===============================================================================
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, 2006
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 if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes _____ No __X__
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes _____No __X__
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes___X___ No ______
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large Accelerated Filer Accelerated Filer Non-Accelerated Filer 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 31, 2006 was 6,475,471.
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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, 2006 and
December 31, 2005............................................ 3
Consolidated Statements of Income for the three-month and
nine-month periods ended September 30, 2006 and 2005 ........ 4
Consolidated Statements of Shareholders' Equity for the
nine-month period ended September 30, 2006 .................. 5
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2006 and 2005 ................. 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...... 19
Item 4. Controls and Procedures...................................... 19-20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......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 share amounts)
ASSETS
September 30, December 31,
------------- ------------
2006 2005
------------- ------------
(unaudited) (restated)
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 27,799 $ 22,521
Pharmaceutical and other receivables, net ....................................... 355 490
Deferred income taxes, net ...................................................... 1,293 999
Prepaids and other current assets ............................................... 2,933 2,768
-------- --------
Total current assets ........................................................ 32,380 26,778
Fixed assets, net ............................................................... 13,459 14,877
Exclusive Service Rights and other intangibles, net ............................. 23,265 24,388
Other assets .................................................................... 674 590
-------- --------
Total assets ................................................................ $ 69,778 $ 66,633
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 765 $ 917
Accrued liabilities ............................................................. 9,421 8,023
Current portion of long-term notes payable and other obligations ................ 1,504 1,500
Due to medical practices ........................................................ 3,848 4,949
Shared Risk Refund program patient deposits ..................................... 6,483 4,739
-------- --------
Total current liabilities ................................................... 22,021 20,128
Deferred tax liability ............................................................. 1,255 1,058
Long-term notes payable and other obligations ...................................... 7,528 8,647
-------- --------
Total Liabilities .................................................................. 30,804 29,833
Commitments and Contingencies
Shareholders' equity:
Common Stock, $.01 par value - 15,000,000 shares authorized; 6,465,266 and
6,378,284 shares issued and
outstanding in 2006 and 2005, respectively .................................... 65 64
Capital in excess of par ........................................................ 49,939 49,734
Accumulated other comprehensive income .......................................... (11) --
Deferred Compensation ........................................................... (859) (354)
Treasury stock, at cost - 4,570 and 132,210 shares in 2006 and 2005, respectively (44) (937)
Accumulated deficit ............................................................. (10,116) (11,707)
-------- --------
Total shareholders' equity .................................................. 38,974 36,800
-------- --------
Total liabilities and shareholders' equity .................................. $ 69,778 $ 66,633
======== ========
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,
------------------- -------------------
2006 2005 2006 2005
-------- ------- ------- --------
(restated) (restated)
(unaudited) (unaudited)
Revenues, net
Provider Services .................... $ 28,563 $ 26,779 $ 85,295 $ 78,324
Consumer Services .................... 3,291 7,177 8,802 19,792
-------- -------- -------- --------
Total revenues ................... 31,854 33,956 94,097 98,116
-------- -------- -------- --------
Costs of revenues:
Provider Services costs .............. 25,669 23,780 76,950 69,845
Consumer Services costs .............. 2,114 6,276 5,558 17,463
-------- -------- -------- --------
Total costs of revenues .......... 27,783 30,056 82,508 87,308
-------- -------- -------- --------
Contribution
Provider Services contribution ....... 2,894 2,999 8,345 8,479
Consumer Services contribution ....... 1,177 901 3,244 2,329
-------- -------- -------- --------
Total contribution ............... 4,071 3,900 11,589 10,808
-------- -------- -------- --------
General and administrative expenses ..... 3,217 3,204 9,221 8,903
Interest income ......................... (269) (137) (750) (352)
Interest expense ........................ 174 121 532 288
-------- -------- -------- --------
Total other expenses ............. 3,122 3,188 9,003 8,839
-------- -------- -------- --------
Income before income taxes .............. 949 712 2,586 1,969
Income tax provision .................... 367 234 995 710
-------- -------- -------- --------
Net income .............................. $ 582 $ 478 $ 1,591 $ 1,259
======== ======== ======== ========
Basic and diluted net earnings per share:
Basic earnings per share ............. $ 0.09 $ 0.08 $ 0.25 $ 0.21
======== ======== ======== ========
Diluted earnings per share ........... $ 0.09 $ 0.08 $ 0.24 $ 0.20
======== ======== ======== ========
Weighted average shares - basic ...... 6,459 6,105 6,460 5,988
Weighted average shares - diluted .... 6,569 6,321 6,570 6,183
See accompanying notes to the consolidated financial statements.
4
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(all amounts in thousands)
(unaudited)
Accumulated Other
Common Stock Capital in Comprehensive Deferred Treasury Stock Accumulated Total
Shares Amount Excess of Par Income Compensation Shares Amount Deficit Equity
------ ------ ------------- ------ ------------ ------ ------ ------- ------
BALANCE AT DECEMBER 31, 2005 6,378 $64 $49,734 $ -- $(354) 132 $(937) $(11,707) $36,800
Net income for the nine months ended
September 30, 2006............ -- -- -- -- -- -- -- 1,591 1,591
Stock grants issued, net......... 82 1 804 -- (805) 4 (44) -- (44)
Stock grant amortization......... -- -- -- -- 300 -- -- -- 300
Exercise of common stock options. 149 1 371 -- -- 12 (121) -- 251
Amortization of common stock options -- -- 87 -- -- -- -- -- 87
Gain (loss) on hedging transaction -- -- -- (11) -- -- -- -- (11)
Cancellation and retirement of
treasury stock................ (144) (1) (1,057) -- -- (144) 1,058 -- --
------- --- ------- ----- ------ ----- ------ -------- -------
BALANCE AT September 30, 2006.... 6,465 $65 $49,939 $(11) $(859) 4 $ (44) $(10,116) $38,974
======= === ======= ===== ====== ===== ====== ======== =======
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,
-------------------
2006 2005
------ -------
(unaudited)
Cash flows from operating activities:
Net income ..................................................... $ 1,591 $ 1,259
Adjustments to reconcile net income to
Net cash provided by (used in) operating activities:
Depreciation and amortization ................................ 4,215 3,980
Deferred income tax provision ................................ 185 594
Stock-based compensation ..................................... 300 224
Changes in assets and liabilities Decrease (increase) in assets:
Pharmaceutical and other accounts receivable .............. 135 (225)
Prepaids and other current assets ......................... (725) (1,031)
Other assets .............................................. (84) (194)
Increase (decrease) in liabilities:
Accounts payable .......................................... (152) 306
Accrued liabilities ....................................... 1,825 (385)
Due to medical practices .................................. (1,101) 1,549
Shared Risk Refund program patient deposits ............... 1,744 2,495
-------- --------
Net cash provided by operating activities .......................... 7,933 8,572
Cash flows from investing activities:
Payment for exclusive FertilityPartners service rights ......... -- (3,329)
Proceeds from sales of fixed assets ............................ 514 --
Purchase of fixed assets and leasehold improvements ............ (2,250) (3,669)
-------- --------
Net cash used in investing activities .............................. (1,736) (6,998)
Cash flows from financing activities:
Issuance debt .................................................. -- 1,000
Principal repayments on debt ................................... (1,072) (863)
Principal repayments under capital lease obligations ........... (54) (50)
Proceeds from exercise of stock options and other .............. 207 284
-------- --------
Net cash provided by (used in) financing activities ................ (919) 371
Net increase (decrease) in cash and cash equivalents ............... 5,278 1,945
Cash and cash equivalents at beginning of period ................... 22,521 11,300
-------- --------
Cash and cash equivalents at end of period ......................... $ 27,799 $ 13,245
======== ========
Supplemental Information:
Interest paid ................................................. $ 526 $ 282
Income taxes paid ............................................. $ 247 $ 969
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, 2006, 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, 2006. These financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in IntegraMed America's Annual Report on Form 10-K for the year
ended December 31, 2005.
Certain amounts from our September 30, 2005 presentations have been
reclassified to conform with our current 2006 presentation.
NOTE 2 -- COMMON SHARES OUTSTANDING:
All common share numbers reported herein reflect the 30% Stock Split
effected in the form of a stock dividend declared by the Board of Directors on
May 23, 2005 and paid to shareholders on June 22, 2005; and the 25% stock split
effected in the form of a stock dividend declared by the Board of Directors on
May 22, 2006 and paid on June 21, 2006.
NOTE 3 -- EARNINGS PER SHARE:
The reconciliation of the numerators and denominators of the basic and
diluted EPS computations for the three and nine-month periods ended September
30, 2006 and 2005 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,
------------------- -------------------
2006 2005 2006 2005
------- -------- -------- --------
Numerator
Net Income.................................................. $ 582 $ 478 $1,591 $1,259
Denominator
Weighted average shares outstanding (basic)................. 6,459 6,105 6,460 5,988
Effect of dilutive options and warrants..................... 110 216 110 195
------ ------ ------ ------
Weighted average shares and dilutive potential
Common shares (diluted)................................ 6,569 6,321 6,570 6,183
Basic EPS................................................... $ 0.09 $ 0.08 $ 0.25 $ 0.21
====== ====== ====== ======
Diluted EPS................................................. $ 0.09 $ 0.08 $ 0.24 $ 0.20
====== ====== ====== ======
For the three and nine-month periods ended September 30, 2006 and 2005,
there were no outstanding options to purchase shares of Common Stock which were
excluded from the computation of the diluted earnings per share amount as the
exercise prices of all outstanding options were less than the average market
price of the shares of Common Stock.
7
INTEGRAMED AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
NOTE 4 -- SEGMENT INFORMATION:
We currently report two major lines of business, our Provider Services,
which is comprised of our FertilityPartners and Affiliate segments, and our
Consumer Services, which is comprised of our Shared Risk and Pharmaceutical
segments. Performance by segment, for the three month and nine month periods
ended September 30, 2006 and September 30, 2005, is presented below.
Providers Consumers
---------------------- ---------------------
Fertility Shared
Corporate Partners Affiliates Risk Pharmaceutical Consolidated
--------- -------- ---------- ---- -------------- ------------
Revenues............................... $ -- $28,256 $ 307 $3,178 $ 113 $31,854
For the three months ended September 30, 2006
Cost of Services....................... -- 25,647 22 2,114 -- 27,783
-------- ------- ----- ------ ------ -------
Contribution........................... -- 2,609 285 1,064 113 4,071
Operating Margin....................... -- 9.2% 92.8% 33.5% 100.0% 12.8%
General and administrative............. 3,217 -- -- -- -- 3,217
Interest, net.......................... (95) -- -- -- -- (95)
--------- ------- ----- ------ ------ --------
Income before income taxes............. (3,122) 2,609 285 1,064 113 949
Depreciation expense included above.... $ 159 $ 883 $ -- $ -- $ -- $ 1,042
Capital expenditures................... $ 122 $ 679 $ -- $ -- $ -- $ 801
Total assets......................... $27,145 $41,051 $ 266 $ 230 $1,086 $69,778
For the nine months ended September 30, 2006
Revenues............................... $ -- $84,401 $ 894 $8,434 $368 $94,097
Cost of Services....................... -- 76,927 23 5,630 (72) 82,508
------- -------- ----- ------ ------ -------
Contribution........................... -- 7,474 871 2,804 440 11,589
Operating Margin....................... -- 8.9% 97.4% 33.2% 119.6% 12.3%
General and administrative............. 9,221 -- -- -- -- 9,221
Interest, net.......................... (218) -- -- -- -- (218)
------- ------- ----- ------ ------ -------
Income before income taxes............. (9,003) 7,474 871 2,804 440 2,586
Depreciation expense included above.... $ 447 $ 2,708 $ -- $ -- $ -- $ 3,155
Capital expenditures................... $ 550 $ 1,700 $ -- $ -- $ -- $ 2,250
Total assets......................... $27,145 $41,051 $ 266 $ 230 $1,086 $69,778
For the three months ended September 30, 2005
Revenues............................... $ -- $26,552 $ 227 $2,308 $4,869 $33,956
Cost of Services....................... -- 23,739 41 1,606 4,670 30,056
------- ------- ----- ------ ------- -------
Contribution........................... -- 2,813 186 702 199 3,900
Operating Margin....................... -- 10.6% 81.9% 30.4% 4.1% 11.5%
General and administrative............. 3,204 -- -- -- -- 3,204
Interest, net.......................... (16) -- -- -- -- (16)
------- ------- ----- ------ ------- -------
Income before income taxes............. (3,188) 2,813 186 702 199 712
Depreciation expense included above.... $ 85 $ 889 $ -- $ -- $ -- $974
Capital expenditures................... $ 250 $ 404 $ -- $ -- $ -- $654
Total assets........................... $11,713 $45,802 $ 30 $ 287 $1,966 $59,798
8
Providers Consumers
---------------------- --------------------
Fertility Shared
Corporate Partners Affiliates Risk Pharmaceutical Consolidated
--------- -------- ---------- ---- -------------- ------------
For the nine months ended September 30, 2005
Revenues............................... $ -- $77,630 $694 $5,759 $14,033 $98,116
Cost of Services....................... -- 69,759 86 3,983 13,480 87,308
-------- -------- ----- ------ -------- -------
Contribution........................... -- 7,871 608 1,776 553 10,808
Operating Margin....................... -- 10.1% 87.6% 30.8% 3.9% 11.0%
General and administrative............. 8,903 -- -- -- -- 8,903
Interest, net.......................... (64) -- -- -- -- (64)
--------- -------- ----- ------ ------ -------
Income before income taxes............. (8,839) 7,871 608 1,776 553 1,969
Depreciation expense included above.... $ 286 $ 2,633 $ -- $ -- $ -- $ 2,919
Capital expenditures................... $ 813 $ 2,856 $ -- $ -- $ -- $ 3,669
Total assets........................... $11,713 $45,802 $ 30 $ 287 $1,966 $59,798
As of December 31, 2005
Total assets......................... $21,038 $43,161 $ 46 $ 241 $2,147 $66,633
NOTE 5 - DUE TO MEDICAL PRACTICES:
Due to Medical Practices is comprised of the net amounts owed by us to
medical practices contracted as FertilityPartners. 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, 2006 and December 31, 2005, Due to Medical Practices
was comprised of the following balances:
2006 2005
--------- --------
Advances to FertilityPartners................. $(13,061) $(12,727)
Undistributed Physician Earnings.............. 2,004 3,721
Physician Practice Patient Deposits........... 14,905 13,955
--------- -------
Due to Medical Practices, net................. $ 3,848 $ 4,949
========= =======
NOTE 6 -- STOCK-BASED EMPLOYEE COMPENSATION:
As of September 30, 2006, we had two stock-based employee compensation
plans, which are described more fully in Note 13 of the financial statements in
our most recent Annual Report on Form 10-K.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share
Based Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees". In 2005, we used APB Opinion No.
25 to account for the value of stock options granted to employees. Effective
January 1, 2006, we adopted SFAS No. 123(R). For the three months and nine
months ended September 30, 2006, we recorded a charge to earnings to recognize
compensation expense of $0 and $87,000, respectively, related to the value of
outstanding stock options issued in prior years which vested in 2006. As of
September 30, 2006, we had no unrecognized compensation costs related to stock
options which had been previously granted under our plans as all options are
currently vested.
9
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 vests over a period of three years. Our General and Administrative
expense includes compensation costs recognized in connection with these
restricted stock grants of $99,000 and $300,000 for the three and nine month
periods ended September 30, 2006, and $98,000 and $224,000 for the three and
nine month periods ended September 30, 2005.
NOTE 7 -- 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.
During the second quarter of 2006, we entered into an interest rate swap
agreement designed to hedge the risks associated with our floating rate debt. As
a result of this agreement, our net income includes financing costs associated
with this transaction of approximately $1,000 in the third quarter of 2006, and
we expect to record additional financing costs of less than $10,000 over the
coming twelve months, given current interest rate forecasts. In addition to the
costs included in our reported net income, this hedge also generated a
non-recognized loss of approximately $11,000 which is reported as part of our
comprehensive income.
We deem this hedge to be highly effective as it shares the same valuation,
termination date and amortization schedule as the underlying debt subject to the
hedge. In addition the swap transaction was structured such that the change in
fair value of the swap inversely mimics the hedged item. As of September 30,
2006, we had no other hedge or derivative transactions.
The following table summarizes total comprehensive income for the
applicable periods (000's omitted):
For the For the
three-month period nine-month period
ended September 30, ended September 30,
------------------- -------------------
2006 2005 2006 2005
------ ------ ------- ------
Net income as reported.......................... $582 $478 $1,591 $1,259
Net gain (loss) on derivative transactions...... 33 -- (11) --
---- ---- ------ ------
Total comprehensive income...................... $615 $478 $1,580 $1,259
==== ==== ====== ======
NOTE 8 -- LITIGATION:
From time to time, we are party to legal proceedings in the ordinary course
of business. As of September 30, 2006, none of these proceedings is expected to
have a material adverse effect on our financial position, results of operations
or cash flows.
NOTE 9 -- RECENT ACCOUNTING STANDARDS:
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value measurements. SFAS No.
157 requires companies to disclose the fair value of their financial instruments
according to a fair value hierarchy as defined in the standard. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, We do not expect the adoption of this standard to have a
material effect on our financial statements.
10
NOTE 10 -- RESTATEMENT:
During October 2006, we provided notification that our financial statements
for 2005 and the first two quarters of 2006 could not be relied on, and will be
restated due to an accounting error. The restatements will not result in any
changes to net income or earnings per share for any period, but will, as of
March 31, 2005, have the effect of increasing intangible assets by $2,035,000,
decreasing deferred tax assets by $977,000 and increasing deferred tax
liabilities by $1,058,000, all non-cash items.
The information related to December 31, 2005 and September 30, 2005
contained in this document have been restated to reflect the correction of the
error described above.
As a result of the error described above, we expect to file amendments to
our Form 10-K and our Forms 10-Q for the above-mentioned periods in the next
forty-five days with the Securities and Exchange Commission to reflect the
correct accounting and related disclosures.
The following table illustrates the impact of the correction:
As
Previously
Reported Restated
-------- --------
Balance Sheet Summary
June 30, 2006
Total Assets................................. $67,976 $69,473
Total Liabilities............................ 29,725 31,222
Total Stockholders' Equity................... 38,251 38,251
March 31, 2006
Total Assets................................. 64,004 65,154
Total Liabilities............................ 26,377 27,527
Total Stockholders' Equity................... 37,627 37,627
December 31, 2005
Total Assets................................. 65,575 66,633
Total Liabilities............................ 28,775 29,833
Total Stockholders' Equity................... 36,800 36,800
Statement of Operations Summary
Six Months ended June 30, 2006
Revenues..................................... 62,284 62,243
Income before taxes.......................... 1,678 1,637
Income tax provision......................... 669 628
Net Income................................... 1,009 1,009
Earnings Per Share........................... 0.15 0.15
Three Months ended March 31, 2006
Revenues..................................... 30,454 30,434
Income before taxes.......................... 792 772
Income tax provision......................... 316 296
Net Income................................... 476 476
Earnings Per Share........................... 0.07 0.07
Year ended December 31, 2005
Revenues..................................... 128,890 128,809
Income before taxes.......................... 2,788 2,707
Income tax provision......................... 1,065 984
Net Income................................... 1,723 1,723
Earnings Per Share........................... 0.28 0.28
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, 2005.
Overview
IntegraMed America, Inc. offers products and services to patients and
providers in the fertility industry. As of September 30, 2006, we have developed
a network comprised of twenty-nine contracted fertility centers in major markets
across the United States, products and services designed to support fertility
center growth, products and services in the pharmaceutical and patient financing
areas, and captive insurance offerings. Twenty-one affiliate fertility centers
subscribe to discrete service packages provided by us and have the right to
distribute our consumer products, and eight fertility centers have access to our
entire portfolio of products and services under our comprehensive
FertilityPartners(TM) program. All twenty-nine centers have access to our
consumer services, principally Shared Risk Refund and pharmaceutical offerings,
as well as patient financing products.
The business strategy of our Provider Services segment is to leverage our
deep expertise and commitment to improved fertility center performance by
providing the best value-specific offerings designed to manage and grow the
center within the context of a long term relationship. The business strategy of
our Consumer Segment is to provide products and services that make obtaining
high quality care easier and more affordable. The primary elements of our
strategy include: (i) expanding our network of fertility centers into new major
markets; (ii) increasing the number and value of service packages purchased by
Affiliates in our network; (iii) entering into additional FertilityPartners
contracts with Affiliated and non-Affiliated fertility centers; (iv) increasing
revenues and profits at contracted fertility centers; and, (v) increasing sales
of Shared Risk Refund, pharmaceutical and treatment financing products to
fertility patients.
Major events impacting financial condition and results of operations
On May 22, 2006, we declared a 25% stock split effected in the form of a
stock dividend for all holders of record as of June 7, 2006. As a result of this
dividend, 1,291,368 new shares of common stock were issued on the payment date
of June 21, 2006. No fractional shares were issued as all fractional amounts
were rounded up to the next whole share. All weighted average shares outstanding
and earnings per share calculations in this filing have been restated to reflect
this stock split.
In December 2005, we amended our existing credit agreement with Bank of
America. The amended agreement is comprised of a renewal and increase in our
three-year revolving credit line to $10 million, and a new $10 million five-year
term loan, of which approximately $3.2 million was used to retire the
outstanding balance on our previous term loan.
Through September 30, 2005, we marketed pharmaceutical products directly to
patients throughout our network and we had contracted with ivpcare, inc. to
provide certain business services related to the distribution of and accounting
for these sales. Effective October 1, 2005, this agreement was superseded by a
new agreement between us and ivpcare, inc. Under the terms of the new agreement,
we are no longer a direct distributor of pharmaceutical products to patients, as
this function is being performed directly by ivpcare. Our responsibilities are
limited to marketing the products for which we are compensated. This
compensation approximates our previous contribution from those pharmaceutical
sales, and is shown on a "net" rather than "gross" basis. As a result, as of
October 1, 2005, we no longer record pharmaceutical sales, the related cost of
sales and other costs related to pharmaceutical distribution. As expected, this
contract change has measurably reduced our pharmaceutical revenues and cost of
sales; however contribution from these operations and income before income
taxes, as well as net income, has been unaffected by the change.
On May 23, 2005, we 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 common stock were issued on the payment date
12
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 in this filing reflect this stock split.
Effective January 1, 2005, we signed a FertilityPartners agreement to
supply a complete range of business, marketing and facility services to the
Reproductive Partners Medical Group, Inc. or RPMG, a fertility practice
comprised of six physicians in the Southern California market. 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
RPMG's earnings. We also committed up to $0.5 million to fund any necessary
capital needs of the practice.
Effective January 1, 2005, the Company became a minority equity investor in
the Assisted Reproductive Technology Insurance Company, LTD, ("ARTIC"). ARTIC is
incorporated as an off-shore captive insurance company designed to offer
malpractice insurance to physicians and related facilities within the IntegraMed
network. IntegraMed's equity investment of $50,000 represents a 10% ownership
stake, which is accounted for on the cost basis. The remaining equity of ARTIC
is owned by participating physician groups. To date, earnings on our equity
investment have been immaterial, however IntegraMed is paid a predetermined fee
to provide certain administrative and risk management related services to ARTIC.
During October 2006, we provided notification that our financial statements
for 2005 and the first two quarters of 2006 could not be relied on, and will be
restated due to an accounting error. The restatements will not result in any
changes to net income or earnings per share for any period, but will, as of
March 31, 2005, have the effect of increasing intangible assets by $2,035,000,
decreasing deferred tax assets by $977,000 and increasing deferred tax
liabilities by $1,058,000, all non-cash items.
Results of Operations
The following table shows the percentage of net revenue represented by
various expenses and other income items reflected in our statement of operations
for the three and nine-month periods ended September 30, 2006 and 2005:
For the For the
three-month period nine-month period
ended September 30, ended September 30,
------------------- -------------------
2006 2005 2006 2005
------ ------ ------- ------
Revenues, net:
Provider services........................... 89.7% 78.9% 90.6% 79.8%
Consumer services........................... 10.3% 21.1% 9.4% 20.2%
Total revenues............................ 100.0% 100.0% 100.0% 100.0%
Costs of services incurred:
Provider services........................... 80.6% 70.0% 81.8% 71.2%
Consumer services........................... 6.6% 18.5% 5.9% 17.8%
Total costs of service.................... 87.2% 88.5% 87.7% 89.0%
Contribution:
Provider services........................... 9.1% 8.9% 8.8% 8.6%
Consumer services........................... 3.7% 2.6% 3.5% 2.4%
Total contribution........................ 12.8% 11.5% 12.3% 11.0%
General and administrative expenses........... 10.1% 9.4% 9.8% 9.1%
Interest income............................... (0.8)% (0.4)% (0.8)% (0.4)%
Interest expense.............................. 0.5% 0.4% 0.6% 0.3%
Total other expenses................... 9.8% 9.4% 9.6% 9.0%
Income from operations before income taxes.... 3.0% 2.1% 2.7% 2.0%
Income tax provision.......................... 1.2% 0.7% 1.0% 0.7%
Net income ................................... 1.8% 1.4% 1.7% 1.3%
13
Three Months Ended September 30, 2006 Compared to Three Months Ended
September 30, 2005
Our reported revenues decreased by $2.1 million, or 6.2%, to $31.9
million for the three months ended September 30, 2006, compared to $34.0 million
for the same period in 2005. The third quarter of 2005 included pharmaceutical
revenue of $4.7 million, which due to the contract change discussed above, must
be excluded from 2005 revenues to make them comparable with 2006. Other
significant factors affecting our reported revenues were as follows:
(i) Provider Services -
Revenues from our Provider Services unit, comprised primarily of
our FertilityPartner locations, Affiliate members and ARTIC
services, increased by $1.8 million, or 6.7% from the same quarter
in the prior year. Approximately $1.7 million of this increase
resulted from consumer driven organic growth within our eight
FertilityPartner centers.
Revenues from our Affiliate clinics increased approximately $0.1
million in the third quarter of 2006 compared to the second
quarter of 2005, reflecting our growing network of affiliated
fertility clinics, which increased from seventeen clinics as of
September 30, 2005 to twenty two clinics as of September 30, 2006.
(ii) Consumer Services -
During the third quarter of 2006, our Shared Risk Refund program
continued to see significant double digit year-over-year growth
with second quarter 2006 revenues of $3.2 million, an increase of
$0.9 million, or 38%, above 2005 revenues of $2.3 million for the
same period. This product offering continues to show strong growth
with the third quarter of 2006 attaining record patient enrollment
rates.
Pharmaceutical revenue was $0.1 million for quarter ended
September 30, 2006, compared to $4.9 million for the same quarter
in 2005. This reduction in revenue is primarily the result of a
change in contract terms with our strategic partner in the
pharmaceutical business, which became effective on October 1,
2005. Under the new contract terms, we no longer record the sales
of pharmaceutical products as revenue and the cost of these
products as costs of sales, but rather report net marketing fees
associated with those sales. While these new terms have an effect
on our reported revenues, and associated cost of sales, they will
not have any impact on our net profit from those sales. As a
result, reported revenues for 2005 should be reduced by $4.7
million to be comparable with 2006 revenues.
Contribution for the quarter ended September 30, 2006 of $4.1 million
increased approximately $0.2 million, or 4.4%, from the same quarter in 2005. As
a percentage of revenue, our contribution margin for the quarter increased to
12.8% in 2006 relative to 11.5% in 2005, due primarily to the current
presentation of "net pharmaceutical revenue" as discussed above, as well as the
continued growth of our Shared Risk Refund program. The following factors had a
significant impact on contribution:
(i) Provider Services -
Contribution from our FertilityPartners segment of $2.6 million
for the third quarter of 2006, was slightly below their
contribution of $2.8 million in the prior year. Despite revenue
growth of $1.7 million, or 6.4%, previously negotiated fee
reductions at three FertilityPartners clinics hampered
contribution growth. The year 2006 represents the final year of
our multi-year fee realignment program. With the fee structures we
currently have in place, we expect that continued revenue growth
in future years will directly translate into growth in
contribution.
Our Affiliate clinics generated contribution of $0.3 million in
2006, an increase of $0.1 million from their contribution in 2005.
This increase is primarily the result of additional Affiliate
clinics participating in our network since the third quarter of
2005.
14
(ii) Consumer Services -
Contribution from our Shared Risk Refund program rose by
approximately 52%, to $1.1 million for the quarter ended September
30, 2006, from $0.7 million in the same quarter of 2005. This
growth is attributable to increased patient enrollment and
continued favorable pregnancy outcomes, especially during early
treatment cycles.
Pharmaceutical contribution of $0.1 million in third quarter of
2006 was essentially consistent with the contribution level in
2005. As previously stated, the change in contract terms with our
strategic partner in the pharmaceutical business was designed to
have no effect on our contribution from the underlying sales.
General and Administrative expenses are comprised of salaries, benefits,
administrative, regulatory compliance, and operational support costs which are
not specifically related to individual clinical operations or other product
offerings. These costs were $3.2 million for both the third quarter of 2006 and
2005. Higher depreciation costs of $73,000 in the third quarter of 2006 versus
the third quarter of 2005, were essentially offset by lower benefit related
costs in 2006 relative to 2005.
Interest income increased to $269,000 for the quarter ended September 30,
2006, from $137,000 in 2005. This increase is primarily attributed to interest
earnings on our higher cash balances in 2006. Interest expense increased to
$174,000 for the third quarter of 2006, from $121,000 in 2005, primarily as a
result of interest charges on higher debt levels associated with our December
2005 amended credit agreement with Bank of America.
Our provision for income tax was approximately $0.4 million in 2006, or
38.7% of pre-tax income, compared to $0.2 million, or 32.9% of 2005 pre-tax
income. Our effective tax rates for both 2006 and 2005 reflect provisions for
both current and deferred federal and state income taxes. The lower effective
tax rate in 2005 related to revised estimates of current state tax liabilities.
Nine months Ended September 30, 2006 Compared to Nine months Ended
September 30, 2005
Our reported revenues for the first nine months of 2006 were $94.1 million,
a decrease of $4.0 million, or 4.1%, from revenues of $98.1 million in 2005. Our
2005 results include pharmaceutical revenue of $13.5 million, which due to the
previously discussed contract change, must be excluded from 2005 revenues to
make them comparable with 2006 results. Other significant factors affecting our
reported revenues were as follows:
(iii) Provider Services -
Revenues from our Provider Services unit increased by $7.0
million, or 8.9% from the same period in the prior year.
Approximately $6.8 million of this increase resulted from same
store growth within our FertilityPartner centers with all clinics
reporting higher revenue. Underlying these increases is our
multi-faceted marketing effort with initiatives on physician
referrals, field sales, internet advertising and other direct to
consumer efforts. Each of our FertilityPartner locations maintains
a staff of full-time, professionally trained team members focused
on patient recruitment and retention.
Revenues from our Affiliate clinics increased approximately $0.2
million in nine months ended September 30, 2006 compared to the
same period in 2005. This increase is primarily the result of five
additional Affiliated clinics participating in our Network as of
September 30, 2006, versus the same period in the prior year.
(iv) Consumer Services -
Our Shared Risk Refund program continued to see significant growth
with revenues of $8.4 million for the first nine months of 2006,
up $2.7 million or 46%, over the first nine months of 2005.
Consumer interest in this program remains strong, with patient
enrollments during the first nine months of 2006 increasing over
their 2005 rates.
15
Pharmaceutical revenue was $0.4 million for the nine months ended
September 30, 2006, compared to $14.0 million for the same period
in 2005. As noted above, approximately $13.5 million of this
reduction in revenue is the result of the previously discussed
change in contract terms with our strategic partner in the
pharmaceutical business, which became effective on October 1,
2005.
Contribution for the nine months ended September 30, 2006 of $11.6 million
represents an increase of $0.8 million, or 7.2%, from the same period in 2005.
As a percentage of revenue, our contribution margin for the first nine months of
2006 increased to 12.3% versus 11.0% in 2005. This increased margin percentage
is primarily due to the current presentation of "net pharmaceutical revenue" as
discussed above as well as the relative growth of our higher margin Shared Risk
Refund program. The following factors had a significant impact on contribution:
(iii) Provider Services -
Contribution from our FertilityPartners segment of $7.5 million,
or 8.9% of related revenues, for the first half of 2006 was
slightly below prior year contribution of $7.9 million, or 10.1%
of revenues. Contribution amounts were primarily affected by
previously disclosed fee reductions at several FertilityPartners
clinics. The year 2006 represents the final year of our multi-year
fee realignment program. With the currently contracted fee
structures in place, we expect that continued organic revenue
growth in future years will directly translate into growth in
contribution dollars and margin percentage.
Our Affiliate clinics generated contribution of $0.9 million in
the first nine months of 2006, an increase of $0.3 million from
their contribution in the same period of 2005. This increase is
primarily the result of network expansion by obtaining additional
Affiliate clinic contracts. As of September 30, 2006, we had
twenty two Affiliate clinics under contract, versus seventeen as
of September 30, 2005.
(iv) Consumer Services -
Contribution from our Shared Risk Refund program rose by 58%, to
$2.8 million for the first nine months of 2006, from $1.8 million
in the first nine months of 2005. This growth is attributable to
higher patient throughput and continued favorable pregnancy rates
on treatment cycles.
Pharmaceutical contribution of $0.4 million in 2006 was
essentially even with contribution in 2005. Our pharmaceutical
contribution is directly dependent upon fees we receive related to
the volume of pharmaceutical products sold by ivpcare, inc., our
pharmaceutical business partner. In an effort to increase these
fees, we are continuing our efforts to promote pharmaceutical
sales volume throughout our network.
General and Administrative expenses totaled $9.2 million, or 79.6% of
contribution, for the first nine months of 2006, compared to $8.9 million, or
82.4% of contribution, for the comparable period in 2005. These costs are
comprised of administrative, regulatory and operational support costs which are
not specifically related to our product offerings. The $0.3 million increase in
costs in 2006 is mainly related to additional employee related expenses and
fixed asset depreciation in 2006 relative to 2005.
Interest income increased to $750,000 for the nine month period ended
September 30, 2006, from $352,000 in the same period of 2005. This increase is
primarily related to interest earnings on our higher cash balances as well as
higher market interest rates relative to 2005. Interest expense increased to
$532,000 for the first nine months of 2006, from $288,000 in 2005, primarily as
a result of interest charges on our higher debt levels associated with our
December 2005 financing with Bank of America.
Our provision for income tax was $1.0 million in 2006, or 38.5% of pre-tax
income, compared to $0.7 million, or 36.1% of 2005 pre-tax income. Our effective
tax rates for both 2006 and 2005 reflect provisions for both current and
deferred federal and state income taxes. The lower 2005 effective tax rates was
due to revised current state tax liabilities.
16
Off-balance Sheet Arrangements
FASB Interpretation No. 46 (FIN 46R) "Consolidation of Variable Interest
Entities" ("VIE's") 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, 2006, we do
not have an interest in any VIE's where we are the primary beneficiary,
therefore the adoption of FIN 46 had no impact on our financial statements.
Liquidity and Capital Resources
As of September 30, 2006, we had approximately $27.8 million in cash and
cash equivalents on hand as compared to $22.5 million at December 31, 2005.
Additionally, we had working capital of approximately $10.4 million, at
September 30, 2006, an increase of $3.7 million from working capital of $6.7
million as of December 31, 2005. Our increased working capital is largely
attributed to cash flows generated from operating activities.
Shared Risk Refund patient deposits, which are reflected as a current
liability, represent funds received from patients in advance of treatment cycles
and are an indication of future Shared Risk revenues. These deposits totaled
approximately $6.5 million and $4.7 million as of September 30, 2006 and
December 31, 2005, respectively. These deposits are a significant source of cash
flow and represent interest-free financing for us.
As of September 30, 2006, we did not have any significant contractual
commitments for the acquisition of fixed assets or construction of leasehold
improvements. However, we anticipate upcoming capital expenditures of
approximately $1.0 million for the remainder of 2006. These expenditures are
primarily related to medical equipment and information system acquisitions and
leasehold improvements. We believe that working capital, specifically cash and
cash equivalents, remain at adequate levels to fund our operations and our
commitments for fixed asset acquisitions. We also believe that the cash flows
from our operations plus our available credit facility will be sufficient to
provide for our future liquidity needs over the next twelve months.
In December 2005, we amended our existing credit facility with Bank of
America. The amended facility is comprised of a $10 million three-year revolving
line of credit and a $10 million 5-year term loan. As of September 30, 2006,
approximately $8.9 million of the term loan was outstanding with a remaining
term of 4.25 years, with no balance outstanding under the revolving line of
credit.
Each component of our amended credit facility bears interest by reference
to Bank of America's prime rate or LIBOR, at our option, plus a margin, which is
dependent upon a leverage test, ranging from 1.75% to 2.50% in the case of
LIBOR-based loans. Prime-based loans are made at Bank of America's prime rate
and do not contain an additional margin. Interest on the prime-based loans is
payable monthly and interest on LIBOR-based loans is payable on the last day of
each applicable interest period. As of September 30, 2006, interest on the term
loan was payable at a rate of approximately 5.32% plus the applicable margin.
Unused amounts under the working capital revolver bear a commitment fee of 0.25%
and are payable quarterly.
Availability of borrowings under the working capital revolver is based on
eligible accounts receivable, as defined in the credit agreement. As of
September 30, 2006, we had no outstanding balance on our $10 million revolving
line of credit. Due to lower eligible outstanding accounts receivable balances,
resulting from increased collections, approximately $9.8 million of the
revolving line of credit was available to us.
In order to mitigate the interest rate risk associated with our term loan,
we entered into an interest rate swap agreement with Bank of America in April
2006. The effect of this swap transaction was to effectively fix the interest
rate on our term loan at 5.42% plus the applicable margin for the life of the
loan.
17
Our Bank of America credit facility is collateralized by substantially all
of our assets. As of September 30, 2006, we were in full compliance with all
applicable debt covenants. We also continuously reviewing our credit agreements
and may renew, revise or enter into new agreements from time to time as deemed
necessary.
Significant Contractual Obligations and Other Commercial Commitments
The following summarizes our contractual obligations and other commercial
commitments at September 30, 2006, 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................. $8,928,000 $1,428,000 $ 2,858,000 $ 4,642,000 $ --
Capital lease obligations..... 93,000 74,000 19,000 -- --
Derivative valuation.......... 11,000 2,000 9,000 -- --
Interest on debt.............. 988,000 441,000 362,000 185,000 --
Operating leases.............. 45,992,000 6,439,000 10,916,000 9,486,000 19,151,000
Total contractual cash
obligations............... $56,012,000 $8,384,000 $14,164,000 $14,313,000 $19,151,000
Amount of Commitment and Expiration Per Period
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
-------- ---------------- ---------------- ------------- -------------
Unused lines of credit........ $10,000,000 $ -- $10,000,000 $ -- $ --
We also have commitments to provide working capital financing to our
FertilityPartners locations. A significant portion of this commitment relates to
our transactions with the medical practices themselves. Our responsibilities to
the medical practices are to provide financing for their accounts receivable and
to hold patient deposits on their behalf as well as undistributed physician
earnings. Disbursements to the medical practices generally occur on or before
the 20th business day of each month. The medical practice's repayment hierarchy
consists of the following:
(i) We provide a cash credit to the practice for billings to patients and
insurance companies;
(ii) We reduce the cash credit for clinic expenses that we have incurred on
behalf of the practice;
(iii) We reduce the cash credit for the base portion of our Service Fee which
relates to the FertilityPartners revenues;
(iv) We reduce the cash credit for the variable portion of our Service Fee which
relates to the FertilityPartners earnings; and
(v) We disburse to the medical practice the remaining cash amount which
represents the physicians undistributed earnings.
We are also responsible for the collection of the FertilityPartners
accounts receivables, which we finance with full recourse. We continuously fund
these needs from our cash flow from operations, the collection of prior months'
receivables and deposits from patients in advance of treatment. If delays in
repayment are incurred, which have not as yet been encountered, we could draw on
our existing working capital line of credit. We also make payments on behalf of
the 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. We have no other funding commitments to the FertilityPartners.
18
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and requires enhanced disclosures about fair value measurements. SFAS No.
157 requires companies to disclose the fair value of their financial instruments
according to a fair value hierarchy as defined in the standard. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, We do not expect the adoption of this standard to have a
material effect on our financial statements.
Forward Looking Statements
This Form 10-Q and discussions and/or announcements made by or on behalf of
us, contain certain forward-looking statements regarding events and/or
anticipated results within the meaning of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the attainment of which
involves various risks and uncertainties. Forward-looking statements may be
identified by the use of forward-looking terminology such as, "may", "will",
"expect", "believe", "estimate", "anticipate", "continue", or similar terms,
variations of those terms or the negative of those terms. Our actual results may
differ materially from those described in these forward-looking statements due
to the following factors: our ability to acquire additional FertilityPartners
agreements, our 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 us, 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. We are under
no obligation to (and expressly disclaim any such obligation) update or alter
any forward-looking statements whether as a result of new information, future
events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business our interest income and expense items are
sensitive to changes in the general level of interest rates. During the second
quarter of 2006 we entered into a derivative transaction designed to hedge our
variable rate term loan. As a result of this derivative transaction we have
successfully shielded ourselves from interest rate risks associated with our
term loan. We are currently subject to interest rate risks associated with our
short term investments and certain advances to our FertilityPartner clinics,
both of which are tied to either short term interest rates or the prime rate. As
of September 30, 2006, a one percent change in interest rates would impact our
pre-tax income by approximately $250,000 annually.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15 under the Exchange Act) as of September
30, 2006 (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 ineffective in
timely alerting them to the material information relating to us required to be
included in our periodic SEC filings. This conclusion is based on the material
weakness in our internal control over financial reporting referred to below.
19
(b) Changes in internal controls.
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. On October 30, 2006 management
identified, and subsequently reported to the Audit Committee of the Board of
Directors, a material weakness in our internal control over financial reporting.
A material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The material weakness resulted in an error in our audited financial
statements for the fiscal year ended December 31, 2005 and our unaudited
financial statements and financial information for the three and six-month
periods ended March 31, 2006 and June 30, 2006. As discussed in Note 10 to the
condensed consolidated financial statements contained in Item 1 of this Form
10-Q, the related financial statements will be restated in order to correct an
error regarding the deferred income tax accounting of acquiring the stock of
Reproductive Partners, Inc. in January, 2005 in accordance with Financial
Accounting Standards Board Emerging Issues Taskforce Issue No. 98-11-
"Accounting for Acquired Temporary Differences in Certain Purchase Transactions
That Are Not Accounted for as Business Combinations". The error was found after
we reviewed our accounting for the above-mentioned transaction and noted that we
did not properly account for the difference between the amount paid in the
transaction (the book basis) and the tax basis of the assets acquired and
therefore we understated the asset acquired and also understated the related
deferred tax accounts. To remediate this material weakness we will implement
additional controls and procedures related to the review and approval of
accounting for non-routine transactions.
Other than these changes, 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.
From time to time, we are party to legal proceedings in the
ordinary course of business. As of September 30, 2006, none of
these proceedings is expected to have a material adverse
effect on our financial position, results of operations or
cash flow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
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, 2006 By:/s/: John W. Hlywak, Jr.
-------------------
John W. Hlywak, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
INDEX TO EXHIBITS
Exhibit
Number Exhibit
-------- -------
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, 2006.
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, 2006.
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, 2006.
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, 2006.
23