UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 33-80987
Merit Behavioral Care Corporation
(Exact name of registrant as specified in its charter)
Delaware 22-3236927
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Maynard Drive
Park Ridge, New Jersey 07656
(Address of principal executive offices)
(201) 391-8700
(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.......
As of July 31, 1997, 28,553,800 shares of the registrant's common stock, par
value $.01 per share, which is the only class of common stock of the registrant,
were outstanding.
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MERIT BEHAVIORAL CARE CORPORATION
Table of Contents
Form 10-Q for the Quarterly Period
Ended June 30, 1997
<S> <C> <C> <C> <C> <C> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at 3
June 30, 1997 and September 30, 1996
Condensed Consolidated Statements of Operations for
the three months ended June 30, 1997 and June 30,
1996 and the nine months ended June 30, 1997
and June 30, 1996 4
Condensed Consolidated Statements of
Cash Flows for the nine months ended
June 30, 1997 and June 30, 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
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MERIT BEHAVIORAL CARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollars in thousands)
<S> <C> <C>
June 30, September 30,
ASSETS 1997 1996
------------ ---------
Current Assets:
Cash and cash equivalents.............................................. $ 53,176 $ 47,375
Short-term marketable securities....................................... 4,111 ---
Accounts receivable, net............................................... 33,853 28,383
Other current assets................................................... 6,530 4,777
---------- -----------
Total current assets................................................. 97,670 80,535
---------- -----------
Property, plant and equipment, net..................................... 75,352 67,880
---------- -----------
Other Assets:
Goodwill and other intangibles, net.................................... 145,218 162,849
Restricted cash and investments........................................ 3,740 5,668
Deferred financing costs, net.......................................... 10,368 11,362
Other assets........................................................... 19,873 16,507
---------- -----------
179,199 196,386
---------- -----------
Total assets........................................................... $ 352,221 $ 344,801
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................................... $ 7,182 $ 5,888
Claims payable......................................................... 75,378 57,611
Deferred revenue....................................................... 6,545 6,577
Accrued interest....................................................... 2,172 5,008
Current portion of long-term debt...................................... 3,000 500
Other current liabilities.............................................. 7,311 13,079
---------- ----------
Total current liabilities............................................ 101,588 88,663
Long-term debt......................................................... 256,500 253,500
Deferred income taxes.................................................. 20,757 30,669
Other long-term liabilities............................................ 1,847 1,451
Stockholders' Equity:
Common stock (40,000,000 shares authorized, $0.01 par
value, 28,553,800 and 28,398,800 shares issued)...................... 286 284
Additional paid in capital............................................. (1,412) (9,756)
Retained deficit....................................................... (21,295) (14,435)
Notes receivable from officers......................................... (6,050) (5,470)
----------- ------------
(28,471) (29,377)
Less common stock in treasury (21,000 shares).......................... --- (105)
----------- ------------
Total stockholders' equity........................................... (28,471) (29,482)
----------- ------------
Total liabilities and stockholders' equity............................. $ 352,221 $ 344,801
========= ==========
See accompanying notes to condensed consolidated financial statements.
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MERIT BEHAVIORAL CARE CORPORATION
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands)
Three months ended Nine months ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
----------- ------------ ----------- --------
Revenue.............................................. $ 143,762 $111,189 $405,130 $333,830
Expenses:
Direct service costs............................... 116,564 86,419 327,739 262,710
Selling, general and administrative................ 17,366 17,313 49,739 47,328
Amortization of intangibles........................ 6,663 6,454 20,133 19,291
---------- ------------ ----------- ---------
140,593 110,186 397,611 329,329
Operating income..................................... 3,169 1,003 7,519 4,501
Other income (expense):
Interest income and other.......................... 823 681 2,368 2,019
Interest expense................................... (6,219) (6,077) (18,651) (17,626)
Merger costs....................................... --- --- --- (3,972)
---------- ------------ ----------- ----------
(5,396) (5,396) (16,283) (19,579)
----------- ------------ ----------- ----------
Loss before income taxes and cumulative effect of
accounting change.................................. (2,227) (4,393) (8,764) (15,078)
Benefit for income taxes............................. (737) (1,364) (1,904) (3,500)
----------- ----------- ----------- ----------
Loss before cumulative effect of accounting change... (1,490) (3,029) (6,860) (11,578)
Cumulative effect of accounting change for deferred
contract start-up costs, net of tax benefit of $757. --- --- --- (1,012)
----------- ----------- ----------- ----------
Net loss............................................. $ (1,490) $ (3,029) $ (6,860) $(12,590)
========== ========== ========== =========
See accompanying notes to condensed consolidated financial statements.
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MERIT BEHAVIORAL CARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nine months ended
June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ------ ------
Net loss ..................................................... $ (6,860) $ (12,590)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of accounting change...................... --- 1,012
Depreciation and amortization............................... 29,228 26,888
Amortization of deferred financing costs.................... 1,007 841
Deferred taxes.............................................. (2,341) (5,084)
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Accounts receivable......................................... (5,470) (2,073)
Other current assets........................................ (1,753) (252)
Deferred contract start-up costs............................ (3,680) (3,310)
Accounts payable and accrued liabilities.................... 10,425 5,451
-------- --------
Net cash provided by operating activities..................... 20,556 10,883
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.................. (16,965) (15,838)
(Purchases) sales of marketable securities.................. (4,111) 1,143
Long-term restrictions removed from (placed on) cash........ 1,928 (1,016)
Investments in and advances to joint ventures............... (1,750) (1,221)
Repayments of advances from joint ventures.................. 675 300
Cash used for acquisitions, contingent consideration, and
related expenses, net of cash acquired.................... --- (11,058)
Other....................................................... (332) (909)
--------- ---------
Net cash used for investing activities...................... (20,555) (28,599)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital contribution.......................... --- 114,980
Proceeds from bridge loan................................... --- 75,000
Proceeds from revolving credit facility..................... 134,500 123,000
Proceeds from senior term loans............................. --- 120,000
Proceeds from sale of notes................................. --- 100,000
Redemption of common stock.................................. --- (254,144)
Repayment of due to parent.................................. --- (70,813)
Repayment of bridge loan.................................... --- (75,000)
Repayment of revolving credit facility...................... (128,500) (94,000)
Repayment of senior term loans.............................. (500) ---
Payment of financing costs.................................. --- (12,504)
Other....................................................... 300 110
Net cash provided by financing activities .................. 5,800 26,629
INCREASE IN CASH AND CASH EQUIVALENTS................ 5,801 8,913
Cash and cash equivalents at beginning of period............ 47,375 29,531
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD...................................................... $ 53,176 $ 38,444
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash (received) paid for income taxes....................... $ (151) $ 1,002
Cash paid for interest...................................... $ 20,480 $ 14,603
See accompanying notes to condensed consolidated financial statements.
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MERIT BEHAVIORAL CARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of Merit Behavioral Care Corporation and its wholly-owned
subsidiaries (the "Company"), 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.
The condensed consolidated balance sheet at June 30, 1997 and the condensed
consolidated statements of operations and cash flows for all periods presented
are unaudited and reflect all adjustments, consisting of normal recurring items,
which management considers necessary for a fair presentation. Operating results
for fiscal 1997 interim periods are not necessarily indicative of results to be
expected for the entire year. The condensed consolidated balance sheet at
September 30, 1996 was derived from the Company's September 30, 1996 audited
financial statements. Certain prior year amounts have been reclassified to
conform with the current year's presentation.
Although the Company believes the accompanying disclosures are adequate, certain
information and disclosures normally included in the notes to the financial
statements have been condensed or omitted as permitted by the rules and
regulations of the Securities and Exchange Commission. The accompanying
unaudited financial statements should be read in conjunction with the financial
statements contained in the Annual Report on Form 10-K for the year ended
September 30, 1996.
2. CONTINGENCIES
In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists, psychologists and social workers brought an
action under the federal antitrust laws in the United States District Court for
the Southern District of New York (the "District Court") against nine behavioral
health managed care organizations, including the Company (collectively,
"Defendants"). The complaint alleges that Defendants violated section 1 of the
Sherman Act by engaging in a conspiracy to fix the prices at which Defendants
purchase services from mental healthcare providers such as plaintiffs. The
complaint further alleges that Defendants engaged in a group boycott to exclude
mental healthcare providers from Defendants' networks in order to further the
goals of the alleged conspiracy. The complaint also challenges the propriety of
Defendants' capitation arrangements with their respective customers, although it
is unclear from the complaint whether plaintiffs allege that Defendants
unlawfully conspired to enter into capitation arrangements with their respective
customers. The complaint seeks treble damages against Defendants in an
unspecified amount and a permanent injunction prohibiting Defendants from
engaging in the alleged conduct which forms the basis of the complaint, plus
costs and attorneys' fees. In January 1997, Defendants filed a motion to dismiss
the complaint. On July 21, 1997, a court-appointed magistrate judge issued a
report and recommendation to the District Court recommending that Defendants'
motion to dismiss the complaint with prejudice be granted. On August 5, 1997,
plaintiffs filed objections to the magistrate judge's report and recommendation;
such objections have not yet been heard. The Company intends to vigorously
defend itself in this litigation. No amounts are recorded on the books of the
Company in anticipation of a loss as a result of this contingency.
3. SUBSEQUENT EVENT
On July 14, 1997, the Company entered into a definitive agreement (the
"Agreement") to acquire all of the capital stock of CMG Health, Inc. ("CMG").
Pursuant to the Agreement, the acquisition will be effected through a merger of
an affiliate of the Company with CMG, as a result of which CMG will become a
wholly owned subsidiary of the Company.
6
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MERIT BEHAVIORAL CARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
The Agreement provides that holders of CMG's common and preferred stock will
receive, in the aggregate, at closing (1) approximately $51,500 in cash (subject
to certain adjustments), (2) 750,000 shares of MBC common stock and (3) rights
to receive certain additional cash and stock consideration based upon future
events and the post-closing financial performance of CMG. The Chase Manhattan
Bank, the agent for the Company's existing senior credit facility, has committed
to provide the funding to make the cash payments required in connection with the
acquisition (including related fees and expenses). The merger is subject to
certain conditions, including the expiration of antitrust regulatory waiting
periods and the funding of the financing arrangements.
7
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
The Company is one of the leading behavioral health managed care companies in
the United States, arranging for a full spectrum of behavioral healthcare
services on a nationwide basis. Behavioral healthcare involves the treatment of
a variety of behavioral health conditions such as emotional and mental health
problems, substance abuse and other personal concerns that require counseling,
outpatient therapy or more intensive treatment services. The Company provides
managed behavioral healthcare services through a systematic clinical approach
with the objective of diagnosing problems promptly and designing treatment plans
to ensure that patients receive the appropriate level of care in an effective
and cost-efficient manner. The Company manages behavioral healthcare programs
for approximately 850 payors across all segments of the healthcare industry,
including health maintenance organization ("HMOs"), Blue Cross Blue Shield
organizations and other insurance companies, corporations and labor unions,
Federal, state and local governmental agencies, and various state Medicaid
programs.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenue. Revenue increased by $32.6 million, or 29.3%, to $143.8 million for the
three months ended June 30, 1997 from $111.2 million for the three months ended
June 30, 1996. Of this increase, $22.2 million was attributable to the inclusion
of revenue from certain contracts that commenced during the prior fiscal year as
well as additional revenue from existing customers generated by an increase in
both the number of programs managed by the Company on behalf of such customers
and an increase in the number of beneficiaries enrolled in such customers'
programs; and $24.1 million was attributable to new customers commencing service
in the current quarter, a significant portion of which was derived from the
Company's contract relating to the Civilian Health and Medical Program of the
Uniformed Services ("Champus") for Champus Regions 7 and 8, under which services
commenced on April 1, 1997. This revenue increase was partially offset by a
$13.7 million decrease in revenue as a result of the termination of certain
contracts, $6.2 million of which was due to terminations that occurred in
various periods of the prior fiscal year. Contract price increases were not a
material factor in the increase in revenue.
Direct Service Costs. Direct service costs increased by $30.2 million, or 35.0%,
to $116.6 million for the three months ended June 30, 1997 from $86.4 million
for the three months ended June 30, 1996. As a percentage of revenue, direct
service costs increased from 77.7% in the prior year period to 81.1% in the
current year period. The increase was primarily due to the anticipated lower
than average direct profit margin earned on the Company's contract relating to
the State of Tennessee's "TennCare Partners Program" and a Medicaid program in
the Commonwealth of Pennsylvania. Under the TennCare Partners Program, services
under which commenced in the fourth quarter of fiscal 1996, the Company
(together with a local Tennessee partner) provides mental health and substance
abuse managed care services to approximately 500,000 Medicaid-eligible and
uninsured individuals residing in the State of Tennessee. In light of the
significance of the contract to the Company's overall revenue base and the
unusual structure of the TennCare Partners Program, the Company expects
unfavorable year over year direct cost percentage comparisons for the remainder
of fiscal 1997. Furthermore, on February 1, 1997, the Company commenced
providing mental health and substance abuse services to approximately 40,000
Medicaid-eligible beneficiaries residing in the County of Delaware of the
Commonwealth of Pennsylvania. The direct profit margin under such program is
contractually limited to an amount which is significantly lower than the average
direct profit margin of the Company's overall business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.1 million, or 0.6%, to $17.4 million for
the three months ended June 30, 1997 from $17.3 million for the three months
ended June 30, 1996. As a percentage of revenue, selling, general and
administrative expenses decreased from 15.6% in the prior year period to 12.1%
in the current year period as a result of these expenses being allocated over a
larger revenue base. In particular, the TennCare Partners and the Delaware
County programs described above are large, self-contained programs requiring
minimal incremental selling, general and administrative expenses or operational
support from the Company, thereby mitigating, in large part, the effects of
their lower than average direct service cost margins.
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Amortization of Intangibles. Amortization of intangibles increased by $0.2
million, or 3.1%, to $6.7 million for the three months ended June 30, 1997 from
$6.5 million for the three months ended June 30, 1996. The increase was
primarily due to an increase in amortization of goodwill recognized in
connection with the acquisition of ProPsych, Inc.
Other Income (Expense). For the three months ended June 30, 1997, other income
and expense consisted of (i) interest expense of $6.2 million related to debt
incurred as a result of the merger of the Company with MDC Acquisition Corp. on
October 6, 1995 (the "Merger"); and (ii) interest and other income of $0.8
million relating primarily to investment earnings on the Company's short-term
investments and restricted cash and investment balances. Both interest expense
and interest income were relatively unchanged from the prior year period.
Income Taxes. The Company recorded a benefit for income taxes during the three
months ended June 30, 1997 based upon the Company's pre-tax loss in such period.
Nine Months Ended June 30, 1997 Compared to Nine Months Ended June 30, 1996
Revenue. The Company's revenue increased by $71.3 million, or 21.4%, to $405.1
million for the nine months ended June 30, 1997 from $333.8 million for the nine
months ended June 30, 1996. Of this increase, $74.1 million was attributable to
the inclusion of revenue from certain contracts that commenced during the prior
fiscal year as well as additional revenue from existing customers generated by
an increase in both the number of programs managed by the Company on behalf of
such customers and an increase in the number of beneficiaries enrolled in such
customers' programs; and $39.1 million was attributable to new customers
commencing service in the current nine month period. This revenue increase was
partially offset by a $41.9 million decrease in revenue as a result of the
termination of certain contracts, $28.7 million of which was due to terminations
that occurred in various periods of the prior fiscal year. Contract price
increases were not a material factor in the increase in revenue.
Direct Service Costs. Direct service costs increased by $65.0 million, or 24.7%,
to $327.7 million for the nine months ended June 30, 1997 from $262.7 million
for the nine months ended June 30, 1996. As a percentage of revenue, direct
service costs increased from 78.7% in the prior year period to 80.9% in the
current year period. The increase was due to the anticipated lower than average
direct profit margin earned on the TennCare Partners and the Delaware County
programs described above, partly offset by a year over year decline in
healthcare utilization in the Company's overall business. In addition, the
Delaware County program replaced a program under which beneficiaries previously
received their mental health benefit through membership in various HMO's
servicing this area. Direct profit margins under contracts that the Company held
with certain of these HMO's, which terminated or membership in which decreased
substantially as a result of this program, were higher than the direct profit
margins for the Delaware County carve-out program and the Company's overall
average direct profit margins. Excluding the effect of the TennCare Partners and
the Delaware County contracts, however, the Company experienced a decline in the
direct service cost percentage as a result of overall lower healthcare
utilization in the current nine month period as compared to the prior year
period, due to the Company's continued development and deployment of alternative
treatment programs designed to achieve more cost-effective treatment and the
Company's increased focus on clinical care techniques directed at patients
requiring more intensive treatment services. Also positively impacting the
direct cost percentage was the effect of a nationwide recontracting program with
providers which began in the second quarter of fiscal 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.4 million, or 5.1%, to $49.7 million for
the nine months ended June 30, 1997 from $47.3 million for the nine months ended
June 30, 1996. The increase in total selling, general and administrative
expenses was primarily attributable to (i) growth in marketing and sales
administrative staff, corporate and regional management and support systems
associated with the higher sales volume, (ii) expenses associated with the
expansion of both the Company's national service center ("National Service
Center") located in St. Louis, Missouri, and the Company's headquarters located
in Park Ridge, New Jersey, and (iii) expenses related to the planned deployment
of the Company's new information systems. As a percentage of revenue, selling,
general and administrative expenses decreased from 14.2% in the prior year
period to 12.3% in the current year period primarily as a result of these
expenses being allocated over a larger revenue base. In particular, as noted
above, the TennCare Partners and the Delaware County programs require minimal
incremental selling, general and administrative expenses or Company operational
support, thereby mitigating, in large part, the effects of their lower than
average direct service cost margins described above.
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Amortization of Intangibles. Amortization of intangibles increased by $0.8
million, or 4.1%, to $20.1 million for the nine months ended June 30, 1997 from
$19.3 million for the nine months ended June 30, 1996. The increase was
primarily due to an increase in amortization of goodwill recognized in
connection with the acquisition of ProPsych, Inc.
Other Income (Expense). For the nine months ended June 30, 1997, other income
and expense consisted of (i) interest expense of $18.7 million related to debt
incurred as a result of the Merger, and (ii) interest and other income of $2.4
million relating primarily to investment earnings on the Company's short-term
investments and restricted cash and investment balances. The year over year
increase in interest expense of $1.0 million was primarily attributable to the
full period impact of (i) the indebtedness incurred on October 6, 1995 by the
Company in connection with the Merger; and (ii) the Company's 11 1/2% Senior
Subordinated Notes due 2005 (the "Notes") which bore interest at a higher rate
than the bridge financing facility that the Notes replaced. The year over year
increase in interest income of $0.4 million was primarily attributable to both
an increase in average invested cash balances as compared to the prior year
period and interest earned on advances to certain joint ventures.
Income Taxes. The Company recorded a benefit for income taxes during the nine
months ended June 30, 1997 based upon the Company's pre-tax loss in such period.
Liquidity and Capital Resources
General. For the nine months ended June 30, 1997, operating activities provided
cash of $20.6 million, investing activities used cash of $20.6 million and
financing activities provided cash of $5.8 million, resulting in a net increase
in cash and cash equivalents of $5.8 million. Investing activities in the
current nine month period consisted principally of (i) capital expenditures of
$17.0 million related primarily to the continued development of the Company's
new information systems and expansion of the Company's National Service Center;
and (ii) expenditures of $4.1 million for the purchase of short-term investments
made to satisfy contracts held by the Company.
Senior Indebtedness. As of June 30, 1997, $40.0 million of revolving loans and
$8.1 million of letters of credit were outstanding under the revolving credit
facility of the Company's Credit Agreement with The Chase Manhattan Bank, N.A.
(the "Senior Credit Facility") and approximately $36.9 million was available for
future borrowing.
Adjusted EBITDA. Adjusted EBITDA, a financial measure used in the Senior Credit
Facility and the indenture for the Notes (the "Indenture"), increased by $2.7
million, or 24.5%, to $13.7 million for the three months ended June 30, 1997
from $11.0 million for the three months ended June 30, 1996. For the nine months
ended June 30, 1997, Adjusted EBITDA increased by $5.7 million , or 17.1%, to
$39.1 million from $33.4 million for the comparable period in the prior year.
Cash in Claims Funds and Restricted Cash. As of June 30, 1997, the Company had
total cash and investment balances (including cash equivalents) of $61.0
million, of which $41.1 million was restricted under certain contractual,
fiduciary and regulatory requirements; moreover, of such amount, $3.7 million
was classified as a long-term asset on the Company's balance sheet. Under
certain contracts, the Company is required to establish segregated claims funds
into which a portion of its capitation fee is held until a reconciliation date
(which reconciliation typically occurs annually). Until that time, cash funded
under these arrangements is unavailable to the Company for purposes other than
the payment of claims. In addition, California and Illinois state regulatory
requirements restrict access to cash held by the Company's subsidiaries in such
states. As of June 30, 1997, the Company also held surplus cash balances,
classified as cash and cash equivalents and short-term investments, as required
by the contracts held by the Company relating to Medicaid program for the State
of Iowa and the TennCare Partners and Delaware County Medicaid programs
described above.
Availability of Cash. Prior to the Merger, the Company had funded its operations
primarily with cash generated from operations and through the funding of certain
acquisitions, investments and other transactions by its former parent, Merck &
Co., Inc. The Company currently and in the future expects to finance its capital
requirements through existing cash balances, cash generated from operations and
borrowings under the revolving credit facility of the Senior Credit Facility.
Based upon the current level of cash flow from operations and anticipated
growth, the Company believes that available cash, together with available
borrowings under the revolving credit facility and other sources of liquidity,
will
10
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be adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures, and scheduled payments of principal and interest
on its indebtedness for the foreseeable future.
Acquisition of CMG Health, Inc. On July 14, 1997, the Company entered into a
definitive agreement (the "Agreement") to acquire all of the capital stock of
CMG Health, Inc. ("CMG"). Pursuant to the Agreement, the acquisition will be
effected through a merger of an affiliate of the Company with CMG, as a result
of which CMG will become a wholly owned subsidiary of the Company. The Agreement
provides that holders of CMG's common and preferred stock will receive, in the
aggregate, at closing (1) approximately $51.5 million in cash (subject to
certain adjustments), (2) 750,000 shares of MBC common stock and (3) rights to
receive certain additional cash and stock consideration based upon future events
and the post-closing financial performance of CMG. The Chase Manhattan Bank, the
agent for the Company's existing senior credit facility, has committed to
provide the funding to make the cash payments required in connection with the
acquisition (including related fees and expenses). The merger is subject to
certain conditions, including the expiration of antitrust regulatory waiting
periods and the funding of the financing arrangements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1996, a group of eight plaintiffs purporting to represent an
uncertified class of psychiatrists, psychologists and social workers brought an
action under the federal antitrust laws in the United States District Court for
the Southern District of New York (the "District Court") against nine behavioral
health managed care organizations, including the Company (collectively,
"Defendants") entitled Edward M. Stephens, Jose A. Yaryura-Tobias, Judith Green,
Ph.D., Fugen Neziroglu, Ph.D., Ona Robinson, Ph.D., Laurie A. Baum, C.S.W.,
Agnes Wohl, C.S.W., and The On-Step Institute For Mental Health Research, Inc.,
individually and on behalf of all others similarly situated, v. CMG Health, FHC
Options, Inc., Foundation Health PsychCare Services, Inc., Green Spring Health
Services, Inc., Human Affairs International, Inc., Merit Behavioral Care Corp.,
MCC Behavioral Care Inc., United Behavioral Systems, Inc., and Value Behavioral
Health, Inc., 96 Civ. 7798 (KMW). The complaint alleges that Defendants violated
section 1 of the Sherman Act by engaging in a conspiracy to fix the prices at
which Defendants purchase services from mental healthcare providers such as
plaintiffs. The complaint further alleges that Defendants engaged in a group
boycott to exclude mental healthcare providers from Defendants' networks in
order to further the goals of the alleged conspiracy. The complaint also
challenges the propriety of Defendants' capitation arrangements with their
respective customers, although it is unclear from the complaint whether
plaintiffs allege that Defendants unlawfully conspired to enter into capitation
arrangements with their respective customers. The complaint seeks treble damages
against Defendants in an unspecified amount and a permanent injunction
prohibiting Defendants from engaging in the alleged conduct which forms the
basis of the complaint, plus costs and attorneys' fees. In January 1997,
Defendants filed a motion to dismiss the complaint. On July 21, 1997, a
court-appointed magistrate judge issued a report and recommendation to the
District Court recommending that Defendants' motion to dismiss the complaint
with prejudice be granted. On August 5, 1997, plaintiffs filed objections to the
magistrate judge's report and recommendation; such objections have not yet been
heard. The Company intends to vigorously defend itself in this litigation.
However, there can be no assurance that the outcome of this litigation will be
favorable to the Company. An unfavorable outcome could have a material adverse
effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
*27 Financial Data Schedule (electronic filing only).
*filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is being filed.
11
<PAGE>
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.
The signatory hereby acknowledges and adopts the typed form of his name in the
electronic filing of this document with the Securities and Exchange Commission.
Date: August 14, 1997 Merit Behavioral Care Corporation
By: /s/ John A. Budnick III
___________________________________
John A. Budnick III
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer,
Accounting Officer and
Duly Authorized Officer)
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS ON PAGES 3 THROUGH 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001005530
<NAME> Merit Behavioral Care Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 53,176
<SECURITIES> 4,111
<RECEIVABLES> 35,607
<ALLOWANCES> 1,754
<INVENTORY> 0
<CURRENT-ASSETS> 97,670
<PP&E> 104,738
<DEPRECIATION> 29,386
<TOTAL-ASSETS> 352,221
<CURRENT-LIABILITIES> 101,588
<BONDS> 256,500
0
0
<COMMON> 286
<OTHER-SE> (28,757)
<TOTAL-LIABILITY-AND-EQUITY> 352,221
<SALES> 0
<TOTAL-REVENUES> 405,130
<CGS> 0
<TOTAL-COSTS> 327,739
<OTHER-EXPENSES> 20,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,651
<INCOME-PRETAX> (8,764)
<INCOME-TAX> (1,904)
<INCOME-CONTINUING> (6,860)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,860)
<EPS-PRIMARY> 0
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