================================================================================
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 March 31, 2007
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 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 May 1, 2007 was 6,513,660.
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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 March 31, 2007
and December 31, 2006...................................... 3
Consolidated Statements of Income for the three-month period
ended March 31, 2007 and 2006 ............................. 4
Consolidated Statements of Shareholders' Equity for the
three-month period ended March 31, 2007 ................... 5
Consolidated Statements of Cash Flows for the three-month
period ended March 31, 2007 and 2006 ...................... 6
Notes to Consolidated Financial Statements .................7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 18
Item 4. Controls and Procedures......................................... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 19
Item 3. Defaults upon Senior Securities................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............. 19
Item 5. Other Information............................................... 19
Item 6. Exhibits ....................................................... 19
SIGNATURES ..................................................... 20
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
March 31, December 31,
--------- ------------
2007 2006
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 32,996 $ 32,184
Pharmaceutical and other receivables, net ................................ 563 445
Deferred income taxes, net ............................................... 2,472 2,472
Prepaids and other current assets ........................................ 3,069 2,927
-------- --------
Total current assets ................................................. 39,100 38,028
Fixed assets, net ........................................................ 13,907 13,900
Exclusive Service Rights and other intangibles, net ...................... 22,540 22,905
Other assets ............................................................. 627 689
-------- --------
Total assets ......................................................... $ 76,174 $ 75,522
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 797 $ 1,507
Accrued liabilities ...................................................... 10,371 11,850
Current portion of long-term notes payable and other obligations ......... 1,487 1,505
Due to medical practices ................................................. 5,220 4,299
Shared Risk Refund program patient deposits .............................. 8,072 6,526
-------- --------
Total current liabilities ............................................ 25,947 25,687
Deferred income tax liability ............................................... 1,712 1,732
Long-term notes payable and other obligations ............................... 6,914 7,269
-------- --------
Total Liabilities ........................................................... 34,573 34,688
Commitments and Contingencies
Shareholders' equity:
Common Stock, $.01 par value - 15,000,000 shares authorized; 6,513,634 and
6,498,480 shares issued and
outstanding in 2007 and 2006, respectively ............................. 65 65
Capital in excess of par ................................................. 49,415 49,261
Accumulated other comprehensive income ................................... (11) (9)
Accumulated deficit ...................................................... (7,868) (8,483)
-------- --------
Total shareholders' equity ........................................... 41,601 40,834
-------- --------
Total liabilities and shareholders' equity ........................... $ 76,174 $ 75,522
======== ========
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
three-month period
ended March 31,
-------------------
2007 2006
------ -------
(unaudited)
Revenues, net
Provider Services .................... $ 29,409 $ 27,776
Consumer Services .................... 2,975 2,658
-------- --------
Total revenues ................... 32,384 30,434
Costs of revenues:
Provider Services costs .............. 26,411 25,032
Consumer Services costs .............. 2,142 1,640
-------- --------
Total costs of revenues .......... 28,553 26,672
Contribution
Provider Services contribution ....... 2,998 2,744
Consumer Services contribution ....... 833 1,018
-------- --------
Total contribution ............... 3,831 3,762
General and administrative expenses ..... 3,132 3,052
Interest income ......................... (335) (221)
Interest expense ........................ 119 159
-------- --------
Total other expenses ............. 2,916 2,990
-------- --------
Income before income taxes .............. 915 772
Income tax provision .................... 300 296
-------- --------
Net income .............................. $ 615 $ 476
======== ========
Basic and diluted net earnings per share:
Basic and diluted earnings per share . $ 0.09 $ 0.07
======== ========
Weighted average shares - basic ...... 6,509 6,501
======== ========
Weighted average shares - diluted .... 6,593 6,629
======== ========
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 Accumulated Total
Shares Amount Excess of Par Income (loss) Deficit Equity
------ ------ ------------- ------------- ------- ------
Balance at December 31, 2006 6,498 $65 $49,261 $(9) $(8,483) $40,834
Net income for the three months
ended March 31, 2007.......... -- -- -- -- 615 615
Stock grant amortization......... -- -- 110 -- -- 110
Exercise of common stock options. 15 -- 44 -- -- 44
Gain (loss) on hedging transaction -- -- -- (2) -- (2)
----- --- -------- ---- -------- -------
Balance at March 31, 2007........ 6,513 $65 $49,415 $(11) $(7,868) $41,601
===== === ======= ==== ======= =======
See accompanying notes to the consolidated financial statements.
5
INTEGRAMED AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts in thousands)
For the
Three-month period
ended March 31,
--------------------
2007 2006
--------- --------
(unaudited)
Cash flows from operating activities:
Net income ..................................................... $ 615 $ 476
Adjustments to reconcile net income to
Net cash provided by (used in) operating activities:
Depreciation and amortization ................................ 1,508 1,421
Deferred income tax provision ................................ (20) 216
Stock-based compensation ..................................... 110 96
Changes in assets and liabilities Decrease (increase) in assets:
Pharmaceutical and other accounts receivable .............. (118) (385)
Prepaids and other current assets ......................... (142) (1,521)
Other assets .............................................. 62 (61)
Increase (decrease) in liabilities:
Accounts payable .......................................... (710) (294)
Accrued liabilities ....................................... (1,479) (994)
Due to medical practices .................................. 921 (965)
Shared Risk Refund program patient deposits ............... 1,546 270
-------- --------
Net cash provided by (used in) operating activities ................ 2,293 (1,741)
-------- --------
Cash flows from investing activities:
Purchase of fixed assets and leasehold improvements ............ (1,150) (683)
-------- --------
Net cash used in investing activities .............................. (1,150) (683)
-------- --------
Cash flows from financing activities:
Principal repayments on debt ................................... (357) (357)
Principal repayments under capital lease obligations ........... (18) (18)
Proceeds from exercise of stock options and other .............. 44 195
-------- --------
Net cash used in financing activities .............................. (331) (180)
-------- --------
Net increase (decrease) in cash and cash equivalents ............... 812 (2,604)
Cash and cash equivalents at beginning of period ................... 32,184 22,521
-------- --------
Cash and cash equivalents at end of period ......................... $ 32,996 $ 19,917
======== ========
Supplemental Information:
Interest paid ................................................. $ 119 $ 282
Income taxes paid ............................................. $ 325 $ 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 March 31, 2007, 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, 2007. 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, 2006.
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 month periods ended March 31, 2007 and
2006 is as follows (000's omitted, except for per share amounts):
For the
three-month period
ended March 31,
------------------
2007 2006
------ ------
Numerator
Net Income......................................... $ 615 $314
Denominator
Weighted average shares outstanding (basic)........ 6,509 6,501
Effect of dilutive options and warrants............ 84 128
------- ------
Weighted average shares and dilutive potential
Common shares (diluted)....................... 6,593 6,629
====== ======
Basic and diluted EPS.............................. $ 0.09 $ 0.07
====== ======
For the three month periods ended March 31, 2007 and 2006, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4 -- SEGMENT INFORMATION:
We currently report two major lines of business, our Provider Services,
which is comprised of our Partner and Affiliate segments, and our Consumer
Services, which is comprised of our Shared Risk and Pharmaceutical segments.
Performance by segment, for the three month periods ended March 31, 2007 and
2006, is presented below.
Providers Consumers
---------------------- -----------------------
(unaudited)
Fertility Shared
Corporate Partners Affiliates Risk Pharmaceutical Consolidated
--------- -------- ---------- ---- -------------- ------------
For the three months ended March 31, 2007
Revenues ............................. $ -- $ 29,092 $ 317 $ 2,917 $ 58 $ 32,384
Cost of Services ..................... -- 26,408 3 2,143 (1) 28,553
-------- -------- -------- -------- -------- --------
Contribution ......................... -- 2,684 314 774 59 3,831
Contribution Margin .................. -- 9.2% 99.1% 26.5% 101.7% 11.8%
General and administrative ........... 3,132 -- -- -- -- 3,132
Interest, net ........................ (216) -- -- -- -- (216)
-------- -------- -------- -------- -------- --------
Income before income taxes ........... (2,916) 2,684 314 774 59 915
Depreciation expense included above .. $ 202 $ 931 $ 1 $ -- $ -- $ 1,134
Capital expenditures ................. $ 182 $ 968 $ -- $ -- $ -- $ 1,150
Total assets ........................ $ 34,156 $ 40,645 $ 731 $ 225 $ 417 $ 76,174
For the three months ended March 31, 2006
Revenues ............................. $ -- $ 27,497 $ 279 $ 2,505 $ 153 $ 30,434
Cost of Services ..................... -- 25,031 1 1,640 -- 26,672
-------- -------- -------- -------- -------- --------
Contribution ......................... -- 2,466 278 865 153 3,762
Contribution Margin .................. -- 9.0% 99.6% 34.5% 100.0% 12.4%
General and administrative ........... 3,052 -- -- -- -- 3,052
Interest, net ........................ (62) -- -- -- -- (62)
-------- -------- -------- -------- -------- --------
Income before income taxes ........... (2,990) 2,466 278 865 153 772
Depreciation expense included above .. $ 139 $ 908 $ -- $ -- $ -- $ 1,047
Capital expenditures ................. $ 174 $ 509 $ -- $ -- $ -- $ 683
Total assets ........................ $ 22,783 $ 41,219 $ 90 $ 523 $ 539 $ 65,154
NOTE 5 - DUE TO MEDICAL PRACTICES:
Due to Medical Practices is comprised of the net amounts owed by us to
medical practices contracted as Partner. 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 March 31, 2007 and December 31, 2006, Due to Medical Practices was
comprised of the following balances:
2007 2006
--------- ---------
(unaudited)
Advances to Partner........................ $(14,584) $(12,732)
Undistributed Physician Earnings........... 2,045 2,839
Physician Practice Patient Deposits........ 17,759 14,192
--------- ---------
Due to Medical Practices, net.............. $ 5,220 $ 4,299
========= =========
8
NOTE 6 -- STOCK-BASED EMPLOYEE COMPENSATION:
As of March 31, 2007, 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". Effective January 1, 2006, we
adopted SFAS No. 123(R). For the three month periods ended March 31, 2007 and
March 31, 2006, we recorded a charge to earnings to recognize compensation
expense of $0 and $60,000, respectively, related to the value of outstanding
stock options issued in prior years which vested in 2006. As of March 31, 2007,
we had no unrecognized compensation costs related to stock options which had
been previously granted under our plans as all options are currently vested.
We also issue restricted stock grants to officers and members of the Board
of Directors. Stock granted to Board members vests immediately and stock granted
to officers generally vests over a period of three years. Our General and
Administrative expense includes compensation costs recognized in connection with
these restricted stock grants of $111,000 and $96,000 for the three month
periods ended March 31, 2007 and March 31, 2006 respectively.
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 $2,000 in the first quarter of 2007, 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 March 31, 2007,
we had no other hedge or derivative transactions.
The following table summarizes total comprehensive income (loss) for the
applicable periods (000's omitted):
For the
three-month period
ended March 31,
------------------
2007 2006
------ ------
(unaudited)
Net income as reported.......................... $ 615 $ 476
Net gain (loss) on derivative transactions...... (11) --
----- -----
Total comprehensive income...................... $ 604 $ 476
===== =====
9
NOTE 8 -- LITIGATION:
From time to time, we are party to legal proceedings in the ordinary course
of business. As of March 31, 2007, 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:
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities
This Statement is effective as of the beginning of an entity's first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of FASB Statement No. 157, Fair
Value Measurements. This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This Statement establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. This Statement does not eliminate disclosure
requirements included in other accounting standards, including requirements for
disclosures about fair value measurements included in FASB Statements No. 157,
Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial
Instruments. The Company is currently evaluating SFAS No. 159.
SAB No. 108, Quantifying Misstatements in Current Year Financial Statements
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 (Topic 1N). "Quantifying Misstatements in Current
Year Financial Statements," ("SAB No. 108). SAB No. 108 addresses how the effect
of prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB No. 108 addresses the
mechanics of correcting misstatements that include effects from prior years. The
Company is currently evaluating the impact of SAB No. 108 and does not believe
this statement will have an effect on its financial statements.
FASB Interpretation No. 48
In February 2007, the SEC staff clarified its views related to changes in
the classification of interest and penalties for periods prior to the adoption
of FIN 48. Specifically, the SEC staff believes that if a registrant changes how
it classifies interest and penalties upon adoption of FIN 48, it should not
reclassify amounts in prior periods. This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
interpretation was adopted by us effective January 1, 2007. The adoption of this
interpretation did not have a material impact on our financial statements.
10
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, 2006.
Overview
IntegraMed America, Inc. offers products and services to patients and
providers in the fertility industry. As of March 31, 2007, we have developed a
network comprised of thirty 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-two 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 Partner
program. All thirty 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 Partner 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
2007
On March 19, 2007, we declared a 25% stock split effected in the form of a
stock dividend for all holders of record as of April 13, 2007. As a result of
this dividend, we issued approximately 1,628,000 new shares of common stock on
the payment date of May 4, 2007. No fractional shares were issued as all
fractional amounts were rounded up to the next whole share. The effect of this
stock split has not been reflected in these financial statements as the payment
date is subsequent to March 31, 2007.
2006
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.
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 were
restated due to an accounting error. The restatements did not result in any
changes to net income or earnings per share for any period, but affected our
intangible assets, deferred tax assets and deferred tax liabilities, all
non-cash items. All periods affected by this error have been restated throughout
this document as appropriate.
11
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 month periods ended March 31, 2007 and 2006:
For the
three-month period
ended March 31,
------------------
2007 2006
------ --------
Revenues, net:
Provider services............................ 90.8% 91.3%
Consumer services............................ 9.2% 8.7%
Total revenues.......................... 100.0% 100.0%
Costs of services incurred:
Provider services............................ 81.6% 82.2%
Consumer services............................ 6.6% 5.4%
Total costs of service.................. 88.2% 87.6%
Contribution:
Provider services............................ 9.2% 9.1%
Consumer services............................ 2.6% 3.3%
Total contribution...................... 11.8% 12.4%
General and administrative expenses............ 9.7% 10.0%
Interest income................................ (1.0)% (0.7)%
Interest expense............................... 0.3% 0.5%
Total other expenses.................... 9.0% 9.8%
Income from operations before income taxes..... 2.8% 2.6%
Income tax provision........................... 0.9% 1.0%
Net income .................................... 1.9% 1.6%
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
Revenues:
Provider Services -
In providing clinical care to patients, each of our Partner practices
generates revenue which we do not report in our financial statements. Although
we do not consolidate the physician practice financials with our own, these
financials do directly affect our revenues. The components of our revenue from
Partner practices are: (a) a Base Service fee calculated as a percentage of
patient revenue (percentage varies from 6% down to 3% depending on the level of
revenues), (b) our reimbursement for the expenses, called Cost of Services, we
advanced during the month (representing substantially all of the expenses
incurred by the practice) and, (c) our Additional fees which represent our share
of the net income of the practice (which varies from a fixed amount or 10% to
20% depending on the practice). From the total of our revenues, we subtract the
annual amortization of our Business Service Rights.
In addition to revenues generated from Partner practices, we receive fees
from Affiliate practices for marketing and other services as well as
miscellaneous revenues related to providing services to medical practices. The
table below illustrates the components of these fees in relation to the
physician practice financials:
12
Three months ended
March 31,
---------------------
2007 2006
-------- --------
(unaudited) (unaudited)
Providers Providers Variance
Physician Financials
(a) Patient revenue .............................. $ 38,862 $ 36,666 $ 2,196 6.0%
(b) Cost of services ............................. 26,385 25,021 1,364 5.5%
(c) Base Service fee ............................. 1,829 1,739 90 5.2%
-------- -------- --------
(d) Practice contribution (a-b-c) ................ 10,648 9,906 742 7.5%
(e) Physician compensation ....................... 9,472 8,905 567 6.4%
(f) IntegraMed additional fee .................... 1,176 1,001 175 17.5%
IntegraMed Financials
(g) IntegraMed gross Partner revenue (b+c+f) ..... 29,390 27,761 1,629 5.9%
(h) Amortization of business service rights ...... (372) (374) 2 -0.5%
(i) Affiliate revenue ............................ 317 279 38 13.6%
(j) Other revenue ................................ 74 110 (36) -32.7%
------ -------- --------
(k) IntegraMed Provider Services revenue (g+h+i+j) 29,409 27,776 1,633 5.9%
====== ======== ========
As of the three months ending March 31, 2007, revenues from Provider
services increased by $1.6 million, or 5.9% from the same period in the prior
year. This increase is comprised of approximately $1.3 million of additional
reimbursed cost of services related to 6.0% FertilityPartner physician practice
revenue growth, $0.3 million in Base and Additional fees paid to IntegraMed by
these practices as a result of improved performance, and an increase in
Affiliate fees which offset slightly lower miscellaneous revenues.
Consumer Services -
Our Shared Risk Refund program continued to experience significant growth
with revenues as of March 31, 2007 rising $0.4 million, or 16% from the same
quarter in the prior year. This growth was fueled by increased patient
enrollments into the program and its expansion and penetration of physician
practices throughout the network.
Pharmaceutical revenue was $58,000 for the three months ended March 31,
2007, compared to $153,000 in the prior year. This decline is a result of
decreasing margins due to pharmaceutical cost increases which are not able to be
passed on to the consumer as a result of competitive pressures.
Contribution:
Our 2007 first quarter contribution of $3.8 million increased approximately
1.8% from the first quarter of 2006. As a percentage of reported revenue, our
contribution margin declined slightly to 11.8% in 2007 versus 12.4% in 2006.
This dip was a result of two factors which impacted our Consumer Services
business and are discussed below. The following factors had a significant effect
on contribution:
Provider Services -
Contribution from our Provider operations in the first quarter of 2007
increased by approximately $254,000, or 9.3% from the same period in the prior
year. This increase is primarily attributable to the continued revenue growth of
the underlying physician practices as described above.
13
Consumer Services -
Contribution from our Shared Risk Refund program was $774,000 in the three
months ended March 31, 2007, compared to $865,000 in the prior year. Although
both revenue and patient volume were higher in 2007 versus 2006, pregnancy
success rates were not. The success rates in the first quarter of 2007 were at
the lower end of expected outcomes for the program and resulted in less revenue
being recognized as we generate income when there is a pregnancy. As the current
year progresses, we expect clinical success rates to return to higher levels.
Pharmaceutical contribution was $59,000 in the first quarter of 2007, was
down $94,000 from the $153,000 contribution reported in the first quarter of
2006. This decrease in contribution, was driven by manufacturer price increases
that were not able to be passed on to the consumer.
General and administrative expenses:
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 approximately $3.1 million for both the first
quarter of 2007 and the first quarter of 2006. Higher depreciation and
information systems disaster recovery costs were generally offset by lower
recruitment and employee benefit costs in the first quarter of 2007 relative to
the first quarter of 2006.
Interest:
Interest income increased to $335,000 for the quarter ended March 31, 2007,
from $221,000 in the same period in 2006. This increase is primarily attributed
to interest earnings on higher investable cash balances in 2007. Interest
expense decreased to $119,000 in the first quarter of 2007, from $159,000 in
2006, primarily as a result of reduced interest charges on our lower debt levels
outstanding.
Income tax provision:
Our provision for income tax was approximately $0.3 million in 2007, or
32.8% of pre-tax income, compared to $0.3 million, or 38.3% of 2006 pre-tax
income. Our effective tax rates for both 2007 and 2006 reflect provisions for
both current and deferred federal and state income taxes. The lower effective
tax rate in 2007 is mainly due to an increase in tax-exempt interest income
projected for the year.
The FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109." This Interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The interpretation was adopted by us
effective January 1, 2007. The adoption of this interpretation did not have a
material impact on our financial statements.
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 March 31, 2007, 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.
14
Liquidity and Capital Resources
As of March 31, 2007, we had approximately $33.0 million in cash and cash
equivalents on hand as compared to $32.2 million at December 31, 2006.
Additionally, we had working capital of approximately $13.2 million, at March
31, 2007, an increase of $0.9 million from working capital of $12.3 million as
of December 31, 2006. 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 $8.1 million and $6.5 million as of March 31, 2007 and December
31, 2006, respectively. These deposits are a significant source of cash flow and
represent interest-free financing for us.
As of March 31, 2007, 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 $3.3 million for the remainder of 2007. 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 March 31, 2007,
approximately $8.3 million of the term loan was outstanding with a remaining
term of 3.75 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 March 31, 2007, interest on the term loan
was payable at a rate of approximately 7.07%. 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 March
31, 2007 under the revolving line of credit the full amount if $10.0 million was
available, of which none was outstanding.
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.
Our Bank of America credit facility is collateralized by substantially all
of our assets. As of March 31, 2007, we were in full compliance with all
applicable debt covenants. We also continuously review our credit agreements and
may renew, revise or enter into new agreements from time to time as deemed
necessary.
15
Significant Contractual Obligations and Other Commercial Commitments
The following summarizes our contractual obligations and other commercial
commitments at March 31, 2007, 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................. $ 8,344,000 $1,439,000 $ 6,905,000 $ -- $ --
Capital lease obligations..... 57,000 57,000 -- -- --
Operating leases.............. 49,284,000 7,208,000 12,561,000 10,649,000 18,866,000
Total contractual cash
obligations............... $57,685,000 $8,704,000 $19,466,000 $10,649,000 $18,866,000
=========== ========== =========== =========== ===========
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
Partner 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 Partner revenues;
(iv) We reduce the cash credit for the variable portion of our Service
Fee which relates to the Partner 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 Partner 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 Partner 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 Partner.
New Accounting Pronouncements
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities
This Statement is effective as of the beginning of an entity's first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007, provided
16
the entity also elects to apply the provisions of FASB Statement No. 157, Fair
Value Measurements. This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This Statement establishes
presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types
of assets and liabilities. This Statement does not eliminate disclosure
requirements included in other accounting standards, including requirements for
disclosures about fair value measurements included in FASB Statements No. 157,
Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial
Instruments. The Company is currently evaluating SFAS No. 159.
SAB No. 108, Quantifying Misstatements in Current Year Financial Statements
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 (Topic 1N). "Quantifying Misstatements in Current
Year Financial Statements," ("SAB No. 108). SAB No. 108 addresses how the effect
of prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB No. 108 addresses the
mechanics of correcting misstatements that include effects from prior years. The
Company is currently evaluating the impact of SAB No. 108 and does not believe
this statement will have an effect on its financial statements.
FASB Interpretation No. 48
In February 2007, the SEC staff clarified its views related to changes in
the classification of interest and penalties for periods prior to the adoption
of FIN 48. Specifically, the SEC staff believes that if a registrant changes how
it classifies interest and penalties upon adoption of FIN 48, it should not
reclassify amounts in prior periods. This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
interpretation was adopted by us effective January 1, 2007. The adoption of this
interpretation did not have a material impact 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 Partner agreements,
our ability to raise additional debt and/or equity capital to finance future
growth, the loss of significant Partner 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 (and
expressly disclaim any such obligation) to update or alter any forward-looking
statements whether as a result of new information, future events or otherwise.
17
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 March 31, 2007, a one percent change in interest rates would impact our
pre-tax income by approximately $240,000 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 March 31,
2007 (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 us to provide an assessment
of the effectiveness of our internal control over financial reporting as of the
end of fiscal year 2007. We are in the process of performing the system and
process documentation, evaluation and testing necessary to make this assessment.
We have not completed this process or its assessment. In the process of
evaluation and testing, we 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.
18
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 March 31, 2007, 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 21.
19
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: May 11, 2007 By:/s/: John W. Hlywak, Jr.
-------------------
John W. Hlywak, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------- ---------
10.23 (i) -- Amendment No. 9 to Service Agreement between IntegraMed
America, Inc. and Shady Grove Fertility Reproductive Science
Center, P.C. dated March 22, 2007.
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 May 11, 2007.
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 May 11, 2007.
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 May 11, 2007.
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 May 11, 2007.
21