<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended February 29, 1996
[ ] 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)
350 West Bay Street, Costa Mesa, California 92627
(Address of principal executive offices and zip code)
(714) 222-2273
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Classes Outstanding at April 12, 1996
- -------------------------------------- -----------------------------
<S> <C>
Common Stock, par value $.01 per share 2,672,084
</TABLE>
<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Index
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. - Condensed Consolidated Financial Statements
<S> <C>
Condensed consolidated balance sheets,
February 29, 1996 and May 31, 1995.................................................. 3
Condensed consolidated statements of operations for
the three and nine months ended February 29, 1996 and February 28, 1995............. 4
Condensed consolidated statements of cash flows for
the nine months ended February 29, 1996 and February 28, 1995....................... 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...................................................................... 26
Item 1. - Legal Proceedings................................................................ 26
Item 3. - Defaults Upon Senior Securities.................................................. 27
Item 6. - Exhibits and Reports on Form 8-K................................................. 27
Signatures.................................................................................. 28
</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>
February 29, May 31,
1996 1995
------------ -------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 3,214 $ 1,542
Accounts and notes receivable, less allowance for
doubtful accounts of $1,056 and $1,096............................... 3,148 3,329
Note receivable........................................................... --- 2,750
Property and equipment held for sale...................................... 3,821 ---
Other current assets...................................................... 517 391
-------- --------
Total current assets............................................................ 10,700 8,012
-------- --------
Property and equipment, at cost................................................. 18,742 25,181
Less accumulated depreciation and amortization.................................. ( 9,023) (13,074)
-------- --------
Net property and equipment...................................................... 9,719 12,107
-------- --------
Property and equipment held for sale ........................................... 2,455 3,746
Other assets.................................................................... 3,724 2,136
-------- --------
Total assets.................................................................... $ 26,598 $ 26,001
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................................. $ 10,078 $ 10,235
Long-term debt in default (see Note 2).................................... 9,538 9,538
Current maturities of long-term debt..................................... 1,630 3,285
Income taxes payable...................................................... 377 296
-------- --------
Total current liabilities....................................................... 21,623 23,354
-------- --------
Long-term debt, excluding current maturities.................................... 2,048 5,077
Income taxes payable............................................................ 7,018 ---
Other liabilities............................................................... 638 1,503
Minority interest............................................................... 1,000 1,000
-------- --------
Commitments and contingencies (see Note 5)
Stockholders' equity:
Preferred stock, $50.00 par value; authorized 60,000 shares............... --- ---
Common stock, $.01 par value; authorized 12,500,000 shares; issued and
outstanding 2,662,085 and 2,464,516 shares........................... 27 25
Additional paid-in capital................................................ 42,517 41,558
Accumulated deficit....................................................... (48,273) (46,516)
-------- --------
Total stockholders' equity (deficit)................................. ( 5,729) ( 4,933)
-------- --------
Total liabilities and stockholders' equity...................................... $ 26,598 $ 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
<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 29, February 28, February 29, February 28,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Operating revenues................................ $ 7,584 $ 6,467 $23,964 $21,859
Costs and expenses:
Operating expenses................................ 6,687 7,556 21,493 23,266
General and administrative expenses............... 2,120 1,037 5,825 2,981
Provision for doubtful accounts................... 251 234 920 1,417
Depreciation and amortization..................... 300 438 983 1,349
------- ------- ------- -------
9,358 9,265 29,221 29,013
------- ------- ------- -------
Loss from operations................................... (1,774) (2,798) (5,257) (7,154)
(Gain)/loss on sale of assets..................... 13 (4) (1,023) (19)
Non-operating gain................................ (860) --- (860) ---
Interest income................................... (100) (20) (164) (31)
Interest expense.................................. 310 416 1,053 941
------- ------- ------- -------
Loss before income taxes............................... (1,137) (3,190) (4,263) (8,045)
------- ------- ------- -------
Provision (benefit) for income taxes................... 30 59 (2,506) 176
------- ------- ------- -------
Net loss............................................... $(1,167) $(3,249) $(1,757) $(8,221)
======= ======= ======= =======
Loss per share:
Net loss.......................................... $ (0.44) $ (1.42) $ (0.67) $ (3.69)
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
February 29, February 28,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $(1,757) $(8,221)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization....................................... 983 1,349
Provision for doubtful accounts..................................... 920 1,417
Gain on sale of assets.............................................. (1,057) ---
Loss on sale/write-down of assets................................... 37 4
Carrying costs incurred on property and equipment held for sale..... (293) (382)
Decrease in accounts and notes receivable........................... 2,013 1,415
Increase in other current assets and other assets................... (1,627) (50)
Decrease in accounts payable and accrued liabilities................ (157) (1)
Increase(decrease) in income taxes payable.......................... 81 (511)
Increase in non-current income taxes payable........................ 7,018 ---
Decrease in other [NON-CURRENT] liabilities......................... (865) (66)
------- -------
Net cash provided by(used in) operating activities....................... 5,296 (5,046)
------- --------
Cash flows from investing activities:
Net proceeds(loss) from sale of property and equipment (operating and
held for sale) .......................................................... (41) 2,766
Additions to property and equipment...................................... (530) (112)
------- -------
Net cash provided by(used in) investing activities....................... (571) 2,654
------- -------
Cash flows from financing activities:
Bank and other borrowings................................................ 1,000 2,000
Proceeds from the issuance of common stock............................... 961 528
Repayment of debt........................................................ (5,014) (153)
------- -------
Net cash provided by(used in) financing activities....................... (3,053) 2,375
------- -------
Net increase(decrease) in cash and cash equivalents............................ 1,672 (17)
Cash and cash equivalents at beginning of period............................... 1,542 1,781
------- -------
Cash and cash equivalents at end of period..................................... $ 3,214 $ 1,764
======= =======
</TABLE>
See accompanying notes.
5
<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 29, 1996, and
the related condensed consolidated statements of operations and cash flows for
the three and nine month periods ended February 29, 1996 and February 28, 1995
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 and nine months ended
February 29, 1996 and February 28, 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
operating losses for fiscal 1996. The continuation of the Company's business is
dependent upon the resolution of operating and short-term liquidity problems and
the realization of the Company's plan of operations 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").
The weighted average number of shares outstanding used to compute loss
per share were 2,657,000 for the three months ended February 29, 1996 and
2,282,000 for the three months ended February 28, 1995 and 2,637,000 for the
nine months ended February 29, 1996 and 2,226,000 for the nine months ended
February 28, 1995. 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
At February 29, 1996, the Company had cash and cash equivalents of
$3,214,000. The Company provided $5.3 million from its operating activities, and
utilized $0.6 million and $3.1 million in its investing and its financing
activities, respectively. The Company reported a net loss of $1.2 million for
the quarter ended February 29, 1996, versus a net loss of $3.2 million for the
quarter ended February 28, 1995. As a result, the Company has an accumulated
deficit of $48.3 million and a total stockholders' deficiency of $5.7 million as
of February 29, 1996. Additionally, the Company's current assets at February 29,
1996 amounted to approximately $10.7 million and current liabilities were
approximately $21.6 million, resulting in working capital deficiency of
approximately $10.9 million and a negative current ratio of 1:2. The Company's
primary use of available cash resources is to expand its behavioral medicine
managed care and contract management businesses and fund operations while it
seeks to restore profitability to certain of its freestanding facilities.
Included in current and non-current assets are four hospital
facilities designated as property and equipment held for sale with a total
carrying value of $6.3 million. In October 1995, the Company sold one of its
operating facilities and in November 1995, closed another due to poor
performance. In December 1995, the Company entered into escrow for the sale of
this facility. Accordingly, the closed property was classified as property held
for sale during the second quarter.
6
<PAGE> 7
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Included in current liabilities are $9.5 million of Debentures in
default and immediately due and payable on account of acceleration and $1.4
million of accrued interest 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 proposed Debenture exchange provides for the
Company to issue $120 worth of its common stock at a defined value for each
$1,000 of Debentures, and the transaction may be contingent upon the Company's
ability to make certain filings with the Securities and Exchange Commission. Due
to the longer than anticipated time frame in implementing the exchange offer,
the Company is considering, and may, among other things, adjust the terms of the
exchange offer. 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 filings. 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 an 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 reduction 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.)
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 as management continues to implement plans for expanding
the Company's managed care and behavioral medicine contract management
operations.
In previous years, the Company was obligated to support and fund
certain poorly performing freestanding facilities that now have been closed,
including two such facilities closed in fiscal 1996 (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 1996 with adjustments for
reduced cash flow requirements associated with facilities closed and/or sold in
fiscal 1996, known contract and cyclical changes, and also giving consideration
to cash on hand at February 29, 1996 of $3.2 million, management expects the
Company to be able to meet its cash obligations required by operations during
the next year, including the Company's obligations under the Debentures
provided that the acceleration has been rescinded. However, the cash needs of
the Company may vary from month to month depending upon the actual level of
business activity, and through the third quarter of fiscal 1996 the Company
continues to incur losses from ongoing operations. Therefore, no assurance can
be given that the Company will generate adequate cash flows to meet cash
obligations required by operations.
In October 1995, the Company received a $9.4 million refund related to
its fiscal 1995 Federal tax return. The Company will utilize such proceeds to
provide funds for the Debenture exchange, payoff the outstanding liabilities to
the IRS, and/or for additional operating needs. The statement of operations for
the nine months ended February 29, 1996, reflects the recognition of $2.6
million in tax benefits for this refund (see Note 4-- "Income Taxes"). In
addition, in November 1995, the Company entered into a Secured Conditional
Exchangeable Note Purchase Agreement. The principal amount of the Note is $1.0
million, interest accrues at 12% per annum, and is secured by a deed of trust.
In addition, the principal amount of the Note is immediately exchangeable into
the Company's
7
<PAGE> 8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
common stock, at the exchange rate of $7.54375 per share, upon approval of the
Company's shareholders, as required. In the event the Company's shareholders do
not approve the transaction, the Note is due on June 1, 1996. or any extended
maturity date agreed upon by both parties. The Company is currently in the
process of extending this due date for nine months to March 1, 1997.
During the third quarter of fiscal 1996, the Company received a legal
settlement of $860,000. The Company also anticipates utilizing one or more of
the following potential sources of cash to provide funds for additional
operating needs:
- Included in current and non-current assets are four hospital
facilities designated as property and equipment held for sale
with a total carrying value of $6.3 million. The Company expects
to sell two of these facilities during the fourth quarter of
fiscal 1996. Contracts on the remaining two facilities have not
been fully negotiated and proceeds from the sales 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
expansion of the Company's managed care and behavioral medicine
contract management operations and the Company's losses in its
freestanding operations.
- 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 $3.0 million
bond for the amount of the award and has filed an appeal of the
judgment. Management is unable to predict the outcome and 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 September 1997 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, and during the
second quarter of fiscal 1996, paid the IRS the remaining balance, including
accrued interest, due on the settlement agreement of approximately $2.5 million.
In addition, during the third quarter of fiscal 1996, the Company paid a legal
settlement of $550,000.
NOTE 3 - PROPERTY AND EQUIPMENT HELD FOR SALE
The Company has decided to dispose of certain freestanding facilities
and other assets (see Note 2-- "Operating Losses and Liquidity"). Property and
equipment held for sale, consisting of land, building, equipment and other fixed
assets with a historical net book value of approximately $13.0 million at
February 29, 1996, is carried at estimated net realizable value of approximately
$6.3 million. Operating revenues and operating expenses of the facilities
designated for disposition were approximately $0.3 million and $0.5 million,
respectively for the nine months ended February 29, 1996.
Property and equipment held for sale, which are under contract and
expected to be sold within the next twelve month period, are shown as current
assets on the consolidated balance sheets. Gains and losses on facilities have
been reflected in the statement of operations. Any impairments to the net
realizable value of property and equipment held for sale have also been recorded
in the statement of operations. Two of the four closed freestanding facilities
included in property and equipment held for sale are currently under sales
contracts.
8
<PAGE> 9
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of the transactions affecting the carrying value of current
and non-current property and equipment held for sale for the nine months ended
February 29, 1996, is as follows (in thousands):
<TABLE>
<S> <C>
Balance as of May 31, 1995......................................... $3,746
Designation of facility as property and equipment held for sale... 2,211
Carrying costs incurred during phase-out period.................... 179
Carrying value of assets sold...................................... (27)
Contingencies on properties sold................................... 125
Adjustment to net realizable value................................. 42
------
Balance as of February 29, 1996.................................... $6,276
======
</TABLE>
The loss on sale/write-down of property held for sale and the gain on
the sale of its operating properties are reflected on the Company's consolidated
statement of operations and consists of the following for the nine months ended
February 29, 1996 (in thousands):
<TABLE>
<S> <C>
Gain on property held for sale..................................... $ 11
Loss on property held for sale..................................... (53)
Adjustment to property held for sale
to net realizable value....................................... 42
------
---
Write-down of operating property................................... ---
Gain on sale of operating property................................. 1,023
------
Gain on sale/write-down of assets.................................. $1,023
======
</TABLE>
NOTE 4 - INCOME TAXES
On July 20,1995, the Company filed its Federal income tax return for
fiscal 1995. On August 4, 1995, the Company filed Form 1139 "Corporate
Application for Tentative Refund" to carry back losses under Section 172(f)
requesting a refund in the amount of $9.4 million. On August 30, 1995, the
Company also filed amended Federal tax returns for several prior years to carry
back losses under Section 172(f). The refunds 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 are $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 guiding legal precedent.
There may be opposition by the Internal Revenue Service ("IRS") as to the
Company's ability to carry back such losses under Section 172(f). Therefore,
assurances cannot be made to the Company's entitlement to all of these claims.
Consequently, a valuation allowance has been established against $20.0 million
of this potential tax benefit.
In October 1995, the Company received a $9.4 million refund for fiscal
1995. Of this refund, $2.4 million was recognized as a tax benefit during the
second quarter of fiscal 1996. Due to the lack of legal precedent regarding
Section 172(f), the remaining amount, $7.0 million, is reflected on the
Company's consolidated balance sheet in non-current income taxes payable. In
addition, during the second quarter the Company reflected a tax benefit of $0.2
million, which is related to prior years' returns. The Company paid a
contingency fee of $1.9 million related to the 1995 refund. In the event the IRS
Appeals Office determines that the Company is not entitled to all or a portion
of the deductions under Section 172(f), this fee is reimbursable to the Company
proportionately. Of the $1.9 million, the Company expensed $0.5 million during
the second quarter of fiscal 1996, which is the amount of fees which is related
to the tax benefit recognized by the Company. The remaining $1.4 million is
reflected in the Company's financial statements as non-current other assets.
9
<PAGE> 10
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 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. RehabCare filed its first brief to set forth argument on January 29,
1996, the Company filed its brief on March 19, 1996 and RehabCare filed its
reply on April 6, 1996. The Company anticipates that the District Court will
hear this appeal during the next six months. Although the Company feels that
RehabCare will not prevail in its appeal, the Company has not recognized any
gain with relation to the judgement. The outcome of this lawsuit will not have
an effect on the Company's results of operations.
In July 1994, the Company 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, Mr. Leslie Livingston and Livingston & Co., and its former
legal counsel, Schwabe, Williamson & Wyatt, to recover advances for services in
connection with an uncompleted sale and leaseback of CMP Properties, Inc. On
February 15, 1996, the Company settled this dispute for $860,000. This
settlement amount was received by the Company during the third quarter of fiscal
1996 and is reflected in the statement of operations as a non-operating gain.
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).
The Company settled this dispute on February 13, 1996 for $550,000. This
settlement amount was paid by the Company during the third quarter of fiscal
1996. The Company had reserved for this settlement amount in a prior fiscal
year, and as a result, there was no impact from this settlement on the Company's
statements of operations.
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 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 that, at a minimum, success
in completing the rescission of the Debenture acceleration (see Note 2--
"Operating Losses and Liquidity") and a return to profitability 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 and fourth quarters of fiscal 1996, to discuss the
Company's financial condition. During fiscal 1995, the
10
<PAGE> 11
Company issued shares without seeking approval of shareholders pursuant to the
exception to the NYSE shareholder approval policy for financially distressed
companies.
From time to time, the Company and its subsidiaries are also parties,
and their respective 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 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements,
the realization of which may be impacted by certain important factors discussed
below under "Risk Factor's -- Important Factor Related to Forward- Looking
Statements and Associated Risks."
General
In response to continuing changes in the behavioral health care
industry, the Company has made significant changes in its operations, including
the divesture of many freestanding facilities, so that the Company can focus on
its managed care and behavioral medicine contract management operations. During
fiscal 1996, managed care operations experienced significant growth through
internal development and an acquisition in April 1995. In addition, on February
7, 1996, the Company entered into a non-binding letter of intent to acquire
Mustard Seed Corporation, a managed care provider based near Philadelphia,
Pennsylvania. The Company has not yet executed a definitive agreement with
respect to this letter of intent, and there can be no assurance that a
definitive agreement will be executed or that such transaction will be
consummated.
As a result of the Company's continued negative results from
operations, the Company has had difficulty generating sufficient cash flows from
operations to meet its obligations and sustain its operations. During fiscal
1996, the Company has utilized the proceeds from the sale of assets, tax
refunds, a litigation settlement, and the private placement of securities to
fund its working capital deficit.
During the third quarter of fiscal 1996, the Company settled two
pending lawsuits. One settlement resulted in a non-operating gain of $860,000
and was received during the third quarter. The other settlement resulted in the
Company paying $550,000 during the third quarter.
Global Restructuring
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 attractiveness to institutional
investors; (ii) negotiate settlement of the Company's payroll tax dispute 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. All of these objectives
were accomplished in fiscal 1995 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. In addition, during the
third quarter of fiscal 1996 there was a sale of an additional 4,000 shares. The
proceeds of such sales were used for working capital and other general corporate
purposes. During the second quarter of fiscal 1996, the Company received a $9.4
million refund from its fiscal 1995 Federal tax return and issued a Secured
Conditional Exchangeable Note for $1.0 million (see Note 2 to the Company's
Condensed Consolidated Financial Statements included herein). The majority of
the proceeds of these items gave been used for working capital purposes.
Remaining proceeds will be applied to the exchange offer to the holders of
Debentures.
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).
11
<PAGE> 12
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 documents for an exchange offer with the
Securities and Exchange Commission, there can be no assurance that the exchange
offer will be successfully completed. In connection with the offer, the Company
is seeking to rescind the Debenture acceleration from the holders of a majority
in principal amount of the Debentures. Due to the longer than anticipated time
frame for implementing the exchange offer, the Company may, among other things,
adjust the terms of the exchange offer. 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 Nine months ended
February 29, November 30, February 28, February 29, February 28,
1996 1995 1995 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Managed care operations:
Covered lives...................... 907,578 693,220 347,471 907,578 347,471
Patient days:
Freestanding facilities............... 1,747 2,033 6,617 7,558 23,501
Behavioral medicine contracts......... 2,986 4,383 6,245 12,903 22,852
Freestanding facilities:
Occupancy rate....................... 23% 14% 24% 15% 22%
Admissions........................... 375 353 795 1,301 2,683
Average length of stay (days)........ 5 6 8 6 9
Behavioral medicine contracts:
Average occupied beds per contract... 4 6 5 5 6
Admissions........................... 458 584 763 1,812 2,825
Average length of stay (days)........ 7 8 8 7 8
Total beds available at end of period:
Freestanding facilities.............. 88 88 277 88 277
Behavioral medicine contracts........ 102 114 133 102 133
</TABLE>
Three Months Ended February 29, 1996 Compared to Three Months Ended February 28,
1995
The Company reported a pretax loss of approximately $1.1 million for
the third quarter of fiscal 1996, an improvement of approximately $2.1 million
or 64% from the pretax loss of approximately $3.2 million reported for the third
quarter of fiscal 1995. Included in the net loss for the third quarter of fiscal
1996 is a non-operating gain of $0.9 million related to a litigation settlement
(see Note 5 to the Company's Condensed Consolidated Financial Statements
included herein).
Operating revenues for the third quarter of fiscal 1996 increased by
$1.1 million or 17% from the third quarter of fiscal 1995. The third quarter of
fiscal 1996 includes an increase in managed care operating revenues of $2.9
million as compared to the third quarter of fiscal 1995. This increase in
managed care operating revenues was partially offset by the decline in operating
revenues from freestanding facilities of $1.8 million or 47% due to the sale and
closure of two facilities during the second quarter of fiscal 1996.
12
<PAGE> 13
Operating expenses decreased by approximately $0.9 million or 12% in
the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995.
The decrease in operating expenses is primarily attributable to a 58% decline in
operating expenses for freestanding operations as a result of reduced admissions
and patient days and was partially offset by an 83% increase in operating
expenses related to managed care operations, and a 49% increase related to
contract operations. General and administrative expenses increased by
approximately $1.1 million from the third quarter of fiscal 1995 as a result of
managed care operations expansion and development and higher corporate legal and
accounting fees in the third quarter of fiscal 1996. During the third quarter, a
decline in the provision for doubtful accounts for freestanding operations of
$0.2 million was offset by an increase of $0.2 million for the provision for
doubtful accounts for behavioral medicine contracts.
Managed Care Operations
At February 29, 1996, the number of covered lives increased to 907,578
from 347,471 a year ago or by 161%. This increase is primarily attributable to
new contracts. Comprehensive Behavioral Care, Inc. ("Comprehensive Behavioral")
believes that it 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 third quarter of fiscal 1996, operating revenues increased by
$2.9 million compared to the third quarter of fiscal 1995. Operating expenses
also increased by $1.5 million in the third quarter of fiscal 1996 compared to
the same period a year ago. In addition, general and administrative expenses
increased to $0.5 million in the third quarter of fiscal 1996 as compared to no
reported expense in the third quarter of fiscal 1995. As a result, the net
operating profit for Comprehensive Behavioral for the third quarter of fiscal
1996 was $44,000, an improvement of $1.1 million from the net operating loss of
$1.1 million in the same quarter of the prior year.
Behavioral Medicine Contracts
In the third quarter of fiscal 1996, CareUnit, Inc. ("CareUnit")
operating revenues increased slightly by 3% from the third quarter of fiscal
1995 and operating expenses increased by $0.5 million or 49%. This resulted in
an increase in CareUnit's net operating loss by $0.6 million to $1.0 million as
compared to the same period of fiscal 1995.
During the third quarter of fiscal 1996, patient days of service at
behavioral medicine contracts declined by approximately 52% from 6,245 patient
days to 2,986 patient days. This decline was due predominately to closure of two
contract units during the third quarter of fiscal 1996. Units which were
operational for both the third quarter of fiscal 1996 and 1995 experienced a 2%
increase in utilization to 2,935 patient days. Average net revenue per patient
day at these units increased by 7% from the same quarter a year ago. Therefore,
the net result of these fluctuations was a decline in an overall net inpatient
operating revenues of 19% to $0.2 million. Net outpatient revenues for programs
operational for both quarters at these units increased 7% from approximately
$82,302 in the third quarter of 1995 to approximately $88,247 in the third
quarter of fiscal 1996.
The following table sets forth quarterly utilization data on a "same
store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
--------------------------
Fiscal 1996 Fiscal 1995
3rd Quarter 3rd Quarter
----------- -----------
<S> <C> <C>
Admissions................................. 448 418
Average length of stay..................... 7 7
Patient days............................... 2,935 2,903
Average occupancy rate..................... 32% 24%
</TABLE>
For units operational for the third quarter of fiscal 1996 compared to
the same quarter of fiscal 1995, operating expenses decreased 6%, when combined
with a 13% decrease in operating revenues resulted in operating income at the
unit level decreasing by 33%.
13
<PAGE> 14
Freestanding Operations
Operating revenues from freestanding operations decreased by $1.8
million or by 47% during the third quarter of fiscal 1996 compared to the third
quarter of fiscal 1995. In addition, operating expenses declined 58% or $2.8
million in the third quarter of fiscal 1996. The decrease in operating revenues
offset by the significant decrease in operating expenses, resulted in an
improvement in hospital operations net operating loss for the third quarter of
fiscal 1996 by $2.4 million compared to losses reported in the same quarter a
year ago.
Admissions in the third quarter of fiscal 1996 decreased to 375 from
795 in the third quarter of fiscal 1995, an overall decline of 53%. This decline
is primarily due to the sale and/or closure of two operating facilities during
the second quarter of fiscal 1996. The following table sets forth selected
quarterly utilization data on a "same store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
--------------------------
Fiscal 1996 Fiscal 1995
3rd Quarter 3rd Quarter
----------- -----------
<S> <C> <C>
Admissions................................. 375 340
Average length of stay..................... 5 9
Patient days............................... 1,747 2,962
</TABLE>
Net revenue per patient day for "same store" facilities increased to
$1,137 for the third quarter of fiscal 1996 from $510 for the third quarter of
fiscal 1995. Admissions increased for the quarter from 340 in the third quarter
of fiscal 1995 to 375 in the third quarter of fiscal 1996. The slight increase
in admissions combined with the decline in length of stay was offset by an
increase in outpatient revenues resulting in an increase in net operating
revenues for the third quarter of fiscal 1996 of $0.5 million.
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
3rd Quarter 3rd Quarter
----------- -----------
<S> <C> <C>
Facilities offering....................................... 2 2
Net outpatient/daycare revenues........................... $1,295 $ 608
% of total "same store" net operating revenues............ 65% 40%
</TABLE>
Operating expenses at the Company's freestanding facilities on a "same
store" basis increased $0.3 million and bad debt expense increased $0.1 million
in the third quarter of fiscal 1996 from the third quarter of fiscal 1995. As a
result, net operating income remained constant in the third quarter of fiscal
1996 from the same period a year ago.
Three Months Ended February 29, 1996 Compared to Three Months Ended November 30,
1995
The Company reported a net loss of approximately $1.2 million or $0.44
per share for the quarter ended February 29, 1996, a decline of approximately
$1.9 million or $0.71 per share from the net income of $0.7 million or $0.27 per
share reported for the quarter ended November 30, 1995. Included in the three
months ended November 30, 1995 is a gain of $1.0 million related to the sale of
an operating facility in October 1995, and an income tax benefit of $2.6 million
related to the carryback of fiscal 1995 losses defined under Section 172(f).
Included in the three months ended February 29, 1996 is a non-operating gain of
$0.9 million related to a legal settlement (see Note 5 to the Company's
Condensed Consolidated Financial Statements included herein).
Operating revenues remained constant at $7.6 million for the third and
second quarters of fiscal 1996. A 25% decline in revenues was experienced by
freestanding facilities due to the sale of operations of one facility in October
1995 and the closure of another in November 1995 which was offset by a 21%
increase in managed care revenues.
14
<PAGE> 15
In addition, revenues for behavioral medicine contract operations declined by 7%
during the third quarter. Operating expenses declined in the third quarter of
fiscal 1996 by 6% or $0.4 million. This decline in operating expenses was
attributable to a decrease of 31% related to freestanding operations, which was
partially offset by an increase in operating expenses for managed care
operations of 12% and contract operations of 11%.
General and administrative expenses also decreased by $0.3 million
during the third quarter of fiscal 1996 compared to the second quarter of fiscal
1996. This decrease is primarily related to $0.5 million in fees related to the
Company's 1995 Federal tax refund which is included in the second quarter of
fiscal 1996. The provision for doubtful accounts declined by 36% during the
third quarter of fiscal 1996 compared to the previous quarter as a result of a
significant decline in hospital operations which was partially offset by a
slight increase for behavioral medicine contract operations.
The Company recorded a non-operating gain of $0.9 million during the
third quarter of fiscal 1996. This gain is related to a legal settlement (see
Note 5 to the Company's Condensed Consolidated Financial Statements included
herein). In addition, the Company recorded $1.0 million for the gain on the sale
of assets during the second quarter of fiscal 1996. This gain is attributable to
the sale of an operating facility in October 1995.
Managed Care Operations
During the third quarter of fiscal 1996, the number of covered lives
increased to 908,000 or by 31% from the previous quarter. Of this increase
covered lives for existing contracts experienced a 4% increase. The remaining
growth, 194,000 covered lives, relates primarily to new contracts for Medicaid
in Puerto Rico.
In the third quarter of fiscal 1996, operating revenues increased by
21% to $4.2 million compared to the second quarter of $3.5 million. Operating
expenses also increased by $0.4 million or 12% in the third quarter of fiscal
1996. General and administrative expenses increased to $0.5 million or by 16% in
the third quarter of fiscal 1996 as compared to the second quarter. As a result,
net operating income for Comprehensive Behavioral for the third quarter of
fiscal 1996 was $44,000, as compared to a net operating loss of $0.3 million
from the prior quarter.
Behavioral Medicine Contracts
In the third quarter of fiscal 1996, CareUnit, Inc. ("CareUnit")
operating revenues decreased $0.1 million or by 7% from the second quarter of
fiscal 1996 although operating expenses increased by $0.1 million or 11%. The
provision for doubtful accounts increased by $0.1 million or 70% during the
third quarter of fiscal 1996 compared to the prior quarter. The decrease in
operating revenues during the third quarter of fiscal 1996 combined with the
increase in operating expenses resulted in an increase in CareUnit's net
operating loss by $0.4 million from the second quarter to $1.0 million.
During the third quarter of fiscal 1996, patient days of service at
behavioral medicine contracts declined by approximately 50% from 4,383 patient
days to 2,986 patient days. Units which were operational for both the second and
third quarters of fiscal 1996 experienced a 13% decrease in utilization to 2,935
patient days. Average net revenue per patient day at these units increased by 5%
from the previous quarter. Therefore the net result of these fluctuations was a
decline in overall net inpatient operating revenues of 9%. Net outpatient
revenues for programs operational for both quarters at these units increased
from approximately $634,000 in the second quarter of 1996 to approximately
$658,000 in the third quarter of fiscal 1996.
The following table sets forth quarterly utilization data on a "same
store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
--------------------------
Fiscal 1996 Fiscal 1995
3rd Quarter 3rd Quarter
----------- -----------
<S> <C> <C>
Admissions................................. 448 480
Average length of stay..................... 7 7
Patient days............................... 2,935 3,369
Average occupancy rate..................... 32% 36%
</TABLE>
15
<PAGE> 16
For units operational for both quarters, operating expenses increased
by $0.1 million or 15%, when combined with the decrease in operating revenues
resulted in operating income at the unit level decreasing by $0.2 million from
the second quarter of fiscal 1996.
Freestanding Operations
Operating revenues for freestanding operations decreased by $0.7
million or by 25% during the third quarter of fiscal 1996 compared to the prior
quarter. During the second quarter of fiscal 1996, the Company sold one
operating facility and closed another due to poor performance. In addition,
operating expenses declined 30% or $0.9 million in the third quarter of fiscal
1996. The provision for doubtful accounts also declined during the third quarter
by $0.2 million or 73%. The Company's freestanding operations business is
seasonal in nature, with a reduced demand for certain services particularly
around the holidays and during the summer months.
Admissions in the third quarter of fiscal 1996 increased to 375 from
353 in the second quarter, an overall increase of 6%. The following table sets
forth selected quarterly utilization data on a "same store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
--------------------------
Fiscal 1996 Fiscal 1995
3rd Quarter 3rd Quarter
----------- -----------
<S> <C> <C>
Admissions................................. 375 282
Average length of stay..................... 5 5
Patient days............................... 1,743 1,444
</TABLE>
Net revenue per patient day for "same store" facilities decreased to
$1,137 for the third quarter of fiscal 1996 from $1,150 for the second quarter
of fiscal 1996. Admissions increased for the quarter from 282 in the second
quarter to 375 in the third quarter of fiscal 1996. The increase in admissions
resulted in an increase in net operating revenues for the third quarter of
fiscal 1996 of $0.3 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
3rd Quarter 3rd Quarter
----------- -----------
<S> <C> <C>
Facilities offering....................................... 2 2
Net outpatient/daycare revenues........................... $1,295 $1,072
% of total "same store" net operating revenues............ 65% 65%
</TABLE>
Operating revenues at the Company's freestanding facilities on a "same
store" basis increased $0.3 million, operating expenses increased $0.2 million
and bad debt expense decreased $0.1 million in the third quarter from the second
quarter of fiscal 1996. As a result, net operating loss improved $0.2 million in
the third quarter from the second quarter of fiscal 1996.
The Company is taking steps designed 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 implementing cost reduction measures, including the closure of
selected facilities. In October 1995, the Company sold one operating facility
and closed another in November 1995 due to poor performance. The Company owns
six freestanding facilities. Two of the six owned facilities are currently
operating. 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.
16
<PAGE> 17
Nine Months Ended February 29, 1996 Compared to Nine Months Ended February 28,
1995
The Company reported a pretax loss of approximately $4.3 million for
the nine months ended February 29, 1996 compared to the pretax loss of $8.0
million reported for the same period for fiscal 1995, an improvement of $3.7
million or 46%. Included in the results for fiscal 1996 is a gain of $1.0
million related to the sale of an operating facility in October 1995 and a
non-operating gain of $0.9 million.
Operating revenues increased by 10% or $2.1 million for the nine months
ended February 29, 1996 compared to the nine months ended February 28, 1995. The
increase in operating revenues is primarily attributable to an increase in
managed care operations of $7.7 million which was partially offset by a decline
of $5.9 million related to hospital operations. Operating expenses declined by
8% or $1.8 million for the nine months ended February 29, 1996 as compared to
the same period for fiscal 1995. This decline is attributable to a decrease in
operating expenses for hospital operations of 45% or $7.1 million partially
offset by an increase in operating expenses for managed care and contract
operations of $4.3 million and $1.2 million, respectively. General and
administrative expenses for the nine months ended February 29, 1996 increased
$2.8 million from the nine months ended February 28, 1995. The increase in
general and administrative expenses for the nine months ended February 29, 1996
is primarily attributable to managed care operations which reported no general
and administrative expenses for the nine months ended February 28, 1995, an
increase of $0.4 million in contract operations and $1.4 million in corporate
legal and accounting expenses which included $0.5 million for fees paid related
to the Company's fiscal 1995 Federal tax refund (see Note 4 to the Company's
Condensed Consolidated Financial Statement included herein). Bad debt expense
declined $0.5 million or 35% for the nine months ended February 29, 1996 as
compared to the same period a year ago and is attributable to decreased volume
from hospital operations. In addition, interest income increased by $0.1 million
for the nine months ended February 29, 1996 compared to the nine months ended
February 28, 1995, related to interest earned on invested cash due to the
receipt of the Company's 1995 Federal tax refund during fiscal 1996.
Included in the nine months ended February 29, 1996 is an income tax
benefit of $2.6 million related to the carryback of fiscal 1995 losses as
defined under Section 172(f) (see Note 4 to the Company's Condensed Consolidated
Financial Statements included herein).
Managed Care Operations
The number of covered lives increased to 907,578 for the nine months
ended February 29, 1996 compared to 347,471 for the same period a year ago.
Covered lives for contracts existing at February 28, 1995 increased by 95,000
lives or 36%. In addition, new contracts implemented after February 28, 1995,
contributed an additional 465,000 lives increasing total covered lives as of
February 29, 1996 by 161% as compared to a year ago. The majority of growth in
covered lives is predominately related to Medicaid and new contracts implemented
in Puerto Rico.
Operating revenues increased by $7.7 million to $11.1 million for the
nine months ended February 29, 1996 compared to the nine months ended February
28, 1995. Operating expenses also increased for the nine months ended February
29, 1996 by $4.3 million compared to the same period a year ago. In addition,
general and administrative expenses increased by $1.3 million for the nine
months ended February 29, 1996. This increase is a result of managed care
operations which reported no general and administrative expenses during fiscal
1995. As a result, the net operating loss for Comprehensive Behavioral for the
nine months ended February 29, 1996 was $0.5 million, an improvement of $1.4
million from the nine month period for fiscal 1995.
Behavioral Medicine Contracts
CareUnit, Inc. ("CareUnit") operating revenues increased by $0.4
million for the nine months ended February 29, 1996 or by 10% from the same
period of fiscal 1995 and operating expenses increased by $1.1 million or 41%.
This resulted in an increase in CareUnit's net operating loss by $1.7 million
from the same period a year ago to $1.9 million.
Patient days of service at behavioral medicine contracts for the nine
months ended February 29, 1996 declined by approximately 44% from 22,852 patient
days to 12,903 patient days for the same period a year ago. Units which were
operational for both the nine months ended February 29, 1996 and February 28,
1995, experienced a 5% increase in utilization to 10,065 patient days. Average
net revenue per patient day at these units increased by 9% for the nine months
ended February 29, 1996 as compared to the same period a year ago. Therefore,
the net result of these fluctuations was in a decline in an overall net
inpatient operating revenues of 17% to $0.8 million. Net
17
<PAGE> 18
outpatient revenues for programs operational for both periods at these units
increased 49% from approximately $0.2 million for the nine months ended February
28, 1995 to approximately $0.3 million for the nine months ended February 29,
1996.
The following table sets forth selected utilization data on a "same
store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
----------------------------
Nine Months Nine Months
Ended Ended
Feb 29, 1996 Feb 28, 1995
------------ ------------
<S> <C> <C>
Admissions...................................... 1,439 1,349
Average length of stay.......................... 7 7
Patient days.................................... 10,065 9,585
Average occupancy rate.......................... 37% 41%
</TABLE>
For units operational from both periods, operating expenses increased
1%, when combined with the slight decrease in operating revenues resulted in
operating income at the unit level decreasing by 16% for the nine months ended
February 29, 1996 compared to the nine months ended February 28, 1995.
Freestanding Operations
Operating revenues of freestanding operations decreased by $5.9 million
or by 41% for the nine months ended February 29, 1996 compared to the nine
months ended February 28, 1995. During the second quarter of fiscal 1996, the
Company sold one operating facility and closed another due to poor performance.
In addition, operating expenses declined 45% or $7.1 million in the nine months
ended February 29, 1996. General and administrative expenses also declined
during the nine months ended February 29, 1996 as compared to the same period a
year ago by $0.3 million and the provision for doubtful accounts declined by
$0.8 million or 55%. The decrease in operating revenues combined with the
decline in expenses resulted in a net operating loss from hospital operations
for the nine months ended February 29, 1995 of $2.3 million, an improvement of
63% or $3.8 million from the nine months ended February 28, 1995.
Admissions for the nine months ended February 29, 1996 decreased to
1,301 from 2,683 for the nine months ended February 28, 1995, an overall decline
of 52%. The following table sets forth selected utilization data on a "same
store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
----------------------------
Nine Months Nine Months
Ended Ended
Feb 29, 1996 Feb 28, 1995
------------ ------------
<S> <C> <C>
Admissions...................................... 935 998
Average length of stay.......................... 5 10
Patient days.................................... 4,727 10,055
</TABLE>
Net revenue per patient day for "same store" facilities decreased to
$1,139 for the nine months ended February 29, 1996 from $513 for the nine months
ended February 28, 1995. Admissions decreased for the period from 998 in the
nine months ended February 28, 1995 to 935 for the nine months ended February
29, 1996. The slight decrease in admissions combined with the decline in length
of stay was offset by an increase in outpatient revenues resulting in an
increase in net operating revenues for the nine months ended February 29, 1996
of $0.2 million as compared to the same period for fiscal 1995. 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.
18
<PAGE> 19
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)
Nine Months Nine Months
Ended Ended
Feb 29, 1996 Feb 28, 1995
------------ ------------
<S> <C> <C>
Facilities offering................................... 2 2
Net outpatient/daycare revenues....................... $3,643 $2,363
% of total "same store" net operating revenues........ 64% 46%
</TABLE>
Operating expenses at the Company's freestanding facilities on a "same
store" basis increased $0.6 million and bad debt expense increased $0.3 million
for the nine months ended February 29, 1996 compared to the same period for
fiscal 1995. As a result, the net operating loss increased $0.6 million for the
nine months ended February 29, 1996 compared to the nine months ended February
28, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At February 29, 1996, the Company had cash and cash equivalents of
$3,214,000. The Company provided $5.3 million from its operating activities, and
utilized $0.6 million and $3.1 million in its investing and its financing
activities, respectively. The Company reported a net loss of $1.2 million for
the quarter ended February 29, 1996, versus a net loss of $3.2 million for the
quarter ended February 28, 1995. As a result, the Company has an accumulated
deficit of $48.3 million and a total stockholders' deficiency of $5.7 million as
of February 29, 1996. Additionally, the Company's current assets at February 29,
1996 amounted to approximately $10.7 million and current liabilities were
approximately $21.6 million, resulting in working capital deficiency of
approximately $10.9 million and a negative current ratio of 1:2. The Company's
primary use of available cash resources is to expand its behavioral medicine
managed care and contract management businesses and fund operations while it
seeks to restore profitability to certain of its freestanding facilities.
Current assets as of February 29, 1996 increased by $2.7 million as
compared to May 31, 1995. This increase is predominately related to the receipt
of the Company's fiscal 1995 Federal tax refund which increased cash and cash
equivalents, and the reclassification of assets held for sale to current from
property and equipment and non-current property and equipment held for sale.
These increases were partially offset by a decline in accounts and notes
receivable. This decline is a result of the sale of one freestanding facility in
the first quarter of fiscal 1996 and the closure of two freestanding facilities
during the second quarter of fiscal 1996.
Other assets increased as of February 29, 1996 by $1.6 million compared
to May 31, 1995. This increase predominantly represents the amount paid by the
Company as a fee related to its fiscal 1995 Federal tax refund. Such fee is
proportionally reimbursable in the event the IRS Appeals Office should disallow
the deductions claimed by the Company under Section 172(f) (see Note 4 to the
Company's Condensed Consolidated Financial Statements included herein).
Current liabilities as of February 29, 1996 decreased $1.7 million as
compared to May 31, 1995. This decrease is primarily a result of a reduction in
current maturities of long-term debt. This reduction is related to the repayment
of the Company's obligations under the settlement agreement with the IRS which
was paid in full during the second quarter of fiscal 1996.
Long-term debt declined by $3.0 million as of February 29, 1996 when
compared to May 31, 1995, also as a result of the payment of the settlement
agreement with the IRS. Non-current income taxes payable increased by $7.0
million as of February 29, 1996. This increase is a result of the tax refund
received by the Company for carryback of fiscal 1995 losses defined under
Section 172(f). A tax benefit has been recognized for $2.4 million of the refund
and the remaining $7.0 million is included in non-current income taxes payable.
Other non-current liabilities decreased by $0.9 million as of February 29, 1995
primarily as a result of legal settlement paid by the Company during the third
quarter of fiscal 1996 (see Note 5 to the Company's Condensed Consolidated
Financial Statements included herein).
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Included in current and non-current assets are four hospital
facilities designated as property and equipment held for sale with a total
carrying value of $6.3 million. In October 1995, the Company sold one of its
operating facilities and in November 1995, closed another due to poor
performance. In December 1995, the Company entered into escrow for the sale of
this facility. Accordingly, the closed property was classified as property held
for sale during the second quarter.
Included in current liabilities are $9.5 million of Debentures in
default and immediately due and payable on account of acceleration and $1.4
million of accrued interest 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 proposed Debenture exchange provides for the
Company to issue $120 worth of its common stock at a defined value for each
$1,000 of Debentures, the transaction may be contingent upon the Company's
ability to make certain filings with the Securities and Exchange Commission. Due
to the longer than anticipated time frame in implementing the exchange offer,
the Company is considering, and may, among other things, adjust the terms of the
exchange offer. 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 filings. 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 an 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 reduction 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.)
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 as management continues to implement plans for expanding
the Company's managed care and behavioral medicine contract management
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 1996 (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 and 1996, known contract and cyclical changes, and also giving
consideration to cash on hand at February 29, 1996 of $3.2 million, management
expects the Company to be able to meet its cash obligations required by
operations during the next year, including the Company's obligations under the
Debentures provided that their acceleration has been rescinded. However, the
cash needs of the Company may vary from month to month depending upon the actual
level of business activity, and through the third quarter of fiscal 1996 the
Company continues to incur losses from ongoing operations. Therefore, no
assurance can be given that the Company will generate adequate cash flows to
meet cash obligations required by operations.
In October 1995, the Company received a $9.4 million refund related to
its fiscal 1995 Federal tax return. The Company will utilize such proceeds as
then may remain to provide a portion of the funds for the Debenture exchange,
payoff the outstanding liabilities to the IRS, or for additional operating
needs. The statement of operations for the nine months ended February 29, 1996
reflects the recognition of $2.6 million in tax benefits for this refund (see
Note 4-- "Income Taxes"). In addition, in November 1995, the Company entered
into a Secured Conditional Exchangeable Note Purchase Agreement. The principal
amount of the Note is $1.0 million, interest accrues at 12% per annum, and is
secured by a deed of trust. In addition, the principal amount of the Note is
immediately
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exchangeable into the Company's common stock at the exchange rate of $7.54375
per share upon approval of the Company's shareholders, as required. In the event
the Company's shareholders do not approve the transaction, the Note is due on
June 1, 1996 or any extended maturity date agreed upon by both parties. The
Company is currently in the process of extending this due date for nine months
to March 1, 1997.
During the third quarter of fiscal 1996, the Company received a legal
settlement of $860,000. The Company also anticipates utilizing one or more of
the following potential sources of cash to provide funds for additional
operating needs:
- Included in current and non-current assets are four hospital
facilities designated as property and equipment held for sale
with a total carrying value of $6.3 million. The Company expects
to sell two of these facilities during fourth quarter of fiscal
1996. However, some 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 expansion of the
Company's operations managed care and behavioral medicine
contract management and the Company's losses in its freestanding
operations.
- 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 $3.0 million
bond for the amount of the award and has filed an appeal of the
judgment. Management is unable to predict the outcome and whether
any proceeds from this judgment will be received in fiscal 1996
(see Note 5 to the Company's Condensed Consolidated Financial
Statements included herein).
- 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 September 1997 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, and during the
second quarter of fiscal 1996, paid the IRS the remaining balance, including
accrued interest, due on the settlement agreement of approximately $2.5 million.
In addition, during the third quarter of fiscal 1996, the Company paid a legal
settlement of $550,000.
RISK FACTORS
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Quarterly Report on Form 10-Q contains certain forward-looking
statements that are based on current expectations and involve a number of risks
and uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the Company's success in (i)
implementing its Debenture restructuring plans, (ii) resolving issues with its
former auditors and timely filing documents with the Securities and Exchange
Commission that may be requisite to the consummation of the private placement
and Debenture exchange transactions described above, (iii) disposing of certain
remaining facilities on acceptable terms, (iv) expanding the behavioral medicine
managed care and contract management portions of the Company's business, (v)
securing and retaining certain refunds from the IRS and certain judgments from
adverse parties in the legal proceedings described above, (vi) maintaining the
listing of the Company's Common Stock on the NYSE, (vii) securing any requisite
stockholder and debenture holder approval and consent, as the case may be, to
the transactions described above, (viii) extending the due date on the $1.0
million Secured Conditional Exchangeable Note, (ix) completing the acquisition
of Mustard Seed Corporation, and (x) relicensing facilities to provide
psychiatric treatment.
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The forward-looking statements included herein are based on current
assumptions that the Company will be able to proceed with the proposed Debenture
exchange offer or otherwise reach a settlement with the Debenture holders, that
competitive conditions within the healthcare industry will not change materially
or adversely, that the Company will retain existing key management personnel,
that the Company's forecasts will accurately anticipate market demand for its
services, and that there will be no material adverse change in the Company's
operations or business. Assumptions relating to the foregoing involve judgments
that are difficult to predict accurately and are subject to many factors that
can materially affect results. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its budgets, which may in turn affect the
Company's results. In light of the factors that can materially affect the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
As of February 29, 1996, the Company had a stockholders' deficiency of
$5.7 million, a working capital deficiency of approximately $10.9 million and a
negative current ratio of 1:2. The loss from operations for the three months
ended August 31, 1995 was $0.8 million, the net loss from operations for the
three months ended November 30, 1995 was $2.6 million, and the loss from
operations for the three months ended February 29, 1996 was $1.8 million.
There can be no assurance that the Company will be able to achieve
profitability and positive cash flows from operations or that profitability and
positive cash flow from operations, if achieved, can be sustained on an ongoing
basis. Moreover, if achieved, the level of that profitability or that positive
cash flow cannot accurately be predicted.
The Company's lack of profitability results also in its failing to
satisfy listing standards of the NYSE. No assurance can be made that the common
stock will continue to trade on the NYSE or that the Company can satisfy the
comparable requirements of any other stock exchange or the NASDAQ stock market.
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING
The Company's negative cash flow from operations has consumed
substantial amounts of cash. Also, the proposed rescission of acceleration of
the Debentures will require substantial amounts of cash including payment of
$1.4 million of default interest and/or payment of $5.5 million in exchange for
surrender of Debentures.
In the event of a failure to accomplish the proposed rescission of
acceleration of the Debentures, the Company would continue to be liable for the
entire $9,538,000 principal amount plus accrued interest from April 15, 1994,
estimated at approximately $1.4 million to February 29, 1996, plus certain
other costs.
During fiscal 1995 and 1996, a principal source of liquidity has been
the private sale of equity securities and debt securities convertible into
equity. Under the shareholder policies of the NYSE, the Company may not be able
to effect large placements of equity without shareholder approval, which if not
obtained may adversely affect the Company with respect to future capital
formation.
Issuance of additional equity securities by the Company could result in
substantial dilution to stockholders.
The Company has received a tax refund for fiscal 1995 in the amount of
$9.4 million based on loss carrybacks under Section 172(f) of the Internal
Revenue Code. Any IRS claim for return of all or any portion thereof could have
a material adverse effect on the Company's cash flows. The IRS payment of such
refund did not follow confirmation of the validity thereof by the IRS, and
Section 172(f) is an area of tax law without any guiding legal precedents.
DISPOSITION OF ASSETS
The Company has been required to dispose of various properties in order
to raise working capital, and no assurance can be made that such dispositions
will not have adverse effects on the Company's financial condition or
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that the Company has additional assets that could be disposed of or utilized as
collateral in order to fund its capital requirements.
Secured promissory notes have been issued by the Company aggregating
$3.0 million in principal amount, the collateral for which constitutes
substantially all of the Company's remaining freestanding facilities.
In connection with a March 3, 1995 letter agreement with a
representative of the debenture holders, the Company conditionally agreed to
pledge all of the shares of its CareUnit, Inc. subsidiary. The Company has not,
nor does it recognize an obligation to have, pledged such shares. The agreement
provides that "At 150 days after the date of this Agreement, provided that the
Participating Securityholders have in each material respect performed (with
opportunity to cure if a cure is possible) their obligations required to be
performed hereunder on or prior to such date, and if the Offer has not then been
consummated, the Company shall pledge (with the Trustee, or an alternate
acceptable to the Company, to act as pledgeholder on terms of a written
agreement containing standard terms reasonably acceptable to the Participating
Securityholders) all of the Shares as collateral for its obligation to purchase
the Securities pursuant to the Offer or otherwise. Such pledge may only be
foreclosed upon following 180 days after the date thereof at the request of any
Securityholder or the Trustee if the Offer is not consummated on or prior to
such date, provided that the Participating Securityholders have in each material
respect performed (with opportunity to cure if a cure is possible) their
obligations required to be performed hereunder on or prior to such date. ...
Upon consummation of the Offer, the said pledges shall be released." Although
the Company believes that the Participating Securityholders did not fully
perform their obligations and are not entitled to such pledged shares, no
assurances can be made that the Participating Securityholders will not demand
such shares or that the Company will not be required to perform such agreement,
or otherwise satisfy its obligations to Debenture holders.
ENGAGEMENT OF ERNST & YOUNG LLP
The Company engaged Ernst & Young LLP ("EY") on or about July 5, 1995,
to audit the Company's financial statements for the year ended May 31, 1995. In
addition, the Company may request Arthur Andersen LLP ("Andersen"), the
Company's former auditors, to consent to the inclusion of its audit reports for
the 1993 and 1994 fiscal years in various SEC reports or registration
statements. As indicated by Andersen in its letter addressed to the SEC,
Andersen intends to conduct a due diligence review in order to ascertain whether
it believes that its report could be reissued without modifications, or what
modifications of its report and qualifications or uncertainties therein would be
necessary. The consent of Andersen to use such reports, or in lieu thereof
reports of another auditor (requiring another complete audit of such periods),
will be necessary in order to, among other things, complete the filings related
to the Debenture exchange offer or to file registration statements to register
shares of Common Stock under the Securities Act of 1933. In addition, the
Company may solicit shareholder approval for the issuance of Common Stock
pursuant to the Secured Conditional Note Purchase Agreement, and such
solicitation requires a proxy statement that includes financial statements and
auditors' consents.
INVOLUNTARY BANKRUPTCY PETITION; ACCELERATION OF INDEBTEDNESS
Despite the dismissal in March 1995 of the involuntary bankruptcy
petition filed against the Company by three purported creditors, no assurance
may be made that such or other persons whom the Company owes any debt could not
file another involuntary petition in bankruptcy court. The Company's 7 1/2%
Convertible Subordinated Debentures continue to be immediately due and payable
in full, including the payment default involving approximately $1.4 million of
interest and interest on default interest accruing from April 1994 on
approximately $9.5 million of outstanding face amount. To rescind the
acceleration of the Debentures would require written consent of a majority of
the Debentures and the cure or waiver of all existing defaults. The Company has
filed and received SEC comments concerning a Schedule 13E-4 and a Schedule 14A
for distribution to the Debenture holders. No assurances can be made that the
holders of a majority in principal amount of the outstanding Debentures will
consent to rescission of the acceleration or that the interest defaults can be
cured, or waivers thereof obtained, or that other defaults may not occur.
Debenture holders, some of whom filed the earlier involuntary bankruptcy
petition, may file another such petition. Other creditors may also file such a
petition, or institute other actions against the Company, in order to prevent
the Debenture holders from collecting on their debts in advance of payment to
themselves.
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TAXES
The Company has received a tax refund of approximately $9.4 million
from the carry back of fiscal 1995 specified losses defined in Section 172(f).
Receipt of the 1995 tax refund does not imply IRS approval. The proceeds to the
Company of this refund were reduced by a $2.5 million offset for the Company's
outstanding payroll tax obligation to the Internal Revenue Service ("IRS"),
including interest, pursuant to a settlement agreement relating to tax years
1983 through 1991. Also, a $1.9 million contingency fee was paid to Deloitte &
Touche, LLP from the refund proceeds. Section 172(f) is an area of the tax law
without guiding legal precedent. There may be substantial opposition by the IRS
to all or a substantial portion of such claims, and no assurances can be made as
to the ability to retain tax refunds based on such deductions. Neither the
Company nor the IRS will be precluded in any resultant tax audit from raising
these and additional issues.
The Company's ability to use any Net Operating Losses may be subject to
limitation in the event that the Company issues or agrees to issue substantial
amounts of additional equity. The Company monitors the potential for "change of
ownership" and believes that its financing plans as contemplated will not cause
a "change of ownership;" however, no assurances can be made that future events
will not act to limit the Company's tax benefits.
The Company may be unable to utilize some or all of its allowable tax
deductions or losses, which depends upon factors including the availability of
sufficient net income from which to deduct such losses during limited carryback
and carryover periods.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company's ability to succeed in increasing revenues may depend in
part on the extent to which reimbursement of the cost of such treatment will be
available from government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price of medical products and services. As a result of
reimbursement changes and competitive pressures, the contractual obligations of
the Company have been subject to intense evaluation.
UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS
The levels of revenues and profitability of healthcare companies may be
affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement governmental controls on
the price of healthcare. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payors for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect healthcare reforms may have
on its business, and no assurance can be given that any such reforms will not
have a material adverse effect on the Company.
MANAGEMENT OF EXPANSION
The Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as managed care, are expected to
place increased demands on the Company's resources. These demands are expected
to require the retention of some or all of the current management, the addition
of new management personnel and the development of additional expertise by
existing management personnel. The failure to retain or acquire such services or
to develop such expertise could have a material adverse effect on the prospects
for the Company's success.
MANAGEMENT OF TRANSITION
The Company's prospects for success depend, to a degree, on its ability
to successfully implement its current plan to focus on its managed care and
behavioral contract management operations and to reduce its freestanding
hospital operations. The failure of the Company to successfully transition, or
any unanticipated or significant delays in such transition, could have a
material adverse effect on the Company's business. There can be no assurance
that the Company will be able to achieve its planned transition without
disruption to its business.
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SHARES ELIGIBLE FOR FUTURE SALE
The Company has issued or committed approximately 700,000 shares, notes
convertible or exchangeable into approximately 500,000 shares, and options or
other rights to purchase approximately 600,000 and contemplates issuing
substantial additional amounts of equity in private transactions, including
approximately 700,000 shares in currently contemplated acquisitions or
placements. Issuance of this equity, and such shares becoming free of
restrictions on resale pursuant to Rule 144 or upon registration thereof
pursuant to registration rights granted on almost all of these shares, and
additional sales of equity, could adversely affect the trading prices of the
Common Stock.
PRICE VOLATILITY IN PUBLIC MARKET
The securities markets have from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating performance
of particular companies. Trading prices of securities of companies in the
healthcare and managed care sectors have experienced significant volatility.
ANTI-TAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation provides for 60,000
authorized shares of Preferred Stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by the Board of Directors
without any vote or action by the stockholders, which could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. The Company's Restated Certificate of Incorporation
also provides for a classified board of directors, with directors divided into
three classes serving staggered terms. In addition, the Company's stock option
plans generally provide for the acceleration of vesting of options granted under
such plans in the event of certain transactions which result in a change of
control of the Company. In addition, Section 203 of the General Corporation Law
of Delaware prohibits the Company from engaging in certain business combinations
with interested stockholders. In addition each share of the Company's Common
Stock includes one right on the terms, and subject to the conditions, of the
Rights Agreement between the Company and Continental Stock Transfer & Trust
Company. These provisions may have the effect of delaying or preventing a change
in control of the Company without action by the stockholders, and therefore
could adversely affect the price of the Company's Common Stock.
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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. RehabCare filed its first brief to set forth argument on January 29,
1996, the Company filed its brief on March 19, 1996 and RehabCare filed its
reply on April 6, 1996. The Company anticipates that the District Court will
hear this appeal during the next six months. Although the Company feels that
RehabCare will not prevail in its appeal, the Company has not recognized any
gain with relation to the judgement. The outcome of this lawsuit will not have
an effect on the Company's results of operations.
In July 1994, the Company 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, Mr. Leslie Livingston and Livingston & Co., and its former
legal counsel, Schwabe, Williamson & Wyatt, to recover advances for services in
connection with an uncompleted sale and leaseback of CMP Properties, Inc. On
February 15, 1996, the Company settled this dispute for $860,000. This
settlement amount was received by the Company during the third quarter of fiscal
1996 and is reflected in the statement of operations as a non-operating gain.
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).
The Company settled this dispute on February 13, 1996 for $550,000. This
settlement amount was paid by the Company during the third quarter of fiscal
1996. The Company had reserved for the settlement amount in a prior fiscal year
and, as a result there was no impact from this settlement on the Company's
statements of operations.
Other Litigation
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's Condensed Consolidated Financial Statements 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 that, at a minimum, success
in "global restructuring" (see Note 2 to the Company's Condensed Consolidated
Financial Statement 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 and fourth
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quarters 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 seventh 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
criterion 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
original listing standards. Management anticipates that the "global
restructuring" (see Note 2 to the Company Condensed Consolidated Financial
Statements included herein) 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.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedules (filed herewith).
(b) Reports on Form 8-K
1) The Company filed a current report on Form 8-K dated December 4,
1995, to report under Item 5, the relocation of the Company's
headquarters to Costa Mesa, California.
2) The Company filed a current report on Form 8-K dated February 7,
1996, to report under Item 5, that it had entered into a
non-binding letter of intent to acquire Mustard Seed Corporation.
27
<PAGE> 28
SIGNATURE
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, 1995 By /s/ DREW Q. MILLER
------------------------------
Drew Q. Miller
Senior Vice President,
Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
April 12, 1995 By /s/ KERRI RUPPERT
------------------------------
Kerri Ruppert
Senior Vice President
and Chief Accounting Officer
(Principal Accounting Officer)
28
<PAGE> 29
COMPREHENSIVE CARE CORPORATION
EXHIBIT INDEX
FORM 10-Q
THIRD QUARTER ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedules (filed herewith).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> FEB-29-1996
<EXCHANGE-RATE> 1000
<CASH> 3214
<SECURITIES> 0
<RECEIVABLES> 3148
<ALLOWANCES> 1056
<INVENTORY> 0
<CURRENT-ASSETS> 10700
<PP&E> 18742
<DEPRECIATION> 9023
<TOTAL-ASSETS> 26598
<CURRENT-LIABILITIES> 21623
<BONDS> 9538
0
0
<COMMON> 27
<OTHER-SE> 5756
<TOTAL-LIABILITY-AND-EQUITY> 26598
<SALES> 23964
<TOTAL-REVENUES> 23964
<CGS> 21493
<TOTAL-COSTS> 21493
<OTHER-EXPENSES> 6808
<LOSS-PROVISION> 920
<INTEREST-EXPENSE> 1053
<INCOME-PRETAX> (4263)
<INCOME-TAX> (2506)
<INCOME-CONTINUING> (1757)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1757)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
