<PAGE> 1
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 JUNE 30, 1998
-------------
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 1-13177
-------
INTEGRA, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3605119
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1060 First Avenue - Suite 410
King of Prussia, PA 19406
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(610) 992-2600
- ----------------------------------------------------
(Registrant's telephone number, including area code)
Apogee, Inc., 1018 W. Ninth Avenue, King of Prussia, PA 19406
- --------------------------------------------------------------------------------
(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 (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 August 10, 1998, Integra, Inc. had 10,119,999 shares of common stock,
$0.01 par value, outstanding.
Page 1 of 23
<PAGE> 2
INTEGRA, INC.
FORM 10-Q - QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
FORM 10-Q FORM 10-Q FORM 10-Q
PART NO: ITEM NO. DESCRIPTION PAGE NO.
- --------- --------- ----------- ---------
<S> <C> <C> <C>
I. FINANCIAL INFORMATION
1. Financial Statements
- Consolidated Statements of
Operations for the Three Months
Ended June 30, 1998 and 1997 3
- Consolidated Statements of
Operations for the Six Months
Ended June 30, 1998 and 1997 4
- Consolidated Balance Sheets
as of June 30, 1998 and
December 31, 1997 5
- Consolidated Statements of
Cash Flows for the Six Months
Ended June 30, 1998 and 1997 6
- Consolidated Statement of
Changes in Stockholders' Equity
for the Six Months Ended
June 30, 1998 7
- Notes to Consolidated Financial
Statements 8-9
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
II. OTHER INFORMATION
1. Legal Proceedings 19
4. Submission of Matters to a Vote of Security Holders 20
5. Other Information 20
6. Exhibits and Reports on Form 8-K 21
Signatures 22
Index to Exhibits 23
</TABLE>
Page 2 of 23
<PAGE> 3
INTEGRA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------
1998 1997
---- ----
<S> <C> <C>
NET REVENUES:
PATIENT SERVICE REVENUE $ 6,493 $ 15,182
PREMIUM REVENUE 3,416 2,728
------------ ------------
TOTAL NET REVENUES 9,909 17,910
------------ ------------
COST OF REVENUES:
PATIENT SERVICE COSTS 5,873 12,117
PREMIUM SERVICE COSTS 2,174 1,360
------------ ------------
TOTAL COST OF REVENUES 8,047 13,477
------------ ------------
GROSS PROFIT 1,862 4,433
SELLING AND ADMINISTRATIVE EXPENSES 1,221 2,363
PROVISION FOR DOUBTFUL ACCOUNTS 419 895
AMORTIZATION OF INTANGIBLE ASSETS AND EXCESS
COST OVER FAIR VALUE OF NET ASSETS ACQUIRED 282 525
------------ ------------
(LOSS) INCOME FROM OPERATIONS (60) 650
INTEREST EXPENSE - RELATED PARTIES 1,020
INTEREST EXPENSE - OTHER 166 356
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (1,246) 294
PROVISION FOR INCOME TAXES 30 30
------------ ------------
NET (LOSS) INCOME ($ 1,276) $ 264
============ ============
BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE ($ 0.13) $ 0.03
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC
AND DILUTED 10,096,234 9,871,130
============ ============
</TABLE>
PAGE 3 OF 23
<PAGE> 4
INTEGRA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------
1998 1997
---- ----
NET REVENUES:
<S> <C> <C>
PATIENT SERVICE REVENUE $ 19,058 $ 31,922
PREMIUM REVENUE 6,255 5,188
------------ ------------
TOTAL NET REVENUES 25,313 37,110
------------ ------------
COST OF REVENUES:
PATIENT SERVICE COSTS 15,427 25,856
PREMIUM SERVICE COSTS 3,908 2,707
------------ ------------
TOTAL COST OF REVENUES 19,335 28,563
------------ ------------
GROSS PROFIT 5,978 8,547
SELLING AND ADMINISTRATIVE EXPENSES 4,286 5,087
PROVISION FOR DOUBTFUL ACCOUNTS 1,189 1,859
AMORTIZATION OF INTANGIBLE ASSETS AND EXCESS
COST OVER FAIR VALUE OF NET ASSETS ACQUIRED 702 1,064
------------ ------------
(LOSS) INCOME FROM OPERATIONS (199) 537
INTEREST EXPENSE - RELATED PARTIES 1,020
INTEREST EXPENSE - OTHER 476 655
------------ ------------
LOSS BEFORE INCOME TAXES (1,695) (118)
PROVISION FOR INCOME TAXES 62 38
------------ ------------
NET LOSS ($ 1,757) ($ 156)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE ($ 0.17) ($ 0.02)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC
AND DILUTED 10,079,485 9,861,236
============ ============
</TABLE>
Page 4 of 23
<PAGE> 5
INTEGRA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
ASSETS 1998 DECEMBER 31,
(UNAUDITED) 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 5,058 $ 2,154
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
FOR DOUBTFUL ACCOUNTS OF $67 IN 1998 AND 681 5,939
$7,348 IN 1997
OTHER ACCOUNTS RECEIVABLE 519 1,455
OTHER CURRENT ASSETS 90 410
-------- --------
TOTAL CURRENT ASSETS 6,348 9,958
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
AMORTIZATION OF $629 IN 1998 AND $1,253 IN 1997 1,186 2,426
INTANGIBLE ASSETS AND EXCESS COST OVER FAIR VALUE
OF NET ASSETS ACQUIRED, NET OF ACCUMULATED
AMORTIZATION OF $954 IN 1998 AND $4,569 IN 1997 9,984 31,031
OTHER ASSETS, NET 15 185
-------- --------
$ 17,533 $ 43,600
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT $ 595 $ 13,891
ACCOUNTS PAYABLE 234 2,283
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 12,272 21,430
-------- --------
TOTAL CURRENT LIABILITIES 13,101 37,604
LONG-TERM DEBT 0 809
OTHER LONG-TERM LIABILITIES 0 128
DEFERRED INCOME TAX LIABILITY 346 346
-------- --------
TOTAL LIABILITIES 13,447 38,887
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
COMMON STOCK, $.01 PAR VALUE, 20,000,000 SHARES
AUTHORIZED; ISSUED 10,119,999 IN 1998 AND
10,029,325 IN 1997 101 100
CAPITAL IN EXCESS OF PAR VALUE 87,467 86,349
ACCUMULATED DEFICIT (83,464) (81,707)
DEFERRED COMPENSATION (18) (29)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 4,086 4,713
-------- --------
$ 17,533 $ 43,600
======== ========
</TABLE>
PAGE 5 OF 23
<PAGE> 6
INTEGRA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($ 1,757) ($ 156)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATIONS:
DEPRECIATION AND AMORTIZATION 1,032 1,425
PROVISION FOR DOUBTFUL ACCOUNTS 1,189 1,859
ISSUE OF WARRANT FOR FINANCING GUARANTEE 880
CHANGES IN ASSETS AND LIABILITIES, NET OF
EFFECTS OF BUSINESSES ACQUIRED:
INCREASE IN ACCOUNTS RECEIVABLE (190) (398)
DECREASE IN OTHER CURRENT ASSETS 70 150
DECREASE IN ACCOUNTS PAYABLE (1,810) (866)
DECREASE IN ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES (1,705) (1,620)
(INCREASE) DECREASE IN OTHER ASSETS AND OTHER LIABILITIES (31) 161
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,322) 555
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONAL PAYMENTS FOR BUSINESSES ACQUIRED
IN PRIOR YEARS (4,775) (2,038)
NET PROCEEDS FROM DISPOSITION OF BUSINESSES 24,129 100
PURCHASES OF PROPERTY AND EQUIPMENT (247) (334)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 19,107 (2,272)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM BORROWINGS 2,700 4,600
PRINCIPAL PAYMENTS ON LONG-TERM OBLIGATIONS (16,581) (2,914)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (13,881) 1,686
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,904 (31)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,154 2,299
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,058 $ 2,268
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
INTEREST PAID $ 812 $ 784
======== ========
INCOME TAXES PAID $ 88 $ 154
======== ========
</TABLE>
PAGE 6 OF 23
<PAGE> 7
INTEGRA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON SHARES
-------------
CAPITAL IN
EXCESS OF ACCUMULATED DEFERRED
NUMBER PAR VALUE PAR VALUE DEFICIT COMPENSATION TOTAL
------ --------- --------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 10,029 $100 $86,349 ($81,707) ($29) $4,713
COMMON STOCK ISSUED IN CONNECTION WITH
ACQUISITIONS 91 1 238 239
ISSUE OF WARRANT FOR FINANCING GUARANTEE 880 880
AMORTIZATION OF DEFERRED COMPENSATION 11 11
NET LOSS (1,757) (1,757)
------ ---- ------- -------- ---- ------
BALANCE AT JUNE 30, 1998 (UNAUDITED) 10,120 $101 $87,467 ($83,464) ($18) $4,086
====== ==== ======= ======== ==== ======
</TABLE>
PAGE 7 OF 23
<PAGE> 8
INTEGRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Dollars in thousands, except share and per share data)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited. These
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission and should be read in conjunction with
the Company's consolidated financial statements and notes thereto for the year
ended December 31, 1997 included in its Form 10-K filed with the Securities and
Exchange Commission on April 15, 1998. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of Company management, the consolidated
financial statements for the unaudited interim periods presented include all
adjustments, consisting only of normal recurring adjustments, necessary to
present a fair statement of the results for such interim periods.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Operating results for the three and six month periods ended June 30, 1998
are not necessarily indicative of the results that may be expected for a full
year or any portion thereof.
NOTE 2 - INCOME TAXES
The provision for income taxes is based on the Company's estimated
effective income tax rate for 1998. At December 31, 1997, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$10,000. The Company will only be able to use the net operating loss
carryforwards against future taxable earnings of the Company. In addition, as
specified in the Internal Revenue Code, the Company's ability to use certain of
the net operating loss carryforwards is limited as they were acquired by the
Company in a purchase of the stock of other companies. The carryforwards expire
in varying amounts through 2012. A valuation reserve has been established
against the potential future benefit of the net operating loss carryforwards
and other deferred tax assets.
Page 8 of 23
<PAGE> 9
INTEGRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Dollars in thousands, except share and per share data)
(Unaudited)
NOTE 3 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -------------
<S> <C> <C>
Clinician fees and medical claims........... $1,962 $3,291
Acquisition related costs................... 396 5,006
Salaries and vacation....................... 415 1,507
Restructuring costs......................... 2,587 3,218
Long-term care reserves..................... 5,800 5,800
Other....................................... 1,112 2,608
---------- -------------
$12,272 $21,430
========== =============
</TABLE>
Page 9 of 23
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company provides managed behavioral health services through full and
shared risk arrangements with employers and managed care organizations and
provides employee assistance programs. The Company provides additional managed
behavioral health services including: third party clinical case management and
claims adjudication.
In December 1997, the Company announced its plans to sell and divest its
outpatient behavioral health group practice operations. The Company entered into
an agreement to sell substantially all of the assets of the outpatient
behavioral practice business (the "Sale"), except for practices located in the
Western region of the United States which the Company has sold or shut down. The
Sale was completed effective May 18, 1998 and resulted in the divestiture by the
Company of substantially all the assets and business of the Company's outpatient
behavioral health practices. As of December 31, 1997, the outpatient behavioral
health practice business accounted for approximately eighty-four percent (84%)
of the assets of the Company (before the impact of the write down of assets held
for sale and the impact of the restructuring charge - see below); and for the
year ended December 31, 1997, approximately eighty-three percent (83%) of the
Company's net revenues. In addition, the Company is currently operating a small
outpatient operation in New York State which was not acquired by PsychPartners.
As a result of the Sale, the Company is significantly smaller in terms of
revenues and assets.
In July 1998, the Company announced it received approval from its
shareholders to change the name of the Company from Apogee, Inc. (AMEX: APG) to
Integra, Inc. (AMEX: IGR). The new name reflects the Company's decision to focus
on the successful Integra behavioral managed care operation which the Company
believes is well established and respected in the behavioral health market.
Sale and Divestiture of Outpatient Business
On December 26, 1997, the Company entered into an agreement of Purchase and
Sale (the "Purchase Agreement") with PsychPartners MidAtlantic, Inc.,
PsychPartners, Inc., and PsychPartners, LLC (collectively "PsychPartners" or the
"Purchasers"). Pursuant to the Purchase Agreement, the Company agreed to sell to
the Purchasers substantially all of the assets and business of the Company's
outpatient behavioral healthcare business, which consisted of (i) all of the
capital stock of one of the subsidiaries of the Company operating two outpatient
behavioral health practices and (ii) substantially all of the assets relating to
20 of the Company's outpatient behavioral health practices (the 22 practices are
collectively, the "Practices").
Page 10 of 23
<PAGE> 11
On May 14, 1998, at the Special Meeting of Shareholders, the shareholders
of the Company approved and adopted the terms of the purchase agreement with
PsychPartners. Effective on May 18, 1998, the Company closed the aforementioned
transaction. PsychPartners elected not to acquire the assets associated with
one of the Company's practices in New York State which is undergoing a Medicaid
review. The purchase price at closing consisted of: (a) $26,400 in cash, (b) a
warrant contingently issuable to purchase 230,000 Common Units of PsychPartners
at a purchase price of $.05 per Common Unit and (c) the assumption of certain
liabilities. The Purchase Price is subject to adjustment if the cash, accounts
receivable, deposits and prepaid expenses of the Practices are less than the
liabilities and future contingent payment obligations of the Practices.
Background to the Sale and Divestiture of Outpatient Business.
On an ongoing basis, the Company evaluates and considers alternatives to
improve operating results and enhance shareholder value. These alternatives
include continued acquisitions or mergers, joint ventures, strategic alliances
and the sale of assets. In October 1997, the Company executed a non-binding
memorandum of understanding with PsychPartners for the sale of substantially
all of the Company's outpatient behavioral health businesses. The Company then
began a more focused assessment of alternatives available to the Company
including an evaluation of the transaction with PsychPartners to determine if
such a transaction was both viable and in the best interests of the Company and
its shareholders. In December 1997, the Company's Board of Directors reached
agreement that an exit and disposal of the Company's outpatient operations and
a refocus on behavioral managed care was the best course of action for the
Company to pursue. The Board authorized management to proceed with and attempt
to close the transaction with PsychPartners. On December 26, 1997, the Company
executed the Purchase Agreement with PsychPartners. The Company's Board of
Directors believes that the terms of the Sale are fair to, and in the best
interests of the Company and its shareholders. Accordingly, the Board of
Directors unanimously approved the Sale and recommended approval of the Sale by
the shareholders. While the Company's estimated future cash flows from these
operations showed full recovery of the carrying value of the related assets
prior to the decision to sell, the Company believed the sale of substantially
all of the Company's outpatient businesses would enable the Company to achieve
higher returns than would be obtained if the Company continued to operate its
outpatient operations. In reaching its decision to approve the Sale to
PsychPartners, the Company and the Board of Directors considered the following
factors:
(i) The condition, prospects and strategic direction of the Company's
outpatient behavioral healthcare business. In this regard, the Board of
Directors reviewed its analyses of the earnings potential of the outpatient
behavioral healthcare business based upon various operating and market
assumptions and its conclusion was that there was a significant probability that
the shareholder value of the Company may not significantly improve in the near
term. This review included a discussion of (a) the Company's cost structure, (b)
the competitive market in each of the Company's businesses, and (c) the
Company's losses in recent periods;
Page 11 of 23
<PAGE> 12
(ii) The constraints on the Company's ability to finance growth, including
the dilutive impact of additional equity financing and the costs of additional
debt financing;
(iii) Recent and historical market prices for the Company Common Stock
indicated that the Company had not created in the eyes of the public market a
clear enough distinction between its group practice strategy and its managed
care strategy and the Sale would allow the Company to focus on pursuing a pure
managed care strategy which might be perceived more positively in the market;
(iv) The successful negotiations regarding the Purchase Agreement which
the Company believes reflected a fair and equitable understanding between the
parties;
(v) The substantial likelihood that the Sale would be consummated and the
fact that no other viable alternative to the Sale was available; and
(vi) The cash consideration received upon the consummation of the Sale
would allow the Company to repay its existing Credit Facility and satisfy its
obligations in connection with past acquisitions and the Florida Medicare
review and would provide the Company with funds to pursue its growth strategy
in the managed behavioral healthcare field.
In addition, the Board received a written fairness opinion from the Banc
One Capital Corporation which states that the Sale was fair from a financial
point of view.
In December 1997, and in conjunction with the above, the Board also
authorized a plan to shut down or sell the remaining outpatient operations not
included in the Sale to PsychPartners. When reaching this decision the Board
considered the following factors:
(i) The recent operating losses in these remaining outpatient operations.
The Company projected that over time, these operations would be able to be
returned to profitability, however, the Company would be required to make a
substantial investment in terms of both capital to fund the short-term losses
and management resources. The Company concluded that dedicating Company
resources to the behavioral managed care market would ultimately result in a
higher return on investment than if the Company continued to invest in the
Western Region outpatient operations.
(ii) The Sale to PsychPartners would divest the Company of substantially
all of its outpatient operations. By executing a plan to divest the remaining
outpatient operations, the Company created the opportunity to significantly
reduce its regional and corporate infrastructure which the Company believes
will improve overall profitability.
Page 12 of 23
<PAGE> 13
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned and beneficially owned subsidiaries. Because of corporate
practice of medicine laws in certain states in which the Company operates
outpatient clinics, the Company does not own the professional corporations which
operate the professional and clinical aspects of the outpatient behavioral
healthcare practices in those states, but instead has the contractual right to
designate, in its sole discretion and at any time, the licensed professional who
is the owner of the capital stock of the professional corporation at a nominal
cost ("Nominee Arrangements"). In addition, the Company entered into exclusive
long-term management services agreements ("Management Services Agreements") with
the professional corporations. Through the Management Services Agreements, the
Company has exclusive authority over decision making relating to all major
ongoing operations of the underlying professional corporations with the
exception of the professional aspects of the practice of psychiatry, psychology
and other professional behavioral healthcare services as required by certain
state laws. Under the Management Services Agreements, the Company establishes
annual operating and capital budgets for the professional corporations and
compensation guidelines for the clinical professionals. The Management Services
Agreements generally have initial terms of ten years or greater. The method of
computing the management fees varies by contract. Management fees are based on
either (i) billings of the affiliated practice less the amounts necessary to pay
professional compensation and other professional expenses or (ii) a license fee
per location, reimbursement of direct costs, reimbursement of marketing costs
plus a markup, and a flat administrative fee or (iii) a percentage of gross
receipts of the affiliated practice. In all cases, these fees are meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests are unilaterally saleable and transferable by the
Company and fluctuate based upon the actual performance of the operations of the
professional corporations.
Through the Nominee Arrangements, the Company has a significant long-term
financial interest in the affiliated practices and, therefore, according to
Emerging Issues Task Force No. 97-02 "Application of FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries and APB Opinion No. 16,
Business Combinations, to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangement", the Company must
consolidate the results of the affiliated practices with those of the Company.
Because the Company must present consolidated financial statements, net revenues
are presented in the accompanying Consolidated Statements of Operations. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.
Page 13 of 23
<PAGE> 14
TOTAL NET REVENUES
Patient Service Revenue
Patient service revenue is reported when earned at time of service at the
estimated amounts to be realized through payments from patients, third party
payors and others for services rendered. Third party reimbursement is initially
billed at "usual, customary and reasonable" market rates. Aggregate billings are
adjusted when recorded to reflect the estimated amounts realizable from third
party payors based on the Company's historical experience and contractual rates
established with the payors. Patient service revenue represents billings of the
Company's operations other than its behavioral managed care division, Integra,
which are principally comprised of the outpatient group practice business and
long-term care behavioral health business.
Patient service revenue for the three and six month periods ended June 30,
1998 decreased significantly from the same periods of the prior year. This
decrease is essentially a result of the impact of operations sold to
PsychPartners on May 18, 1998 or operations which were discontinued or downsized
in conjunction with the Company's restructuring in the fourth quarter of 1997.
Premium Revenue
Premium revenue pertains to the Company's managed behavioral care operation
which maintains a portfolio of agreements with managed care organizations and
corporations to provide inpatient and outpatient behavioral health services.
Revenues are primarily generated by capitated managed behavioral health and
employee assistance programs. The fees are defined by contract and are primarily
calculated on a fixed per-member per-month fee. Revenues under these contracts
are recorded in the month for which the member is entitled to services.
Generally, these membership contracts are on a one to three year basis subject
to cancellation by either party without cause at any time with thirty to ninety
days written notice.
The Company estimates the cost of providing services under these
agreements, including a reserve for services incurred, but not reported, based
upon authorized services, past claim payment experience for member groups and
other facts. The Company typically does not subcapitate the risk of providing
services under these contracts, but the Company arranges discounted
fee-for-service rates with independent inpatient and outpatient behavioral
health providers, which the Company manages. As part of its provider network,
Integra also utilizes certain outpatient behavioral health practices which were
sold to PsychPartners as part of its provider network. The Company anticipates
that where practicable, it will continue to utilize these outpatient behavioral
health practices at the existing or comparable rates which it believes are at
fair market. The Company believes there is a ready supply of service providers
in these markets, and accordingly, is not dependent on these outpatient
behavioral health practices for the delivery of service to their contracts.
Page 14 of 23
<PAGE> 15
Under capitated contracts, the Company is responsible for ensuring
appropriate access to care and bears the risk for utilization levels and pricing
of the cost of services performed under these contracts. The Company believes
the future revenues under these contracts will exceed the costs of services it
will be required to provide under the terms of the contracts. An underestimation
in the utilization or price of services for these contracts could result in
material losses to the Company. Historically, Integra has managed these
capitated contracts profitably. The Company maintains no re-insurance against
the risk of loss under these contracts, however the Company maintains
malpractice and errors and omission insurance coverage for all professionals who
perform services on behalf of the Company.
Premium revenues for the three and six month periods ended June 30, 1998
increased from the same periods of the prior year as a result of new contracts
for capitated managed behavioral health services and employee assistance
programs.
GROSS PROFIT
Gross profit comprises net revenues less personnel, field management,
facility and other costs and expenses directly associated with the delivery of
services. Gross profit decreased significantly for the three and six month
periods ended June 30, 1998 from the comparable periods last year. This decrease
is primarily a result of the impact of operations which were sold to
PsychPartners on May 18, 1998 or which were discontinued in conjunction with the
Company's restructuring in the fourth quarter of 1997.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses are primarily comprised of corporate
office, regional management and centralized billing expenses. Selling and
administrative expenses decreased to $1,221 for the three months ended June 30,
1998 from $2,363 for the same period in 1997, and to $4,286 for the six months
ended June 30, 1998 form $5,087 for the same period in 1997. The decrease is a
result of reduced administrative costs as a result of the operations sold to
PsychPartners on May 18, 1998 or which were discontinued in conjunction with the
Company's restructuring in the fourth quarter of 1997.
PROVISION OF DOUBTFUL ACCOUNTS
The provision for doubtful accounts decreased for the three and six month
periods ended June 30, 1998 from the comparable period in 1997. The decrease
results from the sale and discontinuation of the outpatient operations.
INTEREST EXPENSE - RELATED PARTIES
As a contingency for if the Sale was not completed, the Company entered
into an agreement with certain investment partnerships (the "Investment
Partnerships") which are significant stockholders of the Company and are managed
by Foster Management Company, an affiliated party, to obtain their commitment to
guarantee an additional $7,000 of financing. This amount represented the
estimated additional cash needs during 1998 for contingent payments, seller
notes and for restructure related activities. Under the terms of the agreement,
the investment funds were to receive the following: (i) a commitment fee of 2%
of the guaranteed amount; (ii) a draw down fee of 2% on borrowings in excess of
Page 15 of 23
<PAGE> 16
$15,000; (iii) an unused commitment fee of 1/2% per annum; and (iv) warrants to
purchase 400,000 shares of common stock of the Company at a price of $0.05 per
share (the "Integra Warrants") or, in the event the Sale was not consummated, a
transaction fee of $3,500 payable on April 30, 1999. With the Sale completed,
the cost to the Company of this guarantee was $140 in cash paid to the
Investment Partnerships and a non-cash charge of approximately $880 which
represents the difference between the exercise price of the Integra Warrants and
the fair market value of the underlying Company Common Stock on closing date of
the Sale to PsychPartners. These charges, which are non-recurring in nature,
have been recorded in the Company's results of operations for the quarter ending
June 30, 1998.
INTEREST EXPENSE - OTHER
Interest expense decreased to $166 for the three months ended June 30, 1998
from $356 for the same period in 1997 and to $476 for the six months ended June
30, 1998 from $655 for the same period in 1997. This decrease is primarily due
to the paydown of bank debt with proceeds from the Sale of the outpatient
operations in May.
OTHER MATTERS
During 1996, certain of the Company's Medicare Part B and related
co-insurance billings previously submitted were selected for review by the
Office of the Inspector General of the Department of Health and Human Services
("OIG") and the Department of Justice ("DOJ"). The Company has been informed by
the DOJ that the review is a civil matter relating to billings for services to
Medicare patients in long-term care facilities in the State of Florida during
the period from approximately January 1994 through mid-1995. During the pendency
of this review, the Medicare intermediary has suspended all Medicare payments to
this subsidiary. It is the Company's policy to comply with all Federal, state
and local laws including those applicable to the Medicare program. In December
1997, the Company and representatives from the United States Attorney's office
reached an agreement in principle that would settle all of the OIG's civil
claims against the Company relating to this matter for a payment of $3,000. This
tentative agreement is subject to the final approval by the appropriate officers
of the DOJ and OIG. Throughout this process, the Company has been fully
cooperating with the review and anticipates reaching a definitive agreement in
1998. The Company has established a reserve for the above amount.
In March 1998, the Company received notification that the Medicare
intermediary in California has completed a post payment medical review of
billings previously submitted and paid between 1990 and 1994. Based on the
results of their review, the intermediary has requested a refund of
approximately $1,200. Payment for services were denied primarily on the basis of
medical necessity and incomplete documentation. The Company has not yet
completed its review of the intermediary's findings, but anticipates requesting
an administrative hearing. The Company has fully reserved for the above amount.
In April 1998, the Company received notice from the office of the Attorney
General of New York State that the New York Medicaid billings of one of the
operations with which it has a Management Services Agreement will be audited.
Due to the preliminary nature of the review, the Company can not predict when
the audit will be completed, its ultimate outcome or its potential impact of
earnings, but believes the outcome of the audit, including repayments, if any,
should not have a material adverse effect on the Company's results of operations
or financial condition.
Page 16 of 23
<PAGE> 17
Although management believes the reserves established for the above
matters are sufficient, it is possible that the final resolution of these
matters may exceed the established reserves by an amount which could be
material to the Company's results of operations. The Company does not believe
the ultimate outcome of these matters will have a material adverse effect on
the Company's overall financial condition, liquidity or operations.
Liquidity and Capital Resources
Net cash used in operations was $2,098 for the six months ended June 30,
1998, compared to net cash provided by operations of $55 for the same period in
the prior year. Cash and cash equivalents increased to $5,058 at June 30, 1998
from $2,154 at December 31, 1997 due to the remaining proceeds of the Sale to
PsychPartners.
At June 30, 1998, the Company had a working capital deficit of ($6,753).
This deficit is primarily attributable to the current classification of accrued
liabilities of $8,387 which pertain to the Company's sale of the exit from the
outpatient behavioral group practice business and reserves established for its
long-term care operations which were discontinued in 1996. Although these
amounts are classified as current due to their nature, the Company does not
expect that all of these amounts will require payment within twelve months.
On the closing date of the Sale, the Company terminated its Credit
Facility Agreement with PNC Bank and fully repaid the borrowings under the
Credit Facility which at closing were $14,770. The borrowings were repaid using
proceeds from the Sale. The Company intends to establish a new credit facility
which it expects will provide between $7,000 and $10,000 in borrowings
availability in future periods.
The Company believes that the cash flow generated by the Company's
operations together with its existing cash will be sufficient to meet the
Company's current cash requirements.
The Company's current ratio, working capital and debt to equity ratio are
set forth below for the dates indicated:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Current Ratio....................... .48:1 .26:1
Working Capital Deficit............. $(6,753) $(27,646)
Debt to Equity...................... .15:1 3.1:1
</TABLE>
Inflation
A significant portion of the Company's operating expenses have been
subject to inflationary increases, including clinical and administrative
salaries and rent expense. Based on management's assessment, the Company has
historically been unable to substantially offset inflationary increases through
price increases but believes the Company has somewhat mitigated the effect by
expanding services and increasing operating efficiencies, if any which would
result in a dilutive impact on the Company's future earnings.
Page 17 of 23
<PAGE> 18
CAUTIONARY STATEMENT
Matters discussed above contained forward-looking statements that are
based on the Company's estimates, assumptions and projections. Major factors
which could cause results to differ materially from those expected by management
include the timing and nature of reimbursement changes, the nature of changes in
laws and regulations that govern various aspects of the Company's business, new
criteria adopted to determine medical necessity for behavioral health services,
the outcome of post-payment reviews of the Company's billings to Medicare
patients in long-term care facilities, including a review in the State of
Florida by the Department of Justice, successful negotiation of a new credit
facility, pricing of managed care and other third party contracts, the direction
and success of competitors, management retention and unanticipated market
changes.
Page 18 of 23
<PAGE> 19
INTEGRA, INC.
FORM 10-Q - QUARTER ENDED JUNE 30, 1998
PART II
ITEM 1 - LEGAL PROCEEDINGS
From time to time, the Company is a party to certain claims, suits and
complaints which arise in the ordinary course of business. During 1996, certain
Medicare Part B and related co-insurance billings previously submitted by one of
the Company's subsidiaries were selected for review by the OIG and the DOJ. The
Company has been informed by the DOJ that the review is a civil matter relating
to billings for services to Medicare patients in long-term care facilities in
the State of Florida during the period from approximately January 1994 through
mid-1995. During the pendency of this review, the Medicare intermediary has
suspended all Medicare payments to this subsidiary. It is the Company's policy
to comply with all Federal, state and local laws, including those applicable to
the Medicare program. In December 1997, the Company and representatives from the
United States Attorney's office reached an agreement in principle that would
settle all of the OIG's civil claims against the Company relating to this matter
for a payment of $3,000. This tentative agreement is subject to the final
approval by the appropriate officers of the DOJ and OIG. Throughout this
process, the Company has been fully cooperating with the review and anticipates
reaching a definitive agreement in 1998. The Company has established a reserve
for the above amount which is included with Accrued Expenses and Other Accrued
Liabilities, in the accompanying Balance Sheet.
In March 1998, the Company received notification that the Medicare
intermediary in California has completed a post payment medical review of
billings previously submitted and paid between 1990 and 1994. Based on the
results of their review, the intermediary has requested a refund of
approximately $1,200. Services were denied primarily on the basis of medical
necessity and incomplete documentation. The Company has not yet completed its
review of the intermediary's findings, but anticipates requesting an
administrative hearing. The Company fully reserved for the above amount.
In April 1998, the Company received notice from the office of the Attorney
General of New York State that the New York Medicaid billings of one of the
operations with which it has a Management Services Agreement will be audited.
Due to the preliminary nature of the review, the Company cannot predict when
the audit will be completed, its ultimate outcome or its potential impact of
earnings, but believes the outcome of the audit, including repayments, if any,
should not have a material adverse effect on the Company's results of operations
or financial condition.
Page 19 of 23
<PAGE> 20
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders was held on May 14, 1998.
At the Special Meeting, the holders of Common Stock of the Company approved
a resolution for the sale of substantially all of the assets and business of the
Company by relating to the Company's outpatient behavioral healthcare business
to PsychPartners, L.L.C. pursuant to an Agreement of Purchase and Sale dated as
of December 26, 1997. The vote of the shareholders was:
FOR: 6,391,838
AGAINST: 12,750
ABSTAIN: 16,911
At the Special Meeting, the holders of Common Stock of the Company approved
a resolution approving an adjournment of the Special Meeting, if necessary. The
vote of the shareholders was:
FOR: 6,206,024
AGAINST: 207,164
ABSTAIN: 8,311
ITEM 5 - OTHER INFORMATION
The Securities and Exchange Commission recently adopted certain amendments
to its rules governing the submission by shareholders of proposals intended to
be presented at meetings of shareholders. These amendments, which became
effective on June 29, 1998, included granting the Company the right to exercise
discretionary voting authority with respect to certain shareholder proposals
that the Company did not have notice of within a specified time period prior to
the meeting.
As disclosed in the Company's 1998 Proxy Statement, any shareholder
proposals submitted pursuant to Rule 14a-8 promulgated under the Securities
Exchange Act of 1934, as amended ("Exchange Act Rule 14a-8"), and intended to be
presented at the Company's 1999 Annual Meeting of Shareholders, must be received
in writing by the Company at its principal executive offices on or before March
2, 1999 for inclusion in the proxy statement and form of proxy to be distributed
by the Board of Directors in connection with such meeting. Any shareholder
proposals intended to be presented at the Company's 1999 Annual Meeting, other
than shareholder proposals submitted pursuant to Exchange Act Rule 14a-8, must
be filed with the Secretary of the Company on or before May 15, 1999. In the
event that a shareholder fails to notify the Company by May 15, 1999 of an
intent to be present at the 1999 Annual Meeting of Shareholders in order to
present a proposal for a vote (other than a proposal submitted pursuant to
Exchange Act Rule 14a-8), the Company will have the right to exercise its
discretionary authority to vote against the proposal, if presented, without
including any information about the proposal in its proxy materials.
Page 20 of 23
<PAGE> 21
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) The exhibits required to be filed as part of this Quarterly Report on
Form 10-Q are contained in the attached Index to Exhibits.
b) Current Reports on Form 8-K:
On June 3, 1998, the Company filed a Current Report dated May 19, 1998
on Form 8-K in which the Company disclosed information under "Item 2 -
Acquisition or Disposition of Assets" pertaining to the completion of
the Sale of substantially all of the Company's outpatient business to
PsychPartners.
Page 21 of 23
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
INTEGRA. INC.
--------------------------------
(registrant)
August 12, 1998 /s/ Mark D. Gibson
- ----------------------- --------------------------------
(Date) By: Mark D. Gibson
Chief Financial Officer
Page 22 of 23
<PAGE> 23
INDEX TO EXHIBITS
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
Page 23 of 23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,058
<SECURITIES> 0
<RECEIVABLES> 748
<ALLOWANCES> 67
<INVENTORY> 0
<CURRENT-ASSETS> 6,348
<PP&E> 1,815
<DEPRECIATION> 629
<TOTAL-ASSETS> 17,533
<CURRENT-LIABILITIES> 13,101
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 3,985
<TOTAL-LIABILITY-AND-EQUITY> 17,533
<SALES> 0
<TOTAL-REVENUES> 9,909
<CGS> 0
<TOTAL-COSTS> 8,047
<OTHER-EXPENSES> 1,221
<LOSS-PROVISION> 419
<INTEREST-EXPENSE> 1,186
<INCOME-PRETAX> (1,246)
<INCOME-TAX> 30
<INCOME-CONTINUING> (1,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,276)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
