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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended May 31, 2005or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number 1-9927
 COMPREHENSIVE CARE CORPORATION
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    95-2594724
(IRS Employer
Identification No.)204 South Hoover Blvd., Suite 200
Tampa, Florida
(Address of principal executive offices)
    
    33609
(Zip Code)
 (813) 288-4808
  Securities registered pursuant to Section 12( g ) of the Act:
 Title of each class  Common Stock, Par Value $.01 per share
7 1/2% Convertible Subordinated Debentures due 2010
 þ o
 o þ
 þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IItem 1. BUSINESSItem 2. PROPERTIESItem 3. LEGAL PROCEEDINGSItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIItem 5. MARKET FOR COMPANYS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESItem 6. SELECTED FINANCIAL DATAItem 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSItem 9a. CONTROLS AND PROCEDURESItem 9b. OTHER INFORMATIONPART IIIItem 10. Executive Officers and Directors of the CompanyItem 11. EXECUTIVE COMPENSATIONItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPart IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESExhibit IndexEx-21 List of the Company's SubsidiariesEx-23.1 Consent of Kirkland, Russ Murphy & TappEx-23.2 Consent of EisnerEx-31.1 Section 302 CEO CertificationEx-31.2 Section 302 CFO CertificationEx-32.1 Section 906 CEO CertificationEx-32.2 Section 906 CFO Certification    Table of Contents   
 PART I
 
 Item 1 . BUSINESS
 CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
 Overview
 ® ®(1) SM (2)
     
 (1)
    
    CompCare is a registered trademark of
Comprehensive Care Corporation.(2)
    
    Comprehensive Behavioral Care, Inc. is a
registered service mark of the Company. 2




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Recent Developments
   Sources of Revenue
  3




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Growth Strategy
  Competition
  Seasonality of Business
  4




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Government Regulation
    Accreditation
   5




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Management Information Systems
   Marketing and Sales
  Administration and employees
  Corporate Governance
  6




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Available Information
 www.compcare-shareholders.com
 Code of Ethics
 www.compcare-shareholders.com
 
 Item 2 . PROPERTIES
  Monthly BaseLease
    
    RentName and Location
    
    Expires
    
    (in Dollars)Corporate Headquarters, Regional, Administrative, and Other OfficesTampa, Florida, Corporate Headquarters, and Southeastern
Regional offices
    
    
    2006
    
    
    $
    24,215Grand Prairie, Texas
    
    
    2006
    
    
    
    6,474Bloomfield Hills, Michigan
    
    
    2006
    
    
    
    4,156
 
 Item 3 . LEGAL PROCEEDINGS
  
 Item 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     Name
    
    Votes For
    
    Votes WithheldRobert J. Landis
    
    4,342,786
    
    83,849
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NUMBER OF SHARES
 For
    
    Against
    
    Abstain
    
    Broker Non-Votes1,837,527
    
    417,589
    
    15,126
    
    2,156,393
  
 PART II
 
 Item 5 . MARKET FOR COMPANYS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 (a)
    
    Market Information  Our common stock is traded on the
Over-The-Counter Bulletin Board (OTC-BB) under the symbol CHCR. The following table
sets forth the range of high and low bid quotations for the common stock, as reported
by the OTC-BB, for the fiscal quarters indicated. The market quotations reflect
interdealer prices without retail mark-up, markdown or commissions and may not
represent actual transactions.
 PriceFiscal Year
    
    
    
    
    
    High
    
    Low2005
    
    First Quarter
    
    $
    1.60
    
    
    
    1.20Second Quarter
    
    
    1.60
    
    
    
    1.10Third Quarter
    
    
    1.50
    
    
    
    1.05Fourth Quarter
    
    
    2.00
    
    
    
    1.452004
    
    First Quarter
    
    
    3.00
    
    
    
    2.15Second Quarter
    
    
    2.40
    
    
    
    1.46Third Quarter
    
    
    2.02
    
    
    
    1.35Fourth Quarter
    
    
    1.80
    
    
    
    1.15
 (b)
    
    Holders  As of August 12, 2005, the Company had 1,400 holders of
record of our common stock.(c)
    
    Dividends  The Company did not pay any cash dividends on its common
stock during any quarter of fiscal 2005, 2004, or 2003 and does not contemplate the
initiation of payment of any cash dividends in the foreseeable future. The holders of
record of our Series A Shares are entitled to receive dividends in preference to
holders of our common stock and any of our equity securities ranking junior to our
Series A Shares, when and if declared by our Board. If declared, holders of our
Series A Shares will receive dividends in an amount equal to the
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amount that would have been payable had the Series A Shares been converted into shares of our common stock immediately prior to the declaration of such dividend.
No dividends shall be authorized, declared, paid or set apart for payment on any
class or series of the Companys stock ranking, as to dividends, on a parity with
or junior to the Series A Shares for any period unless full cumulative dividends
have been, or contemporaneously are, authorized, declared, paid or set apart in
trust for such payment on the Series A Shares. In addition, as long as a majority
of the 14,400 shares of our Series A Shares are outstanding, we cannot declare or
pay any dividend or other distribution with respect to any equity securities
without the affirmative vote of holders of at least 50% of the outstanding shares
of Series A Shares. (see Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS).(d)
    
    The equity compensation plan information contained in Item 12 of Part III of
this Annual Report is incorporated herein by reference.
 Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 6 . SELECTED FINANCIAL DATA
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Consolidated Statements of Operations Data:
 Year Ended May 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Amounts in thousands, except per share data)Operating revenues
    
    $
    24,473
    
    
    $
    27,583
    
    
    $
    32,104
    
    
    $
    27,625
    
    
    $
    18,192Costs and expenses:Healthcare operating expenses
    
    
    21,298
    
    
    
    24,178
    
    
    
    29,201
    
    
    
    24,625
    
    
    
    15,326General and administrative expenses
    
    
    3,078
    
    
    
    3,385
    
    
    
    3,459
    
    
    
    3,544
    
    
    
    3,842Provision for (recovery of) doubtful accounts
    
    
    (4
    )
    
    
    (7
    )
    
    
    20
    
    
    
    (112
    )
    
    
    (439
    )Depreciation and amortization
    
    
    96
    
    
    
    107
    
    
    
    195
    
    
    
    342
    
    
    
    656Restructuring expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )24,468
    
    
    
    27,663
    
    
    
    32,875
    
    
    
    28,399
    
    
    
    19,355Operating income (loss) from continuing operations
before items shown below
    
    
    5
    
    
    
    (80
    )
    
    
    (771
    )
    
    
    (774
    )
    
    
    (1,163
    )Other income (expenses):Net gain on IRS settlement
    
    
    
    
    
    
    
    
    
    
    7,717
    
    
    
    
    
    
    
    Loss in connection with prepayment of note receivable
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (496
    )Loss on impairment of investment
    
    
    (118
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    Other non operating income
    
    
    88
    
    
    
    1
    
    
    
    34
    
    
    
    40
    
    
    
    332Interest income
    
    
    15
    
    
    
    26
    
    
    
    47
    
    
    
    88
    
    
    
    163Interest expense
    
    
    (206
    )
    
    
    (215
    )
    
    
    (181
    )
    
    
    (178
    )
    
    
    (208
    )(Loss) income from continuing operations before income
taxes
    
    
    (216
    )
    
    
    (288
    )
    
    
    6,845
    
    
    
    (824
    )
    
    
    (1,372
    )Income tax expense
    
    
    52
    
    
    
    102
    
    
    
    20
    
    
    
    1
    
    
    
    35(Loss) income from continuing operations
    
    
    (268
    )
    
    
    (390
    )
    
    
    6,825
    
    
    
    (825
    )
    
    
    (1,407
    )(Loss) income from discontinued operations
    
    
    
    
    
    
    (387
    )
    
    
    633
    
    
    
    
    
    
    
    290(Loss) income before cumulative effect of change in
accounting principle
    
    
    (268
    )
    
    
    (777
    )
    
    
    7,458
    
    
    
    (825
    )
    
    
    (1,117
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    Net (loss) income attributable to common stockholders
    
    $
    (268
    )
    
    $
    (777
    )
    
    $
    7,458
    
    
    $
    (770
    )
    
    $
    (1,117
    )(Loss) income per common share  basic:(Loss) income from continuing operations
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    1.75
    
    
    $
    (0.21
    )
    
    $
    (0.37
    )(Loss) income from discontinued operations
    
    
    
    
    
    
    (0.09
    )
    
    
    0.16
    
    
    
    
    
    
    
    0.08Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Net (loss) income
    
    $
    (0.05
    )
    
    $
    (0.18
    )
    
    $
    1.91
    
    
    $
    (0.20
    )
    
    $
    (0.29
    )(Loss) income per common share  diluted:(Loss) income from continuing operations
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    1.57
    
    
    $
    (0.21
    )
    
    $
    (0.37
    )(Loss) income from discontinued operations
    
    
    
    
    
    
    (0.09
    )
    
    
    0.15
    
    
    
    
    
    
    
    0.08Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    Net (loss) income
    
    $
    (0.05
    )
    
    $
    (0.18
    )
    
    $
    1.72
    
    
    $
    (0.20
    )
    
    $
    (0.29
    )Balance Sheet Data:Working capital deficit
    
    $
    (3,589
    )
    
    $
    (4,098
    )
    
    $
    (4,447
    )
    
    $
    (12,275
    )
    
    $
    (11,770
    )Total assets
    
    
    6,448
    
    
    
    6,225
    
    
    
    6,379
    
    
    
    11,399
    
    
    
    9,754Total long-term debt and capital lease obligations
    
    
    2,375
    
    
    
    2,364
    
    
    
    2,298
    
    
    
    2,264
    
    
    
    2,244Stockholders deficit
    
    $
    (4,117
    )
    
    $
    (4,725
    )
    
    $
    (4,990
    )
    
    $
    (12,519
    )
    
    $
    (11,778
    )
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Item 7 . MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
      Consolidated
    
    ConsolidatedOperations
    
    OperationsFiscal 2005
    
    Fiscal 2004Operating revenues
    
    $
    24,473
    
    
    $
    27,583Healthcare operating expenses
    
    
    21,298
    
    
    
    24,178General and administrative expenses
    
    
    3,078
    
    
    
    3,385Other operating expenses
    
    
    92
    
    
    
    10024,468
    
    
    
    27,663Operating income (loss)
    
    $
    5
    
    
    $
    (80
    )
 Results of Operations Year Ended May 31, 2005 as Compared to the Year Ended May 31, 2004.
  11




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Results
of Operations  Year Ended May 31, 2004 As Compared to the Year Ended May 31,
2003.
     Seasonality of Business
  12




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Liquidity and Capital Resources
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Commitments and Contractual Obligations
 Payments Due by PeriodLessThan 1
    
    
    
    
    
    4  5
    
    After 5Total
    
    Year
    
    1 - 3 Years
    
    Years
    
    Years(Amounts in thousands)Long-term Debt Obligations (a)
    
    $
    2,244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,244Capital Lease Obligations and related interest
    
    
    128
    
    
    
    63
    
    
    
    65
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    548
    
    
    
    481
    
    
    
    67
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    170
    
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,090
    
    
    
    714
    
    
    
    132
    
    
    
    
    
    
    
    2,244
 
 (a)
    
    Excludes 7 1/2% in interest payable semi-annually in April and October (see Note 11 
Long-term Debt to the audited, consolidated financial statements). Critical Accounting Estimates
   Recent Accounting Pronouncements
  CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
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Risk Factors
 Important Factors Related to Forward-Looking Statements and Associated Risks
  We may not be able to accurately predict utilization of our full-risk contracts resulting in
contracts priced at levels insufficient to ensure profitability.
  Our existing and potential managed care clients operate in a highly competitive environment and may
be subject to a higher rate of merger, acquisition and regulation than in other industries.
  Many managed care companies, including nine of our existing clients, provide services to groups
covered by Medicaid and/or CHIP programs. Recent state budgetary cutbacks to such programs have
reduced reimbursement rates and could ultimately affect companies such as CompCare.
  Because providers are responsible for claims submission, the timing of which is uncertain, we must
estimate the amount of claims incurred but not reported.
  A failure of our information systems would significantly impair our ability to serve our customers
and manage our business.
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We are subject to intense competition that may prevent us from gaining new customers or pricing our
contracts at levels to achieve sufficient gross margins to ensure profitability.
  As a result of our dependence on a limited number of customers, the loss of any one of these
customers, or a reduction in business from any one of them, could have a material, adverse effect
on our working capital and future results of operations.
  The industry is subject to extensive state and federal regulations, as well as diverse licensure
requirements varying by state. Changes in regulations could affect the profitability of our
contracts or our ability to retain clients or to gain new customers.
   We have noted an annual seasonality in the usage of our provider network. Our financial results
may suffer to the extent we cannot adequately manage periods of increased utilization.
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Currently, our Series A Preferred Shareholder is able to exercise decisive influence over our major
corporate decisions.
  
    
    Woodcliff can exercise decisive influence over the election of directors;
    
    Woodcliff can exercise decisive influence over major decisions involving the Company and its assets; and
    
    Woodcliff may have interests that differ from those of the Companys other stockholders.
 The holders of our Series A Shares have significant rights and preferences over the holders of the
common stock.
   
    
    to convert their preferred stock into an increased number of shares
of common stock as a result of antidilution adjustments;
    
    to vote together with the holders of the common stock on an
"as-converted" basis on all matters;
    
    to designate representatives to be appointed to our board of
directors and, voting together as a single class, to elect up to
five directors; and
    
    to prevent the creation and issuance of capital stock with rights
equal to or superior to those of the Series A Shares.
 We may be unable to sell the eye care memberships in which case our financial results will
suffer to the extent we have revenue from such memberships that is less than the cost we paid to
acquire them.
   
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   Report of Kirkland, Russ, Murphy & Tapp P.A
    
    
    19Report of Eisner LLP
    
    
    20Consolidated Balance Sheets, May 31, 2005 and 2004
    
    
    21Consolidated Statements of Operations, Years Ended May 31, 2005, 2004 and 2003
    
    
    22Consolidated Statements of Stockholders Deficit, Years Ended May 31, 2005, 2004 and 2003
    
    
    23Consolidated Statements of Cash Flows, Years Ended May 31, 2005, 2004 and 2003
    
    
    24Notes to Consolidated Financial Statements
    
    
    25-39
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Consolidated Balance Sheets
 May 31,2005
    
    2004(Amounts in Thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,695
    
    
    
    3,209Marketable securities
    
    
    11
    
    
    
    Accounts receivable, less allowance for doubtful accounts of $5 and
$10, respectively
    
    
    113
    
    
    
    191Accounts
receivable  managed care reinsurance contract
    
    
    372
    
    
    
    553Other current assets
    
    
    481
    
    
    
    524Total current assets
    
    
    4,672
    
    
    
    4,477Property and equipment, net
    
    
    384
    
    
    
    390Goodwill, net
    
    
    991
    
    
    
    991Restricted cash
    
    
    72
    
    
    
    325Other assets
    
    
    329
    
    
    
    42Total assets
    
    $
    6,448
    
    
    
    6,225LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    1,310
    
    
    
    1,720Accrued claims payable
    
    
    3,730
    
    
    
    3,647Accrued reinsurance claims payable
    
    
    3,191
    
    
    
    3,183Income taxes payable
    
    
    30
    
    
    
    25Total current liabilities
    
    
    8,261
    
    
    
    8,575Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    60
    
    
    
    131Total long-term liabilities
    
    
    2,304
    
    
    
    2,375Total liabilities
    
    
    10,565
    
    
    
    10,950Stockholders deficit:Preferred stock, $50.00 par value; authorized 18,740 shares; none issued
    
    
    
    
    
    
    Common stock, $0.01 par value; authorized 12,500,000 shares; issued
and outstanding 5,582,547 and 4,673,048, respectively
    
    
    56
    
    
    
    47Additional paid-in capital
    
    
    53,813
    
    
    
    52,950Deferred compensation
    
    
    
    
    
    
    (4
    )Accumulated deficit
    
    
    (57,986
    )
    
    
    (57,718
    )Total stockholders deficit
    
    
    (4,117
    )
    
    
    (4,725
    )Total liabilities and stockholders deficit
    
    $
    6,448
    
    
    
    6,225
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Consolidated Statements of Operations
 Year Ended May 31,2005
    
    2004
    
    2003(Amounts in thousands, except per share data)Operating Revenues
    
    $
    24,473
    
    
    
    27,583
    
    
    
    32,104Costs and Expenses:Healthcare operating expenses
    
    
    21,298
    
    
    
    24,178
    
    
    
    29,201General and administrative expenses
    
    
    3,078
    
    
    
    3,385
    
    
    
    3,459(Recovery of) provision for doubtful accounts
    
    
    (4
    )
    
    
    (7
    )
    
    
    20Depreciation and amortization
    
    
    96
    
    
    
    107
    
    
    
    19524,468
    
    
    
    27,663
    
    
    
    32,875Operating income (loss) before items shown below
    
    
    5
    
    
    
    (80
    )
    
    
    (771
    )Other income (expense):Net gain on IRS settlement
    
    
    
    
    
    
    
    
    
    
    7,717Loss in connection with collection of notes receivable
    
    
    
    
    
    
    (20
    )
    
    
    Loss on impairment  investment in marketable securities
    
    
    (118
    )
    
    
    
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    4Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    (5
    )Other non-operating income, net
    
    
    88
    
    
    
    1
    
    
    
    34Interest income
    
    
    15
    
    
    
    26
    
    
    
    47Interest expense
    
    
    (206
    )
    
    
    (215
    )
    
    
    (181
    )(Loss) income from continuing operations before income taxes
    
    
    (216
    )
    
    
    (288
    )
    
    
    6,845Income tax expense
    
    
    52
    
    
    
    102
    
    
    
    20(Loss) income from continuing operations
    
    
    (268
    )
    
    
    (390
    )
    
    
    6,825(Loss) income from discontinued operations
    
    
    
    
    
    
    (387
    )
    
    
    633Net (loss) income
    
    $
    (268
    )
    
    
    (777
    )
    
    
    7,458(Loss) income per common share  basic:(Loss) income from continuing operations
    
    $
    (0.05
    )
    
    
    (0.09
    )
    
    
    1.75(Loss) income from discontinued operations
    
    
    
    
    
    
    (0.09
    )
    
    
    0.16Net (loss) income
    
    $
    (0.05
    )
    
    
    (0.18
    )
    
    
    1.91(Loss) income per common share  diluted:(Loss) income from continuing operations
    
    $
    (0.05
    )
    
    
    (0.09
    )
    
    
    1.57(Loss) income from discontinued operations
    
    
    
    
    
    
    (0.09
    )
    
    
    0.15Net (loss) income
    
    $
    (0.05
    )
    
    
    (0.18
    )
    
    
    1.72Weighted average common shares outstanding:Basic
    
    
    4,935
    
    
    
    4,284
    
    
    
    3,905Diluted
    
    
    4,935
    
    
    
    4,284
    
    
    
    4,343
  22




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##### Table of Contents



CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
 ADDITIONAL
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    Paid-In
    
    Accumulated
    
    Deferred
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    compensation
    
    DeficitBalance, May 31, 2002
    
    
    3,879
    
    
    $
    39
    
    
    
    51,842
    
    
    
    (64,399
    )
    
    
    (1
    )
    
    
    (12,519
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,458
    
    
    
    
    
    
    
    7,458Shares issued for executive compensation
    
    
    20
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Compensatory stock options and warrants
granted to non-employees
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    (22
    )
    
    
    26Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    7Exercise of stock options
    
    
    38
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    18Balance, May 31, 2003
    
    
    3,937
    
    
    $
    39
    
    
    
    51,928
    
    
    
    (56,941
    )
    
    
    (16
    )
    
    
    (4,990
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (777
    )
    
    
    
    
    
    
    (777
    )Shares issued in connection with private
placement
    
    
    700
    
    
    
    7
    
    
    
    964
    
    
    
    
    
    
    
    
    
    
    
    971Compensatory stock options and warrants
granted to non-employees
    
    
    20
    
    
    
    1
    
    
    
    50
    
    
    
    
    
    
    
    (4
    )
    
    
    47Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    16Exercise of stock options
    
    
    16
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Balance, May 31, 2004
    
    
    4,673
    
    
    $
    47
    
    
    
    52,950
    
    
    
    (57,718
    )
    
    
    (4
    )
    
    
    (4,725
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (268
    )
    
    
    
    
    
    
    (268
    )Shares issued in connection with private
transactions
    
    
    775
    
    
    
    8
    
    
    
    535
    
    
    
    
    
    
    
    
    
    
    
    543Compensatory stock options and warrants
granted to non-employees
    
    
    18
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4Warrants issued in connection with private
transaction
    
    
    
    
    
    
    
    
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    234Exercise of stock options
    
    
    117
    
    
    
    1
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    64Balance, May 31, 2005
    
    
    5,583
    
    
    $
    56
    
    
    
    53,813
    
    
    
    (57,986
    )
    
    
    
    
    
    
    (4,117
    )
  23




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##### Table of Contents



Consolidated Statements of Cash Flows
 Year Ended May 31,2005
    
    2004
    
    2003(Amounts in thousands)Cash flows from operating activities:(Loss) income from continuing operations
    
    $
    (268
    )
    
    
    (390
    )
    
    
    6,825Adjustments to reconcile (loss) income from continuing operations
to net cash used in operating activities:Depreciation and amortization
    
    
    96
    
    
    
    107
    
    
    
    195Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    20Loss on
impairment  investment in marketable securities
    
    
    118
    
    
    
    
    
    
    
    Amortization of deferred revenue
    
    
    (75
    )
    
    
    
    
    
    
    Net gain from IRS settlement
    
    
    
    
    
    
    
    
    
    
    (7,717
    )Loss in connection with prepayment of note receivable
    
    
    
    
    
    
    20
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    (4
    )Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    5Compensation
expense  stock issued
    
    
    31
    
    
    
    33
    
    
    
    20Compensation
expense  stock options and warrants issued
    
    
    4
    
    
    
    31
    
    
    
    15Changes in assets and liabilities:Accounts receivable, net
    
    
    78
    
    
    
    (116
    )
    
    
    229Accounts
receivable  managed care reinsurance contract
    
    
    181
    
    
    
    (199
    )
    
    
    221Other receivable
    
    
    
    
    
    
    
    
    
    
    525Other current assets, restricted cash, and other assets
    
    
    9
    
    
    
    (4
    )
    
    
    286Unbenefitted tax refunds received
    
    
    
    
    
    
    
    
    
    
    (2,258
    )Accounts payable and accrued liabilities
    
    
    (377
    )
    
    
    (270
    )
    
    
    (132
    )Accrued claims payable
    
    
    83
    
    
    
    (456
    )
    
    
    (532
    )Accrued reinsurance claims payable
    
    
    8
    
    
    
    66
    
    
    
    1,098Income taxes payable
    
    
    5
    
    
    
    10
    
    
    
    (1
    )Net cash used in continuing operations
    
    
    (107
    )
    
    
    (1,168
    )
    
    
    (1,205
    )Net cash used in discontinued operations
    
    
    (151
    )
    
    
    (88
    )
    
    
    (480
    )Net cash used in continuing and discontinued operations
    
    
    (258
    )
    
    
    (1,256
    )
    
    
    (1,685
    )Cash flows from investing activities:Net proceeds from sale of property and equipment, net
    
    
    
    
    
    
    
    
    
    
    3Payment received on note for sale of property and equipment, net
    
    
    
    
    
    
    139
    
    
    
    4Additions to property and equipment, net
    
    
    (45
    )
    
    
    (210
    )
    
    
    (77
    )Net cash used in investing activities
    
    
    (45
    )
    
    
    (71
    )
    
    
    (70
    )Cash flows from financing activities:Proceeds from the issuance of common stock
    
    
    841
    
    
    
    979
    
    
    
    18Repayment of other liabilities
    
    
    (52
    )
    
    
    (33
    )
    
    
    (13
    )Net cash provided by financing activities
    
    
    789
    
    
    
    946
    
    
    
    5Net increase (decrease) in cash and cash equivalents
    
    
    486
    
    
    
    (381
    )
    
    
    (1,750
    )Cash and cash equivalents at beginning of year
    
    
    3,209
    
    
    
    3,590
    
    
    
    5,340Cash and cash equivalents at end of year
    
    $
    3,695
    
    
    
    3,209
    
    
    
    3,590Supplemental disclosures of cash flow information:Cash paid during the year forInterest
    
    $
    206
    
    
    
    205
    
    
    
    182Income taxes
    
    $
    48
    
    
    
    92
    
    
    
    22Noncash financing and investing activitiesProperty acquired under capital leases
    
    $
    43
    
    
    
    76
    
    
    
    49
  24




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##### Table of Contents



Note 1  Description of the Companys Business and Basis of Presentation
 
 Note 2  Summary of Significant Accounting Policies
 Principles of Consolidation
  Use of Estimates
  Revenue Recognition
  Healthcare Expense Recognition
   Premium Deficiencies
  25




---



##### Table of Contents



Cash and Cash Equivalents
  Restricted Cash
  Marketable Securities
  Property and Equipment
  Goodwill
   Extinguishment of Debt
  26




---



##### Table of Contents



Accrued Claims Payable
  Accrued Reinsurance Claims Payable
  Income Taxes
  Stock Options
  27




---



##### Table of Contents



Fiscal Year Ended May 31,2005
    
    2004
    
    2003(in thousands except for per share information)Net (loss) income, as reported
    
    $
    (268
    )
    
    $
    (777
    )
    
    $
    7,458Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
    
    
    (233
    )
    
    
    (211
    )
    
    
    (179
    )Pro forma net (loss) income
    
    $
    (501
    )
    
    $
    (988
    )
    
    $
    7,279(Loss) income per common share:Basic  as reported
    
    $
    (0.05
    )
    
    $
    (0.18
    )
    
    $
    1.91Basic  pro forma
    
    $
    (0.10
    )
    
    $
    (0.23
    )
    
    $
    1.86Diluted  as reported
    
    $
    (0.05
    )
    
    $
    (0.18
    )
    
    $
    1.72Diluted  pro forma
    
    $
    (0.10
    )
    
    $
    (0.23
    )
    
    $
    1.68
   Fiscal Year Ended May 31,2005
    
    2004
    
    2003Volatility factor of the expected market price of the
Companys common stock
    
    
    95.0
    %
    
    
    95.0
    %
    
    
    95.0
    %Expected life (in years) of the options
    
    
    5
    
    
    3, 4, and 5
    
    
    
    5Risk-free interest rate
    
    
    3.9
    %
    
    
    3.6
    %
    
    
    4.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    28




---



##### Table of Contents



Per Share data
  Fiscal Year Ended May 31,2005
    
    2004
    
    2003Numerator:(Loss) income from continuing operations
    
    $
    (268
    )
    
    
    (390
    )
    
    
    6,825(Loss) income from discontinued operations
    
    
    
    
    
    
    (387
    )
    
    
    633Numerator for diluted (loss) income per share available to Common
Stockholders
    
    $
    (268
    )
    
    
    (777
    )
    
    
    7,458Denominator:Weighted average shares
    
    
    4,935
    
    
    
    4,284
    
    
    
    3,905Effect of dilutive securities:Employee stock options
    
    
    
    
    
    
    
    
    
    
    437Warrants
    
    
    
    
    
    
    
    
    
    
    1Denominator for diluted income per share-adjusted weighted
Average shares after assumed exercises
    
    
    4,935
    
    
    
    4,284
    
    
    
    4,343(Loss) income per common share  basic:(Loss) income from continuing operations
    
    $
    (0.05
    )
    
    
    (0.09
    )
    
    
    1.75(Loss) income from discontinued operations
    
    
    
    
    
    
    (0.09
    )
    
    
    0.16Net (loss) income
    
    $
    (0.05
    )
    
    
    (0.18
    )
    
    
    1.91(Loss) income per common share  diluted:(Loss) income from continuing operations
    
    $
    (0.05
    )
    
    
    (0.09
    )
    
    
    1.57(Loss) income from discontinued operations
    
    
    
    
    
    
    (0.09
    )
    
    
    0.15Net (loss) income
    
    $
    (0.05
    )
    
    
    (0.18
    )
    
    
    1.72
 Fair Value of Financial Instruments
    2005
    
    2004Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(Amounts in thousands)AssetsCash and cash equivalents
    
    $
    3,695
    
    
    
    3,695
    
    
    
    3,209
    
    
    
    3,209Marketable securities
    
    
    11
    
    
    
    11
    
    
    
    
    
    
    
    Restricted cash
    
    
    72
    
    
    
    72
    
    
    
    325
    
    
    
    325LiabilitiesLong-term debt
    
    $
    2,244
    
    
    
    2,237
    
    
    
    2,244
    
    
    
    2,118
 29




---



##### Table of Contents



Note 3  Liquidity
   Note 4  Major Contracts/Customers
   30




---



##### Table of Contents



Note 5  Accounts Receivable
  Balance
    
    Additions
    
    
    
    
    
    Write-offBeginning
    
    Charged To
    
    Recoveries
    
    of
    
    Balanceof Year
    
    Expense
    
    *
    
    Accounts
    
    End of Year(Amounts in thousands)Year ended May 31, 2005
    
    $
    10
    
    
    
    5
    
    
    
    
    
    
    
    (10
    )
    
    
    5Year ended May 31, 2004
    
    $
    27
    
    
    
    10
    
    
    
    
    
    
    
    (27
    )
    
    
    10Year ended May 31, 2003
    
    $
    8
    
    
    
    43
    
    
    
    
    
    
    
    (24
    )
    
    
    27
 
    Note
6  Other Current Assets
  May 31,2005
    
    2004(Amounts in thousands)Accounts
receivable  other
    
    $
    38
    
    
    
    37Prepaid insurance
    
    
    311
    
    
    
    315Other prepaid fees and expenses
    
    
    132
    
    
    
    172Total other current assets
    
    $
    481
    
    
    
    524
 31




---



##### Table of Contents



Note 7  Other Assets
  May 31,2005
    
    2004(Amounts in thousands)Deferred costs  eye care memberships
    
    $
    125
    
    
    
    Deposits
    
    
    98
    
    
    
    20Other deferred costs
    
    
    106
    
    
    
    22Total other assets
    
    $
    329
    
    
    
    42
 Note 8  Property and Equipment, net
  May 31,2005
    
    2004(Amounts in thousands)Furniture and equipment
    
    $
    2,936
    
    
    
    3,385Leasehold improvements
    
    
    48
    
    
    
    49Capitalized leases
    
    
    141
    
    
    
    1303,125
    
    
    
    3,564Less accumulated depreciation and amortization
    
    
    (2,741
    )
    
    
    (3,174
    )Total property and equipment, net
    
    $
    384
    
    
    
    390
 Note 9  Discontinued Operations
   Note 10  Accounts Payable and Accrued Liabilities
  May 31,2005
    
    2004(Amounts in thousands)Accounts payable
    
    $
    189
    
    
    
    166Accrued salaries and wages
    
    
    118
    
    
    
    135Accrued vacation
    
    
    92
    
    
    
    141Accrued legal and audit
    
    
    96
    
    
    
    84Other accrued liabilities
    
    
    815
    
    
    
    1,194Total accounts payable and accrued liabilities
    
    $
    1,310
    
    
    
    1,720
 32




---



##### Table of Contents



Note 11  Long-term Debt
  May 31,2005
    
    2004(Amounts in Thousands)7 1/2% convertible subordinated debentures due April, 2010, interest
payable semi-annually in April and October*
    
    $
    2,244
    
    
    
    2,244
 
 *
    
    At May 31, 2005, the debentures are convertible into 9,044 shares of common stock at a
conversion price of $248.12 per share. Following the private transaction completed in June 2005
(see Note 17(1)  Subsequent Events), the debentures are convertible into 12,377 shares of common
stock at a conversion price of $181.30.
 Note 12  Income Taxes
  Fiscal Year Ended May 31,2005
    
    2004
    
    2003(Amounts in thousands)Current:Federal
    
    $
    
    
    
    
    
    
    
    
    State
    
    
    52
    
    
    
    102
    
    
    
    20$
    52
    
    
    
    102
    
    
    
    20
  Fiscal Year Ended May 31,2005
    
    2004
    
    2003(Amounts in thousands)Income tax provision (benefit) at the statutory tax rate
    
    $
    (73
    )
    
    
    (230
    )
    
    
    2,543State income tax provision (benefit), net of federal tax effect
    
    
    (8
    )
    
    
    (26
    )
    
    
    296Non-taxable gain on IRS settlement
    
    
    
    
    
    
    
    
    
    
    (3,733
    )Non-deductible items
    
    
    37
    
    
    
    44
    
    
    
    54Benefit of net operating loss carryforward not recognized
    
    
    96
    
    
    
    314
    
    
    
    840Other, net
    
    
    
    
    
    
    
    
    
    
    20$
    52
    
    
    
    102
    
    
    
    20
  May 31,2005
    
    2004(Amounts in thousands)Deferred Tax Assets:Net operating loss carryforwards
    
    $
    1,347
    
    
    
    1,332Accrued expenses
    
    
    78
    
    
    
    134Loss on impairment  investment in marketable securities
    
    
    45
    
    
    
    Employee benefits and options
    
    
    35
    
    
    
    55Other, net
    
    
    76
    
    
    
    90Total Deferred Tax Assets
    
    
    1,581
    
    
    
    1,611Valuation Allowance
    
    
    (1,581
    )
    
    
    (1,611
    )Net Deferred Tax Assets
    
    $
    
    
    
    
    
  33




---



##### Table of Contents



Note 13  Employee Benefit Plan
  Note 14  Preferred Stock, Common Stock, and Stock Option Plans
 Preferred Stock
  Common Stock
  Convertible
debentures(a)
    
    
    9,044Outstanding stock options
    
    
    1,343,956Possible
future issuance under stock option plans and warrants(b)
    
    
    982,503Total
    
    
    2,335,503
 
 
 34




---



##### Table of Contents



Stock Option Plans
    WeightedAverageShares
    
    Exercise PriceOutstanding as of May 31, 2002
    
    
    903,175
    
    
    $
    0.83Granted
    
    
    247,999
    
    
    
    1.03Exercised
    
    
    (38,000
    )
    
    
    0.48Forfeited
    
    
    (3,950
    )
    
    
    2.40Outstanding as of May 31, 2003
    
    
    1,109,224
    
    
    $
    0.88Granted
    
    
    161,666
    
    
    
    1.91Exercised
    
    
    (16,500
    )
    
    
    0.47Forfeited
    
    
    (25,000
    )
    
    
    1.86Outstanding as of May 31, 2004
    
    
    1,229,390
    
    
    $
    1.00Granted
    
    
    250,866
    
    
    
    1.25Exercised
    
    
    (116,500
    )
    
    
    0.55Forfeited
    
    
    (19,800
    )
    
    
    1.97Outstanding as of May 31, 2005
    
    
    1,343,956
    
    
    $
    1.08
 35




---



##### Table of Contents



Weighted-
    
    
    
    
    
    Weighted-Weighted-
    
    Average
    
    
    
    
    
    AverageExercise
    
    Average
    
    Remaining
    
    
    
    
    
    Exercise Price ofOptions
    
    Price
    
    Exercise
    
    Contractual
    
    Options
    
    ExercisableOutstanding
    
    Range
    
    Price
    
    Life
    
    Exercisable
    
    Options321,000
    
    
    $
    0.25-$0.39
    
    
    $
    0.26
    
    
    
    5.09
    
    
    
    321,000
    
    
    $
    0.26420,083
    
    
    $
    0.51-$0.61
    
    
    $
    0.55
    
    
    
    5.13
    
    
    
    420,083
    
    
    $
    0.55239,033
    
    
    $
    1.00-$1.40
    
    
    $
    1.20
    
    
    
    8.97
    
    
    
    201,283
    
    
    $
    1.22189,165
    
    
    $
    1.45-$1.70
    
    
    $
    1.57
    
    
    
    8.96
    
    
    
    152,499
    
    
    $
    1.5977,000
    
    
    $
    1.95-$2.16
    
    
    $
    2.10
    
    
    
    8.26
    
    
    
    77,000
    
    
    $
    2.1097,675
    
    
    $
    3.5625-$4.00
    
    
    $
    3.95
    
    
    
    3.53
    
    
    
    97,675
    
    
    $
    3.951,343,956
    
    
    $
    0.25-$4.00
    
    
    $
    1.08
    
    
    
    6.40
    
    
    
    1,269,540
    
    
    $
    1.06
 Note 15  Commitments and Contingencies
 Lease Commitments
   Fiscal Year
    
    Operating Leases(Amounts in thousands)2006
    
    $
    4812007
    
    
    652008
    
    
    2Total minimum lease payments
    
    $
    548
 Other Commitments and Contingencies
 (1)
    
    In connection with the Companys Preferred Provider Network license in Connecticut,
the Company is required to maintain a performance bond during all applicable terms of the
license. As such, the Company maintains a performance bond of $2,400,000 in compliance with
this requirement. In addition, a contract with one existing client requires the Company to
maintain two performance bonds totaling $330,000 throughout the contract term.(2)
    
    Related to the Companys discontinued hospital operations, Medicare guidelines allow
the Medicare fiscal intermediary to re-open previously filed cost reports. Management
believes that the Companys Fiscal 1998 and 1999 cost reports remain eligible for re-opening
at some future date, in which case the intermediary may determine that additional amounts are
due to or from Medicare.(3)
    
    The Company is subject to the requirements of the Health Insurance Portability and
Accountability Act of 1996 (HIPAA). The purpose of the HIPAA provisions is to improve the
efficiency and effectiveness of the healthcare system through standardization of the
electronic data interchange of certain administrative and financial transactions and, also, to
protect the security and privacy of protected health information. Entities subject to HIPAA
include some healthcare providers and all healthcare plans. To meet the specific requirements
of HIPAA, the Company determined it needed to make a significant investment in its current
information system or in a new information system that would better meet the Companys future
needs. As a result, the Company has entered into a Software License Maintenance and Services
Agreement with Qualifacts Systems, Inc. (Qualifacts), a vendor that has provided the Company
with an immediate, temporary solution to meet HIPAA compliance rules specific to the
Electronic Health Care Transactions and Code Sets Standards Model Compliance Plan with the
Centers for Medicare and Medicaid Services and, additionally, to design a new, customized
management information system that will enable the Company to continue to meet HIPAA
requirements in the future. The Company expects to incur approximately $370,000 of costs to
customize the Qualifacts system and activate the licenses needed for Qualifacts and other,
related third-party software.
 36




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##### Table of Contents



(4)
    
    The Company is actively marketing eye care memberships it acquired in November 2004.
If the Companys marketing plan fails with respect to these memberships, it may have to write
off some or all of the $125,000 the Company paid to acquire them (see Note 7  Other
Assets). While management believes the Companys marketing efforts will be successful, there
can be no assurance the Company will sell a quantity of memberships at prices that will allow
the Company to recover the $125,000 cost.(5)
    
    Effective August 1, 2005, the Companys principal operating subsidiary, CBC, entered
into a marketing agreement with Health Alliance Network, Inc. (HAN) whereas CBC has agreed
to appoint HAN as its primary representative and marketing agent for commercial business (see
Note 17(2)  Subsequent Events).
  37




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##### Table of Contents



Note 16  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 FISCAL 2005
    
    Quarter Ended
    
    Fiscal Year8/31/04
    
    11/30/04
    
    2/28/05
    
    5/31/05
    
    Total(Amounts in thousands, except per share data)Operating revenues
    
    $
    6,039
    
    
    
    6,231
    
    
    
    6,241
    
    
    
    5,962
    
    
    
    24,473Gross profit
    
    
    871
    
    
    
    903
    
    
    
    1,107
    
    
    
    294
    (a)
    
    
    3,175General and administrative expenses
    
    
    702
    
    
    
    727
    
    
    
    846
    
    
    
    803
    
    
    
    3,078Provision for (recovery of) doubtful accounts
    
    
    (5
    )
    
    
    1
    
    
    
    (2
    )
    
    
    2
    
    
    
    (4
    )Depreciation and amortization
    
    
    24
    
    
    
    23
    
    
    
    24
    
    
    
    25
    
    
    
    96Other expense
    
    
    41
    
    
    
    38
    
    
    
    14
    
    
    
    128
    (b)
    
    
    221Income (loss) from continuing operations before income taxes
    
    
    109
    
    
    
    114
    
    
    
    225
    
    
    
    (664
    )
    
    
    (216
    )Income tax expense
    
    
    18
    
    
    
    11
    
    
    
    13
    
    
    
    10
    
    
    
    52Net income (loss) from continuing operations
    
    $
    91
    
    
    
    103
    
    
    
    212
    
    
    
    (674
    )
    
    
    (268
    )Basic income (loss) per common share
    
    $
    0.02
    
    
    
    0.02
    
    
    
    0.04
    
    
    
    (0.12
    )
    
    
    (0.05
    )Diluted income (loss) per common share
    
    $
    0.02
    
    
    
    0.02
    
    
    
    0.04
    
    
    
    (0.12
    )
    
    
    (0.05
    )Weighted Average Common Shares Outstanding  basic
    
    
    4,682
    
    
    
    4,691
    
    
    
    4,794
    
    
    
    5,566
    
    
    
    4,935Weighted Average Common Shares Outstanding  diluted
    
    
    5,272
    
    
    
    5,262
    
    
    
    5,316
    
    
    
    5,566
    
    
    
    4,935
 
 (a)
    
    Includes an $88,000 expense reimbursement received from one former client.(b)
    
    Includes a loss on impairment of approximately $118,000 with respect to the Companys
marketable securities. FISCAL 2004
    Quarter Ended

    Fiscal Year8/31/03
    
    11/30/03
    
    2/29/04
    
    5/31/04
    
    Total(Amounts in thousands, except per share data)Operating revenues
    
    $
    7,893
    
    
    
    7,011
    
    
    
    6,348
    
    
    
    6,331
    
    
    
    27,583Gross profit
    
    
    1,041
    
    
    
    812
    
    
    
    828
    
    
    
    724
    
    
    
    3,405General and administrative expenses
    
    
    908
    
    
    
    970
    
    
    
    799
    
    
    
    708
    
    
    
    3,385Provision for (recovery of) doubtful accounts
    
    
    (8
    )
    
    
    (4
    )
    
    
    (2
    )
    
    
    7
    
    
    
    (7
    )Depreciation and amortization
    
    
    27
    
    
    
    28
    
    
    
    27
    
    
    
    25
    
    
    
    107Other expense
    
    
    35
    
    
    
    48
    
    
    
    73
    
    
    
    52
    
    
    
    208Income (loss) from continuing operations before income taxes
    
    
    79
    
    
    
    (230
    )
    
    
    (69
    )
    
    
    (68
    )
    
    
    (288
    )Income tax expense
    
    
    17
    
    
    
    3
    
    
    
    9
    
    
    
    73
    
    
    
    102Income (loss) from continuing operations
    
    
    62
    
    
    
    (233
    )
    
    
    (78
    )
    
    
    (141
    )
    
    
    (390
    )Loss from discontinued operations
    
    
    (387
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (387
    )Net loss
    
    $
    (325
    )
    
    
    (233
    )
    
    
    (78
    )
    
    
    (141
    )
    
    
    (777
    )Income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.02
    
    
    
    (0.06
    )
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.09
    )Loss from discontinued operations
    
    
    (0.10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Net loss
    
    $
    (0.08
    )
    
    
    (0.06
    )
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.18
    )Income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.01
    
    
    
    (0.06
    )
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.09
    )Loss from discontinued operations
    
    
    (0.08
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Net loss
    
    $
    (0.07
    )
    
    
    (0.06
    )
    
    
    (0.02
    )
    
    
    (0.03
    )
    
    
    (0.18
    )Weighted Average Common Shares Outstanding  basic
    
    
    3,937
    
    
    
    3,942
    
    
    
    4,585
    
    
    
    4,672
    
    
    
    4,284Weighted Average Common Shares Outstanding  diluted
    
    
    4,725
    
    
    
    3,942
    
    
    
    4,585
    
    
    
    4,672
    
    
    
    4,284
 38




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##### Table of Contents



Note
17  Subsequent Events
 (1)
    
    On June 14, 2005, pursuant to a Securities Purchase Agreement (the Securities Purchase
Agreement), the Company completed a private transaction for the sale of 14,400 shares of its
Series A Convertible Preferred Stock, $50.00 par value (Series A Shares), to one investor
for an aggregate of $3,600,000 in gross proceeds to the Company. The Company realized net
cash proceeds of approximately $3.4 million thereby reducing its working capital deficiency
and stockholders deficit each by approximately $3.4 million as a result of this transaction.
The shares issued in connection with this private placement have not been registered and may
be resold pursuant to Rule 144 under the general rules and regulations of the Securities Act
of 1933 as amended assuming that all of the conditions and provisions of the rule are complied
with. The earliest date that these shares would become eligible for resale without a
registration statement would be June 14, 2006. Further, each share of the Series A Shares is
convertible into 294.12 shares, or 4,235,328 shares, of the Companys common stock, subject to
anti-dilution and other customary adjustments. If the shares were converted into the Companys
common stock immediately after the closing of the transactions contemplated by the Securities
Purchase Agreement, the common stock issuable upon such conversion would represent
approximately 43% of the Companys outstanding common stock, excluding exercises of any
options or warrants outstanding at such time. Certain members of the Investor are
non-management employees of the Company. The Securities Purchase Agreement also provides that
the Company may require the Investor to purchase up to approximately 2.95 million shares of
the Companys common stock, subject to the Company attaining certain financial targets and
satisfying other conditions.(2)
    
    On August 3, 2005, the Companys principle operating subsidiary, Comprehensive Behavioral
Care, Inc. (CBC), entered into a marketing agreement (Agreement) with Health Alliance
Network, Inc. (HAN) whereas CBC has agreed to appoint HAN as its primary representative and
marketing agent for commercial business. Pursuant to the Agreement, HAN will receive a $15,000
monthly fee for its marketing services to CBC plus reimbursement of related travel expenses.
HAN will receive three percent of the gross revenues received by CBC from commercial services
agreements resulting from introductions made by HAN or its affiliates and approved by CBC.
HAN will receive an additional payment with respect to those commercial services agreements
exceeding certain pricing targets equal to fifty percent of the gross revenues exceeding such
pricing target. Further, CBC will pay HAN a quarterly bonus of $9,000 or $21,000 if the
Company achieves certain quarterly profit targets. The maximum payments to HAN, inclusive of
all fees and bonuses, shall not exceed $1.0 million in any fiscal year. The Agreement is
effective August 1, 2005 for an initial term of twenty-four (24) months and is automatically
renewable for additional periods of twelve months each unless terminated by either party. Two
of the shareholders of HAN are also part-time senior marketing employees of CBC and,
additionally, they are each members of the investment group that recently acquired 14,400
shares of the Companys Series A Shares (see Note 17(1) above).
 
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
 (a)
    
    On June 1, 2004, the Company dismissed Eisner LLP (Eisner) as its independent registered
public accounting firm. The determination to dismiss Eisner was made by the Audit Committee of
the Board of Directors of the Company and was prompted by economic considerations and, also,
the Companys desire to engage a firm with local presence. Eisners New York office had
audited the Companys consolidated financial statements for each of the two years ended May
31, 2003, and with respect to which had included in its reports a going concern uncertainty.
These reports did not contain any adverse opinion, disclaimer of opinion, or qualification or
modification as to audit scope or accounting principles. Since their retention as the
Companys independent registered public accounting firm and through June 1, 2004, there were
no disagreements with Eisner on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not resolved to
Eisners satisfaction would have caused Eisner to make reference thereto in their report on
the consolidated financial statements of the Company for such years. During the period of
their retention there were no reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K.(b)
    
    New Independent Registered Public Accounting Firm. On June 1, 2004, the Audit
Committee of the Board of Directors of the Company appointed Kirkland, Russ, Murphy & Tapp
P.A. (KRMT) to serve as its independent registered public accounting firm for the fiscal
year ending May 31, 2004. In the years ended May 31, 2003 and 2002, the Company did not
consult KRMT with respect to the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that might be rendered
on the Companys consolidated financial statements, or any other matters or reportable events
as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
 39




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##### Table of Contents



Item 9a. CONTROLS AND PROCEDURES
 Evaluation of the Companys Disclosure Controls and Internal Controls.
 Disclosure Controls and Internal Controls.
 Conclusion.
  
 Item 9b. OTHER INFORMATION
  
 PART III
 
 Item 10. E xecutive Officers and Directors of the Company
    40




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##### Table of Contents



Item 11.  EXECUTIVE COMPENSATION
  
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 EQUITY COMPENSATION PLAN INFORMATION
  (c)(a)
    
    (b)
    
    Number of securities remainingNumber of securities to
    
    Weighted-average
    
    available for future issuancebe issued upon exercise
    
    exercise price of
    
    under equity compensationof outstanding options,
    
    outstanding options,
    
    plans (excluding securitiesPlan category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))Equity compensation
plans approved by
shareholders
    
    
    1,343,956
    
    
    $
    1.08
    
    
    
    576,503Equity compensation
plans not approved
by shareholders*
    
    
    406,000
    
    
    
    1.78
    
    
    
    Total
    
    
    1,749,956
    
    
    $
    1.24
    
    
    
    576,503
 
   
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  41




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##### Table of Contents



Part IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    
    
    1.
    
    
    Consolidated Financial Statements  Included in Part II of this report:Reports of Independent Registered Public Accounting FirmsConsolidated Balance Sheets, May 31, 2005 and 2004Consolidated Statements of Operations, Years Ended May 31, 2005, 2004 and 2003Consolidated Statements of Stockholders Deficit, Years Ended May 31, 2005, 2004 and 2003Consolidated Statements of Cash Flows, Years Ended May 31, 2005, 2004 and 2003Notes to Consolidated Financial Statements2.
    
    
    Consolidated Financial Statement Schedules: None.
   Number
    
    Description and Reference3.1
    
    Restated Certificate of Incorporation as amended. (4)3.2
    
    Restated Bylaws as amended July 20, 2000. (8)3.3
    
    Bylaw amendment.(6)3.4
    
    Certificate of Designation, Preferences, and Rights of Series A
Convertible Preferred Stock of Comprehensive Care Corporation.(6)4.1
    
    Indenture dated April 25, 1985 between the Company and Bank of America,
NT&SA, relating to Convertible Subordinated Debentures. (1)4.2
    
    Form of Common Stock Certificate. (14)10.1
    
    Form of Stock Option Agreement. *(2)10.2
    
    Form of Indemnity Agreement as amended March 24, 1994. *(3)10.3
    
    Comprehensive Care Corporation 1995 Incentive Plan, as amended on November 17, 1998. (9)10.4
    
    Amended and Restated Non-Employee Directors Stock Option Plan. *(5)10.5
    
    Employment Agreement as amended February 7, 2003 between the Company and
Robert J. Landis. *(7)10.6
    
    Employment Agreement amendment dated June 14, 2005 between the Company and
Robert J. Landis. *(6)10.7
    
    Employment Agreement waiver dated June 14, 2005 between the Company and
Robert J. Landis. *(6)10.8
    
    Employment Agreement as amended February 7, 2003 between the Company and
Mary Jane Johnson. *(7)10.9
    
    Employment Agreement amendment dated June 14, 2005 between the Company and
Mary Jane Johnson. *(6)10.10
    
    Employment Agreement waiver dated June 14, 2005 between the Company and Mary Jane Johnson.*(6)10.11
    
    Employment Agreement dated June 3, 2002 between the Company and Thomas C. Clay. *(10)10.12
    
    Comprehensive Care Corporation 2002 Incentive Plan as amended. (11)10.13
    
    Stock Purchase Agreement dated June 14, 2005 between the Company and
Woodcliff Healthcare Investment Partners LLC.(6)10.14
    
    Registration Rights Agreement dated June 14, 2005 between the Company
and Woodcliff Healthcare Investment Partners LLC.(6)10.15
    
    Marketing Agreement by and between the Company and Health Alliance
Network, Inc.(15)14
    
    Code of Business Conduct and Ethics.(12)16
    
    Letter dated June 2, 2004 from Eisner LLP in concurrence with the
Companys statement made concerning Eisner LLPs dismissal as the Companys
principal accountant.(13)21
    
    List of the Companys active subsidiaries (filed herewith).23.1
    
    Consent of Kirkland, Russ, Murphy & Tapp P.A. (filed herewith).23.2
    
    Consent of Eisner LLP (filed herewith).
 42




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##### Table of Contents





Number
    
    Description and Reference31.1
    
    Comprehensive Care Corporation CEO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).31.2
    
    Comprehensive Care Corporation CFO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith).32.1
    
    Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C.
Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).32.2
    
    Comprehensive Care Corporation CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (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 10-K for the fiscal year ended May 31, 1988.(3)
    
    Filed as an exhibit to the Companys Form 10-K for the fiscal year ended
May 31, 1994.(4)
    
    Filed as an exhibit to the Companys Form 10-Q for the quarter ended
February 28, 1995.(5)
    
    Filed as an exhibit to the Companys Form 8-K dated November 9, 1995.(6)
    
    Filed as an exhibit to the Companys Form 8-K dated June 14, 2005.(7)
    
    Filed as an exhibit to the Companys Form 8-K dated February 7, 2003.(8)
    
    Filed as an exhibit to the Companys Form 10-K for the Fiscal Year ended
May 31, 2000.(9)
    
    Filed as an exhibit to the Companys Form 8-K dated November 25, 1998.(10)
    
    Filed as an exhibit to the Companys Form 8-K dated June 7, 2002.(11)
    
    Filed as Appendix A to the Companys definitive proxy statement on Schedule 14A filed
on January 28, 2005.(12)
    
    Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31,
2003.(13)
    
    Filed as an exhibit to the Companys Form 8-K, dated June 4, 2004.(14)
    
    Filed as an exhibit to Form S-8 (File No. 333-108561) filed on September 5, 2003.(15)
    
    Filed as an exhibit to the Companys Form 8-K, dated August 3, 2005. 43




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##### Table of Contents



COMPREHENSIVE CARE CORPORATIONBy
    
    /s/ MARY JANE JOHNSONMary Jane JohnsonPresident and Chief Executive Officer(Principal Executive Officer)By
    
    /s/ ROBERT J. LANDISRobert J. LandisChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
  Signature
    
    Title
    
    Date/s/   MARY JANE JOHNSON

Mary Jane Johnson
    
    President, Chief Executive Officer,
and Director
    
    August 19, 2005/s/   ROBERT J. LANDIS

Robert J. Landis
    
    Chairman of the Board of Directors,
Chief Financial Officer, and Treasurer
(Principal Financial and
Accounting Officer)
    
    August 19, 2005/s/   EUGENE L. FROELICH

Eugene L. Froelich
    
    Director
    
    August 19, 2005/s/   ROBERT PARKER

Robert Parker
    
    Director
    
    August 19, 2005/s/   DAVID P. SCHUSTER

David P. Schuster
    
    Director
    
    August 19, 2005/s/   BARRY A. STEIN

Barry A. Stein
    
    Director
    
    August 19, 2005/s/   PETER JESSE WALCOTT

Peter Jesse Walcott
    
    Director
    
    August 19, 2005
 44




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION
    
    PAGE NUMBER21
    
    List of the Companys subsidiaries
    
    
    4623.1
    
    Consent of Kirkland, Russ, Murphy & Tapp P.A.
    
    
    4723.2
    
    Consent of Eisner LLP
    
    
    4831.1
    
    Comprehensive Care Corporation CEO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    4931.2
    
    Comprehensive Care Corporation CFO Certification pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    
    5032.1
    
    Comprehensive Care Corporation CEO Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    5132.2
    
    Comprehensive Care Corporation CFO Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    52
 45