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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, 1998
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
Commission File No. 1-11440
INTEGRAMED AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
One Manhattanville Road
Purchase, New York
(Address of principal executive offices)
06-1150326
(I.R.S. employer identification no.)
10577
(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 [ ]
The aggregate number of shares of the Registrant's Common Stock, $.01
par value, outstanding on November 1, 1998 was 20,648,369.
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INTEGRAMED AMERICA, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 1998 (unaudited)
and December 31, 1997.....................................3
Consolidated Statement of Operations for the three and
nine-month periods ended September 30, 1998
and 1997 (unaudited)......................................4
Consolidated Statement of Cash Flows for the nine-month
periods ended September 30, 1998 and 1997 (unaudited).....5
Notes to Consolidated Financial Statements (unaudited)....6-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................16-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk......23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................24
Item 2. Changes in Securities...........................................24
Item 3. Defaults upon Senior Securities.................................24
Item 4. Submission of Matters to a Vote of Security Holders.............24
Item 5. Other Information...............................................24
Item 6. Exhibits and Reports on Form 8-K................................24
SIGNATURES ......................................................25
INDEX TO EXHIBITS.............................................................26
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
INTEGRAMED AMERICA, INC.
CONSOLIDATED BALANCE SHEET
(all dollars in thousands)
ASSETS
September 30, December 31,
------------ -----------
1998 1997
------------ -----------
(unaudited)
Current assets:
Cash and cash equivalents .......................................................... $ 5,037 $ 1,930
Patient accounts receivable, less allowance for doubtful accounts of $499 and $180
in 1998 and 1997, respectively.................................................... 10,874 7,061
Management fees receivable, less allowance for doubtful accounts of $114 and $214
in 1998 and 1997, respectively.................................................... 1,785 1,600
Other current assets ............................................................... 1,450 1,757
------- -------
Total current assets............................................................ 19,146 12,348
------- -------
Fixed assets, net .................................................................. 5,077 4,742
Intangible assets, net.............................................................. 19,478 18,445
Other assets........................................................................ 677 566
------- -------
Total assets.................................................................... $44,378 $36,101
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 553 $ 1,475
Accrued liabilities................................................................. 3,400 2,260
Due to Medical Practices (see Note 2)............................................... 2,097 1,745
Dividends accrued on Preferred Stock................................................ 563 464
Notes payable and current portion of long-term debt................................. 2,097 614
Current portion of exclusive management rights obligation........................... 76 472
Patient deposits ................................................................... 2,326 1,236
------- -------
Total current liabilities....................................................... 11,112 8,266
------- -------
Long-term debt ....................................................................... 4,852 451
Exclusive management rights obligation................................................ 454 1,391
Shareholders' equity
Preferred Stock, $1.00 par value -
3,165,644 shares authorized in 1998 and 1997, respectively - 2,500,000
undesignated; 665,644 shares designated as Series A Cumulative Convertible
of which 165,644 shares were issued and outstanding in 1998 and
1997, respectively................................................................ 166 166
Common Stock, $.01 par value - 50,000,000 and 25,000,000 shares authorized;
21,372,369 and 17,198,616 shares issued and outstanding in 1998 and 1997,
respectively...................................................................... 213 172
Capital in excess of par ........................................................... 53,563 46,471
Accumulated deficit ................................................................ (25,982) (20,816)
------- -------
Total shareholders' equity ..................................................... 27,960 25,993
------- -------
Total liabilities and shareholders' equity...................................... $44,378 $36,101
======= =======
See accompanying notes to the consolidated financial statements.
3
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(all amounts in thousands, except per share amounts)
For the For the
three-month period nine-month period
ended September 30, ended September 30,
-------------------- -------------------
1998 1997 1998 1997
------- ------ ------ ------
(unaudited) (unaudited)
Revenues, net (see Note 2)...................................... $9,756 $4,956 $27,927 $13,369
Costs of services incurred on behalf of Network Sites:
Employee compensation and related expenses................... 3,734 1,884 11,050 4,943
Direct materials............................................. 1,153 302 3,359 929
Occupancy costs.............................................. 725 464 2,120 1,198
Depreciation................................................. 343 195 976 556
Other expenses............................................... 1,564 633 3,960 1,926
------ ------ ------- ------
Total costs of services...................................... 7,519 3,478 21,465 9,552
Network Sites' contribution..................................... 2,237 1,478 6,462 3,817
------ ------ ------- ------
General and administrative expenses............................. 1,385 1,005 3,856 3,028
Amortization of intangible assets............................... 234 161 681 349
Interest income................................................. (24) (30) (45) (98)
Interest expense................................................ 126 14 306 48
------ ------ ------- ------
Total other expenses......................................... 1,721 1,150 4,798 3,327
------ ------ ------- ------
Restructuring and other charges (see Note 8).................... -- -- 2,084 --
Income (loss) from continuing operations before income taxes.... 516 328 (420) 490
Provision for income taxes...................................... 94 20 245 84
------ ------ ------- ------
Income (loss) from continuing operations........................ 422 308 (665) 406
Discontinued operations (see Note 7):
Loss from operations of discontinued AWM Division (less
applicable income taxes of $0)............................ -- 200 923 249
(Recapture) loss from disposal of AWM Division............... (350) -- 3,578 --
------ ------ ------- ------
Net income (loss)............................................... 772 108 (5,166) 157
Less: Dividends accrued on Preferred Stock...................... 33 33 99 99
------ ------ ------- ------
Net income (loss) applicable to Common Stock.................... $ 739 $ 75 $(5,265) $ 58
====== ====== ======= ======
Basic and diluted earnings (loss) per share of Common Stock:
Continuing operations........................................ $ 0.02 $ 0.02 $ (0.04) $ 0.03
Discontinued operations...................................... 0.01 (0.01) (0.21) (0.02)
------ ------ ------- ------
Net earnings (loss).......................................... $ 0.03 $ 0.01 $ (0.25) $ 0.01
====== ====== ======= ======
Weighted average shares - basic................................. 21,372 13,243 20,904 10,790
====== ====== ======= ======
Weighted average shares - diluted............................... 21,619 13,473 20,904 11,020
====== ====== ======= ======
See accompanying notes to the consolidated financial statements.
4
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(all amounts in thousands)
For the
nine-month period
ended September 30,
-------------------
1998 1997
------- ------
(unaudited)
Cash flows from operating activities:
Net (loss) income .............................................................. $(5,166) $ 157
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization.................................................. 1,938 1,228
Writeoff of tangible and intangible assets .................................... 5,541 95
Changes in assets and liabilities-- (Increase) decrease in assets:
Patient accounts receivable............................................... (2,733) (2,237)
Management fees receivable................................................ (1,075) (261)
Other current assets...................................................... 199 (108)
Other assets.............................................................. (111) (151)
Increase (decrease) in liabilities:
Accounts payable......................................................... (1,222) (835)
Accrued liabilities...................................................... (343) 285
Due to Medical Practices................................................. 352 (164)
Patient deposits......................................................... 878 434
------ -------
Net cash used in operating activities.......................................... (1,742) (1,557)
------ -------
Cash flows (used in) provided by investing activities:
Proceeds from short term investments......................................... -- 2,000
Purchase of net liabilities (assets) of acquired businesses.................. 487 (661)
Payments for exclusive management rights and related acquisition costs....... (3,165) (9,447)
Purchase of fixed assets and leasehold improvements.......................... (1,216) (834)
Proceeds from sale of fixed assets........................................... 135 139
------ -------
Net cash used in investing activities........................................... (3,759) (8,803)
------ -------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of Common Stock....................................... 5,500 9,601
Used for stock issue costs................................................... (74) (1,193)
Proceeds from bank under Credit Facility..................................... 6,000 250
Principal repayments on debt................................................. (2,833) (193)
Principal repayments under capital lease obligations......................... (84) (97)
Proceeds from exercise of Common Stock options............................... 99 19
------ -------
Net cash provided by financing activities......................................... 8,608 8,387
------ -------
Net increase (decrease) in cash and cash equivalents.............................. 3,107 (1,973)
Cash and cash equivalents at beginning of period.................................. 1,930 3,952
------ -------
Cash and cash equivalents at end of period........................................ $5,037 $ 1,979
====== =======
See accompanying notes to the consolidated financial statements.
5
INTEGRAMED AMERICA, INC.
NOTES TO 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, 1998, and the results of
operations and cash flows for the interim period presented. Operating results
for the interim period are not necessarily indicative of results that may be
expected for the year ending December 31, 1998. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of consolidation --
The consolidated financial statements comprise the accounts of IntegraMed
America, Inc. and its wholly owned subsidiaries, IVF America (NY), Inc., IVF
America (MA), Inc., IVF America (PA), Inc., IVF America (NJ), Inc., IVF America
(MI), Inc., IntegraMed America of Illinois, Inc., Shady Grove Fertility Centers,
Inc. (see Note 6) and the Adult Women's Medical Center, Inc. ("AWMC"). All
significant intercompany transactions have been eliminated. The Company derives
its revenues from management agreements and, with respect to one managed Network
Site and AWMC, from patient service revenues. The Company does not consolidate
the results of its managed Network Sites. Effective August 6, 1998, IVF America
(NY), Inc., IVF America (MA), Inc., IVF America (PA), Inc. and IVF America (MI),
Inc. were merged into IntegraMed America, Inc. Effective September 1, 1998, the
Company disposed of AWMC via a sale of its operations.
In 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "EITF") issued EITF No. 97-2. The EITF reached a consensus
concerning certain matters relating to the physician practice management ("PPM")
industry with respect to the consolidation of professional corporation revenues
and the accounting for business corporations. As an interim step before the
consensus, the EITF allowed PPMs to display the revenues and expenses of managed
physician practices in the statement of operations (the "display method") if the
terms of the management agreement provided the PPM with a "net profits or
equivalent interest" in the medical services furnished by the respective medical
practices. It is the Company's understanding that the EITF did not and would not
object to the use of the display method in PPM financial statements for periods
ending before December 15, 1998. As the Company does not consolidate its managed
Network Sites, the adoption of EITF 97-2 in 1998 does not have a material impact
on the Company's financial position, cash flows or results of operations. As
discussed below, the Company has discontinued the display of revenues for its
Long Island and Boston Network Sites due to changes in the respective management
agreements.
Since inception through December 31, 1997, the management agreements
related to the Long Island and Boston Network Sites have been incorporated in
the Company's consolidated financial statements via the display method as the
Company believed that these management agreements provided it with a "net
profits or equivalent interest" in the medical services furnished by the Medical
Practices at the Long Island and Boston Network Sites. Consequently, for the
Long Island and Boston Network Sites, the Company has historically presented the
Medical Practices' patient services revenue, less amounts retained by the
Medical Practices, or "Medical Practice retainage", as "Revenues after Medical
Practice retainage" in its consolidated statement of operations (the "display
method"). Due to changes in the terms of the management agreements related to
the Long Island and Boston Network Sites, effective in October 1997 and January
1998, respectively, the Company no longer displays the patient services revenue
of the Long Island and Boston Medical Practices. As a result, the Company no
longer displays the patient services revenue and Medical Practice retainage
related to these Network Sites in the accompanying consolidated statement of
operations for the periods prior to January 1, 1998. The revised management
agreements provide for the Company to receive a specific management fee which
the Company has reported in "Revenues, net" in the accompanying Consolidated
Statement of Operations.
6
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles which requires the use of management's
estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue and cost recognition -
Reproductive Science Center(R) Division ("RSC Division")
The Company currently provides comprehensive management services under nine
management agreements.
Under six of the agreements, including the revised management agreement for
the Boston Network Site, the Company receives as compensation for its management
services a three-part management fee comprised of: (i) a fixed percentage of net
revenues generally equal to 6%, (ii) reimbursed costs of services (costs
incurred in managing a Medical Practice and any costs paid on behalf of the
Medical Practice) and (iii) a fixed or variable percentage of earnings after
management fees which is currently generally equal to up to 20%, or an
additional variable percentage of net revenues generally ranging from 7% to
9.5%. Under the revised management agreement for the Long Island Network Site,
as compensation for its management services, the Company receives a fixed fee
(currently equal to $480,000 per annum), plus reimbursed costs of services.
Two of the Company's Network Sites are affiliated with medical centers.
Under one of these management agreements, the Company primarily provides
endocrine testing and administrative and finance services for a fixed percentage
of revenues, equal to 15% of net revenues, and reimbursed costs of services.
Under the second of these management agreements, the Company's revenues are
derived from certain ART laboratory services performed, and directly billed to
the patients by the Company; out of these patient service revenues, the Company
pays its direct costs and the remaining balance represents the Company's Network
Site contribution. All direct costs incurred by the Company are recorded as
costs of services.
All management fees are reported as "Revenues, net" by the Company. Direct
costs incurred by the Company in performing its management services and costs
incurred on behalf of the Medical Practices are recorded in operating expenses
incurred on behalf of Network Sites. The physicians receive as compensation all
remaining earnings after payment of the Company's management fee.
Prior to January 1, 1998, under another form of management agreement which
had been in use at the Long Island and Boston Network Sites, the Company
recorded all patient service revenues and, out of such revenues, the Company
paid the Medical Practices' expenses, physicians' and other medical
compensation, direct materials and certain hospital contract fees. Under these
agreements, the Company guaranteed a minimum physician compensation based on an
annual budget jointly determined by the Company and the physicians. The
Company's management fee was payable only out of remaining revenues, if any,
after the payment of physician compensation and all direct administrative
expenses of the Medical Practice which were recorded as costs of service. Under
these arrangements, the Company had been liable for payment of all liabilities
incurred by the Medical Practices and had been at risk for any losses incurred
in the operation thereof. Due to changes in the management agreements related to
the Long Island and Boston Network Sites, effective in October 1997 and January
1998, respectively, the Company no longer displays patient service revenues of
the Long Island and Boston Medical Practices which had been reflected in
"Revenues, net" in the Company's consolidated statement of operations. The
revised management agreements provide for the Company to receive a specific
management fee which the Company will report in "Revenues, net" in its
consolidated statement of operations. Under the revised management agreement for
the Long Island Network Site, as compensation for its management services, the
Company receives a fixed fee (currently equal to $480,000 per annum), plus
reimbursed costs of services. Under the revised management agreement for the
Boston Network Site, as compensation for its management services, the Company
receives a three-part management fee consistent with the majority of the
Company's existing management agreements. The revised agreements provide for
increased incentives and risk-sharing for the Company's affiliated medical
providers.
7
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AWM Division
In June 1998, the Company committed itself to a formal plan to dispose of
the AWM Division. On September 1, 1998 the Company disposed of the AWM Division
operations via a sale of certain of its fixed assets to a third party and the
third party's assumption of the employees, building lease, research contracts,
and medical records. The operating results of the AWM Division for the three and
nine-month periods ended September 30, 1998 and the charges recorded by the
Company related to its disposal are reflected under "Discontinued Operations" in
the accompanying Consolidated Statement of Operations (See Note 7).
The AWM Division's operations had been comprised of one Network Site with
two locations which were directly owned by the Company and a 51% interest in the
National Menopause Foundation ("NMF"), a company which had developed
multifaceted educational programs regarding women's healthcare. The Network Site
had also been involved in clinical trials with major pharmaceutical companies.
The Company had billed and recorded all patient service revenues of the
Network Site and had recorded all direct costs incurred as costs of services.
The medical providers had received a fixed monthly draw which had been adjusted
quarterly by the Company based on the respective Network Site's actual operating
results.
Revenues in the AWM Division had also included amounts earned under
contracts relating to clinical trials between the Network Site and various
pharmaceutical companies. The Network Site had contracted with major
pharmaceutical companies (sponsors) to perform women's medical care research
mainly to determine the safety and efficacy of a medication. Research revenues
had been recognized pursuant to each respective contract in the period which the
medical services (as stipulated by the research study protocol) had been
performed and collection of such fees had been considered probable. Net
realization had been dependent upon final approval by the sponsor that
procedures were performed according to study protocol. Payments collected from
sponsors in advance for services are included in accrued liabilities, and costs
incurred in performing the research studies had been included in costs of
services rendered.
The Company's 51% interest in NMF had been included in the Company's
consolidated financial statements. The Company had recorded 100% of the patient
service revenues and costs of NMF and had reported 49% of any profits of NMF as
minority interest on the Company's consolidated balance sheet. Minority interest
at September 30, 1998 and December 31, 1997 was $0.
Patient accounts receivable--
Patient accounts receivable represent receivables from patients for medical
services provided by the Medical Practices. Such amounts are recorded net of
contractual allowances and estimated bad debts. As of September 30, 1998 and
December 31, 1997, of total patient accounts receivable of $10,874,000 and
$7,061,000, respectively, approximately $10,527,000 and $4,477,000 of patient
accounts receivable were a function of Network Site revenue (i.e., the Company
purchased the accounts receivable, net of contractual allowances, from the
Medical Practice (the "Purchased Receivables")) and the remaining balances of
$347,000 and $2,584,000, respectively, were a function of net revenues of the
Company (see -- "Revenue and cost recognition" above). Risk of loss in
connection with non-collectiblity of Purchased Receivables is partially borne by
the Company in an amount equal to the Company's proportionate share of revenues
and/or earnings which are paid to the Company from the Medical Practice as its
management fee. Risk of loss in connection with non-collectibility of patient
accounts receivable which are a function of net revenues of the Company is borne
by the Company.
Management fees receivable --
Management fees receivable represent fees owed to the Company primarily for
repayment of advances by the Company to certain of the Medical Practices
pursuant to the respective management agreements with these Medical Practices
(see -- "Revenue and cost recognition" above).
8
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets --
Intangible assets at September 30, 1998 and December 31, 1997 consisted of
the following (000's omitted):
September 30, December 31,
------------ -----------
1998 1997
------------ -----------
Exclusive management rights.............. $20,367 $15,539
Goodwill................................. -- 3,890
Trademarks............................... 398 395
------- -------
Total............................... 20,765 19,824
Less-- accumulated amortization......... (1,287) (1,379)
------- -------
Total............................... $19,478 $18,445
======= =======
Exclusive Management Rights, Goodwill and Other Intangible Assets
Exclusive management rights, goodwill and other intangible assets represent
costs incurred by the Company for the right to manage and/or acquire certain
Network Sites and are valued at cost less accumulated amortization. During the
nine-month period ended September 30, 1998, the Company recorded a charge to
earnings for the writeoff of the entire unamortized portion of goodwill
associated with the AWM Division which was disposed of effective September 1,
1998 and recorded an aggregate exclusive management right impairment charge of
$1.4 million related to certain of the managed single-physician practices (see
Notes 7 and 8).
Trademarks
Trademarks represent trademarks, service marks, trade names and logos
purchased by the Company and are valued at cost less accumulated amortization.
Amortization and recoverability
The Company periodically reviews its intangible assets to assess
recoverability; any impairments would be recognized in the consolidated
statement of operations if a permanent impairment were determined to have
occurred. Recoverability of intangibles is determined based on undiscounted
expected earnings from the related business unit or activity over the remaining
amortization period. Exclusive management rights are amortized over the term of
the respective management agreement, usually ten to twenty-five years. Goodwill
and other intangibles are amortized over periods ranging from three to forty
years. Trademarks are amortized over five to seven years. The fully depreciated
asset balances related to the AWM Division and to certain of the managed
single-physician practices were removed from the Company's records as of
September 30, 1998 (see Notes 7 and 8). As of September 30, 1998, accumulated
amortization of exclusive management rights and trademarks was $961,000 and
$326,000, respectively. As of December 31, 1997, accumulated amortization of
exclusive management rights, goodwill and trademarks was $802,000, $283,000 and
$294,000, respectively.
Due to Medical Practices --
Due to Medical Practices primarily represents amounts owed by the Company
to the Medical Practices for the medical providers' share of the respective
Medical Practice earnings net of the Company's advances to the Medical Practice,
if any. Due to Medical Practices excludes amounts owed by the Company to Medical
Practices for exclusive management rights.
9
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share --
The Company determines earnings (loss) per share in accordance with
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128) which the
Company adopted in December 1997. All historical earnings (loss) per share have
been presented in accordance with FAS 128.
NOTE 3 -- SIGNIFICANT MANAGEMENT CONTRACTS:
For the three and nine-month periods ended September 30, 1998 and 1997, the
Boston, New Jersey, FCI (acquired in mid-August 1997), and Shady Grove (acquired
in mid-March 1998) Network Sites provided greater than 10% of the Company's
Revenues, net and Network Sites' contribution as follows:
Percent of Company Percent of Network Percent of Company Percent of Network
Revenues, net Sites' contribution Revenues, net Sites' contribution
for the three-month for the three-month for the nine-month for the nine-month
period ended Sept. 30, period ended Sept. 30, period ended Sept. 30, period ended Sept. 30,
---------------------- ----------------------- ---------------------- ----------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
Boston.......... 15.54 28.23 20.80 29.30 16.12 31.74 21.97 36.54
New Jersey...... 12.35 19.19 28.28 40.49 12.44 20.78 28.22 43.54
FCI............. 25.81 12.22 22.75 13.98 26.73 4.72 26.69 6.08
Shady Grove..... 18.43 -- 11.89 -- 13.37 -- 8.83 --
NOTE 4 -- NOTES PAYABLE:
In September 1998, the Company obtained from Fleet Bank, N.A. ("Fleet") a
$13.0 million credit facility (the "New Credit Facility"). The New Credit
Facility is comprised of a $4.0 million three-year working capital revolver, a
$5.0 million three-year acquisition revolver and a $4.0 million 5.5 year term
loan. Each component of the New Credit Facility bears interest by reference to
Fleet's prime rate or LIBOR, at the option of the Company, plus a margin ranging
from 0.00% to 0.25% in the case of prime-based loans or 2.75% to 3.00% in the
case of LIBOR-based loans, which margins vary based on a leverage test. Interest
on the prime-based loans is payable monthly and interest on LIBOR-based loans is
payable on the last day of each interest period applicable thereto provided
that, in the case of interest periods in excess of three months, interest is
payable at three-month intervals during such periods. Borrowings under the term
loan will require only interest payments for the first twenty months. Upon
closing of the New Credit Facility, the Company drew the entire $4.0 million
available under the term loan to repay in full its balance outstanding with
First Union National Bank of $2,250,000 and for working capital and acquisition
purposes. In addition, the Company will utilize a portion of the proceeds of the
term loan to pay part of the consideration to repurchase up to $2 million of the
Company's outstanding shares of Common Stock from time to time on the open
market at prevailing market prices or through privately negotiated transactions.
As of November 1, 1998, the Company had repurchased 724,000 shares of its Common
Stock for an aggregate cost of $476,000. Unused amounts under the working
capital and acquisition revolvers bear a commitment fee of 0.25% and 0.20%,
respectively. Availability of borrowings under the working capital revolver are
based on eligible accounts receivable as defined. Availability of borrowings
under the acquisition revolver will be based on financial covenants and
eligibility criteria with respect to each proposed acquisition. Approximately
$4.5 million was available under the working capital and acquisition revolvers
as of September 30, 1998. The New Credit Facility is secured by all of the
Company's assets.
As part consideration for the acquisition of the capital stock of Shady
Grove Fertility Centers, Inc., the Company issued $1.1 million in promissory
notes which are payable in two equal annual installments, due on April 1, 1999
and 2000, respectively, and bear interest at an annual rate of 8.5%.
Also included in notes payable is the Company's aggregate obligation of
approximately $1.6 million in the form of cash, stock, and a note to acquire the
balance of the capital stock of Shady Grove Fertility Centers, Inc., in early
1999.
10
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -- EQUITY:
Effective August 31, 1998, the Board of Directors approved a resolution to
reprice certain stock option agreements held by each officer, director and
employee of the Company, under the 1992 Incentive and Non-Incentive Stock Option
Plan and/or the 1998 Stock Option Plan. Per the resolution, stock option
agreements where the exercise price per share was greater than $1.03 were
amended to provide for an exercise price per share of $1.03 ("New Options").
Except for the exercise price of the New Options, all other terms and conditions
of the agreements remain in full force and effect. Per the resolution, options
to purchase approximately 1.4 million shares of Common Stock were repriced.
The Board of Directors has authorized the repurchase of up to $2 million of
the Company's outstanding shares of Common Stock from time to time on the open
market at prevailing market prices or through privately negotiated transactions.
The Company will utilize a portion of the term loan proceeds from its new credit
facility with Fleet Bank, N.A. to fund a portion of the price of the stock
repurchases.
As of September 30, 1998, dividend payments of approximately $563,000 on
the Series A Cumulative Convertible Preferred Stock (the "Convertible Preferred
Stock") were in arrears. In October 1998, the Company paid all dividend payments
which were in arrears.
The Board of Directors has authorized a one for four reverse stock split of
its outstanding shares of Common Stock through an amendment to the Company's
Amended and Restated Certificate of Incorporation. The reverse stock split will
be submitted for approval by the Company's stockholders at a Special Meeting of
Stockholders to be held on November 17, 1998. If approved by the Company's
stockholders, every four shares of Common Stock will be converted into one share
of Common Stock. On September 21, 1998, the Common Stock had been trading below
$1.00 for 30 consecutive trading days. The reverse stock split is intended to
allow the Company to comply with the minimum $1.00 bid price per share
requirement for continued listing of the Company's Common Stock on the Nasdaq
National Market.
During the first quarter of 1998, the Company consummated an equity private
placement of $5.5 million with entities affiliated with Morgan Stanley Venture
Partners ("Morgan Stanley") providing for the purchase of 3,235,294 shares of
the Company's Common Stock at a price of $1.70 per share and 240,000 warrants to
purchase shares of the Company's Common Stock, at a nominal exercise price. The
Company used a portion of these funds to acquire the capital stock of Shady
Grove Fertility Centers, Inc. (see Note 6).
In March and April 1998, pursuant to amendments to the Bay Area, FCI and
Shady Grove management agreements, the Company issued warrants to purchase an
aggregate of 150,000 shares of Common Stock, at a weighted average exercise
price of $1.77 per share to the shareholder physicians of the respective medical
practices in exchange for an extension of the term of the Company's respective
management agreements from twenty to twenty-five years.
NOTE 6 -- RECENT ACQUISITIONS:
In January 1998, the Company completed its second in-market merger with the
addition of two physicians to the FCI practice. The Company acquired certain
assets of Advocate Medical Group, S.C. ("AMG") and Advocate MSO, Inc. and
acquired the right to manage AMG's infertility practice conducted under the name
Center for Reproductive Medicine ("CFRM"). Simultaneous with the consummation of
this transaction, the Company amended its management agreement with FCI to
include two of the three physicians practicing under the name CFRM. The
aggregate purchase price was approximately $1.5 million, consisting of
approximately $1.2 million in cash and 184,314 shares of Common Stock. The
majority of the purchase price was allocated to exclusive management rights.
On March 12, 1998, the Company acquired the majority of the capital stock
of Shady Grove Fertility Centers, Inc. ("Shady Grove"), currently a Maryland
business corporation which provides management services, and formerly a Maryland
professional corporation engaged in providing infertility services. Prior to the
11
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consummation of the transaction, Shady Grove had entered into a twenty-year
management agreement with Levy, Sagoskin and Stillman, M.D., P.C. (the " Shady
Grove P.C."), an infertility physician group practice comprised of six
physicians and four locations surrounding the greater Washington, D.C. area. The
Company will acquire the balance of the Shady Grove capital stock in early 1999.
The aggregate purchase price for all of the Shady Grove capital stock was $5.7
million, consisting of approximately $2.8 million in cash, approximately $1.4
million in Common Stock, and approximately $1.5 million in promissory notes. The
purchase price was allocated to the various assets and liabilities assumed and
the balance was allocated to exclusive management rights. On March 12, 1998, the
Closing Date, the following consideration was paid: (i) approximately $1.8
million in cash, (ii) approximately $1.2 million in stock or 639,551 shares of
Common Stock, and (iii) approximately $1.1 million in promissory notes. The
Company will pay the balance of the aggregate purchase price of approximately
$1.6 million in the form of cash, stock and a note in early 1999 (the "Second
Closing Date"), when the balance of the Shady Grove capital stock is transferred
to the Company. The $1.1 million of promissory notes currently outstanding are
payable in two equal annual installments due on April 1, 1999 and 2000,
respectively, and bear interest at an annual rate of 8.5%. The number of shares
of Company Common Stock to be issued on the Second Closing Date, which will have
a fair market value of approximately $200,000, will be determined based upon the
average closing price of the Company's Common Stock for the ten-day trading
period prior to the third business day before the Second Closing Date, provided,
however, that in no event will the price per share exceed $2.00 or be less than
$1.70 for purposes of this calculation.
The following unaudited pro forma results of operations for the three and
nine-month periods ended September 30, 1998 and 1997 have been prepared by
management based on the unaudited financial information for Shady Grove, the
Maryland professional corporation, which management arrangement was entered into
in March 1998, and Fertility Centers of Illinois, S.C. which management
agreement was entered into in August 1997, adjusted where necessary, with
respect to pre-acquisition periods, to the basis of accounting used in the
historical financial statements of the Company. Such adjustments include
modifying the results to reflect operations as if the Shady Grove management
agreement had been consummated on January 1, 1998 and 1997, respectively, and as
if the FCI management agreement, excluding the in-market mergers in 1997 and
1998, had been consummated on January 1, 1997. Additional general corporate
expenses which would have been required to support the operations of the new
Network Sites are not included in the pro forma results. The unaudited pro forma
results may not be indicative of the results that would have occurred if the
management agreement had been in effect on the dates indicated or which may be
obtained in the future.
For the For the
three-month nine-month
period ended period ended
September 30, September 30,
(000's omitted) (000's omitted)
--------------- ---------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
Revenues, net................................................. $9,756 $7,123 $29,433 $20,853
Net income (loss) from continuing operations (1).............. $ 422 $ 622 $ (498) $ 1,414
Basic and diluted earnings (loss) per share of Common Stock
from continuing operations................................. $ 0.02 $ 0.04 $ (0.03) $ 0.11
(1) Pro forma income from continuing operations before restructuring and other
charges for the nine-month period ended September 30, 1998 was
approximately $1.6 million, or $0.07 per share.
NOTE 7 -- DISCONTINUED OPERATIONS:
In June 1998, the Company committed itself to a formal plan to dispose of
the AWM Division operations. On September 1, 1998 the Company disposed of the
AWM operations via a sale of certain of its fixed assets to a third party and
the third party's assumption of the employees, building lease, research
12
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contracts, and medical records. As of September 30, 1998, the Company's
Consolidated Balance Sheet includes approximately $30,000 of accounts payable,
$20,000 of accrued liabilities and $262,500 in notes payable related to the AWM
Division. During the nine-month period ended September 30, 1998, the Company
reported a loss from the disposal of the AWM Division of approximately $3.6
million, which principally represented approximately $3.3 million related to the
write-off of goodwill and $243,000 for estimated operating losses during the
phase-out period. During the three-month periods ended September 30, 1998 and
1997, the AWM Division recorded revenues of approximately $338,000 and $459,000,
respectively. During the nine-month periods ended September 30, 1998 and 1997,
the AWM Division recorded revenues of approximately $1.0 million and $1.7
million, respectively.
NOTE 8 -- RESTRUCTURING AND OTHER CHARGES:
The Company recorded approximately $2.1 million in restructuring and other
charges in the three-month period ended June 30, 1998. Such charges included
approximately $1.4 million associated with its termination of its management
agreement with the Reproductive Science Center of Greater Philadelphia, a single
physician Network Site, effective July 1, 1998, which primarily consisted of
exclusive management right impairment and other asset write-offs. Such charges
also included approximately $700,000 for exclusive management right impairment
losses related to two other single physician Network Sites.
NOTE 9 -- 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, 1998 and 1997 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,
------------------- -------------------
1998 1997 1998 1997
----- ------ ------ ------
Numerator
Income (loss) from continuing operations.................. $ 422 $ 308 $ (665) $ 406
Less: Preferred stock dividends accrued................... 33 33 99 99
------- ------- ------- -------
Income (loss) from continuing operations
available to Common stockholders....................... 389 275 (764) 307
Recapture (loss) from discontinued operations............. 350 (200) (4,501) (249)
------- ------- ------- -------
Net income (loss) available to Common Stockholders........ $ 739 $ 75 $(5,265) $ 58
======= ======= ======= =======
Denominator
Weighted average shares outstanding....................... 21,372 13,243 20,904 10,790
Effect of dilutive options and warrants................... 247 230 -- 230
------- ------- ------- -------
Weighted average shares and dilutive potential
Common shares.......................................... 21,619 13,473 20,904 11,020
======= ======= ======= =======
Basic and diluted EPS:
Continuing operations..................................... $ 0.02 $ 0.02 $ (0.04) $ 0.03
Discontinued operations................................... 0.01 (0.01) (0.21) (0.02)
------- ------- ------- -------
Net earnings (loss)....................................... $ 0.03 $ 0.01 $ (0.25) $ 0.01
======= ======= ======= =======
The effect of the assumed exercise of options to purchase approximately
20,000 shares of Common Stock and warrants to purchase 240,000 shares of Common
Stock at exercise prices of $0.625 and of $0.01, respectively, were included in
computing the diluted per share amount for the three-month period ended
September 30, 1998. These shares were excluded in computing the diluted per
share amount for the nine-month period ended September 30, 1998 as they were
antidilutive due to the Company's net loss during the nine-month period. For the
three and nine-month periods ended September 30, 1998, the effect of the assumed
exercise of options to purchase approximately 1.4 million shares of Common Stock
and warrants to purchase approximately 313,000 shares of Common Stock at
13
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exercise prices ranging from $1.00 to $1.03 per share and exercise prices
ranging from $1.25 to $10.34 per share, respectively, were excluded in computing
the diluted per share amount as the exercise price of the options and warrants
equaled or exceeded the average market price of the Common Stock during these
periods. For the three and nine-month periods ended September 30, 1998,
approximately 523,000 shares of Common Stock from the assumed conversion of
Preferred Stock were excluded in computing the diluted earnings per share as the
amount of the dividend declared for these periods per share of Common Stock
obtainable on conversion exceeded basic earnings per share.
The effect of the assumed exercise of options to purchase approximately
562,000 shares of Common Stock and warrants to purchase approximately 150,000
shares of Common Stock at exercise prices ranging from $0.625 to $1.68 and from
$1.25 to $1.81, respectively, were included in computing the diluted per share
amount for the three and nine-month periods ended September 30, 1997. For the
three and nine-month periods ended September 30, 1997, the effect of the assumed
exercise of options to purchase approximately 583,000 shares of Common Stock and
warrants to purchase approximately 233,000 shares of Common Stock at exercise
prices ranging from $2.00 to $3.75 and from $10.34 to approximately $14.54 per
share, respectively, were excluded in computing the diluted per share amount as
the exercise price of the options and warrants exceeded the average market price
of the Common Stock during the period. For the three and nine-month periods
ended September 30, 1997, approximately 414,000 shares of Common Stock from the
assumed conversion of Preferred Stock were excluded in computing the diluted
earnings per share as the amount of the dividend declared for these periods per
share of Common Stock obtainable on conversion exceeded basic earnings per
share.
NOTE 10 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH
TRANSACTIONS:
In connection with the Company's termination of its management agreement
with the Reproductive Sciences Medical Center, Inc. effective September 1, 1998,
the Company was discharged from its remaining exclusive management right
obligation of $650,000.
In connection with the Company's termination of its management agreement
with the Reproductive Science Center of Greater Philadelphia and due to this
Network Site's historical operating losses, approximately $583,000 of the
Company's exclusive right to manage obligation to the physician owner was
applied against the Company's receivable from the physician owner during the
six-month period ended June 30, 1998.
In connection with its acquisition of the exclusive right to manage CFRM in
January 1998, the Company issued 184,314 shares of Common Stock with an
aggregate fair value equal to approximately $300,000.
In connection with its acquisition of the exclusive right to manage the
Shady Grove P.C., in March 1998, the Company issued 639,551 shares of Common
Stock with an aggregate fair value equal to approximately $1.2 million and
approximately $1.1 million in promissory notes. The Company also recorded an
additional aggregate obligation of approximately $1.6 million in the form of
cash, stock and a note to acquire the balance of the capital stock of Shady
Grove, which is anticipated to occur in early 1999.
In connection with its acquisition of the exclusive right to manage Bay
Area Fertility in January 1997, the Company issued 333,333 shares of Common
Stock with an aggregate fair value equal to approximately $500,000.
In March and April 1998, pursuant to amendments to the Bay Area, FCI and
Shady Grove management agreements, the Company issued warrants to purchase an
aggregate 150,000 shares of the Company's Common Stock at a weighted average
exercise price of $1.77 per share to the shareholder physicians of the
respective medical practices in exchange for an extension of the term of the
Company's respective managements agreement from twenty to twenty-five years.
In the three-month period ended September 30, 1997, the Company entered
into a capital lease obligation in the amount of $105,000 for medical equipment.
Accrued dividends on Convertible Preferred Stock outstanding increased by
$99,000 to $563,000 and by $99,000 to $430,000, in the nine-month periods ended
September 30, 1998 and 1997, respectively.
14
State taxes, which primarily reflect various state income taxes, of
$376,000 and $66,000 were paid in the nine-month periods ended September 30,
1998 and 1997, respectively.
Interest paid in cash in the nine-month periods ended September 30, 1998
and 1997 amounted to $306,000 and $48,000, respectively. Interest received in
the nine-month periods ended September 30, 1998 and 1997 amounted to $45,000 and
$168,000 respectively.
15
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
quarterly report and with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Overview
IntegraMed America, Inc. (the "Company") is a health services management
company specializing in fertility and assisted reproductive technology (ART)
services. The Company provides comprehensive management services to a nationwide
network of medical providers currently consisting of nine sites (each, a
"Network Site" or "Reproductive Science Center"). Each Reproductive Science
Center consists of a location or locations where the Company has a management
agreement with a physician group or hospital (each a "Medical Practice") which
employs the physicians. The current network of nine Reproductive Science Centers
is comprised of twenty-one locations in nine states and the District of Columbia
and forty-seven affiliated physicians, including physicians employed by the
Medical Practice, as well as, physicians who have arrangements to utilize the
Company's facilities.
The Company's objective is to develop, manage and integrate a nationwide
network of Medical Practices specializing in the provision of high quality, cost
effective fertility health care services. The primary elements of the Company's
strategy include: (i) establishing additional Reproductive Science Centers, (ii)
increasing revenue at the Reproductive Science Centers, (iii) increasing
operating efficiencies at the Reproductive Science Centers and (iv) developing a
nationwide integrated information system.
Since inception through December 31, 1997, the management agreements
related to the Long Island and Boston Network Sites have been incorporated in
the Company's consolidated financial statements via the display method as the
Company believed that these management agreements provided it with a "net
profits or equivalent interest" in the medical services furnished by the Medical
Practices at the Long Island and Boston Network Sites. Consequently, for the
Long Island and Boston Network Sites, the Company has historically presented the
Medical Practices' patient services revenue, less amounts retained by the
Medical Practices, or "Medical Practice retainage", as "Revenues after Medical
Practice retainage" in its consolidated statement of operations ("display
method"). Due to changes in the management agreements related to the Long Island
and Boston Network Sites effective in October 1997 and January 1998,
respectively, the Company no longer displays the patient services revenue of the
Long Island and Boston Medical Practices. As a result, the Company no longer
displays the patient services revenue and Medical Practice retainage related to
these Network Sites in the accompanying consolidated statement of operations for
the periods prior to January 1, 1998. The revised management agreements provide
for the Company to receive a specific management fee which the Company has
reported in "Revenues, net" in the accompanying consolidated statement of
operations. The revised agreements provide for increased incentives and
risk-sharing for the Company's affiliated Medical Practices.
In the nine-month period ended September 30, 1998, the Company recorded
restructuring and other charges of approximately $2.1 million associated with
its termination of its management agreement with the Reproductive Science Center
of Greater Philadelphia, a single-physician Network Site, effective July 1,
1998, and exclusive management right impairment losses related to two other
single-physician Network Sites.
Due to continued operating losses and the Company's decision to focus
exclusively on fertility services, in June 1998, the Company committed itself to
a formal plan to dispose of the operations of the Adult Women's Medical Division
("AWM Division"). The AWM Division operations were sold effective September 1,
1998. The nine-month period ended September 30, 1998 reflects an aggregate
charge of approximately $4.5 million related to the operating losses and the
disposal of the AWM Division.
During the first quarter of 1998, the Company consummated an equity private
placement of $5.5 million with entities affiliated with Morgan Stanley Venture
Partners. A portion of these funds was used by the Company to purchase the
capital stock of Shady Grove Fertility Centers, Inc. ("Shady Grove") and the
right to manage Levy, Sagoskin and Stillman M.D., P.C. (the "Shady Grove P.C."),
an infertility physician group practice comprised of six physicians and four
locations in the greater Washington, D.C. area.
16
In September 1998, the Company obtained from Fleet Bank, N.A. a $13.0
million credit facility to fund acquisitions over approximately the next one to
two years, to provide working capital, and to refinance its existing bank debt.
In addition, the Company will utilize a portion of the proceeds of the term loan
from its new credit facility to pay part of the consideration to repurchase up
to $2 million of the Company's outstanding shares of Common Stock from time to
time on the open market at prevailing market prices or through privately
negotiated transactions.
The Board of Directors has authorized a one for four reverse stock split of
its outstanding shares of Common Stock through an amendment to the Company's
Amended and Restated Certificate of Incorporation. The reverse stock split will
be submitted for approval by the Company's stockholders at a Special Meeting of
Stockholders to be held on November 17, 1998. If approved by the Company's
stockholders, every four shares of Common Stock will be converted into one share
of Common Stock. On September 21, 1998, the Common Stock had been trading below
$1.00 for 30 consecutive trading days. The reverse stock split is intended to
allow the Company to comply with the minimum $1.00 bid price per share
requirement for continued listing of the Company's Common Stock on the Nasdaq
National Market.
Results of Operations
The following table shows the percentage of net revenue represented by
various expense and other income items reflected in the Company's Consolidated
Statement of Operations.
For the For the
three-month period nine-month period
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
(unaudited) (unaudited)
Revenues, net................................................... 100% 100% 100% 100%
Costs of services incurred on behalf of Network Sites:
Employee compensation and related expenses................. 38.27% 38.01% 39.57% 36.97%
Direct materials........................................... 11.82% 6.09% 12.03% 6.95%
Occupancy costs............................................ 7.43% 9.36% 7.59% 8.96%
Depreciation............................................... 3.52% 3.93% 3.49% 4.16%
Other expenses............................................. 16.03% 12.78% 14.18% 14.41%
----- ----- ----- -----
Total costs of services.................................... 77.07% 70.17% 76.86% 71.45%
Network Sites' contribution..................................... 22.93% 29.83% 23.14% 28.55%
General and administrative expenses............................. 14.20% 20.28% 13.81% 22.65%
Amortization of intangible assets............................... 2.40% 3.25% 2.44% 2.61%
Interest income................................................. (0.24)% (0.60)% (0.16)% (0.73)%
Interest expense................................................ 1.29% 0.28% 1.09% 0.36%
----- ----- ----- -----
Total other expenses....................................... 17.65% 23.21% 17.18% 24.89%
----- ----- ----- -----
Restructuring and other charges................................. 0.00% 0.00% 7.46% 0.00%
Income (loss) from continuing operations before income taxes.... 5.28% 6.62% (1.50)% 3.66%
Provision for income taxes...................................... 0.96% 0.40% 0.88% 0.63%
----- ----- ----- -----
Income (loss) from continuing operations (a).................... 4.32% 6.22% (2.38)% 3.03%
Discontinued operations (recapture) loss........................ (3.59)% 4.04% 16.12% 1.86%
----- ----- ----- -----
Net income (loss)........................................... 7.91% 2.18% (18.5)% 1.17%
===== ===== ===== =====
(a) Excluding the effect of the restructuring and other charges in
1998, income from continuing operations as a percent of revenues, net
would have been 5.08% for the nine months ended September, 30, 1998.
17
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenues, net for the three months ended September 30, 1998 (the "third
quarter of 1998") were approximately $9.8 million as compared to approximately
$5.0 million for the three months ended September 30, 1997 (the "third quarter
of 1997"), an increase of $4.8 million, or 96.9%. The increase in revenues,
excluding revenues related to the Philadelphia Network Site agreement which was
terminated effective July 1, 1998 and including revenues related to the San
Diego Network Site agreement which was terminated effective September 1, 1998,
was approximately 72.5% attributable to new management agreements entered into
in the first quarter of 1998 and the second and third quarter of 1997 and
approximately 27.5% attributable to same market growth. Same market growth was
principally achieved via new service offerings, the expansion of ancillary
services, and increases in patient volume. The aggregate increase in revenue was
comprised of the following: (i) an approximate $4.0 million increase in
reimbursed costs of services; and (ii) an approximate $760,000 increase in the
Company's management fees derived from the managed Medical Practices' net
revenue and/or earnings.
Total costs of services as a percentage of revenue increased by 6.9% in the
third quarter of 1998 as compared to the third quarter of 1997. Employee
compensation and related expenses, direct materials, and other expenses as a
percentage of revenue increased primarily due to the factors attributable to
increasing revenues. Occupancy costs and depreciation as a percentage of revenue
decreased primarily due to the significant increase in revenues.
Network Sites' contribution increased by approximately 51.4% to $2.2
million in the third quarter of 1998 as compared to $1.5 million in the third
quarter of 1997 due to the factors attributable to increasing revenues.
General and administrative expenses for the third quarter of 1998 were
approximately $1.4 million as compared to approximately $1.0 million in the
third quarter of 1997, an increase of 37.8%. As a percentage of revenues,
general and administrative expenses decreased to approximately 14.2% from
approximately 20.3% primarily due to the significant increase in revenues.
Amortization of intangible assets was $234,000 in the third quarter of 1998
as compared to $161,000 in the third quarter of 1997. This increase was
attributable to the Company's acquisitions of new management agreements in the
first quarter of 1998 and the second and third quarters of 1997, partially
offset by the absence of amortization related to certain single physician
Network Sites due to exclusive management right impairment losses which were
recorded in the second quarter of 1998.
Interest income for the third quarter of 1998 decreased to $24,000 from
$30,000 for the third quarter of 1997, due to a lower invested cash balance.
Interest expense for the third quarter of 1998 increased to $126,000 from
$14,000 in the third quarter of 1997, due to increases in bank borrowings
principally to finance working capital and acquisition needs and in notes
payable to Medical Providers for exclusive management rights.
The provision for income taxes primarily reflected various state income
taxes in both the third quarter of 1998 and the third quarter of 1997.
Income from continuing operations was approximately $422,000 in the third
quarter of 1998 as compared to $308,000 in the third quarter of 1997. The
increase was primarily due to the $759,000 increase in Network Site
contribution, which was partially offset by increases in general and
administrative expenses, amortization of intangible assets, interest and income
tax expense.
The Company disposed of the AWM Division via a sale of its operations
effective September 1, 1998. Discontinued operations in the third quarter of
1998 reflect the recapture of $350,000 of disposal costs which had been recorded
in the second quarter of 1998. During the third quarter of 1998 and 1997, the
AWM Division recorded revenues of $338,000 and $459,000, respectively.
18
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenues, net for the nine months ended September 30, 1998 were
approximately $27.9 million as compared to approximately $13.4 million for the
nine months ended September 30, 1997, an increase of approximately $14.5
million, or 109%. The increase in revenues, excluding revenues related to the
Philadelphia Network Site agreement which was terminated effective July 1, 1998
and including revenues related to the San Diego Network Site agreement which was
terminated effective September 1, 1998, was approximately 74.8% attributable to
new management agreements entered into in the first quarter of 1998 and the
second and third quarter of 1997 and approximately 25.2% attributable to same
market growth. Same market growth was principally achieved via new service
offerings, the expansion of ancillary services, and increases in patient volume.
The aggregate increase in revenue was comprised of the following: (i) an
approximate $11.9 million increase in reimbursed costs of services; and (ii) an
approximate $2.6 million increase in the Company's management fees derived from
the managed Medical Practices' net revenue and/or earnings.
Total costs of services as a percentage of revenue increased by 5.41% for
the nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. Employee compensation and related expenses, direct
materials, and other expenses as a percentage of revenue increased primarily due
to the factors attributable to increasing revenues. Occupancy costs and
depreciation as a percentage of revenue decreased primarily due to the
significant increase in revenues.
Network Sites' contribution increased by approximately 69.3% to $6.5
million for the nine months ended September 30, 1998 as compared to $3.8 million
for the nine months ended September 30, 1997 due to the factors attributable to
increasing revenues.
General and administrative expenses for the nine months ended September 30,
1998 were approximately $3.9 million as compared to approximately $3.0 million
for the nine months ended September 30, 1997, an increase of 27.3%. As a
percentage of revenues, general and administrative expenses decreased to
approximately 13.8% from approximately 22.7% primarily due to the significant
increase in revenues.
Amortization of intangible assets was $681,000 for the nine months ended
September 30, 1998 as compared to $349,000 for the nine months ended September
30, 1997. This increase was attributable to the Company's acquisitions of new
management agreements in the first quarter of 1998 and the second and third
quarters of 1997, partially offset by the absence of amortization related to
certain single physician Network Sites due to exclusive management right
impairment losses which were recorded in the second quarter of 1998.
Interest income for the nine months ended September 30, 1998 decreased to
$45,000 from $98,000 for the nine months ended September 30, 1997, due to a
lower invested cash balance. Interest expense for the nine months ended
September 30, 1998 increased to $306,000 from $48,000 for the nine months ended
September 30, 1997, due to an increase in bank borrowings principally to finance
working capital and acquisition needs and in notes payable to Medical Providers
for exclusive management rights.
The provision for income taxes primarily reflected various state income
taxes in both the nine months ended September 30, 1998 and September 30, 1997.
Restructuring and other charges were approximately $2.1 million for the
nine months ended September 30, 1998. Such charges included approximately $1.4
million associated with the Company's termination of its management agreement
with the Reproductive Science Center of Greater Philadelphia, a single physician
Network Site, effective July 1, 1998, which primarily consisted of exclusive
management right impairment and other asset write-offs. Such charges also
included approximately $700,000 for exclusive management right impairment losses
related to two other single physician Network Sites.
Income from continuing operations excluding restructuring and other charges
was approximately $1.4 million for the nine months ended September 30, 1998 as
compared to $406,000 for the nine months ended September 30, 1997. The increase
was primarily due to the approximate $2.6 million increase in Network Site
19
contribution, which waspartially offset by increases in general and
administrative expenses, amortization of intangible assets, interest and income
tax expense.
In June 1998, the Company committed itself to a formal plan to dispose of
the AWM Division operations. On September 1, 1998 the Company disposed of the
AWM Division operations via a sale of certain of its fixed assets to a third
party and the third party's assumption of the employees, building lease,
research contracts, and medical records. Discontinued operations for the nine
months ended September 30, 1998 reflect an aggregate charge of approximately
$4.5 million of which $923,000 represented loss from operations and
approximately $3.6 million represented loss from the disposal of the AWM
Division. The loss from disposal of the AWM Division principally represented
approximately $3.3 million related to the write-off of goodwill and $243,000 for
estimated operating losses during the phase-out period. During the nine months
ended September 30, 1998 and 1997, the AWM Division recorded revenues of
approximately $1.0 million and $1.7 million, respectively.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through
sales of equity securities. More recently, the Company has commenced using bank
financing for working capital and acquisition purposes. The Company anticipates
that its acquisition strategy will continue to require substantial capital
investment. Capital is needed not only for additional acquisitions, but also for
the effective integration, operation and expansion of the Company's existing
Network Sites. The Medical Practices may require capital for renovation and
expansion and for the addition of medical equipment and technology. In September
1998, the Company obtained from Fleet Bank, N. A. a $13.0 million credit
facility to fund acquisitions over approximately the next one to two years, to
provide working capital, and to refinance its existing bank debt. In addition,
the Company will utilize a portion of the proceeds of the term loan from its new
credit facility to pay part of the consideration to repurchase up to $2 million
of the Company's outstanding shares of Common Stock from time to time on the
open market at prevailing market prices or through privately negotiated
transactions.
During the first quarter of 1998, the Company consummated an equity private
placement of $5.5 million with entities affiliated with Morgan Stanley Venture
Partners providing for the purchase of 3,235,294 shares of the Company's Common
Stock at a price of $1.70 per share and 240,000 warrants to purchase shares of
the Company's Common Stock, at a nominal exercise price. A portion of these
funds were used by the Company to purchase the capital stock of Shady Grove and
the right to manage the Shady Grove P.C.'s infertility medical practice. The
balance of these funds have been used for working capital purposes.
At September 30, 1998, the Company had working capital of approximately
$8.0 million, approximately $5.0 million of which consisted of cash and cash
equivalents, compared to working capital of approximately $4.1 million at
December 31, 1997, approximately $1.9 million of which consisted of cash and
cash equivalents. The net increase in working capital at September 30, 1998 was
principally due to the $5.5 million proceeds received from the equity private
placement with Morgan Stanley and $6.0 million in bank loan proceeds, partially
offset by approximately $3.2 million in payments for exclusive management
rights, approximately $2.8 million in debt repayments and an approximate $1.9
million increase in short-term debt related to the Shady Grove transaction.
Patient accounts receivable increased by approximately $2.7 million. The net
increase in patient accounts receivables represented an approximate increase of
$4.9 million in purchased patient accounts receivable, excluding any receivables
acquired on the day of the closing of a new management agreement, partially
offset by an approximate decrease of $2.2 million in patient accounts receivable
which were a function of Company revenue.
During the first quarter of 1998, the Company completed its second
in-market merger with the addition of two physicians to the FCI practice and
entered into a new management agreement with the Shady Grove, P.C. The aggregate
purchase price of these transactions, exclusive of acquisition costs, was
approximately $7.2 million, consisting of approximately $4.0 million in cash,
$1.5 million in promissory notes, 823,865 shares of the Company's Common Stock,
and approximately an additional $200,000 in shares of the Company's Common
Stock. A portion of the aggregate purchase price related to the Shady Grove
acquisition will be paid in early 1999 ( the "Second Closing Date") as follows:
approximately $1.0 million in cash, $403,000 in promissory notes and
approximately $200,000 in shares of the Company's Common Stock. The $1.1 million
of promissory notes currently outstanding are payable in two equal annual
installments, due on April 1, 1999 and 2000, respectively, and bear interest at
20
an annual rate of 8.5%. The number of shares of Common Stock of the Company to
be issued in early 1999 will be determined based upon the average closing price
of the Company's Common Stock for the ten-day trading period prior to the third
business day before the Second Closing Date, provided, however, that in no event
will the price per share exceed $2.00 or be less than $1.70 for purposes of this
calculation.
As previously noted, in September 1998, the Company obtained from Fleet
Bank, N.A. ("Fleet") a $13.0 million credit facility (the "New Credit
Facility"). The New Credit Facility is comprised of a $4.0 million three-year
working capital revolver, a $5.0 million three-year acquisition revolver and a
$4.0 million 5.5 year term loan. Each component of the New Credit Facility bears
interest by reference to Fleet's prime rate or LIBOR, at the option of the
Company, plus a margin ranging from 0.00% to 0.25% in the case of prime-based
loans or 2.75% to 3.00% in the case of LIBOR-based loans, which margins vary
based on a leverage test. Interest on the prime-based loans is payable monthly
and interest on LIBOR-based loans is payable on the last day of each interest
period applicable thereto provided that, in the case of interest periods in
excess of three months, interest is payable at three-month intervals during such
periods. Borrowings under the term loan will require only interest payments for
the first twenty months. Upon closing of the New Credit Facility, the Company
drew the entire $4.0 million available under the term loan to repay in full its
balance outstanding with First Union National Bank of $2,250,000 and for working
capital and acquisition purposes. In addition, the Company will utilize a
portion of the proceeds of the term loan to pay part of the consideration to
repurchase up to $2 million of the Company's outstanding shares of Common Stock
from time to time on the open market at prevailing market prices or through
privately negotiated transactions. As of November 1, 1998, the Company had
repurchased 724,000 shares of its Common Stock for an aggregate cost of
$476,000. Unused amounts under the working capital and acquisition revolvers
bear a commitment fee of 0.25% and 0.20%, respectively. Availability of
borrowings under the working capital revolver are based on eligible accounts
receivable as defined. Availability of borrowings under the acquisition revolver
will be based on financial covenants and eligibility criteria with respect to
each proposed acquisition. Approximately $4.5 million was available under the
working capital and acquisition revolvers as of September 30, 1998. The New
Credit Facility is secured by all of the Company's assets.
The Board of Directors has authorized a one for four reverse stock split of
its outstanding shares of Common Stock through an amendment to the Company's
Amended and Restated Certificate of Incorporation. The reverse stock split will
be submitted for approval by the Company's stockholders at a Special Meeting of
Stockholders to be held on November 17, 1998. If approved by the Company's
stockholders, every four shares of Common Stock will be converted into one share
of Common Stock. On September 21, 1998, the Common Stock had been trading below
$1.00 for 30 consecutive trading days. The reverse stock split is intended to
allow the Company to comply with the minimum $1.00 bid price per share
requirement for continued listing of the Company's Common Stock on the Nasdaq
National Market.
As of September 30, 1998, dividend payments of approximately $563,000 on
the Series A Cumulative Convertible Preferred Stock (the "Convertible Preferred
Stock") were in arrears. In October 1998 the Company paid all dividend payments
which were in arrears.
Year 2000 Issue
The Company's management has recognized the need to ensure that its
operations and relationships with its vendors and other third parties will not
be adversely impacted by software processing errors arising from calculations
using the year 2000 and beyond ("Year 2000"). As such, the Company has appointed
a Year 2000 Task Force to identify and assess the risks associated with its
information systems and operations, and its interactions with vendors and
third-party insurance payors ("the Year 2000 Project"). The five phases of the
Task Force's Year 2000 project are as follows: 1) identification of risks, 2)
assessment of risks, 3) development of remediation and contingency plans, 4)
implementation and 5) testing. The Company's Year 2000 Task Force is currently
in the assessment phase and is scheduled to begin testing in early 1999. The
Company has not yet determined the extent of contingency planning that may be
required.
The Company believes that the Year 2000 risks associated with its
information systems and certain medical equipment may be potentially
significant. In nearly all cases, the Company is relying on assurances from
third party vendors that certain information systems and medical equipment will
be Year 2000 compliant. In addition, in the normal course of business, the
Company has made capital investments in certain third party software and
hardware systems to address the financial and operational needs of the business.
21
These systems, which will improve the efficiencies and productivity of the
replaced systems, have been represented to be Year 2000 compliant by the vendors
and have been or will be installed by November 1999. The Company plans to test
such third-party systems and equipment, but cannot be sure that its test will be
adequate or that, if problems are identified, they will be addressed in a timely
and satisfactory way.
The Company is also highly dependent upon receiving payments from third
party payors for insurance reimbursement for claims submitted by the managed
Medical Practices, and as such, the ability of such payors to process claims
submitted by Medical Practices accurately and timely, constitutes a significant
risk to the Company's cash flow. Individual Network Sites have been or will be
in communication with these payors throughout the country to insure that these
payors will be Year 2000 compliant and will be able to process the Medical
Practices' claims uninterrupted. In addition, the Company deals with numerous
financial institutions, all of whom have indicated that the Year 2000 compliance
issue is being addressed proactively and will not present a problem on the
effective date.
As the Company and its managed Medical Practices are primarily reliant on
third party vendors and payors to be Year 2000 compliant, the Company does not
anticipate that it will incur a material incremental cost associated with
addressing Year 2000 problems. To date, all of the Company's capital projects
regarding information systems were part of its long-term capital strategic plan
and their timing was not accelerated as a result of the Year 2000 issue.
In the event any third parties cannot timely provide the Company with
information systems, equipment or services that meet the Year 2000 requirements,
the Company's ability and the ability of its managed Medical Practices to offer
services and to process sales and the Company's cash flows could be materially
adversely affected. In addition, if the Company fails to satisfactorily resolve
Year 2000 issues related to its operations in a timely manner, it could be
exposed to liability to third parties, particularly, the managed Medical
Practices and their patients.
Management believes that the Company is taking reasonable and adequate
action to address Year 2000 issues. However, there can be no assurance that the
Company's information systems, medical equipment and other non-information
technology systems will be Year 2000 compliant on or before December 31, 1999,
or that vendors and third-party insurance payors are, or will be, Year 2000
compliant, or that the costs required to address the Year 2000 issue will not
have a material adverse effect on the Company's business, financial condition or
results of operations.
Like virtually every company, and indeed every aspect of contemporary
society, the Company is at risk for the failure of major infrastructure
providers to adequately address potential Year 2000 problems. The Company is
highly dependent on a variety of public and private infrastructure providers to
conduct its business in numerous jurisdictions throughout the country. Failures
of the banking system, basic utility providers, telecommunication providers and
other services, as a result of Year 2000 problems, could have a material adverse
effect on the ability of the Company to conduct its business. While the Company
is cognizant of these risks, a complete assessment of all such risks is beyond
the scope of the Company's Year 2000 project or ability of the Company to
address. The Company has focused its resources and attention on the most
immediate and controllable Year 2000 risks.
New Accounting Standards
On June 17, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The Company does not believe
that SFAS No. 133 will have a material effect on the Company's financial
position or results of operations.
Fluctuations in Quarterly Results
The Company's revenues are typically lower during the first quarter of the
Company's fiscal year. This lower level of revenues is primarily attributable to
the commencement of fertility treatment by the patients of the Medical Practices
at the beginning of the calendar year. Quarterly results also may be materially
affected by the timing of acquisitions and the timing and magnitude of costs
related to acquisitions. Therefore, results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent fiscal
quarter or for a full fiscal year.
22
Forward Looking Statements
This Form 10-Q and discussions and/or announcements made by or on behalf of
the Company, 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
involve 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. The Company's actual
results may differ materially from those described in these forward-looking
statements due to the following factors: the Company's ability to acquire
additional management agreements, including the Company's ability to raise
additional debt and/or equity capital to finance future growth, the loss of
significant management agreement(s), the profitability or lack thereof at
Network Sites managed by the Company, the Company's ability to transition sole
practitioners to group practices, increases in overhead due to expansion, the
exclusion of infertility and ART services from insurance coverage, government
laws and regulation regarding health care, changes in managed care contracting,
the timely development of and acceptance of new infertility, ART and/or genetic
technologies and techniques and the risks relating to the Year 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
23
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 1, 1998, the Company and Reproductive Sciences
Medical Center, Inc. ("RSMC") entered into a stipulation
and settlement agreement, resolving all claims against each
other. The management agreement has been terminated, RSMC
will lease the Company's assets over a period of three
years, and the parties have entered into mutual consulting
agreements. Dr. Samuel H. Wood will serve as a special
consultant to the Company with respect to new ART
technologies and the Company shall serve as consultant to
RSMC's Laboratory Director on issues of laboratory
technology.
On October 9, 1998, W.F. Howard, M.D., P.A., filed a
lawsuit against the Company in the District Court of Denton
County, Texas, seeking to rescind the management agreement
related to the Dallas Network Site, or collect damages, on
the ground that its practice has not realized the degree of
growth or increases as allegedly projected by the Company.
The complaint asserts alleged breaches of contract,
fiduciary duties and warranties, as well as a claim under
the Texas Deceptive Trade Practices Act, and claims lost
profit damages as well as an exemplary award under statute.
Litigation counsel has advised the Company that it is too
early in the litigation to meaningfully assess the
likelihood of success of this lawsuit. Nonetheless, counsel
believes that even an unfavorable result will not have a
material adverse effect on the Company. The management
agreement remains in full operation during the pendency of
the lawsuit.
There are a few other legal proceedings to which the
Company is a party. In the Company's view, the claims
asserted and the outcome of these proceedings will not have
a material adverse effect on the financial position or the
results of operations of the Company.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
As of September 30, 1998, dividend payments of
approximately $563,000 on the Series A Cumulative
Convertible Preferred Stock were in arrears. In October
1998 the Company paid all dividend payments which were in
arrears.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Index to Exhibits on page 26.
(b) Reports on Form 8-K.
None.
24
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 16, 1998 By: /s/ Eugene R. Curcio
----------------------------------
Eugene R. Curcio
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
INDEX TO EXHIBITS
Exhibit
Number Exhibit
10.44(c) -- Stipulation of Settlement and Compromise of all Claims Among
IngetraMed America, Inc. and Assisted Reproductive Technologies,
P.C., d/b/a Mainline Reproductive Science Center, Reproductive
Diagnostics, Abraham Munabi, M.D., Reproductive Science Center of
Suburban Philadelphia
10.52(a) -- Agreement dated September 1, 1998 By and Among Women's Medical &
Diagnostic Center, Inc., IntegraMed America, Inc. and Florida
Medical and Research Institute, P.A.
10.81(b) -- Stipulation of Settlement and Compromise of all Claims Among
IntegraMed America, Inc. and Reproductive Sciences Medical Center,
Inc. and Samuel H. Wood, M.D.
10.113(a)-- Loan Agreement dated September 11, 1998 between IntegraMed
America, Inc. and Fleet Bank, National Association
27 -- Financial Data Schedule
26