<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
/ X / Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended August 31, 1995
/ / 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)
4350 Von Karman Avenue, Suite 280, Newport Beach, California 92660
------------------------------------------------------------------
(Address of principal executive offices and Zip Code)
(714) 798-0460
----------------------------------------------------
(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 October 11, 1995
----------------------------- -------------------------------
Common Stock, par value $.01 per share 2,656,932
The number of shares outstanding includes an aggregate of 442,433 shares
previously sold by the Registrant and which the Registrant is obligated to
issue. Issuance of which is pending the completion of administerial acts.
1
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
-----------------------------------------------
Index
-----
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
August 31, 1995 and May 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated statements of operations for
the three months ended August 31, 1995 and 1994 . . . . . . . . . . . . . . . . 4
Condensed consolidated statements of cash flows for
the three months ended August 31, 1995 and 1994 . . . . . . . . . . . . . . . . 5
Notes to condensed consolidated financial statements . . . . . . . . . . . . . . . 6
Item 2. - Management's discussion and analysis of financial condition and
results of operations . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 1. - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
2
<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>
AUGUST 31, MAY 31,
1995 1995
------------ ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 799 $ 1,542
Accounts and notes receivable, less allowance for
doubtful accounts of $1,081 and $1,096 . . . . . . . . . . . . . 3,889 3,329
Note receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 2,750
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 643 391
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,331 8,012
--------- ---------
Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . 25,378 25,181
Less accumulated depreciation and amortization . . . . . . . . . . . . . . (13,407) (13,074)
--------- ---------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . 11,971 12,107
--------- ---------
Property and equipment held for sale . . . . . . . . . . . . . . . . . . . 3,857 3,746
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,956 2,136
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,115 $ 26,001
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . $ 10,176 $ 10,235
Long-term debt in default (see Note 2) . . . . . . . . . . . . . . . . 9,538 9,538
Current maturities of long-term debt . . . . . . . . . . . . . . . . . 1,290 3,285
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . 325 296
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 21,329 23,354
--------- ---------
Long-term debt, excluding current maturities . . . . . . . . . . . . . . . 4,636 5,077
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,460 1,503
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 1,000
Commitments and contingencies (see Notes 2 and 5)
Stockholders' equity:
Preferred stock, $50.00 par value; authorized 60,000 shares . . . . . --- ---
Common stock, $.01 par value; authorized 12,500,000 shares,
issued 2,656,936 and 2,464,516 shares . . . . . . . . . . . . . . 26 25
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 42,487 41,558
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (47,823) (46,516)
------ ------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . (5,310) (4,933)
--------- ---------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . $ 23,115 $ 26,001
========= =========
</TABLE>
Note: The balance sheet at May 31, 1995 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
3
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
---------
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
AUGUST 31, AUGUST 31,
1995 1994
------------ -----------
<S> <C> <C>
Revenues and gains:
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,776 $ 8,057
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6
--------- ---------
8,786 8,063
--------- ---------
Costs and expenses:
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 7,715 7,989
General and administrative expenses . . . . . . . . . . . . . . . . . 1,270 1,067
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 280 750
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 348 461
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 251
--------- ---------
10,067 10,518
--------- ---------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (1,281) (2,455)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . 26 45
--------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,307) $ (2,500)
========= =========
Loss per share:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.50) $ (1.14)
========= =========
</TABLE>
See accompanying notes.
4
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
---------
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
AUGUST 31, AUGUST 31,
1995 1994
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,307) $ (2,500)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 348 461
Provision for doubtful accounts . . . . . . . . . . . . . . . . . 280 750
Loss on sale/write-down of assets . . . . . . . . . . . . . . . . --- (4)
Carrying costs incurred on property and equipment held for sale . (84) (135)
Decrease in accounts and notes receivable . . . . . . . . . . . . 1,910 177
Decrease in other current assets and other assets . . . . . . . . (123) 123
Decrease in accounts payable and accrued liabilities . . . . . . (58) (228)
Increase in income taxes payable . . . . . . . . . . . . . . . . 29 34
Decrease in other liabilities . . . . . . . . . . . . . . . . . . (43) (100)
--------- ---------
Net cash provided by (used in) operating activities . . . . . . . . . 952 (1,422)
---------
Cash flows from investing activities:
Net proceeds (loss) from sale of property and equipment (operating and
held for sale) . . . . . . . . . . . . . . . . . . . . . . . . . . . (46) 5
Additions to property and equipment . . . . . . . . . . . . . . . . . (143) (37)
--------- ---------
Net cash (used in) investing activities . . . . . . . . . . . . . . (189) (32)
--------- ---------
Cash flows from financing activities:
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (2,436) (52)
Proceeds from the issuance of common stock . . . . . . . . . . . . . . 930 ---
--------- ---------
Net cash (used in) financing activities: . . . . . . . . . . . . . . (1,506) (52)
--------- ---------
Net increase(decrease) in cash and cash equivalents . . . . . . . . . . . . (743) (1,506)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 1,542 1,781
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 799 $ 275
========= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
- --------------------------------
The condensed consolidated balance sheet as of August 31, 1995, and the
related condensed consolidated statements of operations and cash flows for the
three months ended August 31, 1995 and 1994 are unaudited and have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. 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 three months ended August 31, 1995, 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, 1995, 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, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company incurred
significant losses from operations in fiscal 1995 and continues to report losses
for the first quarter of fiscal 1996. The continuation of the Company's business
is dependent upon the resolution of operating and short-term liquidity problems
and the consolidated financial statements do not include any adjustments that
might result from an unfavorable outcome of this uncertainty (see Note
2--"Operating Losses and Liquidity").
Primary and fully diluted loss per common and common equivalent shares
have been computed by dividing net loss by the weighted average number of
common shares outstanding during the period. During fiscal 1994, 1995, and the
first quarter of fiscal 1996, the effect of outstanding stock options and the
assumed conversion of the Convertible Subordinated Debentures had an
antidilutive impact on loss per share and, accordingly, were excluded from per
share computations.
The weighted average number of shares outstanding used to compute loss
per share were 2,599,000 and 2,199,000 for the three months ended August 31,
1995 and 1994. All share and per share amounts contained in the Condensed
Consolidated Financial Statements retroactively reflect the effect of the
reverse stock split for all periods presented, which effect is to reduce the
number of shares set forth by a factor of ten, with each stockholder's
proportionate ownership interest remaining constant, except for payment in lieu
of fractional shares.
NOTE 2 - OPERATING LOSSES AND LIQUIDITY
- -----------------------------------------
The Company reported a net loss of $1.3 million for the quarter ended
August 31, 1995 versus a net loss of $2.5 million for the quarter ended August
31, 1994. As a result, the Company has an accumulated deficit of $47.8 million
and a total stockholders' deficiency of $5.3 million as of August 31, 1995.
Additionally, the Company's current assets at August 31, 1995 amounted to
approximately $5.3 million and current liabilities were approximately $21.3
million, resulting in a working capital deficiency of approximately $16.0
million and a current ratio of 1:4.0.
Included in current liabilities are $9.5 million of Debentures in
default as a result of the Company's failure to make scheduled payments of
interest on the Debentures commencing in October 1994. The Company has agreed to
use its best efforts to provide an opportunity for Debenture holders to tender
their Debentures pursuant to an exchange offer to be made by the Company. This
proposed transaction requires the holders of a majority of the Debentures to
give their approval to rescind the acceleration and the Company to obtain and
expend up to $5.5 million of cash during fiscal 1996, over and above cash
required to fund other financing, operating and investing needs. Additionally,
the Debenture exchange provides for the Company to issue $120 worth of its
common stock at a defined value for each $1,000 of Debentures, which may be
contingent upon the Company's ability to effect certain filings with the
Securities and Exchange Commission. The ability to timely proceed with any such
proposed filings will, in part, depend upon the ability of the Company to obtain
a consent from its prior auditors for the use of their report on the Company's
consolidated financial statements in such registration statements. Failure to
obtain Debenture holder approval or to accomplish the Debenture exchange, or, in
the alternative, a failure of the Company and the Debenture holders to otherwise
reach a settlement, may cause the Debenture holders to pursue the involuntary
bankruptcy of the Company and/or the Company to take alternative actions that
may include filing for voluntary protection from creditors. Alternatively, if
the Debenture exchange is accomplished, the elimination of the Debenture's debt
service requirement would decrease the Company's future cash flow requirements.
(The foregoing summary does not constitute an offer to the holders of the
Company's Debentures.
6
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995
(unaudited)
Any such offer may only be made pursuant to an exchange offer, and in conformity
with the relevant securities laws, rules and regulations.)
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying condensed consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the outcome of this
uncertainty.
In fiscal 1993, the Company established a restructuring reserve to
address the Company's operational issues. One purpose of such reserve was for
the realignment of the Company's focus and business and the settlement and
disposition of certain non- performing and under-utilized assets. Many of the
Company's inpatient freestanding facilities have been sold or are in the process
of being closed or sold and management has begun to implement plans for
expanding the Company's contract management and managed care operations.
In previous years, the Company was obligated to support and fund certain
poor performing freestanding facilities that now have been closed, including two
such facilities closed in fiscal 1995 (see Note 3-- "Property and Equipment Held
for Sale"). As a result, the Company will no longer be burdened with the
negative cash flow requirements associated with such facilities. Based upon a
projection of actual performance during fiscal 1995 with adjustments for reduced
cash flow requirements associated with facilities closed and/or sold in fiscal
1995, known contract and cyclical changes, and also giving consideration to cash
on hand at August 31, 1995 of $799,000, management expects the Company to be
able to meet its cash obligations required by operations during fiscal 1996,
excluding the Company's obligations under the Debentures. However, the cash
needs of the Company may vary from month to month depending upon the actual
level of business activity, and through the first quarter of fiscal 1996 the
Company continues to incur losses. Therefore, no assurance can be given that the
Company will generate adequate cash flows to meet cash obligations required by
operations, excluding the Company's obligations under the Debentures, in fiscal
1996.
To provide funds for the Debenture exchange and/or additional operating
needs, the Company anticipates utilizing one or more of the following potential
sources of cash:
- The Company has filed its fiscal 1995 Federal tax return, and a
Form 1139 "Corporate Application for Tentative Refund" in the
amount of $9.4 million. In the event the Company receives the
full refund claim for fiscal 1995, the net amount of cash
available for working capital purposes would be $7.5 million.
The Company has also filed amended Federal tax returns for prior
years to claim refunds of an additional $13.2 million. The net
amount of cash available for working capital purposes would be
$10.6 million. These refund claims have been made under Section
172(f) of the Internal Revenue Code, an area of the tax law
without significant precedent, and there may be substantial
opposition by the IRS to the Company's refund claims.
Accordingly, no assurances can be made to the Company's
entitlement to such refunds or the timing of the receipt thereof
(see Note 4-- "Income Taxes").
- Included in non-current assets are three hospital facilities
designated as property and equipment held for sale with a total
carrying value of $3.9 million. The Company expects to sell two
of these facilities in the next fiscal year and may lease a third
facility to an unrelated entity. However, the contracts have not
been fully negotiated and proceeds from the sales or lease of
such assets are not expected to be available by the time the
Debenture exchange is expected to occur. Accordingly, management
expects to use such cash proceeds, if received during fiscal
1996, to fund and expand the Company's operations and implement
the Company's restructuring plans.
- In March 1995, a jury awarded the Company approximately $2.7
million, plus interest, in damages in its lawsuit against
RehabCare Corporation. The defendant has posted a bond for the
amount of the award and has filed an appeal of the judgment.
Management is unable to predict whether any proceeds from this
judgment will be received in fiscal 1996 (see Note 5--
"Commitments and Contingencies").
- The Company has received a firm commitment from a mutual fund to
purchase in a private placement at least $5.0 million of 15%
fully secured Company notes due no earlier than December 1996 if
offered by the Company.
7
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COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995
(unaudited)
All of these potential sources of additional cash in fiscal 1996 are
subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1996 the Company
will complete the transactions required to fund its working capital deficit.
During the first quarter of fiscal 1996, the Company paid the IRS
approximately $2.3 million pursuant to its settlement agreement (see Note 5--
"Commitments and Contingencies"). The Company utilized the proceeds from a note
receivable on the sale of its Sacramento facility, received on July 10, 1995 for
$2.75 million in order to fund this payment. The Company continues to pay the
remaining balance in monthly installments of $42,000.
NOTE 3 - PROPERTY AND EQUIPMENT HELD FOR SALE
- -----------------------------------------------
The Company recorded no additional asset write-downs during the first
quarter of fiscal 1996 and fiscal 1995 in connection with the recognition of
losses and revaluation of facilities closed, sold or designated for disposition.
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.
A summary of the transactions affecting the carrying value of property
and equipment held for sale for the three months ended August 31, 1995, is as
follows (in thousands):
<TABLE>
<S> <C>
Non-current balance as of May 31, 1995 . . . . . . . . . . . . $ 3,746
Carrying costs incurred during phase-out period . . . . . . . 84
Loss on sale/write down of facilities . . . . . . . . . . . . 27
--------
Balance as of August 31, 1995 . . . . . . . . . . . . . . . . $ 3,857
========
</TABLE>
The loss on sale/write down of property and equipment held for sale is
reflected on the Company's statement of operations and consists of the
following for the three months ended August 31, 1995:
<TABLE>
<CAPTION>
Period Ending
August 31, 1995
---------------
<S> <C>
(Loss) Gain/write down of property
& equipment . . . . . . . . . . . . . . . . . $ 27
Adjustment to estimated property
values. . . . . . . . . . . . . . . . . . . . (27)
----
$ --
====
</TABLE>
NOTE 4 - INCOME TAXES
- ---------------------
On July 20, 1995, the Company filed its Federal tax return for fiscal
1995. On August 4, 1995, the Company filed Form 1139 "Corporate Application for
Tentative Refund" to carry back losses described in Section 172(f) requesting a
refund to the Company in the amount of $9.4 million. On August 30, 1995, the
Company also filed amended Federal tax returns for several prior fiscal years to
carry back losses under Section 172(f). The amount of refund claimed on the
amended returns are approximately $11.7 million for 1986; $0.4 million for 1985;
$0.7 million for 1983 and $0.4 million for 1982. The total refunds applied for
is $22.6 million, $13.2 million for amended prior years' returns and $9.4
million for fiscal year 1995. Section 172(f) is an area of the tax law without
substantial legal precedent. There may be opposition by the IRS as to the
Company's ability to carry back such losses. Therefore, no assurances can be
made to the Company's entitlement to such a claim. Consequently, a valuation
allowance has been established against this potential tax benefit.
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 CAS). The Company sought damages for the lost
benefit of certain stockholder appreciation rights in an amount in excess of
$3.6
8
<PAGE> 9
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995
(unaudited)
million and punitive damages. RehabCare filed a counterclaim in the case
seeking a declaratory judgement with respect to the rights of both parties under
the Stock Redemption Agreement, an injunction enjoining the Company from taking
certain action under the Stock Redemption or Restated Shareholders Agreements
and damages in the form of attorneys' fees and costs allegedly incurred by
RehabCare with respect to its issuance of certain preferred stock and with
respect to prior litigation between the parties. The case was tried before a
jury commencing on February 21, 1995. Prior to the presentation of evidence to
the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8,
1995, the jury returned its verdict awarding the Company $2,681,250 in damages,
plus interest and the costs of the action against RehabCare for securities fraud
and for breach of contract. RehabCare has posted a bond in the amount of $3.0
million and filed a motion for new trial or in the alternative, for judgement as
a matter of law, which the court denied in its entirety on August 4, 1995. On
September 1, 1995, RehabCare filed a notice of appeal with the District Court
indicating its intent to appeal the matter to the United States Court of
Appeals. Although the Company feels that RehabCare will not prevail in its
appeal, the Company has not recognized any gain with relation to the judgement.
In connection with the proposed sale and lease-back of hospitals to CMP
Properties, Inc., a real estate investment trust, the Company advanced $1.1
million to its financial advisor in fiscal 1992. The financial advisor was
affiliated with several members of the Company's Board of Directors at that
time. The advances, which were to be repaid if the transaction was not
completed, were to be secured by a pledge of common stock in an unrelated
company. The pledged shares of common stock were in the possession of the
Company's primary legal counsel at that time, as collateral for the advances.
After the transaction was terminated, the financial advisor refused to repay the
advances and the Company's legal counsel refused to turn over the collateral to
the Company. The Company has filed an action in the United States District Court
for the District of Oregon (Civil Case No. 94- 384 FR) against its former
financial advisor and former legal counsel to recover the advances. The former
financial advisor has counterclaimed against the Company for $1,688,000 for
breach of contract and unjust enrichment. The Company's former law firm has
filed a counterclaim for $193,000 for unpaid legal fees. Management believes
that the counterclaims are without merit and intends to vigorously defend
against them and to pursue the Company's claims.
On June 8, 1994, RehabCare filed a lawsuit against the Company in the
Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement
entered into between the Company and RehabCare in May 1991 (Case No. 663957). An
amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges
that it has incurred attorneys fees in connection with the settlement of certain
tax issues with the IRS and has paid the IRS a settlement amount with respect to
the years 1987 and 1988. RehabCare seeks the recovery from the Company of
$588,000, plus interest, which RehabCare alleges is the amount it incurred for
payments to the IRS in settlement of taxes and attorneys fees it incurred in
dealing with the IRS. The Company has filed its answer and affirmative defenses
contesting the right of RehabCare to obtain the relief it seeks. Discovery is
ongoing. Until such discovery is complete, it is not possible to predict the
likely outcome of the lawsuit. The Company intends to continue to vigorously
defend this matter.
In December 1994, the Company reached a settlement with the Appeals
Office of the Internal Revenue Service ("IRS") on a payroll tax audit for the
calendar years 1983 through 1991. Pursuant to this settlement the Company agreed
to pay the IRS $5.0 million with the Company having no obligation to pay any
penalties or accrued interest. The IRS agent conducting the audit asserted that
certain physicians, psychologists and other staff engaged as independent
contractors by the Company should have been treated as employees for payroll tax
purposes. The settlement was reviewed and accepted on behalf of the IRS by its
district counsel. Payment terms have been accepted at 50% within 90 days of
finalization with the remainder financed over the next five years. In March
1995, the Company paid $350,000 to the IRS against the initial payment due. In
return, the IRS granted the Company an additional 120 days to pay the remaining
balance of $2,150,000. In July 1995, the Company paid the remaining balance of
the initial payment, and continues to make the monthly installment payment
pursuant to the terms of the settlement. The unpaid balance bears interest at 9%
per annum due and payable after the $5.0 million is paid.
An involuntary bankruptcy petition was dismissed on March 6, 1995
pursuant to an agreement dated March 3, 1995 between the Company and a
representative of the petitioners. Under such agreement the Company has agreed,
subject to the conditions therein, to offer to exchange for its outstanding 7
1/2% Convertible Subordinated Debentures a combination of cash and shares. See
Note 2-- "Operating Losses and Liquidity" for a discussion of the Company's
default in the payment of interest on its 7 1/2 % Convertible Subordinated
Debentures and the consequent acceleration of the full principal amount thereof.
The foregoing is intended to disclose an event, and does not constitute an offer
to
9
<PAGE> 10
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995
(unaudited)
the holders of the Company's Debentures. Any such offer may only be made
pursuant to an exchange offer, and in conformity with the relevant securities
laws, rules and regulations.
In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criteria
in regard to net tangible assets available to common stock and three year
average net income among other items. The Listing and Compliance Committee of
the NYSE has determined to monitor the Company's progress toward returning to
continuing listing standards. Management anticipates success in "global
restructuring" (see Note 2-- "Operating Losses and Liquidity") will be necessary
in order to satisfy the Committee of the Company's progress. The Company met
with representatives of the NYSE during the third quarter of fiscal 1995 and
during the first quarter of fiscal 1996, to discuss the Company's financial
condition and intention to issue shares without seeking approval of shareholders
pursuant to the exception to the NYSE policy for financially distressed
companies.
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 such lawsuits will not have a
material adverse impact on the Company's financial statements.
NOTE 6 - SUBSEQUENT EVENTS
- ----------------------------
On August 18, 1995, the Company settled its claim filed against its
fidelity bond carrier in the amount of $425,000. The Company received the
proceeds on September 6, 1995.
On October 3, 1995, the Company sold its 83-bed freestanding facility
CareUnit of Kirkland and three related clinics to Lakeside-Milam Recovery
Centers, Inc. The sale results in a gain of approximately $1.0 million.
10
<PAGE> 11
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
In early fiscal 1995, Management developed a "global restructuring" plan
intended to address the Company's immediate challenges and to return to a base
of profitability for future success. Management intended that this "global
restructuring" include as many of the following steps as possible: (i) effect a
reverse stock split to improve the Company's image; (ii) negotiate settlement of
the Company's payroll tax audit with the IRS; (iii) restructure the Company's
financial obligations represented by the Company's 7 1/2% Convertible
Subordinated Debentures (the "Debentures"); and (iv) raise capital to finance
the restructuring costs.
During fiscal 1995 and 1996 management accomplished its objectives,
described above, except item (iii), restructuring of the Company's financial
obligations represented by the Company's Debentures.
During the first quarter of fiscal 1996, the Company sold an aggregate
of 155,000 shares of common stock to four accredited investors in private
offerings for an aggregate of $930,000 paid in cash. The proceeds of such sales
were used for working capital and other general corporate purposes.
Although the Company is seeking to restructure its obligations under the
Debentures, the Company is currently in default as a result of the Company's
failure to make scheduled payments of interest (see Note 2 to the Company's
Condensed Consolidated Financial Statements included herein).
During the fourth quarter of fiscal 1995, the Company entered into a
letter of agreement with a representative of holders of the Debentures. The
agreement provides, among other things, that the Company provide an opportunity
to holders of the Debentures to tender their Debentures to the Company pursuant
to an exchange offer to be made by the Company to the holders of the Debentures.
Although the Company has filed an exchange offer with the Securities and
Exchange Commission, there can be no assurance that the exchange offer will be
successfully completed. Failure to consummate the Debenture exchange offer may
result in the Company considering alternative actions including filing for
voluntary protection from creditors. The foregoing is intended to disclose an
event, and does not constitute an offer to the holders of the Debentures.
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
------------------------------------
August 31, May 31, August 31,
1995 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Managed care operations:
Covered lives . . . . . . . . . . . . . . . . . . . . . . 679,812 442,946 207,565
Patient days:
Freestanding facilities . . . . . . . . . . . . . . . . . 3,778 4,273 8,564
Behavioral medicine contracts . . . . . . . . . . . . . . 5,534 6,230 8,580
Freestanding facilities:
Occupancy rate . . . . . . . . . . . . . . . . . . . . . . 18% 18% 27%
Admissions . . . . . . . . . . . . . . . . . . . . . . . . 573 646 979
Average length of stay (days) . . . . . . . . . . . . . . 7 7 9
Behavioral medicine contracts:
Average occupied beds per contract . . . . . . . . . . . . 5 5 7
Admissions . . . . . . . . . . . . . . . . . . . . . . . . 770 809 1,072
Average length of stay (days) . . . . . . . . . . . . . . 7 8 8
Total beds available at end of period:
Freestanding facilities . . . . . . . . . . . . . . . . . 237 237 347
Behavioral medicine contracts . . . . . . . . . . . . . . 141 157 251
</TABLE>
11
<PAGE> 12
Three Months Ended August 31, 1995 Compared to Three Months Ended May 31, 1995
- ------------------------------------------------------------------------------
The Company reported a loss of approximately $1.3 million or $0.50 per
share for the quarter ended August 31, 1995, an improvement of approximately
$2.0 million or $.88 per share from the loss reported for the quarter ended May
31, 1995.
Operating revenues increased to $8.8 million in the first quarter of fiscal
1996 from $7.4 million in the fourth quarter of fiscal 1995 or by 19%. This
increase is predominately related to an increase in revenues for managed care
and freestanding facilities. In addition, operating expenses declined by 6% or
$0.5 million. This decline was from freestanding operations and behavioral
medicine contracts, which was offset by a slight increase in operating expenses
for managed care operations.
General and administrative expenses decreased by 6% or $0.1 million during
the first quarter of fiscal 1996 compared to the fourth quarter of 1995. The
first quarter of fiscal 1996 includes a credit of $425,000 related to a
settlement (see Note 6 to the Company's Condensed Consolidated Financial
Statements included herein) which was offset by increase in expenses for managed
care operations. The provision for doubtful accounts increased by $0.3 million
for the first quarter of 1996 versus the fourth quarter of fiscal 1995 as a
result of adjustments made to the Company's provision at May 31, 1995.
The Company recorded $0.3 million for the loss on the sale/write-down of
assets during the fourth quarter of fiscal 1995. This loss is primarily
attributable to the write-off of leasehold improvements on locations no longer
owned or operated by the Company.
Managed Care Operations
- -----------------------
During the first quarter of fiscal 1996, the number of covered lives
increased to 680,000 or by 53% from the end of the fourth quarter of fiscal
1995. This increase is primarily attributable to new contracts added during the
first quarter of fiscal 1996. Comprehensive Behavioral Care, Inc.
("Comprehensive Behavioral") distinguishes itself from its competition by being
the "science-based" provider of care and manages all clinical programs based
upon proven treatment technologies.
In the first quarter of fiscal 1996, operating revenues increased 67% to $3.4
million from the fourth quarter of fiscal 1995. Operating expenses increased by
$0.1 million or 2% in the first quarter of fiscal 1996. In addition, general and
administrative expenses increased by $0.3 million in the first quarter of fiscal
1996 compared to the fourth quarter of fiscal 1995. As a result, the net
operating loss for Comprehensive Behavioral for the first quarter of fiscal 1996
was $0.2 million, an improvement of $1.0 million from the fourth quarter of
fiscal 1995.
Behavioral Medicine Contracts
- -----------------------------
In the first quarter of fiscal 1996, CareUnit operating revenues decreased 3%
from the fourth quarter of fiscal 1995. Operating expenses declined from $1.5
million to $1.3 million or 13% in the first quarter of fiscal 1996 compared to
the prior quarter. The decrease in operating revenues during the first quarter
of fiscal 1996 was offset by a decrease in operating expenses resulting in an
improvement in CareUnit's net operating loss by $0.2 million or 41% from the
fourth quarter of fiscal 1995.
During the first quarter of fiscal 1996, patient days of service at
behavioral medicine contracts declined by approximately 11% from 6,230 patient
days to 5,534 patient days. Units which were operational for both the fourth
quarter of fiscal 1995 and the first quarter of fiscal 1996 experienced a 4%
increase in utilization to 5,455 patient days. Average net revenue per patient
day at these units remained unchanged from the previous quarter and combined
with the increased utilization resulted in an increase in overall net inpatient
operating revenues of 4% to $0.6 million. Net revenues for programs operational
for both quarters at these units also increased 5% from approximately $734,000
in the fourth quarter of 1995 to approximately $774,000 in the first quarter of
fiscal 1996.
12
<PAGE> 13
The following table sets forth quarterly utilization data on a "same store"
basis:
<TABLE>
<CAPTION>
Same Store Utilization
--------------------------
Fiscal 1996 Fiscal 1995
1st Quarter 4th Quarter
----------- -----------
<S> <C> <C>
Admissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747 714
Average length of stay . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7
Patient days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,455 5,264
Average occupancy rate . . . . . . . . . . . . . . . . . . . . . . . . . . 42% 41%
</TABLE>
For units operational for both quarters, operating expenses increased
5%, which combined with the increase in operating revenues resulted in operating
income at the unit level increasing by 7% from the fourth quarter of fiscal
1995.
Freestanding Operations
- -----------------------
Operating revenues for freestanding operations increased 2% during the
first quarter of fiscal 1996 compared to the prior quarter. In addition,
operating expenses declined 9% or $0.4 million in the first quarter of fiscal
1996.
Admissions in the first quarter of fiscal 1996 decreased to 573 from 646
in the fourth quarter of 1995, an overall decline of 11%. The following table
sets forth selected quarterly utilization data on a "same store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
--------------------------
Fiscal 1996 Fiscal 1995
1st Quarter 4th Quarter
----------- -----------
<S> <C> <C>
Admissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573 584
Average length of stay . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6
Patient days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,778 3,708
</TABLE>
Net revenue per patient day for "same store" facilities increased
approximately 14% to $1,002 for the first quarter of fiscal 1996 from $878 for
the fourth quarter of fiscal 1995. Admissions decreased for the quarter from 584
in the fourth quarter of fiscal 1995 to 573 in the first quarter of fiscal 1996
or by approximately 2%. The slight decline in admissions combined with the
increase in length of stay resulted in an increase in net operating revenues for
the first quarter of fiscal 1996 of $0.2 million. The Company believes that the
increasing role of HMO's, reduced benefits from employers and indemnity
companies, and a shifting to outpatient programs continue to impact utilization.
The Company continues to focus its efforts toward providing effective, lower
cost outpatient, partial hospitalization and daycare programs, obtaining
psychiatric treatment licenses for its freestanding facilities, and toward
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 1996 Fiscal 1995
1st Quarter 4th Quarter
----------- -----------
<S> <C> <C>
Facilities offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5
Net outpatient/daycare revenues . . . . . . . . . . . . . . . . . . . . . . $ 2,161 $ 2,133
% of total "same store" net operating revenues . . . . . . . . . . . . . . 57% 61%
</TABLE>
Operating expenses at the Company's freestanding facilities on a "same
store" basis decreased $0.2 million. Operating income increased $0.3 million in
the first quarter of fiscal 1996 from the fourth quarter of fiscal 1995.
The Company is taking steps to increase revenues, primarily through
relicensing facilities to provide psychiatric treatment, and the continued
development of its behavioral medicine managed care business. The Company is
also
13
<PAGE> 14
implementing cost reduction measures, including the closure of selected
facilities. The Company owns six facilities and leases one. Three of the six
owned facilities and the one leased facility are operating for a total of four
operating facilities. 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.
Three Months Ended August 31, 1995 Compared to Three Months Ended August 31,
- ----------------------------------------------------------------------------
1994
- ----
The Company reported a pretax loss of approximately $1.3 million for the
first quarter of fiscal 1996, a decrease of approximately $1.2 million or 48%
from the pretax loss of approximately $2.5 million reported for the first
quarter of fiscal 1995.
Operating revenues for the first quarter of fiscal 1996 increased by
approximately $0.7 million or 9% from the first quarter of fiscal 1995. This
increase is primarily a result of an increase in operating revenues generated by
managed care operations and behavioral medicine contracts, partially offset by a
decline in operating revenues in freestanding operations.
Operating expenses decreased by approximately $0.2 million or 3% from the
first quarter of fiscal 1995 compared to the first quarter of fiscal 1996. The
decrease in operating expenses is primarily attributable to decline in operating
expenses for freestanding operations which was partially offset by a 103%
increase in operating expenses related to managed care operations. General and
administrative expenses increased by approximately $0.2 million from the first
quarter of fiscal 1995 primarily as a result of managed care operations
expansion and development. In addition, in the first quarter of fiscal 1996 a
credit of $425,000 related to a settlement (see Note 6 to the Company's
Condensed Consolidated Financial Statements) reduced general and administrative
expense. The provision for doubtful accounts decreased by $0.5 million or 63%
during the first quarter of fiscal 1996 compared to the same period for fiscal
1995. This decrease is related to the decreased freestanding operations.
Interest expense increased from $0.3 million for the first quarter of fiscal
1995 to $0.5 million in the first quarter of fiscal 1996. The increase is a
result of the additional interest related to the secured convertible note of
$2.0 million and the IRS Offer in Compromise for $5.0 million, both
of which were added during the third quarter of fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of August 31, 1995, the Company has an accumulated deficit of $47.8
million and a total stockholders' deficiency of $5.3 million. Additionally,
the Company's current assets at August 31, 1995 amounted to approximately $5.3
million and current liabilities were approximately $21.3 million, resulting in
a working capital deficiency of approximately $16.0 million and a current
ratio of 1:4.0.
Included in current liabilities are $9.5 million of Debentures in default as
a result of the Company's failure to make scheduled payments of interest on the
Debentures commencing in October 1994. As further discussed in Note 2 to the
Company's Condensed Consolidated Financial Statements included herein, the
Company has agreed to use its best efforts to provide an opportunity for
Debenture holders to tender their Debentures pursuant to an exchange offer to be
made by the Company. This proposed transaction requires the holders of a
majority of the Debentures to give their approval to rescind the acceleration
and the Company to obtain and expend up to $5.5 million of cash during fiscal
1996, over and above cash required to fund other financing, operating and
investing needs. Additionally, the Debenture exchange provides for the Company
to issue $120 worth of its common stock at a defined value for each $1,000 of
Debentures, which may be contingent upon the Company's ability to effect certain
filings with the Securities and Exchange Commission. The ability to timely
proceed with any such proposed filings will, in part, depend upon the ability of
the Company to obtain a consent from its prior auditors for the use of their
report on the Company's consolidated financial statements in such registration
statements. Failure to obtain Debenture holder approval or to accomplish the
Debenture exchange, or, in the alternative, a failure of the Company and the
Debenture holders to otherwise reach a settlement, may cause the Debenture
holders to pursue the involuntary bankruptcy of the Company and/or the Company
to take alternative actions that may include filing for voluntary protection
from creditors. Alternatively, if the Debenture exchange is accomplished, the
elimination of the Debenture's debt service requirement would decrease the
Company's future cash flow requirements. (The foregoing summary does not
constitute an offer to the holders of the Company's Debentures. Any such offer
may only be made pursuant to an exchange offer, and in conformity with the
relevant securities laws, rules and regulations.)
14
<PAGE> 15
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The 1995 consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.
To address the Company's operational issues, in fiscal 1993 the Company
established a restructuring reserve. One purpose of such reserve was for the
realignment of the Company's focus and business and the settlement and
disposition of certain non-performing and under-utilized assets. Through August
31, 1995 many of the Company's inpatient freestanding facilities have been sold
or are in the process of being closed or sold. Additionally, in fiscal 1996,
management has begun to implement plans for expanding the Company's contract
management and managed care operations (see Note 3 to the Company's Condensed
Consolidated Financial Statements included herein).
In previous years, the Company was obligated to support and fund certain
freestanding facilities that now have been closed, including two such facilities
closed in fiscal 1995 (see Note 3 to the Company Condensed Consolidated
Financial Statements included herein). As a result, the Company will no longer
be burdened with the negative cash flow requirements associated with such
facilities. Based upon a projection of actual performance during fiscal 1995
with adjustments for reduced cash flow requirements associated with facilities
closed and/or sold in fiscal 1995, known contract and cyclical changes, and also
giving consideration to cash on hand at August 31, 1995 of $799,000, management
expects the Company to be able to meet its cash obligations required by
operations during fiscal 1996, excluding the Company's obligations under the
Debentures. However, the cash needs of the Company may vary from month to month
depending upon the actual level of business activity, and through the first
quarter of fiscal 1996 the Company continues to incur losses. Therefore, no
assurance can be given that the Company will generate adequate cash flows to
meet cash obligations required by operations, excluding the Company's
obligations under the Debentures, in fiscal 1996.
To provide funds for the Debenture exchange and/or additional operating
needs, the Company anticipates utilizing one or more of the following potential
sources of cash:
- The Company has filed its fiscal 1995 Federal tax return,
and a Form 1139 "Corporate Application for Tentative Refund" in
the amount of $9.4 million. In the event the Company receives
the full refund claim for fiscal 1995, the net amount of cash
available for working capital purposes would be $7.5 million. The
Company has also filed amended Federal tax returns for prior
years to claim refunds of an additional $13.2 million. The net
amount of cash available for working capital purposes would be
$10.6 million. These refund claims have been made under Section
172(f) of the Internal Revenue Code, an area of the tax law
without significant precedent, and there may be substantial
opposition by the IRS to the Company's refund claims.
Accordingly, no assurances can be made to the Company entitlement
to such refunds or the timing of the receipt thereof (see Note 4
to the Company's Condensed Consolidated Financial Statements
included herein).
- Included in non-current assets are three hospital facilities
designated as property and equipment held for sale with a total
carrying value of $3.9 million. The Company expects to sell two
of these facilities during the fiscal year and may lease a third
facility to an unrelated entity. However, the contracts have
not been fully negotiated, and proceeds from the sales or lease
of such assets are not expected to be available by the time the
Debenture exchange is expected to occur. Accordingly, management
expects to use such cash proceeds, if received during fiscal
1996, to fund and expand the Company's operations and implement
the Company's restructuring plans.
- In March 1995, a jury awarded the Company approximately $2.7
million, plus interest, in damages in its lawsuit against
RehabCare Corporation. The defendant has posted a bond for the
amount of the award and has filed an appeal of the judgment.
Management is unable to predict whether any proceeds from this
judgment will be received in fiscal 1996 (see Note 5 to the
Company's Condensed Consolidated Financial Statements).
- The Company has received a firm commitment from a mutual
fund to purchase in a private placement at least $5.0 million of
15% fully secured Company notes due no earlier than December 1996
if offered by the Company.
All of these potential sources of additional cash in fiscal 1996
are subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1996 the Company
will complete the transactions required to fund its working capital deficit.
During the first quarter of fiscal 1996, the Company paid the IRS
approximately $2.3 million pursuant to its settlement agreement (see Note 5 to
the Company's Condensed Consolidated Financial Statements included herein).
The Company
15
<PAGE> 16
utilized the proceeds from a note receivable from the sale of its Sacramento
facility received on July 10, 1995 for $2.75 million in order to fund this
payment. The Company continues to pay the remaining balance in monthly
installments of $42,000.
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 CAS). The Company sought damages for the lost
benefit of certain stockholder appreciation rights in an amount in excess of
$3.6 million and punitive damages. RehabCare filed a counterclaim in the case
seeking a declaratory judgement with respect to the rights of both parties under
the Stock Redemption Agreement, an injunction enjoining the Company from taking
certain action under the Stock Redemption or Restated Shareholders Agreements
and damages in the form of attorneys' fees and costs allegedly incurred by
RehabCare with respect to its issuance of certain preferred stock and with
respect to prior litigation between the parties. The case was tried before a
jury commencing on February 21, 1995. Prior to the presentation of evidence to
the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8,
1995, the jury returned its verdict awarding the Company $2,681,250 in damages,
plus interest and the costs of the action against RehabCare for securities fraud
and for breach of contract. RehabCare has posted a bond in the amount of $3.0
million and filed a motion for new trial or in the alternative, for judgement as
a matter of law, which the court denied in its entirety on August 4, 1995. On
September 1, 1995, RehabCare filed a notice of appeal with the District Court
indicating its intent to appeal the matter to the United States Court of
Appeals. Although the Company feels that RehabCare will not prevail in its
appeal, the Company has not recognized any gain with relation to the judgement.
In connection with the proposed sale and lease-back of hospitals to CMP
Properties, Inc., a real estate investment trust, the Company advanced $1.1
million to its financial advisor in fiscal 1992. The financial advisor was
affiliated with several members of the Company's Board of Directors at that
time. The advances, which were to be repaid if the transaction was not
completed, were to be secured by a pledge of common stock in an unrelated
company. The pledged shares of common stock were in the possession of the
Company's primary legal counsel at that time, as collateral for the advances.
After the transaction was terminated, the financial advisor refused to repay the
advances and the Company's legal counsel refused to turn over the collateral to
the Company. The Company has filed an action in the United States District Court
for the District of Oregon (Civil Case No. 94-384 FR) against its former
financial advisor and former legal counsel to recover the advances. The former
financial advisor has counterclaimed against the Company for $1,688,000 for
breach of contract and unjust enrichment. The Company's former law firm has
filed a counterclaim for $193,000 for unpaid legal fees. Management believes
that the counterclaims are without merit and intends to vigorously defend
against them and to pursue the Company's claims.
On June 8, 1994, RehabCare filed a lawsuit against the Company in the
Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement
entered into between the Company and RehabCare in May 1991 (Case No. 663957). An
amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges
that it has incurred attorneys fees in connection with the settlement of certain
tax issues with the IRS and has paid the IRS a settlement amount with respect to
the years 1987 and 1988. RehabCare seeks the recovery from the Company of
$588,000, plus interest, which RehabCare alleges is the amount it incurred for
settlement payments to the IRS and attorneys fees it incurred in dealing with
the IRS. The Company has filed its answer and affirmative defenses contesting
the right of RehabCare to obtain the relief it seeks. Discovery is ongoing.
Until such discovery is complete, it is not possible to predict the likely
outcome of the lawsuit. The Company intends to continue to vigorously defend
this matter.
In December 1994, the Company reached a settlement with the Appeals
Office of the Internal Revenue Service ("IRS") on a payroll tax audit for the
calendar years 1983 through 1991. Pursuant to this settlement the Company agreed
to pay the IRS $5.0 million with the Company having no obligation to pay any
penalties or accrued interest. The IRS agent conducting the audit asserted that
certain physicians, psychologists and other staff engaged as independent
contractors by the Company should have been treated as employees for payroll tax
purposes. The settlement was reviewed and accepted on behalf of the IRS by its
district counsel. Payment terms have been accepted at 50% within 90 days of
finalization with the remainder financed over the next five years. In March
1995, the Company paid $350,000 to the IRS against the initial payment due. In
return, the IRS granted the Company an additional 120 days to pay the remaining
16
<PAGE> 17
balance of $2,150,000. In July 1995, the Company paid the remaining balance of
the initial payment, and continues to make the monthly installment payment
pursuant to the terms of the settlement. The unpaid balance bears interest at 9%
per annum due and payable after the $5.0 million is paid.
An involuntary bankruptcy petition was dismissed on March 6, 1995
pursuant to an agreement dated March 3, 1995 between the Company and a
representative of the petitioners. Under such agreement the Company has agreed,
subject to the conditions therein, to offer to exchange for its outstanding 7
1/2% Convertible Subordinated Debentures a combination of cash and shares. See
Note 2 to the Company Condensed Consolidated Financial Statements included
herein for a discussion of the Company's default in the payment of interest on
its 7 1/2 % Convertible Subordinated Debentures and the consequent acceleration
of the full principal amount thereof. The foregoing is intended to disclose an
event, and does not constitute an offer to the holders of the Company's
Debentures. Any such offer may only be made pursuant to an exchange offer, and
in conformity with the relevant securities laws, rules and regulations.
In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criteria
in regard to net tangible assets available to common stock and three year
average net income among other items. The Listing and Compliance Committee of
the NYSE has determined to monitor the Company's progress toward returning to
continuing listing standards. Management anticipates success in "global
restructuring" (see Note 2 to the Company Condensed Consolidated Financial
Statements included herein) will be necessary in order to satisfy the Committee
of the Company's progress. The Company met with representatives of the NYSE
during the third quarter of fiscal 1995 and during the first quarter of fiscal
1996, to discuss the Company's financial condition and intention to issue shares
without seeking approval of shareholders pursuant to the exception to the NYSE
policy for financially distressed companies.
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 such lawsuits will not have a
material adverse impact on the Company's financial statements.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
- -----------------------------------------
See the discussion contained in the second paragraph under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" for a discussion of the Company's default in
the payment of interest on its 7 1/2% Convertible Subordinated Debentures and
the acceleration thereof.
In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the
Company that it was below certain quantitative and qualitative listing criteria
in regard to net tangible assets available to common stock and three year
average net income among other items. The Listing and Compliance Committee of
the NYSE has determined to monitor the Company's progress toward returning to
continuing listing standards. Management anticipates success in "global
restructuring" (see Note 2 to the Company's Condensed Consolidated Financial
Statements) will be necessary to satisfy the Committee of the
Company's progress. The Company met with representatives of the NYSE during the
third quarter of fiscal 1995 and the first quarter of fiscal 1996, to discuss
the Company's financial condition and intention to issue shares without seeking
approval of shareholders pursuant to the exception to the NYSE policy for
financially distressed companies. No assurance can be given that the steps of
the restructuring will be successfully completed.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------
(a) Exhibits
10.61* Amended Common Stock Purchase Agreement dated April 15, 1995
between the Company and James R. Moriarty, an accredited
investor.
27* Financial Data Schedules.
* Filed with the Form 10-Q for the Quarters ended August 31, 1995.
(b) Reports on Form 8-K
1) The Company filed a current report on Form 8-K dated July 5,
1995 to report Item 4, the engagement of Ernst & Young LLP as
the independent accountants for the Company.
2) The Company filed a current report on Form 8-K dated July 17,
1995, to report, under Item 5, that the Company had entered
into agreements with four accredited investors for the private
placement of 154,933 shares of the Company's common stock and
to report the Company's intent to mail a notice to
stockholders on or about August 21, 1995.
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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
October 24, 1995 By /s/ DREW Q. MILLER
--------------------------------
Drew Q. Miller
Vice President,
Chief Financial Officer
and Chief Operating Officer
(Principal Financial Officer)
October 24, 1995 By /s/ KERRI RUPPERT
--------------------------------
Kerri Ruppert
Vice President,
Secretary/Treasurer,
and Chief Accounting Officer
(Principal Accounting Officer)
18
