<PAGE> 1
DRAFT
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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
Incorporation or Organization) Identification No.)
1060 First Avenue
King of Prussia, Pennsylvania 19406
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 610-992-7000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- -------------------
<S> <C>
Common Stock, $.01 par value American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None.
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 as the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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2
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers, pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of March 14, 2000, 10,138,552 shares of Common Stock, $.01 par
value, were outstanding, and the aggregate market value of the shares of Common
Stock, $.01 par value, held by non-affiliates of the registrant as of March 29,
2000 was approximately $5,400,000. (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to this requirement
and registrant is not bound by this determination for any other purpose).
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are incorporated
by reference herein, and the Part of the Form 10-K into which the document is
incorporated:
Part III incorporates information by reference from portions of the
registrant's Proxy Statement to be filed with respect to the 2000 Annual Meeting
of Stockholders scheduled to be held on June 21, 2000.
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PART I
ITEM 1. BUSINESS.
GENERAL
Integra, Inc. ("Integra" or the "Company") provides employee assistance
programs ("EAP") and managed behavioral healthcare services through full and
shared risk arrangements with managed care organizations, health plans and
employers typically on a capitated per member (employee) per month basis. In
addition, the Company provides an array of other behavioral health services
including: employee assistance programs; third party clinical case management
and claims administration. At December 31, 1999, Integra's contract service
areas were principally concentrated in Connecticut, Delaware, Georgia, Maryland,
New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Tennessee.
Integra was incorporated in Delaware in 1991 under the name Apogee, Inc. and
changed its name to Integra in 1998. The Company is listed on the American Stock
Exchange and trades under the symbol "IGR."
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements (within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs concerning future events. When
used in this report, the words "believes," "estimates," "plans," "expects,"
"intends," "anticipates," and similar expressions as they relate to the Company
or its management are intended to identify forward-looking statements. The
actual results of the Company could differ materially from those indicated by
the forward-looking statements because of various risks and uncertainties
related to and including, without limitation, the Company's effective and timely
initiation and development of new client relationships and programs, the
maintenance of existing client relationships and programs (particularly since
the Company relies on seven (7) customers to produce 81% of the Company's EAP
and Managed Behavioral Healthcare segment revenues), the successful marketing of
the Company's managed behavioral healthcare services, the achievement of
satisfactory levels of both gross and operating margins, the recruitment and
retention of qualified personnel, the continued enhancement of computer and
information technologies and operational and financial systems, changes in
competition, general economic conditions, costs of financing and leasing of
equipment, the adequacy of cash flows from operations and available financings
to fund capital needs and future growth, changes in governmental rules and
regulations applicable to the Company, the outcome of post-payment reviews of
the Company's billing to Medicare patients in long-term care facilities during
the period when the Company provided such services, purchase price adjustments,
indemnification provisions and contingent liabilities pertaining to the
Company's sale and exit of the outpatient operations, utilization and cost of
services under the Company's capitated contracts and other risks set forth in
this report and in the Company's other filings with the Securities and Exchange
Commission. These risks and uncertainties are beyond the ability of the Company
to control. In many cases, the Company cannot predict the risks and
uncertainties that could cause actual results to differ materially from those
indicated by the forward-looking statements.
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RECENT DEVELOPMENTS
Sale and Exit of Outpatient Operations
In December 1997, the Company announced its plans to exit outpatient
provider behavioral health group practice operations. In connection with this
plan, the Company entered into an Agreement of Purchase and Sale (the "Purchase
Agreement") to sell to PsychPartners, L.L.C., an Alabama limited liability
company, through two subsidiaries of PsychPartners, substantially all of the
assets of the outpatient provider behavioral health group practice business
(hereafter referred to as the "Sale"). The Company completed the Sale as of May
18, 1998 (see Terms of Sale below). Practices located in the Western region of
the United States were not included in the Sale and as a result, during 1998,
the Company sold, divested or shut down all of these remaining operations. In
January 2000, PsychPartners filed for protection under Chapter 11 of the Federal
Bankruptcy Laws. As discussed in Note 3 of the Company's Notes to Consolidated
Financial Statements, the Company recorded a reserve of $1,700 at December 31,
1999 for potential exposures relating to certain leases assigned in the Sale.
TERMS OF SALE - OUTPATIENT PROVIDER 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, L.L.C. (collectively "PsychPartners" or
the "Purchasers"). Pursuant to the Purchase Agreement, the Company sold to the
Purchasers substantially all of the assets and business of the Company's
outpatient behavioral health provider business, which consisted of (i) all of
the capital stock of one of the subsidiaries of the Company (the "Subsidiary
Stock") operating two outpatient behavioral health practices and (ii)
substantially all of the assets (the "Assets") relating to 19 of the Company's
outpatient behavioral health practices (the 21 practices are collectively, the
"Practices").
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On May 14, 1998, at a Special Meeting of the Shareholders of the
Company, the shareholders approved and adopted the terms of the Purchase
Agreement with PsychPartners. Effective on May 18, 1998, the Company completed
the Sale. The purchase price paid at closing consisted of: (a) $26,400,000 in
cash, (b) a warrant contingently issuable to purchase 230,000 Common Units of
PsychPartners, L.L.C. at a purchase price of $.05 per Common Unit and (c) the
assumption of certain liabilities. The purchase price was 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. The Company believes it appropriately reserved for any potential
purchase price adjustment. In March 1999, the Company made a payment to
PsychPartners for purchase price adjustments of approximately $94,000.
EAP AND MANAGED BEHAVIORAL HEALTHCARE MARKET
Mental illness and alcohol and drug abuse remain serious health
problems in the United States. In an effort to improve the clinical outcomes of
treating these illnesses and to handle care in a cost-effective manner,
employers, health plans and managed care organizations have increasingly turned
to Managed Behavioral Healthcare Companies ("MBHCs"). In a study by Open Minds,
a behavioral healthcare trade publication, the total managed behavioral
healthcare market was approximately $5.0 billion in 1997. This study estimated
that approximately 72% of all Americans with health insurance are enrolled in a
managed behavioral health plan. MBHC enrollment has increased approximately 15%
a year since 1993, based upon the Open Minds study. Management believes that
enrollment continues to grow due to (i) privatization of programs such as
CHAMPUS and Medicaid; (ii) a continued emphasis on cost containment by employers
and payors; (iii) the inherent subjective nature of the diagnosis and treatment
of mental health disorders; and (iv) the advent of recent "parity" laws
requiring that behavioral health conditions be treated on a par with other
medical conditions and (v) pressure upon employees to address the personal
problems and needs of employees.
MANAGED BEHAVIORAL HEALTHCARE BUSINESS
In general, the managed behavioral healthcare business may be divided
into four categories of care. Based on the Open Minds studies, the following
summarizes these categories of care:
<TABLE>
<CAPTION>
Beneficiaries Total
In Millions Annual Growth
Category of Care As of January 1, by Category
- ---------------- ---------------- -----------
1999 1998
---- ----
<S> <C> <C> <C>
Utilization Review/Case Management
and Non-Risk Based
Network Services ............ 71.8 68.8 4.4%
Risk-Based Network Services ...... 49.0 45.1 8.6%
Employee Assistance Programs ..... 41.8 31.4 33.1%
Integrated Programs .............. 14.2 16.9 (16.0)%
----- -----
176.8 162.2 9.0%
===== =====
</TABLE>
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Integra offers programs and services in each of these categories.
According to Open Minds, risk-based network products and Employee Assistance
Programs are the most rapidly growing segments of the managed behavioral
healthcare industry. These product areas are the primary focus of Integra's
development efforts.
Utilization Review/Case Management/Non-Risk-Based Network Services
As part of its utilization review/case management/non-risk-based
network services, Integra provides a full array of managed care services which
may include selecting, credentialing and managing a network of providers (such
as psychiatrists, psychologists, social workers and hospitals), and performing
utilization review, claims administration and care management functions. In
these arrangements, Integra does not assume financial responsibility for the
cost of providing treatment services. The third party payor remains responsible
for the cost of providing the treatment services rendered. The Company
categorizes its services within this segment of the managed behavioral
healthcare industry as administrative services only ("ASO") services.
Risk-Based Network Services
As part of its risk-based network services, Integra assumes all or a
portion of the responsibility for the cost of providing behavioral healthcare
treatment services. Specifically, under a risk-based payment arrangement,
Integra agrees to provide services in exchange for a fixed fee per member per
month that may vary depending on the profile of the beneficiary population, or
agrees to otherwise share the responsibility for providing all or some portion
of the treatment services at a specific cost per person. Under these
arrangements, Integra not only approves and monitors a course of treatment, but
also arranges and pays for the provision of patient care through its third party
network providers. Under these contracts, Integra assumes the financial risk for
utilization and payment of services. As a result, Integra must be proficient in
contracting with, credentialing and managing a network of specialized providers
and facilities that covers the necessary continuum of care.
Employee Assistance Programs ("EAPs")
An EAP is a worksite-based program designed to assist in the early
identification and resolution of productivity problems associated with
behavioral conditions or other personal concerns of employees and their
dependents. Under its EAPs, Integra's network providers or other affiliated
clinicians provide assessment and referral services to employee beneficiaries
and their dependents. These services consist of evaluating a patient's needs
and, if indicated, providing counseling and/or identifying an appropriate
provider, treatment facility or other resource for more intensive treatment
services. EAP services typically include consultation services, evaluation and
referral services, employee education and outreach services. Integra's EAP
contracts generally provide between three (3) and eight (8) sessions of
counseling. The Company believes that federal and state "drug-free workplace"
measures and Federal Occupational Health and Safety Act requirements, together
with the growing public perception of increased violence in the workplace, have
prompted many companies to implement EAPs. As reflected in the Open Minds
studies, this is the fastest growing segment of this market in recent years.
Although EAPs originated as a support tool to assist managers in dealing with
troubled employees, payors increasingly regard EAPs as an important
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component in the continuum of behavioral healthcare services and to some extent
as the portal for entry into all Company sponsored health and benefit programs.
Through its EAP program, Integra also offers a variety of workplace
intervention programs including crisis intervention services under which it will
provide on-site counseling to employees who are experiencing emotional distress
as a result of a severe workplace incident. Integra has been developing a larger
portfolio of workplace related programs as add on services to its EAP programs,
including management consultations, organizational development and other
specialized training and intervention programs. Integra has emphasized clinical
data and seeks to partner with companies focused upon an integrated human
resources strategic plan around the health and productivity of its work force.
Workplace interventions targeted by data review and analysis can demonstrate a
significant impact upon the costs of employment as well as the business
effectiveness of organizations. Integra has developed such a data focus as a
core competency.
Integrated EAP/Managed Behavioral Healthcare Services
EAPs are typically utilized in a preventive role and in facilitating
early intervention and brief treatment of behavioral healthcare and other
employee problems before more extensive treatment is required. In an effort to
both reduce costs and increase accessibility and ease of treatment, employers
are increasingly attempting to consolidate EAP and managed behavioral healthcare
services into a coordinated program. Consequently, Integra markets and sells EAP
in connection with its managed behavioral healthcare programs through
"integrated" product offerings. Integrated products offer employers
comprehensive treatment services and management of all aspects of behavioral
healthcare. Although integrated EAP/managed behavioral healthcare products are
currently only a small component of the overall industry, the Company expects
this market segment to eventually grow. In 1999 Integra's program at the Bayer
Company was selected as the Quality Award for EAP excellence winner by EAP
Digest/EAPA. Integra has also received awards from the National Managed
Healthcare Congress (NMHCC) in 1996 and 1998. These awards give Integra a unique
status as the quality leader.
REIMBURSEMENT
During 1999, all of the Company's net revenues were derived from the
EAP and Managed Behavioral Healthcare segment of which 50% of the revenues
relate to a contract which expires on December 31, 2000. The Company estimates
that 41% and 15% of its net revenues during 1998 and 1997, respectively, were
derived from Managed Behavioral Healthcare business. This increase is a result
of the Sale and the exit of the remaining Patient Service and Provider
operations in May 1998 as well as the growth of the EAP and Managed Behavioral
Healthcare segment. In the past, through these former operations, a significant
percentage of the Company's revenues were received directly from Medicare,
Medicaid and CHAMPUS. With the exit of the Patient Service and Provider
operations, the Company no longer bills these entities directly. The Company's
premium or managed care revenues are generated at the present time exclusively
from managed care companies and employers. Potential contracts with union trusts
and government agencies are also being pursued. Integra intends to derive new
sources of revenue from the Internet (World Wide Web) and formation of new
programs focused upon COMPASS(R) and other proprietary tools. See "Business
Strategy."
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BUSINESS STRATEGY
Increase Enrollment in EAP and Managed Behavioral Healthcare Products.
The Company believes it has an opportunity to increase covered lives in all its
managed behavioral healthcare products. The Company believes its reputation for
high quality in-service delivery and clinical outcomes will further enhance its
ability to increase ASO and EAP covered lives with large corporate customers and
union trusts. According to Open Minds, EAP is the fastest growing segment in
recent years. The Company intends to build upon its experience in managing
programs for large corporate customers and to market integrated programs to the
Company's existing EAP customers and other prospective corporate clients. The
Company further believes that it has an opportunity to increase revenues,
earnings and cash flows from operations by increasing the number of lives
covered by its risk-based products. The Company has made investments in
management and systems infrastructure to position itself as a leading provider
of risk-based products for managed behavioral healthcare. Management believes
there will be a continuing shift to risk-based products. According to Open
Minds, industry enrollment in risk-based products grew from approximately 13.6
million in 1993 to approximately 49.0 million in 1999, representing a compound
annual growth rate of over 25%. The Company believes that the market for
risk-based products has grown and will continue to grow as payors attempt to
reduce their cost of providing behavioral healthcare while ensuring a high
quality of care and an appropriate level of access to care. The Company believes
enrollment in its risk-based products will increase through growth in new
covered lives and through some transition of covered lives in ASO and EAP
products to risk-based products.
Sales and Marketing Personnel. Although the Integra EAP and Managed
Behavioral Healthcare segment has experienced an average of over 54% in same
store revenue growth in the last four years, the Company has historically made
limited investments in sales and marketing. At December 31, 1998, the Company
had four dedicated individuals in this department. During 1999, the Company
increased resources in this area to eight individuals. The Company believes that
this increased investment in sales and marketing personnel will put the Company
in a position to continue generating strong internal revenue growth.
Continue to invest in Clinical Outcomes Measures. Management believes a
key differentiation of Integra from its competitors is the manner in which the
Company uses clinical patient data to make decisions about patient care.
The Company's COMPASS(R) system is a patented, unique and
scientifically valid decision support system which tracks and evaluates the
effectiveness of behavioral healthcare concurrently with treatment, while at the
same time collecting information useful to case managers. The ability to use
this information, congruent with treatment decisions for the patient will assist
in lowering behavioral healthcare costs to customers while maintaining or
increasing treatment effectiveness. Management believes COMPASS(R) is one of the
only systems which can "severity adjust" patient data, which is necessary for
the valid use of such data in providing therapist or program performance.
Integra believes it is the one of the few organizations that can
provide a customer with a proven behavioral health outcomes management and
decision support system which allows for a seamless measure to manage a
patient's improvement (decline) across all behavioral health treatment settings.
The Company intends to continue to update and enhance this tool. Management also
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believes that an opportunity exists for the Company to expand the use of this
strategy over the Internet (World Wide Web).
EAP AND MANAGED BEHAVIORAL HEALTHCARE CUSTOMERS
General. The following table sets forth the revenue for the year ended
December 31, 1999 in each of the Company's customer groups described below:
<TABLE>
<CAPTION>
Covered Revenue
Market Lives (In Thousands) Percent
- ------ ----- -------------- -------
<S> <C> <C> <C>
Health Plans and Managed Care Organizations 407,000 $ 13,397 52.6%
Workplace (Corporations and Labor Unions) . 759,000 9,634 37.9%
Public Sector ............................. 34,000 2,424 9.5%
--------- --------- -----
Total ........................... 1,200,000 $ 25,455 100.0%
========= ========= =====
</TABLE>
Health Plans and Managed Care Organizations. The Company has continued
to experience growth in its business with health plans and managed care
organizations ("HMOs"). HMO contracts are full, limited or shared risk contracts
in which the Company generally accepts a fixed fee per member per month from the
HMO in exchange for providing a full or specified range of behavioral healthcare
services for a specific portion of the HMO's beneficiaries. Although certain
large HMOs provide their own managed behavioral healthcare services, many HMOs
"carve out" behavioral healthcare from their general healthcare services and
subcontract such services to managed behavioral healthcare companies such as the
Company. The Company anticipates that its business with HMOs will continue to
grow.
Corporations and Labor Unions. Corporations and, to a lesser extent,
labor unions, account for a large number of the Company's contracts to provide
managed behavioral healthcare services and, in particular, EAP and integrated
EAP/managed care services. The Company has structured a variety of fee
arrangements with corporate customers to cover all or a portion of the
responsibility of the cost of providing treatment services. In addition, the
Company operates a number of programs for corporate customers on an ASO basis.
Management believes the corporate market is an area of potential growth for the
Company, as corporations are anticipated to increase their utilization of
managed behavioral healthcare services particularly as a result of recent
"parity" laws (see "Regulation").
Public Sector. The Company provides managed behavioral healthcare
services to Medicaid and Medicare recipients through subcontracts with HMOs
focused on these beneficiary populations. The Company expects that governmental
agencies will continue to implement a significant number of managed care
Medicaid programs through contracts with HMOs and that many HMOs will
subcontract with managed behavioral healthcare organizations, such as Integra,
for behavioral healthcare services. The Company also expects that states and
counties will continue the trend of "carving-out" behavioral healthcare services
from their general healthcare benefit plans and contracting directly with
managed behavioral healthcare companies such as the Company. While the Company
believes this is a growing market, it intends to selectively pursue only those
opportunities which it believes will appropriately value Integra's
differentiated and quality approach to managed behavioral healthcare.
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MANAGED BEHAVIORAL HEALTHCARE NETWORK
The Company's EAP and Managed Behavioral Healthcare treatment services
are provided by a network of third party providers. The number and type of
providers in a particular area depend upon customer preference, geographic
concentration and demographic make-up of the beneficiary population in that
area. Network providers generally include a variety of specialized behavioral
healthcare personnel, such as psychiatrists, psychologists, licensed clinical
social workers, substance abuse counselors and other professionals.
As of December 31, 1999, the Company had contractual arrangements
covering over 8,000 individual third party network providers. The Company's
network providers are independent contractors located throughout the local areas
in which the Company's customer's beneficiary population resides. Network
providers work out of their own facilities and include individual practitioners
with a variety of healthcare licenses (e.g., physicians, psychologists, licensed
clinical social workers), individuals who are members of group practices or
other licensed centers or programs, inpatient psychiatric and substance abuse
hospitals, intensive outpatient facilities, partial hospitalization facilities
and community health centers. Network providers typically execute standard
contracts with the Company for which they are typically paid by the Company on a
fee-for-service basis. In some cases, network providers are paid on a "case
rate" basis, whereby the provider is paid a set rate for an entire course of
treatment, or through other risk sharing arrangements. A network provider's
contract with the Company typically has a three-year term, with automatic
renewal at the Company's option for successive terms.
VALUE BASED BUSINESS
Integra's management has formally adopted the Company's Mission and
Values -- the reason Integra is in business, and the standards to which its
employees should strive to achieve on a daily basis. This mission and these
values have been introduced to Integra's employees, are fully integrated into
the Company's culture and distinguish Integra from its competitors.
Mission: To help our patients achieve their highest level of
functioning through quality, ethical and cost-effective
behavioral healthcare.
Values:
Patients Come First . . . patient care is the most
important thing we do.
Respect for the Individual . . . the "handshake" between
the Company and each employee.
Exceeding Customer Expectations . . . the needs of our
customers define our services.
Uncompromising Integrity . . . compels us to always do the
right thing.
Continuous Self-Renewal . . . commitment to setting the
standard of excellence which unifies and
strengthens us.
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It is management's belief that a strong commitment to these values will
enable the Company's employees to build the Company's business and their careers
and provide the foundation upon which Integra's business plans are developed.
During 1999, the Company devoted one of its mandatory all-employee quarterly
meetings to a review and emphasis upon these values.
COMPETITION
The managed behavioral health business is highly competitive. The
Company competes with large insurance companies, HMOs, preferred provider
organizations ("PPOs"), third party administrators ("TPAs"), IPAs,
multi-disciplinary medical groups and other managed behavioral health companies.
Many of the Company's competitors are significantly larger and have greater
financial, marketing and other resources than the Company, and some of the
Company's competitors provide a broader range of services. The Company may also
encounter substantial competition in the future from new market entrants. Many
of the Company's customers that are managed care companies may, in the future,
seek to provide managed behavioral healthcare and EAP services to their
employees or subscribers directly, rather than by contracting with the Company
for such services. Because of competition, the Company does not expect to be
able to rely on price increases to achieve revenue growth and expects to
continue experiencing pressure on direct operating margins.
Positioning the Company for continued growth requires the high quality
value-based approach for which Integra has been recognized. Management believes
that the future success of the Company is predicated on the ability of the
Company to differentiate itself.
REGULATION
General
As a managed behavioral healthcare services company, Integra is
currently subject to extensive and frequently changing government regulations.
These regulations are primarily concerned with licensure, conduct of operations,
financial solvency, standards of medical care provided, the dispensing of drugs,
the confidentiality of medical records of patients, and the direct employment of
psychiatrists, psychologists, and other licensed professionals by business
corporations. These various types of regulatory activity affect Integra's
business either by controlling its operations, restricting licensure of the
business entity or by controlling the reimbursement for services provided.
Generally, regulatory agencies have broad discretionary powers when granting,
renewing or revoking licenses or granting approvals. In addition, the time
necessary to obtain licenses varies from state to state. In certain cases, more
than one regulatory agency in each jurisdiction may assert that it has authority
over the activities of the Company. State licensing laws and other regulations
are subject to amendment and to interpretation by regulatory agencies with broad
discretionary powers. Any such licensure and/or regulation could require Integra
to modify its operations materially in order to comply with applicable
regulatory requirements and may have a material adverse effect on the Company's
business, financial condition or results of operations.
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State Insurance Laws
To the extent that Integra operates or is deemed to operate in one or
more states as a prepaid limited health service organization, insurance company,
HMO, PPO, prepaid health plan, or other similar entity, it will be required to
comply with certain statutes and regulations that, among other things, may
require it to maintain minimum levels of deposits, capital, surplus, reserves or
net worth, and also may limit the ability of the Company and its subsidiaries to
pay dividends, make certain investments, and repay certain indebtedness. The
imposition of any such requirements could significantly increase the Company's
costs of doing business and could delay the Company's conduct or expansion of
its business in some areas. The licensure process under state insurance laws can
be lengthy and, unless the applicable state regulatory agency allows the Company
to continue to operate while the licensure process is ongoing, the Company could
experience a material adverse effect on its operating results and financial
condition while its licensure application is pending. Failure by Integra to
obtain or maintain required licenses typically also constitutes an event of
default under Integra's contracts with its customers. The loss of business from
one or more of Integra's major customers as a result of such an event of default
or otherwise could have a material adverse effect on Integra's business,
financial condition or results of operations.
The National Association of Insurance Commissioners (the "NAIC") has
undertaken a comprehensive review of the regulatory status of entities arranging
for the provision of healthcare services through a network of providers that,
like the Company, may assume risk for the cost and quality of healthcare
services, but that are not currently licensed as an HMO or similar entity. As a
result of this review, the NAIC developed a "health organizations risk-based
capital" formula, designed specifically for managed care organizations, that
establishes a minimum amount of capital necessary for a managed care
organization to support its overall operations, allowing consideration for the
organization's size and risk profile. The NAIC initiative also may result in the
adoption of a model NAIC regulation in the area of health plan standards, which
could be adopted by individual states in whole or in part, and could result in
the Company being required to meet additional or new standards in connection
with its existing operations. Individual states have also recently adopted their
own regulatory initiatives that may subject entities such as the Company to
regulation under state insurance laws. These include, but are not limited to,
requiring licensure as an insurance company or HMO and requiring adherence to
specific financial solvency standards. Licensure as an insurance company, HMO or
similar entity could also subject the Company to regulations covering reporting
and disclosure, mandated benefits, and other traditional insurance regulatory
requirements. PPO regulations to which the Company may be subject to may require
the Company to register with a state authority and provide information
concerning its operations, particularly relating to provider and payor
contracting.
Based on the information presently available to it, the Company does
not believe that the imposition of requirements related to maintaining certain
types of assets, prescribed levels of deposits, capital, surplus, reserves or
net worth, or complying with other regulatory requirements applicable to an
insurance company, HMO, PPO or similar operations, would have a material adverse
effect on the Company. Notwithstanding the foregoing, the imposition of such
requirements could increase the Company's costs of doing business and could
delay the Company's conduct or expansion of its business in some areas.
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Utilization Review/Third Party Administrator Laws
Several of the states in which Integra conducts its business have
enacted legislation requiring organizations engaged in utilization review to
register and to meet certain operating standards. Utilization review regulations
typically impose requirements with respect to qualifications of personnel,
appeal procedures, confidentiality and other matters relating to utilization
review services. Integra is currently registered in Maryland, New York,
Pennsylvania, Tennessee and Texas for such services. Integra has been able to
comply with the applicable legislation without significant expense to date.
Integra may be required to comply with similar statutes if other states in which
it conducts its business impose such requirements or if the Company begins doing
business in a state which has such requirements.
Several states have adopted statutes to regulate third party health
claims administrators, which may include aspects of the Company's business.
These statutes typically impose requirements with respect to the financial
solvency and operation of the administrator. The Company may be required to
comply with similar statutes if other states in which it conducts business
impose such requirements or if the Company begins doing business in a state
which has such requirements.
ERISA
Certain of the Company's services are subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ERISA
governs certain aspects of the relationship between employer-sponsored health
benefit plans and certain providers of services to such plans through a series
of complex statutes and regulations that are subject to periodic interpretation
by the Internal Revenue Service and the United States Department of Labor. In
general, these regulations impose, among other things, an obligation on Integra
to act as a fiduciary with respect to some of the health benefit plans it
provides services to. However, there is little direct authority governing the
application of ERISA to many of the activities and arrangements of managed
behavioral healthcare and substance abuse treatment companies such as those
operated by Integra.
Certain federal courts have held that utilization review and third
party administrator licensure requirements are preempted by ERISA. ERISA
preempts state laws that mandate employee benefit structures or their
administration, as well as those that provide alternative enforcement
mechanisms. The Company believes that its utilization review and TPA activities
performed for its self-insured employee benefit plan customers in some states
are exempt from otherwise applicable state licensing or registration
requirements based upon federal preemption under ERISA and has relied on this
general principle in determining not to seek licensure for certain of its
activities in some states. Existing case law is not uniform on the applicability
of ERISA preemption with respect to state regulation of utilization review or
TPA activities. There can be no assurance that additional licensure will not be
required with respect to utilization review or TPA activities in certain states.
Any Willing Provider Laws
Several states have adopted, or are expected to adopt, "any willing
provider" laws. Such laws typically impose upon insurance companies, PPOs, HMOs
or other types of third party payors an obligation to contract with, or pay for
the services of, any healthcare provider willing to meet the terms of the
payor's contracts with similar providers. Compliance with any willing provider
laws could increase the Company's costs of assembling and administering provider
networks and could, therefore, have a material adverse effect on its operations.
<PAGE> 14
14
Provider Regulation
Integra is also affected directly by regulations imposed upon
healthcare providers. The provision of behavioral healthcare treatment services
by psychiatrists, psychologists and other providers is subject to state
regulation with respect to the licensing of healthcare professionals. The
Company believes that the healthcare professionals who provide behavioral
healthcare treatment on behalf of, or under contracts with the Company, are in
compliance with the applicable state licensing requirements and current
interpretations thereof; however, there can be no assurance that changes in such
state licensing requirements or interpretations thereof will not adversely
affect the Company's existing operations or limit expansion. Additional
licensure of clinicians who provide telephonic assessment or stabilization
services to individuals who are calling from out-of-state may be required if
such assessment or stabilization services are deemed by regulatory agencies to
be treatment provided in the state of such individual's residence. The Company
believes that any such additional licensure could be obtained; however, there
can be no assurance that such licensing requirements will not adversely affect
the Company's existing operation or limit expansion.
Regulations imposed upon healthcare providers also include provisions
relating to the conduct of, and ethics in, the practice of psychiatry,
psychology, social work and related mental healthcare professions, and, in
certain cases, the common law duty to warn others of danger or to prevent
patient self-injury. In addition, there are federal and state laws that require
providers of mental health or substance abuse treatment services to maintain the
confidentiality of treatment records and information with respect to such
patients. These laws generally specify the conditions under which
patient-specific information may be disclosed, and may be enforced through the
imposition of criminal fines and other penalties. The Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") includes a provision that
prohibits the wrongful disclosure of certain "individually identifiable health
information." HIPAA requires the Secretary of the United States Department of
Health and Human Services (the "Department") to adopt standards relating to the
transmission of such health information by healthcare providers and healthcare
plans. On November 3, 1999, the Department issued proposed HIPAA privacy and
confidentiality regulations. The regulations, when final, would require the
Company to adopt and implement certain administrative safeguard policies and
procedures to comply with the HIPAA regulations. The Company cannot predict at
the present time the estimated cost to comply with these regulations. Under the
proposed regulations, as presently stated, the Company would have 24 months
after the effective date of the final regulations to comply with the
regulations. Although the Company believes that such regulations do not at
present materially impair the Company's operations, there can be no assurance
that such indirect regulation will not have a material adverse effect on the
Company in the future.
In certain states, the employment of psychiatrists, psychologists and
certain other mental healthcare professionals by business corporations is a
permissible practice. However, other states have legislation or regulations or
have interpreted existing medical practice licensing laws to restrict business
corporations from providing mental health services or from the direct employment
of psychiatrists and, in a few states, psychologists and other mental healthcare
professionals. For example, various state boards of medical examiners have
regulations which prohibit psychiatrists, and in a few cases, psychologists,
from being employed by business corporations and only permit employment by
professional corporations. In addition, the laws of some states prohibit
psychiatrists, psychologists, or other behavioral healthcare professionals from
splitting fees with other persons or entities. Corporate practice and
fee-splitting statutes vary from state to state, and have seldom been
<PAGE> 15
15
recently interpreted by the courts or regulatory agencies. Although the Company
believes it has appropriately structured its arrangements with healthcare
providers to comply with the relevant state statutes, there can be no assurance
that (i) governmental officials charged with responsibility for enforcing these
laws will not assert that the Company or certain transactions in which it is
involved are in violation of such laws, (ii) such state laws will ultimately be
interpreted by the courts in a manner inconsistent with the practices of the
Company or (iii) evolving interpretations of such state laws or the adoption of
other state laws or regulations will not make it necessary for the Company to
restructure certain of its arrangements.
Customer Regulation
Integra is indirectly affected by regulations imposed on its customers
which include, among other things, benefits mandated by statute, exclusions from
coverage prohibited by statute "parity" requirements, procedures governing the
payment and processing of claims, record keeping and reporting requirements,
requirements for and payment rates applicable to coverage of Medicare and
Medicaid beneficiaries, provider contracting and enrollee rights, and
confidentiality requirements. Any such direct and indirect regulation could have
a material adverse effect on the Company's business, financial condition or
results of operation.
Government Pay
Medicare. Medicare is a federal health insurance program which provides
health insurance coverage for certain disabled persons, for persons aged 65 or
older and for certain persons with end stage renal disease. There are two
components to the Medicare program: Part A which covers inpatient services, home
healthcare and hospice care and Part B which covers physicians, other healthcare
professionals and outpatient services. Medicare is funded by both beneficiary
and federal contributions.
Prior to the passage of the Balanced Budget Act of 1997, Medicare
beneficiaries could (i) receive services on a fee-for-service basis pursuant to
which Medicare generally pays providers based on a national fee schedule subject
to the applicable copayment or (ii) elect to enroll with a managed care
organization which had entered into a direct contract with Medicare whereby the
organization is paid a predetermined amount for each covered Medicare
beneficiary without regard to the frequency, extent or nature of services
delivered. The Balanced Budget Act of 1997 reformed Medicare in a number of
respects, including the phase out of existing Medicare risk contracts and the
creation of the Medicare+Choice program. The Medicare+Choice program allows
Medicare beneficiaries, in addition to traditional fee-for-service Medicare, to
have access to a wide array of private health plan choices beyond the previously
existing managed care arrangements. These additional plan options include
"Coordinated Care Plans" which include an HMO with or without point of service
option; a Provider-Sponsored Organization plan; a PPO plan; and a demonstration
Medical Savings Account project. Given the infancy of the Medicare+Choice
program, the Company cannot predict what effect, if any, the program will have
on the Company's future Medicare revenues. At present, the Company does not
directly bill the government for services under Medicare.
Medicaid. Medicaid is the state administered and state and federally
funded program which provides health insurance coverage for certain low-income
individuals. For qualified Medicare
<PAGE> 16
16
beneficiaries "dual eligibles," the Medicaid program pays the beneficiary's Part
B premiums and may reimburse all deductibles and copayment portions of the
approved Medicare charge up to an allowable amount established by each Medicaid
program. The extent of actual copayment contributions varies widely by state.
Most Medicaid programs cover behavioral healthcare services but may limit the
number of approved visits per year. There has been an increasing trend for
Medicaid programs to contract with managed care organizations to administer care
and control costs for its beneficiaries. In these situations, the Company and
its providers must be approved to participate on the select provider panel in
order to treat patients.
Government and other third-party payors' healthcare policies and
programs have been subject to changes in payment levels and payment
methodologies during past years, including determination of medical necessity
for behavioral health services. There can be no assurance that future changes
will not reduce reimbursement from those sources for behavioral healthcare
services.
Prior to the Sale and exit of the Patient Service and Provider
segment, the Company provided direct clinical services to some patients who
were beneficiaries of the federal Medicare and Medicaid programs. The
compensation received by the Company for such services was established by fee
schedules and other similar cost containment measures. In order to receive
Medicare reimbursement, the local operations of the Company's outpatient service
and provider business were required to be registered with Medicare as a group
provider. In addition, each individual provider had to be certified as an
independently practicing provider and be assigned an individual provider number.
The certification criteria, which are established by the Department of Health
and Human Services, are interpreted and administered by each state.
Medicaid programs do not generally require certification of the Company
or its providers over and above the requirements of Medicare.
Federal and some state laws impose restrictions on physicians', and, in
a few states, on psychologists' and other mental healthcare professionals',
referrals for certain designated health services to entities with which they
have financial relationships. The Company believes its outpatient service and
provider business operations were structured to comply with these restrictions
to the extent applicable.
The Social Security Act imposes criminal and civil penalties upon
persons who make or receive kickbacks, bribes or rebates in connection with the
Medicare or Medicaid programs. These anti-fraud and abuse rules prohibit
providers and others from soliciting, offering, receiving or paying, directly or
indirectly, any remuneration in return for either making a referral for services
or items or ordering any services or items for which payment may be made under a
federal healthcare program. Upon conviction, violations of these rules may be
punished by fine of up to $25,000 or imprisonment for up to five years, or both.
The government may impose civil monetary penalties. In addition, the Medicare
and Medicaid Patient and Program Protection Act of 1987 imposes civil sanctions
for violation of these prohibitions, punishable by exclusion from the Medicare
and Medicaid program; such exclusion, if applied to Integra's operations, could
result in significant loss of reimbursement. Management knows of no such
violations and in addition under the Company's Medicare Compliance Program,
actively seeks to ensure full compliance with the law.
<PAGE> 17
17
In order to provide guidance with respect to the anti-fraud and abuse
rules, the Office of the Inspector General ("OIG") of the Department of Health
and Human Services has issued regulations outlining certain "safe harbor"
practices, which although potentially capable of including prohibited referrals,
would not be prohibited if all applicable requirements are met. A relationship
which fails to satisfy a safe harbor is not necessarily illegal, but could be
scrutinized under a case-by-case analysis. The OIG has also issued final
regulations regarding its recently mandated proposals for accepting and issuing
advisory opinions on the anti-fraud and abuse rules. Since the anti-fraud and
abuse laws have been broadly interpreted, they affected the manner in which the
Company could have acquired professional practices and may affect the manner in
which the Company markets its services to, and contracts for services with,
psychiatrists, psychologists, and other mental healthcare professionals.
Management considers and seeks to comply with these regulations in planning its
activities, and believes that its activities, even if not within a safe harbor,
do not violate the anti-fraud and abuse statute.
Budget Acts
The 1998 Budget Act does not contain any legislation that affects the
managed behavioral healthcare industry. Accordingly, the 1998 Budget Act should
not have a material adverse effect on the Company. However, in August 1997,
Congress enacted a Budget Act which included provisions designed to reduce
Medicare expenditures over the next five years by $115 billion, compared to
projected Medicare expenditures before adoption of the Budget Act. The five-year
savings in projected Medicare payments to physicians and hospitals would be
achieved under the Budget Act by reduced fee-for-service reimbursement and by
changes in managed care programs designed to increase enrollment of Medicare
beneficiaries in managed care plans. The increase in Medicare enrollment in
managed care plans would be achieved in part by allowing provider-sponsored
organizations and preferred provider organizations to compete with Medicare
health maintenance organizations for Medicare enrollees. All of these plans are
potential customers of Integra
Prior to adoption of the 1997 Budget Act, states generally were
prohibited from requiring Medicaid recipients to enroll in managed care products
that covered only Medicaid recipients. The Medicaid-related provisions of the
1997 Budget Act gave states broad flexibility to require most Medicaid
recipients to enroll in managed care products that only cover Medicaid
recipients. The 1997 Budget Act also allows states to limit the number of
managed care organizations with which the state will contract with to deliver
care to Medicaid beneficiaries. These changes could have a positive impact on
the Company's business, if they result in increased enrollment of Medicaid
beneficiaries in managed care organizations and increased Medicaid spending on
managed care. However, these changes also may result in significant competition
for such contracts.
The Company cannot predict the effect of the Budget Acts, or other
healthcare reform measures that may be adopted by Congress or state
legislatures, on its managed care operations and no assurance can be given that
either the Budget Act or other healthcare reform measures will not have an
adverse effect on the Company.
Other Legislation
In the last five years, legislation has periodically been introduced at
the state and federal level providing for new regulatory programs and materially
revising existing regulatory programs. Any
<PAGE> 18
18
such legislation, if enacted, could materially adversely affect the Company's
business, financial condition or results of operations. Such legislation could
include both federal and state bills affecting the Medicaid programs which may
be pending in or recently passed by state legislatures and which are not yet
available for review and analysis. Such legislation could also include proposals
for national health insurance and other forms of federal regulation of health
insurance and healthcare delivery. It is not possible at this time to predict
whether any such legislation will be adopted at the federal or state level, or
the nature, scope or applicability to the Company's business of any such
legislation, or when any particular legislation might be implemented. No
assurance can be given that any such federal or state legislation will not have
a material adverse effect on the Company.
The Mental Health Parity Act of 1996 ("MHPA") requires employer
sponsored group health plans that provide both mental health benefits and
medical/surgical benefits to have the same aggregate lifetime and annual dollar
limits for mental health benefits as they do for medical and surgical benefits.
MHPA is effective for plan years beginning in 1998. Because MHPA does not affect
the amount, duration or scope of mental health benefits provided by a plan,
other than annual and lifetime dollar limits, or even require group health plans
to provide mental health benefits if they do not already, it's impact on the
Company's has been negligible. For example, the MHPA parity requirement does not
apply to a plan if its application will raise plan costs by 1% or more. Another
limitation is the use of benefit design features, other than dollar limitations,
for controlling costs for mental health, such as limited visits or days of
coverage, requirements related to medical necessity, or prior authorization or
referrals by primary care physicians. Many states already have mental health
parity laws that vary with regard to coverage.
Pending parity legislation, in Congress and numerous state
legislatures, would generally require health insurers to offer mental health
coverage on equal terms as their coverage of physical ailments. The Company
cannot predict whether these legislative initiatives will be passed or, if so,
the effect on the Company. However, the Company believes that, if legislation is
enacted, many affected group health plans will not be capable to administer
mental health plans. The Company is uniquely situated and skilled in this area
to manage mental health benefit plans and the effect of the enactment of any
such legislation may have a favorable impact on the operations of the Company.
EMPLOYEES
At December 31, 1999, the Company employed approximately 125 full time
equivalent employees. The Company has not experienced any significant difficulty
in filling open positions with qualified employees. None of the Company's
employees are represented by a labor union and the Company is not aware of any
current activities to organize any of its employees. Management considers the
relationship between the Company and its employees to be good.
INSURANCE
The Company maintains general and professional liability insurance. The
policy is written in a "claims made" or "occurrence" basis subject to per
occurrence deductibles and annual aggregates. The Company believes its
coverage's and limits are adequate for current operations.
<PAGE> 19
19
Executive Officers of the Company
Certain information with respect to the executive officers of the
Company is set forth below:
<TABLE>
<CAPTION>
Age at
December
Name Position with the Company 31, 1999
---- ------------------------- --------
<S> <C> <C>
Shawkat Raslan............................... Chairman of the Board and 48
Director
Eric E. Anderson, Ph.D....................... President, Chief Executive 48
Officer and Director
</TABLE>
SHAWKAT RASLAN, has been Chairman of the Board since November 12, 1999.
Mr. Raslan has been a Director of the Company since February 1994. Mr. Raslan
serves as President and Chief Executive Officer of International Resources
Holdings, Inc., an asset management and investment advisory service. He has held
these positions since 1982. Mr. Raslan serves as a director of U.S. Home Care
Corporation.
ERIC E. ANDERSON, Ph.D. has been President and Chief Executive Officer
since November 17, 1999. He has been a director and served as President and
Chief Operating Officer of the Company since October 1998. Dr. Anderson joined
the Company in June 1997 and served as President and Chief Executive Officer of
the Company's behavioral managed care operation until September 1998. From
January 1996 to June 1997, Dr. Anderson served as a consultant in the managed
behavioral health and information technology industries. From February 1994 to
December 1996, Dr. Anderson was an Executive Vice President and General Manager
for Medco Behavioral Care Corp. From May 1991 to January 1994, Dr. Anderson
served as Senior Vice President for College Health Enterprises. Prior to that he
managed the behavioral healthcare operation of PacifiCare. Dr. Anderson is a
licensed psychologist and has over twenty years of behavioral health experience.
No family relationship exists between any of the directors or executive
officers of the Company. Executive officers serve at the discretion of the Board
of Directors.
<PAGE> 20
20
ITEM 2. PROPERTIES.
The Company's principal executive office is located at 1060 First
Avenue, King of Prussia, Pennsylvania. In addition, the Company leases other
office space and clinical facilities. See Note 14 of Notes to the Company's
Consolidated Financial Statements for information concerning the Company's
leases for its office and patient care facilities. The Company does not
anticipate that it will experience any difficulty in renewing any such leases
upon their expiration or obtaining different space on comparable terms if such
leases are not renewed. The Company believes that these facilities are well
maintained and are of adequate size for present needs.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is a party to certain claims, suits and
complaints which arise in the course of business. The following relate to the
Company's discontinued operations which were sold and exited in May 1998.
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. A trial date has been scheduled for the second quarter
of 2000 with a Federal Administrative Law Judge during which the Company intends
to vigorously contest the Intermediary's findings. At December 31, 1999 the
Company was fully reserved for 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 total payment of $382,000 plus
$18,000 of interest. These amounts were fully accrued at December 31, 1999 and
are expected to be paid in full by the end of the first quarter of fiscal year
2000.
During the first half of 1999, the Company received notification of
potential Medicaid program billing issues in Nevada in connection with services
performed at the Company's former Nevada outpatient group practice subsidiaries
which were sold by the Company at the end of 1997. Upon further review of the
Company's former Nevada Medicaid billings, the Company determined that
certain Nevada Medicaid billings of these former outpatient practices were not
in accordance with Medicaid program regulations. In accordance with the
Company's full disclosure policy, the Company disclosed this matter to the
Nevada Medicaid program. In December 1999, the Company reached a settlement
agreement with the State of Nevada which resolves all claims against the Company
relating to this matter. Terms of the settlement include a total payment of
$455,000 plus interest at a simple rate of 7%. The Company paid the first of two
installment payments of $227,500 in December 1999. The remaining installment is
reserved for at December 31, 1999 as
<PAGE> 21
21
part of the Company's long-term care and provider billing reserves and is
expected to be paid in full by the end of the second quarter of fiscal year
2000.
Additionally, during 1998, the Company entered into a Corporate
Integrity Agreement (the "Agreement") with the Office of Inspector General of
the United States Department of Health and Human Services ("OIG") whereas the
Company agreed to undertake certain compliance obligations. The Company, as
required under the terms of the Agreement and with the assistance of outside
auditors, filed its first annual report with the OIG in December 1999. As of
March 29, 2000, no response has been received from the OIG. There were certain
findings in the audit report that management is in the process of resolving. The
Company believes, due to the nature of the findings, no reserve for potential
liability is required at December 31, 1999.
In January 2000, PsychPartners filed for protection under Chapter 11 of
the Federal Bankruptcy Laws. (See "Restructuring Charges" for further disclosure
of the PsychPartners Chapter 11 bankruptcy filing).
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 which,
in the opinion of management, would have a material adverse effect on the
Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A significant shareholder of the Company has committed to advance up to
$2 million through March 1, 2001 to fund working capital deficits of the
Company. Compensation of the commitment includes the issuance of up to 100,000
warrants for common stock. This issuance is subject to shareholder approval,
however, should such warrants not be approved, the commitment still serves as a
binding agreement to the Company and the significant shareholder will receive
cash compensation for the value of the warrants.
During 1999, the Company's Board of Directors ratified and approved the
establishment of an employee stock option plan (the "1999 Plan") under which
options to purchase up to 1,000,000 shares of the Company's common stock may be
granted to employees, officers and directors. The 1999 Plan is subject to
shareholder approval.
<PAGE> 22
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is quoted on the American Stock Exchange
under the symbol IGR. As of March 29, 2000, there were approximately 1,972
shareholders of record. The Company included individual position listings when
calculating the number of shareholders. The following table sets forth the
reported high and low sales prices of the Company's common stock for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended December 31, 1998
First Quarter ............ 2 7/8 2 1/4
Second Quarter ........... 2 9/16 2
Third Quarter ............ 2 9/16 1 1/2
Fourth Quarter ........... 2 3/8 1 1/8
Fiscal Year Ended December 31, 1999
First Quarter ............ 1 11/16 1 1/16
Second Quarter ........... 1 5/8 1 1/14
Third Quarter ............ 2 13/16 1 5/16
Fourth Quarter ........... 2 1/8 1 1/4
</TABLE>
Over the past several years, the Company's common stock price has been
subject to significant volatility. If net revenues or earnings fail to meet
expectations of the investment community, there could be an immediate and
significant adverse impact on the trading price for the Company's common stock.
No dividends have been declared on the common stock since the Company's
inception. The Company does not expect to declare any cash dividends in the
foreseeable future.
Recent Sales of Unregistered Securities
(1) In May 1998, the Company issued warrants to purchase an aggregate
of 400,000 shares of common stock at any time over a three year
period at an exercise price of $.05 per share to Abbingdon
Venture Partners Limited Partnership and Abbingdon Venture
Partners Limited Partnership-II (collectively, the "Investment
Partnerships"). These warrants were issued in return for the
Investment Partnerships' commitment to guarantee additional
financing for the Company. Registration under the Securities Act
of the warrants, and the shares issuable upon the exercise of the
warrants, was not required because such securities were issued in
a transaction not involving any "public offering" within the
meaning of Section 4(2) of the Securities Act, in reliance on
Rule 506 under the Securities Act. Each of the Investment
Partnerships was an accredited investor and
<PAGE> 23
23
there was no general solicitation or general advertising in
connection with such issuance. The Investment Partnerships
attempted to exercise these warrants in December 1999. The
Company is currently evaluating this matter with the assistance
of outside legal counsel.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction
with the Company's Consolidated Financial Statements and the accompanying Notes
presented elsewhere herein.
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues (1) ........... $ 25,455 $ 32,569 $ 70,144 $ 78,727 $ 68,269
Gross profit ............... 8,695 9,021 15,942 18,640 17,737
Income (loss) from
Operations ............ 497 590 (59,672) (12,826) (2,924)
Net income (loss) .......... 303 (935) (61,218) (13,594) (2,451)
Basic and diluted net
income (loss) per
common share (2) ...... .03 (0.09) (6.17) (1.39) (0.26)
Weighted average
Shares outstanding (2):
Basic ................. 10,138,552 10,104,999 9,921,374 9,786,599 9,414,839
Diluted ............... 10,532,109 10,104,999 9,921,374 9,786,599 9,414,839
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ..... $ 3,359 $ 4,016 $ 9,958 $ 16,445 $ 29,886
Total assets ....... 15,230 16,035 43,600 97,783 109,051
Current liabilities 9,664 9,464 37,604 23,547 23,305
Total debt ......... -- 1,663 14,700 12,808 11,246
Stockholders' equity 5,270 4,962 4,713 65,181 78,739
</TABLE>
(1) Net revenues for 1999 reflects premium revenue only in contrast to 1998
which reflects premium revenue and patient service revenue.
(2) In 1997 the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128") which establishes new
standards for computing
<PAGE> 24
24
and presenting earnings per share by replacing the presentations of
weighted shares outstanding, inclusive of common stock equivalents, with
a dual presentation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the dilutive effect of all stock options, shares contingently
payable in connection with certain acquisitions and convertible
debentures.
<PAGE> 25
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(DOLLARS IN THOUSANDS)
Overview
The Company provides EAP and 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
behavioral health services including: employee assistance programs ("EAP's"),
third party clinical case management and claims administration. At December 31,
1999, Integra's contract service areas were 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 exit and divest
its outpatient provider 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
eighty-four percent (84%) of the assets of the Company (before the impact of the
write down of assets and the impact of the restructuring charges), 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.
Managed Behavioral Healthcare
Prior to 1994, the Company was not a direct provider of managed
behavioral healthcare services. During 1994, the Company acquired the Integra
managed behavioral healthcare company which at the time was principally a
regional provider of employee assistance programs. Subsequent to the acquisition
of Integra, the Company continued to invest in additional systems and management
infrastructure and began actively seeking full-risk capitation arrangements with
health plans and other managed care organizations. With the completion of the
above-mentioned Sale and exit of the outpatient provider behavioral health group
practice operations, the Company elected to change the name of the parent
company from Apogee, Inc. to Integra, Inc. The Company believes the Integra name
is well established and respected in the behavioral health market. As indicated
elsewhere this business segment has grown significantly since its acquisition,
and in particular since 1997.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), was adopted
by the Company for 1998. This standard requires disclosure of segment
information on the same basis used internally for evaluating segment performance
and deciding how to allocate resources to segments. The
<PAGE> 26
26
Company's operating segments are organized by product line. During 1999, the
Company had only one operating segment, EAP and Managed Behavioral Healthcare,
for purposes of SFAS No. 131. During 1998 and 1997, the Company had two
segments: (1) EAP and Managed Behavioral Healthcare and (2) Patient Service and
Provider (see Note 13 of the Notes to the Company's Consolidated Financial
Statements for a financial presentation of the Company's segments).
As noted above and further explained in Notes 1 and 3 of the Notes to
the Company's Consolidated Financial Statements, the Company has exited all
business lines except for EAP and Managed Behavioral Healthcare. The strategic
decision to exit the Patient Service and Provider segment was made by the
Company's Board of Directors in December 1997 and was substantially completed
during 1998. Segment information for the Patient Service and Provider segment in
1998 reflects the results of operations of these practices essentially through
the date of the Sale to PsychPartners in May 1998. The Company did not have
Patient Service and Provider businesses in operation during 1999.
The Company's continuing EAP and Managed Behavioral Healthcare segment
provides managed behavioral healthcare services through full and shared risk
arrangements with employers, health plans and managed care organizations. The
Company's revenues are primarily generated through capitated contracts. Revenues
are generated entirely in the United States. Approximately 81% of this segment's
revenues were generated by seven (7) customers. The Company believes this
concentration of revenue over a small customer base is fairly consistent with
industry trends.
Results of Operations
The Company's Consolidated Financial Statements include the accounts of
the Company and all wholly owned and beneficially owned subsidiaries. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.
With regard to the Patient Service and Provider segment which was
completely exited in 1998, because of corporate practice of medicine laws in
certain states in which the Company operated, the Company did not own the
professional corporations which operated the professional and clinical aspects
of the behavioral health provider operations in those states, but instead had
the contractual right to designate, in its sole discretion and at any time, the
licensed professional who was 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 had 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 established annual operating and capital budgets for the professional
corporations and compensation guidelines for the clinical professionals. The
Management Services Agreements generally had initial terms of ten years or
greater. The method of computing the management fees varied by contract.
Management fees were 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
<PAGE> 27
27
of the affiliated practice. In all cases, these fees were meant to compensate
the Company for expenses incurred in providing covered services plus a profit.
These interests were unilaterally saleable and transferable by the Company and
fluctuated based upon the actual performance of the operations of the
professional corporations.
Through the Nominee Arrangements, the Company had a significant
long-term financial interest in the affiliated practices and, therefore,
according to Emerging Issues Task Force No. 97-2 "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
consolidated 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. With
the Sale and exit of the Company's provider operations, the Company has
transferred its rights under the Management Services Agreements, or terminated
those relationships.
The following table sets forth, for the periods indicated, operating
results of the Company:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended December 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Premium revenue ............................................... $ 25,455 $ 13,368 $ 10,425
Patient service revenue ....................................... 19,201 59,719
-------- -------- --------
Total net revenues ......................................... 25,455 32,569 70,144
-------- -------- --------
Cost of revenues:
Premium service costs ......................................... 16,760 7,955 5,819
Patient service costs ......................................... 15,593 48,383
-------- -------- --------
Total cost of revenues ..................................... 16,760 23,548 54,202
-------- -------- --------
Gross profit .................................................... 8,695 9,021 15,942
Selling and administrative expenses ............................. 6,510 6,260 10,447
Provision for doubtful accounts ................................. 1,221 4,226
Amortization of intangible assets
and excess cost over fair value of
net assets acquired ........................................... 488 950 2,441
Write down of assets ............................................ 38,400
Restructuring and other charges, net ............................ 1,200 20,100
-------- -------- --------
Income (loss) from operations ................................... $ 497 $ 590 $(59,672)
======== ======== ========
</TABLE>
EAP and Managed Behavioral Healthcare Segment Revenue
Premium revenue for the EAP and Managed Behavioral Healthcare segment
is essentially comprised of the Company's portfolio of agreements with health
plans, managed care organizations and employers to provide inpatient and
outpatient behavioral health services. Revenues are primarily generated through
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 and are subject to various cancellation provisions
which are typical to industry practice. This segment had approximately
1,200,000, 800,000 and 600,000 covered lives at December 31, 1999, 1998 and
1997, respectively.
<PAGE> 28
28
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
patient census data and other facts. The Company typically does not subcapitate
the risk of providing services under these contracts, but arranges discounted
fee-for-service rates with independent inpatient and outpatient behavioral
health providers, which the Company manages.
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.
EAP and Managed Behavioral Healthcare premium revenue for 1999
increased 90% to $25,455 from $13,368 in 1998. This increase was the result of
the Company securing a capitated-based contract covering over 400,000 lives with
a health plan in New York. Premium revenue for 1998 increased 28% to $13,368
from $10,425 in 1997. This increase was primarily the result of new contracts
for both capitated managed behavioral health services and employee assistance
programs.
Patient Service and Provider Segment Revenue
Revenue for the Patient Service and Provider segment was reported when
earned at the 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 was initially billed at "usual, customary and
reasonable" market rates. Aggregate billings were 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 represented billings of the Company's operations
other than its EAP and Managed Behavioral Healthcare segment. As stated above,
the Company exited all Patient Service and Provider segment operations as of
December 31, 1998.
Patient service revenue for 1998 decreased to $19,201 from $59,719 in
1997. This decrease was the result of the execution of the Company's plan to
sell or shut down all Patient Service and Provider segment operations. The Sale
of the eastern outpatient operations was completed on May 18, 1998. The
remaining outpatient operations were shut down or sold during the first quarter
of 1998. No revenue from this segment was recognized in 1999. The Company does
not expect to reenter this segment in the foreseeable future.
Cost of Revenues
EAP and Managed Behavioral Healthcare segment cost of revenues
increased in 1999 to $16,760 from $7,955 in 1998. This increase is primarily a
result of a large contract which began coverage on January 1, 1999. EAP and
Managed Behavioral Healthcare segment cost of revenues
<PAGE> 29
29
increased in 1998 to $7,955 from $5,819 in 1997. This increase was primarily a
result of new contracts which began coverage in 1998.
Patient Service and Provider segment costs of revenues for 1998
decreased from $48,383 in 1997 to $15,593. This decrease was primarily the
result of the Sale and exit of this segment. No patient service revenues were
generated in 1999 or are expected in the future.
Selling and Administrative Expenses
Selling and administrative expenses are primarily comprised of
corporate office, regional management and centralized billing expenses. Selling
and administrative expenses increased to $6,510 in 1999 from $6,260 in 1998 as a
result of costs incurred in connection with severance payments made to certain
former officers of the Company. Selling and administrative expenses decreased to
$6,260 in 1998 from $10,447 in 1997 as a result of the Sale and exit of the
outpatient provider operations and downsizing of the Company's corporate and
regional management offices.
Provision for Doubtful Accounts
There was no provision for doubtful accounts in 1999 compared to $1,201
for 1998. This decrease is a result of the Sale and exit of the outpatient
provider operations. The Company's EAP and Managed Behavioral Healthcare segment
has historically had minimal provision for doubtful accounts.
The provision for doubtful accounts decreased to $1,221 in 1998 from
$4,226 in 1997. This decrease was also result of the Sale and exit of the
outpatient provider operations. The provision for doubtful accounts was
estimated based on an ongoing review of collectibility of the Company's accounts
receivable. The Company believes the provision for doubtful accounts and the
associated allowance for doubtful accounts are adequate based on management's
ongoing review of collectibility.
The Company recorded additional accounts receivable reserves of $1,400
in 1997 pertaining largely to the Company's long-term care business which the
Company exited in 1996. The amounts were included as a component of
"Restructuring and Other Charges" in the accompanying Consolidated Statements of
Operations (see Restructuring and Other Charges below). Including these amounts,
the provision for doubtful accounts would have been 8% of net revenues in 1997.
Amortization of Intangible Assets and Excess Cost Over Fair Value of Net Assets
Acquired
Amortization of intangible assets and excess cost over fair value of
net assets acquired decreased to $488 in 1999 from $950 in 1998. Amortization of
intangible assets and excess costs over fair value of net assets decreased to
$950 in 1998 from $2,441 in 1997. These decreases are a result of the Sale and
exit of the outpatient operations in 1998. In light of the repositioning of the
Company as a managed behavioral healthcare company and continuing changes in the
managed healthcare industry, the Company changed its estimated useful life for
the excess of cost over fair value of assets acquired from 40 years to 25 years
in 1997.
<PAGE> 30
30
Write Down of Assets
The Company applies Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"), which established accounting standards
for the impairment of long-lived assets, certain identified intangible assets
and goodwill related to those assets to be held and used and for long-lived
assets and certain intangible assets to be disposed of. In accordance with SFAS
121, the Company reviews the realizability of long-lived assets, certain
intangible assets and goodwill whenever events or circumstances occur which
indicate recorded costs may not be recoverable. The Company also reviews the
overall recoverability of goodwill based primarily on estimated future
undiscounted cash flows.
If over the remaining useful life of such assets, the expected
undiscounted future cash flows are less than the carrying amount of such assets,
the Company recognizes an impairment loss for the difference between the
carrying amount of the assets and their estimated fair value. In estimating
future cash flows, the Company uses a combination of recent operating results,
financial forecasts and budgets, and management estimates and assumptions of
factors such as growth and potential future changes when determining whether an
asset is impaired, and in measuring assets that are impaired, the Company groups
assets by geographic region. The geographic region is the level at which the
Company contracts with managed care payors, deploys administrative and clinical
resources and consolidates back office operations. In addition, patients and
Company providers often use clinic locations interchangeably within a geographic
region. Upon signing a non-binding memorandum of understanding ("MOU") with
PsychPartners in October 1997, the Company had an impairment indicator as the
fair value of the Company's assets included in the MOU were less than their
respective carrying values. Accordingly, the Company performed undiscounted cash
flow analyses. In accordance with the Company's policy and SFAS 121, during
1997, the Company measured the carrying value of the related intangible assets
against the estimated future undiscounted cash flows expected to result from the
continued use of these assets. The analyses indicated full recovery of the
related intangible assets prior to the expiration of their remaining estimated
useful lives which were approximately 36 years. The Company changed its
strategic direction in December 1997 with respect to these assets and the Board
approved a plan to exit and dispose of the outpatient operations (see "Sale and
Divestiture of Outpatient Business"). Accordingly, in December 1997, the Company
revised its cash flow analyses to reflect the cash flows expected to result from
the use of these assets prior to their disposal as well as the proceeds expected
to result from their disposal based upon the terms of the Purchase Agreement
with PsychPartners and recorded a charge of $38,400 to write down the carrying
amounts of these businesses to their estimated fair value less costs to sell.
The Sale was completed as of May 18, 1998. Net revenues for all of the
outpatient group practices were approximately $19,201 and $58,056, and recorded
loss from operations including an allocated amount of corporate overhead was
approximately ($850) and ($2,696) in 1998 and 1997, respectively, excluding the
above write down of assets and restructuring and other charges.
Based upon these fundamental changes in the nature of Integra's
business, management's ability to operate and grow the business, no change in
estimating fair value cash are indicated for 1999.
<PAGE> 31
31
Restructuring and Other Charges
This charge is comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1997
---- ----
<S> <C> <C
Restructuring charges ........................................ $ 1,700 $ 14,200
Long-term care and provider billing reserves ................. 200 5,900
Change in estimate (restructuring $266, provider billing $434) (700)
-------- --------
$ 1,200 $ 20,100
======== ========
</TABLE>
Restructuring Charges
In December 1997, the Company recorded a provision for restructuring
pertaining to the Company's decision to divest the outpatient provider group
practices operations that were not sold to PsychPartners, and to reorganize
corporate office functions to reflect the exit from the outpatient business. The
writedown of assets included a goodwill impairment charge of $10,287 associated
with the operations the Company exited. The remainder of the write down of
assets consisted primarily of fixed assets related to the discontinued
operations. When the Company reached the decision to exit the outpatient
business, in accordance with its policy and SFAS 121, the Company measured the
carrying value of the related assets against the estimated fair market value for
these remaining operations less costs to dispose and recorded the above
writedown. Contract termination costs pertain primarily to accrued costs for
lease terminations, and storage of clinical records. Employee severance costs
included the accumulation of benefits set forth in the Company's severance
policy which were paid to approximately 200 of the Company's employees who were
terminated as a result of the restructuring plan. The primary employee groups
affected included clinical and administrative personnel at Western region clinic
locations and regional and corporate staff. The Company's restructuring plan was
substantially completed in 1998.
In January 2000, PsychPartners filed for protection under Chapter 11 of
the Federal Bankruptcy Laws. Based on discussions with PsychPartners personnel
it intends to discontinue all future operations and liquidate all existing
assets to satisfy outstanding obligations. Under the terms of the Purchase
Agreement, PsychPartners assumed responsibility for all facility leases
associated with the practices sold. While the Company obtained assignment
letters for many of these leases, the Company is evaluating whether it may have
contingent exposure under these agreements. The Company is in the process of
coordinating with PsychPartners, the landlords and special counsel which the
Company engaged to assist in this matter. The Company estimates there are
approximately 35 open leases with approximately $2,500 in remaining payments
under the lease terms, not including certain fees and expenses for which the
Company may be responsible. The Company intends to aggressively pursue
resolution of part of the lease situations in terms most favorable to the
Company. Due to the nature of real estate law, it is probable the Company will
be responsible for a portion of these remaining lease obligations. Accordingly,
the Company recorded a charge of $1,700 at December 31, 1999, for this potential
exposure.
<PAGE> 32
32
In addition to the above lease exposure, PsychPartners defaulted on
certain deferred contingent purchase price obligations which were part of the
original acquisition agreements for practices previously purchased by Integra.
These liabilities were also assumed by PsychPartners under the terms of the
Purchase Agreement. The Company believes it has no remaining responsibility for
these obligations, however, the individuals associated with these practices may
choose to assert a claim against the Company. At December 31, 1999, the Company
has not established a reserve for these amounts which it estimates may aggregate
to $1,000. The Company intends to vigorously contest any claims related to this
matter.
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 at
that time, that the Company was over-accrued for these matters by $266. This
change in estimate is offset by additional restructuring reserves of $1,700
recorded in the fourth quarter 1999 relating to the lease exposure as a result
of PsychPartners' Chapter 11 bankruptcy filing as discussed above.
During 1997, the Company also completed execution of the 1996
restructuring plan which discontinued the Company's long-term care operations,
exited and consolidated underperforming outpatient locations and reduced
management and overhead costs. Under these plans, approximately 300 of the
Company's employees were terminated and the Company wrote off assets consisting
primarily of goodwill in the amount of $5,850 and fixed assets related to the
restructured operations.
The following summarizes the Company's restructuring activity:
<TABLE>
<CAPTION>
Restructure Restructure
1997 Amounts Balance at 1999 Change in Amounts Balance at
Restructure Utilized in December Restructure Estimate Utilized December
Provision 1997 & 1998 31, 1998 Provision 1999 in 1999 31, 1999
--------- ----------- -------- --------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Write down of assets $11,622 $(11,622)
Contract termination
costs ............ 2,253 (909) $1,344 $1,700 $(266) $(494) $2,284
Employee severance
costs ............ 325 (248) 77 (77)
------- -------- ------ ------ ----- ----- ------
$14,200 $(12,779) $1,421 $1,700 $(266) $(571) $2,284
======= ======== ====== ====== ===== ===== ======
</TABLE>
Long-term care and provider billing reserves
During 1996, the Company established a $1,300 reserve in connection with
the notification by the Office of the Inspector General of the Department of
Health and Human Services ("OIG") and the Department of Justice ("DOJ") that
certain of the Company's Medicare Part B and related co-insurance billings
previously submitted for services to Medicare patients in long-term care
facilities in Florida were being reviewed. The Company reached a tentative
agreement to settle this civil matter for $3,000 in December 1997. Accordingly,
the Company recorded an additional reserve of $1,700 at December 31, 1997. The
Company also reserved $1,400 against the suspended accounts receivable with the
Florida Intermediary. In October 1998, the Company executed a final settlement
agreement with the OIG and DOJ, which resolved all of the claims against the
Company relating to this matter. The terms of this settlement included a
repayment of approximately $3,000 which the Company made during 1998.
Additionally, during 1998, the Company entered into a Corporate Integrity
Agreement (the "Agreement") with the OIG whereas the Company agreed to undertake
certain compliance obligations. The Company, as required under the terms of the
Agreement and with the assistance of outside
<PAGE> 33
33
auditors, filed its first annual report with the OIG in December 1999. As of
March 29, 2000, no response has been received from the OIG. There were certain
findings in the audit report that management is in the process of resolving. The
Company believes, due to the nature of the findings, no reserve for potential
liability is required at December 31, 1999.
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.
Services were denied primarily on the basis of medical necessity and incomplete
documentation. The Company has requested an administrative hearing. As of
December 31, 1999, the Company was fully reserved for 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 total payment of $382 plus $18
of interest. These amounts were fully accrued at December 31, 1999 and are
expected to be paid in full by the end of the first quarter of fiscal year 2000.
During the first half of 1999, the Company received notification of
potential Medicaid program billing issues in Nevada in connection with services
performed at the Company's former Nevada outpatient group practice subsidiaries
which were sold by the Company at the end of 1997. Upon further review of the
Company's former Nevada Medicaid billings, the Company determined that certain
Nevada Medicaid billings of these former outpatient practices were not in
accordance with Medicaid program regulations. In accordance with the Company's
full disclosure policy, the Company disclosed this matter to the Nevada Medicaid
program. In December 1999, the Company reached a settlement agreement with the
State of Nevada which resolves all claims against the Company relating to this
matter. Terms of the settlement include a total payment of $455 plus interest at
a simple rate of 7%. The Company paid the first of two installment payments of
$228 in December 1999. The remaining installment is reserved for at December 31,
1999 as part of the Company's long-term care and provider billing reserves and
is expected to be paid in full by the end of the second quarter of fiscal year
2000.
As part of its ongoing evaluation of these reserves, at June 30, 1999,
the Company determined, based on its assessment of all remaining matters at that
time, that the Company was over accrued for these matters by $434. This change
in estimate is partially offset by additional billing reserves of $200 recorded
in the fourth quarter 1999 relating to the settlement of the Nevada matter
discussed above.
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
<PAGE> 34
34
believe the ultimate outcome of these matters will have a material adverse
effect on the Company's overall financial condition, liquidity or operations.
Of the total 1997 restructuring and other charges, approximately $5,000
related to amounts to be paid in cash. The non-cash portion of the charges
related to the write-off of certain assets, principally goodwill associated with
Western Region outpatient operations and reserves established for long-term care
services for denied claims.
Interest Expense-Related Party
In order to provide for additional financing if the Sale to
PsychPartners did not occur in 1998, the Company entered into an agreement with
certain investment partnerships (the "Investment Partnerships"), which were
significant stockholders of the Company and were managed by Foster Management
Company, an affiliated party, to obtain their commitment to guarantee an
additional $7,000 of financing. This additional financing amount represented the
Company's estimated additional cash needs during 1998 for contingent payments,
seller notes and restructure related activities.
Under the terms of the agreement, in return for their guarantee, 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 Bank borrowings in
excess of $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 Warrant") 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 $1,020 of which
$140 was paid in cash to the Investment Partnerships. The remaining portion
represents a non-cash charge of approximately $880, which is the difference
between the exercise price of the Integra Warrant and the fair market value of
the underlying common stock of the Company on the closing date of the Sale to
PsychPartners. These charges have been recorded as interest expense in the
Company's results of operations for the year ended December 31, 1998.
Liquidity and Capital Resources
Net cash provided by operations was $1,331 in 1999, compared to net
cash used in operations of $4,399 in 1998. Cash provided is primarily a result
of the income incurred in 1999 as well as the cash used for
restructuring-related payments. Cash and cash equivalents remained fairly
consistent, increasing to $2,452 at December 31, 1998 from $2,154 at December
1997. In 1998, the Company used $936 in cash for capital expenditures compared
with $948 and $1,293 in 1998 and 1997, respectively.
In May 1998, the Company completed the sale of its eastern outpatient
operations to PsychPartners. Net proceeds from the Sale were primarily used to
repay bank debt, fund acquisition notes and contingent consideration, settle the
Florida Medicare review and fund other restructuring costs (see above).
As further discussed in Note 9 of the Notes to the Company's
Consolidated Financial Statements, the Company was in default of certain
covenants contained in its credit facility, principally related to capital
expenditures for computer equipment, with PNC Bank (the "Facility") at December
31, 1999. There were no borrowings outstanding under the Facility at December
31, 1999. The Company was not able to obtain a waiver
<PAGE> 35
35
from PNC Bank. Accordingly, PNC Bank withdrew the Facility. The Company is
continuing its efforts to secure new financing. In order to meet cash flow
demands through December 31, 2000, the Company has obtained a commitment from a
significant shareholder to advance up to $2 million through March 1, 2001 (refer
to Note 19 of the Notes to the Company's Consolidated Financial Statements for
discussion of the terms of the commitment). The Company believes this advance is
adequate to meet cash flow needs through fiscal year 2000.
As further discussed in Note 12 of the Notes to the Company's
Consolidated Financial Statements of Notes to the Company's Consolidated
Financial Statements, a contract with a customer representing approximately 50%
of revenues will terminate on December 31, 2000. Management is in the process of
renegotiating the terms of this Agreement. Management is not aware of any
reasons that this contract would not be renewed.
The Company's current ratio, working capital and debt to equity ratio
are set forth below for the dates indicated:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Current Ratio .35:1 .42:1
Working Capital deficit $(6,305) $(5,448)
Debt to Equity - .34:1
</TABLE>
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 may have been 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.
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 compliant at December 31, 1999.
The Company's clinical and claims administration software has been certified by
the vendor as being year 2000
<PAGE> 36
36
compliant. The Company has completed testing of this system and believes it to
be compliant. Year 2000 remediation costs incurred in 1999 and 1998 were $60 and
$100, respectively.
External Relationship. The Company also faced the risk that one or more
of its critical suppliers or customers ("External Relationships") would 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 assessed its External Relationships and risk
rating each External Relationship based upon the potential business impact,
available alternatives and cost of substitution. The Company attempted 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
engaged in discussions with the third parties and obtained information as to
those parties' year 2000 plans and state of readiness. The Company believes 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 attempted 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 has developed contingency/recovery plans aimed at
maintaining the continuity of critical business functions before and after
December 31, 1999 and through March 1, 2000. As part of that process, the
Company has developed 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. The Company engaged various testing
techniques using Integra, Inc. Information Technology staff and external
consultants during the last half of 1999. Minor problems revealed as a result of
such testing were corrected. Integra's Y2000 readiness was deemed complete in
December 1999. No significant problems were encountered and the Company believes
it will not have future difficulty.
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. 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. However, management is currently in the process of exploring a
variety of E-commerce and Internet based strategies to reduce potential future
operating costs and gain the benefit of potential efficiencies through the use
of appropriate technology.
<PAGE> 37
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1999
and December 31, 1998............................................................................... 38
Consolidated Statements of Operations For the Years
Ended December 31, 1999, 1998 and 1997.............................................................. 39
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997................................................ 40
Consolidated Statements of Cash Flows For the Years
Ended December 31, 1999, 1998 and 1997.............................................................. 41
Notes to Consolidated Financial Statements.......................................................... 42
Report of Independent Accountants................................................................... 62
Schedule II Valuation of Qualifying Accounts........................................................ 68
</TABLE>
<PAGE> 38
38
INTEGRA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 706 $ 2,452
Assets restricted for the settlement of unpaid claims .................... 1,000
Accounts receivable, net of allowance for doubtful
accounts ............................................................. 914 591
Other accounts receivable ................................................ 187 531
Other current assets ..................................................... 552 442
-------- --------
Total current assets ................................................ 3,359 4,016
Property and equipment, net ................................................... 1,859 1,683
Intangible assets and excess cost over fair value
of net assets acquired, net ................................................ 10,009 10,320
Other assets .................................................................. 3 16
-------- --------
$ 15,230 $ 16,035
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................ $ 413
Accounts payable ......................................................... $ 277 594
Reserve for unpaid claims ................................................ 3,385 1,359
Accrued expenses and other current liabilities ........................... 6,002 7,098
-------- --------
Total current liabilities ........................................... 9,664 9,464
Long-term debt ................................................................ 1,250
Other long-term liabilities ................................................... 3
Deferred income tax liability ................................................. 296 356
-------- --------
Total liabilities ........................................... 9,960 11,073
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized; issued and outstanding
10,138,552 ............................................................ 101 101
Capital in excess of par value ........................................... 87,508 87,508
Accumulated deficit ...................................................... (82,339) (82,642)
Deferred compensation .................................................... (5)
-------- --------
Total stockholders' equity .................................. 5,270 4,962
-------- --------
$ 15,230 $ 16,035
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 39
39
INTEGRA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Premium revenue .................................. $ 25,455 $ 13,368 $ 10,425
Patient service revenue .......................... 19,201 59,719
------------ ------------ ------------
Total net revenues ............................ 25,455 32,569 70,144
------------ ------------ ------------
Cost of revenues:
Premium service costs ............................ 16,760 7,955 5,819
Patient service costs ............................ 15,593 48,383
------------ ------------ ------------
Total cost of revenues ........................ 16,760 23,548 54,202
------------ ------------ ------------
Gross profit ........................................... 8,695 9,021 15,942
Selling and administrative expenses .................... 6,510 6,260 10,447
Provision for doubtful accounts ........................ 1,221 4,226
Amortization of intangible assets and
excess cost over fair value of net assets acquired 488 950 2,441
Write down of assets ................................... 38,400
Restructuring and other charges, net ................... 1,200 20,100
------------ ------------ ------------
Income (loss) from operations .......................... 497 590 (59,672)
Non-operating expenses:
Interest expense - related party ................. 1,040
Interest expense, net ............................ 26 363 1,444
------------ ------------ ------------
Income (loss) before income taxes ...................... 471 (813) (61,116)
Provision for income taxes ............................. 168 122 102
------------ ------------ ------------
Net income (loss) ...................................... $ 303 $ (935) $ (61,218)
============ ============ ============
Basic and diluted net income (loss) per common share ... $ 0.03 $ (0.09) $ (6.17)
============ ============ ============
Weighted average shares outstanding:
Basic ............................................ 10,138,552 10,104,999 9,921,374
============ ============ ============
Diluted .......................................... 10,532,109 10,104,999 9,921,374
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 40
40
INTEGRA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Capital in
Common Shares excess of Accumulated Deferred
Number Par value par value deficit compensation Total
------ --------- --------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996............ 9,823 $ 98 $85,624 $(20,489) $(52) $ 65,181
Common stock issued in connection with
acquisitions......................... 206 2 725 727
Amortization of deferred compensation... 23 23
Net loss................................ (61,218) (61,218)
------ ---- ------- -------- ---- --------
Balance at December 31, 1997............ 10,029 100 86,349 (81,707) (29) 4,713
Common stock issued in connection with
acquisitions......................... 110 1 279 280
Issue of warrant for financing guarantee 880 880
Amortization of deferred compensation... 24 24
Net loss................................ (935) (935)
------ ---- ------- -------- ---- --------
Balance at December 31, 1998 10,139 101 87,508 (82,642) (5) 4,962
Amortization of deferred
compensation......................... 5 5
Net income.............................. 303 303
------ ---- ------- -------- ---- --------
Balance at December 31, 1999 10,139 $101 $87,508 $(82,339) $ 5,270
====== ==== ======= ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 41
41
INTEGRA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................ $ 303 $ (935) $(61,218)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization ....................................... 1,248 1,487 3,289
Provision for doubtful accounts ..................................... 1,221 4,226
Non cash portion of asset write down, restructuring and other charges 1,200 58,500
Issue of warrant for financing guarantee ............................ 880
Changes in assets and liabilities, net of effects of businesses acquired:
(Increase) in assets restricted for the settlement of unpaid claims (1,000)
(Increase) decrease in accounts receivable ......................... (323) 33 (657)
(Increase) decrease in other current assets ......................... (161) (284) 626
(Decrease) increase in accounts payable ............................. (317) (1,425) 87
Increase (decrease) in accrued expenses and other current liabilities 383 (5,340) (3,090)
(Decrease) increase in other assets and other liabilities ........... (2) (36) 29
-------- -------- --------
Net cash provided by (used in) operating activities ................. 1,331 (4,399) 1,792
-------- -------- --------
Cash flows from investing activities:
Payments for acquisition of businesses, net of cash acquired of
$8 in 1998 ......................................................... (491)
Additional payments for businesses acquired in prior years .......... (591) (4,527) (2,590)
Net proceeds from disposition of businesses ......................... 23,642 100
Purchases of property and equipment ................................. (936) (948) (1,293)
-------- -------- --------
Net cash (used in) provided by investing activities ................ (1,527) 17,676 (3,783)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable ............................. 3,950 6,420
Principal payments on long-term obligations ......................... (1,550) (16,929) (4,574)
-------- -------- --------
Net cash (used in) provided by financing activities ................. (1,550) (12,979) 1,846
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ......................... (1,746) 298 (145)
Cash and cash equivalents at beginning of period ............................. 2,452 2,154 2,299
-------- -------- --------
Cash and cash equivalents at end of period ................................... $ 706 $ 2,452 $ 2,154
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid ....................................................... $ 77 $ 813 $ 1,403
======== ======== ========
Income taxes paid ................................................... $ 210 $ 137 $ 210
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 42
42
INTEGRA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
NOTE 1 - ORGANIZATION AND OPERATION
Integra, Inc. ("Integra" or the "Company"), a Delaware corporation, was
formed to provide behavioral health services and commenced operations on March
15, 1991. Until 1998 the Company was called Apogee, Inc. Apogee purchased
substantially all of the assets of Integra, Inc. in 1994. The Company today
provides employee assistance programs ("EAP") and managed behavioral health
services through full and shared risk arrangements with employers, health plans
and managed care organizations. At December 31, 1999, Integra's contract service
areas were principally concentrated in Connecticut, Delaware, Maryland, New
Jersey, New York, Pennsylvania, Rhode Island, Virginia and Tennessee.
In December 1997, the Company announced its plans to exit and divest
its outpatient provider behavioral health group practice operations operated
under the brand Apogee and its subsidiaries. The Company entered into an
agreement to sell substantially all of the assets of the outpatient provider
behavioral health 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
practice business accounted for approximately eighty-four percent (84%) of the
assets of the Company (before the impact of the write down of assets and the
impact of the restructuring charges) 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. The Sale is further described in Note 3 below.
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 Integra EAP and Managed Behavioral Healthcare segment, which the Company
believes, is well established and respected in the EAP and managed behavioral
health marketplace.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The Consolidated Financial Statements include the accounts of the
Company and all wholly owned and beneficially owned subsidiaries. All
significant intercompany accounts and transactions, including management fees,
have been eliminated.
With regards to the Patient Service and Provider segment, because of
corporate practice of medicine laws in certain states in which the Company
operated, the Company did not own the professional corporations which operated
the professional and clinical aspects of the behavioral health provider
operations in those states, but instead had the contractual right to designate,
at its sole discretion and at any time, the licensed professional who was the
owner of the capital stock
<PAGE> 43
43
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 had
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 established annual
operating and capital budgets for the professional corporations and compensation
guidelines for the clinical professionals. The Management Services Agreements
generally had initial terms of ten years or greater. The method of computing the
management fees varied by contract. Management fees were 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 were meant to
compensate the Company for expenses incurred in providing covered services plus
a profit. These interests were unilaterally saleable and transferable by the
Company and fluctuated based upon the actual performance of the operations of
the professional corporations.
Through the Nominee Arrangements, the Company had a significant
long-term financial interest in the affiliated practices and, therefore,
according to Emerging Issues Task Force No. 97-2 "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
consolidated 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. With
the Sale and exit of the Company's provider operations in 1998, the Company has
either transferred its rights under the Management Services Agreements or
intends to terminate these relationships, or in other ways discontinue its
involvement in such operations.
Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and short-term
investments with original maturities of 90 days or less.
<PAGE> 44
44
Assets restricted for the settlement of unpaid claims
At December 31, 1999, $1,000 of interest-bearing cash was held for the
payment of claims under the terms of a managed care contract and was classified
as an asset restricted for the settlement of unpaid claims on the balance sheet.
No such requirements existed at December 31, 1998, though it was anticipated as
part of a significant contract which began in 1999.
Concentrations of credit risk
Accounts receivable subjects the Company to a concentration of credit
risk with third party payors that include health insurance companies, managed
healthcare organizations, healthcare providers and government agencies. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific payors, historical trends and other
information. Management believes the allowance for doubtful accounts is adequate
to provide for normal credit losses.
Revenue recognition
Premium revenue pertains to the Company's EAP and Managed Behavioral
Healthcare segment and is 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. Capitated revenues
are recorded and typically paid in the month for which the member is entitled to
services (see Note 14 below). Such premium revenues are adjusted on a monthly
basis based on actual membership levels.
Patient service revenue was reported when earned at the 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 was
initially billed at "usual, customary and reasonable" market rates. When
recorded, aggregated billings were adjusted 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
represented billings of the Company's Patient Service and Provider segment. With
the discontinuance of these operations, no significant future billings are
anticipated.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Additions and betterments are capitalized and maintenance and
repairs are charged to current operations. Internal-use software is capitalized
in accordance with AICPA Statement of Position 98-1. The cost of assets retired
or otherwise disposed of and the related accumulated depreciation and
amortization are removed from the accounts and the gain or loss on such
dispositions is reflected in current operations. Depreciation is provided using
the straight-line method. Estimated useful lives of the assets are:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures.................... 5 to 7 years
Office equipment.......................... 3 to 5 years
Computer hardware and software............ 3 to 5 years
</TABLE>
<PAGE> 45
45
Long lived and intangible assets
Identifiable assets and liabilities acquired in connection with
business combinations accounted for under the purchase method are recorded at
their respective fair values. Deferred taxes have been recorded to the extent of
differences between the fair value and the tax basis of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of
tangible net assets acquired is amortized on a straight-line basis over the
estimated useful life of the intangible assets. Allocation of intangible assets
between identifiable intangibles and goodwill was performed by Company
management with the assistance of independent appraisers. Intangible assets
other than goodwill include patient lists and covenants not to compete which are
amortized over one and five years, respectively. The Company amortizes the
excess of cost over fair value of assets acquired over 25 years.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), which
establishes accounting standards for the impairment of long-lived assets,
certain identified intangible assets and goodwill related to those assets to be
held and used and for long-lived assets and certain intangible assets to be
disposed of. In accordance with SFAS 121, the Company reviews the realizability
of long-lived assets, certain intangible assets and goodwill whenever events or
circumstances occur which indicate recorded cost may not be recoverable.
If the expected future cash flows (undiscounted) are less than the
carrying amount of such assets, the Company recognizes an impairment loss for
the difference between the carrying amount of the assets and their estimated
fair value. When appropriate, in estimating future cash flows for determining
whether an asset is impaired, and in measuring assets that are impaired, assets
are grouped by geographic region.
Financial instruments
The carrying value of cash and cash equivalents, accounts receivable
and payable and accrued liabilities approximates fair value due to the
short-term maturities of these assets and liabilities.
Reserve for unpaid claims
Reserve for unpaid claims represents the liability for healthcare
services authorized or incurred and not yet paid by the Company. Reserves for
unpaid claims are estimated based upon authorized healthcare services, past
claim payment experience for member groups, patient census data and other
factors. While the Company believes the reserve for unpaid claims is adequate,
actual results could differ from such estimates. The Company utilizes a
consultant to review and evaluate the adequacy of certain of these reserves.
Income taxes
The Company accounts for certain items of income and expense in
different time periods for financial reporting and income tax purposes.
Provisions for deferred income taxes are made in recognition of such temporary
differences, where applicable. A valuation allowance is
<PAGE> 46
46
established against deferred tax assets unless the Company believes it more
likely than not that the benefit will be realized.
Earnings per share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") which establishes new standards for
computing and presenting earnings per share by replacing the presentations of
weighted shares outstanding, inclusive of common stock equivalents, with a dual
presentation of basic and diluted earnings per share. Basic earnings per share
includes no dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the dilutive effect of all stock
options, shares contingently payable in connection with certain acquisitions and
convertible debentures. The difference between the basic average number of
shares outstanding and the diluted average number of shares outstanding at
December 31, 1999 is due to the treasury stock method calculation of the impact
of unexercised stock options granted under the Company's stock option plan and
warrants issued in 1998 in connection with a financing guarantee made by certain
investment partnerships which were significant stockholders of the Company which
is discussed further in Note 19. The computation of dilutive earnings per share
excludes approximately 260,500, 678,000 and 212,000 for 1999, 1998 and 1997,
respectively, of common stock equivalents because their inclusion would have
been anti-dilutive in the periods presented.
NOTE 3 - SALE OF OUTPATIENT BUSINESS TO PSYCHPARTNERS, LLC
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 sold to the
Purchasers substantially all of the assets and business of the Company's
outpatient behavioral health provider business, which consisted of (i) all of
the capital stock of one of the subsidiaries of the Company (the "Subsidiary
Stock") operating two outpatient behavioral health practices and (ii)
substantially all of the assets (the "Assets") relating to 19 of the Company's
outpatient behavioral health practices (the 21 practices are collectively, the
"Practices").
On May 14, 1998, at a Special Meeting of the Shareholders of the
Company, the shareholders approved and adopted the terms of the Purchase
Agreement with PsychPartners. Effective on May 18, 1998, the Company completed
the Sale. The purchase price paid at closing primarily consisted of: (a) $26,400
in cash, and (b) the assumption of certain liabilities.
Based on the fair market value established by the Purchase Agreement,
the Company recorded a charge of $38,400 in 1997 to write down the carrying
amounts of these businesses to their estimated fair value less cost to sell. Net
revenues for all the Company's outpatient group practices, including Western
region practices, were approximately $19,201 and $58,056 and loss from
operations including an allocated amount of corporate overhead was approximately
($850) and ($2,696) in 1998 and 1997, respectively, excluding the above write
down of assets and restructuring and other charges.
<PAGE> 47
47
In January 2000, PsychPartners filed for protection under Chapter 11 of
the Federal Bankruptcy Laws. Based on discussions with PsychPartners personnel,
it intends to discontinue all future operations and liquidate all existing
assets to satisfy outstanding obligations. Under the terms of the Purchase
Agreement, PsychPartners assumed responsibility for all facility leases
associated with the sold practices. While the Company obtained assignment
letters for many of these leases, the Company is evaluating whether it may have
contingent exposure under these agreements. The Company is in the process of
coordinating with PsychPartners, the landlords and special counsel and real
estate advisors which the Company engaged to assist in this matter. The Company
estimates there are approximately 35 open leases with approximately $2,500 in
remaining payments under the lease terms, not including certain fees and
expenses for which the Company may be responsible. The Company intends to
aggressively pursue resolution of part of the lease situations in terms most
favorable to the Company. Due to the nature of real estate law, it is probable
the Company will be responsible for a portion of these remaining lease
obligations. Accordingly, the Company recorded a charge of $1,700 at December
31, 1999, for this potential exposure.
In addition to the above lease exposure, PsychPartners defaulted on
certain deferred contingent purchase price obligations which were part of the
original acquisition agreements for practices previously purchased by Integra.
These liabilities were also assumed by PsychPartners under the terms of the
Purchase Agreement. The Company believes it has no remaining responsibility for
these obligations, however, the individuals associated with these practices may
choose to assert a claim against the Company. At December 31, 1999, the Company
has not established a reserve for these amounts which it estimates may aggregate
to $1,000. The Company intends to vigorously contest any claims related to this
matter.
At December 31, 1999, the Company had approximately $1,700 of accrued
liabilities pertaining to business sold to PsychPartners.
NOTE 4 - LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had a working capital deficit of
$6,305. This deficit is primarily attributable to accrued liabilities of $4,219
which pertain to the Company's Sale and exit of the outpatient provider
behavioral group practice business and reserves established for long-term care
and other provider billing matters.
As further discussed in Note 9, the Company was in default of certain
covenants contained in its credit facility, principally related to capital
expenditures for computer equipment, with PNC Bank (the "Facility") at December
31, 1999. There were no borrowings outstanding under the Facility at December
31, 1999. The Company was not able to obtain a waiver from PNC Bank.
Accordingly, PNC Bank withdrew the Facility. The Company is continuing its
efforts to secure new financing. In order to meet cash flow demands through
December 31, 2000, the Company has obtained a commitment from a significant
shareholder to advance up to $2 million through March 1, 2001 (refer to Note 19
for discussion of the terms of the commitment). The Company believes this
advance is adequate to meet cash flow needs through fiscal year 2000.
As further discussed in Note 12, a contract with a customer
representing approximately 50% of revenues will terminate on December 31, 2000.
Management is in the process of
<PAGE> 48
48
renegotiating the terms of this agreement. Management is not aware of any
reasons that this contract would not be renewed.
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Premium revenue receivables .......... $985 $664
Less: Allowance for doubtful accounts 71 73
---- ----
$914 $591
==== ====
</TABLE>
NOTE 6 - BUSINESS ACQUISITIONS
During 1998, the Company acquired one business. The acquisition was
accounted for using the purchase method of accounting. The results of operations
of the acquired practice is included in the Consolidated Financial Statements
from the date of acquisition.
The following unaudited pro forma consolidated results of operations of
the Company, including restructuring and other charges, give effect to the 1998
acquisition as if it had occurred on January 1, 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
1998
----
(Unaudited)
<S> <C>
Net revenues....................................... $33,154
Income from operations............................. 719
Net loss........................................... (819)
Net loss per common share.......................... $(0.08)
</TABLE>
The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisition been made as
of the beginning of 1998 or of the results which may occur in the future.
<PAGE> 49
49
Information with respect to business acquired is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
<S> <C>
Cash paid (net of cash acquired) ......................................... $491
Liabilities assumed ...................................................... 108
----
599
Fair value of assets acquired, principally accounts receivable,
property and equipment and certain identified intangible assets ......... 147
----
Cost in excess of fair value of net assets acquired ......... $452
====
</TABLE>
In connection with certain acquisitions, the Company has entered into
contractual arrangements whereby additional shares of the Company's common stock
and cash may be issued to former owners of acquired companies upon attainment of
specified financial criteria. The number of shares of common stock to be issued
cannot be determined until the earn-out periods expire and the attainment of
criteria is established. If such criteria are attained, but not exceeded, the
Company will be obligated to make cash payments. Under the terms of the Purchase
and Sale Agreement with PsychPartners, the Company's obligation for contingent
consideration for periods subsequent to the closing date for the practices
acquired was assumed by PsychPartners. See Note 3.
The Company paid $591, $4,527 and $2,590 in cash and issued 0, 109,227
and 206,755 shares of common stock in 1999, 1998 and 1997, respectively, in
connection with businesses acquired in prior years. This consideration was
accounted for as additional goodwill.
NOTE 7- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
---- ----
<S> <C> <C>
Furniture, fixtures and leasehold improvements $ 380 $ 189
Office equipment ............................. 231 202
Computer hardware ............................ 1,080 656
Computer software ............................ 1,761 1,469
Less: Accumulated depreciation ............... 1,593 833
------ ------
$1,859 $1,683
====== ======
</TABLE>
Depreciation expense was $760, $537 and $848 for 1999, 1998 and 1997,
respectively.
<PAGE> 50
50
NOTE 8 - INTANGIBLE ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Excess cost over fair value of net assets acquired $11,661 $11,484
Covenants not to compete ......................... 39 39
------- -------
11,700 11,523
Less: Accumulated amortization ................... 1,691 1,203
------- -------
$10,009 $10,320
======= =======
</TABLE>
NOTE 9 - BORROWINGS
In October 1998, the Company entered into an agreement with PNC Bank,
National Association ("PNC Bank") to establish a revolving credit facility for
up to a maximum of $10,000. Borrowings available under this Facility were
primarily based on the Company's earnings before interest, income taxes,
depreciation and amortization, subject to various financial and non-financial
covenants; and secured by substantially all of the assets of the Company.
The Company was in default of certain covenants contained in the
Facility, principally related to capital expenditures for computer equipment, at
December 31, 1999. There were no borrowings outstanding under the Facility at
December 31, 1999. The Company was not able to obtain a waiver from PNC Bank.
Accordingly, PNC Bank withdrew the Facility. The Company is continuing its
efforts to serve new financing. At December 31, 1998 the Company had outstanding
borrowings on the Facility of $1,250 at a rate of interest of prime plus 1.0% or
LIBOR plus 2.5%. In addition, the Company had $413 of 5% - 9% subordinated
promissory notes in connection with business acquisitions which were repaid
during 1999.
The carrying amount of the Company's borrowings under its long-term
revolving credit facility at December 31, 1998 approximated fair value. Based on
the borrowing rates currently available to the Company for loans with similar
terms and maturity, the fair value of the Company's remaining debt at December
31, 1998 was $407.
<PAGE> 51
51
NOTE 10 - INCOME TAXES
The components of the provision for income tax expense for 1999, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal........ $(56)
State.......... $228 $112 158
---- ---- ----
228 112 102
---- ---- ----
Deferred:
Federal........
State.......... (60) 10
---- ---- ----
(60) 10
---- ---- ----
$168 $122 $102
==== ==== ====
</TABLE>
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Net operating loss carry forwards ............................... $ 15,684 $ 14,661
Accruals and reserves not currently deductible
for tax purposes ........................................... 2,207 3,379
-------- --------
Gross deferred tax assets ....................................... 17,891 18,040
Valuation reserve ............................................... (16,826) (17,098)
-------- --------
Total deferred tax assets ....................................... 1,065 942
Temporary differences pertaining to amortization and depreciation (1,361) (1,298)
-------- --------
Net deferred tax liabilities .................................... $ (296) $( 356)
======== ========
</TABLE>
<PAGE> 52
52
The reconciliation of the federal statutory tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate ............................................. (34)% (34)% (34)%
State income taxes, less related federal tax benefit ................... 16 10 (2)
Non-deductible amortization of excess cost over fair value of net assets
acquired ............................................................. 1 9
Business expense disallowance .......................................... 1 1
Non-deductible portion of restructuring charge ......................... 16
Loss for which no tax benefit was recognized ........................... 41 29 20
--- --- ---
25% 15% 0%
=== === ===
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $39,200. Their use is limited
to future taxable earnings of the Company and, as specified in the Internal
Revenue Code, use of 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 2019. A valuation
reserve has been established against the potential future benefit of the net
operating loss carryforwards.
NOTE 11 - RESTRUCTURING AND OTHER CHARGES
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1997
---- ----
<S> <C> <C>
Restructuring charges ......................................... $ 1,700 $ 14,200
Long-term care and provider billing reserves .................. 200 5,900
Change in estimate (restructuring $266, provider billing $434) (700)
-------- --------
$ 1,200 $ 20,100
======== ========
</TABLE>
Restructuring charges
In December 1997, the Company recorded a provision for restructuring
pertaining to the Company's decision to divest the outpatient provider group
practice operations which were not sold to PsychPartners and to reorganize
corporate office functions to reflect the exit of the outpatient provider
business. The write down of assets included a goodwill impairment charge of
$10,287 associated with the operations the Company exited. The remainder of the
write down of assets consisted primarily of fixed assets related to the
discontinued operations. Contract termination costs pertained primarily to
accrued costs for lease termination and storage of clinical records. Employee
severance costs included the accumulation of benefits set forth in the Company's
severance policy which were paid to approximately 200 of the Company's employees
who were terminated as a result of the restructuring plan. The primary employee
<PAGE> 53
53
groups affected included clinical and administrative personnel at Western region
clinic locations and regional and corporate staff. The Company's restructuring
plan was substantially completed in 1998.
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 at
that time, that the Company was over accrued for these matters by $266. This
change in estimate is offset by additional restructuring reserves of $1,700
recorded in the fourth quarter 1999 relating to the lease exposure as a result
of PsychPartners' Chapter 11 bankruptcy filing as discussed in Note 3.
During 1997, the Company also completed execution of the 1996
restructuring plan which discontinued the Company's long term care operations,
exited and consolidated underperforming outpatient locations and reduced
management and overhead costs. Under these plans, approximately 300 of the
Company's employees were terminated and the Company wrote off assets consisting
primarily of goodwill in the amount of $5,850 and fixed assets related to the
restructured operations.
The following summarizes the Company's restructuring activity:
<TABLE>
<CAPTION>
Restructure Restructure
1997 Amounts Balance at Restructuring Change in Amounts Balance at
Restructuring Utilized in December 31, Provision Estimate Utilized December 31,
Provision 1997 & 1998 1998 1999 1999 in 1999 1999
--------- ----------- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Write-down of
assets........... $11,622 $(11,622)
Contract
termination costs 2,253 (909) $1,344 $1,700 $(266) $(494) $2,284
Employee severance
costs............ 325 (248) 77 (77)
------- -------- ------ ------ ----- ----- ------
$14,200 $(12,779) $1,421 $1,700 $(266) $(571) $2,284
======= ======== ====== ====== ===== ===== ======
</TABLE>
Long-term care and provider billing reserves
During 1996, the Company established a $1,300 reserve in connection
with the notification by the Office of the Inspector General of the Department
of Health and Human Services ("OIG") and the Department of Justice ("DOJ") that
certain of the Company's Medicare Part B and related co-insurance billings
previously submitted for services to Medicare patients in long-term care
facilities in Florida were being reviewed. The Company reached a tentative
agreement to settle this civil matter for $3,000 in December 1997. Accordingly,
the Company recorded an additional reserve of $1,700 at December 31, 1997. The
Company also reserved $1,400 against the suspended accounts receivable with the
Florida Intermediary. In October 1998, the Company executed a final settlement
agreement with the OIG and DOJ, which resolved all of the claims against the
Company relating to this matter. The terms of this settlement included a
repayment of approximately $3,000 by the Company which occurred during 1998.
<PAGE> 54
54
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.
Services were denied primarily on the basis of medical necessity and incomplete
documentation. The Company has requested an administrative hearing. As of
December 31, 1999, the Company was fully reserved for 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 total payment of $382 plus $18
of interest. These amounts were fully accrued at December 31, 1999 and are
expected to be paid in full by the end of the first quarter of fiscal year 2000.
During the first half of 1999, the Company received notification of
potential Medicaid program billing issues in Nevada in connection with services
performed at the Company's former Nevada outpatient group practice subsidiaries
which were sold by the Company at the end of 1997. Upon further review of the
Company's former Nevada Medicaid billings, the Company determined that
certain Nevada Medicaid billings of these former outpatient practices were not
in accordance with Medicaid program regulations. In accordance with the
Company's full disclosure policy, the Company disclosed this matter to the
Nevada Medicaid program. In December 1999, the Company reached a settlement
agreement with the State of Nevada which resolves all claims against the Company
relating to this matter. Terms of the settlement include a total payment of $455
plus interest at a simple rate of 7%. The Company paid the first of two
installment payments of $228 in December 1999. The remaining installment is
reserved for at December 31, 1999 as part of the Company's long-term care and
provider billing reserves and is expected to be paid in full by the end of the
second quarter of fiscal year 2000.
As part of its ongoing evaluation of these reserves, at June 30, 1999,
the Company determined, based on its assessment of all remaining matters at that
time, that the Company was over accrued for these matters for $434. This change
in estimate is partially offset by additional billing reserves of $200 in the
fourth quarter 1999 relating to the settlement of the Nevada matter discussed
above.
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
<PAGE> 55
55
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. All of the above matters concern business operations discontinued
during 1998 or prior.
NOTE 12 - MAJOR CUSTOMERS
Certain of the Company's at risk contracts account for a significant
percentage of sales volume, as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
HealthNow New York - Blue Cross/Blue Shield
of Western New York 50%
Fidelis Care of New York 10% 10% 5%
</TABLE>
The Company's contract with HealthNow, which represents fifty percent
of the Company's 1999 revenues, expires on December 31, 2000.
NOTE 13 - SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," ("SFAS 131"), was adopted by
the Company in 1998. This standard requires disclosure of segment information on
the same basis used internally for evaluating segment performance and deciding
how to allocate resources to segments. The Company's operating segments are
organized by product line. During 1999, the Company had only one operating
segment, EAP and Managed Behavioral Healthcare, for purposes of SFAS No. 131.
During 1998 and 1997, the Company had two segments: EAP and Managed Behavioral
Healthcare and Patient Service and Provider. Accordingly, segment information
below is presented only for those periods in which the Company operated more
than one segment.
As further explained in Notes 1 and 3 above, the Company has exited all
business lines except for EAP and Managed Behavioral Healthcare. The strategic
decision to exit the Patient Service and Provider segment was made by the
Company's Board of Directors in December 1997 and was substantially completed
during 1998. Segment information for the Patient Service and Provider segment in
1998 reflects the results of these operations essentially through the date of
the Sale to PsychPartners in May 1998. The Company had no remaining Patient
Service and Provider businesses in operation during 1999.
The Company's continuing EAP and Managed Behavioral Healthcare segment
provides managed behavioral healthcare services through full and shared risk
arrangements with employers, health plans and managed care organizations. The
Company's revenues are primarily generated through capitated contracts. See Note
14 for additional explanation of these contracts. Revenues are generated
entirely in the United States. Approximately 81% of this segment's revenues were
generated by seven (7) customers. The Company believes this concentration of
revenue over a small customer base is fairly consistent with industry trends
though management expects to continue diversification of its customer base.
<PAGE> 56
56
In general, the accounting policies of the segments are the same as
those described in Note 2, Summary of Significant Accounting Policies. The
Company evaluates the performance of its segments based on profit or loss from
operations before interest and income tax expense. The Company does not allocate
corporate expenses, interest income/expense and non-recurring charges such as
restructuring and asset writedowns for management reporting purposes.
Unallocated assets consist principally of cash and cash equivalents, other
account receivables and other assets.
<TABLE>
<CAPTION>
EAP and
Managed Patient
Behavioral Service and
Healthcare Provider Corporate Other Total
---------- -------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
1998
Net revenues.............................. $13,368 $19,201 $32,569
Depreciation and amortization............. 871 616 1,487
Income (loss) from operations............. 2,632 400 $(2,442) 590
Assets.................................... 12,594 3,441 16,035
</TABLE>
<TABLE>
<CAPTION>
EAP and
Managed Patient
Behavioral Service and
Healthcare Provider Corporate Other Total
---------- -------- --------- ----- -----
<S> <C> <C> <C> <C> <C>
1997
Net revenues.............................. $10,425 $59,719 $70,144
Depreciation and amortization............. 525 2,566 $198 3,289
Income (loss) from operations............. 2,536 536 (4,244) $(58,500) (59,672)
Assets.................................... 11,624 27,226 4,750 43,600
</TABLE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leases office and patient care facilities as well as
equipment under noncancellable operating leases which require future minimum
annual rentals as follows:
<TABLE>
<CAPTION>
EAP and
Managed Behavioral
Healthcare
Segment Other Total
------- ----- -----
<S> <C> <C> <C>
2000................. $341 $159 $500
2001................. 35 35
---- ---- ----
$341 $194 $535
==== ==== ====
</TABLE>
<PAGE> 57
57
Certain of the leases contain renewal options and escalation clauses
which require payments of additional rent to the extent of increases in related
operating costs. Rent expense was $494, $1,540 and $3,695 for the years ended
December 31, 1999, 1998 and 1997, respectively.
The Other lease obligations pertain to clinics and locations shut down
and exited for which the Company is currently in the process of negotiating
subleases or buyouts for these locations. In connection with the Sale to
PsychPartners, lease obligations associated with the clinics sold were assumed
by PsychPartners. The Company obtained assignments from the landlords for most
of these locations. In certain cases, Integra is still contingently liable in
the event of default by PsychPartners. Under the Agreement of Purchase and Sale,
Integra is indemnified by PsychPartners for these obligations.
PsychPartners filed for Chapter 11 bankruptcy in January 2000. As
further discussed in Note 3, the Company may have contingent exposure under
these leases and has recorded a charge of $1,700 at December 31, 1999.
Capitated contracts
The Company has a portfolio of agreements with managed care
organizations and corporations to provide EAP and managed behavioral healthcare
programs. 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/employee per month fee. Revenues
under these contracts are recorded in the month for which the member/employee is
entitled to services. Generally, these membership contracts are on a one to
three year basis and are subject to various cancellation provisions which are
typical to industry practice. Integra's EAP and Managed Behavioral Healthcare
segment had approximately 1,200,000, 800,000 and 600,000 covered lives at
December 31, 1999, 1998 and 1997, respectively. Premium revenues in the
Company's EAP and Managed Behavioral Healthcare segment were approximately 100%,
41% and 15% of the Company's total net revenues in 1999, 1998 and 1997,
respectively.
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
patient census data and other factors. The Company typically does not
subcapitate the risk of providing services under these contracts, but arranges
discounted fee-for-service rates with independent inpatient and outpatient
behavioral health providers, which the Company manages.
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.
<PAGE> 58
58
Effective January 1, 1999, the Company implemented coverage of a
full-risk capitated contract with a health plan covering over 400,000 members.
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. The Company utilizes a consultant to
review and evaluate the adequacy of certain of its reserves pertaining to unpaid
claims.
Corporate Integrity Agreement
During 1998, the Company entered into a Corporate Integrity Agreement (the
"Agreement") with the Office of Inspector General of the United States
Department of Health and Human Services ("OIG") whereby the Company agreed to
undertake certain compliance obligations. The Company, as required under the
terms of the Agreement and with the assistance of outside auditors, filed its
first annual report with the OIG in December 1999. As of March 29, 2000, no
response has been received from the OIG. There were certain findings in the
audit report that management is in the process of resolving. The Company
believes, due to the nature of the findings, no reserve for potential liability
is required at December 31, 1999.
NOTE 15 - OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Prepaid insurance............................................ $101 $133
Prepaid medical claims....................................... 255 50
Other........................................................ 196 259
---- ----
$552 $442
==== ====
</TABLE>
NOTE 16 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
Acquisition and sale related costs.......................... $1,070
Salaries and vacation....................................... $ 451 614
Restructuring costs......................................... 2,284 1,421
Long-term care and provider billing reserves................ 1,935 3,018
Other....................................................... 1,332 975
------ ------
$6,002 $7,098
====== ======
</TABLE>
Acquisition related costs pertain to consideration payable to former
owners of acquired businesses based upon the resolution of purchase price
contingencies.
NOTE 17 - MANDATORILY REDEEMABLE PREFERRED STOCK
The Company's Board of Directors may, without further action of the
Company's stockholders, direct the issuance of shares of redeemable preferred
stock. Satisfaction of dividend preferences on preferred stock would reduce the
amount of funds available for the payment of dividends on the Company's common
stock. Holders of preferred stock would be entitled to preference payments in
the event of any liquidation, dissolution or winding-up of the Company. At
December 31, 1999, 10,000 of such shares were authorized and none were issued.
NOTE 18 - BENEFIT PLANS
Stock Option Plan
Effective April 19, 1994, the Company's Board of Directors ratified and
approved the establishment of an employee stock option plan (the "1994 Plan")
under which options to purchase up to 400,000 shares of the Company's common
stock may be granted to employees, officers and directors. Each option granted
under the 1994 Plan must be exercised within a fixed
<PAGE> 59
59
period which may not exceed 10 years and may not be for a price which is less
than the fair market value on the date of grant. Options granted vest over four
years and, at December 31, 1999, the weighted average remaining contractual life
of the outstanding options was eight years.
The following summarizes the activity of the stock option plan:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Options:
Outstanding at beginning of year........................... 278,000 151,950 157,170
Granted.................................................... 20,000 217,500 101,000
Exercised.................................................. -- -- --
Canceled................................................... 17,500 91,450 106,220
------- ------- -------
Outstanding at end of year................................. 280,500 278,000 151,950
======= ======= =======
Option Price Per Share Ranges:
Outstanding at beginning of year........................... $1.25-$12.25 $3.25-$14.75 $4.25-$14.75
Granted.................................................... $1.25 $1.88-$2.25 $3.25-$4.13
Exercised.................................................. -- -- --
Outstanding at end of year................................. $1.25-$12.25 $1.88-$12.25 $3.25-$14.75
Options exercisable at end of year......................... 67,875 78,600 55,520
Exercisable option price ranges............................ $1.25-$12.25 $1.88-$12.25 $3.25-$14.75
Options available for grant at end of year
under the 1994 Stock Option Plan....................... 119,500 122,000 247,700
</TABLE>
During 1999, the Company's Board of Directors ratified and approved the
establishment of an employee stock option plan (the "1999 Plan") under which
options to purchase up to 1,000,000 shares of the Company's common stock may be
granted to employees, officers and directors. Each option granted under the 1999
Plan must be exercised within a fixed period which may not exceed 10 years and
may not be for a price which is less than the fair market value on the date of
grant. Options granted vest over various periods, as determined by the
Compensation Committee of the Company's Board of Directors. At December 31, 1999
no options under the 1999 Plan were granted. During 2000, 625,000 options under
the 1999 Plan were granted to Directors and an officer of the Company. The 1999
Plan is subject to shareholder approval.
<PAGE> 60
60
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), but applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for the Plan. The table below sets
forth the pro forma information as if the Company had adopted the compensation
recognition provisions of SFAS 123:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) to:
Net income (loss).......................................... $(46) $59 $127
Net income (loss) per share................................ $(.00) $(.01) $(.01)
Assumptions:
Expected life (years)...................................... 4.0 4.0 4.0
Risk-free interest rate.................................... 5.1% 4.7% 6.5%
Volatility................................................. 58.2% 34.0% 37.0%
Dividend yield............................................. N/A N/A N/A
</TABLE>
The weighted average fair value of the stock options, calculated using
the Black-Scholes option pricing model, granted in 1999, 1998 and 1997 were
$0.62, $0.75 and $1.56 respectively.
Retirement Plan
The Company has a defined contribution 401(k) plan covering
substantially all of its employees. In general, eligible employees may
contribute up to 6% of their compensation to this plan. During 1999, employee
contributions were matched at the rate of 30%. During 1998 and 1997 employee
contributions were matched at 15%. Company matching contributions were $46, $96
and $136 for 1999, 1998 and 1997 respectively.
NOTE 19 - RELATED PARTY TRANSACTIONS
A significant shareholder of the Company has committed to advance up to
$2 million through March 1, 2001 to fund working capital deficits of the
Company. Compensation of the commitment includes the issuance of up to 100,000
warrants for common stock. This issuance is subject to shareholder approval,
however, should such warrants not be approved, the commitment still serves as a
binding agreement to the Company and the significant shareholder will receive
cash compensation for the value of the warrants.
Commencing July 1993, the Company leased space from an affiliated
entity. The rent under this lease is equal to the amount paid by the affiliated
party under the leasehold agreement and was $121, $128 and $129 for 1999, 1998
and 1997, respectively. In addition, the Company provides services under an
Employee Assistance Plan to an affiliated entity. The revenues from this
contract were $301, $560 and $526 in 1999, 1998 and 1997, respectively.
In order to provide for additional financing if the Sale of the group
practice division in 1998 did not occur, the Company entered into an agreement
with certain investment partnerships (the "Investment Partnerships"), which were
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 additional financing amount represented the
Company's estimated additional cash needs during 1998 for contingent payments,
seller notes and restructure related activities.
<PAGE> 61
61
Under the terms of the agreement, in return for their guarantee 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 Bank borrowings in
excess of $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 Warrant") 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 $1,020 of which
$140 was paid in cash to the Investment Partnerships. The remaining portion
represents a non-cash charge of approximately $880, which is the difference
between the exercise price of the Integra Warrant and the fair market value of
the underlying common stock of the Company on the closing date of the Sale to
PsychPartners. These charges were recorded as interest expense in the Company's
results of operations for the year ended December 31, 1998.
The Investment Partnership attempted to exercise these warrants in
December 1999. The Company is currently evaluating this matter with the
assistance of outside legal counsel.
<PAGE> 62
62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Integra, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 14(a)(1) on page 64 present fairly, in all material
respects, the financial position of Integra, Inc. and its subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedule
listed in the accompanying index appearing under Item 14(a)(2) present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 4, the Company has entered into an agreement with one of
its significant shareholders to provide up to $2 million of financing through
March 1, 2001 that will be used to meet cash flow demands. Additionally, as
discussed in Note 12, the Company's agreement with a significant customer has a
contract termination date of December 31, 2000 and the Company has begun
negotiations to renew the contract.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 30, 2000
<PAGE> 63
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the Company's executive officers is contained in
Part I under "Item 1. Business - Executive Officers of the Company." Information
regarding directors will be contained in the Company's definitive Proxy
Statement (the "Proxy Statement") for its 2000 Annual Meeting of Stockholders
under the caption "Election of Directors" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
For the information concerning this Item, see the table and text under
the captions "Executive Compensation," "Compensation of Directors,"
"Compensation Committee Interlocks and Insider Participation" and "Employment
Arrangements" to be contained in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
For the information concerning this Item, see the table and text under
the caption "Information Concerning Certain Stockholders" to be contained in the
Proxy Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the information concerning this Item, see the text under the
caption "Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions" to be contained in the Proxy Statement, which information
is incorporated herein by reference.
<PAGE> 64
64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998... 38
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.................................................... 39
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997........................... 40
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.................................................... 41
Notes to Consolidated Financial Statements............................. 42
Report of Independent Accountants............................................. 62
2. Financial Statement Schedule
Page
----
Schedule II Valuation and Qualifying Accounts................................. 68
</TABLE>
3. Exhibit
The exhibits required to be filed as part of this Annual Report on Form
10-K are contained in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
None.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibits required to be filed by the Company pursuant to Item 601 of
Regulation S-K are contained in Exhibits listed in response to Item 14(a)(3),
and are incorporated herein by reference.
<PAGE> 65
65
POWER OF ATTORNEY
The registrant and each person whose signature appears below
hereby appoint, Eric E. Anderson, Ph.D. as attorney-in-fact with full power of
substitution, severally, to execute in the name and on behalf of the registrant
and each such person, individually and in each capacity stated below, one or
more amendments to the annual report which amendments may make such changes in
the report as the attorney-in-fact acting in the premises deems appropriate and
to file any such amendment to the report with the Securities and Exchange
Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 30, 2000 INTEGRA, INC.
By: /s/ ERIC E. ANDERSON, Ph.D.
---------------------------
Eric E. Anderson, Ph.D.
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 30, 2000 /s/ ERIC E. ANDERSON, Ph.D.
---------------------------
Eric E. Anderson, Ph.D.
Chief Executive Officer
and Director
Dated: March 30, 2000 /s/ SHAWKAT RASLAN
------------------
Shawkat Raslan
Chairman of the Board
and Director
<PAGE> 66
66
Dated: March 30, 2000 /s/ IRWIN LEHRHOFF, PH.D.
-------------------------
Irwin Lehrhoff, Ph.D.
Director
Dates: March 30, 2000 /s/ CHARLES HENRI WEIL
----------------------
Charles Henri Weil
Director
<PAGE> 67
67
Accountants Report on Schedules
None.
<PAGE> 68
SCHEDULE II
INTEGRA, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Additions Additions Balance at
Beginning Charged to Charged to End
Description of Period Expenses Other Accounts Deductions(A) of Period
- ----------- --------- -------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful accounts .... $ 73 -- -- -- $ 73
Deferred tax asset valuation reserve $17,098 (272) -- -- $16,826
Year ended December 31, 1998:
Allowance for doubtful accounts .... $ 7,348 1,221 -- 8,496 $ 73
Deferred tax asset valuation reserve $16,349 749 -- -- $17,098
Year ended December 31, 1997:
Allowance for doubtful accounts .... $ 9,306 4,226 -- 6,184 $ 7,348
Deferred tax asset valuation reserve $ 5,021 11,328 -- -- $16,349
</TABLE>
(A) Write off of accounts deemed uncollectible including balances sold.
<PAGE> 69
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
2(a) Agreement of Purchase and Sale dated as of July 1, 1994 by and among --
Integra, Inc., Peter L. Brill, M.D. and the Company (incorporated by
reference to Exhibit 2(a) to the Company's Current Report on Form 8-K
dated July 31, 1994).
2(b) Agreement of Purchase and Sale dated as of September 1, 1994 by and --
among Brea Mental Health Associates, Southern California Mental
Health Network Medical Group, Inc., Warren R. Taff, M.D., Gregg A.
Sentenn, M.D. and the Company (incorporated by reference to Exhibit 2
to the Company's Current Report on Form 8-K dated September 30, 1994).
2(c) Agreement of Purchase and Sale dated as of November 1, 1994 by and --
among Metropolitan Psychiatric Group, Inc. ("MPG"), DOC Systems,
Inc., the partners of MPG and the Company (incorporated by reference
to Exhibit 2(b) to the Company's Current Report on Form 8-K dated
November 18, 1994).
2(d) Agreement and Plan of Reorganization dated as of October 1, 1995 by --
and among Arista Behavioral Health, Inc., a New Jersey corporation,
Arista Counseling & Psychological Services, P.C., a New York
professional corporation, Arista Counseling & Psychological Services,
P.C., a New Jersey professional corporation, Integra of Pennsylvania,
Inc., a Delaware corporation, the Company and Hadassah Gurfein, Ph.D.
(incorporated by reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated October 25, 1995).
</TABLE>
- --------
* Copies of exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for distribution
to stockholders of the Company. The Company will furnish a copy of any such
exhibits to any stockholder requesting the same for a nominal charge to cover
duplicating costs.
<PAGE> 70
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
2(e) Agreement of Purchase and Sale ("PsychPartners Purchase Agreement") --
dated as of December 26, 1997 by and among PsychPartners, L.L.C.,
PsychPartners, Inc., PsychPartners MidAtlantic, Inc., the Company and
certain subsidiaries of the Company (incorporated by reference to the
Company's Current Report on Form 8-K dated December 26, 1997).
2(f) Extension Letter with respect to PsychPartners Purchase Agreement --
(incorporated by reference to the Company's Current Report on Form
8-K dated May 19, 1998).
2(g) First Amendment to PsychPartners Purchase Agreement dated May 14, --
1998 (incorporated by reference to the Company's Current Report on
Form 8-K dated May 19, 1998).
2(h) Second Amendment to PsychPartners Purchase Agreement dated as of May --
18, 1998 (incorporated by reference to the Company's Current Report
on Form 8-K dated May 19, 1998).
2(i) Asset Purchase Agreement dated December 31, 1997 by and among Integra --
and Corphealth, Summit Behavioral Partners - Nevada, Inc.
(incorporated by reference to Exhibit 2(f) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997).
3(a) Certificate of Incorporation of the Company, as amended to date --
(incorporated by reference to Exhibit 3 to the Company's Current
Report on Form 8-K dated July 17, 1998).
3(b) By-Laws of the Company as amended and restated as of October 2, 1998
(incorporated by reference to Exhibit 3(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998).
4 Stock Option Plan (incorporated by reference to Exhibit 4 to the --
Company's Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22, 1994).
10(a) Stockholders Agreement dated March 15, 1991 between the Company and --
Irwin Lehrhoff, individually and as trustee under the Irwin Lehrhoff
Trust No. 1 (incorporated by reference to Exhibit 10(a) to the
Company's Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22, 1994).
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10(b) Stock Purchase Agreement dated March 6, 1992 between the Company
and Lawrence M. Davies (incorporated by reference to Exhibit
10(g) to the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the Commission on April 2,
1994).
10(c) Stock Purchase Agreement dated August 1, 1992 between the Company and --
R. Bruce Mosbacher (incorporated by reference to Exhibit 10(i) to the
Company's Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22, 1994).
10(d) Employment Letter dated March 2, 1993 between the Company and --
Lawrence M. Davies (incorporated by reference to Exhibit 10(j) to the
Company's Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22, 1994).
10(e) Stock Purchase Agreement dated June 21, 1993 between the Company and --
Timothy E. Foster (incorporated by reference to Exhibit 10(n) to the
Company's Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22, 1994).
10(f) Stock Purchase Agreement dated June 22, 1993 between the Company and --
Lawrence M. Davies (incorporated by reference to Exhibit 10(o) to the
Company's Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22, 1994).
10(g) Stock Purchase Agreement dated December 6, 1993 between the Company --
and Harvey V. Fineberg, M.D. (incorporated by reference to Exhibit
10(u) to the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the Commission on April 22,
1994).
10(h) Stock Purchase Agreement dated January 28, 1994 between the Company --
and Shawkat Raslan (incorporated by reference to Exhibit 10(y) to the
Company's Registration Statement on Form S-1 (Registration No.
33-78034) filed with the Commission on April 22, 1994).
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10(i) Stock Purchase Agreement dated February 22, 1994 between the Company --
and R. Bruce Mosbacher, Trustee or Successor Trustee under the
Mosbacher/Ditz Living Trust U/A/D 8/30/93 (incorporated by reference
to Exhibit 10(ee) to the Company's Registration Statement on Form S-1
(Registration No. 33-78034) filed with the Commission on April 22,
1994).
10(j) Separation Agreement dated November 12, 1999 and between the Company and
Lawrence M. Davies. --
10(k) Separation Agreement dated December 23, 1999 and between the Company and
Mark D. Gibson.
10(l) Employment Agreement dated November 17, 1999 and between the Company and
Eric E. Anderson, Ph.D. --
10(m) Loan Commitment dated March 23, 2000 and between the Company and
Charles Henri Weil. --
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
24 Powers of Attorney (See "Power of Attorney" in Form 10-K). --
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
</TABLE>
<PAGE> 1
Exhibit 10(j)
INTEGRA, INC.
1060 FIRST AVENUE, SUITE 400
KING OF PRUSSIA, PA 19406
November 12, 1999
Mr. Lawrence M. Davies
131 Howson Lane
Glenmoore, PA 19343
Dear Lawrence:
This will confirm that your employment and all your positions as an
officer and director of Integra, Inc. and its subsidiaries and affiliates have
terminated as of November 12, 1999.
This will further confirm the agreement between you and the Company as
follows:
1. On the Effective Date of November 12, 1999, the Company will provide
you (or your estate or legal representative in the event of your death) a
severance payment of $175,000. In addition, the Company will pay 75% of your
1999 annual bonus opportunity in the amount of $39,375 on the Effective Date.
2. During the period commencing on the Effective Date and ending on
November 12, 2000, the Company will:
(i) provide you with coverage fully paid by the Company under the
medical and dental plans of the Company, on the same terms that coverage is
available to employees of the Company generally; and
(ii) provide you with fully paid coverage under the Long Term
Disability insurance at the current level, to continue your Basic Life Insurance
at two times base salary, and to continue your Accidental Death and
Dismemberment Insurance and Supplemental Life Insurance, in each case in
accordance with the provisions of the applicable group insurance plan of the
Company.
Any benefit referred to in clause (i) or (ii) shall terminate in the
event that you obtain full-time employment or full time (35 hours or more per
week) consulting with another person or organization prior to November 12, 2000
and are eligible for an equivalent benefit from or through such other person or
organization. You agree to notify the Company immediately following your
obtaining any such employment or consulting.
3. The Company will separately provide you with information relating to
your rights to continued medical coverage under COBRA.
4. Your participation in the 401(K) Plan shall cease as of November 12,
1999. The
5. The car allowance will cease 11/30/99.Company will facilitate an
appropriate rollover of your funds as soon as practical.
6. The Company will pay you your accrued paid time-off (PTO) on the
Effective Date. You shall not accrue any vacation after the Effective Date. As
of November 12, 1999, you have 234.7 hours of PTO.
<PAGE> 2
7. The Company will engage you in a consultant capacity effective
12/1/99 and continuing until 4/30/00. This arrangement may be extended by the
Company if mutually agreed upon by you. Duties under this arrangement will be as
an advisor to management in addressing existing and, if requested, future
regulatory legal and other affairs and matters. Specifically, in the ongoing
settlement negotiations with California Transamerica, State of Nevada Medicaid,
discontinued Apogee Group Practice and other related matters. These services
will be paid at a rate of $100 per hour billed, with a minimum of eight hours
per week, and a maximum of twelve hours per week depending upon need, unless
offsite meetings, travel or other reasons cause additional time required in this
regard. You will be entitled to bill biweekly and all invoices will be paid
within ten business days. In addition, other matters such as real estate,
leases, mergers and acquisitions due diligence, etc. may be addressed by you as
requested by management. (Messrs. Raslan or Anderson) and acceptable to you.
These hours will be billed separately from above at a rate of $100 per hour.
8. You expressly represent and warrant that you have returned to the
Company all of its property in your possession, including, but not limited to,
all copies of software, records, keys, identification documents or cards, and
credit cards. You are entitled to keep your home fax machine and lap top
computer. You may use the Company cell phone until 1/1/00 and a Company paid fax
line until 3/31/00.
9. In consideration of the agreements by the company herein provided
(which includes consideration being provided to you to which you are not already
entitled), you hereby release the company and its subsidiary and other
affiliated corporations, and its and their respective officers, directors,
employees and stockholders (collectively, the "Releasees"), from all claims,
actions, causes of action, suits, debts, dues, sums of money, accounts,
covenants, contracts, controversies, agreements, promises, damages, judgments,
executions and demands whatsoever, in law or equity, including, without
limitation, all claims and rights arising under the Age Discrimination in
Employment Act, 29 U.S.C. Section 621, et seq., which you ever had, now have or
hereafter can, shall or may have against the Releases or any of them arising on
or before the date hereof out of our relating to your employment with the
Company and the termination of such employment, except as set forth in this
Agreement. This agreement in no way impairs your right to indemnification as an
officer or director for matters arising during the ordinary course of your
employment.
10. All payments to you referred to in this Agreement shall be subject
to applicable Federal, state and local withholding.
11. The Company agrees to provide you with a positive letter of
reference. All inquiries concerning your employment shall be directed to Mr.
Shawkat Raslan, whose responses to such inquires shall be positive and generally
supportive.
12. Except as required by law, the parties agree that the terms and
conditions of this Agreement and the negotiations leading to this Agreement are
confidential. The parties agree that they and their agents and representatives
shall not distribute or disclose in any manner to any other person or entity any
information whatever relating to either the negotiations leading to this
Agreement or the terms of this Agreement, other than what may be required by law
or legal proceeding. The parties agree that neither will make derogatory,
disparaging or untrue remarks about the other (or about the Company's affiliated
corporations or the Company's or such affiliates' respective officers, directors
and employees) or their previous employment relationship.
<PAGE> 3
13. Except as required by law, you agree to keep all non-public
information known to you about the Company confidential.
14. This Agreement shall be construed in accordance with the laws of
the Commonwealth of Pennsylvania without regard to its conflict of law
provisions.
Please indicate your agreement with the foregoing by signing the
enclosed copy of this letter and returning it to the undersigned, whereupon this
shall constitute a binding agreement between you and the Company.
Very truly yours,
By:
--------------------------------
Shawkat Raslan
Agreed:
- ------------------------------------
Lawrence M. Davies
<PAGE> 1
Exhibit 10(k)
Integra, Inc.
1060 First Avenue, Suite 400
King of Prussia, PA 19406
December 23, 1999
Mr. Mark Gibson
12 Fox Hill Road
Doylestown, Pennsylvania 18901
Dear Mark:
This will confirm that your employment and all your positions as an
officer and director of Integra, Inc. (the "Company") and its subsidiaries and
affiliates have terminated as of December 23, 1999 (the "Effective Date").
This will further confirm the agreement between you and the Company as
follows:
1. On the Effective Date, the Company will provide you a severance
payment of $60,000.
2. During the period commencing on the Effective Date and ending on
June 30, 2000, the Company will:
(i) continue on behalf of you and your dependents and beneficiaries
medical and dental benefits, life insurance, short term disability insurance and
long term disability insurance which were being provided to you on the date
hereof; and
(ii) provide reimbursement of up to $10,000 of any outplacement costs
you incur for any reason so long as you obtain the approval of the Company prior
to incurring such costs, which approval shall not be unreasonably withheld or
delayed.
The benefits referred to in clause (i) shall be no less favorable to
you, in terms of amounts and deductibles and costs to you, than the coverage
provided to you under the plans providing such benefits as of the date hereof.
Any benefit referred to in clause (i) shall terminate in the event that you
obtain employment or full time (35 hours or more per week) consulting with
another person or organization prior to June 30, 2000 and are eligible for an
equivalent benefit from or through such other person or organization. You agree
to notify the Company immediately following your obtaining any such employment
or consulting.
3. The Company will separately provide you with information relating to
your rights to continued medical coverage under COBRA.
4. Your participation in the 401(K) Plan shall cease as of December 23,
1999. Upon your request, the Company will facilitate an appropriate rollover of
your funds.
<PAGE> 2
2
5. The Company will pay you your accrued period time-off ("PTO") on the
Effective Date. You shall not accrue any vacation after the Effective Date. As
of December 23, 1999, you have ____ hours of PTO.
6. The Company will engage you in a consultant capacity effective as of
the Effective Date and continuing until March 31, 1999. This arrangement may be
extended by the Company if mutually agreed upon by you. Duties under this
arrangement will include assisting in the 1999 year-end close and audit,
assisting in the preparation of the Company's Annual Report on Form 10-K, and
such other projects to be agreed upon by you and the Company. During the period
commencing on the Effective Date and ending on March 31, 2000, the Company will
pay you (or your estate or legal representative in the event of your death)
consulting fees at the following rates: (a) $100 per hour during period from the
Effective Date through January 31, 2000; (b) $125 per hour during the period
from February 1, 2000 through February 29, 2000; and (c) $150 per hour during
the period from March 1, 2000 through March 31, 2000 and during any subsequent
periods. You will be entitled to bill biweekly and all invoices will be paid
within ten business days. The Company and you agree that, unless otherwise agree
to by the Company, you will provide consulting services at least two days a week
through February 28 and thereafter on a more limited basis as mutually agreed
upon. The Company understands that you may not be in a position to fully
complete all your consulting projects because of possible commitments to other
employment.
7. You expressly represent and warrant that you have returned, or will
return at the Company's request, to the Company all of its property in your
possession, including, but not limited to, all copies of software, records,
keys, identification documents or cards, and credit cards. Your are entitled to
keep your laptop computer. You may use your existing office, Company e-mail
account, Company telephone extension, Company cell phone and a Company paid fax
line until March 31, 2000, but only so long as you continue as a consultant to
the Company and provided that your use shall generally be only for
business-related purposes and on a limited basis in pursing employment
opportunities. In addition, you will have access to all electronic and paper
files as necessary in the performance of your duties hereunder, and you will
have access to secretarial support, until March 31, 2000. You will have
continued after-hours access to the Company's building and offices until March
31, 2000.
8. The Company shall indemnify you and hold you harmless from and
against any and all expenses and liabilities that may be imposed upon or
incurred by you in connection with, or as a result of, any proceeding in which
you may become involved, as a party or otherwise, by reason of the fact that you
are or were an officer, director, employee, consultant or agent of the Company,
whether or not you continue to be such at the time such expenses and liabilities
shall have been imposed or incurred, to the fullest extent permitted by the laws
of the State of Delaware, as they may be amended from time to time.
9. You agree that any statements you make about the Company, its
officers, directors, employees or agents will be generally positive and
supportive. In consideration of the agreements by the Company herein provided
(which includes consideration being provided to you to which you are not already
entitled), you hereby release the Company and its subsidiary and other
affiliated corporations, and its and their respective officers, directors,
employees and stockholders (collectively, the "Releasees"), from all claims,
actions, causes of action, suits, debts, dues, sums of money, accounts,
covenants, contracts, controversies, agreements, promises, damages, judgments,
executions and demands whatsoever, in law or equity, which you ever had, now
have or hereafter can, shall or may have
<PAGE> 3
3
against the Releasees or any of them arising on or before the date hereof out of
or relating to your employment with the Company and the termination of such
employment, except as set forth in this Agreement. This agreement in no way
impairs your right to indemnification as an officer, director or consultant for
matters arising during the ordinary course of your employment or consultancy.
10. All payments to you referred to in this Agreement, other than the
consulting payments, shall be subject to applicable Federal, state and local
withholding.
11. The Company agrees to provide you with a positive and generally
supportive letter of reference. All inquiries concerning your employment shall
be directed to Eric Anderson or Shawkat Raslan, whose responses to such
inquiries shall be positive and generally supportive.
12. Except as required by law, the parties agree that the terms and
conditions of this Agreement and the negotiations leading to this Agreement are
confidential. The parties agree that they and their agents and representatives
shall not distribute or disclose in any manner to any other person or entity any
information whatever relating to either the negotiations leading to this
Agreement or the terms of this Agreement, other than what may be required by law
or legal proceeding. The parties agree that neither will make derogatory,
disparaging or untrue remarks about the other (or about the Company's affiliated
corporations or the Company's or such affiliates' respective officers, directors
and employees) or their previous employment relationship.
13. Except as required by law, you agree to keep all non-public
information known to you about the Company confidential.
14. This Agreement shall be construed in accordance with the laws of
the Commonwealth of Pennsylvania without regard to its conflict of law
provisions.
15. You may assign your right to receive payment of the consulting fees
provided for in Section 6 of this Agreement to an entity to be determined by
you.
Please indicate your agreement with the foregoing by signing the
enclosed copy of this letter and returning it to the undersigned, whereupon this
shall constitute a binding agreement between you and the Company.
Very truly yours,
INTEGRA, INC.
By
---------------------------
Agreed:
- ---------------------------
Mark Gibson
<PAGE> 1
Exhibit 10(l)
Integra, Inc.
1060 First Avenue
King of Prussia, Pennsylvania 19406
As of November 17, 1999
Eric E. Anderson, Ph.D.
Dear Eric:
This letter sets forth our agreement with you (the "CEO") on matters
relating to your employment with Integra, Inc., a Delaware corporation (the
"Company"), as its President and Chief Executive Officer.
1. Your employment as President and Chief Executive Officer of the
Company shall be governed by the terms hereof for an initial term commencing on
November 17, 1999 (the "Effective Date") and ending December 31, 2002, unless
sooner terminated by you or the Company as provided herein. This Agreement shall
be automatically renewed for successive one (1) year terms upon the expiration
of the initial term of this Agreement, or any renewal term of this Agreement,
unless either the Company or the CEO gives the other party at least six (6)
months written notice prior to the scheduled expiration of the initial term of
this Agreement, or any renewal term of this Agreement, that such party does not
intend to renew the Agreement. As President and Chief Executive Officer of the
Company, the CEO shall perform such duties and responsibilities appropriate to
such position as shall be assigned to the CEO by the Board of Directors of the
Company. The CEO shall report to the Board of Directors of the Company. The CEO
shall devote all his working time and efforts to the business of the Company.
The CEO represents that the CEO is not bound by the provisions of any
non-competition, confidentiality or similar agreement not heretofore disclosed
by the CEO in writing to the Company.
2.
2.1 The CEO's salary shall be at a rate per annum of $240,000, payable
in accordance with the normal payroll practices of the Company (the "Base
Salary"). In addition, the CEO may be entitled to receive merit increases in
salary during the term hereof in amounts and at such times as shall be
determined by the Board of Directors of the Company in its sole discretion based
on the CEO's performance. The CEO's salary shall be reviewed no less than once
per year.
2.2 The CEO shall be entitled to receive a bonus for calendar year 1999
in accordance with his current agreements with the Company.
2.3 In addition to the CEO's salary, the CEO shall be entitled to
payments pursuant to an annual bonus program commencing with calendar year 2000.
Under the bonus
<PAGE> 2
2
program, the CEO shall have an annual bonus opportunity of up to seventy-five
(75%) percent of his Base Salary at the then current rate in effect (the
"Bonus"). Bonus goals shall be mutually agreed upon between the CEO and the
Compensation Committee of the Board of Directors of the Company within the first
ninety (90) days of each calendar year for such year. Except as otherwise
provided herein, the CEO must continue in the employment of the Company through
the end of the applicable year in order to be entitled to a bonus for such year.
The bonus award shall be paid in cash, not later than four weeks following the
completion of the annual audit of the Company by the Company's independent
accountants for the applicable year.
2.4 As promptly as practicable after execution hereof, the Company
shall cause to be granted to the CEO options to purchase an aggregate of 500,000
shares of common stock $.01 par value (the "Common Stock"), of the Company at an
exercise price equal to the fair market value on the date of grant. The options
shall be governed by the terms and conditions of the Company's 1999 Stock Option
Plan, as it may be amended from time to time (the "Plan"), and of the stock
option certificate issued to the CEO. Such options shall vest as follows: 25% on
the date of grant and 25% per year over the three year period after the date of
grant. The options shall vest in full upon a sale of all or substantially all
the assets of the Company or upon the occurrence of a transaction (merger,
consolidation, etc.) which results in the holders of the Common Stock prior to
the transaction owning less than 50% of the Common Stock thereafter (a "Change
in Control"). The options granted hereunder are in addition to any options
heretofore granted under other stock plans of the Company. The CEO will be
eligible for future option grants in the discretion of the Board's stock option
committee.
3. The CEO shall be entitled to participate in the employee benefit
plans and programs offered by the Company from time to time applicable to
executives of the Company, including group insurance and supplemental life and
disability plans, subject to the provisions of such plans and programs from time
to time in effect. The CEO shall be entitled to twenty days of paid time off per
year plus sick leave, to accrue and to be taken in accordance with Company
policy. In addition, commencing March 1, 2000, the Company shall lease an
automobile for use by the CEO at the Company's expense at a monthly lease
expense of approximately $600, shall pay for insurance for such leased vehicle
and shall reimburse the CEO for gasoline, tolls and parking in connection with
business related travel upon the presentation of proper accounts therefor in
accordance with the Company's policies. During the term of this Agreement, the
Company shall reimburse the CEO for the premiums due on his current long-term
disability insurance policy.
4. The CEO agrees that the CEO shall not, at any time, use any
Confidential Information (as hereinafter defined) except in the regular course
of the CEO's employment hereunder, or disclose any Confidential Information to
any person or entity other than an employee or professional adviser of the
Company. "Confidential Information" means any information of a confidential or
proprietary nature relating to the business of the Company and its clients;
provided, however, that Confidential Information shall not include information
which (i) becomes generally available to the public other than as a result of an
unauthorized disclosure by the CEO, (ii) was available to the CEO on a
non-confidential basis prior to the CEO's employment with the Company or (iii)
becomes available to the CEO on a non-confidential basis from a source other
than the Company or any of its affiliates, provided that such source is not
bound by a confidentiality agreement with the Company.
<PAGE> 3
3
5. The CEO agrees that the CEO shall not, during the period of the
CEO's employment, and for a period of one year thereafter (the "Section 5
Period") following termination of the CEO's employment, whether by the CEO or by
the Company, (a) engage, whether as principal, agent, investor (except as an
owner of less than a 5% interest in a publicly held company), distributor,
representative, stockholder, employee, consultant, volunteer or otherwise, with
or without pay, in any activity or business venture anywhere in the United
States which is directly competitive with the business of the Company or any
other member of the Company Group (as hereinafter defined), (b) without written
permission of the Company, solicit or entice or endeavor to solicit or entice
away from the Company any person who was or is at the time of solicitation an
employee of the Company or any other member of the Company Group, either for the
CEO's own account or for any individual, firm or corporation, whether or not
such person would commit any breach of his contract of employment by reason of
leaving the service of the Company or any other member of the Company Group, (c)
employ, directly or indirectly, any person who was an employee of the Company or
any other member of the Company Group at the date of termination of the CEO's
employment or within one (1) month prior to such date of termination, or (d)
solicit or entice or endeavor to solicit or entice away from the Company or any
other member of the Company Group, (i) any client or customer of the Company or
(ii) any corporation, individual or firm with which the Company or any other
member of the Company Group, is, or has been during the last six (6) months of
the CEO's employment with the Company or any other member of the Company Group
in active negotiations in connection with becoming a client, customer,
acquisition candidate, vendor, supplier or joint venture partner of the Company
or any other member of the Company Group, either for the CEO's own account or
for any individual, firm or corporation.
For purposes hereof, "Company Group" shall mean, collectively, the
Company and its subsidiaries, affiliates and parent entities operating from time
to time in the same lines of business for which the CEO has had responsibility.
6. In the event of a breach or threatened breach by the CEO of any of
the provisions of Paragraphs 4 or 5 of this Agreement, the CEO hereby consents
and agrees that the Company shall be entitled to seek an injunction or similar
equitable relief from any court of competent jurisdiction restraining the CEO
from committing or continuing any such breach or threatened breach or granting
specific performance of any act required to be performed by the CEO under any of
such provisions, without the necessity of showing any actual damage or that
money damages would not afford an adequate remedy and without the necessity of
posting any bond or other security. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies at law or in equity
which it may have.
7.
7.1 Upon the CEO's death, the Company will pay the CEO's estate or
other legal representative the CEO's salary (at the annual rate then in effect)
accrued to the date of death and not theretofore paid to the CEO. In addition,
the CEO's estate or other legal representative shall be entitled to receive the
CEO's annual bonus prorated to the date of death, but only if such bonus is
earned. Such bonus, if any, shall be paid at the time set forth in Section 2.3.
The rights and benefits of the CEO's estate or other legal representative under
the benefit plans and programs of the Company shall be determined by reference
to the provisions of
<PAGE> 4
4
such plans and programs of the Company at the time in effect. The estate or
other legal representative of the CEO and the Company shall have no further
rights or obligations under this Agreement.
7.2 If the CEO shall become incapacitated by reason of sickness,
accident or other physical or mental disability and shall for a period of sixty
(60) consecutive days be unable to materially perform his duties hereunder, with
or without reasonable accommodation, the employment of the CEO hereunder may be
terminated by the Company upon thirty (30) days' (the "Notice Period") notice to
the CEO; provided, however, that the CEO's employment by the Company shall not
be terminated pursuant to this Paragraph 7.2 if the CEO returns to work and is
able to materially perform his duties hereunder during the Notice Period. In the
event of such termination, the Company shall pay the CEO his salary (at the
annual rate then in effect) accrued to the effective date of such termination
and not theretofore paid to the CEO. In addition, the CEO shall be entitled to
receive the CEO's annual bonus prorated to the effective date of termination,
but only if such bonus is earned. Such bonus, if earned, shall be paid at the
time set forth in Section 2.3. The CEO's rights under the benefit plans and
programs of the Company shall be determined by reference to the provisions of
such plans and programs at the time in effect. In the event of such termination,
neither the CEO nor the Company shall have any further rights or obligations
under this Agreement, except as set forth in Paragraphs 4, 5 and 6.
7.3 The employment of the CEO hereunder may be terminated by the
Company at any time during the term of this Agreement for Due Cause (as
hereinafter defined). In the event of such termination, the Company shall pay to
the CEO his salary (at the annual rate then in effect) accrued to the date of
such termination and not theretofore paid to the CEO, and, after the
satisfaction of any claim of the Company against the CEO arising as a direct and
proximate result of such Due Cause, neither the CEO nor the Company shall have
any further rights or obligations under this Agreement, except as provided in
Paragraphs 4, 5 and 6. Rights and benefits of the CEO under the benefit plans
and programs of the Company will be determined in accordance with the terms and
provisions of such plans and programs. For purposes hereof, "Due Cause" shall
mean (i) a material breach of any of the CEO's material obligations hereunder,
(ii) that the CEO, in carrying out his duties hereunder, has been guilty of (A)
willful or gross neglect or (B) willful or gross misconduct, resulting in either
case in material harm to any member of the Company Group (as hereinafter
defined); or (iii) that the CEO has been convicted of (A) a felony or (B) any
offense involving moral turpitude. In the event of an occurrence of an event
constituting Due Cause under this Paragraph 7.3, the CEO shall be given written
notice by the Company that it intends to terminate the CEO's employment for
Cause under this Paragraph 7.3, which written notice shall specify in detail the
act or acts upon the basis of which the Company intends so to terminate the
CEO's employment. If the basis for such written notice is an act or acts
described in clause (i) above and not involving moral turpitude, the CEO shall
be given twenty (20) days to cease or correct the performance (or
nonperformance) giving rise to such written notice and, upon failure of the CEO
within such twenty (20) days to cease or correct such performance (or
nonperformance), the CEO's employment by the Company shall automatically be
terminated hereunder for Due Cause.
7.4 The Company may terminate the CEO's employment at any time for
whatever reason it deems appropriate; provided, however, that in the event that
such termination is not pursuant to Paragraphs 7.1, 7.2 or 7.3, the Company
shall pay to the CEO (i) severance pay
<PAGE> 5
5
in the form of salary continuation (at the annual rate then in effect) until the
expiration of the lesser of the remaining term of this Agreement or a period of
twelve (12) months (the "Salary Continuation Period") beginning on the date of
termination of employment hereunder. If a termination shall occur hereunder
within six (6) months of a Change in Control, then the Company shall pay the CEO
his salary continuation benefit in a lump sum on the date of termination and the
CEO shall be entitled to a continuation of the health, disability and life
insurance benefits provided for herein at the Company's expense for a period of
twelve (12) months. Except as provided herein, the CEO's rights and benefits
under the benefit plans and programs shall be determined by reference to the
provisions of such plans and programs at the time in effect. In the event of
such termination, neither the CEO nor the Company shall have any further rights
or obligations under this Agreement, except as set forth herein and in
Paragraphs 4, 5 and 6. An election by the Company not to renew this Agreement
made in accordance with the second sentence of Paragraph 1 shall not be treated
as a termination pursuant to this Paragraph 7.4.
7.5 Anything herein to the contrary notwithstanding, if the Company (i)
demotes the CEO to a lesser position than provided in Paragraph 2; (ii) causes a
material change in the nature or scope of the authorities, powers, functions,
duties, or responsibilities attached to the CEO's position as described in
Section 2; or (iii) decreases the CEO's base salary or eliminates any of the
benefits or perquisites provided for in this Agreement, then, within thirty (30)
days after any occurrence set forth in clause (i), (ii) or (iii) above, the CEO
may advise the Company in writing that the action (or inaction) constitutes a
termination of his employment by the Company (other than for Due Cause), in
which event the Company shall have thirty (30) days (the "Correction Period") in
which to correct such action (or inaction). If the Company does not correct such
action (or inaction) during the Correction Period, such action (or inaction)
shall (unless consented to in writing by the Executive) constitute a termination
of the CEO's employment by the Company pursuant to Paragraph 7.4 (Without Cause)
effective on the first business day following the end of the Correction Period.
8. This Agreement contains all the understandings and representations
between the CEO and the Company pertaining to the subject matter hereof and
supersedes all undertakings and agreements, whether oral or written, if any
there be, previously entered into by the CEO and the Company with respect
thereto.
9. No provision of this Agreement may be amended or modified unless
such amendment or modification is agreed to in writing and signed by the CEO and
by a duly authorized representative of the Company.
10. Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, return receipt requested, addressed to the
party concerned at the address indicated below or at such other address as such
party may subsequently designate by like notice:
<PAGE> 6
6
If to the Company:
Integra, Inc.
Suite 410
1060 First Avenue
King of Prussia, Pennsylvania 19406
Attention: Chairman of the Board
If to the CEO:
Eric E. Anderson, Ph.D.
11. Anything to the contrary notwithstanding, all payments required to
be made by the Company hereunder to the CEO shall be subject to withholding of
such amounts relating to taxes as the Company may reasonably determine it should
withhold pursuant to any applicable law or regulation.
12. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Commonwealth of Pennsylvania
applicable in the case of agreements made and entirely performed in such
Commonwealth.
13. Any controversy or claim arising out of or relating to this
Agreement, or any breach hereof, shall, except as provided in Paragraph 6
hereof, be settled by arbitration in accordance with the rules of the American
Arbitration Association then in effect and judgment upon such award rendered by
the arbitrator may be entered in any court having jurisdiction thereof. The
arbitration shall be held in the Philadelphia, Pennsylvania metropolitan area.
If the foregoing accurately sets forth our agreement, please indicate
the CEO's acceptance hereof on the enclosed counterpart of this letter and
return such counterpart to the Company.
Very truly yours,
INTEGRA, INC.
By
--------------------------------------
Name: Shawkat Raslan
Title: Chairman of the Board
Accepted:
- --------------------------------------
Eric E. Anderson, Ph.D.
<PAGE> 1
Exhibit 10(m)
March 23, 2000
Mr. Charles Henry Weil
8/Rue Cortambert
Paris, France 75116
RE: Loan Commitment to Integra, Inc.
Dear Charles-Henri:
The purpose of this letter is to confirm your commitment to provide to
Integra, Inc. (the "Company") a line of credit of up to $2 million in
consideration of a grant to you of warrants as set forth hereafter.
Draw downs on the line of credit will be based upon a determination of
the Board of Directors of the Company with respect to the need for operating
capital for the Company. It is understood, however, that the Company will be
using its best efforts to arrange with lending institutions an alternative line
of credit as soon as reasonably practicable, and that this line of credit will
terminate and all amounts then due thereunder will be become immediately due and
payable upon closing of such alternative line of credit. In any event, all
amounts due and payable under the line of credit advanced by you will be due and
payable one year from the date hereof, and this line of credit shall then be
deemed terminated.
Except as set forth above, the terms, conditions, draw down procedures,
interest rate provisions, covenants and events of default under the recently
terminated PNC Bank line of credit shall apply to the line of credit hereunder,
and such documents are hereby incorporated by reference.
In consideration of your agreement to provide the line of credit
hereunder, the Company hereby grants the following warrant consideration:
1. Initial Warrant. Upon effectiveness of this letter agreement,
you will be granted by the Company warrants to purchase 50,000
shares of the Company's common stock at the price per share of
the Company's common stock on the closing date of the
Company's annual meeting of shareholders, at which the grants
hereunder will be approved. Such warrant shall be exercisable
for a ten year period, and the exercise price shall be subject
to adjustment in the event of stock splits, stock dividends,
recapitalizations and the like. You acknowledge that the
warrants and the underlying shares have not been registered
under the Securities Act of 1933, and may not be sold or
otherwise encumbered without such registration or opinion
<PAGE> 2
of counsel for the Company that an exemption to such
registration requirements is available.
2. Contingent Additional Warrant. In the event that the Company
is unable to achieve a replacement line of credit which
terminates the line of credit hereunder by June 30, 2000, you
will be granted an additional warrant to purchase 50,000
shares of the Company's common stock on the same terms and
conditions as the warrant described in subparagraph 1, above.
In the event that for any reason the grant of warrants hereunder is not
approved by the Shareholders at the annual meeting, you will receive cash
consideration equal to the value of the warrants based on conventional valuation
methodologies as applied by PricewaterhouseCoopers or its designee appraisal
firm.
The commitments under this letter shall become effective upon your
counter-signature to this letter agreement and approval thereof by the Company's
Board of Directors, a meeting respecting which shall be held immediately. Upon
execution hereof and such Board approval, the commitments set forth herein shall
become legally binding on the parties. Such orders will issue in connection with
the Company's financial statements.
Sincerely yours,
INTEGRA, INC.
By:
-------------------------------------
Eric Anderson,
President & Chief Executive Officer
ACCEPTED:
Charles-Henri Weil
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF INTEGRA, INC.
Advanced Behavioral Management, Inc.
Apogee of Maryland, Inc.
Apogee of Tennessee, Inc.
Apogee Health Services, Inc.
Apogee Services, Inc.
Associated Mental Health Services, Ltd.
Associates in Psychiatry, Inc.
DOC Systems, Inc.
Elliptic Resources, Inc.
Family Social and Psychotherapy Services, Inc.
Integra IPA, Inc.
Integra of Pennsylvania, Inc.
Martin E. Keller, Ed.D., Ltd.
Naperville Psychiatric, Inc.
Nevada Psychological Associates, Inc.
North, Clawson, Bolt Ltd.
Orbital Investments, Inc.
Perigee Properties, Inc.
Psychiatric Associates, Inc.
Psychogeriatrics Consultants, Inc.
The Clifton Group, Inc.
Thunderbird Behavioral Health Institute, Inc.
Twin Ponds III, Inc.
Twin Ponds Management, Inc.
Winston Clinics, Inc.
Woodmont Psychiatric Associates, Inc.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-91660) of Integra, Inc. of our report dated March
30, 2000 relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 30, 2000
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