<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ---------------------
Commission file number 1-7008
-------------------------------------------------------
--------------------------------------------------------------------------
COMMUNITY PSYCHIATRIC CENTERS
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 94-1599386
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
5110 West Sahara Avenue, Las Vegas, Nevada 89102
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (702) 257-3600
-------------------------
6600 W. Charleston Boulevard, Suite 118, Las Vegas, Nevada 89102
- -----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 44,402,000 as of June 30,
1996.
Total number of pages: 15
Exhibit Index at page: 14
Page 1 of 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31 May 31
1996 1995 1996 1995
------------------------------------------
(000s omitted except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net operating revenues $260,172 $255,479 $136,763 $135,938
Investment income and other 1,240 1,552 754 723
-------- -------- -------- --------
261,412 257,031 137,517 136,661
COSTS AND EXPENSES:
Operating expense 201,931 187,118 104,538 98,936
General and administrative
expense 16,631 18,586 8,696 9,898
Bad Debt expense 10,157 16,216 5,454 8,532
Depreciation and amortization 11,776 11,058 6,133 6,045
Interest expense 3,228 2,023 1,855 943
Restructuring charge (credit)-
Note B 1,643 (2,490) 800 (2,490)
-------- -------- -------- --------
245,366 232,511 127,476 121,864
INCOME BEFORE TAXES 16,046 24,520 10,041 14,797
Income taxes 6,097 9,412 3,815 5,619
-------- -------- -------- --------
NET INCOME $ 9,949 $ 15,108 $ 6,226 $ 9,178
======== ======== ======== ========
NET INCOME PER SHARE $ 0.23 $ 0.35 $ 0.14 $ 0.21
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES 44,051 43,614 44,396 43,632
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE .00 .01 .00 .01
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 2 of 15
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31 November 30
1996 1995
(Unaudited) (Audited)
----------------------------
(000s omitted)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 16,783 $ 17,263
Short-term investments - 5,601
Accounts receivable, less allowances
for doubtful accounts
1996 - $31,508/1995 - $24,682 116,411 113,686
Receivable from third parties under
reimbursement contracts - 4,550
Prepaid expenses and other current assets 23,682 14,756
Assets held for sale 24,808 15,512
Refundable and deferred income taxes 22,679 21,979
-------- --------
TOTAL CURRENT ASSETS 204,363 193,347
PROPERTY, BUILDINGS & EQUIPMENT-at
cost less allowances for depreciation 346,046 354,192
Deferred income taxes 18,919 21,334
Other assets 27,547 26,862
Excess of investments in subsidiaries
over net assets acquired 8,741 8,890
-------- --------
$605,616 $604,625
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 44,123 $ 53,143
Income taxes payable 12,346 4,425
Payable to third parties under
reimbursement contracts 4,754 -
Accrued restructuring charges 537 3,693
Current maturities on long-term debt 63,843 18,764
-------- --------
TOTAL CURRENT LIABILITIES 125,603 80,025
LONG-TERM DEBT, EXCLUSIVE OF CURRENT
MATURITIES 27,885 84,883
DEFERRED COMPENSATION 2,006 2,019
DEFERRED INCOME TAXES 19,468 17,659
Commitments and contingencies
Obligation to be settled in common stock 14,970 21,250
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00, authorized
2,000 shares; none issued -- --
Common Stock, par value $1.00, authorized
100,000 shares; issued 1996 - 46,856
shares 1995 - 46,856 shares 46,856 46,856
Additional paid-in capital 59,507 62,096
Retained earnings 337,010 327,062
Foreign currency translation adjustment (2,506) (2,943)
Less treasury stock-at cost 1996 - 2,461
shares and 1995 - 3,166 shares (25,183) (34,282)
-------- --------
415,684 398,789
-------- --------
$605,616 $604,625
======== ========
</TABLE>
NOTE: The balance sheet at November 30, 1995 has been derived from the audited
financial statement at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed financial statements.
Page 3 of 15
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
May 31
1996 (Unaudited) 1995
---------------------
(000s omitted)
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 9,949 $ 15,108
Items not resulting in cash flows:
Depreciation and amortization 11,776 11,058
Provision for uncollectible accounts 10,157 16,216
Restructuring charge (credit) 1,643 (2,490)
Gain on the sale of property (103) --
Other 1,260 2,273
Changes in assets and liabilities:
Short-term investments 5,601 4,629
Accounts receivable (12,882) (37,743)
Receivable from/payable to third parties
under reimbursement contracts 9,304 (1,654)
Prepaid expenses and other current assets (4,901) (884)
Accounts payable and accrued expense (9,020) (2,742)
Accrued restructuring charges (5,199) --
Income taxes 11,445 2,714
-------- --------
Net cash provided from operations 29,030 6,485
FINANCING:
Proceeds from revolving credit facilities -- 15,851
Dividends paid -- (436)
Net proceeds from exercise of stock options 150 590
Payments on long-term debt (11,939) (16,090)
-------- --------
Net cash used for financing activities (11,789) (85)
INVESTING:
Payments received on notes 1,145 370
Loans made to officers (750) (300)
Purchase of property, buildings and equipment (18,917) (18,384)
Investment in pre-opening costs (831) (1,654)
Proceeds from sale of property, buildings
and equipment 1,632 4,256
Payment for business acquisitions:
Property, buildings and equipment -- (6,531)
Excess of purchase price over fair value of
assets acquired -- (221)
-------- --------
Net cash used for investing activities (17,721) (22,464)
-------- --------
Net decrease in cash and
cash equivalents (480) (16,064)
Beginning cash and cash equivalents 17,263 37,263
-------- --------
Ending cash and cash equivalents $ 16,783 $ 21,199
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 15
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MAY 31, 1996
NOTE A: Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, refer to
the consolidated financial statements and footnotes thereto included in
the registrant's annual report on Form 10-K for the year ended November
30, 1995.
NOTE B: Restructuring Charge
--------------------
Effective May 31, 1995, the Company recorded a restructuring credit
totalling $2.5 million ($1.5 million after tax) from the resolution of
previously restructured psychiatric assets. The restructuring credit
resulted from divesting two restructured properties at higher prices
than the 1993 writedown of the facilities anticipated and the Company's
success in collecting accounts receivable balances that were reserved
for as part of the February 28, 1994 restructuring charge.
Effective February 29, 1996, the Company recorded a restructuring
charge totalling $.8 million ($.5 million after tax) determined in
accordance with the provisions of the January 1995 Financial Accounting
Standards Board Emerging Issues Task Force Consensus No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring)", ("EITF 94-3"), in connection with the decision to
close one psychiatric hospital in January of 1996. EITF 94-3 requires
the accrual of certain employee termination costs and costs resulting
from a plan to exit an activity that are not associated with or that do
not benefit activities that will continue and prohibits accrual of
expected future operating losses of the activity exited. The charge
comprised $.6 million for employee termination benefits related to
hospital operations and $.2 million for non-cancelable operating leases
and other exit costs. Approximately 80 hospital employees were
terminated. Net operating revenue and net operating income or (loss)
for the closed hospital totalled $1.1 million and ($.2 million) for the
first two months of fiscal year 1996, $6.2 million and ($1 million) for
fiscal year 1995, and $8.5 million and ($34,000) for fiscal year 1994.
The fixed assets of this hospital were written down to their estimated
fair market value in November 1995 in accordance with the provisions of
Financial Accounting Standard No. 121 ("FAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". This hospital is currently being held for sale.
Effective May 31, 1996, the Company recorded a restructuring charge
totalling $1.2 million ($.8 million after tax) determined in accordance
with the provisions of EITF 94-3 as described above, in connection with
the decision to close two psychiatric hospitals in the second quarter
of 1996. The charge comprised $.6 million for employee termination
benefits related to hospital operations and $.6 million for non-
cancelable contracts and other exit costs. Approximately 150 hospital
employees were terminated. Net operating revenue and net operating
income or (loss) for the closed hospitals totalled $3.3 million and
($50,000) in fiscal year 1996 through March 1996 (the hospitals were
closed in April 1996), $11.5 million and
Page 5 of 15
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MAY 31, 1996
$56,000 for fiscal year 1995, and $13.7 million and $1.1 million for
fiscal year 1994. One of these hospitals was sold for $4.4 million in
April 1996, with consideration consisting of cash of $.4 million
and a note due in May 1997 for $4.0 million. The second hospital was
written down to its estimated fair market value in November 1995 in
accordance with the provisions of FAS 121. This hospital is currently
being held for sale.
Effective May 31, 1996, the Company recorded a restructuring credit
totalling $.4 million ($.3 million after tax) due to the divestiture of
the remaining property from the 1994 restructuring at a higher price
than the original writedown of this facility anticipated.
Management continually reviews all facilities to evaluate potential
closures, divestitures or conversions. Management may elect to close
additional psychiatric facilities in the future which could result in
additional charges to income for the costs necessary to exit the
hospital operations.
NOTE C: Recent Developments
-------------------
Sale of U.K. Operations. On June 21, 1996, CPC completed the sale
of its Priory Hospitals Group ("PHG"), the company's United Kingdom
operations to Foray 911 Limited ("Foray"), a new corporation formed by
Mercury Development Capital, a division of Mercury Asset Management plc
("Mercury"), and other investors for the purpose of acquiring PHG.
After the payments for debt, taxes, fees, severance costs, and other
expenses, the net proceeds are estimated to be approximately $97
million, which includes a $4.6 million 15% subordinated note due 2009.
The total purchase price was approximately $135 million. PHG operates
15 freestanding acute psychiatric hospitals and chemical dependency
facilities comprising 698 beds, including one 42-bed hospital that was
50% owned by CPC. In addition, PHG manages a 13-bed psychiatric unit, a
10-bed secured residential clinic and two 13-station kidney dialysis
units for the British government's National Health Service.
Upon receipt of the proceeds from the sale, the Company repaid $50
million of outstanding bank debt which bore interest at an effective
rate of approximately 8%. Additional uses of the proceeds from the sale
of PHG being contemplated by CPC include the expansion of THC
operations, repayment of additional bank borrowings, general corporate
purposes and other measures which management believes would facilitate
the Company's growth, strengthen its balance sheet and enhance
stockholder value.
NOTE D: Commitments and Contingencies
-----------------------------
On September 28, 1995, CPC reached an agreement to settle certain
consolidated securities class action lawsuits and a related stockholder
derivative action. Although the management of CPC believes that the
claims asserted in such suits lacked merit, CPC believed that it was
prudent to settle these cases due to the continuing substantial costs
of defense, the distraction of management's attention and the risks
associated with litigation.
Page 6 of 15
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
MAY 31, 1996
During the third and fourth quarters of 1995, CPC recorded charges
totalling $46.0 million ($28.9 million after tax) relating to
settlement of the lawsuits and associated legal fees and expenses.
The suits, filed in late 1991, alleged violations of the federal
securities laws by CPC and certain individuals between September 1990
and November 1991 arising from the activities of the U.S. psychiatric
division. The principal terms of the agreement called for a settlement
amount of $45.2 million consisting of a cash settlement fund of $21.25
million and shares of CPC's common stock with value of $21.25 million.
The cash amount, plus interest, was paid in November 1995. The shares
to be issued to the plaintiff class were previously repurchased by the
Company pursuant to a stock buyback program during late 1991 through
early 1993. On March 4, 1996 the Company issued 689,189 of common
shares to the plaintiffs' attorney which represents a portion of the
settlement to be made in common stock. The remaining portion of the
settlement in common stock is estimated to be approximately 1,650,000
shares which are expected to be issued in mid July 1996. Upon issuance,
these shares will have a dilutive effect on CPC's earnings per share.
The class actions and the derivative action have received final court
approval. CPC will be bound by the settlement agreement with respect to
certain remedial measures including the adoption and enforcement of an
insider trading policy, a bi-annual internal audit of accounts
receivable and bad debt reserves and adoption of a policy to receive
and investigate complaints, inquiries and suggestions from employees.
In August 1995, the Government filed a whistleblower suit against
CPC Oklahoma, Inc. under the Federal False Claims Act. CPC Oklahoma,
Inc. operates Southwind Hospital, a psychiatric hospital located in
Oklahoma City, Oklahoma. Subsequently, the Government seized certain of
Southwind's records pursuant to a search warrant. In January 1996 the
Government filed an amended complaint alleging that Southwind Hospital
submitted false claims to various federally-funded health care
programs. On May 31, 1996, the court dismissed the Government's first
amended complaint and gave the Government until July 19, 1996 to file a
second amended complaint. This matter is in the early stages of
litigation and management is presently unable to evaluate the potential
impact of the suit on CPC.
NOTE E: Certain amounts have been reclassified in the 1995 balance sheet to
conform with 1996 presentations.
Page 7 of 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
Results of Operations
SIX MONTHS ENDED MAY 31, 1996
Net operating revenues for the six months ended May 31, 1996 increased
approximately 1.8% to $260.2 million from $255.5 million for the first six
months of the prior year. THC net operating revenue increased 31.9% from $90.0
million in the first six months of 1995 to $118.7 million in the first six
months of 1996. THC's same-store admissions and patient days increased 48.4%
and 27.7%, respectively.
Net operating revenues from the United States psychiatric hospitals decreased
approximately $26.6 million from $134.9 million to $108.3 million primarily due
to the closure of six U.S. psychiatric hospitals in November 1995, one hospital
in January 1996, and two hospitals in the second quarter of 1996. The decrease
in net operating revenues from the closed hospitals totalled $22.1 million. The
remaining portion of the decrease in net operating revenues related to a
decrease in same-store admissions and adjusted patient days of 2.3% and 4.7%,
respectively.
Net operating revenues from the Company's United Kingdom operations increased
by 8.2% or approximately $2.5 million as a result of an increase in patient days
of 9.2%.
Operating expenses as a percentage of net operating revenues were 77.6% for
the six months ended May 31, 1996 compared to 73.2% for the comparable prior
year period. The increase related to several factors including an increase in
personnel costs at the U.S. psychiatric division as the Company is making an
effort to (i) upgrade the quality of its operating and financial personnel in
these hospitals and (ii) to expand the psychiatric and behavioral health
services offered. The increase in operating expenses as a percentage of net
operating revenues was also impacted by the decrease in patient days for the
U.S. psychiatric division over the comparable period in the prior year. In
addition to the above, the Company incurred approximately $2.4 million of post-
closing operating expenses and holding costs related to the nine U.S.
psychiatric hospitals that have been closed between November 1995 and April
1996. These costs were prohibited from being accrued for in any of the related
restructuring charges as they did not qualify as exit costs as defined by EITF
94-3 (see Note B to the condensed consolidated financial statements related to
EITF 94-3 and a description of the restructuring charges for the three U.S.
psychiatric division hospitals that were closed during the first six months of
1996).
General and administrative expense decreased $2.0 million and as a percentage
of net operating revenue to 6.4% from 7.3% in the prior year comparable period.
Beginning in November of 1995, the Company closed three regional offices,
consolidated certain positions at the Corporate office, and continued with
further reductions in Corporate overhead personnel in January of 1996.
Bad debt expense decreased from 6.3% of net operating revenues in the first
six months of 1995 to 3.9% in the first six months of 1996. Bad debt expense was
higher in the first six months of 1995 due to the fact that the Company
experienced a slow down in billing and collections as it converted several U.S.
psychiatric hospitals to a centralized billing office as well as a new computer
system. Also included in the first quarter of 1995 was a charge of approximately
$.7 million related to temporary interruptions in Medicare reimbursement to the
Company and other partial hospitalization providers in California.
Depreciation and amortization increased as the Company added one THC
satellite facility in September 1995 and a new computer system in the second
quarter of 1995.
Interest expense increased $1.2 million over the prior comparable period due
to increased borrowings from the Company's credit facilities. Interest expense
is expected to decrease in future periods as the Company repaid $50 million of
outstanding bank debt in June of 1996 which bore interest at an effective
interest rate of approximately 8%.
Following is a summary of net income by business segment, excluding
restructuring charges/credits, for the six months ended May 31, 1996 and May 31,
1995:
(000s)
1996 1995
------- -------
U.S. psychiatric division* $ 1,829 $ 6,080
U.K. psychiatric division 4,222 5,179
Long-term critical care division 4,917 2,355
------- -------
Net income $10,968 $13,614
======= =======
* Excluding the net income/loss from the nine hospitals that have closed since
November 1995, net income for the U.S. psychiatric division was $4.6 million and
$5.9 million for the six months ended May 31, 1996 and May 31, 1995,
respectively.
Page 8 of 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
Results of Operations (continued)
THREE MONTHS ENDED MAY 31, 1996
Net operating revenues for the quarter ended May 31, 1996 increased
approximately 1% to $136.8 million from $135.9 million for the second quarter of
the prior year. THC net operating revenue increased 28.1% from $49.1 million in
the second quarter of 1995 to $62.9 million in the second quarter of 1996.
THC's same-store admissions and patient days increased 63.3% and 27.6%,
respectively.
Net operating revenues from the United States psychiatric hospitals
decreased approximately $14.7 million from $70.8 million to $56.1 million
primarily due to the closure of six U.S. psychiatric hospitals in November 1995,
one hospital in January 1996, and two hospitals in the second quarter of 1996.
The decrease in net operating revenues from the closed hospitals totalled $13.7
million. The remaining portion of the decrease in net operating revenues related
to a decrease in same-store admissions and adjusted patient days of 1.2% and
4.7%, respectively.
Net operating revenues from the Company's United Kingdom operations increased
by 11.0% or approximately $1.8 million as a result of a 11.4% increase in
patient days.
Operating expenses as a percentage of net operating revenues were 76.4% for
the quarter ended May 31, 1996 compared to 72.8% for the comparable prior year
quarter. The increase related to several factors including an increase in
personnel costs at the U.S. psychiatric division as the Company is making an
effort to (i) upgrade the quality of its operating and financial personnel in
these hospitals and (ii) to expand the psychiatric and behavioral health
services offered. The increase in operating expenses as a percentage of net
operating revenues was also impacted by the decrease in patient days over the
comparable period in the prior year for the U.S. psychiatric division. In
addition to the above, the Company incurred approximately $1.6 million of post-
closing operating expenses and holding costs related to the nine U.S.
psychiatric hospitals that have been closed between November 1995 and April
1996. These costs were prohibited from being accrued for in any of the related
restructuring charges as they did not qualify as exit costs as defined by EITF
94-3 (see Note B to the condensed consolidated financial statements related to
EITF 94-3 and a description of the restructuring charges for the two U.S.
psychiatric division hospitals that were closed in the second quarter of 1996).
General and administrative expense decreased $1.2 million and as a percentage
of net operating revenue to 6.4% from 7.3% in the prior year comparable period.
Beginning in November of 1995, the Company closed three regional offices,
consolidated certain positions at the Corporate office, and continued with
further reductions in Corporate overhead personnel in January of 1996.
Bad debt expense decreased from 6.3% of net operating revenues in the second
quarter of 1995 to 4.0% in the second quarter of 1996. Bad debt expense was
higher in the second quarter of 1995 due to the fact that the Company
experienced a slow down in billing and collections as it converted several U.S.
psychiatric hospitals to a centralized billing office as well as a new computer
system.
Depreciation and amortization increased as the Company added one THC
satellite facility in September of 1995.
Interest expense increased $.9 million over the prior comparable period due
to increased borrowings from the Company's credit facilities.
Following is a summary of net income by business segment, excluding
restructuring charges/credits, for the three months ended May 31, 1996 and May
31, 1995:
(000s)
1996 1995
------ ------
U.S. psychiatric division* $1,233 $3,557
U.K. psychiatric division 2,858 2,973
Long-term critical care division 2,631 1,154
------ ------
Net income $6,722 $7,684
====== ======
* Excluding the net income/loss from the nine hospitals that have closed since
November 1995, net income for the U.S. psychiatric division was $2.8 million and
$2.9 million for the quarter ended May 31, 1996 and May 31, 1995, respectively.
Page 9 of 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES AT MAY 31, 1996
Cash flows provided from operations were $29.0 million and $6.5 million for
the six months ended May 31, 1996 and May 31, 1995, respectively. Net accounts
receivable balances increased $2.7 million during the six months ended May 31,
1996 compared to $21.5 million during the comparable period of the prior year.
The decline in the increase in accounts receivable combined with an $11.0
million increase in cash flows from third party payors were the principal causes
of cash flows from operations improving by $22.5 million over the prior year.
Days revenue in accounts receivable were 78 and 77 at May 31, 1996 and May 31,
1995, respectively.
Cash used for financing activities related primarily to the repayment of
bank credit facilities in the amount of $6.7 million and the repayment of
subordinated debentures totalling $5.2 million.
Purchases of fixed assets totalled $18.9 million during the first six months
of 1996. This amount included $5.2 million for a new office that the Company has
built on the campus of THC Las Vegas Hospital in Las Vegas, Nevada. This
building and its parking structure provide additional administrative offices,
dining facilities, and parking for the hospital and is now serving as the new
location for the corporate office. Capital expenditures for the remainder of
fiscal year 1996 are estimated to be $14 million for THC and $8 million for the
U.S. psychiatric division.
The Company received cash proceeds of $1.6 million and notes receivable
totaling $5.3 million from the sale of two psychiatric hospitals in the second
quarter of 1996.
After considering the receipt of approximately $97 million of net cash
proceeds from the sale of the U.K. psychiatric division and the repayment of $50
million of current long-term debt in June 1996, the Company believes that the
net effect of these cash flows in addition to its current cash and cash
equivalent balances and its operating cash flow will be sufficient to fund the
Company's operations and capital expenditures through the end of fiscal 1996.
Page 10 of 15
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
MAY 31, 1996
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
On September 28, 1995, CPC reached an agreement to settle certain
consolidated securities class action lawsuits and a related stockholder
derivative action. Although the management of CPC believes that the claims
asserted in such suits lacked merit, CPC believed that it was prudent to settle
these cases due to the continuing substantial costs of defense, the distraction
of management's attention and the risks associated with litigation. During the
third and fourth quarters of 1995, CPC recorded charges totalling $46.0 million
($28.9 million after tax) relating to settlement of the lawsuits and associated
legal fees and expenses. The suits, filed in late 1991, alleged violations of
the federal securities laws by CPC and certain individuals between September
1990 and November 1991 arising from the activities of the U.S. psychiatric
division. The principal terms of the agreement called for a settlement amount of
$45.2 million consisting of a cash settlement fund of $21.25 million and shares
of CPC's common stock with value of $21.25 million. The cash amount, plus
interest, was paid in November 1995. The shares to be issued to the plaintiff
class were previously repurchased by the Company pursuant to a stock buyback
program during late 1991 through early 1993. On March 4, 1996 the Company issued
689,189 of common shares to the plaintiffs' attorney which represents a portion
of the settlement to be made in common stock. The remaining portion of the
settlement in common stock is estimated to be approximately 1,650,000 shares
which are expected to be issued in mid July 1996. Upon issuance, these shares
will have a dilutive effect on CPC's earnings per share. The class actions and
the derivative action have received final court approval. CPC will be bound by
the settlement agreement with respect to certain remedial measures including the
adoption and enforcement of an insider trading policy, a bi-annual internal
audit of accounts receivable and bad debt reserves and adoption of a policy to
receive and investigate complaints, inquiries and suggestions from employees.
In August 1995, the Government filed a whistleblower suit against CPC
Oklahoma, Inc. under the Federal False Claims Act. CPC Oklahoma, Inc. operates
Southwind Hospital, a psychiatric hospital located in Oklahoma City, Oklahoma.
Subsequently, the Government seized certain of Southwind's records pursuant to a
search warrant. In January 1996 the Government filed an amended complaint
alleging that Southwind Hospital submitted false claims to various federally-
funded health care programs. On May 31, 1996, the court dismissed the
Government's first amended complaint and gave the Government until July 19, 1996
to file a second amended complaint. This matter is in the early stages of
litigation and management is presently unable to evaluate the potential impact
of the suit on CPC.
ITEM 2. Changes in Securities
---------------------
On June 21, 1996 the Board of Directors of Community Psychiatric Centers
declared a dividend of one Preferred Stock Purchase Right on each outstanding
share of CPC common stock, $1.00 par value per share, payable to stockholders of
record on July 16, 1996. Each Right will entitle stockholders to buy one one-
hundredth of a share of newly created Series B Junior Participating Preferred
Stock of the company at an exercise price of $45. The Rights will be
exercisable if a person or group acquires 15% or more of the common stock or
announces a tender offer for 15% or more of the common stock. The CPC Board
will be entitled to redeem the Rights at $0.01 per Right at any time before a
person has acquired 15% or more of the outstanding common stock.
Page 11 of 15
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
MAY 31, 1996
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities (continued)
---------------------
If a person acquires 15% or more of CPC's outstanding common stock, each Right
will entitle its holder to purchase, at the Right's then-current exercise price,
a number of common shares of CPC having a market value at that time of twice the
Right's exercise price. Rights held by the 15% holder will become void and will
not be exercisable to purchase shares at the bargain purchase price. If CPC is
acquired in a merger or other business combination transaction which has not
been approved by the Board of Directors, each Right will entitle its holder to
purchase, at the Right's then-current exercise price, a number of the acquiring
company's common shares having a market value at that time of twice the Right's
exercise price.
The dividend distribution will be payable to stockholders of record on July 16,
1996 and will expire in 10 years. The Rights distribution is not taxable to
stockholders.
Page 12 of 15
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
MAY 31, 1996
PART II. OTHER INFORMATION (continued)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
Exhibit 11: Computation of Earnings per Share
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
Report dated April 17, 1996 reporting an exclusivity agreement with Mercury
Development Capital pursuant to which CPC agreed not to negotiate with any other
party prior to May 16, 1996 regarding the potential sale of the Company's United
Kingdom Psychiatric Division (PHG).
Report dated July 5 1996 reporting the completion of the sale of PHG to
Mercury Development Capital, related unaudited proforma financial information,
and the adoption of a Stockholders Rights Plan.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY PSYCHIATRIC CENTERS
(Registrant)
Dated: July 15, 1996 /s/ WENDY SIMPSON
------------------------------
Wendy Simpson
Chief Financial Officer
Page 13 of 15
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
11 Computation of Earnings Per Share
27 Financial Data Schedule
Page 14 of 15
<PAGE>
EXHIBIT 11
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31 May 31
1996 1995 1996 1995
------------------- -------------------
(000s, except per share data) (000s, except per share data)
<S> <C> <C> <C> <C>
Weighted average
common shares* 44,051 43,614 44,396 43,632
======== ======== ========= ==========
Net Earnings $ 9,949 $ 15,108 $ 6,226 $ 9,178
======== ======== ========= ==========
Earnings per share $ 0.23 $ 0.35 $ 0.14 $ 0.21
======== ======== ========= ==========
</TABLE>
* Dilutive common stock equivalents are less than 3% of weighted average common
shares outstanding.
Page 15 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 16,783
<SECURITIES> 0
<RECEIVABLES> 116,411
<ALLOWANCES> 31,508
<INVENTORY> 0
<CURRENT-ASSETS> 204,363
<PP&E> 346,046
<DEPRECIATION> 96,206
<TOTAL-ASSETS> 605,616
<CURRENT-LIABILITIES> 125,603
<BONDS> 27,885
0
0
<COMMON> 46,856
<OTHER-SE> 368,828
<TOTAL-LIABILITY-AND-EQUITY> 605,616
<SALES> 260,172
<TOTAL-REVENUES> 261,412
<CGS> 201,931
<TOTAL-COSTS> 201,931
<OTHER-EXPENSES> 30,050<F1>
<LOSS-PROVISION> 10,157
<INTEREST-EXPENSE> 3,228
<INCOME-PRETAX> 16,046
<INCOME-TAX> 6,097
<INCOME-CONTINUING> 9,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,949
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<FN>
<F1>Includes restructuring charges totalling $2.0 million less a restructuring
credit of $400,000.
</FN>
</TABLE>
