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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 June 30, 2008
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, a non-accelerated filer or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |_| Accelerated Filer |X|
Non-Accelerated Filer |_| Smaller Reporting Company|_|
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 July 21, 2008 was 8,668,376.
--------------------------------------------------------------------------------
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INTEGRAMED AMERICA, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2008 and
December 31, 2007......................................... 3
Consolidated Statements of Operations for the three- and
six-month periods ended June 30, 2008 and 2007 ........... 4
Consolidated Statement of Shareholders' Equity for the
six-month period ended June 30, 2008 ..................... 5
Consolidated Statements of Cash Flows for the six-month
period ended June 30, 2008 and 2007 ...................... 6
Notes to Condensed 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... 23-24
Item 4. Controls and Procedures........................................ 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 25
Item 1A. Risk Factors................................................... 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 RULE 13A-14(A), 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. Financial Statements
INTEGRAMED AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(all dollars in thousands, except share amounts)
ASSETS
June 30, December 31,
2008 2007
---------- ------------
(unaudited)
Current assets:
Cash and cash equivalents ................................................. $ 22,271 $ 23,740
Patient and other receivables, net ........................................ 6,396 5,511
Deferred taxes ............................................................ 3,335 4,460
Other current assets ...................................................... 5,379 4,669
--------- ---------
Total current assets .................................................. 37,381 38,380
Fixed assets, net ......................................................... 17,545 16,912
Intangible assets, Business Service Rights, net ........................... 22,607 22,305
Goodwill .................................................................. 29,478 29,359
Trademarks ................................................................ 4,586 4,492
Other assets .............................................................. 1,799 1,619
--------- ---------
Total assets .......................................................... $ 113,396 $ 113,067
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 2,855 $ 1,895
Accrued liabilities ....................................................... 16,456 16,679
Current portion of long-term notes payable and other obligations .......... 3,778 3,661
Due to Fertility Medical Practices ........................................ 7,325 9,043
Shared Risk Revenue Patient Deposits ...................................... 10,609 9,668
--------- ---------
Total current liabilities ............................................. 41,023 40,946
Deferred and other tax liabilities ........................................... 1,535 1,819
Long-term notes payable and other obligations ................................ 20,385 21,799
--------- ---------
Total liabilities ..................................................... 62,943 64,564
Commitments and Contingencies
Shareholders' equity:
Common Stock, $.01 par value - 15,000,000 shares authorized in 2008 and
2007, respectively, 8,668,376 and 8,572,258 shares
issued and outstanding in 2008 and 2007, respectively ................. 87 86
Capital in excess of par .................................................. 54,399 53,890
Accumulated other comprehensive income (loss) ............................. (221) (82)
Treasury stock, at cost - 22,682 and 14,175 shares in 2008 and 2007,
respectively ............................................................ (212) (165)
Accumulated deficit ....................................................... (3,600) (5,226)
--------- ---------
Total shareholders' equity ............................................ 50,453 48,503
--------- ---------
Total liabilities and shareholders' equity ............................ $ 113,396 $ 113,067
========= =========
See accompanying notes to the condensed 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 six-month period
ended June 30, ended June 30,
------------------- -------------------
2008 2007 2008 2007
------- ------- -------- -------
Revenues, net
Fertility Centers .................................... $ 35,051 $ 29,727 $ 67,797 $ 58,819
Consumer Services .................................... 4,707 4,285 8,772 7,577
Vein Clinics ......................................... 10,062 -- 18,904 --
-------- -------- -------- --------
Total revenues ................................... 49,820 34,012 95,473 66,396
-------- -------- -------- --------
Costs of services, net:
Fertility Centers .................................... 34,481 27,246 62,923 54,068
Consumer Services .................................... 3,343 3,038 6,287 5,505
Vein Clinics ......................................... 9,349 -- 17,869 --
-------- -------- -------- --------
Total costs of services and sales ................ 45,173 30,284 87,079 59,573
-------- -------- -------- --------
Contribution
Fertility Centers .................................... 2,570 2,481 4,874 4,751
Consumer Services .................................... 1,364 1,247 2,485 2,072
Vein Clinics ......................................... 713 -- 1,035 --
-------- -------- -------- --------
Total contribution ............................... 4,647 3,728 8,394 6,823
-------- -------- -------- --------
General and administrative expenses ..................... 2,735 2,690 5,098 5,086
Interest income ......................................... (68) (359) (229) (694)
Interest expense ........................................ 365 158 805 277
-------- -------- -------- --------
Total other expenses ............................. 3,032 2,489 5,674 4,669
-------- -------- -------- --------
Income before income taxes .............................. 1,615 1,239 2,720 2,154
Income tax provision .................................... 644 422 1,094 722
-------- -------- -------- --------
Net income .............................................. $ 971 $ 817 $ 1,626 $ 1,432
======== ======== ======== ========
Basic and diluted net earnings per share of Common Stock:
Basic earnings per share ............................. $ 0.11 $ 0.10 $ 0.19 $ 0.18
Diluted earnings per share ........................... $ 0.11 $ 0.10 $ 0.19 $ 0.17
Weighted average shares - basic ...................... 8,600 8,155 8,570 8,147
Weighted average shares - diluted .................... 8,684 8,253 8,652 8,246
See accompanying notes to the condensed consolidated financial statements.
4
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(all amounts in thousands)
(unaudited)
Accumulated Total
Common Stock Capital in Comprehensive Treasury Stock Accumulated Shareholders'
Shares Amount Excess of Par Income (loss) Shares Amount Deficit Equity
------ ------ ------------- ------------ ------ ------ ----------- ------------
BALANCE AT DECEMBER 31, 2007 8,572 $86 $53,890 $ (82) 14 $(165) $(5,226) $48,503
Stock awards issued, net 99 1 (1) - - - - -
Stock award amortization - - 378 - - - - 378
Exercise of common stock options 11 1 297 - (2) (24) - 274
Gain (loss) on hedging transaction - - - (139) - - - (139)
Treasury stock transactions, net (14) (1) (165) - (35) (23) - (189)
Net income for the six months
ended June 30, 2008 - $ - $ - $ - - $ - $ 1,626 $ 1,626
--------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2008 8,668 $87 $54,399 $(221) (23) $(212) $(3,600) $50,453
======================================================================================
See accompanying notes to the condensed consolidated financial statements.
5
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts in thousands)
For the
six-month period
ended June 30,
-------------------
2008 2007
-------- --------
(unaudited)
Cash flows from operating activities:
Net income ...................................................................... $ 1,626 $ 1,432
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 3,623 3,017
Deferred income tax provision ................................................. (284) (20)
Stock-based compensation ...................................................... 378 225
Changes in assets and liabilities --
Decrease (increase) in assets
Patient and other accounts receivable ...................................... (885) 25
Prepaids and other current assets .......................................... 415 324
Other assets ............................................................... (180) 38
(Decrease) increase in liabilities
Accounts payable ........................................................... 960 (745)
Accrued liabilities ........................................................ (223) (378)
Due to medical practices ................................................... (1,718) 1,534
Shared Risk and other patient deposits ..................................... 941 1,951
-------- --------
Net cash provided by operating activities ........................................... 4,653 7,403
Cash flows from investing activities:
Purchase of business service rights ............................................. (950) (500)
Cash paid to purchase VCA ....................................................... (119) --
Purchase of other intangibles ................................................... (94) (37)
Purchase of fixed assets and leasehold improvements, net ........................ (3,608) (2,094)
-------- --------
Net cash used in investing activities ............................................... (4,771) (2,631)
Cash flows from financing activities:
Proceeds from issuance of debt .................................................. 380 --
Debt repayments ................................................................. (1,816) (751)
Common Stock transactions, net .................................................. 85 62
-------- --------
Net cash (used in) in financing activities .......................................... (1,351) (689)
-------- --------
Net increase (decrease) in cash and cash equivalents ................................ (1,469) 4,083
Cash and cash equivalents at beginning of period .................................... 23,740 32,184
-------- --------
Cash and cash equivalents at end of period .......................................... $ 22,271 $ 36,267
======== ========
Supplemental Information:
Interest paid .................................................................. $ 472 $ 263
Income taxes paid .............................................................. $ 736 $ 517
See accompanying notes to the condensed consolidated financial statements.
6
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- INTERIM RESULTS:
The accompanying unaudited condensed 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 condensed interim financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position at June 30, 2008, 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, 2008. 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, 2007.
NOTE 2 -- BASIS OF PRESENTATION
With the acquisition of Vein Clinics of America, Inc. ("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 these
operating segments includes an element of overhead with their Cost of Services
which is specifically associated with that segment's operation. Their overhead
costs had previously been reported as General and Administrative costs. The
result of this change is to reduce overall contribution margins and unallocated
General and Administrative costs, as reported in previous periods. We believe
this presentation provides a clearer view of each division's performance and
operating efficiency. All periods disclosed in this filing have been restated to
reflect this new presentation.
The following pro forma data reflects the consolidated revenue and earnings of
IntegraMed America, and subsidiaries had the VCA acquisition date been January
1, 2007, and had investments to position the revenue cycle management, financial
management, marketing and sales and regional management infrastructure to
provide for sustainable growth not been immediately implemented: (000's omitted,
except per share amounts):
Supplemental pro forma results of operations for the three and six-month periods
ended June 30, 2007
For the For the
three months six months
ended June 30, 2007 ended June 30, 2007
------------------- -------------------
Revenue............................... $43,167 $82,951
Net Income............................ $ 1,581 $ 2,380
Basic Earnings per share.............. $ 0.19 $ 0.29
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 March 19,
2007 and paid on May 4, 2007 .
7
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4 -- EARNINGS PER SHARE:
The reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations for the three and six month periods ended June
30, 2008 and 2007 is as follows (000's omitted, except for per share amounts):
For the For
three-month period six-month period
ended June 30, ended June 30,
------------------ -------------------
2008 2007 2008 2007
-------- ------- ------ --------
Numerator
Net Income ................................... $ 971 $ 817 $1,626 $1,432
Denominator
Weighted average shares outstanding (basic) .. 8,600 8,155 8,570 8,147
Effect of dilutive options and warrants ...... 84 98 82 99
------ ------ ------ ------
Weighted average shares and dilutive potential
Common shares (diluted) ................. 8,684 8,253 8,652 8,246
Basic earnings per share ..................... $ 0.11 $ 0.10 $ 0.19 $ 0.18
====== ====== ====== ======
Diluted earnings per share ................... $ 0.11 $ 0.10 $ 0.19 $ 0.17
====== ====== ====== ======
For the three and six month periods ended June 30, 2008 there were 118,525 and
123,252, respectively, 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 these outstanding options were greater than the
average market price of the shares of Common Stock.
For the three and six month periods ended June 30, 2007 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:
We currently report three major operating divisions and a corporate office that
provides shared services.
Our Fertility Centers Division is comprised of a provider network of 10
contracted fertility centers located in major markets across the United States.
We offer products and services to these providers designed to support the
fertility centers' growth. This division also supports a Council of Physicians
and Scientists, as well as ARTIC, a captive insurance company which provides
malpractice insurance to member physicians.
Our Consumer Services Division offers products directly to fertility patients.
The division's Shared Risk(R) Refund and financing programs are designed to make
the treatment process easier and more affordable for patients. As of June 30,
2008, the division maintained a contracted network of 22 independent fertility
clinics under its Affiliate program which is designed to distribute the
division's products and services to a wider group of patients than just those
serviced by our Fertility Center locations. The division also offers fertility
medications directly to patients via a competitively priced mail-order pharmacy.
8
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Our Vein Clinics Division, formed on August 8, 2007, with the purchase of VCA,
provides business and management services to a network of 31 (as of June, 2008)
clinics located in 11 states which specialize in the treatment of vein disease
and disorders.
We also maintain a Shared Services group within the Corporate office. In
addition to their corporate responsibilities, this group assists the Fertility
Centers, Consumer Services and Vein Clinics Divisions with administrative
services such as finance, accounting, human resources and purchasing support;
access to capital for financing clinic operations and expansion; traditional
marketing; internet marketing and website support and integrated information
systems.
Performance by segment, for the three and six-month periods ended June 30, 2008
and 2007 are presented below.
Fertility Consumer Vein
Centers Services Clinics Corp G&A Consolidated
------- -------- ------- -------- ------------
For the three months ended June 30, 2008
Revenues .......................... $ 35,051 $ 4,707 $ 10,062 $ -- $ 49,820
Cost of Services .................. 32,481 3,343 9,349 -- 45,173
-------- -------- -------- -------- --------
Contribution ...................... 2,570 1,364 713 -- 4,647
Operating margin .................. 7.3% 29.0% 7.1% 0.0% 9.3%
General and Administrative ........ -- -- -- 2,735 2,735
Interest, net ..................... (43) -- 3 337 297
-------- -------- -------- -------- --------
Income before income taxes ........ $ 2,613 $ 1,364 $ 710 $ (3,072) $ 1,615
======== ======== ======== ======== ========
Depreciation expense included above $ 1,114 $ -- $ 190 $ 200 $ 1,504
Capital Expenditures .............. $ 2,053 $ -- $ 150 $ 174 $ 2,377
Total Assets ...................... $ 43,101 $ 932 $ 45,658 $ 23,705 $113,396
For the six-months ended June 30, 2008
Revenues .......................... $ 67,797 $ 8,772 $18,904 $ -- $ 95,473
Cost of Services .................. 62,923 6,287 17,869 -- 87,079
-------- -------- -------- -------- --------
Contribution ...................... 4,874 2,485 1,035 -- 8,394
Operating margin .................. 7.2% 28.3% 5.5% 0.0% 8.8%
General and Administrative ........ -- -- -- 5,098 5,098
Interest, net ..................... (109) -- 2 683 576
-------- -------- -------- -------- --------
Income before income taxes ........ $ 4,983 $ 2,485 $ 1,033 $ (5,781) $ 2,720
======== ======== ======== ======== ========
Depreciation expense included above $ 2,191 $ 1 $ 373 $ 410 $ 2,975
Capital Expenditures .............. $ 2,718 $ -- $ 597 $ 293 $ 3,608
Total Assets ...................... $ 43,101 $ 932 $ 45,658 $ 23,705 $113,396
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 June 30, 2007
Revenues........................... $ 29,727 $ 4,285 $ - $ - $ 34,012
Cost of Services................... 27,246 3,038 - - 30,284
-------- -------- -------- -------- --------
Contribution....................... 2,481 1,247 - - 3,728
Operating margin................... 8.3% 29.1% 0.0% 0.0% 11.0%
General and Administrative......... - - - 2,690 2,690
Interest, net...................... (53) - - (148) (201)
-------- -------- -------- -------- --------
Income before income taxes......... $ 2,534 $ 1,247 $ - $ (2,542) $ 1,239
======== ======== ======== ======== ========
Depreciation expense included above $ 973 $ - $ - $ 217 $ 1,190
Capital Expenditures............... $ 797 $ - $ - $ 147 $ 944
Total Assets....................... $ 40,724 $ 789 $ - $ 36,049 $ 77,562
For the six-months ended June 30, 2007
Revenues........................... $ 58,819 $ 7,577 $ - $ - $ 66,396
Cost of Services................... 54,068 5,505 - - 59,573
-------- -------- -------- -------- --------
Contribution....................... 4,751 2,072 - - 6,823
Operating margin................... 8.1% 27.3% 0.0% 0.0% 10.3%
General and Administrative......... - - - 5,086 5,086
Interest, net...................... (116) - - (301) (417)
-------- -------- -------- -------- --------
Income before income taxes.............. $ 4,867 $ 2,072 $ - $ (4,785) $ 2,154
======== ======== ======== ======== ========
Depreciation expense included above $ 1,904 $ 1 $ - $ 419 $ 2,324
Capital Expenditures............... $ 1,765 $ - $ - $ 329 $ 2,094
Total Assets....................... $ 40,724 $ 789 $ - $ 36,049 $ 77,562
NOTE 6- INTANGIBLE ASSETS:
Business Service Rights consist of fees and expenses paid in conjunction with
service contracts associated with our Fertility Centers Partner program. These
service contracts typically have ten to twenty five year initial lives with the
associated service fees on some contracts refundable upon contract termination.
We amortize our non-refundable Business Service Rights over the life of their
applicable contract. Refundable Service Rights, which totaled approximately $6.1
million as of June 30, 2008, are not amortized because these funds will be
returned to us upon contract termination.
Goodwill consists of amounts paid related to the acquisition of VCA in excess of
the fair value of net assets and liabilities acquired. Contingent consideration
payments, if any, related to earn out provisions of this acquisition are not
included in the value presented 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 goodwill. Currently, no contingent earn out provisions have
been met and no payments are due.
Trademarks are comprised of valuations assigned to assets associated with the
VCA acquisition as well as costs associated with our trademark and service mark
rights.
10
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
We test all our individual intangible assets for impairment on a regular basis.
To date no impairment has been incurred and therefore no impairment charges have
been recognized in our financial statements.
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 with
full recourse 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 June 30, 2008 and December 31, 2007, Due to Medical Practices was
comprised of the following balances (000's omitted):
June 30, 2008 December 31, 2007
------------- -----------------
(unaudited)
Advances to Practice....................... $(18,560) $(15,585)
Undistributed Physician Earnings........... 3,211 6,338
Physician Practice Patient Deposits........ 22,674 18,290
-------- ---------
Due to Medical Practices, net..............$ 7,325 $ 9,043
========= =========
NOTE 8 - STOCK-BASED EMPLOYEE COMPENSATION:
We currently have three stock option plans which have been previously approved
by the stockholders. All three plans are described more fully in Note 16 of the
financial statements in our most recent Annual Report on Form 10-K. Under the
1992 Incentive and Non-Incentive Stock Option Plan (the "1992 Plan"), the 2000
Long-term Compensation Plan (the "2000 Plan") and the 2007 Long-term
Compensation Plan (the "2007 Plan"), 500,000, 700,000 and 500,000 shares
,subject to adjustment, of common stock, respectively, were reserved for
issuance of incentive and non-incentive stock options and stock grants. The 1992
Plan expired in May 2002, and although some options are still outstanding, no
further awards may be made under that plan. Under the 2000 and 2007 Plans, stock
options and stock grants may be awarded to employees, directors and such other
persons as the Board of Directors determines will contribute to our success.
Vesting periods are set by the Board of Directors and stock options are
generally exercisable during a ten-year period following the date of award, with
stock grants generally vesting in three to five years. The Board of Directors
has the authority to accelerate the maturity of any stock option or grant at its
discretion, and all stock options and grants have anti-dilution provisions.
Under all of our plans, options expire three months from the date of the
holder's termination of employment or twelve months in the event of disability
or death. As of June 30, 2008, there were 356,784 shares available for granting
under these plans. We recognize compensation cost for stock option plans over
the vesting period based on the fair value of the option as of the date of the
grant.
The following table sets forth information about the weighted-average fair value
of options granted during the periods below, and the assumptions used for each
grant:
11
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the For the
three months six months
ended June 30, ended June 30,
--------------- ----------------
2008 2007 2008 2007
---- ---- ---- ----
Fair Value of Options................... $8.06 N/A $8.45 N/A
Dividend yield.......................... 0.0% N/A 0.0% N/A
Expected volatility..................... 51.7% N/A 51.8% N/A
Risk free interest rate................. 4.0% N/A 4.0% N/A
Expected term in years.................. 6.31 N/A 6.30 N/A
Stock option activity under these plans is summarized below:
Number of
Shares of
Common Stock
Underlying Weighted Average
Options Exercise Price
---------- ----------------
Options outstanding as of December 31, 2007.... 102,219 $ 2.33
Stock awards (granted)......................... 127,844 $ 8.45
Awards exercised............................... 133 $46.52
Awards cancelled............................... -
---------
Options outstanding as of June 30, 2008........ 229,930 $ 5.71
=======
Options exercisable at:
December 31, 2007......................... 102,219 $ 2.33
June 30, 2008............................. 102,085 $ 2.27
The intrinsic value (difference between exercise price and current value of our
common stock) of exercisable options at December 31, 2007 and June 30, 2008 was
$973,000 and $721,000, respectively.
For the three and six month periods ended June 30, 2008, we recorded a charge to
earnings to recognize compensation expense of $4,000 and $6,000, respectively,
related to the value of outstanding stock options. There was no compensation
expense related to stock options in the comparable periods of 2007. As of June
30, 2008, we had approximately $731,000 of unrecognized compensation costs
related to stock options which will be recognized over their vesting period.
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 to five years. Our General and
Administrative expense includes compensation costs recognized in connection with
these restricted stock grants of $216,000 and $367,000 for the three and six
month periods ended June 30, 2008, respectively, and $115,000 and $225,000 for
the three and six month periods ended June 30, 2007. As of June 30, 2008, we had
approximately $1.7 million of unrecognized compensation costs related to stock
grants which will be recognized over their vesting period.
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.
12
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In conjunction with our term loan agreement, executed during the third quarter
of 2007, we entered into an interest rate swap agreement on a portion of that
loan. This swap agreement is designed to hedge risks associated with a portion
of our principle floating rate debt.
As a result of this agreement, our net income for the three and six-months ended
June 30, 2008, included additional financing costs of approximately $71,000 and
$115,000, respectively, and we expect to record additional financing costs of
approximately $250,000 related to the swap agreement over the next twelve
months, given current interest rate forecasts (these financing costs are
expected to be offset by lower interest rates on that portion of the underlying
term loan not participating in the swap). In addition to the costs included in
our reported net income, this hedge also generated a non-recognized income of
approximately $54,000 for the second quarter of 2008, and a non-recognized loss
of $221,000 as of June 30, 2008 which is reported as part of our accumulated
other comprehensive income (loss).
The interest rate swap agreement is designed to hedge approximately 50% of our
outstanding term loan. We deem this hedge to be highly effective as it shares
the same termination date and amortization schedule as the underlying debt
subject to the hedge and the change in fair value inversely mimics the
appropriate portion of the hedged item. As of June 30, 2008, 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 six-month period
ended June 30, ended June 30,
------------------ -----------------
2008 2007 2008 2007
-------- -------- ------- -------
Net income as reported ..................... $ 971 $ 817 $ 1626 $ 1,432
Net income/(loss) on derivative transactions 54 5 (139) (6)
------- ------- ------- -------
Total comprehensive income ................. $ 1,025 $ 822 $ 1,487 $ 1,426
======= ======= ======= =======
NOTE 10-- LITIGATION:
From time to time, we are party to legal proceedings in the ordinary course of
business. As of June 30, 2008, 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. 141R, Business Combinations
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement 141 (Revised 2007), Business Combinations ("SFAS No. 141R"). The
objective of SFAS 141R is to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects.
To accomplish that, SFAS 141R establishes principles and requirements for how
the acquirer:
a. Recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree
b. Recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase
c. Determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of
the business combination.
13
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
This statement is effective for fiscal years beginning on or after December 15,
2008. We are currently evaluating the impact that SFAS No. 141R could have on
our consolidated financial statements.
SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements
----------------------------------------------------------------------------
In December 2007, the FASB issued Statement No. 160, Non-controlling Interests
in Consolidated Financial Statements -- an amendment of ARB No. 51 ("SFAS No.
160"). SFAS No. 160 requires a company to clearly identify and present ownership
interests in subsidiaries held by parties other than the company in the
consolidated financial statements within the equity section but separate from
the company's equity. It also requires the amount of consolidated net income
attributable to the parent and to the non-controlling interest be clearly
identified and presented on the face of the consolidated statement of income;
changes in ownership interest be accounted for similarly, as equity
transactions; and when a subsidiary is deconsolidated, any retained
non-controlling equity investment in the former subsidiary and the gain or loss
on the deconsolidation of the subsidiary be measured at fair value. This
statement is effective for fiscal years after December 15, 2008. We are
currently evaluating the impact that SFAS No. 160 and believe it will have no
material impact on our consolidated financial statements.
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities
-----------------------------------------------------------------------------
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133
("SFAS 161"). SFAS No. 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedge items affect an entity's financial position,
financial performance, and cash flows. This statement is effective for fiscal
years after November 15, 2008. We are currently evaluating the impact that SFAS
No. 161 and believe it will have no material impact on our consolidated
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
condensed 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, 2007.
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 services or vein care from insurance coverage, government laws and
regulation regarding health care, changes in managed care contracting, and the
timely development of and acceptance of new fertility 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 is a leading provider of specialty healthcare services in
emerging, technology-focused segments. The company currently operates in two
healthcare sectors - the fertility care and varicose vein treatment segments.
The company supports its operations with an established infrastructure of
clinical and business information systems, marketing, facilities and operations
management, finance and accounting, human resources, legal support, risk
management and quality assurance. The company is organized into three operating
divisions.
Our Fertility Centers Division is comprised of ten contracted fertility centers,
located in major markets across the United States. Each contracted center is
comprised of multiple physicians and locations and are typically the number one
or two provider group in the markets served.
The strategy of the Fertility Centers Division is to support long term growth,
attract and retain new patients, enable provision of superior care, and increase
efficiency of contracted fertility centers. The Fertility Center division is
contracted with fertility centers comprised of 82 physicians and PhD scientists
performing 13% of total US IVF volume.
Our Consumer Services Division offers treatment financing programs directly to
fertility patients. The division's Shared Risk Refund and traditional credit
financing programs are designed to make the treatment process easier and more
affordable for patients. The division maintains provider contracts with the
Fertility Centers division as well as a network of 22 independent fertility
clinics under its Affiliate program. The division also offers fertility
medications directly to patients through a competitively priced mail-order
pharmacy.
The strategy of the Consumer Services division is to increase the size of the
Affiliate provider network, increase the number of Shared Risk Refund contracts
sold to patients, maintain excellent pregnancy success rates for patients
enrolled in the program, expand the offerings of the Shared Risk Refund program
to additional patients who currently do not qualify for the current program, and
build new products and services that can be sold directly to consumers of
specialty health care services.
Our Vein Clinics Division was formed on August 8, 2007, with the purchase of
Vein Clinics of America, Inc. The Vein Clinics Division provides business and
management services to a network of 31 clinics located in 11 states which
specialize in the treatment of vein disease and disorders.
The strategy of the Vein Clinics division is to provide technologically advanced
care for varicose vein disease to underserved populations across the US,
increase the volume, productivity and profits of existing vein clinics, open new
15
vein clinics in markets currently being served by the company, open new vein
clinics in markets currently not served by the company, and support anticipated
growth with a solid business management infrastructure.
The Company seeks to support its operating divisions with Shared Services that
can be leveraged across the operations. Included in the Shared Services
infrastructure are information systems, finance and administration, human
resources, legal services and investor relations.
Major Events Impacting Financial Condition and Results of Operations
2008
----
On June 23, 2008, we announced that we entered into a new Affiliate services
contract with the University of North Carolina ("UNC") School of Medicine's
Department of Obstetrics and Gynecology in Chapel Hill, North Carolina. As an
Affiliate, UNC School of Medicine's Department of Obstetrics and Gynecology
receives distribution rights to IntegraMed's consumer products and services. In
addition, UNC School of Medicine's Department of Obstetrics and Gynecology has
the right to receive other products and services uniquely designed to support
the business needs of successful, high-growth fertility centers.
On June 5, 2008, we announced the opening of a new Vein Clinic location in
Marietta, Georgia. This clinic is IntegraMed's fourth vein clinic in Georgia and
this newly completed, state-of-the-art clinic, outfitted with the latest in
laser and other vein treatment technologies is uniquely positioned to deliver
the highest level of patient care available in the area.
On April 29, 2008, we announced the opening of a new Vein Clinic treatment
center in Alexandria, Virginia. This addition to our Vein Clinics Division will
provide focused vein care treatment solutions to the Washington, D.C.
metropolitan area.
On April 24, 2008, we entered into a Business Services Agreement to supply a
complete range of business, marketing and facility services to the Southeastern
Fertility Centers, P.A., located near Charleston, South Carolina. Under the
terms of this 25-year agreement, our service fees are comprised of reimbursed
costs of services, a tiered percentage of revenues, and an additional fixed
percentage of the practice's earnings. We also committed up to $0.6 million to
fund any necessary capital needs of the practice.
On April 1, 2008, we entered into an Affiliate services contract with OU
Physicians Reproductive Health in Oklahoma City, Oklahoma. As a result of this
agreement, OU Physicians Reproductive Health provides another opportunity for
our Consumer Services Division to distribute their product offerings in support
of this successful fertility center.
Subsequent Events
-----------------
On July 9, 2008 we entered into a Business Services Agreement to provide
business, marketing and facility services to Arizona Reproductive Medicine
Specialists in Phoenix, Arizona. Under the terms of this 25 year agreement,
IntegraMed will phase in full implementation of its services over time.
2007
----
On August 29, 2007, we entered in to a Business Services Agreement to supply a
complete range of business, marketing and facility services to the Center for
Reproductive Medicine in Orlando, Florida. The Center for Reproductive Medicine
is a fertility practice comprised of four physicians. Under the terms of this
25-year agreement, our service fees are comprised of reimbursed costs of
services, a tiered percentage of revenues, and an additional fixed percentage of
the Center for Reproductive Medicine's earnings. We also committed up to $1.0
million to fund any necessary capital needs of the practice.
On August 8, 2007, we acquired all of the outstanding stock of Vein Clinics of
America, Inc.(VCA) for a total cost of approximately $29 million in cash and
common stock. The results of VCA are included in our financial statements from
the date of the acquisition.
Also on August 8, 2007 we entered into an amended 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 VCA
transaction). Interest on the new term loan is at our option, at the prime rate
or at LIBOR plus 2% to 2.75% depending upon the level of the ratio of
16
consolidated debt to earnings before interest, taxes depreciation and
amortization ("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. As of June 30, 2008, no amounts were drawn on the
revolver.
Effective July 1, 2007, we expanded the Shady Grove Fertility Center Partner
Service arrangement with the addition of the Fertility Center of the Greater
Baltimore Medical Center ("Center") in Baltimore, Maryland where we will provide
a full range of business, marketing and facility services. Under the terms of
this agreement, we purchased the assets of the Center from Greater Baltimore
Medical Center and have committed additional resources to support further growth
and development of the Center. Under the terms of this agreement, we will be
paid service fees comprised of reimbursed costs of services and a fixed
percentage of revenues, plus an additional fixed amount of the Center's
earnings.
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.
Results of Operations
The following table shows the percentage of net revenue represented by various
expenses and other income items reflected in our statements of operations for
the three and six month periods ended June 30, 2008 and 2007:
For the For the
three-month period six-month period
ended June 30, ended June 30,
------------------ -----------------
2008 2007 2008 2007
-------- -------- ---- ------
(unaudited) (unaudited)
Revenues, net
Fertility Centers .................... 70.4% 87.4% 71.0% 88.6%
Consumer Services .................... 9.4% 12.6% 9.2% 11.4%
Vein Care Services ................... 20.2% 0.0% 19.8% 0.0%
Total Revenues .................. 100.0% 100.0% 100.0% 100.0%
Cost of services and sales
Fertility Centers .................... 65.2% 80.1% 65.9% 81.4%
Consumer Services .................... 6.7% 8.9% 6.6% 8.3%
Vein Care Services ................... 18.3% 0.0% 18.7% 0.0%
Total Costs of services and sales 90.7% 89.0% 91.2% 89.7%
Contribution
Fertility Centers .................... 5.2% 7.3% 5.1% 7.2%
Consumer Services .................... 2.7% 3.7% 2.6% 3.1%
Vein Care Services ................... 1.4% 0.0% 1.1% 0.0%
Total Contribution .............. 9.3% 11.0% 8.8% 10.3%
General and administrative expenses ...... 5.5% 7.9% 5.3% 7.7%
Interest income .......................... (0.1)% (1.0)% (0.2)% (1.0)%
Interest expense ......................... 0.7% 0.5% 0.8% 0.4%
Total other expenses ............ 6.1% 7.4% 5.9% 7.1%
Income before income taxes ............... 3.2% 3.6% 2.9% 3.2%
Income tax provision ..................... 1.3% 1.2% 1.1% 1.0%
Net income ............................... 1.9% 2.4% 1.8% 2.2%
17
Three and Six Months Ended June 30, 2008 Compared to the Three and Six Months
Ended June 30, 2007
------------------------------------------------------------------------------
Revenues
--------
For the three months ended June 30, 2008, total revenues of $49.8 million
increased approximately $15.8 million, or 47%, from the same period in 2007.
Approximately $10.0 million of this increase came from our Vein Clinics
Division, which was acquired in the third quarter of 2007, with the remaining
increase attributable to our existing Fertility Centers and Consumer Services
Divisions. Our Fertility Centers revenue increased approximately $5.3 million,
or 17.9%, as a result of growth within legacy medical practices, the addition of
two new Partner arrangements and the expansion of the Shady Grove contract in
mid-2007. Our Consumer Services segment experienced increased revenues of $0.4
million, or 9.8%, primarily driven by growth in its Shared Risk Refund program.
For the six months ended June 30, 2008, total revenues $95.5 million increased
approximately $29.1 million, or 44%, from the same period in 2007. Approximately
$18.9 million of this increase was derived from our Vein Clinics Division, with
the remaining increase attributable to our existing Fertility Centers and
Consumer Services operations. Our Fertility Centers revenue increased
approximately $9.0 million, or 15.3%, as a result of growth within the
underlying medical practices and the addition of three new Partner agreements.
Our Consumer Services segment experienced increased revenues of $1.2 million, or
15.8%, through the continued expansion of its Shared Risk Refund program.
A segment-by-segment discussion is presented below.
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 fertility practice financials with our own,
these financials do directly affect our revenues.
The components of our revenue from each of the fertility centers are:
o A Base Service fee calculated as a percentage of patient revenue as
reported by the center (this percentage varies from 6% down to 3% depending
on the level of patient revenues);
o Cost of Services equal to reimbursement for the expenses which we advanced
to the center during the month (representing substantially all of the
expenses incurred by the practice) and;
o Our Additional fees which represent our share of the net income of the
center (which varies from 10% to 20% or a fixed amount depending on the
underlying center).
In addition to these revenues generated from our Fertility Centers, we often
receive miscellaneous other revenues related to providing services to medical
practices. 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 centers.
During the second quarter of 2008, Fertility Center revenues increased by $5.3
million or 17.9% from the same period in 2007. Our two newest stand-alone
fertility center contracts, one acquired in the third quarter of 2007, the other
during the second quarter of 2008, were responsible for $2.3 million of the
increase. The remaining growth among our existing centers is mainly attributed
to an increased number of patient visits and patient treatment cycles.
Fertility center revenue for the six months ended June 30, 2008 versus the six
months ended June 30, 2007 increased approximately $9.0 million, or 15.3%.
Approximately $3.6 million of this increase was derived from the two new
stand-alone contracts with the remainder $5.4 million generated based on organic
patient growth at our legacy centers.
The table below illustrates the components of Fertility Centers revenue in
relation to the physician practice financials for the first three and six months
of 2008 compared to 2007:
18
For the For the
three month period six-month period
ended June 30, ended June 30,
------------------ -------------------
2008 2007 2008 2007
------ ------ ------ ------
(unaudited) (unaudited)
Providers Providers Providers Providers
Physician Financials
(a) Patient revenue ............................... $ 48,515 $ 41,666 $ 92,264 $ 80,528
(b) Cost of services .............................. 31,740 26,782 61,504 53,167
(c) Base service fee .............................. 2,201 1,924 4,237 3,753
-------- -------- -------- --------
(d) Practice contribution (a-b-c) ................. 14,574 12,960 26,523 23,608
(e) Physician compensation ........................ 13,201 11,677 23,898 21,149
(f) IntegraMed additional fee ..................... 1,374 1,306 2,625 2,482
IntegraMed Financials
(g) IntegraMed gross revenue (b+c+f) .............. 35,315 30,012 68,366 59,402
(h) Amortization of business service rights ....... (324) (321) (648) (693)
(i) Other revenue ................................. 60 36 79 110
-------- -------- -------- --------
(k) IntegraMed fertility services revenue (g+h+i+j) $ 35,051 $ 29,727 $ 67,797 $ 58,819
======== ======== ======== ========
Consumer Services Segment
Revenues from our Shared Risk Refund program accounted for approximately 93% of
our Consumer Services segment revenues during the second quarter and first six
months of 2008, up from 91% and 90% for the same periods in 2007, respectively.
Patients enrolled in the Shared Risk Refund program generally pay us an upfront
fee (deposit) in return for up to six treatment cycles. The non-refundable
portion of the fee is recognized as revenue at the completion of the first
treatment. The remainder is recognized at the time of a treatment outcome
(clinical pregnancy) or issued as a refund if all treatment options fail. The
two main factors that impact Shared Risk revenue (and contribution) are:
o The number of patients enrolled and receiving treatment
o Pregnancy success rates
On both a quarterly and year to date basis the Shared Risk Refund program
continued to experience significant growth. Revenue of $4.3 million in the
second quarter of 2008 was up $0.5 million, or 12% from the same period in the
prior year. For the six months ended June 30, 2008, revenue from the Shared Risk
Refund program increased $1.3 million, or 19%, from the same period in 2007.
Applications by prospective patients to join the program grew by 23% and 17% for
the three and six months ended June 30, 2008, respectively, versus the same
periods in the prior year.
Our Affiliate program generated revenues of $304,000 during the second quarter
of 2008, versus $321,000 in the same period in the prior year. Our Affiliate
program generated revenues of $587,000 during the first six months of 2008 as
compared to $638,000 for the first six months of 2007. Our two newest fertility
practices, located in Orlando, Florida and Mount Pleasant, South Carolina,
transitioned from the Affiliate program into full fertility clinic contracts the
third quarter of 2007 and second quarter of 2008, respectively. With their
conversion from Affiliate to fertility clinic, earnings from these practices are
now reflected in the Fertility Centers segment of our business. As of June 30,
2008, our Affiliate network was comprised of 22 independent fertility clinics
compared to 21 clinics on June 30, 2007. We have an on-going program designed to
attract independent unaffiliated fertility centers to join our Affiliate
network.
Pharmaceutical revenue was $34,000 and $68,000 for the three and six months
ended June 30, 2008, compared to $68,000 and $105,000 during the same periods in
the prior year. This segment of our Consumer offerings continues to experience
decreasing margins due to pharmaceutical cost increases which are not able to be
passed on to the consumer.
Vein Clinics Segment
Revenues for the three and six months ended June 30, 2008 were $10.1 million and
$18.9 million, respectively. This compares to revenues of $9.2 million and $16.6
million generated in the second quarter and first six months of 2007 by VCA on a
19
stand alone basis, prior to our acquisition of this business segment. Revenues
in this segment are generally from billings to patients or their insurer for
vein disease treatment services with this patient revenue consolidated directly
into our financials.
Contribution
------------
Our 2008 second quarter contribution of $4.6 million increased 25% from the same
period in 2007. Contribution increased from $6.8 million in the first six months
of 2007 to $8.4 million for the first six months of 2008, or an increase of 23%.
A segment-by-segment discussion is presented below.
Fertility Centers Segment
Comparing the second quarters and first six months of 2008 to 2007, Fertility
Center contribution grew 3.5% from $2.5 million to $2.6 million. Second quarter
margins in 2008 of 7.3% were down from 8.3% in 2007. For the first six months of
2008, Fertility Center contribution was $4.9 million as compared to $4.8 million
during the same period in 2007, an increase of 2.6%. Although revenue increased
for the second quarter and first six months of 2008 by $5.3 million and $9.0
million, respectively, and our fertility center locations experienced a 13.5%
increase in new patient volume during this period, margin growth has been
tempered by additional division level infrastructure investments which were
previously disclosed and are designed to support continuing growth and new
acquisitions. The bulk of these investments have already been absorbed into the
division support structure and we expect increased contribution and margins in
future quarters as a result.
Consumer Services Segment
Contribution from our Consumer Services segment grew by $117,000 or 9.4% in the
second quarter of 2008, compared to the same period in the prior year. This
growth was driven by our Shared Risk Refund program in which applications for
enrollment increased by 23.0% from the same period in the prior year and
pregnancy success rates rose by 15.9% versus the second quarter of 2007. On a
six month basis, contribution is up 20%, or $413,000, based on higher patient
activity and success rates of 47% versus 41% during the same period in 2007.
Current success rates of 47% represent the high end of the expected success
range while the prior year success rates were at the lower end of the range.
During the second quarter of 2008 we also contracted with one new fertility
center to be a participating provider in our Affiliate program which should
translate into increased Shared Risk volume in the coming months.
Vein Clinics Segment
For the second quarter of 2008, contribution from our Vein Clinics Division was
$713,000, or 7.1% of Vein Clinic revenues. This compares to contribution of $1.2
million, or 12.7% of revenues in the same period in the prior year. For the
first six months of 2008, Vein Clinic contribution of $1.0 million or 5.5% of
revenue compares to $1.4 million or 8.6% of revenue in the first six months of
2007. The first quarter is traditionally the slowest quarter for this business
segment. The historic core of this segment's operations are in the Upper
Mid-West, which experienced an unusually severe winter season this year versus
last year hampering our six month comparison. In addition to seasonality
factors, 2008 contribution was also impacted by infrastructure additions
designed to support our accelerated new clinic opening plans. This segment
opened three clinics in all of 2007, and has opened three new clinics in 2008 to
date, with plans to open one more clinic before the end of the current year. As
with the Fertility Centers Division, most of the investments in division level
resources for the Vein Clinics have already been absorbed into their cost
structure and will enable us to accelerate new clinic openings in a controlled
and predictable manner with five or six new clinics planned for 2009.
We have also begun to extract benefits from the integration of VCA's
administrative functions with our Corporate Shared Services group. Efficiencies
in the areas of legal, finance, information technology and human resources are
expected to generate additional cost savings as 2008 progresses, with additional
synergistic opportunities continuing to be evaluated.
20
General and Administrative Expenses
-----------------------------------
General and Administrative ("G&A") expenses are comprised of salaries and
benefits, administrative, regulatory compliance, and operational support costs
defined as our Shared Services group, which are not specifically related to
individual clinical operations or other product offerings. These costs totaled
$2.7 million in the second quarter of 2008, and $5.1 million for the first six
months of 2008, approximately even with the same periods in 2007. G&A expenses
were 58.9% of contribution for the second quarter of 2008, down substantially
from 72.2% during the same period in 2007. For the first six months of 2008, G&A
expenses were 60.7% of contribution, as compared to 74.5% during the same period
in 2007. We continue to actively manage G&A expenses in an effort to leverage
our Support Services group and extract economies of scale from within the
organization.
Interest
--------
Net interest expense in the second quarter of 2008 totaled $297,000, compared to
net interest income of $201,000, during the same period in the prior year. Net
interest expense was $576,000 for the first six months of 2008 as compared to
net interest income of $417,000 in the first six months of 2007. The change in
net interest income/expense is primarily the planned result of utilizing cash on
hand and additional borrowings as the principal means of financing our
acquisition of VCA. As expected, if one compares the increased financing costs
to the contribution by our Vein Clinics Division over the first six months of
2008, the acquisition was slightly dilutive after taking into account the shares
issued during the transaction. We expect subsequent quarters to show accretion
in this business segment but still maintain that our Vein Clinics acquisition
will be neutral to slightly accretive over the next six to nine months.
In addition to the impact of financing the VCA transaction, lower market
interest rates, versus a year ago, have reduced the return on our current cash
balances.
Income Tax Provision
--------------------
Our provision for income tax was approximately $1.1 million for the six months
ended June 30, 2008, or 40.2% of pre-tax income. This is compared to
approximately $0.7 million, or 33.5%, of pre-tax income during the same period
in the prior year. For the second quarter of 2008, the income tax provision was
approximately $0.6 million, or 39.9% of pre-tax income, compared to $0.4
million, or 34.0% of pre-tax income in the second quarter of 2007. Our effective
tax rates for 2008 and 2007 reflect provisions for both current and deferred
federal and state income taxes. The higher effective tax rates for the periods
ended June 30, 2008 are mainly due to a decrease in tax-exempt interest income
projected for 2008 compared with 2007. The effective income tax rate for the six
months ended June 30, 2008 also includes additional interest for tax exposure
items of approximately $11,000, which is treated as a discrete item.
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. As of June 30, 2008, the total gross unrecognized tax
benefits were approximately $246,000, and the total unrecognized tax benefits
(net of federal effect) were approximately $179,000, all of which would impact
our effective tax rate if recognized. Interest on unrecognized tax benefits as
of June 30, 2008 was approximately $26,000. We anticipate that approximately
$30,000 of our net unrecognized tax benefits will become recognized over the
next year due to expirations in the statute of limitations.
We file income tax returns in the U.S. federal jurisdiction and various states.
For federal income tax purposes, our 2004 through 2007 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 2007 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 (Revised) "Consolidation of Variable Interest
Entities" (FIN 46R) 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 June 30,
2008, as a result of the acquisition of the VCA we have interests in the
individual vein clinics, where we are the primary beneficiary, therefore the
adoption of FIN 46R has required us to consolidate such vein clinic operations
in our financial statements. Since we do not have any interest in the individual
21
fertility clinics and 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 significant interest in the captive insurance provider and 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 June 30, 2008, we had approximately $22.3 million in cash and cash
equivalents on hand as compared to $23.7 million at December 31, 2007.
Additionally, we had a working capital deficit of approximately $3.6 million, at
June 30, 2008, an increase of $1.0 million in the working capital deficit of
$2.6 million as of December 31, 2007. Cash balances decreased from December 31,
2007 levels primarily due to investments in fixed assets and leasehold
improvements, the purchase of additional business service rights and scheduled
debt repayments. We expect to build cash balances over the remainder of the
current year due to better timing of payments to vendors and a reduction in the
pace of capital expenditures.
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
$10.6 million and $9.7 million as of June 30, 2008 and December 31, 2007,
respectively. These deposits are a significant source of cash flow and represent
interest-free financing for us.
As of June 30, 2008, 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 $2.6
million for the remainder of 2008. 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.
In August, 2007, as part of our acquisition of VCA, we secured a new $25 million
five-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 five-year 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
became 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 June
30, 2008, interest on the term loan was payable at a rate of 5.42%. 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 June 30,
2008 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 June 30, 2008, 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 June 30, 2008, and the effect such obligations are expected to
have on our liquidity and cash flows in future periods.
22
Payments Due by Period (000's omitted)
Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
----- ---------------- --------- --------- -------------
Notes payable......................... $23,816 $3,888 $10,904 $ 9,024 $ -
Interest on notes payable............. 1,274 198 589 487 -
Capital lease obligations............. 347 80 185 82 -
Operating leases...................... 63,026 10,709 16,874 14,314 21,015
------- ------ ------- ------- -------
Total contractual cash
obligations...................... $88,463 $14,875 $28,552 $24,021 $21,015
======= ======= ======= ======= =======
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 member clinics
in our Fertility Centers Division. A significant portion of these commitments
relate to our transactions with the medical practices themselves. Our
responsibilities to the these medical practices are to provide financing for
their accounts receivable and to hold patient deposits as well as undistributed
physician earnings on their behalf. Disbursements to the medical practices
generally occur monthly. The medical practice's repayment hierarchy consists of
the following:
o We provide a cash credit to the practice for billings to patients and
insurance companies;
o We reduce the cash credit for clinic expenses that we have incurred on
behalf of the practice;
o We reduce the cash credit for the base portion of our Service Fee which
relates to the Partner revenues;
o We reduce the cash credit for the variable portion of our Service Fee which
relates to the Partner earnings; and
o 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 fertility center 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
There have been no changes to any of our accounting policies disclosed in our
most recent Annual Report on Form 10-K.
New Accounting Pronouncements
Please see Note 11 of the consolidated financial statements contained in this
quarterly report on Form 10Q for a discussion on recently issued accounting
pronouncements.
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%
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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 June 30, 2008, a one percent change in interest rates would impact
our pre-tax income by approximately $100,000 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 June 30,
2008 (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.
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 VCA subsidiary.
We are in the process of reviewing the internal control system in place,
documenting controls and making 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 have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
24
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 June 30, 2008, none of
these proceedings is expected to have a material adverse
effect on our financial position, results of operations or
cash flow.
Item 1A. Risk Factors
There have been no material changes from the risk factors
previously disclosed in our Form 10-K for the year ended
December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
At an Annual Stockholders Meeting held on May 13, 2008, the
following matters were acted upon by the stockholders with the
indicated votes thereon:
Proposal 1 -- Election of Directors
-----------------------------------
Director Votes For Votes Withheld
-------- --------- --------------
Kush K. Agarwal 5,321,310 1,322,554
Gerardo Canet 5,348,928 1,294,936
Jay Higham 5,358,817 1,285,047
Sarason D. Liebler 5,556,177 1,087,687
Wayne R. Moon 6,510,105 133,759
Lawrence J. Stuesser 6,510,105 133,759
Elizabeth E. Tallett 6,508,556 135,308
Yvonne Thornton, M.D. 6,549,009 94,855
Item 5. Other Information.
None.
Item 6. Exhibits.
See Index to Exhibits on Page 27.
25
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: August 6, 2008 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 (G) -- Copy of By-laws of Registrant (as Amended on June 6, 2008)
31.1 -- CEO Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 dated August 6, 2008.
31.2 -- CFO Certification Pursuant to Rule 13a-14(a) as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 dated August 6, 2008.
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 August 6,
2008.
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 August 6,
2008.
27