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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, 2006
 or
 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.)3405 W. Dr. Martin Luther King, Jr. Blvd, Suite 101
Tampa, Florida
(Address of principal executive offices)
    
    33607
(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
71/2 % Convertible Subordinated Debentures due 2010
 o þ
 o þ
 þ o
 þ
  o o þ
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DOCUMENTS INCORPORATED BY REFERENCE
  2




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TABLE OF CONTENTS  PART IItem 1. BUSINESSItem 1A. RISK FACTORSItem 1B. UNRESOLVED STAFF COMMENTSItem 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 ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A. CONTROLS AND PROCEDURESItem 9B. OTHER INFORMATIONPART IIIItem 10. DIRECTORS AND EXECUTIVE OFFICERS 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 SchedulesSIGNATURESEx-3.1 Restated Certificate of IncorporationEx-10.5 Amendment No. 1 to Stock Option PlanEx-21 Company's Active SubsidiariesEx-23.1 Kirkland Russ ConsentEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 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. 3




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Recent Developments
     4




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Changes in Capitalization
   Sources of Revenue
   5




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Growth Strategy
    Provider Network
    Competition
  6




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Seasonality of Business
  Government Regulation
    Accreditation
   7




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Management Information Systems
   Marketing and Sales
   Administration and employees
  Corporate Governance
  8




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Available Information
  Code of Ethics
  
 Item 1A. 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 eight of our existing clients, provide services to groups
covered by Medicaid and/or CHIP programs. Such state controlled programs are susceptible to annual
changes in reimbursement rates and eligibility requirements that could ultimately affect companies
such as CompCare.
  9




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Because providers are responsible for claims submission, the timing of which is uncertain, we must
estimate the amount of claims incurred but not reported.
  Failure to maintain effective internal controls over financial reporting could have a material
adverse effect on our operating results.
  A failure of our information systems would significantly impair our ability to serve our customers
and manage our business.
  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.
  10




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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.
  We are dependent on our executive officers and other key employees.
  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.
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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.
  The price of our common stock may be adversely affected by our small public capitalization.
   
 Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
  Monthly BaseLease
    
    RentName and Location
    
    Expires
    
    (in Dollars)Corporate Headquarters, Regional, Administrative, and Other OfficesTampa, Florida, Corporate Headquarters
    
    
    2008
    
    
    $
    20,421Grand Prairie, Texas
    
    
    2006
    *
    
    
    6,474
 
 *
    
    In June 2006, we renewed our Grand Prairie office lease for an additional two years
beginning August 1, 2006 at a monthly base rate of $3,086. 
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  12




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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
inter-dealer prices without retail mark-up, mark-down or commissions and may not
represent actual transactions.
 PriceFiscal Year
    
    
    
    High
    
    Low2006
    
    First Quarter
    
    $
    2.50
    
    
    
    1.50Second Quarter
    
    
    2.10
    
    
    
    1.25Third Quarter
    
    
    1.65
    
    
    
    1.10Fourth Quarter
    
    
    2.55
    
    
    
    1.402005
    
    First Quarter
    
    $
    1.60
    
    
    
    1.20Second Quarter
    
    
    1.60
    
    
    
    1.10Third Quarter
    
    
    1.50
    
    
    
    1.05Fourth Quarter
    
    
    2.00
    
    
    
    1.45
 (b)
    
    Holders  As of August 14, 2006, the Company had 1,383 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 year 2006, 2005, or 2004 and does not contemplate
the initiation of payment of any cash dividends in the foreseeable future. The holder
of record of our Series A Shares are entitled to receive dividends in preference to
the 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 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
  13




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##### Table of Contents



Item 6. SELECTED FINANCIAL DATA
    Year Ended May 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Amounts in thousands, except per share data)Consolidated Statements of Operations Data:Operating revenues
    
    $
    23,956
    
    
    $
    24,473
    
    
    $
    27,583
    
    
    $
    32,104
    
    
    $
    27,625Costs and expenses:Healthcare operating expenses
    
    
    20,562
    
    
    
    21,298
    
    
    
    24,178
    
    
    
    29,201
    
    
    
    24,625General and administrative expenses
    
    
    3,316
    
    
    
    3,078
    
    
    
    3,385
    
    
    
    3,459
    
    
    
    3,544(Recovery of) provision for doubtful accounts
    
    
    (88
    )
    
    
    (4
    )
    
    
    (7
    )
    
    
    20
    
    
    
    (112
    )Depreciation and amortization
    
    
    87
    
    
    
    96
    
    
    
    107
    
    
    
    195
    
    
    
    34223,877
    
    
    
    24,468
    
    
    
    27,663
    
    
    
    32,875
    
    
    
    28,399Operating income (loss) from continuing operations
before items shown below
    
    
    79
    
    
    
    5
    
    
    
    (80
    )
    
    
    (771
    )
    
    
    (774
    )Other income (expenses):Net gain on IRS settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,717
    
    
    
    Loss in connection with prepayment of note receivable
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    Loss from software development
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on impairment of investment
    
    
    (17
    )
    
    
    (118
    )
    
    
    
    
    
    
    
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    Other non operating income, net
    
    
    66
    
    
    
    88
    
    
    
    1
    
    
    
    34
    
    
    
    40Interest income
    
    
    78
    
    
    
    15
    
    
    
    26
    
    
    
    47
    
    
    
    88Interest expense
    
    
    (186
    )
    
    
    (206
    )
    
    
    (215
    )
    
    
    (181
    )
    
    
    (178
    )(Loss) income from continuing operations before income
taxes
    
    
    (103
    )
    
    
    (216
    )
    
    
    (288
    )
    
    
    6,845
    
    
    
    (824
    )Income tax expense
    
    
    78
    
    
    
    52
    
    
    
    102
    
    
    
    20
    
    
    
    1(Loss) income from continuing operations
    
    
    (181
    )
    
    
    (268
    )
    
    
    (390
    )
    
    
    6,825
    
    
    
    (825
    )(Loss) income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (387
    )
    
    
    633
    
    
    
    (Loss) income before cumulative effect of change in
accounting principle
    
    
    (181
    )
    
    
    (268
    )
    
    
    (777
    )
    
    
    7,458
    
    
    
    (825
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55Net (loss) income attributable to common stockholders
    
    $
    (181
    )
    
    $
    (268
    )
    
    $
    (777
    )
    
    $
    7,458
    
    
    $
    (770
    )(Loss) income per common share  basic:(Loss) income from continuing operations
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    1.75
    
    
    $
    (0.21
    )(Loss) income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )
    
    
    0.16
    
    
    
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01Net (loss) income
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.18
    )
    
    $
    1.91
    
    
    $
    (0.20
    )(Loss) income per common share  diluted:(Loss) income from continuing operations
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.09
    )
    
    $
    1.57
    
    
    $
    (0.21
    )(Loss) income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )
    
    
    0.15
    
    
    
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01Net (loss) income
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.18
    )
    
    $
    1.72
    
    
    $
    (0.20
    )Balance Sheet Data:Working capital (deficit)
    
    $
    120
    
    
    $
    (3,589
    )
    
    $
    (4,098
    )
    
    $
    (4,447
    )
    
    $
    (12,275
    )Total assets
    
    
    8,182
    
    
    
    6,448
    
    
    
    6,225
    
    
    
    6,379
    
    
    
    11,399Total long-term debt and capital lease obligations
    
    
    2,432
    
    
    
    2,375
    
    
    
    2,364
    
    
    
    2,298
    
    
    
    2,264Stockholders deficit
    
    $
    (743
    )
    
    $
    (4,117
    )
    
    $
    (4,725
    )
    
    $
    (4,990
    )
    
    $
    (12,519
    )
 14




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Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Overview
     Consolidated
    
    
    Consolidated
    
    
    ConsolidatedOperations
    
    
    Operations
    
    
    OperationsFiscal 2006
    
    
    Fiscal 2005
    
    
    Fiscal 2004(Amounts in thousands)Operating revenues:Capitated contracts
    
    $
    23,044
    
    
    $
    22,062
    
    
    $
    23,580Non-capitated sources
    
    
    912
    
    
    
    2,411
    
    
    
    4,003Total operating revenues
    
    
    23,956
    
    
    
    24,473
    
    
    
    27,583Operating expenses:Healthcare operating expenses:Claims expense (1)
    
    
    16,250
    
    
    
    16,379
    
    
    
    18,175Other healthcare operating expenses (1)
    
    
    4,312
    
    
    
    4,919
    
    
    
    6,003Total healthcare operating expenses
    
    
    20,562
    
    
    
    21,298
    
    
    
    24,178General and administrative expenses
    
    
    3,316
    
    
    
    3,078
    
    
    
    3,385Other operating expenses
    
    
    (1
    )
    
    
    92
    
    
    
    10023,877
    
    
    
    24,468
    
    
    
    27,663Operating income (loss)
    
    $
    79
    
    
    $
    5
    
    
    $
    (80
    )
 
 (1)
    
    Claims expense reflects the costs of revenue of capitated contracts, and other
healthcare operating expenses reflects the cost of revenue of capitated and non-capitated
contracts. 15




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Results of Operations Year Ended May 31, 2006 as Compared to the Year Ended May 31,
2005.
    Results of Operations Year Ended May 31, 2005 as Compared to the Year Ended May 31,
2004.
    16




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Seasonality of Business
  Liquidity and Capital Resources
    Commitments and Contractual Obligations
 Payments Due by PeriodLessThan 1
    
    
1  3

    
    
4  5

    
    
    After 5Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years(Amounts in thousands)Long-term Debt Obligations (a)
    
    $
    2,244
    
    
    
    
    
    
    
    
    
    
    
    2,244
    
    
    
    Capital Lease Obligations and related interest
    
    
    210
    
    
    
    83
    
    
    
    72
    
    
    
    55
    
    
    
    Operating Lease Obligations
    
    
    734
    
    
    
    286
    
    
    
    448
    
    
    
    
    
    
    
    Total
    
    $
    3,188
    
    
    
    369
    
    
    
    520
    
    
    
    2,299
    
    
    
    
 
 (a)
    
    Excludes 7 1/2% in interest payable semi-annually in April and October (see Note 13 
Long-term Debt to the audited, consolidated financial statements). Critical Accounting Estimates
  17




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Revenue Recognition
   Accrued Claims Payable and Claims Expense
    18




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May 31,2006
    
    
    2005
    
    
    2004(Amounts in thousands)Beginning accrued claims payable
    
    $
    3,730
    
    
    $
    3,647
    
    
    $
    4,103Claims expense:Current year
    
    
    16,174
    
    
    
    16,854
    
    
    
    18,085Prior year
    
    
    76
    
    
    
    (475
    )
    
    
    90Total claims expense
    
    
    16,250
    
    
    
    16,379
    
    
    
    18,175Claims payments:Current year
    
    
    13,384
    
    
    
    13,124
    
    
    
    14,438Prior year
    
    
    3,806
    
    
    
    3,172
    
    
    
    4,193Total claims payments
    
    
    17,190
    
    
    
    16,296
    
    
    
    18,631Ending accrued claims payable
    
    $
    2,790
    
    
    $
    3,730
    
    
    $
    3,647
   
    
    Changes in utilization patterns
    
    Changes in healthcare costs
    
    Changes in claims submission timeframes by providers
    
    Success in renegotiating contracts with healthcare providers
    
    Occurrence of catastrophes
    
    Changes in benefit plan design
    
    The impact of present or future state and federal regulations
  Change in Healthcare Costs:(Decrease)(Decrease)
    
    IncreaseIncrease
    
    In Claims Expense(5%)
    
    
    ($66,000
    )5%
    
    
    $66,000
 19




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Premium Deficiencies
    Marketable Securities
  
    
    The financial condition of the issuer.
    
    The length of time the investment has been in a continuous unrealized position.
    
    The Companys ability to hold the security for a period of time sufficient to allow for
any anticipated recovery.
 Goodwill
  Recent Accounting Pronouncements
  CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
 20




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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  21




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Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   Report of Kirkland, Russ, Murphy & Tapp P.A.
    
    
    23Consolidated Balance Sheets, May 31, 2006 and 2005
    
    
    24Consolidated Statements of Operations, Years Ended May 31, 2006, 2005 and 2004
    
    
    25Consolidated Statements of Stockholders Deficit, Years Ended May 31, 2006, 2005 and 2004
    
    
    26Consolidated Statements of Cash Flows, Years Ended May 31, 2006, 2005 and 2004
    
    
    27Notes to Consolidated Financial Statements
    
    
    28-42
 22




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Consolidated Balance Sheets
 May 31,2006
    
    
    2005(Amounts in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,463
    
    
    
    3,695Restricted cash
    
    
    589
    
    
    
    Marketable securities
    
    
    1
    
    
    
    11Accounts receivable, less allowance for doubtful
accounts of $0 and $5, respectively
    
    
    153
    
    
    
    113Accounts receivable  managed care reinsurance contract
    
    
    
    
    
    
    372Other current assets
    
    
    476
    
    
    
    481Total current assets
    
    
    6,682
    
    
    
    4,672Property and equipment, net
    
    
    251
    
    
    
    384Note receivable
    
    
    55
    
    
    
    Goodwill, net
    
    
    991
    
    
    
    991Restricted cash
    
    
    
    
    
    
    72Other assets
    
    
    203
    
    
    
    329Total assets
    
    $
    8,182
    
    
    
    6,448LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    1,198
    
    
    
    1,310Accrued claims payable
    
    
    2,790
    
    
    
    3,730Accrued reinsurance claims payable
    
    
    2,526
    
    
    
    3,191Income taxes payable
    
    
    48
    
    
    
    30Total current liabilities
    
    
    6,562
    
    
    
    8,261Long-term liabilities:Long-term debt
    
    
    2,244
    
    
    
    2,244Other liabilities
    
    
    119
    
    
    
    60Total long-term liabilities
    
    
    2,363
    
    
    
    2,304Total liabilities
    
    
    8,925
    
    
    
    10,565Stockholders deficit:Preferred stock, $50.00 par value; authorized 18,740
shares; 14,400 issued
    
    
    720
    
    
    
    Common stock, $0.01 par value; authorized
30,000,000 and 12,500,000 shares, respectively;
issued and outstanding 5,898,707 and 5,582,547,
respectively
    
    
    59
    
    
    
    56Additional paid-in capital
    
    
    56,645
    
    
    
    53,813Accumulated deficit
    
    
    (58,167
    )
    
    
    (57,986
    )Total stockholders deficit
    
    
    (743
    )
    
    
    (4,117
    )Total liabilities and stockholders deficit
    
    $
    8,182
    
    
    
    6,448
  24




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Consolidated Statements of Operations
 Year Ended May 31,2006
    
    
    2005
    
    
    2004(Amounts in thousands, except per share data)Operating Revenues
    
    $
    23,956
    
    
    
    24,473
    
    
    
    27,583Costs and Expenses:Healthcare operating expenses
    
    
    20,562
    
    
    
    21,298
    
    
    
    24,178General and administrative expenses
    
    
    3,316
    
    
    
    3,078
    
    
    
    3,385Recovery of doubtful accounts
    
    
    (88
    )
    
    
    (4
    )
    
    
    (7
    )Depreciation and amortization
    
    
    87
    
    
    
    96
    
    
    
    10723,877
    
    
    
    24,468
    
    
    
    27,663Operating income (loss) before items shown below
    
    
    79
    
    
    
    5
    
    
    
    (80
    )Other income (expense):Loss from software development
    
    
    (123
    )
    
    
    
    
    
    
    Loss in connection with collection of notes receivable
    
    
    
    
    
    
    
    
    
    
    (20
    )Loss on impairment  investment in marketable securities
    
    
    (17
    )
    
    
    (118
    )
    
    
    Other non-operating income, net
    
    
    66
    
    
    
    88
    
    
    
    1Interest income
    
    
    78
    
    
    
    15
    
    
    
    26Interest expense
    
    
    (186
    )
    
    
    (206
    )
    
    
    (215
    )Loss from continuing operations before income taxes
    
    
    (103
    )
    
    
    (216
    )
    
    
    (288
    )Income tax expense
    
    
    78
    
    
    
    52
    
    
    
    102Loss from continuing operations
    
    
    (181
    )
    
    
    (268
    )
    
    
    (390
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (387
    )Net loss
    
    $
    (181
    )
    
    
    (268
    )
    
    
    (777
    )Loss per common share  basic:Loss from continuing operations
    
    $
    (0.03
    )
    
    
    (0.05
    )
    
    
    (0.09
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Net loss
    
    $
    (0.03
    )
    
    
    (0.05
    )
    
    
    (0.18
    )Loss per common share  diluted:Loss from continuing operations
    
    $
    (0.03
    )
    
    
    (0.05
    )
    
    
    (0.09
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Net loss
    
    $
    (0.03
    )
    
    
    (0.05
    )
    
    
    (0.18
    )Weighted average common shares outstanding:Basic
    
    
    5,808
    
    
    
    4,935
    
    
    
    4,284Diluted
    
    
    5,808
    
    
    
    4,935
    
    
    
    4,284
  25




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##### Table of Contents



CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT  ( )
 Additional
    
    
    
    
    
    
    
    
    
    
    TotalPreferred stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Deferred
    
    
    Stockholdersshares
    
    
    amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    compensation
    
    
    DeficitBalance, 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
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (181
    )
    
    
    
    
    
    
    (181
    )Shares issued in connection with private
transactions
    
    
    14
    
    
    
    720
    
    
    
    
    
    
    
    
    
    
    
    2,650
    
    
    
    
    
    
    
    
    
    
    
    3,370Compensatory stock issued to non-employees
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    53Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    282
    
    
    
    3
    
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    132Balance, May 31, 2006
    
    
    14
    
    
    $
    720
    
    
    
    5,899
    
    
    $
    59
    
    
    
    56,645
    
    
    
    (58,167
    )
    
    
    
    
    
    
    (743
    )
  26




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##### Table of Contents



Consolidated Statements of Cash Flows
 Year Ended May 31,2006
    
    
    2005
    
    
    2004(Amounts in thousands)Cash flows from operating activities:Loss from continuing operations
    
    $
    (181
    )
    
    
    (268
    )
    
    
    (390
    )Adjustments to reconcile loss from continuing operations to net
cash used in operating activities:Depreciation and amortization
    
    
    87
    
    
    
    96
    
    
    
    107Asset writedown  eye care memberships
    
    
    63
    
    
    
    
    
    
    
    Loss on impairment  investment in marketable securities
    
    
    17
    
    
    
    118
    
    
    
    Amortization of deferred revenue
    
    
    (58
    )
    
    
    (75
    )
    
    
    Loss from software development
    
    
    123
    
    
    
    
    
    
    
    Loss in connection with prepayment of note receivable
    
    
    
    
    
    
    
    
    
    
    20Compensation expense  stock issued
    
    
    53
    
    
    
    31
    
    
    
    33Compensation expense  stock options and warrants issued
    
    
    
    
    
    
    4
    
    
    
    31Changes in assets and liabilities:Accounts receivable, net
    
    
    (40
    )
    
    
    78
    
    
    
    (116
    )Accounts receivable  managed care reinsurance contract
    
    
    372
    
    
    
    181
    
    
    
    (199
    )Other current assets, restricted cash, and other assets
    
    
    (425
    )
    
    
    9
    
    
    
    (4
    )Accounts payable and accrued liabilities
    
    
    (23
    )
    
    
    (377
    )
    
    
    (270
    )Accrued claims payable
    
    
    (940
    )
    
    
    83
    
    
    
    (456
    )Accrued reinsurance claims payable
    
    
    (665
    )
    
    
    8
    
    
    
    66Income taxes payable
    
    
    18
    
    
    
    5
    
    
    
    10Net cash used in continuing operations
    
    
    (1,599
    )
    
    
    (107
    )
    
    
    (1,168
    )Net cash used in discontinued operations
    
    
    (55
    )
    
    
    (151
    )
    
    
    (88
    )Net cash used in continuing and discontinued operations
    
    
    (1,654
    )
    
    
    (258
    )
    
    
    (1,256
    )Cash flows from investing activities:Payment received on note for sale of property and equipment, net
    
    
    
    
    
    
    
    
    
    
    139Additions to property and equipment, net
    
    
    (25
    )
    
    
    (45
    )
    
    
    (210
    )Net cash used in investing activities
    
    
    (25
    )
    
    
    (45
    )
    
    
    (71
    )Cash flows from financing activities:Proceeds from the issuance of common stock
    
    
    3,502
    
    
    
    841
    
    
    
    979Repayment of other liabilities
    
    
    (55
    )
    
    
    (52
    )
    
    
    (33
    )Net cash provided by financing activities
    
    
    3,447
    
    
    
    789
    
    
    
    946Net increase (decrease) in cash and cash equivalents
    
    
    1,768
    
    
    
    486
    
    
    
    (381
    )Cash and cash equivalents at beginning of year
    
    
    3,695
    
    
    
    3,209
    
    
    
    3,590Cash and cash equivalents at end of year
    
    $
    5,463
    
    
    
    3,695
    
    
    
    3,209Supplemental disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    187
    
    
    
    206
    
    
    
    205Income taxes
    
    $
    60
    
    
    
    48
    
    
    
    92Noncash financing and investing activities:Property acquired under capital leases
    
    $
    131
    
    
    
    43
    
    
    
    76
  27




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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
  28




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##### Table of Contents



Cash and Cash Equivalents
  Restricted Cash
  Marketable Securities
  Property and Equipment
  Goodwill
  29




---



##### Table of Contents



Accrued Claims Payable
  Accrued Reinsurance Claims Payable
  Income Taxes
  Stock Options
  30




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##### Table of Contents



Fiscal Year Ended May 31,2006
    
    
    2005
    
    
    2004(in thousands except for per shareinformation)Net loss, as reported
    
    $
    (181
    )
    
    $
    (268
    )
    
    $
    (777
    )Deduct:Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
    
    
    (212
    )
    
    
    (303
    )
    
    
    (172
    )Pro forma net loss
    
    $
    (393
    )
    
    $
    (571
    )
    
    $
    (949
    )Loss per common share:Basic  as reported
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.18
    )Basic  pro forma
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.22
    )Diluted  as reported
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    $
    (0.18
    )Diluted  pro forma
    
    $
    (0.07
    )
    
    $
    (0.12
    )
    
    $
    (0.22
    )
   Fiscal Year Ended May 31,2006
    
    2005
    
    2004Volatility factor of the expected market price of the
Companys common stock
    
    
    100.8
    %
    
    
    95.0
    %
    
    
    95.0
    %Expected life (in years) of the options
    
    
    5
    
    
    
    5
    
    
    3, 4, and 5Risk-free interest rate
    
    
    4.5
    %
    
    
    3.9
    %
    
    
    3.6
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
   31




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##### Table of Contents



Per Share data
  Fiscal Year Ended May 31,2006
    
    
    2005
    
    
    2004(Amounts in thousands, except per share information)Numerator:Loss from continuing operations
    
    $
    (181
    )
    
    
    (268
    )
    
    
    (390
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (387
    )Numerator for diluted loss per share available to Common
Stockholders
    
    $
    (181
    )
    
    
    (268
    )
    
    
    (777
    )Denominator:Weighted average shares
    
    
    5,808
    
    
    
    4,935
    
    
    
    4,284Effect of dilutive securities:Employee stock options
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted income per share-adjusted weighted
average shares after assumed exercises
    
    
    5,808
    
    
    
    4,935
    
    
    
    4,284Loss per common share  basic and diluted:Loss from continuing operations
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    
    (0.09
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Net loss
    
    $
    (0.03
    )
    
    $
    (0.05
    )
    
    
    (0.18
    )
 Fair Value of Financial Instruments
    2006
    
    2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(Amounts in thousands)AssetsCash and cash equivalents
    
    $
    5,463
    
    
    
    5,463
    
    
    
    3,695
    
    
    
    3,695Marketable securities
    
    
    1
    
    
    
    1
    
    
    
    11
    
    
    
    11Restricted cash
    
    
    589
    
    
    
    589
    
    
    
    72
    
    
    
    72Note receivable
    
    
    79
    
    
    
    79
    
    
    
    
    
    
    
    LiabilitiesLong-term debt
    
    $
    2,244
    
    
    
    2,254
    
    
    
    2,244
    
    
    
    2,237
 32




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##### Table of Contents



Note 3  Liquidity
  Note 4  Sources Of Revenue
  Fiscal Year Ended May 31,2006
    
    
    2005
    
    
    2004Capitated contracts
    
    $
    23,044
    
    
    $
    22,062
    
    
    $
    23,580Non-capitated contracts
    
    
    912
    
    
    
    2,411
    
    
    
    4,003Total
    
    $
    23,956
    
    
    $
    24,473
    
    
    $
    27,583
  Note 5  Major Contracts/Customers
    33




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##### Table of Contents



Note 6  Accounts Receivable
  Balance
    
    Additions
    
    
    
    
    
    Write-offBeginning
    
    Charged To
    
    Recoveries
    
    of
    
    Balanceof Year
    
    Expense
    
    *
    
    Accounts
    
    End of Year(Amounts in thousands)Year ended May 31, 2006
    
    $
    5
    
    
    
    
    
    
    
    (4
    )
    
    
    (1
    )
    
    Year ended May 31, 2005
    
    $
    10
    
    
    
    5
    
    
    
    
    
    
    
    (10
    )
    
    
    5Year ended May 31, 2004
    
    $
    27
    
    
    
    10
    
    
    
    
    
    
    
    (27
    )
    
    
    10
 
 *
    
    Excludes $89,000 in 2006, $9,000 in 2005, and $17,000 in 2004 of recoveries from accounts
previously written off.  Note 7  Other Current Assets
  May 31,2006
    
    
    2005(Amounts in thousands)Accounts receivable  other
    
    $
    17
    
    
    
    38Deposits
    
    
    86
    
    
    
    Prepaid insurance
    
    
    133
    
    
    
    311Note receivable (1)
    
    
    24
    
    
    
    Other prepaid fees and expenses
    
    
    216
    
    
    
    132Total other current assets
    
    $
    476
    
    
    
    481
 
 (1)
    
    The Company had contracted in March 2004 with a software vendor to design a new
managed care information system. In March 2006, after the Company had invested $200,000 of the
$370,000 total cost of the new system, the vendor informed the Company that it would not be able to
complete the design of the information system within the timeframe required by the Company to meet
future information system needs. The Company sought a full refund of amounts paid but to avoid a
protracted dispute, negotiated a settlement agreement whereby the vendor is to pay CompCare $2,500
per month for 36 months beginning August 1, 2006 for a total of $90,000. The receivable from this
vendor is non-interest bearing and unsecured. The difference between the present value of the 36
monthly payments and the Companys $200,000 investment has been recorded in the accompanying
consolidated statement of operations described as a loss from software development. The current
portion of the receivable is a component of other current assets while the non-current portion of
approximately $55,000 appears as a note receivable in the accompanying consolidated balance sheet
at May 31, 2006. Note 8  Other Assets
  May 31,2006
    
    
    2005(Amounts in thousands)Deferred costs  eye care memberships
    
    $
    62
    
    
    
    125Deposits
    
    
    51
    
    
    
    98Other deferred costs
    
    
    90
    
    
    
    106Total other assets
    
    $
    203
    
    
    
    329
 34




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##### Table of Contents



Note 9  Property and Equipment, net
  May 31,2006
    
    
    2005(Amounts in thousands)Furniture and equipment
    
    $
    2,257
    
    
    
    2,936Leasehold improvements
    
    
    46
    
    
    
    48Capitalized leases
    
    
    272
    
    
    
    1412,575
    
    
    
    3,125Less accumulated depreciation and amortization
    
    
    (2,324
    )
    
    
    (2,741
    )Total property and equipment, net
    
    $
    251
    
    
    
    384
 Note 10  Discontinued Operations
  Note 11  Accounts Payable and Accrued Liabilities
  May 31,2006
    
    
    2005(Amounts in thousands)Accounts payable
    
    $
    289
    
    
    
    189Accrued salaries and wages
    
    
    112
    
    
    
    118Accrued vacation
    
    
    101
    
    
    
    92Accrued legal and audit
    
    
    121
    
    
    
    96Short-term portion of capital lease obligations
    
    
    69
    
    
    
    52Other accrued liabilities
    
    
    506
    
    
    
    763Total accounts payable and accrued liabilities.
    
    $
    1,198
    
    
    
    1,310
 35




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##### Table of Contents



Note 12  Capital Leases
  May
31,2006
    
    

2005(Amounts in thousands)Classes of property:Computer equipment
    
    $
    89
    
    
    $
    94Telephone equipment
    
    
    183
    
    
    
    47Total equipment cost
    
    
    272
    
    
    
    141Less: accumulated depreciation
    
    
    98
    
    
    
    59Net book value
    
    $
    174
    
    
    $
    82Future minimum lease payments under the capital leases
are as follows:Fiscal year ended May 31, 2007
    
    
    83Fiscal year ended May 31, 2008
    
    
    42Fiscal year ended May 31, 2009
    
    
    30Fiscal year ended May 31, 2010
    
    
    30Fiscal year ended May 31, 2011
    
    
    38Total minimum lease payments
    
    
    223Less: amount representing interest
    
    
    35Total obligations under capital leases
    
    
    188Less: current installments of capital lease obligations
    
    
    69Longterm obligation under capital leases
    
    $
    119
 Note 13  Long-term Debt
  May 31,2006
    
    
    2005(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, 2006, the debentures are convertible into 12,377 shares of common stock at a conversion
price of $181.30 per share. Note 14  Income Taxes
  Fiscal Year Ended May 31,2006
    
    
    2005
    
    
    2004(Amounts in thousands)Current:Federal
    
    $
    
    
    
    
    
    
    
    
    State
    
    
    78
    
    
    
    52
    
    
    
    102$
    78
    
    
    
    52
    
    
    
    102
 36




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##### Table of Contents



Fiscal Year Ended May 31,2006
    
    
    2005
    
    
    2004(Amounts in thousands)Income tax benefit at the statutory tax rate
    
    $
    (35
    )
    
    
    (73
    )
    
    
    (230
    )State income tax expense (benefit), net of federal tax effect
    
    
    74
    
    
    
    (8
    )
    
    
    (26
    )Change in valuation allowance
    
    
    (16
    )
    
    
    
    
    
    
    Non-deductible items
    
    
    38
    
    
    
    37
    
    
    
    44Benefit of net operating loss carryforward not recognized
    
    
    
    
    
    
    96
    
    
    
    314Other
    
    
    17
    
    
    
    
    
    
    
    $
    78
    
    
    
    52
    
    
    
    102
  May 31,2006
    
    
    2005(Amounts in thousands)Deferred Tax Assets:Net operating loss carryforwards
    
    $
    1,418
    
    
    
    1,347Accrued expenses
    
    
    50
    
    
    
    78Loss on impairment  investment in marketable securities
    
    
    51
    
    
    
    45Employee benefits and options
    
    
    38
    
    
    
    35Other, net
    
    
    (30
    )
    
    
    76Total Deferred Tax Assets
    
    
    1,527
    
    
    
    1,581Valuation Allowance
    
    
    (1,527
    )
    
    
    (1,581
    )Net Deferred Tax Assets
    
    $
    
    
    
    
    
   Note 15  Employee Benefit Plan
  37




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##### Table of Contents



Note 16  Preferred Stock, Common Stock, and Stock Option Plans
 Preferred Stock
   Common Stock
  Convertible debentures(a)
    
    
    12,377Convertible preferred stock(b)
    
    
    4,235,328Outstanding stock options(c)
    
    
    1,186,407Outstanding warrants(d)
    
    
    406,000Possible future issuance under stock option plans
    
    
    1,199,336Total
    
    
    7,039,448
 
 (a)
    
    The debentures are convertible into 12,377 shares of common stock at a conversion price of
$181.30 per share.(b)
    
    The Series A Convertible Preferred Stock is convertible into 4,235,328 shares of common stock
at a conversion rate of 294.12 common shares for each preferred share.(c)
    
    Options to purchase common stock of the Company have been issued to employees and non-employee
Board of Director members with exercise prices ranging from $.25 to $4.00.(d)
    
    Warrants to purchase common stock of the Company have been issued to certain individuals or
vendors in exchange for consulting services. All such warrants were issued in lieu of cash
compensation and have five-year terms with exercise prices ranging from $1.09 to $5.00. Stock Option Plans
  38




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##### Table of Contents



WeightedAverageShares
    
    Exercise PriceOutstanding 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
    
    
    $
    1.08Granted
    
    
    314,666
    
    
    
    1.82Exercised
    
    
    (282,166
    )
    
    
    0.47Forfeited
    
    
    (190,049
    )
    
    
    1.41Outstanding as of May 31, 2006
    
    
    1,186,407
    
    
    $
    1.36
 39




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##### Table of Contents



Weighted-Weighted-

    
    Weighted-

    
    
    
    
    
    AverageExercise
    
    
    Average

    
    Average

    
    
    
    
    
    Exercise Price ofOptions
    
    Price
    
    
    Exercise

    
    Remaining

    
    
    
    
    
    ExercisableOutstanding

    
    Range
    
    
    Price

    
    Contractual Life

    
    Options Exercisable

    
    Options199,000
    
    
    $
    0.25 -  $0.39
    
    
    $
    0.26
    
    
    
    4.24
    
    
    
    199,000
    
    
    $
    0.26281,250
    
    
    $
    0.51 -  $0.61
    
    
    $
    0.55
    
    
    
    4.11
    
    
    
    281,250
    
    
    $
    0.55175,533
    
    
    $
    1.00 -  $1.45
    
    
    $
    1.32
    
    
    
    8.02
    
    
    
    173,033
    
    
    $
    1.32359,499
    
    
    $
    1.60 -  $1.85
    
    
    $
    1.78
    
    
    
    9.17
    
    
    
    172,833
    
    
    $
    1.7474,500
    
    
    $
    1.95 -  $2.45
    
    
    $
    2.14
    
    
    
    7.50
    
    
    
    64,500
    
    
    $
    2.1096,625
    
    
    $
    3.5625 -  $4.00
    
    
    $
    3.95
    
    
    
    2.54
    
    
    
    96,625
    
    
    $
    3.951,186,407
    
    
    $
    0.25 - $4.00
    
    
    $
    1.36
    
    
    
    6.33
    
    
    
    987,241
    
    
    $
    1.27
 Warrants
  Number of warrants Capitated contracts
    
    
    306,000Exercise price
    
    $
    1.25Volatility factor of the expected market price of the
Companys common stock
    
    
    95.0
    %Expected life of the warrants
    
    3 yearsRisk-free interest rate
    
    
    3.9
    %Dividend yield
    
    
    0.0
    %Warrant valuation (in thousands)
    
    $
    234
  Note 17  Commitments and Contingencies
 Lease Commitments
   Fiscal Year
    
    
    
    
    
    
    
    
    

    Operating Leases(Amounts in thousands)2007
    
    
    
    
    
    
    
    
    
    
    $
    2862008
    
    
    
    
    
    
    
    
    
    
    
    2912009
    
    
    
    
    
    
    
    
    
    
    

    157Total minimum lease payments
    
    
    
    
    
    
    
    
    
    
    $
    734
  40




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##### Table of Contents



Other Commitments and Contingencies
 (1)
    
    In connection with the Companys Preferred Provider Network license in Connecticut and
Third Party Administrator license in Maryland, the Company is required to maintain performance
bonds during the terms of the licenses. As such, the Company maintains performance bonds in
amounts totaling $2,425,000 in compliance with these requirements. 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 cost reports are being reviewed, in which case the
intermediary may determine that additional amounts are due to or from Medicare.
 (3)
    
    The Company is actively marketing eye care memberships it acquired in November 2004.
As of May 31, 2006 none of the memberships had been sold. As such, the Company believes it
is probable that it will not recover its full investment of $125,000 and accordingly has
recorded a valuation reserve of 50%, or $62,500, to reduce the carrying value of the
memberships to managements best estimate of recoverable value. If the Companys marketing
plan is not successful with respect to selling these memberships, it may have to write off the
remaining amount the Company paid to acquire them (see Note 8  Other Assets). 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.
 (4)
    
    In August 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 unless terminated by either party. Two of
the shareholders of HAN are each members of the investment group that acquired 14,400 shares
of the Companys Series A Shares in June 2005.
 (5)
    
    The Company has insurance for a broad range of risks as it relates to its business
operations. The Company maintains managed care errors and omissions, professional and general
liability coverage. These policies are written on a claims-made basis and are subject to a
$100,000 per claim self-insured retention. The managed care errors and omissions and
professional liability policies include limits of liability of $1 million per claim and $3
million in the aggregate. The general liability has a limit of liability of $5 million per
claim and $5 million in the aggregate. The Company is responsible for claims within the
self-insured retentions or if the policy limits are exceeded. Management is not aware of any
claims that could have a material adverse impact on the Companys consolidated financial
statements.
 Note 18  Related Party Transactions
  41




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##### Table of Contents



Note 19  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 FISCAL 2006
 Quarter Ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fiscal Year8/31/05
    
    
    
    
    
    
    11/30/05
    
    
    2/28/06
    
    
    
    
    
    
    5/31/06
    
    
    
    
    
    
    Total(Amounts in thousands, except per share data)Operating revenues
    
    $
    6,301
    
    
    
    
    
    
    
    6,756
    
    
    
    5,585
    
    
    
    
    
    
    
    5,314
    
    
    
    
    
    
    
    23,956Gross profit
    
    
    583
    
    
    
    
    
    
    
    979
    
    
    
    1,006
    
    
    
    
    
    
    
    826
    
    (a
    )

    
    
    
    
    3,394General and administrative expenses
    
    
    876
    
    (c
    )

    
    
    
    
    829
    
    
    
    768
    
    
    
    
    
    
    
    843
    
    
    
    
    
    
    
    3,316Provision for (recovery of) doubtful accounts
    
    
    (34
    )
    
    
    
    
    
    
    (2
    )
    
    
    (55
    )
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    (88
    )Depreciation and amortization
    
    
    22
    
    
    
    
    
    
    
    22
    
    
    
    21
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    87Other expense
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    127
    
    (b
    )

    
    
    
    
    45
    
    
    
    
    
    
    
    182Income (loss) from continuing operations before income taxes
    
    
    (286
    )
    
    
    
    
    
    
    125
    
    
    
    145
    
    
    
    
    
    
    
    (87
    )
    
    
    
    
    
    
    (103
    )Income tax expense
    
    
    11
    
    
    
    
    
    
    
    17
    
    
    
    16
    
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    78Net income (loss) from continuing operations
    
    $
    (297
    )
    
    
    
    
    
    
    108
    
    
    
    129
    
    
    
    
    
    
    
    (121
    )
    
    
    
    
    
    
    (181
    )Basic income (loss) per common share
    
    $
    (0.05
    )
    
    
    
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.03
    )Diluted income (loss) per common share
    
    $
    (0.05
    )
    
    
    
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.03
    )Weighted Average Common Shares Outstanding  basic
    
    
    5,682
    
    
    
    
    
    
    
    5,815
    
    
    
    5,851
    
    
    
    
    
    
    
    5,883
    
    
    
    
    
    
    
    5,808Weighted Average Common Shares Outstanding  diluted
    
    
    5,682
    
    
    
    
    
    
    
    10,591
    
    
    
    10,443
    
    
    
    
    
    
    
    5,883
    
    
    
    
    
    
    
    5,808(a)    
Includes a $62,500 asset write down of eye care memberships.

(b)    
Includes a $102,000 loss from software development.

(c)    
Includes $69,000 of expenses attributable to the sale of the Series A Preferred Stock.

FISCAL 2005Quarter Ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fiscal Year8/31/04
    
    
    
    
    
    
    11/30/04
    
    
    2/29/05
    
    
    
    
    
    
    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
    
    (d
    )

    
    
    
    
    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
    
    (e
    )

    
    
    
    
    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
 
 (d)
    
    Includes a $88,000 expense reimbursement received from one former client.(e)
    
    Includes a loss on impairment of approximately $118,000 with respect to the Companys
marketable securities. 42




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##### Table of Contents



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 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
  43




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##### Table of Contents



PART III
 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
      
 Item 11. EXECUTIVE COMPENSATION
  
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 Equity Compensation Plan Information
  (a)
    
    
    (b)
    
    
    (c)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
    
    
    1,186,407
    
    
    $
    1.36
    
    
    
    1,199,336Equity compensation
plans not approved
by shareholders*
    
    
    406,000
    
    
    
    1.78
    
    
    
    Total
    
    
    1,592,407
    
    
    $
    1.47
    
    
    
    1,199,336
 
 *
    
    Consists of 100,000 warrants to purchase common stock of the Company issued in prior fiscal
years to three consultants for their services to the Company, which included public and investor
relations and web site development services. In addition, 306,000 warrants to purchase common stock
of the Company were issued in a prior fiscal year to two consultants and two employees as
compensation for introducing strategic business partners to the Company. All such warrants were
issued in lieu of cash compensation and have five-year terms with exercise prices ranging from
$1.09 to $5.00.  44




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##### Table of Contents



Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 Part IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    1. Consolidated Financial Statements  Included in Part II of this report:Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets, May 31, 2006 and 2005Consolidated Statements of Operations, Years Ended May 31, 2006, 2005 and 2004Consolidated Statements of Stockholders Deficit, Years Ended May 31, 2006, 2005 and 2004Consolidated Statements of Cash Flows, Years Ended May 31, 2006, 2005 and 2004Notes to Consolidated Financial Statements2.
    
    Consolidated Financial Statement Schedules: None.
   ExhibitNumber
    
    Description and Reference3.1
    
    Restated Certificate of Incorporation as amended on November 3, 2005 and
March 23, 2006 (filed herewith).3.2
    
    Amended and Restated Bylaws, as amended July 20, 2000. (7)3.3
    
    Bylaw amendment.(5)3.4
    
    Bylaw amendment, effective October 28, 2005.(15)3.5
    
    Certificate of Designation, Preferences, and Rights of Series A
Convertible Preferred Stock of Comprehensive Care Corporation.(5)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. (12)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. (8)10.4
    
    Amended and Restated Non-Employee Directors Stock Option Plan. *(4)10.5
    
    Amendment No. 1 to Comprehensive Care Corporation Amended and Restated
Non-Employee Directors Stock Option Plan, effective as of March 23, 2006 (filed
herewith).*10.6
    
    Employment Agreement as amended February 7, 2003 between the Company and
Robert J. Landis. *(6)10.7
    
    Employment Agreement amendment dated June 14, 2005 between the Company and
Robert J. Landis. *(5)10.8
    
    Employment Agreement waiver dated June 14, 2005 between the Company and
Robert J. Landis. *(5)10.9
    
    Employment Agreement as amended February 7, 2003 between the Company and
 45




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##### Table of Contents



Mary Jane Johnson. *(6)10.10
    
    Employment Agreement amendment dated June 14, 2005 between the Company and
Mary Jane Johnson. *(5)10.11
    
    Employment Agreement waiver dated June 14, 2005 between the Company and Mary Jane Johnson.*(5)10.12
    
    Employment Agreement dated June 3, 2002 between the Company and Thomas C. Clay. *(9)10.13
    
    Comprehensive Care Corporation 2002
Incentive Plan as amended. *(10)10.14
    
    Stock Purchase Agreement dated June 14, 2005 between the Company and
Woodcliff Healthcare Investment Partners LLC.(5)10.15
    
    Registration Rights Agreement dated June 14, 2005 between the Company
and Woodcliff Healthcare Investment Partners LLC.(5)10.16
    
    Marketing Agreement by and between the Company and Health Alliance
Network, Inc.(13)10.17
    
    Sublease Agreement dated May 22, 2006 between Comprehensive Behavioral
Care, Inc. and AT&T Corporation (14)14
    
    Code of Business Conduct and Ethics.(11)21
    
    List of the Companys active subsidiaries (filed herewith).23.1
    
    Consent of Kirkland, Russ, Murphy & Tapp P.A. (filed herewith).31.1
    
    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 8-K dated November 9, 1995.(5)
    
    Filed as an exhibit to the Companys Form 8-K dated June 14, 2005.(6)
    
    Filed as an exhibit to the Companys Form 8-K dated February 7, 2003.(7)
    
    Filed as an exhibit to the Companys Form 10-K for the Fiscal Year ended May 31, 2000.(8)
    
    Filed as an exhibit to the Companys Form 8-K dated November 25, 1998.(9)
    
    Filed as an exhibit to the Companys Form 8-K dated June 7, 2002.(10)
    
    Filed as Appendix A to the Companys definitive proxy statement on Schedule 14A filed
on January 28, 2005.(11)
    
    Filed as an exhibit to the Companys Form 10-K for the fiscal year ended May 31,
2003.(12)
    
    Filed as an exhibit to Form S-8 (File No. 333-108561) filed on September 5, 2003.(13)
    
    Filed as an exhibit to the Companys Form 8-K, dated August 3, 2005.(14)
    
    Filed as an exhibit to the Companys Form 8-K, dated May 26, 2006.(15)
    
    Filed as an exhibit to the Companys Form 8-K, dated November 3, 2005. 46




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##### Table of Contents



SIGNATURES
  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 (Principal Executive Officer)
    
    August 18, 2006/s/ ROBERT J. LANDIS

Robert J. Landis
    
    Chairman of the Board of Directors,
Chief Financial Officer, and Treasurer
(Principal Financial and
Accounting Officer)
    
    August 18, 2006/s/ EUGENE L. FROELICH

Eugene L. Froelich
    
    Director
    
    August 18, 2006/s/ ROBERT PARKER

Robert Parker
    
    Director
    
    August 18, 2006/s/ DAVID P. SCHUSTER

David P. Schuster
    
    Director
    
    August 18, 2006/s/ BARRY A. STEIN

Barry A. Stein
    
    Director
    
    August 18, 2006/s/ PETER JESSE WALCOTT

Peter Jesse Walcott
    
    Director
    
    August 18, 2006
 47