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 March 31, 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 April 30, 1997, 28,477,800 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
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Table of Contents
Form 10-Q for the Quarterly Period
Ended March 31, 1997
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PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at 3
March 31, 1997 and September 30, 1996
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1997 and March 31,
1996 and the six months ended March 31, 1997
and March 31, 1996 4
Condensed Consolidated Statements of
Cash Flows for the six months ended
March 31, 1997 and March 31, 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 5. Other Information 10
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)
<C> <C>
March 31, September 30,
ASSETS 1997 1996
---------- ---------
Current Assets:
Cash and cash equivalents....................................................... $ 51,746 $ 47,375
Accounts receivable, net........................................................ 30,495 28,383
Other current assets............................................................ 6,186 4,777
---------- -----------
Total current assets.......................................................... 88,427 80,535
---------- ----------
Property, plant and equipment, net.............................................. 72,399 67,880
---------- ----------
Other Assets:
Goodwill and other intangibles, net............................................. 151,031 162,849
Restricted cash................................................................. 5,728 5,668
Deferred financing costs, net................................................... 10,703 11,362
Other assets.................................................................... 19,380 16,507
---------- ----------
186,842 196,386
---------- ----------
Total assets.................................................................... $ 347,668 $ 344,801
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $ 7,559 $ 5,888
Claims payable.................................................................. 64,667 57,611
Deferred revenue................................................................ 7,073 6,577
Accrued interest................................................................ 5,066 5,008
Current portion of long-term debt............................................... 500 500
Other current liabilities....................................................... 9,286 13,079
----------- ----------
Total current liabilities..................................................... 94,151 88,663
Long-term debt.................................................................. 257,500 253,500
Deferred income taxes........................................................... 23,666 30,669
Other long-term liabilities..................................................... 1,416 1,451
Stockholders' Equity:
Common stock (40,000,000 shares authorized, $0.01 par
value, 28,477,800 and 28,398,800 shares issued)............................... 285 284
Additional paid in capital...................................................... (3,825) (9,756)
Retained deficit................................................................ (19,805) (14,435)
Notes receivable from officers.................................................. (5,720) (5,470)
----------- ------------
(29,065) (29,377)
Less common stock in treasury (21,000 shares)................................... --- (105)
-------------- -------------
Total stockholders' equity.................................................... (29,065) (29,482)
------------- -------------
Total liabilities and stockholders' equity...................................... $ 347,668 $ 344,801
========= =========
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See accompanying notes to condensed consolidated financial statements.
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MERIT BEHAVIORAL CARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands)
Three months ended Six months ended
March 31, March 31,
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1997 1996 1997 1996
------------ ------------ ----------- --------
Revenue.......................................................$ 132,743 $111,721 $261,368 $222,641
Expenses:
Direct service costs........................................ 108,243 87,941 211,175 176,291
Selling, general and administrative......................... 15,794 15,707 32,373 30,015
Amortization of intangibles................................. 6,671 6,522 13,470 12,837
------------ ----------- ---------- ----------
130,708 110,170 257,018 219,143
Operating income.............................................. 2,035 1,551 4,350 3,498
Other income (expense):
Interest income and other................................... 765 797 1,545 1,338
Interest expense............................................ (6,246) (6,104) (12,432) (11,549)
Merger costs................................................ --- --- --- (3,972)
------------ ------------- ------------ ---------
(5,481) (5,307) (10,887) (14,183)
----------- ----------- ----------- ----------
Loss before income taxes and cumulative effect of
accounting change........................................... (3,446) (3,756) (6,537) (10,685)
Benefit for income taxes...................................... (948) (1,151) (1,167) (2,136)
------------- ----------- ----------- -----------
Loss before cumulative effect of accounting change... (2,498) (2,605) (5,370) (8,549)
Cumulative effect of accounting change for deferred
contract start-up costs, net of tax benefit of $757....... --- --- --- (1,012)
------------ ------------- ------------ ---------
Net loss............................................. $ (2,498) $ (2,605) $ (5,370) $ (9,561)
========== ========= ========== ==========
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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)
Six months ended
March 31,
<S> <C> <C>
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..............................................................$ (5,370) $ (9,561)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of accounting change............................... --- 1,012
Depreciation and amortization........................................ 19,504 17,552
Amortization of deferred financing costs............................. 671 546
Deferred taxes....................................................... (1,466) (3,296)
Changes in operating assets and liabilities, net of the effect of acquisitions:
Accounts receivable.................................................. (2,112) 2,152
Other current assets................................................. (1,409) 392
Deferred contract start-up costs..................................... (2,282) (2,390)
Accounts payable and accrued liabilities............................. 5,488 9,834
--------- ----------
Net cash provided by operating activities.............................. 13,024 16,241
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........................... (10,914) (11,448)
Sales of marketable securities....................................... --- 1,143
Long-term restrictions placed on cash................................ (60) (1,010)
Investments in and advances to joint ventures........................ (1,750) (1,221)
Repayments of advances from joint ventures........................... 465 120
Cash used for acquisitions, contingent consideration, and
related expenses, net of cash acquired............................. --- (11,058)
Other................................................................ (644) (1,072)
--------- ----------
Net cash used for investing activities............................... (12,903) (24,546)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital contribution................................... --- 114,980
Proceeds from bridge loan............................................ --- 75,000
Proceeds from revolving credit facility.............................. 88,500 80,500
Proceeds from senior term loans...................................... --- 120,000
Proceeds from sale of notes.......................................... --- 100,000
Repayment of notes receivable from officers.......................... 250 250
Redemption of common stock........................................... --- (254,144)
Repayment of due to parent........................................... --- (70,813)
Repayment of bridge loan............................................. --- (75,000)
Repayment of revolving credit facility............................... (84,000) (54,000)
Repayment of senior term loans....................................... (500) ---
Payment of financing costs........................................... --- (11,999)
--------- ----------
Net cash provided by financing activities............................ 4,250 24,774
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS................................. 4,371 16,469
Cash and cash equivalents at beginning of period..................... 47,375 29,531
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD...............................................................$ 51,746 $ 46,000
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash (received) paid for income taxes................................$ (175) $ 801
Cash paid for interest...............................................$ 11,703 $ 6,100
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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 March 31, 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 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, which
motion has not yet been heard or decided. 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.
6
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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 1,000 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 March 31, 1997 Compared to Three Months Ended March 31, 1996
Revenue. Revenue increased by $21.0 million, or 18.8%, to $132.7 million for the
three months ended March 31, 1997 from $111.7 million for the three months ended
March 31, 1996. Of this increase, $22.6 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 $11.6 million was attributable to new customers
commencing service in the current quarter. This revenue increase was partially
offset by a $13.2 million decrease in revenue as a result of the termination of
certain contracts, $10.6 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 $20.3 million, or 23.1%,
to $108.2 million for the three months ended March 31, 1997 from $87.9 million
for the three months ended March 31, 1996. As a percentage of revenue, direct
service costs increased from 78.7% in the prior year period to 81.5% in the
current year period. The increase was due to the anticipated lower than average
direct profit margin earned on the 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 $15.8 million for
the three months ended March 31, 1997 from $15.7 million for the three months
ended March 31, 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 located in St. Louis,
Missouri (the "National Service Center"), 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 14.1% in the prior year to
11.9%
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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 are large, self-contained programs requiring minimal incremental
selling, general and administrative expenses or operational support from the
Company, thereby mitigating the effects of their lower than average direct
service cost margins described above.
Amortization of Intangibles. Amortization of intangibles increased by $0.2
million, or 3.1%, to $6.7 million for the three months ended March 31, 1997 from
$6.5 million for the three months ended March 31, 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 March 31, 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 balances. Both interest expense and interest
income are relatively unchanged from the prior year period.
Income Taxes. The Company recorded a benefit for income taxes during the three
months ended March 31, 1997 based upon the Company's pre-tax loss in such
period.
Six Months Ended March 31, 1997 Compared to Six Months Ended March 31, 1996
Revenue. The Company's revenue increased by $38.8 million, or 17.4%, to $261.4
million for the six months ended March 31, 1997 from $222.6 million for the six
months ended March 31, 1997. Of this increase, $52.0 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 $15.0 million was attributable to new customers
commencing service in the current six month period. This revenue increase was
partially offset by a $28.2 million decrease in revenue as a result of the
termination of certain contracts, $24.7 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 $34.9 million, or 19.8%,
to $211.2 million for the six months ended March 31, 1997 from $176.3 million
for the six months ended March 31, 1996. As a percentage of revenue, direct
service costs increased from 79.2% in the prior year period to 80.8% in the
current year period. The increase was due to the anticipated lower than average
direct profit margin earned on the TennCare Partners Program, partly offset by a
year over year decline in healthcare utilization in the Company's overall
business. Excluding the effect of the TennCare Partners contract, however, the
Company experienced a decline in the direct service cost percentage as a result
of overall lower healthcare utilization in the current six month period as
compared to the previous period, due to 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 8.0%, to $32.4 million for
the six months ended March 31, 1997 from $30.0 million for the six months ended
March 31, 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, and the Company's
headquarters, 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 13.5% in the prior year period to
12.4% in the current year period 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
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 $0.7
million, or 5.5%, to $13.5 million for the six months ended March 31, 1997 from
$12.8 million for the six months ended March 31, 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 six months ended March 31, 1997, other income
and expense consisted of (i) interest expense of $12.4 million related to debt
incurred as a result of the Merger, and (ii) interest and other income of $1.5
million relating primarily to investment earnings on the Company's short-term
investments and restricted cash balances. The year over year increase in
interest expense of $0.9 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 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 $0.2 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 six
months ended March 31, 1997 based upon the Company's pre-tax loss in such
period.
Liquidity and Capital Resources
General. For the six months ended March 31, 1997, operating activities provided
cash of $13.0 million, investing activities used cash of $12.9 million and
financing activities provided cash of $4.3 million, resulting in a net increase
in cash and cash equivalents of $4.4 million. Investing activities in the
current six month period consisted principally of (i) capital expenditures of
$10.9 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) payments totaling $1.8 million for funding under various joint venture
arrangements, the most significant of which was with Community Sector Systems,
Inc.
Senior Indebtedness. As of March 31, 1997, $38.5 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 $38.4 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 $1.0
million, or 8.8%, to $12.4 million for the three months ended March 31, 1997
from $11.4 million for the three months ended March 31, 1996. For the six months
ended March 31, 1997, Adjusted EBITDA increased by $3.0, or 13.4%, to $25.4
million from $22.4 million for the comparable period in the prior year.
Cash in Claims Funds and Restricted Cash. As of March 31, 1997, the Company had
total cash balances (including cash equivalents) of $57.5 million, of which
$38.6 million was restricted under certain contractual, fiduciary and regulatory
requirements; moreover, of such amount, $5.7 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
March 31, 1997, the Company also held surplus cash balances, classified as cash
and cash equivalents, as required by the contracts held by the Company relating
to Medicaid programs for the States of Iowa and Tennessee and for a Medicaid
contract in the Commonwealth of Pennsylvania.
Availability of Cash. Prior to the Merger, the Company has 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 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.
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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 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, which motion has not yet
been heard or decided. 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 5. OTHER INFORMATION
Since July 1996, the Company has been providing services under the
State of Tennessee's "TennCare Partners Program," a mental health and substance
abuse benefits program covering principally Medicaid recipients and uninsured
individuals residing in that State ("TennCare Beneficiaries"). The Company
participates in the TennCare Partners Program through a joint venture (known as
a "behavioral health organization" or "BHO") with Tennessee Behavioral Health,
Inc. ("TBH") pursuant to a contract between the Tennessee Department of Mental
Health and Mental Retardation ("TDMHMR") and TBH. The contract with TDMHMR has
an initial 12 month term ending June 30, 1997 and, by its terms, automatically
renews for successive 12 month periods unless either TDMHMR or TBH gives notice
of its intention not to renew. The Department of Health of the State of
Tennessee ("TDOH"), which has oversight of TDMHMR, recently announced that the
mental health and substance abuse services currently provided by the two BHOs
participating in the TennCare Partners Program are to be transitioned to the
"Managed Care Organizations" (typically, health maintenance organizations)
("MCOs") currently providing medical, surgical and other healthcare benefits to
TennCare Beneficiaries. The earliest date (the "Transition Date") at which such
transition of services to the MCOs may occur is January 1, 1998.
The Company believes that, if the responsibility for providing mental
health and substance abuse services to TennCare Beneficiaries is transferred to
the MCOs, MCOs will most likely subcontract with behavioral health managed care
companies, such as the Company, to provide such services. The Company currently
is in discussions with certain MCOs relating to the possible provision by the
Company of mental health and substance abuse services to TennCare Beneficiaries
covered by such MCOs. However, because the TDOH announcement has been made only
recently, and in light of the uncertainty over the identity of the MCOs that
would service the TennCare Beneficiaries after the Transition Date and the terms
on which such MCOs would provide mental health and substance abuse services, the
Company has not entered into any definitive subcontracts with MCOs. There can be
no assurance that the TennCare Partners Program will be transitioned to the MCOs
or, if such transition occurs, that the Company will subcontract with any MCOs,
that the terms of any such subcontracts will be favorable to the Company or that
the Company will be able
10
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to replace through such subcontracts the revenue it otherwise would have
generated in connection with the TennCare Partners Program after the Transition
Date.
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.
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<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: May 15, 1997 Merit Behavioral Care Corporation
By: /s/ Arthur H. Halper
-----------------------------
Arthur H. Halper, 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 FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY RFEREFNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 51,746
<SECURITIES> 0
<RECEIVABLES> 32,472
<ALLOWANCES> 1,977
<INVENTORY> 0
<CURRENT-ASSETS> 88,427
<PP&E> 99,535
<DEPRECIATION> 27,136
<TOTAL-ASSETS> 347,668
<CURRENT-LIABILITIES> 94,151
<BONDS> 257,500
0
0
<COMMON> 285
<OTHER-SE> (29,350)
<TOTAL-LIABILITY-AND-EQUITY> 347,668
<SALES> 0
<TOTAL-REVENUES> 261,368
<CGS> 0
<TOTAL-COSTS> 211,175
<OTHER-EXPENSES> 13,470
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,432
<INCOME-PRETAX> (6,537)
<INCOME-TAX> (1,167)
<INCOME-CONTINUING> (5,370)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,370)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
