ITEM 1. Business
Company Overview
IntegraMed America, Inc. (the "Company") is a health services management company specializing in fertility and assisted reproductive technology ("ART") services. The Company provides comprehensive management services to a nationwide network of medical providers currently consisting of nine sites (each, a "Network Site" or "Reproductive Science Center(R)"). Each Network Site consists of a location or locations where the Company has a management agreement with a physician group or hospital (each, a "Medical Practice") which employs and/or contracts with the physicians. The current network of nine Reproductive Science Centers ("RSCs") is comprised of twenty-two locations in nine states and the District of Columbia and fifty-four physicians and Ph.D. scientists, including physicians and Ph.D. scientists employed and/or contracted by the Medical Practice, as well as, physicians who have arrangements to utilize the Company's facilities.
Industry
Health Services Management
The health care industry in the United States is undergoing significant changes in an effort to manage costs more efficiently while continuing to provide high quality health care services. The United States Health Care Financing Administration has estimated that national health care expenditures in 1997 were $1.1 trillion, with approximately $218 billion directly attributable to physician services. Historically, health care in the United States has been delivered through a fragmented system of health care providers.
Concerns over the accelerating costs of health care have resulted in increased pressures from payors, including governmental entities and managed care organizations, on providers of medical services to provide cost-effective health care. Many payors are increasingly expecting providers of medical services to develop and maintain quality outcomes through utilization review and quality management programs. In addition, such payors typically desire that physician practices share the risk of providing services through capitation and other arrangements that provide for a fixed payment per member for patient care over a specified period of time. This focus on cost-containment and financial risk sharing has placed physician groups and sole practitioners at a significant competitive disadvantage because they typically have high operating costs, limited purchasing power with suppliers and limited abilities to purchase expensive state-of-the-art equipment and invest effectively in sophisticated information systems.
In response to reductions in the levels of reimbursement by third-party payors and the cost-containment pressures on health care providers, physicians and hospitals are increasingly seeking to affiliate with larger organizations, including health services management companies, which manage the non-medical aspects of physician practices and hospitals, such as billing, purchasing and contracting with payor entities. In addition, affiliation with health services management companies provides physician groups and hospitals with improved access to (i) state-of-the-art laboratory facilities, equipment and supplies, (ii) the latest technology and diagnostic and clinical procedures, (iii) capital and informational, managerial and administrative resources and (iv) access to managed care relationships.
The trends that are leading physicians and hospitals to affiliate with health service management companies are magnified in the field of reproductive medicine due to several factors, including (i) the increasingly high level of specialized skills and technology required for comprehensive patient treatment, (ii) the capital intensive nature of acquiring and maintaining state of-the-art medical equipment and laboratory and clinical facilities, (iii) the need to
develop and maintain specialized management information systems to meet the increasing demands of technological advances, patient monitoring and third-party payors, and (iv) the need for seven-days-a-week service to respond to patient needs and to optimize the outcomes of patient treatments.
Reproductive Medicine
Reproductive medicine encompasses several medical disciplines that focus on male and female reproductive systems and processes. Within the field of reproductive medicine, there are several subspecialties, such as obstetrics and gynecology, infertility and reproductive endocrinology. While there are many reasons why couples have difficulty conceiving, the single most prominent course of infertility therapy involves management of the women's endocrine system to optimize an opportunity for pregnancy. Most obstetricians perform ovulation induction, and many gynecologists perform conventional infertility treatments. Infertility specialists are gynecologists who perform more sophisticated medical and surgical infertility treatments. Reproductive endocrinology refers to the diagnosis and treatment of all hormonal problems that lead to abnormal reproductive function or have an effect on the reproductive organs. Reproductive endocrinologists are physicians who have completed four years of residency training in obstetrics and gynecology and have at least two years of additional training in an approved subspecialty fellowship program.
Conventional infertility services include diagnostic tests performed on the female, such as endometrial biopsy, laparoscopy/hysteroscopy examinations and hormone screens, and diagnostic tests performed on the male, such as semen analysis and tests for sperm antibodies. Depending on the results of the diagnostic tests performed, conventional treatment options may include, among others, fertility drug therapy, artificial insemination and infertility surgeries. These conventional infertility services are not classified as ART services. Current types of ART services include in vitro fertilization, gamete intrafallopian transfer, zygote intrafallopian transfer, tubal embryo transfer, frozen embryo transfer and donor egg programs. Current ART techniques used in connection with ART services include intracytoplasmic sperm injection, assisted hatching and cryopreservation of embryos.
According to The American Society for Reproductive Medicine, it is estimated that in 1996 approximately 10% of women between the ages of 15 and 44, or 6.1 million women, had impaired fertility. Based on data derived from industry sources, the Company estimates that annual expenditures relating to infertility services are approximately $2 billion. The Company believes that multiple factors over the past several decades have affected fertility levels. A demographic shift in the United States toward the deferral of marriage and first birth has increased the age at which women are first having children. This, in turn, makes conception more difficult and increases the risks associated with pregnancy, thereby increasing the demand for ART services. In addition, the technological advances in the diagnosis and treatment of infertility have enhanced treatment outcomes and the prognoses for many couples.
Traditionally, conventional infertility services generally have been covered by managed care payors and indemnity insurance, while ART services have been paid directly by patients. Currently, there are several states that mandate offering benefits of varying degrees for infertility services, including ART services. In some states, the mandate is limited to an obligation on the part of the payor to offer the benefit to employers. In Massachusetts, Rhode Island, Maryland, Arkansas, Illinois and Hawaii, the mandate requires coverage of conventional infertility services as well as ART services.
In the United States, there are approximately 38,000 OB/GYNs and approximately 1,500 infertility specialists of which approximately 600 are reproductive endocrinologists. There are approximately 400 facilities providing ART services in the United States, of which approximately one-third are hospital-affiliated and two-thirds are free-standing physician practices. Increasingly, hospital affiliated programs are moving out of the hospital and into lower cost physician practice settings.
Company Strategy
The Company's objective is to develop, manage and integrate a nationwide network of Medical Practices specializing in the provision of high quality, cost effective fertility health care services. The primary elements of the Company's strategy include: (i) establishing additional Network Sites; (ii) increasing revenues at the Network Sites; and (iii) developing a nationwide integrated information system.
Establishing Additional Network Sites
The Company intends to further develop its nationwide network of Medical Practices by acquiring certain assets of and the right to manage leading physician group practices specializing in infertility and ART services. The Company will primarily focus its acquisition activities on larger group practices operating in major cities, as Medical Practices providing infertility and ART services require high fixed overhead which smaller physician group practices (two physicians) and sole practitioners have difficulty in supporting. The Company believes that a number of beneficial factors will contribute to the successful expansion of its network. These factors include: (i) the high quality reputation of the Company in providing management services in the areas of infertility and ART services; (ii) the Company's experience and expertise in increasing revenues and operating in a cost effective manner at its Medical Practices; (iii) the Company's success in supporting improved patient outcomes by providing management services to its Medical Practices; and (iv) the Company's affiliations and relationships with high quality physician groups with outstanding reputations and market position.
In addition, the Company intends to target hospital affiliations as a promising opportunity for new management contracts. Currently, approximately one-third of all ART services are offered in a hospital setting. ART services are highly specialized with unique resource requirements, which the Company can make available to hospitals, such as, embryology services. The Company will target hospital-based programs located in smaller markets which would typically not be a target for the Company's physician group practice service model. The Company's hospital-based ART program management model is financially attractive as it requires limited capital investment and entails modest financial risk to the Company.
Increasing Revenues at the Network Sites
The Company intends to increase revenues derived under its management agreements by assisting the Medical Practices in (i) acquiring and merging smaller physician group practices in existing markets to expand the revenue base at existing Medical Practices; (ii) expanding service offerings at the Medical Practices which have previously been outsourced, such as laboratory and ART services, thereby increasing revenues per patient; (iii) increasing marketing and sales efforts; and (iv) increasing the participation of the Medical Practices in clinical trials of new drugs, medical devices and diagnostic technologies under development.
Developing a Nationwide Integrated Information System
The Company will continue to develop and implement ARTWorks(TM), a suite of fertility care information systems customized for the Company's network of RSCs. ARTWorks is comprised of information technologies in six areas, four of which are currently being implemented and further customized and the latter two of which are currently being developed: (i) ARTWorks for Clinical Services is a clinician focused, patient centered system that provides instant and universal access to the entire medical record for managing patient cycles and a couple's entire reproductive treatment spectrum from initial consultation through retrieval, transfer, and pregnancy outcome; (ii) ARTWorks for Practice Management utilizes a network accessible "Master Patient Index" which tracks patient scheduling, registration, check- in/out, billing collections, referral management, and analysis reporting for the Medical Practices; (iii) ARTWorks for Sales and Marketing manages contacts and assists in developing an extensive database of prospects, clients, and tracking of events. The package manages calendars, communications, contact histories and direct mail programs; (iv) ARTWorks for Customer Satisfaction is built on a standard mailed survey from which numerous analysis reports may be generated providing a highly effective tool for targeting service improvement opportunities; (v) ARTWorks for Decision Support is a comprehensive query and report writing tool which will retrieve and combine data from each ARTWorks system providing for management and clinical decision making; and (vi) ARTWorks for Human Resources is a comprehensive human resource administrative system which will offer support for maintenance of employee information, benefit administration, license tracking, credentialing, time management and performance reviews.
Management Services
The Company provides comprehensive management services to support the Medical Practices. In particular, the Company provides (i) administrative services, including accounting and finance, human resource functions, and purchasing of supplies and equipment; (ii) access to capital; (iii) marketing and sales; (iv) integrated information systems; (v) assistance in identifying best clinical practices; and (vi) access to technology. These services allow
physicians to devote a greater portion of their efforts and time to meeting the medical needs of their patients, which the Company believes leads to improved outcomes and greater patient satisfaction at lower costs.
Administrative Services
The Company provides all of the administrative services necessary for the non-medical aspects of the Medical Practices, including (i) accounting and finance services, such as billing and collections, accounts payable, payroll, and financial reporting and planning; (ii) recruiting, hiring, training and supervising all non-medical personnel; and (iii) purchasing of supplies, pharmaceuticals, equipment, services and insurance. By providing the Medical Practices relief from increasingly complex administrative burdens, the Company enables physicians at the Medical Practices to devote their efforts on a concentrated and continuous basis to the rendering of medical services. Furthermore, the economies of scale inherent in a network system enable the Company to reduce the operating costs of its affiliated Medical Practices by centralizing certain management functions and by contracting for group purchases.
Access to Capital
The Company provides the Medical Practices increased access to capital for expansion and growth. The Company offers physician and hospital providers in its network access to the latest technology and facilities in order for them to provide a full spectrum of services and compete effectively for patients in the marketplace. For example, the Company has built a new facility inclusive of an embryology laboratory for certain Medical Practices, thereby enabling them to expand their service offerings to include a number of service offerings which had previously been outsourced, such as, laboratory and ART services. In other cases, the Company has introduced a new laboratory technique to the Medical Practice, such as intracytoplasmic sperm injection (ICSI) or blastocyst culture and transfer. The Company believes that access to these facilities and technologies has improved the ability of the Medical Practice to offer comprehensive high quality services, expand the revenue base per patient, and compete effectively.
Marketing and Sales
The Company's marketing and sales department specializes in the development of sophisticated marketing and sales programs giving Medical Practices access to business-building techniques to facilitate growth and development. In today's highly competitive health care environment, marketing and sales are essential for the growth and success of physician practices. However, these marketing and sales efforts are often too expensive for many physician practice groups. Affiliation with the Company's network provides physicians access to significantly greater marketing and sales capabilities than would otherwise be available. The Company's marketing services focus on revenue and referral enhancement, relationships with local physicians, media and public relations and managed care contracting.
The Company believes that participation in its network will assist Medical Practices in establishing contracts with managed care organizations. The Company believes that integrating infertility physicians with ART facilities produces a full service Medical Practice that can compete more effectively for managed care contracts.
Integrated Information System
The Company is in the process of utilizing its established base of RSCs to develop a nationwide, integrated information system called ARTWorks to collect and analyze clinical, patient, administrative (including billing and collections), financial, marketing and human resource data. The Company believes it will be able to use this data to control expenses, measure patient outcomes, improve patient care, develop and manage utilization rates and maximize reimbursements. The Company also believes this integrated information system will allow the Medical Practices to more effectively compete for and price managed care contracts, in large part because an information network can provide these managed care organizations with access to patient outcomes and cost data.
Assistance in Identifying Best Clinical Practices
The Company assists Medical Practices in identifying best clinical practices and implementing quality assurance and risk management programs in order to improve patient care and clinical outcomes. For example, the Company has instituted a Clinical Quality Improvement Program that focuses the physicians and laboratory technicians on the principal elements necessary to achieve successful outcomes and incorporates periodic quality review programs.
The Company believes that this program has contributed to a greater than 50% average improvement in pregnancy rates over the last three years at the RSCs. In addition, the Company's structured Clinical Quality Improvement Program produces a distinctive competitive advantage in the marketplace for the Company's network of Medical Practices.
Access to Technology
By affiliating with the Company's network, Medical Practices gain access to advanced technologies, as well as diagnostic and clinical procedures. For example, through participation in clinical trials of new drugs under development for major pharmaceutical companies, Medical Practices have the opportunity to apply technologies developed in a research environment to the clinical setting. Additionally, participation in clinical trials gives Medical Practices preferential involvement in cutting edge therapies and provide these practices with an additional source of revenue.
The Reproductive Science Centers
Each RSC consists of a location or locations where the Company has a management agreement with a physician group or hospital (each a "Medical Practice"), which in turn employs and/or contracts with the physicians.
Current Reproductive Science Centers
The Company currently has a nationwide network consisting of nine RSCs with twenty-two locations in nine states and the District of Columbia and fifty-four physicians and Ph.D. scientists, including physicians and Ph.D. scientists employed and/or contracted by the Medical Practice, as well as physicians who have arrangements to utilize the Company's facilities. The following table describes in detail each RSC:
Recent Acquisitions
In January 1998, the Company completed its second in-market merger with the addition of two physicians to the Fertility Centers of Illinois, S.C. ("FCI"), a physician group practice comprised of six physicians and six locations in the Chicago, Illinois area. The Company acquired certain assets of Advocate Medical Group, S.C. ("AMG") and Advocate MSO, Inc. and acquired the right to manage AMG's infertility practice conducted under the name Center for Reproductive Medicine ("CFRM"). Simultaneous with closing on this transaction, the Company amended its management agreement with FCI to include two of the three physicians practicing under the name CFRM. The aggregate purchase price was approximately $1.5 million, consisting of approximately $1.2 million in cash and 46,079 shares of Common Stock. The majority of the purchase price was allocated to exclusive management rights.
In March 1998, the Company acquired the majority of the capital stock of Shady Grove Fertility Centers, Inc. ("Shady Grove"), currently a Maryland business corporation which provides management services, and formerly a Maryland professional corporation engaged in providing infertility services. Prior to the closing of the transaction, Shady Grove had entered into a twenty-year management agreement with Levy, Sagoskin and Stillman, M.D., P.C. (the "Shady Grove P.C."), an infertility physician group practice comprised of six physicians and four locations surrounding the greater Washington, D.C. area. The Company acquired the balance of the Shady Grove capital stock on January 5, 1999 (the "Second Closing Date"). The aggregate purchase price for all of the Shady Grove capital stock was approximately $5.7 million, consisting of approximately $2.8 million in cash, 185,756 shares of Common Stock, and $1.5 million in promissory notes. The purchase price was allocated to the various assets and liabilities assumed and the balance was allocated to exclusive management rights.
In regard to the shares of Company Common Stock issued in the above transactions, Gerardo Canet, President and Chief Executive Officer of the Company, was granted a voting proxy with respect to (i) the election of Directors or any amendment to the Company's Certificate of Incorporation affecting Directors and (ii) any change in stock options for management and directors for a two-year period from each transaction's respective closing date.
The Company is evaluating and is engaged in discussions with regard to several potential acquisitions. However, the Company has no agreements relating to any acquisitions and there can be no assurance that any definitive agreements will be entered into by the Company or that any additional acquisitions will be consummated.
Clinical and Medical Services
The RSCs offer conventional infertility and ART services and either have, or subcontract with, a state-of-the-art laboratory providing the necessary diagnostic and therapeutic services. Multi-disciplinary teams help infertile couples identify and address distinct physical, emotional, psychological and financial issues related to infertility. Following a consultation session, a patient couple is advised as to the treatment that has the greatest probability of success in light of the couple's specific infertility problem. At this point, a couple may undergo conventional infertility treatment or, if appropriate, may directly undergo ART treatment.
Infertility and ART Services
Conventional infertility procedures include diagnostic tests performed on the female, such as endometrial biopsy, post-coital test, laparoscopy examinations as well as hormone screens, and diagnostic tests performed on the male, such as semen analysis and tests for sperm antibodies. Depending on the results of the diagnostic tests performed, conventional services may include fertility drug therapy, tubal surgery and intrauterine insemination ("IUI"). IUI is a procedure utilized generally to address male factor or unexplained infertility. Depending on the severity of the condition, the man's sperm is processed to identify the most active sperm for insemination into the woman, who must have a normal reproductive system for this procedure. Such conventional infertility services are not classified as ART services and are traditionally performed by infertility specialists.
Current types of ART services include in vitro fertilization ("IVF"), gamete intrafallopian transfer ("GIFT"), zygote intrafallopian transfer ("ZIFT"), tubal embryo transfer ("TET"), frozen embryo transfer ("FET") and donor egg and sperm programs. IVF is performed by combining an egg and sperm in a laboratory and, if fertilization is successful, transferring the resulting embryo into the woman's uterus. GIFT is performed by inserting an egg and sperm directly into a woman's fallopian tube with a resulting embryo floating into the uterus. ZIFT and TET are procedures in which an egg is fertilized in the laboratory and the resulting embryo is then transferred to the woman's fallopian tube. ZIFT and TET are identical except for the timing of the transfer of the embryo. FET is a procedure whereby previously harvested embryos are transferred to the woman's uterus. Women who are unable to produce eggs but who otherwise have normal reproductive systems can use the donor egg program in which a donor is recruited to provide eggs for fertilization that are transferred to the recipient woman. Current techniques used in connection with ART services include intra-cytoplasmic sperm injection, assisted hatching and cryopreservation of embryos.
Development of New Clinical Services
From 1989 through 1998, the Company sponsored research by Monash University in Melbourne, Australia ("Monash") relating to the development of new ART services and techniques. This research led to the world's first birth of a healthy infant from immature oocyte (egg) technology in 1994. Immature oocyte services involve using transvaginal ultrasound-guided aspiration to obtain immature oocytes from a woman's ovaries, maturing and fertilizing of the oocytes in vitro and transferring one or more of the resulting embryos into the woman's uterus for development of a possible pregnancy. The Company anticipates that this technology may, in certain circumstances, facilitate treatment of infertility by stimulating follicular development without the use of drugs.
The Company also has sponsored research by Genzyme Genetics, a division of Genzyme Corp., relating to preimplantation embryo genetic testing (the fusion of advances in genetic testing and embryology). Pursuant to the terms of the agreement, each party was required to fund certain costs relating to the research projects as well as to contribute up to an aggregate of $300,000 to fund the joint development program. This agreement terminated in December 1996. The Company retains the right to technology developed prior to the termination. The Company believes that preimplantation embryo genetic testing could potentially offer infertile couples utilizing ART services a higher probability of the birth of a healthy baby after fertilization, as well as offer fertile couples at high risk of transmitting certain types of genetic disorders the option to utilize ART services to achieve pregnancy with a higher degree of certainty that the fetus will be free of the genetic disorder for which it was tested.
Laboratory Services
All of the RSCs either have, or subcontract with, a state-of-the-art laboratory for the Medical Practice to perform diagnostic endocrine and andrology laboratory tests on patients receiving infertility and ART services. Endocrine tests assess female hormone levels in blood samples, while andrology tests analyze semen samples. These tests are often used by the physician to determine an appropriate treatment plan. In addition, the majority of the RSCs generate additional revenue by providing such endocrine and andrology laboratory tests for non-affiliated physicians in the geographic area.
Network Site Agreements
In establishing a Network Site, the Company typically (i) acquires certain assets of a Medical Practice, (ii) enters into a long-term management agreement with the Medical Practice under which the Company provides comprehensive management services to the Medical Practice and (iii) assumes the principal administrative, financial and general management functions of the Medical Practice. In addition, the Company typically requires (i) that the Medical Practice enter into long-term employment agreements containing non-compete provisions with the affiliated physicians and (ii) that each of the physician shareholders of the Medical Practice enter into a personal responsibility agreement with the Company. Typically, the Medical Practice contracting with the Company is a professional corporation of which certain of or all of the physicians are the sole shareholders.
Management Agreements
Typically, the management agreements obligate the Company to pay a fixed sum for the exclusive right to manage the Medical Practice, a portion or all of which is paid at the contract signing with any balance to be paid in future annual installments. The agreements are typically for terms of ten to 25 years and are generally subject to termination due to insolvency, bankruptcy or material breach of contract. Generally, no shareholder of the Medical Practice may assign his interest in the Medical Practice without the Company's prior written consent.
The management agreements provide that all patient medical care at a Network Site is provided by the physicians at the Medical Practice and that the Company generally is responsible for the management and operation of all other aspects of the Network Site. The Company provides the equipment, facilities and support necessary to operate the Medical Practice and employs substantially all such other non-physician personnel as are necessary to provide technical, consultative and administrative support for the patient services at the Network Site. Under certain management agreements, the Company is committed to provide a clinical laboratory. Under the management agreements, the Company may also advance funds to the Medical Practice to provide new services, utilize new technologies, fund projects, purchase the net accounts receivable, provide working capital or fund mergers with other physicians or physician groups.
Under six of the agreements, including the revised management agreement for the Boston Network Site, the Company receives as compensation for its management services a three-part management fee comprised of: (i) a fixed percentage of net revenues generally equal to 6%, (ii) reimbursed costs of services (costs incurred in managing a Medical Practice and any costs paid on behalf of the Medical Practice) and (iii) a fixed or variable percentage of earnings after management fees which is currently generally equal to up to 20%, or an additional variable percentage of net revenues generally ranging from 7.5% to 9.5%.
Under the revised management agreement for the Long Island Network Site, as compensation for its management services, the Company receives a fixed fee (currently equal to $540,000 per annum), plus reimbursed costs of services.
Two of the Company's Network Sites are affiliated with medical centers. Under one of these management agreements, the Company primarily provides endocrine testing and administrative and finance services for a fixed percentage of revenues, equal to 15% of net revenues, and reimbursed costs of services. Under the second of these management agreements, the Company's revenues are derived from certain ART laboratory services performed; the Company directly bills patients for these services, and out of these revenues, the Company pays its direct costs.
All management fees are reported as "Revenues, net" by the Company. Direct costs incurred by the Company in performing its management services and costs incurred on behalf of the Medical Practices are recorded in operating expenses incurred on behalf of Network Sites. The physicians receive as compensation all remaining earnings after payment of the Company's management fee.
Prior to January 1, 1998, under another form of management agreement which had been in use at the Long Island and Boston Network Sites, the Company recorded all patient service revenues and, out of such revenues, the Company paid the Medical Practices' expenses, physicians' and other medical compensation, direct materials and certain hospital contract fees. Under these agreements, the Company guaranteed a minimum physician compensation based on an annual budget jointly determined by the Company and the physicians. The Company's management fee was payable only out of remaining revenues, if any, after the payment of physician compensation and all direct administrative expenses of the Medical Practice which were recorded as costs of service. Under these arrangements, the Company had been liable for payment of all liabilities incurred by the Medical Practices and had been at risk for any losses incurred in the operation thereof. Due to changes in the management agreements related to the Long Island and Boston Network Sites, effective in October 1997 and January 1998, respectively, the Company no longer displays patient service revenues of the Long Island and Boston Medical Practices which had been reflected in "Revenues, net" in the Company's consolidated statement of operations. The revised management agreements provide for the Company to receive a specific management fee, as previously described, which the Company will report in "Revenues, net" in its consolidated statement of operations. The revised agreements provide for increased incentives and risk-sharing for the Company's affiliated medical providers.
Physician Employment Agreements
Physician employment agreements between the Medical Practices and the physicians generally provide for an initial term ranging from three to five years, which may be automatically renewed for successive intervals unless the physician or the Medical Practice elects not to renew or such agreement is otherwise terminated for cause or the death or disability of a physician. The physicians are paid based upon either the number of procedures performed or other negotiated formulas agreed upon between the physicians and the Medical Practices, and the Medical Practices provide the physicians with health, death and disability insurance and other benefits. The Medical Practices are obligated to obtain and maintain professional liability insurance coverage which is procured on behalf of the physicians. Pursuant to the employment agreements, the physicians agree not to compete with the Medical Practices with whom they have contracted during the term of the agreement and for a certain period following the termination of such employment agreement. In addition, the agreements contain customary confidentiality provisions.
Personal Responsibility Agreements
Commencing with management agreements entered into during 1997, in order to protect its investment and commitment of resources, the Company has entered into a Personal Responsibility Agreement (a "PR Agreement") with each of the physician shareholders of the Medical Practice. If the physician should cease to practice medicine through the respective contracted Medical Practice during the
first five years of the related management agreement, except as a result of death or permanent disability, the PR Agreement obligates the physician to repay a ratable portion of the fee paid by the Company to the Medical Practice for the exclusive right to manage such Medical Practice. The PR Agreement also contains covenants for the physician not to compete with the Company during the term of his or her employment agreement with the Medical Practice and for a certain period thereafter.
Affiliate Care/Satellite Service Agreements
Medical Practices at the Network Sites may also have affiliate care agreements and satellite service agreements with physicians who are not employed by the Medical Practices or the Company located in the geographic area of the Network Sites. Under an affiliate care agreement, the Medical Practice contracts with a physician for the Medical Practice to provide certain ART services for the physician's patients. Under a satellite service agreement, the Medical Practice contracts with a physician for such physician to provide specific services for the Medical Practice's patients, such as ultrasound monitoring, blood drawing and endocrine testing.
Reliance on Third-Party Vendors
The RSCs, as well as all other medical providers who deliver services requiring fertility medication, are dependent on three third-party vendors that produce such medications (including but not limited to: Lupron, Follistim, Repronex, GonalF and Pregnyl) that are vital to the provision of infertility and ART services. Should any of these vendors experience a supply shortage, it may have an adverse impact on the operations of the RSCs. To date, the RSCs have not experienced any such adverse impacts.
Competition
The business of providing health care services is intensely competitive, as is the health care services management industry, and each is continuing to evolve in response to pressures to find the most cost-effective method of providing quality health care. The Company experiences competitive pressures for the acquisition of the assets of, and the provision of management services to, additional Medical Practices. Although the Company focuses on Medical Practices that provide infertility and ART services, it competes for management contracts with other health care services management companies, including those focused on infertility and ART services, as well as hospitals and hospital- sponsored management services organizations. If federal or state governments enact laws that attract other health care providers to the managed care market, the Company may encounter increased competition from other institutions seeking to increase their presence in the managed care market and which have substantially greater resources than the Company. There can be no assurance that the Company will be able to compete effectively with its current competitors, that additional competitors will not enter the market, or that such competition will not make it more difficult to acquire the assets of, and provide management services for, Medical Practices on terms beneficial to the Company.
The infertility industry is highly competitive and characterized by technological improvements. New ART services and techniques may be developed that may render obsolete the ART services and techniques currently employed at the RSCs. Competition in the areas of infertility and ART services is largely based on pregnancy rates and other patient outcomes. Accordingly, the ability of a Medical Practice to compete is largely dependent on its ability to achieve adequate pregnancy rates and patient satisfaction levels.
Effects of Third-Party Payor Contracts
Traditionally, ART services have been paid for directly by patients and conventional infertility services have been largely covered by indemnity insurance or managed care payors. Currently, there are several states that mandate offering certain benefits of varying degrees for infertility and ART services. In some cases, the mandate is limited to an obligation on the part of the payor to offer the benefit to employers. In Massachusetts, Rhode Island, Maryland, Arkansas, Illinois and Hawaii, the mandate requires coverage of conventional infertility services as well as certain ART services.
Over the past few years much attention has been focused on clinical outcomes in managed care. Infertility is a disorder which naturally lends itself to developing a managed care plan. First, infertility has a clearly defined endpoint: an infertile couple either conceives or does not conceive. Second, the treatment regimens and protocols used for treating infertile couples have predictable outcomes that make it possible to develop statistical tables for the
probability of success. Third, it is possible to develop rational treatment plans over a limited period of time for infertile couples. However, there can be no assurance that third-party payors will increase reimbursement coverage for ART services.
The Company has invested in information technology that takes into consideration the cost structure of a full service practice, the probability of achieving clinical success, and defined treatment plans which result in improved outcomes and reduced costs. In 1998, the Company initiated a managed care strategy which incorporates quality indicators in addition to price. As a result of this strategy, several leading health plans in Massachusetts included quality indicators in their contracting prices for the first time.
The Company estimates that the majority of the couples participating in infertility and ART services at the RSCs, other than in California, Massachusetts and Illinois, have greater than 50% of their costs reimbursed by their health care insurance carrier. In California, the majority of the patient costs are not reimbursed. In Massachusetts and Illinois, where comprehensive infertility and ART services insurance reimbursement is mandated, virtually all patient costs are reimbursed. Approximately 67% and 61% of the Company's revenues, net for the years ended December 31, 1998 and 1997, respectively, were derived from revenues received by the Medical Practices from third-party payors. To date, the Company has not been significantly negatively impacted by existing trends related to managed care contracts. As the Company's management fees for managing such Medical Practices are based on revenues and/or earnings of the respective Medical Practices, changes in managed care practices, including changes in covered procedures or reimbursement rates could adversely affect the Company's management fees in the future.
Government Regulation
As a participant in the health care industry, the Company's operations and its relationships with the Medical Practices are subject to extensive and increasing regulation by various governmental entities at the federal, state and local levels. The Company believes its operations and those of the Medical Practices are in material compliance with applicable health care laws. Nevertheless, the laws and regulations in this area are extremely complex and subject to changing interpretation and many aspects of the Company's business and business opportunities have not been the subject of federal or state regulatory review or interpretation. Accordingly, there is no assurance that the Company's operations have been in compliance at all times with all such laws and regulations. In addition, there is no assurance that a court or regulatory authority will not determine that the Company's past, current or future operations violate applicable laws or regulations. If the Company's interpretation of the relevant laws and regulations is inaccurate, there could be a material adverse effect on the Company's business, financial condition and operating results. There can be no assurance that such laws will be interpreted in a manner consistent with the Company's practices. There can be no assurance that a review of the Company or the Medical Practices by courts or regulatory authorities will not result in a determination that would require the Company or the Medical Practices to change their practices. There also can be no assurance that the health care regulatory environment will not change so as to restrict the Company's or the Medical Practices' existing operations or their expansions. Any significant restructuring or restriction could have a material adverse effect on the Company's business, financial condition and operating results.
Corporate Practice of Medicine Laws. The Company's operations in Massachusetts, New York, New Jersey, Pennsylvania, District of Columbia, Texas, California, Illinois, Maryland and Virginia may be subject to prohibitions relating to the corporate practice of medicine. The laws of these states prohibit corporations other than professional corporations or associations from practicing medicine or exercising control over physicians, and prohibit physicians from practicing medicine in partnership with, or as employees of, any person not licensed to practice medicine and may prohibit a corporation other than professional corporations or associations (or, in some states, limited liability companies) from acquiring the goodwill of a medical practice. In the context of management contracts between a corporation not authorized to practice medicine and the physicians or their professional entity, the laws of most of these states focus on the extent to which the corporation exercises control over the physicians and on the ability of the physicians to use their own professional judgment as to diagnosis and treatment. The Company believes its operations are in material compliance with applicable state laws relating to the corporate practice of medicine. The Company performs only non-medical administrative services, and in certain circumstances, clinical laboratory services. The Company does not represent to the public that it offers medical services, and the Company does not exercise influence or control over the practice of medicine by physicians with whom it contracts in these states. In each of these states, the Medical Practice is the sole employer of the physicians, and the Medical Practice retains the full authority to direct the medical, professional and ethical aspects of its medical practice. However, although the Company believes its operations are in material compliance with applicable state corporate practice of medicine laws, the laws and their
interpretations vary from state to state, and they are enforced by regulatory authorities that have broad discretionary authority. There can be no assurance that these laws will be interpreted in a manner consistent with the Company's practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on the Company's business, financial condition and operating results. If a corporate practice of medicine law is interpreted in a manner that is inconsistent with the Company's practices, the Company would be required to restructure or terminate its relationship with the applicable Medical Practice in order to bring its activities into compliance with such law. The termination of, or failure of the Company to successfully restructure, any such relationship could result in fines or a loss of revenue that could have a material adverse effect on the Company's business, financial condition and operating results. In addition, expansion of the Company's operations to new jurisdictions could require structural and organizational modifications of the Company's relationships with the Medical Practices in order to comply with additional state statutes.
Fee-Splitting Laws. The Company's operations in the states of New York, California, Maryland and Illinois are subject to express fee-splitting prohibitions. The laws of these states prohibit physicians from splitting professional fees with non-physicians and health care professionals not affiliated with the physician performing the services generating the fees. In New York, this prohibition includes any fee the Company may receive from the Medical Practices which is set in terms of a percentage of, or otherwise dependent on, the income or receipts generated by the physicians. In certain states, such as California and New York, any fees that a non-physician receives in connection with the management of a physician practice must bear a reasonable relationship to the services rendered, based upon the fair market value of such services. Under Illinois law, the courts have broadly interpreted the fee-splitting prohibition in that state to prohibit compensation arrangements that include (i) fees that a management company may receive based on a percentage of net profits generated by physicians, despite the performance of legitimate management services, (ii) fees received by a management company engaged in obtaining referrals for its physician where the fees are based on a percentage of certain billings collected by the physician and (iii) purchase price consideration to a seller of a medical practice based on a percentage of the buyer's revenues following the acquisition. Several of the other states where the Company has operations, such as Texas and New Jersey, do not expressly prohibit fee-splitting but do have corporate practice of medicine prohibitions. In these states, regulatory authorities frequently interpret the corporate practice of medicine prohibition to encompass fee-splitting, particularly in arrangements where the compensation charged by the management company is not reasonably related to the services rendered. In addition, certain states (including Virginia and the District of Columbia), have fee-splitting prohibitions which have restrictions on splitting or dividing fees with persons in exchange for professional referrals.
The Company believes that its current operations are in material compliance with applicable state laws relating to fee-splitting prohibitions. However, there can be no assurance that these laws will be interpreted in a manner consistent with the Company's practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on the Company's business, financial condition and operating results. If a fee-splitting law is interpreted in a manner that is inconsistent with the Company's practices, the Company could be required to restructure or terminate its relationship with the applicable Medical Practice in order to bring its activities into compliance with such law. The termination of, or failure of the Company to successfully restructure, any such relationship could have a material adverse effect on the Company's business, financial condition and operating results. In addition, expansion of the Company's operations to new jurisdictions could require structural and organizational modifications of the Company's relationships with the Medical Practices in order to comply with additional state statutes.
With respect to the Chicago and Shady Grove Network Sites, the management agreement between the Company and the affiliated Medical Practice provides that the Company will be paid a base fee equal to a fixed percentage of the revenues at the Network Site and, as additional compensation, an additional variable percentage of such revenues that declines to zero to the extent the costs relating to the management of the Medical Practice increase as a percentage of total revenues. The Company and the respective Medical Practices have agreed that if such compensation arrangement were found to be illegal, unenforceable, against public policy or forbidden by law, the management fee would be an annual fixed fee to be mutually agreed upon, not less than $1.0 million per year, retroactive to the effective date of the agreement. In such event, the management fees derived from these Medical Practices may decrease. Because the Company can not predict or guarantee the actions of regulatory authorities, there is a risk that a regulatory authority may disagree with the compensation arrangement and challenge the same. In the event of such challenge, the compensation arrangement may not be upheld. Moreover, if a management agreement was amended to provide for an annual fixed fee payable to the Company, the contribution from the Network Site could be materially reduced.
Federal Antikickback Law. The Company is subject to the laws and regulations that govern reimbursement under the Medicare and Medicaid programs. Currently less than 5% of the revenues of the Medical Practices are derived from Medicare and none of such revenues are derived from Medicaid. Federal law (the "Federal Antikickback Law") prohibits, with some exceptions, the solicitation or receipt of remuneration in exchange for, or the offer or payment of remuneration to induce, the referral of federal health care program beneficiaries, including Medicare or Medicaid patients, or in return for the recommendation, arrangement, purchase, lease or order of items or services that are covered by Medicare, Medicaid and other federal and state health programs.
With respect to the Federal Antikickback Law, the Office of the Inspector General ("OIG") has promulgated regulatory "safe harbors" under the Federal Antikickback Law that describe payment practices between health care providers and referral sources that will not be subject to criminal prosecution and that will not provide the basis for exclusion from the federal health care programs. Relationships and arrangements that do not fall within the safe harbors are not illegal per se, but will subject the activity to greater governmental scrutiny. Many of the parties with whom the Company contracts refer, or are in a position to refer, patients to the Company. Although the Company believes that it is in material compliance with the Federal Antikickback Law, there can be no assurance that such law or the safe harbor regulations promulgated thereunder will be interpreted in a manner consistent with the Company's practices. The breadth of the Federal Antikickback Law, the paucity of court decisions interpreting the law and the safe harbor regulations, and the limited nature of regulatory guidance regarding the safe harbor regulations have resulted in ambiguous and varying interpretations of the Federal Antikickback Law. The OIG or the Department of Justice ("DOJ") could determine that the Company's past or current policies and practices regarding its contracts and relationships with the Medical Practices violate the Federal Antikickback Law. In such event, no assurance can be given that the Company's interpretation of these laws will prevail. In addition, Congress has passed the Balanced Budget Act of 1997, which, among other provisions, permits the imposition of civil monetary penalties (in addition to existing criminal penalties) for violations of the Antikickback Law. The failure of the Company's interpretation of the Federal Antikickback Law to prevail, and the possibility of having civil monetary penalties imposed as a result of a violation, could have a material adverse effect on the Company's business, financial condition and operating results.
Federal Referral Laws. Federal law also prohibits, with some exceptions, physicians from referring Medicare or Medicaid patients to entities for certain enumerated "designated health services" with which the physician (or members of his or her immediate family) has an ownership or investment relationship, and an entity from filing a claim for reimbursement under the Medicare or Medicaid programs for certain enumerated designated health services if the entity has a financial relationship with the referring physician. Significant prohibitions against physician referrals were enacted by the United States Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions, known as "Stark II," amended prior physician self-referral legislation known as "Stark I" by dramatically enlarging the field of physician-owned or physician-interested entities to which the referral prohibitions apply. The designated health services enumerated under Stark II include: clinical laboratory services, radiology services, radiation therapy services, physical and occupational therapy services, durable medical equipment, parenteral and enteral nutrients, equipment and supplies, prosthetics, orthotics, outpatient prescription drugs, home health services and inpatient and outpatient hospital services. Significantly, certain "in-office ancillary services" furnished by group practices are excepted from the physician referral prohibitions of Stark II. The Company believes that its practices either fit within this and other exceptions contained in such statutes, or have been structured so as to not implicate the statute in the first instance, and therefore, the Company believes it is in compliance with such legislation. Nevertheless, future regulations or interpretations of current regulations could require the Company to modify the form of its relationships with the Medical Practices. Moreover, the violation of Stark I or Stark II by the Medical Practices could result in significant fines, loss of reimbursement and exclusion from the Medicare and Medicaid programs which could have a material adverse effect on the Company.
Recently, Congress enacted the Health Insurance Portability and Accounting Act of 1996, which includes an expansion of certain fraud and abuse provisions (including the Federal Antikickback Law and Stark II) to other federal health care programs and a separate criminal statute prohibiting "health care fraud." Due to the breadth of the statutory provisions of the fraud and abuse laws and the absence of definitive regulations or court decisions addressing the type of arrangements by which the Company and its Medical Practices conduct and will conduct their business, from time to time certain of their practices may be subject to challenge under these laws.
False Claims. Under separate federal statutes, submission of claims for payment that are "not provided as claimed" may lead to civil money penalties, criminal fines and imprisonment and/or exclusion from participation in the
Medicare, Medicaid and other federally-funded health care programs. These false claims statutes include the Federal False Claims Act, which allows any person to bring suit alleging false or fraudulent Medicare or Medicaid claims or other violations of the statute and to share in any amounts paid by the entity to the government in fines or settlement. Such qui tam actions have increased significantly in recent years and have increased the risk that a health care company will have to defend a false claims action, pay fines or be excluded from participation in the Medicare and/or Medicaid programs as a result of an investigation arising out of such an action.
State Antikickback and Self-Referral Laws. The Company is also subject to state statutes and regulations that prohibit kickbacks in return for the referral of patients in each state in which the Company has operations. Several of these laws apply to services reimbursed by all payors, not simply Medicare or Medicaid. Violations of these laws may result in prohibition of payment for services rendered, loss of licenses as well as fines and criminal penalties.
State statutes and regulations that prohibit payments intended to induce the referrals of patients to health care providers range from statutes and regulations that are substantially the same as the federal laws and the safe harbor regulations to regulations regarding unprofessional conduct. These laws and regulations vary significantly from state to state, are often vague, and, in many cases, have not been interpreted by courts or regulatory agencies. Adverse judicial or administrative interpretations of such laws could require the Company to modify the form of its relationships with the Medical Practices or could otherwise have a material adverse effect on the Company's business, financial condition and operating results.
In addition, New York, New Jersey, California, Florida, Pennsylvania, Illinois, Maryland and Virginia have enacted laws on self-referrals that apply generally to the health care profession, and the Company believes it is likely that more states will follow. These state self-referral laws include outright prohibitions on self-referrals similar to Stark or a simple requirement that physicians or other health care professionals disclose to patients any financial relationship the physicians or health care professionals have with a health care provider that is being recommended to the patients. The Company's operations in New York, New Jersey, California and Illinois have laboratories which are subject to prohibitions on referrals for services in which the referring physician has a beneficial interest. However, New York, New Jersey, California and Maryland have an exception for "in-office ancillary services" similar to the federal exception and in Illinois, the self-referral laws do not apply to services within the health care worker's office or group practice or to outside services as long as the health care worker directly provides health services within the entity and will be personally involved with the provision of care to the referred patient. The Company believes that the laboratories in its operations fit within exceptions contained in such statutes or are not subject to the statute at all. Each of the laboratories in the states in which these self-referral laws apply are owned by the Medical Practice in that state and are located in the office of such Medical Practice. However, there can be no assurance that these laws will be interpreted in a manner consistent with the Company's practices or that other laws or regulations will not be enacted in the future that could have a material adverse effect on the Company's business, financial condition or operating results. In addition, expansion of the Company's operations to new jurisdictions could require structural and organizational modifications of the Company's relationships with the Medical Practices in order to comply with new or revised state statutes.
Antitrust Laws. In connection with corporate practice of medicine laws referred to above, the Medical Practices with whom the Company is affiliated necessarily are organized as separate legal entities. As such, the Medical Practices may be deemed to be persons separate both from the Company and from each other under the antitrust laws and, accordingly, subject to a wide range of laws that prohibit anti-competitive conduct among separate legal entities. The Company believes it is in compliance with these laws and intends to comply with any state and federal laws that may affect its development of health care networks. There can be no assurance, however, that a review of the Company's business by courts or regulatory authorities would not have a material adverse effect on the operation of the Company and the Medical Practices.
Government Regulation of ART Services. With the increased utilization of ART services, government oversight of the ART industry has increased and legislation has been adopted or is being considered in a number of states regulating the storage, testing and distribution of sperm, eggs and embryos. The Company believes it is currently in compliance with such legislation where failure to comply would subject the Company to sanctions by regulatory authorities, which could have a material adverse effect on the Company's business, financial condition and operating results.
Regulation of Clinical Laboratories. The Company's and the Medical Practices' endocrine and embryology clinical laboratories are subject to governmental regulations at the federal, state and local levels. The Company and/or the Medical Practices at each Network Site have obtained, and from time to time renew, federal and/or state licenses for the laboratories operated at the Network Sites.
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA 88") extended federal oversight to all clinical laboratories, including those that handle biological matter, such as eggs, sperm and embryos, by requiring that all laboratories be certified by the government, meet governmental quality and personnel standards, undergo proficiency testing, be subject to biennial inspections, and remit fees. For the first time, the federal government is regulating all laboratories, including those operated by physicians in their offices. Rather than focusing on location, size or type of laboratory, this extended oversight is based on the complexity of the test the laboratories perform. CLIA 88 and the 1992 implementing regulations established a more stringent proficiency testing program for laboratories and increased the range and severity of sanctions for violating the federal licensing requirements. A laboratory that performs highly complex tests must meet more stringent requirements, while those that perform only routine "waived" tests may apply for a waiver from most requirements of CLIA 88.
The sanctions for failure to comply with CLIA and these regulations include suspension, revocation or limitation of a laboratory's CLIA certificate necessary to conduct business, significant fines or criminal penalties. The loss of a license, imposition of a fine or future changes in such federal, state and local laws and regulations (or in the interpretation of current laws and regulations) could have a material adverse effect on the Company.
In addition, the Company's clinical laboratory activities are subject to state regulation. CLIA 88 permits a state to require more stringent regulations than the federal law. For example, state law may require that laboratory personnel meet certain more stringent qualifications, specify certain quality control standards, maintain certain records, and undergo additional proficiency testing.
The Company believes it is in material compliance with the foregoing standards.
Other Licensing Requirements. Every state imposes licensing requirements on individual physicians, and some regulate facilities and services operated by physicians. In addition, many states require regulatory approval, including certificates of need, before establishing certain types of health care facilities, offering certain services, or making certain capital expenditures in excess of statutory thresholds for health care equipment, facilities or services. To date, the Company has not been required to obtain certificates of need or similar approvals for its activities. In connection with the expansion of its operations into new markets and contracting with managed care organizations, the Company and the Medical Practices may become subject to compliance with additional federal and state regulations. Finally, the Company and the Medical Practices are subject to federal, state and local laws dealing with issues such as occupational safety, employment, medical leave, insurance regulation, civil rights and discrimination, medical waste and other environmental issues. Increasingly, federal, state and local governments are expanding the regulatory requirements for businesses, including medical practices. The imposition of these regulatory requirements may have the effect of increasing operating costs and reducing the profitability of the Company's operations.
Future Legislation and Regulation. As a result of the continued escalation of health care costs and the inability of many individuals to obtain health insurance, numerous proposals have been or may be introduced in the United States Congress and state legislatures relating to health care reform. There can be no assurance as to the ultimate content, timing or effect of any health care reform legislation, nor is it possible at this time to estimate the impact of potential legislation, which may be material, on the Company.
Liability and Insurance
The provision of health care services entails the substantial risk of potential claims of medical malpractice and similar claims. The Company does not, itself, engage in the practice of medicine or assume responsibility for compliance with regulatory requirements directly applicable to physicians and requires associated Medical Practices to maintain medical malpractice insurance. In general, the Company has established a program that provides the Medical Practices with such required insurance. However, in the event that services provided at the RSCs or any affiliated Medical Practice are alleged to have resulted in injury or other adverse effects, the Company is likely to be named as a party in a legal proceeding.
Although the Company currently maintains liability insurance that it believes is adequate as to both risk and amount, successful malpractice claims could exceed the limits of the Company's insurance and could have a material adverse effect on the Company's business, financial condition or operating results. Moreover, there can be no assurance that the Company will be able to obtain such insurance on commercially reasonable terms in the future or that any such insurance will provide adequate coverage against potential claims. In addition, a malpractice claim asserted against the Company could be costly to defend, could consume management resources and could adversely affect the Company's reputation and business, regardless of the merit or eventual outcome of such claim. In addition, in connection with the acquisition of the assets of certain Medical Practices, the Company may assume certain of the stated liabilities of such practice. Therefore, claims may be asserted against the Company for events related to such practice prior to the acquisition by the Company. The Company maintains insurance coverage related to those risks that it believes is adequate as to the risks and amounts, although there can be no assurance that any successful claims will not exceed applicable policy limits.
There are inherent risks specific to the provision of ART services. For example, the long-term effects of the administration of fertility medication, integral to most infertility and ART services, on women and their children are of concern to certain physicians and others who fear the medication may prove to be carcinogenic or cause other medical problems. Currently, fertility medication is critical to most ART services and a ban by the United States Food and Drug Administration or any limitation on its use would have a material adverse effect on the Company. Further, ART services increase the likelihood of multiple births, which are often premature and may result in increased costs and complications.
Employees
As of March 1, 1999, the Company had 414 employees, 382 are employed at the Network Sites and 32 are employed at the Company's headquarters, including 6 of whom are executive management. Of the Company's employees, 158 persons at the Network Sites and 4 at the Company's headquarters are employed on a part-time basis. The Company is not party to any collective bargaining agreement and believes its employee relationships are good.
ITEM 2.
ITEM 2. Properties
The Company's headquarters and executive offices are in Purchase, New York, where it occupies approximately 8,000 square feet under a lease expiring April 14, 2000 at a monthly rental of $15,339.
The Company leases, subleases, and/or occupies, pursuant to its management agreements, each Network Site location from third-party landlords. Costs associated with these agreements are included in "Cost of services rendered" and are reimbursed to the Company as part of its management fee; reimbursed costs are included in "Revenues, net".
The Company believes its executive offices and the space occupied by the Network Sites are adequate.
ITEM 3.
ITEM 3. Legal Proceedings
On March 10, 1998, the Company had received notice from Reproductive Sciences Medical Center, Inc. ("RSMC") claiming that the Company had materially breached its management agreement with RSMC and demanded that alleged breaches be remedied. Contrary to RSMC's allegations, the Company believed that it had materially performed its obligations under the management agreement and that RSMC had materially breached the management agreement. On September 1, 1998, the Company and RSMC entered into a stipulation and settlement agreement, resolving all claims against each other. The management agreement has been terminated, RSMC will lease the Company's assets over a period of three years, and the parties have entered into mutual consulting agreements.
On October 9, 1998, W.F. Howard, M.D., P.A., filed a lawsuit against the Company in the District Court of Denton County, Texas, seeking to rescind the management agreement related to the Dallas Network Site, or collect damages, on the ground that its practice has not realized the degree of growth or increases as allegedly projected by the Company. The complaint asserts alleged breaches of contract, fiduciary duties and warranties, as well as a claim under the Texas Deceptive Trade Practices Act, and claims lost profit damages as well as an exemplary award under statute. The Company believes that this complaint is without merit, denies the allegations, and intends to vigorously defend its position. Litigation counsel has advised the Company that it is too early in the
litigation to meaningfully assess the likelihood of success of this lawsuit. Nonetheless, counsel believes that even an unfavorable result will not have a material adverse effect on the Company. The management agreement remains in full operation during the pendency of the lawsuit.
There are other minor legal proceedings to which the Company is a party. In the Company's view, the claims asserted and the outcome of these proceedings will not have a material adverse effect on the financial position, results of operations or the cash flows of the Company.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
At a Special Meeting of the stockholders of IntegraMed America, Inc. held on November 17, 1998 approval was obtained for the amendment to the Company's Amended and Restated Certificate of Incorporation to effect a one-for- four reverse stock split of the issued and outstanding shares of the Common Stock, par value $.01 per share, of the Company. The respective vote tabulations were as follows: 17,230,415 votes For; 1,169,134 votes Against; and 19,775 Abstentions.
PART II
ITEM 5.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been traded on the Nasdaq National Market under the symbol "INMD" since the Company's formal name change in May 1996 and prior to the name change under the symbol "IVFA" since May 21, 1993. Prior thereto, the Company's Common Stock had been trading on the Nasdaq Small Cap Market since October 8, 1992. The following table sets forth the high and low sales price for the Common Stock, as reported on the Nasdaq National Market. The 1998 and 1997 sales prices for the Common Stock reflect the Company's 1-for-4 reverse stock split effective November 17, 1998.
Common Stock ---------------- High Low ---- --- First Quarter...................................$10.00 $6.00 Second Quarter.................................. 7.75 5.00 Third Quarter................................... 10.12 5.50 Fourth Quarter.................................. 10.12 5.12
First Quarter................................... $9.50 $5.38 Second Quarter.................................. 9.00 4.75 Third Quarter................................... 6.25 2.50 Fourth Quarter.................................. 5.19 2.25
On March 1, 1998, there were approximately 264 holders of record of the Common Stock and approximately 1,600 beneficial owners of shares registered in nominee or street name.
The Company currently anticipates that it will retain all available funds for use in the operation of its business and for potential acquisitions, and therefore, does not anticipate paying any cash dividends on its Common Stock for the foreseeable future.
Dividends on the Convertible Preferred Stock are payable at the rate of $0.80 per share per annum, quarterly on the fifteenth day of August, November, February and May of each year commencing August 15, 1993. In May 1995, as a result of the Company's Board of Directors suspending four quarterly dividend payments, holders of the Convertible Preferred Stock became entitled to one vote per share of Convertible Preferred Stock on all matters submitted to a vote of stockholders, including election of directors; once in effect, such voting rights are not terminated by the payment of all accrued dividends. In October 1998, the Company paid the aggregate Convertible Preferred Stock dividend payments of $563,186 which had been in arrears. Currently, there are no Convertible Preferred Stock dividend payments in arrears.
In November 1998, the Company issued unregistered warrants to acquire 40,625 shares of Common Stock (the "Boston Warrants") to the shareholders of the Medical Practice associated with the Reproductive Science Center of Boston (the "Boston Medical Practice") in consideration of extending the Company's management agreement with the Boston Medical Practice from ten to twenty-five years. Twenty percent of the Boston Warrants vested immediately and have an exercise price of $4.12. The balance of the Boston Warrants vest in annual 20% increments at an exercise price which increases annually by 20% commencing November 18, 1999.
In January 1999, the Company issued unregistered warrants to acquire 5,000 shares of Common Stock at $5.125 per share to Robert J. Stillman, M.D. in connection with the Second Closing Date of the Shady Grove acquisition.
ITEM 6.
ITEM 6. Selected Financial Data
The following selected financial data are derived from the Company's consolidated financial statements and should be read in conjunction with the financial statements, related notes, and other financial information included elsewhere in this Annual Report on Form 10-K.
Statement of Operations Data (1):
Balance Sheet Data:
(1) Earnings (loss) per share and weighted average share amounts for each year reflect the Company's 1-for-4 reverse stock split effective November 17, 1998.
(2) Refer to Note 6 - Restructuring and Other Charges to the Company's Consolidated Financial Statements.
(3) The AWM Division operations were sold effective September 1, 1998. Refer to Note 5 - Discontinued Operations to the Company's Consolidated Financial Statements.
(4) Net loss per share in 1996 of $(0.85) excludes the effect of the Company's Second Offer. Refer to Note 11 to the Company's Consolidated Financial Statements regarding the impact of the Company's Second Offer on net loss per share from continuing operations in 1996.
(5) Includes controlled assets of certain Medical Providers of $650,000, $1,759,000, and $2,783,000 at December 31, 1996, 1995 and 1994, respectively .
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of operations of the Company for the three years ended December 31, 1998. It should be read in conjunction with the Company's Consolidated Financial Statements, the related notes thereto and other financial and operating information included in this Form 10-K.
Overview
IntegraMed America, Inc. (the "Company") is a health services management company specializing in fertility and assisted reproductive technology ("ART") services. The Company provides comprehensive management services to a nationwide network of medical providers currently consisting of nine sites (each, a "Network Site" or "Reproductive Science Center(R)"). Each Network Site consists of a location or locations where the Company has a management agreement with a physician group or hospital (each, a "Medical Practice") which employs and/or contracts the physicians. The current network of nine Reproductive Science Centers ("RSCs") is comprised of twenty-two locations in nine states and the District of Columbia and fifty-four physicians and Ph.D. scientists, including physicians and Ph.D. scientists employed and/or contracted by the Medical Practice, as well as, physicians who have arrangements to utilize the Company's facilities.
The Company's objective is to develop, manage and integrate a nationwide network of Medical Practices specializing in the provision of high quality, cost effective fertility health care services. The primary elements of the Company's strategy include: (i) establishing additional Network Sites; (ii) increasing revenues at the Network Sites; and (iii) developing a nationwide integrated information system.
During the first quarter of 1998, the Company completed an equity private placement of $5.5 million with Morgan Stanley Venture Partners' affiliates. A portion of these funds was used by the Company to purchase the capital stock of Shady Grove Fertility Centers, Inc. ("Shady Grove") and the right to manage the Levy, Sagoskin and Stillman , M.D., P.C. (the "Shady Grove P.C."), an infertility physician group practice comprised of six physicians and four locations in the greater Washington, D.C. area.
In September 1998, the Company obtained from Fleet Bank, N.A. a $13.0 million credit facility to fund acquisitions over approximately the next one to two years, to provide working capital, and to refinance its existing bank debt. In addition, the Company has and will continue to utilize a portion of the proceeds of the term loan from its new credit facility to pay part of the consideration to repurchase up to $2 million of the Company's outstanding shares of Common Stock from time to time on the open market at prevailing market prices or through privately negotiated transactions.
During 1998, the Company recorded restructuring and other charges of approximately $2.1 million associated with its termination of its management agreement with the Reproductive Science Center of Greater Philadelphia, a single- physician Network Site, effective July 1, 1998, and exclusive management right impairment losses related to two other single-physician Network Sites. In addition, due to continued operating losses and the Company's decision to focus exclusively on fertility services, the Company sold the Adult Women's Medical Division ("AWM Division") operations effective September 1, 1998. In 1998, the Company recorded an aggregate charge of approximately $4.5 million related to the operating losses and the disposal of the AWM Division.
The Company effected a 1-for-4 reverse stock split on November 17, 1998. The reverse stock split was intended to allow the Company to comply with the minimum $1.00 bid price per share requirement for continued listing of the Company's Common Stock on the Nasdaq National Market.
Since inception through December 31, 1997, the management agreements related to the Long Island and Boston Network Sites have been incorporated in the Company's consolidated financial statements via the display method as the Company believed that these management agreements provided it with a "net profits or equivalent interest" in the medical services furnished by the Medical Practices at the Long Island and Boston Network Sites. Consequently, for the Long Island and Boston Network Sites, the Company has historically presented the Medical Practices' patient services revenue, less amounts retained by the Medical Practices, or "Medical Practice retainage", as "Revenues after Medical Practice retainage" in its consolidated statement of operations ("display method"). Due to changes in the management agreements related to the Long Island and Boston Network Sites effective in October 1997 and January 1998, respectively, the Company no longer displays the patient services revenue and
Medical Practice retainage related to these Network Sites in the accompanying consolidated statement of operations for the periods prior to January 1, 1998. The revised management agreements provide for the Company to receive a specific management fee which the Company has reported in "Revenues, net" in the accompanying consolidated statement of operations. The revised agreements provide for increased incentives and risk-sharing for the Company's affiliated Medical Practices.
The Medical Practices managed by the Company are parties to managed care contracts. Approximately 67% and 61% of the Company's revenues, net for the years ended December 31, 1998 and 1997, respectively, were derived from revenues received by the Medical Practices from third-party payors. To date, the Company has not been negatively impacted by existing trends related to managed care contracts. As the Company's management fees for managing such Medical Practices are based on revenues and/or earnings of the respective Medical Practices, changes in managed care practices, including changes in covered procedures or reimbursement rates could adversely affect the Company's management fees in the future.
Results of Operations
The following table shows the percentage of net revenue represented by various expense and other income items reflected in the Company's Consolidated Statement of Operations for the years ended December 31, 1998, 1997 and 1996.
(a) Excluding the effect of the restructuring and other charges in 1998, income from continuing operations as a percent of revenues, net would have been 4.8% for the year ended December 31, 1998.
Calendar Year 1998 Compared to Calendar Year 1997
Revenues, net for 1998 were approximately $38.6 million as compared to approximately $20.6 million for 1997, an increase of $18.0 million, or 87.7%. The increase in revenues, excluding revenues related to the Philadelphia Network Site agreement which was terminated effective July 1, 1998 and including revenues related to the San Diego Network Site agreement which was terminated effective September 1, 1998, was approximately 74.5% attributable to new management agreements entered into during the first quarter of 1998 and the second and third quarter of 1997 and approximately 25.5% attributable to same market growth. Same market growth was principally achieved via new service offerings, the expansion of ancillary services, and increases in patient volume.
The aggregate increase in revenue was comprised of the following: (i) an approximate $14.8 million increase in reimbursed costs of services; and (ii) an approximate $3.2 million increase in the Company's management fees derived from the managed Medical Practices' net revenue and/or earnings.
Total costs of services as a percentage of revenue increased by 4.5% to 77.2% in 1998 as compared to 72.7% in 1997. Employee compensation and related expenses, direct materials, depreciation and other expenses as a percentage of revenue increased primarily due to the factors attributable to increasing revenues. Occupancy costs as a percentage of revenue decreased primarily due to the significant increase in revenues.
Network Sites' contribution increased to $8.8 million in 1998 as compared to $5.6 million in 1997 due to the factors attributable to increasing revenues. The Network Sites' contribution margin decreased to 22.8% of revenues, net in 1998 from 27.3% in 1997 primarily due to reimbursed services accounting for a higher percent of revenues.
General and administrative expenses for 1998 were approximately $5.3 million as compared to approximately $4.2 million in 1997, an increase of 26.8%, primarily due to increases in staffing and travel expenses attributable to recent acquisitions. As a percentage of revenues, general and administrative expenses decreased to approximately 13.8% from approximately 20.4% primarily due to the significant increase in revenues.
Amortization of intangible assets was $962,000 in 1998 as compared to $577,000 in 1997. This increase was attributable to the Company's acquisitions of new management agreements in the first quarter of 1998 and the second and third quarters of 1997. This increase was partially offset by the elimination of amortization of exclusive management rights associated with certain single physician Network Sites. Impairment losses were recorded in the second quarter of 1998 to writeoff unamortized management rights payments on these Network Sites.
Interest income for 1998 decreased to $91,000 from $109,000 for 1997, due to a lower invested cash balance. Interest expense for 1998 increased to $432,000 from $60,000 in 1997, due to increases in bank borrowings principally to finance working capital needs and in notes payable to Medical Providers for exclusive management rights.
The provision for income taxes, which primarily reflected various state income taxes, increased to $340,000 in 1998 from $104,000 in 1997 primarily due to the fact that the last of the New Jersey State net operating loss carryforwards were used in 1997 and to incremental state taxes related to the FCI and Shady Grove Network Sites which were acquired in August 1997 and March 1998, respectively.
Restructuring and other charges were approximately $2.1 million for 1998. Such charges included approximately $1.4 million associated with the Company's termination of its management agreement with the Reproductive Science Center of Greater Philadelphia, a single physician Network Site, effective July 1, 1998, which primarily consisted of exclusive management right impairment and other asset write-offs. Such charges also included approximately $700,000 for exclusive management right impairment losses related to two other single physician Network Sites. The latter impairment losses were recorded based upon the Company's determination that the intangible asset balance was larger than the respective Medical Practice's estimated future cashflow.
Income from continuing operations excluding restructuring and other charges was approximately $1.9 million for 1998 as compared to $795,000 for 1997. The increase was primarily due to the approximate $3.2 million increase in Network Site contribution, which was partially offset by increases in general and administrative expenses, amortization of intangible assets, interest and income tax expense.
Effective September 1, 1998, the Company disposed of the AWM Division operations via a sale of certain of its fixed assets to a third party and the third party's assumption of the employees, building lease, research contracts, and medical records. This disposal was classified as a discontinued operation for which an aggregate charge of approximately $4.5 million was recorded in 1998, of which $923,000 represented loss from operations and approximately $3.6 million represented loss from the disposal of the AWM Division. The loss from disposal of the AWM Division principally represented approximately $3.3 million related to the write-off of goodwill and $243,000 for estimated operating losses during June through September 1, 1998, the phase-out period. During the eight-month period ended August 31, 1998 and the year ended December 31, 1997, the AWM Division recorded revenues of approximately $1.0 million and $2.1 million, respectively, which are classified as discontinued operations.
Calendar Year 1997 Compared to Calendar Year 1996
Revenues, net for 1997 were approximately $20.6 million as compared to approximately $14.9 million for 1996, an increase of approximately $5.7 million, or 37.9%. The increase in revenues was attributable to new management agreements entered into in each of the first three quarters of 1997, partially offset by the absence of revenue related to the Westchester and East Long Meadow, MA Network Site agreements which were terminated in November 1996 and January 1997, respectively. The aggregate increase in revenue was comprised of the following: (i) an approximate $3.4 million increase in reimbursed costs of services; and (ii) an approximate $2.3 million increase in the Company's management fees derived from the managed Medical Practices' net revenue and/or earnings.
Total costs of services as a percentage of revenue decreased by 5.2% for 1997 as compared to 1996 due to the significant increase in revenues.
Network Sites' contribution increased by approximately 70.5% to $5.6 million for 1997 as compared to $3.3 million for 1996 due to the factors attributable to increasing revenues.
General and administrative expenses for 1997 were approximately $4.2 million as compared to approximately $4.7 million for 1996, a decrease of 10.1%. As a percentage of revenues, general and administrative expenses decreased to approximately 20.4% from approximately 31.3% primarily due to the significant increase in revenues.
Amortization of intangible assets was $577,000 for 1997 as compared to $246,000 for 1996. This increase was attributable to the Company's acquisitions of new management agreements in each of the first three quarters of 1997 and to there being a full year of amortization related to the AWM Division which had been established in June 1996.
Interest income for 1997 decreased to $109,000 from $415,000 for 1996, due to a lower invested cash balance. Interest expense for 1997 increased to $60,000 from $36,000 for 1996, principally due to there being a full year of interest related to the note payable issued to the Medical Provider of the AWM Division which had been established in June 1996.
The provision for income taxes primarily reflected various state income taxes in both 1997 and 1996.
Income from continuing operations was 795,000 for 1997 as compared to a loss from continuing operations of approximately $1.4 million in 1996. This increase was primarily due to the approximate $2.3 million increase in Network Site contribution, which was partially offset by the increase in amortization of intangible assets and the decrease in interest income.
Effective September 1, 1998, the Company disposed of the AWM Division which had been established in June 1996. The AWM Division's operations were disposed of via a sale of certain of its fixed assets to a third party and the third party's assumption of the employees, building lease, research contracts, and medical records. During the year ended December 31, 1997, and for the period from June 7, 1996 through December 31, 1996 the AWM Division recorded revenues of approximately $2.1 million and $757,000, respectively, which are classified as discontinued operations.
Liquidity and Capital Resources
Historically, the Company has financed its operations primarily through sales of equity securities. More recently, the Company has commenced using bank financing for working capital and acquisition purposes. The Company anticipates that its acquisition strategy will continue to require substantial capital investment. Capital is needed not only for additional acquisitions, but also for the effective integration, operation and expansion of the Company's existing Network Sites. The Medical Practices may require capital for renovation and expansion and for the addition of medical equipment and technology. In September 1998, the Company obtained from Fleet Bank, N. A. a $13.0 million credit facility to fund acquisitions over approximately the next one to two years, to provide working capital, and to refinance its existing bank debt. In addition, the Company has and will continue to utilize a portion of the proceeds of the term loan from its new credit facility to finance part of the consideration to repurchase up to $2 million of the Company's outstanding shares of Common Stock from time to time on the open market at prevailing market prices or through privately negotiated transactions.
During the first quarter of 1998, the Company completed an equity private placement of $5.5 million with Morgan Stanley Venture Partners' affiliates ("Morgan Stanley") providing for the purchase of 808,824 shares of the Company's Common Stock at a price of $6.80 per share and 60,000 warrants to purchase shares of the Company's Common Stock, at a nominal exercise price. A portion of these funds were used by the Company to purchase the capital stock of Shady Grove and the right to manage the Shady Grove P.C.'s infertility medical practice. The balance of these funds have been used for working capital purposes.
At December 31, 1998, the Company had working capital of approximately $7.7 million, approximately $4.2 million of which consisted of cash and cash equivalents, compared to working capital of approximately $4.1 million at December 31, 1997, approximately $1.9 million of which consisted of cash and cash equivalents. The net increase in working capital at December 31, 1998 was principally due to the $5.5 million proceeds received from the equity private placement with Morgan Stanley and $6.0 million in bank loan proceeds, partially offset by approximately $3.2 million in payments for exclusive management rights, approximately $2.9 million in debt repayments and an approximate $1.9 million increase in short-term debt related to the Shady Grove transaction.
During the first quarter of 1998, the Company completed its second in-market merger with the addition of two physicians to the FCI practice and entered into a new management agreement with the Shady Grove, P.C. The aggregate purchase price of these transactions, exclusive of acquisition costs, was approximately $7.2 million, consisting of approximately $4.0 million in cash, $1.5 million in promissory notes, and 212,433 shares of the Company's Common Stock. A portion of the aggregate purchase price of the Shady Grove transaction was paid in January 1999 as follows: (i) approximately $1.0 million in cash, (ii) approximately $200,000 in stock, or 25,868 shares of Common Stock (based upon a floor price of $6.80), and (iii) a $402,750 promissory note. The $402,750 promissory note issued in January 1999 is payable in two equal annual installments due on July 1, 1999 and April 1, 2000, respectively, and bears interest at an annual rate of 10.17%. The $1.1 million of promissory notes outstanding at December 31, 1998 are payable in two equal annual installments due on April 1, 1999 and 2000, respectively, and bear interest at an annual rate of 8.5%. In addition, in January 1999, the Company issued unregistered warrants to acquire 5,000 shares of Common Stock at $5.125 per share to Robert J. Stillman, M.D. in connection with the Second Closing Date of the Shady Grove acquisition.
As previously noted, in September 1998, the Company obtained from Fleet Bank, N.A. ("Fleet") a $13.0 million credit facility (the "New Credit Facility"). The New Credit Facility was subsequently amended in September 1998 to allow for the Company's repurchase of Common Stock noted below, and for the repayment of dividends in arrears on the Company's Convertible Preferred Stock. The New Credit Facility is comprised of a $4.0 million three-year working capital revolver, a $5.0 million three-year acquisition revolver and a $4.0 million 5.5 year term loan. Each component of the New Credit Facility bears interest by reference to Fleet's prime rate or LIBOR, at the option of the Company, plus a margin ranging from 0.00% to 0.25% in the case of prime-based loans or 2.75% to 3.00% in the case of LIBOR-based loans, which margins vary based on a leverage test. Interest on the prime-based loans is payable monthly and interest on LIBOR-based loans is payable on the last day of each interest period applicable thereto provided that, in the case of interest periods in excess of three months, interest is payable at three-month intervals during such periods. Borrowings under the term loan will require only interest payments for the first twenty months. Upon closing of the New Credit Facility, the Company drew the entire $4.0 million available under the term loan to repay in full its balance outstanding with First Union National Bank of $2,250,000 and for working capital purposes. In addition, the Company has and will continue to utilize a portion of the proceeds of the term loan component of the New Credit Facility to finance a part of the consideration to repurchase up to $2 million of the Company's outstanding shares of Common Stock from time to time on the open market at prevailing market prices or through privately negotiated transactions. As of March 3, 1999, the Company had repurchased 410,500 shares of its Common Stock for an aggregate cost of approximately $1.3 million. Commencing on June 1, 2000, the principal amount of the term loan will be payable in sixteen consecutive quarterly installments each in the amount of $250,000. As of December 31, 1998, interest on the term loan was payable at a rate of 7.75%. Unused amounts under the working capital and acquisition revolvers bear a commitment fee of 0.25% and 0.20%, respectively. Availability of borrowings under the working capital revolver are based on eligible accounts receivable as defined. Availability of borrowings under the acquisition revolver will be based on financial covenants and eligibility criteria with respect to each proposed acquisition. As of December 31, 1998, under the working capital and acquisition revolvers, there were no amounts outstanding and an aggregate amount of approximately $5.8 million was available, exclusive of additional amounts which may become available as a result of completing additional acquisitions. The New Credit Facility is collateralized by all of the Company's assets.
The Company effected a 1-for-4 reverse stock split on November 17, 1998. The reverse stock split was intended to allow the Company to comply with the minimum $1.00 bid price per share requirement for continued listing of the Company's Common Stock on the Nasdaq National Market.
In October 1998, the Company paid approximately $563,000 of Convertible Preferred Stock dividend payments which had been in arrears. As of December 31, 1998, there were no payments in arrears.
Year 2000 Issue
The Company's management has recognized the need to ensure that its operations and relationships with its vendors and other third parties will not be adversely impacted by software processing errors arising from calculations using the year 2000 and beyond ("Y2K"). As such, the Company has appointed a Y2K Task Force to identify and assess the risks associated with its information systems and operations, and its interactions with vendors and third-party insurance payors ("the Y2K Project"). The Y2K Project is comprised of five phases as follows: 1) identification of risks, 2) assessment of risks, 3) development of remediation and contingency plans, 4) implementation and 5) testing. The Company has identified the Y2K risks and is approximately 75% complete in assessing these risks. The last three phases are being done in parallel as opposed to sequential order.
The Company believes that the Y2K risks associated with its information systems and certain medical equipment may be potentially significant. In nearly all cases, the Company is relying on assurances from third party vendors that certain information systems and medical equipment will be Y2K compliant. In addition, in the normal course of business, the Company has made capital investments in certain vendor supplied software applications and hardware systems to address the financial and operational needs of the business. These systems, which will improve the efficiencies and productivity of the replaced systems, have been represented to be Y2K compliant by the vendors and have been or will be installed by November 1999. The Company has tested, is currently testing or will have tested such vendor supplied systems and equipment, but cannot be sure that its tests will be adequate or that, if problems are identified, they will be addressed in a timely and satisfactory way.
The Company is also highly dependent upon receiving payments from third party payors for insurance reimbursement for claims submitted by the managed Medical Practices, and as such, the ability of such payors to process claims submitted by Medical Practices accurately and timely, constitutes a significant risk to the Company's cash flow. Individual Network Sites have been or will be in communication with these payors throughout the country to insure that these payors will be Y2K compliant and will be able to process the Medical Practices' claims uninterrupted. In addition, the Company deals with numerous financial institutions, all of whom have indicated that the Y2K compliance issue is being addressed proactively and should not present a problem on or after January 1, 2000.
As the Company and its managed Medical Practices are primarily reliant on third party vendors and payors to be Y2K compliant, the Company does not anticipate that it will incur a material incremental cost associated with addressing Y2K problems. To date, all of the Company's capital projects regarding information systems were part of its long-term capital strategic plan. The timing of implementation of these capital projects was not accelerated as a result of the Y2K issue, with the exception of the timing of the installation of a new financial system at the FCI Network Site which was accelerated from the year 2000 to 1999. The Company estimates that it will incur an aggregate cost of $300,000 related to the Y2K Project as follows: (i) approximately $140,000 related to computer hardware and software and medical equipment replacements and upgrades, of which approximately 90% will be capitalizable due to the added value of such replacements and upgrades; (ii) approximately $130,000 of non-incremental employee opportunity costs for time spent by information systems and Y2K Task Force employees which would have ordinarily been spent elsewhere; and (iii) approximately $30,000 in incremental staffing costs. By accelerating the implementation of the new financial system at the FCI Network Site, approximately $110,000 of capitalizable equipment and software costs and approximately $25,000 of training costs will be incurred in 1999 instead of the year 2000.
In the event any third parties cannot timely provide the Company with information systems, equipment or services that meet the Y2K requirements, the Company's ability and that of its managed Medical Practices to offer services and to process sales, and the Company's cash flows, could be disrupted. In addition, if the Company fails to satisfactorily resolve Y2K issues related to its operations in a timely manner, it could be exposed to liability, particularly to the managed Medical Practices and their patients. As developed to date, the Company's contingency plan provides for the following: (i) stockpiling higher than normal inventories of critical supplies; (ii) ensuring an adequate line of bank credit if third party payor payments are disrupted; and (iii) ensuring all critical staff are available or scheduled for work prior to, during and immediately after December 31, 1999.
Management believes that the Company is taking reasonable and adequate measures to address Y2K issues. However, there can be no assurance that the Company's information systems, medical equipment and other non- information technology systems will be Y2K compliant on or before December 31, 1999, or that vendors and third-party insurance payors are, or will be, Y2K compliant, or that the costs required to address the Y2K issue will not have a material adverse effect on the Company's business, financial condition or results of operations.
Like virtually every company, and indeed every aspect of contemporary society, the Company is at risk for the failure of major infrastructure providers to adequately address potential Y2K problems. The Company is highly dependent on a variety of public and private infrastructure providers to conduct its business in numerous jurisdictions throughout the country. Failures of the banking system, basic utility providers, telecommunication providers and other services, as a result of Y2K problems, could have a material adverse effect on the ability of the Company to conduct its business. While the Company is cognizant of these risks, a complete assessment of all such risks is beyond the scope of the Company's Y2K Project or ability of the Company to address. The Company has focused its resources and attention on the most immediate and controllable Y2K risks.
New Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). The Company does not believe that FAS No. 133 will have a material effect on the Company's financial position or results of operations.
In 1998, the Company adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." FAS No. 131 does not have a significant impact on the Company as the Company currently operates under one segment.
Forward Looking Statements
This Form 10-K and discussions and/or announcements made by or on behalf of the Company, contain certain forward-looking statements regarding events and/or anticipated results within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the attainment of which involve various risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking terminology such as, "may," "will," "expect," "believe," "estimate," "anticipate," "continue," or similar terms, variations of those terms or the negative of those terms. The Company's actual results may differ materially from those described in these forward- looking statements due to the following factors: the Company's ability to acquire additional management agreements, including the Company's ability to raise additional debt and/or equity capital to finance future growth, the loss of significant management agreement(s), the profitability or lack thereof at RSCs managed by the Company, the Company's ability to transition sole practitioners to group practices, increases in overhead due to expansion, the exclusion of infertility 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 infertility, ART and/or genetic technologies and techniques and the risks relating to the Y2K.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedules on page .
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
Information with respect to the executive officers and directors of the Company is incorporated by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 25, 1999.
ITEM 11.
ITEM 11. Executive Compensation
This information is incorporated by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 25, 1999.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 25, 1999.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
This information is incorporated by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 25, 1999.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedules.
See Index to Financial Statements and Financial Statement Schedules on page.
(3) The exhibits that are listed on the Index to Exhibits herein which are filed herewith as a management agreement or compensatory plan or arrangement are: 10.98 (a) and 10.105 (b).
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The list of exhibits required to be filed with this Annual Report on Form 10-K is set forth in the Index to Exhibits herein.
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Item 8 and 14 (a)(1) and (2)
Contents
Page INTEGRAMED AMERICA, INC.
Report of Independent Accountants....................................F-2 Consolidated Balance Sheet as of December 31, 1998 and 1997..........F-3 Consolidated Statement of Operations for the years ended December 31, 1998, 1997 and 1996..................................F-4 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996.....................F-5 Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996.................................F-6 Notes to Consolidated Financial Statements...........................F-7
FINANCIAL STATEMENT SCHEDULE
Report of Independent Accounts on Financial Statement Schedule II.....S-1 Valuation and Qualifying Accounts..................................S-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of IntegraMed America, Inc.
In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of IntegraMed America, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP
Stamford, Connecticut February 8, 1999
See accompanying notes to the consolidated financial statements
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
F 5
See accompanying notes to the consolidated financial statements.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY:
IntegraMed America, Inc. (the "Company") is a health services management company specializing in fertility and assisted reproductive technology ("ART") services. The Company provides comprehensive management services to a nationwide network of medical providers which consisted of nine sites (each, a "Network Site" or "Reproductive Science Center(R)") as of December 31, 1998. Each Network Site consists of a location or locations where the Company has a management agreement with a physician group or hospital (each, a "Medical Practice") which employs and/or contracts the physicians. As of December 31, 1998, the nine Reproductive Science Centers ("RSCs") managed by the Company were comprised of twenty-one locations in nine states and the District of Columbia and fifty-four physicians and Ph.D. scientists, including physicians and Ph.D. scientists employed and/or contracted by the Medical Practice, as well as, physicians who have arrangements to utilize the Company's facilities.
On November 17, 1998, the Company effected a 1-for-4 reverse stock split of its Common Stock. As a result of the reverse split, references in the accompanying consolidated financial statements to the number of common shares and per share amounts for the years ended December 31, 1998, 1997 and 1996 have been restated.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of consolidation --
The consolidated financial statements comprise the accounts of IntegraMed America, Inc. and its wholly owned subsidiaries, IVF America (NY), Inc., IVF America (MA), Inc., IVF America (PA), Inc., IVF America (NJ), Inc., IVF America (MI), Inc., IntegraMed America of Illinois, Inc., Shady Grove Fertility Centers, Inc. (see Note 6) and the Adult Women's Medical Center, Inc. ("AWMC"). All significant intercompany transactions have been eliminated. The Company derives its revenues from management agreements and, with respect to one managed Network Site and AWMC, from patient service revenues. The Company does not consolidate the results of its managed Network Sites. Effective August 6, 1998, IVF America (NY), Inc., IVF America (MA), Inc., IVF America (PA), Inc. and IVF America (MI), Inc. were merged into IntegraMed America, Inc. Effective September 1, 1998, the Company disposed of AWMC via a sale of its operations.
In 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board (the "EITF") issued EITF No. 97-2. The EITF reached a consensus concerning certain matters relating to the physician practice management ("PPM") industry with respect to the consolidation of professional corporation revenues and the accounting for business corporations. As an interim step before the consensus, the EITF allowed PPMs to display the revenues and expenses of managed physician practices in the statement of operations (the "display method") if the terms of the management agreement provided the PPM with a "net profits or equivalent interest" in the medical services furnished by the respective medical practices. It is the Company's understanding that the EITF did not and would not object to the use of the display method in PPM financial statements for periods ending before December 15, 1998. As the Company does not consolidate its managed Network Sites, the adoption of EITF 97-2 in 1998 does not have a material impact on the Company's financial position, cash flows or results of operations. As discussed below, the Company has discontinued the display of revenues for its Long Island and Boston Network Sites due to changes in the respective management agreements.
Since inception through December 31, 1997, the management agreements related to the Long Island and Boston Network Sites have been incorporated in the Company's consolidated financial statements via the display method as the Company believed that these management agreements provided it with a "net profits or equivalent interest" in the medical services furnished by the Medical Practices at the Long Island and Boston Network Sites. Consequently, for the Long Island and Boston Network Sites, the Company has historically presented the Medical Practices' patient services revenue, less amounts retained by the Medical Practices, or "Medical Practice retainage", as "Revenues after Medical Practice retainage" in its consolidated statement of operations ("display method"). Due to changes in the management agreements related to the Long Island and Boston Network Sites effective in October 1997 and January 1998, respectively, the Company no longer displays the patient services revenue and Medical Practice retainage related to these Network Sites in the accompanying consolidated statement of operations for the periods prior to January 1, 1998.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The revised management agreements provide for the Company to receive a specific management fee which the Company has reported in "Revenues, net" in the accompanying consolidated statement of operations.
These consolidated financial statements are prepared in accordance with generally accepted accounting principles which requires the use of management's estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue and cost recognition -
Reproductive Science Centers(R)
As of December 31, 1998, the Company provided comprehensive management services under nine management agreements, including one which was acquired in the first quarter of 1998. During the year ended December 31, 1998, the Company had also provided management services under two management agreements which were terminated effective June 1 and September 1, 1998, respectively.
Under six of the current agreements, including the revised management agreement for the Boston Network Site, the Company receives as compensation for its management services a three-part management fee comprised of: (i) a fixed percentage of net revenues generally equal to 6%, (ii) reimbursed costs of services (costs incurred in managing a Medical Practice and any costs paid on behalf of the Medical Practice) and (iii) a fixed or variable percentage of earnings after management fees which is currently generally equal to up to 20%, or an additional variable percentage of net revenues generally ranging from 7.5% to 9.5%.
Under the revised management agreement for the Long Island Network Site, as compensation for its management services, the Company receives a fixed fee (currently equal to $540,000 per annum), plus reimbursed costs of services.
Two of the Company's Network Sites are affiliated with medical centers. Under one of these management agreements, the Company primarily provides endocrine testing and administrative and finance services for a fixed percentage of revenues, equal to 15% of net revenues, and reimbursed costs of services. Under the second of these management agreements, the Company's revenues are derived from certain ART laboratory services performed, and directly billed to the patients by the Company; out of these patient service revenues, the Company pays its direct costs and the remaining balance represents the Company's Network Site contribution. All direct costs incurred by the Company are recorded as costs of services.
All management fees are reported as "Revenues, net" by the Company. Direct costs incurred by the Company in performing its management services and costs incurred on behalf of the Medical Practices are recorded in "Costs of services incurred on behalf of Network Sites". The physicians receive as compensation all remaining earnings after payment of the Company's management fee.
Prior to January 1, 1998, under another form of management agreement which had been in use at the Long Island and Boston Network Sites, the Company recorded all patient service revenues and, out of such revenues, the Company paid the Medical Practices' expenses, physicians' and other medical compensation, direct materials and certain hospital contract fees. Under these agreements, the Company guaranteed a minimum physician compensation based on an annual budget jointly determined by the Company and the physicians. The Company's management fee was payable only out of remaining revenues, if any, after the payment of physician compensation and all direct administrative expenses of the Medical Practice which were recorded as costs of service. Under these arrangements, the Company had been liable for payment of all liabilities incurred by the Medical Practices and had been at risk for any losses incurred in the operation thereof. Due to changes in the management agreements related to the Long Island and Boston Network Sites, effective in October 1997 and January 1998, respectively, the Company no longer displays patient service revenues of the Long Island and Boston Medical Practices which had been reflected in "Revenues, net" in the Company's consolidated statement of operations. The revised management agreements provide for the Company to receive a specific
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
management fee, as previously described, which the Company reports in "Revenues, net" in its consolidated statement of operations. The revised agreements provide for increased incentives and risk-sharing for the Company's affiliated medical providers.
AWM Division
In June 1998, the Company committed itself to a formal plan to dispose of the AWM Division. On September 1, 1998 the Company disposed of the AWM Division operations via a sale of certain of its fixed assets to a third party and the third party's assumption of the employees, building lease, research contracts, and medical records. The operating results of the AWM Division for the eight-month period ended August 31, 1998, the year ended December 31, 1997, and for the period from June 7, 1996 through December 31, 1996 and the charges recorded by the Company related to its disposal are reflected under "Discontinued Operations" in the accompanying Consolidated Statement of Operations (See Note 5).
The AWM Division's operations had been comprised of one Network Site with two locations which were directly owned by the Company and a 51% interest in the National Menopause Foundation ("NMF"), a company which had developed multifaceted educational programs regarding women's healthcare. The Network Site had also been involved in clinical trials with major pharmaceutical companies.
The Company had billed and recorded all patient service revenues of the Network Site and had recorded all direct costs incurred as costs of services. The medical providers had received a fixed monthly draw which had been adjusted quarterly by the Company based on the respective Network Site's actual operating results.
Revenues in the AWM Division had also included amounts earned under contracts relating to clinical trials between the Network Site and various pharmaceutical companies. The Network Site had contracted with major pharmaceutical companies (sponsors) to perform women's medical care research mainly to determine the safety and efficacy of a medication. Research revenues had been recognized pursuant to each respective contract in the period which the medical services (as stipulated by the research study protocol) had been performed and collection of such fees had been considered probable. Net realization had been dependent upon final approval by the sponsor that procedures were performed according to study protocol. Payments collected from sponsors in advance for services are included in accrued liabilities, and costs incurred in performing the research studies had been included in costs of services rendered.
The Company's 51% interest in NMF had been included in the Company's consolidated financial statements. The Company had recorded 100% of the patient service revenues and costs of NMF and had reported 49% of any profits of NMF as minority interest on the Company's consolidated balance sheet. Minority interest at December 31, 1998 and 1997 was $0.
Cash and cash equivalents --
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
Patient accounts receivable --
Patient accounts receivable represent receivables from patients for medical services provided by the Medical Practices. Such amounts are recorded net of contractual allowances and estimated bad debts. As of December 31, 1998 and 1997, of total patient accounts receivable of $10,749,000 and $7,061,000, respectively, approximately $10,448,000 and $4,477,000 of patient accounts receivable were a function of Network Site revenue (i.e., the Company purchased the accounts receivable, net of contractual allowances, from the Medical Practice (the "Purchased Receivables") and the remaining balances of $301,000 and $2,584,000, respectively, were a function of net revenues of the Company (see -- "Revenue and cost recognition" above). Risk of loss in connection with non-collectiblity of Purchased Receivables is partially borne by the Company in an amount equal to the Company's proportionate share of revenues and/or earnings which are paid to the Company from the Medical Practice as its management fee. Risk of loss in connection with non-collectibility of patient accounts receivable which are a function of net revenues of the Company is borne by the Company.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management fees receivable --
Management fees receivable represent fees owed to the Company primarily for repayment of advances by the Company to certain of the Medical Practices pursuant to the respective management agreements with these Medical Practices (see -- "Revenue and cost recognition" above).
Fixed assets --
Fixed assets are valued at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, generally three to five years. Leasehold improvements are amortized over the shorter of the asset life or the remaining term of the lease. Assets under capital leases are amortized over the term of the lease agreements. The Company periodically reviews the fair value of long-lived assets, the results of which have had no material effect on the Company's financial position or results of operations.
When assets are retired or otherwise disposed of, the costs and related accumulated depreciation are removed from the accounts. The difference between the net book value of the assets and proceeds from disposition is recognized as gain or loss. Routine maintenance and repairs are charged to expenses as incurred, while costs of betterments and renewals are capitalized.
Intangible assets --
Intangible assets at December 31, 1998 and 1997 consisted of the following (000's omitted):
1998 1997 ------- -------
Exclusive management rights............. $20,389 $15,539 Goodwill................................ -- 3,890 Trademarks.............................. 398 395 ------- ------- Total.............................. 20,787 19,824 Less-- accumulated amortization........ (1,518) (1,379) ------- ------- Total.............................. $19,269 $18,445 ======= =======
Exclusive Management Rights, Goodwill and Other Intangible Assets --
Exclusive management rights, goodwill and other intangible assets represent costs incurred by the Company for the right to manage and/or acquire certain Network Sites and are valued at cost less accumulated amortization. During the year ended December 31, 1998, the Company recorded a charge to earnings for the writeoff of the entire unamortized portion of goodwill associated with the AWM Division which was disposed of effective September 1, 1998 and recorded an aggregate exclusive management right impairment charge of $1.4 million related to certain of the managed single-physician practices (see Notes 5 and 6).
Trademarks --
Trademarks represent trademarks, service marks, trade names and logos purchased by the Company and are valued at cost less accumulated amortization.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization and recoverability --
The Company periodically reviews its intangible assets to assess recoverability; any impairments would be recognized in the consolidated statement of operations if a permanent impairment were determined to have occurred. Recoverability of intangibles is determined based on undiscounted expected earnings from the related business unit or activity over the remaining amortization period. Exclusive management rights are amortized over the term of the respective management agreement, usually ten to twenty-five years. Goodwill and other intangibles had been amortized over periods ranging from three to forty years. Trademarks are amortized over five to seven years. The fully depreciated asset balances related to the AWM Division and to certain of the managed single- physician practices were removed from the Company's records as of September 30, 1998 (see Notes 5 and 6). As of December 31, 1998, accumulated amortization of exclusive management rights and trademarks was $1,180,000 and $338,000, respectively. As of December 31, 1997, accumulated amortization of exclusive management rights, goodwill and trademarks was $802,000, $283,000 and $294,000, respectively.
Due to Medical Practices --
Due to Medical Practices primarily represents amounts owed by the Company to the Medical Practices for the medical providers' share of the respective Medical Practice earnings net of the Company's advances to the Medical Practice, if any. Due to Medical Practices excludes amounts owed by the Company to Medical Practices for exclusive management rights (see Note 9).
Stock based employee compensation --
The Company adopted Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (FAS 123), on January 1, 1996. Under FAS 123, companies can, but are not required to, elect to recognize compensation expense for all stock based awards, using a fair value method. The Company has adopted the disclosure only provisions, as permitted by FAS 123.
Concentrations of credit --
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's trade receivables are primarily from third party payors, principally insurance companies and health maintenance organizations.
Income taxes --
The Company accounts for income taxes utilizing the asset and liability approach.
Earnings per share --
The Company determines earnings (loss) per share in accordance with Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128) which the Company adopted in December 1997. All historical earnings (loss) per share have been presented in accordance with FAS 128.
NOTE 3 -- SIGNIFICANT MANAGEMENT CONTRACTS:
For the years ended December 31, 1998 and 1997, the Boston, New Jersey, FCI (acquired in mid-August 1997), and Shady Grove (acquired in mid-March 1998) Network Sites provided greater than 10% of the Company's Revenues, net and Network Sites' contribution as follows:
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- ACQUISITIONS AND MANAGEMENT AGREEMENTS:
The transactions detailed below were accounted for by the purchase method and the purchase price has been allocated to the intangible assets acquired based upon the estimated fair value at the date of acquisition and to the tangible assets acquired and liabilities assumed based upon the book value at the date of acquisition. The consolidated financial statements at and for the year ended December 31, 1998 and 1997 include the results of these transactions from their respective dates of acquisition.
On January 7, 1997, the Company acquired certain assets of the Bay Area Fertility and Gynecology Medical Group, a California partnership (the "Partnership"), and acquired the right to manage the Bay Area Fertility and Gynecology Medical Group, Inc., a California professional corporation which is the successor to the Partnership's medical practice ("Bay Area Fertility"). The aggregate purchase price was approximately $2.0 million, consisting of $1.5 million in cash and $0.5 million in the form of the Company's Common Stock, or 83,333 shares of the Company's Common Stock. In addition to the exclusive right to manage Bay Area Fertility, the Company acquired other assets which primarily consisted of the name "Bay Area Fertility" and medical equipment and furniture and fixtures which will continue to be used by Bay Area Fertility in the provision of infertility and ART services.
In June 1997, the Company acquired certain assets of and the right to manage Reproductive Science Medical Center, Inc. ("RSMC"), a California professional corporation located near San Diego, CA (the "San Diego Acquisition"). The aggregate purchase price for the San Diego Acquisition was approximately $900,000, consisting of $50,000 in cash and 36,364 shares of Common Stock payable at closing and $650,000 payable upon the achievement of certain specified milestones, at RSMC's option, in cash or in shares of the Company's Common Stock, based on the closing market price of the Common Stock on the third business day prior to issuance. This management agreement was terminated effective September 1, 1998. See Note 15 and Note 17.
In August 1997, the Company acquired certain fixed assets of and the right to manage Fertility Centers of Illinois, S.C. ("FCI"), a physician group practice comprised of six physicians and six locations in the Chicago, Illinois area. The aggregate purchase price was approximately $8.6 million, consisting of approximately $6.6 million in cash and 252,366 shares of Common Stock. Approximately $8.0 million of the aggregate purchase price was allocated to exclusive management rights and $559,000 was allocated to certain fixed assets.
Simultaneous with closing on the FCI transaction, the Company, on behalf of FCI, completed its first in-market merger with the addition of Edward L. Marut, MD to the FCI practice. The aggregate purchase price was $803,000 in cash, of which $750,000 was allocated to exclusive management rights and $53,000 was allocated to certain fixed assets.
In January 1998, the Company completed its second in-market merger with the addition of two physicians to the FCI practice. The Company acquired certain assets of Advocate Medical Group, S.C. ("AMG") and Advocate MSO, Inc. and acquired the right to manage AMG's infertility practice conducted under the name Center for Reproductive Medicine ("CFRM"). Simultaneous with the consummation of this transaction, the Company amended its management agreement with FCI to include two of the three physicians practicing under the name CFRM. The aggregate purchase price was approximately $1.5 million, consisting of approximately $1.2 million in cash and 46,079 shares of Common Stock. The majority of the purchase price was allocated to exclusive management rights.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 12, 1998, the Company acquired the majority of the capital stock of Shady Grove Fertility Centers, Inc. ("Shady Grove"), currently a Maryland business corporation which provides management services, and formerly a Maryland professional corporation engaged in providing infertility services. Prior to the consummation of the transaction, Shady Grove had entered into a twenty-five year management agreement with Levy, Sagoskin and Stillman, M.D., P.C. (the " Shady Grove P.C."), an infertility physician group practice comprised of six physicians and four locations surrounding the greater Washington, D.C. area. The Company acquired the balance of the Shady Grove capital stock on January 5, 1999. The aggregate purchase price for all of the Shady Grove capital stock was $5.7 million, consisting of approximately $2.8 million in cash, approximately $1.4 million in Common Stock, and approximately $1.5 million in promissory notes. The purchase price was allocated to the various assets and liabilities assumed and the balance was allocated to exclusive management rights. On March 12, 1998, the Closing Date, the following consideration was paid: (i) approximately $1.8 million in cash, (ii) approximately $1.2 million in stock , or 159,888 shares of Common Stock, and (iii) approximately $1.1 million in promissory notes. On January 5, 1999 , the Second Closing Date, the balance of the purchase price was paid as follows: (i) approximately $1.0 million in cash, (ii) approximately $200,000 in stock, or 25,868 shares of Common Stock (based upon a floor price of $6.80), and (iii) a $402,750 promissory note. The $402,750 promissory note issued in January 1999 is payable in two equal annual installments due on July 1, 1999 and April 1, 2000, respectively, and bears interest at an annual rate of 10.17%. The $1.1 million of promissory notes outstanding at December 31, 1998 are payable in two equal annual installments due on April 1, 1999 and 2000, respectively, and bear interest at an annual rate of 8.5%. In addition, in January 1999, the Company issued warrants to acquire 5,000 shares of Common Stock at $5.125 per share to Robert J. Stillman, M.D. in connection with the Second Closing Date of the Shady Grove acquisition.
The following unaudited pro forma results of operations for the year ended December 31, 1998 and 1997 have been prepared by management based on the unaudited financial information for Shady Grove, the Maryland professional corporation, which management arrangement was entered into in March 1998, and Fertility Centers of Illinois, S.C. which management agreement was entered into in August 1997, adjusted where necessary, with respect to pre-acquisition periods, to the basis of accounting used in the historical financial statements of the Company. Such adjustments include modifying the results to reflect operations as if the Shady Grove management agreement had been consummated on January 1, 1998 and 1997, respectively, and as if the FCI management agreement, excluding the in-market mergers in 1997 and 1998, had been consummated on January 1, 1997. Additional general corporate expenses which would have been required to support the operations of the new Network Sites are not included in the pro forma results. The unaudited pro forma results may not be indicative of the results that would have occurred if the management agreement had been in effect on the dates indicated or which may be obtained in the future.
(1) Pro forma income from continuing operations before restructuring and other charges for the year ended December 31, 1998 was approximately $2.1 million, or $0.36 per share.
NOTE 5 -- DISCONTINUED OPERATIONS:
In June 1998, the Company committed itself to a formal plan to dispose of the AWM Division operations. On September 1, 1998 the Company disposed of the AWM operations via a sale of certain of its fixed assets to a third party and the third party's assumption of the employees, building lease, research contracts, and medical records. As of December 31, 1998, the Company's Consolidated Balance Sheet included $225,000 in notes payable related to the AWM Division. During the year ended December 31, 1998, the Company reported a loss
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
from the disposal of the AWM Division of approximately $3.6 million, which principally represented approximately $3.3 million related to the write-off of goodwill and $243,000 for estimated operating losses during the phase-out period. During the eight-month period ended August 31, 1998, the year ended December 31, 1997, and for the period from June 7, 1996 through December 31, 1996 the AWM Division recorded revenues of approximately $1.0 million, $2.1 million, and 757,000 respectively.
NOTE 6 -- RESTRUCTURING AND OTHER CHARGES:
The Company recorded approximately $2.1 million in restructuring and other charges in the year ended December 31, 1998. Such charges included approximately $1.4 million associated with its termination of its management agreement with the Reproductive Science Center of Greater Philadelphia, a single physician Network Site, effective July 1, 1998, which primarily consisted of exclusive management right impairment and other asset write-offs. Such charges also included approximately $700,000 for exclusive management right impairment losses related to two other single physician Network Sites. The latter impairment losses were recorded based upon the Company's determination that the intangible asset balance was larger than the respective Medical Practice's estimated future cashflow.
NOTE 7 -- FIXED ASSETS, NET:
Fixed assets, net at December 31, 1998 and 1997 consisted of the following (000's omitted):
1998 1997 ------ ------
Furniture, office and computer equipment.... $4,064 $2,768 Medical equipment........................... 2,200 2,093 Leasehold improvements...................... 3,203 2,408 Assets under capital leases................. 956 1,234 ------ ------ Total................................... 10,423 8,503 Less--Accumulated depreciation and amortization............................ (5,307) (3,761) ------ ------ $5,116 $4,742
Assets under capital leases primarily consist of medical equipment. Accumulated amortization relating to capital leases at December 31, 1998 and 1997 was $947,000 and $1,011,000, respectively.
NOTE 8 -- ACCRUED LIABILITIES:
Accrued liabilities at December 31, 1998 and 1997 consisted of the following (000's omitted):
1998 1997 ------- ------ Accrued insurance............................ $ 552 $ 483 Deferred compensation........................ 467 367 Accrued payroll and benefits................. 410 239 Accrued state taxes.......................... 397 198 Deferred rent................................ 317 432 Deferred research revenue.................... -- 223 Other........................................ 1,337 318 ------ ------ Total accrued liabilities.................... $3,480 $2,260 ====== ======
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- NOTES PAYABLE AND OTHER OBLIGATIONS:
Debt at December 31, 1998 and 1997 consisted of the following (000's omitted):
1998 1997 ------ ------
Note payable to Bank............................. $4,000 $ 292 Acquisition notes payable........................ 1,353 595 Exclusive management rights obligations.......... 520 1,863 Acquisition obligation........................... 1,500 -- Obligations under capital lease.................. 8 178 ------ ------
Total notes payable and other obligations........ 7,381 2,928 Less--Current portion............................ (2,099) (1,086) ------ ------
Long-term notes payable and other obligations.... $5,282 $1,842 ====== ======
Note payable to Bank --
In September 1998, the Company obtained from Fleet Bank, N.A. ("Fleet") a $13.0 million credit facility (the "New Credit Facility"). The New Credit Facility was subsequently amended in September 1998 to allow for the Company's repurchase of Common Stock noted below, and for the repayment of dividends in arrears on the Company's Convertible Preferred Stock. The New Credit Facility is comprised of a $4.0 million three-year working capital revolver, a $5.0 million three-year acquisition revolver and a $4.0 million 5.5 year term loan. Each component of the New Credit Facility bears interest by reference to Fleet's prime rate or LIBOR, at the option of the Company, plus a margin ranging from 0.00% to 0.25% in the case of prime-based loans or 2.75% to 3.00% in the case of LIBOR-based loans, which margins vary based on a leverage test. Interest on the prime-based loans is payable monthly and interest on LIBOR-based loans is payable on the last day of each interest period applicable thereto provided that, in the case of interest periods in excess of three months, interest is payable at three-month intervals during such periods. Borrowings under the term loan will require only interest payments for the first twenty months. Upon closing of the New Credit Facility, the Company drew the entire $4.0 million available under the term loan to repay in full its balance outstanding with First Union National Bank of $2,250,000 and for working capital purposes. In addition, the Company has and will continue to utilize a portion of the proceeds of the term loan component of the New Credit Facility to finance part of the consideration to repurchase up to $2 million of the Company's outstanding shares of Common Stock from time to time on the open market at prevailing market prices or through privately negotiated transactions. As of December 31, 1998, the Company had repurchased 340,500 shares of its Common Stock for an aggregate cost of approximately $1.0 million. Commencing June 1, 2000, the principal amount of the term loan will be payable in sixteen consecutive quarterly installments each in the amount of $250,000. As of December 31, 1998, interest on the term loan was payable at a rate of 7.75%. Unused amounts under the working capital and acquisition revolvers bear a commitment fee of 0.25% and 0.20%, respectively. Availability of borrowings under the working capital revolver are based on eligible accounts receivable as defined. Availability of borrowings under the acquisition revolver will be based on financial covenants and eligibility criteria with respect to each proposed acquisition. As of December 31, 1998, under the working capital and acquisition revolvers, there were no amounts outstanding and an aggregate amount of approximately $5.8 million was available, exclusive of additional amounts which may become available as a result of completing additional acquisitions. The New Credit Facility is collateralized by all of the Company's assets.
In November 1996, the Company obtained a $1.5 million revolving credit facility (the "Credit Facility") issued by First Union National Bank (the "Bank"). Borrowings under the Credit Facility beared interest at the Bank's prime rate plus 0.75% per annum, which at December 31, 1997, was 9.25%. The Credit Facility was collateralized by the Company's assets. On November 13, 1997, the Company entered into a $4.0 million non-restoring line of credit dated November 13, 1997 with the Bank (the "Second Credit Facility"). Borrowings under
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Second Credit Facility beared interest at the Bank's prime rate plus 1% per annum. Accrued interest only on borrowings was payable commencing December 1, 1997 and all principal and accrued interest was due and payable on April 30, 1999. The Second Credit Facility was cross collateralized and cross- defaulted with the Credit Facility and was collateralized by the Company's assets. In September 1998, the aggregate amount outstanding under the Credit Facility and the Second Credit Facility of $2,250,000 was paid in full with borrowings from the New Credit Facility, thereby terminating both the Credit Facility and the Second Credit Facility. As of December 31, 1997, $250,000 and $0 were outstanding under the Credit Facility and the Second Credit Facility, respectively.
As of December 31, 1997, approximately $42,000 in bank debt acquired in the WMDC acquisition in June 1996 was outstanding. This debt was paid in full during 1998.
Acquisition notes payable --
In March 1998, the Company issued $1,127,700 in promissory notes as part consideration for the acquisition of the capital stock of Shady Grove Fertility Centers, Inc. These promissory notes are payable in two equal annual installments, due on April 1, 1999 and 2000, respectively, and bear interest at an annual rate of 8.5%.
In June 1996, the Company purchased a 51% interest in NMF for a total purchase price of $650,000, of which $50,000 was paid at closing and the balance is to be paid in sixteen quarterly installments of $37,500 beginning September 1, 1996. Interest is payable quarterly at the rate of 4.16% (see Note 5). As of December 31, 1998 and 1997, the note payable balance was $225,000 and $375,000, respectively.
On December 30, 1996, the Company acquired North Central Florida Ob-Gyn Associates which it then merged into WMDC. The total purchase price of the acquisition was $320,000 of which $220,000 was to be paid in four equal installments of $55,000 for each of the next four years commencing December 30, 1997. In January 1998, as part of a termination agreement, this note was canceled.
Exclusive management rights obligations --
Exclusive management rights obligations represent the liability owed by the Company to certain Medical Providers for the cost of acquiring the exclusive right to manage the non-medical aspects of their single-physician infertility practices. Exclusive management rights obligations as of December 31, 1998 related to two single-physician management agreements. Exclusive management rights obligations as of December 31, 1997 related to four single-physician management agreements two of which were terminated in 1998.
As of December 31, 1998, $263,333 and $257,500 were payable in quarterly installments of $38,889 and $36,786, through October, 2004 and May, 2005, respectively.
In connection with the Company's termination of its management agreement with the Reproductive Science Center of Greater Philadelphia effective July 1, 1998, and due to this Network Site's historical operating losses, approximately $583,000 of the Company's exclusive right to manage obligation to the physician owner was applied against the Company's receivable from the physician owner during the six-month period ended June 30, 1998.
In connection with the Company's termination of its management agreement with the RSMC effective September 1, 1998, the Company was discharged from its remaining exclusive management right obligation of $650,000.
Acquisition obligation --
The acquisition obligation at December 31, 1998 represented the amount owed by the Company to acquire the balance of the capital stock of Shady Grove Fertility Centers, Inc. This obligation was paid on January 5, 1999 as follows: (i) $951,800 in cash, (ii) $175,900 in stock, or 25,868 shares of Common Stock,
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and (iii) a $402,750 promissory note. The promissory note for $402,750 is payable in two equal annual installments, due on July 1, 1999 and April 1, 2000 and bears interest at a rate of 10.17%.
At December 31, 1998, aggregate notes payable and other obligation payments, excluding capital lease obligation payments, in future years were as follows (000's omitted):
1999........................................... $ 2,099 2000........................................... 1,651 2001........................................... 1,076 2002........................................... 1,076 2003........................................... 1,076 Thereafter..................................... 395 Total payments................................. $7,373
Obligations under capital lease --
Capital lease obligations relate primarily to furniture and medical equipment for the Network Sites. The current portion of capital lease obligations was approximately $6,000 and $131,000 at December 31, 1998 and 1997, respectively.
The Company has operating leases for its corporate headquarters and for medical office space relating to its managed Network Sites. The Company also has operating leases for certain medical equipment. Aggregate rental expense under operating leases was $1,750,000, $1,284,000 and $540,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the minimum lease payments for assets under capital and noncancelable operating leases in future years were as follows (000's omitted): Capital Operating ------- ---------
1999.......................................... $ 6 $1,952 2000.......................................... 3 1,632 2001.......................................... -- 1,459 2002.......................................... -- 1,328 2003.......................................... -- 1,473 Thereafter.................................... -- 3,192 ---- ------- Total minimum lease payments.................. $ 9 $11,036 ======= Less-- Amount representing interest........... 1 ---- Present value of minimum lease payments....... $ 8 ====
NOTE 10 -- INCOME TAXES
The deferred tax provision was determined under the asset and liability approach. Deferred tax assets and liabilities were recognized on differences between the book and tax basis of assets and liabilities using presently enacted tax rates. The provision for income taxes was the sum of the amount of income tax paid or payable for the year as determined by applying the provisions of enacted tax laws to the taxable income for that year and the net change during the year in the Company's deferred tax assets and liabilities. The provision for the years ended December 31, 1998, 1997 and 1996 of $340,000, $104,000 and $141,000, respectively, was comprised of current state taxes payable.
The Company's deferred tax asset primarily represented the tax benefit of operating loss carryforwards. However, such deferred tax asset was fully reduced by a valuation allowance due to the uncertainty of its realization.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, the Company had operating loss carryforwards of approximately $19.6 million which expire in 2002 through 2014. For tax purposes, there is an annual limitation of approximately $2.0 million on the utilization of net operating losses resulting from changes in ownership attributable to the Company's May 1993 Preferred Stock Offering and the August 1997 Common Stock Offering and FCI acquisition.
Significant components of the noncurrent deferred tax assets (liabilities) at December 31, 1998 and 1997 were as follows (000's omitted): December 31, ------------------ 1998 1997 ---- ----
Net operating loss carryforwards......... $7,450 $6,900 Other.................................... 375 500 Valuation allowance...................... (7,825) (7,250) ------ ------ Deferred tax assets...................... -- 150 Deferred tax liabilities................. -- (150) ------ ------ Net deferred taxes....................... $ -- $ -- ====== ======
The financial statement income tax provision differed from income taxes determined by applying the statutory Federal income tax rate to the financial statement income or loss before income taxes for the year ended December 31, 1998, 1997 and 1996 as a result of the following:
NOTE 11 -- EARNINGS PER SHARE:
The reconciliation of the numerators and denominators of the basic and diluted EPS computations for the years ended December 31, 1998, 1997 and 1996 is a follows (000's omitted, except for per share amounts):
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) For the year ended December 31, 1996, basic and diluted earnings per share from continuing operations of $(0.79) excluded the effect of the induced conversion of Preferred Stock in 1996. Net loss from continuing operations applicable to Common Stock before consideration for induced conversion of Preferred Stock of $1,623,000 would be increased by $3,292,000, the assumed value of Common Stock issued to induce conversion of Preferred Stock, net of the reversal of $973,000 of accrued Preferred Stock dividends, to arrive at the net loss from continuing operations applicable to Common Stock after consideration for induced conversion of Preferred Stock of $4,915,000. The assumed per share value of the conversion inducement was $(1.74) bringing the basic and diluted loss per share of Common Stock from continuing operations to $(2.53) after induced conversion of Preferred Stock.
For the years ended December 31, 1998 and 1996, options to purchase approximately 400,000 and 239,000 shares of Common Stock at exercise prices ranging from $2.50 to $15.00 in each year and the assumed exercise of warrants to purchase approximately 176,000 and 94,000 shares of Common Stock at exercise prices ranging from $0.04 to $8.54 and from $5.00 to $53.88, respectively, and approximately 131,000 and 62,000 shares of Common Stock from the assumed conversion of Preferred Stock, were excluded in computing the diluted per share amount as they were antidilutive due to the Company's net loss for these years.
For the year ended December 31, 1997, options to purchase approximately 298,000 shares of Common Stock and warrants to purchase approximately 61,000 shares of Common Stock at exercise prices ranging from $7.48 to $15.00 per share and from $41.36 to $54.84 per share, respectively, were excluded in computing the diluted per share amount as the exercise price of the options and warrants equaled or exceeded the average market price of the Common Stock for the year. For the year ended December 31, 1997, approximately 105,000 shares of Common Stock from the assumed conversion of Preferred Stock were excluded in computing the diluted earnings per share as the amount of the dividend declared for these periods per share of Common Stock obtainable on conversion exceeded basic earnings per share.
NOTE 12 -- SHAREHOLDERS' EQUITY:
The Board of Directors authorized a one- for- four reverse stock split of its outstanding shares of Common Stock through an amendment to the Company's Amended and Restated Certificate of Incorporation which was approved by the Company's stockholders at a Special Meeting of Stockholders held on November 17, 1998. Effective November 17, 1998, every four shares of Common Stock were converted into one share of Common Stock. The reverse stock split was intended to allow the Company to comply with the minimum $1.00 bid price per share requirement for continued listing of the Company's Common Stock on the Nasdaq National Market (see Note 1).
The Board of Directors has authorized the repurchase of up to $2 million of the Company's outstanding shares of Common Stock from time to time on the open market at prevailing market prices or through privately negotiated transactions. The Company has and will continue to utilize a portion of the proceeds of the term loan component of the New Credit Facility to finance a portion of the price of the stock repurchases. As of December 31, 1998, the Company had repurchased 340,500 shares of its Common Stock for an aggregate cost of approximately $1.0 million.
During the first quarter of 1998, the Company completed an equity private placement of $5.5 million with Morgan Stanley Venture Partners' affiliates providing for the purchase of 808,824 shares of the Company's Common Stock at a price of $6.80 per share and 60,000 warrants to purchase shares of the Company's Common Stock, at a nominal exercise price. The Company used a portion of these funds to acquire the capital stock of Shady Grove Fertility Centers, Inc. (see Note 4).
In March and April 1998, pursuant to amendments to the Bay Area, FCI and Shady Grove management agreements, the Company issued immediately vested warrants to purchase an aggregate of 37,500 shares of Common Stock, at a weighted average exercise price of $7.08 per share to the shareholder physicians of the respective medical practices in exchange for an extension of the term of the Company's respective management agreements from twenty to twenty-five years. In December 1998, the exercise price of each of these warrants was amended to
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$4.12 per share. In November 1998, pursuant to an amendment to the Boston management agreement, the Company issued warrants to purchase an aggregate of 40,625 shares of Common Stock (the "Boston Warrants") to the shareholder physicians of the respective medical practice in exchange for an extension of the term of the Company's respective management agreements from ten to twenty-five years. Twenty percent of the Boston Warrants vested immediately and have an exercise price of $4.12. The balance of the Boston Warrants vest in annual 20% increments at an exercise price which increases annually by 20% commencing November 18, 1999. The aggregate fair value of warrants issued in 1998 of approximately $216,000 was capitalized and will be amortized over the remaining life of the management agreements.
In August 1997, the Company consummated an offering of 1,600,000 shares of Common Stock (the "Offering"). The Offering raised gross proceeds of $9.6 million and net proceeds of approximately $8.3 million. Approximately $6.6 million of the net proceeds was used for the asset purchase and right-to-manage agreement with Fertility Centers of Illinois, S.C. The balance of the proceeds of the Offering have been and will continue to be used for working capital and other general corporate purposes, including possible future acquisitions of the assets of, and the right to manage, additional physician practices. In connection with the Offering, five-year warrants to purchase 19,907 shares of Common Stock at $7.24 per share were issued to Vector Securities International, Inc.
The anti-dilution rights of the Series A Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock") provide that the conversion rate of the Convertible Preferred Stock is subject to increase as a result of the issuance of the Common Stock pursuant to the Company's acquisitions and the Offering. As of December 31, 1998, each share of Convertible Preferred Stock was convertible into Common Stock at a conversion rate equal to approximately 0.79 shares of Common Stock for each share of Convertible Preferred Stock.
On June 6, 1996, the Company made its second conversion offer (the "Second Offer") to the holders of the 773,878 outstanding shares of the Company's Convertible Preferred Stock. Under the Second Offer, Preferred Stockholders received one share of the Company's Common Stock (post-reverse stock split) upon conversion of a share of Convertible Preferred Stock and respective accrued dividends, subject to the terms and conditions set forth in the Second Offer. The Second Offer was conditioned upon a minimum of 400,000 shares of Convertible Preferred Stock being tendered; provided that the Company reserved the right to accept fewer shares. Upon expiration of the Second Offer on July 17, 1996, the Company accepted for conversion 608,234 shares, or 78.6% of the Convertible Preferred Stock outstanding, constituting all the shares validly tendered. Following the transaction, there were 165,644 shares of Convertible Preferred Stock outstanding.
Under the Second Offer, Preferred Stockholders received one share of Common Stock (post-reverse stock split) for each share of Convertible Preferred Stock and respective accrued dividends converted. This Second Offer represented an increase from the original terms of the Convertible Preferred Stock which provided for 0.3625 shares of Common Stock (post-reverse stock split) for each share of Convertible Preferred Stock (after adjustment for the failure of the Company to pay eight dividends and after adjustment for the issuance of Common Stock pursuant to its acquisition of WMDC and NMF). Since the Company issued an additional 387,749 shares of Common Stock in the conversion offer compared to the shares that would have been issued under the original terms of the Convertible Preferred Stock, the Company was required, pursuant to a recently enacted accounting pronouncement, to deduct the fair value of these additional shares of approximately $4,265,000 from earnings available to Common Stockholders. This non-cash charge, partially offset by the reversal of $973,000 accrued dividends attributable to the conversion, resulted in the increase in net loss per share by approximately $(1.74) for the year ended December 31, 1996. While this charge was intended to show the cost of the inducement to the owners of the Company's Common Stock immediately before the conversion offer, management does not believe that it accurately reflects the impact of the conversion offer on the Company's Common Stockholders. As a result of the conversion, the Company reversed $973,000 in accrued dividends from its 1996 balance sheet and the conversion has saved the Company from accruing annual dividends of $486,000 and the need to include these dividends in earnings per share calculations. The conversion has eliminated a $6.1 million liquidation preference related to the shares of Convertible Preferred Stock converted.
Dividends on the Convertible Preferred Stock are payable at the rate of $.80 per share per annum, quarterly on the fifteenth day of August, November, February and May of each year commencing August 15, 1993. In May 1995, as a
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
result of the Company's Board of Directors suspending four quarterly dividend payments, holders of the Convertible Preferred Stock became entitled to one vote per share of Convertible Preferred Stock on all matters submitted to a vote of stockholders, including election of directors; once in effect, such voting rights are not terminated by the payment of all accrued dividends. In October 1998, the Company paid all dividend payments which were in arrears, or approximately $563,000 on the Convertible Preferred Stock. As of December 31, 1998, there were no dividend payments in arrears.
As of December 31, 1998, an aggregate of 175,738 warrants were outstanding at a weighted average exercise price of $3.63.
NOTE 13 -- STOCK OPTIONS:
Under the 1988 Stock Option Plan (as amended), (the "1988 Plan") and the 1992 Stock Option Plan (as amended) (the "1992 Plan"), 40,407 and 500,000 shares, respectively, are reserved for issuance of incentive and non-incentive stock options. Under both the 1988 and 1992 Plans, incentive stock options, as defined in Section 422 of the Internal Revenue Code, may be granted only to employees and non-incentive stock options may be granted to employees, directors and such other persons as the Board of Directors (or a committee (the "Committee") appointed by the Board) determines will contribute to the Company's success at exercise prices equal to at least 100%, or 110% for a ten percent shareholder, of the fair market value of the Common Stock on the date of grant with respect to incentive stock options and at exercise prices determined by the Board of Directors or the Committee with respect to non-incentive stock options. The 1988 Plan provides for the payment of a cash bonus to eligible employees in an amount equal to that required to exercise incentive stock options granted. Stock options issued under the 1988 Plan are exercisable, subject to such conditions and restrictions as determined by the Board of Directors or the Committee, during a ten-year period, or a five-year period for incentive stock options granted to a ten percent shareholder, following the date of grant; however, the maturity of any incentive stock option may be accelerated at the discretion of the Board of Directors or the Committee. Under the 1992 Plan, the Board of Directors or the Committee determines the exercise dates of options granted; however, in no event may incentive stock options be exercised prior to one year from date of grant. Under both the 1988 and 1992 Plans, the Board of Directors or the Committee selects the optionees, determines the number of shares of Common Stock subject to each option and otherwise administers the Plans. Under the 1988 Plan, options expire one month from the date of the holder's termination of employment with the Company or six months in the event of disability or death. Under the 1992 Plan, options expire three months from the date of the holder's termination of employment with the Company or twelve months in the event of disability or death.
Under the 1994 Outside Director Stock Purchase Plan ("Outside Director Plan"), 31,250 shares of Common Stock are reserved for issuance. Under the Outside Director Plan, directors who are not full-time employees of the Company may elect to receive all or a part of their annual retainer fees, the fees payable for attending meetings of the Board of Directors and the fees payable for serving on Committees of the Board, in the form of shares of Common Stock rather than cash, provided that any such election be made at least six months prior to the date that the fees are to be paid. At December 31, 1998 and 1997, there were no options outstanding under the Outside Director Plan.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity, under the 1988 and 1992 Plans combined, is summarized as follows:
Number of shares of ommon Stock underlying Weighted Average options exercise price ---------- ----------------
Options outstanding at December 31, 1995..... 210,800 $ 6.52 Granted Option Price = Fair Market Value........ 29,875 $13.68 Option Price > Fair Market Value........ 56,250 $ 9.48 Exercised.................................... (11,011) $ 5.24 Canceled..................................... (19,210) $ 9.48 ------- Options outstanding at December 31, 1996..... 266,704 $ 7.68 Granted Option Price = Fair Market Value........ 90,621 $ 8.32 Exercised.................................... (4,687) $ 4.80 Canceled..................................... (53,784) $ 9.52 ------- Options outstanding at December 31, 1997..... 298,854 $ 7.60 Granted Option Price = Fair Market Value........ 143,813 $ 6.22 Option Price > Fair Market Value........ 307,596 $ 4.12 Exercised.................................... (28,649) $ 3.43 Canceled..................................... (359,967) $ 7.90 ------- Options outstanding at December 31, 1998..... 361,647 $ 4.16 Options exercisable at: December 31, 1996....................... 101,742 $ 6.16 December 31, 1997....................... 145,974 $ 6.64 December 31, 1998....................... 141,032 $ 4.30
Effective August 31, 1998, the Board of Directors approved a resolution to reprice certain stock option agreements held by each officer, director and employee of the Company, under the 1992 Incentive and Non-Incentive Stock Option Plan and/or the 1998 Stock Option Plan. Per the resolution, stock option agreements where the exercise price per share was greater than $1.03 were amended to provide for an exercise price per share of $1.03 ("New Options"). Except for the exercise price of the New Options, all other terms and conditions of the agreements remained in full force and effect. Per the resolution, options to purchase approximately 326,000 shares of Common Stock were repriced. The options which were repriced are included in options that were canceled during 1998 and the New Options are included in options granted at an option price greater than fair market value.
Included in options that were canceled during 1998, 1997 and 1996 were forfeitures (representing canceled unvested options only) of 252,480, 155,580 and 56,710, with weighted average exercise prices of $7.71, $7.96 and $9.20, respectively.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998, options outstanding and exercisable by price range were as follows:
Pro forma information:
FAS 123 requires pro forma disclosures of net income and earnings per share amounts as if compensation expense, using the fair value method, was recognized for options granted after 1994. Using this approach, pro forma net loss and loss per share for the year ended December 31, 1998 would be $1,324,879 and $0.25 higher, respectively, versus reported amounts. Pro forma net income and diluted earnings per share would be $771,000 lower and $0.20, respectively, for the year ended December 31, 1997. Pro forma net loss and loss per share for the year ended December 31, 1996 would be $313,000 and $0.16 higher, respectively, versus reported amounts. The weighted average fair value of options granted at prices equal to fair market value during the years ended December 31, 1998, 1997 and 1996 was $3.31, $1.58 and $2.91, respectively. The weighted average fair value for options granted at prices greater than fair market value during the years ended December 31, 1998 and 1996 were $2.64 and $1.99, respectively. These values, which were used as a basis for the pro forma disclosures, were estimated using the Black-Scholes Options-Pricing Model with the following assumptions used for grants in the years ended December 31, 1998, 1997 and 1996, respectively; dividend yield of 0% in each year; volatility of 109.86%, 86.28% and 108.72% in 1998, 1997 and 1996, respectively; risk-free interest rate of 5.14%, 6.3% and 6.7% in 1998, 1997 and 1996, respectively; and an expected term of 5 years in 1998 and 6 years in 1997 and 1996.
These pro forma disclosures may not be representative of the effects for future years since options vest over several years and options granted prior to 1995 are not considered in these disclosures. Also, additional awards generally are made each year.
The Company recognizes compensation cost for stock-based employee compensation plans over the vesting period based on the difference, if any, between the quoted market price of the stock and the amount an employee must pay to acquire the stock. Deferred employee compensation cost at December 31, 1998, 1997 and 1996 was $467,000, $367,000 and $357,000, respectively. As of December 31, 1998, deferred employee compensation cost included approximately $94,000 related to the Shady Grove acquisition. Total compensation cost recognized in income for the years ended December 31, 1998, 1997 and 1996 was $6,000, $20,000 and $43,000, respectively.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for continuing operations for 1998 and 1997 (in thousands, except per share data) appear below:
(1) The loss from continuing operations in 1998 includes approximately $2.1 million in restructuring and other charges (See Note 6).
NOTE 15 -- COMMITMENTS AND CONTINGENCIES:
Clinical Services Development
From July 1, 1995 through June 30, 1998, the Company had a three-year agreement with Monash University which provided for Monash to conduct research in ART and human fertility which was funded by the Company with a minimum annual payment of 220,000 Australian dollars paid in quarterly installments. The Company expensed approximately $96,000, $144,000 and $189,000 under this agreement for the years ended December 31, 1998, 1997 and 1996.
Under its contract for a joint development program for genetic testing with Genzyme Genetics ("Genzyme"), the Company funded approximately $0 and $56,000 in the years ended December 31, 1997 and 1996, respectively. The Company and Genzyme mutually agreed to terminate this contract in December 1996; the Company retained the right to use the technology developed under the contract through this date.
Operating Leases --
Refer to Note 9 for a summary of lease commitments.
Reliance on Third Party Vendors --
The RSCs, as well as all other medical providers who deliver services requiring fertility medication, are dependent on three third-party vendors that produce such medications (including but not limited to: Lupron, Follistim, Repronex, GonalF and Pregnyl) that are vital to the provision of infertility and ART services. Should any of these vendors experience a supply shortage, it may have an adverse impact on the operations of the RSCs. To date, the RSCs have not experienced any such adverse impacts.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements --
The Company has entered into employment and change in control severance agreements with certain of its management employees, which include, among other terms, noncompetitive provisions and salary and benefits continuation. The Company's minimum aggregate commitment under these agreements at December 31, 1998 was approximately $1.2 million.
Commitments to Medical Practices --
Pursuant to the majority of the Company's management agreements, the Company is obligated to perform the following: (i) advance funds to the Network Site to provide new services, utilize new technologies, fund projects, etc.; and (ii) on or before the fifteenth business day of each month purchase the net accounts receivable of the Network Site arising during the previous month and to transfer or pay to the Network Site such amount of funds equal to the net accounts receivable less any amounts owed to the Company for management fees and/or advances. Any advances are to be repaid monthly and interest expense, computed at the prime rate used by the Company's primary bank in effect at the time of the advance, will be charged by the Company for funds advanced.
Litigation --
On March 10, 1998, the Company had received notice from Reproductive Sciences Medical Center, Inc. ("RSMC") claiming that the Company had materially breached its management agreement with RSMC and demanded that alleged breaches be remedied. Contrary to RSMC's allegations, the Company believed that it had materially performed its obligations under the management agreement and that RSMC had materially breached the management agreement. On September 1, 1998, the Company and RSMC entered into a stipulation and settlement agreement, resolving all claims against each other. The management agreement has been terminated, RSMC will lease the Company's assets over a period of three years, and the parties have entered into mutual consulting agreements.
On October 9, 1998, W.F. Howard, M.D., P.A., filed a lawsuit against the Company in the District Court of Denton County, Texas, seeking to rescind the management agreement related to the Dallas Network Site, or collect damages, on the ground that its practice has not realized the degree of growth or increases as allegedly projected by the Company. The complaint asserts alleged breaches of contract, fiduciary duties and warranties, as well as a claim under the Texas Deceptive Trade Practices Act, and claims lost profit damages as well as an exemplary award under statute. The Company believes that this complaint is without merit, denies the allegations, and intends to vigorously defend its position. Litigation counsel has advised the Company that it is too early in the litigation to meaningfully assess the likelihood of success of this lawsuit. Nonetheless, counsel believes that even an unfavorable result will not have a material adverse effect on the Company. The management agreement remains in full operation during the pendency of the lawsuit.
There are other minor legal proceedings to which the Company is a party. In the Company's view, the claims asserted and the outcome of these proceedings will not have a material adverse effect on the financial position, results of operations or the cash flows of the Company.
Insurance --
The Company and its affiliated Medical Practices are insured with respect to medical malpractice risks on a claims made basis. Management believes it will be able to obtain renewal coverage in the future. Management is not aware of any claims against it or its affiliated Medical Practices which would expose the Company or its affiliated Medical Practices to liabilities in excess of insured amounts. Therefore, none of these claims is expected to have a material impact on the Company's financial position, results of operations or cash flows.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 -- RELATED PARTY TRANSACTIONS:
SDL Consultants, a company owned by Sarason D. Liebler, who became a director of the Company in August, 1994, rendered consulting services to the Company during 1998, 1997 and 1996 for aggregate fees of approximately $43,000, $93,000 and $17,000, respectively.
Pursuant to the Company's management agreement with Shady Grove, Michael J. Levy, M.D., an employed shareholder physician of the P.C., became a member of the Company's Board of Directors effective March 12, 1998.
In connection with the Company's January 1998 equity private placement with Morgan Stanley Venture Partners, M. Fazle Husain, General Partner, became a member of the Company's Board of Directors.
Pursuant to the Company's management agreement with FCI, Aaron Lifchez, M.D., an employed shareholder physician of FCI, became a member of the Company's Board of Directors in August 1997.
Under its contract for a joint development program for genetic testing with Genzyme, the Company funded approximately $56,000 in the years ended December 31, 1996. The Company and Genzyme mutually agreed to terminate this contract in December 1996; the Company retained the right to use the technology developed under the contract through such date.
NOTE 17 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS:
In connection with the Company's termination of its management agreement with the RSMC effective September 1, 1998, the Company was discharged from its remaining exclusive management right obligation of $650,000 which had been incurred in 1997.
In 1996, in connection with the Company's acquisition of certain assets of and the right to manage the Reproductive Sciences Center of Greater Philadelphia (the "Philadelphia Network Site"), the Company incurred a $1,000,000 obligation. In connection with the Company's termination of its management agreement with the Philadelphia Network Site and due to this Network Site's historical operating losses, approximately $583,000 of the Company's exclusive right to manage obligation to the physician owner was applied against the Company's receivable from the physician owner during the six-month period ended June 30, 1998.
In connection with its acquisition of the exclusive right to manage CFRM in January 1998, the Company issued 46,079 shares of Common Stock with an aggregate fair market value equal to approximately $300,000.
In connection with its acquisition of the exclusive right to manage the Shady Grove P.C., in March 1998, the Company issued 159,888 shares of Common Stock with an aggregate fair value equal to approximately $1.2 million and approximately $1.1 million in promissory notes. The Company also recorded an additional aggregate obligation of approximately $1.6 million in the form of cash, stock and a note to acquire the balance of the capital stock of Shady Grove, which occurred in January 1999.
In 1997, in connection with the Company's acquisition of certain assets of and the right to manage Bay Area Fertility, RSMC and FCI, the Company issued an aggregate of 372,063 shares of Common Stock with an aggregate fair market value equal to approximately $8.7 million.
INTEGRAMED AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1998, pursuant to amendments to the Bay Area, FCI, Shady Grove and the Boston management agreements, the Company issued warrants to purchase an aggregate of 78,125 shares of Common Stock in exchange for an extension of the term of the Company's respective management agreements from twenty to twenty-five years.
In connection with the Company's acquisition of WMDC and NMF in June 1996, the Company issued 166,666 shares of Common Stock, acquired tangible assets of $469,000, assumed current liabilities of $245,000, and debt of $97,000, and acquired $214,000 of intangible assets and $3,159,000 of goodwill. In connection with this transaction, the Company also issued a note payable in the amount of $600,000 with annual interest payable at 4.16%.
In May 1996, in connection with the Company's acquisition of certain assets of and the right to manage W.F. Howard, M.D., P.A. located near Dallas, Texas, the Company incurred a $550,000 obligation.
At December 31, 1997 and 1996 there were accrued dividends on Preferred Stock outstanding of $464,000 and $331,000, respectively, (see Note 12).
Pursuant to the Second Offer (see Note 12), 608,234 shares of Preferred Stock were converted into 608,234 shares of Common Stock during the year ended December 31, 1996.
State taxes of $384,000, $93,000 and $119,000 were paid in the years ended December 31, 1998, 1997 and 1996, respectively.
Interest paid in cash during the year ended December 31, 1998, 1997 and 1996, amounted to $331,000, $60,000 and $35,000, respectively. Interest received during the years ended December 31, 1998, 1997 and 1996 amounted to approximately $90,000, $179,000 and $412,000, respectively.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of IntegraMed America, Inc.
Our audits of the consolidated financial statements referred to in our report dated February 8, 1999 appearing on page of the 1998 Annual Report to Shareholders of IntegraMed America, Inc. also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/PricewaterhouseCoopers LLP - ----------------------------- PricewaterhouseCoopers LLP
Stamford, Connecticut February 8, 1999
S-1
SCHEDULE II
INTEGRAMED AMERICA, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997 and 1996
- ---------------- (1) Uncollectible accounts written off.
S-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 15, 1999
By: /s/EUGENE R. CURCIO ------------------------- Eugene R. Curcio Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ GERARDO CANET - ------------------------- Gerardo Canet President, March 15, 1999 Chief Executive Officer and Director (Principal Executive Officer)
/s/ M. FAZLE HUSAIN - ------------------------- M. Fazle Husain Director March 15, 1999
/s/ MICHAEL J. LEVY, M.D. - ------------------------- Michael J. Levy, M.D. Director March 15, 1999
/s/ SARASON D. LIEBLER - ------------------------- Sarason D. Liebler Director March 15, 1999
/s/ AARON LIFCHEZ, M.D. - ------------------------- Aaron Lifchez, M.D. Director March 15, 1999
/s/ PATRICIA M. MCSHANE, M.D. - ----------------------------- Patricia M. McShane, M.D. Director March 15, 1999
/s/ LAWRENCE J. STUESSER - ------------------------- Lawrence J. Stuesser Director March 15, 1999
/s/ ELIZABETH TALLETT - ------------------------- Elizabeth Tallett Director March 15, 1999
INDEX TO EXHIBITS
Item 14(c)
Exhibit Number Exhibit
3.1(a) -- Amended and Restated Certificate of Incorporation of Registrant effecting, inter alia, reverse stock split (ii)
3.1(b) -- Amendment to Certificate of Incorporation of Registrant increasing authorized capital stock by authorizing Preferred Stock (ii)
3.1(c) -- Certificate of Designations of Series A Cumulative Convertible Preferred Stock (ii)
3.1(d) -- Certificate of Amendment to Amended and Restated Certificate of Incorporation increasing authorized Common Stock to 50,000,000 shares (xxiv)
3.2 -- Copy of By-laws of Registrant (i)
3.2(a) -- Copy of By-laws of Registrant (As Amended and Restated on December 12, 1995) (xi)
3.2(b) -- Copy of By-laws of Registrant (As Amended and Restated on March 4, 1997) (xxi)
4.1 -- Warrant Agreement of Robert Todd Financial Corporation. (i)
4.2 -- Copy of Warrant, as amended, issued to IG Labs. (i)
4.3 -- RAS Securities Corp. and ABD Securities Corporation's Warrant Agreement. (ii)
4.4 -- Form of Warrants issuable to Raymond James & Associates, Inc. (vii)
4.6 -- Warrant issued to Morgan Stanley Venture Partners III, L.P. (xviii)
4.7 -- Warrant issued to Morgan Stanley Venture Partners III, L.P. (xviii)
4.8 -- Warrant issued to the Morgan Stanley Venture Partners Entrepreneur Fund, L.P. (xxi)
4.9 (a) -- Warrant issued to Brian Kaplan, M.D. (xxii)
4.9 (b) -- Warrant issued to Aaron S. Lifchez, M.D. (xxii)
4.9 (c) -- Warrant issued to Jacob Moise, M.D. (xxii)
4.9 (d) -- Warrant issued to Jorge Valle, M.D. (xxii)
4.10(a) -- Warrant issued to Donald Galen, M.D. (xxii)
4.10(b) -- Warrant issued to Arnold Jacobson, M.D. (xxii)
4.10(c) -- Warrant issued to Louis Weckstein, M.D. (xxii)
4.11(a) -- Warrant issued to Michael J. Levy, M.D. (xxii)
4.11(b) -- Warrant issued to Arthur W. Sagoskin, M.D. (xxii)
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
4.11 (c) -- Warrant issued to Robert J. Stillman, M.D. (xxii)
4.11 (d) -- Warrant issued to Robert J. Stillman, M.D. dated January 6, 1999
4.12 (a) -- Warrant issued to Patricia M. McShane, M.D. dated November 18,
4.12 (b) -- Warrant issued to Samuel C. Pang, M.D. dated November 18, 1998
4.12 (c) -- Warrant issued to Issac Glatstein, M.D. dated November 18, 1998
4.13 -- Warrant issued to Vector Securities International, Inc.
10.1 -- Copy of Registrant's 1988 Stock Option Plan, including form of option (i)
10.2 -- Copy of Registrant's 1992 Stock Option Plan, including form of option (i)
10.2 (a) -- Copy of Amendment to Registrant's 1992 Stock Option Plan (xxii)
10.4 -- Severance arrangement between Registrant and Vicki L. Baldwin (i)
10.4(a) -- Copy of Change in Control Severance Agreement between Registrant and Vicki L. Baldwin (vii)
10.5(a) -- Copy of Severance Agreement with Release between Registrant and David J. Beames (iv)
10.6 -- Severance arrangement between Registrant and Donald S. Wood (i)
10.6(a) -- Copy of Executive Retention Agreement between Registrant and Donald S. Wood, Ph.D. (viii)
10.7(a) -- Copy of lease for Registrant's executive offices relocated to Purchase, New York (viii)
10.8 -- Copy of Lease Agreement for medical office in Mineola, New York (i)
10.8(a) -- Copy of new 1994 Lease Agreement for medical office in Mineola, New York (v)
10.8(b) -- Copy of Letter of Credit in favor of Mineola Pavilion Associates, Inc. (viii)
10.9 -- Copy of Service Agreement for ambulatory surgery center in Mineola, New York (i)
10.10 -- Copy of Agreement with MPD Medical Associates, P.C. for Center in Mineola, New York (i)
10.10 -- Copy of Agreement with MPD Medical Associates, P.C. for Center in Mineola, New York dated September 1, 1994 (vii)
10.10(a) -- Copy of Agreement with MPD Medical Associates, P.C. for Center in Mineola, New York dated September 1, 1994 (vii)
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
10.11 -- Copy of Service Agreement with United Hospital (i)
10.12 -- Copy of Service Agreement with Waltham Weston Hospital and Medical Center (i)
10.15(a) -- Copy of post-Dissolution Consulting Agreement between Registrant and Allegheny General Hospital (vi)
10.18(a) -- Copy of post-Dissolution Consulting, Training and License Agreement between Registrant and Henry Ford Health Care Systems (iii)
10.19 -- Copy of Guarantee Agreement with Henry Ford Health System (i)
10.20 -- Copy of Service Agreement with Saint Barnabas Outpatient Centers for center in Livingston, New Jersey (i)
10.21 -- Copy of Agreement with MPD Medical Associates, P.C. for center in Livingston, New Jersey (i)
10.22 -- Copy of Lease Agreement for medical offices in Livingston, New Jersey (i)
10.23 -- Form of Development Agreement between Registrant and IG Laboratories, Inc. (i)
10.24 -- Copy of Research Agreement between Registrant and Monash University (i)
10.24(a) -- Copy of Research Agreement between Registrant and Monash University (ix)
10.28 -- Copy of Agreement with Massachusetts General Hospital to establish the Vincent Center for Reproductive Biology and a Technical Training Center (ii)
10.29 -- Copy of Agreement with General Electric Company relating to Registrant's training program (ii)
10.30 -- Copy of Indemnification Agreement between Registrant and Philippe L. Sommer (vii)
10.31 -- Copy of Employment Agreement between Registrant and Gerardo Canet (vii)
10.31(a) -- Copy of Change in Control Severance Agreement between Registrant and Gerardo Canet (vii)
10.31(b) -- Copy of the Amendment of Change in Control Severance Agreement between Registrant and Gerardo Canet (viii)
10.33 -- Copy of Change in Control Severance Agreement between Registrant and Dwight P. Ryan (vii)
10.35 -- Revised Form of Dealer Manager Agreement between Registrant and Raymond James & Associates, Inc. (vii)
10.36 -- Copy of Agreement between MPD Medical Associates, P.C. and Patricia Hughes, M.D. (vii)
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
10.37 -- Copy of Agreement between IVF America (NJ) and Patricia Hughes, M.D. (vii)
10.38 -- Copy of Management Agreement between Patricia M. McShane, M.D. and IVF America (MA), Inc. (vii)
10.39 -- Copy of Sublease Agreement for medical office in North Tarrytown, New York (viii)
10.40 -- Copy of Executive Retention Agreement between Registrant and Patricia M. McShane, M.D. (viii)
10.41 -- Copy of Executive Retention Agreement between Registrant and Lois Dugan (viii)
10.42 -- Copy of Executive Retention Agreement between Registrant and Jay Higham (viii)
10.43 -- Copy of Service Agreement between Registrant and Saint Barnabas Medical Center (ix)
10.44 -- Asset Purchase Agreement among Registrant, Assisted Reproductive Technologies, P.C. d/b/a Main Line Reproductive Science Center, Reproductive Diagnostics, Inc. and Abraham K. Munabi, M.D. (ix)
10.44(a) -- Management Agreement among Registrant and Assisted Reproductive Technologies, P.C. d/b/a Main Line Reproductive Science Center and Reproductive Diagnostics, Inc. (ix)
10.44(b) -- Physician Service Agreement between Assisted Reproductive Technologies P.C. d/b/a Main Line Reproductive Science Center and Abraham K. Munabi, M.D. (ix)
10.44(c) -- Stipulation of Settlement and Compromise of all Claims Among IntegraMed America, Inc. and Assisted Reproductive Technologies, P.C., d/b/a Mainline Reproductive Science Center, Reproductive Diagnostics, Abraham Munabi, M.D., Reproductive Science Center of Suburban Philadelphia (xxv)
10.45 -- Copy of Executive Retention Agreement between Registrant and Stephen Comess (x)
10.46 -- Copy of Executive Retention Agreement between Registrant and Peter Callan (x)
10.47 -- Management Agreement between Registrant and Robert Howe, M.D., P.C. (x)
10.47 (a) -- P.C. Funding Agreement between Registrant and Robert Howe, M.D. (x)
10.48 -- Management Agreement among Registrant and Reproductive Endocrine & Fertility Consultants, P.A. and Midwest Fertility Foundations & Laboratory, Inc. (x)
10.48 (a) -- Asset Purchase Agreement among Registrant and Reproductive Endocrine & Fertility Consultants, Inc. and Midwest Fertility Foundations & Laboratory, Inc. (x)
10.48 (b) -- Amendment No. 2 to Management Agreement among IntegraMed America, Inc. and Reproductive Endocrine & Fertility Consultants, P.A. and Midwest Fertility Foundations & Laboratory, Inc. dated July 1, 1998 (xxiv)
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
10.49 -- Copy of Sublease Agreement for office space in Kansas City, Missouri (x)
10.50 -- Copy of Lease Agreement for office space in Charlotte, North Carolina (x)
10.51 -- Copy of Contract Number DADA15-96-C-0009 as awarded to IVF America by the Department of the Army, Walter Reed Army Medical Center for In Vitro Fertilization Laboratory Services (xi)
10.52 -- Agreement and Plan of Merger By and Among IVF America, Inc., INMD Acquisition Corp., The Climacteric Clinic, Inc., Midlife Centers of America, Inc., Women's Research Centers, Inc., America National Menopause Foundation, Inc. and Morris Notelovitz (xii)
10.52 (a) -- Agreement dated September 1, 1998 By and Among Women's Medical & Diagnostic Center, Inc., IntegraMed America, Inc. and Florida Medical and Research Institute, P.A. (xxv)
10.53 -- Employment Agreement between Morris Notelovitz, M.D., Ph.D. and IVF America, Inc., d/b/a IntegraMed America (xii)
10.54 -- Physician Employment Agreement between Morris Notelovitz, M.D., Ph.D., and INMD Acquisition Corp. ("IAC"), a Florida corporation and wholly owned subsidiary of IVF America, Inc. ("INMD") (xii)
10.55 -- Management Agreement between IVF America, Inc., d/b/a IntegraMed America, Inc. and W.F. Howard, M.D., P.A. (xii)
10.56 -- Asset Purchase Agreement between IVF America, Inc., d/b/a/ IntegraMed America, Inc. and W.F. Howard M.D., P.A. (xii)
10.57 -- Business Purposes Promissory Note dated September 8, 1993 in the amount of $100,000 (xiii)
10.58 -- Business Purposes Promissory Note dated November 18, 1994 in the amount of $64,000 (xiii)
10.59 -- Guaranty Agreement (xiii)
10.60 -- Security Agreement (Equipment and Consumer Goods) (xiii)
10.61 -- Management Agreement dated January 7, 1997 by and between the Registrant and Bay Area Fertility and Gynecology Medical Group, Inc. (xiv)
10.61 (a) -- Amendment No. 1 to Management Agreement between IntegraMed America, Inc. and Bay Area Fertility and Gynecology Medical Group, Inc. (xxii)
10.62 -- Asset Purchase Agreement dated January 7, 1997 by and between the Registrant and Bay Area Fertility and Gynecology Medical Group, a California Partnership. (xiv)
10.63 -- Physician Employment Agreement between Robin E. Markle, M.D. and Women's Medical & Diagnostic Center, Inc. (xv)
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
10.64 -- Physician Employment Agreement between W. Banks Hinshaw, Jr., M.D. and Women's Medical & Diagnostic Center, Inc. (xv)
10.65 -- Agreement between IntegraMed America, Inc., f/k/a IVF America Inc.; Women's Medical & Diagnostic Center, Inc., f/k/a INMD Acquisition Corp, and Morris Notelovitz, M.D. (xv)
10.66 -- Personal Responsibility Agreement between IntegraMed America, Inc., Bay Area Fertility and Gynecology Medical Group, Inc. and Donald I. Galen, M.D. (xv)
10.67 -- Personal Responsibility Agreement between IntegraMed America, Inc., Bay Area Fertility and Gynecology Medical Group, Inc. and Louis N. Weckstein, M.D. (xv)
10.68 -- Personal Responsibility Agreement between IntegraMed America, Inc., Bay Area Fertility and Gynecology Medical Group, Inc. and Arnold Jacobson, M.D. (xv)
10.69 -- Copy of Executive Retention Agreement between Registrant and Glenn G. Watkins (xv)
10.70 -- Management Agreement between Registrant and Fertility Centers of Illinois, S.C. dated February 28, 1997 (xvi)
10.71 -- Asset Purchase Agreement between Registrant and Fertility Centers of Illinois, S.C. dated February 28, 1997 (xvi)
10.72 -- Physician-Shareholder Employment Agreement between Fertility Centers of Illinois, S.C. and Aaron S. Lifchez, M.D. dated February 28, 1997 (xvi)
10.73 -- Physician-Shareholder Employment Agreement between Fertility Centers of Illinois, S.C. and Brian Kaplan, M.D. dated February 28, 1997 (xvi)
10.74 -- Physician-Shareholder Employment Agreement between Fertility Centers of Illinois S.C. and Jacob Moise, M.D. dated February 28, 1997 (xvi)
10.75 -- Physician-Shareholder Employment Agreement between Fertility Centers of Illinois, S.C. and Jorge Valle, M.D. dated February 28, 1997 (xvi)
10.76 -- Personal Responsibility Agreement among Registrant, Fertility Centers of Illinois, S.C. and Aaron S. Lifchez, M.D. dated February 28, 1997 (xvi)
10.77 -- Personal Responsibility Agreement among Registrant, Fertility Centers of Illinois, S.C. and Jacob Moise, M.D. dated February 28, 1997 (xvi)
10.78 -- Personal Responsibility Agreement among Registrant, Fertility Centers of Illinois, S.C. and Brian Kaplan, M.D. dated February 28, 1997 (xvi)
10.79 -- Personal Responsibility Agreement among Registrant, Fertility Centers of Illinois, S.C. and Jorge Valle, M.D. dated February 28, 1997 (xvi)
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
10.80 -- Amendment to Contract Number DADA15-96-C-009 between Registrant and the Department of the Army, Walter Reed Army Medical Center for In Vitro Fertilization Laboratory Services dated February 11, 1997 (xvi)
10.80 (a) -- Amendment Effective January 29, 1998 to Contract Number DADA 15-96-C-009 between INMD and the Department of the Army, Walter Reed Army Medical Center for In Vitro Fertilization Laboratory Services (xxii)
10.81 -- Management Agreement between Registrant and Reproductive Sciences Medical Center, Inc. (xvii)
10.81 (a) -- Amendment Dated July 11, 1997 to Agreement with Reproductive Sciences Medical Center, Inc. (xxiv)
10.81 (b) -- Stipulation of Settlement and Compromise of all Claims Among IntegraMed America, Inc. and Reproductive Sciences Medical Center, Inc. and Samuel H. Wood, M.D. (xxv)
10.82 -- Asset Purchase Agreement between Registrant and Samuel H. Wood, M.D., Ph.D. (xvii)
10.83 -- Personal Responsibility Agreement between Registrant and Samual H. Wood, M.D., Ph.D. (xvii)
10.84 -- Physician-Shareholder Employment Agreement between Reproductive Sciences Medical Center, Inc. and Samuel H. Wood, M.D., Ph.D. (xvii)
10.85 -- Physician-Shareholder Employment Agreement between Reproductive Endocrine & Fertility Consultants, P.A. and Elwyn M. Grimes, M.D. (xvii)
10.86 -- Amendment to Management Agreement between Registrant and Reproductive Endocrine & Fertility Consultants, P.A. (xvii)
10.87 -- Amendment to Management Agreement between Registrant and Fertility Centers of Illinois, S.C. dated May 2, 1997 (xvii)
10.88 -- Management Agreement between Registrant and MPD Medical Associates, P.C. dated June 2, 1997 (xvii)
10.88 (a) -- Amendment to Management Agreement between IntegraMed America, Inc. and MPD Medical Associates, P.C. dated as of January 1, 1998 (xxiv)
10.89 -- Physician-Shareholder Employment Agreement between MPD Medical Associates P.C. and Gabriel San Roman, M.D. (xvii)
10.90 -- Amendment No. 2 to Management Agreement between Registrant and Fertility Centers of Illinois, S.C. dated June 18, 1997 (xvii)
10.91 -- Commitment Letter dated June 30, 1997 between Registrant and First Union National Bank (xvii)
10.92 -- Amendment No. 3 to Management Agreement between Registrant and Fertility Centers of Illinois, S.C. dated August 19, 1997 (xviii)
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
10.93 -- Amendment No. 4 to Management Agreement between Registrant and Fertility Centers of Illinois, S.C. dated January 9, 1998 (xx)
10.94 -- Investment Agreement between Registrant and Morgan Stanley Venture Partners III, L.P.., Morgan Stanley Venture Investors III, L.P. and the Morgan Stanley Venture Partners Entrepreneur Fund, L.P. (xix)
10.95 -- Amendment No. 5 to Management Agreement between Registrant and Fertility Centers of Illinois, S.C. dated March 5, 1998 (xxi).
10.96 -- Termination Agreement by and among Women's Medical & Diagnostic Center, Inc., W. Banks Hinshaw, Jr., Ph.D., M.D., and Robin E. Markle, M.D.
10.97 -- Loan Agreement between First Union National Bank and IntegraMed America, Inc. dated November 13, 1997.
10.98 -- Management Agreement between IntegraMed America, Inc. and MPD Medical Associates (MA), P.C. dated October 1, 1997 (xxi)
10.98 (a) -- Amendment No. 1 to Management Agreement between IntegraMed America, Inc. and MPD Medical Associates (MA) P.C. and Patricia M. McShane, M.D. dated November 11, 1998
10.99 -- Physician-Shareholder Employment Agreement between MPD Medical Associates (MA), P.C. and Patricia McShane, M.D. dated October 1, 1997 (xxi)
10.100 -- Asset Purchase and Sale Agreement by and among IntegraMed America, Inc. and Fertility Centers of Illinois, S.C., Advocate Medical Group, S.C. and Advocate MSO, Inc. dated January 9, 1998 (xxi)
10.101 -- Physician Employment Agreement between Fertility Centers of Illinois, S.C. and Laurence A. Jacobs, M.D. dated January 9, 1998 (xxi)
10.102 -- Physician Employment Agreement between Fertility Centers of Illinois, S.C. and John J. Rapisarda, M.D. dated January 9, 1998 (xxi)
10.103 -- Personal Responsibility Agreement entered into by and among IntegraMed America, Inc., Fertility Centers of Illinois, S.C. and John J. Rapisarda, M.D. dated January 9, 1998 (xxi)
10.104 -- Personal Responsibility Agreement entered into by and among IntegraMed America, Inc., Fertility Centers of Illinois, S.C. and Laurence A. Jacobs, M.D. dated January 9, 1998 (xxi)
10.105 -- Management Agreement between Shady Grove Fertility Centers, P.C. and Levy, Sagoskin and Stillman, M.D., P.C. dated March 11, 1998 (xxi)
10.105 (a) -- Amendment No. 1 to Management Agreement between Shady Grove Fertility Centers, Inc. and Levy Sagoskin and Stillman, M.D., P.C (xxii)
10.105 (b) -- Amendment No. 2 to Management Agreement between Shady Grove Fertility Centers, Inc. and Levy Sagoskin and Stillman, M.D., P.C. dated May 6, 1998
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
10.106 -- Submanagement Agreement between Shady Grove Fertility Centers, Inc. and IntegraMed America, Inc. dated March 12, 1998 (xxi)
10.107 -- Stock Purchase and Sale Agreement among IntegraMed America, Inc. and Michael J. Levy, M.D., Robert J. Stillman, M.D. and Arthur W. Sagoskin, M.D. dated March 12, 1998 (xxi)
10.108 -- Personal Responsibility Agreement by and among IntegraMed America, Inc. and Arthur W. Sagoskin, M.D. dated March 12, 1998 (xxi)
10.109 -- Personal Responsibility Agreement by and among IntegraMed America, Inc. and Michael J. Levy, M.D. dated March 12, 1998 (xxi)
10.110 -- Physician-Stockholder Employment Agreement between Levy, Sagoskin and Stillman, M.D., P.C. and Michael J. Levy, M.D. dated March 11, 1998 (xxi)
10.111 -- Physician-Stockholder Employment Agreement between Levy, Sagoskin and Stillman, M.D., P.C. and Arthur W. Sagoskin, M.D. dated March 11, 1998 (xxi)
10.112 -- Physician-Stockholder Employment Agreement between Levy, Sagoskin and Stillman, M.D., P.C. and Robert J. Stillman, M.D. dated March 11, 1998 (xxi)
10.113 -- Commitment letter with Fleet Bank, National Association (xxiv)
10.113(a) -- Loan Agreement dated September 11, 1998 between IntegraMed America, Inc. and Fleet Bank, National Association (xxv)
21 -- List of Subsidiaries
23.1 -- Consent of Price Waterhouse LLP
27 -- Financial Data Schedule
- -------------------------------------
(i) Filed as Exhibit with identical exhibit number to Registrant's Statement on Form S-1 (Registration No. 33-47046) and incorporated herein by reference thereto.
(ii) Filed as Exhibit with identical exhibit number to Registrant's Statement on Form S-1 (Registration No. 33-60038) and incorporated herein by reference thereto.
(iii) Filed as Exhibit with identical exhibit number to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1994 and incorporated herein by reference thereto.
(iv) Filed as Exhibit with identical exhibit number to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1994 and incorporated herein by reference thereto.
(v) Filed as Exhibit with identical exhibit number to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1994 and incorporated herein by reference thereto.
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
(vi) Filed as Exhibit with identical exhibit number to Registrant's Statement on Form 10-K for the year ended December 31, 1993.
(vii) Filed as Exhibit with identical exhibit number to Registrant's Statement on Form S-4 (Registration No. 33- 82038) and incorporated herein by reference thereto.
(viii) Filed as Exhibit with identical exhibit number to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
(ix) Filed as Exhibit with identical number to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1995.
(x) Filed as Exhibit with identical number to Registrant's Annual Report on Form 10-Q for the year ended September 30, 1995.
(xi) Filed as Exhibit with identical number to Registrant's Statement on Form 10-K for the year ended December 31, 1995.
(xii)
Filed as Exhibit with identical exhibit number to Registrant's Report on Form 8-K dated June 20, 1996.
(xiii) Filed as Exhibit with identical exhibit number to Registrant's Report on Form 8-K/A dated August 20, 1996.
(xiv) Filed as Exhibit with identical exhibit number to Registrant's Report on Form 8-K dated January 20, 1997.
(xv) Filed as Exhibit with identical exhibit number to Statement on Form 10-K for the year ended December 31, 1996.
(xvi) Incorporated by Reference to the Exhibit with the identical exhibit number to Registrant's Registration Statement on Form S-1 (registration No. 333-26551) filed with the Securities and Exchange Commission on May 6, 1997.
(xvii) Incorporated by reference to the Exhibit with the identical exhibit number to Registrant's Registration Statement on Form S-1 (Registration No. 333-26551) filed with the Securities and Exchange Commission on June 20, 1997.
(xviii) Filed as Exhibit with identical exhibit number to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997 and incorporated herein by reference thereto.
(xix) Filed as Exhibit with identical exhibit number to Registrant's Report on Form 8-K dated January 23, 1998.
(xx) Filed as Exhibit with identical exhibit number to Schedule 13D dated February 11, 1998.
(xxi) Filed as Exhibit with identical exhibit number to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
(xxii) Filed as Exhibit with identical number to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1998.
INDEX TO EXHIBITS (Continued)
Item 14(c)
Exhibit Number Exhibit
(xxiii) Incorporated by reference to the Registrant's Definitive Proxy Statement filed on May 5, 1997.
(xxiv) Filed as Exhibit with identical number to Registrant's Quarterly Report on form 10-Q for the period ended June 30, 1998.
(xxv) Filed as Exhibit with identical number to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1995.