UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM
Form 10-K

[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended May 31, 1994 or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year endedMay 31, 2003or
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 0-5751

1-9927
COMPREHENSIVE CARE CORPORATION
(Exact
(Exact name of Registrant as specified in its charter)
Delaware 95-2594724
(State
(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) 95-2594724
(IRS Employer
Identification No.)

16305 Swingley Ridge Drive
200 South Hoover Blvd., Suite 100
Chesterfield, Missouri 63017
(Address200
Tampa, Florida
(Address of principal executive offices) (Zip 33609
(Zip Code)

Registrant's
(813) 288-4808
(Registrant’s telephone number, including area code (314) 537-1288

code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B)12(G) OF THE ACT:
Title of each class Name of each exchange on Title of each class which registered
------------------- ---------------------------

Common Stock, Par Value $.10$.01 per share New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

7 1/2% Convertible Subordinated Debentures due 2010
(Title of Class) Over The Counter Bulletin Board
Over-the-Counter
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Xx No ----- -----o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant'sRegistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x
The aggregate market value of voting stock held by non-affiliates of the Registrant at August 22, 1994,September 3, 2003, was $14,839,164.$8,468,955 based on the average bid and ask price of the Common Stock on September 3, 2003, as reported on the Over The Counter Bulletin Board.
At August 25, 1994,September 3, 2003, the Registrant had 21,986,9163,939,049 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the Registrant's
definitive proxy statement for the Registrant's 1994 annual meeting of
shareholders presently scheduled to be held on November 14, 1994, which Proxy
Statement will be filed no later than 120 days after the close of the
Registrant's fiscal year ended May 31, 1994.

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None.
TABLE OF CONTENTS
PART I
GOVERNMENT REGULATION
ACCREDITATION
MANAGEMENT INFORMATION SYSTEMS
ADMINISTRATION AND EMPLOYEES
MARKETING AND SALES
AVAILABLE INFORMATION
PART II.
Consolidated Balance Sheets
Consolidated Statements of Operations
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
Consolidated Statements of Cash Flows
PART III
Part IV
SIGNATURES
Exhibit Index
Ex-14 Code of Business Ethics
Ex-21 List of Company's Subsidiaries
EX-23 Consent of Eisner LLP
EX-31.1 Section 302 Certification of the CEO
EX-31.2 Section 302 Certification of the CFO
EX-32.1 Section 906 Certification of the CEO
EX-32.2 Section 906 Certification of the CFO
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART I

ITEM
Item 1. BUSINESS.BUSINESS
Organizational History
Comprehensive Care Corporation (the "Company"^® (referred to herein as the “Company”, “CompCare"^®(1), “we”, “our” or “us”) is a Delaware corporationCorporation organized in January 1969. TheUnless the context otherwise requires, all references to the Company is transitioning from
predominantly ainclude the Company’s principal operating subsidiary, Comprehensive Behavioral Care, Inc.^SM(2) (“CBC”) and subsidiary corporations.
CompCare, through its operating subsidiaries, manages the delivery of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf of employers, health plans, including health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”), government organizations, third-party claims administrators, and commercial and other group purchasers of treatment programs for psychiatric disorders and
chemical dependency (including alcohol and drug) to a managed care behavioral health care company providing a continuum ofhealthcare services. SuchCurrent services include
risk based contract capitation of behavioral health expenses for specific
populations and a broad spectrum of inpatient and outpatient mental health and substance abuse therapy, counseling, and counseling.supportive interventions.
Recent Developments
• During June 2003, we implemented one new client contract to provide behavioral healthcare benefits to approximately 97,000 members in Michigan. We estimate that annual revenues from this contract will be $1.5 million.
• The State of Texas has passed legislation that will reduce the amount of funds allocated to our clients to cover behavioral healthcare services to Medicaid and Children’s Health Insurance Program (“CHIP”) recipients in the State of Texas. Such legislation is subject to pending bills that, if passed, could restore some of the benefits to these programs. Under the recently passed legislation, the outpatient behavioral healthcare benefits available to adult Medicaid and CHIP recipients will be provided by the HMOs and their subcontractors, including the Company, on a very limited basis while the inpatient benefits for CHIP recipients may not be covered by the HMOs and their subcontractors. For the fiscal year ended May 31, 2003, we had operating revenue of $3.7 million and $4.5 million, respectively, specific to contracts covering Texas CHIP and Texas Medicaid recipients. These changes to Texas Medicaid and CHIP programs could have a material, adverse impact on our operations. However, we believe certain of our clients will continue to require the types of services we provide to mitigate their exposure to treat serious medical conditions that may result from the lack of adequate behavioral healthcare benefits. We are closely monitoring developments in Texas, but currently cannot predict what financial impact, if any, these changes may have on our business.
Business General
The services we provide are delivered through management service agreements (“MSOs”), administrative service agreements (“ASOs”), and capitated contracts. MSOs and ASOs are contractual obligations under which the Company does not assume any financial risk or responsibility for the member’s behavioral health care costs. We may provide various managed care functions under MSO and ASO arrangements, including clinical care management, provider network development, customer service, claims processing, and information systems reporting. The scope of services under MSO arrangements is slightly narrower in comparison to those services we perform under ASO arrangements. Under capitated contracts, the primary payer of healthcare services prepays us a fixed, per member per month (“PMPM”) fee for covered psychiatric and substance abuse services regardless of actual member utilization and the Company assumes the financial risk for the member’s health care costs. Programs are contracted through inpatient facilities as well as through experienced outpatient practitioners.
We currently manage programs through which services are provided to recipients in fourteen states. Current programs and services include fully integrated, capitated behavioral healthcare services, Employee Assistance Programs (EAPs), case management/utilization review services, administrative services management (ASOs), provider sponsored health plan development, behavioral corrections programs, preferred provider network development, management and physician advisor reviews and overall care management services. We also provide prior and concurrent authorization for physician-prescribed psychotropic medications for a major Medicaid HMO in
(1) CompCare is a registered trademark of Comprehensive Care Corporation.
(2) Comprehensive Behavioral Care, Inc. is a registered service mark of the Company.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Michigan under that state’s mandated pharmacy management program. Members are generally directed to CompCare by their employer, health plan, or physician and receive an initial authorization for an assessment. Based upon the initial assessment, a treatment plan is established for the member. Fully integrated capitated lives (i.e. where the company has contractual, financial risk) totaled approximately 789,000 and 805,000 at freestanding
facilities operated byMay 31, 2003 and 2002, respectively. ASO lives were approximately 337,000 and 375,000 at May 31, 2003 and 2002, respectively. EAP lives were approximately 2,000 at May 31, 2003 and 2002.
Our objective is to provide easily accessible, high quality behavioral healthcare services and products and to manage costs through measures such as the monitoring of hospital inpatient admissions and the review of authorizations for various types of outpatient therapy. The goal is to combine access to quality behavioral healthcare services with effective management controls in order to ensure the most cost-effective use of healthcare resources.
Sources of Revenue
We provide managed behavioral healthcare and substance abuse services to recipients, primarily through subcontracts with HMOs who have historically carved out these functions to managed behavioral healthcare organizations (“MBHOs”) like CompCare. We generally receive a negotiated amount on a per member per month (“PMPM”) or capitated basis in exchange for providing these services. We then contract directly with behavioral healthcare providers who receive a pre-determined, fee-for-service rate or case rate. Behavioral healthcare providers include psychiatrists, clinical psychologists, therapists, other licensed healthcare professionals, and hospitals. As of May 31, 2003, we have approximately 12,000 behavioral healthcare practitioners in our network who are primarily located in the five states in which the Company has its principal contracts. Under such full-risk capitation arrangements, profit is a function of utilization and at independent general hospitalsthe amount of claims payments made to our network providers. Alternatively, we may subcontract with a provider company on a sub-capitated basis. In cases where we have made sub-capitation arrangements, the outside company manages service delivery through CompCare’s approved and credentialed network that is guided by stringent quality standards.
During Fiscal 2003, we provided services under capitated arrangements for commercial, Medicare, Medicaid, and Children’s Health Insurance Program patients in Florida and Texas, commercial and Medicaid patients in Michigan, Medicaid patients in Connecticut, and commercial patients in Arizona, Georgia, Indiana, Kentucky, Minnesota, New York, North Carolina, Ohio, South Carolina, and Wisconsin.
In Fiscal 2003, our new business included two commercial contracts in Indiana, two new Medicaid contracts in Michigan, one new Medicare contract in Texas, and contracts with one new client in Florida that cover individuals under both commercial and Medicaid plans. Additionally, we added one new EAP client with membership in eight states. We perform periodic reviews of our current client contracts to determine profitability. In the Company. A wholly-owned subsidiary, CareUnit, Inc.,
develops, markets and managesevent a contract is not profitable, we may seek to revise the Company's contract programs. During fiscal
1994, psychiatric and chemical dependency treatment programs accounted for
approximately 86%terms of the Company's operating revenues. AccessCare, Inc.
("AccessCare") a wholly-owned subsidiary primarily engaged incontract or to terminate the development
and delivery of managed care services for behavioral medicine, accounted for
approximately 10% of the Company's operating revenues. The remaining 4% of
fiscal 1994 revenues were derived from other activities.

The following table sets forth for each of the years in the five-year
period ended May 31, 1994, the contribution to operating revenues of the
Company's freestanding operations, CareUnit, Inc. contracts, AccessCare
operations, RehabCare programs, and other activities.

YEAR ENDED MAY 31,
----------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----

Freestanding operations . . . . . . . . 70% 81% 75% 34% 53%
CareUnit, Inc. contracts . . . . . . . 16 12 14 14 19
AccessCare operations . . . . . . . . . 10 2 --- --- ---
RehabCare programs (1) . . . . . . . . --- --- 6 47 23
Other activities . . . . . . . . . . . 4 5 5 5 5
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===

________________________________
(1) The Company formerly owned a company known as RehabCare Corporation
("RehabCare"), which developed, marketed and managed the delivery of
comprehensive medical rehabilitation services for functionally
disabled persons. The Company offered RehabCare common stock to the
public in fiscal 1992, maintaining a minority interest, and during
fiscal 1993, sold its remaining 48% stake in RehabCare. Accordingly,
revenues from RehabCare were not material to the Company during fiscal
1993.

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FREESTANDING OPERATIONS

The Company currently operates six owned or leased facilities representing 347
available beds. The following table sets forth selected operating data
regarding the Company's freestanding facilities. Facilities are designated
either psychiatric or chemical dependency based on the license of the facility
and the predominant treatment provided. For information concerning the nature
of the Company's interest in the facilities, see Item 2, "PROPERTIES".

YEAR LICENSED INPATIENT DAYS FOR YEAR ENDED MAY 31,
-------------------------------------
ACQUIRED(1) BEDS 1994 1993 1992 1991 1990
----------- ---- ---- ---- ---- ---- ----

PSYCHIATRIC/CHEMICAL DEPENDENCY FACILITIES
CareUnit Hospital of Fort Worth . . . 1971 83 9,027 10,910 13,534 10,591 15,612
CareUnit Hospital of Kirkland . . . . 1981 83 5,699 6,506 9,478 9,682 12,812
CareUnit Hospital of Cincinnati . . . 1982 128 12,133 12,243 12,744 12,131 20,608
Starting Point, Orange County . . . . 1983 70 2,422 3,487 7,046 10,349 12,818
CareUnit of Grand Rapids . . . . . . . 1985 76 6,545 6,348 6,221 7,662 10,190
Aurora Behavioral Health Hospital (2) 1988 100 2,859 7,237 22,070 8,730 11,709
CLOSED/FACILITIES HELD FOR SALE
CareUnit of Jacksonville Beach (3) . . 1982 --- --- --- 5,026 6,119 12,430
Starting Point, Oak Avenue (4)(5) . . 1983 --- --- 8,868 11,988 14,639 21,155
CareUnit of Orlando (6) . . . . . . . 1987 --- --- --- -- 1,492 7,486
CareUnit of San Diego (7) . . . . . . 1988 --- --- -- -- -- 2,972
CLOSED/SOLD FACILITIES
Crossroads Hospital (8) . . . . . . . --- --- --- 1,705 5,078 6,747
CareUnit Hospital of Albuquerque (4)(9) --- --- 4,150 4,098 4,522 7,215
CareUnit of Coral Springs (4)(10) . . --- --- 3,539 7,617 9,611 13,293
CareUnit Hospital of Nevada (11) . . . --- --- 6,920 7,881 8,632 11,644
CareUnit of South Florida/Tampa (4)(10) --- --- 6,891 6,761 6,957 7,813
Newport Point, Inc. (12) . . . . . . . --- --- 4,669 --- --- ---
Woodview-Calabasas Hospital (8) . . . --- --- --- 7,913 13,809 14,318
Other (13) . . . . . . . . . . . . . . --- --- --- 6,089 53,402
-------- -------- --------- -------- -------
Patient days served during period . . 38,685 81,768 124,082 136,093 242,224
====== ====== ======= ======= =======

Admissions . . . . . . . . . . . . . . . 3,916 7,047 8,859 9,312 14,388
Available beds at end of period (14) . . 347 385 748 1,059 1,513
Average occupancy rate for period (15) . 30% 28% 38% 29% 39%
------------------------------- == == == == ==

(1) Calendar year acquired or leased.
(2) Formerly known as CareUnit of Colorado.
(3) In February 1992, CareUnit of Jacksonville Beach, an 84-bed chemical
dependency facility, was closed. This facility is currently for sale.
(4) In March 1993, CareUnit Hospital of Albuquerque, a seventy-bed chemical
dependency facility, CareUnit of Coral Springs, a 100-bed chemical
dependency facility, CareUnit of South Florida/Tampa, a 100-bed chemical
dependency facility and Starting Point, Oak Avenue, a 136-bed chemical
dependency facility were closed.
(5) Includes Starting Point, Grand Avenue which was sold in July 1991.
(6) In October 1990, CareUnit of Orlando, a 100-bed chemical dependency
facility, was closed. This facility is currently for sale.
(7) In December 1989, CareUnit of San Diego, a 92-bed chemical dependency
facility, was closed. This facility is currently for sale.
(8) The Company is currently in negotiations to dissolve, retroactive to
December 31, 1991, the joint venture which leased Crossroads Hospital and
Woodview-Calabasas Hospital. Crossroads Hospital continued to be managed
by the Company although in August 1992 it was closed and was subleased
through the term of the lease which expired in September 1993.
Woodview-Calabasas continues to be managed by the Company's joint venture
partner although it was closed in April 1993.
(9) On July 1, 1993, CareUnit Hospital of Albuquerque was sold.
(10) On October 1, 1993, CareUnit of So. Florida/Tampa was sold and on December
10, 1993, CareUnit of Coral Springs was sold.
(11) On April 5, 1993, CareUnit Hospital of Nevada, a 50-bed psychiatric
facility, was sold.
(12) Joint operating agreement between Century Healthcare of California and
Starting Point, Inc. to manage Newport Harbor Psychiatric
Hospital, a 68-bed adolescent psychiatric hospital and Starting Point,
Orange County, a 70-bed psychiatric facility. This agreement was mutually
dissolved on February 28, 1993.
(13) Includes Brea Hospital Neuropsychiatric Center, CareUnit Hospital of
Orange, CareUnit Hospital of St. Louis, CareUnit of DuPage, Sutter Center
for Psychiatry and Golden Valley Health Center. These facilities were
closed or sold in fiscal 1989 through 1991.
(14) A facility may have appropriate licensure for more beds than are in use
for a number of reasons, including lack of demand, anticipation of future
need, renovation and practical limitations in assigning patients to
multiple-bed rooms. Available beds is defined as the number of beds which
are available for use at any given time.

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(15) Average occupancy rate is calculated by dividing total patient days by the
average number of available bed-days during the relevant period.

FREESTANDING FACILITY PROGRAMS

The services offered at a freestanding facility are determined by the
licensure of the facility, the needs of the patient community and reimbursement
considerations including working relationships with managed care companies. A
program within the facility represents a separately staffed unit dedicated to
the treatment of patients whose primary diagnosis suggests that their treatment
needs will best be met within the unit. Patients whose diagnosis suggests the
need for supplemental services are accommodated throughout their stay as
dictated by the individual treatment plan developed for each patient.

Psychiatric. Psychiatric programs are offered in most of the Company's
freestanding facilities. Admission to the programs offered by the Company is
typically voluntary although certain facilities provide emergency psychiatric
services and accept involuntary patients who are suffering an acute episodic
psychiatric incident.

Each patient admitted to a psychiatric program undergoes a complete
assessment including an initial evaluation by a psychiatrist, a medical
history, physical examination, a laboratory work-up, a nursing assessment, a
psychological evaluation, and social and family assessments. The assessments
are utilized to develop an individualized treatment plan for each patient.

The treatment programs are undertaken by an interdisciplinary team of
professionals experienced in the treatment of psychiatric problems. Length of
stay varies in accordance with the severityspecific contract terms.
Growth Strategy
Our objective is to expand our presence in both existing and new managed behavioral healthcare markets by obtaining new contracts with health plans, corporations, government agencies, and other payers through CompCare’s reputation of providing quality managed behavioral healthcare services with the most cost-effective use of healthcare resources. Our principal means for pursuing public sector business is through the submission of proposals in response to formal, competitive bidding proceedings that are initiated by health plans or government agencies. We intend, where feasible, to expand our commercial business during the upcoming fiscal year through new marketing initiatives directed at employer groups and, also, HMOs that contract directly with employers. Additionally, we continue to develop products that will bring our core competencies to new market areas such as child welfare, behavioral pharmacy management and preferred provider organization product management for health plans and self-insured employers. The success of our growth strategy is dependent upon our ability to competitively bid on new contracts, comply with conditions contained in requests for proposals, obtain required licenses, if any, in new markets, establish provider networks in new markets and negotiate favorable agreements with our providers.
Competition
The behavioral healthcare industry is very competitive and provides products and services that are price sensitive. We believe that there are approximately 150 managed behavioral healthcare companies providing service
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
for an estimated 227 million covered lives in the United States. Several competitors have revenues, financial resources, and membership substantially larger than ours. We also compete with small local and regional companies at times. Competition is built around pricing, the overall quality of service provided, the extent and quality of the patient's condition. A
comprehensive discharge plan which may include outpatient psychiatric or
psychological treatment, or referral to an alternate treatment facility is
prepared for each patient. Psychiatric programs are also available on an
inpatient, day treatmentprovider network, and outpatient basis and form a continuum of care.

Chemical Dependency. Chemical dependency programs, offered in all
freestanding facilities, are delivered under the names CareUnit(SM), Starting
Point and Aurora Behavioral Health and include programs for adults and
adolescents. Facilities offer a comprehensive treatment program based on
therapy and education. The medically based programs utilize a team approach to
treatment, with a supervising physician, psychologists, counselors, therapists
and specially trained nurses. This multi-disciplinary team approach means that
the medical, emotional, psychological, social and physical needstechnical capacity of the patient
are all addressed in treatment.

Facilities offer levels of care that can form a continuum, including
detoxification, inpatient, residential, day treatmentbehavioral healthcare organization.
GOVERNMENT REGULATION
Regulatory Monitoring and outpatient programs
which meetCompliance
CompCare is subject to extensive and evolving state and federal regulations relating to the evolving needs of patients and their families. Based on an
initial assessment, each patient is placed into the level of care that is most
appropriate for his or her needs. Following assessment, each patient admitted
into treatment receives a full medical and social historynation’s mental health system as well as a physical
examinationchanges in Medicaid and Medicare reimbursement that includes those diagnostic studies ordered bycould have an effect on the patient's
attending physician. Throughout the courseprofitability of treatment, each plan is reviewed
frequently to ensure that it continues to meet the changing needs of the
patient. The length of time spent in treatment is dependent on an individual's
needs and canour contracts. These regulations range from several weekslicensure and compliance with regulations related to several months.

SOURCES OF REVENUES

During fiscal 1994, approximately 57%insurance companies and other risk-assuming entities, to licensure and compliance with regulations related to healthcare providers. These laws and regulations may vary considerably among states. As a result, CompCare may be subject to the specific regulatory approach adopted by each state for regulation of the Company's operating
revenues from freestanding operations were received from private sources
(private health insurers, managed care companies and directly from patients)for providers of behavioral healthcare treatment services. The Company holds licenses or certificates to perform utilization review and third party administrator (“TPA”) services in certain states. Certain of the balance from Medicare, Medicaid andservices provided by our managed behavioral healthcare subsidiaries may be subject to such licensing requirements in other governmental programs.

Private health insurers offer plansstates. There can be no assurance that typically include coverage for
psychiatric and chemical dependency treatment.additional utilization review or TPA licenses will not be required or, if required, that CompCare will qualify to obtain such licenses. In many instances,states, entities that assume risk under contract with licensed insurance companies or health plans who retain ultimate financial responsibility have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure as either an insurer or HMO in certain states. If the levelregulatory positions of coverage for psychiatric and chemical dependency benefits is less than that
provided for medical/surgical services. Lower coverage levels result in higher
co-payments bythese states were to change, our business could be materially affected until such time as CompCare meets the patient, who is often unable to meet his or her commitment
in its entirety or is unable to pay as rapidly asregulatory requirements. Currently, we cannot quantify the insurance company. This
pattern tends to increase bad debts and days outstanding in receivables.

Private insurance plans vary significantly in their methodspotential effects of payment,
including cost, cost plus, prospective rate, negotiated rate, percentageadditional regulation of charges, and billed charges. Health insurersthe managed care industry, but such costs will have adopted a number of payment
mechanisms for the primary purpose of decreasing the amounts paid to hospitals
(including the Company's operations) for services rendered. These mechanisms
include various forms of utilization review, preferred provider

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arrangements where use of participating hospitals is encouraged in exchange for
a discount, and payment limitations or negotiated rates based on community
standards. Without program changes that offer a continuum of care ranging from
outpatient to intensive inpatient services, the Company believes these changing
payment mechanisms will continue to have a negativean adverse effect on its revenues.

Employers, union trusts and other major purchasers of health care
services have become increasingly aggressive in pursuing cost containment. Tofuture operations to the extent that major purchasersthey are self-insured, they actively negotiatenot able to be recouped in future managed care contracts.
As of May 31, 2003, we managed approximately 813,000 lives in connection with hospitals,behavioral and substance abuse services covered through Medicaid and/or Children’s Health Maintenance Organizations ("HMOs"Insurance Programs (“CHIPS”) in Connecticut, Florida, Michigan and Preferred Provider
Organizations ("PPOs") for lower rates. Those major purchasersTexas. Any changes in Medicaid funding could ultimately affect our reimbursement and overall profitability. We are aware that are
insured or use a third-party administrator expect the insurer or administrator
to control claims costs. In addition, many major purchasersState of health care
services are reconsidering the benefitsTexas has passed legislation that they provide and in many cases
reducing the level of coverage, thereby shifting more of the burden to their
employees or members. Such reductions in benefits have had a negative impact
on the Company's business.

Under the Social Security Amendments Act of 1983, a prospective payment
system ("PPS") was adopted to cover routine and ancillary operating costs of
most Medicare inpatient hospital services. Under this system, the Secretary of
the United States Department of Health and Human Services ("HHS") established
fixed payment amounts per discharge based on diagnostic-related groups
("DRG's"). In general, a hospital's payment for Medicare inpatients is limited
to the DRG rate and capital costs, regardless ofwill reduce the amount of funds allocated to our clients to cover behavioral healthcare services provided to CHIP recipients in the patient or the lengthState of Texas. Such legislation is subject to pending bills that, if passed, could restore some of the patient's hospital stay. Under
PPS, a hospital may keep any difference between its prospective payment rate
and its operating costs incurred in furnishing inpatient services, but is at
risk for any operating costs that exceed its payment rate. Qualified providers
of alcohol and drug treatment services are paid under PPS. Psychiatric
hospitals, freestanding inpatient rehabilitation facilities and outpatient
rehabilitation services are exempt from PPS. Inpatient psychiatric and
rehabilitation units within acute care hospitals are eligible to obtain an
exemption from PPS upon satisfaction of specified federal criteria. Exempt
hospitals and exempt units within acute care hospitals are subject to
limitations on the level of cost or the permissible increase in cost subject to
reimbursement under the Medicare program, including those limitations imposed
under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). No
assurance can be given that psychiatric services will continue to be eligible
for exemption from PPS or that other regulatory or legislative changes will not
adversely affect the Company's business.

Five of the Company's facilities participate in the Medicare program.
Of these, three are currently excluded from PPS (TEFRA limits are applicablebenefits to these facilities). Medicare utilization at those facilities participating inprograms. Under the Medicare program averaged approximately 34% in fiscal 1994. The Company
does not believe thatrecently passed legislation, the imposition of TEFRA limits or PPS has had a material
adverse impact on its business at its freestanding facilities or that loss of
exclusion from PPS at freestanding facilities would materially impact the
Company's business. During fiscal 1994, three of the Company's facilities
reflected an increase in Medicare utilization primarily dueoutpatient behavioral healthcare benefits available to their partial
hospitalization programs. In addition, two of the Company's facilities' first
full year in the Medicare program was fiscal 1994.

Hospitals participating in the Medicare program are required to retain
the services of a peer review organization ("PRO"). The PRO is responsible for
determining the medical necessity, appropriatenessadult Medicaid and quality of care given
Medicare program patients. In instances where the medical necessity of an
admission or procedure is challengedCHIP recipients will be provided by the PRO, payment may be delayed,
reduced or denied in its entirety. Amounts denied because of medical reviewHMOs and their subcontractors, including the Company, on a very limited basis while the inpatient benefits for CHIP recipients may not be charged to the service recipient, and are absorbedcovered by the hospital.
In non-emergency admissions (which encompass mostHMOs and their subcontractors. For the fiscal year ended May 31, 2003, we had operating revenue of the Company's admissions)
review is performed prior$3.7 million and $4.5 million, respectively, specific to the patient's arrival at the hospital. In the
event that the PRO does not approve inpatient admission, the patient may be
admitted for outpatient treatment, referredcontracts covering Texas CHIP and Texas Medicaid recipients. These changes to an alternative treatment
provider or sent home. The Company believes that the existence of PROs has
reduced inpatient admissions in its facilities serving Medicare patients.

TheTexas Medicaid program is a combined federal and state program providing
coverage for low income persons. The specific services offered and
reimbursement methods vary from state to state. Less than 9% of the Company's
freestanding facility revenues are derived from the Medicaid program.
Accordingly, changes in Medicaid program reimbursement are not expected toCHIP programs could have a material, adverse impact on our operations. However, we believe certain of our clients will continue to require the Company'stypes of services we provide to mitigate their exposure to treat serious medical conditions that may result from the lack of adequate behavioral healthcare benefits. We are closely monitoring developments in Texas, but currently cannot predict what financial impact, if any, these changes may have on our business.

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COMPETITION AND PROMOTION

The Company's primary competitors are hospitals and hospital management
companies (both not-for-profit and investor-owned) that offer programs similar
CompCare is subject to thosethe requirements of the Company.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, we will incur costs to insure the adequacy and security of our healthcare information system and communication networks. Additionally, we will incur costs to implement a new clinical information system that will process the specific transaction codes required by HIPAA for claims, payment, enrollment, eligibility, or to become compliant with security and privacy rules, which may be more stringent for providers of certain behavioral healthcare services (see “Management Information Systems” below). The expected timetable for us to be compliant is currently October 2003 for transaction code changes due to our October 2002 filing of a formal compliance plan. The Company has faced generally increasing
competition inmet the last few years. Some of the hospitals that competedeadline for compliance with the Company are either owned or supported by governmental agencies or are owned by
not-for-profit corporations supported by endowments and charitable
contributions enabling some of these hospitals to provide a wide range of
services regardless of cost-effectiveness.

Most patients are directed to a specific facility by their employer (or
their agent), the employer's insurance company (i.e. managed care companies), a
physician, a social services agency or another health care provider. The
Company markets its services by contracting with these referral sources. The
primary competitive factors in attracting referral sources and patients are
reputation, success record, cost and quality of care, location and scope of
services offered at a facility. The Company believes it is competitive in
factors necessary for patient attraction. The Company and its competitors also
compete to attract qualified physicians and psychiatrists and other licensed
mental health providers.

The Company maintains a public relations program designed to increase
public awareness of its treatment programs. During fiscal 1994, the Company
spent approximately $0.4 million for media advertising (television, radio and
print) in support of its freestanding operations. The forms of media used are
specifically tailored to the geographic area in which the public relations
efforts are directed.

CONTRACT OPERATIONS

CareUnit, Inc. operates contract programs for behavioral medicine
services in dedicated units of independent hospitals. The programs offered are
similar to the behavioral medicine services offered in the Company's
freestanding facilities.

Under a contract, the hospital furnishes patients with all hospital
facilities and services necessary for their generalized medical care, including
nursing, dietary and housekeeping. CareUnit, Inc. is obligated to provide a
multi-disciplinary team consisting of a physician (who serves as medical
director for the program), a program manager, a social worker, a therapist and
other appropriate supporting personnel. CareUnit, Inc. also typically provides
support in the areas of program implementation and management, staff
recruiting, continuing education, treatment team training, community education,
advertising, public relations, insurance and ongoing program quality assurance.
As a result of reimbursement changes and competitive pressures, the contractual
obligations of CareUnit, Inc. have been subject to intense evaluation. In
general, some prospective client hospitals have expressed a desire for more
control over the services provided by CareUnit, Inc. and, in response,
CareUnit, Inc. is providing a more flexible approach to contract management.
During fiscal 1994 and 1993, CareUnit, Inc. through CareInstitute, a wholly
owned non-profit subsidiary, managed two contracts for the State of Idaho.
These programs provide behavioral medicine services in a residential and
outpatient setting.

During fiscal 1994, CareUnit, Inc. continued to experience a decline in
the number of contracts and beds although three new contracts were opened. The
Company believes that the decline in the number of contracts and beds under
contract is a result of managed care intervention and reduction in available
reimbursement from third parties, which have had the effect of making CareUnit,
Inc.'s contracts less profitable to hospitals. In addition, CareUnit, Inc.
terminated one unprofitable contract during the fiscal year and four were
terminated by the contracting hospital.

Responding to market demands, CareUnit, Inc. has implemented, in the
majority of its contracts, a program of levels of care, offering a wide range
of treatment options including detoxification, inpatient, residential,
day-treatment and outpatient. As a result, inpatient occupancy rates have
declined as patients are moved to a more appropriate level of care.

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7
The following table sets forth selected operating data regarding
behavioral medicine programs managed under contract:

YEAR ENDED MAY 31,
----------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----

Number of contracts at end of period (1):
Adult CareUnits (2)(3) . . . . . . . . . . . 10 12 15 21 36
Adolescent CareUnits (2) . . . . . . . . . . . 1 1 1 2 4
Adult CarePsychCenters (2) . . . . . . . . . . 3 3 3 4 6
Adolescent CarePsychCenters (2) . . . . . . . 0 0 0 0 1
Eating disorders units . . . . . . . . . . . . 1 1 2 2 2
--- --- --- --- ---
Total . . . . . . . . . . . . . . . . . . . . 15(5) 17 21 29 49
=== === === === ===

Available beds at end of period . . . . . . . . . 236 306 479 685 1,210
Patient days served during period . . . . . . . . 34,464 51,524 92,574 151,219 358,185
Admissions . . . . . . . . . . . . . . . . . . . 3,992 5,139 7,867 11,902 23,996
Average occupied beds per contract . . . . . . . 7.3 8.3 9.9 10.6 12.9
Average occupancy rate for period (4) . . . . . . 37% 39% 42% 45% 50%
- -------------------------

(1) Excludes contracts which have been executed but are not operational as of
the end of the period.
(2) CareUnit is the service mark under which the Company markets chemical
dependency treatment programs. CarePsychCenter is the service mark under
which the Company markets psychiatric treatment programs.
(3) Includes two state chemical dependency full-service contracts.
(4) Average occupancy rate is calculated by dividing total patient days by
the number of available bed-days during the relevant period.
(5) During fiscal 1994, CareUnit, Inc. opened 3 contracts and closed 5
contracts, 1 ofprivacy rules, which was terminated by CareUnit, Inc.April 14, 2003. Additionally, we have filed our Electronic Health Care Transactions and 4 by the
contracting hospitals.

SOURCES OF REVENUES

Patients are admitted to a behavioral medicine program under the
contracting hospital's standard admission policies and procedures. The
hospital submits to the patient, the patient's insurance company, or other
responsible party a bill that covers the services of the hospital. Generally,
CareUnit, Inc. receives a negotiated fee for each patient day of service
provided and in many cases also receives a fixed monthly management fee or a
percentage of net revenue. Fees paid by the hospital are subject to annual
adjustments to reflect changes in the Consumer Price Index. CareUnit, Inc. and
the hospital share the risk of nonpayment by patients based on a predetermined
percentage participation by CareUnit, Inc. in bad debts. CareUnit, Inc. may
also participate with a contracting hospital in charity care and certain
contractual allowances and discounts. Hospitals contracting for programs
generally suffer from the same reimbursement pressures as the Company's
freestanding facilities.

Management contracts are generally entered into for a period of two to
five years and thereafter are automatically renewed for successive one-year
periods unless either party gives notice of termination at least 90 days prior
to the end of such periods. Contracts are also terminable for material
defaults. A significant number of contracts are terminable by either party on
their anniversary dates.

DEVELOPMENT, COMPETITION AND PROMOTION

CareUnit, Inc. directs its development activities toward increasing the
number of management contracts with hospitals. The primary competitors of
CareUnit, Inc. are hospitals and hospital management companies that offer
programs similar to those offered by CareUnit, Inc. A major development effort
will be made in conjunctionCode Sets Standards Model Compliance Plan with the Company's managed care subsidiary,
AccessCare, Inc., to expand the contract operations in general hospitals and
develop the continuum of care.

PUBLISHING ACTIVITIES

Since 1976, the Company (under the name CompCare Publishers) has been
engaged in the publication, distribution and sale of books, pamphlets and
brochures generally relating to the Company's health care activities.
Literature distributed by the Company is sold to the general public and
educational institutions. Such literature is also sold to patients
participating in programs managed by the Company. The Company does not own or
operate the printing facilities used in the publication of its literature.

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8
In April 1994, certain assets and rights representing a material
portion of the publishing business were sold. CompCare Publishers is currently
operating and distributing the books and material remaining after the sale via
a distribution agreement with the buyer that expires on April 30, 1995. The
Company will determine on or before April 30, 1995 as to whether it will
liquidate the remaining assets and rights or continue to operate via a
distribution agreement. Publishing activities accounted for less than 3% of
the Company's operating revenues in fiscal 1994.

MANAGED CARE OPERATIONS

The Company has provided a managed care product since the acquisition
of AccessCare, Inc's predecessor in December 1992. AccessCare provides
managed behavioral health care and substance abuse service for employers,
HMO's, PPO's, government organizations, third party claim administrators and
other group purchasers of health care. AccessCare currently provides service
to contracted members in 29 states. The programs and services currently
offered by AccessCare include fully integrated capitated behavioral health care
services, employee assistance programs, case management/utilization review
services, provider sponsored health plan development, preferred provider
network development and management and physician advisor reviews. AccessCare
distinguishes itself from other providers by furnishing superior clinical
management systems, total quality management and supervision, mutual respect
for both providers and clients and responsive and appropriate care that
includes quality and cost effectiveness. AccessCare distinguishes itself from
the competition by being the "science-based" provider of care. AccessCare
manages its clinical service programs on proven treatment technologies and is a
leader in training its providers to use science-based efficacious treatment.

AccessCare accounted for approximately 10% of the Company's operating
revenues in fiscal 1994. AccessCare, in concert with a network of providers
(i.e., CareUnit, Inc.), will assist the Company in developing an integrated
service model to provide high quality, cost effective care.

GOVERNMENTAL REGULATION

The development and operations of health care facilities are subject to
compliance with various federal, state and local laws and regulations. Health
care facilities operated by the Company as well as by hospitals under contract
with CareUnit, Inc. must comply with the licensing requirements of federal,
state and local health agencies, with state-mandated rate control initiatives,
with state certificate of need and similar laws regulating various aspects of
the operation of health facilities (including construction of facilities and
initiation of new services), and with the requirements of municipal building
codes, health codes and local fire departments. State licensing of facilities
is a prerequisite to participation in the Medicare and Medicaid programs.
Legislative, regulatory and policy changes by governmental agencies (including
reduction of budgets for payments under the Medicare, Medicaid and other state
and federal governmental health care reimbursement programs) may impact the
Company's ability to generate revenue and the utilization of its health care
facilities.

Certain facilities operated by the Company are certified as providersCenters for Medicare and Medicaid services. Both the Medicare and Medicaid programs
contain specific physical plant, safety, patient care and other requirements
that must be satisfied by health care facilities in order to qualify under
those programs. The Company believes that the facilities it owns or leases are
in substantial compliance with the various Medicare and Medicaid regulatory
requirements applicable to them. The requirements for certification underServices. While these governmental reimbursement programs are subject to change, and in order
to remain qualified for the program, it may be necessary for the Company to
effect changes from time to time in its facilities, equipment, personnel and
services.

Under the Social Security Act, the Department of Health and Human
Services ("HHS") has the authority to impose civil monetary penalties against
any participant in the Medicare program that makes claims for payment for
services that were not rendered as claimed or were rendered by a person or
entity not properly licensed under state law or other false billing practices.
The Social Security Act also contains provisions making it a felony for a
hospital to make false statements relating to claims for payments under the
Medicare program or to make false statements relating to compliance with the
Medicare conditions of participation. In addition, the making of false claims
for payment by providers participating in the Medicare program is subject to
criminal penalty under federal laws relating generally to claims for payment
made to the federal government or any agency.

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9
Various federal and state laws regulate the relationship between
providers of health care services and physicians. These laws include the
"fraud and abuse" provisions of the Social Security Act, under which civil and
criminal penalties can be imposed upon persons who pay or receive remuneration
in return for inducement of referrals of patients who are eligible for
reimbursement under the Medicare or Medicaid programs. Violations of the law
may result in civil and criminal penalties. Civil penalties range from
monetary fines that may be levied on a per-violation basis to temporary or
permanent exclusion from the Medicare program.

The prohibitions on inducements for referrals are so broadly drafted
that they may create liability in connection with a wide variety of business
transactions and other hospital-physician relations that have been traditional
or commonplace in the health care industry. Courts, HHS and officials of the
Office of Inspector General have construed broadly the fraud and abuse
provisions of the Social Security Act concerning illegal remuneration
arrangements and, in so doing, have created uncertainty as to the legality of
numerous types of common business and financial relationships between health
care providers and practitioners. Such relationships often are created to
respond to competitive pressures.

Limiting "safe harbor" regulations define a narrow scope of practices
thatefforts will be exempted from prosecution or other enforcement action under the
illegal remuneration provisions of the fraudongoing, we expect to meet all compliance rules and abuse law. These clarifying
regulations may be followed by more aggressive enforcement of these provisions
with respect to relationships that do not fit within the specified safe harbor
rules. Activities that fall outside of the safe harbor rules include a wide
range of activities frequently engaged in between hospitals, physicians and
other third parties. These regulations identifying business practices that do
not constitute illegal remuneration do not eliminate this uncertainty, and may
cause providers and practitioners alike to abandon certain mutually beneficial
relationships. The Company does not believe that any such claims or
relationships existtimetables with respect to the Company.

In April 1989, the Inspector General of the Department of HHS issuedHIPAA regulations. Failure to do so may result in penalties and have a report on financial arrangements between physicians and health care businesses.
The report contained a number of recommendations, including a prohibition of
physician referrals to any facilities in which the physician has a financial
interest. Congress adopted legislation in 1989 (effective January 1992, the
"Stark Amendment"), that unless an exemption is otherwise available, prohibits
or restricts a physician from making a referral for which Medicare
reimbursement may be made to a clinical laboratory with which such physician
has a financial relationship, and prohibits such clinical laboratory from
billing for or receiving reimbursement on account of such referral. On March
11, 1992, proposed regulations implementing the Stark Amendment were issued,
but have not been adopted. The Company believes that it is in compliance with
the proposed regulations in all material respects.

Additional legislation expanding the Stark Amendment to other physician
and health care business relationships has been passed as part of the Omnibus
Reconciliation Act of 1993 ("OBRA 1993"). OBRA 1993 broadens the services
included within the referral prohibition of the Stark Amendment: a physician
having a financial relationship with an entity may not make referrals to that
entity for "designated health services," which include, in addition to clinical
laboratory services, physician therapy services; occupational therapy services;
radiology or other diagnostic services; radiation therapy services; durable
medical equipment; parenteral and enteral nutrients, equipment and supplies;
prosthetics, orthotics and prosthetic devices; home health services; outpatient
prescription drugs; and inpatient and outpatient hospital services. This law,
applicable to services covered by Medicaid as well as Medicare, takes effect
after December 31, 1994 with respect to referrals for the expanded list of
designated health services.

Numerous exceptions are allowed under the OBRA 1993 revisions to the
Stark Amendment for financial arrangements that would otherwise trigger the
referral prohibition. These provide, under certain conditions, exceptions for
relationships involving rental of office space and equipment, employment
relationships, personal service arrangements, payments unrelated to designated
services, physician recruitment and certain isolated transactions. HHS may
adopt regulations in the future which expand upon the conditions attached to
qualification for these exceptions. Certain of the Company's relationships
with physicians in its contract operations, as well as the Company's
development of relationships with physicians, will need to be structured in
compliance with the law and its exceptions, including any future regulations,
by the January 1, 1995 effective date. The Company is unable to predict at
this time what effect, if any, the expanded Stark Amendment and any future
regulations implementing its provisions, will have upon its business.

Proposals for health care reform on a national basis have been
introduced in both the House of Representatives and the Senate. The goals of
these health care proposals may include, but would not necessarily be

9
10
limited to, proposals which would impose short-term governmental price
controls, create a national health care budget limiting the amount to be spent
on health care coverage, and give federal and state governments new powers with
respect to medical fees and health insurance premiums. At this time, it is not
possible to determine the exact nature of the proposals, or their legislative
outcome, or their likely impact upon institutional providers.

In addition, several states are undertaking analysis and legislation
designed to modify the financing and delivery of health care at the state
level. A wide variety of bills and regulations are pending in several states
proposing to regulate, control or alter the financing of health care costs;
however, it is not possible at this time to predict with assurance theadverse effect on the business of the Company, if any, of such bills or regulatory actions.

ACCREDITATION

The Joint Commission on Accreditation of Healthcare Organizations
("JCAHO") is an independent commission that conducts voluntary accreditation
programs with the goal of improving the quality of care provided in health care
facilities. Generally, hospitals including dedicated units, long-term care
facilities and certain other health care facilities may apply for JCAHO
accreditation. If a hospital under contract with CareUnit, Inc. requests a
JCAHO survey of its entire facility, the contract program, if a psychiatric or
chemical dependency program, will be separately surveyed. After conducting
on-site surveys, JCAHO awards accreditation for up to three years to facilities
found to be in substantial compliance with JCAHO standards. Accredited
facilities are periodically resurveyed. Loss of JCAHO accreditation could
adversely affect the hospital's reputation and itsCompany’s ability to obtain
third-party reimbursement. All of the Company's freestanding facilities are
accredited and the hospitals under contract with CareUnit, Inc. have receivedretain its customers or have applied for such accreditation.to gain new business.
4
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
ACCREDITATION
To develop standards that effectively evaluate the structure and function of medical and quality management systems in managed care organizations, the National Committee foron Quality Assurance, ("NCQA"(“NCQA”) has developed an extensive review and development process in conjunction with the managed care industry, health carehealthcare purchasers, state regulators, and consumers, an extensive review and development
process.consumers. The Standards for Accreditation of Managed CareBehavioral Healthcare Organizations used by NCQA reviewers to evaluate a managed carebehavioral healthcare organization address the following areas: quality improvement,improvement; utilization management, credentialing, members'management; credentialing; members’ rights and responsibilities, preventative care services guidelinesresponsibilities; preventative-care guidelines; and medical records. These standards validate that a managed carebehavioral healthcare organization is founded on principalsprinciples of quality and is continuously improving the clinical care and services provided.it provides. NCQA also utilizes Health Plan Employer Data and Information Set ("HEDIS"(“HEDIS”), which is a core set of performance measurements developed to respond to complex but simplyclearly defined employer needs as standards for patient care and customer satisfaction. AccessCareCompCare’s Southeast Region operation was awarded a one-year NCQA accreditation in July 1999 and Full Accreditation in December 2001. Effective July 22, 2002, CompCare’s Full Accreditation award extends the NCQA accreditation to July 22, 2005 and covers membership in Connecticut, Florida, Georgia, and Michigan. Full Accreditation is accreditedgranted for a period of three years to those plans that have excellent programs for continuous quality improvement and that meet NCQA’s rigorous standards.
We believe our NCQA accreditation is beneficial to our clients and their members we serve. Additionally, NCQA accreditation may be an important consideration to our prospective clients.
MANAGEMENT INFORMATION SYSTEMS
We currently use a fully integrated, three-tier, managed care information system. During recent months, we determined that a significant investment would be required to upgrade our current version of this software to comply with HIPAA regulations. As a result, during Fiscal 2003, we requested and reviewed several proposals from various vendors and subsequently entered into a Letter of Intent with a new vendor to design a new, customized management information system at a cost below the current vendor’s estimate that will enable us to meet HIPAA compliance. Additionally, the new software is expected to streamline the Company’s entire clinical and claims functions and offer service improvements to our participating providers. The new vendor will also assist CompCare staff in developing an interim solution to meet the HIPAA compliance rules that become effective in October 2003, before the expected “go-live” date for the new system of February 1, 2004. We expect to incur approximately $0.4 million of one-time costs to customize the new system and activate the licenses needed for this and other, related third-party software. We believe the system currently being designed will readily support continued growth and meet our future business needs.
As is the case with our current system, the new system will allow all CompCare locations to connect to the Company’s frame relay telecommunications network, allowing automated call-path routing for overlap coverage at peak call times. Major care management functions such as information assessment, service plans, initial authorizations, extension requests, termination summaries, appeals, credentialing, billing, and claim/encounter processing are supported by NCQA and has adopted HEDIS.

built-in decision aids to correctly adjudicate patient-specific transactions.
ADMINISTRATION AND EMPLOYEES

The Company's
Our executive and administrative offices are located in Chesterfield, Missouri,Tampa, Florida, where management controlswe maintain operations, business development, legalaccounting, reporting and accounting functions, governmentalinformation systems, and statistical
reporting, researchprovider and treatment program evaluation.

At August 3, 1994,member service functions. We currently employ 120 full-time and part-time employees.
MARKETING AND SALES
Our business development staff is responsible for generating new sales leads and for preparing proposals and responses to formal commercial and public sector Requests for Proposals (“RFPs”). The Company’s Chief Development Officer manages marketing initiatives, along with the Company employed approximately 32 persons in its
corporateCompany’s President and Chief Executive Officer. Regional and administrative offices, 326 persons in its freestanding
facilities, 104 persons assignedoperations personnel strengthen the Company’s marketing efforts by providing a local presence. Sales expectations are integrated into the performance requirements for executive staff and local sales personnel.
5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
AVAILABLE INFORMATION
The Company’s shareholder website is www.compcare-shareholders.com. The Company makes available free of charge, through a link to CareUnit, Inc., 37 persons assignedthe Securities and Exchange Commission’s (“SEC”) internet site our annual, quarterly, and current reports, and any amendments to AccessCare, Inc.these reports, as well as any beneficial ownership reports of officers and 2 persons in otherdirectors filed electronically on Forms 3, 4, and 5. All such reports will be available as soon as reasonably practicable after electronically filing such reports with the SEC. Information contained on our website or linked through our website is not part of this report on Form 10-K.
CORPORATE GOVERNANCE
Corporate governance is typically defined as the system that allocates duties and authority among a company’s stockholders, board of directors and management. The stockholders elect the board and vote on extraordinary matters; the board is the company’s governing body, responsible for hiring, overseeing and evaluating management, particularly the Chief Executive Officer (CEO); and management runs the company’s day-to-day operations. ManyOur certificate of the physicians and
psychiatrists who are the medicalincorporation provides for a staggered board of five directors separated into three classes. Our Board of the Company's contract units,
the psychologists serving on treatment teams and the physicians utilizing the
facilities operated by the Company are not employed by the Company and are
treated as independent contractors.Directors currently consists of four directors. The Company is in an ongoing process to try to fill the processone remaining vacancy. The current Board members include two independent directors. The primary responsibilities of the Board of Directors are oversight, counseling and direction to the Company’s management in the long-term interests of the Company and its stockholders. The Board’s detailed responsibilities include: (a) selecting, regularly evaluating the performance of, and approving the compensation of the Chief Executive Officer and other senior executives; (b) reviewing and, where appropriate, approving the Company’s major financial objectives, strategic and operating plans and actions; (c) overseeing the conduct of the Company’s business to evaluate whether the business is being properly managed; and (d) overseeing the processes for maintaining the Company’s integrity with regard to its financial statements and other public disclosures and compliance with law and ethics. The Board of Directors has delegated to the Chief Executive Officer, working with the Company’s other executive officers, the authority and responsibility for managing the Company’s business in a manner consistent with the Company’s standards and practices, and in accordance with any specific plans, instructions or directions of the Board. The Chief Executive Officer and management are responsible for seeking the advice and, in appropriate situations, the approval of the Board with respect to extraordinary actions to be undertaken by the Company.
Audit Committee
The Board of Directors has constituted an Audit Committee comprised of two independent directors, as that term is defined under the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the “Act”). Mr. Eugene L. Froelich is the Chairman of the Audit Committee and is the Audit Committee Financial Expert. The Audit Committee has responsibility for the appointment, compensation, retention and oversight of the Company’s independent auditors; establishing procedures for the receipt, retention and treatment of these individualscomplaints regarding accounting, internal controls or auditing matters, and procedures for the submission of confidential, anonymous concerns by employees regarding questionable accounting or auditing matters.
The Audit Committee has, as partrequired by the Act and Section 301 of its settlementthe Sarbanes-Oxley Act of 2002, adopted a ‘whistleblower policy’ providing for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.
Code of Conduct
The Board of Directors has adopted a Code of Conduct applicable to all officers, directors and employees of the Company which provides, among other things, for honest and ethical conduct; avoidance of conflicts of interest, including the disclosure of any material transaction or relationship that could be expected to give rise to a conflict; full, fair, accurate, and timely and understandable disclosure in reports filed by the Company with the Internal
Revenue Service (See Note 15-- "CommitmentsSecurities and Contingencies").Exchange Commission; internal reporting of Code of Conduct violations; and accountability for any violations.
6
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Compensation Committee
The Company
hasCompensation Committee reviews the Company’s compensation programs and exercises authority with respect to the payment of salaries and incentive compensation to the Company’s executive officers. The Compensation Committee also administers the Company’s 1995 and 2002 Stock Option Plans.
Item 2. PROPERTIES
We do not encounteredown any work stoppages due to labor disputes with its
employees.

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ITEM 2. PROPERTIES.real property. The following table sets forth certain information regarding theour leased properties owned or leased by the Company atas of May 31, 1994:

OWNED OR LEASE MONTHLY
NAME AND LOCATION LEASED(1) EXPIRES(2) RENTAL(3)
----------------- --------- ---------- ---------

Psychiatric/Chemical Dependency Treatment Facilities
CareUnit Hospital . . . . . . . . . . Owned --- ---
Fort Worth, Texas
CareUnit Hospital . . . . . . . . . . Leased 2035 $16,106(4)
Kirkland, Washington
CareUnit Facility (5) . . . . . . . . Owned --- ---
Jacksonville Beach, Florida
CareUnit Hospital . . . . . . . . . . Owned --- ---
Cincinnati, Ohio
Starting Point, Oak Avenue (6) . . . . Owned --- ---
Orangevale, California
Starting Point, Orange County . . . . Owned --- ---
Costa Mesa, California
CareUnit Facility . . . . . . . . . . Leased 1995 8,333
Grand Rapids, Michigan
CareUnit Facility (7) . . . . . . . . Owned --- ---
Orlando, Florida
Aurora Behavioral Health Hospital . . Owned --- ---
Aurora, Colorado
CareUnit Facility (8) . . . . . . . . Owned --- ---
San Diego, California
OTHER OPERATING FACILITIES
CompCare Publishers (9) . . . . . . . Leased 1997 3,009
Minneapolis, Minnesota
AccessCare, Inc.
Tampa, Florida . . . . . . . . . . Leased 1995 7,435
Las Vegas, Nevada . . . . . . . . . Leased 1995 1,997
Edgewood, Kentucky . . . . . . . . Leased 1995 392
Ft. Lauderdale, Florida . . . . . . Leased 1995 586
Tarrytown, New York . . . . . . . . Leased 1994 412
ADMINISTRATIVE FACILITIES
Corporate Headquarters . . . . . . . . Leased 1997 11,355
Chesterfield, Missouri
Regional Headquarters (9) . . . . . . Leased 1995 4,408
Newport Beach, California
Data Processing Center (10) . . . . . Leased 1997 3,882
Riverside, California

_________________________

(1) Subject to encumbrances. For information concerning the Company's
long-term debt, see Note 10 to the Company's consolidated financial
statements contained in this report.
(2) Assumes all options to renew will be exercised.
(3)2003. All leases other than those relating to the Company's administrative
facilities, are triple net leases, under which the CompanyCompCare bears all costs of operations, including insurance, taxes, and utilities. The Company is
responsible for specified increases in taxes, assessments and operating
costs relating to its administrative facilities.
(4) Subject to increase every three years based upon increases in the
Consumer Price Index, not to exceed 10%.
(5) Closed February 1992. The Company intends to sell this property.
(6) Closed March 1993. The Company intends to sell this property.
(7) Closed October 1990. The Company intends to sell this property.
(8) Closed December 1989. The Company intends to sell this property.
(9) Office/operation closed; Company has sublet this property.
(10) This lease was converted to month-to-month.

11
12
ITEM
Monthly Rental
Name and Location Lease Expires (in Dollars)
Corporate Headquarters, Regional, Administrative, And Other Offices
Tampa, Florida, Corporate Headquarters and Southeastern Regional offices 2006 $ 22,813
Grand Prairie, Texas 2004 6,474
Bloomfield Hills, Michigan 2004 9,237
Item 3. LEGAL PROCEEDINGS.

On October 30, 1992,PROCEEDINGS
We had previously reported that the Company had filed a complaintan “Offer in the United States
District Court for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare"Compromise” (“Offer”) seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4-92CV002194-SNL). The Company seeks relief of damages in
the lost benefit of certain stockholder appreciation rights in an amount in
excess of $3.6 million and punitive damages. On May 18, 1993, the District
Court denied a motion for summary judgement filed by RehabCare. On June 16,
1993, RehabCare filed a counterclaim seeking a declaratory judgement with
respect to the rights of both parties under the stock redemption agreement, an
injunction enjoining the Company from taking action under stock redemption or
restated shareholders agreements and damages. The Company has filed a motion
with the court to strike RehabCare's request for damages for attorney's fees
and costs on the grounds that such relief is not permitted by law nor
authorized by the agreements between the parties. This case was scheduled for
trial on May 9, 1994, but has been continued on the court's own initiative and
the new trial date has not been set. Management believes that the Company's
allegations have merit and intends to vigorously pursue this suit. Management
further believes that should RehabCare prevail at trial on its request for such
attorneys fees and costs, such fees and costs would not materially affect the
financial statements of the Company.

In connection with the proposed sale of hospitals to CMP Properties,
Inc. (see Note 5-- "Property and Equipment for Sale"), the Company advanced
$1.1 million to a former consultant which was to be returned in the event the
transaction was terminated. These advances were to be secured by the common
stock of an unrelated company. The shares of common stock pledged were
purported to be in the possession of the Company's former legal firm as
collateral for the advances, but were not provided to the Company when the
transaction was terminated. The Company is currently in litigation with the
former consultant and legal firm to recover the advances.

Other Litigation

The Company is currently undergoing a payroll tax audit by the Internal Revenue Service ("IRS"(“IRS”) for calendar years 1983 through 1991. Theto settle a tax dispute that began in August 1998 when the IRS agent
conductingnotified the audit has assertedCompany that certain physicians and psychologists and
other staff engaged as independent contractorsit was disallowing $12.4 million of tax refunds previously received by the Company should have been
treatedspecific to its Fiscal 1985 and 1986 income tax returns as employees for payroll tax purposes. On April 8, 1991,amended. In January 2003, the Company receivedreported the IRS had accepted its Offer, which gave the Company the option of paying approximately $2.6 million over two years or paying approximately $2.2 million within 90 days of the letter of acceptance in addition to a proposed assessment related$50,000 down payment made by the Company at the time its Offer was submitted to this assertion claiming additional
taxes and penalties due totalingIRS. In February 2003, the Company concluded the IRS settlement by making a cash payment of approximately $19.4$2.2 million for calendar years
1983 through 1988. The Company filed a protestto the IRS to fully settle the previously accrued tax liability of $12.1 million. Coincident with the IRS and contestedsettlement, the proposed assessmentCompany reached an agreement with its former tax advisor requiring the Appeals Officetax advisor to refund $525,000 of the Internal Revenue Serviceoriginal $2.5 million of fees previously paid by the Company. The Company received the $525,000 refund in St. Louis, Missouri. The Appeals Office issuedFebruary 2003.
As a reduced assessmentresult of the resolution of this matter, the Company extinguished the $12.1 million liability and recorded a non-operating gain in the amountquarter ended February 28, 2003 of approximately $6,300,000, plus penalties$7.7 million. The gain is net of settlement expenses consisting primarily of professional fees and interest of $6,500,000.
The IRS is also examining the Company's employment tax returns for the years
1989 through 1991, and the agent conducting the examination proposed the
assessment of additional taxes for those years in the approximate amount of
$1,600,000, plus penalties and interest in an undetermined amount. While
management believes the Company has strong arguments to support its treatment$2.0 million of the payments to independent contractors to whom substantially allaforementioned, unrecovered tax advisor fees. The gain represented $1.97 earnings per share ($1.77 diluted earnings per share). No taxable income resulted from the settlement of the assessment relates, the Company has submitted an offer in compromise toliability. Additionally, the IRS forsettlement requires that the calendar years 1983 through 1991 for $5 million. A reserve has been
established with respect to this matter to cover expenses the Company expects
to incur; however, there can be no assurance that such reserves are adequate
until a formal settlement is reached with the IRS. The Company and RehabCare,
in May 1991, entered into a Tax Sharing Agreement providing for the Company to
indemnify RehabCare for any claims of income or payroll taxes due for all
periods through February 28, 1991. The Company has established a reserve with
respect to covering expenses the Company expects RehabCare to incur under the
Tax Sharing Agreement.

12
13
interest and received the final bill of $821,000 during the fourth quarter of
fiscal 1994. The Company has accrued for this liability, net of refunds, in
income taxes payable.Company.
From time to time, the Company and its subsidiaries are alsomay be parties to and their property is subject to ordinary, routine litigation incidental to their business. In some pending cases,business, in which case claims may exceed insurance policy limits and the Company or a subsidiaryanyone of its subsidiaries may have exposure to a liability that is not covered by insurance. Management believes that the outcomeis not aware of any such lawsuits will notthat could have a material adverse impact on the Company'sCompany’s financial statements.

ITEM
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On March 7, 1994,HOLDERS
During the Board of Directorsfourth quarter of the Company approved and
recommendedfiscal year covered by this report, no matters were submitted to the Stockholders an amendment to the Company's Certificatea vote of Incorporation to effect a reverse stock splitsecurity holders of the Company's Common Stock
proportionate to the range of two- (2) through ten- (10) for-one, while
reducing the par value of the Company's Common Stock to one (1) cent ($0.01)
per share. In addition, the number of Common Shares authorized would be
reduced to five (5) times the number of shares outstanding, reserved or
otherwise committed for future issuance but not less than 12,500,000. On May
16, 1994, the shareholders approved each proposal by written consent with the
following vote:

FOR DISAPPROVE ABSTAIN
--- ---------- -------

1. Amendment to effect reverse stock split . . . . 18,378,536 1,219,079 106,856

2. Reduction in number of shares authorized . . . . 18,544,632 1,001,871 165,961

3. Reduction of the par value per share . . . . . . 18,455,658 1,009,317 247,489

There were no broker non-votes. The reverse stock split would become effective
on any date selected by the Board of Directors occurring within nine months
after the end of the consent solicitation period (May 16, 1994). If no reverse
stock split is effected by February 16, 1995, the Board of Directors will take
action to abandon the reverse stock split. On August 25, 1994, the Board of
Directors authorized management to file an application with the New York Stock
Exchange for the reverse stock split.

EXECUTIVE OFFICERS OF THE COMPANY

CHRISS W. STREET, age 44. Mr. Street has been employed by the
Company since May 1994. Mr. Street was named interim Chief Executive Officer
on May 4, 1994 and in June 1994, he was appointed Chief Executive Officer of
the Company. Mr. Street was elected as Chairman of the Board of Directors in
November 1993. Mr. Street is founder and principal of Chriss Street & Company,
a firm specializing in investment banking, financial advisory services,
securities trading and factoring. Mr. Street commenced operations of Chriss
Street & Company in February 1992 and was Managing Director for Seidler-Amdec
Securities, Inc. from 1988 to 1992.

FRED C. FOLLMER, age 51. Mr. Follmer joined the Company as Senior Vice
President and Chief Financial Officer in January 1993. In September 1993, he
was appointed Senior Executive Vice President. In May 1994, he was named
interim Chief Operating Officer, and in June 1994, he was appointed Chief
Operating Officer of the Company. Prior to his employment with the Company,
he was a self-employed financial consultant providing services to the health
care and other industries. He was Executive Vice President of Healthcare
Services of America for a portion of 1987 and was Vice President of Hospital
Financial Operations at Charter Medical Corporation from 1978 to 1986.

KERRI RUPPERT, age 35. Ms. Ruppert has been employed by the Company
since 1988. In October 1992, she was appointed Vice President and Chief
Accounting Officer and in January 1993, she was elected Secretary of the
Company. She was Vice President and Controller from April 1990 to 1992 and

13
14
Assistant Corporate Controller from 1988 to 1990. Prior to her employment
with the Company, she served in a variety of financial management positions
with Maxicare Health Plans, Inc. from 1983 to 1988.

7
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PART II

ITEMII.
Item 5. MARKET FOR COMPANY'SCOMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a) The Company's Common Stock is traded on the New York Stock Exchange under
the symbol CMP. The following table sets forth the range of high and low
saleMATTERS
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 closing prices for the Common Stock, as reported by the OTC-BB, for the fiscal quarters indicated:
Price
Fiscal Year High Low
2003 First Quarter $ 1.65 $ 0.75
Second Quarter 1.01 0.32
Third Quarter 2.38 0.65
Fourth Quarter $ 3.05 $ 2.01
2002 First Quarter $ 0.61 $ 0.25
Second Quarter 0.55 0.24
Third Quarter 0.96 0.43
Fourth Quarter $ 1.85 $ 0.70
(a) As of September 3, 2003, the Company had 1,416 common stockholders of record.
(b) The Company did not pay any cash dividends on its Common Stock during any quarter of Fiscal 2003 2002, or 2001 and does not contemplate the initiation of payment of any cash dividends in the foreseeable future (see Item 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”).
Item 6. SELECTED FINANCIAL DATA
Prior to Fiscal 1993, CompCare principally engaged in the ownership, operation, and management of psychiatric and substance abuse programs in company owned, leased, or unaffiliated hospitals. During Fiscal 1999, we completed our plan to dispose of our hospital business segment.
Fiscal 2003 results include a $7.7 million, non-operating gain related to the IRS settlement (see Note 13 – “Income Taxes” to the audited, consolidated financial statements). Additionally, Fiscal 2003 results included a $470,000 non-operating gain related to the Medi-Cal settlement (see Note 16 – “Commitments and Contingencies” to the audited, consolidated financial statements). As a result, CompCare reported net income of $7.5 million, or $1.91 earnings per share ($1.72 diluted earnings per share) and an operating loss of $608,000, for the year ended May 31, 2003 compared to the net loss of $770,000, or $0.20 loss per share (basic and diluted), and an operating loss of $774,000, for the fiscal quarters indicated:

PRICE
-----
FISCAL YEAR HIGH LOW
----------- ---- ---

1993:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $1-3/4 $1-1/8
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 2 1-1/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 1-3/4 5/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 1 1/2

1994:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $1-1/8 $5/8
Second Quarter . . . . . . . . . . . . . . . . . . . . . . 7/8 5/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 1-1/4 1/2
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . 7/8 1/2

(b) Asyear ended May 31, 2002. Excluding the $8.2 million of Julynon-operating gains from net income would have resulted in a $729,000 net loss ($0.19 loss per basic and diluted share) for the fiscal year ended May 31, 1994, the Company had 2,174 stockholders of record.

(c) As a result of the Company's operating losses and restrictions contained
in the Company's primary loan agreement, no cash dividend was declared
during any quarter of fiscal 1994, 1993 or 1992.2003.
The Company does not
expect to resume payment of cash dividends in the foreseeable future. See
Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS".

14
15
ITEM 6. SELECTED FINANCIAL DATA.

The following tables summarize selected consolidated financial data andthat follows should be read in conjunction with the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report. Effective June 1, 1990, the
Company adopted the new accounting and reporting methods approved by the
American Institute of Certified Public Accountants ("AICPA") in its health care
industry audit guide (the "AICPA guide") dated July 15, 1990. Accordingly,
provision for losses on accounts receivable is included as an expense rather
than as a reduction of operating revenues beginning in fiscal 1991. Reclassifications of prior year amounts have been made to conform withto the current year'syear’s presentation. See
8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Year Ended May 31,
2003 2002 2001 2000 1999
(Amounts in thousands, except per share data)
Statement of Operations Data:
Operating revenues $ 32,267 $ 27,625 $ 18,192 $ 17,719 $ 39,029
Costs and expenses:
Healthcare operating expenses 29,201 24,625 15,326 15,801 29,778
General and administrative expenses 3,459 3,544 3,842 6,974 9,148
Provision for (recovery of) doubtful accounts 20 (112 ) (439 ) (606 ) 1,641
Depreciation and amortization 195 342 656 794 1,037
Restructuring expenses — — (30 ) 831 600
32,875 28,399 19,355 23,794 42,204
Operating loss from continuing operations before items shown below (608 ) (774 ) (1,163 ) (6,075 ) (3,175 )
Other income (expenses):
Net gain on IRS settlement 7,717 — — — —
Gain on settlement of other liability 470 — — — —
Loss in connection with prepayment of note receivable — — (496 ) — —
Gain on sale of assets 4 — — 9 2
Loss on sale of assets (5 ) — — (1 ) (4 )
Reduction in accrued interest expense — — 290 — —
Other non operating income 34 40 332 204 41
Interest income 47 88 163 399 309
Interest expense (181 ) (178 ) (208 ) (289 ) (281 )
Income (loss) from continuing operations before income taxes 7,478 (824 ) (1,082 ) (5,753 ) (3,108 )
Income tax expense (benefit) 20 1 35 13 (146 )
Income (loss) from continuing operations 7,458 (825 ) (1,117 ) (5,766 ) (2,962 )
Discontinued operations:
Loss from operations — — — — (334 )
Loss on disposal, including operating loss of $282 — — — — (698 )
Income (loss) before cumulative effect of change in accounting principle 7,458 (825 ) (1,117 ) (5,766 ) (3,994 )
Cumulative effect of change in accounting principle — 55 — — —
Net income (loss) 7,458 (770 ) (1,117 ) (5,766 ) (3,994 )
Dividends on convertible Preferred Stock — — — — (55 )
Net income (loss) attributable to common stockholders $ 7,458 $ (770 ) $ (1,117 ) $ (5,766 ) $ (4,049 )
Basic earnings per share:
Income (loss) from continuing operations $ 1.91 $ (0.21 ) $ (0.29 ) $ (1.51 ) $ (0.85 )
Discontinued operations:
Loss from operations — — — — (0.09 )
Loss on disposal — — — — (0.20 )
Cumulative effect of change in accounting principle — 0.01 — — —
Net income (loss) $ 1.91 $ (0.20 ) $ (0.29 ) $ (1.51 ) $ (1.14 )
Diluted earnings per share:
Income (loss) from continuing operations $ 1.72 $ (0.21 ) $ (0.29 ) $ (1.51 ) $ (0.85 )
Discontinued operations:
Loss from operations — — — — (0.09 )
Loss on disposal — — — — (0.20 )
Cumulative effect of change in accounting principle — 0.01 — — —
Net income (loss) $ 1.72 $ (0.20 ) $ (0.29 ) $ (1.51 ) $ (1.14 )
Balance Sheet Data:
Working capital (deficit) $ (4,447 ) $ (12,275 ) $ (11,770 ) $ (12,245 ) $ (9,355 )
Total assets 6,379 11,399 9,754 21,275 29,066
Long-term debt 2,244 2,244 2,244 2,244 2,253
Long-term debt including current maturities and debentures 2,244 2,244 2,244 2,244 2,256
Stockholders’ deficit $ (4,990 ) $ (12,519 ) $ (11,778 ) $ (10,672 ) $ (4,914 )
9
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Item 7, "MANAGEMENT'S7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"OPERATIONS.
This Annual Report on Form 10-K includes forward-looking statements, the realization of which may be impacted by certain important factors discussed below under “Risk Factors — Important Factors Related to Forward-Looking Statements and Associated Risks.”
General
Our Fiscal 2003 results include a $7.7 million, non-operating gain related to the IRS settlement (see Note 13 – “Income Taxes” to the audited, consolidated financial statements). Additionally, results included a $470,000 non-operating gain related to the Medi-Cal settlement (see Note 16 – “Commitments and Contingencies” to the audited, consolidated financial statements), $88,000 of revenue related to a favorable settlement of one hospital cost report and the elimination of a $75,000 reserve for another cost report, both pertaining to the Company’s hospital business segment that was discontinued in Fiscal 1999. As a discussionresult, CompCare reported net income of recent
results of operations$7.5 million, or $1.91 earnings per share ($1.72 diluted earnings per share) and liquidity.

YEAR ENDED MAY 31,
-------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenues and gains:
Operating revenues . . . . . . . . . . . . . $34,277 $51,847 $59,969 $84,689 $163,235
Gain on sale of RehabCare stock, net . . . . --- 13,114 17,683 --- ---
Gain on Sovran settlement, net . . . . . . . --- 584 --- --- ---
Gain on reorganization agreement . . . . . . --- --- --- --- 5,000
Interest income . . . . . . . . . . . . . . . 50 69 336 531 1,093
Equity in earnings(loss) of unconsolidated
affiliates . . . . . . . . . . . . . . . . --- 384 168 (1,289) 231
Other . . . . . . . . . . . . . . . . . . . . --- --- --- --- 508
-------- -------- -------- -------- --------
34,327 65,998 78,156 83,931 170,067
------ ------ ------ ------ -------
Costs and expenses:
Operating expenses . . . . . . . . . . . . . 31,875 50,924 38,810 65,362 100,437
General and administrative expenses . . . . . 5,455 5,754 12,946 21,267 61,599
Provision for doubtful accounts . . . . . . . 1,558 6,187 6,065 4,759 19,541
Depreciation and amortization . . . . . . . . 1,762 2,946 2,602 3,580 8,440
Loss on sale/write-down of assets . . . . . . --- 4,382 15,986 5,863 45,657
Interest expense . . . . . . . . . . . . . . 1,228 1,759 3,908 7,380 9,588
Other restructuring/non-recurring expenses . --- 5,452 2,152 2,819 4,407
-------- ------ ------ -------- --------
41,878 77,404 82,469 111,030 249,669
------ ------ ------ ------- -------
Loss before income taxes . . . . . . . . . . . . (7,551) (11,406) (4,313) (27,099) (79,602)
Provision(benefit) for income taxes . . . . . . . 301 194 249 401 (20,294)
------ ------ ------ -------- -------
Loss before extraordinary item . . . . . . . . . (7,852) (11,600) (4,562) (27,500) (59,308)
Extraordinary item - gain on debenture
conversion . . . . . . . . . . . . . . . . . --- --- --- 11,465 ---
------- -------- ------- ------ --------
Net loss . . . . . . . . . . . . . . . . . . . . $(7,852) $(11,600) $(4,562) $(16,035) $(59,308)
===== ====== ===== ====== ======
Loss per common and common
equivalent share:
Loss before extraordinary item . . . . . . . $(0.36) $(0.53) $(0.21) $(2.27) $(5.83)
Extraordinary item - gain on debenture
conversion . . . . . . . . . . . . . . . . --- --- --- .95 ---
----- ----- ----- ---- -----
Net loss . . . . . . . . . . . . . . . . . . $(0.36) $(0.53) $(0.21) $(1.32) $(5.83)
==== ==== ==== ==== ====
Cash dividends per share . . . . . . . . . . . . $ --- $ --- $ --- $ --- $ ---
====== ====== ====== ====== ======
Weighted average common and common
equivalent shares outstanding . . . . . . . . 21,987 21,957 21,900 12,118 10,172
- ------------------------------

AS OF MAY 31,
-------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
BALANCE SHEET DATA: (DOLLARS IN THOUSANDS)

Working capital . . . . . . . . . . . . . . . . . $ 412 $ 438 $11,901 $11,221 $ 49,832
Total assets . . . . . . . . . . . . . . . . . . 33,226 46,968 70,422 99,084 141,592
Long-term debt . . . . . . . . . . . . . . . . . 10,477 10,652 10,375 28,078 86,564
Stockholders' equity . . . . . . . . . . . . . . 5,099 12,951 24,441 28,976 20,214

15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

RESULTS OF OPERATIONS - FISCAL 1994 (COMPARED WITH FISCAL 1993)

The Company incurred aan operating loss of approximately $7.9 million$608,000, for the year ended May 31, 2003 compared to the net loss of $770,000, or $0.36$0.20 loss per share (basic and diluted), and an operating loss of $774,000, for the fiscal year ended May 31, 1994, which was an improvement2002. Excluding the $8.2 million of $3.7
million or $0.17 per share more than the $11.6 million or $0.53 per share loss
incurred in the prior fiscal year. The fiscal 1994 fourth quarter loss of $4.0
million or $0.19 per share reflected an improvementnon-operating gains from the fourth quarter of
the prior fiscal year by $0.3 million or $0.01 per share.

Results for fiscal 1993 were impacted by a gain of approximately $13.1
million recorded during the second quarter of the fiscal year as a result of
the sale by the Company of 2,300,000 shares of its formerly wholly-owned
subsidiary RehabCare. Prior to the sale the Company owned a 48% interest in
RehabCare which was accounted for on the equity method. Subsequent to the
sale, the Company no longer has an interest in RehabCare and no longer reports
a portion of RehabCare's earnings in its statement of operations. Included in
the loss for fiscal 1993 is a charge of approximately $6.7 million,
attributable to restructuring the organization, of which $1.2 million was
reclassified as asset writedowns during the fourth quarter. In fiscal 1993,
the Company recorded pretax charges of approximately $4.4 million primarily
associated with the write-down of property and equipment held for sale. Of
this amount, $3.4 million was a result of revaluing certain underperforming
assets that the Company had designated for disposition and the remaining $1.0
million was attributable to the write-down of other property and equipment to
net realizable value.

Operating revenues declined $17.6 million or 34% from fiscal 1993,
primarily as the result of the closure of four facilities during fiscal 1993,
the sale of a fifth facility and the decline in both admissions and length of
stay.

Operating expenses decreased by approximately $19.0 million or 37%,
primarily as a result of the closure of four facilities during fiscal 1993 and
the sale of a fifth. General and administrative expenses declined by
approximately $0.3 million or 5% in fiscal 1994 primarily as a result of
management's continued effort to reduce corporate overhead expenses. Interest
expense was reduced by $0.5 million or 30%, primarily as the result of the
paydown of senior secured debt by approximately $1.9 million with the proceeds
of asset sales. In addition, general and administrative expenses reflect a
credit of $0.8 million for fiscal 1993. This credit is the result of the
reduction of provisions for general and administrative expenses.

Equity in the earnings of unconsolidated affiliates was approximately
$0.4 million during fiscal 1993. No equity in the earnings of unconsolidated
affiliates was included in the Company's financial statements for fiscal 1994
(see Note 7-- "Investments in Unconsolidated Affiliates").

The Financial Accounting Standards Board ("FASB") has issued Statement
No. 109, "Accounting for Income Taxes". Effective June 1, 1993, the Company
adopted Statement No. 109 which changed the Company's method of accounting for
income taxes from the deferred method to the asset and liability method. The
change to Statement No. 109 had no cumulative effect on the financial
statements of the Company.

Freestanding Operations

Admissions in fiscal 1994 declined overall by 3,131 to 3,916 from 7,047
in fiscal 1993, an overall decline of 44%. Of this decline, 2,843 fewer
admissions were attributable to facilities which were closed or under contract
to be sold as of May 31, 1994. The remaining facilities ("same store", i.e.,
those operational during both fiscal years) experienced a 7% decrease in
admissions and a 11% decline in length of stay to 10.0 days, resulting in 21%
fewer patient days than the prior fiscal year. The decrease in "same store"
patient days was primarily due to Aurora Behavioral Health Hospital which
experienced a 16% decrease in admissions and a 53% decline in length of stay
whichwould have resulted in 60% fewer patient days in fiscal 1994 compared to the prior
fiscal year. This decline was primarily attributable to the termination during
fiscal 1993 of an acute psychiatric program specializing in dissociative
disorders. Patients in the dissociative disorder program traditionally have a higher acuity requiring additional care$729,000 net loss ($0.19 loss per basic and a longer length of stay. The
following table sets forth selected quarterly utilization data on a "same
store" basis:

16
17

Same Store Utilization
-------------------------------------------------------------------------------
Fiscal 1994 Fiscal 1993
------------------------------------- -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
---- ---- ---- ----- ---- ---- ---- ----

Admissions . . . . . . . . 1,011 955 996 954 1,019 914 1,058 1,213
Average length of stay . . 10 9.9 9.9 10 10.1 10.2 11.8 12.0
Patient days . . . . . . . 9,792 9,409 9,897 9,587 10,277 9,348 12,524 14,582
Average occupancy rate . . 30% 30% 31% 30% 32% 30% 40% 46%

Overall operating revenue per patient day increased by 20% to $618 in
fiscal 1994 from fiscal 1993 and overall patient days declined 53% to 38,685,
resulting in a decrease of approximately $18.0 million, or 43%, in operating
revenues. In addition to the decrease caused by the sale and/or closure of
hospitals, the Company believes that the increasing role of HMOs, reduced
benefits from employers and indemnity companies, a greater number of
competitive beds and a shifting to outpatient programs are responsible for this
decline in patient days. In response to these factors the Company accelerated
the development of effective, lower cost outpatient, daycare, and partial
hospitalization programs in conjunction with its freestanding facilities, and
shifted its marketing activities toward developing relationships and contracts
with managed care and other organizations which pay for or broker such
services.

The following table illustrates the revenues in outpatient and daycare
programs offered by the freestanding facilities on a "same store" basis:

Net Outpatient/Daycare Revenues
------------------------------------------------------------------------------
(Dollars in thousands)
Fiscal 1994 Fiscal 1993
------------------------------------ -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
---- ---- ---- ----- ---- ---- ---- ----

Facilities offering . . . . 6 6 6 6 6 6 6 6
Net outpatient/daycare
revenues . . . . . . . . $3,115 $2,546 $2,111 $1,965 $1,500 $988 $1,195 $1,539
% of total "same store"
net operating revenues . 48% 43% 37% 35% 29% 21% 17% 18%

The Company recorded no asset write-downs during fiscal 1994 and $4.4
million in asset write-downs during fiscal 1993 primarily related to the
recognition of losses on facilities to be sold and revaluation of facilities
designated for disposition. These amounts include the estimated future
operating losses, selling costs and carrying costs of such facilities until
disposition at an assumed future point in time. To the extent that actual
costs and time required to dispose of the facilities differ from these
estimates, adjustments to the amount written-down may be required. Future
operating losses and carrying costs of such facilities will be charged back
directly to the carrying value of the respective assets held for sale. Because
chemical dependency treatment facilities are special purpose structures, their
resale value is negatively affected by the oversupply of beds resulting from
the diminished demand for inpatient treatment currently being experienced
throughout the industry. In the first quarter of 1993, one facility previously
designated for disposition was redesignated as continuing due to improved
operating performance. In the second quarter of fiscal 1993, eight facilities
previously designated for disposition were redesignated as continuing
operations. These facilities were redesignated upon the termination of the
sale/leaseback of properties to CMP Properties, Inc., a wholly-owned subsidiary
(see Note 5-- "Property and Equipment Held for Sale"). In the fourth quarter
of fiscal 1993, the Company closed four facilities which were listed for sale
and sold another one. Additionally, three facilities closed in the fourth
quarter of 1993, were sold during fiscal 1994. The Company currently has four
facilities listed for sale, of which one was closed in fiscal 1993, and the
other three in prior fiscal years. These facilities have been designated for
disposition because of their weak market positions relative to competitors and
limited prospects for generating an acceptable return on investment as an
operating property. The Company will continue to evaluate the performance of
all of these facilities in their respective markets, and, if circumstances
warrant, may increase or reduce the number of facilities designated for
disposition.

17
18
Contract Operations

During fiscal 1994, patient days of service under CareUnit, Inc.
contracts declined by approximately 33% from 51,524 patient days to 34,464
patient days. This decline is attributable to the 5 units which were closed
during fiscal 1994, a decline in length of stay and managed care intervention.
Of the units closed, 1 contract was terminated by CareUnit, Inc. for poor
operating performance. The remaining 4 closures were terminated by the
contracting hospitals upon expiration of their term. The Company believes that
these non-renewals were influenced primarily by increased competition and
changes in reimbursement patterns by third-party payers. During fiscal 1994,
CareUnit, Inc. opened 3 new contracts.

The following table sets forth quarterly utilization data on a "same
store" basis:

Admissions . . . . . . . . 713 630 644 645 598 636 629 588
Average length of stay . . 7.8 6.9 7.4 7.6 7.7 8.0 8.9 8.7
Patient days . . . . . . . 5,733 4,955 5,375 5,591 5,697 5,856 6,426 6,439
Average occupancy rate . . 40% 36% 38% 39% 40% 42% 46% 45%

Units which were operational for both fiscal years experienced a 7%
increase in admissions which combined with the decrease in length of stay
resulted in an 11% decline in utilization to 21,654 patient days. Since
average net revenue per patient day at these units increased by $19, net
inpatient operating revenues increased by 10% to $2.1 million. An additional
$0.6 million was generated by units closed during the fiscal year. Outpatient
revenues increased 11% in fiscal 1994.

The following table illustrates the revenues in outpatient and daycare
programs offered by eight contract units on a "same store" basis:

Facilities offering . . . . 8 8 8 8 8 8 8 8
Net outpatient/daycare
revenues . . . . . . . . $178 $160 $135 $153 $175 $146 $146 $134
% of total "same store"
net operating revenues . 13% 13% 10% 10% 10% 11% 9% 8%

For units operational in both fiscal years, operating expenses
decreased less than 1%, which, combined with the increase in inpatient and
outpatient operating revenues, caused operating income at the unit level to
increase 10% from fiscal 1993. Consequently, overall unit operating income
increased to $0.8 million in fiscal 1994 from $0.7 million in fiscal 1993.

Managed Care Operations

During fiscal 1994, the number of covered lives increased by 33%. This
increase is attributable to new contracts added during fiscal 1994. AccessCare
distinguishes itself from its competition by being the "science-based" provider
of care and manages all clinical programs based upon proven treatment
technologies.

18
19
In fiscal 1994, operating revenue increased 191% from fiscal 1993 due
to the fact that fiscal 1993 consisted of only five months. In addition,
AccessCare is a start-up venture and is in its growth stage. Operating
expenses increased 134% in fiscal 1994 also as a result that fiscal 1993
consisted of only five months and the expenses related to AccessCare's
expansion and development. Although AccessCare experienced an increase in
operating revenue during fiscal 1994, it was more than offset by the increase
in total operating expenses resulting in an increase in AccessCare's net
operating loss of 70% or $0.7 million from fiscal 1993.

RESULTS OF OPERATIONS - FISCAL 1993 (COMPARED WITH FISCAL 1992)

The Company incurred a loss of approximately $11.6 million or $0.53 per
sharediluted share) for the fiscal year ended May 31, 1993, which2003.
No tax provision for federal income taxes was recorded during the fiscal year ended May 31, 2003, as the $7.7 million non-operating gain specific to the IRS settlement is non-taxable. Additionally, management has determined that a valuation allowance at May 31, 2003 and 2002, was necessary to fully offset any deferred tax assets based on the likelihood of future realization.
Consolidated Consolidated
Operations Operations
Fiscal 2003 Fiscal 2002
Operating revenues $ 32,267 $ 27,625
Healthcare operating expenses 29,201 24,625
General/administrative expenses 3,459 3,544
Other operating expenses 215 230
32,875 28,399
Operating loss $ (608 ) $ (774 )
Results of Operations –Year Ended May 31, 2003 Compared to the Year Ended May 31, 2002.
We reported net income of approximately $7.5 million and an operating loss of $7.0$608,000 for the fiscal year ended May 31, 2003 compared to a net loss of $770,000 and an operating loss of $774,000 for the fiscal year ended May 31, 2002. Results for the fiscal year ended May 31, 2003 include a $7.7 million or $0.32non-operating gain in connection with the IRS settlement (see Note 13 – “Income Taxes” to the audited, consolidated financial statements) and a $470,000, non-operating gain related to the Medi-cal settlement (see Note 16 – “Commitments and Contingencies” to the audited, consolidated financial statements). For the fiscal year ended May 31, 2003, excluding the $8.2 million non-operating gains from net income would have resulted in a $729,000 net loss ($0.19 loss per share more thanbasic and diluted share). Additionally, results include $88,000 of revenue related to a favorable settlement of one hospital cost report and the elimination of a $75,000 reserve for another cost report, both pertaining to our hospital business segment that was discontinued in Fiscal 1999. Operating revenues increased by 16.8%, or $4.6 million, or $0.21 per share loss incurred
into approximately $32.3 million for the prior fiscal year. Theyear ended May 31, 2003 compared to $27.6 million for the fiscal 1993 fourth quarter loss of $4.3 million
or $0.20 per share reflected a deteriorationyear ended May 31, 2002. This increase is primarily attributable to membership growth from existing business, one new contract implemented during the fourth quarter of Fiscal 2002, and new Indiana business that was implemented during January 2003. These increases were offset by the priorloss of business from two major customers during Fiscal 2003 (see Note 4(1 and 3) – “Major Customers/Contracts” to the audited, consolidated financial statements).
Healthcare operating expenses increased by approximately $4.6 million, or 18.6%, for the fiscal year ended May 31, 2003 as compared to the fiscal year ended May 31, 2002. This increase is directly attributable to revenue growth as described above. Healthcare operating expense as a percentage of operating revenue increased by $5.01.4%
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
from 89.1% for the fiscal year ended May 31, 2002 to 90.5% for the fiscal year ended May 31, 2003. This increase is primarily attributable to a change in revenue mix resulting in increased Medicaid membership during Fiscal 2003 compared to Fiscal 2002.
General and administrative expenses decreased by $85,000, or 2.4%, for the fiscal year ended May 31, 2003 as compared to the fiscal year ended May 31, 2002. This decrease is primarily attributable to net reductions in outside professional service fees offset by staffing additions necessary to support new revenue. General and administrative expense as a percentage of operating revenue decreased from 12.8% for the fiscal year ended May 31, 2002 to 10.7% for the fiscal year ended May 31, 2003.
Other operating expenses decreased by $15,000 for the fiscal year ended May 31, 2003 compared to the fiscal year ended May 31, 2002. This decrease is attributable to a decrease in depreciation expense offset by an increase in bad debt expense in Fiscal 2003 compared to Fiscal 2002. The increase in bad debt expense is primarily due to a $66,000 bad debt recovery in Fiscal 2002.
Results of Operations – Year Ended May 31, 2002 Compared to the Year Ended May 31, 2001.
We reported a net loss of $770,000 and an operating loss of $774,000 for the fiscal year ended May 31, 2002 compared to the operating loss of $1.2 million for the fiscal year ended May 31, 2001. Operating revenues increased by 51.9%, or $9.4 million, to $27.6 million for the fiscal year ended May 31, 2002 compared to $18.2 million for the fiscal year ended May 31, 2001. This increase was attributable to two major contracts implemented during Fiscal 2001 and membership growth from state sponsored children’s health insurance programs.
Healthcare operating expenses increased by approximately $9.3 million, or $0.23 per share.

Results60.7%, for the fiscal 1993 were impactedyear ended May 31, 2002 as compared to the fiscal year ended May 31, 2001. This increase is directly attributable to revenue growth as described above. Healthcare operating expense as a percentage of operating revenue increased by 4.8%, from 84.3% for the fiscal year ended May 31, 2001 to 89.1% for the fiscal year ended May 31, 2002. This increase was primarily attributable to a change in revenue mix resulting in increased Medicaid and Medicare membership during Fiscal 2002 compared to Fiscal 2001.
General and administrative expenses decreased by approximately $0.3 million, or 7.8%, for the fiscal year ended May 31, 2002 as compared to the fiscal year ended May 31, 2001. This decrease was attributable to our continuing efforts to reduce general and administrative costs. General and administrative expense as a percentage of operating revenue decreased from 21.1% for the fiscal year ended May 31, 2001 to 12.8% for the fiscal year ended May 31, 2002.
Other operating expenses increased $43,000 for the fiscal year ended May 31, 2002 compared to the fiscal year ended May 31, 2001. This increase was primarily attributable to the $327,000 reduction in the amount of recovery of doubtful accounts year over year, offset by a gain$242,000 decrease in depreciation expense, which results from assets being fully depreciated and, also, from decreases in capital spending. Additionally, Fiscal 2002 results do not include any amortization expense compared to $72,000 of approximately $13.1
millionamortization expense recorded during the secondfiscal year ended May 31, 2001 (see Note 10 to the audited, consolidated financial statements – “Goodwill”).
Seasonality of Business
Historically and during Fiscal 2003, we have experienced consistently low utilization during our first fiscal quarter, which comprises the months of June, July, and August, and increased utilization during our fourth fiscal quarter, which comprises the months of March, April and May. Such variations in utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the first fiscal quarter and a negative impact on our gross margins and operating profits during the fourth quarter.
Liquidity and Capital Resources
During the fiscal year ended May 31, 2003, we completed a settlement with the Internal Revenue Service and reached an agreement with our former tax advisor with respect to the related tax advisor fees. Having concluded these settlements, we recorded a non-operating gain of $7.7 million during the quarter ended February 28, 2003, significantly reducing our working capital deficiency and stockholders’ deficit (see Note 13 – “Income Taxes” to the audited, consolidated financial statements), which amount to $4.4 million and $5.0 million, respectively, as of May 31, 2003. The IRS settlement required us to make a cash payment in February 2003 of approximately $2.2 million,
11
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
which was offset in part by $525,000 collected from our former tax advisor. As a result, cash and cash equivalents have decreased by approximately $1.8 million during the fiscal year ended May 31, 2003.
Our unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses. These estimates are subject to the effects of trends in utilization and other factors. Any significant increase in member utilization that falls outside of our estimations would increase healthcare operating expenses and may impact our ability to achieve profitability and positive cash flow. Although considerable variability is inherent in such estimates, we believe that the unpaid claims liability is adequate. However, actual results could differ from the $4.1 million claims payable amount reported as of May 31, 2003.
During Fiscal 2003, net cash used in operations amounted to $1.7 million, which approximates the net amount paid by the Company to complete its settlement with the Internal Revenue Service. Having concluded this settlement, the Company recorded a non-operating gain of $7.7 million during the fiscal year ended May 31, 2003, significantly reducing its working capital deficiency and stockholder’s deficit, which amount to $4.4 million and $5.0 million, respectively, as of May 31, 2003. Our capital needs during Fiscal 2004 will include a portion of the $0.4 million required to implement a new, customized management information system that will enable us to meet HIPAA requirements, streamline our entire clinical and claims functions, and offer service improvements to our participating providers (see “Management Information Systems” above). We are currently pursuing sources of financing on terms that would support our future capital needs and provide available funds for working capital in Fiscal 2004. We cannot state with any degree of certainty whether any required additional equity or debt financing will be available to us during Fiscal 2004 and, if available, that the source of financing would be available on terms and conditions acceptable to us. These conditions raise substantial doubt about the Company’s ability to continue as a going concern, which is dependent upon our ability to continue to generate sufficient cash flow to meet our obligations on a timely basis, obtaining additional financing as may be required and, ultimately, attaining an operating profit.
Summary of Significant Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make significant estimates and judgments to develop the amounts reflected and disclosed in the financial statements. On an on-going basis, we evaluate the appropriateness of our estimates and we maintain a thorough process to review the application of our accounting policies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following significant accounting policies involve our most significant judgments and estimates that are material to our consolidated financial statements:
Accrued Claims Payable— The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims incurred but not yet reported (“IBNR”) to the Company. The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. However, actual claims incurred could differ from the estimated claims payable amount reported as of May 31, 2003. Although considerable variability is inherent in such estimates, we believe that the unpaid claims liability is adequate.
Revenue Recognition— Our managed care activities are performed under the terms of agreements with health maintenance organizations, preferred provider organizations, and other health plans or payers to provide contracted behavioral healthcare services to subscribing participants. Revenue under a substantial portion of these agreements is earned monthly based on the number of qualified participants regardless of services actually provided (generally referred to as capitation arrangements). The information regarding qualified participants is supplied by our clients and we rely extensively on the accuracy of the client remittance and other reported information to determine the amount of revenue to be recognized. Such agreements accounted for 87.4%, or $28.2 million, of revenue for the fiscal year ended May 31, 2003. The balance of our revenues is earned on a fee-for-service basis and is recognized as services are rendered.
Goodwill— As a result of the adoption of SFAS 142, effective June 1, 2001, no amortization expense was recorded during the fiscal years ended May 31, 2003 or 2002 compared to approximately $72,000 of amortization expense recorded during the fiscal year ended May 31, 2001. SFAS 141 requires the elimination of any unamortized
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
deferred credits related to an excess of fair value of acquired assets over cost from a business combination for which the acquisition date was before July 1, 2001 immediately upon adoption of SFAS 142. As of June 1, 2001, the Company had an unamortized deferred credit of $55,000 that related to an acquisition in 1996. As a result, the Company recognized $55,000 as the cumulative effect of a change in accounting principle during the quarter ended August 31, 2001.
Changes in the carrying amount of goodwill are as follows:
Fiscal Year ended May 31,
2003 2002 2001
Balance as of the beginning of the fiscal year $ 991,000 $ 936,000 $ 1,008,000
Amortization — — (72,000 )
Unamortized deferred credit written off and recognized in income — 55,000 —
Balance as of the end of the fiscal year $ 991,000 $ 991,000 $ 936,000
Prior to the adoption of SFAS 142, we amortized goodwill on a straight-line basis over estimated lives up to 20 years. Had we accounted for goodwill consistent with the provisions of SFAS 142 in prior years, the Company’s net loss would have been affected as follows (in thousands, except per share amounts):
Fiscal Year Ended May 31,
2003 2002 2001
Reported net income (loss) $ 7,458 $ (770 ) $ (1,117 )
Add back: Goodwill amortization — — 72
Elimination: Cumulative effect of change in accounting principle — (55 ) —
Adjusted net income (loss) $ 7,458 $ (825 ) $ (1,045 )
Basic earnings (loss) per share:
Reported net income (loss) $ 1.91 $ (0.20 ) $ (0.29 )
Goodwill amortization — — 0.02
Cumulative effect of change in accounting principle — (0.01 ) —
Adjusted net income (loss) $ 1.91 $ (0.21 ) $ (0.27 )
Diluted earnings (loss) per share:
Reported net income (loss) $ 1.72 $ (0.20 ) $ (0.29 )
Goodwill amortization — — 0.02
Cumulative effect of change in accounting principle — (0.01 ) —
Adjusted net income (loss) $ 1.72 $ (0.21 ) $ (0.27 )
Weighted Average Common Shares Outstanding – basic 3,905 3,860 3,818
Weighted Average Common Shares Outstanding – diluted 4,343 3,860 3,818
Risk Factors
Important Factors Related to Forward-Looking Statements and Associated Risks
This Annual Report on Form 10-K contains certain forward-looking statements that are based on current expectations and involve a number of risks and uncertainties. Factors that may materially affect revenues, expenses and operating results include, without limitation, our success in (i) expanding the managed behavioral healthcare operations, (ii) effective management in the delivery of services, and (iii) risk and utilization in context of capitated payouts.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Concentration of Risk
We currently have contracts with four health plans to provide behavioral healthcare services under commercial, Medicaid, and CHIP plans to contracted members in Connecticut, Florida, and Texas. These combined contracts represent approximately 56.7% and 63.6% of our operating revenue for the fiscal year ended May 31, 2003 and May 31, 2002, respectively, and include contracts that terminated effective January 1, 2003, which accounted for a combined 11.7% and 17.0% of our operating revenue for the fiscal years ended May 31, 2003 and 2002, respectively (see Note 4(1) to the audited, consolidated financial statements – “Major Customers/Contracts”) and agreements that terminated effective February 28, 2003, which accounted for 4.8% and 3.6% of our operating revenues during the fiscal years ended May 31, 2003 and 2002, respectively (see Note 4(3) to the audited, consolidated financial statements – “Major Customers/Contracts”). One HMO, whose contract with the Company accounted for approximately $2.8 million, or 8.5%, of our operating revenue for the fiscal year ended May 31, 2003 and is scheduled to renew in January 2004, has verbally advised us that it is evaluating whether to manage its members’ behavioral healthcare benefits “in house” (see Note 4(3) to the audited, consolidated financial statements – “Major Customers/Contracts”). We have not received a formal termination notice, nor has the customer advised the Company of a date by which it will make known its decision. However, at this point in time, we believe there exists a greater risk of non-renewal of this contract, the realization of which rests solely with our customer. Although the loss of this customer could have a material, adverse effect on the Company’s financial condition and future results of operations, we believe the Company will be able to reduce its internal cost of servicing this account to minimize any effect on future results of operations. In general, the terms of each contract are generally for one-year periods and are automatically renewable for additional one-year periods unless terminated by either party. The loss of any one of these customers or changes in any of these State’s Medicaid reimbursement rules could have a material, adverse effect on our working capital and future results of operations (see “Medicaid and Other State Funded Programs” below).
History of Operating Losses – Uncertainty of Future Profitability
For each of the fiscal years ending May 31, 2003, 2002 and 2001, we had operating losses of approximately $608,000, $774,000 and $1,163,000, respectively. The report of the Company’s independent auditors with respect to their examination of the Company’s financial statements for the years ended May 31, 2003 and 2002 contains an explanatory paragraph relating to the preparation of the Company’s financial statements on a “going concern” basis and states that the Company’s working capital deficiency and stockholder’s deficit raise substantial doubt about its ability to continue as a going concern. At May 31, 2003, the Company’s total current liabilities exceeded its total current assets by approximately $4.4 million and it had an accumulated deficit of approximately $56.9 million, with a total stockholders deficit of approximately $5.0 million. While our management has addressed the conditions giving rise to the going concern uncertainty, there is no certainty that we will be successful in implementing any of the plans of management to restore us to profitability, to achieve and maintain positive cash flow on an ongoing basis, or otherwise to ensure that we will be able to continue as a going concern.
Costs of Care — Estimated Claims Incurred But Not Reported
Our costs of care include estimated amounts for claims incurred but not yet reported (“IBNR”) to CompCare. The IBNR is estimated using an actuarial paid completion factor methodology and other statistical analyses that we continually review and adjust, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. Although considerable variability is inherent in such estimates, we believe that our unpaid claims liability is adequate. However, actual results may differ materially from the estimated amounts reported.
Need for Additional Funds; Uncertainty of Future Funding
We believe that our ability to increase business is dependent on our ability to have available working capital and, therefore, we will require additional funding. We are currently pursuing sources of financing on terms that would support our capital needs and provide available funds for working capital in Fiscal 2004. We cannot state with any degree of certainty whether any required additional equity or debt financing will be available to us during Fiscal 2004 and, if available, that the source of financing would be available on terms and conditions acceptable to us.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Uncertainty of Pricing; Healthcare Reform and Related Matters
Managed care operations are at risk for costs incurred to supply agreed upon levels of service. Failure to anticipate or control costs could have material, adverse effects on the Company. Additionally, the business of providing services on a full-risk capitation basis exposes CompCare to the additional risk that contracts negotiated and entered into may ultimately be determined to be unprofitable if utilization levels require us to deliver and provide services at capitation rates which do not account for or factor in such utilization levels.
We typically contract with small to medium sized HMO’s who may be adversely affected by the continuing efforts of governmental and third party payers to contain or reduce the costs of healthcare through various means. Our clients may fall under state supervision or otherwise be subject to state discipline placing them at risk of losing membership to their competitors in which case we may be unable to contract with any succeeding HMOs. They may also determine to manage the behavioral healthcare benefits “in house” and, as a result, discontinue contracting with the Company. Additionally, our clients may be acquired by larger HMO’s, in which case there can be no assurance that the acquiring company would renew our contract.
Medicaid and Other State funded Programs
As of May 31, 2003, we managed approximately 627,000 lives in connection with behavioral and substance abuse services covered through Medicaid in Connecticut, Florida, Michigan and Texas. The aggregate number of Medicaid lives was reduced by approximately 166,000 effective January 1, 2003 due to the termination of the contracts described under Note 4(1) — “Major Contracts/Customers” to the audited, consolidated financial statements. Any changes in Medicaid reimbursement could ultimately affect the Company through contract bidding and cost structures with the health plans first impacted by such changes. The State of Texas has passed legislation that will reduce the amount of funds allocated to our clients to cover behavioral healthcare services to Medicaid and Children’s Health Insurance Program (“CHIP”) recipients in the State of Texas. Such legislation is subject to pending bills that, if passed, could restore some of the benefits to these programs. Under the recently passed legislation, the outpatient behavioral healthcare benefits available to adult Medicaid and CHIP recipients will be provided by the HMOs and their subcontractors, including the Company, on a very limited basis while the inpatient benefits for CHIP recipients may not be covered by the HMOs and their subcontractors. For the fiscal year ended May 31, 2003, we had operating revenue of $3.7 million and $4.5 million, respectively, specific to contracts covering Texas CHIP and Texas Medicaid recipients. These changes to Texas Medicaid and CHIP programs could have a material, adverse impact on our operations. However, we believe certain of our clients will continue to require the types of services we provide to mitigate their exposure to treat serious medical conditions that may result from the lack of adequate behavioral healthcare benefits. We are closely monitoring developments in Texas, but currently cannot predict what financial impact, if any, these changes may have on our business. Additionally, we cannot predict whether other states in which we operate may pass legislation that would reduce our revenue through changes in the reimbursement rates or in the number of eligible participants. In either case, we may be unable to reduce our costs to a level that would allow us to maintain current gross margins specific to our Medicaid and CHIPS programs.
Seasonality of Business
Historically and during Fiscal 2003, we have experienced consistently low utilization during our first fiscal quarter, which comprises the months of June, July, and August, and increased utilization during our fourth fiscal quarter, which comprises the months of March, April and May. Such variations in utilization impact our costs of care during these months, generally having a positive impact on our gross margins and operating profits during the first fiscal quarter and a negative impact on our gross margins and operating profits during the fourth quarter.
Regulatory compliance
CompCare is subject to extensive and evolving state and federal regulations relating to the nation’s mental health system as well as changes in Medicaid and Medicare reimbursement that could have an effect on the profitability of our contracts. These regulations range from licensure and compliance with regulations related to insurance companies and other risk-assuming entities, to licensure and compliance with regulations related to healthcare providers. These laws and regulations may vary considerably among states. As a result, CompCare may be subject to the specific regulatory approach adopted by each state for regulation of managed care companies and for providers of behavioral healthcare treatment services.
15
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CompCare holds licenses or certificates to perform utilization review and third party administrator (“TPA”) services in certain states. Certain of the services provided by our managed behavioral healthcare subsidiaries may be subject to such licensing requirements in other states. There can be no assurance that additional utilization review or TPA licenses will not be required or, if required, that CompCare will qualify to obtain such licenses. In many states, entities that assume risk under contract with licensed insurance companies or health plans have not been considered by state regulators to be conducting an insurance or HMO business. As a result, we have not sought licensure as either an insurer or HMO in any state. If the regulatory positions of these states were to change, our business could be materially affected until such time as we are able to meet the regulatory requirements. Currently, we cannot quantify the potential effects of additional regulation of the managed care industry, but such costs will have an adverse effect on future operations to the extent that they are not able to be recouped in future managed care contracts.
CompCare 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, we will incur costs to insure the adequacy and security of our healthcare information system and communication networks. Additionally, we will incur costs to implement a new clinical information system that will process the specific transaction codes required by HIPAA for claims, payment, enrollment, eligibility, or to become compliant with security and privacy rules, which may be more stringent for providers of certain behavioral healthcare services (see “Management Information Systems” above). The expected timetable for us to be compliant is currently October 2003 for transaction code changes due to our October 2002 filing of a formal compliance plan. The Company has met the deadline for compliance with the privacy rules, which was April 14, 2003. Additionally, we have filed our Electronic Health Care Transactions and Code Sets Standards Model Compliance Plan with the Centers for Medicare and Medicaid Services. While these efforts will be ongoing, we expect to meet all compliance rules and timetables with respect to the HIPAA regulations. Failure to do so may result in penalties and have a material adverse effect on the Company’s ability to retain its customers or to gain new business.
Dependence on Key Personnel
We currently rely heavily on several key executives and other management, clinical and technical personnel for our business performance and development. Recent new hires have included senior management personnel and other essential employees that are assisting executive management with marketing efforts and enhancements to our clinical system designs. Our future success will depend in large part upon our continued ability to attract and retain highly skilled employees.
Shares Eligible for Future Sale
As of September 3, 2003, the Company has issued 1,105,724 options, with exercise prices ranging from $0.25 to $4.00. A total of 867,083 options are exercisable and “in the money” as of September 3, 2003 and, accordingly, could be exercised and resold by optionees.
Anti-takeover Provisions
The Company’s Restated Certificate of Incorporation provides for 60,000 authorized shares of Preferred Stock, the rights, preferences, qualifications, limitations and restrictions of which may be fixed by our Board of Directors without any vote or action by the stockholders that could have the effect of diluting the Common Stock or reducing working capital that would otherwise be available to the Company. As of May 31, 2003, there are 18,740 remaining shares authorized and available to issue, and no outstanding shares of Preferred Stock. The Company’s Restated Certificate of Incorporation also provides for a classified board of directors with directors divided into three classes serving staggered terms. The Company’s stock option plans generally provide for the acceleration of vesting of options granted under such plans in the event of certain transactions that result in a change of control of the Company. Section 203 of the General Corporation Law of Delaware prohibits us from engaging in certain business combinations with interested stockholders. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders and therefore could adversely affect the price of our Common Stock or the possibility of sale of shares to an acquiring person.
16
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Assumptions relating to the foregoing involve judgments that are difficult to predict accurately and are subject to many factors that can materially affect results. Budgeting and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our budgets which may in turn affect the Company’s results. In light of the factors that can materially affect the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company of 2,300,000 shares of its formerly wholly-owned
subsidiary RehabCare. Prioror any other person that our objectives or plans will be achieved.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
While we currently have market risk sensitive instruments, we have no significant exposure to the sale the Company owned a 48%changing interest in
RehabCare which was accounted for on the equity method. Subsequent to the
sale, the Company no longer has an interest in RehabCare and no longer reports
a portion of RehabCare's earnings in its statement of operations. Included in
the loss for fiscal 1993 is a charge of approximately $6.7 million,
attributable to restructuring the organization, of which $1.2 million was
reclassified as asset writedowns during the fourth quarter. In fiscal 1993,
the Company recorded pretax charges of approximately $4.4 million primarily
associated with the write-down of property and equipment held for sale. Of
this amount, $3.4 million was a result of revaluing certain underperforming
assets that the Company had designated for disposition and the remaining $1.0
million was attributable to the write-down of other property and equipment to
net realizable value. During fiscal 1992, the Company recorded pretax charges
of approximately $16.0 million primarily associated with the write-down of
property and equipment held for sale. Of this amount, approximately $9.3
million was a result of revaluing certain underperforming assets that the
Company had designated for disposition. The remaining $6.7 million was
attributable to the write-down to net realizable value of certain hospitals.

Operating revenues declined $8.1 million or 14% from fiscal 1992,
primarilyrates as the result of the closure of four facilities during fiscal 1993,
sale of a fifth facility, the decline in both admissions and length of stay and
the redesignation of facilities as continuing operations.

Operating expenses increased by approximately $12.1 million or 31%,
primarily as a result of the redesignation of facilities as continuing
operations, the expenses incurred in the development of psychiatric services at
the company's freestanding facilities and the start- up costs associated with
the development of its behavioral medicine managed care business. General and
administrative expenses declined by approximately $7.2 million or 56% in fiscal
1993 primarily as a result of management's continued effort to reduce corporate
overhead expenses. Interest expense was reduced by $2.1 million or 55%,
primarily as the result of the paydown of senior secured debt by approximately
$11.8 million with the proceeds of asset sales, the lowering of the prime
interest rate on our long-term debt is fixed. Additionally, we do not use derivative financial instruments for investment or trading purposes and the reduction of interest expense attributableour investments are generally limited to the
Financial Security Plan (see Note 13-- "Employee Benefit Plans").

Equity in the earnings of unconsolidated affiliates improved by
approximately $.2 million during fiscal 1993, primarily as a result of the
termination of a joint venture from which the company reported losses of $1.1
million in fiscal 1992 (see Note 7-- "Investments in Unconsolidated
Affiliates").

LIQUIDITYcash deposits.
17
COMPREHENSIVE CARE CORPORATION AND CAPITAL RESOURCES

The Company's current assets at May 31, 1994 amounted to approximately
$15.1 million and current liabilities were approximately $14.7 million,
resulting in working capital of approximately $0.4 million and a current ratio
of 1:1. Included in current assets are four hospital facilities designated as
property and equipment held for sale with a total carrying value of $6.9
million. Should the Company be unable to complete the sales transactions during
fiscal 1995, the Company's working capital would be materially adversely
affected. The Company is seeking to sell these four hospital facilities during
fiscal 1995. The Company's primary use of working capital is to fund operating
losses while it seeks to restore profitability to certain of its freestanding
facilities and expand its behavioral medicine managed care business. The
Company had no senior secured debt at May 31, 1994.

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20
ITEMSUBSIDIARIES
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

DATA
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES

YEARS ENDED MAY
Index to Consolidated Financial Statements
Years Ended May 31, 1994, 1993 AND 1992

2003, 2002 and 2001

NUMBER PAGE
- ------ ----
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Eisner LLP 19
Consolidated Balance Sheets, May 31, 19942003 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . 23
2002 20
Consolidated Statements of Operations, Years Ended May 31, 1994, 19932003, 2002 and 1992 . . . . . . . . . . 24
2001 21
Consolidated Statements of Stockholders' Equity,Stockholders’ Deficit, Years Ended May 31, 1994, 19932003, 2002 and 1992 . . . . . 25
2001 22
Consolidated Statements of Cash Flows, Years Ended May 31, 1994, 19932003, 2002 and 1992 . . . . . . . . . . 26
2001 23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Financial Statement Schedules:

V. Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
VI. Accumulated Depreciation and Amortization of Property and Equipment . . . . . . . . . . . . . 47
X. Supplementary Statements of Operations Information . . . . . . . . . . . . . . . . . . . . . . 48
24-38

20
21
REPORT OF
18
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEPENDENT PUBLIC ACCOUNTANTS

To AUDITORS’ REPORT
Board of Directors and Stockholders
Comprehensive Care Corporation:Corporation
We have audited the accompanying consolidated balance sheets of Comprehensive Care Corporation (a Delaware corporation) and subsidiaries as of May 31, 19942003 and 1993,2002, and the related consolidated statements of operations, stockholders' equitystockholders’ deficit and cash flows for each of the three years then ended.in the period ended May 31, 2003. These
consolidated financial statements and the schedules referred to below are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted auditing
standards.in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Comprehensive Care
Corporation and subsidiaries as of May 31, 1994 and 1993, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.

As further discussed in Note 15, the Company is negotiating a settlement
with the Internal Revenue Service (IRS) regarding assessments of payroll taxes.
Management believes that adequate reserves have been provided for the
additional taxes to be assessed by the IRS. There can be no assurance,
however, that such reserves will be sufficient until a formal settlement is
reached.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has incurred
significant recurring losses and negative cash flows from operations which
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result should the Company be unable to continue as a going concern.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules V, VI
and X for the years ended May 31, 1994 and 1993, are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN & CO.

St. Louis, Missouri
August 22, 1994

21
22
INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
Comprehensive Care Corporation:

We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Comprehensive Care Corporation and subsidiaries (the
"Company") for the year ended May 31, 1992. In connection with our audit of
the consolidated financial statements, we also have audited the related
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and related financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the resultsconsolidated financial position of Comprehensive Care Corporation'sCorporation and subsidiaries as of May 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the yearthree years in the period ended May 31, 1992,2003, in conformity with accounting principles generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.United States of America.
As discussed in Note 15 to3, the consolidated financial statements, the
Company is currently undergoing a payroll tax audit by the Internal Revenue
Service ("IRS") for calendar years 1983 through 1991. The IRS asserted that
certain physicians and psychologists engaged as independent contractors by the
Company should have been treated as employees for payroll tax purposes and has
issued an assessment claiming additional taxes due on that basis. Management
believes that its treatment of the independent contractors is consistent with
IRS guidelines and established industry practice. Management has filed a
protest to the assessment and intends to defend vigorously the claims made by
the IRS related to this issue. Also, as discussed in Note 15 to the
consolidated financial statements, on August 15, 1991 the Company, along with
others, were named in a stockholder complaint filed in District Court related
to the terminated reorganization with First Hospital Corporation. Management
intends to defend vigorously the claims related to this issue. The ultimate
outcome of these matters cannot presently be determined. Accordingly, no
provision for any liability that may result upon resolution of these matters
has been recognized in the accompanying consolidated financial statements.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company incurred
significant recurring losses and has a substantial portion of its senior
secured debt due on November 15, 1992. The potential need for additional
financing to repay debt as it comes due and finance the Company's anticipatedCompany’s working capital requirements during fiscal 1993 raisesdeficiency, stockholders’ deficit, and continued losses from operations raise substantial doubt about the Company'sits ability to continue as a going concern. Management'sManagement’s plans in
regardas to these matters are also described in Note 2.3. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

KPMG Peat Marwick
As discussed in Note 2, effective June 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142 and changed its method of accounting for goodwill.
/s/ Eisner LLP

St. Louis, Missouri
August 27, 1992

22
23

New York, New York
July 25, 2003
19
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MAY 31,
--------------------
1994 1993
---- ----
(DOLLARS IN THOUSANDS)

A S S E T S
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 1,781 $ 1,126
Accounts and notes receivable, less allowance for
doubtful accounts of $5,729 and $8,217 . . . . . . . . . . . . 5,848 7,702
Property and equipment held for sale . . . . . . . . . . . . . . 6,939 8,254
Other current assets . . . . . . . . . . . . . . . . . . . . . . 508 1,896
------- ------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 15,076 18,978
------ ------

Property and equipment, at cost . . . . . . . . . . . . . . . . . . . 29,326 31,432
Less accumulated depreciation and amortization . . . . . . . . . . . (13,338) (13,229)
------ ------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . 15,988 18,203
------ ------
Property and equipment held for sale . . . . . . . . . . . . . . . . --- 7,098
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,162 2,689
------- ------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,226 $ 46,968
====== ======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . . $ 13,776 $ 15,737
Current maturities of long-term debt . . . . . . . . . . . . . . 154 2,137
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 734 666
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 14,664 18,540
------ ------

Long-term debt, excluding current maturities . . . . . . . . . . . . 10,477 10,652
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,986 4,825
Commitments and contingencies (see Note 15)
Stockholders' equity:
Preferred stock, $50.00 par value; authorized 60,000 shares . . . --- ---
Common stock, $.10 par value; authorized 30,000,000 shares;
issued and outstanding 21,986,916 shares . . . . . . . . . . . 2,199 2,199
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 37,883 37,883
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (34,983) (27,131)
------ ------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 5,099 12,951
------ ------
Total liabilities and stockholders' equity . . . . . . . . . . . . . $ 33,226 $ 46,968
====== ======

The
Consolidated Balance Sheets
May 31,
2003 2002
(Amounts in Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,590 $ 5,340
Accounts receivable, less allowance for doubtful accounts of $27 and $8 75 324
Accounts receivable – managed care reinsurance contract 354 575
Other receivable — 2,548
Other current assets 605 591
Total current assets 4,624 9,378
Property and equipment, net 230 291
Note receivable 155 159
Goodwill, net 991 991
Restricted cash 328 430
Other assets 51 150
Total assets $ 6,379 $ 11,399
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 1,836 $ 2,891
Accrued claims payable 4,103 4,635
Accrued reinsurance claims payable 3,117 2,019
Unbenefitted tax refunds received — 12,092
Income taxes payable 15 16
Total current liabilities 9,071 21,653
Long-term liabilities:
Long-term debt 2,244 2,244
Other liabilities 54 21
Total long-term liabilities 2,298 2,265
Total liabilities 11,369 23,918
Commitments and Contingencies (Note 16)
Stockholders’ 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 3,936,549 and 3,878,552 39 39
Additional paid-in-capital 51,928 51,842
Deferred compensation (16 ) (1 )
Accumulated deficit (56,941 ) (64,399 )
Total stockholders’ deficit (4,990 ) (12,519 )
Total liabilities and stockholders’ deficit $ 6,379 $ 11,399
See accompanying notes are an integral part of these consolidated financial
statements.

23
24
notes.
20
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED MAY 31,
----------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Revenues and gains:
Operating revenues . . . . . . . . . . . . . . . . . $34,277 $51,847 $59,969
Gain on sale of RehabCare stock, net . . . . . . . . --- 13,114 17,683
Gain on Sovran settlement, net . . . . . . . . . . . --- 584 ---
Interest income . . . . . . . . . . . . . . . . . . . 50 69 336
Equity in earnings of unconsolidated affiliates . . . --- 384 168
-------- ------- -------
34,327 65,998 78,156
------ ------ ------

Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . . 31,875 50,924 38,810
General and administrative expenses . . . . . . . . . 5,455 5,754 12,946
Provision for doubtful accounts . . . . . . . . . . . 1,558 6,187 6,065
Depreciation and amortization . . . . . . . . . . . . 1,762 2,946 2,602
Loss on sale/write-down of assets . . . . . . . . . . --- 4,382 15,986
Interest expense . . . . . . . . . . . . . . . . . . 1,228 1,759 3,908
Other restructuring/nonrecurring expenses . . . . . . --- 5,452 2,152
-------- ------ ------
41,878 77,404 82,469
------ ------ ------

Loss before income taxes . . . . . . . . . . . . . . . . (7,551) (11,406) (4,313)

Provision for income taxes . . . . . . . . . . . . . . . 301 194 249
------ ------ ------

Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(7,852) $(11,600) $(4,562)
===== ====== =====

Net loss per share . . . . . . . . . . . . . . . . . . . $(0.36) $(0.53) $(0.21)
==== ==== ====

The
Consolidated Statements of Operations
Year Ended May 31,
2003 2002 2001
(Amounts in thousands, except per share data)
Operating Revenues $ 32,267 $ 27,625 $ 18,192
Costs and Expenses:
Healthcare operating expenses 29,201 24,625 15,326
General and administrative expenses 3,459 3,544 3,842
Provision for (recovery of) doubtful accounts 20 (112 ) (439 )
Depreciation and amortization 195 342 656
Restructuring expenses — — (30 )
32,875 28,399 19,355
Operating loss before items shown below (608 ) (774 ) (1,163 )
Other income (expense):
Net gain on IRS settlement 7,717 — —
Gain on settlement of other liability 470 — —
Loss in connection with prepayment of note receivable — — (496 )
Gain on sale of assets 4 — —
Loss on disposal of assets (5 ) — —
Reduction in accrued interest expense — — 290
Other non-operating income, net 34 40 332
Interest income 47 88 163
Interest expense (181 ) (178 ) (208 )
Income (loss) before items shown below 7,478 (824 ) (1,082 )
Income tax expense 20 1 35
Income (loss) before cumulative effect of change in accounting principle 7,458 (825 ) (1,117 )
Cumulative effect of change of accounting principle — 55 —
Net income (loss) $ 7,458 $ (770 ) $ (1,117 )
Earnings (loss) per common share — basic:
Income (loss) before cumulative effect of change in accounting principle $ 1.91 $ (0.21 ) $ (0.29 )
Cumulative effect of change in accounting principle — 0.01 —
Net income (loss) $ 1.91 $ (0.20 ) $ (0.29 )
Earnings (loss) per common share — diluted:
Income (loss) before cumulative effect of change in accounting principle $ 1.72 $ (0.21 ) $ (0.29 )
Cumulative effect of change in accounting principle — 0.01 —
Net income (loss) $ 1.72 $ (0.20 ) $ (0.29 )
Weighted average common shares outstanding:
Basic 3,905 3,860 3,818
Diluted 4,343 3,860 3,818
See accompanying notes are an integral part of these consolidated financial
statements.

24
25

21
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED

SHARES ------

Balance, May 31, 1991 . . . . . 21,921 Net loss . . . . . . . . . --- Shares issued from treasury stock . . . . --- Retirement of treasury stock (31) Exercise of stock options . 17 ------ Balance, May 31, 1992 . . . . . 21,907 Net loss . . . . . . . . . --- Exercise of stock options . 40 Issuance of shares for the purchase of Mental Health Programs, Inc. 40 ------ Balance, May 31, 1993 . . . . . 21,987 Net loss . . . . . . . . . --- ------ Balance, May 31, 1994 . . . . . 21,987 ======

TheSTOCKHOLDERS’

STATEMENTS OF STOCKHOLDERS' EQUITY ADDITIONAL TOTAL COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCK STOCKHOLDER'S AMOUNT CAPITAL DEFICIT SHARES AMOUNT EQUITY ------ ------- ------- ------ ------ ------ (AMOUNTS IN THOUSANDS) $2,192 $38,743 $(10,969) (80) $(990) $28,976 --- --- (4,562) --- --- (4,562) --- (597) --- 49 602 5 (3) (385) --- 31 388 --- 2 20 --- --- --- 22 ------ ------- -------- ---- ----- ------- 2,191 37,781 (15,531) --- --- 24,441 --- --- (11,600) --- --- (11,600) 4 46 --- --- --- 50 4 56 --- --- --- 60 ------ ------- -------- ---- ----- ------- 2,199 37,883 (27,131) --- --- 12,951 --- --- (7,852) --- --- (7,852) ------ ------- -------- ---- ----- ------- $2,199 $37,883 $(34,983) --- $ --- $ 5,099 ====== ======= ======== ==== ===== ======= DEFICIT
(In Thousands)
Common Stock Additional
Paid-In Accumulated Deferred Total Stockholders'
Shares Amount Capital Deficit Compensation Deficit
Balance, May 31, 2000 3,818 $ 38 $ 51,812 $ (62,512 ) $ (10 ) $ (10,672 )
Net loss — — — (1,117 ) — (1,117 )
Compensatory stock options granted — — 1 — (1 ) —
Amortization of deferred compensation — — — — 11 11
Balance, May 31, 2001 3,818 $ 38 $ 51,813 $ (63,629 ) $ — $ (11,778 )
Net loss — — — (770 ) — (770 )
Compensatory stock options granted — — 1 — (1 ) —
Shares issued for executive compensation 50 1 25 — — 26
Exercise of stock options 11 — 3 — — 3
Balance, May 31, 2002 3,879 $ 39 $ 51,842 $ (64,399 ) $ (1 ) $ (12,519 )
Net income — — — 7,458 — 7,458
Shares issued for executive compensation 20 — 20 — — 20
Compensatory stock options and warrants granted to non-employees — — 48 — (22 ) 26
Amortization of deferred compensation — — — — 7 7
Exercise of stock options 38 — 18 — — 18
��
Balance, May 31, 2003 3,937 $ 39 $ 51,928 $ (56,941 ) $ (16 ) $ (4,990 )
See accompanying notes are an integral part of these consolidated financial
statements.

25
26
notes.
22
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED MAY 31,
--------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS)

Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,852) $(11,600) $(4,562)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 1,762 2,946 2,602
Provision for doubtful accounts . . . . . . . . . . . . . . . 1,558 6,187 6,065
Gain on sale of RehabCare stock, net . . . . . . . . . . . . . --- (13,114) (17,683)
Gain on Sovran settlement, net . . . . . . . . . . . . . . . . --- (584) ---
Loss on sale/write-down of assets . . . . . . . . . . . . . . 36 4,382 15,986
Carrying costs incurred on property and equipment
held for sale . . . . . . . . . . . . . . . . . . . . . . . (1,241) (1,330) (4,487)
Other restructuring/non-recurring expenses . . . . . . . . . . --- 5,452 ---
Equity in earnings of unconsolidated affiliates . . . . . . . --- (384) (168)
Decrease in refundable income taxes . . . . . . . . . . . . . --- --- 4,650
Decrease(increase) in accounts and notes receivable . . . . . 452 2,542 (3,554)
Decrease in accounts payable and accrued liabilities . . . . . (2,762) (4,927) (1,719)
Increase in income taxes payable . . . . . . . . . . . . . . . 68 --- ---
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 818 278 (6,759)
------ ------ ------
Net cash used in operating activities . . . . . . . . . . . (7,161) (10,152) (9,629)
----- ------ ------

Cash flows from investing activities:
Proceeds from sale of property and equipment
(operating and held for sale) . . . . . . . . . . . . . . 10,357 3,489 4,700
Proceeds from the sale of RehabCare stock . . . . . . . . . . --- 18,825 20,553
Proceeds from Sovran settlement, net . . . . . . . . . . . . . --- 584 ---
Additions to property and equipment, net . . . . . . . . . . . (383) (474) (726)
Purchase of operating entity . . . . . . . . . . . . . . . . . --- (75) (750)
Distributions from joint ventures . . . . . . . . . . . . . . --- --- 50
-------- -------- -------
Net cash provided by investing activities . . . . . . . . . 9,974 22,349 23,827
------ ------ ------

Cash flows from financing activities:
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . (2,158) (11,835) (17,071)
Bank and other (repayments)borrowings . . . . . . . . . . . . --- (1,266) 1,266
Exercise of stock options . . . . . . . . . . . . . . . . . . --- 50 22
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 5
------- -------- -------
Net cash used in financing activities . . . . . . . . . . . (2,158) (13,051) (15,778)
----- ------ ------

Net increase(decrease) in cash and cash equivalents . . . . . . . 655 (854) (1,580)
Cash and cash equivalents at beginning of year . . . . . . . . . 1,126 1,980 3,560
----- ------ ------
Cash and cash equivalents at end of year . . . . . . . . . . . . $ 1,781 $ 1,126 $ 1,980
====== ====== ======

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,302 $ 2,050 $ 4,237
====== ====== ======
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 233 $ 338 $ 135
====== ====== ======

The
Consolidated Statements of Cash Flows
Year Ended May 31,
2003 2002 2001
(Amounts in thousands)
Cash flows from operating activities:
Net income (loss) $ 7,458 $ (770 ) $ (1,117 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization 195 342 656
Provision for doubtful accounts 20 — —
Cumulative effect of change in accounting principle — (55 ) —
Net gain from IRS settlement (7,717 ) — —
Gain on settlement of other liability (470 ) — —
Loss in connection with prepayment of note receivable — — 496
Gain on sale of assets (4 ) — —
Loss on disposal of assets 5 — —
Compensation expense – stock issued 20 — —
Compensation expense – stock options and warrants issued 15 — 11
Restructuring expenses — — (30 )
Reduction in accrued interest expense — — (290 )
Changes in assets and liabilities:
Accounts receivable 229 98 (146 )
Accounts receivable – managed care reinsurance contract 221 208 (783 )
Accounts receivable – pharmacy and laboratory costs — — 10,469
Other receivable 525 — —
Other current assets, restricted funds, and other non-current assets 198 284 746
Unbenefitted tax refunds received (2,258 ) — —
Accounts payable and accrued liabilities (687 ) (397 ) (615 )
Accrued claims payable (532 ) 1,564 261
Accrued reinsurance claims payable 1,098 1,236 783
Accrued pharmacy and laboratory costs payable — — (10,469 )
Income taxes payable (1 ) (15 ) (13 )
Other liabilities — (8 ) (47 )
Net cash (used in) provided by operating activities (1,685 ) 2,487 (88 )
Cash flows from investing activities:
Net proceeds from sale of property and equipment 3 — —
Payment received on note for sale of property and equipment 4 4 509
Additions to property and equipment (77 ) (43 ) (48 )
Net cash (used in) provided by investing activities (70 ) (39 ) 461
Cash flows from financing activities:
Proceeds from the issuance of Common Stock 18 3 —
Repayment of debt (13 ) (2 ) —
Net cash provided by financing activities 5 1 —
Net (decrease) increase in cash and cash equivalents (1,750 ) 2,449 373
Cash and cash equivalents at beginning of year 5,340 2,891 2,518
Cash and cash equivalents at end of year $ 3,590 $ 5,340 $ 2,891
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 182 $ 179 $ 177
Income taxes $ 22 $ 16 $ 37
See accompanying notes are an integral part of these consolidated financial
statements.

26
27
notes.
23
COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSUBSIDIARIES
Note 1 — Description of the Company’s Business
Comprehensive Care Corporation (the “Company” or “CompCare”) is a Delaware Corporation organized in 1969. Unless the context otherwise requires, all references to the “Company” include Comprehensive Behavioral Care, Inc. (“CBC”) and subsidiary corporations. The Company, primarily through its wholly owned subsidiary, CBC, provides managed care services in the behavioral health and psychiatric fields, which is its only operating segment. The Company manages the delivery of a continuum of psychiatric and substance abuse services to commercial, Medicare, and Medicaid members on behalf of employers, health plans, government organizations, third-party claims administrators, and commercial and other group purchasers of behavioral healthcare services. The managed care operations include administrative service agreements, fee-for-service agreements, and capitation contracts. The customer base for its services includes both corporate and governmental entities. The Company’s services are provided primarily by unrelated vendors on a subcontract or subcapitated basis.
Note 2 — Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Comprehensive Care Corporation (the "Company") and its wholly owned subsidiaries. All
significant intercompanySignificant inter-company accounts and transactions have been eliminated in consolidation.
Use Of Estimates
The Company's consolidatedpreparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Revenue Recognition
The Company’s managed care activities are presentedperformed under the terms of agreements with health maintenance organizations (“HMOs”), preferred provider organizations (“PPOs”), and other health plans or payers to provide contracted behavioral healthcare services to subscribing participants. Revenue under a substantial portion of these agreements is earned monthly based on the basis that itnumber of qualified participants regardless of services actually provided (generally referred to as capitation arrangements). The information regarding qualified participants is a going concern, which contemplatessupplied by the realization of assetsCompany’s clients and the satisfactionCompany relies extensively on the accuracy of liabilitiesthe client remittance and other reported information to determine the amount of revenue to be recognized. Such agreements accounted for 87.4%, or $28.2 million, of revenue for the fiscal year ended May 31, 2003, 84.7%, or $23.4 million, of revenue for the fiscal year ended May 31, 2002, and 79.2%, or $14.4 million, of revenue for the fiscal year ended May 31, 2001. The balance of the Company’s revenues is earned on a fee-for-service basis and is recognized as services are rendered.
Healthcare Expense Recognition
The Company attempts to control its costs and risk by entering into contractual relationships with healthcare providers including hospitals, physician groups and other managed care organizations either on a sub-capitated, a discounted fee-for-services, or a per-case basis. The Company’s capitation contracts typically exclude risk for chronic care patients. The cost of healthcare services is recognized in the normal course of business. The
continuation of the Company's business is dependent upon the resolution of
operating and short-term liquidity problems (see Note 2-- "Operating Losses
and Liquidity").

Revenue Recognition

Approximately 66%, 88% and 91% of the Company's operating revenues were
received from private sources in fiscal 1994, 1993 and 1992, respectively. The
remainder is received from Medicare, Medicaid and other governmental programs.
The latter are programs which provide for payments at rates generally less than
established billing rates. Payments are subject to audit by intermediaries
administering these programs. Revenues from these programs are recorded under
reimbursement principles applicable to each of the programs. Although
management believes estimated provisions currently recorded properly reflect
these revenues, any differences between final settlement and these estimated
provisions are reflected in operating revenues in the year finalized.

Property and Equipment

Depreciation and amortization of property and equipment are computed on
the straight-line method over the estimated useful lives of the related assets,
principally: buildings and improvements -- 5 to 40 years; furniture and
equipment -- 3 to 12 years; leasehold improvements -- life of lease or life of
asset, whichever is less. Property and equipment is carried at estimated net
realizable value.

Property and Equipment Held for Sale

Property and equipment held for sale represents net assets of certain
freestanding facilities and other propertiesperiod that the Company intendsis obligated to sell,provide such services. Certain contracted healthcare providers assume the financial risk for participant care rendered by them and is carried atthey are compensated on a sub-capitated basis.
In cases where the Company retains the financial responsibility for authorizations, hospital utilization, and the cost of other behavioral healthcare services, the Company establishes an accrual for estimated net realizable value. Net realizable value has
been reduced by theclaims payable (see “Accrued Claims Payable” below).
Premium Deficiencies
Estimated future healthcare costs and expenses in excess of estimated operating and selling costs of these facilities
through their expected disposal dates.

Property and equipment held for sale, which are expected to be sold in
the next fiscal year, are shown as current assets on the consolidated balance
sheets. Gains and losses on facilities soldfuture premiums are recorded as an adjustment to
the remaining property values until all facilities are sold.

Intangible Assets

Intangible assets include costs in excess of fair value of net assets
of businesses purchased (goodwill), licenses, and similar rights. Costs in
excess of net assets purchased are amortized over 20 to 25 years. The costs of
other intangible assets are amortized over the period of benefit. The amounts
in the consolidated balance sheets are net of accumulated amortization of
goodwill of $652,000 and $536,000a loss when determinable. No such deficiencies existed at May 31, 1994 and 1993, respectively.

27
28
2003 or May 31, 2002.
24
COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

Deferred Contract Costs

The Company has entered into contracts with independent general
hospitals whereby it will provide services in excess of the standard agreement.
In recognition of the hospitals' long-term commitment, the Company has paid
certain amounts to them. These amounts may be used by the hospitals for
capital improvements or as otherwise determined by the hospital. The Company
is entitled to a prorata refund in the event that the hospital terminates the
contract before its scheduled termination date; accordingly, these amounts are
charged to expense over the life of the contract.

SUBSIDIARIES
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in short-term investments with original maturities of three months or less. SuchThese investments are deemed to be cash equivalents for purposes of the consolidated statements
of cash flows. Included in cash are short-term investments of $1,294,000aggregated $2.4 million and $228,000$2.6 million at May 31, 19942003 and 1993,2002, respectively. Income Taxes

Effective June 1, 1993,These investments are included in cash equivalents in the accompanying consolidated balance sheets.
Restricted Cash
As of May 31, 2003 and 2002, non-current restricted accounts include $0.3 million of cash held in trust in connection with the Company’s Directors and Officers liability insurance policy. During Fiscal 2003, the Company adoptedsurrendered one license held by an inactive Michigan subsidiary and, as a result, approximately $100,000 of previously restricted cash was released to the Company.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of furniture and equipment is computed using the straight-line method over the estimated useful lives of 3 to 12 years. Leasehold improvements are amortized over the term of the related lease.
Goodwill
Goodwill includes costs in excess of fair value of the net assets acquired in purchase transactions, less amortization.
In June 2001, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets,” which establishes new standards for the treatment of goodwill and other intangible assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 31, 2001 and permits early adoption for companies with a fiscal year beginning after March 15, 2001. SFAS 142 prescribes that amortization of goodwill will cease as of the adoption date. The Company elected to adopt SFAS 142 effective June 1, 2001 and, as a result, there has been no amortization expense recorded during Fiscal 2003 or 2002 (see Note 10 – “Goodwill”). In accordance with SFAS 142, the Company had performed an impairment test within six months of the adoption date and determined that no impairment of goodwill had occurred as of such date. In addition, the Company performs an impairment test at least annually and whenever events and circumstances occur that might affect the carrying value of goodwill. The Company performed an annual impairment test as of May 31, 2003 and 2002 and determined that no impairment of goodwill had occurred as of such dates.
Extinguishment of Debt
In April 2002, the FASB issued Statement No. 109, "Accounting145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board No. 30, “Reporting Results of Operations.” The Company adopted the provisions of SFAS 145 effective for its fiscal year ended May 31, 2003 and has reflected gains on settlement of debt as other income instead of as extraordinary items.
Accrued Claims Payable
The accrued claims payable liability represents the estimated ultimate net amounts owed for all behavioral healthcare services provided through the respective balance sheet dates, including estimated amounts for claims incurred but not yet reported (“IBNR”) to the Company. The unpaid claims liability is estimated using an actuarial paid completion factor methodology and other statistical analyses and is continually reviewed and adjusted, if necessary, to reflect any change in the estimated liability. These estimates are subject to the effects of trends in utilization and other factors. However, actual claims incurred could differ from the estimated claims payable amount reported as of May 31, 2003. Although considerable variability is inherent in such estimates, management believes that the unpaid claims liability is adequate.
25
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Income Taxes" on a
prospective basis. PriorTaxes
The Company calculates deferred taxes and related income tax expense using the liability method. This method determines deferred taxes by applying the current tax rate to this date,net operating loss carryforwards and to the Company accountedcumulative temporary differences between the recorded carrying amounts and the corresponding tax basis of assets and liabilities. A valuation allowance is established for deferred tax assets unless their realization is considered more likely than not. The Company’s provision for income taxes under APB 11. Statementis the sum of the change in the balance of deferred taxes between the beginning and the end of the period and income taxes currently payable or receivable.
Stock Options
In December 2002, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 109 changed148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends the Company'sdisclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation” and provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. As permitted by SFAS 148, the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, in the event that the exercise price of the Company’s employee stock options is less than the market price of the underlying stock on the date of grant, compensation expense is recognized. No stock-based employee compensation cost is reflected in net income, taxes fromas all options granted under the deferred method required under APB 11Company’s employee stock options plans had an exercise price equal to the asset
and liability method. Under the deferred method, annual income tax expense is
matched with pretax accounting income by providing deferred taxes at current
tax rates for timing differences between the determination of net earnings for
financial reporting and tax purposes. The objectivemarket value of the assetunderlying common stock on the date of grant. The following table illustrates the effect on net income (loss) and liability
method isearnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to establish deferred tax assetsstock-based employee compensation.
Year Ended May 31,
2003 2002 2001
(in thousands except for per share information)
Net income (loss), as reported $ 7,458 $ (770 ) $ (1,117 )
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (179 ) (15 ) (15 )
Pro forma net income (loss) $ 7,279 $ (785 ) $ (1,132 )
Earnings (loss) per common share:
Basic – as reported $ 1.91 $ (0.20 ) $ (0.29 )
Basic – pro forma $ 1.86 $ (0.20 ) $ (0.30 )
Diluted – as reported $ 1.72 $ (0.20 ) $ (0.29 )
Diluted – pro forma $ 1.68 $ (0.20 ) $ (0.30 )
The weighted average fair values of options granted were $0.72, $0.40, and liabilities for$0.14 in Fiscal 2003, 2002, and 2001, respectively. For purposes of pro forma disclosures, the temporary
differences between the financial reporting basis and the tax basisestimated fair value of the Company's assets and liabilities at enacted tax rates expectedoptions is amortized to be in effect
when such amounts are realized or settled.expense over the options’ vesting period.
The change to Statement No. 109 had
no cumulative effectfair value of these options was estimated on the financial statementsdate of grant using the Black-Scholes option-pricing model with the following assumptions:
Year Ended May 31,
2003 2002 2001
Volatility 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 5 5 and 4
Risk-free interest rate 4.0 % 4.9 % 5.8 %
Dividend yield 0 % 0 % 0 %
26
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The fair value of options granted to non-employee consultants is being amortized to expense over the vesting period of the Company as a result of
recording a valuation allowance.

Charity Care

The Company provides charity care to patients who meet certain criteria
under its charity care policy without charge or at amounts less than its
established rates. Corporate policy allows for charity when appropriate which
must be prearranged and the patient must meet applicable federal and/or state
poverty guidelines. The Company will not pursue collection of charity
accounts. Charity charges foregone, based upon established rates, were less
than 1% of the Company's operating revenues for fiscal 1994 and 1993.

Loss options.
Per Share Primary and fully diluted lossdata
In calculating basic earnings (loss) per common and common equivalent share, have been computed by dividing net lossincome (loss) is divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the assumed exercise or conversion of all dilutive securities, such as options, warrants, and convertible debentures. No such exercise or conversion is assumed where the effect is antidilutive, such as when there is a net loss. The following table sets forth the computation of basic and diluted earnings (loss) per share in accordance with Statement No. 128, Earnings Per Share (amounts in thousands, except per share data):
Fiscal Year Ended May 31,
2003 2002 2001
Numerator:
Income (loss) before cumulative effect of change in accounting principle $ 7,458 $ (825 ) $ (1,117 )
Cumulative effect of change in accounting principle — 55 —
Numerator for diluted earnings (loss) per share available to Common Stockholders $ 7,458 $ (770 ) $ (1,117 )
Denominator:
Weighted average shares 3,905 3,860 3,818
Effect of dilutive securities:
Employee stock options 437 — —
Warrants 1 — —
Denominator for diluted earnings per share-adjusted weighted average shares after assumed exercises 4,343 3,860 3,818
Basic earnings per share:
Income (loss) before cumulative effect of change in accounting principle $ 1.91 $ (0.21 ) $ (0.29 )
Cumulative effect of change in accounting principle — 0.01 —
Net income (loss) $ 1.91 $ (0.20 ) $ (0.29 )
Diluted earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principle $ 1.72 $ (0.21 ) $ (0.29 )
Cumulative effect of change in accounting principle — 0.01 —
Net income (loss) $ 1.72 $ (0.20 ) $ (0.29 )
Fair Value of Financial Instruments
FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” requires disclosure of fair value information about financial instruments for which it is practical to estimate that value.
For cash and cash equivalents, notes receivable, and restricted cash, the carrying amount approximates fair value. For long-term debt, the fair value is based on the estimated market price for the Debentures on the last day of the fiscal year.
27
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The carrying amounts and fair values of the Company’s financial instruments at May 31, 2003 and 2002, are as follows:
2003 2002
Carrying Fair Carrying Fair
Amount Value Amount Value
(Amounts in thousands)
Assets
Cash and cash equivalents $ 3,590 $ 3,590 $ 5,340 $ 5,340
Note receivable 159 159 163 163
Restricted cash 328 328 430 430
Liabilities
Long-term debt $ 2,244 $ 2,328 $ 2,244 $ 1,534
Note 3 — Basis of Presentation
The accompanying consolidated financial statements are prepared on a going concern basis. During the quarter ended February 28, 2003, the Company completed a settlement with the Internal Revenue Service (“IRS”) and reached an agreement with its former tax advisor with respect to the related tax advisor fees (see Note 13 – “Income Taxes”). Having concluded these settlements, the Company recorded a non-operating gain of $7.7 million during the period. Duringquarter ended February 28, 2003, significantly reducing its working capital deficiency and stockholders’ deficit, which amount to $4.4 million and $5.0 million, respectively, as of May 31, 2003. The IRS settlement required the Company to make a cash payment in February 2003 of approximately $2.2 million, which was offset in part by $525,000 collected from its former tax advisor. As a result, net cash used in operations during the year ended May 31, 2003 amounted to $1.7 million, which approximates the decrease in cash and cash equivalents during such fiscal 1994, 1993year.
The Company is currently pursuing sources of financing on terms that would support the Company’s capital needs and 1992,provide available funds for working capital. Management cannot state with any degree of certainty whether any required additional equity or debt financing will be available to it during Fiscal 2004 and, if available, that the convertible subordinated debentures had an antidilutive impactsource of financing would be available on loss per shareterms and accordingly, were excluded fromconditions acceptable to the computation.

The weighted average numberCompany. Further, the Company has incurred operating losses during each of common and common equivalent shares used
to calculate loss per share was 21,987,000, 21,957,000 and 21,900,000 for the years ended May 31, 1994, 19932003, 2002 and 1992,2001. These conditions raise substantial doubt about the Company’s ability to continue as a going concern, which is dependent upon its ability to continue to generate sufficient cash flow to meet its obligations on a timely basis, obtaining additional financing as may be required and, ultimately, attaining an operating profit. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
Note 4 — Major Contracts/Customers
(1) During the fiscal year ended May 31, 2003, the Company had three contracts with one HMO to provide behavioral healthcare services to Florida members. The combined revenue from these contracts accounted for 11.7%, or $3.8 million, of the Company’s operating revenues during the fiscal year ended May 31, 2003 compared to 17.0%, or $4.7 million, for the fiscal year ended May 31, 2002 and 17.6%, or $3.2 million, for the fiscal year ended May 31, 2001. This HMO has been our customer since November 1998. On September 24, 2002, the Company received a written, 90-day termination notice, dated September 20, 2002, from this client. As such, these contracts covering Florida members terminated effective January 1, 2003. Additionally, the Company has one major contract with an affiliate of this HMO (see Item 2 below).
(2) The Company has one contract to provide behavioral healthcare services to Connecticut members under contract with one HMO. For the fiscal year ended May 31, 2003, this contract represented approximately 9.0%, or $2.9 million, of the Company’s operating revenue compared to 12.7%, or $3.5 million and 3.2%, or $.6 million for the fiscal years ended May 31, 2002 and 2001, respectively. Additionally, this contract provides that the Company, through its contract with this HMO, receives additional funds directly from a state reinsurance program. During the fiscal years ended May 31, 2003 and 2002, the Company filed reinsurance claims totaling approximately $3.0 million and $3.8 million, respectively. Such claims represent cost reimbursements and, as such, are not included in the reported operating revenues and are accounted for as reductions of healthcare operating expenses. As of May 31, 2003 and 2002, respectively, the Company has reported $0.4 million and $0.6 million as accounts receivable–managed care reinsurance contracts, with $3.1 million and $2.0 million reported as accrued reinsurance claims payable, in the accompanying balance sheet. In the event that the Company does not collect the amounts receivable related to reinsurance amounts, the Company could remain liable for the costs of the specific services provided to members that qualify for such reimbursements. The difference between the reinsurance receivable amount and the reinsurance
28 29

COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current year's presentation.

NOTE 2-- OPERATING LOSSES AND LIQUIDITY

The Company incurred losses before income taxes totaling approximately
$7.6 million for the year ended May 31, 1994, which was principally a result of
poor utilization of its freestanding facilities and behavioral medicine
contracts and the development and expansion of its behavioral medicine managed
care business.

In response to these continuing losses, the Company has taken steps to
bring expenses in line with revenues by reducing staff, closure and disposition
of various freestanding facilities and other cost cutting measures. If
utilization at particular facilities continues to deteriorate such that
anticipated reductions in operating losses are not achieved, those facilities
will also be considered for closure and disposition. The Company recorded no
asset writedowns during fiscal 1994 and $4.4 million in asset write-downs
during fiscal 1993 primarily related to the recognition of losses on facilities
to be sold and revaluation of facilities designated for disposition. These
amounts include the estimated future operating losses, selling costs and
carrying costs of such facilities until disposition at an assumed future point
in time. To the extent that actual costs and time required to dispose of the
facilities differ from these estimates, adjustments to the amount written-down
may be required. Future operating losses and carrying costs of such facilities
will be charged back directly to the carrying value of the respective assets
held for sale. Because chemical dependency treatment facilities are special
purpose structures, their resale value is negatively affected by the oversupply
of beds resulting from the diminished demand for inpatient treatment currently
being experienced throughout the industry. In the second quarter of 1993, the
Company redesignated various facilities as continuing operations and in the
fourth quarter of 1993, closed four facilities, incurring significant operating
losses. During fiscal 1994, none of the Company's remaining six operating
facilities were designated for disposition.

The Company's current assets at May 31, 1994, amounted to approximately
$15.1 million and current liabilities were approximately $14.7 million,
resulting in working capital of approximately $0.4 million and a current ratio
of 1:1. Included in current assets are four hospital facilities and two other
properties designated as property and equipment held for sale with a total
carrying value of $6.9 million. The Company sold three facilities during
fiscal 1994 and is seeking to sell the remaining facilities and properties
during fiscal 1995. Should the Company be unable to complete the sale
transactions during fiscal 1995, the Company's working capital would be
materially adversely affected. The Company's primary use of working capital is
to fund operating losses while it seeks to restore profitability to certain of
its freestanding facilities and expand its behavioral medicine managed care
business.

NOTE 3-- ACQUISITIONS AND DISPOSITIONS

On July 3, 1991, RehabCare, a wholly-owned subsidiary of the Company as
of May 31, 1991, and the Company completed an initial public offering of
2,500,000 shares of RehabCare common stock. Of the total shares sold to the
public, 1,700,000 shares were sold by the Company and 800,000 shares were new
shares issued by RehabCare. Net proceeds to the Company totaled approximately
$20.6 million, of which approximately $11.3 million was used to pay a portion
of the Company's senior secured debt. A gain of approximately $18 million on
the sale of the RehabCare shares was recorded in the Company's consolidated
statement of operations for the first quarter of fiscal 1992. The Company's
remaining 48% interest (2,300,000 shares) in RehabCare was accounted for on the
equity method (see Note 7-- "Investments in Unconsolidated Affiliates"). The
Company sold its remaining 48% interest in RehabCare to RehabCare during fiscal
1993 and a gain of approximately $13.1 million was recorded in the Company's
consolidated statement of operations for the second quarter of 1993. Net
proceeds

SUBSIDIARIES
payable amount is related to timing differences between the authorization date, the date the money is received by the Company, and the date the money is paid to the provider. In certain cases, providers have submitted claims for authorized services having incorrect service codes or otherwise incorrect information that has caused payment to be denied by the Company. In such cases, there are contractual and statutory provisions that allow the provider to appeal a denied claim. If no appeal is received by the Company within the prescribed amount of time, the Company may be required to remit the reinsurance funds back to the appropriate party. For non-reinsurance claims incurred but not reported under this contract, the Company estimates its claims payable using a similar method as that used for other existing contracts. This HMO has been a customer since March 2001. The original contract term ended December 31, 2002 and, in accordance with its terms, was automatically renewed for a one-year period ending December 31, 2003.
(3) During the fiscal year ended May 31, 2003, the Company had one contract with one HMO, covering Medicaid, Medicare, and commercial business, to provide behavioral healthcare services to Florida members. This agreement represented approximately 15.6%, or $5.0 million, 21.4%, or $5.9 million, and 19.5%, or $3.5 million, of the Company’s operating revenue for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. This HMO has been a customer since July 2000. On December 24, 2002, the Company entered into a contract with another HMO that acquired the existing client’s Medicaid business. As a result, the Company continues service to the Medicaid members through its new contract with the acquiring HMO that was effective January 1, 2003. Medicaid business from the new HMO client accounted for 8.5%, or $2.8 million, of the Company’s operating revenues during the fiscal year ended May 31, 2003. On December 31, 2002, the Company received a formal termination, effective February 28, 2003, from the existing HMO client with respect to the Medicare and commercial business. In addition, the acquiring HMO, whose contract with the Company is scheduled to renew in January 2004, has verbally advised the Company that it is evaluating whether to manage its members’ behavioral healthcare benefits “in house.”
(4) The Company has contracts with one HMO to provide behavioral healthcare services to contracted commercial, Medicaid, and Children’s Health Insurance Program members in Texas. This business accounted for approximately 7.5%, or $2.4 million, 7.3%, or $2.0 million, and 3.7%, or $0.7 million, of the Company’s operating revenues during the fiscal years ended May 31, 2003, 2002 and 2001, respectively. This HMO has been a customer of the Company since November 1998. The original contract term was for one year and the contract provides for automatic one-year renewal terms. During Fiscal 2003, this HMO customer added Medicaid members that had been covered by another of the Company’s HMO customers that had been placed under conservatorship by the State of Texas. The combined contracts of both HMO customers, including the business transferred to the Company’s current Texas client during Fiscal 2003, represented approximately 11.9%, or $3.9 million, 12.2%, or $3.4 million, and 9.1%, or $1.7 million, of the Company’s operating revenues during the fiscal years ended May 31, 2003, 2002 and 2001, respectively.
29 30

COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

toSUBSIDIARIES
Although the loss of the customer listed under (1) above and the commercial and Medicare business under (3) above could have a material, adverse effect on the Company’s financial condition and future results of operations, the Company totaled $18.8 million which were usedbelieves that it has reduced its internal cost of servicing these accounts to minimize any effect on future results of operations.
In general, the Company’s contracts with its customers are typically for the paydown of a
portion of senior secured debt, short-term borrowings, andinitial one-year terms, with automatic annual extensions. Such contracts generally provide for cancellation by either party with 60 to fund working
capital.

In November 1991, the Company sold its CareUnit Hospital of Orange
which closed in February 1991. In February 1992, the Company sold its
long-term care facility in Tustin, California as an operating facility.

In December 1992, the Company purchased Mental Health Programs, Inc.
based in Tampa, Florida, from the former owner. The Company has changed the
name to AccessCare, Inc. The terms90 days written notice.
Note 5 — Accounts Receivable
Accounts receivable consists of the purchase included a payment of
$75,000, issuance of 40,000 shares of the Company's common stock, an employment
agreement, a stock option agreement and the assumption of bank debt from the
former owner. Both the stock option and employment agreements and the release
of the former owner as guarantor of the bank debt are contingent upon the
continued employment of the former owner with the Company. In July 1993, the
Company terminated the employment agreement and is currently in litigation with
the former owner. In connection with this acquisition, the Company recorded
goodwill of approximately $829,000.

In October 1992, the Company's wholly-owned subsidiary, Starting Point,
Inc., entered into a joint operating agreement with Century HealthCare of
California to manage Newport Harbor Psychiatric Hospital, a 68-bed adolescent
psychiatric facility and Starting Point, Orange County, a 70-bed adult
psychiatric facility. The Company has an 80% interest in this venture. This
agreement was mutually dissolved on February 28, 1993. A pretax loss of
approximately $0.1 million and $1.1 million, net of minority interest, was
included in the consolidated financial statements for the years ended May 31,
1994 and 1993, respectively.

On April 5, 1993, the Company sold its CareUnit Hospital of Nevada.
Proceeds from the sale were utilized to reduce the Company's senior secured
debt and the remainder was used for working capital purposes. On July 1, 1993,
the Company sold its CareUnit Hospital of Albuquerque and on October 1, 1993,
sold its CareUnit Hospital of South Florida/Tampa. Proceeds from both of these
sales were utilized to reduce the Company's senior secured debt and the
remainder was utilized for working capital purposes. On December 10, 1993, the
Company sold its CareUnit Hospital of Coral Springs. Proceeds from the sale
were utilized for working capital purposes. In April 1994, the Company sold a
material portion of its publishing business. Proceeds from the sale will be
used for working capital purposes.

NOTE 4-- ACCOUNTS AND NOTES RECEIVABLE

There were no current notes receivable as of May 31, 1994. Current
notes receivable were $215,000 at May 31, 1993. following:
May 31,
2003 2002
(Amounts in thousands)
Managed care capitation contracts $ 102 $ 281
Other trade — 51
Total $ 102 $ 332
The following table summarizes changes in the Company'sCompany’s allowance for doubtful accounts and contractual
adjustments for the years ended May 31, 1994, 19932003, 2002 and 1992:

ADDITIONS CHARGED TO
--------------------
BALANCE AT RESERVE FOR BALANCE AT
BEGINNING CLOSED END OF
OF YEAR EXPENSE FACILITIES RECOVERIES OTHER YEAR
------- ------- ---------- ---------- ----- ----
(DOLLARS IN THOUSANDS)

Year ended2001:
Balance Additions
Beginning Charged Write-off of Balance End
of Year To Expense Recoveries* Accounts of Year
(Amounts in thousands)
Year ended May 31, 2003 $ 8 $ 43 $ — $ (24 ) $ 27
Year ended May 31, 2002 $ 11 $ (3 ) $ — $ — $ 8
Year ended May 31, 2001 $ 13 $ 9 $ — $ (11 ) $ 11
* Excludes $24,000 in 2003, $109,000 in 2002, and $448,000 in 2001 of recoveries from accounts previously written off.
Recoveries are reflected on the Company’s statement of operations as a reduction to the provision for doubtful accounts.
Note 6 — Other Receivable
Other receivable at May 31, 1994 . . . $ 8,217 $1,558 $ 76 $2,283 $ (6,405) $ 5,729
Year ended May 31, 1993 . . . 10,882 6,187 381 3,518 (12,751) 8,217
Year ended May 31, 1992 . . . 8,714 6,065 2,777 3,815 (10,489) 10,882

30
31, 2002 represented $2.5 million advanced to the Company’s former tax advisor to prepare a federal income tax refund claim that is more fully described in Note 13 — “Income Taxes.” During the quarter ended February 28, 2003, the Company completed a settlement with the IRS and reached an agreement with its former tax advisor requiring the tax advisor to repay $525,000 to the Company, which was received in February 2003. As a result of the resolution to the IRS matter, the Company extinguished the tax liability and recorded a non-operating gain of approximately $7.7 million net of related expenses, including approximately $2.0 million of unrecovered fees paid to its former tax advisor.
Note 7 – Other Current Assets
Other current assets consist of the following:
May 31,
2003 2002
(Amounts in thousands)
Accounts receivable – other $ 138 $ 191
Prepaid insurance 314 295
Other prepaid fees and expenses 153 105
Total other current assets $ 605 $ 591
30
COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

During fiscal 1993, the Company fully implemented its current write-offSUBSIDIARIES
Note 8 — Property and reserve policy whereby all accounts past a certain aging category or
otherwise deemed by management to be uncollectible are written-off and recorded
as bad debt expense. Any recoveries are netted against expense. Other
represents the effect of the write-off of accounts net of the change in the
allowance for contractual adjustments.

NOTE 5-- PROPERTY AND EQUIPMENT HELD FOR SALE

The Company has decided to dispose of certain freestanding facilities
and other assets (see Note 2-- "Operating Losses and Liquidity").Equipment
Property and equipment held forconsists of the following:
May 31,
2003 2002
(Amounts in thousands)
Furniture and equipment $ 3,480 $ 3,399
Leasehold improvements 49 49
Capitalized leases 54 32
3,583 3,480
Less accumulated depreciation (3,353 ) (3,189 )
Net property and equipment $ 230 $ 291
Note 9 — Note Receivable
Note receivable consists of the following:
May 31,
2003 2002
(Amounts in Thousands)
8% promissory note, payable in monthly installments of approximately $1,400, with a $146,000 principal payment due at maturity on April 1, 2006 $ 159 $ 163
Less current maturities (4 ) (4 )
$ 155 $ 159
On August 31, 2000, the Company entered into a prepayment agreement and note modification with Jefferson Hills Corporation (“JHC”) in connection with the secured promissory note, which originated out of the sale consistingin Fiscal 1999 of land, building, equipmentthe Company’s Aurora, Colorado facility to JHC. The terms of the prepayment agreement required JHC to immediately remit $500,000 to the Company as a prepayment on the note. Additionally, the note was modified to reflect a remaining balance due totaling $170,000 and other
fixed assetsto require JHC to make monthly principal and interest payments until April 2006. One final principal payment in the amount of approximately $146,000 will be due from JHC in April 2006. As an inducement to JHC to make such prepayment, the Company credited JHC with an historical net book valueaggregate of approximately $23.3 million
and $38.2 million at May 31, 1994 and 1993, respectively, is carried at
estimated net realizable value of approximately $6.9 million and $15.4 million
at May 31, 1994 and 1993, respectively. In$996,000. As a result, the Company recorded a non-operating loss during the fiscal 1993 and 1992, aggregate
losses were recorded totaling approximately $3.7 million and $15.2 million,
respectively, to reflect these assets at estimated net realizable value and
are included in loss on sale/write-down of assets in the consolidated
statements of operations. Operating revenues and operating expenses of the
facilities designated for disposition were approximately $0.1 million and $1.3
million, respectively, for the year ended May 31, 1994, and $0.8 million and
$2.1 million, respectively, for2001 of approximately $496,000 in connection with this transaction.
Note 10 — Goodwill
As a result of the adoption of SFAS 142, effective June 1, 2001, no amortization expense was recorded during the fiscal years ended May 31, 2003 or 2002 compared to approximately $72,000 of amortization expense recorded during the fiscal year ended May 31, 1993. In addition,
$1,000,000 was reclassified2001. SFAS 141 requires the elimination of any unamortized deferred credits related to property and equipment during fiscal 1994 to
adjust property to its estimatedan excess of fair market value.

A summary of the transactions affecting the carrying value of property
and equipment heldacquired assets over cost from a business combination for sale is as follows:

YEAR ENDED MAY 31,
----------------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS)

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . $15,352 $35,568 $21,496

Designation of facilities as property and equipment held for sale --- 10,977 29,456
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . (9,806) --- (4,700)
Carrying costs incurred during phase-out period . . . . . . . . . 1,241 1,330 4,487
Loss on sale/write-down of facilities . . . . . . . . . . . . . . --- (3,670) (15,171)
Redesignation of facilities as continuing operations . . . . . . --- (28,853) ---
Reclassification to property and equipment . . . . . . . . . . . 1,000 --- ---
Other costs incurred upon sale of assets . . . . . . . . . . . . (848) --- ---
------- -------- --------
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,939 $15,352 $35,568
====== ====== ======

Property and equipment held for sale at May 31, 1992 included certain
hospitals which were proposed for inclusion in sale/leaseback transactions and
were carried at estimated net realizable value totaling $27.8 million. In
early fiscal 1993,the acquisition date was before July 1, 2001 immediately upon adoption of SFAS 142. As of June 1, 2001, the Company had expectedan unamortized deferred credit of $55,000 that related to sell certain freestanding
facilities to CMP Properties, Inc. and lease them back. The facilities
expected to be sold and leased back were carried at estimated net realizable
value which had been reduced for estimated selling costs for these facilities.
On October 28, 1992, the board of directors of the Company terminated its plans
for the public offering of shares of common stock of its wholly owned
subsidiary CMP Properties, Inc.an acquisition in 1996. As a result, the proposed saleCompany recognized $55,000 as the cumulative effect of hospitals to
CMP Properties subject to leaseback to the Company was not completed, and the
properties which were to be part of the transaction and were designated as
assets held for sale were reclassifieda change in accounting principle during the second quarter as property
and equipment. In connection with this proposed transaction, the Company
advanced $1.1 million to a former consultant which was to be returnedended August 31, 2001.
Changes in the event the transaction was terminated. These advances were to be secured by the
common stockcarrying amount of an unrelated company and were classifiedgoodwill are as accounts receivable
at May follows:
Fiscal Year ended May 31,
2003 2002 2001
Balance as of the beginning of the fiscal year $ 991,000 $ 936,000 $ 1,008,000
Amortization — — (72,000 )
Unamortized deferred credit written off and recognized in income — 55,000 —
Balance as of the end of the fiscal year $ 991,000 $ 991,000 $ 936,000
31 1993. The shares of common stock pledged were

31
32

COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

purported to be in the possession of the Company's former legal counsel as
collateral for the advances, but were not providedSUBSIDIARIES
Prior to the adoption of SFAS 142, the Company whenamortized goodwill on a straight-line basis over estimated lives up to 20 years. Had the transaction was terminated. The Company is currently in litigationaccounted for goodwill consistent with the former consultant and legal firm to recoverprovisions of SFAS 142 in prior years, the advances and has no receivable
recorded as of May 31, 1994.

NOTE 6-- PROPERTY AND EQUIPMENT

Property and equipment, at cost, consists of the following:

AS OF MAY 31,
-------------
1994 1993
---- ----
(DOLLARS IN THOUSANDS)

Land and improvements . . . . . . . . . . . . . . . . . . . . . . $ 4,063 $ 4,117
Buildings and improvements . . . . . . . . . . . . . . . . . . . 18,192 19,209
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . 4,817 5,866
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . 1,365 1,364
Capitalized leases . . . . . . . . . . . . . . . . . . . . . . . 889 876
------- ------
$29,326 $31,432
====== ======

Included in property and equipment are writedowns toCompany’s net realizable
value totaling $4,631,700 and $3,490,000 as of May 31, 1994 and 1993,
respectively.

NOTE 7-- INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company has a 50% interest in a joint venture partnership with
another corporation for the purpose of operating two hospitals. Under the
terms of the joint venture agreement, the Company managed Crossroads Hospital
and its partner managed Woodview-Calabasas Hospital. Each of the partners in
the joint venture received a management fee for the hospital it managed. The
Company is currently in negotiation to dissolve this joint venture retroactive
to December 1991. The Company retained the hospital it managed and its partner
retained the other. The results of operations of the hospital retainedloss would have been included in the consolidated financial statements beginning January 1,
1992. Crossroads Hospital continued to be managed by the Company although it
was closed in August 1992,affected as follows (in thousands, except per share amounts):
Fiscal Year Ended May 31,
2003 2002 2001
Reported net income (loss) $ 7,458 $ (770 ) $ (1,117 )
Add back: Goodwill amortization — — 72
Elimination: Cumulative effect of change in accounting principle — (55 ) —
Adjusted net income (loss) $ 7,458 $ (825 ) $ (1,045 )
Basic earnings (loss) per share:
Reported net income (loss) $ 1.91 $ (0.20 ) $ (0.29 )
Goodwill amortization — — 0.02
Cumulative effect of change in accounting principle — (0.01 ) —
Adjusted net income (loss) $ 1.91 $ (0.21 ) $ (0.27 )
Diluted earnings (loss) per share:
Reported net income (loss) $ 1.72 $ (0.20 ) $ (0.29 )
Goodwill amortization — — 0.02
Cumulative effect of change in accounting principle — (0.01 ) —
Adjusted net income (loss) $ 1.72 $ (0.21 ) $ (0.27 )
Weighted Average Common Shares Outstanding – basic 3,905 3,860 3,818
Weighted Average Common Shares Outstanding – diluted 4,343 3,860 3,818
Note 11 — Accounts Payable and was subleased through the remaining term of the
lease which expired in September 1993. Woodview-Calabasas Hospital continues
to be managed by its joint-venture partner although it was closed in April
1993.

The Company has a 50% interest in a joint venture agreement with a
subsidiary of HealthOne Corporation (formerly The Health Central System). The
joint venture owned and operated Golden Valley Health Center, a behavioral
medicine facility located in a suburb of Minneapolis, Minnesota, which was sold
in fiscal 1989. The Company serves as managing partner of the joint venture,
which holds a promissory note from the purchaser of the facility in the amount
of $2.5 million. The purchaser was forced into receivership in January 1992
and was dissolved during fiscal 1994. The Company did not receive any proceeds
from this dissolution. In fiscal 1991, the Company recorded its respective
loss as a result of the uncollectability of the promissory note.

As of May 31, 1993, the Company no longer had any interest in the
outstanding common stock of RehabCare (a wholly-owned subsidiary prior to its
initial public offering which was completed on July 3, 1991) which was
previously carried on the equity method (see Note 3-- "Acquisitions and
Dispositions"). Earnings related to the Company's ownership in RehabCare
amounted to $384,000 and $1,224,000 for the years ended May 31, 1993 and 1992,
respectively. Carrying value, cost and market value of the Company's remaining
investment in RehabCare was $4.0, $3.1 and $19.6 million, respectively, at May
31, 1992. The condensed combined operating

32
33
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

results of affiliates for fiscal 1993 and 1992 include the results of RehabCare
subsequent to July 3, 1991 through the sale of the Company's remaining interest
in November 1992.

The Company reported its interest in these affiliates on the equity
method. The condensed combined operating results of affiliates are as follows:

YEAR ENDED MAY 31,
---------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS)

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $11,928 $47,854
Costs and expenses:
Operating, general and administrative . . . . . . . . . . . --- 10,536 45,500
Depreciation and amortization . . . . . . . . . . . . . . . --- 148 559
------ ------ ------
--- 10,684 46,059
------ ------ ------
Earnings before income taxes . . . . . . . . . . . . . . . . . --- 1,244 1,795
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . --- 443 1,360
------ ------ ------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ 801 $ 435
====== ====== ======

NOTE 8-- OTHER ASSETS

Other assets consist of the following:

AS OF MAY 31,
-------------
1994 1993
---- ----
(DOLLARS IN THOUSANDS)

Intangible assets, net . . . . . . . . . . . . . . . . . . . . $1,762 $1,877
Deferred contract costs, net . . . . . . . . . . . . . . . . . 81 142
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 670
----- -----
$2,162 $2,689
===== =====

NOTE 9-- ACCOUNTS PAYABLE AND ACCRUED LIABILITIESAccrued Liabilities
Accounts payable and accrued liabilities consist of the following:
AS OF MAY 31,
-------------
1994 1993
---- ----
(DOLLARS IN THOUSANDS)

Accounts payable and accrued liabilities . . . . . . . . . . . $9,132 $10,266
Accrued salaries and wages . . . . . . . . . . . . . . . . . . 1,140 1,527
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . 576 628
Accrued legal . . . . . . . . . . . . . . . . . . . . . . . . . 353 1,034
Payable to third-party intermediaries . . . . . . . . . . . . . 1,751 852
Deferred compensation and severance . . . . . . . . . . . . . . 824 1,430
------- -------
$13,776 $15,737
====== ======

33
34

May 31,
2003 2002
(Amounts in Thousands)
Accounts payable $ 379 $ 316
Accrued salaries and wages 151 170
Accrued vacation 130 134
Accrued legal and audit 149 180
Payable to third-party intermediaries — 1,025
Other accrued liabilities 1,026 1,038
Deferred compensation 1 28
$ 1,836 $ 2,891
At May 31, 2002, the amounts payable to third-party intermediaries included a $950,000 accrual related to the Medi-Cal matter that was settled during Fiscal 2003 (see Note 16 under “Other Commitments and Contingencies,” Item 4). Additionally, the May 31, 2002 amount included a $75,000 cost report reserve pertaining to the Company’s hospital business segment that was discontinued in Fiscal 1999. Such reserve was reversed into other non-operating income in Fiscal 2003 as management does not anticipate any further amounts being owed to hospital intermediaries in connection with the one remaining cost report.
32
COMPREHENSIVE CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

NOTE 10-- LONG-TERM DEBT AND SHORT-TERM BORROWINGSSUBSIDIARIES
Note 12 — Long-term Debt
Long-term debt consists of the following:
YEAR ENDED MAY 31,
------------------
1994 1993
---- ----
(DOLLARS IN THOUSANDS)

Senior secured debt:
Senior secured notes, bearing interest at 11.4%, payable semiannually,
maturing in 1995 (b)(c) . . . . . . . . . . . . . . . . . . $ --- $ 1,944
------- ------
--- 1,944
9% to 10% notes, payable in monthly installments with maturity
dates through 1995, collateralized by real and personal
property having a net book value of $4,886 . . . . . . . . . . 41 96
7.5% convertible subordinated debentures due 2010 (a) . . . . . . . 9,538 9,538
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . 740 780
Bank debt, interest and principal payable in monthly installments
maturing in August 1997, collateralized by the trust of the
former owner (d) . . . . . . . . . . . . . . . . . . . . . . . 312 408
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 23
-------- -------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . 10,631 12,789

Less current maturities of long-term debt . . . . . . . . . . . . . 154 2,137
------- ------
Long-term debt, excluding current maturities . . . . . . . . . . . $10,477 $10,652
====== ======

As of May 31, 1994, aggregate annual maturities of long-term debt for
the next five years (in accordance with stated maturities of the respective
loan agreements) are approximately $154,000 in 1995, $614,000 in 1996, $578,000
in 1997, $488,000 in 1998 and $449,000 in 1999.

In March 1992, to fund operations, the Company obtained approximately
$1.3 million in short-term borrowings secured by accounts and notes receivable
of CareUnit, Inc., bearing interest at 12% per annum, and due August 31, 1992.
The Company paid the principal and interest with the proceeds from the sale of
RehabCare stock.

The Company had no revolving loan or short-term borrowings during
fiscal 1994. The maximum amount outstanding on the revolving loan and
short-term borrowings was approximately $4.2 million during the years ended May
31, 1993 and 1992. The average amount outstanding of such borrowings, based
upon an average of month-end balances for periods when the Company had such
debt outstanding, was $2.2 million and $3.2 million during the years ended May
31, 1993 and 1992, respectively. Weighted average interest rates for
short-term borrowings were 7.54% and 8.63% for the years ended May 31, 1993 and
1992, respectively.

(a) In April 1985, the Company issued $46 million in convertible
subordinated debentures. These debentures require that the Company make semi-
annual interest payments in April and October at an interest rate of 7.5%.
��
May 31,
2003 2002
(Amounts in Thousands)
7 1/2% convertible subordinated debentures due April, 2010, interest payable semi-annually in April and October* $ 2,244 $ 2,244
* The debentures are due in 2010 but may be converted to common stockconvertible into approximately 9,000 shares of the Company
at the option of the holderCommon Stock at a conversion price of $25.97$248.12 per share, subject
to adjustment in certain events. The debentures are also redeemable at the
option of the Company in certain circumstances. Mandatory annual sinking fund
payments sufficient to retire 5% of the aggregate principal amount of the
debentures are required to be made on each April 15 commencing in April 1996 to
and including April 15, 2009. During fiscal 1991, holders of approximately

34
35
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

$36.5 million debentures voluntarily converted their debentures into 11,667,200
shares of common stock at a temporarily reduced conversion price.

(b) In July 1988, the Company and two subsidiaries of the Company
issued $20 million in senior secured notes to a group of insurance companies.
The notes were originally secured by three of the Company's freestanding
facilities. See also note (c) below. Performance of the subsidiaries'
obligations under the notes is guaranteed by the Company. The notes originally
provided for the payment of interest at a fixed rate of 10.5% per annum. The
notes require principal payments in five equal annual installments beginning on
August 1, 1991, the first of which was prepaid in July 1990. Interest on the
unpaid balance was payable semi-annually commencing February 1, 1989. From May
1990 to July 1992, the Company entered into several amendments to the trust
indenture which changed certain restrictive covenants, collateral provisions,
maturity dates and interest rates. The Company paid $5.5 million and $1.3
million with the proceeds of the sale of RehabCare stock on September 30, 1992
and Novembershare.
Note 13 1992, respectively. The remaining balance at May 31, 1993
totaled $1.9 million, of which $0.6 million was paid on July 1, 1993, $0.6
million was paid on August 1, 1993 and the remaining balance was paid on
October 1, 1993.

(c) On May 3, 1990, the Company entered into a Collateral Trust
Agreement for the benefit of the holders of the Company's senior secured debt,
that is, the banks, the insurance companies and the revenue bondholder. Under
this agreement, substantially all the Company's assets not previously pledged
were pledged as additional collateral to secure the senior indebtedness.
Substantially all the proceeds resulting from a sale of any of the pledged
assets was used to repay senior indebtedness.

(d) On December 30, 1992, the Company assumed approximately $456,000
in bank debt with the purchase of Mental Health Programs, Inc. (see Note
3--"Acquisition and Dispositions"). The note is secured and guaranteed by the
trust of the former owner of Mental Health Programs, Inc. The release of
collateral and guarantee are contingent upon continued employment of the former
owner with the Company. The note is payable at $8,000 per month with the
balance due on August 31, 1997. Interest is at prime plus 1.5%.

NOTE 11-- LEASE COMMITMENTS

The Company leases certain facilities, furniture and equipment. The
facility leases contain escalation clauses based on the Consumer Price Index
and provisions for payment of real estate taxes, insurance, maintenance and
repair expenses. Total rental expenses for all operating leases are as
follows:

YEAR ENDED MAY 31,
------------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS)

Minimum rentals . . . . . . . . . . . . . . . . . . . . . . $1,342 $1,257 $1,393
Contingent rentals . . . . . . . . . . . . . . . . . . . . --- 15 59
------- ----- -----
Total rentals . . . . . . . . . . . . . . . . . . . . . . . $1,342 $1,272 $1,452
===== ===== =====

Assets under capital leases are capitalized using interest rates
appropriate at the inception of each lease; contingent rents associated with
capital leases in fiscal 1994, 1993 and 1992 were $61,000, $60,000 and $60,000,
respectively. The net book value of capital leases at May 31, 1994 and 1993
was $567,000 and $580,000, respectively.

35
36
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

Future minimum payments, by year and in the aggregate, under capital
leases and noncancellable operating leases with initial or remaining terms of
one year or more consist of the following at May 31, 1994:

CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------ ------
(DOLLARS IN THOUSANDS)

1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 167 $ 719
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 359
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 263
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 7
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 ---
Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . 902 ---
----- -------
Total minimum lease payments . . . . . . . . . . . . . . . . . . . $1,603 $1,348
=====
Less amounts representing interest . . . . . . . . . . . . . . . . 863
-----
Present value of net minimum lease payments . . . . . . . . . . . $ 740
=====

NOTE 12-- INCOME TAXES— Income Taxes
Provision for income taxes consistconsists of the following:
YEAR ENDED MAY 31,
---------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS)

Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . $ --- $ --- $139
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 194 110
--- --- ---
$301 $194 $249
=== === ====

A reconciliation
Year Ended May 31,
2003 2002 2001
(Amounts in thousands)
Current:
Federal $ — $ — $ —
State 20 1 35
$ 20 $ 1 $ 35
Reconciliation between benefit fromthe provision for income taxestax and the amount computed by applying the statutory Federal income tax rate (34%) to lossincome (loss) before income taxestax is as follows:
YEAR ENDED MAY 31,
---------------------------
1994 1993 1992
---- ---- ----
(DOLLARS IN THOUSANDS)

Benefit from income taxes at the statutory tax rate . . . . . . . . $(2,567) $(3,878) $(1,466)
State income taxes, net of federal tax benefit . . . . . . . . . . 199 128 73
Amortization of intangible assets . . . . . . . . . . . . . . . . . 38 30 23
Tax effect of net operating loss . . . . . . . . . . . . . . . . . 2,607 3,888 1,459
Alternative minimum tax expense in excess of regular
tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . --- --- 139
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 26 21
------ ------ ------
$ 301 $ 194 $ 249
===== ===== =====

36
37
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

Deferred income taxes represent the tax effect related to recording
revenue and expense items that are reported in different years for financial
reporting purposes and income tax purposes.
Year Ended May 31,
2003 2002 2001
(Amounts in thousands)
Income tax provision (benefit) at the statutory tax rate $ 2,543 $ (280 ) $ (317 )
State income tax provision (benefit), net of federal tax effect 296 (33 ) (37 )
Non-taxable gain on IRS settlement (3,733 ) — —
Non-deductible items 54 58 111
Benefit of net operating loss carryforward not recognized 840 255 243
Other, net 20 1 35
$ 20 $ 1 $ 35
Significant components of the Company'sCompany’s deferred tax assets and deferred tax liabilities are as follows:
May 31,
2003 2002
(Amounts in thousands)
Deferred Tax Assets:
Net operating loss carryforwards $ 730 $ 15,762
Alternative minimum tax credits — 667
Payable to Third Party Intermediaries — 361
Employee benefits and options 79 88
Other, net 186 283
Total Deferred Tax Assets 995 17,161
Valuation Allowance (995 ) (16,630 )
Net Deferred Tax Assets — 531
Deferred Tax Liabilities:
Other receivables (-- ) (531 )
Total Deferred Tax Liabilities (-- ) (531 )
Net Deferred Tax Assets $ 0 $ 0
The Company had filed an “Offer in Compromise” (“Offer”) with the Internal Revenue Service (“IRS”) to settle a tax dispute that began in August 1998 when the IRS notified the Company that it was disallowing $12.4 million of tax refunds previously received by the Company specific to its Fiscal 1985 and assets are comprised1986 income tax returns as amended. Of such amount, approximately $12.1 million had been recorded as a liability, “unbenefitted tax refunds received,” pending resolution of the following asappropriateness of May 31, 1994 (dollarsthe net operating loss carryback, which gave rise to the refunds. In January 2003, the IRS accepted the Company’s Offer, which gave the Company the option of paying approximately $2.6 million over two
33
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
years or paying approximately $2.2 million within 90 days of the letter of acceptance in thousands):

Deferred Tax Assets:
Net operating loss carryforward . . . . . . . . . $ 14,968
Restructuring/non-recurring costs . . . . . . . . 9,418
Bad debt expense . . . . . . . . . . . . . . . . 568
Employee benefits and options . . . . . . . . . . 663
Other, net . . . . . . . . . . . . . . . . . . . 2,185
--------
Total Deferred Tax Assets . . . . . . . . . 27,802
Valuation Allowance . . . . . . . . . . . . . . . (24,404)
--------
Net Deferred Tax Assets . . . . . . . . . . 3,398
--------
Deferred Tax Liabilities:
Depreciation . . . . . . . . . . . . . . . . . . (2,929)
Cash to accrual differences . . . . . . . . . . . (469)
--------
Total Deferred Tax Liabilities . . . . . . . (3,398)
--------
Net Deferred Tax Assets . . . . . . . . . . . . . . . $ ---
========
addition to a $50,000 down payment made by the Company at the time its Offer was submitted to IRS. In February 2003, the Company concluded the IRS settlement by making a cash payment of approximately $2.2 million to the IRS to fully settle the previously accrued tax liability of $12.1 million. Coincident with the IRS settlement, the Company reached an agreement with its former tax advisor requiring the tax advisor to refund $525,000 of the original $2.5 million of fees previously paid by the Company. The Company is subjectreceived the $525,000 refund in February 2003.
As a result of the resolution of this matter, the Company extinguished the $12.1 million liability and recorded a non-operating gain in the quarter ended February 28, 2003 of approximately $7.7 million net of related expenses, including $2.0 million representing the unrecovered portion of the $2.5 million of fees previously paid to alternative minimumits tax ("AMT") at a 20% rate
on alternative minimumadvisor. The gain represented earnings per share of $1.97 (diluted earnings per share of $1.77). No taxable income which is determined by making statutory
adjustments toresulted from the Company's regular taxable income. Net operating loss
carryforwards may be used to offset only 90%settlement of the Company's alternative
minimum taxable income. The Company expensed federal income tax of $139,000 in
1992 and this amount is expected to be offset against another federal income
tax liability relating to an AMT liability on earlier years (see Note 15--
"Commitments and Contingencies"). The Company will be allowed a credit
carryover of $666,000 against regular tax inliability.
Additionally, the eventIRS settlement requires that regular tax
expense exceeds the alternative minimum tax expense (see Note 15-- "Commitments
and Contingencies").

At May 31, 1994, the Company hasFederal net operating loss carryforwards of approximately $67$42.0 million for financial reporting purposes. Forresulting from losses incurred in fiscal years ended May 31, 1995 through May 31, 2001, and a minimum tax purposes,credit carryover of approximately $0.7 million, are no longer available to the Company hasCompany. As a result, at May 31, 2003, the Company’s Federal net operating loss carryforwards oftotal approximately $39$1.9 million resulting from losses incurred in the fiscal years ended May 31, 2002 and May 31, 2003, which expire in 2006 through 2009. All benefits2022 and 2023.
The Company may be unable to utilize some or all of its allowable tax deductions or losses, which depends upon factors including the availability of sufficient taxable income from recoverable Federal
income taxes paidwhich to deduct such losses during limited carryover periods. Further, the Company’s ability to use any net operating losses may be subject to limitation in prior years (tax carrybacks) were recognizedthe event that the Company issues or agrees to issue substantial amounts of additional equity. The Company monitors the potential for “change of ownership” and believes that its financing plans as contemplated will not cause a “change of ownership”; however, no assurances can be made that future events will not act to limit the Company’s tax benefits.
After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at May 31, 1990. No further2003 and 2002, was necessary to fully offset the deferred tax carrybacks are available.

NOTE 13-- EMPLOYEE BENEFIT PLANSassets based on the likelihood of future realization.
Note 14 — Employee Benefit Plan
The Company had deferred compensation plans ("Financial Security
Plans") for its key executives and medical directors. Under provisions of
these plans, participants elected to defer receipt of a portion of their
compensation to future periods. Upon separation from the Company, participants
received payouts of their deferred compensation balances over periods from five
to fifteen years. Effective January 1, 1989, participants were not offered the
opportunity to defer compensation to future periods. In June 1992, the Company
terminated the plan and placed the remaining participants on 5-year payments.
The consolidated balance sheet as of May 31, 1994 reflects the present value of
the obligation to the participants under the plan of $924,000.

The Company hasoffers a 401(k) Plan (the “Plan”), which is a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code, for the benefit of its eligible employees. All full-time and part-time employees who have attained the age of 21 and have completed six consecutive monthsone thousand hours of employmentservice are eligible to participate in the plan. Effective June 1, 1994, eligibilityPlan. During Fiscal 2003, the Plan was modified to one year of employment and a minimum of twenty

37
38
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

(20) regular scheduled hours per week.comply with recent Internal Revenue Service (“IRS”) guidelines. Each participant may contribute from 2% to 15%50% of his or her compensation to the planPlan subject to limitations on the highly compensated employees to ensure the planPlan is non-discriminatory. Company contributions are discretionary and are determined by the Company’s management. The Company madeCompany’s employer matching contributions were approximately $20,000$9,000, $9,000, and $9,000 in contributions$10,000 to the Plan in fiscal 1994Fiscal 2003, 2002, and 1993,2001, respectively. The Company did not make any matching
contributions
Note 15 — Preferred Stock, Common Stock, and Stock Option Plans
Preferred Stock
As of May 31, 2003, there are 18,740 remaining shares authorized and available to the plan in fiscal year 1992.

NOTE 14-- STOCKHOLDERS' EQUITYissue, and no outstanding shares of Preferred Stock. The Company is authorized to issue 60,000 shares of preferred stock
with aPreferred Stock, $50.00 par value, in one or more series, each series to have such designation and number of $50 per share. No preferred shares as the Board of Directors may fix prior to the issuance of any shares of such series. Each series may have been issued.such preferences and relative participation, optional or special rights with such qualifications, limitations or restrictions stated in the resolution or resolutions providing for the issuance of such series as may be adopted from time to time by the Board of Directors prior to the issuance of any such series.
34
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Common Stock
Authorized shares of common stock reserved for possible issuance for convertible debentures and stock options are as follows at May 31, 2003:
Convertible debentures 9,044
Outstanding stock options 1,109,224
Possible future issuance under stock option plans 444,235
Total 1,562,503
Stock Option Plans
The Company currently has a 1988two active incentive plans, the 1995 Incentive Plan and the 2002 Incentive Plan (“Plans”), that provide for the granting of stock options, stock appreciation rights, limited stock appreciation rights, and restricted stock grants to eligible employees and consultants to the Company. Grants issued under the Plans may qualify as Incentive Stock Option Plan and a 1988
Nonstatutory Stock Option Plan (the "1988 Plans"). Options granted under the
1988 Incentive Stock Option Plan are intended to qualify as incentive stock
options ("ISOs"(“ISOs”) under Section 422422A of the Internal Revenue Code. In fiscal
1992, the 1988 IncentiveOptions for ISOs may be granted for terms of up to ten years and are generally exercisable in cumulative increments of 50% each six months. Options for Non-statutory Stock Option Plan and 1988 Nonstatutory Stock Option
Plan were amendedOptions (“NSOs”) may be granted for terms of up to increase the total number of shares reserved for issuance
under the plans and to expand the class of eligible persons under the
nonstatutory plan to include advisors and consultants. Options granted under
the 1988 Nonstatutory Stock Option Plan do not qualify as ISOs.13 years. The maximum
number of shares subject to options are 1,500,000 and 400,000 for the ISOs and
nonstatutory options, respectively. The following table sets forth the
activity related to ISOs for the years ended May 31, 1994, 1993 and 1992:

OPTION PRICE
NUMBER OF -------------------------
SHARES PER SHARE AGGREGATE
------ --------- ---------
(IN THOUSANDS)

Balance, May 31, 1991 . . . . . . . . . . . . . . . . . . . 432,500 $1.25-3.00 $ 800
Options exercised in fiscal 1992 . . . . . . . . . . . (17,334) $1.25 (22)
Options canceled in fiscal 1992 . . . . . . . . . . . . (42,500) $2.125 (90)
Options issued or regranted in fiscal 1992 . . . . . . 492,500 $2.125-3.38 1,057
Options forfeited in fiscal 1992 . . . . . . . . . . . (100,000) $1.25-3.00 (283)
------- ------
Balance, May 31, 1992 . . . . . . . . . . . . . . . . . . . 765,166 $1.25-3.38 $1,462
Options forfeited in fiscal 1993 . . . . . . . . . . . (130,000) $1.25-3.38 (283)
------- ------
Balance, May 31, 1993 . . . . . . . . . . . . . . . . . . . 635,166 $1.25-3.00 $1,179
Options forfeited in fiscal 1994 . . . . . . . . . . . (467,500) $1.25-3.00 (830)
------- ------
Balance, May 31, 1994 . . . . . . . . . . . . . . . . . . . 167,666 $1.25-3.00 $ 349
======= ======

Options under the 1988 Plans to purchase 126,009 shares and 464,123
shares were exercisable as of May 31, 1994 and 1993, respectively.

38
39
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

The following table sets forth the activity related to nonstatutory
options for the years ended May 31, 1994, 1993 and 1992:

OPTION PRICE
NUMBER OF -------------------------
SHARES PER SHARE AGGREGATE
------ --------- ---------
(IN THOUSANDS)

Balance, May 31, 1991 . . . . . . . . . . . . . . . . . . . 200,000 $1.25 $ 250
Options issued or regranted in fiscal 1992 . . . . . . 120,000 $1.25 150
------- -----
Balance, May 31, 1992 . . . . . . . . . . . . . . . . . . . 320,000 $1.25 $ 400
Options exercised in fiscal 1993 . . . . . . . . . . . (40,000) $1.25 (50)
------- -----
Balance, May 31, 1993 . . . . . . . . . . . . . . . . . . . 280,000 $1.25 $ 350
Options forfeited in fiscal 1994 . . . . . . . . . . . (120,000) $1.25 (150)
-------- -----
Balance, May 31, 1994 . . . . . . . . . . . . . . . . . . . 160,000 $1.25 $ 200
======= =====

Nonstatutory options to purchase 160,000 and 280,000 shares were exercisable as
of May 31, 1994 and 1993, respectively.

The per share exercise price of options issued under the plans is
determined by the Board of Directors, but in no event is the option exercise
price so determined less than the then fair market value (as defined in the
plans) of the shares at the date of grant. In the case of an ISO, if, on the
date of the grant of such option, the optionee is a restricted stockholder (as
defined in the plans), the option exercise price cannot be less than 110% offor ISOs must equal or exceed the fair market value of the shares on the date of grant, and 65% in the grant.

Options vestcase of other options. The Plans also provide for the full vesting of all outstanding options under certain change of control events. The maximum number of shares authorized for issuance is 500,000 under the 2002 Incentive Plan and become1,000,000 under the 1995 Incentive Plan. As of May 31, 2003, there were 315,500 options available for grant and there were 184,500 options outstanding, of which 49,750 options were exercisable, under the 2002 Incentive Plan. Additionally, as of May 31, 2003, there were 400 options available for grant and there were 867,225 options outstanding, of which 864,225 options were exercisable, under the 1995 Incentive Plan.
The Company also has a non-qualified stock option plan for its outside directors (the “Directors’ Plan”). Each non-qualified stock option is exercisable at such times anda price equal to the Common Stock’s fair market value as of the date of grant. Initial grants vest annually in such
installments as25% increments beginning on the Boardfirst anniversary of Directors provides for inthe date of grant, provided the individual option
agreement, except that an option granted tois still a director may not be exercised
untilon those dates. Annual grants will become 100% vested as of the expirationfirst annual meeting of one year fromthe Company’s stockholders following the date such optionof grant, provided the individual is granted. Subject
to the limitation with respect to the vestingstill a director as of that date. Such annual grants include options granted to non-employee directors for service on the various committees of the Company’s Board of Directors may in its sole discretion accelerateDirectors. An optionee who ceases to be a director shall forfeit that portion of the time atoption attributable to such vesting dates on or after the date he or she ceases to be a director. The maximum number of shares authorized for issuance under the Directors’ Plan is 250,000. As of May 31, 2003, there were 128,335 options available for grant and there were 57,499 options outstanding, of which an option or installment thereof may be exercised.

In July 1992, options not under any plan were issued to the former Vice
Chairman. Options for 1,000,000 shares were granted at an exercise price
ranging from $1.50 to $3.00. These10,833 options were exercisable, 25 percent at
grant date and each year thereafter. Options for 250,000 shares are currently
exercisable at $1.50 and expire in February 1995. The remaining 750,000
options were forfeited. In December 1992, options not under any plan were
issued to the former owner of Mental Health Programs, Inc., as an inducement
essential to the purchase of Mental Health Programs, Inc. (see Note 3--
"Acquisitions and Dispositions"). Options for 100,000 shares were granted at
an exercise price ranging from $1.50 to $3.00. These options are exercisable
25 percent after one year from the grant date and each year thereafter and were
contingent upon the continued employment with the Company. In July 1993, the
Company terminated the employment agreement, and as a result, the 100,000
options were forfeited. In February 1993, options not under any plan were
issued to the Company's Chief Financial Officer. Options for 500,000 shares
were granted at an exercise price ranging from $1.00 to $2.00. These options
become exercisable 25 percent after one year from the grant date and each year
thereafter.

On April 19, 1988, the Company declared a dividend of one common share
purchase right ("Right") for each share of common stock outstanding at May 6,
1988. Each Right entitles the holder to purchase one share of common stock at
a price of $30 per share, subject to certain anti-dilution adjustments. The
Rights are not exercisable and are transferable only with the common stock
until the earlier of ten days following a public announcement that a person has
acquired ownership of 25% or moreDirectors’ Plan.
A summary of the Company's commonCompany’s stock or the
commencement or announcement of a tender or exchange offer, the consummation of
which would result in the

39
40
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

ownership by a person of 30% or more of the Company's common stock. In the
event that a person acquires 25% or more of the Company's common stock or if
the Company is the surviving corporation in a mergeroption activity and its common stock is
not changed or exchanged, each holder of a Right, other than the 25%
stockholder (whose Rights will be void), will thereafter have the right to
receive on exercise that number of shares of common stock having a market value
of two times the exercise price of the Right. If the Company is acquired in a
merger or more than 50% of its assets are sold, proper provision shall be made
so that each Right holder shall have the right to receive or exercise, at the
then current exercise price of the Right, that number of shares of common stock
of the acquiring company that at the time of the transaction would have a
market value of two times the exercise price of the Right. The Rights are
redeemable at a price of $.02 per Right at any time prior to ten days after a
person has acquired 25% or more of the Company's common stock.

NOTE 15-- COMMITMENTS AND CONTINGENCIES

On October 30, 1992, the Company filed a complaint in the United States
District Courtrelated information for the Eastern District of Missouri against RehabCare
Corporation ("RehabCare") seeking damages for violations by RehabCare of the
securities laws of the United States, for common law fraud and for breach of
contract (Case No. 4-92CV002194-SNL). The Company seeks relief of damages in
the lost benefit of certain stockholder appreciation rights in an amount in
excess of $3.6 million and punitive damages. On May 18, 1993, the District
Court denied a motion for summary judgement filed by RehabCare. On June 16,
1993, RehabCare filed a counterclaim seeking a declaratory judgement with
respect to the rights of both parties under the stock redemption agreement, an
injunction enjoining the Company from taking action under stock redemption or
restated shareholders agreements and damages. The Company has filed a motion
with the court to strike RehabCare's request for damages for attorney's fees
and costs on the grounds that such relief is not permitted by law nor
authorized by the agreements between the parties. This case was scheduled for
trial on May 9, 1994, but has been continued on the court's own initiative and
the new trial date has not been set. Management believes that the Company's
allegations have merit and intends to vigorously pursue this suit. Management
further believes that should RehabCare prevail at trial on its request for such
attorneys fees and costs, such fees and costs would not materially affect the
financial statements of the Company.

The Company is currently undergoing a payroll tax audit by the Internal
Revenue Service ("IRS") for calendar years 1983 through 1991. The IRS agent
conducting the audit has asserted that certain physicians and psychologists and
other staff engaged as independent contractors by the Company should have been
treated as employees for payroll tax purposes. On April 8, 1991, the Company
received a proposed assessment related to this assertion claiming additional
taxes and penalties due totaling approximately $19.4 million for calendar years
1983 through 1988. The Company filed a protest with the IRS and contested the
proposed assessment with the Appeals Office of the Internal Revenue Service in
St. Louis, Missouri. The Appeals Office issued a reduced assessment in the
amount of approximately $6,300,000, plus penalties and interest of $6,500,000.
The IRS is also examining the Company's employment tax returns for the years
1989 through 1991, and the agent conducting the examination proposed the
assessment of additional taxes for those years in the approximate amount of
$1,600,000, plus penalties and interest in an undetermined amount. While
management believes the Company has strong arguments to support

40
41
COMPREHENSIVE CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1994, 1993 AND 1992

its treatment of the payments to independent contractors to whom substantially
all of the assessment relates, the Company has submitted an offer in compromise
to the IRS for the calendar years 1983 through 1991 for $5 million. A reserve
has been established with respect to this matter to cover expenses the Company
expects to incur; however, there can be no assurance that such reserves are
adequate until a formal settlement is reached with the IRS. The Company and
RehabCare, in May 1991, entered into a Tax Sharing Agreement providing for the
Company to indemnify RehabCare for any claims of income or payroll taxes due
for all periods through February 28, 1991. The Company has established a
reserve with respect to covering expenses the Company expects RehabCare to
incur under the Tax Sharing Agreement.

The federal income tax returns of the Company for its fiscal years
ended 1984 and 1987 through 1991, have been examined by the IRS. The Company
has provided the IRS with satisfactory documentary support for the majority of
items questioned and those items have been deleted from the proposed assessment
and accepted as originally filed. The remaining items have been agreed to and
resulted in a disallowance of approximately $229,000 in deductions which will
be offset against the Company's net operating losses available for carryover.
The examination also included the review of the Company's claim for refund of
approximately $205,000 relating to an amended return for the fiscal year ended
May 31, 1992. During completion of the audit, the IRS noted that the Company
had received excess refunds representing its AMT liability of approximately
$666,000 in 1990 and 1991 from the carryback of net operating losses to the
fiscal years ended May 31 1988is as follows:
Shares Weighted Average
Exercise Price
Outstanding as of May 31, 2000 884,675 $ 1.19
Granted 181,000 0.29
Forfeited (177,150 ) 2.05
Outstanding as of May 31, 2001 888,525 $ 0.84
Granted 38,000 0.45
Exercised (11,250 ) 0.27
Forfeited (12,100 ) 0.66
Outstanding as of May 31, 2002 903,175 $ 0.83
Granted 247,999 1.03
Exercised (38,000 ) 0.48
Forfeited (3,950 ) 2.40
Outstanding as of May 31, 2003 1,109,224 $ 0.88
35
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
A summary of options outstanding and 1989, respectively. On March 29, 1994, the
Company agreed to the assessmentexercisable as of $666,000 plus interestMay 31, 2003 follows:
Weighted- Weighted-
Exercise Average Average Weighted-Average
Options Price Exercise Remaining Exercise Price of
Outstanding Range Price Contractual Life Options Exercisable Exercisable Options
334,500 $0.25 – $0.39 $ 0.27 7.13 334,500 $ 0.27
546,333 $0.50 – $0.61 $ 0.55 7.10 478,750 $ 0.55
127,666 $1.00 – $1.95 $ 1.51 9.58 10,833 $ 1.50
100,725 $3.5625 – $4.00 $ 3.93 5.53 100,725 $ 3.93
1,109,224 $ 0.88 7.25 924,808 $ 0.83
Note 16 — Commitments and received the
final bill of $821,000 during the fourth quarter of fiscal 1994.Contingencies
Lease Commitments
The Company has accruedleases certain facilities and equipment. The facility leases contain escalation clauses based on the Consumer Price Index and provisions for this liability, netpayment of refunds,real estate taxes, insurance, and maintenance and repair expenses. Total rental expense for all operating leases was $0.6 million, $0.6 million, and $0.7 million for fiscal years 2003, 2002, and 2001, respectively.
Future minimum payments, by year and in income taxes payable.the aggregate, under non-cancelable operating leases with initial or remaining terms of one year or more, consist of the following at May 31, 2003:
Fiscal Year Operating Leases
(Amounts in thousands)
2004 $ 514
2005 354
2006 346
2007 45
Total minimum lease payments $ 1,259
Other Commitments and Contingencies
(1) Contracts with two existing clients require the Company to maintain performance bonds throughout the contract terms. At May 31, 2003, the Company maintained performance bonds of $1,200,000 and $600,000 in compliance with these requirements.
(2) The Company would remain liable to perform the services covered under subcapitation agreements if the parties with which the Company subcapitates were unable to fulfill their responsibilities under such agreements.
(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 recently determined it would need to make a significant investment in its current information system or in a new information system that would better meet the future needs of the Company. As a result, the Company has entered into a Letter of Intent with Qualifacts Systems, Inc. (“Qualifacts) to design a new, customized management information system that will enable the Company to meet HIPAA requirements. The Company expects to incur approximately $0.4 million of costs to customize the Qualifacts system and activate the licenses needed for Qualifacts and other, related third-party software.
(4) On February 19, 1999, the California Superior Court denied the Company’s Petition for Writ of Mandate of an adverse administrative appeal decision regarding application of the Maximum Inpatient Reimbursement Limitation to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. The Company owned
36
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
this facility until its disposal in fiscal year 1991. The subject matter of the Superior Court action involved the refusal of the administrative law judge to order further reductions in the liability for costs associated with treating high cost, long stay Medi-Cal patients, which are commonly referred to as “outliers.”
In July 2002, the Company entered into a Repayment Agreement with the Department to resolve this liability, recorded at $950,000 at May 31, 2002, at a substantially reduced amount. The terms of the Repayment Agreement required the Company to either 1) pay one lump sum of $450,000 to the Department on or before September 1, 2002 or 2) beginning September 1, 2002, the Company would be required to make three monthly installment payments of $160,000 each, with the last payment being due on or before November 1, 2002, for a total of $480,000 as full and complete satisfaction of the outstanding liability. As of November 30, 2002, after making three installment payments to the Department of $160,000 each, the Company had fully satisfied its obligations under the terms of the settlement agreement. As a result, the Company recorded a non-operating gain of $470,000 on settlement of the liability during the quarter ended November 30, 2002.
From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary, routine litigation incidental to their business. In some pending cases,business, in which case claims may exceed insurance policy limits and the Company or a subsidiaryany one of its subsidiaries may have exposure to a liability that is not covered by insurance. Management believes that the outcomeis not aware of any such lawsuits will notthat could have a material adverse impact on the Company'sCompany’s financial statements.

41
42

37
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Note 17 — QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FISCAL 2003 Quarter Ended
Fiscal Year
8/31/02 11/30/02 2/28/03 5/31/03 Total
(Amounts in thousands, except per share data)
Operating revenues $ 8,307 $ 8,631 $ 8,061 $ 7,268 $ 32,267
Gross profit 954 871 834 407 3,066
General and administrative expenses 888 952 771 848 3,459
Provision for (recovery of) doubtful accounts (8 ) (6 ) 19 15 20
Depreciation and amortization 68 63 37 27 195
Net gain on IRS settlement — — (7,717 ) — (7,717 )
Gain on settlement of other liability — (470 ) — — (470 )
Other expense 39 25 18 39 121
Net income (loss) $ (33 ) $ 307 (a) $ 7,706 (b)(c) $ (522 )(d) $ 7,458
Earnings (loss) per share — basic $ (0.01 ) $ 0.08 $ 1.97 $ (0.13 ) $ 1.91
Earnings (loss) per share — diluted $ (0.01 ) $ 0.07 $ 1.71 $ (0.13 ) $ 1.72
Weighted Average Common Shares Outstanding — basic 3,879 3,898 3,908 3,929 3,905
Weighted Average Common Shares Outstanding — diluted 3,879 4,254 4,509 3,929 4,343
(a) Includes a $470,000 gain on settlement of the Medi-Cal liability (see Note 16 – “Commitments and Contingencies”).
(b) Includes the $7.7 million gain in settlement of the IRS matter (see Note 13 – “Income Taxes”).
(c) Includes $88,000 of operating revenue related to a favorable cost report settlement that was completed during the fiscal year ended May 31, 2003 pertaining to the Company’s hospital business segment that was discontinued in Fiscal 1999.
(d) Includes $75,000 of operating revenue related to the elimination of the Company’s reserve for cost report settlements (see (c) above).
FISCAL 2002 Quarter Ended
Fiscal Year
8/31/01 11/30/01 2/28/02 5/31/02 Total
(Amounts in thousands, except per share data)
Operating revenues $ 6,126 $ 6,470 $ 7,110 $ 7,919 $ 27,625
Gross profit 916 946 1,017 121 3,000
General and administrative expenses 826 873 874 971 3,544
Recovery of doubtful accounts (14 ) (71 ) (3 ) (24 ) (112 )
Depreciation and amortization 101 87 80 74 342
Other expense 4 24 20 3 51
Income (loss) before cumulative effect of change in accounting principle (1 ) 33 46 (903 ) (825 )
Cumulative effect of change in accounting principle 55 — — — 55
Net income (loss) $ 54 (a) $ 33 (b) $ 46 $ (903 ) $ (770 )
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative effect of change in accounting principle $ — $ 0.01 $ 0.01 $ (0.23 ) $ (0.21 )
Cumulative effect of change in accounting principle 0.01 — — — 0.01
Net income (loss) $ 0.01 $ 0.01 $ 0.01 $ (0.23 ) $ (0.20 )
Weighted Average Common Shares Outstanding — basic 3,834 3,867 3,867 3,871 3,860
Weighted Average Common Shares Outstanding — diluted 3,989 3,988 4,187 3,871 3,860
(a) Includes a $55,000 cumulative effect of change in accounting principle (see Note 10 – “Goodwill”).
(b) Includes a $66,000 bad debt recovery specific to one contract that terminated in 1999
38
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III

ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND EXECUTIVE
COMPENSATION.

The Company expects to file its definitive proxy statement for the 1994
annual meeting of shareholders no later than 120 days after the end
Items 10. executive officers and Directors of the fiscal yearcompany
The executive officers and directors of the Company are as follows:
Name Age Position
Mary Jane Johnson 53 President⁽¹⁾⁽²⁾, Chief Executive Officer⁽¹⁾⁽²⁾, and Director⁽¹⁾⁽²⁾
Robert J. Landis 44 Chairman of the Board of Directors(1)(2), Chief Financial Officer⁽¹⁾⁽²⁾, and Treasurer⁽¹⁾⁽²⁾
Thomas Clay 55 Chief Development Officer⁽²⁾
Paul R. McCarthy 46 Chief Operating Officer⁽²⁾
Cathy J. Welch 43 Secretary⁽¹⁾⁽²⁾, Vice President of Finance/Controller⁽¹⁾⁽²⁾
Eugene L. Froelich 61 Director⁽³⁾
Howard A. Savin 57 Director⁽³⁾
⁽¹⁾ Comprehensive Care Corporation.
⁽²⁾ Comprehensive Behavioral Care, Inc. (Principal subsidiary of the Company).
⁽³⁾ Mr. Froelich and Dr. Savin are each independent directors, and Mr. Froelich is the Audit Committee Financial Expert as that term is defined under General Rules and Regulations under the Securities Exchange Act of 1934, as amended.
MARY JANE JOHNSON, RN, MBA, age 53. Ms. Johnson has served as President and Chief Executive Officer since January 2000. In April 1999, Ms. Johnson was elected a Class I director with her current term expiring at the Securities and Exchange Commission. The information set
forth therein under "Election of Directors" and "Executive Compensation" is
incorporated herein by reference. Executive Officers2003 Annual Meeting. Since joining the Company in August 1996, Ms. Johnson has also served as Chief Operating Officer of Comprehensive Care Corporation, an appointment that was effective July 1999, and as Chief Executive Officer for the Company’s principal subsidiariessubsidiary, Comprehensive Behavioral Care, Inc., since August 1998. Ms. Johnson served as Executive Director for Merit Behavioral Care from 1993 to 1996. Ms. Johnson, a Registered Professional Nurse, has a Bachelors Degree in Nursing from the State University of New York and a Masters Degree in Business Administration from Adelphi University.
ROBERT J. LANDIS, CPA, MBA, age 44. Mr. Landis has served as Chairman of the Board of Directors since January 2000 and as Chief Financial Officer and Treasurer since July 1998. In April 1999, Mr. Landis was elected a Class III director with his current term expiring at the 2004 Annual Meeting. Mr. Landis served as Treasurer of Maxicare Health Plans, Inc., a health maintenance organization, from November 1988 to July 1998. Mr. Landis also serves on the Board of Directors and on the audit committee of Global Axcess Corporation, a company that owns and operates automatic teller machines, whose common stock is publicly traded on the Over The Counter Bulletin Board. Mr. Landis, a Certified Public Accountant, received a Bachelors Degree in Business Administration from the University of Southern California and a Masters Degree in Business Administration from California State University at Northridge.
THOMAS CLAY, MSW, age 55. Mr. Clay has been employed by CompCare since December 1999 and currently serves as the Chief Development Officer for Comprehensive Behavioral Care, Inc. (“CBC”) having served as President, Public Sector Services since June 2002. Mr. Clay previously served as CBC’s Senior Vice President of Clinical Operations from October 2000 through May 2002. During 1997, until joining the Company, Mr. Clay worked as a behavioral healthcare consultant specializing in adapting managed care technology to public sector services for providers and behavioral healthcare organizations. From January 1991 through July 1997, Mr. Clay served in a variety of executive positions for Tarrant County Mental Health Mental Retardation Services in Fort Worth, Texas. Mr. Clay received a Master of Social Work degree from Tulane University and a Bachelor of Arts Degree in Psychology from the University of Texas at Austin.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
PAUL R. MCCARTHY, Ph.D., age 46. Dr. McCarthy rejoined the Company in June 2002 to serve as Chief Operating Officer for Comprehensive Behavioral Care, Inc. From January 2000 through May 2002, Dr. McCarthy was employed by Cigna Behavioral Health (“Cigna”) in Tampa, Florida where as Director of Regional Operations he was responsible for the oversight of operational and financial aspects for two of Cigna’s largest operating units. Prior to joining Cigna, Dr. McCarthy was employed by the Company from February 1998 through January 2000. Dr. McCarthy has also served as Vice President of Quality Improvement and Outcomes Management for Green Spring Health Services/Magellan Health Services from February 1996 through February 1998. Dr. McCarthy holds a Masters Degree in Psychology from Villanova University and a Ph.D. from Pennsylvania State University.
CATHY J. WELCH, CPA, age 43. Ms. Welch has been employed by the Company since February 1998, having served as Controller since February 1999 and Vice President of Finance and Controller since July 1999. In January 2000, Ms. Welch was appointed to the position of Corporate Secretary for the Company. Prior to her employment with CompCare, Ms. Welch served in a variety of financial positions for Columbia/HCA hospitals from November 1993 through June 1997. Ms. Welch, a Certified Public Accountant, received a Bachelor of Arts Degree in Business Administration from the University of South Florida.
EUGENE L. FROELICH, CPA, age 61. In January 2003, the Board of Directors appointed Mr. Froelich to fill an existing vacancy for a Class II Director until the expiration date of the term for this director seat, which is currently the 2005 Annual Meeting. Additionally, Mr. Froelich is the Chairman of the Company’s Audit Committee and he is the Audit Committee Financial Expert as that term is defined under General Rules and Regulations under the Securities Exchange Act of 1934, as amended. He also serves on the Company’s Compensation Committee. Mr. Froelich has more than 30 years of financial experience and has served as an executive to several publicly held healthcare, entertainment, and high tech corporations and is currently working as a consultant in these industries. From April 2001 to October 2001, Mr. Froelich served as Chief Financial Officer of Futurelink Corp., a publicly traded company, engaged in the technology information sector. Futurelink Corp. had filed for protection under Chapter 11 of the federal bankruptcy code in August 2001 and, following such filing, Mr. Froelich voluntarily resigned his position with Futurelink Corp. From July 2000 to April 2001, Mr. Froelich was Chief Financial Officer of Wizshop.com, a private company, engaged in the Internet retail business. From 1998 to 2000, Mr. Froelich acted as an independent consultant and advisor to various corporations. During the period from 1989 to 1998, Mr. Froelich was Chief Financial Officer and Executive Vice President of Maxicare Health Plans, Inc. (“Maxicare”), a publicly traded corporation operating under Chapter 11 of the federal bankruptcy code at the time Mr. Froelich joined Maxicare in 1989.
HOWARD A. SAVIN, Ph.D., age 57. In June 2002, Dr. Savin was appointed as a Class II director, with his current term expiring at the 2005 Annual Meeting, to fill an existing vacancy of the Board of Directors. Additionally, Dr. Savin is the Chairman of the Company’s Compensation Committee and he serves on the Company’s Audit Committee. Dr. Savin is currently Senior Vice President of Clinical Affairs at the Devereux Foundation, an organization engaged in providing high-quality human services to children, adults, and families with special needs that derive from behavioral, psychological, intellectual or neurological impairments. Dr. Savin has served the Devereux Foundation in this capacity since July 1995. From November 1993 to December 1994, Dr. Savin served as Vice President of Medco Behavioral Care Corp., which later became Merit Behavioral Health and Magellan. Dr. Savin holds a Masters Degree in Psychology from the University of Bridgeport and a Ph.D. from the University of Georgia.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Item 11. EXECUTIVE COMPENSATION
The following provides certain information concerning compensation earned by the Company’s Chief Executive Officer and its other executive officers whose total salary and bonus for Fiscal 2003 exceed $100,000 (together, these persons are listedsometimes referred to as the “named executives”).
Annual Compensation Long-term Compensation
Securities Long-term
Fiscal Other Annual Restricted Stock Underlying Incentive All Other
Year Name and Position Salary ($) Bonus ($) Compensation ($) Award(s) ($) Options/SARS (#) Payouts ($) Compensation ($)
2003 Mary Jane Johnson President^(1,2), Chief 175,000 — 6,500 ⁽⁷⁾ — 50,000 — 445 ⁽⁸⁾
2002 Mary Jane Johnson Executive Officer^(1,2), and 175,000 110,200 ⁽⁴⁾ 6,500 ⁽⁷⁾ — — — 937 ⁽⁸⁾
2001 Mary Jane Johnson Director 175,000 50,000 ⁽³⁾ 11,517 ⁽⁶⁾ — 50,000 — 1,314 ⁽⁸⁾
2003 Robert Landis Chairman of the Board of 172,981 15,250 ⁽³⁾ 5,700 ⁽¹⁰⁾ — 50,000 — 908 ⁽⁸⁾
2002 Robert Landis Directors^(1,2), Chief 175,000 59,945 ⁽⁵⁾ 6,500 ⁽¹⁰⁾ — — — 888 ⁽⁸⁾
2001 Robert Landis Financial Officer^(1,2), 175,000 50,000 ⁽³⁾ 3,000 ⁽¹⁰⁾ — 50,000 — 741 ⁽⁸⁾
and Treasurer^(1,2)
2003 Thomas Clay Chief Development 117,692 — 1,800 ⁽¹¹⁾ — 20,000 — 993 ⁽⁸⁾
2002 Thomas Clay Officer⁽²⁾ 111,000 2,550 ⁽⁹⁾ 19,386 ⁽¹¹⁾ — 10,000 — 611 ⁽⁸⁾
2001 Thomas Clay 97,269 — 8,485 ⁽¹¹⁾ — — — 437 ⁽⁸⁾
2003 Paul R. McCarthy Chief Operating Officer⁽²⁾ 118,154 20,001 ⁽⁹⁾ — — 20,000 — 1,197 ⁽⁸⁾
2002 Paul R. McCarthy — — — — — — —
2001 Paul R. McCarthy — — — — — — —
⁽¹⁾ Comprehensive Care Corporation.
⁽²⁾ Comprehensive Behavioral Care, Inc., Principal Subsidiary of the Company.
⁽³⁾ Represents actual payments made in connection with the stay bonus awards described under “Employment Agreements with Executives” below.
⁽⁴⁾ Represents $100,000 in actual payments made during Fiscal 2002 in connection with the stay bonus described under “Employment Agreements with Executives” below plus a non-cash stock bonus valued at $10,200.
⁽⁵⁾ Represents $50,000 in actual payments made during Fiscal 2002 in connection with the stay bonus described under “Employment Agreements with Executives” below plus a non-cash stock bonus valued at $9,945.
⁽⁶⁾ Represents a $2,400 car allowance and $9,117 in moving expenses in accordance to Ms. Johnson’s employment agreement.
⁽⁷⁾ Represents a car allowance in accordance to Ms. Johnson’s employment agreement.
⁽⁸⁾ Represents amounts contributed by the Company to the indicated person’s 401(k) Plan Account.
⁽⁹⁾ Represents a non-cash stock bonus.
⁽¹⁰⁾ Represents compensation expense for personal use mileage in accordance to Mr. Landis’ employment agreement.
⁽¹¹⁾ Represents transitional living expenses paid to Mr. Clay.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
EMPLOYMENT AGREEMENTS WITH EXECUTIVES
On February 7, 2003 the Company entered into a new employment agreement with Mary Jane Johnson, superceding the previous agreement signed in July of 1999. The new agreement commenced February 1, 2003, terminates May 31, 2006 and is subject to two 18-month extensions. Ms. Johnson’s employment agreement provides for her salary to increase from $175,000 to $205,000 per annum beginning June 1, 2003 and includes an annual performance bonus based on page 13the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). Such annual performance bonus shall be equal to the greater of 2 1/2% of the Company’s EBITDA, or $25,000. Ms. Johnson is provided an auto allowance of $250 biweekly as well as a policy of life insurance. In addition, the Company pays for a portion of Ms. Johnson’s health insurance and other group insurance premiums in accordance with the Company’s general benefit guidelines covering all full-time employees. Ms. Johnson’s employment agreement provides that in the event of a change in control of the Company, or in the case of termination without cause, Ms. Johnson will be paid a severance benefit equal to twenty four (24) months base salary, together with her performance bonus. Ms. Johnson is additionally eligible to receive a special transaction bonus should the company merge with or into another entity in which the Company is not the surviving entity, or if the Company sells all or substantially all of its assets and the special transaction is $5.0 million or greater. The special transaction bonus shall be an amount equal to 1% of the special transaction value in excess of $5.0 million. Effective with the 2003 Annual Meeting of Stockholders and annually coincident with such meetings, Ms. Johnson will be granted options to purchase 25,000 shares of the Company’s common stock. The options will bear an exercise price of the fair market value of the Company’s stock on the date of grant and will vest within one year of such date. Ms. Johnson’s employment agreement may be terminated by either party in accordance with its terms, which require written notification to the other party at least six months prior to the initial termination date or renewal termination date.
On February 7, 2003, the Company entered into a new employment agreement with Robert J. Landis, superceding a predecessor agreement dated September 14, 1998. The new agreement commenced February 1, 2003, terminates May 31, 2006 and is subject to two 18-month extensions. Mr. Landis’ employment agreement provides for his salary to increase from $175,000 to $185,000 per annum beginning June 1, 2003 and includes an annual performance bonus based on the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). Such annual performance bonus shall be equal to the greater of 2 1/2% of the Company’s EBITDA, or $20,000. In addition, the Company pays for a portion of Mr. Landis’ health insurance and other group insurance premiums in accordance with the Company’s general benefit guidelines covering all full-time employees. Mr. Landis is also provided with a policy of life insurance and a $250 biweekly auto allowance. Mr. Landis’ employment agreement provides that in the event of a change in control of the Company or in the case of termination without cause, Mr. Landis will be paid a severance benefit equal to twenty four (24) months base salary, together with his performance bonus. Mr. Landis is additionally eligible to receive a special transaction bonus should the company merge with or into another entity in which the Company is not the surviving entity, or if the Company sells all or substantially all of its assets and the special transaction is $5.0 million or greater. The special transaction bonus shall be an amount equal to 1% of the special transaction value in excess of $5.0 million. Effective with the 2003 Annual Meeting of Stockholders and annually coincident with such meetings, Mr. Landis will be granted options to purchase 25,000 shares of the Company’s common stock. The options will bear an exercise price of the fair market value of the Company’s stock on the date of grant and will vest within one year of such date. Mr. Landis’ employment agreement may be terminated by either party in accordance with its terms, which require written notification to the other party at least six months prior to the initial termination date or renewal termination date.
On June 3, 2002, the Company entered into an employment agreement with Thomas Clay. Mr. Clay’s employment agreement provides for a salary at the rate of $120,000 per annum and includes a performance-based bonus not to exceed $20,000 per annum, which will be based 20% on individual performance and 80% on the Company’s financial performance against set criteria. Mr. Clay is provided with a policy of life insurance and the Company pays for a portion of Mr. Clay’s health insurance and other group insurance premiums in accordance with the Company’s general benefit guidelines covering all full-time employees. Mr. Clay’s employment agreement provides that, in the event of a change in control of the Company as defined, Mr. Clay will be paid a severance benefit equal to six (6) months base salary or, in the case of termination without cause, Mr. Clay will be paid a severance benefit equal to three (3) months base salary. Mr. Clay’s employment
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
agreement continues unless terminated by either party in accordance with the terms of the employment agreement.
On June 3, 2002, the Company entered into an employment agreement with Paul R. McCarthy, Ph.D. Dr. McCarthy’s employment agreement provides for a salary at the rate of $120,000 per annum and includes a performance-based bonus not to exceed $20,000 per annum, which will be based 20% on individual performance and 80% on the Company’s financial performance against set criteria. Dr. McCarthy is provided with a policy of life insurance and the Company pays for a portion of Dr. McCarthy’s health insurance and other group insurance premiums in accordance with the Company’s general benefit guidelines covering all full-time employees. Dr. McCarthy’s employment agreement provides that, in the event of a change in control of the Company as defined, Dr. McCarthy will be paid a severance benefit equal to six (6) months base salary or, in the case of termination without cause, Dr. McCarthy will be paid a severance benefit equal to three (3) months base salary. Dr. McCarthy’s employment agreement continues unless terminated by either party in accordance with the terms of the employment agreement.
Effective July 2, 1999, the Board awarded stay bonuses to Ms. Johnson and Mr. Landis in amounts not to exceed the greater of: $150,000 or 85% of the current base salary, and $125,000 or 83% of the current base salary, respectively, not payable unless each remained employed by the Company through December 31, 2000. Effective January 1, 2001, Ms. Johnson and Mr. Landis each were entitled to receive $150,000 and $145,250, respectively, in connection with these stay bonus awards. As an accommodation to the Company, the two executive officers consented to a deferral of the receipt of their stay bonus. During Fiscal 2001, Ms. Johnson and Mr. Landis each were paid $50,000. During Fiscal 2002, Ms. Johnson was paid $100,000 and Mr. Landis, $50,000. In the fiscal year ended May 31, 2003, Mr. Landis received $15,250 related to this Form 10-K.

ITEMbonus.
Effective July 6, 2001, a restricted stock grant of 20,000 shares, 19,500 shares, and 5,000 shares of the Company’s Common Stock was made to Ms. Johnson, Mr. Landis, and Mr. Clay, respectively, and was included in Fiscal 2002 executive compensation. Such shares were valued at $0.51 per share, representing the fair market value of the Company’s Common Stock on July 6, 2001. During Fiscal 2003, Dr. McCarthy was awarded two restricted stock grants for a total of 20,001 shares of the Company’s Common Stock to be included in Fiscal 2003 executive compensation. The initial award was for 6,667 shares, valued at $1.50 per share, representing the fair market value of the Company’s Common Stock on June 3, 2002. The second award to Dr. McCarthy was for 13,334 shares, valued at $0.75 per share, representing the fair market value of the Company’s Common Stock on September 5, 2002.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
In connection with the Company’s indemnification program for executive officers and directors, Ms. Johnson, Mr. Landis, Mr. Clay, and Dr. McCarthy as well as seven current, key management employees, directors, or subsidiary directors, nine former directors, and ten former executive officers, are entitled to indemnification and are beneficiaries of the officers and directors indemnification trust (as defined below).
Upon written demand for payment by the person designated in the Trust Agreement as Beneficiary Representative accompanied by a “Notice of Qualification” (as defined below), the Trustee shall pay the person designated in the Trust Agreement (“Underwriter”) to administer the payments to the accounts of Indemnitees an amount not greater than the balance, if any, of the specified bookkeeping account (“Account”) recorded by the Trustee for each Indemnitee. A “Notice of Qualification” is a written statement by the Beneficiary Representative which (i) states the date and action on which the policyholder is obligated to Indemnitee(s) under the terms of the Indemnification Agreement, (ii) certifies that, pursuant to the terms of the Indemnification Agreement, the Indemnitees are entitled to payment thereunder as a result of the investigation, claim, action, suit or proceeding, and (iii) states the amount of the payment to which the Underwriter is entitled. Upon the receipt of a demand, the Trustee shall promptly inform the Company of such receipt, by courier delivery to the Company, of written notice thereof. Subject to any contrary order issued by a court of competent jurisdiction, a payment made pursuant to this Section may be made without the approval or direction of the Company, and shall be made despite any direction to the contrary by the Company. Prior to the time amounts are to be paid to the Underwriter or his designee from the Trust Fund as described above, Indemnitees have no preferred claim or beneficial ownership interest in trust funds, and their rights are merely unsecured contractual rights.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
The Company considers it desirable to provide each Indemnitee with specified assurances that the Company can and will honor the Company’s obligations under the Indemnification Agreements, including a policy of insurance to provide for directors and officers liability coverage.
Table II – Options Held at May 31, 2003
The following tables present information regarding the number of unexercised options held by the Company’s named executives at May 31, 2003. No options were exercised by any named executive during Fiscal 2003. Further, no stock appreciation rights were granted or held by such persons during Fiscal 2003.
Option Grants In the Last Fiscal year
Percent of Total Exercise
Options/SARS or Base Grant Date
Granted to Employees Price Expiration Present
Name Options Granted in Fiscal Year ($/Share) Date Value
Mary Jane Johnson 25,000 13.1 % $ .51 11/07/12 $ 0.3771
25,000 13.1 % $ 1.40 02/07/13 $ 1.0351
Robert J. Landis 25,000 13.1 % $ .51 11/07/12 $ 0.3771
25,000 13.1 % $ 1.40 02/07/13 $ 1.0351
Thomas Clay 10,000 5.2 % $ .51 11/07/12 $ 0.3771
10,000 5.2 % $ 1.95 02/26/13 $ 1.4417
Paul R. McCarthy* 10,000 5.2 % $ .51 11/07/12 $ 0.3771
10,000 5.2 % $ 1.95 02/26/13 $ 1.4417
* Rejoined the Company effective May 28, 2002.
The present value as of the date of grant, calculated using the Black-Scholes method is based on assumptions about future interest rates, stock price volatility and dividend yield. There is no assurance that these assumptions will prove to be true in the future. The actual value, if any, that may be realized by each individual will depend upon the market price of the Common Stock on the date of exercise.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND AGGREGATED FISCAL YEAR-END OPTION VALUE
Number of Securities Value of
Shares Value Underlying Unexercised Unexercised In-the-money
Acquired on Realized Options/SARs at FY End (#) Options/SARs at FY End ($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable⁽¹⁾
Mary Jane Johnson — — 232,500/37,500 $ 514,018/$63,625
Robert J. Landis — — 278,125/37,500 $ 514,018/$63,625
Thomas Clay — — 32,500/15,000 $ 67,260/$19,950
Paul R. McCarthy ⁽²⁾ — — 5,000/15,000 $ 11,450/$19,950
⁽¹⁾ Calculated on the basis of the closing sale price per share for the Company’s Common Stock on the Over The Counter Bulletin Board of $2.80 on May 30, 2003. Value was calculated on the basis of the difference between the option price and $2.80 multiplied by the number of shares of Common Stock underlying the respective options.
⁽²⁾ Rejoined the Company effective May 28, 2002.
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information required is setMANAGEMENT
The following table sets forth certain information known to the Company concerning the beneficial ownership of Common Stock as of May 31, 2003, by (i) all persons who are beneficial owners of five percent (5%) or more of the Common Stock, (ii) each director of the Company, and (iii) the executive officers named in the Summary Compensation Table included elsewhere herein, and (iv) all directors and executive officers as a group in accordance with Section 13(d)(3) under the caption "Principal
Stockholders"general rules and regulations of the Securities and Exchange Commission (“SEC”) Act of 1934, as amended. According to rules adopted by the SEC, a person is the “beneficial owner” of securities if he or she has, or shares, the power to vote such securities or to direct their investment. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to shares beneficially owned.
Shares Beneficially Percent of Common
Name of Beneficial Owner Owned Stock Outstanding
Mary Jane Johnson⁽²⁾ 252,500 6.1 %
Robert J. Landis⁽³⁾ 308,125 7.3 %
Thomas Clay⁽¹⁾ 37,500 *
Paul R. McCarthy⁽⁴⁾ 25,001 *
Howard A. Savin⁽⁵⁾ 10,833 *
Eugene L. Froelich⁽⁶⁾ — *
All executive officers and directors As a group (7 persons)⁽⁴⁾ 698,959 15.4 %
^* ^{Less than 1%.}
⁽¹⁾ Includes 5,000 shares of common stock held directly and 32,500 shares subject to options that are presently exercisable. Excludes 15,000 options that are not presently exercisable.
⁽²⁾ Includes 20,000 shares of common stock held directly and 232,500 shares subject to options that are presently exercisable. Excludes 37,500 options that are not presently exercisable.
⁽³⁾ Includes 30,000 shares of common stock held directly and 278,125 shares subject to options that are presently exercisable. Excludes 37,500 options that are not presently exercisable.
⁽⁴⁾ Includes 20,001 shares of common stock held directly and 5,000 shares subject to options that are presently exercisable. Excludes 15,000 options that are not presently exercisable.
⁽⁵⁾ Includes 10,833 options that are presently exercisable. Excludes 25,833 options that are not presently exercisable.
⁽⁶⁾ No options are presently exercisable. Excludes 20,833 options that are not presently exercisable.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes share and exercise price information with respect to the Company’s equity compensation plans (including individual compensation arrangements) under which equity securities of Comprehensive Care Corporation are authorized for issuance as of May 31, 2003:
(a) (b) (c)
Number of securities remaining
Number of securities to Weighted-average available for future issuance
be issued upon exercise exercise price of under equity compensation
of outstanding options, outstanding options, plans (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
Equity compensation plans approved by shareholders 1,109,224 $ 0.88 444,235
Equity compensation plans not approved by shareholders* 92,500 3.48 —
Total 1,201,724 $ 1.08 444,235
^{* Consists of warrants to purchase common stock of the Company issued to three consultants, in lieu of cash compensation, for services provided to the proxy statement for the 1994 annual meeting of
shareholders and is incorporated herein by reference.

ITEMCompany.}
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information required is set forthTRANSACTIONS
For information relating to the employment agreements with executive officers, stock options, stay bonuses, stock grants, and other compensation, see the information included in Item 11 above. During the fiscal year ended May 31, 2003, two executive officers served on the Board of Directors of the Company and, also, on the Board of Directors for each of the Company’s wholly-owned subsidiary corporations.
Item 14. Controls and Procedures
Evaluation of the Company’s Disclosure Controls and Internal Controls.Within the 90 days prior to filing this report on Form 10-K, the Company evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” (“Disclosure Controls”), and its “internal controls and procedures for financial reporting” (“Internal Controls”). This evaluation (the “Controls Evaluation”) was done under the caption "Compensation
Committee Interlockssupervision and Insider Participation"with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Rules adopted by the Securities and Exchange Commission (“SEC”) require that in this section of the Annual Report on Form 10-K we present the conclusions of the CEO and the CFO about the effectiveness of our Disclosure Controls and Internal Controls based on and as of the date of the Controls Evaluation.
Disclosure Controls and Internal Controls.As provided in Rule 13a-14 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, Disclosure Controls are defined as meaning controls and procedures that are designed with the objective of insuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, designed and reported within the time periods specified by the SEC’s rules and forms. Disclosure Controls include, within the definition under the Exchange Act, and without limitation, controls and procedures designed to insure that information required to be disclosed by us in our reports is accumulated and communicated to our management including our CEO and CFO, as appropriate, to allow timely decisions regarding disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.
Scope of the Controls Evaluation.The evaluation made by our CEO and CFO of our Disclosure Controls and our Internal Controls included a review of the controls’ objectives and design, the controls’ implementation by the Company and the effect of the controls on the information generated for use in this Form 10-K. In the course of the Controls Evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation will be done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary; our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were any “significant deficiencies” or “material weaknesses” in the proxy statement forCompany’s Internal Controls, or whether the 1994 annual meetingCompany had identified any acts of shareholdersfraud involving personnel who have a significant role in the Company’s Internal Controls. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions”; these are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A “material weakness” is incorporated hereindefined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by reference.

42
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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULESerror or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accordance with our on-going procedures.
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COMPREHENSIVE CARE CORPORATION AND REPORTS ON FORM 8-K.

(A) 1. FINANCIAL STATEMENTS
IncludedSUBSIDIARIES
The Company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in Part IIall control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
In accordance with SEC requirements, our CEO and CFO each have confirmed that, since the date of the Controls Evaluation to the date of this report:Annual Report of Independent Public Accountants
Independent Auditors' Report
Consolidated Balance Sheets, May 31, 1994on Form 10-K, there have been no significant changes in Internal Controls or in other factors that could significantly affect Internal Controls, including any corrective actions with regard to significant deficiencies and 1993
Consolidated Statements of Operations, Years Ended May 31, 1994,
1993material weaknesses.
Conclusion.Based upon the Controls Evaluation, our CEO and 1992
Consolidated Statements of Stockholders' Equity, Years Ended May 31,
1994, 1993CFO have each concluded that our Disclosure Controls are effective to ensure that material information relating to the Company and 1992
Consolidated Statements of Cash Flows, Years Ended May 31, 1994,
1993its consolidated subsidiaries is made known to management, including the CEO and 1992
NotesCFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to Consolidatedprovide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.
Part IV
Item 15. Exhibits, Financial Statements

2. FINANCIAL STATEMENT SCHEDULES
V. PropertyStatement Schedules, and Equipment
VI. Accumulated Depreciation and Amortization of Property and Equipment
X. Supplementary Statements of Operations InformationReports on Form 8-K
(a) 1. Financial Statements — Included in Part II of this report:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets, May 31, 2003 and 2002
Consolidated Statements of Operations, Years Ended May 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders’ Deficit, Years Ended May 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows, Years Ended May 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: None.
Other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
3. EXHIBITS

Exhibits:

EXHIBIT
NUMBER DESCRIPTION AND REFERENCE
------- -------------------------

Number Description and Reference
3.1 Restated Certificate of Incorporation (1).
as amended.⁽⁵⁾
3.2 Restated Bylaws as amended March 24, 1994 (filed herewith).
July 20, 2000.⁽⁸⁾
4.1 Indenture dated April 25, 1985 between the Company and Bank of America, NT&SA, relating to Convertible Subordinated Debentures (2).
4.3 Rights Agreement dated asDebentures.⁽¹⁾
4.2 Form of April 19, 1988 between the Company and Security Pacific National Bank (3).
Common Stock Certificate.⁽⁶⁾
10.1 Standard form of CareUnit Contract (4).
10.2 Standard form of CarePsychCenter Contract (4).
10.4 Financial Security Plan for executive management and medical directors (5)*.
10.5 Form of Stock Option Agreement (4)Agreement.*.
10.6 ⁽²⁾
10.2 Form of Indemnity Agreement as amended March 24, 1994 (filed herewith)1994.*.
10.28 The Company's Employee Savings Plan as amended⁽³⁾
10.3 Directors and restated as of June 30, 1993 (6)*.
10.31 AgreementOfficers Trust dated February 27, 1995 between the Company and Livingston & Company dated April 1, 1991 (7).
10.32 Shareholder Agreement datedMark Twain Bank.*⁽⁴⁾
47
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Number Description and Reference
10.4 Comprehensive Care Corporation 1995 Incentive Plan, as of May 8, 1991amended on November 17, 1998.⁽⁹⁾
10.5 Amended and Restated Non-Employee Director’s Stock Option Plan.*⁽⁵⁾
10.6 Employment agreement as amended February 7, 2003 between the Company and RehabCare Corporation Robert J. Landis.*^{(7).
10.33 Tax Sharing Agreement dated}
10.7 Employment agreement as of May 8, 1991amended February 7, 2003 between the Company and RehabCare Corporation Mary Jane Johnson.*^{(7).
10.35 Agreement between Company and Livingston & Co.}
10.8 Employment agreement dated December 21, 1991 (8).
10.36 Option Agreement with Richard W. Wolfe dated July 1, 1992 (8).*
10.37 Redemption Agreement dated September 1, 1992 between RehabCare and the Company (8).
10.40 1988 Incentive Stock Option and 1988 Nonstatutory Stock Option Plans, as amended (8).*
10.46 Employment Agreement dated December 30, 1992June 3, 2002 between the Company and Walter E. Afield, M.D. (9).

43
44
EXHIBITS (CONTINUED)

EXHIBIT
NUMBER DESCRIPTION AND REFERENCE
------ -------------------------

10.47 Non-qualified Option AgreementPaul R. McCarthy.*⁽¹⁰⁾10.9 Employment agreement dated December 30, 1992June 3, 2002 between the Company and Walter E. Afield, M.D. (9).
10.48 Non-Qualified Stock Option Agreement dated February 2, 1993, between the CompanyThomas C. Clay.*⁽¹⁰⁾
10.10 Comprehensive Care Corporation 2002 Incentive Plan.⁽¹¹⁾
14 Code of Business Conduct and Fred C. Follmer (filed herewith)*.
11 Computation of Loss Per ShareEthics (filed herewith).
22
21 List of the Company'sCompany’s active subsidiaries (filed herewith).
24.1
23 Consent of Arthur Andersen & Co. (filed herewith).
24.2 Consent of KPMG Peat MarwickEisner LLP (filed herewith).
99.1 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).
99.2 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
* 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 10-Q for the quarter ended February 28, 1995.
(6) Filed with original filing of Registration Statement on Form S-1, dated January 29, 1997.
(7) Filed as an exhibit to the Company’s Form 10-Q for the quarter ended August
31, 1986.
(2) Filed as an exhibit to the Company's Form S-3 Registration Statement No.
2-97160.
(3) Filed as an exhibit to the Company's Form 8-K dated May 4, 1988.
(4) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1988.
(5) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1990.
(6) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1991.
(7) Filed as an exhibit to RehabCare Corporation's Form S-1 Registration
Statement No. 33-40467.
(8) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1992.
(9) Filed as an exhibit to the Company's Form 10-K for the fiscal year ended
May 31, 1993.

(B) REPORTS ON 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 an exhibit to the Company’s Form 8-K, dated September 20, 2002.
(b) Reports on Form 8-K.
1) On March 7, 1994, theThe Company filed a current report on Form 8-K, dated March 3, 2003, to report new members ofunder Item 5 that the Board of Directors, new
members ofCompany had fully satisfied the Compensation Committee,“Offer in Compromise” with the Board approval of
amendment ofInternal Revenue Service (IRS) and, additionally, that the Company's Certificate of Incorporation
(subjectCompany reached a settlement agreement with its former tax advisor with respect to shareholder approval) and the tentative approval
of voluntary, temporary reduction of conversion price of
convertible debentures.fees previously paid by the Company to the advisor.
2) On May 10, 1994, theThe Company filed a current report on Form 8-K, reporting the resignation of Richard C. Peters, President
and Chief Executive Officer.

3) On June 30, 1994, the Company filed a current report on Form
8-Kdated May 8, 2003, to report an assessment received fromunder Item 5 that the IRS relating toCompany’s Central U.S. Service Center, located in Bloomfield Hills, Michigan, was awarded a contract by the payroll tax audit for calendar years 1983 through 1988
(see Note 15-- "Commitments and Contingencies").

44
45
second largest Medicaid qualified health plan in Michigan.
48
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, August 25, 1994.

September 5, 2003.
COMPREHENSIVE CARE CORPORATION

By /s/ CHRISS W. STREET
---------------------------------
Chriss W. Street
Chairman
By /s/ MARY JANE JOHNSON
Mary Jane Johnson
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ ROBERT J. LANDIS
Robert J. Landis
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates so indicated.

SIGNATURE TITLE DATE
- --------- ----- ----

Chairman and
Signature Title Date
/s/ MARY JANE JOHNSON President, Chief Executive Officer, /s/ CHRISS W. STREET (Principal Executive Officer) August 25, 1994
- ------------------------------------
Chriss W. Street
Chief Operating Officer and Director September 5, 2003
Mary Jane Johnson
/s/ ROBERT J. LANDIS Chairman of the Board of Directors, September 5, 2003
Chief Financial Officer, /s/ FRED C. FOLLMER (Principaland Treasurer
Robert J. Landis (Principal Financial Officer) August 25, 1994
- -----------------------------------
Fred C. Follmer
Vice President, Secretary and
Chief Accounting Officer
/s/ KERRI RUPPERT (Principal Accounting Officer) August 25, 1994
- -------------------------------------
Kerri Ruppert

/s/ WILLIAM H. BOUCHER Director August 25, 1994
- ---------------------------------
William H. Boucher

/s/ J. MARVIN FEIGENBAUM Director August 25, 1994
- -----------------------------------
J. Marvin Feigenbaum

/s/ HARVEY G. FELSEN Director August 25, 1994
- -----------------------------------
Harvey G. Felsen

/s/
/s/ HOWARD S. GROTH A. SAVIN Director August 25, 1994
- -----------------------------------
September 5, 2003
Howard S. Groth

/s/ W. JAMES NICOL A. Savin
/s/ EUGENE L. FROELICH Director August 25, 1994
- --------------------------------------
W. James Nicol
September 5, 2003
Eugene L. Froelich

45
46

49
COMPREHENSIVE CARE CORPORATION SCHEDULE V - PROPERTY AND EQUIPMENT

YEARS ENDED MAYSUBSIDIARIES
Exhibit Index
Fiscal Year Ended May 31, 1994, 1993 AND 1992

BALANCE AT SALES BALANCE AT
BEGINNING OF ADDITIONS AND RECLASSI- END OF
PERIOD AT COST RETIREMENTS FICATIONS(1) PERIOD
------ ------- ----------- --------- ------
(DOLLARS IN THOUSANDS)

Year ended May 31, 1994
Land and improvements . . . . . . . . $ 4,117 $ --- $ --- $ (54) $ 4,063
Buildings and improvements . . . . . 19,209 82 99 (1,000) 18,192
Furniture and equipment . . . . . . . 5,866 280 1,956 627 4,817
Leasehold improvements . . . . . . . 1,364 3 15 13 1,365
Capitalized leases . . . . . . . . . 876 18 --- (5) 889
------- ---- ------- ------- -------
$31,432 $383 $2,070 $ (419) $29,326
====== === ===== ==== ======

Year ended May 31, 1993
Land and improvements . . . . . . . . $ --- $ --- $ --- $ 4,117 $ 4,117
Buildings and improvements . . . . . 2,963 203 2,731 18,774 19,209
Furniture and equipment . . . . . . . 3,440 360 3,201 5,267 5,866
Leasehold improvements . . . . . . . 463 136 24 789 1,364
Capitalized leases . . . . . . . . . --- 67 --- 809 876
------- --- ------ ------ ------
$ 6,866 $766 $5,956 $29,756 $31,432
====== === ===== ====== ======

Year ended May 31, 1992
Land and improvements . . . . . . . . $ 7,525 $ --- $ --- $ (7,525) $ ---
Buildings and improvements . . . . . 25,309 337 56 (22,627) 2,963
Furniture and equipment . . . . . . . 11,463 403 2,330 (6,096) 3,440
Leasehold improvements . . . . . . . 829 11 377 --- 463
Capitalized leases . . . . . . . . . 745 --- 745 --- ---
------ ---- ----- --------- --------
$45,871 $751 $3,508 $(36,248) $ 6,866
====== === ===== ======= ======

(1) Includes amounts which have been reclassified from(to) property and
equipment held for sale.

See accompanying Report of Independent Public Accountants.

46
47
COMPREHENSIVE CARE CORPORATION

SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND
EQUIPMENT

YEARS ENDED MAY 31, 1994, 1993 AND 1992

BALANCE AT SALES BALANCE AT
BEGINNING OF ADDITIONS AND RECLASSI- END OF
PERIOD AT COST RETIREMENTS FICATIONS(1) PERIOD
------ ------- ----------- --------- ------
(DOLLARS IN THOUSANDS)

Year ended May 31, 1994
Buildings and improvements . . . . . $ 7,670 $ 887 $ 95 $ 205 $ 8,667
Furniture and equipment . . . . . . . 4,470 507 1,877 311 3,411
Leasehold improvements . . . . . . . 792 79 14 81 938
Capitalized leases . . . . . . . . . 297 25 --- --- 322
------ ----- ----- ------ ------
$13,229 $1,498 $1,986 $ 597 $13,338
====== ===== ===== ====== ======

Year ended May 31, 1993
Buildings and improvements . . . . . $ 871 $1,371 $ 869 $ 6,297 $ 7,670
Furniture and equipment . . . . . . . 1,338 926 922 3,129 4,471
Leasehold improvements . . . . . . . 383 82 22 349 792
Capitalized leases . . . . . . . . . --- --- --- 296 296
----- ----- ----- ------ ------
$2,592 $2,379 $1,813 $10,071 $13,229
===== ===== ===== ====== ======

Year ended May 31, 1992
Buildings and improvements . . . . . $ 1,664 $1,268 $ 8 $(2,053) $ 871
Furniture and equipment . . . . . . . 8,579 982 1,246 (6,977) 1,338
Leasehold improvements . . . . . . . 528 66 308 97 383
Capitalized leases . . . . . . . . . 612 52 631 (33) ---
------ ----- ----- ------ -----
$11,383 $2,368 $2,193 $(8,966) $ 2,592
====== ===== ===== ====== =====

(1) Includes amounts which have been reclassified from(to) property and
equipment held for sale.

See accompanying Report of Independent Public Accountants.

47
48
COMPREHENSIVE CARE CORPORATION

SCHEDULE X - SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION

YEARS ENDED MAY 31, 1994, 1993 AND 1992

1994 1993 1992
---- ---- ----
(Dollars in thousands)

Advertising costs . . . . . . . . . . . . . . . . . . . . . . $566 $2,238 $2,557
=== ===== =====

See accompanying Report of Independent Public Accountants.

48
49
COMPREHENSIVE CARE CORPORATION

EXHIBIT INDEX

FISCAL YEAR ENDED MAY 31, 1994

SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------

3.2 Restated Bylaws as amended March 24, 1994 ..........

10.6 Form of Indemnity Agreement as amended March 24,
1994 ...............................................

10.48 Non-Qualified Stock Option Agreement dated
February 7, 1993 between the Company and Fred C.
Follmer ............................................

11 Computation of Loss Per Share ......................

22 List of Company's subsidiaries .....................

24.1 Consent of Arthur Andersen & Co. ...................

24.2 Consent of KPMG Peat Marwick LLP ...................

2003

EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER

14 Code of Business Conduct and Ethics 51-57
21 List of the Company’s subsidiaries 58
23 Consent of Eisner LLP 59
31.1 Comprehensive Care Corporation CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 60
31.2 Comprehensive Care Corporation CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 61
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 62
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 63
50


Delaware ~~95-2594724 (State~~ (State or other jurisdiction of ~~(I.R.S. Employer~~ incorporation or organization)		95-2594724 (IRS Employer Identification No.) ~~16305 Swingley Ridge Drive~~

200 South Hoover Blvd., Suite ~~100 Chesterfield, Missouri 63017 (Address~~200 Tampa, Florida (Address of principal executive offices) ~~(Zip~~		33609 (Zip Code)


x		Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year endedMay 31, 2003or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to


Title of each class		Name of each exchange on ~~Title of each class~~ which registered ~~------------------- ---------------------------~~

Common Stock, Par Value ~~$.10~~$.01 per share ~~New York Stock Exchange, Inc. Common Share Purchase Rights New York Stock Exchange, Inc. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:~~ 7 1/2% Convertible Subordinated Debentures due 2010 ~~(Title of Class)~~		Over The Counter Bulletin Board Over-the-Counter


PART I
GOVERNMENT REGULATION
ACCREDITATION
MANAGEMENT INFORMATION SYSTEMS
ADMINISTRATION AND EMPLOYEES
MARKETING AND SALES
AVAILABLE INFORMATION
PART II.
Consolidated Balance Sheets
Consolidated Statements of Operations
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
Consolidated Statements of Cash Flows
PART III
Part IV
SIGNATURES
Exhibit Index
Ex-14 Code of Business Ethics
Ex-21 List of Company's Subsidiaries
EX-23 Consent of Eisner LLP
EX-31.1 Section 302 Certification of the CEO
EX-31.2 Section 302 Certification of the CFO
EX-32.1 Section 906 Certification of the CEO
EX-32.2 Section 906 Certification of the CFO

•		During June 2003, we implemented one new client contract to provide behavioral healthcare benefits to approximately 97,000 members in Michigan. We estimate that annual revenues from this contract will be $1.5 million.

•		The State of Texas has passed legislation that will reduce the amount of funds allocated to our clients to cover behavioral healthcare services to Medicaid and Children’s Health Insurance Program (“CHIP”) recipients in the State of Texas. Such legislation is subject to pending bills that, if passed, could restore some of the benefits to these programs. Under the recently passed legislation, the outpatient behavioral healthcare benefits available to adult Medicaid and CHIP recipients will be provided by the HMOs and their subcontractors, including the Company, on a very limited basis while the inpatient benefits for CHIP recipients may not be covered by the HMOs and their subcontractors. For the fiscal year ended May 31, 2003, we had operating revenue of $3.7 million and $4.5 million, respectively, specific to contracts covering Texas CHIP and Texas Medicaid recipients. These changes to Texas Medicaid and CHIP programs could have a material, adverse impact on our operations. However, we believe certain of our clients will continue to require the types of services we provide to mitigate their exposure to treat serious medical conditions that may result from the lack of adequate behavioral healthcare benefits. We are closely monitoring developments in Texas, but currently cannot predict what financial impact, if any, these changes may have on our business.

(1)		CompCare is a registered trademark of Comprehensive Care Corporation.

(2)		Comprehensive Behavioral Care, Inc. is a registered service mark of the Company.


				Monthly Rental
Name and Location		Lease Expires		(in Dollars)

Corporate Headquarters, Regional, Administrative, And Other Offices
	Tampa, Florida, Corporate Headquarters and Southeastern Regional offices		2006	$	22,813
	Grand Prairie, Texas		2004		6,474
	Bloomfield Hills, Michigan		2004		9,237


	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 closing prices for the Common Stock, as reported by the OTC-BB, for the fiscal quarters indicated:


		Price

Fiscal Year		High		Low

2003	First Quarter	$	1.65	$	0.75
	Second Quarter		1.01		0.32
	Third Quarter		2.38		0.65
	Fourth Quarter	$	3.05	$	2.01
2002	First Quarter	$	0.61	$	0.25
	Second Quarter		0.55		0.24
	Third Quarter		0.96		0.43
	Fourth Quarter	$	1.85	$	0.70

(a)		As of September 3, 2003, the Company had 1,416 common stockholders of record.

(b)		The Company did not pay any cash dividends on its Common Stock during any quarter of Fiscal 2003 2002, or 2001 and does not contemplate the initiation of payment of any cash dividends in the foreseeable future (see Item 7. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”).


		Year Ended May 31,

		2003			2002			2001			2000			1999

					(Amounts in thousands, except per share data)
Statement of Operations Data:
Operating revenues		$	32,267		$	27,625		$	18,192		$	17,719		$	39,029
Costs and expenses:
	Healthcare operating expenses		29,201			24,625			15,326			15,801			29,778
	General and administrative expenses		3,459			3,544			3,842			6,974			9,148
	Provision for (recovery of) doubtful accounts		20			(112	)		(439	)		(606	)		1,641
	Depreciation and amortization		195			342			656			794			1,037
	Restructuring expenses		—			—			(30	)		831			600

			32,875			28,399			19,355			23,794			42,204

Operating loss from continuing operations before items shown below			(608	)		(774	)		(1,163	)		(6,075	)		(3,175	)
Other income (expenses):
	Net gain on IRS settlement		7,717			—			—			—			—
	Gain on settlement of other liability		470			—			—			—			—
	Loss in connection with prepayment of note receivable		—			—			(496	)		—			—
	Gain on sale of assets		4			—			—			9			2
	Loss on sale of assets		(5	)		—			—			(1	)		(4	)
	Reduction in accrued interest expense		—			—			290			—			—
	Other non operating income		34			40			332			204			41
	Interest income		47			88			163			399			309
	Interest expense		(181	)		(178	)		(208	)		(289	)		(281	)

Income (loss) from continuing operations before income taxes			7,478			(824	)		(1,082	)		(5,753	)		(3,108	)
Income tax expense (benefit)			20			1			35			13			(146	)

Income (loss) from continuing operations			7,458			(825	)		(1,117	)		(5,766	)		(2,962	)
Discontinued operations:
Loss from operations			—			—			—			—			(334	)
Loss on disposal, including operating loss of $282			—			—			—			—			(698	)

Income (loss) before cumulative effect of change in accounting principle			7,458			(825	)		(1,117	)		(5,766	)		(3,994	)
Cumulative effect of change in accounting principle			—			55			—			—			—

Net income (loss)			7,458			(770	)		(1,117	)		(5,766	)		(3,994	)
Dividends on convertible Preferred Stock			—			—			—			—			(55	)

Net income (loss) attributable to common stockholders		$	7,458		$	(770	)	$	(1,117	)	$	(5,766	)	$	(4,049	)

Basic earnings per share:
Income (loss) from continuing operations		$	1.91		$	(0.21	)	$	(0.29	)	$	(1.51	)	$	(0.85	)
Discontinued operations:
	Loss from operations		—			—			—			—			(0.09	)
	Loss on disposal		—			—			—			—			(0.20	)
Cumulative effect of change in accounting principle			—			0.01			—			—			—

Net income (loss)		$	1.91		$	(0.20	)	$	(0.29	)	$	(1.51	)	$	(1.14	)

Diluted earnings per share:
Income (loss) from continuing operations		$	1.72		$	(0.21	)	$	(0.29	)	$	(1.51	)	$	(0.85	)
Discontinued operations:
	Loss from operations		—			—			—			—			(0.09	)
	Loss on disposal		—			—			—			—			(0.20	)
Cumulative effect of change in accounting principle			—			0.01			—			—			—

Net income (loss)		$	1.72		$	(0.20	)	$	(0.29	)	$	(1.51	)	$	(1.14	)

Balance Sheet Data:
Working capital (deficit)		$	(4,447	)	$	(12,275	)	$	(11,770	)	$	(12,245	)	$	(9,355	)
Total assets			6,379			11,399			9,754			21,275			29,066
Long-term debt			2,244			2,244			2,244			2,244			2,253
Long-term debt including current maturities and debentures			2,244			2,244			2,244			2,244			2,256
Stockholders’ deficit		$	(4,990	)	$	(12,519	)	$	(11,778	)	$	(10,672	)	$	(4,914	)


		Consolidated			Consolidated
		Operations			Operations
		Fiscal 2003			Fiscal 2002

Operating revenues		$	32,267		$	27,625
Healthcare operating expenses			29,201			24,625
General/administrative expenses			3,459			3,544
Other operating expenses			215			230

			32,875			28,399

	Operating loss	$	(608	)	$	(774	)


	Fiscal Year ended May 31,

	2003		2002		2001

Balance as of the beginning of the fiscal year	$	991,000	$	936,000	$	1,008,000
Amortization		—		—		(72,000	)
Unamortized deferred credit written off and recognized in income		—		55,000		—

Balance as of the end of the fiscal year	$	991,000	$	991,000	$	936,000


Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Eisner LLP			19
Consolidated Balance Sheets, May 31, ~~1994~~2003 and ~~1993 . . . . . . . . . . . . . . . . . . . . . . . . 23~~ 2002			20
Consolidated Statements of Operations, Years Ended May 31, ~~1994, 1993~~2003, 2002 and ~~1992 . . . . . . . . . . 24~~ 2001			21
Consolidated Statements of ~~Stockholders' Equity,~~Stockholders’ Deficit, Years Ended May 31, ~~1994, 1993~~2003, 2002 and ~~1992 . . . . . 25~~ 2001			22
Consolidated Statements of Cash Flows, Years Ended May 31, ~~1994, 1993~~2003, 2002 and ~~1992 . . . . . . . . . . 26~~ 2001			23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Financial Statement Schedules: V. Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 VI. Accumulated Depreciation and Amortization of Property and Equipment . . . . . . . . . . . . . 47 X. Supplementary Statements of Operations Information . . . . . . . . . . . . . . . . . . . . . . 48			24-38


		May 31,

		2003			2002

		(Amounts in Thousands)
ASSETS
Current assets:
	Cash and cash equivalents	$	3,590		$	5,340
	Accounts receivable, less allowance for doubtful accounts of $27 and $8		75			324
	Accounts receivable – managed care reinsurance contract		354			575
	Other receivable		—			2,548
	Other current assets		605			591

Total current assets			4,624			9,378
Property and equipment, net			230			291
Note receivable			155			159
Goodwill, net			991			991
Restricted cash			328			430
Other assets			51			150

Total assets		$	6,379		$	11,399

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable and accrued liabilities	$	1,836		$	2,891
	Accrued claims payable		4,103			4,635
	Accrued reinsurance claims payable		3,117			2,019
	Unbenefitted tax refunds received		—			12,092
	Income taxes payable		15			16

Total current liabilities			9,071			21,653

Long-term liabilities:
	Long-term debt		2,244			2,244
	Other liabilities		54			21

Total long-term liabilities			2,298			2,265

Total liabilities			11,369			23,918

Commitments and Contingencies (Note 16)
Stockholders’ 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 3,936,549 and 3,878,552		39			39
	Additional paid-in-capital		51,928			51,842
	Deferred compensation		(16	)		(1	)
	Accumulated deficit		(56,941	)		(64,399	)

Total stockholders’ deficit			(4,990	)		(12,519	)

Total liabilities and stockholders’ deficit		$	6,379		$	11,399


		Common Stock				Additional
						Paid-In		Accumulated			Deferred			Total Stockholders'
		Shares		Amount		Capital		Deficit			Compensation			Deficit

Balance, May 31, 2000			3,818	$	38	$	51,812	$	(62,512	)	$	(10	)	$	(10,672	)
	Net loss		—		—		—		(1,117	)		—			(1,117	)
	Compensatory stock options granted		—		—		1		—			(1	)		—
	Amortization of deferred compensation		—		—		—		—			11			11

Balance, May 31, 2001			3,818	$	38	$	51,813	$	(63,629	)	$	—		$	(11,778	)
	Net loss		—		—		—		(770	)		—			(770	)
	Compensatory stock options granted		—		—		1		—			(1	)		—
	Shares issued for executive compensation		50		1		25		—			—			26
	Exercise of stock options		11		—		3		—			—			3

Balance, May 31, 2002			3,879	$	39	$	51,842	$	(64,399	)	$	(1	)	$	(12,519	)
	Net income		—		—		—		7,458			—			7,458
	Shares issued for executive compensation		20		—		20		—			—			20
	Compensatory stock options and warrants granted to non-employees		—		—		48		—			(22	)		26
	Amortization of deferred compensation		—		—		—		—			7			7
	Exercise of stock options		38		—		18		—			—			18
														��
Balance, May 31, 2003			3,937	$	39	$	51,928	$	(56,941	)	$	(16	)	$	(4,990	)


	2003				2002

	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

	(Amounts in thousands)
Assets
Cash and cash equivalents	$	3,590	$	3,590	$	5,340	$	5,340
Note receivable		159		159		163		163
Restricted cash		328		328		430		430
Liabilities
Long-term debt	$	2,244	$	2,328	$	2,244	$	1,534

(1)		During the fiscal year ended May 31, 2003, the Company had three contracts with one HMO to provide behavioral healthcare services to Florida members. The combined revenue from these contracts accounted for 11.7%, or $3.8 million, of the Company’s operating revenues during the fiscal year ended May 31, 2003 compared to 17.0%, or $4.7 million, for the fiscal year ended May 31, 2002 and 17.6%, or $3.2 million, for the fiscal year ended May 31, 2001. This HMO has been our customer since November 1998. On September 24, 2002, the Company received a written, 90-day termination notice, dated September 20, 2002, from this client. As such, these contracts covering Florida members terminated effective January 1, 2003. Additionally, the Company has one major contract with an affiliate of this HMO (see Item 2 below).

(2)		The Company has one contract to provide behavioral healthcare services to Connecticut members under contract with one HMO. For the fiscal year ended May 31, 2003, this contract represented approximately 9.0%, or $2.9 million, of the Company’s operating revenue compared to 12.7%, or $3.5 million and 3.2%, or $.6 million for the fiscal years ended May 31, 2002 and 2001, respectively. Additionally, this contract provides that the Company, through its contract with this HMO, receives additional funds directly from a state reinsurance program. During the fiscal years ended May 31, 2003 and 2002, the Company filed reinsurance claims totaling approximately $3.0 million and $3.8 million, respectively. Such claims represent cost reimbursements and, as such, are not included in the reported operating revenues and are accounted for as reductions of healthcare operating expenses. As of May 31, 2003 and 2002, respectively, the Company has reported $0.4 million and $0.6 million as accounts receivable–managed care reinsurance contracts, with $3.1 million and $2.0 million reported as accrued reinsurance claims payable, in the accompanying balance sheet. In the event that the Company does not collect the amounts receivable related to reinsurance amounts, the Company could remain liable for the costs of the specific services provided to members that qualify for such reimbursements. The difference between the reinsurance receivable amount and the reinsurance

		payable amount is related to timing differences between the authorization date, the date the money is received by the Company, and the date the money is paid to the provider. In certain cases, providers have submitted claims for authorized services having incorrect service codes or otherwise incorrect information that has caused payment to be denied by the Company. In such cases, there are contractual and statutory provisions that allow the provider to appeal a denied claim. If no appeal is received by the Company within the prescribed amount of time, the Company may be required to remit the reinsurance funds back to the appropriate party. For non-reinsurance claims incurred but not reported under this contract, the Company estimates its claims payable using a similar method as that used for other existing contracts. This HMO has been a customer since March 2001. The original contract term ended December 31, 2002 and, in accordance with its terms, was automatically renewed for a one-year period ending December 31, 2003.

(3)		During the fiscal year ended May 31, 2003, the Company had one contract with one HMO, covering Medicaid, Medicare, and commercial business, to provide behavioral healthcare services to Florida members. This agreement represented approximately 15.6%, or $5.0 million, 21.4%, or $5.9 million, and 19.5%, or $3.5 million, of the Company’s operating revenue for the fiscal years ended May 31, 2003, 2002 and 2001, respectively. This HMO has been a customer since July 2000. On December 24, 2002, the Company entered into a contract with another HMO that acquired the existing client’s Medicaid business. As a result, the Company continues service to the Medicaid members through its new contract with the acquiring HMO that was effective January 1, 2003. Medicaid business from the new HMO client accounted for 8.5%, or $2.8 million, of the Company’s operating revenues during the fiscal year ended May 31, 2003. On December 31, 2002, the Company received a formal termination, effective February 28, 2003, from the existing HMO client with respect to the Medicare and commercial business. In addition, the acquiring HMO, whose contract with the Company is scheduled to renew in January 2004, has verbally advised the Company that it is evaluating whether to manage its members’ behavioral healthcare benefits “in house.”

(4)		The Company has contracts with one HMO to provide behavioral healthcare services to contracted commercial, Medicaid, and Children’s Health Insurance Program members in Texas. This business accounted for approximately 7.5%, or $2.4 million, 7.3%, or $2.0 million, and 3.7%, or $0.7 million, of the Company’s operating revenues during the fiscal years ended May 31, 2003, 2002 and 2001, respectively. This HMO has been a customer of the Company since November 1998. The original contract term was for one year and the contract provides for automatic one-year renewal terms. During Fiscal 2003, this HMO customer added Medicaid members that had been covered by another of the Company’s HMO customers that had been placed under conservatorship by the State of Texas. The combined contracts of both HMO customers, including the business transferred to the Company’s current Texas client during Fiscal 2003, represented approximately 11.9%, or $3.9 million, 12.2%, or $3.4 million, and 9.1%, or $1.7 million, of the Company’s operating revenues during the fiscal years ended May 31, 2003, 2002 and 2001, respectively.


Convertible debentures			9,044
Outstanding stock options			1,109,224
Possible future issuance under stock option plans			444,235

Total			1,562,503


	Shares			Weighted Average Exercise Price

Outstanding as of May 31, 2000		884,675		$	1.19
Granted		181,000			0.29
Forfeited		(177,150	)		2.05

Outstanding as of May 31, 2001		888,525		$	0.84
Granted		38,000			0.45
Exercised		(11,250	)		0.27
Forfeited		(12,100	)		0.66

Outstanding as of May 31, 2002		903,175		$	0.83
Granted		247,999			1.03
Exercised		(38,000	)		0.48
Forfeited		(3,950	)		2.40

Outstanding as of May 31, 2003		1,109,224		$	0.88


		Weighted-		Weighted-
	Exercise	Average		Average				Weighted-Average
Options	Price	Exercise		Remaining				Exercise Price of
Outstanding	Range	Price		Contractual Life		Options Exercisable		Exercisable Options

334,500	$0.25 – $0.39	$	0.27		7.13		334,500	$	0.27
546,333	$0.50 – $0.61	$	0.55		7.10		478,750	$	0.55
127,666	$1.00 – $1.95	$	1.51		9.58		10,833	$	1.50
100,725	$3.5625 – $4.00	$	3.93		5.53		100,725	$	3.93

1,109,224		$	0.88		7.25		924,808	$	0.83


Fiscal Year	Operating Leases

	(Amounts in thousands)
2004	$	514
2005		354
2006		346
2007		45

Total minimum lease payments	$	1,259

(1)		Contracts with two existing clients require the Company to maintain performance bonds throughout the contract terms. At May 31, 2003, the Company maintained performance bonds of $1,200,000 and $600,000 in compliance with these requirements.

(2)		The Company would remain liable to perform the services covered under subcapitation agreements if the parties with which the Company subcapitates were unable to fulfill their responsibilities under such agreements.

(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 recently determined it would need to make a significant investment in its current information system or in a new information system that would better meet the future needs of the Company. As a result, the Company has entered into a Letter of Intent with Qualifacts Systems, Inc. (“Qualifacts) to design a new, customized management information system that will enable the Company to meet HIPAA requirements. The Company expects to incur approximately $0.4 million of costs to customize the Qualifacts system and activate the licenses needed for Qualifacts and other, related third-party software.

(4)		On February 19, 1999, the California Superior Court denied the Company’s Petition for Writ of Mandate of an adverse administrative appeal decision regarding application of the Maximum Inpatient Reimbursement Limitation to Medi-Cal reimbursement paid to Brea Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. The Company owned

		this facility until its disposal in fiscal year 1991. The subject matter of the Superior Court action involved the refusal of the administrative law judge to order further reductions in the liability for costs associated with treating high cost, long stay Medi-Cal patients, which are commonly referred to as “outliers.”

		In July 2002, the Company entered into a Repayment Agreement with the Department to resolve this liability, recorded at $950,000 at May 31, 2002, at a substantially reduced amount. The terms of the Repayment Agreement required the Company to either 1) pay one lump sum of $450,000 to the Department on or before September 1, 2002 or 2) beginning September 1, 2002, the Company would be required to make three monthly installment payments of $160,000 each, with the last payment being due on or before November 1, 2002, for a total of $480,000 as full and complete satisfaction of the outstanding liability. As of November 30, 2002, after making three installment payments to the Department of $160,000 each, the Company had fully satisfied its obligations under the terms of the settlement agreement. As a result, the Company recorded a non-operating gain of $470,000 on settlement of the liability during the quarter ended November 30, 2002.


FISCAL 2003	Quarter Ended
													Fiscal Year
	8/31/02			11/30/02			2/28/03			5/31/03			Total

	(Amounts in thousands, except per share data)
Operating revenues	$	8,307		$	8,631		$	8,061		$	7,268		$	32,267

Gross profit		954			871			834			407			3,066

General and administrative expenses		888			952			771			848			3,459
Provision for (recovery of) doubtful accounts		(8	)		(6	)		19			15			20
Depreciation and amortization		68			63			37			27			195
Net gain on IRS settlement		—			—			(7,717	)		—			(7,717	)
Gain on settlement of other liability		—			(470	)		—			—			(470	)
Other expense		39			25			18			39			121

Net income (loss)	$	(33	)	$	307	(a)	$	7,706	(b)(c)	$	(522	)(d)	$	7,458

Earnings (loss) per share — basic	$	(0.01	)	$	0.08		$	1.97		$	(0.13	)	$	1.91

Earnings (loss) per share — diluted	$	(0.01	)	$	0.07		$	1.71		$	(0.13	)	$	1.72

Weighted Average Common Shares Outstanding — basic		3,879			3,898			3,908			3,929			3,905

Weighted Average Common Shares Outstanding — diluted		3,879			4,254			4,509			3,929			4,343

	(a)		Includes a $470,000 gain on settlement of the Medi-Cal liability (see Note 16 – “Commitments and Contingencies”).

	(b)		Includes the $7.7 million gain in settlement of the IRS matter (see Note 13 – “Income Taxes”).

	(c)		Includes $88,000 of operating revenue related to a favorable cost report settlement that was completed during the fiscal year ended May 31, 2003 pertaining to the Company’s hospital business segment that was discontinued in Fiscal 1999.

	(d)		Includes $75,000 of operating revenue related to the elimination of the Company’s reserve for cost report settlements (see (c) above).

	(a)		Includes a $55,000 cumulative effect of change in accounting principle (see Note 10 – “Goodwill”).

	(b)		Includes a $66,000 bad debt recovery specific to one contract that terminated in 1999


Name	Age		Position

Mary Jane Johnson		53	President⁽¹⁾⁽²⁾, Chief Executive Officer⁽¹⁾⁽²⁾, and Director⁽¹⁾⁽²⁾
Robert J. Landis		44	Chairman of the Board of Directors(1)(2), Chief Financial Officer⁽¹⁾⁽²⁾, and Treasurer⁽¹⁾⁽²⁾
Thomas Clay		55	Chief Development Officer⁽²⁾
Paul R. McCarthy		46	Chief Operating Officer⁽²⁾
Cathy J. Welch		43	Secretary⁽¹⁾⁽²⁾, Vice President of Finance/Controller⁽¹⁾⁽²⁾
Eugene L. Froelich		61	Director⁽³⁾
Howard A. Savin		57	Director⁽³⁾

⁽¹⁾		Comprehensive Care Corporation.

⁽²⁾		Comprehensive Behavioral Care, Inc. (Principal subsidiary of the Company).

⁽³⁾		Mr. Froelich and Dr. Savin are each independent directors, and Mr. Froelich is the Audit Committee Financial Expert as that term is defined under General Rules and Regulations under the Securities Exchange Act of 1934, as amended.


			Annual Compensation								Long-term Compensation

													Securities		Long-term
Fiscal								Other Annual			Restricted Stock		Underlying		Incentive		All Other
Year	Name and Position		Salary ($)		Bonus ($)			Compensation ($)			Award(s) ($)		Options/SARS (#)		Payouts ($)		Compensation ($)

2003	Mary Jane Johnson	President^(1,2), Chief		175,000		—			6,500	⁽⁷⁾		—		50,000		—		445	⁽⁸⁾
2002	Mary Jane Johnson	Executive Officer^(1,2), and		175,000		110,200	⁽⁴⁾		6,500	⁽⁷⁾		—		—		—		937	⁽⁸⁾
2001	Mary Jane Johnson	Director		175,000		50,000	⁽³⁾		11,517	⁽⁶⁾		—		50,000		—		1,314	⁽⁸⁾
2003	Robert Landis	Chairman of the Board of		172,981		15,250	⁽³⁾		5,700	⁽¹⁰⁾		—		50,000		—		908	⁽⁸⁾
2002	Robert Landis	Directors^(1,2), Chief		175,000		59,945	⁽⁵⁾		6,500	⁽¹⁰⁾		—		—		—		888	⁽⁸⁾
2001	Robert Landis	Financial Officer^(1,2),		175,000		50,000	⁽³⁾		3,000	⁽¹⁰⁾		—		50,000		—		741	⁽⁸⁾
		and Treasurer^(1,2)
2003	Thomas Clay	Chief Development		117,692		—			1,800	⁽¹¹⁾		—		20,000		—		993	⁽⁸⁾
2002	Thomas Clay	Officer⁽²⁾		111,000		2,550	⁽⁹⁾		19,386	⁽¹¹⁾		—		10,000		—		611	⁽⁸⁾
2001	Thomas Clay			97,269		—			8,485	⁽¹¹⁾		—		—		—		437	⁽⁸⁾
2003	Paul R. McCarthy	Chief Operating Officer⁽²⁾		118,154		20,001	⁽⁹⁾		—			—		20,000		—		1,197	⁽⁸⁾
2002	Paul R. McCarthy			—		—			—			—		—		—		—
2001	Paul R. McCarthy			—		—			—			—		—		—		—