10-Q 1 w49117e10-q.txt 10-Q FOR INTEGRA FOR 03/31/2001 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------------------- ----------------------- COMMISSION FILE NUMBER 1-13177 ----------- INTEGRA, INC. ------------- (Exact name of registrant as specified in its charter) Delaware 13-3605119 -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1060 First Avenue - Suite 410 King of Prussia, PA 19406 ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) -------------- Registrant's telephone number, including area codes: (610) 992-2600) 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 1634 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of May 15, 2001, Integra, Inc. had 10,138,552 shares of common stock, $0.01 par value, outstanding. Page 1 of 15 2 INTEGRA, INC. FORM 10-Q - QUARTER ENDED MARCH 31, 2000 INDEX

Page 2 of 15 3 INTEGRA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Page 3 of 15 4 INTEGRA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Page 4 of 15 5 INTEGRA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. Page 5 of 15 6 INTEGRA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (Dollars in thousands, except share and per share data) (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements are unaudited. These statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 2000 included in its Form 10-K filed with the Securities and Exchange Commission on March 30, 2001. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of Company management, the condensed consolidated financial statements for the unaudited interim periods presented include all adjustments, consisting only of normal recurring adjustments, necessary to present a fair statement of the results for such interim periods. Certain prior period amounts have been reclassified to conform to the current period presentation. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for a full year or any portion thereof. NOTE 2 - RESERVE FOR UNPAID CLAIMS This liability primarily relates to amounts owed for healthcare services authorized and incurred and not yet paid by the Company's managed behavioral healthcare business. Medical claims payable are estimated based upon authorized healthcare services, past claim payment experience for member groups, patient census data and other factors. Effective January 1, 1999, the Company implemented coverage on a capitated contract in New York State which currently covers over 440,000 members and is the Company's largest contract. The Company estimates the medical claims payable for this contract in a manner similar to its existing contracts, however, the Company has not yet fully developed its own historical experience with this contract. As the Company continues to provide coverage and pay claims for this contract, management will make necessary revisions in the estimates used to determine medical claims payable. While the Company believes its estimate of the liability for medical claims payable is adequate, actual results could differ from such estimates. Page 6 of 15 7 NOTE 3 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

NOTE 4 - RESTRUCTURING AND OTHER CHARGES In December 1997, the Company entered into an agreement with PsychPartners of Alabama and PsychPartners, LLC (collectively "PsychPartners") whereby it sold substantially all of the assets and the business of the Company's outpatient behavioral health provider business. In January 2000, PsychPartners filed for protection under Chapter 11 of the Federal Bankruptcy Laws. Based on discussions with PsychPartners personnel, as well as developments in the bankruptcy court, the Company understands that PsychPartners 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 outpatient practices sold. While the Company obtained assignment letters for many of these leases, due to the nature of both real estate and bankruptcy laws, it is possible that the Company will be responsible for a portion of these remaining lease obligations. The Company has engaged special counsel and is evaluating its exposure in this matter on an ongoing basis. The Company initially estimated that there were 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. In 1999, a $1,700 restructuring charge was recorded related to the PsychPartners bankruptcy filing. The Company intends to aggressively pursue resolution of this matter in terms most favorable to the Company. During the first quarter of 2001 the Company paid $66 relating to legal costs and lease obligations in connection with this matter. In addition, the Company reversed $129 of its PsychPartners restructuring accrual, as it continued to review its exposure with respect to the remaining leases currently in effect. As such, the Statement of Operations for the three months ended March 31, 2001 reflects $129 of restructuring income. In addition to the above lease exposure, PsychPartners defaulted on certain deferred contingent purchase price obligations that were part of the original acquisition agreements for practices previously purchased by the Company. PsychPartners assumed these liabilities 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. The Company has not established a reserve for these amounts that it estimated may aggregate to $1,000. The Company intends to vigorously contest any claims related to this matter. Page 7 of 15 8 In prior years, the Company established reserves in connection with its restructurings and the exit of long-term care and outpatient operations. The Company believes the remaining reserves for these matters are adequate at March 31, 2001. However, as the Company continues to pursue resolution of open matters, actual results could differ from such estimates. During the first quarter of 2001 the Company paid $23 relating to these matters, including legal costs. NOTE 5 - COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) was the same as net income (loss) for the three months ended March 31, 2001 and 2000. Page 8 of 15 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) OVERVIEW Integra, Inc. (the "Company") provides employee assistance programs (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 employee or per member per month basis. In addition, the Company provides an array of managed behavioral health services including employee assistance programs, third party clinical case management and claims administration and selected consulting services. The Company's contract service areas are principally concentrated in Connecticut, Delaware, Maryland, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Tennessee. RESULTS OF OPERATIONS SERVICE REVENUE Service revenue pertains to the Company's managed behavioral healthcare business that maintains a portfolio of agreements with managed care organizations and corporations to provide inpatient and outpatient behavioral health services. Revenues are primarily generated by capitated managed behavioral healthcare and employee assistance programs. The fees are defined by contract and are primarily calculated on a fixed per employee or per member per month fee. Revenues under these contracts are recorded in the month for which the member or employee is entitled to services. Generally, the term of these contracts is between one and three years and the contracts are subject to various cancellation provisions that are typical to industry practice. Service revenue for the three-month period ended March 31, 2001 decreased from the corresponding period of the prior year from $6,480 to $6,475. Although essentially unchanged, the Company did experience growth in its health plan business that was offset by a net decrease in employees covered through EAP contracts. SERVICE COSTS Service costs are primarily comprised of medical claims and personnel costs associated with the Company's service delivery, support and management of its portfolio of behavioral healthcare contracts. The Company estimates the medical claims cost of providing services under these agreements, including a reserve for services incurred, but not reported, based upon authorized healthcare services, past claim payment experience for member groups, patient census data and other factors. The Company typically does not subcapitate the risk of providing services under these contracts, but the Company arranges discounted fee-for-service rates with independent inpatient and outpatient behavioral health providers. Under capitated contracts, the Company is responsible for ensuring appropriate access to care and bears the risk for utilization levels and pricing of the cost of services performed under these contracts. The Company believes the future revenues under these contracts will exceed the costs of services it will be required to provide under the terms of the contracts. An underestimation in the utilization or price of services for these contracts Page 9 of 15 10 could result in material losses to the Company. Historically, the company has managed these capitated contracts profitably. The Company maintains no re-insurance against the risk of loss under these contracts. Service costs decreased for the three-month period ended March 31, 2001 to $4,252 from $4,572 in the corresponding period in the prior year. This decrease is primarily a result of a reduced utilization of services by its health plan members SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses are primarily comprised of corporate office, sales and administration expenses. Selling and administrative expenses increased to $2,240 for the three months ended March 31, 2001 from $2,145 for the same period in 2000. The increase is primarily a result of increased investment in information systems and sales personnel. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operations was $688 for the three months ended March 31, 2001 compared to net cash used in operations of $105 for the same period in the prior year. Unrestricted cash and cash equivalents decreased to $39 at March 31, 2001 from $812 at December 31, 2000. At March 31, 2001, the Company also had $1,000 in cash which is designated as a restricted reserve for medical claims payable under the contract with HealthNow New York. At March 31, 2001 the Company had a working capital deficit of $4,796. The deficit is primarily attributable to accrued liabilities of $3,438 of which $2,532 pertain to the exit of the outpatient provider behavioral group practice business and reserves established for long-term care and other provider billing matters. Although these amounts are classified as current due to their nature, the Company does not expect that all of these amounts will require payment in the next year. The remainder of the Company's accrued liabilities is operating in nature. In December 2000, the Company entered into a credit facility with Progress Bank that allows for up to $500 (will increase to $650 effective May 31, 2001) in borrowings subject to a formula based on eligible accounts receivable. $100 was outstanding under the credit facility as of March 31, 2001. The Company believes that the cash flow generated by the Company's operations together with its existing cash and credit available from its Bank as well as credit available from a significant shareholder in the amount of $1,000 will be sufficient to meet the Company's cash requirements in 2001. The Company's current and working capital ratios are set forth below for the dates indicated:

Page 10 of 15 11 INFLATION A significant portion of the Company's operating expenses has been subject to inflationary increases, including clinical and administrative salaries and rent expense. The Company has historically sought to offset inflationary increases through price increases. Further, the Company believes it has somewhat mitigated the effect of inflation by expanding services and increasing operating efficiencies especially through the use of automation and technology. 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. SIGNIFICANT CONTRACTS Effective January 1, 1999, the Company implemented coverage of a behavioral health carve-out contract with a health plan which currently covers over 440,000. The Company expects that this contract will generate over $14,000 in annual revenues and it is currently the Company's largest contract (approximately 56% of revenue for the first quarter of 2001). Profitability under this capitated 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. In 2000, this contract performed according to plan. Management expects performance under the contract in 2001 to be profitable. This contract represented fifty-two percent of the Company's 2000 revenues and expires on December 31, 2001. In addition, the Company has been providing managed behavioral healthcare services to another health plan covering approximately 42,000 members since August 1, 1995. This contract expires on July 31, 2001, and the Company is currently pursuing an extension of the agreement. Page 11 of 15 12 CAUTIONARY STATEMENT Matters discussed above contained forward-looking statements that are based on the Company's estimates, assumptions and projections. Major factors which could cause results to differ materially from those expected by management include the timing and nature of reimbursement changes, the nature of changes in laws and regulations that govern various aspects of the Company's business, new criteria adopted to determine medical necessity for behavioral health services, the outcome of post-payment reviews of the Company's billings to Medicare patients in long-term care facilities, pricing of managed care and other third party contracts, the utilization and cost of services under the Company's capitated contracts, the direction and success of competitors, management and customer retention and unanticipated market changes. Page 12 of 15 13 INTEGRA, INC. FORM 10-Q - QUARTER ENDED MARCH 31, 2001 PART II ITEM 1 - LEGAL PROCEEDINGS From time to time, the Company is a party to certain claims, suits and complaints that arise in the ordinary course of business. The following relate to the Company's discontinued operations that were sold and exited in May 1998. In March 1998, the Company received notification that the Medicare Intermediary in California had completed a post payment medical review of billings previously submitted and paid between 1990 and 1994. Based upon the results of their review, the Intermediary has requested a refund of approximately $1,200,000. Services were denied primarily on the basis of medical necessity and incomplete documentation. The Company fully reserved for the above amount as of December 31, 1997. Hearings occurred in April, September and November 2000 before an Administrative Law Judge and a decision is pending. 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") 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. In April and May 2000 the Company exchanged information with the OIG with respect to its 1999 Filing. The OIG offered several suggestions for improvement of the Company's Corporate Compliance Program that have been effected. In addition, the OIG requested specific procedures be implemented in connection with the Company's second Annual Report that was timely filed in November 2000. As of May 10, 2001, no response has been received from the OIG with respect to this report. The Company believes that no reserve for potential liability was required at March 31, 2001. 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 resolved 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%. During the first quarter, the Company satisfied its remaining obligation under this agreement with payment of $117. In January 2000, PsychPartners filed for protection under Chapter 11 of the Federal Bankruptcy Laws. (See Note 4 "Restructuring and Other Charges," to the Consolidated Financial Statements, 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. Page 13 of 15 14 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K a) There are no exhibits required to be filed as part of this Quarterly Report on Form 10-Q. b) Current Reports on Form 8-K: None Page 14 of 15 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1634, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. INTEGRA, INC. ------------- (Registrant) May 15, 2001 /s/ Jack N. Brown ------------ ----------------------- (Date) Jack N. Brown Chief Financial Officer (Principal Financial and accounting officer) Page 15 of 15

INTEGRA INC 10-Q