========================================================================================

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

 

OR

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

 

Commission File No. 0-20260

IntegraMed America, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

06-1150326

 

 

(State or other jurisdiction of incorporation or organization)

(IRS employer identification no.)

 

 


 

Two Manhattanville Road

 

 

 

Purchase, NY

10577

 

 

(Address of principal executive offices)

(Zip code)


(914) 253-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 (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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated filer  o

Accelerated Filer  x

 

 

Non-Accelerated filer  o

Smaller Reporting Company  o

 

 


Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes  o  No  x

The aggregate number of shares of the Registrant’s Common Stock, $.01 par value, outstanding on November 4, 2009 was approximately 8,781,000.

 

======================================================================================

 


INTEGRAMED AMERICA, INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1

 

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2009 and December 31,2008(restated)

3

 

 

 

 

 

 

Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2009 and 2008 (restated)

4

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity for the nine-month period ended September 30, 2009

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2009 and 2008 (restated)

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7-16

 

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17-28

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

 

Item 4.

 

Controls and Procedures

28-29

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1

 

Legal Proceedings

30

 

 

 

 

Item 1A.

 

Risk Factors

30-35

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

35

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

35

 

 

 

 

Item 5.

 

Other Information

35

 

 

 

 

Item 6.

 

Exhibits

35

 

 

 

 

SIGNATURES

36

 

 

 

 

CERTIFICATIONS PURSUANT TO RULE 13A-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

EXHIBITS

 

 

 

 

CERTIFICATIONS PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

EXHIBITS


 

2

 


INTEGRAMED AMERICA, INC.

CONSOLIDATED BALANCE SHEETS

(All amounts in thousands, except share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

 

2009

 

 

2008

 

 

 

 

(unaudited)

 

 

(restated)

 

ASSETS

 

 

 

 

 

 

 

Current Asset

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,186

 

$

28,275

 

Patient and other receivables, net

 

 

7,590

 

 

6,681

 

Deferred taxes

 

 

4,352

 

 

5,744

 

Other current assets

 

 

6,068

 

 

6,468

 

Total current assets

 

 

53,196

 

 

47,168

 

 

 

 

 

 

 

 

 

Fixed assets, net

 

 

16,674

 

 

16,618

 

Intangible assets, Business Service Rights, net

 

 

20,984

 

 

21,956

 

Goodwill

 

 

29,478

 

 

29,478

 

Trademarks

 

 

4,442

 

 

4,442

 

Other assets

 

 

3,682

 

 

1,781

 

Total assets

 

$

128,456

 

$

121,443

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

2,049

 

$

2,853

 

Accrued liabilities

 

 

18,823

 

 

17,818

 

Current portion of long-term notes payable and other obligations

 

 

11,335

 

 

11,351

 

Due to Fertility Medical Practices

 

 

10,551

 

 

6,354

 

Attain IVF deferred revenue and other patient deposits

 

 

12,996

 

 

11,237

 

Total current liabilities

 

 

55,754

 

 

49,613

 

 

 

 

 

 

 

 

 

Deferred and other tax liabilities

 

 

271

 

 

696

 

Long-term notes payable and other obligations

 

 

15,845

 

 

18,868

 

Total liabilities

 

 

71,870

 

 

69,177

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common Stock, $.01 par value – 15,000,000 shares authorized on September 30, 2009 and December 31, 2008, respectively, 8,781,150 and 8,645,994 shares issued and outstanding on September 30, 2009 and December 31, 2008, respectively

 

 

88

 

 

87

 

Capital in excess of par

 

 

56,011

 

 

54,943

 

Accumulated other comprehensive loss

 

 

(222

)

 

(375

)

Treasury stock, at cost – 46,408 and 22,682 shares on September 30, 2009 and December 31, 2008, respectively

 

 

(375

)

 

(211

)

Retained earnings (Accumulated deficit)

 

 

1,084

 

 

(2,178

)

Total shareholders’ equity

 

 

56,586

 

 

52,266

 

Total liabilities and shareholders’ equity

 

$

128,456

 

$

121,443

 

 

See accompanying notes to consolidated financial statements.

 

3

 


INTEGRAMED AMERICA, INC

CONSOLIDATED STATEMENT OF OPERATIONS

(all amounts in thousands, except per share amounts)

(unaudited)

 

 

 

For the

Three-month period

ended September 30,

 

For the

Nine-month period

ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

(restated)

 

 

 

 

 

(restated)

 

Revenues, net

 

 

 

 

 

 

 

 

 

 

 

 

 

Fertility Centers

 

$

35,964

 

$

36,505

 

$

109,538

 

$

104,302

 

Consumer Services

 

 

5,013

 

 

5,364

 

 

15,242

 

 

14,367

 

Vein Clinics

 

 

12,621

 

 

10,360

 

 

37,288

 

 

29,264

 

Total revenues

 

 

53,598

 

 

52,229

 

 

162,068

 

 

147,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of services and sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Fertility Centers

 

 

32,985

 

 

33,762

 

 

100,860

 

 

96,685

 

Consumer Services

 

 

3,945

 

 

4,012

 

 

11,501

 

 

10,333

 

Vein Clinics

 

 

11,626

 

 

9,468

 

 

34,257

 

 

27,337

 

Total costs of services and sales

 

 

48,556

 

 

47,242

 

 

146,618

 

 

134,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution

 

 

 

 

 

 

 

 

 

 

 

 

 

Fertility Centers

 

 

2,979

 

 

2,743

 

 

8,678

 

 

7,617

 

Consumer Services

 

 

1,068

 

 

1,352

 

 

3,741

 

 

4,034

 

Vein Clinics

 

 

995

 

 

892

 

 

3,031

 

 

1,927

 

Total contribution

 

 

5,042

 

 

4,987

 

 

15,450

 

 

13,578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

 

2,764

 

 

2,853

 

 

9,333

 

 

7,951

 

Interest income

 

 

(44

)

 

(95

)

 

(187

)

 

(324

)

Interest expense

 

 

303

 

 

403

 

 

869

 

 

1,208

 

Total other expenses

 

 

3,023

 

 

3,161

 

 

10,015

 

 

8,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

2,019

 

 

1,826

 

 

5,435

 

 

4,743

 

Income tax provision

 

 

791

 

 

727

 

 

2,173

 

 

1,909

 

Net income

 

$

1,228

 

$

1,099

 

$

3,262

 

$

2,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net earnings per share of Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.14

 

$

0.13

 

$

0.37

 

$

0.33

 

Diluted earnings per share

 

$

0.14

 

$

0.13

 

$

0.37

 

$

0.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

 

8,776

 

 

8,648

 

 

8,770

 

 

8,607

 

Weighted average shares - diluted

 

 

8,839

 

 

8,714

 

 

8,833

 

 

8,685

 

 

See accompanying notes to consolidated financial statements.

 

4

 


INTEGRAMED AMERICA, INC.

CONOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(all amounts in thousands)

(unaudited)

 

 

 

 

Common Stock

 

 

 

 

 

Treasury Shares

 

 

 

 

 

 

 

Shares

 

Amount

 

Capital in

Excess of Par

 

Accumulated Comprehensive Income (loss)

 

Shares

 

Amount

 

Accumulated Deficit

 

Total Equity

 

Balance at December 31, 2008(restated)

 

8,668

 

$

87

 

$

54,943

 

$

(375

)

 

23

 

$

(211

)

$

(2,178

)

$

52,266

 

Stock awards granted, net

 

142

 

 

1

 

 

(1

)

 

 

 

23

 

 

(164

)

 

 

 

(164

)

Restricted stock award and stock option expense amortization

 

 

 

 

 

1,038

 

 

 

 

 

 

 

 

 

 

1,038

 

Stock options exercised

 

17

 

 

 

 

31

 

 

 

 

 

 

 

 

 

 

31

 

Unrealized gain on hedging transaction

 

 

 

 

 

 

 

153

 

 

 

 

 

 

 

 

153

 

Net income for the nine months ended

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

3,262

 

 

3,262

 

 

Balance at September 30, 2009

 

8,827

 

$

88

 

$

56,011

 

$

(222)

 

 

46

 

$

(375)

 

$

1,084

 

$

56,586

 

 

See accompanying notes to consolidated financial statements.

 

 

5

 


INTEGRAMED AMERICA, INC.

STATEMENT OF CASH FLOWS

(all amounts in thousands)

 

 

 

For the Nine-month period

ended September 30,

 

 

 

 

2009

 

 

 

2008

 

 

 

 

 

(unaudited)

Restated

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,262

 

 

$

2,834

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,382

 

 

 

5,459

 

Deferred income tax provision

 

 

(836

)

 

 

(376

)

Stock-based compensation

 

 

1,038

 

 

 

617

 

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities —

 

 

 

 

 

 

 

 

Decrease (increase) in assets

 

 

 

 

 

 

 

 

Patient and other accounts receivable

 

 

(909

)

 

 

(1,235

)

Other current assets

 

 

400

 

 

 

433

 

Other assets

 

 

(149)

 

 

 

(323

)

(Decrease) increase in liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

(804

)

 

 

587

 

Accrued liabilities

 

 

841

 

 

 

(1,314

)

Due to fertility medical practices

 

 

4,197

 

 

 

(2,025

)

Attain IVF deferred revenue and other patient deposits

 

 

1,759

 

 

 

1,219

 

Net cash provided by operating activities

 

 

14,181

 

 

 

5,876

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of business service rights

 

 

 

 

 

(950

)

Cash paid to purchase VCA, net of cash acquired

 

 

 

 

 

(119

)

Purchase of other intangibles

 

 

 

 

 

(110

)

Purchase of fixed assets and leasehold     improvements, net

 

 

(4,466

)

 

 

(3,896

)

Net cash used in investing activities

 

 

(4,466

)

 

 

(5,075

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

 

 

 

380

 

Debt repayments, net

 

 

(2,835

)

 

 

(2,736

)

Common Stock transactions, net

 

 

31

 

 

 

261

 

Net cash used by financing activities

 

 

(2,804

)

 

 

(2,095

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

6,911

 

 

 

(1,294

)

Cash and cash equivalents at beginning of period

 

 

28,275

 

 

 

23,740

 

Cash and cash equivalents at end of period

 

$

35,186

 

 

$

22,446

 

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

812

 

 

$

1,012

 

Income taxes paid

 

$

3,658

 

 

$

1,483

 

See accompanying notes to consolidated financial statements.

 

6

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 — INTERIM RESULTS

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position at September 30, 2009, and the results of operations and cash flows for the interim periods presented. Operating results for the interim period are not necessarily indicative of results that may be expected for the year ending December 31, 2009. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in IntegraMed America’s Annual Report on Form 10-K/Amendment 2 for the year ended December 31, 2008 (to be filed by November 30, 2009).

 

NOTE 2 — RESTATEMENT OF REVENUE RECOGNITION FOR ATTAIN IVF PROGRAM:

 

On October 28, 2009, the management of IntegraMed America, Inc. (the “Company”) concluded and subsequently reported to the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) that the Company’s audited financial statements for the years ended December 31, 2006, 2007 and 2008 (collectively, the “Relevant Periods”) should no longer be relied upon and will be restated due to an understatement in revenue recognized in connection with its Attain IVF Refund Program within its Consumer Services Division.

 

As previously reported on a Current Report on Form 8-K filed on March 31, 2009, the Company restated certain financial statements after determining that they could not be relied upon. Specifically, the Company restated its prior financial statements with respect to the timing of revenue and profit recognition of $3,477,000 of the revenue related to its Attain IVF Refund Program (formerly “Shared Risk Refund Program”) within its Consumer Services Division for the years 2001 through 2008. That restatement did not impact the cash flows from operations of this program or the ultimate profits to be recognized, only the timing of the revenue and profit recognition.

 

Subsequent to the original restatement, the Company developed, programmed and tested a new patient management and revenue recognition system for the Attain IVF Refund Program. The new system recently reached sufficient operating proficiency to allow input of the patient information related to the Attain IVF Refund Program. As a result, the Company identified that the deferred revenue amount of $3,477,000, related to the years 2001 through 2008, that had been previously restated should have been only $822,000. The Company determined that while the previous system properly accounted for the recognition of the proportional fair value revenue related to the non-refundable portion of the patient fee (which was the subject of a comment and review process by the Staff of the Division of Corporation Finance of the Securities and Exchange Commission), it assumed all patients would either achieve pregnancy or utilize all services available to them under the program. It is a fact that most of the patients that seek a refund, do so prior to utilizing all services available under the program. As a result we failed to recognize as revenue a portion of the non-refundable fee on that class of patients.

 

 

7

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The change in our Statement of Operations and Consolidated Balance Sheet for the three and nine months ended September 30, 2008, and the twelve months ended December 31, 2008 is presented below (000’s, except per share amounts):

 

 

 

For the

Three-month period

ended September 30,

 

For the

Nine-month period

ended September 30,

 

For the

Twelve months

ended December 31,

 

 

 

 

2008

 

 

2008

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Revenue recognized from prior period

 

$

382

 

$

750

 

$

750

 

Revenue deferred to future period

 

 

(171

)

 

(171

)

 

 

Net change in period revenue

 

$

211

 

$

579

 

$

750

 

 

 

 

 

 

 

 

 

 

 

 

Revenue as reported

 

$

52,018

 

$

147,354

 

$

197,403

 

Net change in reported revenue

 

 

211

 

 

579

 

 

750

 

Revenue as restated

 

$

52,229

 

$

147,933

 

$

198,153

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes as reported

 

$

1,619

 

$

4,174

 

$

5,715

 

Net change in reported revenue

 

 

211

 

 

579

 

 

750

 

Net change in reserve for medical costs

 

 

(4

)

 

(10

)

 

(13

)

Income before income taxes as restated

 

$

1,826

 

$

4,743

 

$

6,452

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision as reported

 

$

640

 

$

1,670

 

$

2,227

 

Net change in income taxes from above

adjustments

 

 

87

 

 

239

 

 

309

 

Income tax provision as restated

 

$

727

 

$

1,909

 

$

2,536

 

 

 

 

 

 

 

 

 

 

 

 

Net income as reported

 

$

979

 

$

2,504

 

$

3,488

 

Summary of above adjustments

 

 

120

 

 

330

 

 

427

 

Net income as restated

 

$

1,099

 

$

2,834

 

$

3,915

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share as reported

 

$

0.11

 

$

0.29

 

$

0.40

 

Change in earnings per share from above

adjustments

 

 

0.02

 

 

0.04

 

 

0.05

 

Diluted earnings per share as restated

 

$

0.13

 

$

0.33

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities as reported

 

 

 

 

 

 

 

$

51,126

 

Cumulative effect of restatement on

current liabilities

 

 

 

 

 

 

 

 

(1,513

)

Current liabilities as restated

 

 

 

 

 

 

 

$

49,613

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity as reported

 

 

 

 

 

 

 

$

50,753

 

Cumulative effect of restatement on

Shareholders’ Equity

 

 

 

 

 

 

 

 

1,513

 

Shareholders’ Equity as restated

 

 

 

 

 

 

 

$

52,266

 

 

 

 

There was no change to cash flow as a result of this restatement.

 

8

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

For a complete description of our revenue recognition policy please refer to Note 3 – “Summary of Significant Accounting Policies” contained in our Annual Report on form 10-K for the year ended December 31, 2008.

All references to 2008 numbers hereafter have been updated to include the impact of this restatement.

 

NOTE 3 — EARNINGS PER SHARE:

The reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three month periods ended September 30, 2009 and 2008 is as follows (000's omitted, except for per share amounts):

 

 

 

For the three-month period

ended September 30,

 

For the nine-month period

ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

1,228

 

$

1,099

 

$

3,262

 

$

2,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (basic)

 

 

8,776

 

 

8,648

 

 

8,770

 

 

8,607

 

Effect of dilutive options and warrants

 

 

63

 

 

66

 

 

63

 

 

78

 

Weighted average shares and dilutive potential Common shares (diluted)

 

 

8,839

 

 

8,714

 

 

8,833

 

 

8,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.14

 

$

0.13

 

$

0.37

 

$

0.33

 

Diluted earnings per share

 

$

0.14

 

$

0.13

 

$

 

 

0.37

 

$

0.33

 

 

For both the three and nine month periods ended September 30, 2009, there were 127,845 outstanding options to purchase shares of Common Stock which were excluded from the computation of the diluted earnings per share amount as the exercise prices of these outstanding options were greater than the average market price of the shares of Common Stock.

For the three and nine month periods ended September 30, 2008, there were 127,845 and 15,845, respectively, outstanding options to purchase shares of Common Stock which were excluded from the computation of the diluted earnings per share amount as the exercise prices of these outstanding options were greater than the average market price of the shares of Common Stock.

 

NOTE 4 — SEGMENT INFORMATION:

We currently report three major operating segments and a corporate office that provides shared services. These three operating segments reflect our organizational structure, lines of responsibility and management’s perspective of the organization. Each segment includes an element of overhead costs specifically associated with its operations with the corporate shared services group responsible for support functions generic to all three segments.

Performance by segment, for the three and nine months ended September 30 2009 and 2008 are presented below (000’s omitted):

 

9

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

 

 

Fertility Centers

 

 

Consumer Services

 

 

Vein

Clinics

 

 

Corp G&A

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues, net

 

$

35,964

 

$

5,013

 

$

12,621

 

$

 

$

53,598

 

Cost of Services and Sales

 

 

32,985

 

 

3,945

 

 

11,626

 

 

 

 

48,556

 

Contribution

 

 

2,979

 

 

1,068

 

 

995

 

 

 

 

5,042

 

Operating margin

 

 

8.3%

 

 

21.3%

 

 

7.9%

 

 

 

 

9.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

 

 

 

 

 

 

2,764

 

 

2,764

 

Interest, net

 

 

(44)

 

 

 

 

 

 

303

 

 

259

 

Income before income taxes

 

$

3,023

 

$

1,068

 

$

995

 

$

(3,067

)

$

2,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense included above

 

$

1,018

 

$

 

$

221

 

$

222

 

$

1,461

 

Capital Expenditures

 

$

364

 

$

 

$

324

 

$

121

 

$

809

 

Total Assets

 

$

35,772

 

$

125

 

$

49,556

 

$

43,003

 

$

128,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues, net

 

$

109,538

 

 

15,242

 

$

37,288

 

$

 

$

162,068

 

Cost of Services and Sales

 

 

100,860

 

 

11,501

 

 

34,257

 

 

 

 

146,618

 

Contribution

 

 

8,678

 

 

3,741

 

 

3,031

 

 

 

 

15,450

 

Operating margin

 

 

7.9 %

 

 

24.5%

 

 

8.1%

 

 

 

 

9.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

 

 

 

 

 

 

9,333

 

 

9,333

 

Interest, net

 

 

(187)

 

 

 

 

 

 

869

 

 

682

 

Income before income taxes

 

$

8,865

 

$

3,741

 

$

3,031

 

$

(10,202

)

$

5,435

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense included above

 

$

3,107

 

$

1

 

$

640

 

$

663

 

$

4,411

 

Capital Expenditures

 

$

3,084

 

$

 

$

705

 

$

677

 

$

4,466

 

Total Assets

 

$

35,772

 

$

125

 

$

49,556

 

$

43,003

 

$

128,456

 

 

For the three months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues, net

 

$

36,505

 

$

5,364

 

$

10,360

 

$

 

$

52,229

 

Cost of Services and Sales

 

 

33,762

 

 

4,012

 

 

9,468

 

 

 

 

47,242

 

Contribution

 

 

2,743

 

 

1,352

 

 

892

 

 

 

 

4,987

 

Operating margin

 

 

7.5

%

 

25.2

%

 

8.6

%

 

%

 

9.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

 

 

 

 

 

 

2,853

 

 

2,853

 

Interest, net

 

 

(95

)

 

 

 

 

 

403

 

 

308

 

Income before income taxes

 

$

2,838

 

$

1,352

 

$

892

 

$

(3,256

)

$

1,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense included above

 

$

1,018

 

$

1

 

$

193

 

$

295

 

$

1,507

 

Capital Expenditures

 

$

37

 

$

 

$

104

 

$

147

 

$

288

 

Total Assets

 

$

37,533

 

$

371

 

$

46,603

 

$

28,808

 

$

113,315

 

 

 

10

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

 

 

Fertility Centers

 

 

Consumer Services

 

 

Vein

Clinics

 

 

Corp G&A

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues, net

 

$

104,302

 

$

14,367

 

$

29,264

 

$

 

$

147,933

 

Cost of Services and Sales

 

 

96,685

 

 

10,333

 

 

27,337

 

 

 

 

134,355

 

Contribution

 

 

7,617

 

 

4,034

 

 

1,927

 

 

 

 

13,578

 

Operating margin

 

 

7.3

%

 

28.1

%

 

6.6

%

 

%

 

9.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and Administrative

 

 

 

 

 

 

 

 

7,951

 

 

7,951

 

Interest, net

 

 

(323

)

 

 

 

(1)

 

 

1,208

 

 

884

 

Income before income taxes

 

$

7,940

 

$

4,034

 

$

1,928

 

$

(9,159

)

$

4,743

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense included above

 

$

3,235

 

$

2

 

$

566

 

$

679

 

$

4,482

 

Capital Expenditures

 

$

2,749

 

$

 

$

707

 

$

440

 

$

3,896

 

Total Assets

 

$

37,533

 

$

371

 

$

46,603

 

$

28,808

 

$

113,315

 

 

NOTE 5 – CASH AND CASH EQUIVALENTS:

Cash and cash equivalents consist of cash, short term marketable securities and accrued interest on these securities. To the extent that cash balances exceed short term operating needs, excess cash is invested in short term interest bearing instruments. It is our policy to restrict our investments to high-quality securities with fixed maturity dates and principle amounts. The composition of our cash and cash equivalents as of September 30, 2009 and December 31, 2008 is as follows (000’s omitted):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

 

(unaudited)

 

 

 

Cash

 

$

33,775

 

$

26,865

 

Short term investments

 

 

1,400

 

 

1,400

 

Accrued interest income

 

 

11

 

 

10

 

Total cash and cash equivalents

 

$

35,186

 

$

28,275

 

 

 

NOTE 6 – PATIENT AND OTHER RECEIVABLES, NET:

Patient and other receivables are principally comprised of gross patient and insurance receivables from our Vein Clinics segment which represent outstanding balances due for patient treatments less estimated allowances for insurance contractual agreements and uncollectible balances. Insurance contractual allowances are calculated based on recent allowance trends stratified by major payer category and uncollectible reserves are based on both historical trends and specific identification of specific accounts.

For the periods ended September 30, 2009 and December 31, 2008, we believe that our receivable reserves were adequate to provide for any contractual or collection issues.

The composition of our patient and other receivables as of September 30, 2009 and December 31, 2008 is as follows (000’s omitted):

 

11

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

Vein Clinic patient and insurance receivables

 

$

14,240

 

$

12,865

 

Reserve for insurance contractual allowance

 

 

(3,897

)

 

(3,866

)

Reserve for uncollectible accounts

 

 

(2,878

)

 

(2,648

)

Subtotal Vein Clinic receivables, net

 

 

7,465

 

 

6,351

 

Other receivables

 

 

125

 

 

330

 

Total Patient and other receivables, net

 

$

7,590

 

$

6,681

 

 

 

NOTE 7 – INTANGIBLE ASSETS:

Business Service Rights consist of fees and expenses paid in conjunction with service contracts associated with our Fertility Centers Partner program. These service contracts typically have ten to twenty five year initial lives with the associated service fees on some contracts refundable upon contract termination. We amortize our non-refundable Business Service Rights over the life of their applicable contract. Refundable Business Service Rights, which totaled approximately $6.1 million as of September 30, 2009, are not amortized because these funds will be returned to us upon contract termination.

Goodwill consists of amounts paid related to the acquisition of Vein Clinics of America, Inc. in excess of the fair value of net assets and liabilities acquired. We do not amortize our goodwill.

Trademarks are comprised of valuations assigned to assets associated with the Vein Clinics of America, Inc. acquisition as well as costs associated with our other trademark and service mark rights. We do not amortize our trademarks as they have an indefinite useful life.

 

We test all our individual intangible assets for impairment on a regular basis. To date no impairment has been incurred and therefore no impairment charges have been recognized in our financial statements.

 

 

NOTE 8 – DUE TO FERTILITY MEDICAL PRACTICES:

Due to Fertility Medical Practices is comprised of the net amounts owed by us to medical practices contracted as Fertility Centers. We do not consolidate the results of the Fertility Centers into our accounts. This balance is comprised of amounts due to us by the medical practices for funds, which we advanced for use in financing their accounts receivable, less balances owed to the medical practices by us for undistributed physician earnings and patient deposits we hold on behalf of the medical practices.

 

As of September 30, 2009 and December 31, 2008, Due to Fertility Medical Practices was comprised of the following balances (000’s omitted):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

Advances to Medical Practices

 

$

(13,952

)

$

(17,121

)

Undistributed Physician Earnings

 

 

3,716

 

 

3,205

 

Physician Practice Patient Deposits

 

 

20,787

 

 

20,270

 

Due to Fertility Medical practices, net

 

$

10,551

 

$

6,354

 

 

 

12

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 9 — NOTES PAYABLE AND OTHER OBLIGATIONS:

Notes payable and other obligations as of September 30, 2009 and December 31, 2008 consisted of the following (000’s omitted):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

Term Loan

 

$

19,035

 

$

21,809

 

Revolving Line of Credit

 

 

7,500

 

 

7,500

 

Derivative Fair valuation adjustment

 

 

406

 

 

609

 

Obligations under capital lease

 

 

239

 

 

301

 

 

 

 

 

 

 

 

 

Total notes payable and other obligations

 

$

27,180

 

$

30,219

 

Less — current portion

 

 

(11,335

)

 

(11,351

)

 

 

 

 

 

 

 

 

Long-term notes payable and other obligations

 

$

15,845

 

$

18,868

 

 

Our term loan and revolving line of credit are financed by Bank of America and are collateralized by substantially all of our assets. As of September 30, 2009 and December 31, 2008, we were in full compliance with all applicable debt covenants.

 

NOTE 10 – STOCK-BASED EMPLOYEE COMPENSATION:

We currently have three stock option plans which have been previously approved by the stockholders. All three plans are described more fully in Note 19 of the financial statements in our most recent Annual Report on Form 10-K. Under these plans, stock options and stock grants may be granted to employees, directors and such other persons as the Board of Directors determines will contribute to our success. Vesting periods are set by the Board of Directors and stock options are generally exercisable during a ten-year period following the date of grant. The Board of Directors has the authority to accelerate the maturity of any stock option or grant at its discretion, and all stock options and grants have anti-dilution provisions. Under all of our plans, options expire three months from the date of the holder’s termination of employment or twelve months in the event of disability or death. As of September 30, 2009, there were 464,933 shares available for granting under these Plans.

The following table sets forth information about the weighted-average fair value of options granted in 2008, and the fair value assumptions used. No options have been granted during 2009 to date:

 

 

 

For the three-month period

Ended September 30,

 

For the nine-month period

Ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Fair value of options granted

 

 

N/A

 

 

N/A

 

 

N/A

 

$

8.45

 

Dividend yield

 

 

N/A

 

 

N/A

 

 

N/A

 

 

0.0

%

Expected volatility

 

 

N/A

 

 

N/A

 

 

N/A

 

 

51.8

%

Risk free interest rate

 

 

N/A

 

 

N/A

 

 

N/A

 

 

4.0

%

Expected term in years

 

 

N/A

 

 

N/A

 

 

N/A

 

 

6.30

 

 

We recognize compensation cost for stock option plans over the vesting period which approximates the service period, based on the fair value of the option as of the date of the grant.

 

Stock option activity for the first nine months of 2009 under these plans is summarized below:

 

 

13

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

 

 

Number of shares of Common Stock underlying options

 

Weighted Average Exercise Price

 

Options outstanding at December 31, 2008

 

 

227,016

 

$

5.78

 

Granted

 

 

 

 

 

Exercised

 

 

(17,331

)

$

1.75

 

Canceled

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at September 30, 2009

 

 

209,685

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at:

 

 

 

 

 

 

 

December 31, 2008

 

 

99,171

 

$

2.34

 

September 30, 2009

 

 

115,780

 

$

4.27

 

 

The aggregate intrinsic value (difference between exercise price and current value of our common stock) of options outstanding and exercisable as of September 30, 2009 and December 31, 2008 was approximately $351,000 and $333,000, respectively.

We recorded a charge to earnings to recognize compensation expense related to outstanding stock options of $47,000 and $142,000 for the three and nine months ended September 30, 2009, respectively, and $47,000 and $57,000 for the three and nine months ended September 30, 2008, respectively. As of September 30, 2009, we had approximately $495,000 of unrecognized compensation costs related to stock options which will be recognized over their remaining vesting period, which approximates the service period.

We also issue restricted stock grants to officers and members of the Board of Directors. Stock granted to Board members vests immediately and stock granted to officers generally vests over a period of three to five years. Our General and Administrative expense includes compensation costs recognized in connection with these restricted stock grants of $251,000 and $896,000 for the three and nine month periods ended September 30, 2009, respectively, and $179,000 and $556,000 for the three and nine months ended September 30, 2008, respectively. As of September 30, 2009, we had approximately $1,402,000 of unrecognized compensation costs related to stock grants which will be recognized over their vesting period, which approximates the service period.

 

NOTE 11 INTEREST RATE HEDGING TRANSACTION:

In the normal course of business we are exposed to the risk that our earnings and cash flows could be adversely impacted by market driven fluctuations in the level of interest rates. It is our policy to manage these risks by using a mix of fixed and floating rate debt and derivative instruments.

In conjunction with our term loan agreement, executed during the third quarter of 2007, we entered into an interest rate swap agreement on a portion of that loan. This swap agreement is designed to hedge risks associated with a portion of our principle floating rate debt.

As a result of this agreement, our net income for the three and nine months ended September 30, 2009 included additional pre-tax financing costs of $116,000 and $279,000, respectively. We also expect to record additional pre-tax financing costs of approximately $300,000 related to this swap agreement over the coming twelve months, given current interest rate forecasts (these financing costs are expected to be offset by lower interest rates on the portion of the underlying term loan not covered by the interest rate swap).

In addition to the costs included in our reported net income, recording this hedge at fair value also generated a non-recognized tax effected gain of $71,000 and $153,000 for the three and nine months ended September 30, 2009, respectively. Recording the fair value of this hedge has also generated a non-recognized tax-effected loss of approximately $222,000 since its inception, which is reported as part of our comprehensive income. The fair value of this hedge was calculated in accordance with SFAS No. 157 – Fair Value Measurements, utilizing Level 2 inputs of quoted prices for similar liabilities in active markets.

 

14

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

We deem this hedge to be highly effective as it shares the same termination date and amortization schedule as the underlying debt subject to the hedge and the change in fair value inversely mimics the appropriate portion of the hedged item. As of September 30, 2009, we had no other hedge or derivative transactions.

The following table summarizes total comprehensive income (loss) for the applicable periods (000’s omitted):

 

 

 

For the three-month period

ended September 30,

 

For the nine-month period

ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income as reported

 

$

1,228

 

$

1,099

 

$

3,262

 

$

2,834

 

Unrealized gain (loss) on hedging transction

 

 

71

 

 

43

 

 

153

 

 

(96

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

1,299

 

$

1,142

 

$

3,415

 

$

2,738

 

 

 

NOTE 12— LITIGATION AND COMPLIANCE WITH HEALTHCARE REGULATIONS:

From time to time, we are party to legal proceedings in the ordinary course of business and are required to maintain compliance with extensive healthcare regulations. As of September 30, 2009, none of these proceedings or potential issues associated with healthcare regulation compliance are expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

NOTE 13 — RECENT ISSUED ACCOUNTING GUIDANCE:

FASB ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value

Issued: August 2009

 

ASU 2009-05 amends ASC 820 by providing additional guidance (including illustrative examples) clarifying the measurement of liabilities at fair value. When a quoted price in an active market for the identical liability is not available, the amendments in ASU 2009-05 require that the fair value of a liability be measured using one or more of the listed valuation techniques that should maximize the use of relevant observable inputs and minimize the use of unobservable inputs. In addition, the amendments in ASU 2009-05 clarify that when estimating the fair value of a liability, an entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The amendments also clarify how the price of a traded debt security (i.e., an asset value) should be considered in estimating the fair value of the issuer’s liability.

 

The amendments in ASU 2009-05 are effective for the first reporting period (including interim periods) beginning after its issuance. The adoption of ASU 2009-5 did not have a material impact on our consolidated financial statements.

 

FASB ASU 2009-13, Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements

 

Issued: October 2009

 

The consensus in ASU 2009-13 supersedes certain guidance in ASC 605-25, Revenue Recognition – Multiple Element Arrangements, and requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices (i.e., the relative-selling-price method). The consensus eliminates the use of the residual method of allocation (i.e., in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration) and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables subject to ASC 605-25.

 

15

 


INTEGRAMED AMERICA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

When applying the relative-selling-price method, the determination of the selling price for each deliverable must be consistent with the objective of determining vendor-specific objective evidence of fair value (VSOE); that is, the price at which the entity does or would sell the element on a stand-alone basis. This determination requires the use of a hierarchy designed to maximize the entity’s use of available, objective evidence to support its selling price. The entity must consider market conditions as well as entity-specific factors when estimating this selling price.

 

The amendments in ASU 2009-13 require both ongoing disclosures regarding an entity’s multiple-element revenue arrangements as well as certain transitional disclosures during periods after adoption. The objective of the ongoing disclosures is to provide information regarding the significant judgments and estimates made and their impact on revenue recognition. Additionally, disclosures will be made when changes in either those judgments or the application of the relative-selling-price method may significantly affect the timing or amount of revenue recognition. An entity will be required to aggregate these disclosures for similar types of arrangements.

 

All entities must have adopted the guidance in ASU 2009-13 no later than the beginning of their first fiscal year beginning on or after June 15, 2010. We are currently evaluating the impact, if any, ASU 2009-13 will have on our financial statements.                                                                          

 

16

 


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included in this report and with IntegraMed America, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of events could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed under the caption “Risk Factors” appearing under Item 4 included elsewhere in this Form 10Q.

 

Overview

 

We manage highly specialized outpatient centers in emerging, technology-based, niche medical markets. Currently, we are a leading manager of fertility centers and vein clinics in the United States. We provide services and products through our three operating divisions (Fertility Centers, Consumer Services and Vein Clinics) and shared support services for providers through our corporate offices. Each of our operating divisions is presented as a separate segment for financial reporting purposes.

 

Our Fertility Centers Division is a provider network of 11 contracted fertility centers, referred to as our Partner Program, serving 13 metropolitan markets across the United States. We offer products and services to these providers designed to support the fertility center’s growth. All fertility Partners also have full access to our Consumer Services Division offerings. The division also sponsors a Council of Physicians and Scientists for fertility providers. Physicians affiliated with our Partner fertility centers obtain a portion of their malpractice insurance through ARTIC — Assisted Reproductive Technology Insurance Company, a captive insurance company which we helped organize in 2005.

 

Our Consumer Services Division offers our Attain IVF programs to fertility patients. The division’s Attain IVF programs are designed to make the treatment process easier and more affordable for patients. Currently, this division maintains a contracted network of 25 independent fertility centers (23 as of December 31, 2008) under its Affiliate Program, which is designed to distribute the division’s products and services to a wider group of patients than those serviced by our Partner locations.

 

Our Vein Clinics Division began operations on August 8, 2007, with the purchase of Vein Clinics of America, Inc. (“VCA”), a company that had been in business since 1981. The Vein Clinics Division currently manages a network of 34 clinics (32 as of December 31, 2008) located in 13 states, which specialize in the treatment of vein disease and other vein disorders.

 

 

The primary elements of our business strategy include:

 

 

 

 

 

• 

Making selective contract acquisitions of Partner fertility centers;

 

 

 

 

• 

Expanding our network of Affiliate fertility centers;

 

 

 

 

• 

Developing de novo vein clinics;

 

 

 

 

• 

Increasing the total number of patients treated;

 

 

 

 

• 

Increasing the penetration of our Attain IVF programs; and

 

 

 

 

• 

Continuing to improve operating efficiencies.

 

 

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Major Events Impacting Financial Condition and Results of Operations

 

2009

 

On October 28, 2009, the management of the Company concluded and subsequently reported to the Audit Committee of the Company’s Board of Directors that the Company’s audited financial statements for the years ended December 31, 2006, 2007 and 2008 should no longer be relied upon and will be restated due to an understatement in revenue recognized in connection with its Attain IVF program within its Consumer Services Division. See Note 2 to the consolidated financial statements for additional information.

 

On April 20, 2009, we announced the opening of a new vein clinic in Cleveland, Ohio. This represents the 34th clinic in our Vein Clinics Division, our entry into the Cleveland market and the expansion of our presence in the State of Ohio.

 

On April 1, 2009, we elected to exercise the option contained in our business service agreement with Arizona Reproductive Medicine Specialists, based in Phoenix, Arizona, and expand our service offerings from a limited range of services to those offered to our other fertility Partners.

 

On January 20, 2009, we announced the opening of a new vein clinic in Cincinnati, Ohio. This represents the 33rd clinic in our Vein Clinics Division and our first entry into the State of Ohio and the Cincinnati market.

 

2008

 

From June 2008 through March 2009, our 2007 annual and our 2008 periodic interim Securities and Exchange Commission reports were the subject of a standard comment and review process by the Staff of the Division of Corporation Finance of the Securities and Exchange Commission. The application of generally accepted accounting principles to our Attain IVF Refund Program’s (formerly our Shared Risk Refund Program’s) multiple element revenue arrangements is complex and management’s interpretation of the applicable authoritative literature related to the timing of the recognition of the fair value of revenues for the non-refundable portion of the Attain IVF Refund Program fees differed from that of the Securities and Exchange Commission, which caused us to re-evaluate our revenue recognition policies. As a result, we restated our prior financial statements with respect to the timing of revenue recognition for our Attain IVF Refund Program within our Consumer Services Division. Our previous revenue recognition policy had generally recognized the non-refundable patient fees (generally 30% of the contract amount) as revenues upon the completion of the first treatment cycle. We now recognize the non-refundable fees based on the relationship of the fair value of each treatment to the total fair value of the treatment package available to each patient. We also recognize a “warranty reserve” representing the estimated cost of services to be provided in the event a qualified patient miscarries. This restatement does not impact our cash flows from operations or the ultimate profits from our Attain IVF Refund Program, only the timing of the revenue recognition for the non-refundable portion of the Attain IVF Refund Program fees paid by patients. See Note 2 of our consolidated financial statements included elsewhere in this prospectus. The financial data included in this prospectus reflects this restatement.

 

On December 17, 2008, we announced the opening of a new vein clinic in Skokie, Illinois. This clinic represents our ninth vein care clinic in the greater Chicago metropolitan area and benefits from the operational and marketing leverage we have developed in that market.

 

On December 8, 2008, we announced the opening of a new vein clinic in Monroeville, Pennsylvania. This clinic is our first vein clinic in Pennsylvania and is designed to provide state-of-the-art vein care to patients in the greater Pittsburgh area.

 

On July 9, 2008, we entered into a business services agreement to provide discrete business services to Arizona Reproductive Medicine Specialists, based in Phoenix, Arizona. Under the terms of this 25-year agreement, our service fees were initially comprised of a fixed percentage of the fertility practice’s net revenues.

 

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We also had the exclusive option, which we exercised on April 1, 2009, at any point during the life of the contract to expand our service offerings into a complete range of business, marketing and financial services. After we exercised the option on April 1, 2009, our fees also included a fixed percentage of the fertility practice’s earnings.

 

On June 23, 2008, we announced that we entered into a new Affiliate services contract with the University of North Carolina (“UNC”) School of Medicine’s Department of Obstetrics and Gynecology in Chapel Hill, North Carolina. As an Affiliate, UNC School of Medicine’s Department of Obstetrics and Gynecology receives distribution rights to our consumer products and services. In addition, UNC School of Medicine’s Department of Obstetrics and Gynecology has the right to receive other products and services uniquely designed to support the business needs of successful, high-growth fertility centers.

 

On June 5, 2008, we announced the opening of a new vein clinic in Marietta, Georgia. This clinic was our fourth vein clinic in Georgia.

 

On April 29, 2008, we announced the opening of a new vein clinic in Alexandria, Virginia. This addition to our Vein Clinics Division provides focused vein care treatment solutions to the Washington, D.C. metropolitan area.

 

On April 24, 2008, we entered into a business service agreement to supply a complete range of business, marketing and facility services to Southeastern Fertility Centers, P.A., located in Mount Pleasant, South Carolina. Under the terms of this 25-year agreement, our service fees are comprised of reimbursed costs of services, a tiered percentage of revenues and an additional fixed percentage of the practice’s earnings. We also committed up to $600,000 to fund any necessary capital needs of the practice.

 

On April 1, 2008, we entered into an Affiliate services contract with OU Physicians Reproductive Health in Oklahoma City, Oklahoma. As a result of this agreement, OU Physicians Reproductive Health provides another opportunity for our Consumer Services Division to distribute its product offerings.

 

2007

 

On August 30, 2007, we entered into a business service agreement to supply a complete range of business, marketing and facility services to the Center for Reproductive Medicine in Orlando, Florida. The Center for Reproductive Medicine is a fertility practice comprised of four physicians. Under the terms of this 25-year agreement, our service fees are comprised of reimbursed costs of services, a tiered percentage of revenues and an additional fixed percentage of the Center for Reproductive Medicine’s earnings. We also committed up to $1.0 million to fund any necessary capital needs of the practice.

 

On August 8, 2007, we acquired all of the outstanding stock of VCA for a total cost of approximately $29 million in cash and common stock. The results of VCA are included in our financial statements from the date of the acquisition.

 

Also on August 8, 2007, we entered into an amended credit agreement with Bank of America, N.A. (“Bank of America”). The new term loan under the amended credit agreement is in the amount of $25 million (the proceeds of which were applied to repay our original term loan and finance, in part, the VCA transaction). Interest on the new term loan is, at our option, at the prime rate less up to 0.50% or at LIBOR plus 2.00% to 2.75%, depending upon the level of the ratio of consolidated debt to earnings before interest, taxes depreciation and amortization (“EBITDA”). The amended credit agreement also contains provisions for a revolving line of credit in the amount of $10 million. Interest on the revolving line of credit is at the prime rate less up to 0.50% or at LIBOR plus 1.5% to 2.5%, depending on the level of the ratio of consolidated debt to EBITDA.

 

Effective July 1, 2007, we expanded our fertility center Partner service arrangement with Shady Grove Fertility Reproductive Science Center, P.C. (“Shady Grove”) with the addition of the Fertility Center of the Greater Baltimore Medical Center (the “Center”) in Baltimore, Maryland, where we now provide a full range of business, marketing and financial services. Under the terms of this agreement, we purchased the assets of the Center from Greater Baltimore Medical Center and have committed additional resources to support further

 

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growth and development of the Center. Under the terms of this agreement, we are paid service fees comprised of reimbursed costs of services and a fixed percentage of revenues, plus an additional fixed amount of the Center’s earnings.

 

On March 19, 2007, we declared a 25% common stock split effected in the form of a common stock dividend for all holders of record as of April 13, 2007. As a result of this dividend, 1,628,907 new shares of common stock were issued on the payment date of May 4, 2007. No fractional shares were issued as all fractional amounts were rounded up to the next whole share. All weighted average shares outstanding and earnings per share calculations in this prospectus have been restated to reflect this common stock dividend.

 

Significant Accounting Policies and Use of Estimates

 

Our significant accounting policies are described in Note 3 of our consolidated financial statements included out Form 10-K.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States, including our significant accounting policies, 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 periods. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for uncollectible accounts and contractual allowance reserves, contingencies and income taxes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements. The most significant use of estimates and assumptions in the preparation of our consolidated financial statements relates to the determination of net revenues and accounts receivable and reserves for estimated refunds due to pregnancy losses in our Attain IVF Refund Program.

 

Contractual allowance and uncollectible reserve amounts are determined based on historical collection performance data and are reviewed and adjusted monthly as necessary. We make periodic estimates for pregnancy loss based upon Company specific data.

Results of Operations

The following table shows the percentage of net revenue represented by various expenses and other income items reflected in our statements of operations for the three and nine month periods ended September 30, 2009 and 2008:

 

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For the three-month period

Ended September 30,

 

For the nine-month period

Ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues, Net

 

 

 

 

 

 

 

 

 

 

 

 

 

Fertility Centers

 

 

67.1

%

 

69.9

%

 

67.6

%

 

70.5

%

Consumer Services

 

 

9.4

%

 

10.3

%

 

9.4

%

 

9.7

%

Vein Clinics

 

 

23.5

%

 

19.8

%

 

23.0

%

 

19.8

%

Total revenues

 

 

100.0

%

 

100.0

%

 

100.0

%

 

100.0

%