<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended November 30, 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)
1111 Bayside Drive, Suite 100, Corona del Mar, California 92625
---------------------------------------------------------------
(Former address of the 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 January 14, 1997
- --------------------------------------- -------------------------------
<S> <C>
Common Stock, par value $.01 per share 3,262,855
</TABLE>
<PAGE> 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. - Condensed Consolidated Financial Statements
Condensed consolidated balance sheets,
November 30, 1996 and May 31, 1996 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated statements of operations for
the three and six months ended November 30, 1996 and 1995 . . . . . . . . . . . 4
Condensed consolidated statements of cash flows for
the six months ended November 30, 1996 and 1995 . . . . . . . . . . . . . . . . 5
Notes to condensed consolidated financial statements . . . . . . . . . . . . . . . 6
Item 2. - Management's discussion and analysis of financial condition and
results of operations . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 1. - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 3. - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . 29
Item 4. - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . 29
Item 6. - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</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>
Pro forma
May 31, November 30, November 30,
1996 1996 1996
---------- ---------- ----------
(Note) (Unaudited) (Unaudited)
(Note 2)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 4,433 $ 7,578 $ 3,060
Accounts receivable, less allowance for
doubtful accounts of $877 and $1,097 . . . . . . . . . 2,476 3,274 3,274
Other receivables . . . . . . . . . . . . . . . . . . . . . 1,478 2,477 2,477
Property and equipment held for sale . . . . . . . . . . . . 1,233 1,221 1,221
Other current assets . . . . . . . . . . . . . . . . . . . . 352 343 151
---------- ---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 9,972 14,893 10,183
---------- ---------- ----------
Property and equipment, at cost . . . . . . . . . . . . . . . . . 9,863 9,912 9,912
Less accumulated depreciation and amortization . . . . . . . . . (3,590) (3,624) (3,624)
---------- ---------- ----------
Net property and equipment . . . . . . . . . . . . . . . . . . . 6,273 6,288 6,288
---------- ---------- ----------
Property and equipment held for sale . . . . . . . . . . . . . . 6,915 4,708 4,708
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . 212 1,978 1,978
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,746 2,773 2,748
---------- ---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $25,118 $30,640 $25,905
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities . . . . . . . . . . $10,714 $13,381 $11,446
Long-term debt in default (see Note 3) . . . . . . . . . . . 9,538 9,538 ---
Current maturities of long-term debt . . . . . . . . . . . . 2,464 2,072 2,072
Unbenefitted tax refunds received . . . . . . . . . . . . . 7,018 12,092 12,092
Income taxes payable . . . . . . . . . . . . . . . . . . . . 410 382 382
---------- ---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 30,144 37,465 25,992
---------- ---------- ----------
Long-term debt, excluding current maturities . . . . . . . . . . 24 --- 2,692
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 749 688 688
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . 1,000 1,060 1,060
Commitments and contingencies (see Notes 3 and 7)
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 2,848,685 and 3,069,929 shares
(pro forma 3,234,233 shares) . . . . . . . . . . . . . 28 31 33
Additional paid-in capital . . . . . . . . . . . . . . . . . 43,931 44,921 46,891
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (50,758) (53,525) (51,451)
---------- ---------- ----------
Total stockholders' equity(deficit) . . . . . . . . . . (6,799) (8,573) (4,527)
---------- ---------- ----------
Total liabilities and stockholders' equity . . . . . . . . . . . $25,118 $30,640 $25,905
========== ========== ==========
</TABLE>
Note: The balance sheet at May 31, 1996 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 Six Months Ended
------------------ ----------------
November 30, November 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues and gains:
Operating revenues . . . . . . . . . . . . . . . . . $ 9,710 $ 7,605 $18,703 $16,380
Costs and expenses:
Direct healthcare expenses . . . . . . . . . . . . . 8,420 7,091 16,589 14,806
General and administrative expenses . . . . . . . . 2,156 2,435 3,810 3,705
Provision for doubtful accounts . . . . . . . . . . 154 389 201 669
Depreciation and amortization . . . . . . . . . . . 176 335 338 683
Restructuring expenses . . . . . . . . . . . . . . . --- --- 195 ---
---------- ---------- ---------- ----------
10,906 10,250 21,133 19,863
---------- ---------- ---------- ----------
Loss from operations . . . . . . . . . . . . . . . . . . (1,196) (2,645) (2,430) (3,483)
Gain on sale of assets . . . . . . . . . . . . . . . 20 1,036 26 1,067
Loss on sale of assets . . . . . . . . . . . . . . . (12) --- (12) (31)
Non-recurring loss . . . . . . . . . . . . . . . . . --- --- (250) ---
Interest income . . . . . . . . . . . . . . . . . . 105 54 150 64
Interest expense . . . . . . . . . . . . . . . . . . (260) (289) (596) (743)
---------- ---------- ---------- ----------
Loss before income taxes . . . . . . . . . . . . . . . . (1,343) (1,844) (3,112) (3,126)
Benefit for income taxes . . . . . . . . . . . . . . . . 344 2,562 345 2,536
---------- ---------- ---------- ----------
Net earnings/(loss) . . . . . . . . . . . . . . . . $ (999) $ 718 $(2,767) $ (590)
========== ========== ========== ==========
Earnings/(loss) per share:
Net earnings/(loss) . . . . . . . . . . . . . . . . $ (0.34) $ 0.27 $ (0.96) $ (0.22)
========== ========== ========== ==========
Supplemental earnings/(loss) per share (Note 8):
Net earnings/(loss) . . . . . . . . . . . . . . . . $ 0.43 $ 0.27 $ (0.16) $ (0.22)
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
-----------
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
November 30,
1996 1995
------------ ------------
(Note 9)
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,767) $ (590)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 338 683
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 201 669
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . (26) (1,067)
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . 12 31
Carrying costs incurred on property and equipment held for sale . . . --- (240)
Changes in assets and liabilities net of effect of acquisitions:
Decrease(increase) in accounts receivable . . . . . . . . . . . . (937) 2,873
Increase in other receivables . . . . . . . . . . . . . . . . . . (1,015) (1,400)
Increase in other current assets and other assets . . . . . . . . (10) (308)
Increase in accounts payable and accrued liabilities . . . . . . . 2,103 392
Increase in unbenefitted tax refunds received . . . . . . . . . . . . 5,074 7,066
Decrease in income taxes payable . . . . . . . . . . . . . . . . . . . (28) ---
Decrease in other liabilities . . . . . . . . . . . . . . . . . . . . (188) (481)
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . 2,757 7,628
---------- ----------
Cash flows from investing activities:
Net proceeds(loss) from sale of property and equipment (operating and
held for sale) . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 (42)
Additions to property and equipment . . . . . . . . . . . . . . . . . (196) (290)
---------- ----------
Net cash provided by(used in) investing activities . . . . . . . 209 (332)
---------- ----------
Cash flows from financing activities:
Bank and other borrowings . . . . . . . . . . . . . . . . . . . . . . --- 1,000
Proceeds from the issuance of Common Stock . . . . . . . . . . . . . . 873 930
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (694) (4,885)
---------- ----------
Net cash provided by(used in) financing activities . . . . . . . 179 (2,955)
---------- ----------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . 3,145 4,341
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 4,433 1,542
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 7,578 $5,883
========== ==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
NOTE 1-- BASIS OF PRESENTATION
The condensed consolidated balance sheet as of November 30, 1996, and
the related condensed consolidated statements of operations and cash flows for
the three and six month periods ended November 30, 1996 and 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 six months ended November 30, 1996 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. The notes to consolidated financial statements
for the year ended May 31, 1996 elsewhere herein 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 1996 and continues to
report losses for fiscal 1997. 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. These conditions
raise doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recovery and classification of assets or the
amount and classification of liabilities that may result from the outcome of
this uncertainty (see Note 3-- "Operating Losses and Liquidity").
The weighted average number of shares outstanding used to compute loss
per share were 2,935,000 and 2,628,000 for the three months ended November 30,
1996 and 1995, respectively; and 2,895,000 and 2,628,000 for the six months
ended November 30, 1996 and 1995, respectively.
NOTE 2-- DEBENTURE EXCHANGE OFFER
The Company did not make its payment of interest on its 7 1/2%
Convertible Subordinated Debentures (the "Debentures") when such payment was
scheduled on October 17, 1994. In early February 1995, a group of holders and
purported holders of the Debentures gave notice of acceleration of the entire
amount of principal and interest due under the Debentures, and on February 24,
1995, a subset of such persons filed an involuntary petition in the United
States Bankruptcy Court for the Northern District of Texas under Chapter 7 of
the U.S. Bankruptcy Code. On March 3, 1995, the Company entered into a letter
agreement with a representative of the certain holders of the Debentures who
had taken such actions. The agreement provided for a consensual, out-of-court
resolution that the Company's Board of Directors approved as in the best
interests of the Company, its stockholders and other stakeholders. The
holders' representative agreed to use bet efforts to provide notices of waiver
of the interest non-payment default, notices of rescission of the Debenture
acceleration and the effects thereof, and consent to the immediate dismissal of
the involuntary Chapter 7 petition. In return, the Company agreed to use best
efforts to provide an opportunity to holders of 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.
6
<PAGE> 7
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
On November 14, 1996, the Company commenced a consent solicitation
pursuant to a proxy statement addressed to its Debentureholders (the "Consent
Solicitation"). The Company simultaneously initiated an exchange offer (the
"Debenture Exchange Offer"). In addition, the Debenture Exchange Offer
required the holders of a majority of the Debentures to give their approval to
rescind the acceleration and waive the defaults described above.
The Debenture Exchange Offer offered to the holders of Debentures to
exchange $500 in cash plus sixteen (16) shares of Common Stock designated
aggregately as payment of principal, plus $80 in cash plus eight (8) shares of
Common Stock, designated aggregately as a payment of interest for each $1,000
of the outstanding principal amount of its Debentures and the waiver by the
Debentureholder of all interest accrued and unpaid on such principal amount as
of the date of the Exchange
On December 30, 1996, the Company completed the Debenture Exchange
Offer with its Debentureholders. The Company was advised by the Exchange
Agent that affirmative consents of Debentureholders in excess of 82% had been
received, and that all propositions had been consented to and approved by
Debentureholders. An aggregate of $6,846,000 of principal amount of
Debentures (the "Tendered Debentures"), representing 72% of the issued and
outstanding Debentures, were tendered for exchange to the Company pursuant to
the terms of the Exchange Offer. With respect to the Tendered Debentures, the
Company paid the Exchange Agent, on behalf of tendering Debentureholders, an
aggregate amount of $3,970,680 and requisitioned for issue 164,304 shares of
the Company's Common Stock, representing the stock portion of the Exchange
Offer. The distribution of the exchange consideration to tendering
Debentureholders was made by the Exchange Agent within five days after the
closing date of December 30, 1996. With respect to the $2,692,000 of
principal amount of Debentures which were not tendered for exchange, the
Company paid an aggregate of $552,701 of interest and default interest to such
non-tendering Debentureholders. Due to the affirmative result of the Consent
Solicitation and the payment by the Company of interest and default interest
with respect to all Debentures which have not been tendered for exchange, the
Company is no longer in default with respect to such Debentures.
The effect of these transactions on the Company's consolidated
financial position as of November 30, 1996 has been reflected in the
accompanying pro forma Condensed Consolidated Balance Sheet as if the Debenture
Exchange Offer had occurred as of the period presented based upon the price of
the Company's Common Stock on November 30, 1996 of $12.00 per share. The
resulting gain on the Debenture Exchange was $2.4 million less approximately
$0.3 million in related costs and expenses for a net gain of $2.1 million with
the remaining amount of $2.0 million being recorded to additional-paid-in
capital. The aggregate principal amount of Debentures which were not tendered
was $2,692,000 and is reflected in long-term debt.
NOTE 3-- OPERATING LOSSES AND LIQUIDITY
At November 30, 1996, the Company had cash and cash equivalents of $7.6
million. During the six months ended November 30, 1996, the Company provided
$2.8 million from its operating activities, provided $0.2 million from its
investing activities and provided $0.2 million in its financing activities.
The Company reported a net loss of $1.0 million for the quarter ended November
30, 1996, versus net income of $0.7 million for the quarter ended November 30,
1995. As a result, the Company has an accumulated deficit of $53.5 million and
a total stockholders' deficiency of $8.6 million as of November 30, 1996.
Additionally, the Company's current assets at November 30, 1996 amounted to
approximately $14.9 million and current liabilities were approximately $37.5
million, resulting in a working capital deficiency of approximately $22.6
million and a negative current ratio of 1:2.5. 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 dispose of
certain of its freestanding facilities.
7
<PAGE> 8
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
Included in current and non-current assets are three hospital
facilities designated as property and equipment held for sale with a total
carrying value of $5.9 million.
In August 1996, the Company sold one of its non-operating facilities
and also closed an operating facility due to poor performance. The Company
used the proceeds from the sale of the facility to pay off secured debt and for
other working capital purposes. As part of the transaction related to this
sale, the Company took back a note on the property. The provisions of the note
allow the buyer a discount if the note is redeemed in the first six months. In
the event the buyer exercises this option, the proceeds to the Company would be
an additional $1.55 million. In the first quarter of fiscal 1997, the Company
entered into escrow for the sale of another facility which is scheduled to
close during the third quarter. Accordingly, this non-operating property is
classified as current property held for sale.
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 and another in fiscal 1997
(see Note 5-- "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 1997 with adjustments for reduced cash flow requirements
associated with facilities closed and/or sold in fiscal 1996 and 1997, known
contract and cyclical changes, and also giving consideration to cash on hand at
November 30, 1996 of $7.6 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. However, the cash
needs of the Company may vary from month to month depending upon the actual
level of business activity. Therefore, no assurance can be given that the
Company will generate adequate cash flows to meet cash obligations required by
operations.
Included in current liabilities are $9.5 million of Debentures in
default, immediately due and payable on account of acceleration and $2.0
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.
See Note 2-- "Debenture Exchange Offer" for a discussion of the Company's
default in the payment of interest on its Debentures, the acceleration thereof,
the obtaining of affirmative consents to waive such default and acceleration
and the Debenture Exchange Offer. Accomplishment of the Debenture Exchange
will reduce the Debenture's debt service requirement and decrease the
Company's future cash flow requirements.
Also included in current maturities of long-term debt is approximately
$2.0 million which represents the Company's obligation pursuant to its Secured
Convertible Note due in January 1997. The Company has requested and has
received a thirty day extension on the maturity of this Note, and is currently
in negotiation to convert this Note and the outstanding accrued interest into
non-voting Preferred Stock. The holder of the Note has agreed in principle to
the exchange of the Note for shares of a newly designated non-voting Preferred
Stock and to accept additional shares of Preferred Stock in lieu of
approximately $63,000 of accrued interest. While the Company does not believe
that such exchange will not be effected, no assurance can be made that an
ultimate agreement will be completed.
At the time of the commencement of the Debenture Exchange Offer, the
Company had sufficient cash resources available to fund the cash portion of the
Exchange. As of the completion of the Exchange, the Company utilized an
aggregate of $4.5 million to fund the cash portion of the Exchange and the
payment of interest due with respect to Debentures not tendered. Such cash
resources represented approximately 60% of the Company's available cash
resources as of November 30, 1996. Based upon current levels of operation and
cash anticipated to be internally generated from operations, the Company
believes that it has sufficient working capital to meet obligations as they
become due, however, the occurrence of business or economic conditions beyond
the control of the Company or the loss of existing contracts from cash from
operations is internally generated or the inability to conclude pending
contract proposals may adversely affect the adequacy of such working capital.
Such anticipated
8
<PAGE> 9
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
cash resources to fund additional operating needs include:
o 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 April 1998 if offered by
the Company.
o The Company filed its fiscal 1995 Federal tax return, and a Form
1139 "Corporate Application for Tentative Refund" in the amount of
$9.4 million. The Company received the full refund claim for
fiscal 1995 in October 1995. In September 1996, the Company filed
its fiscal 1996 Federal tax return and also filed a Form 1139.
The Company received a refund in the amount of $5.4 million during
the second quarter of fiscal 1997. The Company has also filed
amended Federal tax returns for prior years to claim refunds for
an additional $7.7 million. These refund claims have been made
under Section 172(f) of the Internal Revenue Code, an area of the
tax law without significant precedent, and there may be
substantial opposition by the IRS to the Company's refund claims.
The Company is currently under audit by the IRS regarding its 1995
Federal tax return and the amended returns for prior years.
Accordingly, no assurances can be made to the Company's
entitlement to such refunds or the timing of the receipt thereof
(see Note 6-- "Income Taxes").
o Included in property and equipment held for sale is one hospital
facility currently under contract to be sold. The sale of this
facility is scheduled to close during the third quarter of fiscal
1997. The proceeds from the sale are expected to be $1.3 million.
o Included in assets held for sale (non-current) are two hospital
facilities designated as property and equipment held for sale with
a total carrying value of $4.7 million. The Company expects to
sell these facilities during fiscal 1997. In addition, the
Company sold a non-operating facility during the first quarter of
fiscal 1997. As part of this transaction, the Company took back a
note on the property with provisions that allow the buyer a
discount if the note is redeemed in the first six months. In the
event the buyer exercises this option, the proceeds to the Company
would be $1.55 million.
All of these potential sources of additional cash in fiscal 1997 are
subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1997 the
Company will complete the transactions required to fund its working capital
deficit.
NOTE 4-- ACQUISITIONS AND DISPOSITIONS
On July 25, 1996, the Company consented to closing the acquisition of
Healthcare Management Services, Inc., Healthcare Management Services of Ohio,
Inc., Healthcare Management Services of Michigan Inc. and Behavioral Healthcare
Management, Inc. (hereafter collectively referred to as "HMS"). The Company
consented to the closing reserving its rights to assert certain claims against
the former owners (the "Sellers") and others (see Note 6-- "Commitments and
Contingencies"). HMS contracts with commercial and governmental agencies to
provide managed behavioral health care programs to patients in Michigan and
Ohio. Additionally, HMS provides the following on a contract basis: case
management (precertification, concurrent review, quality assurance,
retrospective chart reviews, peer review and clinical audits as requested by
their clients), claims review, network development, credentialing and
management of clinical services for hospitals and community providers. The
Company recorded the acquisition using the purchase method of accounting. The
Company's Condensed Consolidated Financial Statements for the six months ended
November 30, 1996 reflect the results of operations for HMS for the period of
July 25, 1996 through November 30, 1996. In conjunction with this acquisition,
the Company issued 16,000 shares of its Common Stock. In addition, certain
provisions of the employment
9
<PAGE> 10
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
agreements with the Sellers provide for an additional earn out of stock
warrants based on performance. The Company recorded $1.0 million in goodwill
related to the acquisition which will be amortized on a straight line basis
over 20 years.
On August 12, 1996, the Company sold a non-operating facility in Costa
Mesa, California. As part of this transaction, the Company took back a note
equal to 83% of the selling price. This note provides the buyer with an
incentive option should the note be paid off in full on or before six months
from closing. In the event the buyer elects this option, he will receive a 21%
discount on the note. Given this sale is highly leveraged, the Company has
elected not to recognize any income on this sale. In the event the buyer
exercises this option, the proceeds to the Company would be $1.55 million and
the Company would recognize a loss of approximately $273,000. If the buyer
does not exercise this option, the Company will recognize a gain on the sale of
$127,000 using the installment method of accounting. Under the installment
method, the Company would have recognized a gain on the disposal of assets of
approximately $21,600 for the first six months of fiscal 1997.
NOTE 5-- PROPERTY AND EQUIPMENT HELD FOR SALE
The Company has decided to dispose of certain freestanding facilities
and other assets (see Note 3-- "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 $11.4 million at
November 30, 1996, is carried at estimated net realizable value of
approximately $5.9 million. Direct healthcare expenses for the facilities
designated for disposition were approximately $0.2 million for the three months
ended November 30, 1996. There were no operating revenues for this period.
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. One of the three closed freestanding
facilities included in property and equipment held for sale is currently under
a sales contract.
A summary of the transactions affecting the carrying value of current
and non-current property and equipment held for sale for the three months ended
November 30, 1996, is as follows (in thousands):
<TABLE>
<S> <C>
Balance as of August 31, 1996 . . . . . . . . . . . . . . . . $5,937
Carrying value of assets sold . . . . . . . . . . . . . . . . (8)
------
Balance as of November 30, 1996 . . . . . . . . . . . . . . . $5,929
======
</TABLE>
NOTE 6-- 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 to the Company in the amount of $9.4 million. On August
30, 1995, the Company also filed amended Federal tax returns for several prior
years to carry back losses under Section 172(f). The refunds requested on the
amended returns are approximately $6.2 million for 1986; $0.4 million for 1985;
$0.7 million for 1983 and $0.4 million for 1982. On September 20, 1996, the
Company filed its Federal income tax return for fiscal 1996, and subsequently
filed form 1139 "Corporate Application for Tentative Refund" to carry back
losses described in Section 172(f) requesting a refund to the Company in the
amount of $5.5 million. The Company has requested refunds totalling $22.6
million as follows: $7.7 million for amended prior years' returns, $9.4
million for fiscal year 1995, and $5.5 million for fiscal year 1996. There may
be opposition by the Internal Revenue
10
<PAGE> 11
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
Service ("IRS") as to the Company's ability to obtain benefits from refunds
claimed under Section 172(f). Therefore, no assurances can be made as to the
Company's entitlement to all claimed refunds.
In October 1995, the Company received a $9.4 million tentative refund
for fiscal 1995. Of this refund, $2.4 million was recognized as a tax benefit
during the second quarter of fiscal 1996. In September 1996, the Company
received a $5.4 million tentative refund for fiscal 1996. Of this refund, $0.3
million has been recognized as a tax benefit during the second quarter of
fiscal 1997. Receipt of the 1995 and 1996 Federal tax refunds does not imply
IRS approval. Due to the lack of legal precedent regarding Section 172(f), the
unbenefitted amounts from fiscal 1995 and 1996 of $7.0 million and $5.1
million, respectively, are reflected on the Company's consolidated balance
sheet in unbenefitted tax refunds received. In connection with the refund
claims, the Company paid contingency fees of $1.9 million and $1.1 million
relating to the fiscal 1995 and 1996 refunds, respectively. The Company
expensed a pro rata portion of the contingency fees as related tax benefits
were recognized. The remaining amount of $2.4 million is reflected in the
Company's consolidated balance sheet as other receivables. 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.
The Company is currently under audit by the IRS related to its fiscal
1995 Federal income tax return and the amended returns for prior years.
Neither the Company nor the IRS will be foreclosed from raising other tax
issues in regard to any audits of such returns, which also could ultimately
affect the Company's tax liability.
NOTE 7-- 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 judgment 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 judgment 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. Verbal argument was heard
by the District Court in June 1996. On October 22, 1996, The U.S. Court of
Appeals for the Eighth Circuit reversed the judgment in favor of the Company
and against RehabCare entered by the District Court following the jury's
verdict in favor of the Company. On November 5, 1996, the Company filed a
Petition for Rehearing with the Eighth Circuit. Any effect from the outcome of
this lawsuit will not have a material adverse impact on the Company's results
of operations.
On December 27, 1995, AGCA, Inc. and Merit Behavioral Care Systems
Corporation filed a lawsuit against a subsidiary of the Company, one of its
employees, and other non-related parties. The cause, originally filed in
Travis County, has been moved to the 101st District Court of Dallas County
(Case No. 962970E). On January 29, 1996, AGCA, Inc. also filed a lawsuit
against a subsidiary of the Company and one of its employees in the U.S.
District Court, Tampa Division (Case No. 95-15768). Both lawsuits seek
injunctive relief and the Texas
11
<PAGE> 12
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
action includes a claim of conspiracy. Plaintiffs agreed to mediate both the
Texas and Florida actions, on September 3, 1996, in Tampa, Florida. On
September 4, 1996, the Company settled this dispute. The settlement agreement
and release requires a payment by the Company's subsidiary and its employee of
$325,000. In addition, the subsidiary's employee agreed not to solicit certain
customers until after May 15, 1997. The Company recorded a charge of $250,000
during the first quarter of fiscal 1997 which represents the net amount paid by
the Company. The Company paid the settlement amount on September 21, 1996.
The Company entered into a Stock Purchase Agreement on April 30, 1996
to purchase the outstanding stock of HMS (see Note 4-- "Acquisitions and
Dispositions"). The Stock Purchase Agreement was subject to certain escrow
provisions and other contingencies which were not completed until July 25,
1996. In conjunction with this transaction, HMS initiated an arbitration
against The Emerald Health Network, Inc. ("Emerald") claiming breach of
contract and seeking damages and other relief. In August 1996, Emerald, in
turn, initiated action in the U.S. District Court for the Northern District of
Ohio, Eastern Division, against the Company claiming, among other things,
interference with the contract between Emerald and HMS and seeking unspecified
damages and other relief. Discovery has been initiated by all parties and the
Company believes it has good and meritorious defenses and that HMS has
meritorious claims in its arbitration. In November 1996, Emerald moved the
court for summary judgment. The hearing on such motion has been adjourned and
the Company's response is pending. The Company believes that it has claims
arising from this transaction against the accountants and legal counsel of HMS
as well as HMS's lending bank. On October 1, 1996, the Company filed a claim
of malpractice against the legal counsel of HMS. These claims are presently
being investigated and have not as yet been quantified. The Company does not
believe that the impact of these claims will have a material adverse effect on
the Company's financial position, results of operations and cash flows.
On September 6, 1996, the Company instituted an arbitration against the
Sellers of HMS with the American Arbitration Association in Orange County,
California seeking, among other things, damages from the Sellers which the
Company sustained by reason of the inaccuracies of the representations and
warranties made by the Sellers and for the indemnification from each of the
Sellers as provided for under the terms of the Stock Purchase Agreement. The
Sellers have not interposed their answers to the arbitration, and the
arbitration is therefore in its formative stages. The Company does not believe
that the impact of these claims will have a material adverse effect on the
Company's financial position, results of operations and cash flows.
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. The Listing and Compliance Committee of the NYSE has
determined to monitor the Company's progress toward returning to continuing
listing standards and has so indicated in approving the Company's most recent
Listing Application on December 30, 1996. Management believes, though no
assurance may be given, that the recent completion of the Company's Debenture
Exchange Offer will enable the Company to seek additional equity and thereby
satisfy the Committee of the Company's progress. No assurance may be given
that additional equity may be obtained on terms favorable to the Company. No
assurance may be given as to the actions that the NYSE may take or that the
steps of the restructuring will be successfully completed.
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 3 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, the acceleration of the
full principal amount thereof, and the affirmative consents of Debentureholders
to waive the default and acceleration (see Note 2-- "Debenture Exchange
Offer").
12
<PAGE> 13
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(unaudited)
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 a liability that is not
covered by insurance. Management believes that the outcome of such lawsuits
will not have a material adverse impact on the Company's financial statements.
NOTE 8-- SUPPLEMENTAL EARNINGS/(LOSS) PER SHARE
The supplemental earnings/(loss) per share information gives effect to
the Debenture Exchange Offer as if it had occurred at the beginning of the
period being presented (see Note 2-- "Debenture Exchange Offer").
NOTE 9-- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997, the Company purchased all of the capital stock of
Healthcare Management Services, Inc., Healthcare Management Services of Ohio,
Inc., Healthcare Management Services of Michigan Inc. and Behavioral Healthcare
Management, Inc. In conjunction with this acquisition, the assets acquired and
liabilities assumed were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired . . . . . . . . . . . . . . . . $ 373
Purchased goodwill . . . . . . . . . . . . . . . . . . . . . . 1,048
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . (1,301)
Issuance of Common Stock . . . . . . . . . . . . . . . . . . . (120)
--------
$ ---
========
</TABLE>
NOTE 10-- RESTRUCTURING CHARGES
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. During fiscal 1996, the Company established an
additional restructuring reserve of $0.1 million for severance and other cash
outlays related to the planned facility closure and disposition which occurred
during the first quarter of fiscal 1997. In addition, in July 1996, the
Company closed the administrative offices of Comprehensive Care Integration
located in San Ramon, California. Closure of this office and several non-
performing contract units was part of the planned restructuring of these
operations. The impact of this restructuring was approximately $0.2 million
and was recorded during the first quarter of fiscal 1997. The following table
sets forth the activity to the restructuring reserve during the second quarter
of fiscal 1997:
<TABLE>
<CAPTION>
CHARGES
AUGUST 31, ----------------- NOVEMBER 30,
1996 INCOME EXPENSE PAYMENTS 1996
---- ------ ------- -------- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Restructuring Reserve:
---------------------
Severance . . . . . . . . . . . $104 $--- $--- $(17) $ 87
Operations/corporate relocation 365 --- --- (40) 325
------- ------- ------- ------- -------
. . . . . . . . . . . . $469 $--- $--- $(57) $412
======= ======= ======= ======= =======
</TABLE>
13
<PAGE> 14
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Quarterly Report on Form 10-Q contains or may contain 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) disposing of certain remaining facilities on
acceptable terms, (ii) expanding the behavioral medicine managed care and
contract management portions of the Company's business, (iii) securing and
retaining certain refunds from the IRS and recovering monetary damages from
adverse parties in pending legal proceedings, (iv) the ability to obtain and
perform risk-based capitation contracts at profitable levels, (v) maintaining
the listing of the Company's Common Stock on the New York Stock Exchange, Inc.,
(vi) obtaining additional equity capital to fund losses from operations and to
expand the Company's principal behavioral healthcare business, as to which no
assurance can be given that such additional equity may be obtained on terms
favorable to the Company, and (vii) the impact and consideration of other
business, economic or other considerations discussed below.
The forward-looking statements included herein are based on current
assumptions including 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.
General
In response to continuing changes in the behavioral healthcare
industry, the Company has made significant changes in its operations, including
the divestiture of many freestanding facilities, so that the Company can focus
on its network solutions related to managed care and behavioral medicine
contract management operations. During fiscal 1996, managed care operations
experienced significant growth through internal development and the expansion
into new managed care behavioral health markets and products. The following
table sets forth operating revenues of the Company's managed care, behavioral
medicine contracts and hospital operations for the selected periods:
<TABLE>
<CAPTION>
Three months ended
----------------------------------------
November 30, May 31, November 30,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Managed care operations . . . . . . . . . . . 67% 56% 46%
Behavioral medicine contract operations . . . 16 17 18
Freestanding operations . . . . . . . . . . 17 26 35
Corporate services . . . . . . . . . . . . . --- 1 1
------ ------ ------
100% 100% 100%
====== ====== ======
</TABLE>
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 the
second quarter of fiscal 1997, the Company has utilized the proceeds from
income tax refunds and available cash on hand to fund its working capital
deficit.
14
<PAGE> 15
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 has achieved all of the
stated objectives in the global restructuring plan. The restructuring of the
Company's financial obligations represented by the Company's 7 1/2%
Convertible Subordinated Debentures (the "Debentures") occurred during the
third quarter of fiscal 1997 (see Note 2 to the Company's Condensed
Consolidated Financial Statements included herein).
During fiscal 1996, the Company recorded $0.1 million in
restructuring charges related to the Company's planned closure and disposition
of its freestanding facility in Cincinnati, Ohio which occurred during the
first quarter of fiscal 1997. The components of this charge are predominately
severance to hospital employees. Closure of this facility is consistent with
the Company's global restructuring plans and will eliminate the funding of
operating losses and cash flow deficits required by this facility.
In addition, in July 1996, the Company closed the administrative
offices of Comprehensive Care Integration located in San Ramon, California.
Closure of this office and several non-performing contract units was part of
the planned restructuring of these operations. The impact of this
restructuring was approximately $0.2 million and was recorded during the first
quarter of fiscal 1997. The following table sets forth the activity to the
restructuring reserve during the second quarter of fiscal 1997:
<TABLE>
<CAPTION>
CHARGES
AUGUST 31, ----------------- NOVEMBER 30,
1996 INCOME EXPENSE PAYMENTS 1996
---- ------ ------- -------- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Restructuring Reserve:
---------------------
Severance . . . . . . . . . . . $104 $--- $--- $(17) $ 87
Operations/corporate relocation 365 --- --- (40) 325
------ ------ ------ ------ ------
$469 $--- $--- $(57) $412
====== ====== ====== ====== ======
</TABLE>
In August 1996, the Company sold its non-operating freestanding
facility in Costa Mesa, California which had been closed in November 1995 due
to poor performance. The Company utilized the proceeds received from the sale
to reduce secured debt and other working capital purposes. One of the three
non-operating freestanding facilities is currently under contract to be sold
and is scheduled to close escrow during the third quarter of fiscal 1997.
The Company has been seeking to restructure its obligations under the
Debentures, and was 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). On November 14, 1996,
the Company commenced a Consent Solicitation pursuant to a proxy statement
addressed to its Debentureholders. The Company simultaneously initiated the
Debenture Exchange Offer to exchange cash and Common Stock of the Company for
its Debentures. As a result of the completion of the Debenture Exchange Offer,
the Company's debt obligations have been reduced by $6,846,000. Subsequently,
$2,692,000 of the Company's debt obligations represented by untendered
Debentures will be reclassified to long term debt during the third quarter of
fiscal 1997.
RESULTS OF OPERATIONS
Statistical Information
The following utilization statistics include data from all operations
including closures during the periods, joint ventures and closed facilities:
15
<PAGE> 16
<TABLE>
<CAPTION>
Three months ended Six months ended
----------------------------------------- --------------------------
November 30, August 31, November 30, November 30, November 30,
1996 1996 1995 1996 1995
---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Managed care operations:
Covered lives . . . . . . . . . 1,331,155 1,147,664 693,220 1,331,155 693,220
Patient days:
Freestanding facilities . . . . . . 1,591 1,516 2,033 3,107 5,811
Behavioral medicine contracts . . . 2,256 2,986 4,383 5,170 9,917
Freestanding facilities:
Occupancy rate . . . . . . . . . . 47% 29% 14% 34% 11%
Admissions . . . . . . . . . . . . 301 312 353 613 926
Average length of stay (days) . . 5 5 6 5 6
Behavioral medicine contracts:
Average occupied beds per contract 5 5 6 5 7
Admissions . . . . . . . . . . . . 358 464 584 822 1,354
Average length of stay (days) . . 6 6 8 6 7
Total beds available at end of period:
Freestanding facilities . . . . . 38 58 84 38 84
Behavioral medicine contracts . . 55 82 114 55 114
</TABLE>
SIX MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
1995
The Company reported a pretax loss of approximately $3.1 million for
the six months ended November 30, 1996 which was comparable to the pretax loss
of $3.1 million reported for the same period for fiscal 1996. 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 credit of $0.4 million related to a
settlement with the Company's fidelity bond carrier. Included in the results
for fiscal 1997 is a restructuring charge of $0.2 million, a legal settlement
of $0.3 million and $0.1 million in fees and expenses relating to the Company's
Exchange Offer of its Debentures. Exclusive of these non-recurring items, the
pretax loss for the six months ended November 30, 1996 was $2.5 million
compared to the pretax loss of $4.5 million for the same period a year ago.
Operating revenues increased by 14% or $2.3 million for the six months
ended November 30, 1996 compared to the six months ended November 30, 1995.
The increase in operating revenues is primarily attributable to an increase in
managed care operations of $5.1 million which was offset by a decline of $ 3.2
million related to freestanding operations. Direct healthcare expenses
increased by 12% or $1.8 million for the six months ended November 30, 1996 as
compared to the same period for fiscal 1996. This decline is attributable to a
decrease in direct healthcare expenses for hospital operations of 55% or $3.6
million which was offset by an increase in direct healthcare expenses for
managed care operations of $4.8 million. General and administrative expenses
for the six months ended November 30, 1996 increased $0.1 million from the six
months ended November 30, 1995. The increase in general and administrative
expenses for the six months ended November 30, 1996 includes an increase in
managed care operations of $0.6 million, a decrease of $0.1 million in contract
operations general and administrative expenses, an increase in hospital general
and administrative expenses of $0.3 million, and a decrease in corporate
general and administrative expenses of $0.7 million and which included $0.1
million for fees paid related to the Company's fiscal 1996 Federal tax refund.
The provision for doubtful accounts declined $0.5 million or 70% for the six
months ended November 30, 1996 as compared to the same period a year ago and is
attributable to the decline in hospital operations. In addition, interest
expense decreased by $0.1 million or 20% for the six months ended November 30,
1996 compared to the six months ended November 30, 1995.
Managed Care Operations
The number of covered lives increased to 1,331,155 or by 92% as of
November 30, 1996 compared to 693,220 for the same period a year ago. Covered
lives for contracts existing at November 30, 1995 increased by 108,000 lives or
16%. In addition, new contracts implemented after November 30, 1995
contributed an additional 530,000 lives increasing total covered lives as of
November 30, 1996 by 76% as compared to a year ago. The majority of growth in
covered lives is predominately related to new contracts implemented in Florida,
Puerto Rico
16
<PAGE> 17
and Texas. During fiscal 1997, managed care operations added approximately
70,000 lives under Administrative Service Organization ("ASO") contracts.
Under an ASO contract, the Company provides overall care management services;
however, the Company is not at risk.
Operating revenues increased by $5.1 million to $12.0 million for the
six months ended November 30, 1996 compared to the six months ended November
30, 1995. Direct healthcare expenses also increased for the six months ended
November 30, 1996 by $4.8 million compared to the same period a year ago. In
addition, general and administrative expenses increased by $0.7 million for the
six months ended November 30, 1996.
Included in general and administrative expenses for the six months ended
November 30, 1996 is a legal settlement of $0.3 million and $0.4 million in
non-recurring legal expenses. As a result, the net operating loss for managed
care operations for the six months ended November 30, 1996 was $1.2 million, an
increase of $0.7 million from the six month period for fiscal 1996.
Behavioral Medicine Contracts
CCI operating revenues increased by $0.2 million for the six months
ended November 30, 1996 or 8% from the same period of fiscal 1996 and direct
healthcare expenses remained constant. In addition, general and administrative
expenses decreased $0.1 million to $0.4 million, compared to the same fiscal
period a year ago. In addition, a restructuring charge of $0.2 million was
recorded in the six months ended November 30, 1996. The net result of these
items was a net operating loss of $0.8 million compared to the loss for the
same period a year ago of $0.9 million.
Patient days of service at behavioral medicine contracts for the six
months ended November 30, 1996 declined by approximately 48% from 9,917 patient
days to 5,170 patient days for the same period a year ago. Units which were
operational for both the six months ended November 30, 1996 and November 30,
1995, experienced a 13% decrease in utilization to 3,139 patient days. Average
net revenue per patient day at these units increased by 10% from the previous
period resulting in a decline in overall net inpatient operating revenues of 5%
to $0.5 million. Net outpatient revenues for programs operational for both
periods at these units increased 38% from approximately $0.8 million for the
six months ended November 30, 1995 to approximately $1.1 million for the six
months ended November 30, 1996.
The following table sets forth utilization data on a "same store"
basis:
<TABLE>
<CAPTION>
Same Store Utilization
---------------------------
Six Months Six Months
Ended Ended
Nov. 30, 1996 Nov. 30, 1995
------------- -------------
<S> <C> <C>
Admissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704 683
Average length of stay . . . . . . . . . . . . . . . . . . . . . . 4 5
Patient days . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,139 3,623
Average occupancy rate . . . . . . . . . . . . . . . . . . . . . . 31% 36%
</TABLE>
For units operational for both periods, direct healthcare expenses
increased slightly and when combined with the 19% increase in operating
revenues, resulted in operating income at the unit level increasing by 144% for
the six months ended November 30, 1996 compared to the six months ended
November 30, 1995. This increase is due to an increase in the utilization for
the partial hospitalization program.
Freestanding Operations
Operating revenues for freestanding operations decreased by $3.2
million or 49% for the six months ended November 30, 1996 compared to the six
months ended November 30, 1995. During the first quarter of fiscal 1997, the
Company sold one non-operating facility and closed one operating facility due
to poor performance. In addition, direct healthcare expenses declined 55% or
$3.6 million in the six months ended November 30, 1996. The provision for
doubtful accounts declined by $0.6 million. The decrease in operating revenues
combined with the decline in expenses resulted in a net operating loss from
hospital operations for the six months ended November 30, 1996 of $0.3 million,
an improvement of 74% or $0.9 million from the six months ended November 30,
1995.
17
<PAGE> 18
Admissions for the six months ended November 30, 1996 decreased to 613
from 926 for the six months ended November 30, 1995, an overall decline of 34%.
The following table sets forth quarterly utilization data on a "same
store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
----------------------------
Six Months Six Months
Ended Ended
Nov. 30, 1996 Nov. 30, 1995
------------- -------------
<S> <C> <C>
Admissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613 286
Average length of stay . . . . . . . . . . . . . . . . . . . . . . 5 5
Patient days . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,107 1,511
</TABLE>
Net revenue per patient day for "same store" facilities decreased to
$1,052 for the six months ended November 30, 1996 from $1,789 for the six
months ended November 30, 1995. Admissions increased for the period from 286
in the six months ended November 30, 1995 to 613 for the six months ended
November 30, 1996. The increase in admissions combined with no changes in
length of stay, and an increase in outpatient revenues, resulted in an increase
in net operating revenues for the six months ended November 30, 1996 of
$565,000 as compared to the same period for fiscal 1996. 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 day care
programs offered by the "same store" facilities:
<TABLE>
<CAPTION>
Net Outpatient/Daycare Revenues
-----------------------------
(Dollars in thousands)
Six Months Six Months
Ended Ended
Nov. 30, 1996 Nov. 30, 1995
------------- -------------
<S> <C> <C>
Facilities offering . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Net outpatient/daycare revenues . . . . . . . . . . . . . . . . . . $2,816 $1,780
% of total "same store" net operating revenues . . . . . . . . . . 84% 73%
</TABLE>
Direct healthcare expenses at the Company's freestanding facilities on
a "same store" basis increased $0.6 million and bad debt expense decreased $0.2
million for the six months ended November 30, 1996 compared to the same period
for fiscal 1996. As a result, the net operating income increased $0.2 million
for the six months ended November 30, 1996 compared to the six months ended
November 30, 1995.
THREE MONTHS ENDED NOVEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 1995
The Company reported a pretax loss of approximately $1.3 million for
the second quarter of fiscal 1997, an improvement of approximately $0.5 million
or 28% from the pretax loss of approximately $1.8 million reported for the
second quarter of fiscal 1996. Included in revenues for the second quarter of
fiscal 1996 is a gain of $1.0 million related to the sale of an operating
facility in October 1995.
Operating revenues for the second quarter of fiscal 1997 increased by
$2.1 million or 28% from the second quarter of fiscal 1996. The second quarter
of fiscal 1997 reflects an increase in managed care operating revenues of $3.0
million or 86% as compared to the second quarter of fiscal 1996. This increase
in managed care operating revenues was offset by the decline in operating
revenues from freestanding facilities due to the closure of one freestanding
facility during the first quarter of fiscal 1997.
18
<PAGE> 19
Direct healthcare expenses increased by approximately $1.3 million or
19% from the second quarter of fiscal 1996 compared to the second quarter of
fiscal 1997. The increase in direct healthcare expenses is primarily
attributable to an increase of 93% in direct healthcare expenses related to
managed care operations which was partially offset by the 49% decline in direct
healthcare expenses for freestanding operations. General and administrative
expenses decreased by approximately $0.3 million from the second quarter of
fiscal 1996 as a result of a decline in corporate overhead expenses. The
second quarter of fiscal 1996 includes $0.5 million in fees related to the
Company's fiscal 1995 Federal income tax refund. The second quarter of fiscal
1997 includes $0.1 million in fees related to the Company's fiscal 1996 Federal
income tax refund (see Note 6 to the Company's Condensed Consolidated Financial
Statements included herein). The provision for doubtful accounts decreased by
$0.2 million or 60% during the second quarter of fiscal 1997 compared to the
same period for fiscal 1996 as a result of the significant decline in
freestanding operations.
Managed Care Operations
The following table reflects covered lives by major product provided:
<TABLE>
<CAPTION>
November 30, August 31, November 30,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Carve-out (capitated) . . . . . . . . . . . . . . . 1,184,324 1,039,372 598,086
Blended products . . . . . . . . . . . . . . . . . . 4,585 4,601 5,128
EAP services . . . . . . . . . . . . . . . . . . . . 66,343 69,915 83,599
ASO services . . . . . . . . . . . . . . . . . . . . 75,903 33,776 6,407
------------ ------------ ------------
Total covered lives . . . . . . . . . . . . . . 1,331,155 1,147,664 693,220
============ ============ ============
</TABLE>
At November 30, 1996, the number of covered lives increased to
1,331,155 from 693,220 a year ago or by 92%. This increase is primarily
attributable to new contracts added during the period in South Florida,
Michigan, Puerto Rico and Texas.
In the second quarter of fiscal 1997, operating revenues increased by
$3.0 million compared to the second quarter of fiscal 1996. Direct healthcare
expenses also increased by $2.7 million in the second quarter of fiscal 1997
compared to the same period a year ago. In addition, general and
administrative expenses increased to $1.0 million or by $0.6 million in the
second quarter of fiscal 1997 as compared to the second quarter of fiscal 1996.
Included in the results for the second quarter of fiscal 1997 are $0.4 million
in legal fees related to litigation. As a result, the net operating loss for
managed care operations for the second quarter of fiscal 1997 was $0.7 million,
an increase of $0.3 million from the same quarter a year ago which reported a
net operating loss of $0.4 million.
Behavioral Medicine Contracts
In the second quarter of fiscal 1997, Comprehensive Care Integration
("CCI") operating revenues increased by $0.2 million or by 15% from the second
quarter of fiscal 1996, and direct healthcare expenses decreased 3%. In
addition, general and administrative expenses decreased $0.2 million or 62% in
the second quarter of fiscal 1997 compared to the second quarter of fiscal
1996. The increase in operating revenues during the second quarter of fiscal
1997 combined with the decrease in expenses and resulted in a net operating
loss of $0.3 million, an improvement of $0.3 million as compared to the same
period for fiscal 1996.
During the second quarter of fiscal 1997, CCI closed five contract
units. These units were closed due to poor performance or were at the end of
the term of their contract. As a result, during the second quarter of fiscal
1997, patient days of service for behavioral medicine contracts declined by
approximately 49% from 4,383 patient days to 2,256 patient days as compared to
the same period the prior year. Units which were operational for both the
second quarter of fiscal 1997 and 1996 experienced a 17% decrease in
utilization to 1,319 patient days. Average net revenue per patient day at
these units increased by 28% from the same quarter a year ago resulting in an
increase in overall net inpatient operating revenues of 7% to $0.2 million.
Net outpatient revenues for programs operational for both quarters at these
units increased 24% from approximately $727,000 in the second quarter of fiscal
1996 to approximately $901,000 in the second quarter of fiscal 1997. The
increase in net outpatient revenues is predominately a result of an increase in
utilization of partial hospitalization programs.
19
<PAGE> 20
The following table sets forth quarterly utilization data on a "same
store" basis:
<TABLE>
<CAPTION>
Same Store Utilization
------------------------
Fiscal 1997 Fiscal 1996
2nd Quarter 2nd Quarter
----------- -----------
<S> <C> <C>
Admissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 314
Average length of stay . . . . . . . . . . . . . . . . . . . . . . 4 5
Patient days . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,319 1,581
Average occupancy rate . . . . . . . . . . . . . . . . . . . . . . 26% 32%
</TABLE>
For units which were operational for the second quarters of fiscal
1997 and 1996, direct healthcare expenses increased 20%, which was offset by a
20% increase in operating revenues. This resulted in an increase in operating
income at the unit level by 34%.
Freestanding Operations
Operating revenues for freestanding operations decreased by $1.1
million or by 39% during the second quarter of fiscal 1997 compared to the
second quarter of fiscal 1996. In addition, direct healthcare expenses
declined 49% or $1.5 million in the second quarter of fiscal 1997 and general
and administrative expenses declined by $0.1 million. The decrease in
operating revenues when combined with the significant decrease in direct
healthcare expenses, resulted in an improvement in hospital operations net
operating loss for the second quarter of fiscal 1997 of $0.1 million compared
to the loss of $0.5 million reported for the same quarter a year ago.
Admissions in the second quarter of fiscal 1997 decreased to 301 from
353 in the second quarter of fiscal 1996, an overall decline of 15%. This
decline is primarily due to the closure of an operating facility during the
first quarter of fiscal 1997.
The following table sets forth selected quarterly utilization data on
a "same store" basis.
<TABLE>
<CAPTION>
Same Store Utilization
------------------------
Fiscal 1997 Fiscal 1996
2nd Quarter 2nd Quarter
----------- -----------
<S> <C> <C>
Admissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 182
Average length of stay . . . . . . . . . . . . . . . . . . . . . . 5 5
Patient days . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,591 926
</TABLE>
Net revenue per patient day for "same store" facilities decreased to
$1,001 for the second quarter of fiscal 1997 from $1,676 for the second quarter
of fiscal 1996. Admissions increased for the quarter from 182 in the second
quarter of fiscal 1996 to 301 in the second quarter of fiscal 1997. In
addition, patient days increased from 926 in the second quarter of fiscal 1996
to 1,591 in the second quarter of fiscal 1997. The increase in admissions and
patient days resulted in an increase in net operating revenues for the second
quarter of fiscal 1997 of $41,000.
The following table illustrates revenues in outpatient and day care
programs offered by the "same store" facilities:
<TABLE>
<CAPTION>
Same Store
Net Outpatient/Daycare Revenues
-------------------------------
(Dollars in thousands)
Fiscal 1997 Fiscal 1996
2nd Quarter 2nd Quarter
----------- -----------
<S> <C> <C>
Facilities offering . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Net outpatient/daycare revenuyes . . . . . . . . . . . . . . . . . . . $1,363 $908
% of total "same store" net operating revenues . . . . . . . . . . 83% 72%
</TABLE>
Direct healthcare expenses at the Company's freestanding facilities on
a "same store" basis increased $0.2 million and bad debt expense decreased $0.1
million in the second quarter of fiscal 1997 from the second quarter of
20
<PAGE> 21
fiscal 1996. Net operating income decreased $57,000 in the second quarter of
fiscal 1997 from the same period a year ago. This is primarily due to a
Medicare cost report settlement of $287,000 received in November 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported a net loss of $4.2 million for the year ended May
31, 1996 and has reported net losses in each of the five preceding fiscal years
aggregating an additional $51.6 million. At November 30, 1996, the Company had
cash and cash equivalents of $7.6 million. During the six months ended
November 30, 1996, the Company provided $2.8 million from its operating
activities, provided $0.2 million from its investing activities and provided
$0.2 million from its financing activities. The Company reported a net loss of
$2.8 million for the six months ended November 30, 1996, versus a net loss of
$0.6 million for the six months ended November 30, 1995. As a result, the
Company has an accumulated deficit of $53.5 million and a total stockholders'
deficiency of $8.6 million as of November 30, 1996. Additionally, the
Company's current assets at November 30, 1996 amounted to approximately $14.9
million and current liabilities were approximately $37.5 million, resulting in
a working capital deficiency of approximately $22.6 million and a negative
current ratio of 1:2.5. 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 dispose of certain of its
freestanding facilities.
Included in operating activities for the first six months of fiscal
1997 is an increase in accounts receivable of $0.9 million, and an increase in
other receivables of $1.0 million. Also included in operating activities for
the first six months of fiscal 1997 is an increase in accounts payable and
accrued liabilities of $2.1 million and an increase in unbenefitted tax refunds
received of $5.1 million. The increase in other receivables and unbenefitted
tax refunds received is related to the Company's 1996 Federal income tax refund
(see Note 6 to the Company's Condensed Consolidated Financial Statements
included herein).
Included in the Company's investing activities for the first six
months of fiscal 1997 are the proceeds from the sale of property and equipment
of $0.4 million which was offset by the additions to property and equipment of
$0.2 million. These proceeds are related to the sale of the Company's
freestanding facility in Costa Mesa, California in August 1996.
Included in the cash flows from financing activities for the six
months of fiscal 1997 is repayment of debt in the amount of $0.7 million which
is primarily related to debt secured by the Company's freestanding facility
which was sold in August 1996. Also included in financing activities is the
proceeds from the issuance of the Company's Common Stock of $0.9 million. These
issuances are related to the exercise of employee stock options. The
cumulative effect of the above resulted in an ending cash position for the
Company on November 30, 1996 of $7.6 million, an increase of $3.1 million from
May 31, 1996.
During fiscal 1997, the Company acquired HMS. In conjunction with this
acquisition, the Company acquired assets and assumed liabilities. For a
supplement schedule of the noncash investing and financing activities related
to this acquisition see Note 9 to the Company's Condensed Consolidated
Financial Statements included herein.
Current assets as of November 30, 1996 increased by $4.9 million as
compared to May 31, 1996. This increase is predominately related to an
increase in cash and cash equivalents, accounts receivable and other
receivables. Non-current property and equipment held for sale declined by $2.2
million and non-current notes receivable increased by $1.8 million. These
changes are related to the sale of the Company's non-operating facility in
Costa Mesa, California, which occurred in August 1996. As part of the
transaction, the Company took back a note on the property with provisions that
allow the buyer a discount if the note is redeemed in the first six months.
The increase in other assets as of November 30, 1996 is related to the goodwill
recorded in conjunction with the acquisition of HMS.
Current liabilities as of November 30, 1996 increased $7.3 million as
compared to May 31, 1996. This increase is primarily a result of an increase
in accounts payable and accrued liabilities of $2.7 million and unbenefitted
tax refunds received of $5.1 million. In October 1996, the Company received a
refund of $5.4 million related to its 1996 Federal tax return (see Note 6 to
the Company's Condensed Consolidated Financial Statements included herein).
21
<PAGE> 22
During fiscal 1996, the Company generated $4.4 million from its
operating activities, an additional $1.3 million from its investing activities,
and utilized $2.8 million in its financing activities. Included in the
Company's funds provided from its investing activities are the proceeds from
the sale of property and equipment in the amount of $2.1 million which was
partially offset by the additions to property and equipment of $0.8 million.
These proceeds from the sale of the Company's freestanding facility in San
Diego, California will be utilized to fund the Company's operating deficit. In
addition, the Company utilized $2.3 million of proceeds from the sale of Common
Stock in private offerings and $1.0 million in borrowings from banks and other
lenders to assist with funding the deficit from operations and repaid $4.6
million of debt and $1.6 million to banks and other lenders (including the IRS
payroll tax settlement and Secured Conditional Exchangeable Note).
Included in operating activities for fiscal 1996 is a gain on sale of
assets of $1.1 million and gain on property held for sale of $0.3 million. The
gain on sale of assets includes the sale of operations in Kirkland, Washington
and the gain on property held for sale represents the freestanding facility in
San Diego, California, which was sold in May 1996. There was a decline in the
provision for doubtful accounts of $0.5 million to $0.9 million compared to the
prior fiscal year. Accounts receivable as of May 31, 1996, declined by $0.8
million to $2.5 million as compared to the prior year. In addition, there was
a decline in other receivables of $1.3 million. This decline is related to
payment received of $2.75 million in July 1995 related to the note receivable
from the sale of Starting Point, Oak Avenue, which was offset by the addition
during fiscal 1996 of the other receivable of $1.4 million related to the
Company's Federal tax refund. Included in fiscal 1996 is an increase in
depreciation and amortization of $0.3 million to $2.1 million. The decline of
depreciation expense as the Company continues to implement its plan for the
disposal and sale of freestanding facilities was offset during fiscal 1996 by
the write-off of $0.8 million in goodwill.
The increase in other assets as of May 31, 1996 of $1.0 million and a
$7.0 million increase in income taxes payable are related to the Company's 1995
Federal tax refund received in October 1995. The decrease in other liabilities
of $0.8 million is primarily related to a legal settlement. The cumulative
effect of the above resulted in an ending cash position for the Company on May
31, 1996 of $4.4 million, an increase of $2.9 million from the prior year.
During fiscal 1995, the Company utilized $7.9 million for its
operating activities, and generated $2.8 million and $4.8 million from its
investing and financing activities, respectively. Included in the Company's
funds provided from its investing activities are the proceeds from the sale of
properties and equipment in the amount of $3.2 million. These proceeds include
the sale of the Company's freestanding facility in Sacramento, California and
Orlando, Florida. In addition, during fiscal 1995, the Company utilized $2.5
million of proceeds from the sale of Common Stock in private offerings and
borrowings of $3.1 million from banks and/or other lenders (including the
Secured Convertible Note) to assist with funding the deficit from operations
and repaid $0.7 million to banks and other lenders. Included in operating
activities is the gain on sale of assets of $0.8 million, which was offset by
the write-down of assets and the loss on sale of assets of $1.1 million ($0.7
million and $0.4 million, respectively). During fiscal 1995, there was a
decline in accounts receivable of $1.1 million from the prior fiscal year due
to the reduction of operating revenue as a result of the sale and/or closure of
several of the Company's freestanding facilities.
In fiscal 1994, the Company utilized $7.2 million in its operating
activities, provided $10.0 million from its investing activities and utilized
$2.2 million in its financing activities. Included in the Company's operating
activities for fiscal 1994 was a decrease of $2.8 million reflecting the
decline in accounts payable and accrued liabilities. Also included in the
operating activities for fiscal 1994 is the gain on the sale of assets of $1.8
million, which was offset by the write-down of property held for sale of $1.8
million. During fiscal 1994, investing activities provided funds for
operations from the sale of properties in the amount of $10.4 million. The
Company sold its freestanding facilities in Tampa and Coral Springs, Florida
and a material portion of its publishing business during fiscal 1994. During
fiscal 1994, the Company also utilized $2.2 million for the repayment of debt
to banks and other lenders.
Included in current and non-current assets as of November 30, 1996 are
three hospital facilities designated as property and equipment held for sale
with a total carrying value of $5.9 million.
22
<PAGE> 23
In August 1996, the Company sold one of its non-operating facilities
and also closed an operating facility due to poor performance. The Company
used the proceeds from the sale of the facility to pay off secured debt and for
other working capital purposes. As part of the transaction related to this
sale, the Company took back a note on the property. The provisions of the note
allow the buyer a discount if the note is redeemed in the first six months. In
the event the buyer exercises this option, the proceeds to the Company would be
an additional $1.55 million. In the first quarter of fiscal 1997, the Company
entered into escrow for the sale of another facility which is scheduled to
close during the third quarter of fiscal 1997. Accordingly, this non-operating
property is classified as current property held for sale.
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 and another in fiscal 1997
(see Note 5 to the Company's Condensed Consolidated Financial Statements
included herein). As a result, the Company will no longer be burdened with the
negative cash flow requirements associated with such facilities. Based upon a
projection of actual performance during fiscal 1997 with adjustments for
reduced cash flow requirements associated with facilities closed and/or sold in
fiscal 1996 and 1997, known contract and cyclical changes, and also giving
consideration to cash on hand at November 30, 1996 of $7.6 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.
Included in current liabilities as of November 30, 1996, are $9.5
million of Debentures in default, immediately due and payable on account of
acceleration and $2.0 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. See Note 2 to the Company's Condensed Consolidated Financial
Statements included herein for a discussion of the Company's default in the
payment of interest on its Debentures, the acceleration thereof, the obtaining
of affirmative consents to waive the default and acceleration and the results
of the Debenture Exchange Offer. Accomplishment of the Debenture Exchange
reduces the Debenture's debt service requirement and decreases the Company's
future cash flow requirements. As a result of the completion of the Debenture
Exchange Offer, the Company's debt obligations will be reduced by $6,846,000 in
the third quarter of fiscal 1997. Subsequently, $2,692,000 of the Company's
debt obligations represented by untendered Debentures will be reclassified to
long term debt during the third quarter of fiscal 1997.
Also included in current maturities of long-term debt as of November
30, 1996, is approximately $2.0 million which represents the Company's
obligation pursuant to its Secured Convertible Note due in January 1997. During
the third quarter of fiscal 1997, the Company exchanged this Note for shares of
a newly designated Series A Non-Voting 4% Cumulative Convertible Preferred
Stock (the "Preferred Stock") and the Holder agreed to accept additional shares
of Preferred Stock in lieu of approximately $63,000 of accrued interest.
At the time of the commencement of the Debenture Exchange Offer, the
Company had sufficient cash resources available to fund the cash portion of the
Exchange. As of the completion of the Exchange, the Company utilized an
aggregate of $4.5 million to fund the cash portion of the Exchange and the
payment of interest due with respect to Debentures not tendered. Such cash
resources represented approximately 60% of the Company's available cash
resources as of November 30, 1996. Based upon current levels of operation and
cash anticipated to be internally generated from operations, the Company
believes that it has sufficient working capital to meet obligations as they
become due, however, the occurrence of business or economic conditions beyond
the control of the Company or the loss of existing contracts from cash from
operations is internally generated or the inability to conclude pending
contract proposals may adversely affect the adequacy of such working capital.
Cash resources to fund additional operating needs include:
o 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 April 1998 if offered by
the Company.
o The Company filed its fiscal 1995 Federal tax return, and a Form
1139 "Corporate Application for Tentative Refund" in the amount of
$9.4 million. The Company received the full refund claim for
fiscal 1995 in October 1995. In September 1996, the Company filed
its fiscal 1996 Federal tax return and also filed a Form 1139.
The Company received a refund in the amount of $5.4 million during
the second quarter of fiscal 1997. The Company has also filed
amended
23
<PAGE> 24
Federal tax returns for prior years to claim refunds for an
additional $7.7 million. These refund claims have been made under
Section 172(f) of the Internal Revenue Code, an area of the tax
law without significant precedent, and there may be substantial
opposition by the IRS to the Company's refund claims. The Company
is currently under audit by the IRS regarding its 1995 Federal tax
return and the amended returns for prior years. Accordingly, no
assurances can be made to the Company's entitlement to such
refunds or the timing of the receipt thereof (see Note 6 to the
Company's Condensed Consolidated Financial Statements included
herein).
o Included in property and equipment held for sale is one hospital
facility currently under contract to be sold. The sale of this
facility is scheduled to close during the third quarter of fiscal
1997. The proceeds from the sale are expected to be $1.3 million.
o Included in assets held for sale (non-current) are two hospital
facilities designated as property and equipment held for sale with
a total carrying value of $4.7 million. The Company expects to
sell these facilities during fiscal 1997. In addition, the
Company sold a non-operating facility during the first quarter of
fiscal 1997. As part of this transaction, the Company took back a
note on the property with provisions that allow the buyer a
discount if the note is redeemed in the first six months. In the
event the buyer exercises this option, the proceeds to the Company
would be $1.55 million.
All of these potential sources of additional cash in fiscal 1997 are
subject to variation due to business and economic influences outside the
Company's control. There can be no assurance that during fiscal 1997 the
Company will complete the transactions required to fund its working capital
deficit.
RISK FACTORS
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Quarterly Report on Form 10-Q includes forward-looking statements,
the realization of which may be impacted by certain important factors discussed
under "Item 2-- Management's Discussion and Analysis of Financial Conditions."
HISTORY OF LOSSES AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
As of November 30, 1996, the Company had a stockholders' deficiency of
$8.6 million, a working capital deficiency of approximately $22.6 million and a
negative current ratio of 1:2.5. The net loss from operations for the six
months ended November 30, 1996 was $2.7 million.
There can be no assurance that the Company will be able to achieve
profitability and maintain positive cash flows from operations or that
profitability and positive cash flow from operations 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 has resulted in the Company 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.
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN
The Company's independent auditors have included an explanatory
paragraph in their report that states that the Company's history of losses and
consolidated financial position raise substantial doubt about its ability to
continue as a going concern.
NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING
The Company's negative cash flow from operations has consumed
substantial amounts of cash. The completion of the Debenture Exchange Offer
required substantial amounts of cash for the payment of $4.5 million
24
<PAGE> 25
of default interest and/or payment in exchange for surrender of Debentures
which resulted in a depletion of the Company's cash resources (see Note 2 to
the Company's Condensed Consolidated Financial Statements included herein).
During prior fiscal years, 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. In addition, issuance of additional equity securities by the
Company could result in substantial dilution to stockholders.
The Company has received tax refunds for fiscal 1995 and 1996 in the
amounts of $9.4 million and $5.4 million, respectively. Such refunds are 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 an adverse effect on
the Company's cash flows. See "Taxes" below.
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 that the
Company has additional assets that could be disposed of or utilized as
collateral in order to fund its capital requirements.
TAXES
The Company has received tax refunds of approximately $9.4 million and
$5.4 million from the carry back of specified losses for fiscal 1995 and 1996,
respectively, as defined in Section 172(f) of the Internal Revenue Code.
Receipt of the 1995 and 1996 tax refunds does not imply IRS approval. The
proceeds to the Company of the 1995 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, $1.9 million and $1.1 million
contingency fees were paid to Deloitte & Touche, LLP from the refund proceeds
for fiscal 1995 and 1996, respectively. Section 172(f) is an area of the tax
law without significant 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.
Although the Company is currently being audited by the IRS, neither the Company
nor the IRS will be precluded in any resultant tax audit from raising these and
additional issues.
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. Further, 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.
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
Managed care operations are at risk for costs incurred to supply agreed
upon levels of service. Failure to anticipate or control costs could
materially adversely affect the Company. Additionally, the business of
providing services on a full risk capitation basis exposes the Company to the
additional risk that contracts negotiated and
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entered into may ultimately be determined to be unprofitable, and result in
significant losses by reason of unanticipated utilization levels requiring the
Company to deliver and provide services at capitation rates which do not
account for or factor in such utilization levels.
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.
SHARES ELIGIBLE FOR FUTURE SALE
As of November 30, 1996, the Company has issued or committed
approximately 249,912 shares for future issuances related to business
transactions, debt convertible or exchangeable into approximately 565,612
shares, and options or other rights to purchase approximately 1,174,725 shares
and contemplates issuing additional amounts of equity in private transactions.
Issuance of additional 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. The Company has determined, based upon inquiry made to the NYSE,
that a "short position" has existed with respect to the Company's Common Stock.
This "short position" has varied from time to time and the Company has been
advised that the net of "short position" as of December 31, 1996 was
approximately 697,227 shares. The Company cannot predict the effect, if any,
that such "short position" may have on either the market or prices for the
Company's Common Stock.
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 or the possibility of sale of shares to an acquiring person.
CONTINUED LISTING ON NYSE
The Company has been below certain continued listing criteria of the
NYSE since prior to October 1994. The continued listing of the Company's
Common Stock on the NYSE is subject to continual review and possible delisting
upon notices from the Listing and Compliance Committee of the NYSE.
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LIMITATIONS ON THE DEDUCTIBILITY OF COMPENSATION UNDER CERTAIN CIRCUMSTANCES
Pursuant to the 1993 Omnibus Budget Reconciliation Act, a portion of
annual compensation payable after 1993 to any of the Company's five highest
paid executive officers would not be deductible by the Company for federal
income tax purposes to the extent such officers' overall compensation exceeds
$1.0 million per executive officer. Qualifying performance-based incentive
compensation, however, would be both deductible and excluded for purposes of
calculating the $1.0 million base. The Board of Directors has determined that
no portion of anticipated compensation payable to any executive officer in 1996
would be non-deductible. The Board of Directors will continue to address this
issue when formulating compensation arrangements for executive officers, but
believes that the deductibility of officer compensation in excess of the $1.0
million threshold is not likely to be an issue for the Company to address in
the foreseeable future.
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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 judgment 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 judgment 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. Verbal argument was heard
by the District Court in June 1996. On October 22, 1996, The U.S. Court of
Appeals for the Eighth Circuit reversed the judgment in favor of the Company
and against RehabCare entered by the District Court following the jury's
verdict in favor of the Company. On November 5, 1996, the Company filed a
Petition for Rehearing with the Eighth Circuit. Any effect from the outcome of
this lawsuit will not have a material adverse impact on the Company's results
of operations.
On December 27, 1995, AGCA, Inc. and Merit Behavioral Care Systems
Corporation filed a lawsuit against a subsidiary of the Company, one of its
employees, and other non-related parties. The cause, originally filed in
Travis County, has been moved to the 101st District Court of Dallas County
(Case No. 962970E). On January 29, 1996, AGCA, Inc. also filed a lawsuit
against a subsidiary of the Company and one of its employees in the U.S.
District Court, Tampa Division (Case No. 95-15768). Both lawsuits seek
injunctive relief and the Texas action includes a claim of conspiracy.
Plaintiffs agreed to mediate both the Texas and Florida actions, on September
3, 1996, in Tampa, Florida. On September 4, 1996, the Company settled this
dispute. The settlement agreement and release requires a payment by the
Company's subsidiary and its employee of $325,000. In addition, the
subsidiary's employee agreed not to solicit certain customers until after May
15, 1997. The Company recorded a charge of $250,000 during the first quarter
of fiscal 1997 which represents the net amount paid by the Company. The
Company paid the settlement amount on September 21, 1996.
The Company entered into a Stock Purchase Agreement on April 30, 1996
to purchase the outstanding stock of HMS (see Note 4-- "Acquisitions and
Dispositions"). The Stock Purchase Agreement was subject to certain escrow
provisions and other contingencies which were not completed until July 25,
1996. In conjunction with this transaction, HMS initiated an arbitration
against The Emerald Health Network, Inc. ("Emerald") claiming breach of
contract and seeking damages and other relief. In August 1996, Emerald, in
turn, initiated action in the U.S. District Court for the Northern District of
Ohio, Eastern Division, against the Company claiming, among other things,
interference with the contract between Emerald and HMS and seeking unspecified
damages and other relief. Discovery has been initiated by all parties and the
Company believes it has good and meritorious defenses and that HMS has
meritorious claims in its arbitration. In November 1996, Emerald moved the
court for summary judgment. The hearing on such motion has been adjourned and
the Company's response is pending. The Company believes that it has claims
arising from this transaction against the accountants and legal counsel of HMS
as well as HMS's lending bank. On October 1, 1996, the Company filed a claim
of malpractice against the legal counsel of HMS. These claims are presently
being investigated and have not as yet been quantified. The Company does not
believe that the impact of these claims will have a material adverse effect on
the Company's financial position, results of operations and cash flows.
On September 6, 1996, the Company instituted an arbitration against the
Sellers of HMS with the American Arbitration Association in Orange County,
California seeking, among other things, damages from the Sellers which the
Company sustained by reason of the inaccuracies of the representations and
warranties made by the Sellers and for the indemnification from each of the
Sellers as provided for under the terms of the Stock Purchase Agreement. The
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Sellers have not interposed their answers to the arbitration, and the
arbitration is therefore in its formative stages. The Company does not believe
that the impact of these claims will have a material adverse effect on the
Company's financial position, results of operations and cash flows.
OTHER LITIGATION
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. The Listing and Compliance Committee of the NYSE has
determined to monitor the Company's progress toward returning to continuing
listing standards and has so indicated in approving the Company's most recent
Listing Application on December 30, 1996. Management believes, though no
assurance may be given, that the recent completion of the Company's Debenture
Exchange Offer will enable the Company to seek additional equity and thereby
satisfy the Committee of the Company's progress. No assurance may be given
that additional equity may be obtained on terms favorable to the Company. No
assurance may be given as to the actions that the NYSE may take or that the
steps of the restructuring will be successfully completed.
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 3 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, the acceleration of the
full principal amount thereof, and the affirmative consents of Debentureholders
to waive the default and acceleration (see Note 2-- "Debenture Exchange
Offer").
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 a 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 Note 2 to the Company's Condensed
Consolidated Financial Statements included herein for a discussion of the
Company's default in the payment of interest on its 7 1/2% Convertible
Subordinated Debentures, the acceleration thereof, and the affirmative consents
of Debentureholders to waive the default and acceleration.
In October 1994, the New York Stock Exchange, Inc. 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. The Listing and Compliance Committee of the NYSE has determined to
monitor the Company's progress toward returning to continuing listing standards
and has so indicated in approving the Company's most recent Listing Application
on December 30, 1996. Management believes, though no assurance may be given,
that the recent completion of the Company's Debenture Exchange Offer will
enable the Company to seek additional equity and thereby satisfy the Committee
of the Company's progress.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of the Company's Annual Shareholders' Meeting were
reported in the Company's Report on Form 8-K dated December 10, 1996.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
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1) The Company filed a current report on Form 8-K dated
September 6, 1996, to report under Item 5, the Stock
Purchase Agreement between the Company and Healthcare
Management Services, Inc. and three sister
corporations and the commencement of arbitration with
the Emerald Health Network, Inc. and the sellers of
HMS.
2) The Company filed a current report on Form 8-K dated
October 15, 1996, to report under Item 5, the
resignation of Ronald G. Hersch, Ph.D., Vice
President of Strategic Planning and Development.
3) The Company filed a current report on Form 8-K dated
October 22, 1996, under Item 5, to report that the
U.S. Court of Appeals for the 8th Circuit Court
reversed the judgment in favor of the Company and
against RehabCare.
4) The Company filed a current report on Form 8-K dated
November 18, 1996, under Item 5, to report that it
had commenced an exchange offer to the holders of its
7 1/2% Convertible Subordinated Debentures due April
15, 2010.
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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
February 10, 1997 By /s/ Chriss W. Street
---------------------------------
Chriss W. Street
President and
Chief Executive Officer
(Principal Executive Officer)
February 10, 1997 By /s/ Kerri Ruppert
---------------------------------
Kerri Ruppert
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
31
