-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, h1dwCyPCm67MnkwEkqkJQ38cWjf9z6XK8g6Tu41OrYV9KWb4lKFy0W3n5vG0gqfz i9p8pHiPacO0lhHsCcp17Q== 0000022872-94-000019.txt : 19941114 0000022872-94-000019.hdr.sgml : 19941114 ACCESSION NUMBER: 0000022872-94-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940831 FILED AS OF DATE: 19941014 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPREHENSIVE CARE CORP CENTRAL INDEX KEY: 0000022872 STANDARD INDUSTRIAL CLASSIFICATION: 8060 IRS NUMBER: 952594724 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09927 FILM NUMBER: 94552796 BUSINESS ADDRESS: STREET 1: 16305 SWINGLEY RIDGE DR CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145371288 MAIL ADDRESS: STREET 1: 16305 SWINGLEY RIDGE DRIVE CITY: CHESTERFIELD STATE: MO ZIP: 63017 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended August 31, 1994 --------------- [ ] 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 (I.R.S. Employer Identification No.) of incorporation or organi- zation) 16305 Swingley Ridge Dr. Suite 100, Chesterfield, Missouri 63017 - - - ------------------------------------------------------------------ (Address of principal executive offices and Zip Code) (314) 537-1288 -------------- (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Classes Outstanding at October 13, 1994 - - - -------------------------------------- ---------------------------- - - - --- Common Stock, par value $.10 per share 21,986,916 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Index Part I - Financial Information Item 1. - Condensed Consolidated Financial Statements Condensed consolidated balance sheets, August 31, 1994 and May 31,1994---------------------------------------------------- 3 Condensed consolidated statements of operations for the three months ended August 31, 1994 and 1993------------------------ 4 Condensed consolidated statements of cash flows for the three months ended August 31, 1994 and 1993------------------------ 5 Notes to condensed consolidated financial statements--------------- 6 Item 2. - Management's discussion and analysis of financial condition and results of operations---------------------- 9 Part II - Other Information---------------------------------------- 12 Item 1. - Legal Proceedings--------------------------------------- 12 Item 6. - Exhibits and Reports on Form 8-K------------------------ 13 Signatures--------------------------------------------------------- 14 PART I. - FINANCIAL INFORMATION Item 1. - Condensed Consolidated Financial Statements COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in thousands, except per share amounts)
August 31, May 31, 1994 1994 --------- ------ (unaudited) Assets Current assets: Cash and cash equivalents $ 275 $ 1,781 Accounts and notes receivable, less allowance for doubtful accounts of $4,965 and $5,729 4,921 5,848 Property and equipment held for sale 7,054 6,939 Other current assets 399 508 ------ ------ Total current assets 12,649 15,076 ------ ------ Property and equipment, at cost 29,317 29,326 Less accumulated depreciation and amortization (13,676) (13,338) ------ ------ Net property and equipment 15,641 15,988 ------ ------ Other assets 2,090 2,162 ------ ------ Total assets $30,380 $33,226 ====== ====== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities $13,548 $13,776 Current maturities of long-term debt 144 154 Income taxes payable 768 734 ------ ------ Total current liabilities 14,460 14,664 ------ ------ Long-term debt, excluding current maturities 10,435 10,477 Other liabilities 2,886 2,986 Commitments and contingencies (see Note 5) Stockholders' equity: Preferred stock, $50.00 par value; authorized 60,000 shares --- --- Common stock, $.10 par value; authorized 30,000,000 shares, issued 21,986,916 shares 2,199 2,199 Additional paid-in capital 37,883 37,883 Accumulated deficit (37,483) (34,983) ------ ------ Total stockholders'equity 2,599 5,099 ------ ------ Total liabilities and stockholders' equity $30,380 $33,226 ====== ======
The accompanying notes are an integral part of these consolidated financial statements. COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts)
Three Months Ended --------------------- August 31, August 31, 1994 1993 Revenues and gains: Operating revenues $8,057 $8,713 Interest income 6 5 ------ ------ 8,063 8,718 Costs and expenses: Operating expenses 7,989 7,609 General and administrative expenses 1,067 852 Provision for doubtful accounts 750 711 Depreciation and amortization 461 503 Interest expense 251 339 ------ ------ 10,518 10,014 ------ ------ Loss before income taxes (2,455) (1,296) Provision for income taxes 45 45 ------ ------ Net loss $(2,500) $(1,341) ====== ====== Loss per share: Net loss $(0.11) $(0.06) ===== ===== The accompanying notes are an integral part of these consolidated financial statements. COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Three Months Ended ------------------------ August 31, August 31, 1994 1993 --------- --------- Cash flows from operating activities: Net loss $(2,500) $(1,341) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 461 503 Provision for doubtful accounts 750 711 Loss(gain) on sale/write-down of assets (4) 24 Carrying costs incurred on property and equipment held for sale (135) (481) Decrease in accounts and notes receivable 177 549 Decrease in other current assets and other assets 123 241 Decrease in accounts payable and accrued liabilities (228) (1,642) Increase(decrease) in income taxes payable 34 (16) Decrease in other liabilities (100) (216) ----- ----- Net cash used in operating activities (1,422) (1,668) ----- ----- Cash flows from investing activities: Net proceeds from sale of property and equipment held for sale 5 3,252 Additions to property and equipment (37) (92) ----- ----- Net cash provided by (used in) investing activities (32) 3,160 ----- ----- Cash flows from financing activities: Repayment of debt (52) (1,313) ----- ----- Net cash (used in) financing activities: (52) (1,313) ------ ----- Net increase(decrease) in cash and cash equivalents (1,506) 179 Cash and cash equivalents at beginning of period 1,781 1,126 ----- ----- Cash and cash equivalents at end of period $ 275 $1,305 ===== =====
The accompanying notes are an integral part of these consolidated financial statements. Note 1 - Basis of Presentation The condensed consolidated balance sheet as of August 31, 1994, and the related condensed consolidated statements of operations and cash flows for the three months ended August 31, 1994 and 1993 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The results of operations for the three months ended August 31, 1994, are not necessarily indicative of the results to be expected during the balance of the fiscal year. The condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Notes to consolidated financial statements included in Form 10-K for the year ended May 31, 1994, on file with the Securities and Exchange Commission, provide additional disclosures and a further description of accounting policies. The Company's financial statements are presented on the basis that it is a going concern. The Company incurred significant losses from operations in fiscal 1994 and continues to report losses for fiscal 1995. The continuation of the Company's business is dependent upon the resolution of operating and short-term liquidity problems. The consolidated financial statements do not include any adjustments that might result from an unfavorable outcome of this uncertainty. The weighted average number of shares outstanding used to compute loss per share were 21,987,000 for the three months ended August 31, 1994 and 1993. NOTE 2 - OPERATING LOSSES AND LIQUIDITY The Company's current assets at August 31, 1994 amounted to approximately $12.6 million and current liabilities were approximately $14.5 million, resulting in working capital deficit of approximately $1.9 million and a current ratio of 1:.9. Included in current assets are four hospital facilities designated as property and equipment held for sale with a total carrying value of $7.1 million. The Company's primary use of working capital is to fund operations while it seeks to restore profitability to certain of its freestanding facilities and expand its behavioral medicine managed care business. The Company does not expect to make its next payment of interest on its 7 1/2% Convertible Subordinated Debentures (the "Debentures") when such payment is otherwise scheduled to be made (October 17, 1994). Notwithstanding this development, management intends to seek to restructure several of its obligations and commitments in order to satisfy its payment obligations under the Indenture for the Debentures before expiration of the applicable grace period for non-payment and the declaration of an event of default thereunder. Management intends that this "global restructuring" include as many of the following steps as possible: (i) the effectuation of a 1-for-10 reverse stock split (which will occur on October 21, 1994); (ii) completion of the proposed settlement of the Company's payroll tax audit with the IRS (see Note 5 to the Company's Condensed Consolidated Financial Statements included herein); (iii) restructuring of the Company's financial obligations represented by the Debentures; and (iv) an equity capital infusion. No assurance can be given that all of the foregoing steps will be successfully completed. NOTE 3 - PROPERTY AND EQUIPMENT HELD FOR SALE The Company recorded no additional asset write-downs during the first quarter of fiscal 1995 and fiscal 1994 in connection with the recognition of losses and revaluation of facilities closed, sold or designated for disposition. Future operating losses and carrying costs of such facilities will be charged directly to the carrying value of the respective property and equipment 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 being experienced throughout the industry. The Company will continue to evaluate the performance of all of its operating facilities in their respective markets, and, if circumstances warrant, modify the number of facilities designated for disposition. Property and equipment held for sale, which are expected to be sold in the next fiscal year, are shown as current assets on the consolidated balance sheets. Gains and losses on facilities sold are recorded as an adjustment to the remaining property values until all facilities are sold. A summary of the transactions affecting the carrying value of property and equipment held for sale for the three months ended August 31, 1994, is as follows (in thousands): Balance as of May 31, 1994--------------------------------------$6,939 Carrying costs incurred during phase-out period----------------- 135 Other----------------------------------------------------------- (20) ----- Balance as of August 31, 1994-----------------------------------$7,054 ===== NOTE 4 - 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. 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. NOTE 5 - COMMITMENTS AND CONTINGENCIES On October 30, 1992, the Company filed a complaint in the United States District Court for the Eastern District of Missouri against RehabCare Corporation ("RehabCare") seeking damages for violations by RehabCare of the securities laws of the United States, for common law fraud and for breach of contract (Case No. 4-92CV002194-SNL). The Company seeks relief of damages in the lost benefit of certain stockholder appreciation rights in an amount in excess of $3.6 million and punitive damages. On May 18, 1993, the District Court denied a motion for summary judgement filed by RehabCare. On June 16, 1993, RehabCare filed a counterclaim seeking a declaratory judgement with respect to the rights of both parties under the stock redemption agreement, an injunction enjoining the Company from taking action under stock redemption or restated shareholders agreements and damages. The Company has filed a motion with the court to strike RehabCare's request for damages for attorneys' fees and costs on the grounds that such relief is not permitted by law nor authorized by the agreements between the parties. This case is set for a jury trial beginning February 13, 1995. Management believes that the Company's allegations have merit and intends to vigorously pursue this suit. Management further believes that should RehabCare prevail at trial on its request for such attorneys' fees and costs, such fees and costs would not materially affect the financial statements of the Company. In connection with the proposed sale of hospitals to CMP Properties, Inc., the Company advanced $1.1 million to a former consultant which was to be returned in the event the transaction was terminated. These advances were to be secured by the common stock of an unrelated company. The shares of common stock pledged were purported to be in the possession of the Company's former legal firm as collateral for the advances, but were not provided to the Company when the transaction was terminated. The Company is currently in litigation with the former consultant and legal firm to recover the advances. The Company is currently undergoing a payroll tax audit by the Internal Revenue Service ("IRS") for calendar years 1983 through 1991. The IRS agent conducting the audit has asserted that certain physicians and psychologists and other staff engaged as independent contractors by the Company should have been treated as employees for payroll tax purposes. On April 8, 1991, the Company received a proposed assessment related to this assertion claiming additional taxes and penalties due totaling approximately $19.4 million for calendar years 1983 through 1988. The Company filed a protest with the IRS and contested the proposed assessment with the Appeals Office of the Internal Revenue Service in St. Louis, Missouri (the "Appeals Office"). The Appeals Office issued a reduced assessment in the amount of approximately $6,300,000, plus penalties and interest of $6,500,000. The IRS is also examining the Company's employment tax returns for the years 1989 through 1991, and the agent conducting the examination proposed the assessment of additional taxes for those years in the approximate amount of $1,600,000, plus penalties and interest in an undetermined amount. While management believes the Company has strong arguments to support its treatment of the payments to independent contractors to whom substantially all of the assessment relates, the Company has now reached a proposed settlement for the calendar years 1983 through 1991 with the Appeals Office pursuant to which it is proposed that the Company pay the IRS $5 million, in full settlement of the audit. This proposed settlement is currently under review by the IRS district counsel. Payment terms have been proposed at 50% within 90 days of finalization with the remainder financed over the next five years. A reserve has been established with respect to this matter to cover expenses the Company expects to incur; however, there can be no assurance that such reserves are adequate until a formal settlement is reached with the IRS. In May 1991, the Company and RehabCare entered into a Tax Sharing Agreement providing for the Company to indemnify RehabCare for any claims of income or payroll taxes due for all periods through February 28, 1991. RehabCare settled a proposed assessment for a payroll tax audit of calendar years 1987 and 1988 for $326,114. The Company has established a reserve with respect to this settlement. The federal income tax returns of the Company for its fiscal years ended 1984 and 1987 through 1991 have been examined by the IRS. The Company has provided the IRS with satisfactory documentary support for the majority of items questioned and those items have been deleted from the proposed assessment and accepted as originally filed. The remaining items have been agreed to and resulted in a disallowance of approximately $229,000 in deductions which will be offset against the Company's net operating losses available for carryover. The examination also included the review of the Company's claim for refund of approximately $205,000 relating to an amended return for the fiscal year ended May 31, 1992. During completion of the audit, the IRS noted that the Company had received excess refunds representing its AMT liability of approximately $666,000 in 1990 and 1991 from the carryback of net operating losses to the fiscal years ended May 31, 1988 and 1989, respectively. On March 29, 1994, the Company agreed to the assessment of $666,000 plus interest and received the final bill of $821,000 during the fourth quarter of fiscal 1994. The Company has accrued for this liability, net of refunds, in income taxes payable. From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the 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 6 - SUBSEQUENT EVENT The Company intends to effectuate a one-for-ten reverse stock split as of the close of business on Friday, October 21, 1994, subject to approval by the New York Stock Exchange, Inc. of the Company's Supplemental Listing Application. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statistical Information The following utilization statistics include data from all operations including closures during the periods, joint ventures and closed facilities: Three months ended -------------------------------- August 31, May 31, August 31, 1994 1994 1993 --------- ------ --------- Patient days: Freestanding facilities 8,564 9,792 9,587 Behavioral medicine contracts 8,580 7,954 10,050 Freestanding facilities: Occupancy rate 27% 30% 30% Admissions 979 1,011 954 Average length of stay (days) 9 10 10 Behavioral medicine contracts: Average occupied beds per contract 7 7 7 Admissions 1,072 953 1,132 Average length of stay (days) 8 8 9 Total beds available at end of period: Freestanding facilities 347 347 347 Behavioral medicine contracts 251 236 309
THREE MONTHS ENDED AUGUST 31, 1994 COMPARED TO THREE MONTHS ENDED MAY 31, 1994 The Company reported a loss of approximately $2.5 million or $0.11 per share for the quarter ended August 31, 1994, an improvement of approximately $1.5 million or $0.08 per share from the loss reported for the quarter ended May 31, 1994. Included in the loss for the fourth quarter is an increase in general and administrative expenses which is predominantly attributable to increasing the accrual for prior years' employment taxes. FREESTANDING OPERATIONS Admissions in the first quarter of fiscal 1995 decreased to 979 from 1,011 in the fourth quarter of 1994, an overall decline of 3%. The following table sets forth selected quarterly utilization data on a "same store" basis: Same Store Utilization ----------------------- Fiscal 1995 Fiscal 1994 1st Quarter 4th Quarter ----------- ----------- Admissions 979 1,011 Average length of stay 9 10 Patient days 8,564 9,792 Net revenue per patient day for "same store" facilities decreased approximately 3% to $646 for the first quarter of fiscal 1995 from $667 for the fourth quarter of fiscal 1994. Admissions also decreased for the quarter from 1,011 in the fourth quarter of fiscal 1994 to 979 in the first quarter of fiscal 1995 or by approximately 3%. The decline in admissions combined with the decrease in length of stay resulted in a decrease in net operating revenues for the first quarter of fiscal 1995 of $1.0 million. The Company believes that the increasing role of HMO's, reduced benefits from employers and indemnity companies, and a shifting to outpatient programs continue to impact and affect this decline in utilization. The Company continues to focus its efforts toward providing effective, lower cost outpatient, partial hospitalization and daycare programs, obtaining psychiatric treatment licenses for its freestanding facilities, and toward establishing and maintaining relationships and contracts with managed care and other organizations which pay for or broker such services. The following table illustrates revenues in outpatient and daycare programs offered by the "same store" facilities: Net Outpatient/Daycare Revenues ------------------------------- (Dollars in thousands) Fiscal 1995 Fiscal 1994 1st Quarter 4th Quarter ----------- ----------- Facilities offering 6 6 Net outpatient/daycare revenues $2,803 $3,115 % of total "same store" net operating revenues 51% 48% Although operating expenses at the Company's freestanding facilities on a "same store" basis decreased $0.3 million, the provision for doubtful accounts increased by $0.2 million. As a result, operating income decreased $0.9 million from the fourth quarter of fiscal 1994. The Company is taking steps to increase revenues, primarily through relicensing facilities to provide psychiatric treatment, and the continued development of its behavioral medicine managed care business. The Company is also inplementing cost reduction measures, including the closure of selected facilities. The Company owns six facilities which are operating and four facilities which are closed and currently listed for sale. The Company will continue to evaluate the performance of these facilities in their respective markets, and, if circumstances warrant, may increase or reduce the number of facilities designated for disposition. BEHAVIORAL MEDICINE CONTRACTS During the first quarter of fiscal 1995, patient days of service at behavioral medicine contracts declined by approximately 6% from 9,161 patient days to 8,580 patient days. Units which were operational for both the fourth quarter of fiscal 1994 and the first quarter of fiscal 1995 experienced an 8% decline in utilization to 8,580 patient days. Average net revenue per patient day at these units decreased by 2% from the previous quarter resulting in a decline in overall net inpatient operating revenues of 8% to $0.8 million. Net outpatient revenues for programs operational for both quarters at these units decreased 4% from approximately $389,000 in the fourth quarter of 1994 to approximately $372,000 in the first quarter of fiscal 1995. The following table sets forth quarterly utilization data on a "same store" basis: Same Store Utilization ---------------------- Fiscal 1995 Fiscal 1994 1st Quarter 4th Quarter ----------- ----------- Admissions 1,072 1,053 Average length of stay 8.0 9.0 Patient days 8,580 9,161 Average occupancy rate 37% 41% For units operational for both quarters, operating expenses increased 2%, which combined with the decline in operating revenues resulted in operating income at the unit level decreasing by 27% from the fourth quarter of fiscal 1994. MANAGED CARE OPERATIONS During the first quarter of fiscal 1995, the number of covered lives increased by 7%. This increase is primarily attributable to new contracts added during fiscal 1995. AccessCare distinguishes itself from its competition by being the "science-based" provider of care and manages all clinical programs based upon proven treatment technologies. In the first quarter of fiscal 1995, operating revenues increased 13% from the fourth quarter of fiscal 1994. Operating expenses declined 24% in fiscal 1995 as a result of the decrease in start-up costs which were required during fiscal 1994. The increase in operating revenues during the first quarter of fiscal 1995 combined with the decrease in operating expenses resulted in an improvement in AccessCare's net operating loss of 60% or $0.6 million from the fourth quarter of fiscal 1994. THREE MONTHS ENDED AUGUST 31, 1994 COMPARED TO THREE MONTHS ENDED AUGUST 31, 1993 The Company reported a pretax loss of approximately $2.5 million for the first quarter of fiscal 1995, an increase of approximately $1.2 million from the pretax loss of approximately $1.3 million reported for the first quarter of fiscal 1994. Operating revenues for the first quarter of fiscal 1995 declined by approximately $0.7 million from the first quarter of fiscal 1994. This decrease is primarily a result of the sale of an operating entity during fiscal 1994 and a decline in operating revenues in the behavioral medicine contracts and freestanding operations which offset the increase in operating revenues generated by managed care operations. Operating expenses increased by approximately $0.4 million from the first quarter of fiscal 1994 to the first quarter of fiscal 1995. The increase in operating expenses is primarily attributable to the freestanding operations and the expenses related to managed care operations expansion and development. General and administrative expenses increased by approximately $0.2 million from the first quarter of fiscal 1994. The first quarter of 1994 reflects approximately $345,000 as a result of the revaluation of a provision for general and administrative expenses. Excluding the revaluation, general and administrative expenses decreased $0.1 million during the first quarter of fiscal 1995 compared to the same quarter of fiscal 1994. Interest expense decreased by approximately $0.1 million from the first quarter of fiscal 1994 as a result of the repayment of debt with the proceeds from the sale of assets and the reduction of the interest expense attributable to the Financial Security Plan, the Company's former deferred compensation plan. LIQUIDITY AND CAPITAL RESOURCES The Company's current assets at August 31, 1994 amounted to approximately $12.6 million and current liabilities were approximately $14.5 million, resulting in working capital deficit of approximately $1.9 million and a current ratio of 1:.9. Included in current assets are four hospital facilities designated as property and equipment held for sale with a total carrying value of $7.1 million. The Company's primary use of working capital is to fund operations while it seeks to restore profitability to certain of its freestanding facilities and expand its behavioral medicine managed care business. The Company does not expect to make its next payment of interest on its 7 1/2% Convertible Subordinated Debentures (the "Debentures") when such payment is otherwise scheduled to be made (October 17, 1994). Notwithstanding this development, management intends to seek to restructure several of its obligations and commitments in order to satisfy its payment obligations under the Indenture for the Debentures before expiration of the applicable grace period for non-payment and the declaration of an event of default thereunder. Management intends that this "global restructuring" include as many of the following steps as possible: (i) the effectuation of a 1-for-10 reverse stock split (which will occur on October 21, 1994); (ii) completion of the proposed settlement of the Company's payroll tax audit with the IRS (see Note 5 to the Company's Condensed Consolidated Financial Statements included herein); (iii) restructuring of the Company's financial obligations represented by the Debentures; and (iv) an equity capital infusion. No assurance can be given that all of the foregoing steps will be successfully completed. PART II - OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS On October 30, 1992, the Company filed a complaint in the United States District Court for the Eastern District of Missouri against RehabCare Corporation ("RehabCare") seeking damages for violations by RehabCare of the securities laws of the United States, for common law fraud and for breach of contract (Case No. 4-92CV002194-SNL). The Company seeks relief of damages in the lost benefit of certain stockholder appreciation rights in an amount in excess of $3.6 million and punitive damages. On May 18, 1993, the District Court denied a motion for summary judgement filed by RehabCare. On June 16, 1993, RehabCare filed a counterclaim seeking a declaratory judgement with respect to the rights of both parties under the stock redemption agreement, an injunction enjoining the Company from taking action under stock redemption or restated shareholders agreements and damages. The Company has filed a motion with the court to strike RehabCare's request for damages for attorney's fees and costs on the grounds that such relief is not permitted by law nor authorized by the agreements between the parties. This case is set for a jury trial beginning February 13, 1995. Management believes that the Company's allegations have merit and intends to vigorously pursue this suit. Management further believes that should RehabCare prevail at trial on its request for such attorneys fees and costs, such fees and costs would not materially affect the financial statements of the Company. In connection with the proposed sale of hospitals to CMP Properties, Inc., the Company advanced $1.1 million to a former consultant which was to be returned in the event the transaction was terminated. These advances were to be secured by the common stock of an unrelated company. The shares of common stock pledged were purported to be in the possession of the Company's former legal firm as collateral for the advances, but were not provided to the Company when the transaction was terminated. The Company is currently in litigation with the former consultant and legal firm to recover the advances. Other Litigation The Company is currently undergoing a payroll tax audit by the Internal Revenue Service ("IRS") for calendar years 1983 through 1991. The IRS agent conducting the audit has asserted that certain physicians and psychologists and other staff engaged as independent contractors by the Company should have been treated as employees for payroll tax purposes. On April 8, 1991, the Company received a proposed assessment related to this assertion claiming additional taxes and penalties due totaling approximately $19.4 million for calendar years 1983 through 1988. The Company filed a protest with the IRS and contested the proposed assessment with the Appeals Office of the Internal Revenue Service in St. Louis, Missouri. The Appeals Office issued a reduced assessment in the amount of approximately $6,300,000, plus penalties and interest of $6,500,000. The IRS is also examining the Company's employment tax returns for the years 1989 through 1991, and the agent conducting the examination proposed the assessment of additional taxes for those years in the approximate amount of $1,600,000, plus penalties and interest in an undetermined amount. While management believes the Company has strong arguments to support its treatment of the payments to independent contractors to whom substantially all of the assessment relates, the Company has now reached a proposed settlement for the calendar years 1983 through 1991 with the Appeals Office pursuant to which it is proposed that the Company pay the IRS $5 million, which will include penalties and interest. This proposed settlement is currently under review by the IRS district counsel. Payment terms have been proposed at 50% within 90 days of finalization with the remainder financed over the next three years. A reserve has been established with respect to this matter to cover expenses the Company expects to incur; however, there can be no assurance that such reserves are adequate until a formal settlement is reached with the IRS. In May 1991, the Company and RehabCare entered into a Tax Sharing Agreement providing for the Company to indemnify RehabCare for any claims of income or payroll taxes due for all periods through February 28, 1991. RehabCare has settled a proposed assessment for a payroll tax audit of calendar years 1987 and 1988 for $326,114. The Company has established a reserve with respect to this settlement. The federal income tax returns of the Company for its fiscal years ended 1984 and 1987 through 1991 have been examined by the IRS. The Company has provided the IRS with satisfactory documentary support for the majority of items questioned and those items have been deleted from the proposed assessment and accepted as originally filed. The remaining items have been agreed to and resulted in a disallowance of approximately $229,000 in deductions which will be offset against the Company's net operating losses available for carryover. The examination also included the review of the Company's claim for refund of approximately $205,000 relating to an amended return for the fiscal year ended May 31, 1992. During completion of the audit, the IRS noted that the Company had received excess refunds representing its alternative minimum tax ("AMT") liability of approximately $666,000 in 1990 and 1991 from the carryback of net operating losses to the fiscal years ended May 31, 1988 and 1989, respectively. On March 29, 1994, the Company agreed to the assessment of $666,000 plus interest and received the final bill of $821,000 during the fourth quarter of fiscal 1994. The Company has accrued for this liability, net of refunds, in income taxes payable. From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the Company or a subsidiary may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.49 Non-qualified Stock Option Agreement dated August 25, 1994 between the Company and Chriss W. Street (filed herewith). 10.50 Non-qualified Stock Option Agreement dated August 25, 1994 between the Company and Ronald G. Hersch (filed herewith). 27 Financial Data Schedules (filed herewith). (b) Reports on Form 8-K 1.) On September 13, 1994, the Company filed a current report on Form 8-K to report the appointment of Mr. Rudy R. Miller as a director. SIGNATURES Pursuant to the requirements 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. COMPREHENSIVE CARE CORPORATION October 14, 1994 By /s/ FRED C. FOLLMER -------------------------- Fred C. Follmer Senior Vice President and Chief Financial Officer (Principal Financial Officer) October 14, 1994 By /s/ KERRI RUPPERT -------------------------- Kerri Ruppert Vice President and Chief Accounting Officer COMPREHENSIVE CARE CORPORATION EXHIBIT INDEX FIRST QUARTER ENDED AUGUST 31, 1994 Sequentially Numbered Exhibit No. Description Page - - - ----------- ----------- ------------ 10.49 Non-qualified Stock Option Agreement dated August 25, 1994 between the Company and Chriss W. Street (filed herewith). 10.50 Non-qualified Stock Option Agreement dated August 25, 1994 between the Company and Ronald G. Hersch (filed herewith). 27 Financial Data Schedules (filed herewith). EX-10.49 2 NEITHER THIS OPTION AGREEMENT NOR THE SHARES ISSUABLE BY COMPREHENSIVE CARE CORPORATION (THE "COMPANY) UPON EXERCISE HEREOF, HAVE BEEN OR WILL BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND THIS OPTION IS BEING ISSUED IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS ARISING THEREUNDER, AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE STATE AND FEDERAL SECURITIES LAWS AND UPON FURNISHING THE COMPANY AN OPINION OF COUNSEL, THAT THE PROPOSED TRANSFER WOULD BE IN COMPLIANCE WITH ALL APPLICABLE STATE AND FEDERAL SECURITIES LAWS. ANY DOCUMENTS EVIDENCING THIS SECURITY, INCLUDING STOCK CERTIFICATES EVIDENCING THE UNDERLYING SHARES, WILL CONTAIN A SIMILAR LEGEND. THE COMPANY SHALL PLACE NOTATIONS WITH RESPECT TO THESE RESTRICTIONS ON ITS SECURITIES RECORDS AND SHALL INFORM THE TRANSFER AGENT, OF SUCH RESTRICTIONS. NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement ("Agreement") is made effective as of August 25, 1994 ("Option Grant Date"), by and between Comprehensive Care Corporation, a Delaware corporation, ("Company") and Chriss W. Street ("Optionee"). In consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as set forth below. 1. THE OPTION. Optionee may, at Optionee's option and on the terms and conditions set forth herein, purchase all or any part of an aggregate of 500,000 shares of common stock at the price per share of $0.75, $1.00, and $1.50, vesting at the rate of one-half at the grant date, one-fourth at the end of the second year and one-fourth at the end of third year ("Option") pursuant to Exhibit A. 2. VESTING AND EXERCISABILITY OF OPTION. Subject to the limitations set forth herein, the option granted shall vest and be exercisable in accordance with the following rules: A. GENERAL. Subject to the other provisions of this Section 2, Option shall vest and become exercisable at such times and in such installments as set forth in Section 1. Unless otherwise provided in this Section 2, the Option may be exercised when the installments accrue and at any time thereafter until, and including, the day before the Termination Date (as defined below). Option shall remain exercisable until the Termination Date, notwithstanding the subsequent grant of additional options with different start or termination dates. Optionee acknowledges that Optionee has no right whatsoever to exercise the Option granted hereunder with respect to any share covered by an installment until such installment accrues as provided in Section 1. B. TERMINATION OF OPTION. All installments of the Option shall expire and terminate on August 24, 2004 ("Termination Date"). C. TERMINATION OF EMPLOYMENT. In the event that the employment of the Optionee is terminated for any reason, any installments under the option held by such Optionee which have not accrued as of the employment termination date shall expire and become unexercisable as of the employment termination date. In the event that Optionee's employment with the Company is terminated "for cause", then the option granted hereunder to such terminated Optionee, whether vested or not, shall expire and become unexercisable as of the effective date of the termination of employment of the Optionee. All accrued installments as of the employment termination date shall remain exercisable for three (3) months following the employment termination date. 3. EXERCISE OF OPTION. The Option may be exercised in accordance with this Section as to all or any portion of the Shares covered by an accrued installment of the Option from time to time during the applicable option period, except that the Option shall not be exercisable with respect to fractions of a Share. The Option may be exercised, in whole or in part, by giving written notice of exercise to the Company, which notice shall specify the number of Shares to be purchased and shall be accompanied by payment in full of the purchase price in accordance with Section 4. The Option shall be deemed exercised when such written notice of exercise has been received by the Company. No Shares shall be issued until full payment has been made and the Optionee has satisfied such other conditions as may be required by applicable law, rules, or regulations, or as may be adopted or imposed by the Company. Until the issuance of stock certificates, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to optioned Shares notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other rights for which the record date is prior to the date the stock certificate is issued. 4. PAYMENT OF OPTION EXERCISE PRICE. Except as otherwise provided in this Section, the entire option exercise price shall be paid at the time the option is exercised by cashier's check or such other means as deemed acceptable by the Company. 5. OPTION NOT TRANSFERABLE. The Option granted under this Agreement may not be sold, pledged, hypothecated, assigned, encumbered, gifted or otherwise transferred or alienated in any manner. 6. RESTRICTIONS ON ISSUANCE OF SHARES. A. No Shares shall be issued or delivered upon exercise unless and until there shall have been compliance with all applicable requirements of the Securities Act of 1933, all applicable listing requirements of any national securities exchange on which Shares are then listed, and any other requirement of law or of any regulatory body having jurisdiction over such issuance and delivery. The inability of the Company to obtain any required permits, authorizations, or approvals necessary for the lawful issuance and sale of any Shares hereunder on terms deemed reasonable by the Company shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite permits, authorizations, or approvals shall not have been obtained. B. As a condition to the granting or exercise of the Option, the Company may require the person receiving or exercising such option to make any representation and/or warranty to the Company as may be required under any applicable law or regulation, including but not limited to a representation that the Option and/or Shares are being acquired only for investment and without any present intention to sell or distribute each Option and/or Shares if such representation is required under the Securities Act of 1933 or any other applicable law, rule, or regulation. 7. TAXES. On the Exercise Date, the Optionee must pay to the Company the amount of the federal, state and local tax withholding obligation arising from the exercise of the Option; A. in cash equal to the minimum withholding; B. if the Exercise Price for the Option Shares is paid by a broker, dealer or other "creditor" (as defined by Regulation T issued by the Board of Governors of the Federal Reserve System) with the Optionee making a Tax Withholding Election to have such broker, dealer or other "creditor" deliver to the Company cash in the amount of tax withholding due after the Optionee has delivered to the Company instructions acceptable to the Company regarding the delivery of the number of Option Shares being exercised to such broker, dealer or other "creditor". 8. LEGENDS ON OPTION AND STOCK CERTIFICATES. Each certificate representing Shares acquired upon exercise of the option shall be endorsed with all legends, if any, required by applicable federal and state securities laws to be placed on the certificate. The determination of which legends, if any, shall be placed upon said Shares shall be made by the Company in its sole discretion and such decision shall be final and binding. 9. CERTAIN REPRESENTATIONS AND WARRANTIES. Executive expressly acknowledges, represents and agrees: A. Optionee understands that the option is not issued under the Company's existing stock option plans. B. That the Shares are not now registered under applicable securities laws or listed on any national securities exchange, and that the Company may require, as a condition to the granting or exercise of the Option, that the person receiving or exercising the option must make such representations or warranties to the Company as may be required under applicable law or regulation, including but not limited to a representation that the Option and/or Shares are being acquired only for investment and without any present intention to sell or distribute such Option or Shares. C. That Optionee understands that the existence and execution of this Agreement is not sufficient by itself to cause any exercise of the Option. D. That Optionee is a person subject to the provisions of Section 16 of the Securities Exchange Act of 1934, and Optionee has been advised to consult with a competent federal securities law advisor as to the reporting obligations or potential liability for short swing profits under Section 16 with respect to the granting, investing and exercise of the Option. E. Nothing in this Agreement shall be construed to create any contract of employment between the Company and the Optionee or confer upon Optionee any right to continue in the employment of the Company. The Company shall have the right to deal with Optionee in the same manner as if this Agreement did not exist including without limitation the hiring, discharge, compensation and conditions of employment of Optionee. 10. AGREEMENT BINDING ON SUCCESSORTS. The terms of this Agreement shall be binding upon the executors, administrators, heir and successors of Optionee and Optionee may not transfer or assign this Agreement, except in compliance with all applicable state and federal securities laws and upon furnishing the Company an opinion of counsel to that effect. 11. GOVERNING LAW. This Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the internal laws, and not the laws pertaining to conflicts or choice of laws, of the State of Missouri applicable to agreements made and to be performed wholly within the State of Missouri. 12. NECESSARY ACTS. Executive agrees to perform all acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement, including but not limited to all acts and documents related to compliance with federal and/or state securities laws. 13. INVALID PROVISIONS. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. 14. NOTICE. Any notice or other communication required or permitted to be given pursuant to the Agreement must be in writing and may be given by registered or certified mail, and if given by registered or certified mail, shall be determined to have been given and received when a registered or certified letter containing such notice, properly addressed with postage prepaid, is deposited in the United States mails; and if given otherwise than by registered or certified mail, it shall be deemed to have been given when delivered to and received by the party to whom addressed. Notice shall be given to Optionee at his most recent address shown in the Company's records. Notice to the Company shall be addressed to the Company at the address of the Company's principal executive offices, to the attention of the Secretary of the Company. IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement effective as the date first written above. COMPREHENSIVE CARE CORPORATION By /s/ Kerri Ruppert -------------------------------------------- Its Vice President/Secretary -------------------------------------------- OPTIONEE /s Chriss W. Street -------------------------------------------- Chriss W. Street EXHIBIT A Date Exercisable Number of Shares and Price --------------------- -------------------------- Year One 8/25/94 250,000 at $0.75 per share Year Two 8/25/96 125,000 at $1.00 per share Year Three 8/25/97 125,000 at $1.50 per share EX-10.50 3 NEITHER THIS OPTION AGREEMENT NOR THE SHARES ISSUABLE BY COMPREHENSIVE CARE CORPORATION (THE "COMPANY) UPON EXERCISE HEREOF, HAVE BEEN OR WILL BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND THIS OPTION IS BEING ISSUED IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS ARISING THEREUNDER, AND MAY NOT BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE WITH ALL APPLICABLE STATE AND FEDERAL SECURITIES LAWS AND UPON FURNISHING THE COMPANY AN OPINION OF COUNSEL, THAT THE PROPOSED TRANSFER WOULD BE IN COMPLIANCE WITH ALL APPLICABLE STATE AND FEDERAL SECURITIES LAWS. ANY DOCUMENTS EVIDENCING THIS SECURITY, INCLUDING STOCK CERTIFICATES EVIDENCING THE UNDERLYING SHARES, WILL CONTAIN A SIMILAR LEGEND. THE COMPANY SHALL PLACE NOTATIONS WITH RESPECT TO THESE RESTRICTIONS ON ITS SECURITIES RECORDS AND SHALL INFORM THE TRANSFER AGENT, OF SUCH RESTRICTIONS. NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement ("Agreement") is made effective as of August 25, 1994 ("Option Grant Date"), by and between Comprehensive Care Corporation, a Delaware corporation, ("Company") and Ronald G. Hersch ("Optionee"). In consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as set forth below. 1. THE OPTION. Optionee may, at Optionee's option and on the terms and conditions set forth herein, purchase all or any part of an aggregate of 150,000 shares of common stock at the price per share of $0.75, $1.00, and $1.50, vesting at the rate of one-third at the end of the first year and at the end of each year thereafter at the rate of one third ("Option") pursuant to Exhibit A. 2. VESTING AND EXERCISABILITY OF OPTION. Subject to the limitations set forth herein, the option granted shall vest and be exercisable in accordance with the following rules: A. GENERAL. Subject to the other provisions of this Section 2, Option shall vest and become exercisable at such times and in such installments as set forth in Section 1. Unless otherwise provided in this Section 2, the Option may be exercised when the installments accrue and at any time thereafter until, and including, the day before the Termination Date (as defined below). Option shall remain exercisable until the Termination Date, notwithstanding the subsequent grant of additional options with different start or termination dates. Optionee acknowledges that Optionee has no right whatsoever to exercise the Option granted hereunder with respect to any share covered by an installment until such installment accrues as provided in Section 1. B. TERMINATION OF OPTION. All installments of the Option shall expire and terminate on August 24, 2004 ("Termination Date"). C. TERMINATION OF EMPLOYMENT. In the event that the employment of the Optionee is terminated for any reason, any installments under the option held by such Optionee which have not accrued as of the employment termination date shall expire and become unexercisable as of the employment termination date. In the event that Optionee's employment with the Company is terminated "for cause", then the option granted hereunder to such terminated Optionee, whether vested or not, shall expire and become unexercisable as of the effective date of the termination of employment of the Optionee. All accrued installments as of the employment termination date shall remain exercisable for three (3) months following the employment termination date. 3. EXERCISE OF OPTION. The Option may be exercised in accordance with this Section as to all or any portion of the Shares covered by an accrued installment of the Option from time to time during the applicable option period, except that the Option shall not be exercisable with respect to fractions of a Share. The Option may be exercised, in whole or in part, by giving written notice of exercise to the Company, which notice shall specify the number of Shares to be purchased and shall be accompanied by payment in full of the purchase price in accordance with Section 4. The Option shall be deemed exercised when such written notice of exercise has been received by the Company. No Shares shall be issued until full payment has been made and the Optionee has satisfied such other conditions as may be required by applicable law, rules, or regulations, or as may be adopted or imposed by the Company. Until the issuance of stock certificates, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to optioned Shares notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other rights for which the record date is prior to the date the stock certificate is issued. 4. PAYMENT OF OPTION EXERCISE PRICE. Except as otherwise provided in this Section, the entire option exercise price shall be paid at the time the option is exercised by cashier's check or such other means as deemed acceptable by the Company. 5. OPTION NOT TRANSFERABLE. The Option granted under this Agreement may not be sold, pledged, hypothecated, assigned, encumbered, gifted or otherwise transferred or alienated in any manner. 6. RESTRICTIONS ON ISSUANCE OF SHARES. A. No Shares shall be issued or delivered upon exercise unless and until there shall have been compliance with all applicable requirements of the Securities Act of 1933, all applicable listing requirements of any national securities exchange on which Shares are then listed, and any other requirement of law or of any regulatory body having jurisdiction over such issuance and delivery. The inability of the Company to obtain any required permits, authorizations, or approvals necessary for the lawful issuance and sale of any Shares hereunder on terms deemed reasonable by the Company shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite permits, authorizations, or approvals shall not have been obtained. B. As a condition to the granting or exercise of the Option, the Company may require the person receiving or exercising such option to make any representation and/or warranty to the Company as may be required under any applicable law or regulation, including but not limited to a representation that the Option and/or Shares are being acquired only for investment and without any present intention to sell or distribute each Option and/or Shares if such representation is required under the Securities Act of 1933 or any other applicable law, rule, or regulation. 7. TAXES. On the Exercise Date, the Optionee must pay to the Company the amount of the federal, state and local tax withholding obligation arising from the exercise of the Option; A. in cash equal to the minimum withholding; B. if the Exercise Price for the Option Shares is paid by a broker, dealer or other "creditor" (as defined by Regulation T issued by the Board of Governors of the Federal Reserve System) with the Optionee making a Tax Withholding Election to have such broker, dealer or other "creditor" deliver to the Company cash in the amount of tax withholding due after the Optionee has delivered to the Company instructions acceptable to the Company regarding the delivery of the number of Option Shares being exercised to such broker, dealer or other "creditor". 8. LEGENDS ON OPTION AND STOCK CERTIFICATES. Each certificate representing Shares acquired upon exercise of the option shall be endorsed with all legends, if any, required by applicable federal and state securities laws to be placed on the certificate. The determination of which legends, if any, shall be placed upon said Shares shall be made by the Company in its sole discretion and such decision shall be final and binding. 9. CERTAIN REPRESENTATIONS AND WARRANTIES. Executive expressly acknowledges, represents and agrees: A. Optionee understands that the option is not issued under the Company's existing stock option plans. B. That the Shares are not now registered under applicable securities laws or listed on any national securities exchange, and that the Company may require, as a condition to the granting or exercise of the Option, that the person receiving or exercising the option must make such representations or warranties to the Company as may be required under applicable law or regulation, including but not limited to a representation that the Option and/or Shares are being acquired only for investment and without any present intention to sell or distribute such Option or Shares. C. That Optionee understands that the existence and execution of this Agreement is not sufficient by itself to cause any exercise of the Option. D. That Optionee is a person subject to the provisions of Section 16 of the Securities Exchange Act of 1934, and Optionee has been advised to consult with a competent federal securities law advisor as to the reporting obligations or potential liability for short swing profits under Section 16 with respect to the granting, investing and exercise of the Option. E. Nothing in this Agreement shall be construed to create any contract of employment between the Company and the Optionee or confer upon Optionee any right to continue in the employment of the Company. The Company shall have the right to deal with Optionee in the same manner as if this Agreement did not exist including without limitation the hiring, discharge, compensation and conditions of employment of Optionee. 10. AGREEMENT BINDING ON SUCCESSORS. The terms of this Agreement shall be binding upon the executors, administrators, heir and successors of Optionee and Optionee may not transfer or assign this Agreement, except in compliance with all applicable state and federal securities laws and upon furnishing the Company an opinion of counsel to that effect. 11. GOVERNING LAW. This Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the internal laws, and not the laws pertaining to conflicts or choice of laws, of the State of Missouri applicable to agreements made and to be performed wholly within the State of Missouri. 12. NECESSARY ACTS. Executive agrees to perform all acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement, including but not limited to all acts and documents related to compliance with federal and/or state securities laws. 13. INVALID PROVISIONS. In the event that any provision of this Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. 14. NOTICE. Any notice or other communication required or permitted to be given pursuant to the Agreement must be in writing and may be given by registered or certified mail, and if given by registered or certified mail, shall be determined to have been given and received when a registered or certified letter containing such notice, properly addressed with postage prepaid, is deposited in the United States mails; and if given otherwise than by registered or certified mail, it shall be deemed to have been given when delivered to and received by the party to whom addressed. Notice shall be given to Optionee at his most recent address shown in the Company's records. Notice to the Company shall be addressed to the Company at the address of the Company's principal executive offices, to the attention of the Secretary of the Company. IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement effective as the date first written above. COMPREHENSIVE CARE CORPORATION By /S/ Kerri Ruppert -------------------------------------- Its Vice President/Secretary OPTIONEE /s/ Ronald G. Hersch -------------------------------------- Ronald G. Hersch EXHIBIT A Date Exercisable Number of Shares and Price ------------------ -------------------------- Year One 8/25/95 50,000 at $0.75 per share Year Two 8/25/96 50,000 at $1.00 per share Year Three 8/25/97 50,000 at $1.50 per share EX-27 4
5 QTR-1 MAY-31-1995 AUG-31-1994 275 0 4,921 4,965 0 12,649 29,317 13,676 30,380 14,460 10,579 2,199 0 0 250 30,380 8,057 8,063 0 7,989 1,528 750 251 2,455 45 2,500 0 0 0 2,500 .11 .11
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