===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-20260
IntegraMed America, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 06-1150326
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
Two Manhattanville Road
Purchase, New York 10577
(Address of principal executive offices) (Zip code)
(914) 253-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12 b-2).
Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act ).
Yes [ ] No [X]
The aggregate number of shares of the Registrant's Common Stock, $.01
par value, outstanding on October 26, 2005 was 5,091,528.
===============================================================================
INTEGRAMED AMERICA, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 2005
and December 31, 2004...................................... 3
Consolidated Statements of Income for the three-month and
nine-month periods ended September 30, 2005 and 2004 ...... 4
Consolidated Statements of Shareholders' Equity for the
nine-month period ended September 30, 2005. .............. 5
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2005 and 2004 ................. 6
Notes to Consolidated Financial Statements .................7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 20
Item 4. Controls and Procedures....................................... 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities......................................... 21
Item 3. Defaults upon Senior Securities................................. 21
Item 4. Submission of Matters to a Vote of Security Holders..............21
Item 5. Other Information................................................21
Item 6. Exhibits ........................................................21
SIGNATURES .......................................................22
CERTIFICATIONS PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.......................EXHIBITS
CERTIFICATIONS PURSUANT TO 18 U.S.C ss.1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.......................EXHIBITS
2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
INTEGRAMED AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(all dollars in thousands, except per share amounts)
ASSETS
September 30, December 31,
------------- ------------
2005 2004
------------ ----------
(unaudited)
Current assets:
Cash and cash equivalents ........................................................ $ 13,245 $ 11,300
Pharmaceutical sales accounts receivable, net .................................... 1,571 1,259
Deferred income taxes, net ....................................................... 1,005 1,950
Prepaids and other current assets ................................................ 3,074 2,043
-------- --------
Total current assets ......................................................... 18,895 16,552
Long-term assets:
Fixed assets, net ................................................................ 15,617 14,868
Intangible assets, net ........................................................... 22,788 20,519
Deferred income taxes,net ........................................................ 1,717 1,366
Other assets ..................................................................... 604 410
-------- --------
Total assets ................................................................. $ 59,621 $ 53,715
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 825 $ 519
Accrued liabilities .............................................................. 7,107 7,451
Current portion of long-term notes payable and other obligations ................. 5,233 2,218
Due to Medical Practices, net .................................................... 4,927 3,291
Shared Risk Refund patient deposits .............................................. 5,267 2,772
-------- --------
Total current liabilities .................................................... 23,359 16,251
Long-term notes payable and other obligations .................................... 93 3,021
-------- --------
Total Liabilities ............................................................ 23,452 19,272
Stockholders' Equity:
Common Stock, $.01 par value - 15,000,000 and 15,000,000 shares authorized in
2005 and 2004 respectively; and 5,091,528 and 4,741,466 shares issued in
2005 and 2004, respectively .................................................. 51 47
Capital in excess of par value ................................................... 49,757 48,467
Deferred compensation ............................................................ (520) (293)
Treasury stock, at cost - 105,768 and 52,711 shares in 2005 and 2004, respectively (937) (337)
Accumulated deficit .............................................................. (12,182) (13,441)
-------- --------
Total stockholders' equity ................................................... 36,169 34,443
-------- --------
Total liabilities and stockholders' equity ................................... $ 59,621 $ 53,715
======== ========
See accompanying notes to the consolidated financial statements.
3
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(all amounts in thousands, except per share amounts)
For the For the
three-month period nine-month period
ended September 30, ended September 30,
------------------- -------------------
2005 2004 2005 2004
------- -------- --------- --------
(unaudited) (unaudited)
Revenues, net:
FertilityPartners , net of Service Rights amortization
of $354 and $1,061 in 2005, respectively, and $261
and $903 in 2004, respectively ........................ $ 26,540 $ 21,535 $ 77,596 $ 63,608
Pharmaceutical ............................................ 4,871 4,102 14,054 11,771
FertilityDirect ........................................... 2,565 1,579 6,526 4,124
-------- -------- -------- --------
Total ................................................. 33,976 27,216 98,176 79,503
Cost of services and sales:
FertilityPartners, including depreciation of $889 and
$2,633 in 2005, respectively, and $632 and $1,926 in
2004, respectively ................................... 23,739 19,136 69,743 56,983
Pharmaceutical ............................................ 4,671 3,958 13,481 11,331
FertilityDirect ........................................... 1,646 989 4,084 2,810
-------- -------- -------- --------
Total ................................................. 30,056 24,083 87,308 71,124
Contribution:
FertilityPartners ......................................... 2,801 2,399 7,853 6,625
Pharmaceutical ............................................ 200 144 573 440
FertilityDirect ........................................... 919 590 2,442 1,314
-------- -------- -------- --------
Total ................................................. 3,920 3,133 10,868 8,379
Other expenses (income):
General and administrative expenses, including depreciation
of $85 and $286 in 2005, respectively, and $87 and
$253 in 2004, respectively ............................ 3,204 2,556 8,903 6,928
Interest income ........................................... (137) (65) (352) (185)
Interest expense .......................................... 121 77 288 229
-------- -------- -------- --------
Total ................................................. 3,188 2,568 8,839 6,972
Income before income taxes ................................... 732 565 2,029 1,407
Income tax provision ......................................... 254 225 770 560
-------- -------- -------- --------
Net income ................................................... $ 478 $ 340 $ 1,259 $ 847
======== ======== ======== ========
Basic earnings per share ..................................... $ 0.10 $ 0.07 $ 0.26 $ 0.18
======== ======== ======== ========
Diluted earnings per share ................................... $ 0.10 $ 0.07 $ 0.25 $ 0.17
======== ======== ======== ========
Weighted average shares - basic .............................. 4,884 4,616 4,790 4,667
======== ======== ======== ========
Weighted average shares - diluted ............................ 5,057 4,807 4,946 4,919
======== ======== ======== ========
See accompanying notes to the consolidated financial statements.
4
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(all amounts in thousands)
(unaudited)
Total
Common Stock Capital in AccumulatedTreasury Stock Deferred Shareholders'
Shares Amount Excess of Par Deficit Shares Amount Compensation Equity
------ ------ ------------- ------- ------ ------ ------------ ------
BALANCE AT DECEMBER 31, 2004 4,741 $47 $48,467 $(13,441) 53 $(337) $(293) $34,443
Options and warrants exercised 298 3 853 -- 49 (559) -- 297
Stock grants issued, net 52 1 437 -- 4 (41) (451) (54)
Stock grant amortization -- -- -- -- -- -- 224 224
Net income for the nine month ended
September 30, 2005 -- -- -- 1,259 -- -- -- 1,259
---------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2005 5,091 $51 $49,757 $(12,182) 106 $(937) $(520) $36,169
======================================================================================
See accompanying notes to the consolidated financial statements.
5
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts in thousands)
For the
nine-month period
ended September 30,
--------------------
2005 2004
-------- ------
(unaudited)
Cash flows from operating activities:
Net income .................................................................................. $ 1,259 $ 847
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................................................. 3,980 3,082
Deferred income taxes ..................................................................... 594 476
Deferred compensation ..................................................................... 224 73
Change in assets and liabilities --
Decrease (increase) in assets:
Pharmaceutical sales accounts receivable ............................................... (312) (200)
Prepaids and other current assets ...................................................... (1,031) 1,839
Other assets ........................................................................... (194) (90)
Increase (decrease) in liabilities:
Accounts payable ...................................................................... 306 (469)
Accrued liabilities ................................................................... (385) 3,054
Due to Medical Practices .............................................................. 1,636 4,662
Shared Risk Refund patient deposits ................................................... 2,495 823
-------- --------
Net cash provided by operating activities ...................................................... 8,572 14,097
-------- --------
Cash flows used in investing activities:
Payment for Exclusive Service Rights ...................................................... (3,329) (1,204)
Trademarks ................................................................................ -- (39)
Purchase of fixed assets and leasehold improvements ....................................... (3,669) (4,953)
-------- --------
Net cash used in investing activities .......................................................... (6,998) (6,196)
-------- --------
Cash flows provided by (used in) financing activities:
Proceeds from revolving debt agreement .................................................... 1,000 --
Principal repayments on debt .............................................................. (863) (925)
Principal repayments under capital lease obligations ...................................... (50) (43)
Proceeds from exercise of common stock warrants and options ............................... 284 523
Repurchase of common stock ................................................................ -- (445)
-------- --------
Net cash provided by (used in) financing activities ............................................ 371 (890)
-------- --------
Net change in cash and cash equivalents ........................................................ 1,945 7,011
Cash and cash equivalents at beginning of period ............................................... 11,300 6,885
-------- --------
Cash and cash equivalents at end of period ..................................................... $ 13,245 $ 13,896
======== ========
Supplemental Information:
Interest paid............................................................................. $ 282 $ 228
Income taxes paid......................................................................... $ 969 $ 75
See accompanying notes to the consolidated financial statements.
6
INTEGRAMED AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 -- INTERIM RESULTS:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, accordingly, do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying unaudited interim financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the financial position at September 30, 2005, 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, 2005. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in IntegraMed America's (the "Company") Annual Report on Form
10-K for the year ended December 31, 2004.
Certain amounts in the December 31, 2004 and the interim 2004 presentations
have been reclassified to conform with the 2005 presentation. See Note 2 and
Note 8.
NOTE 2 -- COMMON SHARES OUTSTANDING:
All common share numbers reported herein reflect the 30% Stock Split
effected in the form of a Dividend declared by the Board of Directors on May 23,
2005 and paid to shareholders on June 22, 2005.
NOTE 3 -- EARNINGS PER SHARE:
The reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the three month and nine-month periods ended
September 30, 2005 and 2004 is as follows (000's omitted, except for per share
amounts):
For the For the
three-month period nine-month period
ended September 30, ended September 30,
------------------- -------------------
2005 2004 2005 2004
--------- --------- --------- --------
Numerator
Net Income ................................... $ 478 $ 340 $1,259 $ 847
Denominator
Weighted average shares outstanding (basic) .. 4,884 4,616 4,790 4,667
Effect of dilutive options and warrants ...... 173 191 156 252
------ ------ ------ ------
Weighted average shares and dilutive potential
Common shares (diluted) ...................... 5,057 4,807 4,946 4,919
Basic EPS .................................... $ 0.10 $ 0.07 $ 0.26 $ 0.18
Diluted EPS .................................. $ 0.10 $ 0.07 $ 0.25 $ 0.17
For the three-month and nine-month period ended September 30, 2005, there
were no outstanding options or warrants to purchase shares of Common Stock which
were excluded from the computation of the diluted earnings per share amount as
the exercise prices of all outstanding options and warrants were less than the
average market price of the shares of Common Stock.
For the three-month period ended September 30, 2004, the effect of the
assumed exercise of options to purchase approximately 10,000 shares of Common
Stock at an exercise price of $6.15 per share was excluded in computing the
diluted per share amount because the exercise prices of the options were greater
than the
7
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
average market price of the shares of Common Stock, therefore causing these
options to be anti-dilutive. For the nine-month period ended September 30, 2004,
there were no outstanding options to purchase shares of Common Stock which were
excluded from the computation of the diluted earnings per share amount as the
exercise price of all outstanding options was less than the average market price
of the shares of Common Stock.
NOTE 4 -- SEGMENT INFORMATION:
The Company is principally engaged in providing products and services to
the fertility market. For disclosure purposes, the Company recognizes Business
Services offered to its network of FertilityPartners and its pharmaceutical
distribution operations as separate reporting segments. The Business Services
segment includes revenues and costs categorized as FertilityPartners Service
Fees and FertilityDirect Revenues, as follows (000's omitted):
Business Pharmaceutical
Corporate Services Distribution Consolidated
--------- -------- ------------ ------------
For the three months ended September 30, 2005
Revenues...................................... $ -- $29,105 $4,871 $33,976
Cost of services and sales.................... -- 25,385 4,671 30,056
------ ------- ------- -------
Contribution.................................. -- 3,720 200 3,920
General and administrative costs.............. 3,204 3,204
Interest, net................................. (16) (16)
------ ------- ------- -------
Income before income taxes.................... (3,188) 3,720 200 732
====== ======= ======= =======
Depreciation expense included above........... 974
Capital expenditures.......................... 250 404 -- 654
Total assets.................................. 13,512 44,113 1,996 59,621
For the nine months ended September 30, 2005
Revenues...................................... $ -- $84,122 $14,054 $98,176
Cost of services and sales.................... -- 73,827 13,481 87,308
------ ------- ------- -------
Contribution.................................. -- 10,295 573 10,868
General and administrative costs.............. 8,903 8,903
Interest, net................................. (64) (64)
------ ------- ------- -------
Income before income taxes.................... (8,839) 10,295 573 2,029
====== ======= ======= =======
Depreciation expense included above........... 2,919
Capital expenditures.......................... 813 2,856 -- 3,669
Total assets.................................. 13,512 44,113 1,996 59,621
8
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
Business Pharmaceutical
Corporate Services Distribution Consolidated
--------- -------- ------------ ------------
For the three months ended September 30, 2004
Revenues........................................... $ -- $23,114 $4,102 $27,216
Cost of services.............................. -- 20,125 3,958 24,083
------ ------- ------- ---------
Contribution.................................. -- 2,989 144 3,133
General and administrative costs.............. 2,556 2,556
Interest, net................................. 12 12
------ ------- ------- ---------
Income before income taxes.................... (2,568) 2,989 144 565
====== ======= ======= =========
Depreciation expense included above........... 719
Capital expenditures.......................... 316 1,687 2,003
Total assets.................................. 37,831 13,761 2,123 53,715
For the nine months ended September 30, 2004
Revenues........................................... $ -- $67,732 $11,771 $79,503
Cost of services.............................. -- 59,793 11,331 71,124
------ ------- ------- ---------
Contribution.................................. -- 7,939 440 8,379
General and administrative costs.............. 6,928 6,928
Interest, net................................. 44 44
------ ------- ------- ---------
Income before income taxes.................... (6,972) 7,939 440 1,407
====== ======== ========== ========
Depreciation expense included above........... 2,179
Capital expenditures.......................... 458 4,495 -- 4,953
Total assets.................................. 37,831 13,761 2,123 53,715
NOTE 5 -- STOCK-BASED EMPLOYEE COMPENSATION:
As of September 30, 2005, the Company had two stock-based employee
compensation plans, which are described more fully in Note 12 of the Company's
financial statements in its most recent Annual Report on Form 10-K. Prior to
fiscal 2003, the Company accounted for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Under this standard, no stock
option-based employee compensation cost is reflected in net income, as all
options granted under the plans had an exercise price equal to the market value
of the underlying Common Stock on the date of grant. Effective July 1, 2003, the
Company adopted the fair value recognition provisions of FAS No. 148. Under the
Prospective transition method selected by the Company, fair value accounting is
applied to all new stock grants and modifications to old grants since January 1,
2003. Disclosure of pro-forma net income and EPS is continued for any
pre-adoption grants. No options have been granted subsequent to the adoption of
FAS No. 148.
9
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
The following table illustrates the effect on net income and earnings per
share as if the fair value based method had been applied to all outstanding and
unvested awards in each period. (000's omitted, except per share amounts).
For the For the
three-month period nine-month period
ended September 30, ended September 30,
------------------- -------------------
2005 2004 2005 2004
------- -------- ------- -------
Net Income, as reported................................ $478 $340 $1,259 $847
Add: Stock-based employee compensation expense
included in reported net income, net of related tax
effects................................................ 64 38 139 44
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects............. (111) (99) (272) (227)
---- ------ ------ -----
Pro forma net income................................... 431 279 1,126 664
==== ===== ====== =====
Earnings per share:
Basic-as reported................................. $0.10 $0.07 $0.26 $0.18
Basic-pro forma................................... $0.09 $0.06 $0.24 $0.14
Diluted-as reported............................... $0.10 $0.07 $0.25 $0.17
Diluted-pro forma................................. $0.09 $0.06 $0.23 $0.13
NOTE 6 -- LITIGATION
As of September 30, 2005, there are no legal proceedings to which the
Company is a party.
NOTE 7 -- RECENT ACCOUNTING STANDARDS
The Company discloses its critical accounting policies in its Form 10-K
filed with the Securities and Exchange Commission. Since December 31, 2004, none
of those policies has changed, nor has any been added.
In December 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 123R, "Share-Based Payment," which is a revision of SFAS
No. 123, "Accounting For Stock-Based compensation." SFAS 123R requires that all
share based compensation, including current grants and the unvested portion of
stock options previously issued, is to be recognized in the income statement
based on their fair value as of date of issue. This Statement is effective for
the fiscal year beginning January 1, 2006, and is expected to increase our
General and Administrative expense, and reduce pre-tax income by approximately
$87,000 for the year ending December 31, 2006, based on unvested stock options
currently outstanding.
NOTE 8 -- CHANGE IN PRESENTATION: DUE TO MEDICAL PRACTICES
In order to more properly reflect our relationship with our Partner
Practices, Due to Medical Practices now includes deposits from patients for
medical services to be performed. As a result of this change in presentation,
Total Assets and Total Liabilities were each reduced by $9.9 million and $8.1
million as of September 30, 2005 and December 31, 2004, respectively. There was
no change to working capital, cash flow from operations or results of operations
in any reporting period.
10
Due to Medical Practices is now comprised of funds due the Company from
advances to our FertilityPartners as financing for their patient and insurance
receivables, less amounts due FertilityPartners for undistributed physician
earnings and deposits received from patients in advance of medical services to
be performed.
As of September 30, 2005 and December 31, 2004, Due to Medical Practices
were comprised of the following balances:
September 30, December 31,
------------- ------------
2005 2004
------------- -------------
Advances to FertilityPartners............ $13,602 $12,160
Undistributed Physician Earnings......... (3,712) (4,030)
Patient Deposits......................... (14,817) (11,421)
------- -------
Due to Medical Practices, net............ $(4,927) $(3,291)
======= =======
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included in this
quarterly report and with IntegraMed America Inc.'s Annual Report on Form 10-K
for the year ended December 31, 2004.
Overview
IntegraMed America, Inc. (the "Company") offers products and services to
patients and providers in the fertility industry. The IntegraMed Network is
comprised of twenty-five fertility centers in major markets across the United
States, a pharmaceutical products and services subsidiary, a financing
subsidiary, the Council of Physicians and Scientists, and a leading fertility
portal (www.integramed.com). Seventeen affiliate fertility centers purchase
discrete service packages provided by the Company and eight fertility centers
have access to the entire portfolio of products and services under the
comprehensive FertilityPartners(TM) program. All twenty-five centers have access
to the Company's consumer services, principally pharmaceutical products and
patient financing products.
The primary elements of the Company's strategy include: (i) expanding the
IntegraMed Provider Network into new major markets; (ii) increasing the number
and value of service packages purchased by members of the IntegraMed Provider
Network; (iii) entering into additional FertilityPartners contracts; (iv)
increasing revenues at contracted FertilityPartners centers; (v) increasing the
number of Shared Risk Refund treatment packages sold to patients of the
IntegraMed Provider Network and managing the risk associated with the Shared
Risk Refund program; and (vi) increasing sales of pharmaceutical products and
services.
Major events impacting financial condition and results of operations
During 2003, the Company negotiated revised fee structures on three of its
existing FertilityPartner contracts. In all three of these contracts, the
company began a phased-in fee reduction, which commenced in the first quarter of
2004, and is expected to extend through 2006. Beginning in the year 2006, these
revised contracts contain a maximum limit on the amount of fees the Company can
earn, which are based on the earnings of the underlying fertility centers. The
maximum limitation on one contract is below the fees expected to be earned by
the Company on this contract in 2005. The company's other FertilityPartner
agreements do not contain fee reduction or fee limitation provisions.
On January 1, 2004, the Company signed a FertilityPartner agreement with
the Seattle, Washington based Seattle Reproductive Medicine, Inc., P.S. ("SRM")
physician practice. Under the terms of this 15-year agreement, the Company's
service fees are comprised of reimbursed costs of services, a tiered percentage
of revenues, and an additional fixed percentage of SRM's earnings. The Company
also committed up to $2 million to fund the construction and equipping of a new
state-of-the-art facility to house the clinical practice and embryology
laboratory for SRM and its patients. Based on the terms of this transaction,
IntegraMed was paid a fixed service fee for approximately eleven months of 2004
until the new facility was fully operational in December 2004. Upon becoming
fully operational, IntegraMed's service fees reverted to the fee structure
described above.
Effective January 1, 2005, the Company signed a FertilityPartner agreement
to supply a complete range of business, marketing and facility services to the
Reproductive Partners Medical Group, Inc., a fertility practice comprised of six
physicians in the Southern California market. Under the terms of this 25-year
agreement, IntegraMed has committed up to $0.5 million to fund any necessary
capital needs of the practice. Based on the terms of the transaction,
IntegraMed's service fees will be comprised of the Company's standard reimbursed
costs of services, a tiered percentage of revenues, plus an additional fixed
percentage of the center's earnings.
12
Effective January 1, 2005, the Company became a minority equity investor in
the Assisted Reproductive Technology Insurance Company, LLC, ("ARTIC"). ARTIC is
incorporated as an off-shore captive insurance company designed to offer
malpractice insurance to physicians within the IntegraMed network. IntegraMed's
equity investment of $50,000 represents a 10% ownership stake, which is
accounted for on the equity basis. The remaining equity of ARTIC is owned by
participating physician groups. IntegraMed has agreed to provide certain
administrative and risk management related services to ARTIC for a predetermined
fee.
On May 23, 2005, the Company declared a 30% stock split effected in the
form of a stock dividend for all holders of record as of June 8, 2005. As a
result of this dividend, 1,129,141 new shares of the Company's common stock were
issued on the payment date of June 22, 2005. 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 have been
restated to reflect the stock split.
During the second quarter of 2005 the Company and Theralogix, a developer
of evidence-based nutritional supplements, announced the launch of Fertility
Sciences, LLC, a new venture committed to developing nutritional supplements to
help enhance fertility. Fertility Science's mission is to facilitate the
responsible use of evidence-based, complementary therapies in reproductive
practice. The company distributes a limited number of evidence-based nutritional
supplements, which are formulated and endorsed by leading fertility specialists,
and certified for purity and content accuracy. The company's first product
offering, ConceptionXR for Men, targets male factor infertility. The supplement
is intended to benefit fertility providers and patients by providing a product
whose formula is vetted by highly-credentialed scientists and whose
manufacturing, bottling and labeling is overseen by NSF International, a global
leader in independent third-party certification.
Subsequent to September 30, 2005, the Company and ivpcare, inc. entered
into a new agreement and canceled their agreement of January 16, 2002. Under the
prior agreement, the Company was a distributor of pharmaceutical products to
patients of its affiliated practices. The Company outsourced fulfillment of its
distribution efforts to ivpcare while retaining its responsibilities for
marketing and financing cash flow and the related accounts receivable. As a
result, the Company recorded all sales, cost of sales and other costs related to
this operation. The new agreement calls for ivpcare to take over
responsibilities for financing cash flow and the related accounts receivable.
The Company will retain its marketing duties and will be paid a fee for those
services. Those fees will approximate the Company's current contribution from
operations from pharmaceutical sales and services, and will be shown on a "net"
rather than "gross" basis. As a result, the Company will no longer record
pharmaceutical sales, the related cost of sales and other costs related to
pharmaceutical distribution. Beginning in the fourth quarter of 2005, we believe
revenues and cost of sales will be reduced by significant amounts, however
(assuming the same volume of pharmaceutical products is distributed)
contribution from operations and income before income taxes, as well as net
income, will be virtually unaffected from this contract change.
13
Results of Operations
The following table shows the percentage of net revenues represented by
various expense and other income items reflected in our Consolidated Statement
of Operations.
For the For the
three-month period nine-month period
ended September 30, ended September 30,
------------------- -------------------
2005 2004 2005 2004
----- ------ ------ ------
(unaudited)
Revenues, net
FertilityPartners ............... 78.1% 79.1% 79.0% 80.0%
Pharmaceutical .................. 14.3% 15.1% 14.3% 14.8%
FertilityDirect ................. 7.6% 5.8% 6.7% 5.2%
------ ------ ------ ------
Total ........................... 100.0% 100.0% 100.0% 100.0%
Costs of services incurred:
FertilityPartners ............... 69.9% 70.3% 71.0% 71.1%
Pharmaceutical .................. 13.7% 14.6% 13.7% 14.3%
FertilityDirect ................. 4.9% 3.6% 4.2% 3.5%
------ ------ ------ ------
Total ........................... 88.5% 88.5% 88.9% 89.5%
Contribution
FertilityPartners ............... 8.2% 8.8% 8.0% 8.3%
Pharmaceutical .................. 0.6% 0.6% 0.6% 0.6%
FertilityDirect ................. 2.7% 2.2% 2.5% 1.7%
------ ------ ------ ------
Total ........................... 11.5% 11.4% 11.1% 10.6%
General and administrative expenses... 9.4% 9.4% 9.1% 8.7%
Interest income....................... (0.4)% (0.3)% (0.4)% (0.3)%
Interest expense...................... 0.4% 0.2% 0.3% 0.2%
------ ------ ------ ------
Total other expenses............. 9.4% 9.4% 9.0% 8.7%
Income before income taxes............ 2.2% 2.1% 2.1% 1.8%
Provision for income taxes............ 0.8% 0.8% 0.8% 0.7%
------ ------ ------ ------
Net income............................ 1.4% 1.3% 1.3% 1.1%
====== ====== ====== ======
Three Months Ended September 30, 2005 Compared to Three Months Ended
September 30, 2004
Revenues for the three months ended September 30, 2005 increased
approximately $6.8 million, or 24.8%, from the same period in 2004. The main
growth factors contributing to this increase were:
(i) Revenues at our FertilityPartner locations increased by $5.0
million, or 23.2% during the quarter ended September 30, 2005,
from the same period in the prior year. Revenues at our six
FertilityPartner centers opened prior to 2004, increased by $1.9
million, or 8.9%. This increase resulted from growth in new
patient volume and clinical billings at the FertilityPartner
level, and is attributable to our ongoing direct to consumer
marketing efforts. Revenue from our two recent FertilityPartner
centers, located in the Seattle, Washington and Southern
California markets, who joined our network in January 2004 and
January 2005 respectively, totaled $3.6 million in the third
quarter of 2005 versus revenues of $0.5 million in the prior
year.
14
(ii) Revenue at our pharmaceutical unit increased by $769,000, or
18.8% during the third quarter of 2005 from the same period in
2004. This revenue growth was based on additional product
shipments resulting from increased pharmaceutical sales
penetration within both the FertilityPartner and affiliated
clinics participating in our network.
(iii) FertilityDirect revenues, which are comprised primarily of our
Shared Risk Refund program, membership fees from affiliated
clinics, and administrative fees earned from ARTIC, increased by
$986,000, or 62.4% from prior year levels. We plan to continue
aggressive promotion of our FertilityDirect product lines and
anticipate that these programs will continue to show strong
revenue growth in future quarters.
Contribution of $3.9 million in the third quarter of 2005 was up $787,000,
or 25.1% from the same period in 2004. As a percentage of revenue, the
contribution margin increased to 11.5% in the third quarter of 2005 from 11.4%
in the third quarter of 2004. The following factors had a significant effect on
third quarter 2005 contribution:
(i) Contribution generated by our FertilityPartners agreements
increased by a net $402,000, or 16.8%, in the third quarter of
2005 versus the same period in 2004.
(ii) Pharmaceutical contribution increased by $57,000, or 39.9%, and
margin rates increased to 4.1%, during the third quarter of 2005
from 3.5% in 2004. We anticipate that these margins will
stabilize in their historic range of 3.5 - 4.0%.
(iii) Contribution from our FertilityDirect programs increased by
$328,000, or 55.5% from the same period in the prior year. This
increase was driven by significant growth in Shared Risk Refund
patient volume, continuing monthly membership fees from
affiliated network clinics and a contribution of $31,000 from
ARTIC management fees.
General and Administrative expenses increased by $648,000 in the third
quarter of 2005 versus the same period in 2004. The major factors responsible
for this increase were additional personnel costs associated with a net
headcount increase of six full time employees (FTE's), designed to support the
business services offered to our expanding FertilityPartner locations,
additional personnel costs associated with a net headcount increase of three
FTE's related to increased volume in our FertilityDirect product lines, and
costs related to our HIPAA, FDA and Sarbanes-Oxley regulatory compliance
efforts.
Interest income rose to $137,000 for the quarter ended September 30, 2005,
from $65,000 in 2004. This increase was mainly attributable to finance charges
assessed to various FertilityPartner locations on invested capital in excess of
predefined limits, interest income on advances and business loans, as well as
higher market interest rates on available cash balances.
Interest expense increased by $44,000 from the same quarter in the prior
year as a result of slightly higher average debt levels during the quarter and
higher market interest rates.
The provisions for income tax were $254,000, versus $225,000, for the
quarters ended September 30, 2005 and 2004, respectively. The tax rates of 34.7%
for the third quarter of 2005, and 39.8% for the third quarter of 2004 included
provisions for both federal and state taxes. The reduction in tax provision was
due to revised estimates of the Company's current State tax liabilities.
15
Nine month Ended September 30, 2005 Compared to Nine month Ended
September 30, 2004
Revenues for the nine months ended September 30, 2005 increased by a net
of approximately $18.7 million, or 23.5%, from the same period in 2004. The main
factors contributing to this increase were:
(i) Revenues at our FertilityPartner centers increased by $14.0
million, or 22.0% from prior year levels. Growth at
FertilityPartner locations open prior to January 1, 2004
increased by $4.3 million from the same period in the prior
year. Our two FertilityPartners agreements signed subsequent to
January 1, 2004, and located in the Seattle, Washington and
Southern California markets, contributed revenues of $10.3
million and $0.7 million in the first nine months of 2005 and
2004, respectively. With additional focus on direct to consumer
advertising, we anticipate continued in-market revenue growth
among our FertilityPartner locations.
(ii) Revenue at our pharmaceutical unit increased by $2.3 million, or
19.4% from the same period in 2004. This increase reflects
enhanced sales penetration levels among our network members and
their growing patient populations.
(iii) FertilityDirect revenues increased by $2.4 million, or 58.2%
from the same period in 2004. This increase is primarily the
result of continued strong consumer demand for our Shared Risk
Refund product. During 2005 we enhanced the Shared Risk Refund
program by offering additional frozen embryo cycles to patients
at no additional cost.
Contribution for the first nine months of 2005 increased by $2.5 million,
or 29.7%, to $10.9 million from $8.4 million for the same period in 2004. The
main factors driving this increase were as follows:
(i) Contribution generated by our FertilityPartner agreements
increased by $1.2 million in the first nine months of 2005
relative to the same period in 2004. Contribution by
FertilityPartner locations opened prior to January 1, 2004
increased by $0.1 million, with contribution by the two
FertilityPartner locations opened subsequent to January 1, 2004
accounting for $1.1 million of the increase. Contribution
increases at the FertilityPartner locations opened prior to
January 1, 2004 was hampered by results at one clinic, and
previously disclosed pricing adjustments on several
FertilityPartner contracts.
(ii) Pharmaceutical contribution increased by $0.1 million, or 30.4%,
over the first nine months of 2004. Margin rates increased to
4.1% for the first nine months of 2005 versus 3.7% for the
similar period in 2004. As previously stated, historical margin
rates at our pharmaceutical unit have averaged in the 3.5 - 4.0%
range.
(iii) Contribution from the FertilityDirect program increased by $1.1
million, or 85.8% from the same period in the prior year. This
increase reflects continued strong volume growth within our
Shared Risk Refund program, as well as better than anticipated
pregnancy success rates by Shared Risk patients. Contribution
from ARTIC administration and risk management fees totaled
$78,000 for the first nine months of 2005.
General and Administrative costs increased by approximately $2.0 million in
the first nine months of 2005 versus the first nine months of 2004. As
previously discussed, this increase is driven by additional personnel
investments directly related to supporting revenue growth within our
FertilityPartner and FertilityDirect product lines as well as compliance costs
related to HIPAA, FDA and Sarbanes-Oxley requirements.
Interest income increased by $167,000 to $352,000 for the nine months ended
September 30, 2005, from $185,000 in the same period in 2004. This increase was
attributable to finance charges assessed to various FertilityPartner locations
on invested capital, interest earned on advances and loans and higher market
interest rates earned on investable cash balances. Interest expense also
increased to $288,000 from $229,000 from the same period in the prior year
primarily as a result of higher market interest rates on our outstanding debt.
16
Our provisions for income taxes were approximately 37.9% of pre-tax income
for the nine months ended September 30, 2005 and 39.8% of pre-tax income for the
nine months ended September 30, 2004. Tax expense in both years included
provisions for both federal and state tax liabilities. The reduction in tax
provision was due to revised estimates of the Company's current State tax
liabilities.
Off-balance Sheet Arrangements
In December 2003, the FASB issued FASB Interpretation No. 46 (FIN 46R
revised December 2003), "Consolidation of Variable Interest Entities," ("VIE's")
which replaced FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," issued in January 2003. FIN 46R addresses how a business enterprise
should evaluate whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly should consolidate the
entity. As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or VIE's,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. As of
September 30, 2005, we were not involved in any unconsolidated VIE transactions.
Liquidity and Capital Resources
Historically, we have financed our operations by the sale of equity
securities, issuance of notes and internally generated resources. In addition,
we also use bank financing for working capital and business development
purposes. Our working capital as of September 30, 2005 was a negative $4.5
million as compared to a working capital of $0.3 million on December 31, 2004.
Approximately $2.0 million of this change in working capital results from
recording our entire outstanding commitments with Bank of America as a current
liability since our existing credit agreement expires in June 2006. Negotiations
have been completed on renewing our credit agreements, but they were unsigned as
of our reporting date of September 30, 2005. Other factors affecting our working
capital have been ongoing investments in capital assets designed to promote
continued revenue growth, and the payment of Business Service Rights related to
our recent Southern California FertilityPartner contract. We believe that cash
flows from our operations plus our credit facilities and term loan will be
sufficient to provide for our future liquidity needs for the next twelve months.
Patient deposits, which are reflected as a current liability, represent
funds received from patients in advance of treatment cycles, increased by
$5,890,000 since December 31, 2004 to $20,083,000 as of September 30, 2005.
These deposits, which are comprised of both Shared Risk and non-Shared Risk
sources, are prepayments of future revenues from patients without full insurance
coverage. Deposits are a significant source of recurring cash flow and represent
interest free financing for us.
On July 31, 2003, we entered into a credit agreement with Bank of America
(formerly Fleet Bank). This agreement was comprised of a $7.0 million three-year
working capital revolver and a $5.75 million three-year term loan. Each of these
components bear interest by reference to Bank of America's prime rate or LIBOR,
at our option, plus a margin which is dependent upon a leverage test, ranging
from 2.25% to 2.75% in the case of LIBOR-based loans. Prime based loans are made
at Bank of America's prime rate and do not contain an additional margin.
Interest on the prime-based loan is payable monthly and interest on LIBOR-based
loan is payable on the last day of each applicable interest period. Unused
amounts under the working capital revolver bear a commitment fee of 0.25% and
are payable quarterly. Availability of borrowings under the working capital
revolver is based on eligible accounts receivable as defined. As of September
30, 2005, the term loan had an outstanding balance of approximately $3.2 million
and we had borrowed $2.0 million under the working capital revolver agreement
for general corporate purposes. The remaining working capital revolver balance
of $5.0 million is available to us. The Bank of America credit facility is
collateralized by all of our assets. The credit facility is subject to several
covenants, all of which were met as of September 30, 2005.
We continuously review our credit agreements and may renew, revise or enter
into new agreements from time to time as deemed necessary.
17
Significant Contractual Obligations and Other Commercial Commitments:
The following summarizes our contractual obligations and other commercial
commitments at September 30, 2005, and the effect such obligations are expected
to have on our liquidity and cash flows in future periods.
Payments Due by Period
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
---------- ---------------- ----------- ------------ -------------
Notes Payable................. $ 5,162,000 $ 5,162,000 $ -- $ -- $ --
Capital lease obligations..... 164,000 71,000 93,000 -- --
Operating leases.............. 37,490,000 6,158,000 10,947,000 8,672,000 11,713,000
FertilityPartners capital
projects.................. 500,000 500,000 -- -- --
----------- ----------- ----------- ---------- -----------
Total contractual
cash obligations.......... $43,316,000 $11,891,000 $11,040,000 $8,672,000 $11,713,000
=========== =========== =========== ========== ===========
Amount of Commitment Expiration Per Period
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
---------- ---------------- ------------- ------------- -------------
Lines of credit............... $ 7,000,000 $ 7,000,000 $ -- $ -- $ --
We also have commitments to provide accounts receivable financing under our
FertilityPartners agreements. Our financing of this receivable generally occurs
by the 20th business day of each month. The medical practice's repayment
priority consists of the following:
(i) Reimbursement of expenses that we have incurred on their behalf;
(ii) Payment of the fixed or, if applicable, the variable portion of
the service fee which relates to the FertilityPartners revenues;
and
(iii) Payment of the variable portion of the service fee.
We are responsible for the collection of receivables, which we finance. We
have continuously funded these needs from cash flow from operations and the
collection of the prior month's receivables. If delays in repayment are
incurred, which have not as yet been encountered, we could draw on our existing
working capital line of credit. We make payments on behalf of the
FertilityPartners for which we are reimbursed in the short-term. Other than
these payments, as a general course, we do not make other advances to the
medical practice. Other than the capital commitments, we have no other funding
commitments to the FertilityPartners.
Recent Accounting Standards
The Company discloses its critical accounting policies in its Form 10-K
filed with the Securities and Exchange Commission. Since December 31, 2004, none
of those policies has changed, nor has any been added.
In December 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 123R, "Share-Based Payment," which is a revision of SFAS
No. 123, "Accounting For Stock-Based compensation." SFAS 123R requires that all
share based compensation, including current grants and the unvested portion of
stock options previously issued, is to be recognized in the income statement
based on their fair value as of date of issue. This Statement is effective for
the fiscal year beginning January 1, 2006, and is expected to increase our
General and Administrative expense, and reduce pre-tax income by approximately
$87,000 for the year ending December 31, 2006, based on unvested stock options
currently outstanding.
18
Forward Looking Statements
This Form 10-Q and discussions and/or announcements made by or on behalf of
the Company, contain certain forward-looking statements regarding events and/or
anticipated results within the meaning of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the attainment of which
involves various risks and uncertainties. Forward-looking statements may be
identified by the use of forward-looking terminology such as, "may", "will",
"expect", "believe", "estimate", "anticipate", "continue", or similar terms,
variations of those terms or the negative of those terms. The Company's actual
results may differ materially from those described in these forward-looking
statements due to the following factors: the Company's ability to acquire
additional FertilityPartners agreements, the Company's ability to raise
additional debt and/or equity capital to finance future growth, the loss of
significant FertilityPartners agreement(s), the profitability or lack thereof at
fertility centers serviced by the Company, increases in overhead due to
expansion, the exclusion of fertility and ART services from insurance coverage,
government laws and regulation regarding health care, changes in managed care
contracting, the timely development of and acceptance of new fertility, and ART
and/or genetic technologies and techniques. The Company is under no obligation
to (and expressly disclaims any such obligation) update or alter any
forward-looking statements whether as a result of new information, future events
or otherwise.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding our exposure to certain market risks, see Item
7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, in our Annual
Report on Form 10-K for the year ended December 31, 2004. As of September 30,
2005, a one percent increase in interest rates would have a negligible impact on
the company, reducing both pre-tax and after tax income by less than $1,000.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15 under the Exchange Act) as of September
30, 2005 (the "Evaluation Date"). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us required to be included
in our periodic SEC filings.
Section 404 of the Sarbanes-Oxley Act requires the Company's management to
provide an assessment of the effectiveness of the Company's internal control
over financial reporting as of the end of fiscal year 2007. The Company is in
the process of performing the system and process documentation, evaluation and
testing necessary to make its assessment. The Company has not completed this
process or its assessment. In the process of evaluation and testing, the Company
may identify deficiencies that will require remediation.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
As of September 30, 2005, there are no legal proceedings to
which the Company is a party.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.
During the first nine months of 2005, the Company obtained
53,057 shares of its Common Stock that are now held as
treasury shares, as payment for withholding taxes on stock
grants and as consideration for the exercises of stock
options, from employees and individuals affiliated with its
Network. The Company currently has no plans to dispose of
these shares.
In June 2005, the company obtained 12,793 additional shares
of its Common Stock as a result of a 30% stock split,
effected in the form of a stock dividend, on existing
treasury shares held by the Company. The Company currently
has no plans to dispose of these shares.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
See Index to Exhibits on Page 23.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRAMED AMERICA, INC.
(Registrant)
Date: November 14, 2005 By: /s/: John W. Hlywak, Jr.
---------------------
John W. Hlywak, Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------ -------
10.12 (a) -- Employment Agreement between IntegraMed America, Inc. and Jay
Higham
10.25 (a) -- Termination and Settlement Agreement by and among IntegraMed
America, Inc , ivpcare, inc. and IntegraMed Pharmaceutical
Services, Inc. filed as Exhibit with identical number to
Registrant's Form 8-K dated October 31, 2005
10.25 (b) -- Agreement between ivpcare, inc. and IntegraMed America, Inc.
filed as Exhibit with identical number to Registrant's Form 8-K
dated October 31, 2005
31.1 -- CEO Certification Pursuant to 18 U.S.C. ss. 1350 as Adopted
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 dated
November 14, 2005.
31.2 -- CFO Certification Pursuant to 18 U.S.C. ss. 1350 as Adopted
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 dated
November 14, 2005.
32.1 -- CEO Certification Pursuant to 18 U.S.C. ss. 1350 as Adopted
Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 dated
November 14, 2005.
32.2 -- CFO Certification Pursuant to 18 U.S.C. ss. 1350 as Adopted
Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 dated
November 14, 2005.
23