<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, 1999
------------------
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)
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 5, 1999, Integra, Inc. had 10,138,552 shares of common stock, $0.01
par value, outstanding.
Page 1 of 20
<PAGE> 2
INTEGRA, INC.
FORM 10-Q - QUARTER ENDED JUNE 30, 1999
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, 1999 and 1998 3
- Consolidated Statements of Operations
for the Six Months Ended June 30, 1999
and 1998 4
- Consolidated Balance Sheets
as of June 30, 1999 and
December 31, 1998 5
- Consolidated Statements of
Cash Flows for the Six Months
Ended June 30, 1999 and 1998 6
- Consolidated Statement of
Changes in Stockholders' Equity
for the Six Months Ended
June 30, 1999 7
- Notes to Consolidated Financial
Statements 8
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
II. OTHER INFORMATION
1. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 17
6. Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits 20
</TABLE>
Page 2 of 20
<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,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net revenues:
Patient service revenue $ 6,493
Premium revenue $ 6,239 3,416
------------ ------------
Total net revenues 6,239 9,909
------------ ------------
Cost of revenues:
Patient service costs 5,873
Premium service costs 3,991 2,174
------------ ------------
Total cost of revenues 3,991 8,047
------------ ------------
Gross profit 2,248 1,862
Selling and administrative expenses 1,462 1,221
Provision for doubtful accounts 419
Restructuring and other charges (700)
Amortization of intangible assets and excess cost
over fair value of net assets acquired 121 282
------------ ------------
Income (loss) from operations 1,365 (60)
Interest expense - related parties 1,020
Interest expense - net 25 166
------------ ------------
Income (loss) before income taxes 1,340 (1,246)
Provision for income taxes 37 30
------------ ------------
Net income (loss) $ 1,303 $ (1,276)
============ ============
Net income (loss) per common share:
Basic $ 0.13 $ (0.13)
============ ============
Diluted $ 0.12 $ (0.13)
============ ============
Weighted average shares outstanding:
Basic 10,138,552 10,096,234
============ ============
Diluted 10,523,514 10,096,234
============ ============
</TABLE>
Page 3 of 20
<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,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net revenues:
Patient service revenue $ 19,058
Premium revenue $ 12,595 6,255
------------ ------------
Total net revenues 12,595 25,313
------------ ------------
Cost of revenues:
Patient service costs 15,427
Premium service costs 8,203 3,908
------------ ------------
Total cost of revenues 8,203 19,335
------------ ------------
Gross profit 4,392 5,978
Selling and administrative expenses 2,749 4,286
Provision for doubtful accounts 1,189
Restructuring and other charges (700)
Amortization of intangible assets and excess cost
over fair value of net assets acquired 242 702
------------ ------------
Income (loss) from operations 2,101 (199)
Interest expense - related parties 1,020
Interest expense - net 35 476
------------ ------------
Income (loss) before income taxes 2,066 (1,695)
Provision for income taxes 68 62
------------ ------------
Net income (loss) $ 1,998 $ (1,757)
============ ============
Net income (loss) per common share:
Basic $ 0.20 $ (0.17)
============ ============
Diluted $ 0.19 $ (0.17)
============ ============
Weighted average shares outstanding:
Basic 10,138,552 10,079,485
============ ============
Diluted 10,524,061 10,079,485
============ ============
</TABLE>
Page 4 of 20
<PAGE> 5
INTEGRA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
----------- ------------
Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,384 $ 2,452
Restricted cash 400
Accounts receivable, net of allowance for doubtful
accounts of $71 in 1999 and $73 in 1998 940 591
Other accounts receivable 251 531
Other current assets 464 442
-------- --------
Total current assets 3,439 4,016
Property and equipment, net of accumulated amortization of $1,159 in 1999
and $833 in 1998 1,987 1,683
Intangible assets and excess cost over fair value of net assets
acquired, net of accumulated amortization of $1,445 in 1999 and
$1,203 in 1998 10,252 10,320
Other assets, net 20 16
-------- --------
$ 15,698 $ 16,035
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 413
Accounts payable $ 183 594
Accrued expenses and other current liabilities 8,195 8,457
-------- --------
Total current liabilities 8,378 9,464
Long-term debt 1,250
Other long-term liabilities 3
Deferred income tax liability 355 356
-------- --------
Total liabilities 8,733 11,073
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares
authorized; issued 10,138,552 in 1999 and 1998 101 101
Capital in excess of par value 87,508 87,508
Accumulated deficit (80,644) (82,642)
Deferred compensation (5)
-------- --------
Total stockholders' equity 6,965 4,962
-------- --------
$ 15,698 $ 16,035
======== ========
</TABLE>
Page 5 of 20
<PAGE> 6
INTEGRA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,998 $ (1,757)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 568 1,032
Provision for doubtful accounts 1,189
Issue of warrant for financing guarantee 880
Non-cash portion of restructuring and other charges (700)
Changes in assets and liabilities, net of effects of businesses acquired:
Increase in accounts receivable (349) (190)
Increase in restricted cash (400)
(Increase) decrease in other current assets (137) 70
Decrease in accounts payable (411) (1,810)
Increase (decrease) in accrued expenses and other
current liabilities 1,006 (1,705)
Increase in other assets and other liabilities (22) (31)
-------- --------
Net cash provided by (used in) operating
activities 1,553 (2,322)
-------- --------
Cash flows from investing activities:
Additional payments for businesses acquired in prior years (441) (4,775)
Net proceeds from disposition of businesses 24,129
Purchases of property and equipment (630) (247)
-------- --------
Net cash used in investing activities (1,071) 19,107
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 2,700
Principal payments on long-term obligations (1,550) (16,581)
-------- --------
Net cash (used in) provided by financing activities (1,550) (13,881)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,068) 2,904
Cash and cash equivalents at beginning of period 2,452 2,154
-------- --------
Cash and cash equivalents at end of period $ 1,384 $ 5,058
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 47 $ 812
======== ========
Income taxes paid $ 171 $ 88
======== ========
</TABLE>
Page 6 of 20
<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, 1998 10,139 $101 $87,508 $(82,642) $(5) $4,962
Amortization of deferred
compensation 5 5
Net income 1,998 1,998
------ ---- ------- -------- --- ------
Balance at June 30, 1999
(unaudited) 10,139 $101 $87,508 $80,644 $-- $6,965
====== ==== ======= ======== === ======
</TABLE>
Page 7 of 20
<PAGE> 8
INTEGRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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, 1998 included in its Form 10-K filed with the Securities and
Exchange Commission on March 30, 1999. 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,
1999 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 1999. At December 31, 1998, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$36,000. 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 2013. 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 20
<PAGE> 9
INTEGRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Dollars in thousands, except share and per share data)
(Unaudited)
NOTE 3 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Medical claims payable .......................... $3,531 $1,359
Salaries and vacation.................................. 580 614
Acquisition and sale related costs .................. 515 1,070
Restructuring costs...................................... 572 1,421
Long-term care and provider billing reserves ......... 2,030 3,018
Other.................................................. 967 975
------ ------
$8,195 $8,457
====== ======
</TABLE>
Medical claims payable primarily represents the liability for
healthcare services authorized or incurred and not yet paid by the Company's
managed behavioral healthcare business. Medical claims payable are estimated
based upon authorized healthcare services, past claim payment experience for
member groups, patient census data and other factors. Effective January 1, 1999,
the Company implemented coverage on a capitated contract in New York State which
covers over 350,000 members and is currently the Company's largest contract. The
Company estimates the medical claims payable for this contract in a manner
similar to it existing contracts, however, the Company has not yet fully
developed its own historical experience with this contract. As the Company
continues to provide coverage and pay claims for this contract, management will
make necessary revisions in the estimates used to determine medical claims
payable. While the Company believes its estimate of the liability for medical
claims payable is adequate, actual results could differ from such estimates.
NOTE 4 - RESTRUCTURING AND OTHER CHARGES
In prior years, the Company established reserves in connection with its
restructurings and the exit of long-term care and outpatient operations. As part
of its ongoing evaluation of these reserves, at June 30, 1999, the Company
determined, based on its assessment of all remaining open matters, that the
Company was over accrued for these matters by $700. This change in estimate is
separately reflected in the Statement of Operations under "Restructuring and
Other Charges." The Company believes the remaining reserves for these matters
are adequate at June 30, 1999, however, as the Company continues to pursue
resolution of open matters, actual results could differ from such estimates.
Page 9 of 20
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OVERVIEW
The Company provides managed behavioral healthcare services through
full and shared risk arrangements with employers, health plans and managed care
organizations to perform behavioral health services on a capitated per member
per month basis. In addition, the Company provides an array of managed
behavioral health services including employee assistance programs, third party
clinical case management and claims administration. Integra's contract service
areas are principally concentrated in Connecticut, Delaware, Maryland, New
Jersey, New York, Pennsylvania, Rhode Island, Virginia and Tennessee.
SALE AND DIVESTITURE OF PATIENT SERVICE AND PROVIDER SEGMENT
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 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 eight-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); and for the year ended
December 31, 1997, approximately eighty-three percent (83%) of the Company's net
revenues. As a result of the Sale, the Company is significantly smaller in terms
of revenues and assets. Patient service revenues and patient service costs
pertained solely to the outpatient business and as a result of the exit of this
segment, the Company no longer performs direct patient service and hence has no
patient service revenues or patient service costs.
RESULTS OF OPERATIONS
PREMIUM REVENUE
Premium revenue pertains to the Company's managed behavioral healthcare
business 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 healthcare 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 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.
Premium revenue for the three and six month periods ended June 30,
1999 increased from the corresponding periods of the prior year primarily due to
one new contract in New York State for which the Company implemented coverage on
a capitated basis effective January 1, 1999.
Page 10 of 20
<PAGE> 11
PREMIUM SERVICE COSTS
Premium service costs are primarily comprised of medical claims and
personnel costs associated with the Company's service delivery, support and
management of its portfolio of behavioral healthcare contracts. The Company
estimates the medical claims cost of providing services under these agreements,
including a reserve for services incurred, but not reported, based upon
authorized healthcare services, past claim payment experience for member groups,
patient census data and other factors. 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.
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.
Premium service costs increased for the three and six month periods
ended June 30, 1999 from the corresponding periods in the prior year. This
increase is primarily a result of the coverage implemented on new contracts.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses are primarily comprised of
corporate office, sales and administration. Selling and administrative expenses
increased to $1,462 for the three months ended June 30, 1999 from $1,221 for the
same period in 1998. The increase is essentially a result of increased
investment in sales and marketing personnel. Selling and administrative expenses
for the six month period ended June 30, 1999 decreased to $2,749 from $4,286 for
the same period in 1998. This decrease is essentially the result of the impact
of the operations sold and the downsizing of the corporate office in connection
with the Sale.
PROVISION FOR DOUBTFUL ACCOUNTS
There was no provision for doubtful accounts for the three or six month
periods ended June 30, 1999 as compared to $419 for the three months ended June
30, 1999 and $1,189 for the six months ended June 30, 1999. This decrease is a
result of the Sale and exit of the outpatient provider operations. The Company's
managed behavioral healthcare business has historically had minimal provision
for doubtful accounts.
RESTRUCTURING AND OTHER CHARGES
In prior years, the Company established reserves in connection with its
restructurings and the exit of long-term care and outpatient operations. As part
of its ongoing evaluation of these reserves, at June 30, 1999, the Company
determined, based on its assessment of all remaining open matters, that the
Company was over accrued for these matters by $700. This change in estimate is
separately reflected in the Statement
Page 11 of 20
<PAGE> 12
of Operations under "Restructuring and Other Charges." The Company believes the
remaining reserves for these matters are adequate at June 30, 1999, however, as
the Company continues to pursue resolution of open matters, actual results could
differ from such estimates.
INTEREST EXPENSE - RELATED PARTIES
In 1998, as a contingency plan in the event the Sale had not been 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 Company's estimated additional cash needs
during 1998 for contingent payments, seller notes and for restructure related
activities. Under the terms of the agreement, the Investment Partnerships 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 $5,000; (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 in 1998, 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 the closing date of the
Sale. 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 - NET
Interest expense, net, decreased for the three and six month periods
ended June 30, 1999 from the corresponding periods in the prior year. This
decrease is primarily due to the pay down of bank debt in May 1998 with proceeds
from the Sale to PsychPartners.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $1,553 for the six months ended
June 30, 1999, compared to net cash used in operations of ($2,322) for the same
period in the prior year. Unrestricted cash and cash equivalents decreased to
$1,384 at June 30, 1999 from $2,452 at December 31, 1998. At June 30, 1999, the
Company also had $400 in cash which is contractually restricted as a reserve for
medical claims payable.
At June 30, 1999, the Company had a working capital deficit of $4,939.
The deficit is primarily attributable to accrued liabilities of $2,967 which
pertain to the exit of the outpatient provider behavioral group practice
business and reserves established for long-term care and other provider billing
matters. Although these amounts are classified as current due to their nature,
the Company does not expect that all of these amounts will require payment in
the next year. The remainder of the Company's accrued liabilities are operating
in nature.
The Company has established a Credit Facility with PNC Bank. At June
30, 1999, borrowing availability under this Credit Facility was approximately
$9,000. The Credit Facility is secured by substantially all of the assets of the
Company. If necessary, the Company will use its Credit Facility to fund working
capital requirements.
Page 12 of 20
<PAGE> 13
The Company believes that the cash flow generated by the Company's
operations together with its existing cash and availability of additional
borrowings under its Credit Facility will be sufficient to meet the Company's
cash requirements in 1999.
The Company's current ratio, working capital and debt to equity ratio
are set forth below for the dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Current Ratio............................... .41:1 .42:1
Working Capital Deficit..................... $(4,939) $(5,448)
Debt to Equity.............................. -- .34:1
</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. The Company believes it has somewhat mitigated the effect of
inflation by expanding services and increasing operating efficiencies. There can
be no assurance that the Company will be able to offset future inflationary
increases in expenses, if any, which would result in a dilutive impact on the
Company's future earnings.
NEW CONTRACT
Effective January 1, 1999, the Company implemented coverage of a
full-risk capitated contract with a health plan covering over 350,000 members.
The Company expects that this contract will generate over $11,000 in annual
revenues and it is currently the Company's largest contract. Profitability under
this contract will depend upon the Company's ability to manage the utilization
of services within the premiums received. An underestimation in the expected
utilization of services for this contract could result in a material loss to the
Company.
POTENTIAL IMPACT OF YEAR 2000 COMPUTER ISSUES
The Year 2000 problem is primarily the result of two potential
malfunctions that could have an impact on the Company's systems and equipment.
The first problem arises due to computers being programmed to use two rather
than four digits to define the applicable year. The second problem arises in
embedded chips where microchips and microcontrollers have been designed using
two rather than four digits to define the applicable year. Certain of the
Company's computers, programs, and building infrastructure components (e.g.
alarm systems and HVAC systems) are date sensitive and may recognize a date
using "00" as the Year 1900 rather than the Year 2000.
The Company relies on information technology ("IT") systems and other
systems and facilities such as telephones, building access control systems and
heating and ventilation equipment ("Embedded Systems") to conduct its business.
These systems are potentially vulnerable to Year 2000 problems due to their use
of date information. The Company also has business relationships with customers
and healthcare providers and other critical vendors who are themselves reliant
on IT and Embedded Systems to conduct their businesses.
Page 13 of 20
<PAGE> 14
State of Readiness
The Company's internal IT systems are largely centralized and consist
primarily of purchased software. The Company's IT hardware infrastructure is
built mainly around IBM PC compatible servers and desktop systems. The Company's
IT software primarily utilizes Microsoft systems including SQL Server, Windows
NT, Internet Information Server, Exchange and Office. The Company believes these
systems are either compliant or, with soon to be released "service packs" from
Microsoft, will be compliant by September 30, 1999. The Company's clinical and
claims administration software has been certified by the vendor as being Year
2000 compliant. The Company intends to complete testing of this system during
the third quarter of 1999. Year 2000 remediation costs incurred in 1998 were
approximately $100 and are estimated at under $250 in 1999.
External Relationship
The Company also faces the risk that one or more of its critical
suppliers or customers ("External Relationships") will not be able to interact
with the Company due to the third party's inability to resolve its own Year 2000
issues, including those associated with its own External Relationships. The
Company has been assessing its External Relationships and risk rating each
External Relationship based upon the potential business impact, available
alternatives and cost of substitution. The Company is attempting to determine
the overall Year 2000 readiness of its External Relationships. In the case of
significant customers and mission critical suppliers such as banks,
telecommunications providers and other utilities and IT vendors, the Company is
engaged in discussions with the third parties and is attempting to obtain
detailed information as to those parties' Year 2000 plans and state of
readiness. The Company, however, does not have sufficient information at the
current time to predict whether its External Relationships will be Year 2000
ready.
Risks and Contingency/Recovery Planning
If the Company's Year 2000 issues were unresolved, it is possible the
Company would not have the ability to accurately and timely authorize and
process benefits and claims, accurately bill customers, assess claims exposure,
determine liquidity requirements, report accurate data to management,
stockholders, customers, regulators and others, and would be subject to business
interruptions or shutdowns, financial losses, reputational harm, loss of
significant customers, increased scrutiny by regulators and litigation related
to Year 2000 issues. The Company is attempting to limit the potential impact of
the Year 2000 by monitoring the progress of its own Year 2000 project and those
of its critical External Relationships and by developing contingency/recovery
plans. The Company cannot guarantee that it will be able to resolve all of its
Year 2000 issues. Any critical unresolved Year 2000 issues of the Company or its
External Relationships could have a material adverse effect on the Company's
results of operations, liquidity or financial condition.
The Company is developing contingency/recovery plans aimed at
maintaining the continuity of critical business functions before and after
December 31, 1999. As part of that process, the Company is developing manual
work alternatives to automated processes which will be designed to maintain
business continuity. These manual alternatives presume, however, that basic
infrastructure such as electrical power and telephone service, as well as
purchased systems which are advertised to be Year 2000 compliant by their
manufacturers (primarily IT hardware and software) will remain unaffected by the
Year 2000 problem.
Page 14 of 20
<PAGE> 15
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, Year 2000 issues, pricing of managed care
and other third party contracts, the utilization and cost of services under the
Company's capitated contracts, the direction and success of competitors,
management retention and unanticipated market changes.
Page 15 of 20
<PAGE> 16
INTEGRA, INC.
FORM 10-Q - QUARTER ENDED JUNE 30, 1999
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 course of business.
In March 1998, the Company received notification that the Medicare
Intermediary in California 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
$1,200,000. Services were denied primarily on the basis of medical necessity and
incomplete documentation. The Company has requested an administrative hearing.
At December 31, 1997, the Company fully reserved the above amount.
In April 1998, the Company received notice that the Office of the
Attorney General of New York State ("the State") was conducting an audit of the
New York Medicaid billings of one of the outpatient provider operations with
which it had an Administrative Services Agreement. The State was investigating
whether the Company had any liability arising from the operation of, and its
relationship with, that provider. In October 1998, the Company terminated its
agreements with that provider. In May 1999, the Company reached a settlement
agreement with the State which resolves all claims against the Company relating
to this matter. Terms of the settlement include a payment of $382,000 plus
$18,000 of interest. These amounts were fully accrued as of June 30, 1999.
Although management believes that established reserves 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. Due to the nature of these matters, the
Company cannot predict when these matters will be resolved. 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.
Currently, there are no other such claims, suits or complaints that, in
the opinion of management, would have a material adverse effect on the Company's
financial position, results of operations or liquidity.
Page 16 of 20
<PAGE> 17
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 23, 1999, the Company held its 1999 Annual Meeting of
Shareholders. At the Annual Meeting, the following matters were submitted to a
vote of shareholders:
1. The following eight individuals, constituting the full Board of
Directors of the Company, were nominated and elected to serve as
the directors of the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
John H. Foster FOR: 9,118,935
WITHHOLD
AUTHORITY: 21,680
Lawrence M. Davies FOR: 9,118,935
WITHHOLD
AUTHORITY: 21,680
Eric E. Anderson, Ph.D. FOR: 9,118,935
WITHHOLD:
AUTHORITY: 21,680
Harvey V. Fineberg, M.D. FOR: 9,118,935
WITHHOLD
AUTHORITY: 21,680
Timothy E. Foster FOR: 9,118,935
WITHHOLD
AUTHORITY: 21,680
Irwin Lehrhoff, Ph.D. FOR: 9,118,935
WITHHOLD
AUTHORITY: 21,680
R. Bruce Mosbacher FOR: 9,118,935
WITHHOLD
AUTHORITY: 21,680
Shawkat Raslan FOR: 9,118,935
WITHHOLD
AUTHORITY: 21,680
</TABLE>
2. The holders of 9,134,265 shares of common stock voted in favor of, the
holders of 6,350 shares of common stock voted against, with respect to,
the ratification of the selection of PricewaterhouseCoopers LLP,
independent certified public accountants, to serve as independent
accountants for the Company.
Page 17 of 20
<PAGE> 18
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: None
Page 18 of 20
<PAGE> 19
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, 1999 /s/ Mark D. Gibson
- --------------- -----------------------
(Date) Mark D. Gibson
Chief Financial Officer
Page 19 of 20
<PAGE> 20
INDEX TO EXHIBITS
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
Page 20 of 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,384
<SECURITIES> 0
<RECEIVABLES> 1,011
<ALLOWANCES> 71
<INVENTORY> 0
<CURRENT-ASSETS> 3,439
<PP&E> 3,146
<DEPRECIATION> 1,159
<TOTAL-ASSETS> 15,698
<CURRENT-LIABILITIES> 8,378
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 6,864
<TOTAL-LIABILITY-AND-EQUITY> 15,698
<SALES> 0
<TOTAL-REVENUES> 6,239
<CGS> 0
<TOTAL-COSTS> 3,991
<OTHER-EXPENSES> 1,462
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 1,340
<INCOME-TAX> 37
<INCOME-CONTINUING> 1,303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,303
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
</TABLE>
