<PAGE> 1
UNITED STATES CONFORMED
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 February 28, 1994
[ ] 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)
Delaware 95-2594724
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organi-
zation)
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:
Classes Outstanding at April 12, 1994
Common Stock, par value $.10 per share 21,986,916
Page 1 of 16
<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Index
Part I - Financial Information
<TABLE>
<S> <C>
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
February 28, 1994 and May 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated statements of operations for
the three and nine months ended February 28, 1994 and 1993. . . . . . . . . . . . . 4
Condensed consolidated statements of cash flows for nine months
ended February 28, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to condensed consolidated financial statements . . . . . . . . . . . . . . . . . 6
Item 2. - Management's discussion and analysis of financial condition and
results of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 1. - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
Page 2 of 16
<PAGE> 3
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
February 28, May 31,
1994 1993
----------- --------
<S> <C> <C>
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,170 $ 1,126
Accounts and notes receivable, less allowance for
doubtful accounts of $4,818 and $8,217 . . . . . . . . . . . . . . . 6,636 7,702
Property and equipment held for sale . . . . . . . . . . . . . . . . . . . . . . . 5,962 8,254
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,655 1,896
------ ------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,423 18,978
------ ------
Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,742 31,432
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . (13,388) (13,229)
------ ------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,354 18,203
------ ------
------ ------
Property and equipment held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . 599 7,098
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,291 2,689
------ ------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,667 $ 46,968
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . $ 12,921 $ 15,737
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . 160 2,137
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706 666
------ ------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,787 18,540
------ ------
------ ------
Long-term debt, excluding current maturities . . . . . . . . . . . . . . . . . . . . . . . 10,522 10,652
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,219 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,943) (27,131)
------ ------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 9,139 12,951
------ ------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . $ 37,667 $ 46,968
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3 of 16
<PAGE> 4
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
February 28, February 28,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and gains:
Operating revenues . . . . . . . . . . . . . . . . $ 8,376 $ 12,719 $ 25,318 $ 43,410
Gain on sale of RehabCare stock . . . . . . . . . --- --- --- 13,114
Interest income . . . . . . . . . . . . . . . . . 20 19 30 60
Equity in earnings of unconsolidated affiliates . --- --- --- 384
Other . . . . . . . . . . . . . . . . . . . . . . --- --- --- 960
----- ------ ------ ------
8,396 12,738 25,348 57,928
----- ------ ------ ------
Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . 8,005 14,603 23,337 42,009
General and administrative expenses . . . . . . . 940 1,335 3,003 3,120
Provision for doubtful accounts . . . . . . . . . 85 2,288 859 6,419
Depreciation and amortization . . . . . . . . . . 392 780 1,278 2,244
Interest expense . . . . . . . . . . . . . . . . . 294 377 933 1,545
Loss on writedown of assets . . . . . . . . . . . --- --- --- 2,940
Other restructuring/non-recurring expenses . . . . (52) --- (397) 6,682
----- ------ ------ ------
9,664 19,383 29,013 64,959
----- ------ ------ ------
Loss before income taxes . . . . . . . . . . . . . . . (1,268) (6,645) (3,665) (7,031)
Provision for income taxes . . . . . . . . . . . . . . 40 74 147 194
----- ------ ------ ------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(1,308) $ (6,719) $ (3,812) $ (7,225)
----- ------ ------ ------
----- ------ ------ ------
Loss per share:
Net loss . . . . . . . . . . . . . . . . . . . . . $ (0.06) $ (0.31) $ (0.17) $ (0.33)
----- ------ ------ ------
----- ------ ------ ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 16
<PAGE> 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
February 28, February 28,
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,812) $ (7,225)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 1,278 2,244
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . 859 6,419
Gain on sale of RehabCare stock, net . . . . . . . . . . . . . . . . . --- (13,114)
Other gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- (960)
Loss on sale/write-down of assets . . . . . . . . . . . . . . . . . . . 37 2,940
Carrying costs incurred on property and equipment held for sale . . . . (1,025) (518)
Other restructuring/non-recurring expenses . . . . . . . . . . . . . . (397) 6,682
Equity in earnings of unconsolidated affiliates . . . . . . . . . . . . --- (384)
Decrease(increase) in accounts and notes receivable . . . . . . . . . . 492 (257)
Decrease in other current assets and other assets . . . . . . . . . . . 402 566
Decrease in accounts payable and accrued liabilities . . . . . . . . . (1,665) (2,578)
Increase(decrease) in income taxes payable . . . . . . . . . . . . . . 40 (108)
Decrease in other liabilities . . . . . . . . . . . . . . . . . . . . . (606) (1,166)
------ ------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . (4,397) (7,459)
------ ------
Cash flows from investing activities:
Net proceeds from sale of property and equipment held for sale . . . . . . . . . . 9,826 18,870
Additions to property and equipment, net . . . . . . . . . . . . . . . . . . . . . (278) (591)
Purchase of operating entity . . . . . . . . . . . . . . . . . . . . . . . . . . . --- (75)
------ ------
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . 9,548 18,204
------ ------
Cash flows from financing activities:
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,107) (12,152)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 50
------ ------
Net cash (used in) financing activities: . . . . . . . . . . . . . . . . . . . . (2,107) (12,102)
------ ------
Net increase(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 3,044 (1,357)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . 1,126 1,980
------ ------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 4,170 $ 623
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5 of 16
<PAGE> 6
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of February 28, 1994 and
the related condensed consolidated statements of operations for the three and
nine month period ended February 28, 1994 and 1993, and the statements of cash
flows for the nine months ended February 28, 1994 AND 1993, 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 nine months ended
February 28, 1994 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 for the three months ended February 28, 1994 and
February 28, 1993, and 21,987,000 and 21,670,000 for the nine months ended
February 28, 1994 and 1993, respectively.
NOTE 2 - OPERATING LOSSES AND LIQUIDITY
The Company's current assets at February 28, 1994 amounted to
approximately $18.4 million and current liabilities were approximately $13.8
million, resulting in working capital of approximately $4.6 million and a
current ratio of 1.34:1. Included in current assets are two hospital
facilities designated as property and equipment held for sale with a total
carrying value of $5.4 million. The Company sold one hospital facility in the
third quarter of fiscal 1994 and plans to sell two additional hospital
facilities in the fourth quarter. 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.
Page 6 of 16
<PAGE> 7
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
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. However,
$1,000,000 was reclassified to property and equipment during the third quarter
of 1994 to adjust property to its fair market value.
A summary of the transactions affecting the carrying value of property
and equipment held for sale for the nine months ended February 28, 1994, is as
follows (in thousands):
<TABLE>
<S> <C>
Balance as of May 31, 1993 . . . . . . . . . . . . . . . . . . $15,352
Proceeds from sale of assets . . . . . . . . . . . . . . . . . (9,806)
Carrying costs incurred during phase-out period . . . . . . . 1,025
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
------
Balance as of February 28, 1994 . . . . . . . . . . . . . . . $ 6,561
------
------
</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)
------
$ ---
------
------
</TABLE>
PROVISION FOR INCOME TAXES
<TABLE>
<S> <C>
Effect of first, second and third quarter results . . . . $(1,136)
Effect of tax rate change as of june 1, 1993 . . . . . . . (571)
Change in valuation reserve in first, second and third quarter 1,854
-------
$ 147
-------
-------
</TABLE>
Page 7 of 16
<PAGE> 8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
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 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 was scheduled for trial on May
9, 1994, but has been continued on the court's own initiative and no new trial
date has been set. Management believes that the Company's allegations have
merit and intends to vigorously pursue this suit. Management further believes
that should RehabCare prevail at trial on its request for such attorneys fees
and costs, such fees and costs would not materially affect the financial
statements of the Company.
The Company is currently undergoing a payroll tax audit by the
Internal Revenue Service ("IRS") for calendar years 1983 through 1991. The IRS
agent conducting the audit has asserted that certain physicians and
psychologists and other staff engaged as independent contractors by the Company
should have been treated as employees for payroll tax purposes. On April 8,
1991, the Company received a proposed assessment related to this assertion
claiming additional taxes and penalties due totaling approximately $19.4
million for calendar years 1983 through 1988. The Company filed a protest with
the IRS and contested the proposed assessment with the appeals office of the
Internal Revenue Service in St. Louis, Missouri. The Appeals Office has
advised the Company that it intends to issue a reduced assessment in the amount
of approximately $6,000,000. The IRS is also examining the company's
employment tax returns for the years 1989 through 1991, and the agent
conducting the examination has indicated that he will propose the assessment of
additional taxes for those years in the approximate amount of $1,300,000. The
Company intends to continue to defend vigorously both the proposed reduced
assessment for the years 1983 through 1988, as well as any proposed assessment
for subsequent years. While management believes the Company has strong
arguments to support its treatment of the payments to 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, were examined by the IRS. The Company has
provided the IRS with satisfactory documentary support for the majority of
items questioned and those items have been deleted from the proposed assessment
and accepted as originally filed. The remaining items have been agreed to and
resulted in a disallowance of approximately $229,000 in deductions which will
be offset against the company's net operating losses available for carry over.
The examination also included the review of the Company's claim for refund of
approximately $205,000 relating to an amended return for the fiscal year ended
May 31, 1992. During completion of the audit, the irs noted that the Company
had received excess refunds of approximately $666,000 in 1990 and 1991 from the
carryback of net operating losses to the fiscal years ended May 31, 1988 and
1989, respectively. On March 29, 1994, the Company agreed to the assessment of
$666,000 plus interest and anticipates receiving the final bill in the near
future.
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.
Page 8 of 16
<PAGE> 9
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
NOTE 6 - SUBSEQUENT EVENT
On March 7, 1994, the Board of Directors of the Company approved and
will recommend to the Stockholders an amendment to the Company's Certificate of
Incorporation to effect a reverse stock split of the Company's Common Stock
proportionate to the range of two (2) through ten (10)-for-one, while reducing
the par value of the Company's Common Stock to one (1) cent ($0.01) per share.
In addition, the number of Common Shares authorized would be reduced to five
(5) times the number of shares outstanding, reserved or otherwise committed for
future issuance but not less than 12,500,000. The Company intends to mail
solicitation and consent material to Stockholders on or about April 15, 1994.
Page 9 of 16
<PAGE> 10
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 NINE MONTHS ENDED
-------------------------------- ---------------------
Feb. 28, Nov. 30, Feb. 28, Feb. 28, Feb. 28,
1994 1993 1993 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Patient days:
Freestanding facilities . . . . . . . . . . . . . . . . 9,409 9,897 19,991 28,893 70,512
Behavioral medicine contracts . . . . . . . . . . . . . 7,555 8,905 11,680 26,510 41,049
Freestanding facilities:
Occupancy rate . . . . . . . . . . . . . . . . . . . . 30% 31% 25% 30% 30%
Admissions . . . . . . . . . . . . . . . . . . . . . . 955 996 1,870 2,905 5,937
Average length of stay (days) . . . . . . . . . . . . . 10 10 11 10 12
Behavioral Medicine contracts:
Average occupied beds per contract . . . . . . . . . . . 6 7 10 7 13
Admissions . . . . . . . . . . . . . . . . . . . . . . . 892 1,015 1,255 3,039 4,050
Average length of stay (days) . . . . . . . . . . . . . 9 9 9 9 10
Total beds available at end of period:
Freestanding facilities . . . . . . . . . . . . . . . . 347 347 894 347 873
Behavioral medicine contracts . . . . . . . . . . . . . 218 264 330 218 330
</TABLE>
Three Months Ended February 28, 1994 Compared to Three Months Ended November
30, 1993
The Company reported a net loss of approximately $1.3 million
or $0.06 per share for the quarter ended February 28, 1994, an increase
of approximately $0.1 million from the loss reported for the quarter ended
November 30, 1993. Included in the loss for the third quarter is a revaluation
of a compensation accrual of $52,000 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.
Page 10 of 16
<PAGE> 11
FREESTANDING OPERATIONS
Admissions in the third quarter of fiscal 1994 decreased by 41 to 955
from 996 in the second quarter of 1994, an overall decrease 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
3RD QUARTER 2ND QUARTER
----------- -----------
<S> <C> <C>
Admissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955 996
Average length of stay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 10
Patient days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,409 9,897
</TABLE>
Net revenue per patient day for "same store" facilities increased by
approximately 9% from $580 for the second quarter of fiscal 1994 to $631 for
the third quarter of fiscal 1994. Admissions decreased for the quarter from
996 in the second quarter of fiscal 1994 to 955 in the third quarter of fiscal
1994 or by approximately 4%. net operating revenues for the third quarter of
fiscal 1994 increased by $0.2 million. 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
-------------------------------
(DOLLARS IN THOUSANDS)
FISCAL 1994 FISCAL 1994
3RD QUARTER 2ND QUARTER
----------- -----------
<S> <C> <C>
Facilities offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6
Net outpatient/daycare revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,560 $2,111
% of total "same store" net operating revenues . . . . . . . . . . . . . . . . . . . . . . 43% 37%
</TABLE>
Operating expenses at the Company's freestanding facilities on a "same
store" basis increased $0.4 million, which was offset by an increase in
operating revenues of $0.2 million. As a result, operating income decreased
$0.2 million from the second 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 third quarter of fiscal 1994, the Company sold
one facility and entered into an agreement for the sale of another. During the
fourth quarter, the Company entered into an agreement for the sale of an
additional facility. The Company owns six facilities which are operating and
four facilities which are closed, all of which are 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 third quarter of fiscal 1994, patient days of service at
behavioral medicine contracts declined by approximately 15% from 8,905 patient
days to 7,555 patient days from the second quarter of fiscal 1994. Units which
were operational for both the second and the third quarters of fiscal 1994
experienced an 8% decline in utilization to 4,955 patient days. Average net
revenue per patient day at these units increased slightly by 2% from the
previous quarter and overall net inpatient operating revenues decreased by 1%
to $0.5 million. Outpatient revenues for programs operational for both
quarters at these units increased 28% from approximately $97,000 in the second
quarter of 1994 to approximately $124,000 in the third quarter of fiscal 1994.
Page 11 of 16
<PAGE> 12
Operating expenses at units operational for both quarters decreased 9%,
which offset the decrease in operating revenues resulting in operating income
at the unit level increasing by 2% from the second 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. Management believes that 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 responsive and appropriate care that
includes quality and cost effectiveness. AccessCare, Inc. accounted for
approximately 10% of the Company's operating revenues for the second and third
quarters 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 FEBRUARY 28, 1994 COMPARED TO THREE MONTHS ENDED FEBRUARY
28, 1993
The Company reported a pretax loss of approximately $1.3 million for
the third quarter of fiscal 1994, an improvement of approximately $5.3 million
from the pretax loss of approximately $6.6 million reported for the third
quarter of fiscal 1993.
Operating revenues declined by approximately $4.3 million from the
third 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
third quarter of fiscal 1993 to the third 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 third quarter of fiscal 1993 primarily as a result of
management's continuing efforts to reduce corporate overhead expenses. The
provision for doubtful accounts declined by $2.2 million in the third quarter
of fiscal 1994 which is primarily attributable to the closure and sale of the
freestanding facilities during the fourth quarter of fiscal 1993.
Interest expense decreased by approximately $0.1 million from the third
quarter of fiscal 1993 as a result of the repayment of debt with the proceeds
from the sale of assets.
NINE MONTHS ENDED FEBRUARY 28, 1994 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
1994
The Company reported a pretax loss of approximately $3.7 million for
the nine months of fiscal 1994, an improvement of $3.3 million from the pretax
loss of approximately $7.0 million in the first nine months of fiscal 1993.
Included in the results of operations for the first nine months of fiscal 1993
was 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 nine months of fiscal 1994 was
approximately $4.1 million, or an improvement of approximately $6.4 million
from a corresponding loss of $10.5 million for the first nine months of fiscal
1993.
Operating revenues declined $18.1 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 $18.7 million or 45% from
approximately $42.0 million in the first nine months of fiscal 1993 to
approximately $23.3 million in the first nine 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. In addition, general and administrative expenses decreased 4% in
the first nine
Page 12 of 16
<PAGE> 13
months of fiscal 1994. The first nine 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. Excluding this revaluation, general and
administrative expenses decreased 23% in the first nine months of fiscal 1994
compared to the first nine months of fiscal 1993. The provision for doubtful
accounts declined by $5.6 million or 86% in the first nine months of fiscal
1994 compared to the first nine months of fiscal 1993. This decrease is
primarily attributable to the closure and sale of freestanding facilities
during the fourth quarter of fiscal 1993.
Interest expense decreased by approximately $0.6 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 February 28, 1994 amounted to
approximately $18.4 million and current liabilities were approximately $13.8
million, resulting in working capital of approximately $4.6 million and a
current ratio of 1.34:1. Included in current assets are two hospital
facilities designated as property and equipment held for sale with a total
carrying value of $5.4 million. The Company sold one hospital facility in the
third quarter of fiscal 1994 and plans to sell two additional hospital
facilities in the fourth quarter. 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.
Page 13 of 16
<PAGE> 14
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 was scheduled for trial on May
9, 1994, but has been continued on the court's own initiative and no new trial
date has been set. Management believes that the Company's allegations have
merit and intends to vigorously pursue this suit. Management further believes
that should RehabCare prevail at trial on its request for such attorneys fees
and costs, such fees and costs would not materially affect the financial
statements of the Company.
The Company is currently undergoing a payroll tax audit by the Internal
Revenue Service ("IRS") for calendar years 1983 through 1991. The IRS agent
conducting the audit has asserted that certain physicians and psychologists and
other staff engaged as independent contractors by the Company should have been
treated as employees for payroll tax purposes. On April 8, 1991, the Company
received a proposed assessment related to this assertion claiming additional
taxes and penalties due totaling approximately $19.4 million for calendar years
1983 through 1988. The Company filed a protest with the IRS and contested the
proposed assessment with the appeals office of the Internal Revenue Service
in St. Louis, Missouri. The Appeals Office has advised the Company that it
intends to issue a reduced assessment in the amount of approximately
$6,000,000. The IRS is also examining the Company's employment tax returns for
the years 1989 through 1991, and the agent conducting the examination has
indicated that he will propose the assessment of additional taxes for those
years in the approximate amount of $1,300,000. The Company intends to continue
to defend vigorously both the proposed reduced assessment for the years 1983
through 1988, as well as any proposed assessment for subsequent years. While
management believes the Company has strong arguments to support its treatment
of the payments to 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, were examined by the IRS. The Company has
provided the IRS with satisfactory documentary support for the majority of
items questioned and those items have been deleted from the proposed assessment
and accepted as originally filed. The remaining items have been agreed to and
resulted in a disallowance of approximately $229,000 in deductions which will
be offset against the Company's net operating losses available for carry over.
The examination also included the review of the Company's claim for refund of
approximately $205,000 relating to an amended return for the fiscal year ended
may 31, 1992. During completion of the audit, the IRS noted that the Company
had received excess refunds of approximately $666,000 in 1990 and 1991 from the
carryback of net operating losses to the fiscal years ended May 31, 1988 and
1989, respectively. On March 29, 1994, the Company agreed to the assessment of
$666,000 plus interest and anticipates receiving the final bill in the near
future.
Page 14 of 16
<PAGE> 15
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
A report on Form 8-K was filed by the Company on March 7,
1994 reporting the following:
1) The appointment of new members of the Board of
Directors;
2) Appointment of new members of the Compensation
Committee;
3) Approval by the Board of Directors of amendment of
the Company's Certificate of Incorporation,
subject to approval by holders of the Company's
outstanding shares of common stock for a reverse
stock split;
4) Tentative approval by the Board of Directors of
voluntary, temporary reduction of the conversion
price of the Company's 7 1/2% convertible
subordinated debentures due April 15, 2010.
Page 15 of 16
<PAGE> 16
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
April 12, 1994 By /S/ FRED C. FOLLMER
Fred C. Follmer
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
April 12, 1994 BY /S/ KERRI RUPPERT
Kerri Ruppert
Vice President
and Chief Accounting Officer
(Principal Accounting Officer)
Page 16 of 16
