<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended November 30, 1993
/ / 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
COMPREHENSIVE CARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-2594724
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
</TABLE>
16305 SWINGLEY RIDGE DR. SUITE 100, CHESTERFIELD, MISSOURI 63017
(Address of principal executive offices and Zip Code)
(314) 537-1288
(Registrant's telephone number, including area code)
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 /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
<TABLE>
<S> <C>
CLASSES OUTSTANDING AT JANUARY 11, 1994
Common Stock, par value $.10 21,986,916
per share
</TABLE>
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<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
Part I -- Financial Information
Item 1. -- Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
November 30, 1993 and May 31, 1993.............................................. 3
Condensed consolidated statements of operations for
the three and six months ended November 30, 1993 and 1992....................... 4
Condensed consolidated statements of cash flows for
six months ended November 30, 1993 and 1992..................................... 5
Notes to condensed consolidated financial statements.............................. 6
Item 2. -- Management's discussion and analysis of financial condition and
results of operations.................................................... 9
Part II -- Other Information........................................................... 13
Item 1. -- Legal Proceedings......................................................... 13
Item 6. -- Exhibits and Reports on Form 8-K.......................................... 14
Signatures........................................................................... 15
</TABLE>
2
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PART I. -- FINANCIAL INFORMATION
ITEM 1. -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1993 1993
------------ --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 1,264 $ 1,126
Accounts and notes receivable, less allowance for doubtful
accounts of $4,893 and $8,217.................................... 7,371 7,702
Property and equipment held for sale................................ 7,150 8,254
Other current assets................................................ 1,623 1,896
------------ --------
Total current assets.................................................. 17,408 18,978
------------ --------
Property and equipment, at cost....................................... 30,701 31,432
Less accumulated depreciation and amortization........................ (13,127) (13,229)
------------ --------
Net property and equipment............................................ 17,574 18,203
------------ --------
Property and equipment held for sale.................................. 1,865 7,098
Other assets.......................................................... 2,426 2,689
------------ --------
Total assets.......................................................... $ 39,273 $ 46,968
------------ --------
------------ --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................ $ 13,096 $ 15,737
Current maturities of long-term debt................................ 166 2,137
Income taxes payable................................................ 650 666
------------ --------
Total current liabilities............................................. 13,912 18,540
------------ --------
Long-term debt, excluding current maturities.......................... 10,567 10,652
Other liabilities..................................................... 4,347 4,825
Commitments and contingencies (see Note 5)
Stockholders' equity:
Preferred stock, $50.00 par value; authorized 60,000 shares......... -- --
Common stock, $.10 par value; authorized 30,000,000 shares,
issued 21,986,916 shares......................................... 2,199 2,199
Additional paid-in capital.......................................... 37,883 37,883
Accumulated deficit................................................. (29,635) (27,131)
------------ --------
Total stockholders' equity..................................... 10,447 12,951
------------ --------
Total liabilities and stockholders' equity............................ $ 39,273 $ 46,968
------------ --------
------------ --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------- -------------------
1993 1992 1993 1992
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues and gains:
Operating revenues................................ $ 8,229 $14,458 $16,942 $30,691
Gain on sale of RehabCare stock................... -- 13,114 -- 13,114
Interest income................................... 5 25 10 41
Equity in earnings of unconsolidated affiliates... -- -- -- 384
Other............................................. -- 584 -- 960
------- ------- ------- -------
8,234 28,181 16,952 45,190
------- ------- ------- -------
Costs and expenses:
Operating expenses................................ 7,723 14,313 15,332 27,405
General and administrative expenses............... 866 1,291 2,063 1,785
Provision for doubtful accounts................... 63 2,364 774 4,131
Depreciation and amortization..................... 383 717 886 1,464
Interest expense.................................. 300 504 639 1,168
Loss on writedown of assets....................... -- -- -- 2,940
Other restructuring/non-recurring expenses........ -- -- (345) 6,682
------- ------- ------- -------
9,335 19,189 19,349 45,575
------- ------- ------- -------
Earnings (loss) before income taxes................. (1,101) 8,992 (2,397) (385)
Provision for income taxes.......................... 62 60 107 120
------- ------- ------- -------
Net earnings (loss)................................. $(1,163) $ 8,932 $(2,504) $ (505)
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per share:
Net earnings (loss)............................... $ (0.05) $ 0.41 $ (0.11) $ (0.02)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
NOVEMBER 30, NOVEMBER 30,
1993 1992
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (2,504) $ (505)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 886 1,464
Provision for doubtful accounts................................ 774 4,131
Gain on sale of RehabCare stock, net........................... -- (13,114)
Other gains.................................................... -- (960)
Loss on sale/write-down of assets.............................. 38 2,940
Carrying costs incurred on property and equipment held for
sale.......................................................... (816) (331)
Other restructuring/non-recurring expenses..................... (345) 6,682
Equity in earnings of unconsolidated affiliates................ -- (384)
Increase in accounts and notes receivable...................... (161) (2,865)
Decrease in other current assets and other assets.............. 373 284
Decrease in accounts payable and accrued liabilities........... (1,543) (627)
Decrease in income taxes payable............................... (16) (142)
Decrease in other liabilities.................................. (478) (2,278)
-------- --------
Net cash used in operating activities............................. (3,792) (5,705)
-------- --------
Cash flows from investing activities:
Net proceeds from sale of property and equipment held for sale.... 6,157 18,825
Additions to property and equipment, net.......................... (171) (261)
-------- --------
Net cash provided by investing activities...................... 5,986 18,564
-------- --------
Cash flows from financing activities:
Repayment of debt................................................. (2,056) (12,040)
Exercise of stock options......................................... -- 50
-------- --------
Net cash (used in) financing activities:....................... (2,056) (11,990)
-------- --------
Net increase in cash and cash equivalents........................... 138 869
Cash and cash equivalents at beginning of period.................... 1,126 1,980
-------- --------
Cash and cash equivalents at end of period.......................... $ 1,264 $ 2,849
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The condensed consolidated balance sheet as of November 30, 1993, and the
related condensed consolidated statements of operations and cash flows for the
six months ended November 30, 1993 and 1992 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of normal
recurring items. The results of operations for the six months ended November 30,
1993, are not necessarily indicative of the results to be expected during the
balance of the fiscal year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Notes to consolidated financial statements
included in Form 10-K for the year ended May 31, 1993, on file with the
Securities and Exchange Commission, provide additional disclosures and a further
description of accounting policies.
The Company's financial statements are presented on the basis that it is a
going concern. The Company incurred significant losses from operations in fiscal
1993 and continues to report losses in fiscal 1994. The continuation of the
Company's business is dependent upon the resolution of operating and short-term
liquidity problems. The consolidated financial statements do not include any
adjustments that might result from an unfavorable outcome of this uncertainty.
The weighted average number of shares outstanding used to compute loss per
share were 21,987,000 and 21,927,000 for the six months ended November 30, 1993
and 1992, respectively.
NOTE 2 -- OPERATING LOSSES AND LIQUIDITY
The Company's current assets at November 30, 1993 amounted to approximately
$17.4 million and current liabilities were approximately $13.9 million,
resulting in working capital of approximately $3.5 million and a current ratio
of 1.25:1. Included in current assets are two hospital facilities designated as
property and equipment held for sale with a total carrying value of $6.6
million. The Company sold one of these facilities in the third quarter of fiscal
1994. The Company's primary use of working capital is to fund operations while
it seeks to restore profitability to certain of its freestanding facilities and
expand its behavioral medicine managed care business.
NOTE 3 -- PROPERTY AND EQUIPMENT HELD FOR SALE
The Company recorded approximately $3.7 million and $15.2 million in asset
write-downs during fiscal 1993 and 1992, respectively, in connection with the
recognition of losses and revaluation of facilities closed, sold or designated
for disposition. These amounts include the estimated future operating losses and
carrying costs of such facilities until disposition. To the extent that actual
costs and time required to dispose of the facilities differ from these
estimates, adjustments to the carrying value of these assets may be required.
Future operating losses and carrying costs of such facilities will be charged
directly to the carrying value of the respective property and equipment 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 being experienced
throughout the industry. The Company will continue to evaluate the performance
of all of its operating facilities in their respective markets, and, if
circumstances warrant, modify the number of facilities designated for
disposition.
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 sold are recorded as an adjustment to the
remaining property values until all facilities are sold.
6
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
A summary of the transactions affecting the carrying value of property and
equipment held for sale for the six months ended November 30, 1993, is as
follows (in thousands):
<TABLE>
<S> <C>
Balance as of May 31, 1993.......................................... $15,352
Proceeds from sale of assets........................................ (6,145)
Carrying costs incurred during phase-out period..................... 816
Other............................................................... (1,008)
-------
Balance as of November 30, 1993..................................... $ 9,015
-------
-------
</TABLE>
NOTE 4 -- INCOME TAXES
Effective June 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," on a prospective basis. The new standard requires, among other
things, that an asset and liability approach be applied in accounting for income
taxes. There was no cumulative effect of applying the provisions of SFAS No. 109
as a result of recording a valuation allowance.
Under SFAS No. 109, deferred income taxes reflect the net tax effects of
temporary differences between the amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of June 1,
1993, are summarized below (in thousands):
<TABLE>
<S> <C>
Deferred compensation and severance................................ $ 486
Employee benefits and options...................................... 390
Asset write-downs.................................................. 8,468
Bad debt expense................................................... 845
Restructuring costs................................................ 306
Cash to accrual differences........................................ (1,531)
Depreciation methods............................................... (1,360)
Accrued legal...................................................... 351
Reserve for carrying costs......................................... 511
Operating loss carryforward........................................ 9,520
Joint venture and other............................................ 1,432
--------
$ 19,418
Valuation allowance................................................ (19,418)
--------
$ --
--------
--------
PROVISION FOR INCOME TAXES
Effect of first and second quarter results......................... $ (732)
Effect of tax rate change in first quarter......................... (571)
Change in valuation reserve in first and second quarter............ 1,410
--------
$ 107
--------
--------
</TABLE>
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
On October 30, 1992, the Company filed a complaint in the United States
District Court 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
7
<PAGE> 8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(UNAUDITED)
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 counter claim 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 attorneys fees and costs on the grounds that such relief is not
permitted by law nor authorized by the agreements between the parties. This case
has been scheduled for trial on May 9, 1994. Management believes that the
Company's allegations are with merit and intends to vigorously pursue their
suit. Management further believes that even should RehabCare prevail at trial on
their 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 has filed a protest with the IRS and intends to
defend vigorously any claims made by the IRS related to this issue. While
management believes the Company has strong arguments to support its treatment of
the independent contractors to whom substantially all of the assessment relates,
management is unable to predict the ultimate outcome of the IRS audit. A reserve
has been established with respect to this matter to cover expenses the Company
expects to incur. 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 federal income tax returns of the Company for its fiscal years ended
1984 and 1987 through 1991, are under examination by the IRS. In August 1993,
the Company received a 30-day letter from the IRS in which the IRS proposes to
assess additional income taxes in the aggregate amount of $12.3 million. The
Company subsequently received extensions to the 30-day letter through January
31, 1994. 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 Company and the IRS
expect to resolve the remaining items before the expiration of the present
extension with agreed changes to the federal income tax returns as originally
filed. In lieu of paying any additional taxes resulting from the audit, the
Company will apply its net operating losses against the agreed changes.
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, claims exceed insurance policy limits and the
Company or a subsidiary may have exposure to liability that is not covered by
insurance. Management believes that the outcome of lawsuits will not have a
material adverse impact on the Company's financial statements.
8
<PAGE> 9
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS", included in the Company's annual
report on Form 10-K for the fiscal year ended May 31, 1993 on file with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Statistical Information
The following utilization statistics include data from all operations
including closures during the periods, joint ventures and closed facilities:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------
NOV. 30, AUG. 31, NOV. 30, NOV. 30, NOV. 30,
1993 1993 1992 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Patient days:
Freestanding facilities........................ 9,897 9,587 24,364 19,484 50,521
Behavioral medicine contracts.................. 8,905 10,050 14,189 18,955 29,369
Freestanding facilities:
Occupancy rate................................. 31% 30% 30% 29% 32%
Admissions..................................... 996 954 1,971 1,950 4,067
Average length of stay (days).................. 10 10 12 10 12
Behavioral medicine contracts:
Average occupied beds per contract............. 7 7 9 7 9
Admissions..................................... 1,015 1,132 1,378 1,128 2,795
Average length of stay (days).................. 9 9 10 9 11
Total beds available at end of period:
Freestanding facilities........................ 347 347 899 386 899
Behavioral medicine contracts.................. 264 309 376 264 376
</TABLE>
Three Months Ended November 30, 1993 Compared to Three Months Ended August 31,
1993
The Company reported a net loss of approximately $1.2 million or $0.05 per
share for the quarter ended November 30, 1993, a decrease of approximately $0.2
million from the loss reported for the quarter ended August 31, 1993. Included
in the loss for the first quarter is a revaluation of a compensation accrual of
$345,000 in non-recurring expenses.
A facility closed in the fourth quarter of 1993 was sold in the first
quarter of 1994. Another facility was sold in the second quarter of fiscal 1994
and a third facility was sold in the third quarter of fiscal 1994.
Freestanding Operations
Admissions in the second quarter of fiscal 1994 increased by 42 to 996 from
954 in the first quarter of 1994, an overall increase of 4%. The following table
sets forth selected quarterly utilization data on a "same store" basis:
<TABLE>
<CAPTION>
SAME STORE UTILIZATION
--------------------------
FISCAL 1994 FISCAL 1994
2ND QUARTER 1ST QUARTER
----------- -----------
<S> <C> <C>
Admissions............................................................. 996 954
Average length of stay................................................. 10 10
Patient days........................................................... 9,897 9,587
</TABLE>
Net revenue per patient day for "same store" facilities decreased slightly
by approximately 2% from $594 for the first quarter of fiscal 1994 to $580 for
the second quarter of fiscal 1994. Admissions increased for the quarter from 954
in the first quarter of fiscal 1994 to 996 in the second quarter of fiscal 1994
or by
9
<PAGE> 10
approximately 4%. As a result, net operating revenues for the second quarter of
fiscal 1994 increased by $0.1 million. The Company believes that the increasing
role of HMO's, reduced benefits from employers and indemnity companies, and a
shifting to outpatient programs are responsible for this decline in net revenue
per patient day. The Company continues to focus its efforts toward providing
effective, lower cost outpatient and daycare programs, obtaining psychiatric
treatment licenses for its freestanding facilities, and establishing and
maintaining relationships and contracts with managed care and other
organizations which pay for or broker such services.
The following table illustrates revenues in outpatient and daycare programs
offered by the "same store" facilities:
<TABLE>
<CAPTION>
NET OUTPATIENT/DAYCARE REVENUES
-------------------------------
FISCAL 1994 FISCAL 1994
2ND QUARTER 1ST QUARTER
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Facilities offering............................................... 6 6
Net outpatient/daycare revenues................................... $ 2,111 $ 1,965
% of total "same store" net operating revenues.................... 37% 35%
</TABLE>
Operating expenses at the Company's freestanding facilities on a "same
store" basis increased $0.2 million, which was offset by a decrease in the
provision for doubtful accounts of $0.3 million. As a result operating income
increased $0.2 million from the first quarter of fiscal 1994.
The Company is taking steps to increase revenues, primarily through
relicensing facilities to provide psychiatric treatment, as well as the closure
of selected facilities and the continued development of its behavioral medicine
managed care business. In the second quarter of fiscal 1994, the Company sold
one facility and entered into an agreement for the sale of another.
Additionally, the Company owns six facilities which are operating and five
facilities which are closed and currently listed for sale. The Company will
continue to evaluate the performance of these facilities in their respective
markets, and, if circumstances warrant, may increase or reduce the number of
facilities designated for disposition.
Behavioral Medicine Contracts
During the second quarter of fiscal 1994, patient days of service at
behavioral medicine contracts declined by approximately 11% from 10,050 patient
days to 8,905 patient days. Units which were operational for both the first and
the second quarters of fiscal 1994 experienced a 3% decline in utilization to
6,330 patient days. Average net revenue per patient day at these units increased
by 24% from the previous quarter and overall net inpatient operating revenues
increased by 6% to $0.6 million. Outpatient revenues for programs operational
for both quarters at these units increased 2% from approximately $114,000 in the
first quarter of 1994 to approximately $116,000 in the second quarter of fiscal
1994.
Operating expenses at units operational for both quarters decreased 3%,
which combined with the increase in operating revenues resulted in operating
income at the unit level increasing by 14% from the first quarter of fiscal
1994.
Managed Care Operations
The Company has provided a managed care product since the acquisition of
Mental Health Programs, Inc. in December 1992, and has changed the name to
AccessCare, Inc. AccessCare, Inc. provides managed behavioral health and
substance abuse service for employers, HMO's, PPO's and other group purchasers
of health care. AccessCare, Inc. currently provides service to over 2,900,000
covered lives. The programs and services currently offered by AccessCare, Inc.,
include fully integrated capitated behavioral healthcare services, employee
assistance programs, case management/utilization review services and physician
advisor reviews. AccessCare, Inc. distinguishes itself from other providers by
furnishing superior clinical management systems, total quality management and
supervision, mutual respect for both providers and clients and
10
<PAGE> 11
responsive and appropriate care that includes quality and cost effectiveness.
AccessCare, Inc. accounted for approximately 9% of the Company's operating
revenues for the first quarter of fiscal 1994 and 10% for the second quarter of
fiscal 1994. Management believes that AccessCare, Inc., in concert with a
network of providers (i.e., CareUnit, Inc.), will assist the Company to develop
an integrated service model to provide quality, cost effective care.
Three Months Ended November 30, 1993 Compared to Three Months Ended November
30, 1992
The Company reported a pretax loss of approximately $1.1 million for the
second quarter of fiscal 1994, a decline of approximately $10.1 million from the
pretax earnings of approximately $9.0 million reported for the second quarter of
fiscal 1993. Included in the earnings reported for the second quarter of fiscal
1993 is a gain of approximately $13.1 million from the sale of 2,300,000 shares
of RehabCare Corp. ("RehabCare") to RehabCare.
Operating revenues declined by approximately $6.2 million from the second
quarter of fiscal 1993, primarily as a result of the closure of four
freestanding facilities and the sale of a fifth during the fourth quarter of
fiscal 1993.
Operating expenses declined by approximately $6.6 million from the second
quarter of fiscal 1993 to the second quarter of fiscal 1994. The reduction of
operating expenses is attributable to the closure of four freestanding
facilities and the sale of a fifth during the fourth quarter of fiscal 1993.
General and administrative expenses decreased by approximately $0.4 million from
the second quarter of fiscal 1993 primarily as a result of management's
continuing efforts to reduce corporate overhead expenses.
Interest expense decreased by approximately $0.2 million from the first
quarter of fiscal 1994 as a result of the repayment of debt with the proceeds
from the sale of assets.
Six Months Ended November 30, 1993 Compared to Six Months Ended November 30,
1992
The Company reported a pretax loss of approximately $2.4 million for the
six months of fiscal 1994, an increase of $2.0 million from the pretax loss of
approximately $0.4 million in the first six months of fiscal 1993. Included in
the results of operations for the first six months of fiscal 1993 is a gain of
approximately $13.1 million from the sale of RehabCare stock, asset writedowns
of approximately $2.9 million and restructuring charges of approximately $6.7
million. Excluding gains, writedowns and restructuring charges, the pretax loss
for the first six months of fiscal 1994 was approximately $2.4 million, or an
improvement of approximately $1.5 million from a corresponding loss of $3.9
million for the first six months of fiscal 1993.
Operating revenues declined $13.7 million from the comparable period in the
prior year primarily as a result of the closure of four freestanding facilities
and the sale of a fifth during the fourth quarter of fiscal 1993.
Operating expenses decreased by approximately $12.1 million or 44% from
approximately $27.4 million in the first six months of fiscal 1993 to
approximately $15.3 million in the first six months of fiscal 1994. Once again,
this decrease is primarily attributable to the closure of four freestanding
facilities and the sale of a fifth during the fourth quarter of fiscal 1993.
Partially offsetting this decrease was a slight increase in general and
administrative expenses of approximately $0.3 million. The first six months of
fiscal 1993 reflected a credit of approximately $0.8 million as a result of the
revaluation of provisions for general and administrative expenses.
Interest expense decreased by approximately $0.5 million from the first six
months of fiscal 1993 as a result of the repayment of debt with the proceeds
from the sale of assets.
Liquidity and Capital Resources
The Company's current assets at November 30, 1993 amounted to approximately
$17.4 million and current liabilities were approximately $13.9 million,
resulting in working capital of approximately $3.5 million and a current ratio
of 1.25:1. Included in current assets are two hospital facilities designated as
property and equipment held for sale with a total carrying value of $6.6
million. The Company sold one of these facilities in the third quarter of fiscal
1994. The Company's primary use of working capital is to fund operations while
it seeks to restore profitability to certain of its freestanding facilities and
expand its behavioral medicine managed care business.
11
<PAGE> 12
PART II -- OTHER INFORMATION
ITEM 1. -- LEGAL PROCEEDINGS
On October 30, 1992, the Company filed a complaint in the United States
District Court 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 counter claim 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 attorneys fees and costs on the grounds that
such relief is not permitted by law nor authorized by the agreements between the
parties. This case has been scheduled for trial on May 9, 1994. Management
believes that the Company's allegations are with merit and intends to vigorously
pursue their suit. Management further believes that even should RehabCare
prevail at trial on their 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 has filed a protest with the IRS and intends to
defend vigorously any claims made by the IRS related to this issue. While
management believes the Company has strong arguments to support its treatment of
the independent contractors to whom substantially all of the assessment relates,
management is unable to predict the ultimate outcome of the IRS audit. A reserve
has been established with respect to this matter to cover expenses the Company
expects to incur. 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 federal income tax returns of the Company for its fiscal years ended
1984 and 1987 through 1991, are under examination by the IRS. In August 1993,
the Company received a 30-day letter from the IRS in which the IRS proposes to
assess additional income taxes in the aggregate amount of $12.3 million. The
Company subsequently received extensions to the 30-day letter through January
31, 1994. 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 Company and the IRS
expect to resolve the remaining items before the expiration of the present
extension with agreed changes to the federal income tax returns as originally
filed. In lieu of paying any additional taxes resulting from the audit, the
Company will apply its net operating losses against the agreed changes.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements 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.
COMPREHENSIVE CARE CORPORATION
January 12, 1993 By /S/ FRED C. FOLLMER
---------------------------------------
Fred C. Follmer
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
January 12, 1993 By /S/ KERRI RUPPERT
---------------------------------------
Kerri Ruppert
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
13
