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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 0-20260
Commission File No. 1-11440
IntegraMed, 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)
One Manhattanville Road
Purchase, New York 10577
(Address of principal executive offices) (Zip Code)
(914) 253-8000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Series A Cumulative Convertible Preferred Stock, $1.00 par value
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K (17 CRF ss. 229.405) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-K
or any amendment to this Form 10-K [X]
Aggregate market value of voting stock (Common Stock,$.01 par value and
Preferred Stock, $1.00 par value) held by non-affiliates of the Registrant was
approximately $30.7 million on August 15, 1997 based on the closing sale price
of the Common Stock and Preferred Stock on such date.
The aggregate number of shares of the Registrant's Common Stock, $.01 par
value, outstanding was approximately 16,174,152 on August 15, 1997.
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PART I
ITEM 1. BUSINESS
Company Overview
IntegraMed America, Inc. (the "Company") is a physician practice
management company specializing in women's health care, with a focus on
infertility and assisted reproductive technology ("ART") services as well as
health care services to peri- and post-menopausal women. The Company provides
management services to a nationwide network of medical providers that currently
consists of ten sites (each, a "Network Site"). Each Network Site 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 or where the Company directly employs the physicians. In February
1997, the Company entered into a management agreement with Fertility Centers of
Illinois, S.C. ("FCI"), one of the largest providers of infertility and ART
services in the United States (the "Pending Acquisition"). Upon consummation of
the Pending Acquisition, the Company's network will consist of 11 Network Sites
and 21 locations.
Until 1996, the Company was focused exclusively on providing management
services to Medical Practices in the area of infertility and ART services.
During 1996, the Company, with the acquisition of a medical practice in Florida,
broadened its focus to include health care services to peri- and post-menopausal
women (ages 40-50 and over 50, respectively). As a result, the Company
established two divisions: the Reproductive Science Center Division (the "RSC
Division"), which provides management services to Medical Practices focused on
infertility and ART services, and the Adult Women's Medical Division (the "AWM
Division"), which provides management services to Medical Practices focused on
health care services for peri- and post-menopausal women.
Industry
Physician Practice Management
The health care industry in the United States is undergoing significant
changes in an effort to manage costs more efficiently while continuing to
provide high quality health care services. The United States Health Care
Financing Administration has estimated that national health care expenditures in
1994 were over $900 billion, with approximately $180 billion directly
attributable to physician services. Historically, health care in the United
States has been delivered through a fragmented system of health care providers.
Concerns over the accelerating costs of health care have resulted in
increased pressures from payors, including governmental entities and managed
care organizations, on providers of medical services to provide cost-effective
health care. Many payors are increasingly expecting providers of medical
services to develop and maintain quality outcomes through utilization review and
quality management programs. In addition, such payors typically desire that
physician practices share the risk of providing services through capitation and
other arrangements that provide for a fixed payment per member for patient care
over a specified period of time. This focus on cost-containment and financial
risk sharing has placed physician groups and sole practitioners at a significant
competitive disadvantage because they typically have high operating costs,
limited purchasing power with suppliers and limited abilities to purchase
expensive state-of-the-art equipment and invest cost- effectively in
sophisticated information systems.
In response to reductions in the levels of reimbursement by third-party
payors and the cost-containment pressures on health care providers, physicians
are increasingly seeking to affiliate with larger organizations, including
physician practice management companies, which manage the nonmedical aspects of
physician practices, such as billing, purchasing and contracting with payor
entities. In addition, affiliation with physician practice management companies
provides physician groups and sole practitioners with improved access to (i)
state-of-the-art laboratory facilities, equipment and supplies, (ii) the latest
technology and diagnostic and clinical procedures, (iii) capital and
informational, managerial and administrative resources and (iv) access to
managed care relationships.
1
The trends that are leading physicians to affiliate with physician
practice management companies are magnified in the fields of reproductive
medicine and adult women's health care due to several factors, including (i) the
increasingly high level of specialized skills and technology required for
comprehensive patient treatment, (ii) the capital intensive nature of acquiring
and maintaining state of-the-art medical equipment and laboratory and clinical
facilities, (iii) the need to develop and maintain specialized management
information systems to meet the increasing demands of technological advances,
patient monitoring and third-party payors, and (iv) the need for
seven-days-a-week service to respond to patient needs and to optimize the
outcomes of patient treatments.
Reproductive Medicine
Reproductive medicine encompasses several medical disciplines that focus
on male and female reproductive systems and processes. Within the field of
reproductive medicine, there are several subspecialties, such as obstetrics and
gynecology, infertility and reproductive endocrinology. While there are many
reasons why couples have difficulty conceiving, the single most prominent course
of infertility therapy involves management of the women's endocrine system to
optimize an opportunity for pregnancy. Most obstetricians perform ovulation
induction, and many gynecologists perform conventional infertility treatments.
Infertility specialists are gynecologists who perform more sophisticated medical
and surgical infertility treatments. Reproductive endocrinology refers to the
diagnosis and treatment of all hormonal problems that lead to abnormal
reproductive function or have an effect on the reproductive organs. Reproductive
endocrinologists are physicians who have completed four years of residency
training in obstetrics and gynecology and have at least two years of additional
training in an approved subspecialty fellowship program.
Conventional infertility services include diagnostic tests performed on
the female, such as endometrial biopsy, laparoscopy/hysteroscopy examinations
and hormone screens, and diagnostic tests performed on the male, such as semen
analysis and tests for sperm antibodies. Depending on the results of the
diagnostic tests performed, conventional treatment options may include, among
others, fertility drug therapy, artificial insemination and infertility
surgeries. These conventional infertility services are not classified as ART
services. Current types of ART services include in vitro fertilization, gamete
intrafallopian transfer, zygote intrafallopian transfer, tubal embryo transfer,
frozen embryo transfer and donor egg programs. Current ART techniques used in
connection with ART services include intra-cytoplasmic sperm injection, assisted
hatching and cryopreservation of embryos.
According to The American Society for Reproductive Medicine, it is
estimated that in 1995 approximately 10% of women between the ages of 15 and 44,
or 6.1 million women, had impaired fertility. The Company believes that
approximately 2.5 million women with impaired fertility seek care in any year.
According to industry sources, annual expenditures relating to infertility
services exceed $1 billion. The Company believes that multiple factors over the
past several decades have affected fertility levels. A demographic shift in the
United States toward the deferral of marriage and first birth has increased the
age at which women are first having children. This, in turn, makes conception
more difficult and increases the risks associated with pregnancy, thereby
increasing the demand for ART services. In addition, the technological advances
in the diagnosis and treatment of infertility have enhanced treatment outcomes
and the prognoses for many couples.
Traditionally, conventional infertility services generally have been
covered by managed care payors and indemnity insurance, while ART services have
been paid for directly by patients. Currently, there are several states that
mandate offering benefits of varying degrees for infertility services, including
ART services. In some states, the mandate is limited to an obligation on the
part of the payor to offer the benefit to employers. In Massachusetts, Rhode
Island, Maryland, Arkansas, Illinois and Hawaii, the mandate requires coverage
of conventional infertility services as well as ART services.
In the United States, there are approximately 38,000 OB/GYNs and
approximately 600 reproductive endocrinologists. There are approximately 250
facilities providing ART services in the United States, of which approximately
half are hospital-affiliated and half are free-standing physician practices.
Increasingly, hospital affiliated programs are moving out of the hospital and
into lower cost physician practice settings.
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Adult Women's Health Care
The wide range of medical conditions that frequently emerge in women in
menopause comprise a critical element of adult women's health care. When many
women reach menopause, they begin to experience a number of associated physical
and psychological conditions. For example, women entering menopause frequently
have a condition known as estrogen deficiency. Low levels of estrogen have been
associated with osteoporosis, cardiovascular disease, and metabolic and
endocrine disorders. Furthermore, women in menopause are at increased risk for a
number of other conditions, including various cancers, arthritis, urinary
incontinence and visual and hearing disorders. In addition to the range of
physical symptoms, women in menopause frequently experience psychological
disorders, including depression and other emotional problems.
In the United States, there are over 20 million peri-menopausal women
(ages 40-50) and approximately 39 million post-menopausal women (over age 50).
An additional 42 million women in the United States will reach age 50 over the
next 20 years. Most women in the peri-menopausal range are asymptomatic, but
have underlying health issues that begin to emerge with the onset of menopause.
Traditionally, women in menopause have been treated by their OB/GYN with hormone
replacement therapy and are referred to a specialist if there is suspicion of
more complicated health problems. The additional conditions and symptoms
associated with menopause are typically treated by a disconnected array of other
physicians, including those specializing in primary care, endocrinology,
internal medicine, orthopedic medicine, psychiatry and others, often leading to
increased patient inconvenience and higher costs.
The Company believes there is a significant unmet medical need for a
comprehensive diagnostic and treatment approach to the broad range of medical
conditions that emerge in peri- and post-menopausal women. While a number of
physician practice management companies have developed a focus on obstetrics and
gynecology, the Company believes that there are currently no well organized
medical delivery systems that fully address the preventative and therapeutic
needs of peri- and post-menopausal woman. The Company believes that peri- and
post-menopausal women's health and well being can be vastly improved through a
comprehensive program of preventative and curative treatment and guidance.
Company Strategy
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 women's health care services. The primary elements of the
Company's strategy include (i) establishing additional Network Sites, (ii)
further developing the AWM Division, (iii) increasing revenues at the Network
Sites, (iv) increasing operating efficiencies at the Network Sites and (v)
developing a nationwide, integrated information system.
Establishing Additional Network Sites
The Company intends to further develop its nationwide network of Medical
Practices by acquiring certain assets of and the right to manage leading
physician practices in the Company's two areas of focus. The Company will
primarily focus its acquisition activities on larger group practices operating
in major cities. The Company believes that a number of beneficial factors will
contribute to the successful expansion of its network. These factors include (i)
the high quality reputation of the Company in providing management services in
the areas of infertility and ART services and adult women's health care, (ii)
the Company's experience and expertise in increasing revenues and lowering costs
at its Medical Practices, (iii) the Company's success in improving patient
outcomes by providing management services to its Medical Practices and (iv) the
Company's affiliations and relationships with leading academic institutions,
health care companies and managed care organizations and other third-party
payors.
Further Developing the AWM Division
With the establishment of its current AWM Network Site, the Company has
developed a clinical care model whereby it can effectively provide the broad
range of medical services necessary for the treatment of peri- and
post-menopausal women. The Company's AWM Network Site offers a multidisciplinary
approach, integrating "under one roof" the physicians and other medical
specialists necessary for the prevention, diagnosis and treatment of peri- and
post-menopausal conditions. The Company intends to acquire and manage
3
the practices of leading gynecologists and integrate these practices with other
specialty physicians and professionals focused on adult women's health care. In
addition, the Company intends to continue to expand the participation of the AWM
Division in the clinical testing of new drugs to treat women's health care
conditions and the promotion of educational programs relating to menopause.
Increasing Revenues at the Network Sites
The Company intends to increase revenues derived under its management
agreements by assisting the Medical Practices in (i) adding additional
physicians to achieve multi-physician group practices with sizable market
presence, (ii) adding services offered at the Medical Practices which have
previously been outsourced, such as laboratory and ART services, (iii)
increasing marketing and practice development efforts and (iv) increasing the
participation of the Medical Practices in clinical trials of new drugs under
development.
Increasing Operating Efficiencies at the Network Sites
The Company intends to increase the operating efficiencies of its current
Network Sites as well as future Network Sites to be acquired. By consolidating
the overhead of the Network Sites, including staffing, purchasing and financial
reporting and controls, the Company believes that it can significantly reduce
the time and costs associated with managing the operating and financial aspects
of individual Medical Practices. For example, Medical Practices will be able to
reduce the costs of supplies, drugs, equipment, services and insurance by
contracting through the Company on a consolidated group basis. In addition, by
eliminating the administrative and management burdens of running a Medical
Practice, the Company enables physicians to devote a greater portion of their
efforts and time to meeting the medical needs of their patients, which the
Company believes leads to improved clinical outcomes and greater patient
satisfaction at lower costs.
Developing a Nationwide, Integrated Information System
The Company plans to utilize its established base of Network Sites to
develop a nationwide, integrated information system to collect and analyze
clinical, patient, administrative and financial data. The Company believes it
will be able to use this data to control expenses, measure patient outcomes,
improve patient care, develop and manage utilization rates and maximize
reimbursements. The Company also believes an integrated information system will
allow the Medical Practices to more effectively compete for and price managed
care contracts, in large part because an information network can provide these
managed care organizations with access to patient outcomes and cost data.
Management Services
The Company provides comprehensive management services to support the
Medical Practices in each of its divisions. In particular, the Company provides
(i) administrative services, including accounting and finance, human resource
functions and purchasing supplies and equipment, (ii) access to capital, (iii)
marketing and practice development, (iv) information systems and assistance in
developing clinical strategies and (v) access to technology. These services
allow the physicians to devote a greater portion of their efforts and time to
meeting the medical needs of their patients, which the Company believes leads to
improved outcomes and greater patient satisfaction at lower costs.
Administrative Services
The Company provides all of the administrative services necessary for the
non-medical aspects of the Medical Practices, including (i) accounting and
finance services, such as billing and collections, accounts payable, payroll,
and financial reporting and planning, (ii) recruiting, hiring, training and
supervising all non-medical personnel, and (iii) purchasing of supplies,
pharmaceuticals, equipment, services and insurance. By providing the Medical
Practices relief from increasingly complex administrative burdens, the Company
enables physicians at the Medical Practices to devote their efforts on a
concentrated and continuous basis to the rendering of medical services.
Furthermore, the economies of scale inherent in a network system enable the
Company to reduce the operating costs of its affiliated Medical Practices by
centralizing certain management functions and by contracting for group
purchases.
4
Access to Capital
The Company provides the Network Sites increased access to capital.
Increased access to capital allows for expansion and growth of the Medical
Practices, as well as the acquisition of state-of-the-art laboratory, diagnostic
and clinical facilities needed to conduct advanced procedures and to achieve
successful clinical outcomes. For example, many ART procedures, which are being
performed in hospital settings, result in higher costs and less revenues to the
physicians. By providing ART facilities, the Company enables Medical Practices
to reduce costs and increase revenues by removing these procedures from hospital
settings.
Marketing and Practice Development
In today's highly competitive health care environment, marketing and
practice development are essential for the growth and success of physician
practices. However, these marketing and development efforts are often too
expensive for many physician practice groups. Affiliation with the Company's
network provides physicians access to significantly greater marketing and
practice development capabilities than would otherwise be available. The
Company's marketing services focus on revenue and referral enhancement,
relationships with local physicians, media and public relations and managed care
contracting.
The Company believes that participation in its network will assist Medical
Practices in establishing contracts with managed care organizations. With
respect to the RSC Division, the Company believes that integrating infertility
physicians with ART facilities produces a full service Medical Practice that can
compete more effectively for managed care contracts. With respect to the AWM
Division, the Company believes that the clinical care model developed at the AWM
Network Site and the preventative nature of the services offered will be well
received by managed care organizations.
Information Systems and Clinical Strategies
The Company provides the Medical Practices with information systems and
assists Medical Practices in developing clinical strategies and implementing
quality assurance and risk management programs in order to improve patient care
and clinical outcomes. For example, the RSC Division has instituted a pregnancy
rate improvement program that focuses the physicians and laboratory technicians
on the principal elements necessary to achieve successful outcomes and
incorporates periodic quality review programs. The Company believes that this
program has contributed to improved pregnancy rates at the RSC Network Sites.
Physicians at the Medical Practices also can access a number of customized
practice and research based systems designed by the Company for analyzing
clinical data.
Access to Technology
By affiliating with the Company's network, Medical Practices gain access
to advanced technologies, as well as diagnostic and clinical procedures. For
example, through participation in clinical trials of new drugs under development
for major pharmaceutical companies, Medical Practices have the opportunity to
apply technologies developed in a research environment to the clinical setting.
Additionally, participation in clinical trials gives Medical Practices
preferential involvement in cutting edge therapies and provide these practices
with an additional source of revenue. Furthermore, the Company sponsors research
conducted at leading ART programs, including Monash University, Australia.
The Network Sites
Each of the Company's Network Sites consists of a location or locations
where the Company has a management agreement with a Medical Practice, which in
turn employs the physicians or where, in the case of the AWM Network Site, the
Company owns the Medical Practice and directly employs the physicians. All of
the Network Sites are managed by the Company except for the AWM Network Site
which is owned by the Company. At certain Network Sites, Medical Practices have
agreements with physicians who are not employed by the particular Medical
Practices or the Company for such physicians to use the Network Sites'
facilities.
5
Current Network Sites
The Company currently has a nationwide network consisting of ten Network
Sites with 15 locations in eight states and the District of Columbia and 45
physicians. Upon consummation of the Pending Acquisition, the Company's network
will consist of 11 Network Sites with 21 locations in nine states and the
District of Columbia and 50 physicians. The following table describes in detail
each Network Site:
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Initial
Number of Number of Management
Network Site City Locations Physicians(1) Contract Date
------------ ---- --------- ------------- -------------
RSC DIVISION
Reproductive Science Center of Boston Waltham, MA 2 6 July 1988
Reproductive Science Associates Mineola, NY 1 10 June 1990
(Long Island)
Institute of Reproductive Medicine and
Science of Saint Barnabas Medical Center Livingston, NJ 1 5 December 1991
Reproductive Science Center of
Greater Philadelphia Wayne, PA 2 7 May 1995
Reproductive Science Associates Kansas City, MO 1 2 November 1995
Reproductive Science Center of Walter Reed
Army Medical Center Washington, DC 1 5 December 1995
Reproductive Science Center of Dallas Carrollton, TX 1 1 May 1996
Reproductive Science Center of the Bay Area
Fertility and Gynecology Medical Group San Ramon, CA 1 3 January 1997
Fertility Centers of Illinois, S.C. Chicago, IL 6 5 Pending(2)
Reproductive Sciences Medical
Center of San Diego La Jolla, CA 2 2 June 1997
AWM DIVISION
Women's Medical & Diagnostic Center Gainesville, FL 3 4 June 1996 (3)
- -------------------------------------------------------------------------------------------------------
- ----------
(1) Includes physicians employed by the Medical Practices or the Company, as
well as physicians who have arrangements to utilize the Company's
facilities.
(2) On February 28, 1997, the Company entered into agreements to acquire
certain assets of and the right to manage FCI.
(3) Represents the date of acquisition of the AWM Network Site.
Recent Acquisitions
Since May 1996, the Company has acquired certain assets of three Medical
Practices to establish three new RSC Network Sites and directly acquired two
Medical Practices to establish the AWM Network Site.
In May 1996, the Company acquired certain assets of and the right to
manage the Reproductive Science Center of Dallas in Carrollton, Texas, a
provider of conventional infertility and ART services. The aggregate purchase
price was approximately $701,500, consisting of $244,000 in cash and a $457,500
promissory note.
In June 1996, the Company, through its wholly-owned subsidiary INMD
Acquisition Corp., acquired the Merger Companies and 51% of the outstanding
stock of NMF to establish the AWM Division. In exchange for the shares of the
Merger Companies, the Company paid cash in an aggregate amount of $350,000 and
issued 666,666 shares of Common Stock. In addition, Gerardo Canet was granted an
irrevocable proxy to vote the shares of Common Stock issued in the transaction
through September 30, 1997. In exchange for 51% of the outstanding stock of NMF,
the Company paid $50,000 and issued a $600,000 promissory note. In December
1996, the Company acquired Hinshaw and merged Hinshaw's operations into the AWM
Division. The aggregate purchase price for Hinshaw was $465,200, of which
$235,200 was paid in cash and the balance is
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payable in four equal installments of $55,000 commencing December 31, 1997.
Effective March 31, 1997, Morris Notelovitz, M.D., Ph.D., the principal
stockholder of the Merger Companies, terminated his employment arrangement with
the Company.
In January 1997, the Company acquired certain assets of the Bay Area
Fertility and acquired the right to manage the Bay Area Fertility and Gynecology
Medical Group, Inc., a California professional corporation which is the
successor to Bay Area Fertility's medical practice. The aggregate purchase price
was approximately $2.1 million, consisting of $1.5 million in cash and 333,333
shares of Common Stock.
In June 1997, the Company acquired certain assets of and the right to
manage RSMC. The aggregate purchase price for the San Diego Acquisition was
approximately $900,000, consisting of $50,000 in cash and 145,454 shares of
Common Stock payable at closing and $650,000 payable upon the achievement of
certain specified milestones, at RSMC's option, in cash or in shares of the
Company's Common Stock, based on the closing market price of the Common Stock on
the third business day prior to issuance. In addition, RSMC granted Gerardo
Canet an irrevocable proxy to vote the shares of Common Stock issued to it in
the San Diego Acquisition with respect to the election of directors and certain
other matters for a two year period from the date of issuance of such shares.
Pending Acquisition
In February 1997, the Company entered into agreements to acquire certain
assets of and the right to manage FCI, a physician group practice comprised of
five physicians and six locations in the Chicago, Illinois area. The aggregate
purchase price for the Pending Acquisition is approximately $8.6 million,
approximately $6.6 million of which is payable in cash and approximately $2.0
million of which is payable in shares of Common Stock, the exact number of which
will be determined based on the average market price of the Common Stock for the
ten trading day period on the third business day prior to closing of the Pending
Acquisition, subject to a minimum and maximum price per share. The Company has
agreed to cause a nominee of FCI to be appointed as a director of the Company
upon consummation of the Pending Acquisition and nominated as a director of the
Company at the first annual meeting of stockholders after consummation of the
Pending Acquisition. In addition, FCI will grant Gerardo Canet an irrevocable
proxy to vote the Common Stock issued to it in the Pending Acquisition with
respect to the election of directors and certain other matters for a two-year
period following the closing of the Pending Acquisition. The closing of the
Pending Acquisition is conditioned upon the Company's raising at least $6.0
million in capital by August 28, 1997 and other customary closing conditions.
The Company is evaluating and is engaged in discussions with regard to
several potential acquisitions. However, except with respect to the Pending
Acquisition, the Company has no agreements relating to any acquisitions and
there can be no assurance that any definitive agreements will be entered into by
the Company or that any additional acquisitions will be consummated.
Clinical and Medical Services
RSC Network Sites
The RSC Network Sites offer conventional infertility and ART services and
the majority of the RSC Network Sites have a state-of-the-art laboratory
providing the necessary diagnostic and therapeutic services. Multi-disciplinary
teams help infertile couples identify and address distinct physical, emotional,
psychological and financial issues related to infertility. Following a
consultation session, a patient couple is advised as to the treatment that has
the greatest probability of success in light of the couple's specific
infertility problem. At this point, a couple may undergo conventional
infertility treatment or, if appropriate, may directly undergo ART treatment.
7
Infertility and ART Services
Conventional infertility procedures include diagnostic tests performed on
the female, such as endometrial biopsy, post-coital test, laparoscopy
examinations as well as hormone screens, and diagnostic tests performed on the
male, such as semen analysis and tests for sperm antibodies. Depending on the
results of the diagnostic tests performed, conventional services may include
fertility drug therapy, tubal surgery and intrauterine insemination ("IUI"). IUI
is a procedure utilized generally to address male factor or unexplained
infertility. Depending on the severity of the condition, the man's sperm is
processed to identify the most active sperm for insemination into the woman, who
must have a normal reproductive system for this procedure. Such conventional
infertility services are not classified as ART services and are traditionally
performed by infertility specialists.
Current types of ART services include in vitro fertilization ("IVF"),
gamete intrafallopian transfer ("GIFT"), zygote intrafallopian transfer
("ZIFT"), tubal embryo transfer ("TET"), frozen embryo transfer ("FET") and
donor egg programs. IVF is performed by combining an egg and sperm in a
laboratory and, if fertilization is successful, transferring the resulting
embryo into the woman's uterus. GIFT is performed by inserting an egg and sperm
directly into a woman's fallopian tube with a resulting embryo floating into the
uterus. ZIFT and TET are procedures in which an egg is fertilized in the
laboratory and the resulting embryo is then transferred to the woman's fallopian
tube. ZIFT and TET are identical except for the timing of the transfer of the
embryo. FET is a procedure whereby previously harvested embryos are transferred
to the woman's uterus. Women who are unable to produce eggs but who otherwise
have normal reproductive systems can use the donor egg program in which a donor
is recruited to provide eggs for fertilization that are transferred to the
recipient woman. Current techniques used in connection with ART services include
intra-cytoplasmic sperm injection, assisted hatching and cryopreservation of
embryos.
Development of New Clinical Services
Since 1989, the Company has sponsored research by Monash University in
Melbourne, Australia ("Monash") relating to the development of new ART services
and techniques. In July 1995, the Company entered into a three-year agreement
with Monash University which provides for Monash to conduct research in ART and
human fertility to be funded by a minimum annual payment of 220,000 Australian
dollars by the Company, the results to be jointly owned by the Company and
Monash. If certain milestones are met as specified in the agreement, the
Company's annual payment may be a maximum of 300,000 Australian dollars in year
two and 380,000 Australian dollars in year three. Minimum payments of 55,000
Australian dollars and payments for the attainment of certain research
milestones will be made quarterly throughout the term of the agreement from July
1, 1995 until June 30, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." This research led to the world's first birth of a healthy infant
from immature oocyte (egg) technology in 1994. Immature oocyte services involve
using transvaginal ultrasound-guided aspiration to obtain immature oocytes from
a woman's ovaries, maturing and fertilizing of the oocytes in vitro and
transferring one or more of the resulting embryos into the woman's uterus for
development of a possible pregnancy. The Company anticipates that this
technology may, in certain circumstances, facilitate treatment of infertility by
stimulating follicular development without the use of drugs.
The Company also has sponsored research by Genzyme Genetics, a division of
Genzyme Corp., relating to preimplantation embryo genetic testing (the fusion of
advances in genetic testing and embryology). Pursuant to the terms of the
agreement, each party was required to fund certain costs relating to the
research projects as well as to contribute up to an aggregate of $300,000 to
fund the joint development program. This agreement terminated in December 1996.
The Company retains the right to technology developed prior to the termination.
The Company believes that preimplantation embryo genetic testing could
potentially offer infertile couples utilizing ART services a higher probability
of the birth of a healthy baby after fertilization, as well as offer fertile
couples at high risk of transmitting a genetic disorder the option to utilize
ART services to achieve pregnancy with a higher degree of certainty that the
fetus will be free of the genetic disorder for which it was tested.
8
Laboratory Services
At a majority of the RSC Network Sites, facilities are available for
Medical Practices to perform diagnostic endocrine and andrology laboratory tests
on patients receiving infertility and ART services. Endocrine tests assess
female hormone levels in blood samples, while andrology tests analyze semen
samples. These tests are often used by the physician to determine an appropriate
treatment plan. In addition, the majority of the RSC Network Sites generate
additional revenue by providing such endocrine and andrology laboratory tests
for non-affiliated physicians in the geographic area.
AWM Network Site
The Company's AWM Network Site represents the clinical care model for
future AWM Network Sites. The AWM Network Site focuses on the identification and
treatment needs of peri- and post-menopausal women and incorporates both
preventative and curative health care. The AWM Network Site combines specialty
physicians and other health professionals to offer a multidisciplinary approach
to the diagnosis and treatment of health care problems common to peri- and
post-menopausal women. Such problems include cardiovascular disease,
incontinence, osteoporosis, metabolic and endocrine conditions, and emotional
and psychological disorders. The Company currently employs two OB/GYNs, one
family practice physician and one radiologist at the AWM Network Site and has
entered into arrangements with a nutritionist, a physical therapist and a
psychologist. The AWM Division concentrates its efforts in the following three
areas: clinical care, clinical research and educational programs.
Clinical Care
The AWM Division has adopted a clinical care model based on the fact that
the health risk factors of peri- and post-menopausal women can be objectively
measured and once identified, treated. Clinical services include complete
cardiovascular assessment, urodynamic analysis, bone densitometry, hormone
replacement therapy, physical therapy, exercise stress testing, nutrition
assessment/dietary recommendation, psychological/sexual counseling, as well as
mammography and laboratory tests designed to provide early detection of cancers
of the breast, colon and reproductive organs.
Recent studies have indicated that with proper preventive medical care,
lifestyle changes, diet and exercise, the health risk factors of women aged 40
to 65 can be significantly reduced. Early intervention can reduce the risk
factors for osteoporosis and heart disease, and early detection of problems such
as breast and other cancers can increase survival rates.
Clinical services are provided at the AWM Network Site by physicians and
health professionals who specifically focus on peri-and post-menopausal women.
The Company believes that the provision of medical services by physicians
familiar with the diagnosis and treatment of the symptoms and conditions that
develop at menopause will result in improved quality of patient care.
Additionally, the Company believes that having physicians with a number of
specializations available at the same location should lead to improved patient
convenience and satisfaction. The Company also believes that the focus on
preventive treatment and cost-containment at the AWM Network Site will be well
received by managed care organizations and other third-party payors.
Clinical Research
The AWM Division contracts with major pharmaceutical companies to perform
clinical trials on new drugs under development to determine the safety and
efficacy of such drugs. Since June 1996, the AWM Division has been involved in
approximately 24 clinical trials with 14 pharmaceutical companies. The Company
believes that participation in these clinical trials provides access to advanced
therapies for patients not otherwise readily available and generates additional
revenue for the Company and the Medical Practices. The Company believes that
pharmaceutical companies retain the physicians at the Medical Practices to
conduct clinical trials due to the quality of such physicians, the Company's
ability to recruit subjects for the clinical trials, and the Company's
experience with the clinical protocols and record keeping necessary for such
clinical trials.
9
Educational Programs
The AWM Division offers multifaceted educational programs designed to
increase patient compliance, attract new patients and educate peri- and
post-menopausal women on related health care and quality of life issues. For
example, the AWM Division offers support groups, lectures, resource materials
and products designed specifically for the needs of adult women. The AWM
Division also publishes the Women's Health Digest, a quarterly publication which
is distributed nationally and includes articles on traditional and
non-traditional medical therapies as well as important breakthroughs in women's
health care and topics that enhance the quality of life. In addition, the AWM
Division has a 1-900 number available to answer common questions women have
regarding their own health.
Network Site Agreements
In establishing a Network Site in states in which there are prohibitions
restricting commercial enterprises from owning medical service companies, the
Company typically (i) acquires certain assets of a physician practice, (ii)
enters into a long-term management agreement with the physician practice under
which the Company provides comprehensive management services to the physician
practice, (iii) requires that the physician practice enter into long-term
employment agreements containing non-compete provisions with the affiliated
physicians and (iv) assumes the principal administrative, financial and general
management functions of the physician practice. Typically, the physician
practice contracting with the Company is a professional corporation of which the
physicians are the sole shareholders.
Management Agreements
Typically, the management agreements obligate the Company to pay a fixed
sum for the exclusive right to manage the Medical Practice, a portion or all of
which is paid at the contract signing with any balance to be paid in future
annual installments. The agreements are typically for terms of ten to 20 years
and are generally subject to termination due to insolvency, bankruptcy or
material breach of contract by the other party. Generally, no shareholder of the
Medical Practice may assign his interest in the Medical Practice without the
Company's prior written consent.
The management agreements provide that all patient medical care at a
Network Site is provided by the physicians at the Medical Practice and that the
Company generally is responsible for the management and operation of all other
aspects of the Network Site. The Company provides the equipment, facilities and
support necessary to operate the Medical Practice and employs substantially all
such other non-physician personnel as are necessary to provide technical,
consultative and administrative support for the patient services at the Network
Site. Under certain management agreements, the Company is committed to provide a
clinical laboratory. Under the management agreements, the Company may also
advance funds to the Medical Practice to provide new services, utilize new
technologies, fund projects, purchase the net accounts receivable, provide
working capital or fund mergers with other physicians or physician groups.
Under the Company's current form of management agreement, which is in use
at five Network Sites, 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 Network Site and any costs paid on behalf of the Network
Site) and (iii) a fixed or variable percentage of earnings after the Company's
management fees and any guaranteed physician compensation, or an additional
fixed or variable percentage of net revenues which generally results in the
Company receiving up to an additional 15% of net revenues. The form of
management agreement relating to the Pending Acquisition is substantially the
same as the form of management agreement in use at these five Network Sites.
Under another form of management agreement, which is in use at two Network
Sites, the Company records all patient service revenues and, out of such
revenues, the Company pays the Medical Practices' expenses, physicians' and
other medical compensation, direct materials and certain hospital contract fees.
Specifically, under the management agreement for the Boston Network Site, the
Company guarantees a minimum physician compensation based on an annual budget
primarily determined by the Company. Remaining revenues, if any, which represent
the Company's management fees, are used by the Company for other direct
administrative expenses which are recorded as costs of services. Under the
management agreement for the Long Island Network Site, the Company's management
fee is payable only out of remaining revenues, if any, after the payment of all
expenses of the Medical Practice. Under these arrangements, the Company is
liable for payment
10
of all liabilities incurred by the Medical Practices and is at risk for any
losses incurred in the operation thereof. The Company has recently entered into
an agreement with respect to the Long Island Network Site pursuant to which the
Company will receive a fixed fee (initially equal to $240,000 per annum) and
reimbursed costs of services. The Company anticipates that this agreement will
become effective during the second half of 1997, subject to applicable
regulatory approvals and certain other conditions. If such approvals are not
obtained and conditions not met, the current agreement relating to the Long
Island Network Site will remain in effect.
In addition, 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; the Company
directly bills patients for these services, and out of these revenues, the
Company pays its direct costs.
Physician Employment Agreements
Physician employment agreements between the Medical Practices and the
physicians generally provide for an initial term ranging from three to five
years, which may be automatically renewed for successive intervals unless the
physician or the Medical Practice elects not to renew or such agreement is
otherwise terminated for cause or the death or disability of a physician. The
physicians are paid based upon either the number of procedures performed or
other negotiated formulas agreed upon between the physicians and the Medical
Practices, and the Medical Practices provide the physicians with health, death
and disability insurance and other benefits. The Medical Practices are obligated
to obtain and maintain professional liability insurance coverage which is
procured on behalf of the physicians. Pursuant to the employment agreements, the
physicians agree not to compete with the Medical Practices with whom they have
contracted during the term of the agreement and for a certain period following
the termination of such employment agreement. In addition, the agreements
contain customary confidentiality provisions.
In Florida, where the Company's current AWM Network Site is located, there
are currently no prohibitions restricting commercial enterprises from owning
medical service companies. As a result, the Company was able to acquire a direct
ownership interest in the Medical Practice at the AWM Network Site. The Company
entered into employment agreements (containing customary non-compete provisions)
directly with the physicians at the AWM Network Site. In the event a physician's
employment agreement is terminated for any reason other than death or permanent
disability of the physician during the first five years, the Company is entitled
to receive from the physician any unamortized purchase price paid by the Company
to acquire the exclusive right to manage the Medical Practice.
Personal Responsibility Agreements
In order to protect its investment and commitment of resources, the
Company has entered into a Personal Responsibility Agreement (a "PR Agreement")
with each of the physicians in connection with the Bay Area Acquisition and with
the physician shareholder in connection with the San Diego Acquisition. If the
physician should cease to practice medicine through the respective contracted
Medical Practice during the first five years of the related management
agreement, except as a result of death or permanent disability, the PR Agreement
obligates the physician to repay a ratable portion of the fee paid by the
Company to the Medical Practice for the exclusive right to manage such Medical
Practice. The PR Agreement also contains covenants for the physician not to
compete with the Company during the term of his or her employment agreement with
the Medical Practice and for a certain period thereafter. Upon consummation of
the Pending Acquisition, the Company will have PR Agreements with each of the
physicians at FCI. In appropriate circumstances, the Company may enter into such
agreements with physicians in connection with future acquisitions.
Affiliate Care/Satellite Service Agreements
Medical Practices at the Network Sites may also have affiliate care
agreements and satellite service agreements with physicians who are not employed
by the Medical Practices or the Company located in the geographic area of the
Network Sites. Under an affiliate care agreement, the Medical Practice contracts
with a physician for the Medical Practice to provide certain ART services for
the physician's patients. Under a satellite service agreement, the Medical
Practice contracts with
11
a physician for such physician to provide specific services for the Medical
Practice's patients, such as ultrasound monitoring, blood drawing and endocrine
testing.
Reliance on Third-Party Vendors
The RSC Network Sites are dependent on three third-party vendors that
produce fertility medications (Lupron, Metrodin and Fertinex) that are vital to
the provision of infertility and ART services. Should any of these vendors
experience a supply shortage, it may have an adverse impact on the operations of
the RSC Network Sites. To date, the RSC Network Sites have not experienced any
such adverse impacts.
Competition
The business of providing health care services is intensely competitive,
as is the physician practice management industry, and each is continuing to
evolve in response to pressures to find the most cost-effective method of
providing quality health care. The Company experiences competitive pressures for
the acquisition of the assets of, and the provision of management services to,
additional physician practices. Although the Company focuses on physician
practices that provide infertility, ART and adult women's health care services,
it competes for management contracts with other physician practice management
companies, including those focused on infertility and ART services, as well as
hospitals and hospital-sponsored management services organizations. If federal
or state governments enact laws that attract other health care providers to the
managed care market, the Company may encounter increased competition from other
institutions seeking to increase their presence in the managed care market and
which have substantially greater resources than the Company. There can be no
assurance that the Company will be able to compete effectively with its
competitors, that additional competitors will not enter the market, or that such
competition will not make it more difficult to acquire the assets of, and
provide management services for, physician practices on terms beneficial to the
Company.
The infertility industry is highly competitive and characterized by
technological improvements. New ART services and techniques may be developed
that may render obsolete the ART services and techniques currently employed at
the RSC Network Sites. Competition in the areas of infertility and ART services
is largely based on pregnancy rates and other patient outcomes. Accordingly, the
ability of a Medical Practice to compete is largely dependent on its ability to
achieve adequate pregnancy rates and patient satisfaction levels.
A number of physician practice management companies have emerged with a
focus on routine obstetrics and gynecology. In addition, other health care
corporations, medical providers and physician practice management companies may
decide to enter into the adult women's health care market, particularly if the
Company's concept to establish a multi-disciplinary approach to treat peri- and
post-menopausal women gains market acceptance. In addition, private practice
physician groups often contract with pharmaceutical companies to perform
clinical trials relating to women's health care. These physician group practices
compete with the AWM Network Site in obtaining contracts for clinical trials.
Effects of Third-Party Payor Contracts
Traditionally, ART services have been paid for directly by patients and
conventional infertility services have been largely covered by indemnity
insurance or managed care payors. Currently, there are several states that
mandate offering certain benefits of varying degrees for infertility and ART
services. In some cases, the mandate is limited to an obligation on the part of
the payor to offer the benefit to employers. In Massachusetts, Rhode Island,
Maryland, Arkansas, Illinois and Hawaii, the mandate requires coverage of
conventional infertility services as well as certain ART services.
Over the past few years much attention has been focused on clinical
outcomes in managed care. Infertility is a disorder which naturally lends itself
to developing a managed care plan. First, infertility has a clearly defined
endpoint: an infertile couple either conceives or does not conceive. Second, the
treatment regimens and protocols used for treating infertile couples have
predictable outcomes that make it possible to develop statistical tables for the
probability of success. Third, it is possible to develop rational treatment
plans over a
12
limited period of time for infertile couples. However, there can be no assurance
that third-party payors will increase reimbursement coverage for ART services.
The RSC Division has invested in information technology that takes into
consideration the cost structure of a full service practice, the probability of
achieving clinical success, and defined treatment plans which result in improved
outcomes and reduced costs. The Company estimates that the majority of the
couples participating in infertility and ART services at an RSC Network Site,
other than in Massachusetts, have greater than 50% of their costs reimbursed by
their health care insurance carrier. In Massachusetts, where comprehensive
infertility and ART services insurance reimbursement is mandated, virtually all
patient costs are reimbursed.
The majority of diagnostic and therapeutic services offered through the
Company's AWM Division are currently covered by third-party payors. As these
services emphasize prevention and screening, the Company believes that they will
continue to be covered by third-party payors.
Government Regulation
As a participant in the health care industry, the Company's operations and
its relationships with the Medical Practices are subject to extensive and
increasing regulation by various governmental entities at the federal, state and
local levels. The Company believes its operations and those of the Medical
Practices are in material compliance with applicable health care laws.
Nevertheless, the laws and regulations in this area are extremely complex and
subject to changing interpretation and many aspects of the Company's business
and business opportunities have not been the subject of federal or state
regulatory review or interpretation. Accordingly, there is no assurance that the
Company's operations have been in compliance at all times with all such laws and
regulations. In addition, there is no assurance that a court or regulatory
authority will not determine that the Company's past, current or future
operations violate applicable laws or regulations. If the Company's
interpretation of the relevant laws and regulations is inaccurate, there could
be a material adverse effect on the Company's business, financial condition and
operating results. There can be no assurance that such laws will be interpreted
in a manner consistent with the Company's practices. There can be no assurance
that a review of the Company or the Medical Practices by courts or regulatory
authorities will not result in a determination that would require the Company or
the Medical Practices to change their practices. There also can be no assurance
that the health care regulatory environment will not change so as to restrict
the Company's or the Medical Practices' existing operations or their expansions.
Any significant restructuring or restriction could have a material adverse
effect on the Company's business, financial condition and operating results.
Corporate Practice of Medicine Laws. The Company's operations in
Massachusetts, New York, New Jersey, Pennsylvania, District of Columbia, Texas,
California and Illinois (in the event the Pending Acquisition is consummated),
are subject to prohibitions relating to the corporate practice of medicine. The
laws of these states prohibit corporations other than professional corporations
or associations from practicing medicine or exercising control over physicians,
and prohibit physicians from practicing medicine in partnership with, or as
employees of, any person not licensed to practice medicine and prohibit a
corporation other than professional corporations or associations from acquiring
the goodwill of a medical practice. In the context of management contracts
between a corporation not authorized to practice medicine and the physicians or
their professional entity, the laws of most of these states focus on the extent
to which the corporation exercises control over the physicians and on the
ability of the physicians to use their own professional judgment as to diagnosis
and treatment. The Company believes its operations are in material compliance
with applicable state laws relating to the corporate practice of medicine. The
Company performs only non-medical administrative services, and in certain
circumstances, clinical laboratory services. The Company does not represent to
the public that it offers medical services, and the Company does not exercise
influence or control over the practice of medicine by physicians with whom it
contracts in these states. In each of these states, the Medical Practice is the
sole employer of the physicians, and the Medical Practice retains the full
authority to direct the medical, professional and ethical aspects of its medical
practice. However, although the Company believes its operations are in material
compliance with applicable state corporate practice of medicine laws, the laws
and their interpretations vary from state to state, and they are enforced by
regulatory authorities that have broad discretionary authority. There can be no
assurance that these laws will be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted in the
future that could have a material adverse effect on the Company's business,
financial condition and operating results. If a corporate practice of medicine
13
law is interpreted in a manner that is inconsistent with the Company's
practices, the Company would be required to restructure or terminate its
relationship with the applicable Medical Practice in order to bring its
activities into compliance with such law. The termination of, or failure of the
Company to successfully restructure, any such relationship could result in fines
or a loss of revenue that could have a material adverse effect on the Company's
business, financial condition and operating results. In addition, expansion of
the Company's operations to new jurisdictions could require structural and
organizational modifications of the Company's relationships with the Medical
Practices in order to comply with additional state statutes.
Fee-Splitting Laws. The Company's operations in the states of New York,
California and, potentially, Illinois are subject to express fee-splitting
prohibitions. The laws of these states prohibit physicians from splitting
professional fees with non-physicians and health care professionals not
affiliated with the physician performing the services generating the fees. In
New York, this prohibition includes any fee the Company may receive from the
Medical Practices which is set in terms of a percentage of, or otherwise
dependent on, the income or receipts generated by the physicians. In certain
states, such as California and New York, any fees that a non-physician receives
in connection with the management of a physician practice must bear a reasonable
relationship to the services rendered, based upon the fair market value of such
services. Under Illinois law, the courts have broadly interpreted the
fee-splitting prohibition in that state to prohibit compensation arrangements
that include (i) fees that a management company may receive based on a
percentage of net profits generated by physicians, despite the performance of
legitimate management services, (ii) fees received by a management company
engaged in obtaining referrals for its physician where the fees are based on a
percentage of certain billings collected by the physician and (iii) purchase
price consideration to a seller of a medical practice based on a percentage of
the buyer's revenues following the acquisition. Several of the other states
where the Company has operations, such as Texas and New Jersey, do not expressly
prohibit fee-splitting but do have corporate practice of medicine prohibitions.
In these states, regulatory authorities frequently interpret the corporate
practice of medicine prohibition to encompass fee-splitting, particularly in
arrangements where the compensation charged by the management company is not
reasonably related to the services rendered.
The Company believes that its current operations are in material
compliance with applicable state laws relating to fee-splitting prohibitions.
However, there can be no assurance that these laws will be interpreted in a
manner consistent with the Company's practices or that other laws or regulations
will not be enacted in the future that could have a material adverse effect on
the Company's business, financial condition and operating results. If a
fee-splitting law is interpreted in a manner that is inconsistent with the
Company's practices, the Company could be required to restructure or terminate
its relationship with the applicable Medical Practice in order to bring its
activities into compliance with such law. The termination of, or failure of the
Company to successfully restructure, any such relationship could have a material
adverse effect on the Company's business, financial condition and operating
results. In addition, expansion of the Company's operations to new jurisdictions
could require structural and organizational modifications of the Company's
relationships with the Medical Practices in order to comply with additional
state statutes.
With respect to the Pending Acquisition in Illinois, the management
agreement between the Company and the affiliated Medical Practice provides that
the Company will be paid a base fee equal to a fixed percentage of the revenues
at the Network Site and, as additional compensation, an additional variable
percentage of such revenues that declines to zero to the extent the costs
relating to the management of the Medical Practice increase as a percentage of
total revenues. The Company and the Medical Practice have agreed that if such
compensation arrangement were found to be illegal, unenforceable, against public
policy or forbidden by law, the management fee would be an annual fixed fee to
be mutually agreed upon, not less than $1.0 million per year, retroactive to the
effective date of the agreement. In such event, the management fees derived from
this Medical Practice may decrease. There is a substantial risk that the
compensation arrangement, being based upon a percentage of revenues, would not
be upheld if challenged. Moreover, if the management agreement were amended to
provide for an annual fixed fee payable to the Company, the contribution from
this Network Site could be materially reduced.
Federal Antikickback Law. The Company is subject to the laws and
regulations that govern reimbursement under the Medicare and Medicaid programs.
Currently less than 5% of the revenues of the Medical Practices are derived from
Medicare and none of such revenues are derived from Medicaid. Federal law (the
"Federal Antikickback Law") prohibits, with some exceptions, the solicitation or
receipt of remuneration in exchange
14
for, or the offer or payment of remuneration to induce, the referral of federal
health care program beneficiaries, including Medicare or Medicaid patients, or
in return for the recommendation, arrangement, purchase, lease or order of items
or services that are covered by Medicare, Medicaid and other federal and state
health programs.
With respect to the Federal Antikickback Law, the OIG has promulgated
regulatory "safe harbors" under the Federal Antikickback Law that describe
payment practices between health care providers and referral sources that will
not be subject to criminal prosecution and that will not provide the basis for
exclusion from the federal health care programs. Relationships and arrangements
that do not fall within the safe harbors are not illegal per se, but will
subject the activity to greater governmental scrutiny. Many of the parties with
whom the Company contracts refer or are in a position to refer patients to the
Company. Although the Company believes that it is in material compliance with
the Federal Antikickback Law, there can be no assurance that such law or the
safe harbor regulations promulgated thereunder will be interpreted in a manner
consistent with the Company's practices. The breadth of the Federal Antikickback
Law, the paucity of court decisions interpreting the law and the safe harbor
regulations, and the limited nature of regulatory guidance regarding the safe
harbor regulations have resulted in ambiguous and varying interpretations of the
Federal Antikickback Law. The OIG or the Department of Justice ("DOJ") could
determine that the Company's past or current policies and practices regarding
its contracts and relationships with the Medical Practices violate the Federal
Antikickback Law. In such event, no assurance can be given that the Company's
interpretation of these laws will prevail. The failure of the Company's
interpretation of the Federal Antikickback Law to prevail could have a material
adverse effect on the Company's business, financial condition and operating
results.
Federal Referral Laws. Federal law also prohibits, with some exceptions,
physicians from referring Medicare or Medicaid patients to entities for certain
enumerated "designated health services" with which the physician (or members of
his or her immediate family) has an ownership or investment relationship, and an
entity from filing a claim for reimbursement under the Medicare or Medicaid
programs for certain enumerated designated health services if the entity has a
financial relationship with the referring physician. Significant prohibitions
against physician referrals were enacted by the United States Congress in the
Omnibus Budget Reconciliation Act of 1993. These prohibitions, known as "Stark
II," amended prior physician self-referral legislation known as "Stark I" by
dramatically enlarging the field of physician-owned or physician-interested
entities to which the referral prohibitions apply. The designated health
services enumerated under Stark II include: clinical laboratory services,
radiology services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
equipment and supplies, prosthetics, orthotics, outpatient prescription drugs,
home health services and inpatient and outpatient hospital services.
Significantly, certain "in-office ancillary services" furnished by group
practices are excepted from the physician referral prohibitions of Stark II. The
Company believes that its practices either fit within this and other exceptions
contained in such statutes, or have been structured so as to not implicate the
statute in the first instance, and therefore, the Company believes it is in
compliance with such legislation. Nevertheless, future regulations or
interpretations of current regulations could require the Company to modify the
form of its relationships with the Medical Practices. Moreover, the violation of
Stark I or Stark II by the Medical Practices could result in significant fines,
loss of reimbursement and exclusion from the Medicare and Medicaid programs
which could have a material adverse effect on the Company.
Recently, Congress enacted the Health Insurance Portability and Accounting
Act of 1996, which includes an expansion of certain fraud and abuse provisions
(including the Federal Antikickback Law and Stark II) to other federal health
care programs and a separate criminal statute prohibiting "health care fraud."
Due to the breadth of the statutory provisions of the fraud and abuse laws and
the absence of definitive regulations or court decisions addressing the type of
arrangements by which the Company and its Medical Practices conduct and will
conduct their business, from time to time certain of their practices may be
subject to challenge under these laws.
False Claims. Under separate federal statutes, submission of claims for
payment that are "not provided as claimed" may lead to civil money penalties,
criminal fines and imprisonment and/or exclusion from participation in the
Medicare, Medicaid and other federally-funded health care programs. These false
claims statutes include the Federal False Claims Act, which allows any person to
bring suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and to share in any amounts paid by the entity to the
government in fines or settlement. Such qui tam actions have increased
significantly in recent years and
15
have increased the risk that a health care company will have to defend a false
claims action, pay fines or be excluded from participation in the Medicare
and/or Medicaid programs as a result of an investigation arising out of such an
action.
State Antikickback and Self-Referral Laws. The Company is also subject to
state statutes and regulations that prohibit kickbacks in return for the
referral of patients in each state in which the Company has operations. Several
of these laws apply to services reimbursed by all payors, not simply Medicare or
Medicaid. Violations of these laws may result in prohibition of payment for
services rendered, loss of licenses as well as fines and criminal penalties.
State statutes and regulations that prohibit payments intended to induce
the referrals of patients to health care providers range from statutes and
regulations that are substantially the same as the federal laws and the safe
harbor regulations to regulations regarding unprofessional conduct. These laws
and regulations vary significantly from state to state, are often vague, and, in
many cases, have not been interpreted by courts or regulatory agencies. Adverse
judicial or administrative interpretations of such laws could require the
Company to modify the form of its relationships with the Medical Practices or
could otherwise have a material adverse effect on the Company's business,
financial condition and operating results.
In addition, New York, New Jersey, California, Florida, Pennsylvania and
Illinois have enacted laws on self-referrals that apply generally to the health
care profession, and the Company believes it is likely that more states will
follow. These state self-referral laws include outright prohibitions on
self-referrals similar to Stark or a simple requirement that physicians or other
health care professionals disclose to patients any financial relationship the
physicians or health care professionals have with a health care provider that is
being recommended to the patients. The Company's operations in New York, New
Jersey, California and Illinois have laboratories which are or will be subject
to prohibitions on referrals for services in which the referring physician has a
beneficial interest. However, New York, New Jersey and California have an
exception for "in-office ancillary services" similar to the federal exception
and in Illinois, the self-referral laws do not apply to services within the
health care worker's office or group practice or to outside services as long as
the health care worker directly provides health services within the entity and
will be personally involved with the provision of care to the referred patient.
The Company believes that the laboratories in its operations fit within
exceptions contained in such statutes or are not subject to the statute at all.
Each of the laboratories in the states in which these self-referral laws apply
are owned by the Medical Practice in that state and are located in the office of
such Medical Practice. However, there can be no assurance that these laws will
be interpreted in a manner consistent with the Company's practices or that other
laws or regulations will not be enacted in the future that could have a material
adverse effect on the Company's business, financial condition or operating
results. In addition, expansion of the Company's operations to new jurisdictions
could require structural and organizational modifications of the Company's
relationships with the Medical Practices in order to comply with new or revised
state statutes.
Antitrust Laws. In connection with corporate practice of medicine laws
referred to above, the Medical Practices with whom the Company is affiliated
necessarily are organized as separate legal entities. As such, the Medical
Practices may be deemed to be persons separate both from the Company and from
each other under the antitrust laws and, accordingly, subject to a wide range of
laws that prohibit anti-competitive conduct among separate legal entities. The
Company believes it is in compliance with these laws and intends to comply with
any state and federal laws that may affect its development of health care
networks. There can be no assurance, however, that a review of the Company's
business by courts or regulatory authorities would not have a material adverse
effect on the operation of the Company and the Medical Practices.
Government Regulation of ART Services. With the increased utilization of
ART services, government oversight of the ART industry has increased and
legislation has been adopted or is being considered in a number of states
regulating the storage, testing and distribution of sperm, eggs and embryos. The
Company believes it is currently in compliance with such legislation where
failure to comply would subject the Company to sanctions by regulatory
authorities, which could have a material adverse effect on the Company's
business, financial condition and operating results.
Regulation of Clinical Laboratories. The Company's and the Medical
Practices' endocrine and embryology clinical laboratories are subject to
governmental regulations at the federal, state and local levels. The Company
16
and/or the Medical Practices at each Network Site have obtained, and from time
to time renew, federal and/or state licenses for the laboratories operated at
the Network Sites.
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA 88")
extended federal oversight to all clinical laboratories, including those that
handle biological matter, such as eggs, sperm and embryos, by requiring that all
laboratories be certified by the government, meet governmental quality and
personnel standards, undergo proficiency testing, be subject to biennial
inspections, and remit fees. For the first time, the federal government is
regulating all laboratories, including those operated by physicians in their
offices. Rather than focusing on location, size or type of laboratory, this
extended oversight is based on the complexity of the test the laboratories
perform. CLIA 88 and the 1992 implementing regulations established a more
stringent proficiency testing program for laboratories and increased the range
and severity of sanctions for violating the federal licensing requirements. A
laboratory that performs highly complex tests must meet more stringent
requirements, while those that perform only routine "waived" tests may apply for
a waiver from most requirements of CLIA 88.
The sanctions for failure to comply with CLIA and these regulations
include suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines or criminal penalties. The loss
of license, imposition of a fine or future changes in such federal, state and
local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company.
In addition, the Company's clinical laboratory activities are subject to
state regulation. CLIA 88 permits a state to require more stringent regulations
than the federal law. For example, state law may require that laboratory
personnel meet certain more stringent qualifications, specify certain quality
control standards, maintain certain records, and undergo additional proficiency
testing.
The Company believes it is in material compliance with the foregoing
standards.
Other Licensing Requirements. Every state imposes licensing requirements
on individual physicians, and some regulate facilities and services operated by
physicians. In addition, many states require regulatory approval, including
certificates of need, before establishing certain types of health care
facilities, offering certain services, or making certain capital expenditures in
excess of statutory thresholds for health care equipment, facilities or
services. To date, the Company has not been required to obtain certificates of
need or similar approvals for its activities. In connection with the expansion
of its operations into new markets and contracting with managed care
organizations, the Company and the Medical Practices may become subject to
compliance with additional regulations. Finally, the Company and the Medical
Practices are subject to federal, state and local laws dealing with issues such
as occupational safety, employment, medical leave, insurance regulation, civil
rights and discrimination, medical waste and other environmental issues.
Increasingly, federal, state and local governments are expanding the regulatory
requirements for businesses, including medical practices. The imposition of
these regulatory requirements may have the effect of increasing operating costs
and reducing the profitability of the Company's operations.
Future Legislation and Regulation. As a result of the continued escalation
of health care costs and the inability of many individuals to obtain health
insurance, numerous proposals have been or may be introduced in the United
States Congress and state legislatures relating to health care reform. There can
be no assurance as to the ultimate content, timing or effect of any health care
reform legislation, nor is it possible at this time to estimate the impact of
potential legislation, which may be material, on the Company.
Liability and Insurance
The provision of health care services entails the substantial risk of
potential claims of medical malpractice and similar claims. The Company does
not, itself, engage in the practice of medicine or assume responsibility for
compliance with regulatory requirements directly applicable to physicians and
requires associated Medical Practices to maintain medical malpractice insurance.
In general, the Company has established a program that provides the Medical
Practices with such required insurance. However, in the event that services
provided at the Network Sites or any affiliated Medical Practice are alleged to
have resulted in injury or other adverse effects, the Company is likely to be
named as a party in a legal proceeding.
17
Although the Company currently maintains liability insurance that it
believes is adequate as to both risk and amount, successful malpractice claims
could exceed the limits of the Company's insurance and could have a material
adverse effect on the Company's business, financial condition or operating
results. Moreover, there can be no assurance that the Company will be able to
obtain such insurance on commercially reasonable terms in the future or that any
such insurance will provide adequate coverage against potential claims. In
addition, a malpractice claim asserted against the Company could be costly to
defend, could consume management resources and could adversely affect the
Company's reputation and business, regardless of the merit or eventual outcome
of such claim. In addition, in connection with the acquisition of the assets of
certain Medical Practices, the Company may assume certain of the stated
liabilities of such practice. Therefore, claims may be asserted against the
Company for events related to such practice prior to the acquisition by the
Company. The Company maintains insurance coverage related to those risks that it
believes is adequate as to the risks and amounts, although there can be no
assurance that any successful claims will not exceed applicable policy limits.
There are inherent risks specific to the provision of ART services. For
example, the long-term effects of the administration of fertility medication,
integral to most infertility and ART services, on women and their children are
of concern to certain physicians and others who fear the medication may prove to
be carcinogenic or cause other medical problems. Currently, fertility medication
is critical to most ART services and a ban by the United States Food and Drug
Administration or any limitation on its use would have a material adverse effect
on the Company. Further, ART services increase the likelihood of multiple
births, which are often premature and may result in increased costs and
complications.
Employees
As of August 1, 1997, the Company had 215 employees, six of whom are
executive management, 192 are employed at the Network Sites and 23 are employed
at the Company's headquarters. Of the Company's employees, 28 persons at the
Network Sites and five at the Company's headquarters are employed on a part-time
basis. The Company is not party to any collective bargaining agreement and
believes its employee relationships are good.
18
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three years ended December 31, 1996. It should
be read in conjunction with the Company's Consolidated Financial Statements, the
related notes thereto and other financial and operating information included in
this Form 10-K/A.
Overview
The Company has historically focused its efforts on providing management
support services to Medical Practices in the area of infertility and ART
services. During 1996, the Company broadened its focus from infertility and ART
services to include adult women's health care services. In connection therewith,
the Company established two divisions: the RSC Division, which concentrates on
infertility and ART services, and the AWM Division, which concentrates on
comprehensive diagnostic and treatment alternatives for peri- and
post-menopausal women. To more accurately reflect its broadened focus, in 1996,
the Company changed its name from "IVF America, Inc." to "IntegraMed America,
Inc."
In 1996, the Company had a net loss of approximately $1.5 million, largely
due to non-recurring charges and operating losses of $581,000 associated with
the closing of the Westchester Network Site and to non-recurring charges and
operating losses of $522,000 associated with the establishment of the AWM
Division. The Westchester Network Site had a hospital-based agreement with the
Company that required the Company to rely on the hospital for the provision of
medical and support services, space and utilities. The Company determined to
terminate this arrangement at the Westchester Network Site because the Network
Site contribution at the Westchester Network Site did not compare favorably to
the Network Site contribution at other Medical Practices managed by the Company,
due, in part, to the lack of a formal management agreement with the physicians
and the Company's inability to provide both infertility and ART services at this
Network Site. Costs incurred for the AWM Division primarily related to physician
severance and to the development of two new medical office locations.
During 1996, the Company derived substantially all of its revenue pursuant
to eight management agreements, the Westchester Network Site agreement and from
the AWM Division. For the year ended December 31, 1996, the management agreement
relating to the Boston Network Site provided 38.5% of revenues and the
management agreement relating to the New Jersey Network Site and the Westchester
Network Site agreement, which was terminated in November 1996, each comprised
over 10% of the Company's revenues.
The Medical Practices managed by the Company are parties to managed care
contracts. Approximately 48% and 54% of the Company's revenues, net for the
fiscal years ended December 31, 1996 and 1995, respectively, were derived from
revenues received by the
19
Medical Practices from third-party payors. The foregoing percentages include
patient service revenues and management fees and do not include the portion of
the management fees which consist of reimbursed costs which are indirectly
derived from third-party payors. The Company is not able to estimate the
percentage of such reimbursed costs derived from third party payors. To date,
the Company has not been negatively impacted by existing trends related to
managed care contracts. As the Company's management fees for managing such
Medical Practices are based on revenues and/or earnings of the respective
Medical Practices, changes in managed care practices, including changes in
covered procedures or reimbursement rates could adversely affect the Company's
management fees in the future.
Recent Acquisitions
During 1996 and early 1997, the Company completed several significant
acquisition transactions. In May 1996, the Company acquired certain assets of
and the right to manage the Reproductive Science Center of Dallas in Carrollton,
Texas, a provider of conventional infertility and ART services. The aggregate
purchase price was approximately $701,500, consisting of $244,000 in cash and a
$457,000 promissory note. In June 1996, the Company acquired all of the
outstanding stock of three related Florida corporations (collectively, the
"Merger Companies") and 51% of the outstanding stock of the National Menopause
Foundation, Inc. ("NMF"), a related Florida corporation, to establish the AWM
Division. In exchange for the shares of the Merger Companies, the Company paid
an aggregate of approximately $2.9 million, consisting of $350,000 in cash and
666,666 shares of Common Stock. In exchange for 51% of the outstanding stock of
NMF, the Company paid cash in an aggregate amount of $50,000 and issued a
$600,000 promissory note. In December 1996, the Company acquired W. Banks
Hinshaw, Jr., M.D., P.A., a Florida professional association ("Hinshaw"), and
merged Hinshaw's operations into the AWM Division. The aggregate purchase price
for Hinshaw was $465,200, of which $235,200 was paid in cash and the balance is
payable in four equal installments of $55,000 commencing December 31, 1997. In
January 1997, the Company acquired certain assets of the Bay Area Fertility and
acquired the right to manage the Bay Area Fertility and Gynecology Medical
Group, Inc., a California professional corpo-ration which is the successor to
Bay Area Fertility's medical practice (the "Bay Area Acquisition"). The
aggregate purchase price for the Bay Area Acquisition was approximately $2.1
million, consisting of $1.5 million in cash and 333,333 shares of Common Stock.
Pending Acquisition
In February 1997, the Company entered into agreements to acquire certain
assets of and the right to manage the Fertility Centers of Illinois, S.C.
("FCI"), a five physician group practice with six locations in the Chicago area
(the "Pending Acquisition"). The aggregate purchase price for the Pending
Acquisition is approximately $8.6 million, consisting of approximately $6.6
million in cash and approximately $2.0 million in shares of Common Stock (an
estimated 956,938 shares based on a per share price of $2.09), the exact number
of which will be determined based on the average market price of the Common
Stock for the ten trading day period prior to the third business day prior to
closing of the Pending Acquisition; but not more than $3.25 per share or less
than $1.75 per share. The Pending Acquisition will be the largest acquisition by
the Company to date. The form of management agreement relating to the Pending
Acquisition is substantially the same as the form of management agreement
currently in use at five Network Sites as described below under "--RSC
Division". The Company believes that the Pending Acquisition will represent a
significant revenue source for the Company.
20
RSC Division
The operations of the RSC Division are currently conducted pursuant to
nine management agreements.
Under five of the Company's management agreements (and the management
agreement relating to the Pending Acquisition), the Company receives a
three-part management fee as compensation for its management services comprised
of: (i) a fixed percentage of net revenues generally equal to 6%, (ii)
reimbursed costs of services (costs incurred in managing a Network Site and any
costs paid on behalf of the Network Site) and (iii) a fixed or variable
percentage of earnings after the Company's management fees and any guaranteed
physician compensation, or an additional fixed or variable percentage of net
revenues which generally results in the Company receiving up to an additional
15% of net revenues. Direct costs incurred by the Company in performing its
management services and costs incurred on behalf of the Network Site are
recorded as cost of services rendered. The physicians receive as compensation
all earnings remaining after payment of the Company's management fee. The
Company's compensation pursuant to the management agreement relating to the
Pending Acquisition will also be determined and recorded in this manner.
Under the Company's management agreements for the Boston and Long Island
Network Sites, the Company displays the patient service revenues of the Medical
Practices which are reflected in revenues, net on its consolidated statement of
operations. Under these agreements, the Company records all patient service
revenues and, out of such revenues, the Company pays the Medical Practices'
expenses, physicians' and other medical compensation, direct materials and
certain hospital contract fees (the "Medical Practice retainage"). Specifically,
under the management agreement for the Boston Network Site, the Company
guarantees a minimum physician compensation based on an annual budget primarily
determined by the Company. Remaining revenues, if any, which represent the
Company's management fees, are used by the Company for other direct
administrative expenses which are recorded as costs of services. Under the
management agreement for the Long Island Network Site, the Company's management
fee is payable only out of remaining revenues, if any, after the payment of all
expenses of the Medical Practice. Under these arrangements, the Company is
liable for payment of all liabilities incurred by the Medical Practices and is
at risk for any losses incurred in the operation thereof. The Company has
entered into an agreement with respect to the Long Island Network Site pursuant
to which the Company will receive a fixed fee (initially equal to $240,000 per
annum) and reimbursed costs of services. The Company anticipates that this
agreement will become effective during the second half of 1997, subject to
applicable regulatory approvals and certain other conditions. If such approvals
are not obtained and conditions not met, the current agreement relating to the
Long Island Network Site will remain in effect.
Under the Company's management agreement for the New Jersey Network Site,
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 management agreement for the Walter Reed
Network Site, the Company's revenues are derived from certain ART laboratory
services performed, and the Company bills patients directly for these services.
The Company's direct costs are reimbursed out of these revenues with the balance
representing the Company's Network Site contribution. All direct costs incurred
by the Company are recorded as costs of services.
The management agreements are typically for terms of ten to 20 years and
are generally subject to termination due to insolvency, bankruptcy or material
breach of contract by the other party.
AWM Division
The AWM Division's operations are currently conducted through and owned by
the Women's Medical & Diagnostic Center, Inc., a Florida corporation and a
wholly-owned subsidiary of the Company. The Company bills and records all
clinical revenues of the AWM Division and records all direct costs incurred as
costs of services rendered. The Company retains as Network Site contribution an
amount determined using the three-part management fee calculation described
above. The remaining balance is paid as compensation to the employed physicians
and is recorded by the Company as costs of services rendered. The employed
physicians receive a fixed monthly draw which may be adjusted quarterly by the
Company based on the Network Site's actual operating results.
21
Revenues in the AWM Division also include amounts earned under contracts
relating to clinical trials performed by the AWM Division. The AWM Division has
contracted with major pharmaceutical companies to participate in clinical trials
to determine the safety and efficacy of drugs under development. Research
revenues are recognized pursuant to each respective contract in the period in
which the medical services (as stipulated by the clinical trial protocol) are
performed and collection of such fees is considered probable. Net realization is
dependent upon final approval by the sponsor that procedures were performed
according to trial protocol. Payments collected from sponsors in advance for
services are included in accrued liabilities, and costs incurred in performing
the clinical trials are included as costs of services rendered.
The Company's 51% interest in NMF is included in the Company's
consolidated financial statements. The Company records 100% of the revenues and
costs of NMF and reports 49% of any profits of NMF as minority interest on the
Company's consolidated balance sheet.
Results of Operations
Calendar Year 1996 Compared to Calendar Year 1995
Revenues for 1996 were approximately $18.3 million as compared to
approximately $16.7 million for 1995, an increase of 9.8%. For the year ended
December 31, 1996, the Company's RSC Division and AWM Division contributed 95.9%
and 4.1%, respectively, of the Company's total revenues.
RSC Division revenues for the year ended December 31, 1996 were
approximately $17.6 million as compared to $16.7 million for the year ended
December 31, 1995, an increase of 5.2%. Revenues under the RSC Division were
comprised of (i) patient service revenues, (ii) three-part management fees and
(iii) at the New Jersey Network Site, management fees based on a percentage of
revenues and reimbursed costs of services. Patient service revenues for the year
ended December 31, 1996 were $11.4 million compared to $13.8 million for the
year ended December 31, 1995 , a decrease of 17.1%. Patient service revenues
decreased due to a 52.9% decrease in patient service revenues related to the
Westchester Network Site agreement which the Company terminated in November 1996
and to the effects of the Company's new management agreement related to the New
Jersey Network Site, pursuant to which the Company's revenues now consist of a
fixed percentage of the New Jersey Network Site's revenues and reimbursed costs
of services (as described below) and are no longer recorded as patient service
revenues. The decrease in patient service revenues was partially offset by a
7.1% increase in revenue at the Boston Network Site and a 11.7% increase in
revenue at the Long Island Network Site, both of which were attributable to an
increase in volume at such Network Sites. The increase in volume at the Long
Island Network Site in 1996 was primarily attributable to increased revenues
generated from additional facility agreements entered into with physicians at
such Network Site in 1996. The 1996 results also reflect a full year of
operations at the Long Island Network Site as compared to 1995, during which
period such Network Site was closed for approximately five months to implement
operational changes at such Network Site. Three-part management fee revenues
were approximately $3.2 million for the year ended December 31, 1996 compared to
approximately $981,000 for the year ended December 31, 1995. The increase in
three-part management fee revenues was primarily attributable to new management
agreements entered into in the second quarter of 1996 and to there being a full
year of revenues for those agreements that were entered into during 1995.
Management fees based on a percentage of revenues and reimbursed costs of
services of the New Jersey Network Site were approximately $3.0 million in 1996
compared to approximately $1.9 million in 1995, an increase of 55.9%,
attributable to there being a full year under the new management agreement. AWM
Division revenues for the year ended December 31, 1996 were approximately
$757,000.
Medical Practice retainage for 1996 was approximately $2.7 million as
compared to approximately $3.1 million in 1995, a decrease of 12.5%, primarily
due to the decrease in volume and a negotiated reduction in hospital contract
fees at the Westchester Network Site, management contract changes related to the
New Jersey Network Site and to operational changes at the Long Island Network
Site. This decrease was partially offset by an increase in physician
compensation at the Boston Network Site attributable to the addition of a
physician who commenced services at such Network Site in July 1995 and to
renegotiated physician compensation at such Network Site.
Revenues after Medical Practice retainage were approximately $15.7 million
in 1996 as compared to $13.6 million in 1995, an increase of 14.8%. The increase
was due to the new management agreements entered into in the second quarter of
1996. The increase in revenues was partially offset by the net decrease in
management fees related to the Boston, Westchester, Long Island and New Jersey
Network Sites. Management fees (i.e., patient service revenues less Medical
Practice retainange) related to the Boston, Westchester and Long Island Network
Sites (in which the Company displayed the patient service revenues on its
consolidated statement of operations for the year ended December 31, 1996) were
approximately $8.2 million in 1996 compared to management fees related to the
Boston, Westchester, Long Island and New Jersey Network Sites (in which the
Company displayed the patient service revenues on its consolidated statement of
operations for the year ended December 31, 1995) which were approximately $10.8
million in 1995, a decrease of 23.4%. The decrease was primarily due to the
decrease in patient service revenues at the Westchester Network Site and the
termination of the Westchester Network Site Agreement in November 1996. In
addition, the decrease was also due to the effects of the Company's new
management agreement related to the New Jersey Network Site, pursuant to which
the Company's revenues now consist of a fixed percentage of the New Jersey
Network Site's revenues and reimbursed costs of services and are no longer
recorded as patient service revenues. While the change in the New Jersey
agreement resulted in a decrease in management fees for the Network Sites in
which
22
the Company displayed patient service revenues, the revenues after Medical
Practice retainage related to the New Jersey Network Site were approximately the
same for both periods. The decrease in such management fees was partially offset
by the increase in management fees related to the Long Island Network Site.
Costs of services rendered were approximately $12.4 million in 1996 as
compared to approximately $10.0 million in 1995, an increase of 24.2%. Such
increase was primarily due to the Network Sites acquired by the Company in the
second and fourth quarters of 1995 and the second quarter of 1996, and to a
$365,000 charge recorded in the third quarter of 1996 associated with closing
the Westchester Network Site. These increases were partially offset by the
effects of the new management contract related to the New Jersey Network Site,
which included the reversal of $120,000 in deferred rent, and lower occupancy
and direct material costs related to the Long Island Network Site due to the
relocation and operational changes effected at this Network Site in the second
quarter of 1995.
General and administrative expenses were approximately $4.3 million in
1996 as compared to approximately $3.7 million in 1995, an increase of 17.9%.
Such increase was primarily attributable to $522,000 of costs incurred primarily
in establishing the AWM Division and administrative costs attributable to the
opening of regional offices in the third quarter of 1995 and in 1996.
Clinical service development expenses, consisting of costs incurred under
the Company's development contracts, were approximately $323,000 in 1996 as
compared to approximately $290,000 in 1995, an increase of 11.4%. Such increase
was due to funding requirements pursuant to the Company's new collaborative
agreement with Monash University, which expenses were partially offset by a
decrease in development costs related to genetic and immature oocyte testing.
Amortization of intangible assets was approximately $331,000 in 1996 as
compared to approximately $73,000 in 1995 and principally represented the
amortization of the purchase price paid by the Company for the exclusive right
to manage Network Sites that were acquired in the second and fourth quarters in
1995 and the second quarter of 1996. The 1996 expense amount also included
goodwill and other intangible asset amortization related to the establishment of
the AWM Division in June 1996. At December 31, 1996, the Company's consolidated
financial statements reflect goodwill and other intangible assets of
approximately $5.9 million, which is being amortized over periods ranging from
three to 40 years. The Company anticipates that the Bay Area Acquisition and the
Pending Acquisition, as well as any future acquisitions, will involve the
recording of a significant amount of goodwill and intangible assets on its
balance sheet.
Interest income for 1996 was approximately $415,000 compared to
approximately $626,000 in 1995. This decrease was due to a lower cash balance
and lower short-term interest rates.
The provision for income taxes primarily reflected Massachusetts income
taxes and New York capital taxes in 1996 and 1995.
Net loss was approximately $1.5 million in 1996 as compared to net income
of approximately $70,000 in 1995. This net loss was primarily due to a $397,000
decrease in Network Site contribution attributable to a $1.4 million decrease in
contribution related to the Westchester Network Site, inclusive of a $365,000
non-recurring charge to account for the closing of this Network Site, and a
decrease in contribution from the Boston Network Site, partially offset by
significant increases in contribution from the New Jersey and Long Island
Network Sites. In addition, general and administrative expenses increased by
$659,000 largely due to non-recurring charges associated with the establishment
of the AWM Division, a $258,000 increase in amortization of intangible assets,
and a $211,000 decrease in interest income.
Calendar Year 1995 Compared to Calendar Year 1994
Revenues for 1995 were approximately $16.7 million as compared to
approximately $17.6 million for 1994, a decrease of 4.9%. The decrease in
revenues was attributable to two significant events. The first event was the
temporary closing in late February 1995 of the Long Island Network Site for
implementation of certain changes in its operational structure, including
relocating the facility and modifying certain agreements it has with Medical
Practices. The Long Island Network Site reopened in July 1995 at a new location
in Mineola. The second event was the new management contract with Saint Barnabas
Medical Center, effective in May 1995,
23
involving the New Jersey Network Site, pursuant to which the Company's revenues
now consist of a fixed percentage of the New Jersey Network Site's revenues and
reimbursed costs of services, as opposed to 100% of this Network Site's
revenues. Unfavorable revenue variances were partially offset by higher revenues
associated with the Boston and Westchester Network Sites, primarily attributable
to increased volume and patient service mix, respectively, and by revenues
recorded pursuant to the Company's management agreements with the Philadelphia,
Kansas City and Longmeadow Network Sites, all of which were acquired in 1995.
Medical Practice retainage for 1995 was approximately $3.1 million as
compared to approximately $3.8 million in 1994, a decrease of 19.9%, primarily
due to the two significant events described above.
The majority of the decrease in revenues was offset by the decrease in
Medical Practice retainage which resulted in less than a 1.0% decrease in
revenues after Medical Practice retainage earned in 1995 compared to 1994.
Costs of services rendered were approximately $10.0 million in 1995 as
compared to approximately $11.0 million in 1994, a decrease of 9.2%. Such
decrease was primarily due to the temporary closing of both the Long Island and
New Jersey Network Sites and to the new management contract with the New Jersey
Network Site, partially offset by additional costs recorded by the Company
pursuant to its management contracts with the Network Sites acquired in 1995. As
a percentage of revenues, costs of services decreased to 59.8% in 1995 compared
to 62.6% in 1994 due to the favorable variance in cost of services partially
offset by the unfavorable variance in revenues.
General and administrative expenses for 1995 were approximately $3.7
million as compared to approximately $3.4 million in 1994, an increase of 6.8%.
Such increase was primarily attributable to new regional offices and higher
marketing costs, partially offset by a decrease in consulting fees.
Clinical service development expenses were approximately $290,000 in 1995
as compared to approximately $452,000 in 1994, a decrease of 35.8%. Such
decrease was primarily due to lower expenses pursuant to the Company's
collaborative agreements with Monash University under which the Company made its
final funding in July 1994 under its original agreement and made its initial
funding under a new agreement entered into in July 1995, and a decrease in
development costs related to genetic and immature oocyte testing.
Amortization of intangible assets of $73,000 in 1995 represented the
amortization of the purchase price paid by the Company for the exclusive right
to manage certain of the Network Sites acquired in 1995 over the ten-year term
of each management agreement.
Interest income for 1995 was approximately $626,000 as compared to
approximately $519,000 in 1994 due to higher short-term interest rates.
The provision for income taxes in 1995 reflected Massachusetts income
taxes and New York capital taxes, and, in 1994, reflected Massachusetts income
taxes and Connecticut capital taxes.
Net income was approximately $70,000 in 1995 compared to a net loss of
approximately $814,000 in 1994. Such increase was primarily due to a $906,000
increase in Network Site contribution, a $162,000 decrease in clinical service
development expenses, and a $107,000 increase in interest income, partially
offset by a $233,000 increase in general and administrative costs and a $73,000
increase in amortization of intangible assets.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through
sales of equity securities. At December 31, 1996, the Company had working
capital of $7.1 million (including $650,000 of controlled assets of Medical
Providers), approximately $6.0 million of which consisted of cash and cash
equivalents (including $191,000 of controlled cash) and short term investments,
compared to working capital of $10.0 million at December 31, 1995 (including
$1.8 million of controlled assets of Medical Providers), $9.7 million of which
consisted of cash and cash equivalents (including $296,000 of controlled cash)
and short term investments. The decrease in working capital during 1996 was
principally due to payments of $1.4 million for exclusive management rights,
acquired physician practices and related net asset purchases, payments of $1.5
million for fixed asset purchases and leasehold improvements primarily for
existing Network sites, a $839,000 increase in accounts payable and $409,000 of
debt and capital lease repayments. These decreases in working capital were
partially offset by a $615,000 decrease in the Company's accrued dividend
obligation on its Preferred Stock due to the consummation of the June 1996
conversion offer, a $442,000 net increase in aggregate patient, management and
research accounts receivable and a $379,000 increase in other current assets
primarily related to prepaid insurance.
24
In January 1997, the Company acquired certain assets of Bay Area Fertility
and the right to manage Bay Area Fertility and Gynecology Medical Group, Inc., a
California professional corporation which is the successor to Bay Area
Fertility's medical practice for an aggregate purchase price of approximately
$2.0 million, consisting of $1.5 million in cash and 333,333 shares of Common
Stock. In February 1997, the Company entered into agreements with respect to the
purchase of certain assets of and the right to manage FCI. The aggregate
purchase price for the Pending Acquisition is approximately $8.6 million, of
which approximately $6.6 million is payable in cash and approximately $2.0
million is payable in shares of the Company's Common Stock. In June 1997, the
Company acquired certain assets of and the right to manage RSMC for an aggregate
purchase price of $900,000, consisting of $50,000 in cash and 145,454 shares of
Common Stock. An additional $650,000 is payable upon the achievement of certain
specified milestones, at RSMC's option, in cash or in shares of the Company's
Common Stock based on the closing market price of the Common Stock on the third
business day prior to issuance.
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 existing Network Sites. Under certain of its management
agreements, the Company has committed to provide a clinical laboratory. The
Medical Practices may require capital for renovation and expansion and for the
addition of medical equipment and technology. The Company expects that it will
need to obtain additional financing to pursue its acquisition strategy and
intends to obtain significant additional financing over the next two years to
fund such strategy.
Under certain of its management agreements, the Company is obligated to
advance funds to the Medical Practices to provide a minimum physician draw (up
to an aggregate of approximately $1.3 million per annum) and to provide new
services, utilize new technologies, fund projects, purchase the net accounts
receivable of the Medical Practices and for other purposes. Any advances are to
be repaid monthly and will bear interest at the prime rate used by the Company's
primary bank in effect at the time of the advance.
In November 1996, the Company obtained a $1.5 million revolving credit
facility (the "Credit Facility") issued by First Union National Bank (the
"Bank"). Borrowings under the Credit Facility bear interest at the Bank's prime
rate plus 0.75% per annum, which at August 11, 1997, was 9.25%. The Credit
Facility terminates on April 1, 1998 and is secured by the Company's assets. At
August 11, 1997, $250,000 was outstanding under the Credit Facility.
The Company has commitments to fund clinical services development pursuant
to various collaboration agreements. Effective July 1, 1995, the Company entered
into a new three-year agreement with Monash University that provides for Monash
to conduct research in ART services and techniques to be funded by a minimum
annual payment of 220,000 Australian dollars, the results of such research to be
jointly owned by the Company and Monash. If certain milestones are met as
specified in this agreement, the Company's annual payment may be a maximum of
300,000 Australian dollars in year two and 380,000 Australian dollars in year
three. Minimum payments of 55,000 Australian dollars and payments for the
attainment of certain research milestones will be made quarterly throughout the
term of this agreement. The Company expensed approximately $48,000, $189,000 and
$88,000 under this agreement in the three months ended March 31, 1996 and in the
fiscal years ended December 31, 1996 and 1995, respectively.
25
In July 1996, the Company made a conversion offer to holders of the
Convertible Preferred Stock in order to strengthen the Company's capital
structure by reducing the number of shares of Convertible Preferred Stock
outstanding, with the concomitant elimination on all shares of Convertible
Preferred Stock converted of (i) the need to pay or accrue the $0.80 per share
cumulative annual dividend thereon and (ii) the $10.00 per share liquidation
preference thereon plus accumulated and unpaid dividends. As a result of the
conversion offer of the Convertible Preferred Stock, pursuant to which
approximately 78.6% of the Convertible Preferred Stock then outstanding was
converted into Common Stock, the Company reversed approximately $973,000 in
accrued dividends from its balance sheet and reversed the required accrual of
$486,000 in annual dividends and the requirement to include these dividends in
earnings per share calculations. As of December 31, 1996, dividend payments of
$331,000 were in arrears as a result of the Company's Board of Directors
suspending ten consecutive quarterly dividend payments on the Preferred Stock
and the Company does not anticipate the payment of any dividends on the
Preferred Stock in the foreseeable future.
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in the first quarter of 1996. The Company
periodically reviews the fair value of long-lived assets, the results of which
have had no material effect on the Company's financial position or results of
operations.
The Company also adopted SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), on January 1, 1996. Under SFAS 123, companies can,
but are not required to, elect to recognize compensation expense for all stock
based awards using a fair value method. The Company has adopted the disclosure
only provisions, as permitted by SFAS 123.
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.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
INTEGRAMED AMERICA, INC. Page
----
Report of Independent Accountants ................................ F-2
Consolidated Balance Sheet as of December 31, 1995 and 1996 ...... F-3
Consolidated Statement of Operations for the years ended
December 31, 1994, 1995 and 1996 ............................. F-4
Consolidated Statement of Shareholders' Equity for the
years ended December 31, 1994, 1995 and 1996 ................. F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 ............................. F-6
Notes to Consolidated Financial Statements ....................... F-7
MPD Medical Associates (MA), P.C.
Report of Independent Accountants ................................ F-25
Balance Sheet as of December 31, 1995 and 1996 ................... F-26
Statement of Operations for the years ended December 31, 1994,
1995 and 1996 ................................................. F-27
Notes to Financial Statements .................................... F-28
Financial Statement Schedule
II Valuation and Qualifiying Accounts ............................. S-1
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
IntegraMed America, Inc.
In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of IntegraMed
America, Inc. and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Stamford, Connecticut
February 24, 1997
F-2
INTEGRAMED AMERICA, INC.
CONSOLIDATED BALANCE SHEET
(all amounts in thousands)
December 31,
-----------------
1995 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 7,883 $ 3,761
Short term investments ......................................................... 1,500 2,000
Patient accounts receivable, less allowance for doubtful accounts
of $64 and $113 in 1995 and 1996, respectively ............................... 1,271 2,770
Management fees receivable, less allowance for doubtful accounts
of $0 and $50 in 1995 and 1996, respectively ................................. 1,125 1,249
Research fees receivable ....................................................... -- 232
Other current assets ........................................................... 508 897
Controlled assets of Medical Practices (see Note 2)
Cash ......................................................................... 296 191
Accounts receivable, less allowance for doubtful accounts
of $25 and $146 in 1995 and 1996, respectively ............................. 1,449 459
Other current assets ........................................................... 14 --
-------- --------
Total controlled assets of Medical Practices ........................... 1,759 650
Total current assets ................................................... 14,046 11,559
-------- --------
Fixed assets, net ................................................................. 2,266 3,186
Intangible assets, net ............................................................ 1,761 5,894
Other assets ...................................................................... 198 211
-------- --------
Total assets ........................................................... $ 18,271 $ 20,850
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 181 $ 1,020
Accrued liabilities ............................................................ 1,307 1,652
Due to Medical Practices-- (see Notes 2 and 6) ................................. 606 326
Dividends accrued on Preferred Stock ........................................... 946 331
Current portion of exclusive management rights obligation ...................... 297 222
Note payable and current portion of long-term debt ............................. 274 426
Patient deposits ............................................................... 411 490
-------- --------
Total current liabilities .............................................. 4,022 4,467
-------- --------
Exclusive management rights obligation ............................................ 978 1,213
Long-term debt .................................................................... 340 692
Commitments and Contingencies -- (see Note 14) .................................... -- --
Shareholders' equity:
Preferred Stock, $1.00 par value --
3,785,378 shares authorized in 1995 and 3,165,644 shares authorized in 1996
-- 2,500,000 undesignated; 1,285,378 and 665,644 shares designated
as Series A Cumulative Convertible of which 785,378 and 165,644 were
issued and outstanding in 1995 and 1996, respectively ........................ 785 166
Common Stock, $.01 par value-- 25,000,000 shares authorized;
6,086,910 and 9,230,557 shares issued and outstanding in
1995 and 1996, respectively .................................................. 61 92
Capital in excess of par ....................................................... 31,785 35,410
Accumulated deficit ............................................................ (19,700) (21,190)
-------- --------
Total shareholders' equity ............................................. 12,931 14,478
-------- --------
Total liabilities and shareholders' equity ............................. $ 18,271 $ 20,850
======== ========
See accompanying notes to the consolidated financial statements
F-3
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(all amounts in thousands, except per share amounts)
For the years ended December 31,
----------------------------------
1994 1995 1996
---- ---- ----
Revenues, net (see Note 2) .................. $ 17,578 $16,711 $ 18,343
Medical Practice retainage (see Note 2) ..... 3,824 3,063 2,680
------- ------- --------
Revenues after Medical Practice retainage
(see Note 2) ............................. 13,754 13,648 15,663
Costs of services rendered .................. 10,998 9,986 12,398
------- ------- --------
Network Sites' contribution ................. 2,756 3,662 3,265
------- ------- --------
General and administrative expenses ......... 3,447 3,680 4,339
Clinical service development expenses ....... 452 290 323
Amortization of intangible assets ........... -- 73 331
Interest income ............................. (519) (626) (415)
Interest expense ............................ 40 20 36
. ------- ------- --------
Total other expenses ....................... 3,420 3,437 4,614
------- ------- --------
(Loss) income before income taxes .......... (664) 225 (1,349)
Provision for income and capital taxes ..... 150 155 141
------- ------- --------
Net (loss) income .......................... (814) 70 (1,490)
Less: Dividends accrued and/or paid on
Preferred Stock ......................... 1,146 600 132
------- ------- --------
Net loss applicable to Common Stock before
consideration for induced conversion of
Preferred Stock ......................... $(1,960) $ (530) $ (1,622)
======= ======= ========
Net loss per share of Common Stock before
consideration for induced conversion of
Preferred Stock ......................... $ (0.32) $ (0.09) $ (0.21)
======= ======= ========
Net loss per share of Common Stock
(see Note 11) ........................... $ (0.32) $ (0.09) $ (0.68)
======= ======= ========
Weighted average number of shares of
Common Stock outstanding ................ 6,081 6,087 7,602
======= ======= ========
See accompanying notes to the consolidated financial statements.
F-4
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(all amounts in thousands, except share amounts)
Cumulative Convertible
Preferred Stock Common Stock Total
---------------------- ------------------ Capital in Accumulated Shareholders'
Shares Amount Shares Amount Excess of Par Deficit Equity
------- -------- ------ ------ ------------- ----------- ------------
BALANCE AT DECEMBER 31, 1993 ................. 2,000,000 $ 2,000 2,666,867 $27 $ 33,461 $(18,956) $ 16,532
Conversion of Preferred Stock to Common
Stock, net of issuance costs .............. (1,136,122) (1,136) 3,408,366 34 326 -- (776)
Dividends accrued and paid to
preferred shareholders ..................... -- -- -- -- (1,146) -- (1,146)
Exercise of Common Stock options ............. -- -- 11,677 -- 23 -- 23
Net loss ..................................... -- -- -- -- -- (814) (814)
---------- ------- --------- --- -------- -------- --------
BALANCE AT DECEMBER 31, 1994 ................. 863,878 864 6,086,910 61 32,664 (19,770) 13,819
Dividends accrued to preferred shareholders .. -- -- -- -- (600) -- (600)
Purchase and retirement of Preferred Stock ... (78,500) (79) -- -- (279) -- (358)
Net income ................................... -- -- -- -- -- 70 70
---------- ------- --------- --- -------- -------- --------
BALANCE AT DECEMBER 31, 1995 ................. 785,378 785 6,086,910 61 31,785 (19,700) 12,931
Conversion of Preferred Stock to Common
Stock, net of issuance costs and the
reversal of accrued Preferred Stock
dividends .................................. (608,234) (608) 2,432,936 24 1,298 -- 714
Issuance of Common Stock for acquisition ..... -- -- 666,666 7 2,493 -- 2,500
Dividends accrued to preferred shareholders .. -- -- -- -- (132) -- (132)
Purchase and retirement of Preferred Stock ... (11,500) (11) -- -- (72) -- (83)
Exercise of Common Stock options ............. -- -- 44,045 -- 38 -- 38
Net loss ..................................... -- -- -- -- -- (1,490) (1,490)
---------- ------- --------- --- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 ................. 165,644 166 9,230,557 92 35,410 (21,190) 14,478
See accompanying notes to the consolidated financial statements.
F-5
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(all amounts in thousands)
For the years ended December 31,
--------------------------------
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
Net (loss) income ..................................... $ (814) $ 70 $(1,490)
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization ...................... 770 775 1,116
Writeoff of fixed assets ........................... 275 21 --
Changes in assets and liabilities net of effects from
acquired businesses --
(Increase) decrease in assets:
Patient accounts receivable ........................ (142) (94) (1,318)
Management fees receivable ......................... -- (1,125) (124)
Research fees receivable ........................... -- -- 10
Other current assets ............................... 22 (304) (379)
Other assets ....................................... 1 (21) (13)
(Increase) decrease in controlled assets of
Medical Practices:
Patient accounts receivable ........................ 316 806 990
Other current assets ............................... 15 25 14
Increase (decrease) in liabilities:
Accounts payable ................................... 175 (502) 839
Accrued liabilities ................................ (56) 3 106
Due to Medical Practices ........................... 124 (131) (280)
Patient deposits ................................... (109) (77) 79
-------- -------- -------
Net cash (used in) provided by operating activities ...... 577 (554) (450)
-------- -------- -------
Cash flows (used in) provided by investing activities:
Purchase of short term investments .................... -- (1,500) (500)
Proceeds from short term investments .................. -- -- --
Payment for exclusive management rights and acquired
physician practices ................................ -- (177) (984)
Purchase of net assets of acquired businesses ......... -- (168) (394)
Purchase of fixed assets and leasehold improvements ... (913) (1,152) (1,498)
Proceeds from sale of fixed assets and leasehold
improvements ....................................... -- 651 86
-------- -------- -------
Net cash (used in) provided by investing activities ...... (913) (2,346) (3,290)
-------- -------- -------
Cash flows (used in) provided by financing activities:
Proceeds from bank under Credit Facility .............. -- -- --
Principal repayments on debt .......................... (78) (84) (193)
Principal repayments under capital lease obligations .. (326) (173) (216)
Repurchase of Convertible Preferred Stock ............. -- (358) (83)
Used for recapitalization costs ....................... (776) -- (33)
Dividends paid on Convertible Preferred Stock ......... (800) -- --
Proceeds from exercise of Common Stock options ........ 23 -- 38
-------- -------- -------
Net cash (used in) provided by financing activities ...... (1,957) (615) (487)
-------- -------- -------
Net decrease in cash ..................................... (2,293) (3,515) (4,227)
Cash at beginning of period .............................. 13,987 11,694 8,179
-------- -------- -------
Cash at end of period .................................... $ 11,694 $ 8,179 $ 3,952
======== ======== =======
See accompanying notes to the consolidated financial statements.
F-6
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
IntegraMed America, Inc. (the "Company") is a physician practice
management company specializing in women's health care, with a focus on
infertility and assisted reproductive technology ("ART") services as well as
health care services to peri- and post-menopausal women. During 1996, the
Company provided management services to a nationwide network of medical
practices that consists of ten sites (each, a "Network Site"). Each Network Site
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 or where the Company directly employs the physicians.
Until 1996, the Company was focused exclusively on providing management
services to Medical Practices in the area of infertility and ART services.
During 1996, the Company, with the acquisition of a medical practice in Florida,
broadened its focus to include health care services to peri- and post-menopausal
women (ages 40-50 and over 50, respectively). As a result, the Company
established two divisions: the Reproductive Science Center Division (the "RSC
Division"), which provides management services to Medical Practices focused on
infertility and ART services, and the Adult Women's Medical Division (the "AWM
Division"), which provides management services to Medical Practices focused on
health care services for peri- and post-menopausal women.
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. and the Adult Women's Medical Center, Inc. All significant
intercompany transactions have been eliminated. The Company derives its revenues
from patient service revenues, management agreements with a three-part
management fee and, with respect to the New Jersey Network Site, a management
agreement with fees based on a percentage of the revenues and reimbursed costs
of services of such Network Site.
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 --
RSC Division
During 1996, the RSC Division's operations were comprised of nine
management agreements, one of which was terminated in November 1996 and one of
which was terminated in January 1997.
F-7
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under four of the agreements 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 cost 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 and any guaranteed physician compensation, or an
additional fixed or variable percentage of net revenues which generally results
in the Company receiving up to an additional 15% of net revenues. 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 Practice are recorded in costs of services rendered. The physicians
receive as compensation all remaining earnings after payment of the Company's
management fee.
Under three management agreements, one of which was terminated in November
1996, the Company displays the patient service revenues of the Medical Practices
which are reflected in revenues, net on its consolidated statement of
operations. Under these agreements, the Company records all patient service
revenues and, out of such revenues, the Company pays the Medical Practices'
expenses, physicians' and other medical compensation, direct materials and
certain hospital contract fees (the "Medical Practice retainage"). Approximately
70-80% of Medical Practice retainage is fixed and the balance is primarily
comprised of certain physician compensation and drug costs which vary according
to Medical Practice volume. Specifically, under the management agreement for the
Boston Network Site, the Company guarantees a minimum physician compensation
based on an annual budget primarily determined by the Company. Remaining
revenues, if any, which represent the Company's management fee, are used by the
Company for other direct administrative expenses which are recorded as costs of
services. Under the management agreement for the Long Island Network Site, the
Company's management fee is payable only out of the remaining revenues, if any,
after the payment of all expenses of the Medical Practice. Under these
arrangements, the Company is liable for payment of all liabilities incurred by
the Medical Practices and is at risk for any losses incurred in the operations
thereof.
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.
AWM Division
The AWM Division's operations are currently comprised of one Network Site
with three locations which are directly owned by the Company and a 51% interest
in the National Menopause Foundation ("NMF"), a company which develops
multifaceted educational programs regarding women's healthcare and publishes a
quarterly women's health digest. The Network Site is also involved in clinical
trials with major pharmaceutical companies.
The Company bills and records all patient service revenues of the Network
Site and records all direct costs incurred as costs of services. The Company
retains as Network site contribution an amount determined using the three-part
management fee calculation described above with regard to the RSC Division, and
the balance is paid as compensation to the Medical Practices and is recorded by
the Company in costs of services rendered. The Medical Practices receive a fixed
monthly draw which may be adjusted quarterly by the Company based on the
respective Network Site's actual operating results.
Revenues in the AWM Division also include amounts earned under contracts
relating to clinical trials between the Network Site and various pharmaceutical
companies. The Network Site contracts with major pharmaceutical companies
(sponsors) to perform women's medical care research mainly to determine the
safety and efficacy of a medication. Research revenues are recognized pursuant
to each respective contract in the period which the medical services (as
stipulated by the research study protocol) are performed and collection of such
fees is considered probable. Net realization is 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 are included
in costs of services rendered.
F-8
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's 51% interest in NMF is included in the Company's
consolidated financial statements. The Company records 100% of the patient
service revenues and costs of NMF and reports 49% of any profits of NMF as
minority interest on the Company's consolidated balance sheet. Minority interest
at December 31, 1996 was $0.
Cash and cash equivalents --
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Short term investments --
Short term investments consist of investments in corporate commercial
paper with an original maturity of less than one year but greater than three
months and are available for sale. Investments are recorded at cost, which
approximates market.
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 and risk of loss due to
non-collectibility is borne by the Company. As of December 31, 1996, the total
patient accounts receivable of $2,770,000, approximately $836,000 of accounts
receivable was a function of Network Site revenue (i.e., the Company purchased
the accounts receivable from the Medical Practice) and the balance of $1,934,000
was a function of net revenues of the Company (see Note 2 -- "Revenue and cost
recognition" above).
Management fees receivable --
Management fees receivable represent fees owed to the Company pursuant to
its management agreements with certain Network Sites (see Note 2 -- "Revenue and
cost recognition" above).
Research fees receivable --
Research fees receivable represent receivables from pharmaceutical
companies for medical services provided by the Medical Practices at the Network
Site under the AWM Division to patients pursuant to protocols stipulated under
contracts relating to clinical trials between the pharmaceutical companies and
the AWM Division.
Controlled assets of Medical Practices --
Controlled cash represents segregated cash held in the name of certain
Medical Practices; controlled accounts receivable represent patient receivables
due to certain Medical Practices, and controlled other current assets represent
assets owned by and held in the name of certain Medical Practices, all of which
are reflected on the Company's consolidated balance sheet due to the Company's
unilateral control of such assets.
At December 31, 1995 and 1996, of the $1,759,000 and $650,000,
respectively, controlled assets of Medical Practices, $279,000 and $117,000,
respectively, were restricted for payment of the amounts due to Medical
Practices and the balances of $1,480,000 and $533,000, respectively, were
payable to the Company.
Fixed assets --
Fixed assets are valued at cost less accumulated depreciation and
amortization. Depreciation is computed on a straight-line basis over the
estimated useful lives of the related assets, generally three to five years.
Leasehold improvements are amortized over the shorter of the asset life or the
remaining term of the lease. Assets under capital leases are amortized over the
term of the lease agreements. The Company periodically reviews the fair value of
long-lived assets, the results of which have had no material effect on the
Company's financial position or results of operations.
When assets are retired or otherwise disposed of, the costs and related
accumulated depreciation are removed from the accounts. The difference between
the net book value of the assets and proceeds from disposition is recognized as
gain or loss. Routine maintenance and repairs are charged to expenses as
incurred, while costs of betterments and renewals are capitalized.
F-9
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Intangible assets --
Intangible assets at December 31, 1995 and 1996 consisted of the following
(000's omitted):
1995 1996
---- ----
Exclusive management rights .............. $1,621 $2,178
Goodwill ................................. 50 3,935
Trademarks ............................... 372 394
------ ------
Total ................................ 2,043 6,507
Less -- accumulated amortization ......... (282) (613)
------ ------
Total ................................ $1,761 $5,894
====== ======
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.
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 or twenty years. Goodwill and
other intangibles are amortized over periods ranging from three to forty years.
Trademarks are amortized over seven years. Accumulated amortization of exclusive
management rights, goodwill and trademarks was $73,000, $0 and $209,000 at
December 31, 1995, respectively, and $270,000, $91,000 and $252,000 at December
31, 1996, respectively.
Due to Medical Practices --
Due to Medical Practices represents liabilities the Company was obligated
to pay on behalf of, or directly to, the Medical Practices from the controlled
assets of Medical Practices, which may be offset by advances made by the Company
to certain Medical Practices for professional and affiliate fees.
Stock based employee compensation --
The Company adopted Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (FAS 123), on January 1, 1996. Under FAS 123,
companies can, but are not required to, elect to recognize compensation expense
for all stock based awards, using a fair value method. The Company has adopted
the disclosure only provisions, as permitted by FAS 123.
Concentrations of credit --
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's trade receivables are primarily from third party payors,
principally insurance companies and health maintenance organizations.
Income taxes --
The Company accounts for income taxes utilizing the asset and liability
approach.
F-10
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings per share --
Net loss per share is determined by dividing net income or loss, decreased
or increased by accrued dividends and dividend payments on the Series A
Cumulative Convertible Preferred Stock ("Preferred Stock"), by the weighted
average number of shares of Common Stock outstanding during the period (see Note
11).
NOTE 3 -- REVENUES, MEDICAL PRACTICE RETAINAGE AND COSTS OF SERVICES:
The following table sets forth for the years ended December 31, 1994, 1995
and 1996, revenues, Medical Practice retainage and costs of services for each of
the Company's three types of management agreements (patient service revenues,
three-part management fee and percent of revenues and reimbursed costs of
services) and revenues and costs of services for the AWM Division (000's
omitted):
For the years
ended December 31,
---------------------------
1994 1995 1996
------- ------ ------
Revenues, net:
RSC Division --
Patient service revenues ................. $17,578 $13,820 $11,449
Management fees-- three part management
fee ................................... -- 981 3,159
Management fees-- percent of revenues
and reimbursed costs of services of the
New Jersey Network Site ............... -- 1,910 2,978
------- ------- -------
Total RSC Division revenues, net ... 17,578 16,711 17,586
------- ------- -------
AWM Division -- revenues ................... -- -- 757
------- ------- -------
Total revenues, net ................ $17,578 $16,711 $18,343
======= ======= =======
Medical Practice retainage:
RSC Division --
Medical Practice retainage related to
patient service revenues .............. $ 3,824 $ 3,063 $ 2,680
======= ======= =======
Costs of services:
RSC Division --
Costs related to patient service revenues $10,998 $ 7,963 $ 7,465
Costs related to three part management
fees .................................. -- 933 3,049
Costs related to New Jersey Network Site . -- 1,090 1,095
------- ------- -------
Total RSC division costs of services 10,998 9,986 11,609
------- ------- -------
AWM Division-- Costs of services ........... -- -- 789
------- ------- -------
Total costs of services ............ $10,998 $ 9,986 $12,398
======= ======= =======
F-11
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the year ended December 31, 1996, the Boston Network Site, which is
reflected as patient service revenues under the RSC Division, provided 38.5% and
58.9% of revenues, net and Network Sites' contribution, respectively, of the
Company. Summary financial information for this Network Site is as follows
(000's omitted):
For the
years ended December 31,
------------------------------
1994 1995 1996
----- ----- -----
Revenues, net ................. $5,960 $6,594 $7,063
Medical Practice retainage..... 451 556 1,015
----- ----- -----
Revenues after Medical
Practice retainage ......... 5,509 6,038 6,048
Costs of services rendered..... 3,632 3,970 4,126
----- ----- -----
Network Site's contribution.... $1,877 $2,068 $1,922
===== ===== =====
In addition, the New Jersey Network Site, which management fee is based
upon a percentage of revenues, provided 16.9% and 34.5% of revenues, net and
Network Sites' contribution, respectively, of the Company.
NOTE 4 -- FIXED ASSETS, NET:
Fixed assets, net at December 31, 1995 and 1996 consisted of the following
(000's omitted):
1995 1996
---- ----
Furniture, office and other equipment ..... $ 1,617 $ 2,145
Medical equipment ......................... 1,319 1,954
Leasehold improvements .................... 728 1,246
Assets under capital leases ............... 1,453 1,426
------- -------
Total ................................. 5,117 6,771
Less--Accumulated depreciation and
amortization .......................... (2,851) (3,585)
------- -------
$ 2,266 $ 3,186
======= =======
Assets under capital leases primarily consist of medical equipment.
Accumulated amortization relating to capital leases at December 31, 1995 and
1996 was $908 and $1,065, respectively.
NOTE 5 -- ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1995 and 1996 consisted of the
following (000's omitted):
1995 1996
---- ----
Deferred compensation ........................ $ 314 $ 357
Accrued payroll and benefits ................. -- 226
Deferred research revenue .................... -- 118
Accrued state taxes .......................... 93 166
Deferred rent ................................ 286 166
Westchester Network Site closing reserve ..... -- 90
Other ........................................ 614 529
------ ------
Total accrued liabilities .................... $1,307 $1,652
====== ======
F-12
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6 -- DUE TO MEDICAL PRACTICES:
Due to Medical Practices at December 31, 1995 and 1996
consisted of the following (000's omitted):
1995 1996
---- ----
Accrued hospital contract fees ................. $446 $ 354
Accrued professional fees and affiliates, net .. 130 (46)
Accrued other .................................. 30 18
---- -----
Total due to Medical Practices ................. $606 $ 326
==== =====
NOTE 7 -- ACQUISITIONS AND MANAGEMENT AGREEMENTS
The transactions detailed below were accounted for by the purchase method
and the purchase price has been allocated to the assets acquired and liabilities
assumed based upon the estimated fair value at the date of acquisition. The
consolidated financial statements at and for the year ended December 31, 1996
include the results of these transactions, with the exception of the Bay Area
Acquisition which was completed in January 1997 (see Note 18), from their
respective dates of acquisition.
On June 7, 1996, the Company entered into an Agreement and Plan of Merger
(the "Agreement") pursuant to which INMD Acquisition Corp. ("IAC"), a Florida
corporation and wholly-owned subsidiary of the Company, acquired all of the
outstanding stock of the following three related Florida corporations: The
Climacteric Clinic, Inc. ("CCI"), Midlife Centers of America, Inc. ("MCA"), and
Women's Research Centers, Inc. ("WRC"), America, (collectively, the "Merger
Companies"), and 51% of the outstanding stock of NMF, a related Florida
corporation. Pursuant to the Agreement, the Merger Companies were merged with
and into IAC, the surviving corporation in the Merger, which will continue its
corporate existence under the laws of the State of Florida under the name Adult
Women's Medical Center, Inc. ("AWMC"). In exchange for the shares of the Merger
Companies, the Company paid cash in an aggregate amount of $350,000 and issued
666,666 shares of Common Stock which had a market value of $2.5 million. In
exchange for the 51% of the outstanding stock of NMF, the Company paid cash in
an aggregate amount of $50,000 and issued a note in an amount of $600,000, which
is payable in sixteen quarterly installments of $37,500 beginning September 1,
1996 with simple interest at a rate of 4.16%. The Merger Companies and NMF
represent one of the locations under the Women's Medical & Diagnostic Center
("WMDC").
The aggregate purchase price of the Merger Companies of $2,850,000 was
allocated as follows to assets acquired and liabilities assumed: $338,000 to
current assets, $99,000 to fixed assets, $214,000 to intangible assets which
will be amortized over a three-year period, $235,000 to accrued liabilities,
$97,000 to debt and the balance of $2,531,000 to goodwill, which will be
amortized over a forty-year period. The aggregate purchase price of NMF of
$650,000 was allocated as follows: $2,000 to current assets, $30,000 to fixed
assets, $10,000 to current liabilities and the $628,000 balance to goodwill,
which will be amortized over a forty-year period.
On May 15, 1996, the Company acquired certain assets of and the right to
manage W.F. Howard, M.D., P.A. near Dallas, Texas (the "RSC of Dallas"), a
provider of conventional infertility and assisted reproductive technology
services. The aggregate purchase price was approximately $701,500 of which
approximately $244,000 was paid at closing and the Company issued a promissory
note for the $457,500 balance which is payable as follows: $100,000 on the last
business day of May 1997 and 1998, and $36,786 on the last business day of May
in each of the seven years thereafter, thru May 2005. The aggregate purchase
price was allocated to fixed assets in the amount of $144,000 and the balance of
$557,500 to exclusive management rights, which will be amortized over the ten
year term of the agreement.
F-13
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following unaudited pro forma results of operations have been prepared
by management based on the unaudited financial information of the Merger
Companies, NMF, the RSC of Dallas and Bay Area Fertility 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 unaudited results to reflect operations as if the related
management agreements had been consummated on January 1, 1996 and 1995,
respectively. 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 acquisition and management agreement
had been in effect on the dates indicated or which may be obtained in the
future.
For the year ended December 31,
(000's omitted)
-------------------------------
1995 1996
---- ----
(unaudited)
Revenues, net ..................................................... $ 21,388 $ 21,006
(Loss) income before income taxes (1) ............................. $ 139 $ (1,593)
Net (loss) applicable to Common Stock (includes $132,000 and
$600,000 dividends accrued on Preferred Stock for the year-ended
December 31, 1996 and 1995, respectively) before consideration
for induced conversion of Preferred Stock ....................... $ (623) $ (1,878)
Net (loss) per share of Common Stock before consideration
for induced conversion of Preferred Stock ....................... $ (0.09) $ (0.23)
- ------------------
(1) Income (loss) before income taxes include $385,000 and $520,000 of
goodwill and exclusive management rights amortization in 1995 and 1996,
respectively.
NOTE 8 -- EXCLUSIVE MANAGEMENT RIGHTS OBLIGATION:
Exclusive management rights obligation represents the liability owed by
the Company to Medical Practices for the cost of acquiring the exclusive right
to manage the non-medical aspects of the Medical Practices' infertility
practices. Typically, the Company will pay cash for a portion of such cost at
the inception of the management agreement and pay the balance in equal
installments over the life of the agreement, usually ten years.
At December 31, 1996, aggregate exclusive management rights obligation
payments in future years were as follows (000's omitted):
1997 .............................................. $ 222
1998 .............................................. 222
1999 .............................................. 159
2000 .............................................. 159
2001 .............................................. 159
Thereafter ........................................ 514
------
Total payments .................................... $1,435
======
F-14
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9 -- DEBT:
Debt at December 31, 1995 and 1996 consisted of the following (000's
omitted):
1995 1996
---- ----
Acquisition note payable ..................... $ -- $ 525
Note payable to Bank ......................... -- --
Notes payable to Medical Practices employed
by the Company ........................... -- 220
Obligations under capital lease .............. 485 269
Construction loan ............................ 129 51
Other ........................................ -- 53
----- -------
Total debt ................................... 614 1,118
Less--Current portion ........................ (274) (426)
----- -------
Long-term debt ............................... $ 340 $ 692
===== =======
In November 1996, the Company obtained a $1.5 million revolving credit
facility (the "Credit Facility") issued by First Union National Bank (the
"Bank"). Borrowings under the Credit Facility bear interest at the Bank's prime
rate plus 0.75% per annum, which at March 31, 1997, was 9.25%. The Credit
Facility terminates on April 1, 1998 and is secured by the Company's assets. At
March 31, 1997, $250,000 was outstanding under the Credit Facility and is
included in "Note payable and current portion of long-term debt" in the
accompanying consolidated balance sheet. At December 31, 1996, no amounts were
outstanding under the Credit Facility.
In June 1996, the Company purchased a 51% interest in NMF for a total
purchase price of $650,000, of which $50,000 was paid at closing and the balance
is to be paid in sixteen quarterly installments of $37,500 beginning September
1, 1996. Interest is payable quarterly at the rate of 4.16% (see Notes 7 and
15).
On December 30, 1996, the Company acquired North Central Florida Ob-Gyn
Associates which it then merged into WMDC. The total purchase price of the
acquisition was $320,000 of which $220,000 is to be paid in four equal
installments of $55,000 for each of the next four years commencing December 30,
1997.
In May 1992, the Company obtained a $350,000 construction loan for the
development of its New Jersey Network Site of which $129,000 and $51,000 were
outstanding at December 31, 1995 and 1996, respectively. The debt is payable in
fifty-four monthly installments of $6,481 commencing on April 1, 1993 through
September 1, 1997. Interest is payable at the bank's prime rate which was 8.5%,
8.25% and 8.25% at December 31, 1995 and 1996 and March 31, 1997, respectively.
Capital lease obligations relate primarily to furniture and medical
equipment for the Network Sites. The current portion of capital lease
obligations was $202,000, $139,000 and $163,000 at December 31, 1995, 1996 and
March 31, 1997, respectively.
The Company has operating leases for its corporate headquarters and for
medical office space relating to its managed Network Sites. In 1996, the Company
also entered into operating leases for certain medical equipment. Aggregate
rental expense under operating leases was $829,000, $522,000 and $540,000 for
the year ended December 31, 1994, 1995 and 1996, respectively. Refer to Note 14
- -- "Commitments and Contingencies -- Commitments to Medical Practices."
F-15
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1996, the minimum lease payments for assets under capital
and noncancelable operating leases in future years were as follows (000's
omitted):
Capital Operating
------- ---------
1997 ...................................... $ 149 $ 730
1998 ...................................... 124 739
1999 ...................................... 6 702
2000 ...................................... 4 357
2001 ...................................... -- 265
Thereafter ................................ -- 831
----- ------
Total minimum lease payments .............. 283 $3,624
======
Less -- Amount representing interest ...... (14)
-----
Present value of minimum lease payments ... $ 269
=====
NOTE 10 -- INCOME TAXES:
The deferred tax provision was determined under the asset and liability
approach. Deferred tax assets and liabilities were recognized on differences
between the book and tax basis of assets and liabilities using presently enacted
tax rates. The provision for income taxes was the sum of the amount of income
tax paid or payable for the year as determined by applying the provisions of
enacted tax laws to the taxable income for that year and the net change during
the year in the Company's deferred tax assets and liabilities. The provision for
the years ended December 31, 1994, 1995 and 1996 of $150,000, $155,000 and
$140,000, respectively, was comprised of current state taxes payable.
The Company's deferred tax assets primarily represented the tax benefit of
operating loss carryforwards. However, such deferred tax asset was fully reduced
by a valuation allowance due to the uncertainty of its realization. This
valuation allowance increased from $6,584,000 at December 31, 1995 to $7,115,000
at December 31, 1996, respectively, due to changes in operating losses and tax
deductible temporary differences.
At December 31, 1996, the Company had operating loss carryforwards of
approximately $17.9 million which expire in 2002 through 2011. Approximately
$14.5 million of such loss carryforwards occurred prior to the 1993 ownership
change which resulted from the Company's May 1993 Preferred Stock offering. For
tax purposes, there is an annual limitation of approximately $2.8 million on the
utilization of net operating losses resulting from this change in ownership in
May 1993.
Significant components of the noncurrent deferred tax assets (liabilities)
at December 31, 1995 and 1996 were as follows (000's omitted):
December 31,
--------------------
1995 1996
---- ----
Net operating loss carryforwards ............... $ 6,138 $ 6,777
Other .......................................... 504 438
Valuation allowance ............................ (6,584) (7,115)
------- -------
Deferred tax assets ............................ 58 100
Deferred tax liabilities ....................... (58) (100)
------- -------
Net deferred taxes ............................. $ -- $ --
======= =======
F-16
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The financial statement income tax provision differed from income taxes
determined by applying the statutory Federal income tax rate to the financial
statement income or loss before income taxes for the year ended December 31,
1994, 1995 and 1996 as a result of the following:
For the Year Ended
December 31,
--------------------------------
1994 1995 1996
---- ---- ----
Tax expense (benefit) at Federal statutory rate ...... $(277,000) $ 79,000 $(472,000)
State income taxes ................................... 150,000 155,000 141,000
Net operating profit or loss (providing)
not providing current year tax benefit ............ 277,000 (79,000) 472,000
--------- --------- ---------
Provision for income taxes ........................... $ 150,000 $ 155,000 $ 141,000
========= ========= =========
NOTE 11 -- SHAREHOLDERS' EQUITY:
At its meeting held on July 26, 1994, the Company's Board of Directors
approved an offer to the holders ("Preferred Stockholders") of the 2,000,000
outstanding shares of the Company's Preferred Stock to convert each share of
Preferred Stock into 3.0 shares of the Company's Common Stock, $.01 par value
per share, and $.20 in cash (the "Offer"). Upon expiration of the Offer on
November 10, 1994 and pursuant to its terms, 1,136,122 shares of Preferred Stock
were accepted for conversion into 3,408,366 shares of Common Stock and $227,224
in cash. In connection with the Offer, five-year warrants to purchase 70,826
shares of Common Stock at $1.25 per share were issued to Raymond James &
Associates, Inc.
On June 6, 1996, the Company made a new conversion offer (the "Second
Offer") to the holders of the 773,878 outstanding shares of the Company's
Preferred Stock. Under the Second Offer, Preferred Stockholders received four
shares of the Company's Common Stock upon conversion of a share of Preferred
Stock and respective accrued dividends, subject to the terms and conditions set
forth in the Second Offer. The Second Offer was conditioned upon a minimum of
400,000 shares of Preferred Stock being tendered; provided that the Company
reserved the right to accept fewer shares. Upon expiration of the Second Offer
on July 17, 1996, the Company accepted for conversion 608,234 shares, or 78.6%
of the Preferred Stock outstanding, constituting all the shares validly
tendered. Following the transaction, there were 9,198,375 shares of IntegraMed
America's Common Stock outstanding and 165,644 shares of Preferred Stock
outstanding.
Under the Second Offer, Preferred Stockholders received four shares of
Common Stock for each share of Preferred Stock and respective accrued dividends
converted. This Second Offer represented an increase from the original terms of
the Preferred Stock which provided for 1.45 shares of Common Stock for each
share of Preferred Stock (after adjustment for the failure of the Company to pay
eight dividends and after adjustment for the issuance of Common Stock pursuant
to its acquisition of WMDC and NMF). Since the Company issued an additional
1,550,997 shares of Common Stock in the conversion offer compared to the shares
that would have been issued under the original terms of the Preferred Stock, the
Company was required, pursuant to a recently enacted accounting pronouncement,
to deduct the fair value of these additional shares of approximately $4,265,000
from earnings available to Common Stockholders. This non-cash charge, partially
offset by the reversal of $973,000 accrued dividends attributable to the
conversion, resulted in the increase in net loss per share by approximately
$(.47) for the year ended December 31, 1996. While this charge is intended to
show the cost of the inducement to the owners of the Company's Common Stock
immediately before the conversion offer, management does not believe that it
accurately reflects the impact of the conversion offer on the Company's Common
Stockholders. As a result of the conversion, the Company reversed $973,000 in
accrued dividends from its balance sheet and the conversion will save the
Company from accruing annual dividends of $486,000 and the need to include these
dividends in earnings per share calculations. The conversion has also eliminated
a $6.1 million liquidation preference related to the shares of Preferred Stock
converted.
F-17
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividends on the Preferred Stock are payable at the rate of $.80 per share
per annum, quarterly on the fifteenth day of August, November, February and May
of each year commencing August 15, 1993. In May 1995, as a result of the
Company's Board of Directors suspending four quarterly dividend payments,
holders of the Preferred Stock became entitled to one vote per share of
Preferred Stock on all matters submitted to a vote of stockholders, including
election of directors; once in effect, such voting rights are not terminated by
the payment of all accrued dividends. The Company does not anticipate the
payment of any cash dividends on the Preferred Stock in the foreseeable future.
As a result of the issuance of the Common Stock pursuant to the Company's
acquisition of the WMDC in June 1996 and the anti-dilution rights of the
Preferred Stock, the conversion rate of the Preferred Stock is subject to
increase and each share of Preferred Stock was convertible into Common Stock at
a conversion rate equal to 1.45 shares of Common Stock for each share of
Preferred Stock as of December 31, 1996.
On November 30, 1994, the Company announced it may purchase up to 300,000
shares of its outstanding Preferred Stock at such times and prices as it deems
advantageous. The Company has no commitment or obligation to purchase any
particular number of shares, and it may suspend the program at any time.
In conjunction with the Second Offer, the Company entered into an
agreement with two representatives of the underwriters of such offering (the
"Representatives") to issue warrants to one or both of the Representatives.
Pursuant to this agreement (the "Warrant Agreement"), the Company issued to the
Representatives warrants to purchase through May 21, 1998 (a) up to an aggregate
200,000 shares of Preferred Stock at an initial price of $16.00 per share, (b)
up to 220,000 shares, subject to certain adjustments, of Common Stock at an
initial exercise price of $14.54 per share of Common Stock or (c) any
combination of such securities at the respective exercise prices which results
in an aggregate exercise price of $3,200,000, all subject to the terms and
conditions of the Warrant Agreement. No warrants have been exercised through
December 31, 1996.
NOTE 12 -- STOCK OPTIONS:
Under the 1988 Stock Option Plan (as amended), (the "1988 Plan") and the
1992 Stock Option Plan (the "1992 Plan"), 144,567 and 1,300,000 shares,
respectively, are reserved for issuance of incentive and non-incentive stock
options. Under both the 1988 and 1992 Plans, incentive stock options, as defined
in Section 422 of the Internal Revenue Code, may be granted only to employees
and non-incentive stock options may be granted to employees, directors and such
other persons as the Board of Directors (or a committee (the "Committee")
appointed by the Board) determines will contribute to the Company's success at
exercise prices equal to at least 100%, or 110% for a ten percent shareholder,
of the fair market value of the Common Stock on the date of grant with respect
to incentive stock options and at exercise prices determined by the Board of
Directors or the Committee with respect to non-incentive stock options. The 1988
Plan provides for the payment of a cash bonus to eligible employees in an amount
equal to that required to exercise incentive stock options granted. Stock
options issued under the 1988 Plan are exercisable, subject to such conditions
and restrictions as determined by the Board of Directors or the Committee,
during a ten-year period, or a five-year period for incentive stock options
granted to a ten percent shareholder, following the date of grant; however, the
maturity of any incentive stock option may be accelerated at the discretion of
the Board of Directors or the Committee. Under the 1992 Plan, the Board of
Directors or the Committee determines the exercise dates of options granted;
however, in no event may incentive stock options be exercised prior to one year
from date of grant. Under both the 1988 and 1992 Plans, the Board of Directors
or the Committee selects the optionees, determines the number of shares of
Common Stock subject to each option and otherwise administers the Plans. Under
the 1988 Plan, options expire one month from the date of the holder's
termination of employment with the Company or six months in the event of
disability or death. Under the 1992 Plan, options expire three months from the
date of the holder's termination of employment with the Company or twelve months
in the event of disability or death.
F-18
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On April 19, 1994, the Compensation Committee of the Board of Directors of
the Company approved a stock option exchange program under which incentive stock
options to purchase an aggregate of 107,992 shares of Common Stock at an
exercise price of $2.50 per share were granted to employees holding options to
purchase an identical number of shares at exercise prices ranging from $8.00 to
$11.75, contingent upon the surrender of the old stock options. The new stock
options expire on April 18, 2004 and are exercisable, with respect to 25% of the
underlying shares, one year from the date of grant; thereafter the options
become exercisable every three months at the rate of 6.25% of the total number
of shares subject to each such option. Stock options to purchase an aggregate of
105,559 shares of Common Stock were surrendered.
On April 19, 1994, the Board of Directors approved the 1994 Outside
Director Stock Purchase Plan, reserving for issuance thereunder 125,000 shares
of Common Stock, pursuant to which directors who are not full-time employees of
the Company may elect to receive all or a part of their annual retainer fees,
the fees payable for attending meetings of the Board of Directors and the fees
payable for serving on Committees of the Board, in the form of shares of Common
Stock rather than cash, provided that any such election be made at least six
months prior to the date that the fees are to be paid. At December 31, 1995 and
1996, there were no options outstanding under the 1994 Outside Director Stock
Purchase Plan.
Stock option activity, under the 1988 and 1992 Plans combined, is
summarized as follows:
Number of
shares of
Common Stock
underlying Weighted Average
options exercise price
------- ------------
Options outstanding at December 31, 1993 .......... 181,377 $6.37
Granted
Option Price = Fair Market Value .............. 437,627 $1.38
Option Price > Fair Market Value .............. 206,992 $2.25
Option Price < Fair Market Value .............. 95,000 $0.63
Exercised ......................................... (11,677) $1.44
Canceled .......................................... (176,692) $6.77
--------
Options outstanding at December 31, 1994 .......... 732,627 $1.44
Granted
Option Price = Fair Market Value .............. 130,250 $2.62
Canceled ...................................... (19,675) $2.06
--------
Options outstanding at December 31, 1995 .......... 843,202 $1.63
Granted
Option Price = Fair Market Value .............. 119,500 $3.42
Option Price > Fair Market Value .............. 225,000 $2.37
Exercised ......................................... (44,045) $1.31
Canceled .......................................... (76,841) $2.37
Options outstanding at December 31, 1996 .......... 1,066,816 $1.92
Options exercisable at:
December 31, 1994 ............................. 57,060 $1.17
December 31, 1995 ............................. 270,035 $1.47
December 31, 1996 ............................. 406,968 $1.54
Included in options that were canceled during 1994, 1995 and 1996 were
forfeitures (representing canceled unvested options only) of 133,723, 16,034 and
56,710, with weighted average exercise prices of $6.20, $2.10 and $2.30,
respectively.
The average remaining life of the 1,066,816 options outstanding at
December 31, 1996, under the 1988 and 1992 Plan combined, was 8.2 years at
exercise prices ranging from $0.63 to $3.75.
F-19
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro forma information:
FAS 123 requires pro forma disclosures of net income and earnings per
share amounts as if compensation expense, using the fair value method, was
recognized for options granted after 1994. Using this approach, pro forma net
income would be $38,000 lower and loss per share would be $0.01 higher for the
year ended December 31, 1995. Pro forma net loss and earnings per share for the
years ended December 31, 1996 would be $313,000 and $0.04 higher, respectively,
versus reported amounts. The weighted average fair value of options granted
during the year ended December 31, 1996 was $2.91 for options granted at prices
equal to market value and $1.99 for options granted at prices higher than fair
value ($2.28 for options granted during 1995). These values, which were used as
a basis for the pro forma disclosures, were estimated using the Black-Scholes
Options-Pricing Model with the following assumptions used for grants in the
years ended December 31, 1995 and 1996, respectively; dividend yield of 0% in
both years; volatility of 115.18% and 108.72% for the years ended December 31,
1995 and 1996; risk-free interest rate of 6.3% and 6.7% in 1995 and 1996,
respectively; and an expected term of 6 years for both years.
These pro forma disclosures may not be representative of the effects for
future years since options vest over several years and options granted prior to
1995 are not considered in these disclosures. Also, additional awards generally
are made each year.
The Company recognizes compensation cost for stock-based employee
compensation plans over the vesting period based on the difference, if any,
between the quoted market price of the stock and the amount an employee must pay
to acquire the stock. Deferred employee compensation cost at December 31, 1995
and 1996 was $314,000 and $357,000, respectively. Total compensation cost
recognized in income for the years ended December 31, 1995 and 1996 was $81,000
and $43,000, respectively.
NOTE 13 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1995 and 1996 (in thousands, except
per share data) appear below:
Network Sites' Net Net loss per
Revenues, net contribution (loss) income share (1)
------------------ --------------- --------------- -----------------
1995 1996 1995 1996 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ---- ----
First quarter ... $ 4,132 $ 4,175 $ 618 $ 818 $(122) $ (74) $ (.05) $(0.04)
Second quarter .. 4,288 4,822 1,079 1,116 128 85 (.01) (0.01)
Third quarter ... 4,088 5,016 999 577 12 (693) (.02) (0.08)
Fourth quarter .. 4,203 4,330 966 754 52 (808) (.02) (0.09)
-------- -------- ------- ------- ----- ------- ------ -----
Total year ...... $ 16,711 $ 18,343 $ 3,662 $ 3,265 $ 70 $(1,490) $ (.09) (0.21)
======== ======== ======= ======= ===== ======= ====== =====
- ---------------
(1) Refer to Note 11 -- Shareholders' Equity -- regarding the impact of the
Company's Second Offer on net loss per share in 1996.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES:
Clinical Services Development
The Company has commitments to fund clinical services development pursuant
to various collaboration agreements. Effective July 1, 1995, the Company entered
into a new three-year agreement with Monash University which provides for Monash
to conduct research in ART and human fertility to be funded by a minimum annual
payment of 220,000 in Australian dollars, the results to be jointly owned by the
Company and Monash. If certain milestones are met as specified in the Agreement,
the Company's annual payment may be a maximum of 300,000 Australian dollars in
year two and 380,000 Australian dollars in year three. Minimum payments of
55,000 Australian dollars and payments for the attainment of certain research
milestones will be
F-20
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
made quarterly throughout the term of the Agreement, July 1, 1995 through June
30, 1998. The Company expensed approximately $88,000 and $189,000 under this
agreement for the years ended December 31, 1995 and 1996.
Under its contract for a joint development program for genetic testing
with Genzyme Genetics ("Genzyme"), the Company funded approximately $134,000 and
$56,000 in the years ended December 31, 1995 and 1996, respectively. The Company
and Genzyme mutually agreed to terminate this contract in December 1996; the
Company retained the right to use the technology developed under the contract
through this date.
Operating Leases
Refer to Note 9 for a summary of lease commitments.
Reliance on Third Party Vendors
The Network sites under the RSC Division are dependent on three
third-party vendors that produce patient fertility medications (lupron, metrodin
and fertinex)which are vital to the provision of ART services. Should any of
these vendors experience a supply shortage of medication, it may have an adverse
impact on the operations of the Network sites. To date, the Network sites under
the RSC Division have not experienced any such adverse impacts.
Employment Agreements
The Company has entered into employment and change in control severance
agreements with certain of its management employees, which include, among other
terms, noncompetitive provisions and salary and benefits continuation. The
Company's minimum aggregate commitment under these agreements at December 31,
1996 was approximately $1.7 million.
Commitments to Medical Practices
Pursuant to most new management contracts entered into by the Company in
1995, the Company is obligated to perform the following: (i) advance funds to
the Network Site to guarantee a minimum physician salary and/or to provide new
services, utilize new technologies, fund projects, etc.; and (ii) on or before
the fifteenth business day of each month purchase the net accounts receivable of
the Network site arising during the previous month and to transfer or pay to the
Network Site such amount of funds equal to the net accounts receivable less any
amounts owed to the Company for management fees and/or advances. Any advances
are to be repaid monthly and interest expense, computed at the prime rate used
by the Company's primary bank in effect at the time of the advance, will be
charged by the Company for funds advanced. The Company may guarantee the Medical
Practice a certain amount of compensation (i.e. medical practice distributions)
during the first twelve months of the agreement. Minimum physician salary
guaranteed at December 31, 1996 was $1.0 million.
Under certain management agreements which expire through 2001, the Company
pays the affiliated Medical Practice a fee for the use of space and other
facility services. Such fee is a fixed amount and/or a fee based upon the number
of "procedures" or "cycles", as defined in the respective agreement, performed
at the Network Site. The aggregate amount expensed pursuant to such agreements
was $1,443,000, $1,136,000 and $856,000, for the years ended December 31, 1994,
1995 and 1996.
Commitments to the National Menopause Foundation
In connection with its acquisition of 51% of the outstanding stock of NMF
in June 1996, the Company committed to provide funding to and for the
development of NMF on an as-needed basis during the four year period commencing
June 6, 1996 in amounts not to exceed $500,000 in the aggregate; as of January
1, 1997 the Company had not provided any funding and pursuant to an agreement
between the Company and the minority owner of NMF, the Company is no longer
obligated to provide such funding.
F-21
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Litigation
On or about December 14, 1994, a holder of the Company's Series A
Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock")
commenced a class action, Bernstein v. IVF America, et. al, in the Chancery
Court of New Castle County, Delaware, against the Company and its Directors
asserting that the Company's offer to convert each share of Convertible
Preferred Stock into three shares of the Company's Common Stock plus $.20 in
cash (the "Conversion Offer") had triggered the anti-dilution provisions of the
Certificate of Designations (which sets out the rights and privileges of the
Convertible Preferred Stock) and that this necessitated an adjustment of the
conversion rate of the Convertible Preferred Stock remaining outstanding. On
September 5, 1996, the plaintiff in Bernstein v. IVF America, et. al. withdrew
his appeal of the Delaware Court of Chancery's earlier decision denying the
plaintiff's claim that Preferred Stockholders were entitled to expanded
anti-dilution rights as a result of the Company's November 1994 Conversion Offer
with respect to the Preferred Stock. As a result of the plaintiff's appeal being
withdrawn, the case has been dismissed.
In November 1994, the Company was served with a complaint in a matter
captioned Karlin v. IVF America, et. al., filed in the Supreme Court of the
State of New York, County of Westchester. The suit also named, as co-defendants,
Vicki L. Baldwin, a Director of the Company, United Hospital and Dr. John
Stangel. The action purported to be a class action, initiated by plaintiffs on
behalf of themselves and a class of persons similarly situated. The complaint
alleged that the defendants, individually and collectively, had, in the
communication of clinical outcome statistics, inaccurately stated success rates
or failed to communicate medical risks attendant to ART procedures. These
allegations gave rise to the central issue of the case, that of informed
consent. The plaintiffs' application for class certification was denied by the
court. The court ruled that the potential class of patients treated at the
Westchester Network Site did not meet the criteria for class action status as
required by New York law. The plaintiffs appealed this decision. In June 1997,
the Appellate Division of the Supreme Court of the State of New York, Second
Department, affirmed the lower court's decision.
There are several 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.
Insurance
The Company and its affiliated Medical Practices are insured with respect
to medical malpractice risks on a claims made basis. Management is not aware of
any claims against it or its affiliated Medical Practices which might have a
material impact on the Company's financial position or results of operations.
NOTE 15 -- RELATED PARTY TRANSACTIONS:
In connection with the Company's acquisition of WMDC in June 1996 (see
Note 7), Morris Notelovitz, M.D., Ph.D. (the "Physician") became a member of the
Company's Board of Directors, and under two long term employment agreements (the
"Employment Agreements"), one being with the Company and the other with AWMC,
the Physician agreed to serve as Vice President for Medical Affairs and Medical
Director of the AWM Division and agreed to provide medical services under the
AWM Division, as defined, respectively. Effective January 1, 1997, Dr.
Notelovitz resigned from his position as a director of the Company and
terminated the Employment Agreements (medical services under the Employment
Agreement with AWMC will be terminated effective March 31, 1997). At December
31, 1996, Dr. Notelovitz was a greater than 5% shareholder of the Company's
outstanding Common Stock and remains a consultant to the Company (see Note 9).
SDL Consultants, a company owned by Sarason D. Liebler, who became a
director of the Company in August, 1994, rendered consulting services to the
Company during 1995 and 1996 for aggregate fees of approximately $22,000 and
$17,000, respectively.
F-22
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under its contract for a joint development program for genetic testing
with Genzyme, the Company funded approximately $134,000 and $56,000 in the
year-ended December 31, 1995 and 1996, respectively. The Company and Genzyme
mutually agreed to terminate this contract in December 1996; the Company
retained the right to use the technology developed under the contract through
such date.
NOTE 16 -- RESTRICTED CASH:
Included in other assets at December 31, 1995 was restricted cash of
$100,000 which represented a security deposit for a letter of credit outstanding
in connection with the lease for the Long Island Network Site. As of December
31, 1996, a security deposit was no longer required for this letter of credit.
NOTE 17 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
AND NON-CASH TRANSACTIONS:
In connection with the Company's acquisition of WMDC and NMF in June 1996,
the Company issued 666,666 shares of Common Stock, acquired tangible assets of
$469,000, assumed current liabilities of $245,000, and debt of $97,000, and
acquired $214,000 of intangible assets and $3,159,000 of goodwill. In connection
with this transaction, the Company also issued a note payable in the amount of
$600,000 with annual interest payable at 4.16%.
In May 1996, the Company entered into a management agreement with W.F.
Howard, M.D., P.A. located near Dallas, Texas. Pursuant to this agreement, the
Company incurred a $550,000 obligation for the exclusive right to manage this
facility.
Pursuant to its management agreement with the Philadelphia Network Site,
the Company incurred a $1,000,000 obligation for the exclusive right to manage
these facilities and assumed capital lease obligations of $89,000.
At December 31, 1995 and 1996 there were accrued dividends on Preferred
Stock outstanding of $946,000 and $331,000, respectively, (see Note 11).
Pursuant to the Offer (see Note 11), 1,136,122 shares of Preferred Stock
were converted into 3,408,366 shares of Common Stock and $227,224 in cash.
Included in recapitalization costs in 1994 was the $227,224 paid to converting
holders of Preferred Stock.
Pursuant to the Second Offer (see Note 11), 608,234 shares of Preferred
Stock were converted into 2,432,936 shares of Common Stock.
Controlled cash of Medical Practices decreased $34,000, $193,000 and
$105,000 for the year ended December 31, 1994, 1995, and 1996, respectively.
State taxes, which primarily reflect Massachusetts income taxes and
Connecticut capital taxes, of $150,000, $155,000 and $119,000 were paid in the
years ended December 31, 1994, 1995 and 1996, respectively.
Interest paid in cash during the year ended December 31, 1994, 1995 and
1996, amounted to $40,000, $20,000 and $35,000, respectively. Interest received
during the year ended December 31, 1994, 1995 and 1996 amounted to $498,000,
$648,000 and $412,000, respectively.
NOTE 18 -- SUBSEQUENT EVENTS -- (Unaudited):
Subsequent to December 31, 1996, the Company entered into two new asset
purchase and management agreements and terminated one management agreement under
the RSC Division as described below.
On January 7, 1997, the Company acquired certain assets of the Bay Area
Fertility and Gynecology Medical Group, a California partnership (the
"Partnership"), and acquired the right to manage the Bay Area
F-23
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fertility and Gynecology Medical Group, Inc., a California professional
corporation which is the successor to the Partnership's medical practice ("Bay
Area Fertility"). The aggregate purchase price was approximately $2.0 million,
consisting of $1.5 million in cash and $0.5 million in the form of the Company's
Common Stock, or 333,333 shares of the Company's Common Stock. In addition to
the exclusive right to manage Bay Area Fertility, the Company acquired other
assets which primarily consisted of the name "Bay Area Fertility" and medical
equipment and furniture and fixtures which will continue to be used by Bay Area
Fertility in the provision of infertility and ART services.
On February 28, 1997, the Company entered into agreements to acquire
certain assets of and the right to manage the Fertility Centers of Illinois, S.
C., a five physician group practice with six locations (the "Pending
Acquisition"). The aggregate purchase price for the Pending Acquisition is
approximately $8.6, approximately $6.6 million of which is payable in cash and
approximately $2.0 million of which is payable in shares of Common Stock, the
exact number of which will be determined based upon the average market price of
the Common Stock for the ten trading day period prior to closing of the Pending
Acquisition, subject to a minimum and maximum price per share. The closing of
the Pending Acquisition is conditioned upon the Company's raising at least $6
million in capital by August 28, 1997.
In June 1997, the Company acquired certain assets of and the right to
manage the Reproductive Sciences Center, Inc. ("RSMC"), a California
professional corporation located near San Diego (the "San Diego Acquisition").
The aggregate purchase price for the San Diego Acquisition was approximately
$900,000, consisting of $50,000 in cash and 145,454 shares of Common Stock. An
additional $650,000 is payable upon the achievement of certain milestones, at
RSMC's option, in cash or in shares of Common Stock, based on the closing market
price of the Common Stock on the third business day prior to issuance.
Effective January 31, 1997, the Company terminated its management
agreement with the Network Site in East Longmeadow, MA. Concurrently, the
Medical Practice at the Boston Network Site entered into an affiliate and
satellite agreement with the respective physician.
F-24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of
MPD Medical Associates (MA), P.C.
In our opinion, the accompanying balance sheet and related statement of
operations present fairly, in all material respects, the financial position of
MPD Medical Associates (MA), P.C. (the "P.C.") at December 31, 1995 and 1996,
and the results of its operations for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the P.C.'s
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 5, a statement of cash flows has been excluded from
the presentation of financial data related to the P.C., as under the terms of a
management agreement, IntegraMed America, Inc. controls all cash inflows and
outflows related to the P.C.'s operations.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Stamford, Connecticut
February 24, 1997
F-25
MPD MEDICAL ASSOCIATES (MA), P.C.
BALANCE SHEET
(all dollar amounts in thousands, except per share amounts)
ASSETS
December 31,
------------
1995 1996
---- ----
Current assets:
Cash .............................................. $2 $2
-- --
Total current assets ............................ 2 2
-- --
Total assets .................................... $2 $2
== ==
SHAREHOLDER'S EQUITY
Shareholder's equity:
Common Stock, $.01 par value -- 200,000
shares authorized, issued and outstanding
in 1995, 1996 and 1997, respectively............... $2 $2
-- --
Total shareholder's equity ...................... $2 $2
== ==
See accompanying notes to the financial statements.
F-26
MPD MEDICAL ASSOCIATES (MA), P.C.
STATEMENT OF OPERATIONS
(all amounts in thousands)
For the years ended
December 31,
--------------------------
1994 1995 1996
--------------------------
Revenues, net (see Note 2)..... $5,960 $6,594 $7,063
Physician compensation ........ 451 556 1,015
Management fee expense
(see Notes 1 and 2) ........ 5,509 6,038 6,048
------- ------ -------
Net income..................... $ -- $ -- $ --
======= ====== =======
See accompanying notes to the financial statements.
F-27
MPD MEDICAL ASSOCIATES (MA), P.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
MPD Medical Associates (MA), P.C. (the "P.C.") is a medical practice
located in the greater Boston, Massachusetts area which specializes in providing
gynecology and infertility services. The P.C. is 100% owned by Patricia McShane,
M.D.
The P.C. is managed by IntegraMed America, Inc. ("INMD") a public
physician practice management company. INMD has managed this practice since July
1988 and the term of its current management agreement with the P.C. (the
"management agreement") expires in January 2006. Pursuant to the management
agreement, the medical providers employed by the P.C. provide all medical
services and INMD provides all management and administrative services to the
P.C.'s medical practice. Under the management agreement, INMD has guaranteed
physician compensation, or medical practice retainage, and is liable for all
liabilities incurred by the P.C. and is at risk for any loss in the operation
thereof. As compensation for its management services, the P.C. pays INMD any
revenues remaining after payment of physician compensation. Out of these
remaining revenues INMD pays all other costs of services related to the P.C. and
the balance, if any, represents INMD's net management fee.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue and cost recognition --
Revenues consist of patient service revenues. Patient revenues are
recorded on a net realizable basis after deducting contractual allowances and
consist of patient fees collected by INMD on behalf of the P. C. for gynecology
and infertility services performed by the P.C. Patient revenues and related
direct costs are recognized in the period in which the clinical and/or
laboratory services are rendered. Net realization is dependent upon benefits
provided by the patient's insurance policy or agreements between the P.C. and
the third party payor.
Operating Assets and Liabilities --
Under the management agreement, INMD owns all operating assets of the P.C.
and is liable for all expenses and obligations of the P.C., therefore all
operating assets and liabilities related to the P.C.'s operations are reported
by INMD on its consolidated balance sheet.
Fixed assets --
INMD owns all of the fixed assets utilized by the P.C.'s medical
providers.
Management fee expense --
Management fee expense represents payment to INMD for management and
administrative services to the P.C.
Use of estimates in the preparation of the financial statements --
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management of the P.C. to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
F-28
MPD MEDICAL ASSOCIATES (MA), P.C
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3 -- DEPENDENCE UPON REIMBURSEMENT BY THIRD PARTY PAYORS:
In Massachusetts, state mandate requires insurance coverage of convential
infertility services as well as certain assisted reproductive technology
services. Approximately 85% to 91% of the P.C.'s revenues for the years ended
December 31, 1994, 1995 and 1996 and for the three months ended March 31, 1996
and 1997 were derived from revenues received from third party payors.
NOTE 4 -- RELATED PARTY INFORMATION:
Patricia McShane, M.D., who owns 100% of the outstanding common stock of
the P.C., has been a vice president of INMD in charge of Medical Affairs since
September 1992.
NOTE 5 -- CASH FLOW INFORMATION:
Under the management agreement INMD controls all cash inflows and outflows
related to the P.C.'s operations, therefore all operating, investing, and
financing cash flow activity is reported by INMD on its consolidated statement
of cash flows.
NOTE 6 -- SUBSEQUENT EVENT (unaudited):
Effective February 28, 1997, Patricia McShane, M.D. resigned as the vice
president of INMD in charge of Medical Affairsand in March 1997 she became a
director of INMD.
F-29
SCHEDULE II
INTEGRAMED AMERICA, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995 and 1994
Additions-
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions(1) Period
--------- -------- ------------- ------
Year Ended December 31, 1996
Allowance for
doubtful accounts $ 89,000 $344,000 $124,000 $309,000
Year Ended December 31, 1995
Allowance for
doubtful accounts $125,000 $119,000 $155,000 $ 89,000
Year Ended December 31, 1994
Allowance for
doubtful accounts $193,000 $289,000 $357,000 $125,000
- ---------------------------------------
(1) Uncollectible accounts written off.
S-1
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.
By: /s/ Gerardo Canet
----------------------------------------------
Gerardo Canet, President, Chief Executive
Officer and Director (Principal Financial and
Accounting Officer)
Dated: August 18, 1997