Company an additional 120 days to pay the remaining balance of $2,150,000. In July 1995, the Company paid the remaining balance of the initial payment, and continues to make the monthly installment payment pursuant to the terms of the settlement. The unpaid balance bears interest at 9% per annum due and payable after the $5.0 million is paid. The Federal income tax returns of the Company for its fiscal years ended 1984 and 1987 through 1991 were examined by the IRS resulting in a disallowance of approximately $229,000 in deductions which were offset against the Company's net operating losses available for carryover. The examination also included the review of the Company's claim for refund of approximately $205,000 relating to an amended return for the fiscal year ended May 31, 1992. During completion of the audit, the IRS noted that the Company had received excess refunds representing its alternative minimum tax ("AMT") liability of approximately $666,000 in 1990 and 1991 from the carry back of net operating losses to the fiscal years ended May 31, 1988 and 1989, respectively. On March 29, 1994, the Company agreed to the assessment of $666,000 plus interest and received the final bill of $821,000 during the fourth quarter of fiscal 1994. The Company paid the assessment including interest during the third quarter of fiscal year 1995. The Company will no longer report on this issue. An involuntary bankruptcy petition was dismissed on March 6, 1995 pursuant to an agreement dated March 3, 1995 between the Company and a representative of the petitioners. Under such agreement the Company has agreed, subject to the conditions therein, to offer to exchange for its outstanding 7 1/2% Convertible Subordinated Debentures with a combination of cash and shares. See Note 10-- "Long-Term Debt and Short-Term Borrowings" for a discussion of the Company's default in the payment of interest on its 7 1/2 % Convertible Subordinated Debentures and the consequent acceleration of the full principal amount thereof. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations. In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criterion in regard to net tangible assets available to common stock and three year average net income among others. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards. Management anticipates success in "global restructuring" (see Note 2-- "Operating Losses and Liquidity") will be necessary in order to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter of fiscal 1995 and during the first quarter of fiscal 1996, to discuss the Company's financial condition and intention to issue shares without seeking approval of shareholders pursuant to the exception to the NYSE policy for financially distressed companies. 60 61 COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1995, 1994 AND 1993 From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the Company or a subsidiary may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements. NOTE 16-- EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE On June 29, 1995, the Company entered into an amended common stock purchase agreement with Lindner Growth Fund ("Lindner"). The agreement, among other things, amends the original common stock purchase between the Company and Lindner Fund, Inc. dated February 1, 1995 for the purchase of 100,000 shares of common stock at $6.00 per share. The amended agreement allows for an additional 15,000 shares as an adjustment in the February 1, 1995 purchase for delay in registration of shares and without additional payment. In addition, the amended agreement provides that Lindner agreed to acquire an additional 135,000 shares of common stock for $6.00 per share. The Company received the proceeds for such purchase on July 14, 1995. On July 31, 1995, the Company entered into an agreement with an accredited investor to acquire, through private placement, 4,100 respectively, of common stock of the Company for $6.00 per share. The Company received the proceeds on August 15, 1995. On August 15, 1995, the Company entered into agreements with two accredited investors to acquire, through private placement, 10,833 and 5,000 shares, respectively, of common stock of the Company for $6.00 per shares. The Company received the proceeds on August 17, 1995. On August 18, 1995, the Company settled its claim filed against its fidelity bond carrier in the amount of $425,000. The Company received the proceeds on September 6, 1995. 61 62 PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS. Previously reported on Form 8-K dated May 22, 1995, Form 8-K/A dated May 22, 1995 and Form 8-K dated July 5, 1995 incorporated herein by reference. ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EXECUTIVE COMPENSATION. The Company expects to file its definitive proxy statement for the 1995 annual meeting of shareholders no later than 120 days after the end of the fiscal year with the Securities and Exchange Commission. The information set forth therein under "Election of Directors" and "Executive Compensation" is incorporated herein by reference. Executive Officers of Comprehensive Care Corporation and principal subsidiaries are listed on page 14 of this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required is set forth under the caption "Principal Stockholders" in the proxy statement for the 1995 annual meeting of shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required is set forth under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the proxy statement for the 1995 annual meeting of shareholders and is incorporated herein by reference. 62 63 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS Included in Part II of this report: Report of Independent Auditors Report of Independent Accountants Consolidated Balance Sheets, May 31, 1995 and 1994 Consolidated Statements of Operations, Years Ended May 31, 1995, 1994 and 1993 Consolidated Statements of Stockholders' Equity, Years Ended May 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows, Years Ended May 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES None. Other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 3. EXHIBITS
EXHIBIT NUMBER DESCRIPTION AND REFERENCE ------ ------------------------- 3.1 Restated Certificate of Incorporation as amended (12). 3.2 Restated Bylaws as amended November 14, 1994 (12). 4.1 Indenture dated April 25, 1985 between the Company and Bank of America, NT&SA, relating to Convertible Subordinated Debentures (1). 4.3 Rights Agreement dated as of April 19, 1988 between the Company and Security Pacific National Bank (2). 4.4 Rights Agreement between the Registrant and Continental Stock Transfer & Trust Company dated April 19, 1988 restated and amended October 21, 1994 (11). 10.1 Standard form of CareUnit Contract (3). 10.2 Standard form of CarePsychCenter Contract (3). 10.4 Financial Security Plan for executive management and medical directors (4).* 10.5 Form of Stock Option Agreement (3).* 10.6 Form of Indemnity Agreement as amended March 24, 1994 (9).* 10.28 The Company's Employee Savings Plan as amended and restated as of June 30, 1993 (5).* 10.31 Agreement between the Company and Livingston & Company dated April 1, 1991 (5). 10.32 Shareholder Agreement dated as of May 8, 1991 between the Company and RehabCare Corporation (6). 10.33 Tax Sharing Agreement dated as of May 8, 1991 between the Company and RehabCare Corporation (6). 10.35 Agreement between Company and Livingston & Co. dated December 21, 1991 (7). 10.36 Option Agreement with Richard W. Wolfe dated July 1, 1992 (7). 10.37 Redemption Agreement dated September 1, 1992 between RehabCare and the Company (7). 10.40 1988 Incentive Stock Option and 1988 Nonstatutory Stock Option Plans, as amended (11).* 10.46 Employment Agreement dated December 30, 1992 between the Company and Walter E. Afield, M.D. (8).
63 64 10.47 Non-qualified Option Agreement dated December 30, 1992 between the Company and Walter E. Afield, M.D. (8). 10.48 Non-qualified Stock Option Agreement dated February 2, 1993, between the Company and Fred C. Follmer (9).* 10.49 Non-qualified Stock Option Agreement dated August 25, 1994 between the Company and Chriss W. Street (10).* 10.50 Non-qualified Stock Option Agreement dated August 25, 1994 between the Company and Ronald G. Hersch (10). 10.54 1995 Directors Stock Option Plan (11).* 10.55 Non-qualified Stock Option Agreement dated October 11, 1994 between the Company and Richard L. Powers (11). 10.56 Employment Agreement dated January 1, 1995 between the Company and Chriss W. Street (11).* 10.57 Secured Convertible Note Purchase Agreement dated January 5, 1995 between the Company and Lindner Bulwark Fund, an accredited investor (11). 10.58 Stock Purchase Agreement dated February 1, 1995 between the Company and Lindner Funds, Inc., an accredited investor (12). 10.59 Directors and Officers Trust dated February 27, 1995 between the Company and Mark Twain Bank (12).* 10.60 Letter Agreement between the Company and Jay H. Lustig, a representative of the holders of the 7 1/2% Convertible Subordinated Debentures (12). 10.61 Common Stock Purchase Agreement dated April 15, 1995 between the Company and James R. Moriarty, an accredited investor (13). 10.62 Amended Common Stock Purchase Agreement dated June 29, 1995 between the Company and Lindner Growth Fund, an accredited investor (14). 10.63 Common Stock Purchase Agreement dated July 31, 1995, between the Company and W.V.C. Limited, an accredited investor (14). 10.64 Common Stock Purchase Agreement dated August 15, 1995 between the Company and Helen Jean Quinn, an accredited investor (14). 10.65 Common Stock Purchase Agreement dated August 15,1995 between the Company and BLC Investments, an accredited investor (14). 10.66 Preferred Stock Purchase Agreement dated May 23, 1995 between Physician Corporation of America and Comprehensive Behavioral Care, Inc. (filed herewith). 10.67 First Right of Refusal Agreement dated May 23, 1995 between Physician Corporation of America and Comprehensive Behavioral Care, Inc. (filed herewith). 11 Computation of Loss Per Share (filed herewith). 21 List of the Company's subsidiaries (filed herewith). 23.1 Consent of Ernst & Young LLP (filed herewith) 23.2 Consent of Arthur Andersen LLP (filed herewith). 27 Financial Data Schedules (filed herewith).
------------------------------------ *Management contract or compensatory plan or arrangement with one or more directors or executive officers. (1) Filed as an exhibit to the Company's Form S-3 Registration Statement No. 2-97160. (2) Filed as an exhibit to the Company's Form 8-K dated May 4, 1988. (3) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1988. (4) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1990. (5) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1991. (6) Filed as an exhibit to RehabCare Corporation's Form S-1 Registration Statement No. 33-40467. (7) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1992.
64 65 (8) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1993. (9) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended May 31, 1994. (10) Filed as an exhibit to the Company's Form 10-Q for the quarter ended August 31, 1994. (11) Filed as an exhibit to the Company's Form 10-Q for the quarter ended November 30, 1994. (12) Filed as an exhibit to the Company's Form 10-Q for the quarter ended February 28, 1995. (13) Filed as an exhibit to the Company's Form 8-K dated April 19, 1995. (14) Filed as an exhibit to the Company's Form 8-K dated July 17, 1995.
(b) REPORTS ON FORM 8-K 1) The Company filed a current report on Form 8-K, dated April 19, 1995, to announce, under Item 4, that an accredited investor had acquired, through private placement, 150,000 shares of restricted Common Stock of the Company for $6.50 per share. 2) The Company filed a current report on Form 8-K, dated May 22, 1995, to report, under Item 4, Arthur Andersen LLP, ("AA"), the Company's independent accountants, advised the Company that the Company did not meet Arthur Andersen's client profile so as to enable AA to proceed with the Company's audit for the fiscal year ending May 31, 1995. 3) The Company filed a current report on Form 8-K/A, dated May 22, 1995, to amend the Company's Form 8-K dated May 25, 1995, for the purpose of appending as an exhibit, under Item 4, the response of Arthur Andersen LLP ("AA") to the statements made by the Company in said Form 8-K. 65 66 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, September, 1995. COMPREHENSIVE CARE CORPORATION By /s/ CHRISS W. STREET ---------------------------- Chriss W. Street Chairman, President and Chief Executive Officer By /s/ DREW Q. MILLER ---------------------------- Drew Q. Miller (Principal Financial Officer) By /s/ KERRI RUPPERT ---------------------------- Kerri Ruppert (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates so indicated.
SIGNATURE TITLE DATE --------- ----- ---- Chairman, President and Chief Executive Officer /s/ CHRISS W. STREET (Principal Executive Officer) September 12, 1995 ----------------------------------- Chriss W. Street Vice President, Chief Financial Officer and Chief Operating Officer /s/ DREW Q. MILLER (Principal Financial Officer) September 12, 1995 ----------------------------------- Drew Q. Miller Vice President, Secretary/Treasurer and Chief Accounting Officer /s/ KERRI RUPPERT (Principal Accounting Officer) September 12, 1995 ----------------------------------- Kerri Ruppert /s/ J. MARVIN FEIGENBAUM Vice Chairman September 12, 1995 ----------------------------------- J. Marvin Feigenbaum /s/ WILLIAM H. BOUCHER Director September 12, 1995 ----------------------------------- William H. Boucher
66 67 /s/ RUDY R. MILLER Director September 12, 1995 ----------------------------------- Rudy R. Miller /s/ W. JAMES NICOL Director September 12, 1995 ----------------------------------- W. James Nicol
67 68 COMPREHENSIVE CARE CORPORATION EXHIBIT INDEX FISCAL YEAR ENDED MAY 31, 1994
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE ------ ----------- ---- 10.66 Preferred Stock Purchase Agreement dated May 23, 1995 between 69 Physician Corporation of America and Comprehensive Behavioral Care, Inc. (filed herewith). 10.67 First Right of Refusal Agreement dated May 23, 1995 between 103 Physician Corporation of America and Comprehensive Behavioral Care, Inc. (filed herewith). 11 Computation of Loss Per Share (filed herewith). 112 21 List of the Company's subsidiaries (filed herewith). 113 23.1 Consent of Ernst & Young LLP (filed herewith) 114 23.2 Consent of Arthur Andersen LLP (filed herewith). 115 27 Financial Data Schedules (filed herewith). 116
EX-10.66 2 ACCESSCARE PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.66 ================================================================================ ACCESSCARE, INC. ------------------- ACCESSCARE PREFERRED STOCK PURCHASE AGREEMENT ------------------- Dated as of May 23, 1995 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1 CERTAIN DEFINED TERMS................................. 1 (a) "Common Stock"............................... 1 (b) "CompCare"................................... 1 (c) "Consolidated"............................... 1 (d) "Debt Securities"............................ 2 (e) "Event of Default"........................... 2 (f) "Indebtedness"............................... 2 (g) "Person"..................................... 2 (h) "Preferred Stock"............................ 2 (i) "Qualified Public Offering".................. 2 (j) "Series A Preferred Stock"................... 3 (k) "Securities Act"............................. 3 (l) "Subsidiary"................................. 3 (m) "Transaction Documents"...................... 3 1.2 ACCOUNTING TERMS...................................... 3 ARTICLE II PURCHASE, SALE AND TERMS OF SERIES A PREFERRED STOCK 2.1 THE SERIES A PREFERRED STOCK.......................... 3 2.2 CLOSING............................................... 3 ARTICLE III CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS 3.1 REPRESENTATIONS AND WARRANTIES........................ 4 3.2 DOCUMENTATION AT CLOSING.............................. 4 3.3 CONSENTS, WAIVERS, ETC................................ 5 3.4 ABSENCE OF LITIGATION................................. 5 3.5 PERFORMANCE OF OBLIGATIONS............................ 5 3.6 MATERIAL ADVERSE CHANGE............................... 5
i 3 ARTICLE IV CONDITIONS PRECEDENT TO ACCESSCARE'S OBLIGATIONS 4.1 REPRESENTATIONS AND WARRANTIES........................ 6 4.2 DOCUMENTATION AT CLOSING.............................. 6 4.3 CONSENTS, WAIVERS, ETC................................ 6 4.4 ABSENCE OF LITIGATION................................. 7 4.5 PERFORMANCE OF OBLIGATIONS............................ 7 4.6 PAYMENT............................................... 7 ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACCESSCARE 5.1 ORGANIZATION AND STANDING OF ACCESSCARE............... 7 5.2 CORPORATE ACTION...................................... 7 5.3 GOVERNMENTAL APPROVALS................................ 7 5.4 LITIGATION............................................ 8 5.5 COMPLIANCE WITH OTHER INSTRUMENTS..................... 8 5.6 STOCK OWNERSHIP....................................... 8 5.7 SECURITIES ACT OF 1933................................ 9 5.8 NO BROKERS OR FINDERS................................. 9 5.9 CAPITALIZATION; STATUS OF CAPITAL STOCK............... 9 5.10 FINANCIAL STATEMENTS.................................. 9 5.11 ABSENCE OF CHANGES.................................... 9 5.12 PROPERTY.............................................. 10 5.13 SUBSIDIARIES.......................................... 10 5.14 TAXES AND TAX RETURNS................................. 10 5.15 INSURANCE............................................. 11 5.16 CERTAIN TRANSACTIONS.................................. 11 5.17 CONTRACTS AND COMMITMENTS............................. 11 5.18 EMPLOYMENT BENEFIT PLANS.............................. 11 5.19 PATENTS, COPYRIGHTS AND TRADEMARKS.................... 12 5.20 ENVIRONMENTAL MATTERS................................. 12 5.21 COMPLIANCE WITH LAWS, CERTIFICATES.................... 12 5.22 DISCLOSURE............................................ 12 5.23 ABSENCE OF UNDISCLOSED LIABILITIES.................... 13 5.24 PROJECTIONS........................................... 13
ii 4 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF INVESTOR 6.1 RESTRICTED SHARES..................................... 13 6.2 INVESTMENT INTENT..................................... 13 6.3 ABILITY TO BEAR RISK.................................. 13 6.4 INVESTMENT EXPERIENCE................................. 13 6.5 UNMARKETABLE SHARES................................... 14 6.6 ACCREDITED INVESTOR................................... 14 6.7 CORPORATE ASSETS...................................... 14 6.8 LEGENDS............................................... 14 6.9 DUE AUTHORIZATION..................................... 14 6.10 BINDING EFFECT........................................ 15 6.11 CONSENTS AND APPROVALS................................ 15 6.12 CONTRACTS AND COMMITMENTS............................. 15 6.13 NO BROKERS OR FINDERS................................. 15 ARTICLE VII COVENANTS OF ACCESSCARE AND INVESTOR 7.1 REPORTING REQUIREMENTS................................ 15 7.2 AFFIRMATIVE COVENANTS OF ACCESSCARE OTHER THAN REPORTING REQUIREMENTS.............................. 16 (a) PAYMENT OF TAXES AND TRADE DEBT.............. 16 (b) MAINTENANCE OF INSURANCE..................... 16 (c) PRESERVATION OF CORPORATE EXISTENCE.......... 16 (d) COMPLIANCE WITH LAWS......................... 16 (e) KEEPING OF RECORDS AND BOOKS OF ACCOUNT...... 17 (f) MAINTENANCE OF PROPERTIES, ETC............... 17 (g) BUDGETS AND BOARD APPROVAL................... 17 (h) FINANCINGS................................... 17 (i) BOARD OF DIRECTORS; INDEMNIFICATION.......... 17 (j) BOARD OF DIRECTORS MEETINGS.................. 17 (k) COMPENSATION COMMITTEE....................... 17 (l) INSPECTION, CONSULTATION AND ADVICE.......... 18 (m) USE OF PROCEEDS.............................. 18 (n) BY-LAWS...................................... 18 7.3 NEGATIVE COVENANTS OF ACCESSCARE...................... 18 (a) DEALINGS WITH AFFILIATES AND OTHERS.......... 18 (b) DIVIDENDS.................................... 19 (c) RESTRICTIVE AGREEMENTS PROHIBITED............ 19 (d) COMPENSATION................................. 19 7.4 CONFIDENTIALITY....................................... 19 7.5 COOPERATION........................................... 19
iii 5 ARTICLE VIII RIGHT TO PARTICIPATE IN FINANCINGS 8.1 RIGHT OF PARTICIPATION................................ 20 8.2 EXCEPTIONS............................................ 20 8.3 NO ASSIGNMENT OF RIGHTS............................... 20 ARTICLE IX OBLIGATIONS PENDING THE CLOSING 9.1 ACCESS................................................ 21 9.2 CONDUCT OF COMPANY'S BUSINESS......................... 21 (a) COMPENSATION................................. 21 (b) ORGANIZATION................................. 21 (c) VENDORS...................................... 21 (d) INSURANCE.................................... 21 (e) LAWSUITS, CLAIMS............................. 22 (f) CERTAIN CHANGES.............................. 22 (g) CONDITION OF ASSETS.......................... 22 (h) TAXES........................................ 22 (i) DIVIDENDS, ETC............................... 22 (j) CORPORATE MATTERS............................ 22 (k) LIABILITIES AND EXPENSES..................... 22 9.3 CONSENTS.............................................. 23 9.4 NOTICE OF BREACH...................................... 23 ARTICLE X SURVIVAL OF REPRESENTATIONS AND WARRANTIES 10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES............ 23 ARTICLE XI INDEMNIFICATION 11.1 INDEMNIFICATION BY ACCESSCARE......................... 23 11.2 LIMITATIONS ON INDEMNIFICATION BY ACCESSCARE.......... 23 11.3 INDEMNIFICATION BY INVESTOR........................... 24 11.4 LIMITATIONS ON INDEMNIFICATION BY INVESTOR............ 24 11.5 CLAIMS FOR INDEMNIFICATION............................ 24 11.6 DEFENSE BY INDEMNITOR................................. 24
iv 6 ARTICLE XII MISCELLANEOUS 12.1 NO WAIVER; CUMULATIVE REMEDIES........................ 25 12.2 AMENDMENTS, WAIVERS AND CONSENTS...................... 25 12.3 ADDRESSES FOR NOTICES, ETC............................ 25 12.4 COSTS, EXPENSES AND TAXES............................. 26 12.5 BINDING EFFECT; ASSIGNMENT............................ 27 12.6 TERMINATION........................................... 27 12.7 PRIOR AGREEMENTS...................................... 27 12.8 SEVERABILITY.......................................... 27 12.9 GOVERNING LAW......................................... 27 12.10 HEADINGS.............................................. 27 12.11 COUNTERPARTS.......................................... 27 12.12 FURTHER ASSURANCES.................................... 28 12.13 COVENANT OF GOOD FAITH AND FAIR DEALING............... 28 EXHIBITS Exhibit Index.................................................. 29
7 ACCESSCARE PREFERRED STOCK PURCHASE AGREEMENT THIS ACCESSCARE PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into as of May 23, 1995, by and between ACCESSCARE, INC., a Nevada corporation ("AccessCare"), and PHYSICIAN CORPORATION OF AMERICA, a Delaware corporation ("Investor"). R E C I T A L S A. On the date of this Agreement, Comprehensive Care Corporation, a Delaware corporation ("CompCare") owns 100% of the outstanding capital stock of AccessCare. B. AccessCare desires to sell to Investor, and Investor desires to purchase from AccessCare, the Series A Preferred Stock, as hereinafter defined, on the terms and conditions of this Agreement and the Transaction Documents. AGREEMENT NOW, THEREFORE, the parties hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): (a) "Common Stock" includes (a) AccessCare's Common Stock, par value $1.00 per share, as authorized on the date of this Agreement, (b) any other capital stock of any class or classes (however designated) of AccessCare, authorized on or after the date hereof, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of directors of AccessCare (even though the right so to vote has been suspended by the happening of such a contingency), and (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (b) "CompCare" means Comprehensive Care Corporation, a Delaware corporation. (c) "Consolidated" when used with reference to any term defined herein shall mean that term as applied to the accounts of AccessCare and its Subsidiaries, if any, consolidated in accordance with generally accepted accounting principles after eliminating intercompany items. 8 (d) "Debt Securities" means and includes (i) any debt security of AccessCare that by its terms is convertible into or exchangeable for any equity security of AccessCare that is a combination of debt and equity, or (ii) any option, warrant or other right to subscribe for, purchase or otherwise acquire any such debt security of AccessCare. (e) "Event of Default" means as to the respective party (i) any representation or warranty made by AccessCare or Investor in this Agreement, or by AccessCare (or any officers of AccessCare) or Investor (or any officers of Investor) in any certificate, instrument or written statement contemplated by or made or delivered pursuant to or in connection with this Agreement, that shall prove to have been incorrect in any material respect when made; or (ii) AccessCare or Investor failing to perform or observe any material term, covenant or agreement contained in this Agreement or the Series A Preferred Stock or the Transaction Documents on its part to be performed or observed, and any such failure remaining unremedied for thirty (30) days after written notice thereof shall have been given to AccessCare or Investor, as applicable, by the other, unless such default cannot reasonably be corrected within such period, then, so long as the party so failing has in good faith commenced to cure such default and continues to act diligently to cure such default, the period to so cure shall be extended by such time as may be reasonably necessary to correct such default for up to thirty (30) additional days (except in the case of any failure which cannot, by its nature, be remedied, then upon delivery of such notice there shall have occurred an Event of Default). (f) "Indebtedness" means all obligations, contingent and otherwise, which should, in accordance with generally accepted accounting principles consistently applied, be classified upon the obligor's balance sheet as liabilities, excluding any liabilities in respect of deferred federal or state income taxes, but in any event including, without limitation, liabilities secured by any mortgage on property owned or acquired subject to such mortgage, whether or not the liability secured thereby shall have been assumed, and also including, without limitation, (i) all guaranties, endorsements and other contingent obligations in respect of Indebtedness of others, whether or not the same are or should be so reflected in said balance sheet, except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business and (ii) the present value of any lease payments due under leases required to be capitalized in accordance with applicable Statements of Financial Accounting Standards, determined by discounting all such payments at the interest rate determined in accordance with applicable Statements of Financial Accounting Standards. (g) "Person" means an individual, corporation, partnership, joint venture, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. (h) "Preferred Stock" includes (a) AccessCare's Preferred Stock as authorized on the date of this Agreement, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (i) "Qualified Public Offering" means and includes the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act, covering the offer and sale of Common Stock for the account of AccessCare from which the aggregate gross proceeds to AccessCare shall equal or exceed $5,000,000. 2 9 (j) "Series A Preferred Stock" shall mean (a) the 135 shares of AccessCare's Series A Preferred Stock, par value $1.00 per share, as authorized on the date of this Agreement, and (b) any other securities into which or for which any of the securities described in (a) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (k) "Securities Act" means the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Securities and Exchange Commission (or of any other Federal agency then administering the Securities Act) thereunder, all as the same shall be in effect at the time. (l) "Subsidiary" means any corporation, 50% or more of the outstanding voting stock of which shall at the time be owned by AccessCare or by one or more Subsidiaries, or any other entity or enterprise, 50% or more of the equity of which shall at the time be owned by AccessCare or by one or more Subsidiaries. (m) "Transaction Documents" means, collectively, this Agreement, the Certificate of Designation, the Option Agreement and the First Right of Refusal Agreement, each as defined elsewhere herein. 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles, and all other financial data submitted pursuant to this Agreement shall be prepared and calculated in accordance with such principles. ARTICLE II PURCHASE, SALE AND TERMS OF SERIES A PREFERRED STOCK 2.1 THE SERIES A PREFERRED STOCK. AccessCare has authorized the issuance, sale and delivery of one hundred thirty-five (135) shares of its Series A Preferred Stock at an aggregate price of $1,000,000.00 to Investor. The designation, rights, preferences and other terms and conditions relating to the Series A Preferred Stock shall be as set forth in the Certificate of Designation of Rights, Preferences and Privileges of the Series A Preferred Stock attached as Exhibit 2.1 ("Certificate of Designation"). 2.2 CLOSING. AccessCare agrees to issue and sell to Investor and, subject to and in reliance upon the representations, warranties, terms and conditions of this Agreement, Investor agrees to purchase, the 135 shares of Series A Preferred Stock for $1,000,000 in cash payable by wire transfer of same-day or next-day funds. Such purchase and sale shall take place at a closing (the "Closing") to be held at Physician Corporation of America, 5835 Blue Lagoon Drive, Miami, Florida 33126, on May 23, 1995, at 1:00 P.M. Eastern Daylight Time, or on such other date and at such time as may be mutually agreed upon by the parties. At the Closing, AccessCare will issue and deliver a certificate evidencing the Series A Preferred Stock sold at the Closing against wire transfers to the account of AccessCare in same-day or next-day funds in payment of the full purchase price for such Series A Preferred Stock. 3 10 ARTICLE III CONDITIONS PRECEDENT TO INVESTOR'S OBLIGATIONS The obligation of Investor to purchase and pay for the Series A Preferred Stock at the Closing is subject to the following conditions, any one of which may be waived in writing by Investor: 3.1 REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of AccessCare set forth in Article V hereof shall be true and correct in all material respects on the date of the Closing with the same force and effect as though made at and as of that time. 3.2 DOCUMENTATION AT CLOSING. Investor shall have received prior to or at the Closing all of the following, each in form and substance reasonably satisfactory to Investor and its counsel, and all of the following events shall have occurred prior to or simultaneous with the Closing hereunder: (a) A copy of all charter documents of AccessCare certified by the Nevada Secretary of State, a certified copy of the resolutions of the Board of Directors and the shareholder of AccessCare, evidencing approval of this Agreement, the Transaction Documents, and the transactions contemplated thereby, the authorization for issuance and delivery of the Series A Preferred Stock and other matters contemplated hereby, a certified copy of the bylaws of AccessCare and certified copies of all documents evidencing other necessary corporate or other action and governmental approvals, if any, with respect to this Agreement and the Series A Preferred Stock; (b) A certificate of the Secretary or an Assistant Secretary of AccessCare stating the names of the officers of AccessCare authorized to sign this Agreement and the other Transaction Documents to which it is a party, the certificates for the Series A Preferred Stock and the other documents or certificates to be delivered pursuant to this Agreement by AccessCare or any of its officers, together with the true signatures of such officers; (c) A certificate from AccessCare signed by a duly authorized officer of AccessCare stating that the representations and warranties of AccessCare contained in Article V hereof and otherwise made by AccessCare or CompCare in writing in connection with the transactions contemplated hereby or in the other Transaction Documents were true and correct in all material respects when made and are true and correct in all material respects as of the date of Closing, with the same force and effect as if such representations and warranties had been made at and as of that time and that all conditions required to be performed by AccessCare prior to or at the Closing have been performed or complied with in all material respects, except as may be waived in writing by Investor, and that no condition or event has occurred or is continuing or will result from the execution and delivery of this Agreement or the issuance and delivery of the Series A Preferred Stock which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both; (d) A copy of the Certificate of Designation, executed by AccessCare and filed on behalf of AccessCare in the office of the Nevada Secretary of State; 4 11 (e) A First Right of Refusal Agreement, in the form set forth in Exhibit 3.2(e) ("First Right of Refusal Agreement"), executed and delivered by AccessCare and CompCare; (f) An Option Agreement, in the form set forth in Exhibit 3.2(f) ("Option Agreement"), executed and delivered by CompCare; and (g) One or more fully executed and completed stock certificates representing the Series A Preferred Stock registered in the Investor's name. 3.3 CONSENTS, WAIVERS, ETC. Prior to the Closing, AccessCare or CompCare, as the case may be, shall have obtained all consents or waivers, if any, necessary for AccessCare to execute and deliver this Agreement and for AccessCare or CompCare to execute and deliver the other documents and certificates to be delivered pursuant to this Agreement or the other Transaction Documents, to issue and deliver the Series A Preferred Stock and to carry out the transactions contemplated hereby and thereby, and all such consents and waivers shall be in full force and effect. All corporate and other actions and governmental filings necessary to effectuate the terms of this Agreement, the Series A Preferred Stock and other agreements and instruments executed and delivered by AccessCare or CompCare in connection herewith shall have been made or taken, except for any post-sale filing that may be required under federal and state securities laws. In addition to the documents set forth above, AccessCare and CompCare, respectively, shall have provided Investor any other information or copies of documents that they may reasonably request. 3.4 ABSENCE OF LITIGATION. There shall be no litigation, whether brought against CompCare, AccessCare, or Investor seeking to prevent the consummation of the transactions contemplated by this Agreement or the other Transaction Documents, and no such litigation shall have been threatened. Further, there shall not be in effect any order restraining or prohibiting the consummation of the transactions contemplated by the Transaction Documents nor any proceedings pending with respect thereto. 3.5 PERFORMANCE OF OBLIGATIONS. AccessCare or CompCare, as the case may be, shall have performed and complied, in all material respects, with all covenants, conditions and obligations required by this Agreement to have been performed or complied with by AccessCare or CompCare, respectively, at or prior to the Closing. 3.6 MATERIAL ADVERSE CHANGE. There shall not have been, subsequent to the balance sheet of AccessCare dated May 31, 1994, any material adverse change in the financial condition of the business of AccessCare, or its assets, liabilities, business, results of operations, or customer, supplier or employee relations, other than changes occurring in the normal course of the business of AccessCare. 5 12 ARTICLE IV CONDITIONS PRECEDENT TO ACCESSCARE'S OBLIGATIONS The obligations of AccessCare to consummate the sale of the Series A Preferred Stock to Investor and to perform under this Agreement and the other Transaction Documents shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions, any one of which may be waived in writing by AccessCare: 4.1 REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of Investor set forth in Article III of this Agreement shall be true and correct in all material respects on the date of the Closing with the same force and effect as though made at and as of that time. 4.2 DOCUMENTATION AT CLOSING. AccessCare or CompCare, as applicable, shall have received prior to or at the Closing all of the following, each in form and substance satisfactory to AccessCare and its counsel, and all of the following events shall have occurred prior to or simultaneous with the Closing hereunder: (a) A certificate from Investor, signed by a duly authorized officer of Investor, certifying that Investor's representations and warranties contained herein and otherwise made by Investor in connection with the transactions contemplated hereby were true and correct in all material respects when made and are true and correct in all material respects on and as of the Closing Date, with the same force and effect as if such representations and warranties had been at and as of that time, and that all conditions required to be performed by Investor prior to or at the Closing have been performed or complied with in all material respects, except as may be waived in writing by AccessCare and CompCare, and that no condition or event has occurred or is continuing or will result from the execution and delivery of this Agreement which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both; (b) The First Right of Refusal Agreement, executed and delivered by Investor; and (c) The Option Agreement, executed and delivered by Investor. 4.3 CONSENTS, WAIVERS, ETC. Investor shall have obtained all consents or waivers, if any, necessary to execute and deliver this Agreement and the other documents and certificates to be delivered pursuant to this Agreement, issue and deliver the Series A Preferred Stock and to carry out the transactions contemplated hereby and thereby, and all such consents and waivers shall be in full force and effect. All corporate and other actions and governmental filings necessary to effectuate the terms of this Agreement, the Series A Preferred Stock and other agreements and instruments executed and delivered by Investor in connection herewith shall have been made or taken, except for any post-sale filing that may be required under federal and state securities laws. Investor shall have provided AccessCare and CompCare any other information or documents, including without limitation resolutions, certified or in such other form as may reasonably be requested by AccessCare or CompCare, as the case may be. 6 13 4.4 ABSENCE OF LITIGATION. There shall be no litigation, whether brought against AccessCare, Investor or CompCare, seeking to prevent the consummation of the transactions contemplated by this Agreement, and no such litigation shall have been threatened. Further, there shall not be in effect any order restraining or prohibiting the consummation of the transactions contemplated by this Agreement nor any proceedings pending with respect thereto. 4.5 PERFORMANCE OF OBLIGATIONS. Investor shall have performed and complied, in all material respects, with all of its respective covenants, conditions and obligations required by this Agreement to have been performed or complied with by Investor at or prior to the Closing. 4.6 PAYMENT. AccessCare shall have received payment in full, from Investor, for the Series A Preferred Stock. ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACCESSCARE Except as set forth on the disclosure schedule attached hereto as Exhibits 5.00, et seq. ("Disclosure Schedule") pursuant to this Article V, which disclosures shall be deemed to be representations and warranties as if made hereunder, AccessCare represents and warrants to the Investor that: 5.1 ORGANIZATION AND STANDING OF ACCESSCARE. AccessCare is a duly incorporated and validly existing corporation in good standing under the laws of the State of Nevada and has all requisite corporate power and authority for the ownership and operation of its properties and for the carrying on of its business as now conducted and as now proposed to be conducted. AccessCare is duly licensed or qualified, and in good standing as a foreign corporation authorized to do business, in all jurisdictions in which the character of the property owned or leased, or the nature of the activities conducted, by it makes such licensing or qualification necessary and where failure to be licensed or to so qualify would have a material adverse effect upon AccessCare. 5.2 CORPORATE ACTION. AccessCare has all necessary corporate power and has taken all corporate action required to make all the provisions of this Agreement, the Series A Preferred Stock and any other agreements and instruments executed in connection herewith and therewith, the valid and enforceable obligations of AccessCare upon execution thereof. The issuance of the Series A Preferred Stock is not subject to preemptive or other preferential rights, or similar statutory or contractual rights of third parties, either arising pursuant to any agreement or instrument to which AccessCare is a party or by which AccessCare is otherwise bound. 5.3 GOVERNMENTAL APPROVALS. No authorization, consent, approval, license, exemption of, or filing or registration with, any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with, the offer, issuance, sale, execution or delivery by AccessCare, or for the performance by it of its obligations under, this Agreement or the Series A Preferred Stock except for post-sale filings to be made, if any, to comply with exemptions from registration or qualification under federal and state securities laws. 7 14 5.4 LITIGATION. There is no litigation or governmental proceeding or investigation pending or, to the knowledge of AccessCare after due inquiry, threatened against AccessCare or affecting any of its properties or assets, or, to the knowledge of AccessCare after due inquiry, against any officer of AccessCare that is likely to result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs or conditions of AccessCare or any of its properties or assets taken as a whole, or that is likely to call into question the validity of this Agreement, any of the Series A Preferred Stock or any action taken or to be taken pursuant hereto or thereto. Neither AccessCare nor CompCare is in default with respect to any order, writ, injunction, decree, ruling or decision of any court, commission, board or other government agency, which default is likely to result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs or conditions of AccessCare or any of its properties or assets taken as a whole. 5.5 COMPLIANCE WITH OTHER INSTRUMENTS. AccessCare is in compliance in all respects with the terms and provisions of its articles of incorporation and bylaws and in all material respects with the terms and provisions of this Agreement. To the best of AccessCare's knowledge, AccessCare is in compliance in all material respects with (i) the terms and provisions of each mortgage, indenture, lease, agreement and other instrument relating to obligations of AccessCare in excess of $25,000, individually or in the aggregate, and (ii) all judgments, decrees, governmental orders, statutes, rules or regulations by which it is bound or to which its properties or assets are subject, except in each case any such noncompliance which would not have a material adverse effect on the business, assets or financial condition of AccessCare. Neither the execution and delivery of this Agreement or the Series A Preferred Stock, nor the consummation of any transaction contemplated hereby or thereby, has constituted or resulted in or will constitute or result in a default or violation of any term or provision in the articles of incorporation or bylaws of AccessCare and, to the best of AccessCare's knowledge, has constituted or resulted in or will constitute or result in a material default or violation of any term or provision in any documents or instruments. 5.6 STOCK OWNERSHIP. On the date of this Agreement, CompCare is the sole owner, beneficially and of record, of eight hundred sixty-five (865) shares of the Common Stock, comprising all of the outstanding Common Stock of AccessCare, free and clear of all claims, liens, encumbrances, security interests, pledges, options, charges, restrictions and defects in title of any nature whatsoever, other than restrictions imposed by federal and applicable state securities laws or the Transaction Documents. At the Closing, CompCare will be the sole owner, beneficially and of record, of eight hundred sixty-five (865) shares of Common Stock, which will comprise all of the then outstanding Common Stock of AccessCare, free and clear of all claims, liens, encumbrances, security interests, pledges, options, charges, restrictions and defects in title of any nature whatsoever, other than restrictions imposed by federal and applicable state securities laws or the Transaction Documents. Prior to the Closing, 135 shares of Common Stock presently held by CompCare will be cancelled and returned to the status of authorized and unissued shares. CompCare has not, and as of the Closing shall not have, granted or sold, and is not, and at the time of Closing will not be, a party to any agreement, commitment or understanding, written or oral, providing for the grant or sale of, options or other rights to purchase or restricting the transfer of, and is not, and at the Closing will not be, obligated to sell or otherwise transfer, any of the shares of the outstanding capital stock of AccessCare to any person or entity. 8 15 5.7 SECURITIES ACT OF 1933. AccessCare has complied, and will comply, with all applicable federal or state securities laws in connection with the issuance and sale of the Series A Preferred Stock. Neither AccessCare nor anyone authorized to act on its behalf has offered or will offer to sell the Series A Preferred Stock or similar securities to, or solicit offers with respect thereto from, or enter into any preliminary conversations or negotiations relating thereto with, any Person, so as to bring the issuance and sale of the Series A Preferred Stock under the registration provisions of the Securities Act. 5.8 NO BROKERS OR FINDERS. AccessCare has taken no action or failed to take any action, and knows of no such act or omission by any Person, which would give rise to any right, interest or valid claim against or upon AccessCare or Investor for any commission, fee or other compensation as a finder or broker as a result of the transactions contemplated by this Agreement, and AccessCare agrees to indemnify and hold Investor harmless against any liability for or related to such commissions, fees, expenses or other compensation. 5.9 CAPITALIZATION; STATUS OF CAPITAL STOCK. Immediately preceding the Closing, AccessCare will have a total authorized capitalization consisting of 25,000 shares of Common Stock, par value $1.00 per share, of which 865 shares will be outstanding, and 10,000 shares of Preferred Stock, of which 135 shares are designated as Series A Preferred Stock, none of which are outstanding. Immediately following the Closing, there will be 865 shares of Common Stock and 135 shares of Series A Preferred Stock outstanding. As of the Closing, all of the outstanding shares of capital stock of AccessCare will have been duly authorized, validly issued and fully paid and nonassessable. The Series A Preferred Stock, when issued and delivered in accordance with the terms hereof, will be duly authorized, validly issued and fully paid and nonassessable free and clear of all liens and encumbrances created by AccessCare. There are no authorized, issued or outstanding options, warrants or rights to purchase which obligate AccessCare to issue any shares of capital stock or other securities nor is AccessCare obligated in any other manner to issue shares of its capital stock or other securities. Except as set forth in the Disclosure Schedule, there are no restrictions on the transfer of shares of capital stock of AccessCare other than those imposed by relevant state and federal securities laws or the Transaction Documents. Prior to the Closing, no holder of any security of AccessCare is entitled to preemptive or similar statutory or contractual rights, either arising pursuant to any agreement or instrument to which AccessCare is a party or that are otherwise binding upon AccessCare. The offer and sale of all shares of capital stock or other securities of AccessCare issued before the Closing complied with or were exempt from registration or qualification under all federal and state securities laws. 5.10 FINANCIAL STATEMENTS. The unaudited financial statements of AccessCare for the year ended May 31, 1994, as reviewed by Arthur Andersen & Co. and unaudited financial statements for the 11 months ended April 30, 1995 (collectively, the "Financial Statements"), copies of which Financial Statements, along with any officers' reports, have heretofore been delivered to Investor or its counsel and are attached to the Disclosure Schedule, and fairly present the financial position and results of operations of AccessCare for the periods covered. The financial statements for the year ended May 31, 1994 were prepared in accordance with generally accepted accounting principles consistently applied throughout the period involved. 5.11 ABSENCE OF CHANGES. Since May 31, 1994: (i) AccessCare has not entered into any material transaction which was not in the ordinary course of its businesses; (ii) there has 9 16 been no materially adverse change in the condition (financial or otherwise), business, properties, assets, or liabilities of AccessCare; (iii) there has been no damage to or destruction or loss of physical property of AccessCare (whether or not covered by insurance) materially adversely affecting the business or operations of AccessCare; (iv) AccessCare has not declared or paid any dividend or made any distribution on its capital stock or redeemed, purchased or otherwise acquired any of its capital stock (other than as contemplated by the Transaction Documents); (v) there has been no organized labor dispute involving AccessCare or any of its employees and none is pending or, to the best knowledge of AccessCare threatened; (vi) there has been no material adverse change, except in the ordinary course of business, in the contingent obligations of AccessCare, by way of guaranty, endorsement, indemnity, warranty, or otherwise; (vii) AccessCare has not mortgaged, pledged, transferred a security interest in, or subjected to lien any of its properties or assets, except (A) liens for current taxes not yet delinquent, (B) liens imposed by law and incurred in the ordinary course of business for obligations not yet due to carriers, warehousemen, laborers, materialmen and the like, (C) liens in respect of pledges or deposits under workers' compensation laws or similar legislation, (D) minor defects in title which, individually or in the aggregate, do not materially interfere with the use of such property, (E) liens outstanding and in the aggregate less than $10,000 or (F) liens disclosed in the Financial Statements or the notes thereto (collectively, the "Liens"); and (viii) to the best knowledge of AccessCare, there has been no other event or condition of any character specifically relating to AccessCare which specifically pertains to and materially adversely affects its business, properties or condition, financial or otherwise. 5.12 PROPERTY. (a) Except for the Liens, AccessCare has good and marketable title to, or a valid leasehold interest in, its properties and assets in each case free and clear of all liens, claims, security interests, charges and encumbrances and has the right to use all the assets it presently uses in the operation of its business. The properties and assets of AccessCare in all material respects are in good working order, operating condition and state of repair, ordinary wear and tear excepted. (b) All of the accounts receivable reflected on the balance sheet at April 30, 1995 included in the Financial Statements, and all accounts receivable created after the date hereof as of the Closing, arose from valid sales in the ordinary course of business and are generally collectible in the ordinary course of business, subject to reserves for uncollectible accounts set forth in the Financial Statements. 5.13 SUBSIDIARIES. AccessCare does not control, directly or indirectly, any other corporation, association, partnership, joint venture or other business entity or own any shares of capital stock or other securities of any other Person. 5.14 TAXES AND TAX RETURNS. Except as disclosed in the Disclosure Schedule: (i) AccessCare has duly filed all tax returns which are required by law to be filed by it ("Tax Return"); (ii) AccessCare has duly paid all taxes due or claimed to be due from it ("Taxes") (whether or not shown on any Tax Return), and there are no assessments or claims for payment of Taxes now pending or, to the knowledge of AccessCare after due inquiry, threatened, nor is there any audit of the records of AccessCare being made or, to the knowledge of AccessCare after due inquiry, threatened by any taxing authority; (iii) each Tax Return of AccessCare 10 17 previously filed, or to be filed in the future relating to any period up to the date of Closing, is or will be (as the case may be) correct and complete in all material respects; and (iv) AccessCare is not currently the beneficiary of any extension of time within which to file any Tax Return. 5.15 INSURANCE. Set forth in the Disclosure Schedule is a complete list of all insurance policies currently maintained by AccessCare and in effect and, with respect to each of such policies, a general description of the risks covered and claims insured. Copies of all of such policies will have been furnished or made available to Investor or its representatives upon reasonable request. 5.16 CERTAIN TRANSACTIONS. AccessCare is not indebted, either directly or indirectly, to any of the officers or directors of AccessCare, or to their respective spouses or children, in any amount whatsoever, other than for payment of salary for services rendered and reasonable expenses, and none of said officers or directors or any members of their immediate families, are indebted to AccessCare. 5.17 CONTRACTS AND COMMITMENTS. (a) Except as expressly contemplated by this Agreement, or as set forth in the Disclosure Schedule, and to the best of AccessCare's knowledge, as of the Closing AccessCare will not be a party to, or bound by, any currently effective written or oral agreement except for any entered into in the ordinary course of its business. (b) AccessCare has performed in all material respects all obligations required to be performed by it and is not in default under, in material breach of or, after due inquiry, in receipt of any written claim, or other claim that is otherwise known by AccessCare, of default under or breach of any material agreement disclosed in the Disclosure Schedule to which it is a party or to which its assets are subject and AccessCare has no present expectation or intention of not fully performing all such obligations. 5.18 EMPLOYMENT BENEFIT PLANS. (a) Set forth in the Disclosure Schedule is a complete list of all employee benefit plans, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), and all other profit-sharing, deferred compensation, bonus, stock option, stock purchase, vacation pay, holiday pay, and other compensation arrangements maintained or contributed to by AccessCare for the benefit of its employees (or former employees) and/or their beneficiaries. Both of these types of plans shall be collectively referred to as "Benefit Plans." AccessCare does not have, nor has it ever had, any Benefit Plan that is or was subject to Title IV of ERISA or any "multiemployer plans" (as defined in Section 3(37) of ERISA). (b) Each Benefit Plan complies currently, and has complied in the past, in form and operation, in all material respects with all applicable law including ERISA and the Code (including Section 4980B thereof), except any such failure to comply which would not have a material adverse effect on AccessCare. No excise tax is due or owing from AccessCare with respect to any "prohibited transaction" (as defined in Section 4975(c)(1) of the Code) relating to any of the Benefit Plans. There are no lawsuits or other claims, pending or, to the knowledge of AccessCare after due inquiry, threatened (other than routine claims for benefits under the plan) 11 18 against (i) any Benefit Plan, or (ii) any "fiduciary" of such plan (within the meaning of Section 3(21)(A) of ERISA) brought on behalf of any participant, beneficiary or fiduciary thereunder, nor is there any reasonable basis for any such claim. 5.19 PATENTS, COPYRIGHTS AND TRADEMARKS. AccessCare has sufficient title to and ownership of, or has sufficient licenses to, or can obtain on terms which will not result in any material adverse effect on its business, all necessary patents, licenses, trademarks, service marks, trade names, copyrights, trade secrets, inventions, franchises, computer software and other proprietary rights necessary for its business as now conducted, without any conflict with or infringement of the rights of others. 5.20 ENVIRONMENTAL MATTERS. AccessCare has not, contrary to applicable statutes and regulations now in effect, stored or disposed of on, under or about its existing or prior premises hazardous materials, and to the best of AccessCare's knowledge, during the time period any prior owners owned or leased such premises, such prior owners or lessees or third parties did not, contrary to applicable statutes and regulations now in effect, so store or dispose of on, under or about such premises or transfer to or from the premises any hazardous materials. As used in this Agreement, the term "hazardous materials" shall mean substances defined as "hazardous substances" or "hazardous materials" or "toxic substances" in the Comprehensive Environmental Response and Compensation Liability Act of 1980, as amended, 42 U.S.C., Section 9601, et seq.; The Hazardous Materials Transportation Act, 49 U.S.C., Section 1801, et seq.; The Resource Conservation Recovery Act, 42 U.S.C., Section 6901, et seq.; and those substances defined as hazardous wastes or hazardous substances in any applicable Florida statutes or codes and any regulations or publication promulgated pursuant to any of said laws or regulations. 5.21 COMPLIANCE WITH LAWS, CERTIFICATES. AccessCare has complied in all material respects with all applicable United States' federal, state, municipal and other political subdivision or governmental agency statutes, ordinances and regulations. All certificates, licenses, approvals and permits necessary in connection with the present use and operation of AccessCare's business and the real property on which such business is located, and the lawful occupancy thereof, have been issued by the appropriate governmental authorities, except such certificates, licenses, approvals, and permits the failure of which to be issued would not have a material adverse effect on AccessCare. To the best knowledge of AccessCare, all such licenses, approvals, permits and certificates shall continue in full force and effect after giving effect to the transactions contemplated hereby. 5.22 DISCLOSURE. No representation, warranty or statement by AccessCare in this Agreement or in any written statement or certificate required to be furnished to Investor or its counsel pursuant to this Agreement contains or will contain any untrue statement of material fact or omits or will omit to state a material fact necessary to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading, it being understood that Investor has not received or been provided with a "prospectus" (as defined in the Securities Act) covering AccessCare. 12 19 5.23 ABSENCE OF UNDISCLOSED LIABILITIES. Neither does AccessCare have any debt, liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, nor, to the knowledge of AccessCare's management, is there any basis for the assertion against AccessCare of any such debt, liability and/or obligation, except for (i) debts, liabilities and/or obligations described in the Disclosure Schedule; or (ii) debts, liabilities and/or obligations reserved or reflected in the Financial Statements or incurred in the ordinary course of business after April 30, 1995. 5.24 PROJECTIONS. Management of AccessCare has prepared the Financial Projections of AccessCare attached hereto as Exhibit 5.24 (the "Projections"). To the best knowledge of the management of AccessCare, the Projections are based on reasonable assumptions, subject to, among other things, changes adversely affecting the industry generally, and, in management's reasonable judgment, the results presented in the Projections are reasonably achievable results based on the assumptions presented. Nothing in this Section 5.24 shall be construed as a representation or warranty of AccessCare to Investor that AccessCare will actually achieve the financial results set forth in the Projections. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF INVESTOR Investor represents and warrants to AccessCare that: 6.1 RESTRICTED SHARES. Investor has been advised that the Series A Preferred Stock has not been registered under the Securities Act nor qualified under any state securities laws on the ground, among others, that no distribution or public offering of the Series A Preferred Stock is to be effected, and that in this connection AccessCare is relying in part on the representations of Investor set forth herein. 6.2 INVESTMENT INTENT. Investor's intention is to acquire the Series A Preferred Stock for its own account and that the securities are being and will be acquired for the purpose of investment and not with a view to distribution or resale thereof. 6.3 ABILITY TO BEAR RISK. Investor is able to bear the economic risk of an investment in the Series A Preferred Stock acquired by it pursuant to this Agreement and can afford to sustain a total loss on such investment. 6.4 INVESTMENT EXPERIENCE. Investor is an experienced and sophisticated investor, is able to fend for itself in the transactions contemplated by this Agreement and has such knowledge and experience in financial and business matters that it is capable of evaluating the risks and merits of acquiring the Series A Preferred Stock. It has not been formed or organized for the specific purpose of acquiring the Series A Preferred Stock. Investor has had, during the course of this transaction and prior to its purchase of the Series A Preferred Stock, the opportunity to ask questions of, and receive answers from, AccessCare and its management concerning AccessCare and the terms and conditions of this Agreement. Investor hereby acknowledges that it or its representatives have received all such information as it considers necessary for evaluating the risks and merits of acquiring the Series A Preferred Stock and for verifying the accuracy of any information furnished to it or to which it had access. Investor represents and warrants that 13 20 the nature and amount of the Series A Preferred Stock it is purchasing is consistent with its investment objectives, abilities and resources. Investor's representation's and warranties in this Section do not limit AccessCare's liability for a breach of its representations or warranties under this Agreement. 6.5 UNMARKETABLE SHARES. Investor understands that there is no public market for the Series A Preferred Stock and that there may never be a public market, and that even if a market develops it may never be able to sell or dispose of the Series A Preferred Stock and may thus have to bear the risk of its investment for a substantial period of time, or forever. Investor is aware that none of the Series A Preferred Stock may be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions have been met and until Investor has held the Series A Preferred Stock for at least two (2) years. Among the conditions for use of the Rule is the availability of current information to the public about AccessCare. Investor understands that AccessCare has not made such information available and has no present plans to do so. 6.6 ACCREDITED INVESTOR. Investor is an "accredited investor" for purposes of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act and the rules of the Florida Department of Banking and Finance and is not counted for purposes of Section 517.061(11)(a) of the Florida Securities and Investor Protection Act or Section 25102(f) of the California Corporate Securities Law of 1968. 6.7 CORPORATE ASSETS. Investor is a corporation with assets of $500,000 or more for purposes of Section 517.061(8) of the Florida Securities and Investor Protection Act. 6.8 LEGENDS. Investor acknowledges that the certificates representing the Series A Preferred Stock and any other securities receivable by Investor pursuant to this Agreement, when issued, shall contain substantially the following legend, in addition to any other legends required by the Transaction Documents: THE SECURITIES REPRESENTED BY THIS CERTIFICATE (INCLUDING ANY SECURITIES ISSUABLE ON CONVERSION, EXCHANGE OR WITH RESPECT TO ANY OTHER RIGHT CONNECTED HEREWITH) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. ANY TRANSFEREE OR ISSUEE OF SUCH SECURITIES MAY BE REQUIRED TO PROVIDE APPROPRIATE INVESTMENT REPRESENTATIONS PRIOR TO ANY SUCH TRANSFER OR ISSUANCE. 6.9 DUE AUTHORIZATION. Investor has duly authorized, executed and delivered this Agreement, the Transaction Documents and any other agreements and instruments executed in connection herewith or therewith. 14 21 6.10 BINDING EFFECT. This Agreement and such other agreements and instruments constitute the valid and binding obligations of Investor, enforceable against it in accordance with their respective terms. 6.11 CONSENTS AND APPROVALS. No consent or approval of any Person is required in connection with the execution, delivery and performance of this Agreement and such other agreements and instruments by Investor which has not heretofore been obtained. 6.12 CONTRACTS AND COMMITMENTS. The execution and performance of this Agreement shall not result in a material default of other agreements or instruments by Investor. 6.13 NO BROKERS OR FINDERS. No Person has or will have, as a result of the transactions contemplated by this Agreement, any right, interest or valid claim upon or against AccessCare for any commission, fee or other compensation as a finder or broker because of any act or omission by Investor, and Investor agrees to indemnify and hold AccessCare harmless against all liability for or related to any such commissions, fees or other compensation. ARTICLE VII COVENANTS OF ACCESSCARE AND INVESTOR 7.1 REPORTING REQUIREMENTS. AccessCare will furnish the following to each holder who owns of record or beneficially or has the right to acquire from AccessCare any shares of Series A Preferred Stock as soon as available, and in any event within ninety (90) days after the end of each fiscal year of AccessCare, (a) respecting the fiscal year ending on May 31, 1995, and each subsequent fiscal year of AccessCare, a copy of the annual audit report for such year for AccessCare and its Subsidiaries, including therein Consolidated and consolidating balance sheets of AccessCare and its Subsidiaries as of the end of such fiscal year and Consolidated and consolidating statements of income and retained earnings and of statements of cash flow of AccessCare and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year, all duly certified by a "Big Six" independent public accounting firm; (b) at the time of delivery of each annual financial statement pursuant to the preceding clause (a), a certificate executed by the chief financial officer of AccessCare stating that such officer has caused this Agreement and the terms of the Certificate of Designation to be reviewed and has no knowledge of any default by AccessCare in the performance or observance of any of the provisions of this Agreement or the Certificate of Designation, or if such officer has such knowledge, specifying such default and the nature thereof; (c) promptly following receipt by AccessCare, each audit response letter, accountant's management letter and other written report submitted to AccessCare by its independent public accountants in connection with an annual or interim audit of the books of AccessCare or any of its subsidiaries; (d) promptly after the commencement thereof, notice of all actions, suits, claims, proceedings, investigations and inquiries of any type that could materially adversely affect AccessCare or any of its subsidiaries; (e) promptly upon sending, making available or filing the same, all press releases, reports and financial statements that AccessCare sends or makes available to its shareholders or files with the Securities and Exchange Commission; and (f) promptly, from time to time, such other information regarding the business, prospects, financial condition, operations, property or affairs 15 22 of AccessCare and its subsidiaries as Investor reasonably may request. Any Person receiving the information agrees to hold such information in confidence to the same extent that would be required of a member of AccessCare's Board of Directors. 7.2 AFFIRMATIVE COVENANTS OF ACCESSCARE OTHER THAN REPORTING REQUIREMENTS. Without limiting any other covenants and provisions hereof, AccessCare covenants and agrees that, so long as any of the shares of Series A Preferred Stock remain outstanding and are held by Investor and prior to a Qualified Public Offering, it will perform and observe the following covenants and provisions and will cause each Subsidiary to perform and observe such of the following covenants and provisions as are applicable to such Subsidiary, and will not, without approval of holders of the Series A Preferred Stock, amend or revise any terms of this Section 7.2. (a) PAYMENT OF TAXES AND TRADE DEBT. AccessCare shall pay and discharge, and cause each Subsidiary to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or business, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims, which, if unpaid, might become a lien or charge upon any properties of AccessCare or any Subsidiary, provided that neither AccessCare nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim that is being contested in good faith and by appropriate proceedings if AccessCare or Subsidiary concerned shall have set aside on its books adequate reserves with respect thereto as shall be determined by its Board of Directors. AccessCare shall pay and cause each Subsidiary to pay, when due, or in conformity with customary trade terms, all lease obligations, all trade debt, and all other Indebtedness incident to the operations of AccessCare or its Subsidiaries, except such as are being contested in good faith and by appropriate proceedings if AccessCare or Subsidiary concerned shall have set aside on its books adequate reserves with respect thereto as shall be determined by its Board of Directors. (b) MAINTENANCE OF INSURANCE. AccessCare shall maintain, and cause each Subsidiary to maintain, with responsible and reputable insurance companies or associations insurance in such amounts and covering such risks as is usually carried by companies of similar size engaged in similar businesses and owning similar properties in the same general areas in which AccessCare or such Subsidiary operates. (c) PRESERVATION OF CORPORATE EXISTENCE. AccessCare shall preserve and maintain, and cause each Subsidiary to preserve and maintain, its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership of its properties. AccessCare shall preserve and maintain, and cause each Subsidiary to preserve and maintain, all material licenses and other rights to use patents, processes, licenses, trademarks, trade names, inventions, intellectual property rights or copyrights owned or possessed by it and necessary to the conduct of its business. (d) COMPLIANCE WITH LAWS. AccessCare shall comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations and orders of any United States' federal or State governmental authority, noncompliance with which could materially adversely affect its business or condition, financial or otherwise, except 16 23 non-compliance being contested in good faith through appropriate proceedings so long as AccessCare shall have set up sufficient reserves, if any, required under generally accepted accounting principles with respect to such items. (e) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. AccessCare shall keep, and cause each Subsidiary to keep, adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of AccessCare and such Subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection within its business shall be made. (f) MAINTENANCE OF PROPERTIES, ETC. AccessCare shall maintain and preserve, and cause each Subsidiary to maintain and preserve, all of its properties necessary or useful in the proper conduct of its business, in good repair, working order and condition, ordinary wear and tear excepted. (g) BUDGETS AND BOARD APPROVAL. Prior to the commencement of each fiscal year, AccessCare shall prepare and submit to, and obtain the approval of a majority of, the Board of Directors a budget and operating plan for the then upcoming fiscal year, including projections or forecasts of capital and operating expenses, cash flow, and profits and losses, all itemized in reasonable detail and attempt to obtain the approval of such budget and plan not more than sixty (60) days following the end of the prior fiscal year. (h) FINANCINGS. AccessCare shall promptly, fully and in detail, inform the Board of Directors in advance of any commitments or contracts relating to financing of any nature in which AccessCare pledges corporate assets, other than under purchase money security interests secured only by the assets purchased with such financing in the ordinary course of business. (i) BOARD OF DIRECTORS; INDEMNIFICATION. The Board of Directors shall consist of five (5) directors, elected pursuant to the Certificate of Designation. The bylaws of AccessCare shall provide for a maximum authorized number of directors equal to or less than (5) directors, except with the prior written consent of Investor, which shall not be unreasonably withheld. The articles of incorporation or bylaws of AccessCare shall at all times provide for the indemnification of the Board of Directors to the full extent provided by the law of the jurisdiction in which AccessCare is organized. AccessCare shall use its best efforts to obtain and maintain directors and officers liability insurance with coverage and premium levels consistent with policies carried by similar companies of similar size. AccessCare shall pay for reasonable travel and living expenses of the members of the Board of Directors in attending meetings of the Board of Directors and committees thereof and in conducting other business on behalf of AccessCare. (j) BOARD OF DIRECTORS MEETINGS. AccessCare shall use its best effort to ensure that meetings of its Board of Directors are held at least once each calendar quarter. (k) COMPENSATION COMMITTEE. AccessCare shall have a Compensation Committee of the Board of Directors, which shall be comprised of two directors designated by CompCare and one director designated by the Investor. The Compensation Committee shall 17 24 determine management compensation, including the awarding of any stock options or other non-cash compensation to the management of AccessCare. (l) INSPECTION, CONSULTATION AND ADVICE. AccessCare shall permit and cause each of its Subsidiaries to permit Investor and such persons as Investor may designate, at Investor's expense, as applicable, to visit and inspect any of the properties of AccessCare and its Subsidiaries, examine their books and take copies and extracts therefrom, discuss the affairs, finances and accounts of AccessCare and its Subsidiaries with their officers, employees and public accountants (and AccessCare hereby authorizes said accountants to discuss with Investor and such designees such affairs, finances and accounts), and consult with and advise the management of AccessCare and its Subsidiaries as to their affairs, finances and accounts, all at reasonable times and upon reasonable notice. (m) USE OF PROCEEDS. AccessCare shall use the proceeds from the sale of the Series A Preferred Stock for repayment of existing debts of AccessCare and/or for working capital. AccessCare will not use the proceeds to pay existing debt to CompCare, other than to reimburse CompCare for funds it has advanced to the suppliers or vendors of AccessCare for bona fide costs or expenses of AccessCare. (n) BY-LAWS. AccessCare shall at all times cause its By-laws to provide that (a) unless otherwise required by the laws of the state of its incorporation, any two directors and any holder or holders of at least 75% of the outstanding shares of Series A Preferred Stock shall have the right to call a meeting of the Board of Directors or shareholders; and (b) the number of directors fixed in accordance therewith shall in no event conflict with any of the terms of the Series A Preferred Stock as set forth in the Certificate of Designation. 7.3 NEGATIVE COVENANTS OF ACCESSCARE. Without limiting any other covenants and provisions hereof, AccessCare covenants and agrees that, so long as any of the shares of Series A Preferred Stock remain outstanding and are held by Investor or until a Qualified Public Offering, it will not take the actions contained in the following covenants and provisions, and will cause each Subsidiary to not take actions contained in the following covenants and provisions as are applicable to such Subsidiary, and will not, without the approval of holders of the Series A Preferred Stock voting as a separate class, amend or revise any terms of this Section 7.3: (a) DEALINGS WITH AFFILIATES AND OTHERS. Except as specifically contemplated by this Agreement, AccessCare shall not enter into any transaction, including, without limitation, any loans or extensions of credit or royalty agreements, with CompCare, or any officer or director of CompCare, or any officer or director of AccessCare or any officer or director of any Subsidiary or holder of any class of capital stock of AccessCare, or any member of their respective immediate families or any corporation or other entity directly or indirectly controlled by one or more of such officers, directors or shareholders or members of their immediate families (other than any such transactions in the ordinary course of business which are specifically determined by the Board of Directors to be beneficial to AccessCare and on terms no less favorable to AccessCare than would be available from any unrelated third party under similar circumstances). All corporate allocations between CompCare and AccessCare will be fair and reasonable and represent fair value for actual services rendered. 18 25 (b) DIVIDENDS. AccessCare shall not prior to a Qualified Public Offering or while the Series A Preferred Stock is outstanding, declare or pay any dividends on any class of AccessCare's or any Subsidiary's capital stock now or hereafter outstanding (other than dividends on the Series A Preferred Stock or payable in Common Stock or by any Subsidiary either to AccessCare or to another Subsidiary that is the parent of the paying Subsidiary), or purchase, redeem or otherwise acquire or retire any of AccessCare's or any Subsidiary's capital stock of any class now or hereafter outstanding or otherwise return capital or make distributions of assets to shareholders as such, which would reduce the aggregate amount invested by CompCare in debt or equity of AccessCare below $3,750,000 as determined in accordance with Generally Accepted Accounting Principles. (c) RESTRICTIVE AGREEMENTS PROHIBITED. Neither AccessCare nor any of its Subsidiaries shall become a party to any agreement that by its terms restricts AccessCare's performance of this Agreement or the Certificate of Designation. (d) COMPENSATION. AccessCare shall not pay any compensation to its management employees unless such compensation shall have been approved by the Compensation Committee of the Board of Directors. In no event shall such compensation exceed the compensation customarily paid to management in companies of similar size, of similar maturity, and in similar businesses, as AccessCare. 7.4 CONFIDENTIALITY. Any information obtained by Investor any holder of the Series A Preferred Stock pursuant to this Agreement, prior to or following the Closing, shall be treated as confidential and shall not be disclosed to a third party without the consent of the Board of Directors, except that such information shall not be deemed confidential for the purpose of enforcement of this Agreement or valuation of the Series A Preferred Stock or other capital stock and except that any such holder may otherwise disclose such information to its partners (or its third party valuation firm for the purpose of valuing the Series A Preferred Stock or other capital stock) if such partners (and valuation firm) agree to be bound by the restrictions contained in this Section 6.3, and except for disclosure (i) in response to legal process, (ii) to the extent required to comply with applicable law, or (iii) to the extent disclosed to any bank, finance company or other lender or investor in connection with the financing of the transactions contemplated by this Agreement. Investor shall not be obligated to maintain as confidential any information obtained from AccessCare which is publicly available, readily available from public sources, known to it at the time the information was disclosed or which was rightly obtained from a third party. At the request of the Board of Directors, any Person receiving any information pursuant to this Agreement shall execute reasonable confidentiality agreements consistent with this Section 7.4. 7.5 COOPERATION. So long as Investor remains an equity holder of AccessCare, Investor and its Subsidiaries will negotiate in good faith to contract with AccessCare for the delivery of mental health services in all of Investor's and its subsidiaries' service areas where AccessCare or a subsidiary then has an adequate network. The AccessCare capitation rate to Investor and its subsidiaries shall be the rate competitive with those rates charged to like customers by behavioral health care companies for similar services in specific service areas. The provisions of this Section 7.5 shall inure to the benefit of, and be binding upon, the successors of the parties hereto. 19 26 ARTICLE VIII RIGHT TO PARTICIPATE IN FINANCINGS 8.1 RIGHT OF PARTICIPATION. Until AccessCare has completed a Qualified Public Offering, Investor shall have a preemptive right to purchase or subscribe for (i) any shares of Common Stock, (ii) any other equity security of AccessCare, including, without limitation, shares of Preferred Stock, (iii) any option, warrant or other right to subscribe for, purchase or otherwise acquire any equity security of AccessCare, or (iv) any Debt Securities (the "Offered Securities"). Investor's preemptive right in this Article VIII shall however be only to purchase or subscribe for that portion of the Offered Securities as the aggregate number of shares of Common Stock (as adjusted for any stock dividends, combinations or splits with respect to such shares) then held by or issuable upon conversion of Preferred Stock to Investor bears to the total number of shares of Common Stock (as adjusted for any stock dividends, combinations or splits with respect to such shares) of AccessCare then held by or issuable to any Person. 8.2 EXCEPTIONS. The rights of Investor under this Article VIII shall not apply to: (a) Common Stock issued as a stock dividend to holders of Common Stock or upon any subdivision or combination of shares of Common Stock; or (b) the issuance of shares of Common Stock, or options exercisable therefor, including options outstanding on the date of this Agreement (such number to be equitably adjusted in the event of any stock split, combination, reclassification or other similar event occurring on or after the date of this Agreement) issuable to officers, directors or employees of the Company and any Subsidiary pursuant to any stock option agreement or plan or stock purchase agreement or plan approved by a vote of the Compensation Committee of the Board of Directors, provided that the aggregate number of shares issued or issuable to such persons shall not exceed ten percent (10%) of the outstanding shares of Common Stock of the Company at the Closing on a fully-diluted basis; or (c) the issuance of any shares of Common Stock in connection with any public offering by AccessCare; or (d) the issuance of any shares of capital stock or other securities in connection with a merger of AccessCare with or into another entity, or a purchase or sale of assets of AccessCare; provided, that in each such case such transaction is in compliance with the terms of the First Right of Refusal Agreement; or (e) Common Stock issued upon conversion of Series A Preferred Stock or exercise or conversion of any Offered Securities issued in accordance with the requirements of this Section. 8.3 NO ASSIGNMENT OF RIGHTS. Investor may not assign its rights hereunder, whether in connection with any transfer of its Series A Preferred Stock or otherwise. 20 27 ARTICLE IX OBLIGATIONS PENDING THE CLOSING Between the date hereof and the Closing, unless this Agreement is terminated sooner, pursuant to Section 12.6 hereof: 9.1 ACCESS. AccessCare shall give to Investor and its counsel, accountants and other authorized representatives from and after the date of execution of this Agreement, on prior request therefor from Investor or such representatives, such access to the premises, employees, agents and consultants of AccessCare, and such copies of AccessCare's financial statements, books and records, and contracts and leases and other documentation, so as to enable Investor to inspect and evaluate all aspects of the business and operations, assets, operating results, financial condition, future prospects, capitalization, ownership, and legal and regulatory affairs of AccessCare and to verify the accuracy of the information heretofore furnished to Investor and the representations and warranties made in this Agreement, by AccessCare with respect to the foregoing matters. AccessCare will furnish all information reasonably requested by Investor. Investor agrees to conduct its review in a manner designed to minimize any disruption of AccessCare's operations. 9.2 CONDUCT OF COMPANY'S BUSINESS. Unless Investor gives its prior written consent for actions to be taken to the contrary, from the date of this Agreement and until the Closing or termination of this Agreement, whichever first occurs, AccessCare shall: (a) COMPENSATION. Operate and conduct AccessCare's business and operations diligently and only in the ordinary course of business consistent with past practices. AccessCare shall not increase the compensation or benefits of any employee, independent contractor or agent or adopt or amend any commission plan or arrangement or any employee benefit plan or arrangement of any type which results or may result in an increase in costs or liabilities thereunder of more than $25,000 per month, in the aggregate, above those existing on the date hereof, or otherwise lend or advance any sum or extend credit to any employee, director or shareholder or any of their respective affiliates; (b) ORGANIZATION. Preserve intact AccessCare's organization and use its reasonable best efforts to retain all employees of and consultants to AccessCare, commensurate with the requirements of AccessCare's business; (c) VENDORS. Use its reasonable best efforts to retain the services of all vendors, suppliers, agents and consultants used in AccessCare's business, commensurate with the requirements of AccessCare's business; (d) INSURANCE. Use its reasonable best efforts to maintain insurance, including liability and errors and omissions insurance, consistent with past practices and, unless comparable insurance is substituted therefor or is not generally available to businesses of the type conducted by AccessCare, not take any action to terminate or modify, nor permit the lapse or termination of, the present insurance policies and coverages of AccessCare as set forth in the Disclosure Schedule; 21 28 (e) LAWSUITS, CLAIMS. Promptly notify Investor of, and if requested by Investor, use its reasonable best efforts to defend against, all lawsuits, claims, proceedings or investigations that are, or which any officers of AccessCare, as a result of events or circumstances actually known to them, has reason to believe may be, threatened, brought, asserted or commenced against AccessCare or any of its officers or directors, involving or affecting in any way AccessCare's business or operations, or any of its assets, or the Series A Preferred Stock or the transactions contemplated hereby; (f) CERTAIN CHANGES. Not sell or otherwise dispose, or enter into any agreement for the sale, of any of its assets or properties, except in the ordinary course of business and consistent with past practices, and not permit or allow, or enter into any agreements providing for or permitting, any of its assets or properties to be subjected to any mortgage, security interest, pledge, option, lien, charge or encumbrance other than liens or security interests in existence on the date hereof and statutory liens to secure taxes that are not yet due and payable; (g) CONDITION OF ASSETS. Maintain in good working order and condition, ordinary wear and tear excepted, and in compliance in all material respects with all applicable laws and regulations, all vehicles, machinery, equipment, computers, furniture, fixtures, tools, and other tangible assets, wherever located, that are used, leased or owned by AccessCare; (h) TAXES. Pay, when due, and prior to the imposition or assessment of any interest, penalties or liens by reason of the non-payment of, all Taxes assessed against AccessCare, any of its assets or its operations; (i) DIVIDENDS, ETC. Except as contemplated by this Agreement not: (i) declare or pay any dividends or make any distributions with respect to or redeem any shares of AccessCare's capital stock; (ii) accelerate the payment of or prepay any indebtedness or other obligations of AccessCare; (iii) approve or effect any reclassification or recapitalization of AccessCare or its authorized or outstanding shares; (iv) merge or consolidate AccessCare with or sell any of its assets to a third party other than sales of assets in the ordinary course of business and consistent with past practices; (v) approve or commence any proceedings for the liquidation of AccessCare; or (vi) enter into any agreement to do any of the foregoing; (j) CORPORATE MATTERS. Other than to provide for the Series A Preferred Stock, not: (i) amend in any manner the articles of incorporation or bylaws of AccessCare; (ii) alter the composition or membership of AccessCare's Board of Directors; (iii) except for shares purchased upon exercise of outstanding options, authorize or issue any shares of capital stock of any class or series; (iv) create or issue any warrants, obligations, subscriptions, options, convertible securities or other commitments under which any additional shares of the capital stock of any class or other equity securities of AccessCare may be directly or indirectly authorized, issued or transferred; or (v) agree to do any of the above; and (k) LIABILITIES AND EXPENSES. Not create or incur (whether as principal, surety or otherwise) any actual or contingent liabilities or expenses other than liabilities and expenses incurred in the ordinary course of business consistent with past practices. 22 29 9.3 CONSENTS. Each party to this Agreement shall use its reasonable best efforts to obtain or cause to be obtained at the earliest practicable date, and prior to the Closing, all consents, approvals and licenses, if any, which such party requires to permit it to consummate the transactions contemplated hereby without violating any material agreement, contract, instrument or applicable law or regulation, license or permit, to which it is a party or to which it or its assets are subject. The parties hereto shall cooperate with each other in their efforts to obtain all such consents, approvals and licenses. 9.4 NOTICE OF BREACH. Each party to this Agreement will immediately give notice to the other parties of the occurrence of any event, or the failure of any event to occur, that results in a breach by it of any representation or warranty or a failure by it to comply with or fulfill any covenant, condition or agreement contained herein. ARTICLE X SURVIVAL OF REPRESENTATIONS AND WARRANTIES 10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement, or any other Transaction Document or instrument or document delivered on or before the Closing referred to herein or therein, shall survive the Closing and the consummation of the transactions contemplated hereby and shall expire one hundred fifty (150) days after AccessCare's fiscal year ending May 31, 1996. Notwithstanding the foregoing, the representations and warranties made by AccessCare in Sections 5.6 and 5.9 shall survive the Closing indefinitely. ARTICLE XI INDEMNIFICATION 11.1 INDEMNIFICATION BY ACCESSCARE. AccessCare shall defend, indemnify and hold harmless Investor and its respective officers, directors, employees, successors and assigns in respect of any and all claims, actions, suits or other proceedings and any and all losses, costs, expenses, liabilities, fines, penalties, interest and damages, whether or not arising out of any claim, action, suit or other proceeding (and including reasonable counsel and accountants' fees and expenses and all other reasonable costs and expenses of investigation, defense or settlement of claims and amounts paid in settlement) ("Damages") incurred by, imposed on or borne by Investor or AccessCare resulting from the breach of any of the representations, warranties, covenants or agreements made by AccessCare in this Agreement. 11.2 LIMITATIONS ON INDEMNIFICATION BY ACCESSCARE. Anything to the contrary notwithstanding herein, (i) Investor shall not be indemnified and held harmless in respect of any Damages which are covered by insurance owned by AccessCare to the extent that any net loss is reduced by such insurance; (ii) Investor shall not be indemnified and held harmless in respect of any Damages until the total of all Damages covered by indemnification under this section exceeds an aggregate indemnification deductible of Twenty- five Thousand Dollars ($25,000), at which point all Damages incurred above such amount are covered; and (iii) the liability of AccessCare shall be limited to an aggregate amount equal to One Million Dollars ($1,000,000). 23 30 11.3 INDEMNIFICATION BY INVESTOR. Investor shall defend, indemnify and hold harmless AccessCare in respect of any and all Damages incurred by, imposed on or borne by AccessCare resulting from the breach of any of the representations, warranties, covenants or agreements made by Investor pursuant to this Agreement. 11.4 LIMITATIONS ON INDEMNIFICATION BY INVESTOR. Anything to the contrary notwithstanding herein, (i) AccessCare shall not be indemnified and held harmless in respect of any Damages which are covered by insurance owned by Investor to the extent that any net loss is reduced by such insurance; (ii) AccessCare shall not be indemnified and held harmless in respect of any Damages until the total of all Damages covered by indemnification under this section exceeds an aggregate indemnification deductible of Twenty-five Thousand Dollars ($25,000), at which point all Damages incurred above such amount are covered; and (iii) the liability of Investor shall be limited to an aggregate amount equal to One Million Dollars ($1,000,000). 11.5 CLAIMS FOR INDEMNIFICATION. Whenever any claim shall arise for indemnification hereunder, the indemnified party ("Indemnitee") shall promptly notify the indemnifying party ("Indemnitor") of the claim and, when known, the facts constituting the basis for such claim; provided, however, that the Indemnitee's failure to give such notice shall not affect any rights or remedies of the Indemnitee hereunder with respect to indemnification for damages except to the extent that the Indemnitor is materially prejudiced thereby. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a third party, the notice to the Indemnitor shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The Indemnitee shall not settle or compromise any claim by a third party for which they are entitled to indemnification hereunder, without the prior written consent of the Indemnitor (which shall not be unreasonably withheld) unless suit shall have been instituted against it and the Indemnitor shall not have taken control of such suit after notification thereof as provided in Section 11.6 of this Agreement. 11.6 DEFENSE BY INDEMNITOR. In connection with any claim giving rise to indemnity hereunder or resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, Indemnitor at its sole cost and expense may, upon written notice to Indemnitee, assume the defense of any such claim or legal proceeding if they acknowledge to Indemnitee in writing its obligations to indemnify Indemnitee with respect to all elements of such claim, and thereafter diligently conduct the defense thereof with counsel reasonably acceptable to Indemnitee. Indemnitee shall be entitled to participate in (but not control) the defense of any such action with its counsel and at its own expense. If Indemnitor does not assume or fail to conduct in a diligent manner the defense of any such claim or litigation resulting therefrom, (i) Indemnitee may defend against such claim or litigation, in such manner as they may deem appropriate, including, but not limited to, settling such claim or litigation, after obtaining the consent thereto of Indemnitor (which consent shall not be unreasonably withheld), on such terms as Investor may deem appropriate, and (ii) Indemnitor shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If Indemnitor thereafter seeks to question the manner in which Indemnitee defended such third party claim or the amount or nature of any such settlement, Indemnitor shall have the burden to prove by a preponderance of the evidence that Indemnitee did not defend or settle such third party claim in a reasonably prudent manner. Each party agrees to cooperate fully with the other, such cooperation to include, without limitation, attendance at depositions and the provision of relevant documents as may be reasonably requested by the other party, provided that Indemnitor will hold 24 31 Indemnitee harmless from all of their expenses, including reasonable attorneys' fees, incurred in connection with such cooperation by Indemnitee. ARTICLE XII MISCELLANEOUS 12.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 12.2 AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this Agreement or the Series A Preferred Stock to the contrary notwithstanding, changes in or additions to this Agreement or the Series A Preferred Stock issued pursuant hereto may be made, and compliance with any covenant or provision herein or therein set forth may be omitted or waived, if AccessCare shall obtain consent thereto in writing from Persons holding a majority of the Series A Preferred Stock affected by the proposed change, addition or waiver; and shall, in each such case, deliver copies of such consent in writing to any holders who did not execute the same; provided, however, that no such consent shall be effective to reduce or to postpone the date fixed for the payment of the amount redeemable on the Series A Preferred Stock, without the consent of the respective holder thereof. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 12.3 ADDRESSES FOR NOTICES, ETC. All notices, requests, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or mailed, certified, return receipt requested, postage prepaid: (i) If to AccessCare, addressed to: AccessCare, Inc. 2203 North Lois Avenue, Suite 1150 Tampa, Florida 33607 Attention: Ronald G. Hersch, President with copies to: Comprehensive Care Corporation 4350 Von Karman, Suite 280 Newport Beach, California 92660 Attention: Drew Q. Miller, Chief Financial Officer 25 32 with a copy to: James A. Rowe Corporate Counsel AccessCare, Inc. 2203 N. Lois Avenue, Suite 1150 Tampa, Florida 33607 (ii) If to Investor addressed to Physician Corporation of America P.O. Box 527500 Miami, Florida 33152-7500 Attention: Peter E. Kilissanly, President and COO or delivered in person to Physician Corporation of America 5835 Blue Lagoon Drive Miami, Florida 33126 Attention: Peter E. Kilissanly, President and COO with a copy, in either case, to: John A. Hageman, Esq., General Counsel Physician Corporation of America 5835 Blue Lagoon Drive Miami, Florida 33126 Any party hereto may from time to time, upon written notice to the other parties, designate a different address, which shall be substituted for the one specified above for such party. If any notice or other document is sent by certified or registered mail, return receipt requested, postage prepaid, properly addressed as aforementioned, the same shall be deemed served or delivered forty-eight (48) hours after mailing thereof. If any notices are sent by facsimile ("fax") to a party, it will be deemed to have been delivered on the date the fax thereof is actually received, provided the original thereof is sent by mail in the manner set forth above within twenty-four (24) hours after the fax is sent. 12.4 COSTS, EXPENSES AND TAXES. Each of the parties agrees to pay all of its own costs and expenses in connection with the investigation, preparation, execution and delivery of this Agreement, the Series A Preferred Stock and other instruments and documents to be delivered hereunder and the transactions contemplated hereby and the other Transaction Documents, including the fees and out-of-pocket expenses of its legal counsel, independent public accountants and other outside experts. Any and all stamp and other taxes and any and all filing fees payable or determined to be payable in connection with the execution and delivery of this Agreement, the Series A Preferred Stock and other instruments and documents to be delivered hereunder or under other Transaction Documents shall be paid by the respective party thereto responsible therefor under applicable law. 26 33 12.5 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of AccessCare and Investor and their respective successors and assigns, except that neither party shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the other party. 12.6 TERMINATION. This Agreement may be terminated prior to the Closing (i) by the mutual consent of the parties hereto; (ii) by AccessCare if there has been a material misrepresentation or material breach on the part of Investor in the representations and warranties of Investor set forth herein, which, if curable, has not been cured within ten (10) business days after notice thereof by AccessCare; (iii) by Investor if there has been a material misrepresentation or material breach on the part of AccessCare or CompCare in the representations, warranties and covenants of CompCare or AccessCare set forth in the Transaction Documents, which, if curable, has not been cured within ten (10) business days after notice thereof by Investor; (iv) by AccessCare upon delivery to Investor of a written notice if any event occurs which renders impossible satisfaction of one or more of the conditions to the AccessCare's obligations contained in Article IV hereof and noncompliance is not waived by AccessCare; (v) by Investor upon delivery to AccessCare of a written notice if any event occurs which renders impossible satisfaction of one or more of the conditions to Investor's obligations contained in Article III hereof and noncompliance is not waived by Investor; and (vi) by any party by written notice to the other parties if the Closing shall not have occurred by the close of business on May 26, 1995, or such later date if the Closing is delayed by reason of any delay in receipt of confirmation of the filing of the Certificate of Designation of AccessCare. The termination of this Agreement except pursuant to subsection (i) shall not affect the right of any party to bring an action against another party for breach of this Agreement. 12.7 PRIOR AGREEMENTS. The Transaction Documents and this Agreement constitute the entire agreement of the respective parties to each thereof parties and supersede any prior understandings or agreements concerning the subject matter hereof, including without limitation the letter agreement dated March 22, 1995 among AccessCare, CompCare and Investor. 12.8 SEVERABILITY. The invalidity or unenforceability of any provision hereto shall in no way affect the validity or enforceability of any other provision. 12.9 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Florida. 12.10 HEADINGS. Article, Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 12.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 27 34 12.12 FURTHER ASSURANCES. From and after the date of this Agreement, upon the request of either party, the other party shall execute and deliver or cause to be executed or delivered such instruments, documents and other writings as may be necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement and the Series A Preferred Stock. 12.13 COVENANT OF GOOD FAITH AND FAIR DEALING. Each party hereto agrees to act in good faith with respect to the other party or parties in exercising its rights and discharging its obligations under this Agreement. Each party further agrees to use its best efforts to ensure that the purposes of this Agreement are realized and to take all steps as are reasonable in order to implement the operational provisions of this Agreement. Each party agrees to execute, deliver and file any document or instrument necessary or advisable to realize the purposes of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this AccessCare Preferred Stock Purchase Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. ACCESSCARE, INC. By: /s/ Ronald G. Hersch ------------------------------------ Ronald G. Hersch, Ph.D., President PHYSICIAN CORPORATION OF AMERICA By: /s/ Peter E. Kilissanly ------------------------------------ Peter E. Kilissanly, President and Chief Operating Officer 28 EX-10.67 3 FIRST RIGHT OF REFUSAL AGREEMENT DATED 5-23-95 1 EXHIBIT 10.67 FIRST RIGHT OF REFUSAL AGREEMENT THIS FIRST RIGHT OF REFUSAL AGREEMENT (this "Agreement") is made as of this 23rd day of May, 1995, by and among COMPREHENSIVE CARE CORPORATION, a Delaware corporation ("CompCare"), ACCESSCARE, INC., a Nevada corporation ("AccessCare"), and PHYSICIAN CORPORATION OF AMERICA, a Delaware corporation ("Investor"). R E C I T A L S : A. AccessCare and Investor are concurrently herewith entering into the AccessCare Preferred Stock Purchase Agreement dated as of May 23, 1995 (the "Stock Purchase Agreement") whereby, among other things, Investor is purchasing the Series A Preferred Stock of AccessCare (the 135 shares of AccessCare Series A Preferred Stock, and any shares receivable therefor upon a stock dividend, reclassification, merger or other corporate reorganization, but excluding the common stock of AccessCare issuable upon conversion of the Series A Preferred Stock (and excluding any other securities receivable on account of ownership of such common stock), herein called the "Preferred Shares") on the terms and conditions of the Stock Purchase Agreement and the other documents referred to therein (sometimes collectively called "Transaction Documents"). B. Pursuant to the Stock Purchase Agreement, CompCare and AccessCare hereby grant, and Investor hereby receives, a first right of refusal to purchase AccessCare, on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, the parties agree as follows: 1. Definitions. 1.1 The term "Acquisition Proposal" shall mean any proposal made by a third party, orally or in writing, solicited or unsolicited by or for CompCare or AccessCare, whether effected in one transaction or a series of related transactions, for (i) the acquisition (other than in an "Excluded Transaction" as defined below) of the capital stock of AccessCare then held by CompCare representing all or any substantial portion (ie., more than 10%) of the voting power of AccessCare; (ii) the acquisition (other than in an "Excluded Transaction" as defined below), through sale, assignment, license, lease or other transfer of all or substantially all of the assets of AccessCare; or (iii) the acquisition, by merger, consolidation or any other reorganization of AccessCare (other than in an "Excluded Transaction" as defined below), of the capital stock of AccessCare then held by CompCare representing all or any substantial portion (ie., more than 10%) of the voting power of AccessCare or through which all or substantially all of the assets of AccessCare are converted or released (other than in an "Excluded Transaction" as defined below). 2 1.2 The term "Excluded Transaction" shall include any transactions of a nature like those described in Section 1.1 as a result of which the acquisition is made by a person or entity controlling, controlled by or under common control with CompCare which agrees in writing to be a party to, and be bound by, this Agreement with respect to any subsequent transaction occurring prior to termination of this Agreement. 2. First Right of Refusal. 2.1 Notice of Acquisition Proposal . In the event that AccessCare or CompCare receives an Acquisition Proposal, AccessCare or CompCare, as the case may be, shall first deliver to Investor a written notice (the "Notice") specifying the name and address of the party which submitted the Acquisition Proposal and the terms and conditions of the Acquisition Proposal, including the consideration offered to acquire AccessCare. In the event that AccessCare or CompCare desires to accept such an Acquisition Proposal, the Notice shall so specify or a supplement that so specifies to the Notice shall be sent to Investor. A Notice so providing or supplemented shall be hereinafter referred to as a "Notice of Acceptable Offer." 2.2 Notice of Election to Acquire . During the thirty (30) day period following receipt of the Notice of Acceptable Offer, Investor shall have the right to acquire AccessCare at the price (subject to the terms of subsection 2.4 below) and upon the terms and conditions specified in the Notice of Acceptable Offer. Investor shall give written notice to AccessCare and CompCare of such election to acquire AccessCare within such thirty (30) day period. 2.3 Consummation of Acquisition Proposal . In the event that Investor does not elect to acquire AccessCare pursuant to subsection 2.2 above, AccessCare or CompCare, as the case may be, may then accept the Acquisition Proposal set forth in the Notice of Acceptable Offer and consummate such transaction, provided such transaction is consummated within the ninety (90) day period following the date of the Notice of Acceptable Offer, upon terms and conditions, as a whole, as favorable as or superior to those set forth in the Notice of Acceptable Offer, with the offering party or a third party. 2.4 Purchase Price . If Investor elects to acquire the outstanding stock of AccessCare then held by CompCare or the assets of AccessCare pursuant to subsection 2.2 above, Investor shall have the right to acquire AccessCare for cash consideration, whether or not part or all of the consideration specified in the Notice of Acceptable Offer is other than cash. If part or all of the consideration to acquire AccessCare as stated in the Notice of Acceptable Offer is other than cash, the price to acquire AccessCare stated in the Notice of Acceptable Offer shall be deemed to be the sum of the cash consideration, if any, specified in the Notice of Acceptable Offer, plus the fair market value of the non-cash consideration. The fair market value of such non-cash consideration shall be determined by the mutual agreement of Investor, on the one hand, and CompCare or AccessCare, on the other hand as the case may be. If Investor and either AccessCare or CompCare, as the case may be, cannot agree upon the fair market value of the non-cash consideration within five (5) days after Investor exercises its first right of refusal as set forth herein, the fair market value of the non-cash consideration shall be determined by an independent qualified appraiser agreed upon by Investor and CompCare. Such appraiser shall submit his or her appraisal to CompCare, Investor and AccessCare within ten (10) days of his or her appointment and such appraiser's determination shall be binding upon all of the parties hereto. If CompCare, Investor and AccessCare are unable to agree upon an appraiser within ten 2 3 (10) days after Investor exercises its first right of refusal as set forth herein, then Investor, on the one hand, and AccessCare and CompCare, together on the other hand, each shall select, within five (5) days thereafter, an independent qualified appraiser. Such two appraisers shall select, within five (5) days after the selection of the second of such two appraisers, a third similarly qualified appraiser. Within ten (10) days after the third appraiser is selected, the appraisers shall independently determine the fair market value of the non-cash consideration. On the date which is ten (10) days after the third appraiser is selected, the three appraisers shall submit their appraisals to CompCare, Investor and AccessCare, and the average of the two appraisals which are closest in amount shall constitute the fair market value of the non-cash consideration. If one appraisal is the mean of the other two appraisals, such appraisal shall constitute the fair market value of the non-cash consideration. If either party fails to appoint its appraiser within the required time period, the appraiser appointed by the other party shall be the sole appraiser and such appraiser's determination shall be binding upon all parties hereto. Investor and AccessCare shall share equally the fees and expenses of the appraiser jointly named. In the event Investor and AccessCare fail to agree upon an appraiser, then Investor shall pay the fees and expenses of the appraiser appointed by Investor and AccessCare shall pay the fees and expenses of the appraiser appointed by AccessCare, and the cost of the third appraiser shall be shared equally between Investor and AccessCare. 2.5 Transfers in Violation of this Section . Any sale, assignment or other transfer of capital stock of AccessCare by CompCare pursuant to an Acquisition Proposal contrary to the provisions of this Section 2 shall be null and void, and the transferee shall not be recognized by AccessCare as a holder or owner of the capital stock purported to have been sold, assigned or transferred for any purposes, unless and until CompCare has satisfied the requirements of this Section 2 with respect to such proposed sale, assignment or other transfer. No transaction pursuant to an Acquisition Proposal shall be deemed consummated unless and until the requirements of this Section 2 with respect to such Acquisition Proposal have been satisfied in full. 3. Termination. This Agreement shall terminate upon the earliest of (i) 1:00 p.m. New York City time on the tenth (10th ) anniversary of the date of this Agreement; (ii) the conversion, sale or disposition, by way of redemption or otherwise (excluding for purposes of this clause (ii) only a partial redemption at the election of AccessCare) of all of the Preferred Shares, or any portion thereof; (iii) the redemption at the election of AccessCare of all of the Preferred Shares; or (iv) the failure of Investor to exercise its election to acquire AccessCare within the thirty (30) day period specified in subsection 2.2 above (but, in the case of clause (iv), only if the transaction giving rise to the Investor's election shall have been consummated by AccessCare or CompCare on the terms provided in subsection 2.3 above); provided however, that if an Acquisition Proposal is presented to AccessCare or CompCare prior to the occurrence of the earliest of the events described above, the rights and obligations hereunder shall continue through and including any period required to satisfy the notice provisions and other requirements of Section 2 above. 3 4 4. Non-transferability. Neither this Agreement nor the first right of refusal may be assigned or otherwise transferred by Investor to any other person or entity except a transfer of this Agreement and the Right as a whole to a single entity that either (i) acquires, in combination with one or more commonly-controlled affiliates of such entity, substantially all of the assets and business of Investor or (ii) is a surviving entity of a recapitalization, merger, consolidation, or other form of corporation reorganization of Investor succeeding to substantially all of Investor's assets and business and that, in either case (i) or (ii), expressly assumes in writing Investor's obligations under the Transaction Documents. Except as permitted in the preceding sentence, any such assignment or transfer shall be void. 5. Representations and Warranties of Investor . Investor hereby represents and warrants to CompCare and AccessCare that: 5.1 Authorization . Investor has full power and authority to enter into this Agreement, and this Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms. 5.2 Purchase Entirely for Own Account . This Agreement is made with Investor in reliance upon Investor's representation that the first right of refusal acquired hereby (the "Right"), any shares of AccessCare Common stock or other securities to be purchased upon exercise of the Right by Investor and any shares the Common Stock or other securities of AccessCare issuable upon conversion or exercise of securities referred to above (collectively, the "Securities") will be acquired for investment for Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, Investor further represents that Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 5.3 Disclosure of Information . Investor believes it has received all the information it considers necessary or appropriate for deciding whether to acquire the Right to purchase the Securities. Investor further represents that it has had an opportunity to ask questions and receive answers from CompCare and AccessCare regarding the terms and conditions of the offering of the Securities. Investor's representation's and warranties in this Section do not limit AccessCare's liability for a breach of its representations or warranties under this Agreement. 5.4 Investment Experience . Investor is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission ("SEC") and the rules of the Florida Department of Banking and Finance and is not counted for purposes of Section 517.061(11)(a) of the Florida Securities and Investor Protection Act or Section 25102(f) of the California Corporate Securities Law of 1968 and further that Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and 4 5 experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Right and an investment in the Securities. 5.5 Florida Transaction Exemption . Investor is a corporation with assets of $500,000 or more for purposes of Section 517.061(8) of the Florida Securities and Investor Protection Act. 5.6 Restricted Securities . Investor understands that the Securities are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from CompCare in a transaction not involving a public offering and that under such laws and applicable regulations such Securities may be resold without registration under the Securities Act of 1933, as amended (the "Act"), only in certain limited circumstances. In this connection, Investor represents that he is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 5.7 Legends . It is understood that certificates evidencing the Securities may bear substantially one or more of the following legends: (a) THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. (b) Any legend required by any applicable state law. (c) Any legend required by any applicable Transaction Documents. 6. Representations and Warranties of AccessCare and CompCare . Each of AccessCare and CompCare, jointly and severally, represents and warrants to Investor that: 6.1 Organization and Standing of CompCare . CompCare is a duly incorporated and validly existing corporation in good standing under the laws of the State of Delaware, and AccessCare is a duly incorporated and validly existing corporation in good standing under the laws of the State of Nevada, and each, respectively, has all requisite corporate power and authority for the ownership and operation of its properties and for the carrying on of its business as now conducted and as now proposed to be conducted. Each of AccessCare and CompCare, respectively, is duly licensed or qualified, and in good standing as a foreign corporation authorized to do business, in all jurisdictions in which the character of the property owned or leased, or the nature of the activities conducted, by it makes such licensing or qualification necessary and where failure to be licensed or to so qualify would have a material adverse effect upon it. 6.2 Corporate Action . Each of AccessCare and CompCare, respectively, has all necessary corporate power and has taken all corporate action required to make all the 5 6 provisions of this Agreement, and the documents and instruments executed in connection herewith, its valid and enforceable obligations upon execution thereof. 6.3 Governmental Approvals . No authorization, consent, approval, license, exemption of, or filing or registration with, any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary for, or in connection with, the offer, issuance, sale, execution or delivery by AccessCare or CompCare, respectively, or for the performance by it of its obligations under, this Agreement except for post-sale filings to be made, if any, to comply with exemptions from registration or qualification under federal and state securities laws. 7. No Privilege of Stock Ownership . Prior to exercise of this Right, Investor shall not be entitled, by virtue of holding this Right, to any rights of a stockholder of AccessCare, including (without limitation) the right to vote, receive dividends or other distributions, exercise preemptive rights or be notified of stockholder meetings, and such holder shall not be entitled to any notice or other communication concerning the business or affairs of AccessCare. 8. Non-transferability . Neither this Agreement nor the Right may be assigned or otherwise transferred by Investor to any other person or entity. Any such assignment or transfer shall be void. 9. Legend. Each certificate representing shares of capital stock of AccessCare held by CompCare or outstanding on the date hereof shall contain a legend in substantially the following form: THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE PROVISIONS OF A FIRST RIGHT OF REFUSAL AGREEMENT DATED AS OF MAY 23, 1995, WHICH AGREEMENT IS ON FILE AT THE OFFICES OF THE COMPANY, A COPY OF WHICH SHALL BE PROVIDED UPON WRITTEN REQUEST. 10. Miscellaneous. 10.1 Notices . All notices, requests, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or mailed, certified, return receipt requested, postage prepaid: 6 7 (a) If to CompCare or AccessCare, addressed to: AccessCare, Inc. 2203 N. Lois Avenue, Suite 1150 Tampa, Florida 33607 Attn: Ronald G. Hersch, President and Comprehensive Care Corporation 4350 Von Karman Suite 280 Newport Beach, California 92660 Attention: Drew Q. Miller, Chief Financial Officer with a copy to: James A. Rowe Corporate Counsel AccessCare, Inc. 2203 N. Lois Avenue, Suite 1150 Tampa, Florida 33607 (b) If to Investor addressed to Physician Corporation of America P.O. Box 527500 Miami, Florida 33152-7500 Attention: Peter E. Kilissanly, President and COO or delivered in person to Physician Corporation of America 5835 Blue Lagoon Drive Miami, Florida 33126 Attention: Peter E. Kilissanly, President and COO with a copy, in either case, to: Physician Corporation of America 5835 Blue Lagoon Drive Miami, Florida 33126 Attention: John A. Hageman, Esq., General Counsel Any party hereto may from time to time, upon written notice to the other parties, designate a different address, which shall be substituted for the one specified above for such party. If any notice or other document is sent by certified or registered mail, return receipt requested, postage prepaid, properly addressed as aforementioned, the same shall be deemed served or delivered 7 8 forty-eight (48) hours after mailing thereof. If any notices are sent by facsimile ("fax") to a party, it will be deemed to have been delivered on the date the fax thereof is actually received, provided the original thereof is sent by mail in the manner set forth above within twenty-four (24) hours after the fax is sent. 10.2 Attorneys' Fees . In the event of any controversy or claim or dispute between the parties hereto arising out of or relating to this Agreement or any of the documents provided for herein, or the breach thereof, the prevailing party shall be entitled to recover from the losing party reasonable attorneys' fees, expenses and costs. 10.3 Binding Effect . This Agreement shall be binding upon the heirs, executors, representatives, successors and assigns of the respective parties hereto; provided, however, that no assignment hereunder by Investor shall be permitted. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 10.4 Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 10.5 Headings . The subject headings of the sections and subsections of this Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 10.6 Waivers . Any party to this Agreement may waive any right, breach or default which it has the right to waive; provided that such waiver will not be effective against the waiving party, unless it is in writing and specifically refers to this Agreement and notice thereof is promptly given to all parties in the manner provided in Subsection 5.3 of this Agreement. No waiver will be deemed to be a waiver of any other matter, whenever occurring and whether identical, similar or dissimilar to the matter waived. 10.7 Entire Agreement . The Transaction Documents collectively embody the entire agreement and understanding of the parties hereto. This Agreement supersedes the Letter Agreement and all other prior or contemporaneous agreements or understandings (whether written or oral) among the parties, in respect to the subject matter contained herein. 10.8 Governing Law . This Agreement shall be construed in accordance with, and governed by, the laws of the State of Florida. 10.9 Covenant of Good Faith and Fair Dealing . Each party hereto agrees to act in good faith with respect to the other party or parties in exercising its rights and discharging its obligations under this Agreement. Each party further agrees to use its best efforts to ensure that the purposes of this Agreement are realized and to take all steps as are reasonable in order to 8 9 implement the operational provisions of this Agreement. Each party agrees to execute, deliver and file any document or instrument necessary or advisable to realize the purposes of this Agreement. IN WITNESS WHEREOF, the parties to this First Right of Refusal Agreement have duly executed it on the day and year first above written. "Investor" PHYSICIAN CORPORATION OF AMERICA, a Delaware corporation By: /s/ Peter E. Kilissanly ------------------------------------------------- Peter E. Kilissanly, President and Chief Operating Officer "AccessCare" ACCESSCARE, INC., a Nevada corporation By: /s/ Ronald G. Hersch ------------------------------------------------- Ronald G. Hersch, Ph.D., President "CompCare" COMPREHENSIVE CARE CORPORATION, a Delaware corporation By: /s/ Kerri Ruppert ------------------------------------------------- Its: Vice President, Secretary/Treasurer and CAO 9 EX-11 4 COMPUTATION OF LOSS PER SHARE 1 COMPREHENSIVE CARE CORPORATION EXHIBIT 11 Calculation of Loss Per Share
YEAR ENDED MAY 31, --------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Primary and Fully Diluted: Loss applicable to common stock: Loss before extraordinary item $(11,533) $(7,852) $(11,600) $(4,562) $(27,500) Extraordinary item - gain on debenture conversion..................................... --- --- --- --- 11,465 -------- ------- -------- ------- -------- Net loss......................................... $(11,533) $(7,852) $(11,600) $(4,562) $(16,035) ======== ======= ======== ======= ======== Average number of shares of common stock and common stock equivalents......................... 2,257 2,199 2,196 2,190 1,212 ======== ======= ======== ======= ======== Loss per common and common equivalent share: Loss before extraordinary item $(5.11) $(3.57) $(5.28) $(2.08) $(22.69) Extraordinary item - gain on debenture conversion..................................... --- --- --- --- 9.46 -------- ------- -------- ------- -------- Net loss......................................... $(5.11) $(3.57) $(5.28) $(2.08) $(13.23) ======== ======= ======== ======= ========
EX-21 5 LIST OF THE COMPANY'S SUBSIDIARIES 1 EXHIBIT 21 COMPREHENSIVE CARE CORPORATION SCHEDULE OF SUBSIDIARIES
STATE OF SUBSIDIARY NAME INCORPORATION --------------- ------------- N.P.H.S., Inc. California CareManor Hospital of Washington, Inc. Washington Trinity Oaks Hospital, Inc. Texas CareUnit, Inc. California Starting Point Incorporated California CareUnit Hospital of Albuquerque, Inc. New Mexico Comprehensive Care Corporation Nevada CareUnit Clinic of Washington, Inc. Washington CareUnit Hospital of Ohio, Inc. Ohio Comprehensive Care Corporation (Canada) Ltd. Canada CareUnit, Inc. Delaware CMP Properties, Inc. Oregon CareUnit of Florida, Inc. Florida Comprehensive Behavioral Care, Inc. Nevada Managed Behavioral Healthcare, Inc. Florida AccessCare of Washington, Inc. Washington CareInstitute California
EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 1 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-43841) and Registration Statement (Form S-8 No. 33-27213) of our report dated September 7, 1995 with respect to the consolidated financial statements of Comprehensive Care Corporation and subsidiaries for the year ended May 31, 1995, included in the Annual Report (Form 10-K) for the year ended May 31, 1995. /s/ Ernst & Young LLP Orange County, California September 11, 1995 EX-23.2 7 CONSENT OF ARTHUR ANDERSEN 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.2 As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed S-8 Registration Statement File No. 33-43841 and the S-8 Registration Statement File No. 33-27213. /s/ Arthur Anderson LLP ----------------------- ARTHUR ANDERSEN LLP September 11, 1995 St. Louis, Missouri EX-27 8 FINANCIAL DATA SCHEDULES
5 1000 12-MOS MAY-31-1995 JUN-01-1994 MAY-31-1995 1542 0 3329 1096 0 8012 25181 13074 26001 23354 5077 25 0 0 (4958) 26001 29282 29320 15421 15421 37884 1423 1366 (11353) 180 (11533) 0 0 0 (11,533) (5.11) (5.11)