-----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, MGADiJMOpk1bmEQmLWP5YGjlSvF2CGx9OLA8BAoFu70kGqQRRAzZPOqKjTOElGDk OLHWXsCC91m5BH2gY/iBmA== 0000898430-96-004762.txt : 19961015 0000898430-96-004762.hdr.sgml : 19961015 ACCESSION NUMBER: 0000898430-96-004762 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961011 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY PSYCHIATRIC CENTERS /NV/ CENTRAL INDEX KEY: 0000022764 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 941599386 STATE OF INCORPORATION: NV FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07008 FILM NUMBER: 96642598 BUSINESS ADDRESS: STREET 1: 5110 WEST SAHARA AVE STREET 2: STE 118 CITY: LAS VEGAS STATE: NV ZIP: 89102 BUSINESS PHONE: 7022593600 FORMER COMPANY: FORMER CONFORMED NAME: SUCCESSOR TO COMMUNITY PSYCHIATRIC CENTERS/CA/ DATE OF NAME CHANGE: 19600201 10-Q 1 FORM 10-Q FOR PERIOD ENDED AUGUST 31, 1996 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1996 ------------------------------------------------- OR [ ] 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 1-7008 --------------------------------------------------------- - -------------------------------------------------------------------------------- COMMUNITY PSYCHIATRIC CENTERS ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEVADA 94-1599386 - ------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer I.E. No.) incorporation or organization) 5110 West Sahara Avenue, Las Vegas, Nevada 89102 - ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (702)257-3600 --------------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 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: 43,949,000 as of September 30, 1996. Total number of pages: 16 Exhibit Index at page: 13 Page 1 of 16 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended Three Months Ended August 31 August 31 1996 1995 1996 1995 ------------------------------------------ (000s omitted except per share data) REVENUES: Net operating revenues $373,700 $383,550 $113,528 $128,071 Gain on sale of UK Subsidiary 55,515 --- 55,515 --- Investment income and other 2,628 2,044 1,388 492 -------- -------- -------- -------- 431,843 385,594 170,431 128,563 COSTS AND EXPENSES: Operating expense 292,766 285,047 90,835 97,929 General and administrative expense 25,484 28,101 8,853 9,515 Bad Debt expense 13,961 23,109 3,804 6,893 Depreciation and amortization 17,182 17,380 5,406 6,322 Interest expense 3,761 3,427 533 1,404 Settlement Costs --- 45,000 --- 45,000 Restructuring charge (credit)- Note B 2,165 (2,490) 522 --- -------- -------- -------- -------- $355,319 $399,574 $109,953 $167,063 INCOME(LOSS)BEFORE TAXES 76,524 (13,980) 60,478 (38,500) Income taxes(credit) 27,467 (4,756) 21,370 (14,168) -------- -------- -------- -------- NET INCOME(LOSS) $ 49,057 $ (9,224) $ 39,108 $(24,332) ======== ======== ======== ======== NET INCOME(LOSS) PER SHARE $ 1.11 $ (0.21) $ 0.88 $ (0.56) ======== ======== ======== ======== WEIGHTED AVERAGE COMMON SHARES 44,142 43,630 44,322 43,660 ======== ======== ======== ======== DIVIDENDS PER COMMON SHARE .00 .01 .00 .00 ======== ======== ======== ========
See notes to condensed consolidated financial statements. Page 2 of 16 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
August 31 November 30 1996 1995 (Unaudited) (Audited) ----------------------------- (000s omitted) ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 73,763 $ 17,263 Short-term investments --- 5,601 Accounts receivable, less allowances for doubtful accounts 1996 - $29,174/1995 - $24,682 100,553 113,686 Receivable from third parties under reimbursement contracts --- 4,550 Prepaid expenses and other current assets 20,307 14,756 Assets held for sale 24,808 15,512 Refundable and deferred income taxes 4,657 21,979 -------- -------- TOTAL CURRENT ASSETS 224,088 193,347 PROPERTY, BUILDINGS & EQUIPMENT-at cost less allowances for depreciation 289,225 354,192 Deferred income taxes 18,956 21,334 Other assets 25,863 26,862 Excess of investments in subsidiaries over net assets acquired 4,014 8,890 -------- -------- $562,146 $604,625 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY - ---------------------------------- CURRENT LIABILITIES: Accounts payable and accrued expenses $ 41,967 $ 53,143 Income taxes payable 8,549 4,425 Payable to third parties under reimbursement contracts 6,782 --- Accrued restructuring charges 525 3,693 Current maturities on long-term debt 8,670 18,764 -------- -------- TOTAL CURRENT LIABILITIES 66,493 80,025 LONG-TERM DEBT, EXCLUSIVE OF CURRENT MATURITIES 17,885 84,883 DEFERRED COMPENSATION 2,001 2,019 DEFERRED INCOME TAXES 17,313 17,659 Commitments and contingencies Obligation to be settled in common stock --- 21,250 STOCKHOLDERS' EQUITY: Preferred stock, par value $1.00, authorized 2,000 shares; none issued --- --- Common Stock, par value $1.00, authorized 100,000 shares; issued 1996 - 46,856 shares 1995 - 46,856 shares 46,856 46,856 Additional paid-in capital 56,657 62,096 Retained earnings 376,119 327,062 Foreign currency translation adjustment --- (2,943) Less treasury stock-at cost 1996 - 2,511 shares and 1995 - 3,166 shares (21,178) (34,282) -------- -------- 458,454 398,789 -------- -------- $562,146 $604,625 ======== ========
NOTE: The balance sheet at November 30, 1995 has been derived from the audited financial statement at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. Page 3 of 16 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended August 31 1996(Unaudited) 1995 -------------------- (000s omitted) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 49,057 $ (9,224) Items not resulting in cash flows: Depreciation and amortization 17,182 17,380 Provision for uncollectible accounts 13,961 23,109 Settlement Costs --- 43,480 Restructuring charge (credit) 2,165 (2,490) Gain on sale of UK Subsidiary (55,515) --- Gain on the sale of property (103) --- Other 686 251 Changes in assets and liabilities net of effects from sale of UK Subsidiary: Short-term investments 5,601 8,756 Accounts receivable (12,255) (37,854) Receivable from/payable to third parties under reimbursement contracts 11,332 (7,775) Prepaid expenses and other current assets (9,758) 655 Accounts payable and accrued expense (1,662) (4,651) Accrued restructuring charges (5,733) --- Income taxes 32,652 (14,813) -------- -------- Net cash provided from operations 47,610 16,824 FINANCING: Proceeds from revolving credit facilities --- 31,648 Dividends paid --- (436) Purchase of treasury shares (13,815) --- Payments of deferred compensation (121) (593) Net proceeds from exercise of stock options 150 829 Payments on long-term debt (77,111) (17,504) -------- -------- Net cash provided from (used for) financing activities (90,897) 13,944 INVESTING: Payments received on notes 1,605 985 Loans made to officers (825) (1,825) Net proceeds from sale of UK Subsidiary 125,085 --- Purchase of property, buildings and equipment (26,473) (27,586) Investment in pre-opening costs (1,237) (2,211) Proceeds from sale of property, buildings and equipment 1,632 5,289 Payment for business acquisitions: Property, buildings and equipment --- (8,604) Excess of purchase price over fair value of assets acquired --- (365) -------- -------- Net cash provided from (used for) investing activities 99,787 (34,317) -------- -------- Net increase (decrease) in cash and cash equivalents 56,500 (3,549) Beginning cash and cash equivalents 17,263 37,263 -------- -------- Ending cash and cash equivalents $ 73,763 $ 33,714 ======== ========
See notes to condensed consolidated financial statements. Page 4 of 16 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AUGUST 31, 1996 NOTE A: Basis of Presentation --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the registrant's annual report on Form 10-K for the year ended November 30, 1995. NOTE B: Restructuring Charges (Credits) ------------------------------- Effective May 31, 1995, the Company recorded a restructuring credit totalling $2.5 million ($1.5 million after tax) from the resolution of previously restructured psychiatric assets. The restructuring credit resulted from divesting two restructured properties at higher prices than the 1993 writedown of the facilities anticipated and the Company's success in collecting accounts receivable balances that were reserved for as part of the February 28, 1994 restructuring charge. Effective February 29, 1996, the Company recorded a restructuring charge totalling $.8 million ($.5 million after tax) determined in accordance with the provisions of the January 1995 Financial Accounting Standards Board Emerging Issues Task Force Consensus No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring)," ("EITF 94-3"), in connection with the decision to close one psychiatric hospital in January of 1996. EITF 94-3 requires the accrual of certain employee termination costs and costs resulting from a plan to exit an activity that are not associated with or that do not benefit activities that will continue and prohibits accrual of expected future operating losses of the activity exited. The charge comprised $.6 million for employee termination benefits related to hospital operations and $.2 million for non-cancelable operating leases and other exit costs. Approximately 80 hospital employees were terminated. Net operating revenue and net operating income or (loss) for the closed hospital totalled $1.1 million and ($.2 million) for the first two months of fiscal year 1996, $6.2 million and ($1 million) for fiscal year 1995, and $8.5 million and ($34,000) for fiscal year 1994. The fixed assets of this hospital were written down to their estimated fair market value in November 1995 in accordance with the provisions of Financial Accounting Standard No. 121 ("FAS 121"), "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of." This hospital is currently being held for sale. Effective May 31, 1996, the Company recorded a restructuring charge totalling $1.2 million ($.8 million after tax) determined in accordance with the provisions of EITF 94-3 as described above, in connection with the decision to close two psychiatric hospitals in the second quarter of 1996. The charge comprised $.6 million for employee termination benefits related to hospital operations and $.6 million for non-cancelable contracts and other exit costs. Approximately 150 hospital employees were terminated. Net operating revenue and net operating income or (loss) for the closed hospitals totalled $3.3 million and ($50,000) in fiscal year 1996 through March 1996 (the hospitals were closed in April 1996), $11.5 million and $56,000 for fiscal year 1995, and $13.7 million and $1.1 million for fiscal year 1994. Page 5 of 16 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AUGUST 31, 1996 One of these hospitals was sold for $4.4 million in April 1996, with consideration consisting of cash of $.4 million and a note due in May 1997 for $4.0 million. The second hospital was written down to its estimated fair market value in November 1995 in accordance with the provisions of FAS 121. This hospital is currently being held for sale. Effective May 31, 1996, the Company recorded a restructuring credit totalling $.4 million ($.3 million after tax) due to the divestiture of the remaining property from the 1994 restructuring at a higher price than the original writedown of this facility anticipated. Effective August 31, 1996, the Company recorded a restructuring charge totalling $.5 million ($.3 million after tax) determined in accordance with the provisions of EITF 94-3 as described above, in connection with the decision to close one psychiatric hospital and an outpatient clinic in the third quarter of 1996. The charge comprised $.3 million for employee termination benefits related to hospital operations and $.2 million for non-cancelable contracts and other exit costs. Approximately 50 hospital employees were terminated. Net operating revenue and net operating income or (loss) for the closed facilities totalled $2.3 million and ($.4 million) during the nine months ended August 31, 1996, $4.2 million and $61,000 for fiscal year 1995, and $4.3 million and $.4 million for fiscal year 1994. The Company is currently evaluating an alternative business use for the closed hospital. Management continually reviews all facilities to evaluate potential closures, divestitures or conversions. Management may elect to close additional psychiatric facilities in the future which could result in additional charges to income for the costs necessary to exit the hospital operations. NOTE C: Recent Developments ------------------- Sale of U.K. Operations. On June 21, 1996, CPC completed the sale of its Priory Hospitals Group ("PHG"), the Company's United Kingdom operations, to Foray 911 Limited ("Foray"), a new corporation formed by Mercury Development Capital, a division of Mercury Asset Management plc ("Mercury"), and other investors for the purpose of acquiring PHG. After the payments for debt, taxes, fees, severance costs, and other expenses, the net proceeds are estimated to be approximately $97 million before any final purchase price adjustments, which includes a $4.6 million 15% subordinated note due 2009. The total purchase price was approximately $135 million. PHG operates 15 freestanding acute psychiatric hospitals and chemical dependency facilities comprising 698 beds, including one 42-bed hospital that was 50% owned by CPC. In addition, PHG manages a 13-bed psychiatric unit, a 10-bed secured residential clinic and two 13- station kidney dialysis units for the British government's National Health Service. Upon receipt of the proceeds from the sale, the Company repaid $50 million of outstanding bank debt which bore interest at an effective rate of approximately 8%. The Company also re-purchased 1.7 million shares of its common stock for $13.8 million in the third quarter of 1996. Additional uses of the proceeds from the sale of PHG being contemplated by CPC include the expansion of THC operations, repayment of additional bank borrowings, general corporate purposes and other measures which management believes would facilitate the Company's growth, strengthen its balance sheet and enhance stockholder value. NOTE D: Commitments and Contingencies ----------------------------- On September 28, 1995, CPC reached an agreement to settle certain consolidated securities class action lawsuits and a related stockholder derivative action. Although the management of CPC believes that the claims asserted in such suits lacked merit, CPC believed that it was prudent to settle these cases due to the continuing substantial costs of defense, the distraction of management's attention and the risks associated with litigation. Page 6 of 16 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AUGUST 31, 1996 During the third and fourth quarters of 1995, CPC recorded charges totalling $46.0 million ($28.9 million after tax) relating to settlement of the lawsuits and associated legal fees and expenses. The suits, filed in late 1991, alleged violations of the federal securities laws by CPC and certain individuals between September 1990 and November 1991 arising from the activities of the U.S. psychiatric division. The principal terms of the agreement called for a settlement amount of $45.2 million consisting of a cash settlement fund of $21.25 million and shares of CPC's common stock with value of $21.25 million. The cash amount, plus interest, was paid in November 1995. The shares to be issued to the plaintiff class were previously repurchased by the Company pursuant to a stock buyback program during late 1991 through early 1993. On March 4, 1996 the Company issued 689,189 of common shares to the plaintiffs' attorney which represents a portion of the settlement to be made in common stock. The remaining portion of the settlement in common stock totaled 1,652,778 shares which were issued on August 21, 1996. Upon issuance, these shares had a dilutive effect on CPC's earnings per share. The class actions and the derivative action have received final court approval. CPC is bound by the settlement agreement with respect to certain remedial measures including the adoption and enforcement of an insider trading policy, a bi-annual internal audit of accounts receivable and bad debt reserves and adoption of a policy to receive and investigate complaints, inquiries and suggestions from employees. In July 1995, the Government served a whistleblower suit against CPC Oklahoma, Inc., under the Federal False Claims Act. CPC Oklahoma, Inc. operates Southwind Hospital, a psychiatric hospital located in Oklahoma City, Oklahoma. The suit was originally filed by a former employee and a relative of another under the qui tam provisions of the --- --- Act. Several days after the service of the complaint, the Government seized certain of Southwind's records pursuant to a search warrant. In response to the Government's Second Amended Complaint, Southwind filed a motion to dismiss on the grounds that the complaint failed to state a claim. In a decision dated October 1, 1996, the Court denied the motion to dismiss. Management is presently unable to evaluate the potential impact of the suit or investigation on CPC. NOTE E: Certain amounts have been reclassified in the 1995 balance sheet to conform with 1996 presentations. Page 7 of 16 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES Results of Operations NINE MONTHS ENDED AUGUST 31, 1996 Net operating revenues for the nine months ended August 31, 1996 decreased approximately $9.9 million from the first nine months of the prior year due to the sale of the Company's United Kingdom Psychiatric operations on June 21, 1996. THC net operating revenue increased 26.6% from $141.9 million in the first nine months of 1995 to $179.7 million in the first nine months of 1996. THC's same-store admissions and patient days increased 45.4% and 24.1%, respectively. Net operating revenues from the United States psychiatric hospitals decreased approximately $38.0 million from $194.9 million to $156.8 million primarily due to the closure of six U.S. psychiatric hospitals in November 1995, one hospital in January 1996, and two hospitals in the second quarter of 1996. The decrease in net operating revenues from the closed hospitals totalled $33.0 million. The remaining portion of the decrease in net operating revenues related to a decrease in same-store adjusted patient days of 4.0%. Operating expenses as a percentage of net operating revenues were 78.3% for the nine months ended August 31, 1996 compared to 74.3% for the comparable prior year period. The increase related to several factors including an increase in personnel costs at the U.S. psychiatric division as the Company is making an effort to (i) upgrade the quality of its operating and financial personnel in these hospitals and (ii) to expand the psychiatric and behavioral health services offered. The increase in operating expenses as a percentage of net operating revenues was also impacted by the decrease in patient days for the U.S. psychiatric division over the comparable period in the prior year. In addition to the above, the Company incurred approximately $3.5 million of post- closing operating expenses and holding costs related to the nine U.S. psychiatric hospitals that have been closed between November 1995 and April 1996. These costs were prohibited from being accrued for in any of the related restructuring charges as they did not qualify as exit costs as defined by EITF 94-3 (see Note B to the condensed consolidated financial statements related to EITF 94-3 and a description of the restructuring charges for the four U.S. psychiatric division hospitals that were closed during the first nine months of 1996). General and administrative expense decreased $2.6 million and as a percentage of net operating revenue to 6.8% from 7.3% in the prior year comparable period. Beginning in November of 1995, the Company closed three regional offices, consolidated certain positions at the Corporate office, and continued with further reductions in Corporate overhead personnel in January of 1996. Bad debt expense decreased from 6.0% of net operating revenues in the first nine months of 1995 to 3.7% in the first nine months of 1996. Bad debt expense was higher in the first nine months of 1995 due to the fact that the Company experienced a slow down in billing and collections as it converted several U.S. psychiatric hospitals to a centralized billing office as well as a new computer system. In addition, collections were adversely impacted in the prior year as certain State Medicaid programs converted to managed care initiatives in 1995. Following is a summary of net income by business segment, excluding the gain on sale of subsidiary, settlement costs (1995), and restructuring charges/credits, for the nine months ended August 31, 1996 and August 31, 1995:
(000s) 1996 1995 ------- ------- U.S. psychiatric division* $ 2,014 $ 5,863 U.K. psychiatric division 4,454 7,103 Long-term critical care division 7,846 4,666 ------- ------- Net income $14,314 $17,632 ======= =======
* Excluding the net income/loss from the ten hospitals that have closed since November 1995, net income for the U.S. psychiatric division was $5.7 million and $5.6 million for the nine months ended August 31, 1996 and August 31, 1995, respectively. Page 8 of 16 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES Results of Operations (continued) THREE MONTHS ENDED AUGUST 31, 1996 Net operating revenues for the quarter ended August 31, 1996 decreased approximately $14.5 million to $113.5 million from $128.1 million for the third quarter of the prior year. Net revenues from the United Kingdom operations decreased $12.0 million as the division was sold on June 21, 1996. THC net operating revenue increased 17.5% from $51.9 million in the third quarter of 1995 to $60.9 million in the third quarter of 1996. THC's same-store admissions and patient days increased 39.5% and 17.5%, respectively. Net operating revenues from the United States psychiatric hospitals decreased approximately $11.5 million from $60.0 million to $48.5 million primarily due to the closure of six U.S. psychiatric hospitals in November 1995, one hospital in January 1996, and two hospitals in the second quarter of 1996. The decrease in net operating revenues from the closed hospitals totalled $11.4 million. The remaining portion of the decrease in net operating revenues related primarily to a decrease in same-store adjusted patient days of 2.4%. Operating expenses as a percentage of net operating revenues were 80.0% for the quarter ended August 31, 1996 compared to 76.5% for the comparable prior year quarter. The increase related to several factors including an increase in personnel costs at the U.S. psychiatric division as the Company is making an effort to (i) upgrade the quality of its operating and financial personnel in these hospitals and (ii) to expand the psychiatric and behavioral health services offered. The increase in operating expenses as a percentage of net operating revenues was also impacted by the decrease in patient days over the comparable period in the prior year for the U.S. psychiatric division. In addition to the above, the Company incurred approximately $1.1 million of post- closing operating expenses and holding costs related to the nine U.S. psychiatric hospitals that have been closed between November 1995 and April 1996. These costs were prohibited from being accrued for in any of the related restructuring charges as they did not qualify as exit costs as defined by EITF 94-3 (see Note B to the condensed consolidated financial statements related to EITF 94-3 and a description of the restructuring charges for the two U.S. psychiatric division hospitals that were closed in the second quarter of 1996). General and administrative expense decreased $.7 million compared to the prior year comparable period. Beginning in November of 1995, the Company closed three regional offices, consolidated certain positions at the Corporate office, and continued with further reductions in Corporate overhead personnel in January of 1996. Bad debt expense decreased from 5.4% of net operating revenues in the third quarter of 1995 to 3.4% in the third quarter of 1996. Bad debt expense was higher in the third quarter of 1995 due to the fact that the Company experienced a slow down in billing and collections as it converted several U.S. psychiatric hospitals to a centralized billing office as well as a new computer system. Depreciation and amortization decreased due to the sale of the Company's United Kingdom Psychiatric operations in June of 1996. Interest expense decreased $.9 million over the prior comparable period as the Company repaid $50 million of outstanding bank debt in June 1996 which bore interest at an effective interest rate of approximately 8%. Page 9 of 16 PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES Results of Operations (continued) THREE MONTHS ENDED AUGUST 31, 1996 Following is a summary of net income by business segment, excluding the gain on sale of subsidiary, settlement costs (1995), and restructuring charges/credits, for the three months ended August 31, 1996 and August 31, 1995:
(000s) 1996 1995 ------ ------ U.S. psychiatric division* $ 185 $ (217) U.K. psychiatric division 232 1,924 Long-term critical care division 2,929 2,311 ------ ------ Net income $3,346 $4,018 ====== ======
* Excluding the net income/loss from the ten hospitals that have closed since November 1995, net income for the U.S. psychiatric division was $1.2 million and $.4 million for the quarter ended August 31, 1996 and August 31, 1995, respectively. LIQUIDITY AND CAPITAL RESOURCES AT AUGUST 31, 1996 Cash flows provided from operations were $47.6 million and $16.8 million for the nine months ended August 31, 1996 and August 31, 1995, respectively. Net accounts receivable balances decreased $13.1 million during the nine months ended August 31, 1996 compared to an increase of $14.7 million during the comparable period of the prior year. The decrease in accounts receivable during 1996 is primarily due to the sale of the Company's United Kingdom Psychiatric Subsidiary on June 21, 1996. Excluding the effects from the sale of the United Kingdom Psychiatric Subsidiary, net accounts receivable balances decreased $1.7 million during the nine months ended August 31, 1996. The improvement in cash flows from accounts receivable combined with a $19.1 million increase in cash flows from third party payors were the principal causes of cash flows from operations improving by $30.8 million over the prior year. Excluding fiscal year 1996 operating revenue produced by the United Kingdom Psychiatric Subsidiary prior to the June 21, 1996 sale date, days revenue in accounts receivable were 85 at August 31, 1996 and August 31, 1995. On August 5, 1996, the Company announced that its Board of Directors had authorized spending up to $25 million to buy back company stock from time to time on the open market. As of August 31, 1996 the Company had purchased 1.7 million shares for $13.8 million. Proceeds from the sale of the Company's United Kingdom Psychiatric Subsidiary were used for the repayment of bank credit facilities in the amount of $65.2 million. In addition, the Company repaid $5.2 million of subordinated debentures and $6.7 million of bank credit facilities during the first two quarters of 1996. The Company sold its United Kingdom Subsidiary on June 21, 1996 which produced $125.1 million in net cash proceeds. Purchases of fixed assets totalled $26.5 million during the first nine months of 1996. This amount included $6.0 million for a new office that the Company has built on the campus of THC Las Vegas Hospital in Las Vegas, Nevada. This building and its parking structure provide additional administrative offices, dining facilities, and parking for the hospital and is now serving as the new location for the corporate office. Capital expenditures for the remainder of fiscal year 1996 are estimated to be $9.2 million for THC and $4.0 million for the U.S. psychiatric division. The Company received cash proceeds of $1.6 million and notes receivable totalling $5.3 million from the sale of two psychiatric hospitals in the second quarter of 1996. The Company believes that its current cash and cash equivalent balances and its operating cash flow will be sufficient to fund the Company's operations and capital expenditures through the end of fiscal 1996. Page 10 of 16 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES AUGUST 31, 1996 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- On September 28, 1995, CPC reached an agreement to settle certain consolidated securities class action lawsuits and a related stockholder derivative action. Although the management of CPC believes that the claims asserted in such suits lacked merit, CPC believed that it was prudent to settle these cases due to the continuing substantial costs of defense, the distraction of management's attention and the risks associated with litigation. During the third and fourth quarters of 1995, CPC recorded charges totalling $46.0 million ($28.9 million after tax) relating to settlement of the lawsuits and associated legal fees and expenses. The suits, filed in late 1991, alleged violations of the federal securities laws by CPC and certain individuals between September 1990 and November 1991 arising from the activities of the U.S. psychiatric division. The principal terms of the agreement called for a settlement amount of $45.2 million consisting of a cash settlement fund of $21.25 million and shares of CPC's common stock with value of $21.25 million. The cash amount, plus interest, was paid in November 1995. The shares to be issued to the plaintiff class were previously repurchased by the Company pursuant to a stock buyback program during late 1991 through early 1993. On March 4, 1996 the Company issued 689,189 of common shares to the plaintiffs' attorney which represents a portion of the settlement to be made in common stock. The remaining portion of the settlement in common stock totaled 1,652,778 shares which were issued on August 21, 1996. Upon issuance, these shares had a dilutive effect on CPC's earnings per share. The class actions and the derivative action have received final court approval. CPC will be bound by the settlement agreement with respect to certain remedial measures including the adoption and enforcement of an insider trading policy, a bi- annual internal audit of accounts receivable and bad debt reserves and adoption of a policy to receive and investigate complaints, inquiries and suggestions from employees. In July 1995, the Government served a whistleblower suit against CPC Oklahoma, Inc., under the Federal False Claims Act. CPC Oklahoma, Inc. operates Southwind Hospital, a psychiatric hospital located in Oklahoma City, Oklahoma. The suit was originally filed by a former employee and a relative of another under the qui tam provisions of the Act. Several days --- --- after the service of the complaint, the Government seized certain of Southwind's records pursuant to a search warrant. In response to the Government's Second Amended Complaint, Southwind filed a motion to dismiss on the grounds that the complaint failed to state a claim. In a decision dated October 1, 1996, the Court denied the motion to dismiss. Management is presently unable to evaluate the potential impact of the suit or investigation on CPC. Page 11 of 16 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES AUGUST 31, 1996 PART II. OTHER INFORMATION (continued) ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits Exhibit 10: Amendment to Credit agreement dated as of September 20, 1993 among Registrant, Transitional Hospitals Corporation, and Bank of America National Trust and Savings Association, dated as of August 22, 1996. Exhibit 11: Computation of Earnings per Share Exhibit 27: Financial Data Schedule (b) Reports on Form 8-K Report dated July 5, 1996 reporting the completion of the sale of PHG to Mercury Development Capital, related unaudited proforma financial information, and the adoption of a Stockholders Rights Plan. SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY PSYCHIATRIC CENTERS (Registrant) Dated: October 11, 1996 /s/ WENDY SIMPSON ------------------------------ Wendy Simpson Chief Financial Officer Page 12 of 16 EXHIBIT INDEX Exhibit Page No. - ------- -------- 10 Amendment to Credit Agreement 14 - 15 11 Computation of Earnings Per Share 16 27 Financial Data Schedule Page 13 of 16 EX-10 2 AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10 August 22, 1996 Community Psychiatric Centers 5110 West Sahara Avenue Las Vegas, Nevada 89102 Transitional Hospitals Corporation 5110 West Sahara Avenue Las Vegas, Nevada 89102 Re: Credit Agreement dated as of September 20, 1993 Ladies and Gentlemen: Reference is hereby made to the Credit Agreement dated as of September 20, 1993, as amended among CPC, THC and Bank (the "Agreement"). Capitalized terms not otherwise defined herein shall have the meanings specified in the Agreement. The Bank hereby waives compliance with Section 7.12 of the Agreement to the extent required to permit the Company to purchase its capital stock in an amount not to exceed $25,000,000 through August 31, 1997. Notwithstanding other provisions in the Agreement to the contrary, from July 1, 1996 to and including October 28, 1996, the "Base Rate Increment" shall be deemed to be 0.00% and the "Offshore Rate Increment" shall be deemed to be 1.00%. On and after October 29, 1996, the provisions of the Agreement defining and setting the "Base Rate Increment" and the "Offshore Rate Increment" shall be restored to full force and effect. In consideration for the granting of the foregoing waiver, the Company represents and warrants to the Bank that the representations and warrants set forth in Article V of the Agreement are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof, and no Default or Event of Default under the agreement has occurred and is continuing. Except as hereby expressly modified, the Agreement shall remain in full force and effect and are hereby ratified and confirmed in all respects. This waiver is specific in time and in intent and does not constitute, nor should it be construed as, a waiver of any other right, power or privilege under the Agreement, or under any agreement, contract, indenture, document or instrument mentioned in the Agreement; nor does it preclude other or further exercise hereof or the exercise of any other right, power or privilege, nor shall any waiver of any agreement, contract, indenture, document or instrument mentioned in the Agreement constitute a waiver of any default of the same or of any other term or provision thereunder. This waiver shall not be effective until signed by CPC, THC and the Guarantors and may be signed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Very truly yours, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: Wyatt Ritchie ---------------------------------- Wyatt Ritchie Managing Director ACCEPTED AND AGREED TO THIS 22ND DAY OF AUGUST, 1996 COMMUNITY PSYCHIATRIC CENTERS TRANSITIONAL HOSPITALS CORPORATION By: Wendy L. Simpson ------------------------------ Name: Wendy L. Simpson Title: Executive Vice President and Chief Operating Officer/ Chief Financial Officer Page 14 of 16 CONSENT OF GUARANTORS - --------------------- The undersigned Guarantors hereby acknowledge that they have reviewed and consented to the foregoing waiver dated as of August 22, 1996 to the Credit Agreement dated as of September 20, 1993, as amended, among Community Psychiatric Centers, Transitional Hospitals Corporation and Bank of America National Trust and Savings Association, and hereby reaffirm that their respective General Continuing General Guaranties, continue in full force and effect on and as of the date hereof. Date: August 22, 1996 EACH OF THE GUARANTORS LISTED ON ANNEX A TO EACH OF THE GUARANTIES, WHICH ARE INCORPORATED BY REFERENCE HEREIN BY THIS REFERENCE By: Richard Conte ---------------------------------------------- Title: Chairman and CEO ------------------------------------------- By: Wendy L. Simpson ---------------- Title: Executive Vice President and Chief Operating -------------------------------------------- Officer/Chief Financial Officer ------------------------------- Page 15 of 16 EX-11 3 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Nine months ended Three Months Ended August 31 August 31 1996 1995 1996 1995 -------------------------- ----------------------------- (000s, except per share data) (000s, except per share data) Weighted average common shares* 44,142 43,630 44,322 43,660 ======= ======= ======= ======== Net income (loss) $49,057 $(9,224) $39,108 $(24,332) ======= ======= ======= ======== Net income (loss) per share $ 1.11 $ (0.21) $ .88 $ (0.56) ======= ======= ======= ========
* Dilutive common stock equivalents are less than 3% of weighted average common shares outstanding. Page 16 of 16 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS NOV-30-1996 DEC-01-1995 AUG-31-1996 73,763 0 100,553 29,174 0 224,088 289,225 84,266 562,146 66,493 17,885 0 0 46,856 411,598 562,146 373,700 431,843 292,766 292,766 44,831 13,961 3,761 76,524 27,467 49,057 0 0 0 49,057 1.11 1.11 Includes restructuring charges totalling $2.6 million less a restructuring credit of $400,000.
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