<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 August 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
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- --------------------------------------------------------------------------------
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.E. 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
---------------------
- --------------------------------------------------------------------------------
(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: 43,949,000 as of September 30,
1996.
Total number of pages: 16
Exhibit Index at page: 13
Page 1 of 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
August 31 August 31
1996 1995 1996 1995
------------------------------------------
(000s omitted except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net operating revenues $373,700 $383,550 $113,528 $128,071
Gain on sale of UK Subsidiary 55,515 --- 55,515 ---
Investment income and other 2,628 2,044 1,388 492
-------- -------- -------- --------
431,843 385,594 170,431 128,563
COSTS AND EXPENSES:
Operating expense 292,766 285,047 90,835 97,929
General and administrative
expense 25,484 28,101 8,853 9,515
Bad Debt expense 13,961 23,109 3,804 6,893
Depreciation and amortization 17,182 17,380 5,406 6,322
Interest expense 3,761 3,427 533 1,404
Settlement Costs --- 45,000 --- 45,000
Restructuring charge (credit)-
Note B 2,165 (2,490) 522 ---
-------- -------- -------- --------
$355,319 $399,574 $109,953 $167,063
INCOME(LOSS)BEFORE TAXES 76,524 (13,980) 60,478 (38,500)
Income taxes(credit) 27,467 (4,756) 21,370 (14,168)
-------- -------- -------- --------
NET INCOME(LOSS) $ 49,057 $ (9,224) $ 39,108 $(24,332)
======== ======== ======== ========
NET INCOME(LOSS) PER SHARE $ 1.11 $ (0.21) $ 0.88 $ (0.56)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES 44,142 43,630 44,322 43,660
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE .00 .01 .00 .00
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 2 of 16
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31 November 30
1996 1995
(Unaudited) (Audited)
-----------------------------
(000s omitted)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 73,763 $ 17,263
Short-term investments --- 5,601
Accounts receivable, less allowances
for doubtful accounts
1996 - $29,174/1995 - $24,682 100,553 113,686
Receivable from third parties under
reimbursement contracts --- 4,550
Prepaid expenses and other current assets 20,307 14,756
Assets held for sale 24,808 15,512
Refundable and deferred income taxes 4,657 21,979
-------- --------
TOTAL CURRENT ASSETS 224,088 193,347
PROPERTY, BUILDINGS & EQUIPMENT-at
cost less allowances for depreciation 289,225 354,192
Deferred income taxes 18,956 21,334
Other assets 25,863 26,862
Excess of investments in subsidiaries
over net assets acquired 4,014 8,890
-------- --------
$562,146 $604,625
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 41,967 $ 53,143
Income taxes payable 8,549 4,425
Payable to third parties under
reimbursement contracts 6,782 ---
Accrued restructuring charges 525 3,693
Current maturities on long-term debt 8,670 18,764
-------- --------
TOTAL CURRENT LIABILITIES 66,493 80,025
LONG-TERM DEBT, EXCLUSIVE OF CURRENT
MATURITIES 17,885 84,883
DEFERRED COMPENSATION 2,001 2,019
DEFERRED INCOME TAXES 17,313 17,659
Commitments and contingencies
Obligation to be settled in common stock --- 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 56,657 62,096
Retained earnings 376,119 327,062
Foreign currency translation adjustment --- (2,943)
Less treasury stock-at cost 1996 - 2,511
shares and 1995 - 3,166 shares (21,178) (34,282)
-------- --------
458,454 398,789
-------- --------
$562,146 $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 consolidated financial statements.
Page 3 of 16
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
August 31
1996(Unaudited) 1995
--------------------
(000s omitted)
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss) $ 49,057 $ (9,224)
Items not resulting in cash flows:
Depreciation and amortization 17,182 17,380
Provision for uncollectible accounts 13,961 23,109
Settlement Costs --- 43,480
Restructuring charge (credit) 2,165 (2,490)
Gain on sale of UK Subsidiary (55,515) ---
Gain on the sale of property (103) ---
Other 686 251
Changes in assets and liabilities net of
effects from sale of UK Subsidiary:
Short-term investments 5,601 8,756
Accounts receivable (12,255) (37,854)
Receivable from/payable to third parties
under reimbursement contracts 11,332 (7,775)
Prepaid expenses and other current assets (9,758) 655
Accounts payable and accrued expense (1,662) (4,651)
Accrued restructuring charges (5,733) ---
Income taxes 32,652 (14,813)
-------- --------
Net cash provided from operations 47,610 16,824
FINANCING:
Proceeds from revolving credit facilities --- 31,648
Dividends paid --- (436)
Purchase of treasury shares (13,815) ---
Payments of deferred compensation (121) (593)
Net proceeds from exercise of stock options 150 829
Payments on long-term debt (77,111) (17,504)
-------- --------
Net cash provided from (used for) financing
activities (90,897) 13,944
INVESTING:
Payments received on notes 1,605 985
Loans made to officers (825) (1,825)
Net proceeds from sale of UK Subsidiary 125,085 ---
Purchase of property, buildings and equipment (26,473) (27,586)
Investment in pre-opening costs (1,237) (2,211)
Proceeds from sale of property, buildings
and equipment 1,632 5,289
Payment for business acquisitions:
Property, buildings and equipment --- (8,604)
Excess of purchase price over fair value of
assets acquired --- (365)
-------- --------
Net cash provided from (used for)
investing activities 99,787 (34,317)
-------- --------
Net increase (decrease) in cash and
cash equivalents 56,500 (3,549)
Beginning cash and cash equivalents 17,263 37,263
-------- --------
Ending cash and cash equivalents $ 73,763 $ 33,714
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 16
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 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 Charges (Credits)
-------------------------------
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 $56,000 for
fiscal year 1995, and $13.7 million and $1.1 million for fiscal year
1994.
Page 5 of 16
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
AUGUST 31, 1996
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.
Effective August 31, 1996, the Company recorded a restructuring
charge totalling $.5 million ($.3 million after tax) determined in
accordance with the provisions of EITF 94-3 as described above, in
connection with the decision to close one psychiatric hospital and an
outpatient clinic in the third quarter of 1996. The charge comprised $.3
million for employee termination benefits related to hospital operations
and $.2 million for non-cancelable contracts and other exit costs.
Approximately 50 hospital employees were terminated. Net operating
revenue and net operating income or (loss) for the closed facilities
totalled $2.3 million and ($.4 million) during the nine months ended
August 31, 1996, $4.2 million and $61,000 for fiscal year 1995, and $4.3
million and $.4 million for fiscal year 1994. The Company is currently
evaluating an alternative business use for the closed hospital.
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 before
any final purchase price adjustments, 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%. The Company also re-purchased 1.7 million
shares of its common stock for $13.8 million in the third quarter of
1996. 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 16
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
AUGUST 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 totaled 1,652,778 shares which were issued on August 21,
1996. Upon issuance, these shares had a dilutive effect on CPC's
earnings per share. The class actions and the derivative action have
received final court approval. CPC is 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 July 1995, the Government served 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. The suit was originally filed by a former
employee and a relative of another under the qui tam provisions of the
--- ---
Act. Several days after the service of the complaint, the Government
seized certain of Southwind's records pursuant to a search warrant. In
response to the Government's Second Amended Complaint, Southwind filed a
motion to dismiss on the grounds that the complaint failed to state a
claim. In a decision dated October 1, 1996, the Court denied the motion
to dismiss. Management is presently unable to evaluate the potential
impact of the suit or investigation on CPC.
NOTE E: Certain amounts have been reclassified in the 1995 balance sheet
to conform with 1996 presentations.
Page 7 of 16
<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
NINE MONTHS ENDED AUGUST 31, 1996
Net operating revenues for the nine months ended August 31, 1996 decreased
approximately $9.9 million from the first nine months of the prior year due to
the sale of the Company's United Kingdom Psychiatric operations on June 21,
1996.
THC net operating revenue increased 26.6% from $141.9 million in the first
nine months of 1995 to $179.7 million in the first nine months of 1996. THC's
same-store admissions and patient days increased 45.4% and 24.1%, respectively.
Net operating revenues from the United States psychiatric hospitals
decreased approximately $38.0 million from $194.9 million to $156.8 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 $33.0
million. The remaining portion of the decrease in net operating revenues
related to a decrease in same-store adjusted patient days of 4.0%.
Operating expenses as a percentage of net operating revenues were 78.3% for
the nine months ended August 31, 1996 compared to 74.3% 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 $3.5 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 four U.S.
psychiatric division hospitals that were closed during the first nine months of
1996).
General and administrative expense decreased $2.6 million and as a
percentage of net operating revenue to 6.8% 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 6.0% of net operating revenues in the first
nine months of 1995 to 3.7% in the first nine months of 1996. Bad debt expense
was higher in the first nine 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. In addition, collections were adversely impacted in the prior year as
certain State Medicaid programs converted to managed care initiatives in 1995.
Following is a summary of net income by business segment, excluding the
gain on sale of subsidiary, settlement costs (1995), and restructuring
charges/credits, for the nine months ended August 31, 1996 and August 31, 1995:
<TABLE>
<CAPTION>
(000s)
1996 1995
------- -------
<S> <C> <C>
U.S. psychiatric division* $ 2,014 $ 5,863
U.K. psychiatric division 4,454 7,103
Long-term critical care division 7,846 4,666
------- -------
Net income $14,314 $17,632
======= =======
</TABLE>
* Excluding the net income/loss from the ten hospitals that have closed since
November 1995, net income for the U.S. psychiatric division was $5.7 million and
$5.6 million for the nine months ended August 31, 1996 and August 31, 1995,
respectively.
Page 8 of 16
<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 AUGUST 31, 1996
Net operating revenues for the quarter ended August 31, 1996 decreased
approximately $14.5 million to $113.5 million from $128.1 million for the third
quarter of the prior year. Net revenues from the United Kingdom operations
decreased $12.0 million as the division was sold on June 21, 1996.
THC net operating revenue increased 17.5% from $51.9 million in the third
quarter of 1995 to $60.9 million in the third quarter of 1996. THC's same-store
admissions and patient days increased 39.5% and 17.5%, respectively.
Net operating revenues from the United States psychiatric hospitals
decreased approximately $11.5 million from $60.0 million to $48.5 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 $11.4
million. The remaining portion of the decrease in net operating revenues
related primarily to a decrease in same-store adjusted patient days of 2.4%.
Operating expenses as a percentage of net operating revenues were 80.0% for
the quarter ended August 31, 1996 compared to 76.5% 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 $1.1 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 $.7 million compared to 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 5.4% of net operating revenues in the third
quarter of 1995 to 3.4% in the third quarter of 1996. Bad debt expense was
higher in the third 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 decreased due to the sale of the Company's
United Kingdom Psychiatric operations in June of 1996.
Interest expense decreased $.9 million over the prior comparable period as
the Company repaid $50 million of outstanding bank debt in June 1996 which bore
interest at an effective interest rate of approximately 8%.
Page 9 of 16
<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 AUGUST 31, 1996
Following is a summary of net income by business segment, excluding the gain on
sale of subsidiary, settlement costs (1995), and restructuring charges/credits,
for the three months ended August 31, 1996 and August 31, 1995:
<TABLE>
<CAPTION>
(000s)
1996 1995
------ ------
<S> <C> <C>
U.S. psychiatric division* $ 185 $ (217)
U.K. psychiatric division 232 1,924
Long-term critical care division 2,929 2,311
------ ------
Net income $3,346 $4,018
====== ======
</TABLE>
* Excluding the net income/loss from the ten hospitals that have closed since
November 1995, net income for the U.S. psychiatric division was $1.2 million and
$.4 million for the quarter ended August 31, 1996 and August 31, 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES AT AUGUST 31, 1996
Cash flows provided from operations were $47.6 million and $16.8 million
for the nine months ended August 31, 1996 and August 31, 1995, respectively.
Net accounts receivable balances decreased $13.1 million during the nine months
ended August 31, 1996 compared to an increase of $14.7 million during the
comparable period of the prior year. The decrease in accounts receivable during
1996 is primarily due to the sale of the Company's United Kingdom Psychiatric
Subsidiary on June 21, 1996. Excluding the effects from the sale of the United
Kingdom Psychiatric Subsidiary, net accounts receivable balances decreased $1.7
million during the nine months ended August 31, 1996. The improvement in cash
flows from accounts receivable combined with a $19.1 million increase in cash
flows from third party payors were the principal causes of cash flows from
operations improving by $30.8 million over the prior year. Excluding fiscal year
1996 operating revenue produced by the United Kingdom Psychiatric Subsidiary
prior to the June 21, 1996 sale date, days revenue in accounts receivable were
85 at August 31, 1996 and August 31, 1995.
On August 5, 1996, the Company announced that its Board of Directors had
authorized spending up to $25 million to buy back company stock from time to
time on the open market. As of August 31, 1996 the Company had purchased 1.7
million shares for $13.8 million.
Proceeds from the sale of the Company's United Kingdom Psychiatric
Subsidiary were used for the repayment of bank credit facilities in the amount
of $65.2 million. In addition, the Company repaid $5.2 million of subordinated
debentures and $6.7 million of bank credit facilities during the first two
quarters of 1996.
The Company sold its United Kingdom Subsidiary on June 21, 1996 which
produced $125.1 million in net cash proceeds.
Purchases of fixed assets totalled $26.5 million during the first nine
months of 1996. This amount included $6.0 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 $9.2 million for THC and $4.0
million for the U.S. psychiatric division.
The Company received cash proceeds of $1.6 million and notes receivable
totalling $5.3 million from the sale of two psychiatric hospitals in the second
quarter of 1996.
The Company believes that 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 16
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
AUGUST 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 totaled 1,652,778
shares which were issued on August 21, 1996. Upon issuance, these shares
had 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 July 1995, the Government served 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. The suit was originally filed by a former employee and a
relative of another under the qui tam provisions of the Act. Several days
--- ---
after the service of the complaint, the Government seized certain of
Southwind's records pursuant to a search warrant. In response to the
Government's Second Amended Complaint, Southwind filed a motion to dismiss
on the grounds that the complaint failed to state a claim. In a decision
dated October 1, 1996, the Court denied the motion to dismiss. Management
is presently unable to evaluate the potential impact of the suit or
investigation on CPC.
Page 11 of 16
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
AUGUST 31, 1996
PART II. OTHER INFORMATION (continued)
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
Exhibit 10: Amendment to Credit agreement dated as of September 20,
1993 among Registrant, Transitional Hospitals
Corporation, and Bank of America National Trust and
Savings Association, dated as of August 22, 1996.
Exhibit 11: Computation of Earnings per Share
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
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: October 11, 1996 /s/ WENDY SIMPSON
------------------------------
Wendy Simpson
Chief Financial Officer
Page 12 of 16
<PAGE>
EXHIBIT INDEX
Exhibit Page No.
- ------- --------
10 Amendment to Credit Agreement 14 - 15
11 Computation of Earnings Per Share 16
27 Financial Data Schedule
Page 13 of 16
<PAGE>
EXHIBIT 10
August 22, 1996
Community Psychiatric Centers
5110 West Sahara Avenue
Las Vegas, Nevada 89102
Transitional Hospitals Corporation
5110 West Sahara Avenue
Las Vegas, Nevada 89102
Re: Credit Agreement dated as of September 20, 1993
Ladies and Gentlemen:
Reference is hereby made to the Credit Agreement dated as of September 20,
1993, as amended among CPC, THC and Bank (the "Agreement"). Capitalized terms
not otherwise defined herein shall have the meanings specified in the Agreement.
The Bank hereby waives compliance with Section 7.12 of the Agreement to the
extent required to permit the Company to purchase its capital stock in an amount
not to exceed $25,000,000 through August 31, 1997.
Notwithstanding other provisions in the Agreement to the contrary, from
July 1, 1996 to and including October 28, 1996, the "Base Rate Increment" shall
be deemed to be 0.00% and the "Offshore Rate Increment" shall be deemed to be
1.00%. On and after October 29, 1996, the provisions of the Agreement defining
and setting the "Base Rate Increment" and the "Offshore Rate Increment" shall be
restored to full force and effect.
In consideration for the granting of the foregoing waiver, the Company
represents and warrants to the Bank that the representations and warrants set
forth in Article V of the Agreement are true and correct in all material
respects on and as of the date hereof as though made on and as of the date
hereof, and no Default or Event of Default under the agreement has occurred and
is continuing.
Except as hereby expressly modified, the Agreement shall remain in full
force and effect and are hereby ratified and confirmed in all respects.
This waiver is specific in time and in intent and does not constitute, nor
should it be construed as, a waiver of any other right, power or privilege under
the Agreement, or under any agreement, contract, indenture, document or
instrument mentioned in the Agreement; nor does it preclude other or further
exercise hereof or the exercise of any other right, power or privilege, nor
shall any waiver of any agreement, contract, indenture, document or instrument
mentioned in the Agreement constitute a waiver of any default of the same or of
any other term or provision thereunder.
This waiver shall not be effective until signed by CPC, THC and the
Guarantors and may be signed in any number of counterparts, each of which when
so executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION
By: Wyatt Ritchie
----------------------------------
Wyatt Ritchie
Managing Director
ACCEPTED AND AGREED TO THIS
22ND DAY OF AUGUST, 1996
COMMUNITY PSYCHIATRIC CENTERS
TRANSITIONAL HOSPITALS CORPORATION
By: Wendy L. Simpson
------------------------------
Name: Wendy L. Simpson
Title: Executive Vice President and
Chief Operating Officer/
Chief Financial Officer
Page 14 of 16
<PAGE>
CONSENT OF GUARANTORS
- ---------------------
The undersigned Guarantors hereby acknowledge that they have reviewed and
consented to the foregoing waiver dated as of August 22, 1996 to the Credit
Agreement dated as of September 20, 1993, as amended, among Community
Psychiatric Centers, Transitional Hospitals Corporation and Bank of America
National Trust and Savings Association, and hereby reaffirm that their
respective General Continuing General Guaranties, continue in full force and
effect on and as of the date hereof.
Date: August 22, 1996
EACH OF THE GUARANTORS LISTED ON ANNEX A TO EACH OF THE
GUARANTIES, WHICH ARE INCORPORATED BY REFERENCE HEREIN
BY THIS REFERENCE
By: Richard Conte
----------------------------------------------
Title: Chairman and CEO
-------------------------------------------
By: Wendy L. Simpson
----------------
Title: Executive Vice President and Chief Operating
--------------------------------------------
Officer/Chief Financial Officer
-------------------------------
Page 15 of 16
<PAGE>
EXHIBIT 11
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine months ended Three Months Ended
August 31 August 31
1996 1995 1996 1995
-------------------------- -----------------------------
(000s, except per share data) (000s, except per share data)
<S> <C> <C> <C> <C>
Weighted average
common shares* 44,142 43,630 44,322 43,660
======= ======= ======= ========
Net income (loss) $49,057 $(9,224) $39,108 $(24,332)
======= ======= ======= ========
Net income (loss)
per share $ 1.11 $ (0.21) $ .88 $ (0.56)
======= ======= ======= ========
</TABLE>
* Dilutive common stock equivalents are less than 3% of weighted average
common shares outstanding.
Page 16 of 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 73,763
<SECURITIES> 0
<RECEIVABLES> 100,553
<ALLOWANCES> 29,174
<INVENTORY> 0
<CURRENT-ASSETS> 224,088
<PP&E> 289,225
<DEPRECIATION> 84,266
<TOTAL-ASSETS> 562,146
<CURRENT-LIABILITIES> 66,493
<BONDS> 17,885
0
0
<COMMON> 46,856
<OTHER-SE> 411,598
<TOTAL-LIABILITY-AND-EQUITY> 562,146
<SALES> 373,700
<TOTAL-REVENUES> 431,843
<CGS> 292,766
<TOTAL-COSTS> 292,766
<OTHER-EXPENSES> 44,831<F1>
<LOSS-PROVISION> 13,961
<INTEREST-EXPENSE> 3,761
<INCOME-PRETAX> 76,524
<INCOME-TAX> 27,467
<INCOME-CONTINUING> 49,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,057
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.11
<FN>
<F1>Includes restructuring charges totalling $2.6 million less a restructuring
credit of $400,000.
</FN>
</TABLE>
