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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2007
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 No. 0-20260
IntegraMed America, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 06-1150326
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
Two Manhattanville Road
Purchase, New York 10577
(Address of principal executive offices) (Zip code)
(914) 253-8000 (Registrant's
telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- -----
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X .
---- ---- ----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act. Yes No X.
----- ----
The aggregate number of shares of the Registrant's Common Stock, $.01 par
value, outstanding on October 25, 2007 was 8,525,392.
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INTEGRAMED AMERICA, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2007 and
December 31, 2006.......................................... 3
Consolidated Statements of Operations for the three- and
nine-month periods ended September 30, 2007 and 2006 ...... 4
Consolidated Statements of Shareholders' Equity for the
nine-month period ended September 30, 2007 ................ 5
Consolidated Statements of Cash Flows for the three- and
nine-months period ended September 30, 2007 and 2006 ...... 6
Notes to Consolidated Financial Statements ................ 7-14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................15-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......24
Item 4. Controls and Procedures..........................................24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......25
Item 3. Defaults upon Senior Securities..................................25
Item 4. Submission of Matters to a Vote of Security Holders..............25
Item 5. Other Information................................................25
Item 6. Exhibits ........................................................25
SIGNATURES ......................................................26
CERTIFICATIONS PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.........................EXHIBITS
CERTIFICATIONS PURSUANT TO 18 U.S.C ss.1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.........................EXHIBITS
2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
INTEGRAMED AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(all dollars in thousands, except share amounts)
ASSETS
September 30, December 31,
---------------------------
2007 2006
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 25,868 $ 32,184
Patient and other receivables, net ...................................... 6,004 445
Deferred taxes .......................................................... 1,381 2,472
Other current assets .................................................... 3,968 2,927
--------- ---------
Total current assets ................................................ 37,221 38,028
Fixed assets, net ....................................................... 16,346 13,900
Intangible assets, net .................................................. 56,359 22,905
Other assets ............................................................ 856 689
--------- ---------
Total assets ........................................................ $ 110,782 $ 75,522
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 2,313 $ 1,507
Accrued liabilities ..................................................... 16,057 11,850
Current portion of long-term notes payable .............................. 2,770 1,505
Due to medical practices ................................................ 8,328 4,299
Shared Risk Revenue Patient Deposits .................................... 9,753 6,526
--------- ---------
Total current liabilities ........................................... 39,221 25,687
Deferred tax liability ..................................................... 1,329 1,732
Long-term notes payable and other obligations .............................. 22,662 7,269
--------- ---------
Total Liabilities .................................................. 63,212 34,688
Commitments and Contingencies
Shareholders' equity:
Common Stock, $.01 par value .......................................... 85 81
Capital in excess of par ................................................ 53,598 49,245
Other comprehensive loss ................................................ (23) (9)
Accumulated deficit ..................................................... (6,090) (8,483)
--------- ---------
Total shareholders' equity .......................................... 47,570 40,834
--------- ---------
Total liabilities and shareholders' equity .......................... $ 110,782 $ 75,522
========= =========
See accompanying notes to the consolidated financial statements.
3
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(all amounts in thousands, except per share amounts)
(unaudited)
For the For the
three-month period nine-month period
ended September 30, ended September 30,
--------------------- -------------------
2007 2006 2007 2006
-------- --------- ------- --------
Revenues, net
Fertility Centers .................... $ 31,046 $ 28,256 $ 89,866 $ 84,401
Consumer Services .................... 4,579 3,598 12,155 9,696
Vein Clinics ......................... 4,687 -- 4,687 --
--------- --------- --------- ---------
Total revenues ................... 40,312 31,854 106,708 94,097
--------- --------- --------- ---------
Costs of services and sales:
Fertility Centers .................... 28,332 26,082 82,312 78,136
Consumer Services .................... 3,368 2,414 8,873 6,509
Vein Clinics ......................... 4,159 -- 4,159 --
--------- --------- --------- ---------
Total costs of services and sales 35,859 28,496 95,344 84,645
--------- --------- --------- ---------
Contribution
Fertility Centers .................... 2,714 2,174 7,554 6,265
Consumer Services .................... 1,211 1,184 3,282 3,187
Vein Clinics ......................... 528 -- 528 --
--------- --------- --------- ---------
Total contribution ............... 4,453 3,358 11,364 9,452
--------- --------- --------- ---------
General and administrative expenses ..... 2,850 2,504 8,024 7,084
Interest income ......................... (294) (269) (988) (750)
Interest expense ........................ 328 174 605 532
--------- --------- --------- ---------
Total other expenses ............. 2,884 2,409 7,641 6,866
--------- --------- --------- ---------
Income before income taxes .............. 1,569 949 3,723 2,586
Income tax provision .................... 608 367 1,330 995
--------- --------- --------- ---------
Net income .............................. $ 961 $ 582 $ 2,393 $ 1,591
========= ========= ========= =========
Basic and diluted net earnings per share:
Basic earnings per share ............. $ 0.11 $ 0.08 $ 0.29 $ 0.20
Diluted earnings per share ........... $ 0.11 $ 0.07 $ 0.29 $ 0.19
Weighted average shares - basic ...... 8,389 7,631 8,228 8,075
Weighted average shares - diluted .... 8,487 7,901 8,330 8,213
See accompanying notes to the consolidated financial statements.
4
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(all amounts in thousands)
(unaudited)
Accumulated Other
Common Stock Capital in Comprehensive Treasury Stock Accumulated Total
Shares Amount Excess of Par Income Shares Amount Deficit Equity
------ ------ ------------- ------ ------ ------ ------- ------
BALANCE AT DECEMBER 31, 2006..........8,127 $81 $49,245 $(9) -- -- $(8,483) $40,834
Net income for the nine months ended
September 30, 2007................. -- -- -- -- -- -- 2,393 2,393
Issuance of common stock for
VCA acquisition................... 336 3 3,997 -- -- -- -- 4,000
Stock grants issued, net.............. 44 -- -- -- 5 (63) -- (63)
Stock grant amortization.............. -- -- 358 -- -- -- -- 358
Exercise of common stock options...... 23 1 61 -- -- -- -- 62
Unrealized loss on hedging transaction -- -- -- (14) -- -- -- (14)
Cancellation and retirement of
treasury stock (5) -- (63) -- (5) 63 -- --
BALANCE AT September 30, 2007.........8,525 $85 $53,598 $(23) -- $-- $(6,090) $47,570
===== === ======= ==== ===== === ======= =======
See accompanying notes to the consolidated financial statements.
5
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts in thousands)
For the For the
Three month period Nine month period
ended September 30, ended September 30,
------------------- -------------------
2007 2006 2007 2006
------- -------- ------- --------
Cash flows from operating activities:
Net income ................................................... $ 961 $ 582 $ 2,393 $ 1,591
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation and amortization .............................. 1,665 1,354 4,682 4,215
Deferred income tax provision .............................. -- (315) (20) 185
Stock-based compensation ................................... 133 99 358 300
Changes in assets and liabilities, net of acquired assets
and liabilities --
Patient and other receivables ........................... (596) 113 (571) 135
Prepaids and other current assets ....................... 732 58 1,056 (725)
Other assets ............................................ 784 -- 822 (84)
Accounts payable ........................................ 892 -- 147 (152)
Accrued liabilities ..................................... (578) 578 (956) 1,825
Due to medical practices ................................ 2,495 (728) 4,029 (1,101)
Shared Risk and Vein Clinics patient deposits ........... 175 764 2,126 1,744
-------- -------- -------- --------
Net cash provided by operating activities ........................ 6,663 2,505 14,066 7,933
Cash flows from investing activities:
Purchase of business service rights .............................. (2,153) -- (2,653) --
Cash paid to purchase VCA, net of cash acquired .................. (23,442) -- (23,442) --
Other intangibles ................................................ 33 -- (4) --
Proceeds from sale of fixed assets ............................... -- 514 -- 514
Purchase of fixed assets and leasehold improvements .............. (2,119) (801) (4,213) (2,250)
-------- -------- -------- --------
Net cash used in investing activities ............................ (27,681) (287) (30,312) (1,736)
Cash flows from financing activities:
Proceeds from issuance of debt ............................... 25,000 -- 25,000 --
Principal repayments on debt ................................. (14,381) (376) (15,132) (1,126)
Common Stock transactions, net ............................... -- 9 62 207
-------- -------- -------- --------
Net cash provided by (used in) financing activities .............. 10,619 (367) 9,930 (919)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ............. (10,399) 1,851 (6,316) 5,278
Cash and cash equivalents at beginning of period ................. 36,267 25,948 32,184 22,521
-------- -------- -------- --------
Cash and cash equivalents at end of period ....................... 25,868 27,799 25,868 27,799
======== ======== ======== ========
Supplemental Information:
Interest paid ............................................... 51 178 314 526
Income taxes paid ........................................... 125 -- 642 247
See note 2 for description of Vein Clinics of America acquisition.
See accompanying notes to the consolidated financial statements.
6
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- INTERIM RESULTS:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, accordingly, do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying unaudited interim financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position at September 30, 2007, and the results of
operations and cash flows for the interim periods presented. Operating results
for the interim period are not necessarily indicative of results that may be
expected for the year ending December 31, 2007. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in IntegraMed America's Annual Report on Form 10-K for the year
ended December 31, 2006.
NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements comprise the accounts of IntegraMed
America, Inc. and its wholly owned subsidiaries.
Vein Clinics of America, Inc. Transaction-
On August 8, 2007, we acquired of all of the common stock of Vein Clinics of
America, Inc. (VCA) for approximately $24 million in cash, $4 million in
IntegraMed common stock and the assumption of $6.6 million of debt. The
acquisition will be treated as a purchase business combination for accounting
purposes and VCA assets acquired and liabilities assumed will be recorded at
fair value. We have reflected the preliminary assessment of the purchase price
allocation, as of the date of the acquisition. The final assessment of the fair
value of the assets and liabilities could change. Any such change would be
reflected in regular quarterly financial reporting as an adjustment to goodwill.
Further, the finalization of the purchase price is subject to adjustment based
upon the terms of the purchase agreement, including calculation of the final
"working capital" at the date of acquisition, as defined in the agreement. We
anticipate valuation adjustments to be substantially complete in the fourth
quarter of 2007.
The Company is still in the process of completing its allocation of the purchase
price, and the final allocation is subject to completion of a review of acquired
intangibles by a third party valuation specialist. Our preliminary allocation
consists of (000's omitted):
Total purchase price................................. $28,000
Transaction costs and purchase price adjustments..... 1,711
Add net liabilities acquired......................... 3,962
-------
Total............................................ 33,673
Less: Indentified indefinite life intangibles........ 4,340
-------
Goodwill............................................. $29,333
=======
Contingent consideration payments, if any, related to earn out provisions of the
purchase agreement (based on attainment of certain levels of earnings before
interest, taxes, depreciation and amortization for 2007 and 2008) have been
excluded from the above calculation as they are not estimable at this time. Such
payments, if any, will be paid 50% in cash and 50% in stock and will result in
an adjustment to the purchase price and allocated to goodwill. Currently, no
contingent earn out provisions have been met and no payments are due.
The results of VCA are included in these financial statements from the date of
the acquisition.
7
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The unaudited pro forma consolidated statements of income give effect to the
acquisition and related financing transaction as if they had occurred on January
1, 2007.
The unaudited pro forma financial statement is based on available information
and certain estimates and assumptions set forth in the accompanying notes. This
unaudited pro forma financial statement does not give effect to any integration
costs or any cost savings or other operating efficiencies that could result from
the acquisition. This unaudited pro forma financial statement is provided for
informational purposes only, and does not purport to represent our results of
operations that would have been achieved if the acquisition and related
financing transaction had occurred on the dates noted above, or to project the
results of operations for any future date or period.
Nine months ended
September 30. 2007
------------------
(000's omitted,except per share amounts)
Revenues $126,812
Contribution 13,193
Net Income 2,749
Earnings per share- basic $0.32
Earnings per share- fully diluted $0.32
Reporting Basis-
With the acquisition of Vein Clinics of America (VCA) in the third quarter of
2007, we reorganized our service offerings into three major product lines,
Fertility Centers, Consumer Services and Vein Clinics - See note 5 for further
details. In our Fertility Centers Segment, we derive our revenues from business
service contracts with independent fertility centers. Our Consumer Services
Segment derives its revenues from fees assessed to patients enrolling in our
Shared Risk(R) Refund program, fees assessed to affiliated fertility clinics,
and the sale of pharmaceutical products to fertility patients. In our Vein
Clinics Segment, net patient service revenue is recognized based upon the amount
billed to the patient less any expected contractual allowances resulting from
specified rates contained within patient health insurance contracts.
Our Vein Clinic Segment also records an allowance for uncollectible accounts
receivable, as determined based upon historical performance. Additionally,
amounts received from patients in advance of services performed are recorded as
a patient deposit on our consolidated balance sheet.
We report the results of our clinic operations in accordance with FASB
Interpretation No. 46 (FIN 46R) "Consolidation of Variable Interest Entities"
("VIE's"). Since we do not have a controlling financial interest in any of the
fertility medical practices to which we provide services, we do not consolidate
their results. We do have a controlling financial interest in the operations of
each of the vein clinics and therefore consolidate the results of those clinic
operations. Accordingly, we report the revenue for patient services only from
the vein clinic segment and those fertility patients who enroll in the shared
risk services program (included in our consumer services segment)
Reclassifications-
With the addition of VCA, we have realigned the way we operate our business into
three segments. As a result we have reclassified certain costs within the three
divisions to reflect this change in our operating structure. The result of this
change is to reduce overall contribution margins and unallocated General &
Administrative costs, as reported in previous periods, to provide a clearer view
of each division's operating performance and efficiency.
8
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3 -- COMMON SHARES OUTSTANDING:
All common share numbers reported herein reflect the 25% stock split effected in
the form of a stock dividend declared by the Board of Directors on May 22, 2006
and paid on June 21, 2006, and the 25% stock split effected in the form of a
stock dividend declared by the Board of Directors on March 19, 2007 and paid on
May 4, 2007.
NOTE 4 -- EARNINGS PER SHARE:
The reconciliation of the numerators and denominators of the basic and diluted
EPS computations for the three and nine month periods ended September 30, 2007
and 2006 is as follows (000's omitted, except for per share amounts):
For the For the
three-month period nine-month period
ended September 30, ended September 30,
------------------- -------------------
2007 2006 2007 2006
---------- -------- --------- ---------
Numerator
Net Income ................................... $ 961 $ 582 $2,393 $1,591
Denominator
Weighted average shares outstanding (basic) .. 8,389 7,631 8,228 8,075
Effect of dilutive options and warrants ...... 98 270 102 138
------ ------ ------ ------
Weighted average shares and dilutive potential
Common shares (diluted) ................. 8,487 7,901 8,330 8,213
Basic EPS .................................... $ 0.11 $ 0.08 $ 0.29 $ 0.20
====== ====== ====== ======
Diluted EPS .................................. $ 0.11 $ 0.07 $ 0.29 $ 0.19
====== ====== ====== ======
For the three and nine month periods ended September 30, 2007 and 2006, there
were no outstanding options to purchase shares of Common Stock which were
excluded from the computation of the diluted earnings per share amount as the
exercise prices of all outstanding options were less than the average market
price of the shares of Common Stock.
NOTE 5 -- SEGMENT INFORMATION:
With the acquisition of Vein Clinics of America (VCA) in the third quarter of
2007, we reorganized our service offerings into three major product lines,
Fertility Centers, Consumer Services and Vein Clinics. Each of the operating
segments includes an element of overhead specifically associated with it. Such
overhead costs were previously reported as General and Administrative costs.
Such costs were reclassified in all periods presented.
Performance by segment, for the three and nine month periods ended September 30,
2007 and 2006 are presented below.
9
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Fertility Consumer Vein
Centers Services Clinics Corp G&A Consolidated
------- -------- ------- -------- ------------
For the three months ended September 30, 2007
Revenues ............................... $ 31,046 $ 4,579 $ 4,687 $ -- $ 40,312
Cost of Services ....................... 28,332 3,368 4,159 -- 35,859
--------- --------- --------- --------- ---------
Contribution ........................... 2,714 1,211 528 -- 4,453
Operating Margin ....................... 8.7% 26.4% 11.3% 0.0% 11.0%
General and administrative ............. -- -- -- 2,850 2,850
Interest, net .......................... (44) -- 2 76 34
--------- --------- --------- --------- ---------
Income before income taxes ............. 2,758 1,211 526 (2,926) 1,569
========= ========= ========= ========= =========
Depreciation expense included at ....... 1,023 1 90 226 1,340
Capital expenditures ................... 1,469 -- 373 227 2,119
Total assets ........................... 43,362 840 42,302 24,278 110,782
For the nine months ended September 30, 2007
Revenues ............................... $ 89,866 $ 12,155 $ 4,687 $ -- $ 106,708
Cost of Services ....................... 82,312 8,873 4,159 -- 95,344
--------- --------- --------- --------- ---------
Contribution ........................... 7,554 3,282 528 -- 11,364
Operating Margin ....................... 8.4% 27.0% 11.3% 0.0% 10.6%
General and administrative ............. -- -- -- 8,024 8,024
Interest, net .......................... (159) -- 2 (226) (383)
--------- --------- --------- --------- ---------
Income before income taxes ............. 7,713 3,282 526 (7,798) 3,723
========= ========= ========= ========= =========
Depreciation expense included at ....... 2,927 2 90 645 3,664
Capital expenditures ................... 3,235 -- 373 605 4,213
Total assets ........................... 43,362 840 42,302 24,278 110,782
For the three months ended September 30, 2006
Revenues ............................... $ 28,256 $ 3,598 $ -- $ -- $ 31,854
Cost of Services ....................... 26,082 2,414 -- -- 28,496
--------- --------- --------- --------- ---------
Contribution ........................... 2,174 1,184 -- -- 3,358
Operating Margin ....................... 7.7% 32.9% 0.0% 0.0% 10.5%
General and administrative ............. -- -- -- 2,504 2,504
Interest, net .......................... -- -- -- (95) (95)
--------- --------- --------- --------- ---------
Income before income taxes ............. 2,174 1,184 -- (2,409) 949
========= ========= ========= ========= =========
Depreciation expense included at ....... 883 -- -- 159 1,042
Capital expenditures ................... 679 -- -- 122 801
Total assets ........................... 41,051 1,582 -- 27,145 69,778
10
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Fertility Consumer Vein
Centers Services Clinics Corp G&A Consolidated
------- -------- ------- -------- ------------
For the nine months ended September 30, 2006
Revenues...................................... $ 84,401 $9,696 $ -- $ -- 94,097
Cost of Services.............................. 78,136 6,509 -- -- 84,645
--------- ------- ---- ---- --------
Contribution.................................. 6,265 3,187 -- -- 9,452
Operating Margin.............................. 7.4% 32.9% 0.0% 0.0% 10.0%
General and administrative.................... -- -- -- 7,084 7,084
Interest income, net.......................... -- -- -- (218) (218)
-------- -------- ----- ------- -------
Income before income taxes.................... 6,265 3,187 -- (6,866) 2,586
======= ======== ===== ======= =======
Depreciation expense included above........... 2,708 -- -- 447 3,155
Capital expenditures.......................... 1,700 -- -- 550 2,250
Total assets.................................. 41,051 1,582 -- 27,145 69,778
NOTE 6 - INTANGIBLE ASSETS:
Intangible assets consist principally of payments to contracted Fertility
Centers for business service rights, the excess of cost over the fair value of
net assets acquired (goodwill arising from the VCA transaction) and trademarks.
In the current quarter we recorded additional business services rights of
approximately $2.1 million related to our recent agreement with the Center for
Reproductive Medicine, based in Orlando, Florida. We also recorded approximately
$29.3 million of goodwill and $4.3 million of trademarks related to our
acquisition of the Vein Clinics of America, as part of the purchase price
allocation. Generally, we amortize business service rights over the life of the
underlying Fertility Center agreement. Goodwill and our trademarks have an
indefinite life and are currently not being amortized.
We test all our individual intangible assets for impairment in accordance with
the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." This
test consists of a two-step process. The first step is to identify potential
impairment by comparing the fair value of the underlying asset with its carrying
amount. If the fair value, which is based on future cash flows, exceeds the
carrying amount, the intangible asset is not considered impaired. If the
carrying amount exceeds the fair value, the second step must be performed to
measure the amount of the impairment loss, if any. The second step compares the
implied fair value of the intangible with the carrying amount of that
intangible. If the implied fair value is less than the carrying amount, an
impairment loss would be recognized in an amount equal to the excess of the
carrying amount of the intangible over its implied fair value. To date we have
not recorded any impairment losses.
As of September 30, 2007 and December 31, 2006, we had unamortized intangible
assets of $56,359,000 and $22,905,000, respectively. The following table details
amounts relating to those assets (000's omitted):
11
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
September 30, December 31,
2007 2006
------------- -------------
Carrying Carrying
Amount Amount
-------- --------
Business Service Rights....................................... $33,439 $32,682
Goodwill...................................................... 29,333 --
Trademarks.................................................... 4,396 13
Less accumulated amortization and other adjustments........... (10,809) (9,790)
------- -------
Total......................................................... $56,359 $22,905
======= =======
Amortization expense related to our business service rights, totaled $1,018,000
and $1,496,000 for the nine and twelve month periods ended September 30, 2007
and December 31, 2006 respectively.
NOTE 7 - DUE TO MEDICAL PRACTICES:
Due to Fertility Medical Practices is comprised of the net amounts owed by us to
medical practices contracted as Fertility Centers. We do not consolidate the
results of the Fertility Centers into our accounts. This balance is comprised of
amounts due to us by the medical practices for funds, which we advanced for use
in financing their accounts receivable, less balances owed to the medical
practices by us for undistributed physician earnings and patient deposits we
hold on behalf of the medical practices.
As of September 30, 2007 and December 31, 2006, Due to Medical Practices was
comprised of the following balances (000's omitted):
2007 2006
--------- --------
(unaudited)
Advances to Practice................... $(17,499) $(12,732)
Undistributed Physician Earnings....... 5,336 2,839
Physician Practice Patient Deposits.... 20,491 14,192
--------- ---------
Due to Medical Practices, net.......... $ 8,328 $ 4,299
========= =========
NOTE 8 - STOCK-BASED EMPLOYEE COMPENSATION:
As of September 30, 2007, we had two stock-based employee compensation plans,
which are described more fully in Note 13 of the financial statements in our
most recent Annual Report on Form 10-K.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share Based
Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Effective January 1, 2006, we
adopted SFAS No. 123(R). For the three and nine month periods ended September
30, 2006, we recorded a charge to earnings to recognize compensation expense of
$27,000 and $87,000, respectively, related to the value of outstanding stock
options issued in prior years which vested in 2006. As of September 30, 2007, we
had no unrecognized compensation costs related to stock options which had been
previously granted under our plans as all options are currently vested.
We also issue restricted stock grants to officers and members of the Board of
Directors. Stock granted to Board members vests immediately and stock granted to
officers generally vests over a period of three years. Our General and
Administrative expense includes compensation costs recognized in connection with
these restricted stock grants of $133,000 and $358,000 for the three and nine
month periods ended September 30, 2007 and $99,000 and $300,000 for the three
and nine month periods ended September 30, 2006, respectively.
12
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 9 -- INTEREST RATE HEDGING TRANSACTION:
In the normal course of business we are exposed to the risk that our earnings
and cash flows could be adversely impacted by market driven fluctuations in the
level of interest rates. It is our policy to manage these risks by using a mix
of fixed and floating rate debt and derivative instruments.
During the second quarter of 2006 we entered into an interest rate swap
agreement designed to hedge the risks associated with our floating rate debt.
During the third quarter of 2007, this agreement was terminated and a new
agreement was negotiated as part of our new bank term loan. As a result of these
agreements, our net income includes financing costs associated with these
transactions of approximately $0 in the third quarter of 2007 and $4,000 in the
first nine months of 2007. We expect to record additional financing costs of
approximately $240,000 over the coming twelve months, given current interest
rate forecasts. In addition to the costs included in our reported net income,
this hedge also generated non-recognized loss of approximately $17,000 for the
third quarter of 2007, and a loss of approximately $23,000 for the first nine
months ended September 30, 2007 which is reported as part of our comprehensive
income.
We deem this hedge to be highly effective as it shares the same valuation,
termination date and amortization schedule as the underlying debt subject to the
hedge. In addition the swap transaction was structured such that the change in
fair value of the swap inversely mimics the hedged item. As of September 30,
2007, we had no other hedge or derivative transactions.
The following table summarizes total comprehensive income (loss) for the
applicable periods (000's omitted):
For the For the
three-month period nine-month period
September 30, September 30,
------------------ ------------------
2007 2006 2007 2006
-------- ------- ------- -------
Net income as reported ................... $ 961 $ 582 $ 2,393 $ 1,591
Net gain (loss) on derivative transactions (17) 33 (14) (11)
------- ------- ------- -------
Total comprehensive income ............... $ 944 $ 615 $ 2,379 $ 1,580
======= ======= ======= =======
NOTE 10 -- LITIGATION:
From time to time, we are party to legal proceedings in the ordinary course of
business. As of September 30, 2007, none of these proceedings is expected to
have a material adverse effect on our financial position, results of operations
or cash flows.
NOTE 11 -- RECENT ACCOUNTING STANDARDS:
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and will become effective for us
beginning with the first quarter of 2008. We do not believe the adoption of SFAS
No. 159 will have a material impact on our financial statements.
13
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SFAS No. 157, Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and will become effective for us beginning with the first
quarter of 2008. We do not believe the adoption of SFAS No. 159 will have a
material impact on our financial statements.
14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included in this report and
with IntegraMed America Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2006.
Forward Looking Statements
This Form 10-Q and discussions and/or announcements made by or on behalf of us,
contain certain forward-looking statements regarding events and/or anticipated
results within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the attainment of which involves
various risks and uncertainties. Forward-looking statements may be identified by
the use of forward-looking terminology such as, "may", "will", "expect",
"believe", "estimate", "anticipate", "continue", or similar terms, variations of
those terms or the negative of those terms. Our actual results may differ
materially from those described in these forward-looking statements due to the
following factors: our ability to acquire additional Fertility Partner
agreements or open additional vein clinics, our ability to raise additional debt
and/or equity capital to finance future growth, the loss of significant Partner
agreement(s), the profitability or lack thereof at fertility centers or vein
clinics serviced by us, increases in overhead due to expansion, the exclusion of
fertility and Assisted Reproductive Technology (ART) services or vein care from
insurance coverage, government laws and regulation regarding health care,
changes in managed care contracting, the timely development of and acceptance of
new fertility, ART, genetic or vein treatment technologies and techniques. We
are under no obligation (and expressly disclaim any such obligation) to update
or alter any forward-looking statements whether as a result of new information,
future events or otherwise.
Business Overview
IntegraMed America, Inc. offers products and services to patients and providers
in the fertility medical sector and services to patients seeking vein disease
treatment. As of September 30, 2007, our business comprised of:
Fertility Centers --
o A Network of nine contracted fertility centers in major markets across
the United States receiving the company's full compliment of services;
o Products and services designed to support fertility center growth; and
o Captive insurance offerings.
Nine fertility centers have access to our entire portfolio of products and
services under our comprehensive Partner program. All centers, including those
referred to under Consumer Services below, have access to our Consumer services,
principally the Shared Risk Refund program, as well as pharmaceutical offerings
and patient financing products.
Consumer Services --
o Products and services in the pharmaceutical and patient financing
areas; and
o A Network of 20 Affiliate fertility centers in major markets across the
U.S. receiving limited services.
The primary service in this segment is the Shared Risk Refund program which
enables a patient to contract for a total of 6 assisted reproductive technology
treatments for an affordable fee and to qualify for up to a 100% refund if
treatment does not result in a successful birth. IntegraMed developed this
program in 2001, and it has become an important competitive advantage in the
marketplace. Further, as our highest margin business, Shared Risk Refund has
become an important contributor to the Company's overall performance.
Twenty Affiliated fertility centers subscribe to discrete service packages
provided by us and have the right to distribute our Consumer products.
Vein Clinics --
o Services to patients affected by varicose vein disease through a
network of 27 vein clinics in major markets
15
The primary elements of our Company strategy include:
o Expanding our network of fertility and vein centers into new major
markets;
o Increasing the number and value of Consumer Service packages purchased
by Affiliates in our network;
o Entering into additional Partner contracts with Affiliated and
non-Affiliated fertility centers;
o Opening new vein treatment clinics;
o Increasing revenues and profits at contracted fertility centers and
consolidated vein clinics;
o Increasing sales of Shared Risk Refund, pharmaceutical and treatment
financing products to fertility patients; and
o Leveraging Corporate general and administrative costs over a larger
base of operations.
The business strategy of our Fertility Center segment is to leverage our deep
expertise and commitment to improved fertility center performance by providing
the best value-specific offerings designed to manage and grow the center within
the context of a long-term relationship.
The business strategy of our Consumer Segment is to provide products and
services that make obtaining high quality fertility treatment easier and more
affordable for patients.
The business strategy of the Vein Clinic segment is provide technologically
advanced care for varicose vein disease to an underserved population through the
opening of additional clinics, growing each of the clinics and achieving higher
productivity and profitability at each clinic.
Major events impacting financial condition and results of operations
2007
On March 19, 2007, we declared a 25% stock split effected in the form of a
stock dividend for all holders of record as of April 13, 2007. As a result of
this dividend, 1,628,907 new shares of common stock were issued on the payment
date of May 4, 2007. No fractional shares were issued as all fractional amounts
were rounded up to the next whole share. All weighted average shares outstanding
and earnings per share calculations in this filing have been restated to reflect
this stock split.
On August 8, 2007, we acquired all of the outstanding stock of Vein Clinics of
America, Inc. for approximately $24 million in cash, $4 million in IntegraMed
common stock and the assumption of $6.6 million of debt. The results of VCA are
included in our financial statements contained elsewhere in this report from the
date of the acquisition.
Also on August 8, 2007 we entered into a Second Amended and Restated Loan
Agreement with Bank of America. The new term loan is in the amount of $25
million (the proceeds of which were applied to repay our original term loan and
finance in part the Vein Clinics of America, Inc. transaction). Interest on the
new term loan is at LIBOR plus 2% to 2.75% depending upon the level of the ratio
of consolidated debt to EBITDA. The loan agreement also contains provisions for
a revolving line of credit in the amount of $10 million. Interest on the
revolver is at LIBOR plus 1.5% to 2.5% depending on the level of the ratio of
consolidated debt to EBITDA. No amounts were drawn on the revolver.
On August 29, 2007, we entered in to a Business Services Agreement with the
Center for Reproductive Medicine in Orlando Florida.
2006
On May 22, 2006, we declared a 25% stock split effected in the form of a stock
dividend for all holders of record as of June 7, 2006. As a result of this
dividend, 1,291,368 new shares of common stock were issued on the payment date
of June 21, 2006. No fractional shares were issued as all fractional amounts
were rounded up to the next whole share. All weighted average shares outstanding
and earnings per share calculations in this filing have been restated to reflect
this stock split.
16
During October 2006, we provided notification that our financial statements for
2005 and the first two quarters of 2006 could not be relied on, and were
restated due to an accounting error. The restatements did not result in any
changes to net income or earnings per share for any period, but affected our
intangible assets, deferred tax assets and deferred tax liabilities, all
non-cash items. All periods affected by this error have been restated throughout
this document as appropriate.
Results of Operations
The following table shows the percentage of net revenue represented by various
expenses and other income items reflected in our statement of operations for the
three- and nine-month periods ended September 30, 2007 and 2006:
For the For the
three-month period nine-month period
ended September 30, ended September 30,
---------------------- ----------------------
2007 2006 2007 2006
-------- --------- --------- ---------
Revenues, net:
Fertility Centers.......................... 77.0% 88.7% 84.2% 89.7%
Consumer Services.......................... 11.4% 11.3% 11.4% 10.3%
Vein Clinics............................... 11.6% 0.0% 4.4% 0.0%
Total revenues......................... 100.0% 100.0% 100.0% 100.0%
Costs of services incurred:
Fertility Centers.......................... 70.3% 81.9% 77.1% 83.1%
Consumer Services.......................... 8.4% 7.6% 8.3% 6.9%
Vein Clinics............................... 10.3% 0.0% 3.9% 0.0%
Total costs of service................. 89.0% 89.5% 89.3% 90.0%
Contribution:
Fertility Centers.......................... 6.7% 6.8% 7.1% 6.6%
Consumer Services.......................... 3.0% 3.7% 3.1% 3.4%
Vein Clinics............................... 1.3% 0.0% 0.5% 0.0%
Total contribution..................... 11.0% 10.5% 10.7% 10.0%
General and administrative expenses........... 7.1% 7.7% 7.5% 7.5%
Interest income............................... (0.8)% (0.8)% (0.9)% (0.8)%
Interest expense.............................. 0.8% 0.6% 0.6% 0.6%
Total other expenses................... 7.1% 7.5% 7.2% 7.3%
Income from operations before income taxes.... 3.9% 3.0% 3.5% 2.8%
Income tax provision.......................... 1.5% 1.2% 1.3% 1.1%
Net income ................................... 2.4% 1.8% 2.2% 1.7%
Revenues
Fertility Centers Segment
In providing clinical care to patients, each of our Fertility Centers generates
patient revenue which we do not report in our financial statements. Although we
do not consolidate the physician practice financials with our own, the financial
results of these practices do directly affect our revenues.
The components of our revenue from each of the Fertility Centers are:
(i) A Base Service fee calculated as a percentage of patient revenue as
reported by the Fertility Centers (percentage varies from 6% down to 3%
depending on the level of patient revenues);
(ii) Cost of Services equal to reimbursement for the expenses which we
advanced to the Fertility Centers during the month (representing
substantially all of the expenses incurred by the practice); and
(iii) Our Additional fees which represent our share of the net income of the
Fertility Centers (which varies from 10% to 20% or a fixed amount
depending on the Fertility Centers).
17
From the total of our revenues, we subtract the annual amortization of our
Business Service Rights, which are the rights to provide Business Services to
each of the Fertility Centers.
In addition to revenues generated from Fertility Centers, we receive
miscellaneous revenues related to providing services to medical practices.
Fertility Center revenues in the third quarter of 2007 increased by $2.8 million
or 9.9% from the same period in 2006. For the nine months, Fertility Center
revenues increased by $5.5 million or 6.5% from the same period last year. This
growth is attributed to increased patient revenues driven by effective marketing
programs, and higher contribution margins resulting from an increased focus on
expense management and operational efficiencies.
The table below illustrates the components of Fertility Centers revenue in
relation to the physician practice financials for the third quarter and the
first nine months of 2007 compared to 2006:
Three Months Ending Nine Months Ending
September 30, September 30,
------------------- ----------------------
2007 2006 2007 2006
------- ------- ------- ---------
Physician Financials
(a) Patient revenue $43,084 $38,409 $123,612 $113,689
(b) Cost of services 27,776 25,679 80,943 76,906
(c) Base service fee 1,972 1,808 5,725 5,346
------- ------- ------- -------
(d) Practice contribution (a-b-c) 13,336 10,922 36,944 31,437
(e) Physician compensation 12,026 9,820 33,175 28,320
(f) IntegraMed additional fee 1,288 1,102 3,770 3,117
IntegraMed Financials
IntegraMed gross revenue (b+c+f) 31,036 28,589 90,438 85,369
(g) Amortization of business service rights (325) (374) (1,018) (1,122)
(h) Other revenue 335 41 446 154
------- ------- ------- -------
(i) IntegraMed provider services revenue (g+h+i) 31,046 28,256 89,866 84,401
======= ======= ======= =======
Consumer Services Segment
Revenues from our Shared Risk Refund program represent over 79% of our Consumer
Services Segment revenues. Patients enrolled in the Shared Risk Refund program
pay us an upfront fee (deposit) in return for up to six ART treatments (3 fresh
embryo; 3 frozen embryo). The non-refundable portion of the fee is recognized as
revenue at the completion of the first treatment. The remainder is recognized or
refunded at the time of a treatment outcome (clinical pregnancy) or issued as a
refund if treatment fails. The two main factors that impact Shared Risk revenue
(and contribution) are:
(i) Number of patients enrolled and receiving treatment
(ii) In vitro fertilization cycle outcomes (pregnancy success rates).
In the first nine months of 2007, the Shared Risk Refund program continued to
experience significant growth, with three-month and nine-month revenues as of
September 30, 2007 rising $1.1 million (or 33%) and $2.6 million (or 31%)
respectively over the same periods in the prior year. This growth is primarily
due to increased patient enrollments into the program (24% increase for the
second quarter of 2007 over the second quarter of 2006, and 39% for the first
half 2007 over the first half 2006). The higher patient enrollments are a direct
result of an increased adoption of the program within the physician practices in
our network. Average success rates (in-vitro fertilization cycle pregnancy
outcomes) in the program during 2007 have not changed significantly from 2006.
Pharmaceutical revenue was $20,000 for the three months ended September 30,
2007, compared to $113,000 during the same prior last year. For the nine months
to date, revenue was $109,000 compared to $369,000 in the same period last year.
This decline is a result of decreasing margins due to pharmaceutical cost
increases which are not able to be passed on to the consumer as a result of
competitive pressures.
18
Vein Clinics Segment
Revenues for the three and nine months ended September 30, 2007 represent the
results for the seven weeks since acquisition. Revenues in this segment are
generally from billings to patients or their insurer for vein disease treatment
services. Revenues reported by VCA on a stand alone basis for the three and nine
months ended September 30, 2007 were $8.2 million and $24.8 million,
respectively.
Contribution
Our 2007 third quarter contribution of $4.5 million increased 33% from the third
quarter of 2006. As a percentage of reported revenue, our contribution margin
increased to 11.0% in the third quarter of 2007, versus 10.5% in 2006. Our
nine-month contribution of $11.4 million increased approximately 20% from the
same period last year. As a percentage of reported revenue, our contribution
margin increased to 10.6% during the first nine months of 2007, versus 10.0%
during the same period in 2006.
Fertility Centers Segment
Fertility Center contribution in the third quarter of 2007 increased by
approximately $540,000, or 24.8% from the same period in the prior year. During
the first nine months, Fertility Center contribution increased by approximately
$1,289,000, or 20.6% from the same period in 2006. This increase is primarily
attributable to the continued revenue and margin growth of our Fertility
Centers, and our new Fertility center location based in Orlando, Florida, which
contributed $47,000 to the third quarter of 2007.
Consumer Services Segment
Contribution from our Consumer Services segment grew by 2.2% and 3.0% in the
third quarter and first nine months of 2007, compared to the same periods in the
prior year. Continued contribution growth from our Shared Risk Refund unit, up
15% for the quarter and up 14.7% for the nine months versus the prior year, was
offset by declines in our pharmaceutical lines.
Vein Clinics Segment
Vein Clinics contribution was 11.3% of this Segment's revenue for the seven
weeks since the acquisition.
General and Administrative Expenses
General and Administrative (G&A) expenses are comprised of salaries and
benefits, administrative, regulatory compliance, and operational support costs
which are not specifically related to individual clinical operations or other
product offerings. These costs were approximately 64.0% of contribution in the
third quarter, compared to 74.6% during the same period last year. For the first
nine months of 2007, G&A expenses were 70.6% of contribution, compared to 74.9%
for the same period last year. The Company continues to actively manage G&A
expenses in an effort to drive economies of scale from growth in total
contribution.
Interest
During the third quarter of 2007, our previously disclosed acquisition of Vein
Clinics of America, and purchase of Business Service Rights related to our
Orlando based Fertility Center location, resulted in a use of cash of
approximately $25.6 million. Taking into account these investments, average cash
balances slightly exceeded those of the prior year. As a result, interest income
increased by 9.3%, or $25,000, for the three months ending September 30, 2007,
compared to the same period in 2006. For the first nine months of 2007, interest
income increased by 31.7%, or $238,000, compared to the same period in 2006.
This increase in interest earnings is primarily attributed to higher average
cash balances invested during the first nine months of 2007 versus the same
period in 2006.
In the third quarter of 2007, interest expense increased by 88.5%, or $154,000,
from the same period in 2006. This increase is directly related to higher debt
levels associated with the refinancing of the debt resulting from the Vein
Clinic and Orlando Business Service Rights acquisitions, which resulted in a net
additional borrowings of approximately $15 million. For the first nine months of
19
2007, interest expense increased by 13.7%, or $73,000, from the same period in
2006, as a result of higher average debt levels related to the Vein Clinic and
Orlando acquisitions.
Income tax provision
Our provision for income tax was approximately $0.6 million and $1.3 million for
the three months and nine months ended September 30, 2007, respectively, or
38.8% and 35.7% of pre-tax income, respectively. This is compared to $0.4
million and $1.0 million for the three months and nine months ended September
30, 2006, respectively, or 38.7% and 38.5% of pre-tax income, respectively. Our
effective tax rates for 2007 and 2006 reflect provisions for both current and
deferred federal and state income taxes. The lower effective tax rate for the
nine months ended September 30, 2007 is mainly due to an increase in tax-exempt
interest income projected for the year compared with 2006. The higher effective
tax rate for the three months ended September 30, 2007 is mainly due to a change
in the projected tax-exempt interest income for the year.
Effective January 1, 2007, we adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48 (FIN No. 48), "Accounting for Uncertainty in Income
Taxes," which clarifies the accounting and disclosure for uncertainty in income
taxes. The adoption of this interpretation did not have a material impact on our
financial statements.
We file income tax returns in the U.S. federal jurisdiction and various states.
For federal income tax purposes, our 2004 through 2006 tax years remain open for
examination by the tax authorities under the normal three year statute of
limitations. For state tax purposes, our 2003 through 2006 tax years remain open
for examination by the tax authorities under a four year statute of limitations.
Off-balance Sheet Arrangements
FASB Interpretation No. 46 (FIN 46R) "Consolidation of Variable Interest
Entities" ("VIE's") addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity. As of September 30,
2007, through the acquisition of the Vein Clinics of America, Inc, we have
interests in the individual vein clinics, where we are the primary beneficiary,
therefore the adoption of FIN 46 has required us to consolidate such vein clinic
operations in our financial statements. Since we do not have any interest in the
individual fertility clinics where we are not the primary beneficiary, we do not
consolidate the results of the fertility clinics in our accounts. Also, since we
do not have any interest in the captive insurance provider where we are not the
primary beneficiary, we do not consolidate the results of the captive insurance
company in our accounts
Liquidity and Capital Resources
As of September 30, 2007, we had approximately $25.9 million in cash and cash
equivalents on hand as compared to $32.2 million at December 31, 2006.
Additionally, we had working capital of approximately $(2.0) million, at
September 30, 2007, a decrease of $14.3 million from working capital of $12.3
million as of December 31, 2006.
Shared Risk Refund patient deposits, which are reflected as a current liability,
represent funds received from patients in advance of treatment cycles and are an
indication of future Shared Risk revenues. These deposits totaled approximately
$9.8 million and $6.5 million as of September 30, 2007 and December 31, 2006,
respectively. These deposits are a significant source of cash flow and represent
interest-free financing for us.
As of September 30, 2007, we did not have any significant contractual
commitments for the acquisition of fixed assets or construction of leasehold
improvements. However, we anticipate upcoming capital expenditures of
approximately $0.2 million for the remainder of 2007. These expenditures are
primarily related to medical equipment, information system infrastructure and
leasehold improvements. We believe that working capital, specifically cash and
cash equivalents, remain at adequate levels to fund our operations and our
commitments for fixed asset acquisitions. We also believe that the cash flows
from our operations plus our available credit facility will be sufficient to
provide for our future liquidity needs over the next twelve months.
20
In August, 2007, as part of our acquisition of Vein Clinics of America, we
secured a new $25 million 5-year term loan. Our previous term loan of $7.7
million was paid off in its entirety as part of this agreement. After deducting
the previous loan amount, interest and fees, our net funding from Bank of
America was $17.0 million. Other features of this credit facility include a $10
million three-year revolving line of credit. As of September 30, 2007, there was
no balance outstanding under this revolving line of credit.
Each component of our amended credit facility bears interest by reference to
Bank of America's prime rate or LIBOR, at our option, plus a margin, which is
dependent upon a leverage test, ranging from 2.00% to 2.75% in the case of
LIBOR-based loans. Prime-based loans are made at Bank of America's prime rate
and do not contain an additional margin. Interest on the prime-based loans is
payable quarterly beginning November 8, 2007 and interest on LIBOR-based loans
is payable on the last day of each applicable interest period. As of September
30, 2007, interest on the term loan was payable at a rate of approximately
7.07%. Unused amounts under the working capital revolver bear a commitment fee
of 0.25% and are payable quarterly.
Availability of borrowings under the working capital revolver is based on
eligible accounts receivable, as defined in the credit agreement. As of
September 30, 2007 under the revolving line of credit the full amount of $10.0
million was available, of which none was outstanding.
In order to mitigate the interest rate risk associated with our new term loan,
we entered into an interest rate swap agreement with Bank of America in August
2007 for 50% of the loan amount. The effect of this swap transaction was to
effectively fix the interest rate on our term loan at 5.39% plus the applicable
margin for the life of the loan.
Our Bank of America credit facility is collateralized by substantially all of
our assets. As of September 30, 2007, we were in full compliance with all
applicable debt covenants. We also continuously review our credit agreements and
may renew, revise or enter into new agreements from time to time as deemed
necessary.
Significant Contractual Obligations and Other Commercial Commitments
The following summarizes our contractual obligations and other commercial
commitments at September 30, 2007, and the effect such obligations are expected
to have on our liquidity and cash flows in future periods.
Payments Due by Period (000's omitted)
Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
----- ---------------- --------- --------- -------------
Notes payable......................... $25,023 $ 2,683 $10,733 $11,607 $ --
Capital lease obligations............. 409 88 263 58 --
Operating leases...................... 50,835 8,211 13,916 11,696 17,012
Total contractual cash
obligations...................... $76,267 $10,982 $24,912 $23,361 $17,012
======= ======= ======= ======= =======
Total Less than 1 year 1-3 Years 4-5 Years After 5 Years
----- ---------------- --------- --------- -------------
Unused lines of credit................ $10,000 $10,000 $ -- $ -- $ --
We also have commitments to provide working capital financing to the Fertility
Services segment. A significant portion of this commitment relates to our
transactions with the medical practices themselves. Our responsibilities to the
medical practices are to provide financing for their accounts receivable and to
hold patient deposits on their behalf as well as undistributed physician
earnings. Disbursements to the medical practices generally occur on or before
the 20th business day of each month. The medical practice's repayment hierarchy
consists of the following:
(i) We provide a cash credit to the practice for billings to patients and
insurance companies;
(ii) We reduce the cash credit for clinic expenses that we have incurred
on behalf of the practice;
21
(iii) We reduce the cash credit for the base portion of our Service Fee
which relates to the Partner revenues;
(iv) We reduce the cash credit for the variable portion of our Service Fee
which relates to the Partner earnings; and
(v) We disburse to the medical practice the remaining cash amount which
represents the physician's undistributed earnings.
We are also responsible for the collection of the Partner accounts receivables,
which we finance with full recourse. We continuously fund these needs from our
cash flow from operations, the collection of prior months' receivables and
deposits from patients in advance of treatment. If delays in repayment are
incurred, which have not as yet been encountered, we could draw on our existing
working capital line of credit. We also make payments on behalf of the Partner
for which we are reimbursed in the short-term. Other than these payments, as a
general course, we do not make other advances to the medical practice. We have
no other funding commitments to the Partner.
New Significant Accounting Policies
With the acquisition of Vein Clinics of America, Inc. a number of new accounting
policies were added. While there have been no changes in the accounting policies
in place for the IntegraMed units that were disclosed in our Annual Report on
Form 10-K, the VCA unit related significant accounting policies follow:
Use of estimates: The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates. The use
of estimates and assumptions in the preparation of the accompanying consolidated
financial statements is primarily related to the determination of net accounts
receivable. Due to uncertainties inherent in the estimation and assumption
process, it is at least reasonably possible that changes in these estimates and
assumptions in the near term would be material to the consolidated financial
statements.
Net patient service revenue: Net patient service revenue is recognized based
upon the amount billed to the patient less any expected contractual allowances
resulting from specified rates contained within patient health insurance
contracts.
Accounts receivable and allowance for uncollectible accounts: The collection of
receivables from third-party payors and patients is the Company's primary source
of cash for operations and is critical to its operating performance. The primary
collection risks relate to uninsured patient accounts and patient accounts for
which the primary insurance payor has paid, but patient responsibility amounts
(deductibles and copayments) remain outstanding. Patient receivables, where a
third-party payor is responsible for paying the amount, are carried at a net
amount determined by the original charge for the service provided, less an
estimate made for contractual adjustments or discounts provided to third-party
payors.
Patient receivables due directly from the patients are carried at the original
charge for the service provided less amounts covered by third-party payors and
less an estimated allowance for uncollectible receivables. Management estimates
this allowance based on the aging of its accounts receivable and its historical
collection experience by clinic and for each payor type. Recoveries of
receivables previously written off are recorded as a reduction of bad debt
expense when received.
The past due status of receivables is determined on a case-by-case basis
depending on the payor responsible. Interest is generally not charged on past
due accounts.
22
Additionally, amounts received from patients in advance of services performed
are recorded as a patient deposit on our consolidated balance sheet.
Inventories: Inventories (principally pharmaceuticals and supplies) are stated
at the lower of cost (first-in, first-out method) or market.
New Accounting Pronouncements
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. This statement also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and will become effective for us
beginning with the first quarter of 2008. We do not believe the adoption of SFAS
No. 159 will have a material impact on our financial statements.
SFAS No. 157, Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. The Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and will become effective for us beginning with the first
quarter of 2008. We do not believe the adoption of SFAS No. 159 will have a
material impact on our financial statements.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our interest income and expense items are
sensitive to changes in the general level of interest rates. During the third
quarter of 2007 we entered into a derivative transaction designed to hedge 50%
of our variable rate term loan. As a result of this derivative transaction we
have successfully shielded ourselves from a portion of the interest rate risks
associated with our term loan. We are currently subject to interest rate risks
associated with our short term investments and certain advances to our Fertility
clinics, both of which are tied to either short term interest rates or the prime
rate. As of September 30, 2007, a one percent change in interest rates would
impact our pre-tax income by approximately $210,000 annually.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15 under the Exchange Act) as of September
30, 2007 (the "Evaluation Date"). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us required to be included
in our periodic SEC filings.
Section 404 of the Sarbanes-Oxley Act requires us to provide an assessment of
the effectiveness of our internal control over financial reporting as of the end
of fiscal year 2007. We are in the process of performing the system and process
documentation, evaluation and testing necessary to make this assessment. We have
not completed this process or its assessment. In the process of evaluation and
testing, we may identify deficiencies that will require remediation.
As permitted by Section 404 of the Sarbanes-Oxley Act, we have elected to defer
until the end of fiscal year 2008 the assessment of the effectiveness of
internal control over financial reporting for the newly acquired Vein Clinics of
America, Inc, subsidiary. We are in the process of reviewing the internal
control system in place and will shortly begin to document controls and make
enhancements where needed.
(b) Changes in internal controls
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are party to legal proceedings in the
ordinary course of business. As of September 30, 2007, none of
these proceedings is expected to have a material adverse
effect on our financial position, results of operations or
cash flow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On August 8, 2007, the Company issued 336,700 shares of
unregistered securities in connection with the acquisition of
VCA which issuance was reported on the Company's Form 8-K
filed on August 9, 2007.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
See Index to Exhibits on Page 27.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRAMED AMERICA, INC.
(Registrant)
Date: November 14, 2007 By:/s/: John W. Hlywak, Jr.
-------------------
John W. Hlywak, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
INDEX TO EXHIBITS
Exhibit
Number Exhibit
3.2 (e) -- Copy of By-laws of Registrant (as Amended on September 25,
2007) filed as exhibit with identical exhibit number to
Registrant's Annual Report on form 10Q for the period ended
September 30, 2007.
31.1 -- CEO Certification Pursuant to 18 U.S.C. ss. 1350 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
dated November 14, 2007.
31.2 -- CFO Certification Pursuant to 18 U.S.C. ss. 1350 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
dated November 14, 2007.
32.1 -- CEO Certification Pursuant to 18 U.S.C. ss. 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
dated November 14, 2007.
32.2 -- CFO Certification Pursuant to 18 U.S.C. ss. 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
dated November 14, 2007.
27