-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ghu4l/i9a5fhZb9qDW5AW4NuKvN3jueK03gYOgV+6zg5qod4MR5XwZa3YKxicNn3 VBW+XcWqJuWFxAkHhmfSCQ== 0000892569-96-001057.txt : 19960624 0000892569-96-001057.hdr.sgml : 19960624 ACCESSION NUMBER: 0000892569-96-001057 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950831 FILED AS OF DATE: 19960621 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMPREHENSIVE CARE CORP CENTRAL INDEX KEY: 0000022872 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 952594724 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09927 FILM NUMBER: 96584223 BUSINESS ADDRESS: STREET 1: 1111 BAYSIDE DRIVE, #100 CITY: CORONA DE MAR STATE: CA ZIP: 92625 BUSINESS PHONE: 714-222-2273 MAIL ADDRESS: STREET 1: 350 W BAY ST CITY: COSTA MESA STATE: CA ZIP: 92627 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES DATE OF NAME CHANGE: 19730501 FORMER COMPANY: FORMER CONFORMED NAME: JADE OIL CO DATE OF NAME CHANGE: 19700402 FORMER COMPANY: FORMER CONFORMED NAME: NEURO PSYCHIATRIC & HEALTH SERVICES INC DATE OF NAME CHANGE: 19700402 10-Q/A 1 AMENDMENT NO. 2 TO THE FORM 10-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A AMENDMENT NO. 2 [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended August 31, 1995 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ______________ Commission File Number 0-5751 COMPREHENSIVE CARE CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-2594724 - ---------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organi- zation) 1111 Bayside Drive, Suite 100, Corona del Mar, ---------------------------------------------- California 92625 (Address of principal executive offices and Zip Code) (714) 222-2273 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date: Classes Outstanding at October 11, 1995 - -------------------------------------- ------------------------------- Common Stock, par value $.01 per share 2,656,932 The number of shares outstanding includes an aggregate of 442,433 shares previously sold by the Registrant and which the Registrant is obligated to issue. Issuance of which is pending the completion of administerial acts. 2
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES Index Part I - Financial Information Item 1. - Condensed Consolidated Financial Statements Condensed consolidated balance sheets, August 31, 1995 and May 31, 1995.................................................... 3 Condensed consolidated statements of operations for the three months ended August 31, 1995 and 1994..................................... 4 Condensed consolidated statements of cash flows for the three months ended August 31, 1995 and 1994..................................... 5 Notes to condensed consolidated financial statements ................................... 6 Item 2. - Management's discussion and analysis of financial condition and results of operations......................................................... 12 Part II - Other Information ..................................................................... 19 Item 1. - Legal Proceedings ............................................................... 19 Item 3. - Defaults Upon Senior Securities ................................................. 21 Item 6. - Exhibits and Reports on Form 8-K ................................................ 21 Signatures ................................................................................. 22
2 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)
August 31, May 31, 1995 1995 ---------- ------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents .............................................. $ 799 $ 1,542 Accounts and notes receivable, less allowance for doubtful accounts of $1,081 and $1,096 ............................ 3,889 3,329 Note receivable ........................................................ -- 2,750 Other current assets ................................................... 643 391 ------ ------- Total current assets ......................................................... 5,331 8,012 ------ ------- Property and equipment, at cost .............................................. 25,378 25,181 Less accumulated depreciation and amortization ............................... (13,407) (13,074) ------ ------- Net property and equipment ................................................... 11,971 12,107 ------ ------- Property and equipment held for sale ......................................... 3,857 3,746 Other assets ................................................................. 1,956 2,136 ------- ------- Total assets ................................................................. $23,115 $26,001 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities ............................... $10,176 $10,235 Long-term debt in default (see Note 2) ................................. 9,538 9,538 Current maturities of long-term debt ................................... 1,290 3,285 Income taxes payable ................................................... 325 296 ------- ------- Total current liabilities .................................................... 21,329 23,354 ------- ------- Long-term debt, excluding current maturities ................................. 4,636 5,077 Other liabilities ............................................................ 1,460 1,503 Minority interest ............................................................ 1,000 1,000 Commitments and contingencies (see Notes 2 and 5) Stockholders' equity: Preferred stock, $50.00 par value; authorized 60,000 shares ............ -- -- Common stock, $.01 par value; authorized 12,500,000 shares, issued 2,656,936 and 2,464,516 shares ............................. 26 25 Additional paid-in capital ............................................. 42,487 41,558 Accumulated deficit .................................................... (47,823) (46,516) ------- ------- Total stockholders' equity ........................................ (5,310) (4,933 ------- ------- Total liabilities and stockholders' equity ................................... $23,115 $26,001 ======= =======
Note: The balance sheet at May 31, 1995 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 3 4
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except per share amounts) Three Months Ended August 31, August 31, 1995 1994 ----------- ------------ Revenues and gains: Operating revenues .......................................... $8,776 $8,057 Costs and expenses: Operating expenses .......................................... 7,715 7,989 General and administrative .................................. 1,270 1,067 Provision for doubtful accounts ............................. 280 750 Depreciation and amortization ............................... 348 461 ------ ------ Loss from operations............................................... (837) (2,210) Interest income.............................................. (10) (6) Interest expense............................................. 454 251 ------ ------ Loss before income taxes .......................................... (1,281) (2,455) ------ ------ Provision for income taxes ........................................ 26 45 ------ ------ Net loss .......................................................... $(1,307) $(2,500) -===== ====== Loss per share: Net loss .................................................... $(0.50) $(1.14) ===== =====
See accompanying notes. 4 5
COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands) Three Months Ended August 31, August 31, 1995 1994 ------------ ------------ Cash flows from operating activities: Net loss ................................................................ $(1,307) $(2,500) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization....................................... 348 461 Provision for doubtful accounts..................................... 280 750 Loss on sale/write-down of assets................................... -- (4) Carrying costs incurred on property and equipment held for sale..... (84) (135) Decrease in accounts and notes receivable........................... 1,910 177 Decrease in other current assets and other assets................... (123) 123 Decrease in accounts payable and accrued liabilities................ (58) (228) Increase in income taxes payable.................................... 29 34 Decrease in other liabilities....................................... (43) (100) ------ ------ Net cash provided by (used in) operating activities ..................... 952 (1,422) ------ ------ Cash flows from investing activities: Net proceeds (loss) from sale of property and equipment (operating and held for sale) ......................................................... (46) 5 Additions to property and equipment ..................................... (143) (37) ------ ------ Net cash (used in) investing activities ............................... (189) (32) ------ ------ Cash flows from financing activities: Proceeds from the issuance of common stock .............................. 930 -- Repayment of debt ....................................................... (2,436) (52) ------ ------ Net cash (used in) financing activities: .............................. (1,506) (52) ------ ------ Net increase(decrease) in cash and cash equivalents ........................... (743) (1,506) Cash and cash equivalents at beginning of period .............................. 1,542 1,781 ------ ------ Cash and cash equivalents at end of period .................................... $ 799 $ 275 ====== =====
See accompanying notes. 5 6 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1995 (unaudited) NOTE 1 - BASIS OF PRESENTATION The condensed consolidated balance sheet as of August 31, 1995, and the related condensed consolidated statements of operations and cash flows for the three months ended August 31, 1995 and 1994 are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The results of operations for the three months ended August 31, 1995, are not necessarily indicative of the results to be expected during the balance of the fiscal year. The condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Notes to consolidated financial statements included in Form 10-K for the year ended May 31, 1995, on file with the Securities and Exchange Commission, provide additional disclosures and a further description of accounting policies. The Company's financial statements are presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred significant losses from operations in fiscal 1995 and continues to report losses for the first quarter of fiscal 1996. The continuation of the Company's business is dependent upon the resolution of operating and short-term liquidity problems and the consolidated financial statements do not include any adjustments that might result from an unfavorable outcome of this uncertainty (see Note 2-- "Operating Losses and Liquidity"). The weighted average number of shares outstanding used to compute loss per share were 2,599,000 and 2,199,000 for the three months ended August 31, 1995 and 1994. All share and per share amounts contained in the Condensed Consolidated Financial Statements retroactively reflect the effect of the reverse stock split for all periods presented, which effect is to reduce the number of shares set forth by a factor of ten, with each stockholder's proportionate ownership interest remaining constant, except for payment in lieu of fractional shares. NOTE 2 - OPERATING LOSSES AND LIQUIDITY The Company reported a net loss of $1.3 million for the quarter ended August 31, 1995 versus a net loss of $2.5 million for the quarter ended August 31, 1994. As a result, the Company has an accumulated deficit of $47.8 million and a total stockholders' deficiency of $5.3 million as of August 31, 1995. Additionally, the Company's current assets at August 31, 1995 amounted to approximately $5.3 million and current liabilities were approximately $21.3 million, resulting in a working capital deficiency of approximately $16.0 million and a negative current ratio of 1:4.0. The Company's primary use of available cash resources is to expand its behavioral medicine managed care and contract management businesses and fund operations while it seeks to restore profitability to certain of its freestanding facilities. Included in non-current assets are three hospital facilities designated as property and equipment held for sale with a total carrying value of $3.9 million. There were no additions or sales of these properties during the first quarter of fiscal 1996. Included in current liabilities are $9.5 million of Debentures in default and immediately due and payable on account of acceleration and $1.0 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. The Company has agreed to use its best efforts to provide an opportunity for Debenture holders to tender their Debentures pursuant to an exchange offer to be made by the Company. This proposed transaction requires the holders of a majority of the Debentures to give their approval to rescind the acceleration and the Company to obtain and expend up to $5.5 million of cash during fiscal 1996, over and above cash required to fund other financing, operating and investing needs. Additionally, the Debenture exchange provides for the Company to issue $120 worth of its common stock at a defined value for each $1,000 of Debentures, which may be contingent upon the Company's ability to make certain filings with the Securities and Exchange Commission. The ability to timely proceed with any such 6 7 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1995 (unaudited) proposed filings will, in part, depend upon the ability of the Company to obtain a consent from its prior auditors for the use of their report on the Company's consolidated financial statements in such filings. Failure to obtain Debenture holder approval or to accomplish the Debenture exchange, or, in the alternative, a failure of the Company and the Debenture holders to otherwise reach a settlement, may cause the Debenture holders to pursue the involuntary bankruptcy of the Company and/or the Company to take alternative actions that may include filing for voluntary protection from creditors. In the event of a failure to accomplish the proposed recission of the Debentures the Company would continue to be liable for the entire $9,538,000 principal amount plus accrued interest from April 15, 1994 estimated at approximately $1.1 million through August 31, 1995 plus certain other costs. Alternatively, if the Debenture exchange is accomplished, the elimination of the Debenture's debt service requirement would decrease the Company's future cash flow requirements. (The foregoing summary does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations.) These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty. In fiscal 1993, the Company established a restructuring reserve to address the Company's operational issues. One purpose of such reserve was for the realignment of the Company's focus and business and the settlement and disposition of certain non-performing and under-utilized assets. Many of the Company's inpatient freestanding facilities have been sold or are in the process of being closed or sold and management has begun to implement plans for expanding the Company's contract management and managed care operations. In previous years, the Company was obligated to support and fund certain poor performing freestanding facilities that now have been closed, including two such facilities closed in fiscal 1995 (see Note 3-- "Property and Equipment Held for Sale"). As a result, the Company will no longer be burdened with the negative cash flow requirements associated with such facilities. Based upon a projection of actual performance during fiscal 1995 with adjustments for reduced cash flow requirements associated with facilities closed and/or sold in fiscal 1995, known contract and cyclical changes, and also giving consideration to cash on hand at August 31, 1995 of $799,000, management expects the Company to be able to meet its cash obligations required by operations during fiscal 1996, excluding the Company's obligations under the Debentures. However, the cash needs of the Company may vary from month to month depending upon the actual level of business activity, and through the first quarter of fiscal 1996 the Company continues to incur losses. Therefore, no assurance can be given that the Company will generate adequate cash flows to meet cash obligations required by operations, excluding the Company's obligations under the Debentures, in fiscal 1996. To provide funds for the Debenture exchange and/or additional operating needs, the Company anticipates utilizing one or more of the following potential sources of cash: - The Company has filed its fiscal 1995 Federal tax return, and a Form 1139 "Corporate Application for Tentative Refund" in the amount of $9.4 million. In the event the Company receives the full refund claim for fiscal 1995, the net amount of cash available for working capital purposes would be $7.5 million. The Company has also filed amended Federal tax returns for prior years to claim refunds of an additional $13.2 million. The net amount of cash available for working capital purposes would be $10.6 million. These refund claims have been made under Section 172(f) of the Internal Revenue Code, an area of the tax law without significant precedent, and there may be substantial opposition by the IRS to the Company's refund claims. Accordingly, no assurances can be made to the Company's entitlement to such refunds or the timing of the receipt thereof (see Note 4-- "Income Taxes"). - Included in non-current assets are three hospital facilities designated as property and equipment held for sale with a total carrying value of $3.9 million. The Company expects to sell two of these facilities in the next fiscal year and may lease a third facility to an unrelated 7 8 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1995 (unaudited) entity. However, the contracts have not been fully negotiated and proceeds from the sales or lease of such assets are not expected to be available by the time the Debenture exchange is expected to occur. Accordingly, management expects to use such cash proceeds, if received during fiscal 1996, to fund and expand the Company's operations and implement the Company's restructuring plans. - In March 1995, a jury awarded the Company approximately $2.7 million, plus interest, in damages in its lawsuit against RehabCare Corporation. The defendant has posted a bond for the amount of the award and has filed an appeal of the judgment. Management is unable to predict the outcome and whether any proceeds from this judgment will be received in fiscal 1996 (see Note 5-- "Commitments and Contingencies"). - The Company has received a firm commitment from a mutual fund to purchase in a private placement at least $5.0 million of 15% fully secured Company notes due no earlier than December 1996 if offered by the Company. All of these potential sources of additional cash in fiscal 1996 are subject to variation due to business and economic influences outside the Company's control. There can be no assurance that during fiscal 1996 the Company will complete the transactions required to fund its working capital deficit. During the first quarter of fiscal 1996, the Company paid the IRS approximately $2.3 million pursuant to its settlement agreement (see Note 5-- "Commitments and Contingencies"). The Company utilized the proceeds from a note receivable on the sale of its Sacramento facility, received on July 10, 1995 for $2.75 million in order to fund this payment. The Company continues to pay the remaining balance in monthly installments of $42,000. NOTE 3 - PROPERTY AND EQUIPMENT HELD FOR SALE The Company has decided to dispose of certain freestanding facilities and other assets (see Note 2-- "Operating Losses and Liquidity"). Property and equipment held for sale, consisting of land, building, equipment and other fixed assets with a historical net book value of approximately $16.2 million at August 31, 1995, is carried at estimated net realizable value of approximately $3.9 million. Operating revenues and expenses of the facilities designated for disposition were approximately $0.2 million and $0.3 million, for the three months ended August 31, 1995 and 1994 respectively. Property and equipment held for sale, which are under contract and expected to be sold within the next twelve month period, are shown as long-term assets on the consolidated balance sheets. Gains and losses on facilities have been reflected in the statement of operations. Any impairments to the net realizable value of property and equipment held for sale have also been recorded in the statement of operations. Two of the four closed freestanding facilities included in property and equipment held for sale are currently under sales contracts. A summary of the transactions affecting the carrying value of property and equipment held for sale for the three months ended August 31, 1995, is as follows (in thousands):
Non-current balance as of May 31, 1995 ................... $3,746 Carrying costs incurred during phase-out period .......... 84 Adjustment to net realizable value ....................... 27 ------ Balance as of August 31, 1995 ............................ $3,857 ======
8 9 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1995 (unaudited) The loss on sale/write-down of property and equipment held for sale is reflected on the Company's statement of operations and consists of the following for the three months ended August 31, 1995 (in thousands):
PERIOD ENDING AUGUST 31, 1995 --------------- Gain on property held for sale ....................................... $ 27 Adjustment to properties held for sale to net realizable value ....... (27) -------- $ -- ========
NOTE 4 - INCOME TAXES On July 20, 1995, the Company filed its Federal income tax return for fiscal 1995. On August 4, 1995, the Company filed Form 1139 "Corporate Application for Tentative Refund" to carry back losses under Section 172(f) requesting a refund to the Company in the amount of $9.4 million. On August 30, 1995, the Company also filed amended Federal tax returns for several prior fiscal years to carry back losses under Section 172(f). The amount of refund claimed on the amended returns are approximately $11.7 million for 1986; $0.4 million for 1985; $0.7 million for 1983 and $0.4 million for 1982. The total refunds applied for is $22.6 million, $13.2 million for amended prior years' returns and $9.4 million for fiscal year 1995. Section 172(f) is an area of the tax law without guiding legal precedent. There may be opposition by the IRS as to the Company's ability to carry back such losses under Section 172(f). Therefore, no assurances can be made to the Company's entitlement to all of these claims. Consequently, a valuation allowance has been established against $22.6 million of this potential tax benefit. NOTE 5 - COMMITMENTS AND CONTINGENCIES On October 30, 1992, the Company filed a complaint in the United States District Court for the Eastern District of Missouri against RehabCare Corporation ("RehabCare") seeking damages for violations by RehabCare of the securities laws of the United States, for common law fraud and for breach of contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost benefit of certain stockholder appreciation rights in an amount in excess of $3.6 million and punitive damages. RehabCare filed a counterclaim in the case seeking a declaratory judgement with respect to the rights of both parties under the Stock Redemption Agreement, an injunction enjoining the Company from taking certain action under the Stock Redemption or Restated Shareholders Agreements and damages in the form of attorneys' fees and costs allegedly incurred by RehabCare with respect to its issuance of certain preferred stock and with respect to prior litigation between the parties. The case was tried before a jury commencing on February 21, 1995. Prior to the presentation of evidence to the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8, 1995, the jury returned its verdict awarding the Company $2,681,250 in damages, plus interest and the costs of the action against RehabCare for securities fraud and for breach of contract. RehabCare has posted a bond in the amount of $3.0 million and filed a motion for new trial or in the alternative, for judgement as a matter of law, which the court denied in its entirety on August 4, 1995. On September 1, 1995, RehabCare filed a notice of appeal with the District Court indicating its intent to appeal the matter to the United States Court of Appeals. Although the Company feels that RehabCare will not prevail in its appeal, the Company has not recognized any gain with relation to the judgement. The outcome of this lawsuit will not have an effect on the Company's results of operations. In connection with the proposed sale and lease-back of hospitals to CMP Properties, Inc., a real estate investment trust, the Company advanced $1.1 million to its financial advisor, Mr. Leslie Livingston and Livingston & Co., in fiscal 1992. The financial advisor was affiliated with several members of the Company's 9 10 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1995 (unaudited) Board of Directors at that time. The Company had classified these advances as accounts receivable as of May 31, 1993 and wrote off all such receivables during fiscal 1994. The advances, which were to be repaid if the transaction was not completed, were to be secured by a pledge of common stock in an unrelated company. The pledged shares of common stock were in the possession of the Company's primary legal counsel at that time, Schwabe, Williamson & Wyatt, as collateral for the advances. After the transaction was terminated, the financial advisor refused to repay the advances and the Company's legal counsel refused to turn over the collateral to the Company. The Company has filed an action in the United States District Court for the District of Oregon (Civil Case No. 94-384 FR) against its former financial advisor and former legal counsel to recover the advances. The former financial advisor has counterclaimed against the Company for $1,688,000 for breach of contract and unjust enrichment. The Company's former law firm has filed a counterclaim for $193,000 for unpaid legal fees. Management believes that the counterclaims are without merit and intends to vigorously defend against them and to pursue the Company's claims. The Company does not expect the outcome of this lawsuit to have an effect on the Company's results of operations. On June 8, 1994, RehabCare filed a lawsuit against the Company in the Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement entered into between the Company and RehabCare in May 1991 (Case No. 663957). An amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges that it has incurred attorneys fees in connection with the settlement of certain tax issues with the IRS and has paid the IRS a settlement amount with respect to the years 1987 and 1988. RehabCare seeks the recovery from the Company of $588,000, plus interest, which RehabCare alleges is the amount it incurred for payments to the IRS in settlement of taxes and attorneys fees it incurred in dealing with the IRS. The Company has filed its answer and affirmative defenses contesting the right of RehabCare to obtain the relief it seeks. Discovery is ongoing. Until such discovery is complete, it is not possible to predict the likely outcome of the lawsuit. The Company intends to continue to vigorously defend this matter. The Company established a reserve for this lawsuit in a prior fiscal year and does not believe it will have an impact on the Company' financial statements or results of operations. In December 1994, the Company reached a settlement with the Appeals Office of the Internal Revenue Service ("IRS") on a payroll tax audit for the calendar years 1983 through 1991. Pursuant to this settlement the Company agreed to pay the IRS $5.0 million with the Company having no obligation to pay any penalties or accrued interest. The IRS agent conducting the audit asserted that certain physicians, psychologists and other staff engaged as independent contractors by the Company should have been treated as employees for payroll tax purposes. The settlement was reviewed and accepted on behalf of the IRS by its district counsel. Payment terms have been accepted at 50% within 90 days of finalization with the remainder financed over the next five years. In March 1995, the Company paid $350,000 to the IRS against the initial payment due. In return, the IRS granted the Company an additional 120 days to pay the remaining balance of $2,150,000. In July 1995, the Company paid the remaining balance of the initial payment, and continues to make the monthly installment payment pursuant to the terms of the settlement. The unpaid balance bears interest at 9% per annum due and payable after the $5.0 million is paid. The Company had accrued for this settlement amount over several previous fiscal years and, as a result, there was no impact on the Company's current year financial statements for this settlement. The Company's future statements of operations will reflect the interest expense related to the outstanding settlement amount. An involuntary bankruptcy petition was dismissed on March 6, 1995 pursuant to an agreement dated March 3, 1995 between the Company and a representative of the petitioners. Under such agreement the Company has agreed, subject to the conditions therein, to offer to exchange for its outstanding 7 1/2% Convertible Subordinated Debentures a combination of cash and shares. See Note 2-- "Operating Losses and Liquidity" for a discussion of the Company's default in the payment of interest on its 7 1/2 % Convertible Subordinated Debentures and the consequent acceleration of the full principal amount thereof. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations. 10 11 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1995 (unaudited) In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criteria in regard to net tangible assets available to common stock and three year average net income among other items. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards. Management anticipates that, at a minimum, success in completing the rescission of the debenture acceleration (see Note 2-- "Operating Losses and Liquidity") and a return to profitability will be necessary in order to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter of fiscal 1995 and during the first quarter of fiscal 1996, to discuss the Company's financial condition, and intention to issue shares without seeking approval of shareholders pursuant to the exception to the NYSE policy for financially distressed companies. From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary routine litigation incidental to their business. In some pending cases, claims exceed respective insurance policy limits and the Company or a subsidiary may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements. NOTE 6 - SUBSEQUENT EVENTS On August 18, 1995, the Company settled its claim filed in 1992 against its fidelity bond carrier in the amount of $425,000. The Company received the proceeds on September 6, 1995. On October 3, 1995, the Company sold its 83-bed freestanding facility CareUnit of Kirkland and three related clinics to Lakeside Milam Recovery Centers, Inc. The sale results in a gain of approximately $1.0 million. 11 12 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In early fiscal 1995, Management developed a "global restructuring" plan intended to address the Company's immediate challenges and to return to a base of profitability for future success. Management intended that this "global restructuring" include as many of the following steps as possible: (i) effect a reverse stock split to improve the Company's image; (ii) negotiate settlement of the Company's payroll tax audit with the IRS; (iii) restructure the Company's financial obligations represented by the Company's 7 1/2% Convertible Subordinated Debentures (the "Debentures"); and (iv) raise capital to finance the restructuring costs. During fiscal 1995 and 1996 management accomplished its objectives, described above, except item (iii), restructuring of the Company's financial obligations represented by the Company's Debentures. During the first quarter of fiscal 1996, the Company sold an aggregate of 155,000 shares of common stock to four accredited investors in private offerings for an aggregate of $930,000 paid in cash. The proceeds of such sales were used for working capital and other general corporate purposes. Although the Company is seeking to restructure its obligations under the Debentures, the Company is currently in default as a result of the Company's failure to make scheduled payments of interest (see Note 2 to the Company's Condensed Consolidated Financial Statements included herein). During the fourth quarter of fiscal 1995, the Company entered into a letter of agreement with a representative of holders of the Debentures. The agreement provides, among other things, that the Company provide an opportunity to holders of the Debentures to tender their Debentures to the Company pursuant to an exchange offer to be made by the Company to the holders of the Debentures. Although the Company has filed an exchange offer with the Securities and Exchange Commission, there can be no assurance that the exchange offer will be successfully completed. Failure to consummate the Debenture exchange offer may result in the Company considering alternative actions including filing for voluntary protection from creditors. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Debentures. RESULTS OF OPERATIONS Statistical Information The following utilization statistics include data from all operations including closures during the periods, joint ventures and closed facilities:
Three months ended August 31, May 31, August 31, 1995 1995 1994 --------- --------- ------- Managed care operations: Covered lives ................................... 679,812 442,946 207,565 Patient days: Freestanding facilities ......................... 3,778 4,273 8,564 Behavioral medicine contracts ................... 5,534 6,230 8,580 Freestanding facilities: Occupancy rate .................................. 18% 18% 27% Admissions ...................................... 573 646 979 Average length of stay (days) ................... 7 7 9 Behavioral medicine contracts: Average occupied beds per contract .............. 5 5 7 Admissions ...................................... 770 809 1,072 Average length of stay (days) ................... 7 8 8 Total beds available at end of period: Freestanding facilities ......................... 237 237 347 Behavioral medicine contracts ................... 141 157 251
12 13 Three Months Ended August 31, 1995 Compared to Three Months Ended August 31, 1994 The Company reported a pretax loss of approximately $1.3 million for the first quarter of fiscal 1996, an improvement of approximately $1.2 million or 48% from the pretax loss of approximately $2.5 million reported for the first quarter of fiscal 1995. Operating revenues for the first quarter of fiscal 1996 increased by $0.7 million or 9% from the first quarter of fiscal 1995. The first quarter of fiscal 1996 includes an increase in managed care operating revenues of $2.4 million as compared to the first quarter of fiscal 1995. This increase in managed care operating revenues was partially offset by the decline in operating revenues from freestanding facilities of $1.9 million due to the sale and/or closure of two facilities during the third and fourth quarters of fiscal 1995. Operating expenses decreased by approximately $0.3 million or 3% in the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995. The decrease in operating expenses is primarily attributable to a 34% decline in operating expenses for freestanding operations as a result of reduced admissions and patient days and was partially offset by a 100% increase in operating expenses related to managed care operations, and a 34% increase related to contract operations. General and administrative expenses increased by approximately $0.6 million from the first quarter of fiscal 1995 primarily as a result of managed care operations expansion and development and higher corporate legal and accounting fees in the first quarter of fiscal 1996. The first quarter of fiscal 1996 includes a credit of $0.4 million related to a settlement (see Note 6 to the Company's Condensed Consolidated Financial Statements included herein). During the first quarter, a decline in the provision for doubtful accounts for freestanding operations of $0.5 million as a result of continued downsizing. Managed Care Operations At August 31, 1995, the number of covered lives increased to 679,812 from 207,565 a year ago or by 228%. This increase is primarily attributable to new contracts. Comprehensive Behavioral Care, Inc. ("Comprehensive Behavioral") believes that it distinguishes itself from its competition by being the "science-based" provider of care and manages all clinical programs based upon proven treatment technologies. In the first quarter of fiscal 1996, operating revenues increased by $2.4 million compared to the first quarter of fiscal 1995. Operating expenses increased by $1.3 million in the first quarter of fiscal 1996 compared to the same period a year ago. In addition, general and administrative expenses increased to $0.4 million in the first quarter of fiscal 1996 as compared to no reported expense in the first quarter of fiscal 1995. As a result, the net operating loss for Comprehensive Behavioral for the first quarter of fiscal 1996 was $0.2 million, an improvement of $0.2 million from the net operating loss of $0.4 million in the same quarter of the prior year. Behavioral Medicine Contracts In the first quarter of fiscal 1996, CareUnit, Inc. ("CareUnit") operating revenues increased by 18% from the first quarter of fiscal 1995 and operating expenses increased by $0.3 million or 34%. This resulted in an increase in CareUnit's net operating loss by $0.4 million to $0.3 million as compared to the same period of fiscal 1995. During the first quarter of fiscal 1996, patient days of service at behavioral medicine contracts declined by approximately 36% from 8,580 patient days to 5,534 patient days. This decline was due predominately to closure of five contract units during the fourth quarter of fiscal 1995 and the first quarter of fiscal 1996. Units which were operational for both the first quarter of fiscal 1996 and 1995 experienced a 2% increase in utilization to 4,844 patient days. Average net revenue per patient day at these units decreased by 10% from the same quarter a year ago. Therefore, the net result of these fluctuations was a decline in an overall net inpatient operating revenues of 9%. Net outpatient revenues for programs operational for both quarters at these units increased 47% from approximately $92,000 in the first quarter of 1995 to approximately $135,000 in the first quarter of fiscal 1996. 13 14 The following table sets for quarterly inpatient utilization data on a "same store" basis:
Same Store Utilization ------------------------- Fiscal 1996 Fiscal 1995 1st Quarter 1st Quarter ----------- ----------- Admissions............................................................ 747 625 Average length of stay................................................ 7 8 Patient days.......................................................... 4,844 4,760 Average occupancy rate................................................ 42% 49%
For units operational in both the first quarter of fiscal 1996 and the same quarter of fiscal 1995, operating expenses increased 3%, when combined with an 1% increase in operating revenues resulted in an increase in the net operating income at the unit level by $6,000 to $193,000. Freestanding Operations Operating revenues from freestanding operations decreased by $1.9 million or by 33% during the first quarter of fiscal 1996 compared to the first quarter of fiscal 1995. In addition, operating expenses also declined 34% or $1.9 million in the first quarter of fiscal 1996. The decrease in operating revenues offset by the significant decrease in operating expenses, resulted in a 38% improvement in hospital operations net operating loss for the first quarter of fiscal 1996 by $0.5 million compared to losses reported in the same quarter a year ago. Admissions in the first quarter of fiscal 1996 decreased to 573 from 979 in the first quarter of fiscal 1995, an overall decline of 41%. This decline is primarily due to the sale and/or closure of two operating facilities during the third and fourth quarters of fiscal 1995. The following table sets forth selected quarterly utilization data on a "same store" basis:
Same Store Utilization ------------------------- Fiscal 1996 Fiscal 1995 1st Quarter 1st Quarter ----------- ----------- Admissions............................................................ 573 586 Average length of stay................................................ 7 9 Patient days.......................................................... 3,778 5,557
Net revenue per patient day for "same store" facilities increased to $1,002 for the first quarter of fiscal 1996 from $646 for the first quarter of fiscal 1995. Admissions decreased for the quarter from 586 in the first quarter of fiscal 1995 to 573 in the first quarter of fiscal 1996. The slight decrease in admissions combined with the decline in length of stay was offset by the increase in net revenue per patient day resulting in an overall decrease in the net loss for the first quarter of fiscal 1996 of $0.5 million. The following table illustrates revenues in outpatient and daycare programs offered by the "same store" facilities:
Net Outpatient/Daycare Revenues ------------------------------- (Dollars in thousands) Fiscal 1996 Fiscal 1995 1st Quarter 1st Quarter ----------- ----------- Facilities offering................................................... 5 5 Net outpatient/daycare revenues....................................... $2,161 $2,352 % of total "same store" net operating revenues........................ 57% 60%
14 15 Operating expenses at the Company's freestanding facilities on a "same store" basis decreased $2.0 million and bad debt expense decreased $0.4 million in the first quarter of fiscal 1996 from the first quarter of fiscal 1995. As a result, the net operating loss was reduced by $0.8 million in the first quarter of fiscal 1996 from the same period a year ago. Three Months Ended August 31, 1995 Compared to Three Months Ended May 31, 1995 The Company reported a loss of approximately $1.3 million or $0.50 per share for the quarter ended August 31, 1995, an improvement of approximately $2.0 million or $0.88 per share from the loss reported for the quarter ended May 31, 1995. Operating revenues increased to $8.8 million in the first quarter of fiscal 1996 from $7.2 million in the fourth quarter of fiscal 1995 or by 23%. This increase is predominately related to an increase in revenues for managed care and a slight increase in revenue for freestanding facilities. In addition, operating expenses declined by 6% or $0.5 million. This decline was primarily from freestanding operations and behavioral medicine contracts, which was offset in part by a slight increase in operating expenses for managed care operations. General and administrative expenses decreased by 6% or $0.1 million during the first quarter of fiscal 1996 compared to the fourth quarter of 1995. The first quarter of fiscal 1996 includes a credit of $0.4 million related to a settlement (see Note 6 to the Company's Condensed Consolidated Financial Statements included herein) which was offset by increase in expenses for managed care operations. The provision for doubtful accounts increased by $0.3 million for the first quarter of 1996 versus the fourth quarter of fiscal 1995. The reduction adjustment in the fourth quarter of fiscal 1995 was due primarily to the closure of freestanding facilities during the fiscal year and collections of accounts previously written off as bad debt. The Company recorded $0.3 million for the loss on the sale/write-down of assets during the fourth quarter of fiscal 1995. This loss is primarily attributable to the write-off of leasehold improvements on locations no longer owned or operated by the Company. Managed Care Operations During the first quarter of fiscal 1996, the number of covered lives increased to 680,000 or by 53% from the fourth quarter of fiscal 1995. This increase is primarily attributable to new contracts added during the first quarter of fiscal 1996. In the first quarter of fiscal 1996, operating revenues increased 67% to $3.4 million from the fourth quarter of fiscal 1995. Operating expenses increased by $0.1 million or 2% in the first quarter of fiscal 1996. In addition, general and administrative expenses increased by $0.3 million in the first quarter of fiscal 1996 compared to the fourth quarter of fiscal 1995. As a result, the net operating loss for Comprehensive Behavioral for the first quarter of fiscal 1996 was $0.2 million, an improvement of $1.0 million from the fourth quarter of fiscal 1995. Behavioral Medicine Contracts In the first quarter of fiscal 1996, CareUnit operating revenues decreased 3% from the fourth quarter of fiscal 1995. Operating expenses declined by approximately 10% from $1.5 million to $1.3 million in the first quarter of fiscal 1996 compared to the prior quarter. The decrease in operating revenues during the first quarter of fiscal 1996 was offset by a decrease in operating expenses resulting in an improvement in CareUnit's net operating loss by $0.2 million or 42% from the fourth quarter of fiscal 1995. During the first quarter of fiscal 1996, patient days of service at behavioral medicine contracts declined by approximately 11% from 6,230 patient days to 5,534 patient days. Units which were operational for both the fourth quarter of fiscal 1995 and the first quarter of fiscal 1996 experienced a 4% increase in utilization to 5,455 patient days. Average net revenue per patient day at these units remained unchanged from the previous quarter and combined with the increased utilization resulted in an increase in overall net inpatient operating revenues of 15 16 4% to $0.6 million. Net revenues for programs operational for both quarters at these units also increased 5% from approximately $734,000 in the fourth quarter of 1995 to approximately $774,000 in the first quarter of fiscal 1996. The following table sets forth quarterly utilization data on a "same store" basis:
Same Store Utilization ----------------------- Fiscal 1996 Fiscal 1995 1st Quarter 4th Quarter ----------- ----------- Admissions............................................................ 747 714 Average length of stay................................................ 7 7 Patient days.......................................................... 5,455 5,264 Average occupancy rate................................................ 42% 41%
For units operational for both quarters, operating expenses increased 5%, which combined with the increase in operating revenues resulted in operating income at the unit level increasing by 7% from the fourth quarter of fiscal 1995. Freestanding Operations Operating revenues for freestanding operations increased 2% during the first quarter of fiscal 1996 compared to the prior quarter. In addition, operating expenses declined 9% or $0.4 million in the first quarter of fiscal 1996. Admissions in the first quarter of fiscal 1996 decreased to 573 from 646 in the fourth quarter of 1995, an overall decline of 11%. This decline is primarily due to the sale and/or closure of one operating facility during the fourth quarter of fiscal 1995. The following table sets forth selected quarterly utilization data on a "same store" basis:
Same Store Utilization ----------------------- Fiscal 1996 Fiscal 1995 1st Quarter 4th Quarter ----------- ----------- Admissions............................................................ 573 584 Average length of stay................................................ 7 6 Patient days.......................................................... 3,778 3,708
Net revenue per patient day for "same store" facilities increased approximately 14% to $1,002 for the first quarter of fiscal 1996 from $878 for the fourth quarter of fiscal 1995. Admissions decreased for the quarter from 584 in the fourth quarter of fiscal 1995 to 573 in the first quarter of fiscal 1996 or by approximately 2%. The slight decline in admissions combined with the increase in length of stay resulted in an increase in net operating revenues for the first quarter of fiscal 1996 of $0.1 million. The Company believes that the increasing role of HMO's, reduced benefits from employers and indemnity companies, and a shifting to outpatient programs 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. 16 17 The following table illustrates revenues in outpatient and daycare programs offered by the "same store" facilities:
Net Outpatient/Daycare Revenues ------------------------------ (Dollars in thousands) Fiscal 1996 Fiscal 1995 1st Quarter 4th Quarter ----------- ----------- Facilities offering................................................... 5 5 Net outpatient/daycare revenues....................................... $2,161 $2,133 % of total "same store" net operating revenues........................ 57% 61%
Operating expenses at the Company's freestanding facilities on a "same store" basis decreased $0.2 million resulting in an increase in operating income increased $0.3 million in the first quarter of fiscal 1996 from the fourth quarter of fiscal 1995. The Company is taking steps to increase revenues, primarily through relicensing facilities to provide psychiatric treatment, and the continued development of its behavioral medicine managed care business. The Company is also implementing cost reduction measures, including the closure of selected facilities. The Company owns six facilities and leases one. Three of the six owned facilities and the one leased facility are currently operating for a total of four operating facilities. The Company will continue to evaluate the performance of these facilities in their respective markets and, if circumstances warrant, may increase or reduce the number of facilities designated for disposition. LIQUIDITY AND CAPITAL RESOURCES At August 31, 1995, the Company had cash and cash equivalents of $0.8 million. The Company provided $1.0 million from its operating activities, and utilized $0.2 million and $1.5 million in its investing and its financing activities, respectively. The Company reported a net loss of $1.3 million for the quarter ended August 31, 1995, versus a net loss of $2.5 million for the quarter ended August 31, 1994. As a result, the Company has an accumulated deficit of $47.8 million and a total stockholders' deficiency of $5.3 million. Additionally, the Company's current assets at August 31, 1995 amounted to approximately $5.3 million and current liabilities were approximately $21.3 million, resulting in a working capital deficiency of approximately $16.0 million and a negative current ratio of 1:4.0. Current assets as of August 31, 1995 decreased by $2.7 million as compared to May 31, 1995. This decrease is related to the receipt of the Company's note receivable used to finance the sale of a facility in the fourth quarter of fiscal 1995. Included in non-current assets are three hospital facilities designated as property and equipment held for sale with a total carrying value of $3.9 million. There were no additions or sales of these properties during the first quarter of fiscal 1996. Current liabilities as of August 31, 1995 decreased by $2.0 million compared to May 31, 1995. This decrease is primarily a result of a reduction in current maturities of long-term debt related to the repayment of the Company's obligations under the settlement agreement with the IRS. Long-term debt declined by $0.4 million as of August 31, 1995 when compared to May 31, 1995, also as a result of the payment of the settlement agreement with the IRS. Included in current liabilities are $9.5 million of Debentures in default and immediately due and payable on account of acceleration and $1.0 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. As further discussed in Note 2 to the Company's Condensed Consolidated Financial Statements included herein, the Company has agreed to use its best efforts to provide an opportunity for Debenture holders to tender their Debentures pursuant to an exchange 17 18 offer to be made by the Company. This proposed transaction requires the holders of a majority of the Debentures to give their approval to rescind the acceleration and the Company to obtain and expend up to $5.5 million of cash during fiscal 1996, over and above cash required to fund other financing, operating and investing needs. Additionally, the Debenture exchange provides for the Company to issue $120 worth of its common stock at a defined value for each $1,000 of Debentures, which may be contingent upon the Company's ability to effect certain filings with the Securities and Exchange Commission. The ability to timely proceed with any such proposed filings will, in part, depend upon the ability of the Company to obtain a consent from its prior auditors for the use of their report on the Company's consolidated financial statements in such registration statements. Failure to obtain Debenture holder approval or to accomplish the Debenture exchange, or, in the alternative, a failure of the Company and the Debenture holders to otherwise reach a settlement, may cause the Debenture holders to pursue an involuntary bankruptcy of the Company and/or the Company to take alternative actions that may include filing for voluntary protection from creditors. Alternatively, if the Debenture exchange is accomplished, the elimination of the Debenture's debt service requirement would decrease the Company's future cash flow requirements. (The foregoing summary does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations.) These conditions raise substantial doubt about the Company's ability to continue as a going concern. The 1995 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty. 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 has begun to implement plans for expanding the Company's contract management and managed care operations (see Note 3 to the Company's Condensed Consolidated Financial Statements included herein). In previous years, the Company was obligated to support and fund certain freestanding facilities that now have been closed, including two such facilities closed in fiscal 1995 (see Note 3 to the Company Condensed Consolidated Financial Statements included herein). As a result, the Company will no longer be burdened with the negative cash flow requirements associated with such facilities. Based upon a projection of actual performance during fiscal 1995 with adjustments for reduced cash flow requirements associated with facilities closed and/or sold in fiscal 1995, known contract and cyclical changes, and also giving consideration to cash on hand at August 31, 1995 of $799,000, management expects the Company to be able to meet its cash obligations required by operations during fiscal 1996, excluding the Company's obligations under the Debentures. However, the cash needs of the Company may vary from month to month depending upon the actual level of business activity, and through the first quarter of fiscal 1996 the Company continues to incur losses. Therefore, no assurance can be given that the Company will generate adequate cash flows to meet cash obligations required by operations, excluding the Company's obligations under the Debentures, in fiscal 1996. To provide funds for the Debenture exchange and/or additional operating needs, the Company anticipates utilizing one or more of the following potential sources of cash: - The Company has filed its fiscal 1995 Federal tax return, and a Form 1139 "Corporate Application for Tentative Refund" in the amount of $9.4 million. In the event the Company receives the full refund claim for fiscal 1995, the net amount of cash available for working capital purposes would be $7.5 million. The Company has also filed amended Federal tax returns for prior years to claim refunds of an additional $13.2 million. The net amount of cash available for working capital purposes would be $10.6 million. These refund claims have been made under Section 172(f) of the Internal Revenue Code, an area of the tax law without significant precedent, and there may be substantial opposition by the IRS to the Company's refund claims. Accordingly, no assurances can be made to the Company entitlement to such refunds or the timing of the receipt thereof (see Note 4 to the Company's Condensed Consolidated Financial Statements included herein). 18 19 - Included in non-current assets are three hospital facilities designated as property and equipment held for sale with a total carrying value of $3.9 million. The Company expects to sell two of these facilities during the fiscal year and may lease a third facility to an unrelated entity. However, the contracts have not been fully negotiated, and proceeds from the sales or lease of such assets are not expected to be available by the time the Debenture exchange is expected to occur. Accordingly, management expects to use such cash proceeds, if received during fiscal 1996, to fund and expand the Company's operations and implement the Company's restructuring plans. - In March 1995, a jury awarded the Company approximately $2.7 million, plus interest, in damages in its lawsuit against RehabCare Corporation. The defendant has posted a bond for the amount of the award and has filed an appeal of the judgment. Management is unable to predict whether any proceeds from this judgment will be received in fiscal 1996 (see Note 5 to the Company's Condensed Consolidated Financial Statements included herein). - The Company has received a firm commitment from a mutual fund to purchase in a private placement at least $5.0 million of 15% fully secured Company notes due no earlier than December 1996 if offered by the Company. All of these potential sources of additional cash in fiscal 1996 are subject to variation due to business and economic influences outside the Company's control. There can be no assurance that during fiscal 1996 the Company will complete the transactions required to fund its working capital deficit. During the first quarter of fiscal 1996, the Company paid the IRS approximately $2.3 million pursuant to its settlement agreement (see Note 5 to the Company's Condensed Consolidated Financial Statements included herein). The Company utilized the proceeds from a note receivable from the sale of its Sacramento facility received on July 10, 1995 for $2.75 million in order to fund this payment. The Company continues to pay the remaining balance in monthly installments of $42,000. PART II - OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS On October 30, 1992, the Company filed a complaint in the United States District Court for the Eastern District of Missouri against RehabCare Corporation ("RehabCare") seeking damages for violations by RehabCare of the securities laws of the United States, for common law fraud and for breach of contract (Case No. 4:92CV002194 CAS). The Company sought damages for the lost benefit of certain stockholder appreciation rights in an amount in excess of $3.6 million and punitive damages. RehabCare filed a counterclaim in the case seeking a declaratory judgement with respect to the rights of both parties under the Stock Redemption Agreement, an injunction enjoining the Company from taking certain action under the Stock Redemption or Restated Shareholders Agreements and damages in the form of attorneys' fees and costs allegedly incurred by RehabCare with respect to its issuance of certain preferred stock and with respect to prior litigation between the parties. The case was tried before a jury commencing on February 21, 1995. Prior to the presentation of evidence to the jury, the Court struck RehabCare's counterclaim in its entirety. On March 8, 1995, the jury returned its verdict awarding the Company $2,681,250 in damages, plus interest and the costs of the action against RehabCare for securities fraud and for breach of contract. RehabCare has posted a bond in the amount of $3.0 million and filed a motion for new trial or in the alternative, for judgement as a matter of law, which the court denied in its entirety on August 4, 1995. On September 1, 1995, RehabCare filed a notice of appeal with the District Court indicating its intent to appeal the matter to the United States Court of Appeals. Although the Company feels that RehabCare will not prevail in its appeal, the Company has not recognized any gain with relation to the judgement. The outcome of this lawsuit will not have an effect on the Company's results of operations. In connection with the proposed sale and lease-back of hospitals to CMP Properties, Inc., a real estate investment trust, the Company advanced $1.1 million to its financial advisor, Mr. Leslie Livingston and Livingston & Co., in fiscal 1992. The Company had classified these advances as accounts receivable as of May 19 20 31, 1993 and wrote off all such receivables during fiscal 1994. The financial advisor was affiliated with several members of the Company's Board of Directors at that time. The advances, which were to be repaid if the transaction was not completed, were to be secured by a pledge of common stock in an unrelated company. The pledged shares of common stock were in the possession of the Company's primary legal counsel at that time, Schwabe, Williamson & Wyatt, as collateral for the advances. After the transaction was terminated, the financial advisor refused to repay the advances and the Company's legal counsel refused to turn over the collateral to the Company. The Company has filed an action in the United States District Court for the District of Oregon (Civil Case No. 94-384 FR) against its former financial advisor and former legal counsel to recover the advances. The former financial advisor has counterclaimed against the Company for $1,688,000 for breach of contract and unjust enrichment. The Company's former law firm has filed a counterclaim for $193,000 for unpaid legal fees. Management believes that the counterclaims are without merit and intends to vigorously defend against them and to pursue the Company's claims. On June 8, 1994, RehabCare filed a lawsuit against the Company in the Circuit Court of St. Louis County, Missouri concerning a Tax Sharing Agreement entered into between the Company and RehabCare in May 1991 (Case No. 663957). An amended petition was filed November 15, 1994. In the lawsuit, RehabCare alleges that it has incurred attorneys fees in connection with the settlement of certain tax issues with the IRS and has paid the IRS a settlement amount with respect to the years 1987 and 1988. RehabCare seeks the recovery from the Company of $588,000, plus interest, which RehabCare alleges is the amount it incurred for settlement payments to the IRS and attorneys fees it incurred in dealing with the IRS. The Company has filed its answer and affirmative defenses contesting the right of RehabCare to obtain the relief it seeks. Discovery is ongoing. Until such discovery is complete, it is not possible to predict the likely outcome of the lawsuit. The Company intends to continue to vigorously defend this matter. In December 1994, the Company reached a settlement with the Appeals Office of the Internal Revenue Service ("IRS") on a payroll tax audit for the calendar years 1983 through 1991. Pursuant to this settlement the Company agreed to pay the IRS $5.0 million with the Company having no obligation to pay any penalties or accrued interest. The IRS agent conducting the audit asserted that certain physicians, psychologists and other staff engaged as independent contractors by the Company should have been treated as employees for payroll tax purposes. The settlement was reviewed and accepted on behalf of the IRS by its district counsel. Payment terms have been accepted at 50% within 90 days of finalization with the remainder financed over the next five years. In March 1995, the Company paid $350,000 to the IRS against the initial payment due. In return, the IRS granted the Company an additional 120 days to pay the remaining balance of $2,150,000. In July 1995, the Company paid the remaining balance of the initial payment, and continues to make the monthly installment payment pursuant to the terms of the settlement. The unpaid balance bears interest at 9% per annum due and payable after the $5.0 million is paid. An involuntary bankruptcy petition was dismissed on March 6, 1995 pursuant to an agreement dated March 3, 1995 between the Company and a representative of the petitioners. Under such agreement the Company has agreed, subject to the conditions therein, to offer to exchange for its outstanding 7 1/2% Convertible Subordinated Debentures a combination of cash and shares. See Note 2 to the Company Condensed Consolidated Financial Statements included herein for a discussion of the Company's default in the payment of interest on its 7 1/2 % Convertible Subordinated Debentures and the consequent acceleration of the full principal amount thereof. The foregoing is intended to disclose an event, and does not constitute an offer to the holders of the Company's Debentures. Any such offer may only be made pursuant to an exchange offer, and in conformity with the relevant securities laws, rules and regulations. In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criteria in regard to net tangible assets available to common stock and three year average net income among other items. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards. Management anticipates success in "global restructuring" (see Note 2 to the Company Condensed Consolidated Financial Statements included herein) will be necessary in order to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter of fiscal 1995 and during the first quarter of fiscal 1996, to discuss the Company's financial condition and intention to issue shares without seeking approval of shareholders pursuant to the exception to the NYSE policy for financially distressed companies. 20 21 From time to time, the Company and its subsidiaries are also parties and their property is subject to ordinary routine litigation incidental to their business. In some pending cases, claims exceed insurance policy limits and the Company or a subsidiary may have exposure to liability that is not covered by insurance. Management believes that the outcome of such lawsuits will not have a material adverse impact on the Company's financial statements. ITEM 3. - DEFAULTS UPON SENIOR SECURITIES See the discussion contained in the second paragraph under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for a discussion of the Company's default in the payment of interest on its 7 1/2% Convertible Subordinated Debentures and the acceleration thereof. In October 1994, the New York Stock Exchange, Inc. ("NYSE") notified the Company that it was below certain quantitative and qualitative listing criteria in regard to net tangible assets available to common stock and three year average net income among other items. The Listing and Compliance Committee of the NYSE has determined to monitor the Company's progress toward returning to continuing listing standards. Management anticipates success in "global restructuring" (see Note 2-- to the Company's Condensed Consolidated Financial Statements) will be necessary to satisfy the Committee of the Company's progress. The Company met with representatives of the NYSE during the third quarter of fiscal 1995 and the first quarter of fiscal 1996, to discuss the Company's financial condition and intention to issue shares without seeking approval of shareholders pursuant to the exception to the NYSE policy for financially distressed companies. No assurance can be given that the steps of the restructuring will be successfully completed. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedules (filed herewith). (b) Reports on Form 8-K 1) The Company filed a current report on Form 8-K dated July 5, 1995 to report Item 4, the engagement of Ernst & Young LLP as the independent accountants for the Company. 2) The Company filed a current report on Form 8-K dated July 17, 1995, to report, under Item 5, that the Company had entered into agreements with four accredited investors for the private placement of 154,933 shares of the Company's common stock and to report the Company's intent to mail a notice to stockholders on or about August 21, 1995. 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPREHENSIVE CARE CORPORATION June 20, 1996 By /s/ DREW Q. MILLER ------------------------- Drew Q. Miller Senior Vice President, Chief Operating Officer and Chief Operating Officer (Principal Financial Officer) June 20, 1996 By /s/ KERRI RUPPERT ------------------------- Kerri Ruppert Senior Vice President, Secretary/Treasurer, and Chief Accounting Officer (Principal Accounting Officer) 22 23 COMPREHENSIVE CARE CORPORATION EXHIBIT INDEX FIRST QUARTER ENDED AUGUST 31, 1995 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedules (filed herewith). EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAY-31-1996 JUN-01-1995 AUG-31-1995 799 0 3,889 1,081 0 5,331 25,378 13,407 23,115 21,329 4,636 0 0 26 5,336 23,115 8,776 8,776 7,715 7,715 0 280 454 (1,281) 21 (1,307) 0 0 0 (1,307) (.50) (.50)
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